(Warren R. Plunkett, Raymond F. Attner, Gemmy S. A (BookFi)

MANAGEMENT
Meeting and Exceeding Customer Expectations

Ninth Edition
This page intentionally left blank
MANAGEMENT
Ninth Edition
Warren R. Plunkett
Raymond F. Attner
Brookhaven College
Gemmy S. Allen
North Lake College
Management: Meeting and Exceeding Customer Expectations
Ninth Edition
Warren R. Plunkett, Raymond F. Attner, Gemmy S. Allen
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BRIEF CONTENTS
Part 1: Management Concepts 1
1. Management: An Overview 2
2. Management Thought: Past and Present 34
3. Management Ethics and Social Responsibility 62
4. Management’s Commitments to Quality and Productivity 94
Part 2: Planning and Decision Making 127

5. The Manager’s Environment 128
6. Planning and Strategy 152
7. Making Decisions 190
Part 3: Organizing 223

8. Organizing Principles 224
9. Organizational Design, Culture, and Change 262
Part 4: Staffing 313

10. Staffing the Workforce 314
11. Communication: Interpersonal and Organizational 358
12. Human Motivation 390
Part 5: Leading 431

13. Leadership 432
14. Team Management and Conflict 464
Part 6: Controlling 497

15. Information Management Systems 498
16. Control: Purpose, Process, and Techniques 526
Appendices 575
A. Operations Management 576
B. International Management 602
C. Succeeding in Your Organization 632
References 663
Glossary 675
Index 689
v
CONTENTS
PART 1: MANAGEMENT CONCEPTS 1
Chapter 1: Management: An Overview 2
Introduction 4
Management and Managers 4
Organizational Need for Managers 5
The Manager’s Universe 6
The Need to Please Customers, 6
Global Applications: The Globalization of Wipro Ltd. 7
Managing Technology: Customer Relationship Management (CRM) 8
Ethical Management: Telemarketers Survive Do Not Call 9
The Need to Provide Leadership, 9 • The Need to Act Ethically, 10 •
The Need to Value Diversity in Their Employees, 10 • The Need
to Cope with Global Challenges, 11
Valuing Diversity: MTV Networks Adds Chief Diversity Officer (CDO) 13
Levels of Management 13
Top Management, 14 • Middle Management, 14 • First-Line
Management, 15 • Functional Managers, 15
Management Functions 17
Planning, 18 • Organizing, 19 • Staffing, 19 • Leading, 19 •
Controlling, 19
Functions and the Levels of Management 20
Top Management, 20 • Middle Management, 21 • First-Line
Management, 21
Management Roles 21
Interpersonal Roles, 21 • Informational Roles, 22 • Decisional Roles, 23 •
Roles and Managerial Functions, 23 • Roles and the Expectations of
Others, 23
Management Skills 23
Technical Skills, 23 • Human Skills, 25 • Conceptual Skills, 25 •
Skills and Levels of Management, 25
Management Myths and Realities 26
Evaluating a Manager’s Performance 27
vii
viii Contents
Chapter 2: Management Thought: Past and Present 34

Introduction 36
History and Theory of Management 37
Value of History, 37 • Ancient History, 37 • Value of Theory, 37
Classical Management Theory 37
Classical Scientific School, 38
Valuing Diversity: From Equal Opportunity to Valuing Diversity 40
Classical Administrative School, 41
Behavioral Management Theory 43
Behavioral School Proponents, 43
Quantitative Management Theory 45
Operations Management, 46 • Management Information Systems, 47
Systems Management Theory 47
Systems School, 48 • Cumulative Energy of Synergy, 49
Contingency Management Theory 50
Quality Management Theory 51
Kaizen Approach, 51 • Reengineering Approach, 52
Ethical Management: How the Pursuit of Quality Can Alienate Customers 53
Major Contributors to Quality Management, 53
Managing Technology: Enterprise Resource Planning (ERP) 54
Global Applications: Government and Industry Cooperation in Japan 55
Chapter 3: Management Ethics and Social Responsibility 62

Introduction 64
Managing Ethically 64
Individuals and Ethical Conduct, 65
Managing Technology: Electronic Commerce Ethics 66
Leaders’ Ethics, 67
Organizational Influences on Ethical Conduct 67
Importance of Organizational Controls 68
Commitment of Top Management, 68 • Codes of Ethics, 68 •
Compliance Programs, 68
Global Applications: Bill and Melinda Gates Foundation 72
Legal Constraints, 73 • Ethical Dilemmas, 75 • Guidelines for Acting
Ethically, 76
Nature of Social Responsibility 77
Approaches to Social Responsibility, 78 • Responsibilities to
Stakeholders, 81
Valuing Diversity: Diversity’s Link to Social Responsibility—The Abbot Approach 82
Government Regulation: Pros and Cons, 83
Managing for Social Responsibility 85
Top Management Commitment, 85
Contents ix
Ethical Management: BuildingBlocks International, 1000 Challenge 87

Social Audit, 87
Chapter 4: Management’s Commitments

to Quality and Productivity 94
Introduction 96
Quality, Productivity, and Profitability 97
Quality Function Deployment, 98
Global Applications: The Toyota Way 100
Cost-Effective Quality, 103
Managing Technology: Technologically Literate Managers 104
Productivity, 104 • Quality–Productivity–Profitability Link, 105
Improving Quality and Productivity 106
Ethical Management: Raytheon’s Approach to Quality and Ethics 107
Business Process Reengineering (BPR) Approaches, 108 • Commitments
at the Top, 109 • Commitments at the Middle, 113
Valuing Diversity: Empowerment at Toyota 114
Commitments at the Bottom, 115 • External Commitments, 116
Additional Internal and External Influences on Quality and Productivity 119
Internal Influences, 119 • External Influences, 120
PART 2: PLANNING AND DECISION MAKING 127

Chapter 5: The Manager’s Environment 128
Introduction 130
The Organization as a System 130
Internal Environment 132
Mission, Vision, and Core Values, 132 • Core Competencies, 133
Managing Technology: Knowledge Management (KM) 134
Organizational Culture, 134 • Organizational Climate, 135 •
Leadership, 135 • Organizational Structure, 136 • Resources, 136
External Environment 138
Directly Interactive Forces, 139
Ethical Management: Cola Wars on Campus 140
Indirectly Interactive Forces, 141
Global Applications: Britain and the Measure of Things 143
Environments and Management 144
Sensing and Adapting to Environments, 144 • Influencing
Environments, 144 • Meeting Responsibilities to Stakeholders, 144
Valuing Diversity: Frito-Lay Cultural Festival 146
x Contents
Chapter 6: Planning and Strategy 152

Introduction 154
Planning Defined 154
Mission Statement, 154 • Goals, 155 • Plans, 155 • Strategies and
Tactics, 157 • Determining Resource Requirements, 157
Types of Plans 157
Strategic Plans, 157 • Tactical Plans, 158
Valuing Diversity: Planning for Diversity 160
Operational Plans, 160
Ethical Management: Privacy: Company Policy and the Law 162
Unified Hierarchy of Goals, 162 • Contingency Plans, 164
Basic Planning Process 165
Setting Objectives, 165 • Analyzing and Evaluating the Environment,
166 • Identifying the Alternatives, 167 • Evaluating the Alternatives,
167 • Selecting the Best Solution, 168 • Implementing the Plan, 168 •
Controlling and Evaluating the Results, 168
Making Plans Effective 168
Improving the Quality of Assumptions and Forecasts, 169 •
Planning Tools, 169
Managing Technology: Database 170
Global Applications: Forecasting Leads Mercedes to Alabama 171
Barriers to Planning 171
Nature of Strategic Planning and Strategic Management 172
Elements of Strategic Planning, 173 • Responsibility for Strategic
Planning, 174 • Strategy Formulation Versus Strategy Implementation,
174 • Levels of Strategy, 174
Strategic Planning Process 175
Formulating Corporate-Level Strategy 179
Grand Strategies, 179 • Portfolio Strategy, 180
Formulating Business-Level Strategy 181
Adaptive Strategies, 181 • Competitive Strategies, 182
Formulating Functional-Level Strategy 183
Chapter 7: Making Decisions 190

Introduction 192
What You Need to Know About Decisions 192
What Decision Making Is 193
Decision Making, Problem Solving, and Opportunity Management,
193 • Universality of Decision Making, 193 • Approaches to Decision
Making, 194 • Programmed and Nonprogrammed Decisions, 194
Managing Technology: Breakthrough Business Models 195
Ethical Management: Questionable Decision Making at WorldCom 197
Contents xi
Seven-Step Decision-Making Process 197

Defining the Problem or Opportunity, 197 • Identifying Limiting
Factors, 199 • Developing Potential Alternatives, 200 • Analyzing the
Alternatives, 200 • Selecting the Best Alternative, 201 • Implementing
the Decision, 202 • Establishing a Control and Evaluation System, 202
Global Applications: Making the Right Decisions at Puma 203
Environmental Influences on Decision Making 203
Degree of Certainty, 203 • Imperfect Resources, 205 • Internal
Environment, 205 • External Environment, 208
Influence of Managerial Style on Decision Making 208
Personal Decision-Making Approaches, 208 • Ability to Set Priorities,
209 • Timing of Decisions, 209 • Tunnel Vision, 209 • Commitment
to Previous Decisions, 210 • Creativity, 210
Group Decision Making 210
Brainstorming, 210 • Nominal Group Technique, 211 • Delphi
Technique, 212
Valuing Diversity: Not Old . . . Wise 213
Advantages and Disadvantages of Group Decision Making, 213
Quantitative Decision-Making Techniques 214
Decision Trees, 214 • Payback Analysis, 214 • Simulations, 215
Creating an Environment for Effective Decision Making 217
PART 3: ORGANIZING 223

Chapter 8: Organizing Principles 224
Introduction 226
The Formal Organization 226
Organizing Process 227
Relationship Between Planning and Organizing, 227
Managing Technology: How an Outsourcing Company Handles a Health
Insurance Claim 228
Benefits of Organizing, 229
Five-Step Organizing Process 229
Reviewing Plans and Goals, 229
Global Applications: Rightsizing Vanguard Info Solutions 231
Determining Work Activities, 231 • Classifying and Grouping
Activities, 233
Valuing Diversity: Reorganizing to Maximize Talent 235
Assigning Work and Delegating Authority, 236 • Designing a Hierarchy
of Relationships, 236
Major Organizational Concepts 237
Authority, 238 • Unity of Command, 241 • Power, 241 •
Delegation, 243 • Span of Control, 244
xii Contents
Ethical Management: Payoffs and Kickbacks—Who Pays? 245

Centralization Versus Decentralization, 247
The Informal Organization 250
Informal Organization Defined, 250 • Informal and Formal
Organizations Compared, 250 • Emergence of the Informal
Organization, 251 • Structure of the Informal Organization, 252 •
Impact of the Informal Organization, 254
Chapter 9: Organizational Design, Culture, and Change 262

Introduction 264
Designing Organizational Structures 264
Organizational Design Defined, 264 • Objectives of Organizational
Design, 264
Ethical Management: Profits and Layoffs 265
Global Applications: Nokia: Reorganized Business 266
Range of Organizational Design Outcomes, 266 • Mechanistic
Organizational Structures, 267 • Organic Organizational
Structures, 267
Contingency Factors Affecting Organizational Design 268
Strategy, 268 • Environment, 268 • Size of the Organization, 269 •
Age of the Organization, 270 • Technology, 272
Structural Options in Organizational Design 273
Functional Structure, 273 • Divisional Structure, 274 • Matrix
Structure, 276 • Team Structure, 278 • Network Structure, 279
Organizational Culture 280
Organizational Culture Defined, 280 • Factors Shaping Culture, 281
Valuing Diversity: Deloitte & Touche Changes the Culture 283
Manifestations of Culture 284
Statements of Principle, 284 • Stories, 284 • Slogans, 284 •
Heroes, 284 • Ceremonies, 284 • Symbols, 285 • Climate, 285 •
Physical Environment, 286
Creation of Culture 286
Role of Managers, 286 • Role of Employees, 287 • Factors
Contributing to the Effectiveness of Culture, 288
Nature of Culture 289
Sources of Change, 290 • Types of Change, 291 • Rates
of Change, 292 • Management and Change, 293
Managing Technology: Collaboration 294
How to Manage Change 295
Need for Change: Diagnosing and Predicting It, 295 • Steps in
Planned Change, 297
Qualities Promoting Change 298
Mutual Trust, 298 • Organizational Learning, 299 • Adaptability, 299
Contents xiii
Implementation of Change 299

Resistance to Change, 299 • Why Change Efforts Fail, 301 •
Methods of Effecting Change, 301
Organizational Development 303
Purposes of Organizational Development, 304 • Strategies
of Organizational Development, 304 • Evaluating the Effectiveness
of Organizational Development, 305
PART 4: STAFFING 313

Chapter 10: Staffing the Workforce 314
Introduction 316
Responsibility for Staffing 317
Staffing Process 317
Staffing Environments 318
Legal Environment, 318 • Sociocultural Environment, 323
Valuing Diversity: “Avoiding This Workplace” Top-10 List 324
Union Environment, 327
Human Resource Planning 328
Job Analysis, 328 • Human Resource Inventory, 329 • Human Resource
Forecasting, 330 • Inventory and Forecast Comparison, 331
Recruitment, Selection, and Orientation 332
Strategies for Recruiting, 332
Ethical Management: Coping with Workplace Romances 333
Selection Process, 334
Managing Technology: Directfit’s Internet Videos 335
Orientation, 338
Training and Development 339
Purposes of Training, 339 • Challenges of Training, 340 • Techniques
of Training, 341 • Purposes of Development, 342 • Techniques of
Development, 342
Performance Appraisal 342
Purposes of Performance Appraisal, 342 • Components of Appraisal
Systems, 343 • Appraisal Methods, 344 • Legality of Appraisals, 346
Implementation of Employment Decisions 346
Promotions, 346 • Transfers, 347 • Demotions, 347 • Separations, 347
Global Applications: The End of Japan’s Lifetime Employment 348
Compensation 349
Purposes of Compensation, 349 • Factors Influencing
Compensation, 350 • Wages and Salaries, 350 • Benefits, 351 •
Executive Compensation, 352
xiv Contents
Chapter 11: Communication: Interpersonal

and Organizational 358
Introduction 360
Communication Process 361
Mediums of Communication 362
Verbal Communication, 362 • Nonverbal Communication, 363
Ethical Management: Profits through Imitation 365
Interpersonal Communication 365
Managing Technology: Real-Time Customer Support 366
Communication and Teams, 366 • Barriers to Interpersonal
Communication, 368
Valuing Diversity: Benefits of Racial Diversity 369
Organizational Communication 371
Formal Downward Channels, 372 • Formal Horizontal Channels,
373 • Formal Upward Channels, 373 • Formal Communication
Networks, 374 • Informal Communication Channels, 374 • Barriers
to Organizational Communication, 377
Improvement of Communication 379
Responsibilities of Senders, 379 • Responsibilities of Receivers, 381
Global Applications: Samsung Buys Quality and Design Message 382
Ten Commandments of Good Communication, 383
Chapter 12: Human Motivation 390

Introduction 392
Challenge of Motivation 392
Basics of Motivation, 393
Global Applications: No More Fear at Semco 394
Motivation Model, 394 • Integrated Motivation Model, 396
Content Theories: Motivation Theories Focusing on Needs 398
Maslow’s Hierarchy of Needs, 398
Ethical Management: A Pink Slip for PeopleSoft 400
Herzberg’s Two-Factor Theory, 402 • McClelland and the Need
for Achievement, 404 • Alderfer’s ERG Theory, 407
Process Theories: Motivation Theories Focusing on Behaviors 408
Expectancy Theory, 408 • Reinforcement Theory, 411 • Equity
Theory, 413 • Goal-Setting Theory, 414
Building a Philosophy of Management 415
Theory X and Theory Y, 415 • Argyris’s Maturity Theory, 416 •
Development of Expectations, 417
Managing for Motivation 417
Treating People as Individuals, 417
Managing Technology: Personalization 418
Providing Support, 419 • Recognizing and Valuing Diversity, 419
Contents xv
Valuing Diversity: GNL Gets A Wake-up Call 420

Empowering Employees, 420 • Providing an Effective Reward
System, 421 • Redesigning Jobs, 422 • Principles of Job Redesign, 422 •
Promoting Intrapreneurship, 424 • Creating Flexibility, 425
PART 5: LEADING 431

Chapter 13: Leadership 432
Introduction 434
Leadership Defined 434
Leadership Traits, 435
Valuing Diversity: “Male” and “Female” Approaches to Leadership 436
Leadership Skills, 436 • Leadership Behaviors, 437 • Management
Versus Leadership, 437
Ethical Management: Peer Reviews at Risk International 441
Power and Leadership 442
Legitimate Power, 442 • Coercive Power, 442 • Reward Power, 442
Global Applications: Wal-Mart’s Subcontractors and Illegal Immigration 443
Expert Power, 443 • Referent Power, 443
Leadership Styles 444
Positive Versus Negative Motivation, 444 • Decision-Making
Styles, 445 • Task Orientation Versus People Orientation, 447
Theories of Situational Leadership 450
Fiedler’s Contingency Model, 450 • House and Mitchell’s Path–Goal
Theory, 451 • Hersey and Blanchard’s Life-Cycle Theory, 454
Challenges Facing Leaders 454
Leadership Throughout an Organization, 455 • Leadership
and Rapid Response, 455 • Leadership and Tough Decisions, 456
How Managers Can Become Better Leaders 456
Managing Technology: Disaster Recovery in Action 457
Chapter 14: Team Management and Conflict 464

Introduction 466
Nature of Teams 466
Teams Defined, 466 • Characteristics of Effective Teams, 467 •
Types of Teams, 467
Philosophical Issues of Team Management 469
How to Use Teams, 469
Managing Technology: Web Log or Blog 471
Global Applications: Reshaping Siemens 472
How Much Independence to Give Teams, 472
Establishment of Team Organization 474
Process of Team Building, 474 • Team-Building Considerations, 476
xvi Contents
Valuing Diversity: Experience Counts 478

Management of Team Processes 478
Stages of Team Development, 478 • Team Cohesiveness, 480 •
Team Norms, 481 • Team Personality, 482
Measurements of Team Effectiveness 482
Benefits of Teams, 482 • Costs of Teams, 483
Ethical Management: The Paycheck Counts 484
Team and Individual Conflict 484
Views of Conflict, 484 • Positive and Negative Aspects of
Conflict, 485 • Sources of Conflict, 485
Strategies for Managing Conflict 487
Analysis of the Conflict Situation, 487 • Development of
a Strategy, 487 • Conflict Stimulation, 489
PART 6: CONTROLLING 497

Chapter 15: Information Management Systems 498
Introduction 500
Information and the Manager 500
Managing Technology: Knowledge Management at Xerox 504
Management Information Systems 504
Functions of an Effective Information System (IS), 505 • Guidelines
for Developing an Information System (IS), 505
Computerized Information Systems 507
Computer Operations, 510 • Data-Processing Modes, 511 •
Linking Computer Systems, 511 • CIS Management Tools, 512
Ethical Management: Staying Close to Customers Can Get You Too Close 513
Managing Information Systems 515
Overcoming Resistance, 515
Valuing Diversity: Meetings and Diversity 516
Enabling Users, 517 • Outsourcing, 517
Global Applications: IT Outsourcing at BP 518
Evaluating Results, 519
Chapter 16: Control: Purpose, Process, and Techniques 526

Introduction 528
Controlling and the Other Management Functions 529
Control Process 530
Establishing Performance Standards, 530 • Measuring
Performance, 532 • Comparing Measured Performance
to Established Standards, 533
Ethical Management: Enron Loses Customer Trust 534
Taking Corrective Action, 534
Contents xvii
Types of Controls and Control Systems 535

Feedforward Controls, 535 • Concurrent Controls, 535
Valuing Diversity: Reliable Mature Workers 536
Feedback Controls, 537 • Control Systems, 538
Characteristics of Effective Controls 539
Focus on Critical Points, 539 • Integration, 539 • Acceptability, 539 •
Timeliness, 540 • Economic Feasibility, 540 • Accuracy, 540 •
Comprehensibility, 541
Control Monitoring 541
Monitoring Organizational Impacts, 541
Managing Technology: RFID in Casinos 542
Updating Controls, 542
Subsystem Controls 544
Finance Controls, 544 • Marketing Controls, 544 • Human Resource
Controls, 545
Financial Controls 546
Financial Statements, 546 • Financial Ratio Analysis, 550 •
Financial Responsibility Centers, 551 Financial Audits, 553
Budget Controls 555
Budget Development Process, 555 •Operating Budgets, 557 •
Financial Budgets, 558
Marketing Controls 559
Marketing Research, 559 • Test-Marketing, 559 • Marketing
Ratios, 560 • Sales Quotas, 561 • Stockage, 561
Human Resource Controls 562
Statistical Analysis, 562 • Human Asset Valuation, 563 • Training
and Development (T&D), 563 • Performance Appraisals, 563 •
Attitude Surveys, 564 • Management Audits, 564
Computers and Control 564
Global Applications: Vietnam Controls Bird Flu 565
APPENDICES 575
Appendix A: Operations Management 576
Introduction 578
Nature of Operations Management 578
Operations Strategy and Operations Management Defined, 578 •
Importance of Operations Management, 578
Operations Planning 579
Product or Service Design Planning, 579 • Facilities Layout, 581 •
Production Processes and Technology, 583 • Facilities Location, 586 •
Capacity Planning, 586
xviii Contents
Management of Operations 586

Aggregate Plan, 587 • Master Schedule, 587 • Structure for
Implementing Production, 588
Controls for Quality and Productivity 588
Design Control, 588 • Materials Control: Purchasing, 588 • Inventory
Control, 590 • Scheduling Control, 594 • Product Control, 596
Appendix B: International Management 602

Introduction 604
Why Businesses Become International 604
The Multinational Corporation 605
Characteristics of Multinationals 606
International Environment 607
Political Environment, 607 • Legal Environment, 609 • Economic
Environment, 609 • Sociocultural Environment, 610 • Technological
Environment, 612
Planning and the International Manager 612
Choosing Strategies, 612 • Assessing the External Variables, 613
Organizing and the International Manager 615
Pre-International Division Phase, 617 • International Division Phase,
618 • Global Structure Phase, 618
Staffing and the International Manager 621
Staffing Problems and Solutions, 621 • Compensation, 622
Leading and the International Manager 623
Employee Attitudes, 624 • Communication Problems, 624 •
Cross-Cultural Management, 625
Controlling and the International Manager 627
Characteristics of Controls, 627 • Control Problems, 628
Appendix C: Succeeding in Your Organization 632

Introduction 634
Managing to Success 634
Nature of Careers, 634 • Career Perspective, 634 • New Career
Environment, 635
Career Planning 636
Stages of Career Development, 637 • Steps in Career Planning, 638
Career Management 644
Analyzing and Understanding the Organization, 644 • Assessment
and Alignment, 646
Strategies for Career Advancement 647
Committing to Lifelong Learning, 647 • Creating Visibility, 648 •
Developing Mentor Relationships, 650 • Developing Networks, 652 •
Understanding Power and Politics, 652 • Working with the Boss, 653 •
Managing Stress, 654 • Nature of Stress, 654
Contents xix
Organizational Dilemmas 657

Conflicts Between Personal and Organizational Values, 657 • Loyalty
Demands, 658 • Advancement Decisions, 658 • Independence and
Sponsorship, 659
References 663
Glossary 675
Index 689
We dedicate this book to our past and present students,
who have taught us how to be better managers.
PREFACE
This ninth edition of Management: Meeting and Exceeding Customer Expecta-
tions is a comprehensive survey of the functions of management as they are cur-
rently being applied in the United States and around the world. The content and
features are structured to reinforce two continuing themes that are woven into
the chapters’ narratives: (1) the never-ending effort by managers and organiza-
tions to meet or exceed customers’ needs, and (2) the need organizations and
their people have to be guided by effective leadership.
The authors have made every effort to keep this text objective, timely, and
interesting to both the student and the instructor. All case problems, examples,
and features portray actual companies and managers in action. Companies have
been selected to provide balance between large and small organizations repre-
senting service, manufacturing, and retailing industries. Successes as well as
failures are included to lend perspective and aid in understanding.
Features
This text is designed to introduce you to terminology, theories, and principles
at the core of business management. The book is divided into six comprehensive
parts, comprising a variety of examples, applications, exercises, and devices.
Each chapter contains the following components: L IST
TO DO Object
ives
arning n
Scan Le in Actio
• A To Do List—study plan at the beginning of each chapter. anagem
en t
Read M
xt s
• A list of specific Learning Objectives—concepts to be mastered through Read te
questi
ons in
feature
Answer p. 203
chapter content—at the beginning of each chapter. Each Learning Objec- p. 19 5
p. 197
p. 213
s
ey Term
tive is also highlighted in the page margin to identify where the content ad- Paraph
rase K
ap te r S u mm
ary
Ch
Review ons
dresses the objective. Rev ie w Questi
Answer n ments
ss ig
lete A
• Key Terms defi ned within the chapter’s narrative are also highlighted in the C omp
page margin and presented in the Glossary at the back of the book. In ad-
dition to defi ning the Key Term, the Glossary also includes page numbers
where you can locate the Key Term.
• A chapter introductory case entitled Management in Action, which tells
how managers and their organizations engage in a variety of activities that
relate to and connect with each chapter’s essential concepts. In addition, the
top manager’s career path is highlighted. These cases are regularly referred
to throughout the chapter.
• Figures designed to illustrate and summarize essential concepts.
1
Discuss the importance
of communication in
organizations
xxi
xxii Preface
• A Global Applications feature demonstrating the successful application of

one or more of a chapter’s concepts to the practice of management in other
countries. At least one critical thinking question is found at the end of this
feature.
266
GLOBAL APPLICATIONS Part 3 Organizing
ages
Nokia: Reorganized Business
Get ty Im
• An Ethical Management feature reporting on managers facing decisions
that contain a variety of issues and consequences for themselves and others.
At least one critical thinking question is found at the end of this feature.
Chapter 2 Management Thought: Past and Present

ages ETHICAL MANAGEMENT 53
How the Pursuit of Quality

Get ty Im
Can Alienate Customers
• A Valuing Diversity feature depicting unique ways in which organizations

show appreciation for their diverse employees. At least one critical thinking
question is found at the end of this feature.
Chapter 9 Organizational Design, Culture, and Change
VALUING DIVERSITY 283

es ag
Deloitte & Touche Changes

Get ty Im
the Culture
• A Managing Technology feature highlighting techniques that can make the

manager more productive.
294
MANAGING TECHNOLOGY Part 3 Organizing

ages
Collaboration
Get ty Im
• A Chapter Summary providing a narrative explanation for each of the chap-

ter’s learning objectives.
• Review Questions designed to assist in mastery of the chapter’s learning
objectives.
• Discussion Questions for Critical Thinking intended to provide an oppor-
tunity to analyze and apply the chapter’s concepts to practical situations.
Preface xxiii
• Internet Exercises designed to help in applying one or more of the chapter’s

key concepts.
• BCRC—exercises to give students up-to-date, targeted, and proprietary in-
formation by searching the Business and Company Resource Center.
• An Application Case—positioned at the end of each chapter—presenting
managers and organizations and their attempt to cope with the major issues
raised in that chapter.
• An On the Job Video Case to help bring key management concepts and is-
sues to life in the classroom.
• A Biz Flix Video Case to relay key management concepts depicted in
movies.
Throughout your study of this text, try to relate what you read and discuss
to your own experiences. You have already been practicing—and perhaps violat-
ing—many of the principles of management. What you are about to learn is an
extension and refinement of what you already know—a blending of it with the
experiences of others.
Although you will be reading each chapter as a separate area of study, try to
relate it to what you have experienced and read previously. By linking the con-
tent of each chapter to that which has preceded it, you will begin to appreciate
that management is a tapestry with many threads that run parallel to and across
one another. For example, planning relates to all the management functions; it is
part of every management activity in much the same way as is communicating.
Periodically step back from your study to see the “big picture” of which each
chapter is but a part.
Upon completion of this text and course, you will have developed your own
philosophy of management and be armed with the essentials necessary for im-
proving your career. You will become a better manager of your own concerns as
well as the work of others.
Organization of the Content

Part 1: Management Concepts
This section provides a basic overview of management, the evolution of manage-
ment thought, management’s commitment to improvement, and the various en-
vironments that affect the practice of management.
Chapter 1 explores what management is about, why it is necessary, the
needs managers must address, management functions, management roles, man-
agement skills, and management myths and realities.
Chapter 2 takes you on a journey through the past, examining the evolution
of management theory from the classical schools through today. It assesses the
contributions made by each and explains the links among them.
Chapter 3 examines ethical issues and the need to be proactive when man-
aging for social responsibility. After defi ning both concepts, the chapter explores
ethical tests, approaches to social responsibility, and the links between them and
applicable legal requirements. It also deals with the issues of responsibilities to
stakeholders and of government regulation of business activities as well.
Chapter 4 focuses on management’s commitment to continuous improve-
ment. It explains the link between quality, productivity, and profitability. It also
xxiv Preface
examines factors that affect productivity, along with the commitments neces-
sary by top, middle, and first-line management to improve quality and produc-
tivity. Chapter 4 also introduces key concepts such as core values, reengineering,
open-book management, empowerment, and knowledge management.
Part 2: Planning and Decision Making

This section begins with a look at the manager’s environments and their ef-
fects on organizational management. The importance of the fi rst function of
management—planning—is examined in Chapter 6 from several perspectives:
organizational, contingency, strategic, and operational. The relationship of plan-
ning to all other management functions, and ways to make it more effective, are
covered. The art of decision making is the focus of Chapter 7.
Chapter 5 lists and defi nes the internal and external environments that af-
fect and challenge the practice of management. Business as an open system and
the demands of stakeholders are the major focus.
Chapter 6 explains the importance of planning, the framework for plans,
types and uses of plans, and the planning process.
Chapter 7 guides the student through the steps for rational decisions, deci-
sion-making climates, quantitative methods, and the various influences on the
manager’s problem-solving efforts.
Part 3: Organizing
Organizing is examined as a process, along with why different organizations
adopt different approaches to structuring their operations. Both the formal and
informal organizations are included in the discussions. Organizing principles
are demonstrated with examples.
Chapter 8 looks at the formal organization, the organizing process, its key
principles and concepts, and the informal organization.
Chapter 9 covers organizational design, the range of organizational-design
outcomes, organizational culture, and handling change.
Part 4: Staffing
This section develops the concepts of staffi ng, communica-
tion, and motivation.
Chapter 10 surveys staffi ng from human resource plan-
ning to employee separations. It addresses sociocultural and
STAFFING CHAPTER 10 legal influences, along with such activities as job analysis,
Staffing the Workforce
CHAPTER 11
Communication: Interpersonal
job evaluation, training and development, and the practice of
and Organizational
CHAPTER 12
staffi ng in a union environment.
Human Motivation
Chapter 11 focuses on communication—organizational
and interpersonal—and demonstrates the communication
process and barriers to it, along with how managers can im-
prove their communication efforts.
Chapter 12 explores motivation and the applications of
Getty Images
the most relevant theories. It gives special consideration to

how managers can use their insights and principles to get the
most from themselves and team members.
Part 5: Leading
This section develops the concepts of leadership, team management, and con-
fl ict. Essential legal concepts are included along with the principles and prac-
tices that affect each.
Preface xxv
Chapter 13 looks at leadership and details its importance and associations

with power and authority. It reviews the roles leaders must play with their fol-
lowers, along with the theories that govern the practice of leadership and the
styles that leaders may adopt.
Chapter 14 examines team management and conflict, including the nature
and types of teams, philosophical approaches to team management, and how to
establish team-based organizations. It defi nes confl ict and discusses the causes
and methods for managing it.
Part 6: Controlling
This section examines and applies different aspects of the principles and theo-
ries of control.
Chapter 15 focuses on information flow and how it can be managed in or-
ganizations and discusses in detail management information systems and deci-
sion support systems.
Chapter 16 focuses on the nature of control, the control process, types of
controls, and characteristics of effective controls, and gives special attention to
the art of making controls effective.
Appendices
This section provides basic coverage of operations management, international
management, and succeeding in one’s career.
Appendix A looks at operations management—its nature; its link to plan-
ning, processes, and facilities; and how to manage operations, and includes in-
formation on how to control operations for both quality and productivity.
Appendix B explores the recent trends affecting businesses in global mar-
kets, the nature of the international business environment, and the nature of
multinational corporations. It discusses each function of management as it ap-
plies to an international operation and environment.
Appendix C is concerned with career management. It analyzes stages in ca-
reer development and steps in career planning, and follows the analyses with
several strategies managers can take to advance their careers.
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xxvi Preface
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BIZ FLIX VIDEO CASE

The video package contains two options: On the Job videos and Biz Flix vid-
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Preface xxvii
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xxviii Preface
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Preface xxix
Acknowledgments
We extend heartfelt thanks to the following reviewers who have been so helpful
in preparing this ninth edition:
Gil Wolpe, Newbury College

Brenda J. Jolivette, Lee College
William J. Waxmann, Edison Community College
Jewel Boozer Cherry, Forsyth Technical Community College
With thanks,
Warren Plunkett
Raymond Attner
Gemmy Allen
MANAGEMENT
Ninth Edition
MANAGEMENT CHAPTER 1
Management: An Overview
CONCEPTS
CHAPTER 2
Management Thought: Past and Present
CHAPTER 3
Management Ethics and Social Responsibility
CHAPTER 4
Management’s Commitments to Quality
and Productivity
Getty Images
O LIST
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LEARNING OBJECTIVES
MANAGEMENT: After studying this chapter, you should be able to:
AN OVERVIEW 1 Explain why organizations need managers
Determine the needs that affect a manager’s universe

2
Identify three levels of management
3
Describe five management functions
4
Apply management functions to each level of management
5
Summarize ten management roles
6
Analyze three management skills
7
Contrast the myths with the realities of a manager’s job
8
Discuss the criteria used to evaluate a manager’s performance
9
Getty Images
MANAGEMENT IN ACTION
Best Buy: Close to the Customer
Best Buy is a company which lacks the advantages
that come with product innovation, but it is the nation’s Brad Anderson
leading consumer electronics and entertainment re- Born: 1949, Sheridan, Wyoming
tailer. In fact, it held the number one position on the Current Position: Vice Chairman and Chief
Stores ranking of the Top 100 Specialty Retailers (Au- Executive Officer, Best Buy
gust 2005). Marcus Buckingham—author of The One Career Highlights:
Thing You Need to Know . . . About Great Managing,
1973 Commissioned Salesman, Sound of Music
Great Leading, and Sustained Individual Success (Free
Press)—attributes the success of Best Buy to Brad 1981 Store Manager, Sound of Music
Anderson, its Vice Chairman and Chief Executive Offi- 1981 Vice President, Sound of Music
cer. He found that Anderson gained an advantage over 1983 Sound of Music becomes Best Buy
competitors by mastering the discipline of managing. 1986 Executive Vice President
Buckingham spent 17 years researching the 1986 Elected to Board of Directors
world’s best managers for the Gallup Organization. 1991 President and Chief Operating Officer
One million employees and 80,000 managers in all 2001 Vice Chairman
kinds of organizations, at all levels, in most industries, 2002 Chief Executive Officer
and in many countries were studied. Marcus Buck- Education: Waldorf College, AA, 1969; University
ingham and Curt Coffman of the Gallup Organization
of Denver, BA, 1971
presented the findings of Gallup’s in-depth study of
great managers in their book First, Break All the Rules Personal: Wife, Janet, and two sons
(Simon & Schuster). They found that “great manag- Source: International Directory of Business Biographies
(Thomson Gale)
ers share one common trait: They do not hesitate to
break virtually every rule held sacred by conventional
wisdom.”
Gallup’s research identified 12 questions that from those employees who are closest to the cus-
measure dimensions that managers can influence. tomer” (Best Buy: Our Leaders: Biography).
• Do you know what is expected of you at work? For more on Best Buy, read About Best Buy at http://www
• Do you have the materials and equipment you .bestbuy.com. For more on the Gallup Organization, read About
need to do your work right? Us at http://www.gallup.com. For more on what the world’s
• At work, do you have the opportunity to do what greatest managers do differently, read Marcus Buckingham and
Curt Coffman, First, Break All the Rules (Simon & Schuster, 1999)
you do best every day? and Now, Discover Your Strengths (Free Press, 2001).
• In the last seven days, have you received recog-
nition or praise for doing good work? retailer
ig box”
• Does your supervisor, or someone at work, seem
le c tr o nics “b in th e U.S.
to care about you as a person? v e e n abled e c ia lt y retailer ve O f-
ti
ithin ha ne sp e E xecu
• Is there someone at work who encourages rs h ip skills w th e n u mb er o a n a n d Chief ll e n ge com
-
Leade h a
your development? to b e ranked V ic e Chairm n g n e ss to c c o m peti -
t Bu y t Bu y ’s a wil li reate d
• At work, do your opinions seem to count? Bes Anderson, Bes managing and engths have c
B ra d s te ry of rs h ip str
• Does the mission/purpose of your company a o leade
as a m
ficer, h ese tw
make you feel your job is important? w is d om. T h a ny wide.
• Are your associates (fellow employees) mon g e c omp
v a n ta
committed to doing quality work? tive ad
• Do you have a best friend at work?
© Douglas C. Pizac/Associated Press
• In the last six months, has someone at work

talked to you about your progress?
• In the last year, have you had opportunities at
work to learn and grow?
Employee satisfaction on Gallup’s 12 questions
distinguish the greatest managers from all the rest.
Buckingham’s findings revealed that Best Buy is a
successful workplace with strong managers building
it. Brad Anderson “believes that constant innovation
is required to enhance the quality of the customer’s
experience and is convinced that the best ideas come
4 Part 1 Management Concepts
Introduction
This chapter’s Management in Action case discusses key people—managers—
creating, overseeing, and expanding the operations of a business organization
by coordinating various resources, skills, and activities. In addition to profi t-
seeking enterprises, key people initiate, oversee, and expand other types of orga-
nizations such as not-for-profit enterprises, including charities, private schools,
and governmental agencies in every country in the world.
Peter F. Drucker—the late, preeminent management thinker—asserted that
“management is not business management.”
There are, of course, differences in management between different
organizations—mission defines strategy, after all, and strategy defi nes
structure. But the differences between managing a chain of retail stores
and managing a Roman Catholic diocese are amazingly fewer than
either retail executives or bishops realize. The differences are mainly in
application rather than in principles.1
The paragraphs that follow provide a brief introduction and overview of the on-
going features and themes of this text. They explain what management is and
why it is needed and describe the functions, roles, and skills executed by all
managers. The following chapters examine the details of what managers do and
how they do it.
Each chapter contains six features designed to help you understand and
apply its contents.
• Management in Action: An introductory case involving managers and their
organizations—large or small, service or manufacturing—engaging in a va-
riety of activities that relate and connect each chapter’s essential concepts. It
is regularly referred to throughout its chapter.
• Global Applications: Successful application of one or more of a chapter’s
concepts from the practice of management in other countries.
• Ethical Management: Managers making or facing decisions that contain a
variety of issues and consequences for themselves and others.
• Valuing Diversity: Unique ways in which organizations show appreciation
for their diverse employees.
• Managing Technology: Ways in which organizations use technology and
technology-related concepts to their benefit.
• Application Case: Positioned at the end of each chapter, a concluding case
of managers’ and organizations’ attempts to cope with each chapter’s major
issues.
Each of these features serves to reinforce two continuing themes that are wo-
ven into the chapters’ narratives: (1) the continual effort by managers and organi-
zations to meet or exceed their customers’ needs and expectations; and (2) the need
that organizations and their people have to be guided by effective management.
Management and Managers

Best Buy is one of the nation’s largest retailers, tracing its beginnings to 1966
when Richard Schulze and his business partner opened the Sound of Music store
in St. Paul, Minnesota. After graduating from college, Brad Anderson took a job
at the small music store because, as he says, “I could listen to music and get paid
Chapter 1 Management: An Overview 5
for it.” 2 He worked his way up to manager and today is the vice chairman and
chief executive officer of Best Buy Co., Inc. By 2004, Forbes magazine named
Best Buy “Company of the Year.” Best Buy has great managers: people who managers
allocate and oversee the use of resources. People who allocate and over-
see the use of resources
Collectively, Best Buy’s managers constitute its management: one or more
managers individually and collectively setting and achieving goals by exercising management
related functions (planning, organizing, staffing, leading, and controlling) and co- One or more managers individu-
ally and collectively setting and
ordinating various resources (information, materials, money, and people). A small achieving goals by exercising
organization’s management may consist of only one person; such is often the case related functions (planning, or-
in sole proprietorships. Each management function listed above is briefly defi ned ganizing, staffing, leading, and
controlling) and coordinating
later in this chapter and examined in great detail in Parts II through VI of the text. various resources (information,
A goal is an outcome to be achieved or a destination to be reached over a pe- materials, money, and people)
riod of time through the exercise of management functions and the expenditure
goal
of resources. One long-term goal at Best Buy is customer centricity, a focus on An outcome to be achieved or a
the needs of its diverse customer mix. All of Best Buy’s managers must coordi- destination to be reached over
nate their efforts with each other to achieve this goal. a period of time through the
exercise of management func-
A specific kind of goal is called an objective. A goal is general and long tions and the expenditure of
term. An objective is short term, rather than long, usually achieved in less than resources
a year. Since employees cannot “do a goal,” objectives are set to help them re-
alize their accomplishments. An objective is written to be specifi c, measurable,
attainable, result-oriented, and time limited. For Best Buy’s business managers,
selecting highly talented employees for the right jobs is a continuing short-term
goal (objective).
As you have noticed, student learning objectives appear at the beginning
of this chapter. These and the ones listed in following chapters can be achieved
over the span of this course.
Organizational Need for Managers

Basically, an organization is an entity managed by one or more persons to
achieve stated goals. Best Buy’s business name is Best Buy Co., Inc. Renowned
management author, professor, and consultant Peter Drucker wrote that manag-
ers have two basic tasks: “One, running a business, and two, building an orga-
nization.” 3 To do both, managers in charge of activities must coordinate what
1
Explain why organizations
need managers
organization
they do with each other while simultaneously accepting “the values [and] the An entity managed by one
or more persons to achieve
goals of the organization.” 4 stated goals
Values constitute beliefs and basic tenets that are important and meaningful
to those individuals and organizations that hold them.5 They must be harmoni-
ous and support one another. At Best Buy, all employees contribute in various
ways to making the company’s values an everyday reality for its customers.
Best Buy’s Values
• Having fun while being the best
• Learn from challenge and change
• Show respect, humility, and integrity
• Unleash the power of our people
Source: Bestbuy.com: About Us: About Best Buy: FAQ, http://bestbuymedia.tekgroup.com/news/section_news
.cfm?news_section1338#Values.
James C. Collins, business consultant and coauthor of the best-selling book

Built to Last, reports that companies achieve long-term success by sticking pas-
sionately to a set of values and creating systems that encourage employees to act
in parallel with those values.6 The systematic ways in which a company’s man-
agement selects, trains, evaluates, and rewards its employees demonstrate the
values that managers want to promote and their commitment to them.
Organizations exist everywhere and provide the means for individuals,
groups, and societies to meet their needs. As at Best Buy, managers create organi-
zations. Once created, organizations need one or more managers to oversee their
operations and change or update them as needed. Thus, whether a new organiza-
tion or an old, there is a universal need for managers.
The Manager’s Universe
2
Determine the needs
that affect a manager’s
universe
Change is often said to be the only constant in business. Therefore, as we shall
note in discussions throughout this text, managers must be able to sense the
need for change in themselves, the need for change in their areas of influence
and in their organizations, and the need to become the driving force for achiev-
ing change.
This section begins the development of the five continuing and evolving
themes that are reinforced by each chapter’s features:
1. Managers and their organizations need to please customers by meeting or
exceeding their needs and expectations.
2. Managers should provide leadership.
3. Managers and organizations must act ethically.
4. Organizations should value diversity in their employees.
5. Managers and organizations must learn to cope with global challenges.
How each need is met is largely affected by each manager’s and organization’s
values, how well each manager executes the five management functions, and the
availability of needed resources. We examine each of these needs, beginning with
the need to please customers.
The Need to Please Customers

Managers know that the survival and profitability of their organization are di-
rectly linked to meeting or exceeding customers’ needs and expectations. They
can satisfy customers by guaranteeing that all individual efforts and their results
quality possess quality: “The totality of features and characteristics of a product or ser-
The features and characteris- vice that bear on its ability to satisfy stated or implied [requirements of those
tics of a product or service that
allow it to satisfy requirements who use or consume them].” 7 Quality translates into the ability of some per-
of those who use or consume son’s, group’s, or organization’s output to meet or exceed some other person’s,
them group’s, or organization’s (i.e., a customer’s) needs.
customer Throughout this text, a customer includes any person or group, both inside
Any person or group, both in- and outside an organization, who uses or consumes outputs from an organization
side and outside an organiza- or its members. The internal customer is any person or group inside the organiza-
tion, who uses or consumes
outputs from an organization or tion who receives what is needed from others in the organization. Referring back
its members to the Management in Action case, examples include:
• Managers at Best Buy’s headquarters receiving reports on time from their
regional managers
• A Best Buy employee receiving her paycheck on time and in the right amount
from the company’s payroll clerk?
• Each of Best Buy’s customers receiving properly prepared reports in a rea-
sonable time
Chapter 1 Management: An Overview
GLOBAL APPLICATIONS 7
a g es
The Globalization of Wipro Ltd.
Get t y Im
Wipro Ltd., headquartered in Bangalore, India, is a global work can be removed and done somewhere else, it will be
company, with offices in America, Europe, and Asia. Most done where it’s most cost-effective. Take a large law firm.
of its business comes from information technology (IT) The clerks and paralegals could be trained in India, serving
services. Wipro competes with companies such as Ac- partners and associates in the U.S. Salomon Smith Barney
centure, EDS, and IBM. It focuses on quality improvement has a big research staff here. Why can’t 60 percent of its
concepts to software and is the first PCMM Level 5 and reports be done from India? Why should they require
SEI CMM Level 5 certified IT Services Company globally. everyone to be in the United States?
Basically, this means that Wipro has reached the highest
American companies continue to outsource their work-
level in the People Capability Maturity Model for software
force to India and other countries. A major reason is cost.
development and maintenance.
Salaries at Wipro headquarters in India are considerably
Wipro Chairman and Managing Director, Azim H.
lower than those in the United States. For example, a top
Premji, is a billionaire and India’s richest individual. He in-
technology-strategy consultant with a bachelor’s degree
herited the Western India Vegetable Products Company
in electronics and communications makes $21,000 a year,
in 1966. Mr. Premji diversified the company into personal
and software programmers average $8000 a year.
care products, then lightbulbs, then computers, scanners,
and printers. In 1990, he began offering offshore outsourc- • How can American managers compete with their
ing solutions, at lower prices, to other companies. global counterparts?
Here’s what Premji tells American executives. • How are you preparing for your future?
What’s happening now in services is what happened For more on Wipro visit http://www.wipro.com and read Keith H.
Hammonds, “The New Face of Global Competition,” Fast Company,
15 years ago in manufacturing. It started in software, in February 2003, Issue 67, p. 90, http://www.fastcompany.com/
application development. It’s moving to software-enabled online/67/newface.html.
services, call centers, legal services, medical. Wherever
Best Buy’s external customers—persons or groups outside the organization

who expect the organization’s outputs to meet their needs—include:
• The customer receiving what he ordered in a reasonable period of time and
with friendly service
• An outside supplier receiving Best Buy’s quality specifications for a Gallup
service it must provide
• A building contractor receiving Best Buy’s payments on time and in the
proper amounts for services and materials provided
Quality is defi ned by both internal and external customers’ needs, but those
needs and expectations are like moving targets—always changing. Customers
continue to want things faster, better, and cheaper. Today’s external customers
can choose from the best that producers anywhere in the world have to offer. This
expectation puts pressure on managers to make the quality of their activities and
outputs “world class,” a set of standards that can be used to measure and com-
pare performance.
All employees are simultaneously customers and the means to satisfy custom-
ers. As customers, they must make those who exist to serve them aware of what
they need. As the means to satisfy customers, they must determine who their cus-
tomers are and what they require. Finally, employees must make it both a per-
sonal commitment and a primary duty to meet customer needs.
Text not available due to copyright restrictions
Best Buy’s management fully understands that companies are evaluated in

the marketplace by both customers and investors on how well they meet all their
customers’ needs and manage customer relationships. As depicted in Managing
customer relationship
management (CRM) Technology, customer relationship management (CRM) allows organizations to
A long-term management ap- track and analyze shifting customer needs, link marketing campaigns to sales re-
proach to customer relations sults, and monitor sales activities for improved forecasting accuracy. To guaran-
that attempts to strengthen the
bond between the customer tee that its employees deliver quality outputs, Best Buy employees are expected
and the organization to focus on the needs of customers. Chapter 4 examines quality in more detail.
ETHICAL MANAGEMENT 9
a g es
Telemarketers Survive Do Not Call
Get t y Im
Many legitimate companies sell their products and ser- one of the most popular services ever offered by the fed-
vices over the telephone, because it is productive and ef- eral government. The FTC, the Federal Communications
ficient. Telemarketing efforts sell everything from used Commission (FCC), and the states enforce the National
books to home repairs and exist at the manufacturing, Do Not Call Registry, which was started in 2003. During
wholesale, and retail levels in every major industry. Even 2003 and 2004, over 64 million telephone numbers were
charitable organizations use the phone to raise money. registered (FTC, Annual Report). Telemarketers who call
Telemarketing generates eight to ten times more sales those on the list face fines of as much as $11,000 per call.
than its direct-mail counterpart and costs far less than The Do Not Call list has stopped most, but not all, tele-
putting salespeople on the streets. marketing calls. Telemarketers have not gone out of busi-
There is a dark side, however. Every state’s attorney ness. They have shifted their emphasis to activities not
general can testify to the abuses deceptive telemarketing included on the list: not-for-profit organizations, political
efforts bring. The Federal Trade Commission (FTC) reports: campaigns, and companies that have an existing business
Fraud by telephone, Internet and mail is a serious interrelationship with a call recipient.
national problem. It steals your money, your identity and • What do you think are the ethical issues relating to
even your self-respect. . . . When a caller asks you to telemarketing?
send money to claim a big prize, it’s fraud! You’ll lose • How can telemarketers justify the human costs con-
your money. When a caller or Internet contact asks for nected with their business?
your Social Security, driver’s license, or bank or credit card • Should similar lists be put in place for e-mail and in-
numbers, don’t provide it! You could lose your identity and stant messaging? Defend your answer.
your money (FTC, Fraud).
Sources: U.S. Federal Trade Commission, “Fraud: Recognize It.
In response to complaints against telemarketers, many Report It. Stop It,” http://www.ftc.gov/bcp/conline/pubs/tmarkg/
fraud.htm; U.S. Federal Trade Commission, “Annual Report to
states, as well as the federal government offer a Do Not Congress FY 2003 and 2004,” submitted to Congress, September
Call list, allowing people to register their telephone 2005, http://www.ftc.gov/reports/donotcall/051004dncfy0304.pdf;
For more on the Do Not Call list, visit the Federal Trade Commission,
numbers so that they will not be called by telemarketers. http://www.ftc.gov and the Federal Communications Commission,
Millions of people have registered and it has proven to be http://www.fcc.gov.
The Need to Provide Leadership

“Without leaders who can attract and retain talent, manage knowledge, and
unblock people’s capacity to adapt and innovate, an organization’s future is in
jeopardy.” 8 Leadership practitioners (leaders) accomplish this in part by exhibit- leadership
ing sets of values, skills, abilities, and traits that are needed by and are an inspi- The ability to get people to
follow voluntarily
ration to others. Leadership involves gaining commitments from organizational
members to achieve management’s goals and properly equipping them to do so.
According to professor and author John Kotter of Harvard University, lead-
ers initiate and facilitate change.9 They face two basic tasks: “First, to develop
and articulate exactly what the [organization] is trying to accomplish, and sec-
ond, to create an environment in which employees can figure out what needs to
be done and then do it well.” 10 To be successful, companies must have leaders at
every level and in every unit, creating and maintaining supportive environments.
Warren Bennis, Distinguished Professor of Business Administration and
founding Chairman of the Leadership Institute at the University of Southern
California’s Marshall School of Business, provides further insight.
“The truth is that no one factor makes a company admirable,” wrote
Thomas Stewart, “but if you were forced to pick the one that makes the
most difference, you’d pick leadership. In Warren Buffett’s phrase, ‘Peo-

ple are voting for the artist and not the painting.’ ” 11
Chapter 13 has more to say about leadership.
The Need to Act Ethically

The daily news is littered with examples of organizations and individuals exer-
cising questionable judgment, ignoring their moral and legal obligations, and
taking actions that negatively affect others. What causes underlie these head-
lines? The answer lies in part with the importance that people and their organi-
ethics zations place on ethics: the branch of philosophy concerned with what consti-
The branch of philosophy con- tutes right and wrong human conduct, including values and actions, in a given
cerned with what constitutes
right and wrong human conduct, set of circumstances.
including values and actions, in When people ignore or act in spite of the negative consequences their ac-
a given set of circumstances tions can yield, they often do needless harm to themselves and others. An indi-
vidual’s previous experiences all combine “to produce a personal moral code of
ethical values with associated attitudes.” 12 Our values dictate to some degree
our ethics and moral compass—our conscience. While contemplating or taking
action, each one of us can choose to follow or suppress our conscience. And, as
this chapter’s Ethical Management feature indicates, various pressures exist to
drive individuals from an ethical path.
Each employee must have and act on a personal ethical and moral code.
Their organization must provide values and support systems to make certain
that no person or group is needlessly harmed by the organization’s or an em-
ployee’s actions. Managers cannot be leaders without a strong set of moral and
ethical values and a commitment to avoid compromising them. Certainly cus-
tomers expect no less. Author and researcher Danny Cox has conducted studies
on leadership and believes that
at the core of any high standard of personal ethics is the declaration of
personal responsibility. A person who refuses to accept responsibility
lacks the ethical armor to stand against temptation.13
Chapter 3 explores ethical concepts in more depth.
The Need to Value Diversity in Their Employees

Managers no longer manage a homogeneous workforce. Organizations are com-
posed of a heterogeneous mix of people that reflects our nation’s population.
Data from the U.S. Department of Labor show that “the future racial and ethnic
makeup of America will be considerably different than it is today. Trends show
that whites will be a declining share of the future total population, while the His-
panic share will grow faster than that of non-Hispanic blacks. By 2050, minori-
ties are projected to rise from one in every four Americans to almost one in ev-
ery two. The Asian and Pacific Islander population is also expected to increase.
Growth rates of both the Hispanic-origin and the Asian and Pacific Islander
populations may exceed 2 percent per year until 2030.”
diversity America’s diversity includes people from differing age groups, genders, eth-
Includes people from differing nic and racial backgrounds, cultural and national origins, and mental and physi-
age groups, genders, ethnic and
racial backgrounds, cultural cal capabilities. Our nation’s diversity represents three challenges for managers:
and national origins, and mental
and physical capabilities 1. Integrate the diversity that exists in their communities and in their external
customers into their workforces.
2. Learn about and understand their employees’ differences.
3. Find ways for themselves, their employees, and their organizations to utilize
and celebrate these differences.
America’s equal employment opportunity laws help to guarantee access to
organizations for all its citizens. The key issues then become how these differing
individuals and groups will be welcomed and managed once inside. Sylvia Ann
Hewlett, President of the Center for Work Life Policy in New York and Head of
the Gender and Policy Program at Columbia University’s School of International
and Public Affairs, and Cornel West, Professor of Religion at Princeton Univer-
sity, found that prejudice in management still exists. For example, they found
that in Fortune 500 companies, 98 percent of chief executive officers (CEOs) and
95 percent of top earners are men, the overwhelming majority of them white.14
Almost 11 years of data from the Equal Employment Opportunity Com-
mission shows that minorities are making slow but steady progress into man-
agement jobs. For example, in 2001 (the most recent year for which statistics
are available), African Americans held 6.8 percent of the jobs in management,
up from 5.2 percent in 1990. Figure 1.1 depicts this progress, as well as that of
other racial and ethnic groups.
This chapter’s Valuing Diversity feature highlights how MTV Networks is
working to value the diversity of its employees.
The Need to Cope with Global Challenges

Conducting business internationally is a way of life for many businesses. Accord-
ing to the Small Business Administration (SBA), international sales have contrib-
Figure 1.1 The employment of minorities as officials and managers, 1990–2001
Source: U.S. Equal Employment Opportunity Commission Characteristics of Private Employment Sector Employment 2003, http://www.eeoc
.gov/stats/reports/ceosummit/index.html.
uted to nearly 30 percent of domestic economic growth in recent years. But this
success is not limited to large corporations; the number of American businesses
sending their goods and services overseas has tripled since 1990, with a full
two-thirds of that boom coming from companies with fewer than 20 employ-
ees. It’s become a necessity for any business to export, and those that don’t are
9 percent more likely to fail in any given year than comparable fi rms that do.
Most of America’s 1000 largest companies, such as the giant commercial air-
craft producer Boeing, make more than half of their sales dollars from foreign
customers. Even the smallest of businesses that call their customers neighbors
cannot escape influences from abroad. Many of their raw materials, supplies, and
retail inventories come from growers, producers, and service providers around
the world. For example, nearly all the coffee processed and sold in the United
States comes from sources outside its borders.
In a global economy, national borders become insignificant. Companies in
every industry must locate operations wherever they can serve their customers
best and procure needed resources. Organizations including Germany’s BMW,
England’s BP, France’s Michelin, and Japan’s Toyota have built production facil-
ities in the United States and in dozens of other nations in order to better serve
their customers and lower their production costs. They also obtain needed re-
sources and market their production output in the countries where they have
built facilities as well as many other countries.
According to David Fagiano, former President and CEO of the American
Management Association—a worldwide professional development organiza-
tion with branches in 30 countries—American managers can learn much from
the practice of management by foreigners wherever they do business. “We must
stop thinking that the United States has cornered the market on intelligence and
realize that innovations in management are happening everywhere.” 15
Clearly, integrating the preceding idea into each manager’s philosophy and,
therefore, into management’s approaches to solving problems and making deci-
sions makes the practice of management an awesome challenge. In addition to
the above-mentioned needs, however, the manager’s universe is made even more
complex by several additional factors:
• Technological advances that lead to breakthroughs in such areas as virtual
reality, telecommunications, robotics, and computer applications require
managers to learn new skills, design new training programs, and reexamine
operations and processes.
• Economic changes in levels of interest rates, inflation, taxation, and the on-
set of a recession in one or more markets require managers to revisit their
plans and make adjustments in a variety of areas, including the size of work-
forces and the spending for resources.
• Natural disasters, such as the 2005 hurricanes Katrina and Rita in the Gulf
Coast area of the United States, require managers in insurance companies,
farm cooperatives, utilities, and transportation companies to act immedi-
ately and decisively; they must adjust their goals and their timetables.
• Crises, such as September 11, 2001 (9/11) and the bombing of the Alfred P.
Murrah Federal Building in Oklahoma City in 1995, activate chains of man-
agement decisions in dealing with rescue teams, aid agencies, and the media.
• Social and political changes (e.g., widespread drug use discovered in a com-
pany’s workforce and changes in both laws and population mixes where a
company’s operations are located) require managers to rethink practices,
adjust spending priorities, and implement new training programs.
a g es
MTV Networks Adds Chief
Get t y Im
Diversity Officer (CDO)
MTV Networks, a unit of Viacom International Inc., is one Company and to identify new ways of enhancing exist-
of the world’s leading creators of programming and con- ing initiatives;
tent across all media platforms. Upon appointing Billy • work with MTV Networks’ current diversity councils
Dexter as its first Executive Vice President & Chief Diver- and teams to create more formal structures and pro-
sity Officer (CDO) in October 2005, Judy McGrath, Chair- cesses for implementing key recommendations; and
man and CEO of MTV Networks, said, “The creation of a • continue to forge new partnerships with relevant out-
Chief Diversity Officer at MTV Networks is a crucial next side organizations and represent the Company’s diver-
step in building the most diverse culture and creative out- sity efforts externally.
put in the industry. We are completely committed to di-
“I am very excited to help take the company’s great work
versity and inclusion, because it’s the most creative and
to the next level and move forward towards a true culture
vibrant thing we can do for our future. The audience for
of inclusion where all voices are heard,” said Dexter.
our content is increasingly global, diverse in thought, de-
mographic and lifestyle. Over the years, no other initiative • What is the significance of MTV Networks making di-
has so enriched MTV Networks, or made us more rele- versity the responsibility of a chief officer?
vant and successful.” • Why do you think the CEO mentioned inclusion in ad-
As CDO, Dexter will: dition to diversity?
• partner with MTV Networks’ senior leadership to de- Source: “MTV Networks Names Billy Dexter as Chief Diversity
Officer,” Black Talent News, November 1, 2005, http://www.black
velop strategies that further diversity throughout the talentnews.com/artman/publish/article_303.shtml.
In a global economy, managers must adapt their execution of basic func-

tions to unfamiliar cultures, commercial regulations, economic conditions, and
climates. Customer demands and preferences, as well as the values and customs
of indigenous workforces, must be respected and accommodated. Wipro, the
subject of this chapter’s Global Applications, is hiring local nationals wherever
it does business. Azim H. Premji, Wipro Chairman and Managing Director, re-
lates, “A true global company appears to be local wherever it does business.” 16
One of Wipro’s goals is to have local nationals as three-quarters of its employees.
All the preceding factors combine to make the real world of management
complex, ever changing, exciting, and fi lled with pressure. As Roger Penske, fa-
mous automobile racer and Chairman of Penske Corporation, puts it, “The chal-
lenges are there every day and stress is a persistent adversary.” 17 Appendix B
examines the conduct of business in an international arena in more detail.
Levels of Management
Although all managers perform the same set of functions, they actually do so
on only three organizational levels. Generically speaking, managers are found
at the top, middle, and fi rst-line—sometimes called the supervisory, front-line,
or operating—levels of management. Collectively, these levels constitute the
management hierarchy, as shown in Figure 1.2.
3
Identify three levels of
management
management hierarchy
Shown at the left in Figure 1.2 is a pyramid representing management in The top, middle, and first-line
levels of management
a medium- or larger-sized sole proprietorship and partnership. On the right is
the model of a traditional management structure in a similar-sized corporation.
Figure 1.2 Levels of the management hierarchy
Board of Directors
Top-Management
Level
Middle-Management
Level
First-Line, or Operating-
Management
Level
Sole Proprietorship Corporation
and Partnership
The latter model includes a board of directors consisting of members elected by

stockholders (the owners of a corporate enterprise) who, in turn, appoint key
members of a corporation’s top management.
Top Management
top management The tip of the pyramid consists of the organization’s top management: The chief
The chief executive officer executive officer (CEO) and/or president and his, her, or their immediate sub-
(CEO) and/or president and his,
her, or their immediate subordinates, usually called vice presidents. Top management is responsible for
ordinates, usually called vice overseeing the entire organization. It establishes long-term, companywide goals
presidents and oversees the work of middle managers. Top management also creates and
coordinates alliances and partnerships with outsiders. For example, Ford and
Nissan formed an alliance to develop and produce a front-wheel drive minivan
to counter Chrysler’s models. Both have benefited from the partnership through
lower product-development costs and higher profits.
Best Buy, Inc., is a company that owns and operates stores in the United
States as well as Canada. Its operations include: Best Buy, Future Shop, Geek
Squad and Magnolia Audio Video. Brad Anderson is Vice Chairman and Chief
Executive Officer of Best Buy; Shari Ballard is Executive Vice President of Hu-
man Capital and Leadership; Kal Patel is Executive Vice President, Strategy and
International; Darren Jackson is CFO & Executive VP–Finance and Treasurer;
Michael Linton is Executive Vice President, Consumer and Brand Marketing–
CMO; and John Walden is Executive Vice President, Customer Business Group.
They compose the organization’s top management. Expanding the company and
keeping it competitive are their primary concerns.
Middle Management
middle management Middle management includes “any managers two levels below the CEO and one
Includes managers below the level above line workers and professionals.” 18 The smallest organizations have
rank of vice president but above
the supervisory level no middle managers; larger ones have several layers of them. Along with setting
their own goals, middle managers typically translate top management’s long-
term goals into shorter-term objectives that the middle managers will be respon-
sible for achieving. They oversee the work of other middle managers and those on
the operating level. Such is the case with Best Buy’s regional managers. Their pri-
mary job is to add new stores and oversee the performances of their subordinate
managers including the store managers in their regions.
Middle managers must communicate with and satisfy their managers,

respond to end users and energize and nurture their employees. Then
there are budgets, meetings and reports to tend to. They must hire new
workers, juggle limited resources, stay on top of ever-evolving technol-
ogy and anticipate future directions.19
According to a variety of management consultants and industry experts, sev-

eral trends affect middle managers. They must be generalists as well as special-
ists. They are being trained to become team leaders and facilitators, and their
ranks are being thinned. “As more information becomes available and less costly,
fewer levels of management are needed. In contrast, more specialist task leaders
are needed.” 20
Middle managers, like their counterparts at the other levels, are being trained
to become team leaders—leading a group as a member of the group—and team
facilitators. Bic Vogel is a team facilitator and a middle manager of Atlanta-based
Delta Technology Inc. He oversees several teams and describes his job as a bal-
ancing act: “The challenge is to deliver effective results in an efficient manner but
not to stifle creativity.” 21
In the 1990s, corporate America eliminated as many layers of middle man-
agers as possible (thus reducing the height of the management pyramid) in or-
der to reduce costs, become more flexible and responsive to customers, facilitate
rapid communication and decision making, and replace the vertical execution
of activities with a horizontal one. Some concluded that middle managers were
doomed to extinction. But a six-year study of middle managers by Quy Nguyen
Huy shows that implementing radical organizational change is best accomplished
by middle managers. 22
First-Line Management
First-line management is the home of supervisors, team leaders, and team fa- first-line management
cilitators who oversee the work of nonmanagement people, often called operat- Supervisors, team leaders, and
team facilitators who oversee
ing employees, associates, or team members. 23 These managers convert middle the work of nonmanagement
managers’ goals and objectives into their own sets of objectives. Of all the levels, people, often called operating
the fi rst-line is most concerned with the day-to-day execution of ongoing opera- employees, associates, or team
members
tions. It executes the tasks that directly affect most of an organization’s external
customers each day.
At Best Buy, the store managers and their assistant managers are its fi rst-line
management. They directly interface with customers each day, thus affecting,
more directly than any other level of management, the company’s image and the
quality of service experienced by external customers.
Functional Managers
Managers may also be identified by the kind of business functions for which
they are responsible. Like the functions of management, business functions are
universal and apply to every type of business. The most essential business func-
tions are marketing, operations (production of goods and services), fi nance, and
human resource management. Managers whose expertise lies primarily in one functional managers
Managers whose expertise lies
or another of the specialty areas are known as functional managers. All other primarily in one or another of
managers are usually referred to as general managers. the specialty areas
Figure 1.3 Typical titles in the three levels of management
Top Management
President
Vice President, Vice President, Vice President, Vice President,

Manufacturing Marketing Finance Human Resources
Middle Management
Northern Central Southern

Regional Regional Regional
Manager Manager Manager
Eastern Central Western Eastern Central Western

District District District District District District
Manager Manager Manager Manager Manager Manager
Northern Central Southern Northern Central Southern

Group Group Group Group Group Group
Area Area Area Area Area Area

Operating Employees (Workers, Associates, and Team Members)
Many businesses, such as Best Buy, are organized around these functions
and execute the varied activities of each function through both individuals and
teams, horizontally or vertically, at all three management levels. Figure 1.3 il-
lustrates the three levels of management organized to execute the basic business
functions. Note that only the marketing department is shown in the middle and
operating levels of management.
Marketing Managers The marketing function involves identifying current

and potential customers’ needs and preferences, along with developing goods
and services that will satisfy them. Working with the other functional manag-
ers, marketing managers determine the physical and performance characteristics
for products. In addition, they focus on ways to properly price, promote, sell,
and distribute an organization’s goods and services. In Figure 1.3, the vice presi-
dent of marketing is the member of top management in charge of this function.
Operations Managers Managers in operations perform the activities needed

to manufacture an item or provide a service. In manufacturing companies, oper-
ations managers are concerned about controlling inventory levels and deliveries,
determining factory layout, scheduling production, maintaining equipment, and
meeting quality requirements for all production activities. Best Buy’s store man-
agers are concerned with delivering both products and services. They focus on
maintaining efficiency and meeting quality requirements in the conduct of sell-
ing, delivery, and installation activities. In Figure 1.3, the vice president of man-
ufacturing is the member of top management in charge of operations.
Finance Managers Finance managers are most concerned with managing the
flow of funds into and out of the organization, and they help to determine how
company funds can be used most effectively. Individual managers in this func-
tional area are responsible for granting and using their company’s credit, in-
vesting company funds, safeguarding the company’s assets, keeping track of the
company’s fi nancial health, and preparing budgets. In Figure 1.3, the vice presi-
dent of fi nance oversees the organization’s fi nancial activities.
Human Resource Managers Human resource (HR) managers are responsible

for building and maintaining a competent and stable workforce. They perform
and assist other managers in executing the activities connected to these tasks to
include forecasting the need for recruiting, selecting, and training people; creat-
ing performance appraisal and compensation systems; overseeing relations with
the company’s unions; and handling all these activities within the limits and de-
mands of federal, state, and local laws. In most small organizations, HR activi-
ties must usually be performed without the assistance of full-time HR managers.
In Figure 1.3, the top-management person who oversees these activities is the
vice president of human resources.
Most middle managers and all those at the top should be familiar with more
than one of these specialty areas. The higher a person rises in the levels of man-
agement, the more knowledge about each of these areas he or she must possess.
Chapter 10 focuses on the execution of human resource activities.
We now turn our attention to the major management functions (groups of
activities) that all managers perform to set and achieve goals. The objective here
is limited to providing a brief explanation of each. Later chapters examine each
function in more depth.
Management Functions
Part of this chapter’s definition of management states that goals are set and
achieved “by [the] exercising [of] related functions—planning, organizing, staff-
ing, leading, and controlling.” Managers everywhere perform management func-
tions, but how they are executed is determined in part by organizational influ-
ences and the individuals involved.
4
Describe five manage-
ment functions
Although we discuss these functions separately, they are interdependent and

must be considered simultaneously. Managers do not plan in the morning, or-
ganize before noon, staff between 1:00 p.m. and 2:00 p.m., and control from
2:30 p.m. until the end of the day. Acquiring human resources (staffi ng), for ex-
ample, requires planning; the changes that will occur to established work groups
must be implemented (organizing); subordinates must be guided as they execute
staffi ng functions (leading); and the progress toward staffing goals and the expen-
diture of resources in doing so must be monitored and measured (controlling).
Planning
Planning is often called the fi rst function because it lays the groundwork for all
other functions and is the fi rst step taken when performing them. When plan-
ning, managers begin by identifying goals and alternative ways of achieving them.
Managers assign priorities to each goal and determine the resources required to
reach each one. Planning determines actions that commit individuals, depart-
ments, and the entire organization for days, months, or years to come.
Duration and Scope of Planning The length of time covered by a manag-

er’s plan—its duration—depends on his or her position in management. In gen-
eral, top managers plan beyond one year and frequently focus on five or more
years into the future. Such plans must be continually updated in light of chang-
ing circumstances. Top management’s plans affect middle management’s. Mid-
dle managers focus on what they must accomplish each year to guarantee that
long-term, companywide goals will be achieved. At first-line levels, planning is
affected by middle managers’ plans and spans a day, week, or month.
The scope of plans at each level varies as well. Top management is concerned
with the entire organization. Middle managers’ plans might be focused on ex-
ecuting and improving a business function like marketing or a process such as
purchasing. First-line managers are most concerned with planning their depart-
ments’ activities and the work of their individual employees and teams.
Influences on Planning Both internal and external forces influence plans. The
most immediate internal influences come from the plans created at higher man-
agement levels and the resources they will make available. All managers’ plans
must adhere to these constraints in order to be both compatible with and sup-
portive of one another. This influence of higher levels on lower ones is known as
a vertical influence.
Each planner must also consider the impact of a plan on others. Unit man-
agers occupying the same levels must coordinate their plans and planning efforts
to prevent confusion and the wasting of resources.
In addition, every manager’s plans are continually affected by influences
outside the organization (the environmental forces in a manager’s universe dis-
cussed earlier)—social, legal/political, technological, and so forth. Changes in
numerous areas beyond managers’ and their organization’s abilities to control
affect every management and business function. Managers at all levels must
continually monitor these external influences to identify trends and changes and
adjust their plans as necessary. Chapter 5 examines the manager’s environment
in greater detail.
Flexibility in Planning Because of the preceding factors, planning is not a

one-time activity. Plans cannot be carved in stone. As time passes and circum-
stances change, plans that have not been executed must be reviewed and up-
dated. Also, because many plans do not yield the precise outcomes expected,
managers must prepare and be ready to use alternative plans to deal with any
deficiencies in their original ones. Chapter 6 explores planning in greater detail.
Organizing
Organizing creates a structure to facilitate the accomplishment of goals—the
management hierarchy—and all the nonmanagement positions that support it.
In executing the organizing function, managers determine the tasks that must
be accomplished, group these tasks to form positions to be occupied by full- or
part-time employees, and decide on the relationships the positions will have to
one another.
Organizations are usually a mix of divisions, departments, regions, and in-
dividuals or teams within each. Automobile manufacturers may choose to or-
ganize by product groups such as General Motors’ Buick, Cadillac, Chevrolet,
GMC, HUMMER, Pontiac, and Saturn divisions. Each of these, in turn, can be
organized to execute functions either nationwide or by region. FedEx, the inter-
national package carrier, is organized to conduct both ground and air delivery
services by regions and nations served.
Like the other functions, organizing is a continuing concern. As a compa-
ny’s situation changes, so, too, will its goals and objectives. This often results in
a change to its management structure. As Best Buy expands into new territories,
it must add new regional managers. New store managers must be integrated into
each region’s management structure. Chapter 8 explores the organizing function.
Staffing
Staffi ng—the acquiring and placing of people—breathes life into an organiza-
tion. Sometimes executed as the final stage of the organizing function, staffi ng
executes the human resource management activities—recruiting, hiring, train-
ing, and so on. Planning to staff an organization includes determining what
skills and experiences people must possess to hold each position and how many
persons will be needed to meet both short- and long-term requirements.
At Best Buy, staffing is a primary concern of regional and store managers. As
new sites are chosen, new fi rst-line managers are hired to run the new facilities.
The fi rst-line managers must then hire, train, and help to motivate each store
worker and assistant manager. Staffi ng is the primary focus of Chapter 10.
Leading
Everything stated in this chapter about leadership and leaders applies here as
well. Through leadership, managers help their organizations and their employ-
ees achieve their goals. They serve as models for expected behaviors. They coach,
counsel, inspire, and encourage both individuals and groups. Leaders build and
maintain work environments that encourage motivation and construct working
relationships based on mutual respect and trust. These activities place a premium
on a manager’s ability to work with and through people.
To build and maintain a supportive environment, a manager must use two-
way communication channels to convey values, goals, and expectations; listen to
employees; respond to their concerns; and resolve disputes. Chapters 11 through
14 deal with communication and leading.
Controlling
Managers know that the other functions may result in wasted effort unless a
mechanism is provided to ensure that things go according to plan. That mecha-
nism is controlling. Basically, controlling attempts to prevent, identify, and cor-

rect deviations from guidelines set to evaluate both people and processes. Locks,
timing devices, and security guards are examples of prevention controls. Ob-
serving ongoing operations and measuring them against maximum and mini-
mum guidelines for acceptable levels of output help workers and managers to
identify unacceptable deviations. Finally, identifying and correcting the causes
of such deviations must be accomplished to eliminate waste. Chapters 15 and 16
examine controlling.
Functions and the Levels of Management
5
Apply management
functions to each level of
management
Regardless of title, position, or management level, all managers execute these
five management functions and work through and with others to set and achieve
the organization’s goals. Figure 1.4 shows the relative amounts of time spent by
each management level on each function. Note that although all managers per-
form the same functions, managers at the various management levels require
different amounts of time for each function. The points of emphasis in each
function also differ. As you read the following paragraphs, note the differences
at each level of management.
Top Management
Top managers plan for the entire organization and the acquisition of needed
resources. They develop the organization’s values, purpose, long-term goals,
and partnerships with outsiders. Their organizing efforts focus on creating and
adapting the overall organizational structure to cope with varying challenges
and opportunities. Staffi ng at the top is concerned with determining long-term
human resource needs and creating guidelines to govern the staffing practices of
managers at all levels. Top management’s leadership concerns consist of creating
a companywide management philosophy and putting systems in place to sup-
Figure 1.4 Relative emphasis on each management function at different management levels
Planning Organizing Staffing Leading Controlling
Top
Management
Middle
Management
First-Line
Management
Time
port the development and practice of leadership at all levels. Controlling efforts
set guidelines for evaluating overall company performance and determining how
efficiently key resources are used and companywide goals are achieved.
Middle Management
Middle managers develop objectives to implement top-management goals. Orga-
nizing and staffi ng efforts modify the company structure, increasing or decreas-
ing the numbers of positions and people, in line with top-management guide-
lines, at both the middle- and operating-management levels. Leading focuses
on facilitating the work of individual managers and their teams in the middle
and operating levels. Controlling consists of monitoring the results of plans
and making adjustments as required to ensure that the organization’s goals and
objectives are achieved.
First-line managers plan primarily for the short term. For Best Buy’s store man-
ager, planning involves scheduling employees and establishing detailed proce-
dures to perform worker tasks. Organizing may consist of adding additional
persons to a shift to handle an unusually large group of shoppers and reassign-
ing tasks to cover for an absent employee. First-line staffi ng consists of building
an initial staff, training each new hire, and replacing employees as needed. Lead-
ing includes gaining the commitments of employees to the values and goals of
Best Buy as well as to the methods and objectives of each store. Controlling fo-
cuses on ensuring that individuals and the entire store staff meet the manager’s
and the company’s performance and quality objectives.
Management Roles
A role is a set of expectations for a manager’s behavior. Like professional actors
throughout their careers, managers play different roles as circumstances dictate.
Henry Mintzberg studied what managers do. His book The Nature of Mana-
gerial Work defi nes ten roles managers are expected to play and groups them
into three categories: interpersonal, informational, and decisional. The roles
6
Summarize ten
management roles
role
have not changed much over the years. Each management role is examined here. A set of expectations for a
Figure 1.5 describes the roles and provides brief examples of how a typical chief manager’s behavior
executive officer plays them.
Interpersonal Roles
A manager’s interpersonal roles are the result of the position he or she holds in
management.
• Figurehead. As head of a work unit (division, department, or section), a man-
ager routinely performs certain ceremonial duties. Examples of ceremonial
duties include entertaining visitors, attending a subordinate’s wedding, and
officiating at a group luncheon.
• Leader. As a leader, a manager creates the environment, works to improve em-
ployees’ performances and reduce conflict, provides feedback, and encourages
individual growth.
• Liaison. In addition to superiors and subordinates, managers interact with
others—peer-level managers in other departments, staff specialists, other
departments’ employees, and suppliers and clients. In this role, the manager
builds contacts.
Figure 1.5 Mintzberg’s ten management roles
IDENTIFIABLE ACTIVITIES FROM

ROLE DESCRIPTION STUDY OF CHIEF EXECUTIVES
INTERPERSONAL
Figurehead Performs symbolic routine duties Attending ceremonies or other public,
of legal or social nature legal, or social functions; officiating
Leader Motivates subordinates, ensures Interacting with subordinates
hiring and training of staff
Liaison Maintains self-developed network of contacts Acknowledging mail and interacting
and informers who provide favors and with outsiders
information
INFORMATIONAL
Monitor Seeks and receives wide variety of special Handling all mail and contacts
information to develop thorough understanding concerned primarily with receiving
of the organization and environment information
Disseminator Transmits information received from outsiders Forwarding mail into the organization
or subordinates to members of the organization for informational purposes, maintain-
(some information is factual, some involves ing verbal contacts involving fl ow to
interpretation and integration) subordinates
Spokesperson Transmits to outsiders information about Attending board meetings, handling
organization’s plans, policies, actions, results, mail and contacts involving trans-
and so forth; serves as expert on organiza- mission of information to outsiders
tion’s industry
DECISIONAL
Entrepreneur Searches organization and its environment Implementing strategy and review
for opportunities and initiates projects to bring sessions involving improvement
about change
Disturbance Initiates corrective action when organization Implementing strategy to resolve
Handler faces important, unexpected disturbances disturbances and crises
Resource Fulfills responsibility for the allocation of Scheduling, requesting authorization,
Allocator organizational resources of all kinds—in effect, budgeting, programming of
makes or approves all significant decisions subordinates’ work
Negotiator Represents the organization in major negotiations Negotiating
Source: Chart from The Nature of Managerial Work, by Henry Mintzberg. Copyright © 1973 by Henry Mintzberg. Reprinted by permission
of the author.
Informational Roles
Partly as a result of contacts inside and outside the organization, a manager nor-
mally has more information than other members of the staff have. Three key
roles derive from the use and dissemination of information.
• Monitor. While constantly monitoring the environment to determine what
is going on, the manager collects information both directly (by asking ques-
tions) and indirectly (by receiving unsolicited information).
• Disseminator. As a disseminator, a manager passes on to subordinates some
information that would not ordinarily be accessible to them.
• Spokesperson. A manager speaks for the work unit to people outside the
work unit. Sometimes a spokesperson informs superiors; sometimes he or
she communicates with people outside the organization.
Decisional Roles
In playing the four decisional roles, managers make choices, alone or with oth-
ers, or influence the choices of others.
• Entrepreneur. In sharing and initiating new ideas or methods that may im-
prove the work unit’s operations, a manager assumes the entrepreneur’s role.
• Disturbance handler. As a disturbance handler, a manager deals with sched-
ule problems, equipment failure, strikes, broken contracts, and any other
feature of the work environment that decreases productivity.
• Resource allocator. A manager determines who in the work unit gets what
resources—money, facilities, equipment, and access to the manager.
• Negotiator. A manager must spend a significant portion of time negotiat-
ing, because only a manager has the information and authority required to
do so. Items to be negotiated include contracts with suppliers, trade-offs for
resources inside the organization, and agreements with labor organizations.
Roles and Managerial Functions

By effectively discharging these multiple roles, managers accomplish their mana-
gerial functions. In planning and organizing, a manager performs the resource
allocator role. In staffi ng, managers play the leadership role by providing subor-
dinates with feedback on performance. In leading, managers perform as dissem-
inators, entrepreneurs, and disturbance handlers; in controlling, they perform
as monitors.
Roles and the Expectations of Others

Simultaneously, managers may be expected to play several roles by several dif-
ferent individuals and groups. Figure 1.6 shows the potentially conflicting role
demands on a manager. The ability to meet these multiple role demands makes
the difference between a successful manager and an unsuccessful one. 24 Any
manager who has a problem adjusting to such conflicts will have a work unit
that suffers to some extent.
Management Skills
Skills allow individuals to perform activities and to function in society. For
instance, everyone needs basic reading, writing, and oral communication skills
to grow intellectually and share ideas with others. Communication (the sub-
ject of Chapter 11) is at the heart of every human interaction, not just those of
managers.
7
Analyze three manage-
ment skills
Our focus here is on the three basic sets of skills required of and routinely
exercised by managers—technical, human, and conceptual—as identified and
described by author and researcher Robert Katz. 25 All are needed to properly ex-
ecute the five management functions and play the interpersonal, informational,
and decisional roles just discussed.
Technical Skills
Technical skills are the abilities to use the processes, practices, techniques, technical skills
and tools of the specialty area a manager supervises. The manager supervising The abilities to use the pro-
cesses, practices, techniques,
accountants, for example, must know accounting. Although he or she need not and tools of the specialty area a
be an expert, the manager must have enough technical knowledge and skill to manager supervises
Figure 1.6 Conflicting role demands on a manager
I want her to be an
entrepreneur.
Boss
I expect her to I expect her to be a

share resources. problem solver.
Peer Manager Peer
Job
Description:
The
incumbent I see myself
will act as as a leader.
a liaison.
S ubo
rdinate at e
S ubordin
I need her to I need her to be a

represent me. source of information.
intelligently direct employees, organize tasks, communicate the work group’s

needs to others, and solve problems.
technology Successful companies have always used technology, the practical application
The practical application of of knowledge, to aid in the conduct of business. Technology used in most com-
knowledge
panies is the computer. To be considered computer literate, managers must have
a basic knowledge of computer terminology and hardware and software com-
ponents; they must also be able to perform basic computer applications. Man-
agers must be able to use the Internet (referred to as Internet literacy) to search
for information, evaluate content, and present information. For example, man-
agers should visit their own company’s Web site(s), compare them to competitors’
Web sites, and analyze them from a customer’s point of view. Technology savvy
managers can access, store, and move digital information, including voice, sound,
text, graphics, and numbers.
Technical skills are most essential at the fi rst-line level of management and
least important at the top. An example of technical skills being least important
at the top is Louis V. Gerstner Jr., the former Chairman and Chief Executive Of-
ficer of International Business Machines Corporation. He did not have a back-
ground in technology or computers, but he possessed enough technical knowl-
edge to communicate effectively with those among his operating employees who
were. Their job was to help corporate customers decide which computers and
software to buy to meet their needs. Gerstner’s job was to help them to do so by
providing needed resources and support.
Human Skills
Human skills (sometimes called human relations) consist of the abilities to inter- human skills
act and communicate successfully with other persons. These skills include leader- The abilities to interact and
communicate successfully with
ship of subordinates and facility in intergroup relationships. A manager must be other persons
able to understand, work with, and relate to both individuals and groups to build
a team environment. The manager’s ability to work effectively as a group mem-
ber and to build cooperative effort within the group depends on human skills.26
As managers move into the international environment and function within a
global enterprise, human skills will become even more important. The ability to
communicate with and be sensitive to different cultures will be at a premium. 27
Conceptual Skills
Conceptual skills—the mental capacity to conceive and manipulate ideas and conceptual skills
abstract relationships—allow the manager to view an organization as a whole The mental capacity to con-
ceive and manipulate ideas and
and to see how its parts relate to and depend on one another. The conceptually abstract relationships
skilled manager can visualize how work units and individuals interrelate, under-
stand the effect of any action throughout the organization, and imaginatively
execute the five basic management functions.
Well-developed conceptual skills equip the manager to identify a problem,
develop alternative solutions, select the best alternative, and implement the solu-
tion. According to the American Management Association’s most recent AMA
Fast-Response Survey, “the gap between what companies need and what man-
agers can contribute is widest in the area of conceptual skills, including the abil-
ity to identify opportunities for innovation; and to recognize problem areas and,
implement solutions.” 28
Skills and Levels of Management

Figure 1.7 shows the importance of each management skill at each of the three
levels of management. Note that human skills are required to the same degree by
all three levels. One reason for this is contained in a quote from Herb Kelleher,
former Chairman and CEO of the superefficient and highly profitable Southwest
Airlines.
[Recognize] that your own people are absolutely the key to your suc-
cess. . . . If you serve your own people well, then they will serve the public
well. Everybody, be they a producer of products or a producer of services,
is in the Customer Satisfaction business. 29
As one progresses upward in the management ranks, technical skills be-
come less important and conceptual skills become more important. Middle
Figure 1.7 Proportions of management skills needed by management level
Conceptual Skills Technical Skills Human Skills
Top
Management
Middle
Management
First-Line
Management
managers need to work within and visualize a larger piece of the organizational
“pie” than do fi rst-level managers. Top management must be concerned with the
whole pie—its basic ingredients and making it larger.
Management Myths and Realities
8
Contrast the myths
with the realities of a
manager’s job
People who have not held management jobs and have not studied management
often hold perceptions disconnected from reality—that is, myths—about man-
agers’ needs and functions. The following six myths and their corresponding re-
alities have been uncovered by the research of several management experts.
As previously mentioned, Henry Mintzberg studied how managers actually
work. In 1975, he published an article examining the effect of multiple demands
on managers. “The Manager’s Job: Folklore and Fact” was chosen in 1998 by
Harvard Business Review as a “classic” article for its enduring value. His re-
search is still relevant today. He identifi ed commonly held beliefs about managers
and countered them with the reality of a manager’s regular existence:
Myth #1. Managers are refl ective, methodical planners with time to systemati-
cally plan and work through a day. Reality: Typical managers take on so much
and encounter such constant interruption that little time remains for reflection.
Events range from trivialities to crises; the average time spent on one activity is
nine minutes.
Myth #2. Effective managers have no regular duties to perform. They es-
tablish others’ responsibilities in advance and then relax to watch others do
the work. Reality: Although their days may be interrupted by crises, managers
have regular duties to perform. They must attend meetings, see to visitors from
the community and other parts of the organization, and continuously process
information. To perform all their duties, managers often extend the day into the
night.
Myth #3. The manager’s job is a science; managers work systematically and
analytically to determine programs and procedures. Reality: The manager’s
job is less a science than an art. Rather than systematic procedures and pro-
grams, managers rely heavily on intuition and judgment.
Authors and researchers Clinton Longenecker and Dennis Gioia 30 have

added the following three myths and realities of a manager to Mintzberg’s list:
Myth #4. “Managers are self-starting, self-directing, and autonomous, or they
would not be managers.” Reality: “Good managers are self-managing, often
to an extraordinary degree. They want, appreciate, and accept autonomy, but
they also want input, attention, and guidance that only their superiors can
provide.”
Myth #5. “Good managers seek out the information they need.” Reality:
“Good managers are [active] information seekers. Yet they often do not have
access to the information that their bosses have. Their [efforts are] thus wasted
on unnecessary work that their superiors could eliminate with better informa-
tion flow.”
Myth #6. “Competition among managers is good for . . . business.” Reality:
“Competition is effective among businesses but not necessarily within a busi-
ness. Collaboration and cooperation within the organization are . . . better . . .
for improving competitiveness in the business arena.”
As you read further in this text, you will discover additional research, prin-
ciples, and real-world examples that influence the practice of management.
They will help you to identify and abandon some of your own myths about
management.
Evaluating a Manager’s Performance

Managers are evaluated by using a variety of factors:
• How effectively they play the three sets of management roles listed in this
chapter
• Whether they possess and properly apply needed management skills
9
Discuss the criteria used
to evaluate a manager’s
performance
• How effective they are in setting objectives and achieving goals

• How efficiently they use their talents and resources
• How well they demonstrate leadership
• Whether they act ethically
• How effectively they make use of the diversity of their people
• How effectively they and their people please customers
In short, managers are evaluated in how well they demonstrate through every-
day actions the essential ideas in this chapter.
Ram Charan found that 38 derailed chief executive offi cers “just weren’t
worrying enough about the right things: execution, decisiveness, follow-through,
delivering on commitments.” 31
In addition to the preceding factors, consider the findings of an alliance
of consulting fi rms—Manchester Partners International. “About 40 percent of
managers and executives who take new positions fail within 18 months.” 32 The
primary reasons for the failures include the following:
• Being uncertain about the expectations of their bosses
• Being unable to make tough decisions
• Taking too long to learn the job
• Being unable to build partnerships with subordinates and peers
• Lacking political savvy
Do you see the link between and among these reasons for failing and the
skills, roles, and functions discussed in this chapter? Managers’ uncertainty
about their boss’s expectations may be based on poor communication skills and
ignorance of the criteria being used in their organization to evaluate managers.
Tough decisions often involve ethical issues and effective and effi cient use of
resources. Building partnerships requires all the skills and leadership concepts
discussed. Political savvy requires partnerships and the practice of human
skills.
CHAPTER SUMMARY
Explain why organizations need managers. Describe five management functions. The five
1 Managers—people who set and achieve goals with
and through others—are needed to create organizations
4 management functions are planning, organiz-
ing, staffi ng, leading, and controlling. Planning involves
and oversee their operations and growth. By playing identifying goals, alternative ways of achieving them,
various roles, exercising a variety of skills, and perform- and the resources required. Organizing includes defi ning
ing five basic functions, they provide the leadership and the tasks required to meet goals, grouping these into po-
coordination needed to meet the objectives of every sitions, and creating the management hierarchy. Staffi ng
organization. includes determining the organization’s need for people
and then recruiting, hiring, training, appraising, and
Determine the needs that affect a manager’s
2 universe. Management’s universe is complex,
ever-changing, exacting, exciting, and fi lled with pres-
compensating the personnel. Leading involves provid-
ing guidance and inspiration to individuals and groups,
providing a climate in which individuals can deliver
sure. Managers and their organizations must simulta-
motivated behaviors, and communicating and winning
neously focus on meeting customers’ needs, providing
commitments to organizational values and goals from
leadership, acting ethically, valuing diversity, and coping
employees. Controlling attempts to prevent, identify, and
with international challenges. The manager’s universe is
correct deviations from guidelines established to evaluate
shaped by external environmental forces including com-
performances and outputs of both people and processes.
petition, technological advances, natural phenomena,
emergencies, as well as social, cultural, and political Apply management functions to each level of
factors. 5 management. Managers at every level perform
the same functions. They differ in the time spent on each
Identify three levels of management. Most or-
3 ganizations contain the three traditional levels of
management: top, middle, and fi rst-line or operating.
function and the depth of their involvement with each.
Top management is most concerned about the long term
and the entire organization. Middle managers focus on
Top management consists of the chief executive offi-
translating top management’s goals into objectives for
cer and/or president and his or her immediate subordi-
the execution of both business and management func-
nates—vice presidents. Middle management includes all
tions. First-line managers take a narrower view. They
managers below the rank of vice president but above the
focus on converting middle managers’ objectives into
fi rst-line level. First-line managers manage workers. Like
ones of their own, and they concentrate on the execution
their counterparts in middle management, they are rap-
of operations and functions that directly interact with
idly being transformed into team leaders and team
external customers.
facilitators.
Summarize ten management roles. To carry 1. The myth: Managers are reflective, systematic plan-
6 out their jobs, managers must be able to perform
certain roles. The roles are influenced by a manager’s job
ners. The reality: The typical manager is so busy
there is little time for reflection.
description and the expectations held by a manager’s su-
2. The myth: Effective managers have no regular duties
periors, subordinates, and peers. The ten management
to perform. The reality: Managers, although inter-
roles are grouped into three categories: interpersonal
rupted by crises, have a job description containing
roles (figurehead, leader, liaison), informational roles
regular duties to perform.
(monitor, disseminator, spokesperson), and decisional
roles (entrepreneur, disturbance handler, resource 3. The myth: The manager’s job is a science. The real-
allocator, negotiator). ity: The manager’s job is less a science than an art.
Interpersonal roles require interactions with others
4. The myth: Managers are self-starting, self-directing,
on a regular basis. Informational roles require manag-
and autonomous. The reality: Good managers appre-
ers to gather information from many sources, share what
ciate autonomy, but also want input, attention, and
they discover with the appropriate people, and represent
guidance from superiors.
their units to others inside the organization. Decisional
roles require managers to acquire, distribute, and safe- 5. The myth: Good managers seek out needed infor-
guard needed resources. Managers must also negotiate mation. The reality: Effective managers are proac-
with and between competing forces and handle disrup- tive information seekers, but too often managers do
tions to their operations. not have access to information they need and their
bosses possess.
Analyze three management skills. Managers
7 need three basic skills: technical, human, and
conceptual. Technical skills grant the ability to use the
6. The myth: Competition among managers is good for
managers and the business. The reality: Competi-
processes, practices, techniques, and tools of a specialty tion is not effective within a business. Collaboration
area. Human skills consist of the ability to interact and and cooperation within the organization and among
communicate with other persons successfully. Concep- managers is a better approach.
tual skills are the ability to: (1) view an organization
Discuss the criteria used to evaluate a man-
as a whole and see how its parts relate and depend on
one another, (2) deal with ideas and abstractions, and
9 ager’s performance. Managers are evaluated
through the use of many criteria including how well they
(3) diagnose and solve a problem.
play their roles, exercise their skills, execute the manage-
Contrast the myths with the realities of a ment functions, set and achieve goals, please customers,
8 manager’s job. Six myths are associated with a
manager’s job and the realities:
provide leadership, act ethically, and value diversity, as
well as how effectively and efficiently they use their
resources.
KE Y TERMS
conceptual skills functional managers middle management
customer goal organization
customer relationship management human skills quality
(CRM) leadership role
diversity management technical skills
ethics management hierarchy technology
fi rst-line management managers top management
RE VIE W QUESTIONS
1. How do managers assist an organization to achieve 3. Where are managers located within an organiza-
its goals and objectives? tion’s management hierarchy? How are the different
levels similar? How are they different?
2. What factors make the manager’s universe complex?
4. What are the regular activities that all managers per- 7. What management skills are most essential for a
form? Which of these activities is called the “fi rst” CEO? Why? What skills are required to about the
function? Why? same degree by all managers? Why?
5. How do the functions in question 4 apply to the 8. Why do people hold the different myths mentioned
three levels of management found in most organiza- in this chapter? How do you think people create
tions? In what ways are the execution of controlling these myths?
activities similar on each of the three levels of man-
9. If you were a CEO of a small company, what criteria
agement? How is it different?
would you use to evaluate your managers’ perfor-
6. What is a management role? Do all managers per- mances? Which criterion do you believe is most es-
form the same roles? Why or why not? sential? Why?
DISCUSSION QUESTIONS FOR CRITICAL THINKING

1. Denzel Jones now holds the job of Data Entry Clerk 2. What myths about management have you discovered
and is being considered for a promotion into a fi rst- that you hold and now wish to abandon after having
line management position over his coworkers. What read this chapter?
additional skills will he need, and what types of
3. How are the three types of skills related to the exe-
training should the organization provide to help
cution of the ten management roles and the five man-
Jones make the transition to manager?
agement functions?
INTERNE T E XERCISES
Links are provided for all Internet exercises at http:// Identify the position. What skill sets are needed to
plunkett.swlearning.com. qualify for this position?
1. The American Management Association (AMA), a 3. The American Institute for Managing Diversity
membership-based management development orga- (AIMD) helps organizations understand the business
nization, offers a full range of business education imperative for managing diversity, provides ongo-
and management development programs for individ- ing insights into the strategic implementation of di-
uals and organizations in Europe, the Americas, and versity, identifies and categorizes trends in diversity
Asia. What year did the AMA originate? What is the management, and suggests new areas of research
mission of the AMA? critical to successful application. AIMD has links
to other Internet resources. Identify and describe
2. Visit the Occupational Outlook Handbook. Pick
one Internet resource for diversity-related informa-
one of the management and business and fi nancial
tion. As a future manager, how will you use this
operations occupations and read the job description.
information?
BUSINESS AND COMPANY RESOURCE CENTER

The Business and Company Resource Center (BCRC) is the database. (Also, you may have access to it through
an online database and research tool published by Thom- this textbook. Check with your instructor.) The BCRC
son/Gale. Most college and university libraries subscribe will give you more up-to-date, targeted, and proprietary
to electronic databases, as well as print. Check to see if information than any Internet search engine. Further-
your library subscribes to BCRC. If so, you may access more, the information you fi nd is highly respected.
Use the BCRC to fi nd the following information about BEST BUY AT A GLANCE
Best Buy. Add any other interesting information that Headquarters:
you fi nd. Founded:
Top Executive:
Revenues for past year?
52-week stock price high/low:
Number of Stores:
APPLICATION CASE
Circuit City Challenge • Busy suburban moms who want to enrich their chil-
In the 1980s Circuit City, based in Richmond, Virginia, dren’s lives with technology and entertainment
was the top consumer electronics retailer. It was the fi rst
• Small-business customers who can use Best Buy’s
to expand its format into the warehouse superstore. The
products and services to enhance the profitability of
company built a proprietary computer system, which
their businesses
gave it a competitive advantage throughout most of the
1990s. The system supported commission-based sales After identifying its customer segments, Best Buy
compensation and allowed associates to check and hold matched its store layouts and merchandise to meet the
inventory for customers. But by 2000, the system was needs of those customer segments. By 2001, Best Buy
slow and prone to crash. Competitors were beginning to surpassed Circuit City in revenue, and today Best Buy
pay employees a salary, with no commission. has more stores.
In order to save money on rent, Circuit City stores Circuit City is trying to regain its position in
were located in out-of-the-way locations. “Executives at electronics retailing. The company sold its non-core
the time figured that since its stores were destinations, businesses and is focusing on the business of selling
consumers would go a little bit out of their way to get to consumer electronics. Employees are on salary, not com-
them.” However, in the 1990s, Best Buy started expand- mission. The company is making a significant invest-
ing by buying property and building stores in busy shop- ment in new technology to aid management in deci-
ping centers. Circuit City responded by remodeling its sion making. In Oc tober 2004, Circuit City hired Philip
stores, but sales continued to decline. Schoonover from Best Buy as its new President. He
While Best Buy pursued its customer-centricity ini- “plans to turn the company into a customer-focused
tiative, Circuit City managers “relied on their instincts business that delivers a personalized experience to all of
or what worked in the past to determine what products its customers across all of its channels (stores, Web and
to promote, how to promote them and where to place call centers).”
merchandise in stores.” Circuit City lost focus of its core
business. It “opened a bank to operate a private-label Questions
credit card fi nancing operation, took a minority stake in 1. Which management functions did Circuit City man-
a used car dealership and conceived a pay-per-view for- agers fail to perform? Cite examples to support your
mat for DVDs that consumers ultimately rejected.” answer.
In Chapter 3 of their book, Return on Customer:
2. What management roles did Circuit City managers
Creating Maximum Value From Your Scarcest Resource
fail to perform in the actions taken? Give examples
(Currency Books), Don Peppers and Martha Rogers re-
to support your answer.
port that Best Buy’s customer-centric strategy allowed it
to identify its most profitable customers and place them 3. Which management skills did Circuit City managers
into the following five segments: fail to use? Cite examples to support your answer.
• Affluent professionals who want the best technology 4. How did Best Buy exercise leadership? Give exam-
and entertainment experience ples to support your answer.
• Active younger males who want the latest technology
Source: Meridith Levinson, “Circuit City Rewires,” CIO Magazine,
and entertainment July 1, 2005, http://www.cio.com/archive/070105/circuit.html.
• Family men who want technology to improve their
lives—practical adopters of technology and
entertainment
ON THE JOB VIDEO CASE

Original Penguin Rides Out Turbulence ops relationships with employees so that they can work
Penguins have always been cool. But golf shirts with a well together. “My job is really the A to Z in assembling
little flapping bird printed on them experienced a lull in a team of people who can focus on certain pieces of that
coolness. In fact, their popularity remained frozen for business and deliver on the strategic goals for the com-
two decades largely because they were worn by aging pany,” he explains. “I feel very fortunate to have such
golfers. Now the penguins are back, flapping furiously— a good team.” He makes decisions about where to take
and, many would argue, coolly—not just on golf shirts the brand. Right now, he has his sights set on a more up-
but also on a wide array of men’s and women’s cloth- scale market. He envisions his customers as comfortable
ing and accessories, including shirts, shoes, hats, belts, suburbanites who want high-quality, fashionable casual
neckties, handbags, and even bathing suits. These items clothing. But he doesn’t worry too much about direct
represent the extreme makeover of a 50-year-old brand competitors in the clothing industry. Instead, he focuses
of clothing called Original Penguin. Now owned by on how Original Penguin can compete for consumer dol-
Perry Ellis International, the Original Penguin brand of lars. “My role as vice president of Penguin really is . . .
clothing is experiencing rejuvenation—thanks largely to I’m acting president of a very small division—a start-up
Penguin’s Vice President, Chris Kolbe. company attached to a larger company,” Kolbe observes.
Chris Kolbe knows that thawing out an old brand “So I really took on the A to Z of running a brand or
is a daunting task under the best circumstances. But running a company, from the . . . creative vision of the
the fashion industry is particularly difficult—the pace brand, to marketing the brand, to the business opera-
is dizzying, and the turbulence is sometimes terrifying. tions and sales of the brand.”
Kolbe’s activities as a manager are clearly characterized As for that turbulence? Kolbe shrugs it off. “In ev-
by variety, fragmentation, and brevity. For example, in a ery business there are roadblocks. So your ability to
single day, Kolbe may be expecting several hundred sam- focus on the roadblock or work around the roadblock
ples from sources around the globe to arrive in time for a sometimes comes down to your ability to be success-
fashion show. He may have to decide whether to extend ful.” This is true even when the roadblock happens to be
credit to a retailer or whether to drop one retailer in fa- a shipment of women’s fl ip-flops that hasn’t arrived in
vor of another. He may have to review ad copy, return time for the fashion show.
calls from fashion magazines, thumb through swatches
of fabric, welcome sales reps arriving for a meeting, and
fi x his own computer. “We are always way behind and Questions
scrambling,” he says with a chuckle. But Kolbe thrives 1. Describe the conceptual skills you think Chris
on these activities because he is convinced that the time Kolbe needs for his job as Vice President of Original
is right for his penguins to regain their place in the mar- Penguin.
ket among other legendary figures such as alligators and 2. Suppose those fl ip-flops—or other components of
polo ponies—and he intends to make it happen. the upcoming fashion show—don’t arrive in time.
Because the Penguin division is a tiny component Describe how Chris Kolbe might manage the
of the much larger Perris Ellis company, Kolbe serves situation.
all the management functions of planning, organizing, 3. What do you think is the most difficult part of
leading, and controlling—often during the course of one Kolbe’s job? Why?
work day. “I take personal responsibility and account-
ability for everything that has the Penguin brand on it,” Sources: Company Web site, http://www.originalpenguin.com, accessed
Kolbe notes. January 16, 2007; “Pick up an Original Penguin,” Fashion UK, July 8,
Kolbe also fulfi lls all the roles of a top manager. He 2004, http://www.fuk.co.uk; Carl Swanson, “A Senior Moment,” The
New York Times, Spring 2004, p. 44; Stephanie Thomson, “Perry El-
considers himself a hands-on manager, communicating lis Banks on Brand Resurrections,” Advertising Age, March 15, 2004,
constantly with his staff and keeping himself “involved p. 14; Rima Sugi, “The Bird Is the Word,” New York Metro.com, De-
in every detail so I don’t lose sight” of things. He devel- cember 8, 2003, http://www.nymag.com.
BIZ FLIX VIDEO CASE

8 Mile sequence. In the fi rst part of the scene, Jimmy’s car
Jimmy “B-Rabbit” Smith Jr. (Eminem) wants to be a won’t start so he rides the city bus to work and arrives
successful rapper and to prove that a white man can cre- late. The second part occurs after he is beaten by Papa
ate moving sounds. He works days at a plant run by the Doc (Anthony Mackie) and Papa Doc’s gang. Jimmy’s
North Detroit Stamping Company and pursues his mu- mother (Kim Basinger) returns to their trailer and tells
sic at night, sometimes on the plant’s grounds. The fi lm’s him she won $3200 at bingo. The fi lm continues to its
title refers to Detroit’s northern city boundary which di- end with Jimmy’s last battle (a rapper competition).
vides Detroit’s white and African American populations.
This fi lm gives a gritty look at Detroit’s hip-hop culture
in 1995 and Jimmy’s desire to be accepted by it. Emi- What to Watch for and Ask Yourself
nem’s original songs “Lose Yourself” and “8 Mile” re- 1. What is your perception of the quality of Jimmy’s
ceived Golden Globe and Academy Award nominations. job and his work environment?
This scene is an edited composite of two brief se- 2. What is the quality of Jimmy’s relationship with
quences involving the stamping plant. The fi rst half of Manny, his foreman (Paul Bates)? Does it change?
the scene appears early in the fi lm as part of “The Fran- If it does, why?
chise” sequence. The second half appears in the last 25 3. How would you react to this type of work
minutes of the fi lm as part of the “Papa Doc Payback” experience?
O LIST
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LEARNING OBJECTIVES
MANAGEMENT After studying this chapter, you should be able to:
THOUGHT: PAST 1 Discuss why knowledge of the evolution of management

theories is important to managers
AND PRESENT Explain the contributions of the following:
2 a. Classical schools of management thought
b. Behavioral school of management thought
c. Quantitative school of management thought
d. Systems school of management thought
e. Contingency school of management thought
f. Quality school of management thought
Getty Images
Procter & Gamble: Management Trendsetter
Procter & Gamble Company (P&G), the leading man-
ufacturer of household and consumer products, was A. G. Lafley
established in 1837 as a small, family-operated soap Born: 1947, Keene, New Hampshire
and candle company. William Procter, a candlemaker, Current Position:
and James Gamble, apprenticed to a soapmaker, mar- President, Chief Executive Officer, and Chairman,
ried sisters, Olivia and Elizabeth Norris, whose father Procter & Gamble
convinced his new sons-in-law to become business
Career Highlights:
partners. Today, the company markets more than
250 products to more than 5 billion consumers in 130 1977 Brand Assistant, Joy
countries. Its brands include Head and Shoulders, 1978 Assistant Brand Manager, Tide
Pringles, Pampers, Tide, Pantene, Bounty, Folgers, 1980 Brand Manager, Dawn and Ivory Snow
and Crest. (See http://www.pg.com Company, Who 1982 Brand Manager, Cheer
We Are, Our History.) 1983 Associate Advertising Manager, PS&D
Born during the classical school of manage- 1986 Advertising Manager, PS&D
ment thought, P&G embraced scientific methods for 1988 General Manager, Laundry Products, PS&D
manufacturing. But the use of the scientific method Division
is about the only connection P&G has to that school. 1991 Vice President, Laundry and Cleaning
P&G invented the concept of the brand that offers
Products
consumers the product quality and reliability they de-
mand. Trusted brands are as relevant in the twenty- 1992 President, Laundry and Cleaning Products
first century as they were in the nineteenth. From and Group Vice President, P&G
its beginnings P&G has been ahead of its time, be- 1994 Group Vice President and President of
longing more to the recent schools of management P&G Asia
thought (behavioral, systems, contingency, and qual- 1995 Executive Vice President, P&G and Presi-
ity) than to the classical. dent, P&G Asia
P&G remains at the forefront of marketing by pur- 1999 President, Global Beauty Care and P&G
suing genuine value for the consumer. Led through North America
difficult times by Chief Executive Officer A. G. Lafley, 2000 President and Chief Executive Officer
the company changed its focus from household prod-
2002 President, Chief Executive Officer and
ucts to health and beauty products. After becoming
CEO, Lafley cut costs and used the savings to boost Chairman
marketing spending and to invest in P&G’s big brands Education: Hamilton College, BA, 1969; Harvard
(Gonsalves). Lafley says, “What I’m trying to build Business School, MBA, 1977
into this organization is something that will last long Personal: Wife, Margaret, and two children
after I’m gone. This is a company that aspires to be Source: International Directory of Business Biographies
around for 1,000 years” (Brooker). http://www.referenceforbusiness.com/biography/F-L/Lafley-
© The Procter & Gamble Company/PRNewsFoto (NewsCom)
Complex adaptive system theory has been used A-G-1947.html.

since 1998 in an effort to improve P&G’s supply chain
dynamics. “We’re trying to move to a consumer-
driven supply network,” says Larry Kellam, direc- s
its sud
tor of business-to-business supply chain innovation. h a s proven a s a
b le ere
“We are all about taking time, cost, and cash out of & G am nings w
rocter ry begin gemen
t
the supply chain to add value to the consumer” s u p e rstar P th c e n tu m a n a
d u c ts it s 1 9 m o d e rn u s e -
(Melymuka). mer pro lthough pany, a onal ho
C o n su wer. A le com ternati
Previously confined to science and mathe- v e s ta ying po a p a n d c and m a d e it an in G ’s ic onic
ha un s o tion ha
s of P&
matics, complexity theory in its practical appli- family -r atisfac e value og foo
d.
small, o n s umer s rs tr ust in th h s o ap to d
n c nsum e d is
cation emphasizes the ways in which a factory focus o day, co pers to
me. To om dia
resembles an ecosystem, responding to natural hold na ly ra n ging fr
diverse
laws to find the best possible solutions to prob- brands
lems. Complexity theory suggests that organiza-
tions need an element of chaos to thrive. Chaos
theory, a branch of complexity theory, is a name
complexity theory for the mathematical study of complex, unstable systems. There is nonlinearity between
A theory that emphasizes the cause and effect, and tiny causes can lead to big effects. Although it is impossible to pre-
ways in which a factory resem- dict the exact behavior of such a system, it is possible to make overall models of it. Under
bles an ecosystem, responding the right conditions, large, seemingly chaotic systems will, all by themselves, organize into
to natural laws to find the best well-ordered states.
possible solutions to problems Organizations like P&G are interested in extending predictability into realms once
thought to be chaotic. The term learning organization describes the process whereby
chaos theory
The mathematical study of com- groups and individuals within the organization challenge existing models of behavior and
plex, unstable systems learn to rapidly and creatively adapt to a changing environment (Senge). Herbert Spencer,
the creator of Social Darwinism, referred to this process of adaptation as “survival of the
learning organization fittest.” In other words, the firm that is most successful in modifying its strategy to adapt
A process whereby groups and to changing conditions in the environment is the firm that is most likely to survive its com-
individuals within the organiza- petitors and thrive in the future. A competitive advantage may be gained by effectively
tion challenge existing models adapting to novel and unpredictable situations faster than the competition.
of behavior and learn to rapidly BiosGroup helped P&G improve supply-chain efficiency. Stuart Kauffman founded
and creatively adapt to a chang-
BiosGroup, and he was a founding member of the Santa Fe Institute (SFI), an organization
ing environment
that studies all kinds of complex adaptive systems. SFI scientists share a conviction that
existing scientific and economic orthodoxy can’t explain how systems of any type—molec-
ular, economic, and ecological—adapt under conditions of constant change and unpredict-
ability. Kauffman says, “None of these ideas was new. P&G just couldn’t quantify how im-
portant they were before” (Melymuka).
One central idea of complexity theory is that rigorously controlling a complex sys-
tem is impossible. P&G has applied a wide range of statistical and management tools to
existing manufacturing operations that make consumer products ranging from diapers to
fruit juice. Rather than accepting minor assembly-line defects in return for manufacturing
speed, managers recognize and correct seemingly isolated defects in the manufacturing
process that make things stop, slow down, cause defects, and lower productivity. In P&G’s
Atlanta fruit drink bottling plant, productivity has risen by 44 percent (CRM Today).
Sources: Katrina Brooker and Julie Schlosser, “The Un-CEO: A. G. Lafley Doesn’t Overpromise. He Doesn’t
Believe in the Vision Thing. All He’s Done Is Turn Around P&G in 27 Months,” Fortune, September 16, 2002,
p. 88; Kathleen Melymuka, “What If . . .?”, Computer World, February 2002, http://www.computerworld.com/
industrytopics/financial/story/0,10801,67916,00.html; CRM Today, “Procter & Gamble, KPMG Consulting Team
to Offer Powerfactore, the New Manufacturing Solution,” March 22, 2002, http://www.crm2day.com/news/crm/
EpEyZAlEVEueKJVjAV.php; Peter M. Senge, The Fifth Discipline: The Art and Practice of the Learning Organization
(Currency/Doubleday, 1994); Antone Gonsalves, “Supply-Chain Systems Help P&G Meet Aggressive Financial
Goals,” Internet Week, January 31, 2003; Procter & Gamble, http://www.pg.com; BiosGroup (a NuTech Solutions
company), http://www.biosgroup.com; Santa Fe Institute, http://www.santafe.edu.
Introduction
For many generations people believed that the Earth was flat and the center of
the universe. No educated person believes this today. Throughout history, one
generation’s “fact” has become, in part or in total, the next generation’s fiction.
The conventional wisdom of every era evolves as its cherished beliefs are chal-
lenged by the new, leaving behind only those elements that have survived the
test of time. So it is with the various schools of thought about the ways in which
organizations, their resources, and their processes should be managed.
Since the Industrial Revolution began in the late 1700s, those in charge of
organizations have been alternately creating, testing, embracing, and rejecting
multiple theories of management. All have contributed in various ways to how
managers currently practice their art. This chapter examines the six major the-
ories or schools of management that have evolved over the past 200 years and
assesses them for their relevance to the twenty-fi rst century.
Chapter 2 Management Thought: Past and Present 37
History and Theory of Management

Each generation of managers needs to understand the lessons learned by its pre-
decessors and build on them. As you shall see throughout this text, preceding
generations of managers have much to teach.
Value of History
1
Discuss why knowledge
of the evolution of man-
agement theories is
important to managers
People who ignore the past are destined to relive it. A person unaware of mis-
takes made by others is likely to repeat them. The wise person studies the past to
avoid its pitfalls and benefit from its achievements.
Ancient History
Graphic records from ancient times—the Bible, Egyptian tomb paintings, and
Babylonian clay tablets—record how early civilizations thought about manage-
ment and how they managed their affairs. Management began when the earli-
est humans banded together in clans and tribes. Their survival depended on ef-
fective hunting and gathering. Such activities needed both skilled individuals
and cooperative efforts. In time, strong individuals with the ability to manage
emerged within each community to take over the management of specialized
tasks and of the community as a whole.
Value of Theory
A theory is a part of an art or science that attempts to explain the relationships theory
between and among its underlying principles. Theories give people a reason for Part of an art or science that at-
tempts to explain the relation-
doing things one way rather than another. Various management theories have ships between and among its
arisen over past decades; some aspects of each have failed the test of time, others underlying principles
have survived it and are used by managers today.
To summarize the evolution of the six major theories or schools of thought
about management, see Figure 2.1. It provides a time line showing when each
emerged. Notice that all the theories continue into the present, indicating that
parts of each are still affecting the ways in which managers practice their art.
Classical Management Theory

The classical management theory originated during England’s Industrial Revolu-
tion, which began in the late 1700s with the invention of reliable steam-powered
machinery. Steam power freed manufacturers from dependence on running wa-
ter and wind. For the fi rst time, manufacturers could mass-produce goods in
factories that operated year-round. The textile industry was among the first to
2a
Explain the contributions
of the classical schools of
management thought
capitalize on the new technology. Before steam power, an individual working classical management
on a home loom wove cotton or woolen cloth. After the Industrial Revolution, theory
A theory that focused on finding
weaving was done in urban areas by large groups of semiskilled workers using the “one best way” to perform
reliable machines under one roof. The Industrial Revolution allowed manufac- and manage tasks
turers to make standardized goods for domestic and overseas mass markets.
Early factories depended on a constant flow of labor and materials. Owners
needed to plan, organize, lead, control, and staff many different kinds of opera-
tions. Writing of the new managerial skills required of successful industrialists,
economic historian P. L. Payne observed, “In many cases, better organization
contributed almost as much to increased production as the use of the machines
themselves.” 1
Figure 2.1 Time line of management thought
Quality School
Contingency School
Systems School
Quantitative School
Behavioral School
Classical Schools
1760 1780 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000
The classical management theory focused on fi nding the “one best way” to
perform and manage tasks. As the Industrial Revolution continued, the environ-
ment of the early factory gave rise to two separate doctrines of management—
two schools of thought linked under the label “classical.”
classical scientific school First came the classical scientific school, which focused on the manufactur-
Focused on the manufacturing ing environment and getting work done on the factory floor. Then came the clas-
environment and getting work
done on the factory floor sical administrative school, which emphasized the flow of information and how
organizations should operate. Both schools articulated principles and functions
classical administrative of management discussed throughout this text.
school
Emphasized the flow of infor-
mation and how organizations Classical Scientific School
should operate Among the pioneers of the classical scientific school was British mathemati-
cian and inventor Charles Babbage (1792–1871), who in 1832 published On
the Economy of Machinery and Manufactures, a study that presented the fruit
of Babbage’s observations of the factory floor. Babbage concluded that defi nite
management principles existed, that they had broad applications, and that they
could be determined by experience. He thought that the most important prin-
ciple was “the division of labor amongst the persons who perform the work.”
Babbage called for the division of work into discrete processes that could be
mastered quickly by one person.
Other pioneers of the classical scientific school also made theoretical con-
tributions that increased labor efficiency and productivity. Frederick W. Tay-
lor (1856–1915), sometimes called the Father of Scientific Management, applied
scientific methods to factory problems and urged the proper use of human la-
bor, tools, and time. In 1909, he published Principles of Scientific Management.
During a career as executive, consultant, production specialist, and efficiency
expert, Taylor pursued four key goals: to develop a science of management, to
select workers scientifically, to educate and train workers scientifically, and to

create cooperation between management and labor. From his experience at Mid-
vale Steel, Simonds Rolling Machine, and Bethlehem Steel, Taylor developed the
core ideas of scientific management. Devising time and motion studies to ana-
lyze the movements of workers on the job, he determined the output that indi-
vidual workers should be able to achieve with specific materials and equipment.
From such data he determined the quickest ways to perform tasks. Taylor intro-
duced work breaks and the piece-rate system for worker pay.2
Frank Gilbreth (1868–1924) and Lillian Gilbreth (1878–1972) added to
Taylor’s fi ndings. The Gilbreths used time and motion studies to analyze work-
ers’ activities and remove unnecessary movements and causes of fatigue. One of
Frank’s fi rst studies involved bricklaying. Frank reduced a 10-step process to 5
steps, thus doubling productivity. His study of hospital operating-room func-
tions saved resources and shortened the time patients spent on operating tables.
Lillian assisted her husband and expanded on his work after his death.
Henry Metcalf, another thinker of the classical scientific school, empha-
sized the need for scientific administration. The management system he advo-
cated relied on fi xed responsibilities for cost control and an effective flow of
information. He urged managers to record their experiences for the benefit of
others. Henry Gantt’s idea represented a move away from authoritarian man-
agement. He advocated a bonus system to reward workers for acceptable and su-
perior work, and he invented the Gantt chart, a graphic means of representing
and planning production activities and time frames.
Assessment The theories and principles developed by the early classical scien-
tific thinkers are with us today, although experience and accumulated data have
modified the ideas significantly. One of the methods used by the early thinkers,
the time and motion study, is still in common use.
Authors, professors, and researchers Christopher A. Bartlett and Sumantra
Ghoshal provide this tight summary of classical thinking:
Early in this century, [Frederick] Taylor wrote that management’s role
was to ensure that workers’ tasks were well defi ned, measured, and con-
trolled. With the objective of making people as consistent, reliable, and
efficient as the machines they supported, managers came to regard their
subordinates as little more than another factor of production. In that
context, managers designed systems, procedures, and policies that would
ensure that all employees conformed to the company way. The goal was
to make the middle managers’ and workers’ activities more predictable
and thus more controllable. . . . The systems that insured control and
conformity also inhibited creativity and initiative. . . . At best, the result-
ing organizational culture grew passive; with amused resignation em-
ployees implemented corporate-led initiatives that they knew would fail.
At worst, the tightly controlled environment triggered antagonism and
even subversion; people deep in the organization found ways to under-
mine the system that constrained them. 3
The classical school failed to welcome or tap into the great diversity that
existed in organizations. Employees with beliefs, values, and customs different
from those held by the people in charge—owners and their managers—were told
to suppress them and conform to the organization’s beliefs, values, and customs.
See this chapter’s Valuing Diversity feature for the evolution of how diversity has
been handled in America. Leadership was expected at the top but suppressed
40
VALUING DIVERSITY Part 1 Management Concepts
a g es
From Equal Opportunity to Valuing
Get t y Im
Diversity
Since its very first people arrived, the United States has The first phase is an inclusion phase. As diverse in-
been populated by diverse groups of immigrants and their dividuals and groups are allowed to display their unique-
descendants. But as history points out, they have not al- ness, support groups form, often spontaneously, whether
ways tolerated one another’s existence. encouraged or not by the organization’s leadership. The
Since the 1964 Civil Rights Act, various federal, state, diverse groups and individuals begin to interact, demon-
and local laws have been passed to promote equal em- strate their talents, and build respect and appreciation for
ployment opportunities for a variety of protected groups: each other’s values, customs, traditions, and contributions.
most notably, women and minorities such as African In the second phase, all organizational members learn
Americans, Hispanic-surnamed Americans, American and to appreciate and value both the need for and the contribu-
Alaskan natives, Asian Americans, the physically and men- tions of diverse individuals and groups. Through a variety
tally challenged, and people age 40 and over. Although of company-sponsored programs and activities, employ-
equal opportunity laws and the agencies designated to ees become active, committed, contributing members,
enforce them can help to promote entrance of the above- accepted and respected by those who differ from them.
mentioned groups into organizations, they cannot guaran- All members become full participants individually and in
tee their acceptance and effective utilization. teams. Only in this second phase can the true potential
Once diversity is created in an organization’s ranks, in every employee be developed and effectively utilized.
diverse individuals and groups are usually received with Imagine a company with thousands of employees, most
some hostility and a little tolerance (but usually not accep- of whom differ from each other in many ways. Imagine
tance and respect) from preexisting personnel. Separate- further that these people are willing to contribute their
ness exists rather than inclusion. To move from these talents and energy to help each other and solve both the
conditions, carefully planned and executed training pro- organization’s and its customers’ problems. You are imag-
grams—usually conducted with the aid of outside con- ining what is a reality in many of America’s most success-
sultants—are necessary. For these programs to be effec- ful large and small organizations. In following chapters, we
tive, most organizations must pass through two distinct will use this feature to show you more about how organi-
phases, both of which call for commitment and leadership zations are valuing their diversity.
from top to bottom and for the elimination of biases and
• What examples from your own experience can you
stereotypes.
give that demonstrate your valuing diversity?
everywhere else; management’s primary concern was to meet the organization’s

needs. People doing the work were taught a precise set of motions for doing it
and were not asked about or allowed to deviate from the ways they were taught.
In most industries, U.S. companies had little competition from abroad.
Whatever they built, they could sell. Quality, where concern for it did exist, was
the responsibility of a quality-control department and depended in large mea-
sure on fi nal inspections of finished goods. When defects were spotted, items
were reworked or scrapped.
The classical school grew and prospered in a sellers’ market with few laws
to constrain the conduct of business. The prevailing ethical view among business
leaders was that if it was good for business, it was good for the country. Most
consumers soon learned to govern their behavior by the motto, “Buyer beware!”
The classical scientific thinkers taught managers to analyze everything,
teach effective methods to others, constantly monitor workers, plan responsibly,
and organize and control the work and the workers. Their successors—today’s
managers—realize that, without committed men and women empowered to ex-
amine their own output and take responsibility for it, neither productivity nor
quality can improve. The idea of specialization, prized in the classical scientifi c
school, has been modified. The aim today is to avoid the physical and psycho-
logical hazards of boring, repetitive work, for example. Modern managers em-
phasize cross training, which allows workers to perform a variety of tasks, many
of which require high literacy and computational skills. Successful modern fac-
tories depend on innovation, imagination, and creativity from dedicated work-
ers who are backed by managers. These managers act not as commanders, but as
teachers, coaches, and servants.
Classical Administrative School

As the complexity of organizations grew, managers needed a new theory to help
them meet their new challenges. To meet this demand, the classical administra-
tive school grew from classical scientific roots. The administrative branch em-
phasized efficiency and productivity in running factories and businesses. It pro-
vided a theoretical basis for all managers, no matter their area of expertise.
Early Contributors Frenchman Henri Fayol (1841–1925) believed that man-

agement ability was not a personal talent that some had by birth and others did
not. From practical experience, he knew that management required specific skills
that could be learned and taught. As mentioned in Chapter 1, the roots of to-
day’s management functions—planning, organizing, staffi ng, leading, and con-
trolling—can be found in Fayol’s universal management functions: planning, or-
ganizing, commanding, coordinating, and controlling. (It should be noted here
that some authors and managers view staffi ng as a part of either leading or orga-
nizing. Also, coordinating is usually done by all managers while they are execut-
ing the other functions.) Fayol also developed 14 principles (summarized in Fig-
ure 2.2) that form the foundation for modern management practice and sound
administrative structure.4
Another contributor to the administrative school was American political
scientist Mary Parker Follett. Her work in the 1920s focused on how organiza-
tions cope with confl ict and the importance of goal sharing among managers.
She emphasized the human element in organizations and the need to discover
and enlist individual and group motivation. Believing that the first principle for
both individual and group success is the “capacity for organized thinking,” Fol-
lett urged managers to prepare themselves for their profession as seriously as
candidates for any of the traditional learned professions. 5
Another American theorist of the administrative school was Chester Bar-
nard, who was president of New Jersey Bell Telephone Company. In his 1938
work, The Functions of the Executive, Barnard argued that managers must gain
acceptance for their authority. He advocated the use of basic management prin-
ciples, and he cautioned managers to issue no order that could not or would not
be obeyed. To do so, he believed, destroyed authority, discipline, and morale.6
The German theorist Max Weber (1864–1920) was a professor of law and
economics who wrote about social, political, and economic issues. Weber was
the fi rst to describe the principles of bureaucracies—rational organizations based bureaucracies
on the control of knowledge. Although Weber’s milestone work, The Theory of Rational organizations based on
the control of knowledge
Social and Economic Organizations, appeared in Germany early in the twen-
tieth century, it was not translated into English until 1947. The book describes
how bureaucratic organizations operate and how they lend themselves to the ad-
ministration of ongoing work and functions.
Weber argued that the bureaucratic organization developed in parallel with
the evolving capitalist system. He saw the bureaucratic organization as a superior
mechanism for administering businesses, governments, religious orders, univer-
sities, and the military. He based his conclusion on his view that technically com-
petent individuals who provide stable, strict, intensive, and continuous admin-
istration are the people who control bureaucracies. In the typical bureaucratic
hierarchy, he said, clearly defi ned offices (positions) are occupied by qualified ca-
reer people selected on the basis of their expertise and experience (often on the
basis of standardized examinations). By and large, these workers are promoted
according to the judgments of superiors, and the workers are subject to the disci-
plinary system of the organization. A fi ne example of a classic bureaucracy is the
federal government of the United States. Career professionals who hold their po-
sitions until retirement age, regardless of political administration, generally are
the staff at the Agriculture Department, the Federal Bureau of Investigation, the
Bureau of Land Management, the Internal Revenue Service, and many other fed-
eral departments.
Assessment By 1900, industrial leaders began to recognize that a manager did

not have to be the one who owned the business. The flow of authority and pa-
perwork could be governed by scientific principles, and people could be trained
to be effective managers. Industrial leaders realized that successful organizations
needed unity of purpose, command, and direction. An ordered environment;
subordination of individual interests to the survival of the organization; and har-
mony, equity, and stability of tenure for key personnel all became hallmarks of
effective organizations.
Management according to the classical administrative school has limita-
tions, however. The monumental difficulties experienced by the former Soviet
Union—possibly the most rigidly bureaucratic system yet attempted—illustrate
the downside. Rigid and unresponsive decision making and a lack of commit-
ment among workers given no autonomy led to a strangled economic system.
Within the classical administrative school, the work of Mary Parker Fol-
lett most directly discussed the disadvantages of bureaucratic theory. She em-
phasized for the fi rst time the importance of the individual—both manager and
worker. As we briefly discussed previously, Follett believed that scientific meth-
ods could be applied to human relationships, and she believed that people could
reach their potentials only through groups.7 Follett and others defi ned the social
context of work and emphasized reliance on skilled, principled, and professional
managers.
The classical administrative school opened the door for the next important
school: the behavioral, or human relations, school.
Behavioral Management Theory

The behavioral school took management thinking one step further. Its propo-
nents recognized employees as individuals with concrete human needs, as parts
of work groups, and as members of a larger society. Enlightened managers were
to view their subordinates as assets to be developed, not as nameless robots ex-
pected to follow orders blindly.
2b
of the behavioral school of
management thought
behavioral school
Behavioral School Proponents Recognized employees as indi-
viduals with concrete, human
The fi rst modern author to address the concern for people in the work environ- needs, as parts of work groups,
ment was Robert Owen, considered by many the father of modern personnel and as members of a larger
society
management. In 1813, with the publication of “An Address to the Superinten-
dents of Manufactories,” Owen asserted that the quality and quantity of work-
ers’ output were influenced by conditions both on and off the job. Owen demon-
strated, by referring to the textile mills he managed in Scotland, that devoting
attention to the “vital machine” (people) made as much sense as devoting atten-
tion to inanimate machines.8 Owen was far ahead of his time, and not until the
work of Mary Parker Follett in the 1920s did the individual worker again re-
ceive scholarly attention.
Like Follett, psychologist Elton Mayo emphasized the behavioral aspects of
workers. Beginning in 1924 Mayo and the National Academy of Sciences con-
ducted five studies. Each focused on the Western Electric plant in Cicero, Il-
linois. The studies heightened management’s awareness of the social needs of
workers and showed how an organization’s social environment influenced pro-
ductivity. He discovered that when employees were treated with dignity, in a
way that showed concern for their welfare and individuality, commitment and
productivity increased.
Mayo’s studies on the effects of piece rates on production led to the discovery
that social pressures exerted by coworkers were a significant influence on perfor-
mance. In the bank-wiring study at Western Electric, workers in teams developed
their own production quotas. Mayo found that, rather than release finished pieces,
workers kept pieces to help the group meet future quotas, and they pressured co-
workers to keep production within the bounds of established quotas.9
Abraham Maslow—a humanistic psychologist, teacher, and practicing man-
ager—developed a needs-based theory of motivation. Maslow’s theory is now
considered central to understanding human motivations and behavior. His work
paralleled many of the fi ndings of psychology and sociology, social sciences that
were then emerging. These sciences affi rmed what artists and historians had
always known—that people are extraordinarily complex creatures with many
motives for behaviors on and off the job. Maslow’s seminal work on human be-
havior in the workplace, Eupsychian Management, published in 1963, was up-
dated with Deborah C. Stephens and Gary Heil in 1998 and entitled Maslow on
Management.
In a 1943 article for Psychological Review titled “A Theory of Human Mo-
tivation,” Maslow identified and analyzed five basic needs, which he believed un-
derlay all human behavior. These needs related to physiology (food, water, air,
and sex), security (safety, the absence of illness), society or affiliation (friend-
ship, interaction, love), esteem (respect and recognition), and self-actualization
(the ability to reach one’s potential).
Maslow’s list of needs provided a radically different perspective for manag-
ers. Before Maslow, most managers assumed that people were primarily moti-
vated by money. Maslow’s work caused many managers to evaluate their own ac-
tions, their companies’ conduct, and their individual philosophies about people.
Chapter 12 will discuss Maslow’s hierarchy of needs at length.
In 1960, Douglas McGregor expanded the ideas of his predecessors in man-
agement theory by publishing The Human Side of Enterprise. In it, McGregor
explained his view that all managers operated from one or two basic assump-
tions about human behavior: Theory X and Theory Y. The fi rst theory, the view
traditionally held about labor, portrayed workers in industry as being lazy and
needing to be coerced, controlled, and directed. The second described people
as McGregor thought them to be: responsible; willing to learn; and, given the
proper incentives, inherently motivated to exercise ingenuity and creativity.
McGregor believed that the traditional way of treating people—regarding them
as unthinking, uncaring robots—must change. Indeed, McGregor stressed that
only by changing these assumptions could managers tap into workers’ vast tal-
ents. What mattered, he emphasized, was how people were treated and valued
in their work settings. McGregor told managers that if they gave employees a
chance to contribute and to take control and responsibility, they would do so.10
Assessment The behavioral management school brought the human dimen-

sion of work fi rmly into the mainstream of management thought. The results
continue today. Many managers work hard to discover what employees want
from work; how to enlist their cooperation and commitment; and how to un-
leash their talents, energy, and creativity. The behaviorists integrated, for the
fi rst time, ideas from sociology, anthropology, and psychology with manage-
ment theory.
One result of the behavioral school was the creation of positions for pro-
fessional human resource managers. Behavioral management theory effectively
paved the way for modern-day employee-assistance programs, such as substance-
abuse intervention and day care for children, and innovations in communication
involving subordinates and peers, individually and collectively.
The major limitation of behavioral management theory is its complexity. It
does not yield quick or simple conclusions, and it does not conclusively explain
or predict the actions of individuals or groups. Most managers, not being trained
social scientists, have a difficult time using the vast amount of information pro-
vided by the social sciences, as the behavioral school says managers should do.
Behavioral theory becomes even more complicated in light of the facts that peo-
ple are motivated by more than one need at any given time and that they must
constantly reconcile confl icting demands. No simple formulas can always moti-
vate all individuals in the workplace. What’s more, people’s needs change with
time, making the same person tough to manage one day and a delight the next.
Nevertheless, by considering psychology, managers can prepare themselves to
effectively manage their most important and complex resource: people.
The primary difference between one company and another is its people. “To
compete in today’s market, large corporations need to provide workers an envi-
ronment in which they can make their own decisions and create their own vi-
sions. That means letting go of the old command-and-control model in favor of
a looser approach.” 11 This could describe Procter & Gamble, the subject of this
chapter’s Management in Action case.
Quantitative Management Theory

The next wave of management thought moved from concern for people to the
use of quantitative tools to help plan and control nearly everything in the orga-
nization. The emphasis in this new school, the quantitative school of manage-
ment theory, was on mathematical approaches to management problems. This
approach was born during World War II with research teams that developed ra-
2c
of the quantitative school
of management thought
dar, guidance systems, jet engines, information theory, and the atomic bomb. quantitative school
Since then, quantitative tools have been applied to every aspect of business.12 Emphasized mathematical
approaches to management
Management science is the study of complex systems of people, money, problems
equipment, and procedures, with the goal of understanding them and improving
their effectiveness.13 Management science is a facet of quantitative management management science
The study of complex systems
theory. Historians Lester Bittel and Jackson Ramsey presented the following ex- of people, money, equipment,
planation of the management science approach: and procedures, with the goal
of understanding them and im-
Such studies are conducted through the use of the scientific method, proving their effectiveness
utilizing tools and knowledge from the physical, mathematical, and
behavioral sciences. Its ultimate purpose is to provide the manager with

a sound, scientific, and quantitative basis for decision making.
Management science enables managers to design specific measures, such as
a computer program, to test or evaluate the effects and effectiveness of a pro-
cess or intended action. Airlines use management science to schedule fl ights,
to schedule maintenance, and to book passenger reservations. An area of man-
operations research agement science called operations research commonly uses models, simulations,
An area of management science and games. For example, sophisticated computer models and simulations of the
that commonly uses models,
simulations, and games interactions between and among atmospheric forces forecast the weather. For
another example, through the use of several commercially available software
programs, we can predict and understand in advance the impact throughout a
business of an expected price increase for vital raw materials.
The techniques and tools of management science are frequently used to plan,
organize, staff, lead, and control production operations; this aspect of manage-
ment science is known as operations management. The management science
approach is also used to direct facilities, purchasing, investments, marketing,
personnel, and research and development. Management science depends on the
participation of a variety of experienced researchers and practitioners to gather
and process information, analyze operations, and develop and use the appropri-
ate tools and techniques. Regardless of the methods, tools, and personnel used,
however, the ultimate test of management science is whether better decisions are
made and more effective processes are developed.14
Today, INFORMS (Institute for Operations Research and the Management
Sciences) defi nes operations research (OR) and the management sciences (MS)
as the professional disciplines that deal with the application of information
technology for informed decision making.
OR/MS OR/MS professionals aim to provide rational bases for decision mak-
Operations research (OR) and ing by seeking to understand and structure complex situations and to
the management sciences (MS)
are the professional disciplines use this understanding to predict system behavior and improve system
that deal with the application of performance. Much of this work is done using analytical and numeri-
information technology for in- cal techniques to develop and manipulate mathematical and computer
formed decision making
models of organizational systems composed of people, machines, and
procedures. OR/MS draws upon ideas from engineering, management,
mathematics, and psychology to contribute to a wide variety of applica-
tion domains; the field is closely related to several other fi elds in the “de-
cision sciences”—applied mathematics, computer science, economics,
industrial engineering, and systems engineering.15
Operations Management
The branch of management science that applies to manufacturing or service in-
operations management dustries is operations management. Some of the most common tools of opera-
The branch of management sci- tions management include
ence that applies to manufac-
turing or service industries • Inventory models that determine optimum storage levels and reorder points
• Break-even analyses to determine levels of production and sales at which the
organization recaptures the total costs of development and manufacturing
• Production scheduling, which determines when operations begin and end
• Production routing, which directs the path followed by parts and products
during assembly
You can fi nd more about operations management in Appendix A.
Management Information Systems

A key ingredient in management science is the timely and effi cient delivery of
up-to-date information. Most organizations utilize information technology to
implement, maintain, and oversee their use of computers. A management in-
formation system (MIS) is a computer-based system that gives managers the in-
formation they need to make decisions. Specialists who know what the users of
system output need maintain an MIS. The Wal-Mart chain of retail stores im-
plemented a management information system by using computer links to con-
nect headquarters, suppliers (such as Procter & Gamble), and outlets. The sys-
tem allowed Wal-Mart to minimize expenses and the time needed to gather and
process information about sales and inventory.
Companies that depend on domestic and foreign suppliers and outlets for
their goods and services must know promptly and precisely what is happening
in all vital operations. Without such information, managers cannot make timely
and appropriate decisions. Chapter 15 will examine information technology and
management information systems in detail.
Assessment From the 1950s well into the 1980s, large numbers of American
managers became preoccupied with quantitative measurement. The manage-
ment of business after business was given over to engineers and fi nancial man-
agers dedicated to achieving the lowest possible cost and the highest short-term
profits. Symbolic of this view were the substantial bonuses paid to managers ac-
cording to fi nancial performance in each quarter or year. A decision not based
on a quantitative tool or technique was considered a poor decision.
This prolonged, intense focus on immediate results generated significant dif-
ficulties. Long-term investment was neglected—especially investment in research
and development. Companies ignored trends developing overseas and, as a result,
lost market share to innovative competitors. Organizations forgot the human-
ism of the behavioral approach and the lessons learned from behavioral manage-
ment theory. Companies produced what they wanted to produce in the way they
wanted to produce it; they forgot about quality and their customers. The result
was disastrous for many firms and whole industries. Perhaps the most dramatic
examples of such industries are the American steel and auto manufacturers. How-
ever, examples exist in every industry. The losers run the gamut, from the makers
of small appliances and footwear to the manufacturers of textiles and tires.
In hindsight, the lesson of overemphasizing the quantitative management
approach is clear. It is not the tools that are important, but the results they bring
to the organization and the community. Management science can help managers
analyze, develop, and improve operations, but management science techniques
cannot substitute for sound, balanced judgment and management experience.
Management science cannot be forgotten or ignored, however. Like all phases
of management theory, management science contains positive aspects. The wise
manager draws upon the best aspects of each management theory and integrates
them with insight and imagination.
Systems Management Theory

A system is a set of interrelated parts that work together to achieve stated goals
or to function according to a plan or design. Figure 2.3 shows an organization
as a system, with inputs being processed, through operations, into outputs. Out-
puts go to users who are either inside or outside the organization. An internal
2d
of the systems school of
management thought
Figure 2.3 The organization as a system
Inputs Processing Outputs
People Products
Information Transformation Services

Through
Facilities Applications of Profits or Losses
Workforce
Equipment Expertise and Customer
Technology Satisfaction
Machinery
Ethical Behavior
Materials
Socially
Supplies Responsible
Behavior
Finances
Feedback
system user is the person down the line who receives a part or a project when another
A set of interrelated parts that
work together to achieve stated
worker fi nishes with it. Anyone in the organization who uses or depends on the
goals or to function according to output of others in the organization is an internal user, or internal customer. In-
a plan or design formation, products, or services sent outside go to external users (suppliers, cus-
tomers, or government agencies).
Systems School
systems school The systems school holds that an organization comprises various parts (subsys-
The theory that an organiza- tems) that must perform tasks necessary for the survival and proper function-
tion comprises various parts
(subsystems) that must perform ing of the system as a whole. The functional areas of a business—marketing, fi -
tasks necessary for the survival nance, and human resources management—are subsystems. So, too, are various
and proper functioning of the processes such as billing and order processing when managed by teams. All man-
system as a whole
agers should understand how each subsystem works, how each interacts with
others, and what each contributes to the whole. Changes in any one subsystem
usually affect other subsystems and, therefore, the entire system.
When managers adopt a systems approach, they determine how planned
changes will affect others and their operations before they implement them. By
keeping the entire system and its subsystems in mind, they hope to ensure that a
positive move in one area does not negatively affect another.
A malfunctioning subsystem causes ripple effects that have an impact on
other systems. Consider, for example, a United Airlines 777 twin-engine jet car-
rying 200 passengers from Los Angeles to Chicago. Once serviced and refueled
in Chicago, the plane will continue on to New York. Some Los Angeles passen-
gers must make connections in Chicago or New York for other flights, and some
passengers boarding in Chicago must make connections in New York. United
baggage handlers in Los Angeles fail to properly secure the 777’s cargo door.
As the plane moves to its takeoff position, a crew member discovers the prob-
lem. The plane returns to the loading gate so the door can be secured, thus los-
ing its takeoff position and causing a 30-minute delay. Several Chicago-bound
passengers will now miss their connecting fl ights; many heading for New York
are similarly inconvenienced. The delayed departure means a delay in fi nding an
available gate in Chicago. In addition, passengers’ families are frustrated and
business schedules are affected.
Cumulative Energy of Synergy

Systems and Synergy Synergy is the increased effectiveness that results from synergy
combined action or cooperation. It is sometimes described as the 2 2 5 ef- The increased effectiveness
that results from combined
fect, because the result of a synergistic partnership is actually more than the action or cooperation
sum of the production of each partner alone. A corporate merger often provides
an illustration of a synergistic process. When Procter & Gamble (P&G) merged
with Gillette to form the world’s biggest consumer-products enterprise in 2005,
many experts saw enormous synergistic potential. The combined organization,
they believed, offered powerful product and marketing potential unavailable
to the separate fi rms. In such mergers, old identities are lost and a new, stron-
ger combination may be formed. Some combinations produce negative effects,
however. Possible threats to the Procter & Gamble and Gillette merger include
a clash of corporate cultures, as described in Chapter 9, and the loss of jobs and
competition.
Synergy usually occurs when organizations and their subsystems interact
with outsiders—subsystems or entire systems. This is one reason why companies
form partnerships and invite outsiders to evaluate their operations or products
and services. Since its founding, many of P&G’s products have been the result
of astute salespeople sensing customers’ needs and responding to customer rec-
ommendations. P&G’s employees add synergy to its efforts at new process and
product design by sharing the results of their research.
At P&G, package design, product development, manufacturing, and
marketing are like fi ngers of a hand. If they’re not in sync, the task won’t
get done smoothly. For example, take a Pringles potato chip. The shape
of the chip is determined, in part, by its cylindrical container, which
has to be designed so the snack won’t break between when it’s made
and when the can is opened by the hungry consumer. In addition, pack-
age designers need to incorporate in the artwork color, shapes, logo,
and other elements preferred by customers based on marketing surveys.
Manufacturing has to stay on top of all development work, since it will
have to make the chip and the packaging.16
Assessment According to systems theory, the components of an enterprise in-

teract to create synergy that can benefit each component and the whole. The sys-
tems approach encourages managers to view their organizations holistically—to
envision workers, groups, and tasks as interrelated parts of an organic whole.
This integrated approach requires information systems that can provide manag-
ers at every level with enough accurate and timely input to facilitate sound de-
cisions. Such a situation brings Henri Fayol’s principles—unity of command,
unity of direction, and harmony—to mind. Keeping people focused on the ob-
jectives to be achieved is the manager’s most important task. When everyone
works together toward a goal to which they are all committed, synergy results.
The systems view has led managers to think about quality (defined in Chap-
ter 1) as a concept affected by each action of every employee and every unit. The
result has been a commitment by all employees of an organization, beginning
at the top, to focus their energies on meeting or exceeding the organization’s in-
ternal and external customers’ needs. This focus has become so strong and per-
vasive in so many companies that it has evolved into the most recent school of
management thought. It is discussed at the end of this chapter and is the central
focus of Chapter 4.
Fear can beset managers when they consider just how complex and con-
nected their organizations’ subsystems are. This fear can lead to paralysis. Man-
agers may become overly cautious and refuse to act until they have contacted ev-
ery possible source, conducted exhaustive analysis, and asked for reviews from
upper management. The time constraints and conditions of business seldom al-
low such luxuries.
Contingency Management Theory
2e
of the contingency school
of management thought
The contingency school is based on the premise that managers’ preferred actions
or approaches depend on the variables of the situations they face. Adherents of
the school seek the most effective way to deal with any situation or problem,
recognizing that each situation encountered, although possibly similar to others
in the past, possesses unique characteristics.
contingency school Managers holding the contingency view feel free to draw on all past theories
A theory based on the premise in attempting to analyze and solve problems. The true contingency approach
that managers’ preferred ac-
tions or approaches depend on is integrative. During a typical day, a manager may have to use behavioral ap-
the variables of the situations proaches to soothe a subordinate’s hurt feelings, apply management science to
they face program production for a new assembly, and use classical scientific tools to
study an assembly operation to determine where it can be improved.
Adherents of the contingency school recognize that a human resource man-
ager at Citibank may need to analyze a job applicant’s interview and test results
differently than would a human resource manager at First National of Chicago.
Both managers have differing systems, needs, and experiences; the contingency
school maintains that their choices should reflect those differences as well as the
unique characteristics and histories of the job applicants.
The contingency theory can be summarized as an “it all depends” device.
Right and proper conduct under one set of circumstances may fail utterly under
another set. Since no two problems possess identical details and circumstances,
neither should any two solutions. Several solutions and approaches may be pos-
sible and might yield equally good results. Supporters of the contingency theory
would acknowledge that many roads lead to a city from several directions; they
would also stress that the route that appears the shortest might not be the best
choice if it is undergoing repairs.
The contingency theory tells managers to look to their experiences and the
past and to consider many options before choosing the course of action. It en-
courages managers to stay flexible and to consider alternatives and fallback po-
sitions when defi ning and attacking problems. The theory also tells them that
intelligent choices come only from adequate preliminary research.
Assessment The contingency theory applies to any organization and to man-

agers who face change. The purchase of one company by another is an example of
significant change. By using the contingency approach, top managers of the pur-
chasing company may discover that they need to learn or embrace the methods
of the purchased company. If the theory works as its supporters predict, they will
make the discovery before imposing inappropriate methods on the acquired fi rm.
The contingency theory requires managers to know the history of manage-
ment thought. Managers must be familiar with the tried and true principles and
practices that have provided benefits in the past but not be bound to mindlessly
repeat them. Contingency thinking tells managers to try the new, to experi-
ment—to think “outside the box” of the past—until they fi nd the right means.
It also encourages managers to stay flexible; to consider alternatives and fall-
back positions when attempting to solve problems, meet challenges, or take ad-
vantage of opportunities (regardless of where in the world they arise) within a
framework of both the law and ethics. The diversity in most of today’s organiza-
tions helps to guarantee that additional and unique perspectives will be brought
to bear on problem solving when it is truly valued. Contingency theory, along
with those theories previously discussed, has led managers to the most recent
theory of management thought: quality management.
Quality Management Theory

During the fi rst 50 years of the last century, American companies in such ma-
jor industries as electronics, textiles, automobiles, and steel supplied most of the
world’s consumer and industrial products. If it wasn’t produced by U.S. manu-
facturers, it either wasn’t available or it wasn’t as good. After World War I, the
United States emerged as the leading industrial power.
2f
of the quality school of
management thought
Throughout the 1940s and into the 1950s, our major competitors and trad-
ing partners today—Great Britain, Germany, France, Italy, Japan, and most of
its Asian neighbors—were engaged in recovering from the devastation of World
War II. U.S. industries were dominant largely because they had no serious for-
eign competition and were untouched by both world wars. But challenges came
swiftly to most U.S. industries by the 1960s, and their impacts were magnified
with the oil shortages caused by the major oil-producing nations in the early
1970s. American consumers, along with those in other nations, had discovered
alternative products from several foreign nations that better met their needs.
As Chapter 1 pointed out, quality is defi ned as the ability of a product or
service to satisfy the stated or implied goals or requirements of users or cus-
tomers of that product or service. How managers and organizations can create
and nurture this ability is a continuing theme in this book, as its title suggests.
You will recall that users/customers exist both inside and outside organizations.
Users/customers receive the output generated by people, machines, and processes.
The essence of the quality of any output is its ability to meet the needs of the
person or group requiring it. This is the heart of the quality school of manage- quality school
ment thought. Quality management is often referred to as total quality manage- The essence of the quality
of any output is its ability to
ment (TQM), or continuous improvement. meet the needs of the person
or group
Kaizen Approach
Kaizen is a Japanese term used in business to mean incremental, continuous im- kaizen
provement for people, products, and processes. The kaizen approach to quality A Japanese term used in busi-
ness to mean incremental, con-
means that an individual or organization cannot rest after any achievement. No tinuous improvement for peo-
matter how well things are going, the individual or organization can do better. ple, products, and processes
When defect rates drop from 5 percent to 1 percent, they must continue to drop
until no defects occur. Once adopted, the kaizen philosophy commits organiza-
tions, their leaders, and their employees to a never-ending journey: to continu-
ally strive to improve, learn, and grow.
Increasing sales revenue through better-quality products and services that
attract more customers and realize better prices can improve profits. However,
quality has to be focused on the customers’ needs fi rst. This chapter’s Ethical
Management feature focuses on what can go wrong when a company becomes
obsessed with producing quality products.
Reengineering Approach
It has been said that the only constant in business is change. Perhaps the great-
est challenges facing managers at every level are to sense the need for change,
see change coming, and react effectively to it when it comes. It is precisely for
these reasons that a kaizen approach to managing change may not be sufficient.
Rapid, radical, and even revolutionary changes may be necessary. In their book,
Reengineering the Corporation, authors Michael Hammer and James Champy
(see Figure 2.4) called for such an approach to managing change and efforts to
reengineering improve quality of products and operations. They define reengineering as “the
Business processes are rede- fundamental rethinking and radical redesign of business processes to achieve
signed to achieve improvements
in performance dramatic improvements in critical, contemporary measures of performance,
such as cost, quality, service, and speed.” 17 Companies adopting a reengineer-
ing approach quickly learn to question everything they do and why they do it.
“Reengineering fi rst determines what a company must do, then how to do it. Re-
engineering takes nothing for granted. It ignores what is and concentrates on
what should be.” 18 Reengineering is also known as business process redesign,
internal business improvement, or process innovation.
A key concept in reengineering is to determine what a company should be
doing, based on its core competencies and experience—that is, what it can do
best. The company can then determine if what needs to be done is best done in-
house or by some other entity. This approach has led companies to downsize
and outsource. Organization owners and managers must continually ask two
questions: What are we doing? and What should we be doing?
The most profound lesson of business process reengineering was never
reengineering, but business processes. Processes are how we work. Any
company that ignores its business processes or fails to improve them
risks its future. . . . For technologists, the lesson from reengineering is a
reminder of an old truth: information technology is only useful if it helps
people do their work better and differently.19
Today, many companies are achieving impressive savings by redesigning
business processes around the Internet. Enterprise resource planning software
is used to integrate all departments and functions across a company (such as
accounting, human resources, and manufacturing applications) onto a single
computer system that can serve all those departments’ particular needs. Soft-
ware for electronic commerce consolidates online purchasing, supply chain, and
sourcing. An enterprise resource planning (ERP) system is depicted in this chap-
ter’s Managing Technology feature. James Champy, coauthor of Reengineering
the Corporation, predicted, “The Internet is a catalyst forcing companies to
change the way they process orders. Electronic commerce is going to have huge
reengineering consequences.”20
a g es
How the Pursuit of Quality
Get t y Im
Can Alienate Customers
Toyota and other Japanese manufacturers pioneered the Resource Center (DVIRC), but did little to implement the
Lean Manufacturing system, which is built around single training. “Callahan concluded that instead of converting
piece flow (Flow), waste elimination, just-in-time (JIT) to a lean machine, MEECO’s production floor became a
production, and delivery. The goal is continuous improve- mean machine. The employees blamed Lean for problems
ment. Kaizen events help traditional manufacturers imple- it either didn’t address, like personality clashes, or for prob-
ment lean production. Cross-functional teams spend lem areas where MEECO had yet to implement the con-
several days focusing on a defined area of the plant, ana- cept, such as purchasing and inventory control” (Bergson).
lyzing, implementing changes, and measuring effects of Bergson realized that “our mismanagement, com-
the new system. pounded by the factory floor’s misunderstanding, got
Lisa Bergson is President and CEO of MEECO Inc., Lean off to a bad start at MEECO” (Bergson). However,
a manufacturer of trace analyzers for the gas, chemi- MEECO is committed to Lean. Employees must un-
cals, and semiconductor industries. She chose Lean derstand and embrace the importance of the changes.
Manufacturing to implement change in her factory. Bergson accepts “enlightening and inspiring” employees
Bergson says, “Lean is a commonsense approach to as part of her top management job. The irony of MEECO’s
mapping out a work process for identifying bottlenecks commitment to quality was that it did not extend to meet-
and implementing solutions. Done well, a more efficient, ing or exceeding its customers’ needs. It had lost sight
cleaner, more compact, cross-trained, and profitable orga- of the ultimate measure of quality—happy customers, be
nization results” (Bergson). they internal or external.
Lean production reduces the cost of quality if it is part
• What harm can come from changes not embraced by
of the company’s culture. Bergson found that lean conver-
the employees?
sion cannot progress without the support from employees.
• What additional ethical issues do you note in this
MEECO’s fanatical obsession with product quality began
feature?
to alienate its employees. Donna Callahan, MEECO’s Sales
& Service Coordinator, helped Bergson understand why Sources: Lisa Bergson, “Lean Manufacturing? Fat Chance!”
BusinessWeek, May 24, 2002, http://www.businessweek.com/
her employees attended the meetings conducted by Frank smallbiz/content/may2002/sb20020524_4859.htm; MEECO, http://
Garcia, a consultant for the Delaware Valley Industrial www.meeco.com.
Major Contributors to Quality Management

Beginning in the 1950s, foreign-made goods within several industries began to
meet or exceed the requirements of the world’s consumers better than did Amer-
ican-made goods. One measure of that is in the chronic, continuing deficit in
America’s balance of trade with the world. On average, the United States im-
ports about 50 percent more goods and services than it sells abroad.
As an example, the American auto industry experienced its first serious
threat from Volkswagen’s Beetle. “Volkswagen sold 330 Beetles in 1950, 32,662
in 1955, and 61,507 in 1959, by which time the Big Three auto marketers were
fretting: Who is this contrarian new consumer?”21 By the 1960s, Japanese cars
were gaining a foothold by offering fuel-efficient, low-cost, and high-quality
subcompact and compact cars. Their sales really took off with the oil embargo
of the 1970s, as Detroit carmakers had few fuel-efficient quality products to
meet the domestic demand. By the 1980s, import cars had taken more than one-
third of the American car market. This trend continues today. According to auto
forecaster CSM Worldwide, foreign car imports in the United States rose from
2.8 million in 2000 to 3.4 million in 2005 (http://www.csmauto.com). See this
chapter’s Global Applications feature for more information on how the Japanese
penetrated the U.S. market for cars.
Producers in several nations had discovered the importance of quality. In
contrast, most U.S. companies had not, and they waited until the early 1980s
to embark on serious efforts to improve the quality of their goods and services.
By that time many domestic markets had fallen entirely or in large part to the
dominant foreign producers. The real irony of America’s late recognition of the
a g es
Government and Industry
Get t y Im
Cooperation in Japan
With the end of World War II, Japanese policy makers ness in Japan. Industries are targeted by Japanese manu-
chose to allow government and business to work to- facturers, which make long-term efforts to capture market
gether to rebuild their nation and its economy. The Japa- share. America’s consumer electronics industry yielded to
nese created the Ministry of International Trade and In- Japanese competition by bits and pieces. Zenith remained
dustry (MITI) to work with industrial leaders to determine as the only American producer of consumer electronics
what direction the country should take. MITI began the until November 1995, when LG Electronics Inc. (LGE) of
rebuilding by concentrating on the creation of a strong in- Korea acquired a majority interest in Zenith.
frastructure and the reestablishment of core industries, Similarly, the Japanese targeted the U.S. auto mar-
particularly iron and steel. Next, the ministry targeted ket. They began by offering economy cars at a time when
shipbuilding as the principal industry in which the country U.S. manufacturers were neither willing nor ready to mod-
should excel. By the 1960s, Japan led the world in build- ify their traditional full-size product lines. By the 1980s,
ing seagoing vessels of nearly every type, including oil Japanese automakers moved upscale, offering luxury cars
tankers and bulk freighters. for a market long dominated by European manufacturers.
Through MITI, Japan’s industrial community cooperates By 1990, about one in three new cars sold were produced
and shares resources. National and industrywide goals are by Japanese auto companies. Ford’s and General Motors’s
set, and strong commitments are made to achieve them. share of the U.S. auto and truck market has continued to
The Japanese government protects the industries it de- decline—Ford from 24.1% in 2000 to 17.4% in 2005; GM
termines to be vital to the national interest (farming, steel, from 28.3% to 26.2%.
communications), and industrial trade associations act to
• What other factors besides government and industry
protect individual corporate interests.
cooperation have helped Japan advance with extraor-
A strong network of manufacturers and related sup-
dinary speed to become the second-largest economy
pliers dedicated to the survival of the whole is but one
in the world, after the U.S.?
reason why foreign corporations find it difficult to do busi-
importance of quality is that nearly all of quality’s strongest proponents are

Americans. Figure 2.4 profi les the major contributors to the evolution of quality
management theory. Two of the listed individuals—W. Edwards Deming and Jo-
seph M. Juran—taught Japanese manufacturers most of the major quality con-
cepts and principles the Japanese companies operate under to this day.
Assessment The quality school of management thought has its roots most di-
rectly in the behavioral, quantitative, systems, and contingency schools of man-
agement theory. People are the key to both commitments and performance. What
is done must be measured and evaluated quantitatively and qualitatively. Systems
interact and execute the vast majority of processes. What needs to be done at
any given time must be done in the most appropriate manner. Past practices and
traditions have many current applications to today’s management problems.
The quality school is the most current and is embraced worldwide, to vary-
ing degrees, by managers and their organizations in every industry. Some adopt
a total commitment; others engage in a short-term quest to make substantial im-
provements in their quality. Once improvements are made, efforts cease. The for-
mer is exemplified by companies like Motorola, Xerox, and Ford, and all of their
Figure 2.4 Major contributors to quality management theory
G. S. Radford In 1922, Radford published The Control of Quality in Manufacturing, in which he advo-
cated inspection as the cornerstone of industrial quality control. In his view, “it was the
inspector’s job to examine, weigh, and measure every item prior to its being loaded on
a truck for shipment” (Hart and Bogan, 1992). Radford believed that maintaining quality
was a management responsibility and that quality should be considered during the design
stages of a product (Garvin, 1988).
Walter A. Shewhart Shewhart advocated the control of quality through scientific methods and quantitative
measures. He and his colleagues at Bell Laboratories, then a division of AT&T, created
what is now called statistical quality controls and statistical process controls. Through the
use of these tools, any process can be determined to be in control (predictable) or out of
control (unpredictable). W. Edwards Deming and Joseph M. Juran, both of whom worked
with Shewhart at Bell Labs, adopted and developed Shewhart’s ideas (Gabor, 1990).
W. Edwards Deming Deming taught the value of quantitative tools for measuring processes and controlling
quality. Following World War II, the Union of Japanese Scientists and Engineers, orga-
nized to help in the rebuilding of Japanese industry, contacted Deming and asked for his
assistance. Deming, along with Joseph Juran, helped to make Japanese product quality a
standard for the world’s producers. Japan’s most esteemed awards for quality bear Dem-
ing’s name. In the 1980s, he helped Ford and other U.S. companies launch their never-
ending journey towards quality improvement.
Joseph M. Juran Juran argues that quality should not be considered merely an expense. It should be
viewed, instead, as an investment in a firm’s profitability. Juran holds that managers must
design quality into products, services, and processes during the planning phase. He urges
a systems approach to managing quality, combining three subsystems: quality planning,
quality control, and quality improvements. Using Deming’s and Juran’s teachings, the
Japanese developed the kaizen concept.
Armand V. Following up on Juran’s contributions was Armand Feigenbaum, manager of quality
Feigenbaum control for General Electric headquarters in the 1950s. Feigenbaum believed that “qual-
ity was too central to a company’s identity to be entrusted to an isolated corps of inspec-
tors. For a total response, every single employee and vendor had to be brought into the
process” (Hart and Bogan, 1992; Feigenbaum, 1956). Although quality involved everyone,
Feigenbaum believed that managers who were specialists in quality control should take
charge of the quality effort. Today the approach differs. Top managers want all employees
to be quality control experts and committed to quality in all their undertakings.
Philip B. Crosby Crosby was a 40-year employee of AT&T, a company that has contributed much to man-
agement know-how and technological breakthroughs. He was a vice president of ITT for
14 years. In his books, Crosby asserted that everyone needs to be trained by quality ex-
perts in quality control, quality assurance, and total quality management. Crosby has pop-
ularized quality through his down-to-earth language and approaches. He and Thomas J.
Peters have accelerated national awareness of the importance of quality to our lives, our
economy, and the perpetuation of our standard of living.
Thomas J. Peters Author, lecturer, consultant, and professor, Tom Peters has given us a look at companies
doing the right things. Peters has sounded alarms and taught average Americans about
the need to get better at everything we do, and to become more like our competitors by
imitating them, learning from them, and trying to stay ahead of the trends.
Michael Hammer Hammer, author, president of his own consulting firm, and former professor, has added
reengineering as a concept related to quality. He calls for giant leaps forward and a contin-
ual questioning of what is done, why it is done, and how it is done. Change must some-
times be radical. Managers can tinker with existing systems just so long before they must
be replaced or eliminated. Only through a constant rethinking of everything can organiza-
tions and their people compete effectively.
James Champy Chairman of a consulting company, Champy, along with his coauthor Michael Hammer,
has popularized the reengineering approach in corporate America. Their book, Reengi-
neering the Corporation (1993), created a revolution. Their hands-on experiences as con-
sultants allow them to show companies how a horizontal process focus can lead to higher
levels of customer satisfaction, greater speed in cycle times, and huge improvements in
cutting costs and increasing profits. He rejects gradual (kaizen) improvement in favor of
creating new structures and processes.
suppliers, both large and small. The latter approach is quite common among
smaller enterprises with fewer resources and less enlightened leadership. A com-
pany committed to total quality will choose only suppliers and partners who
make the same commitment.
The price for not striving for quality and for failing to make a total commit-
ment to the quest is to risk being surpassed and overwhelmed by the competi-
tion and to provide products and services that do not meet or exceed customer
expectations. In the fi nal analysis, a company exists to help its members and its
external customers meet their needs. The company that can do this best will sur-
vive and prosper in its industry. Chapter 4 extends our investigation of quality.
CHAPTER SUMMARY
Discuss why a knowledge of the evolution the creativity and diverse contributions of all employees
1 of management theories is important to
managers. People ignorant of the past are destined to
can an organization expect to achieve its goals.
Quantitative school of management
repeat it. Knowing what has gone before allows us to
avoid mistakes and repeat successes. In order to under-
2c thought. Quantitative tools used in decision
making proliferate and are made more effective and ef-
stand the present you must see its connections to the
ficient through a variety of computer software appli-
past. All the theories and schools that make up the his-
cations and hardware interfaces. They continue to be
tory of management thought have some value for today’s
valuable aids to decision making but are not substitutes
managers. A manager should use the best and reject the
for sound, balanced judgment and experience. They
obsolete contributions of each theory.
also continue to be part of problem solving, but they
Explain the contributions of the following: do not rule the process. Without a continuing focus on
2a Classical schools of management thought.
Classical management thinkers looked for the “one best
ethics and customers’ needs, even the best of scientifi-
cally based, quantitative decisions can lead to disaster.
way” to do something. Skilled, principled, professional In the diversity of today’s organizations, many alterna-
managers continue to search for better ways to do every- tive problem-solving methods and models exist. In the
thing, knowing that today’s best way will not be tomor- fi nal analysis, a decision is evaluated on the results it
row’s. They used time and motion studies and a scien- achieves, not on the way it is made.
tific approach to study work and work flow and to solve
Systems school of management thought.
problems. Many of these tools are used today. Nearly
all of Fayol’s general principles of management exist in
2d A systems approach encourages managers to
view their organizations holistically—to envision work-
modified form and govern management behavior in to-
ers, groups, and tasks as interrelated parts of an organic
day’s organizations. Although the following concepts
whole. Systems are affected by both internal and exter-
persist, many have fallen from favor: narrow job descrip-
nal forces, not the least of which are customer demands.
tions; the concept of the one best way; top-down deci-
Changes in any subsystem can affect other subsystems
sion making; bureaucratic structures in highly competi-
and the operations of the whole. The systems view has
tive, fast-changing industries; discouraging leadership at
led managers to think about quality as a concept af-
lower levels of an organization; and the suppression of
fected by each action of every employee and unit and
diverse groups.
as customer driven. The result has been a commitment
Behavioral school of management thought. within organizations by all its employees to concentrate
2b Managers now realize that their most impor-
tant and complex resource is people. Employees and
their energies on meeting or exceeding all their custom-
ers’ expectations. The basic tenets of the systems school
their contributions are the primary differences between are very much a part of the contingency and quality
one organization and another. Motivated, satisfied em- schools of management thought.
ployees perform outstanding work, which leads to satis-
Contingency school of management
fying user/customer needs—the central purpose behind
any organization. People are viewed as assets, not ex-
2e thought. The contingency theory tells manag-
ers to experiment and be creative—to try the new and
penses. Money invested to train and develop talent re-
different, to think “outside the box.” Although using
turns to the business many times over. Only by enlisting
the best from the past, they are not bound to repeat it contingency schools converge in the quality school of
in a mindless way. For innovation and creative urges to management thought. To determine the quality of prod-
succeed, managers must develop innovative techniques. ucts and services, quantitative and qualitative measure-
This theory also tells managers to stay flexible and to ments must be used. People are the key, and highly moti-
consider alternatives and fallback positions when at- vated and committed people make quality decisions and
tempting to solve problems, meet challenges, and take deliver quality outputs. Quality depends on everyone’s
advantage of opportunities. Through contingency think- commitment to meet and exceed customers’ expecta-
ing, diversity becomes a clear advantage to organizations. The quality commitment must extend beyond an
tions. Diverse individuals and groups bring differing organization’s borders to encompass its suppliers’ and
perspectives and perceptions to bear on every issue. partners’ personnel. Without quality inputs, quality out-
Since no two problems exist in identical circumstances, puts are not possible. Since one size of anything will not
different approaches allow for tailored solutions. fit all, companies must innovate to meet the needs of
their customers. Companies must develop and utilize the
Quality school of management thought.
2f The behavioral, quantitative, systems, and
leadership potential that exists within their employees.
KE Y TERMS
behavioral school contingency school quality school
bureaucracies kaizen quantitative school
chaos theory learning organization reengineering
classical administrative school management science synergy
classical management theory operations management system
classical scientific school operations research systems school
complexity theory OR/MS theory
RE VIE W QUESTIONS
1. How can knowledge of past schools of management management thought? Are there any areas that can-
thought benefit today’s managers? not benefit? Why or why not?
2. What are the major contributions of the two schools 5. In your experience, how have the concepts intro-
of classical management thought? duced in the systems school of management thought
been illustrated?
3. How are the contributions of the behavioral school
of management thought exhibited where you work? 6. What are the major contributions of the contingency
Where you attend school? school of management thought?
4. What areas of business activity can benefit most 7. Why is the quality school of management thought so
from the contributions of the quantitative school of popular?

1. What evidence can you cite from your experiences c. Systems school
to prove the existence of classical school thinking in d. Contingency school
some of today’s organizations?
3. How does P&G, the subject of this chapter’s opening
2. In what specific ways has each of the following case, exhibit elements from the behavioral school?
contributed to the quality school of management The systems school? The quality school?
thought?
4. What specific examples can you give that demon-
a. Behavioral school
strate an application of the kaizen approach to man-
b. Quantitative school
aging organizations? The reengineering approach?
Links are provided for all Internet exercises at http:// 2. Prepare a basic outline of complexity theory and ex-
plunkett.swlearning.com. plain its relevance to business.
1. Compare the workplace of today with work in the 3. Compare Mary Parker Follett’s thinking of the be-
last century. What differences exist? What similari- havioral school to the contingency school of manage-
ties exist? ment thought.

The Business and Company Resource Center (BCRC) Use the BCRC to fi nd the following information about
is an online database and research tool published by Procter & Gamble. Add any other interesting informa-
Thomson/Gale. Most college and university librar- tion that you fi nd.
ies subscribe to electronic databases, as well as print.
PROCTER & GAMBLE AT A GLANCE
Check to see if your library subscribes to BCRC. If so,
Headquarters:
you may access the database. (Also, you may have access
Founded:
to it through this textbook. Check with your instruc-
Top Executive:
tor.) The BCRC will give you more up-to-date, targeted,
Revenues for past year:
and proprietary information than any Internet search
engine. Furthermore, the information you fi nd is highly
Number of Brands:
respected.
APPLICATION CASE
Ford Motor Company computer modeling, to focus on the best ways to de-
Following the turn of the twentieth century, Ford Mo- sign its cars. In the 1970s, Ford embraced the quality
tor Company was founded in Dearborn, Michigan, in movement and adopted the motto, “Quality is Job 1.”
1903 by Henry Ford, the son of a farmer. Ford’s most Today, the motto has evolved into “Built for the Road
famous car, the Model T, was sold from Oc tober 1908 Ahead.” Its automotive brands include Ford, Lincoln,
to 1927, with little change in design and functioning. Mercury, Mazda, Jaguar, Land Rover, Aston Martin,
The Model T set production and sales records. In 1913, and Volvo.
Ford used the moving assembly line to speed up produc- Born during the classical school of management
tion. By 1920, the Highland Park plant was producing thought, Ford built a bureaucratic structure.
one car per minute. A black enamel paint was the only
Just as old Henry’s assembly line parceled an
one that could keep up with this speed. Henry Ford’s fa-
intricate manufacturing operation into discrete
mous statement, “You can have any color as long as it’s
tasks, executives at Ford and other companies
black,” stemmed from his desire to speed automation.
cleaved their businesses into smaller product
Faster assembly resulted in lower prices and more people
groups, then into functional units. If you worked
being able to afford a Model T. By the early 1920s, more
at Ford, you were a Lincoln man or a manufac-
than half of all the cars in the world were Model Ts. In
turing guy; your allegiance and your thinking
1927, Ford sensed the need to initiate change. Model T
ended there. Since the executives at the top were
production was shut down for several months while the
the only ones who could see above the partitions,
company retooled.
they made the decisions, nudging increasingly
Beginning in the 1940s and into the 1960s, the
immobile giants along their courses (Hammonds).
quantitative and systems schools of management
thought were warmly embraced by a number of large However, in order to compete in today’s global markets,
and small U.S. fi rms, Ford among them. The company Bill Ford, Executive Chairman of the Board of Directors
adopted a variety of quantitative methods, including of Ford Motor Co. and the great-grandson of company
Founder Henry Ford, says, “The old way of doing things Questions
doesn’t work” (Elliott). His plan to make the company 1. Which schools of management thought are illus-
more innovative was called “Way Forward.” He hoped trated in this case?
it would result in a smaller company—less hierarchy and 2. Bill Ford encourages his employees to “think like a
bureaucracy and more risk taking. small company.” How can a smaller company with
The Piquette Project, a new product development fewer employees, fewer plants, and fewer paying
“think tank,” is an example of Ford’s commitment to customers be more innovative?
innovation. The name comes from the historic plant in 3. What caused Ford to begin its Piquette Project?
Detroit where Henry Ford and a group of engineers
conceived the Model T in 1908. The ultimate goal of Sources: Dorinda Elliott, “Can This Man Save the American Auto In-
the project is to create a recycled, reusable car. In the dustry?”, TIME, January 30, 2006, pp. 38–48; Keith H. Hammonds,
“Grassroots Leadership—Ford Motor Co.,” Fast Company, issue 33,
past, the Piquette Project would not have gotten further April 2000, p. 138, http://www.fastcompany.com/online/33/ford.html;
than a meeting. Today, it is an example of Ford’s Ford Motor Company, http://www.ford.com (History).
future.

Original Penguin Becomes a Learning Organization want to. Original Penguin was about to become a
Taking charge of a company is both a challenge and a learning organization, complete with teams, empowered
dream for any young manager. Chris Kolbe, Vice Presi- employees, and a free flow of information.
dent of Original Penguin, a division of Perry Ellis Inter- Kolbe relies on collaboration and communica-
national, is no exception. Original Penguin is experi- tion across departments—usually just across cubicles—
encing a total makeover, courtesy of Chris Kolbe and a among team members. He helps them set goals, makes
small staff of designers, marketers, and finance manag- sure they have the information they need, and then al-
ers. Once the domain of middle-aged golfers, the pen- lows them to take responsibility for their own perfor-
guin logo now graces hats, neckties, shoes, and an en- mance. “If you have a team, you have to give them
tire line of fashionable women’s clothing and accessories ownership of what they do,” Kolbe explains. He com-
ranging from T-shirts and skirts to belts, shoes, hand- municates regularly with the design team and marketing
bags, and bathing suits. Original Penguin clothing now team but says that he prefers to limit the time everyone
appears in such upscale department stores as Barney’s spends in meetings. “I’m a one-on-one guy. I try not to
and Saks—as well as its own retail store in midtown schedule a lot of meetings because meetings can be
Manhattan. This hip new brand of clothing has come a stifl ing.”
long way from the golf courses of half a century ago. Kolbe believes fi rmly in empowering employees
Remaking a brand involves remaking an organiza- with the freedom and resources to initiate their own
tion. In 1955, marketers for Munsingwear Penguin ap- ideas, make their own decisions, and perform their best.
proached celebrities such as Bing Crosby and Bob Hope “Chris is easy to work with,” says Marketing Manager
with the request to provide shirts for their golf tourna- Laura Bellafronto. “He makes you feel comfortable and
ments. Then they contacted the Golf Association, asking secure . . . he makes you want to be here and be working
for a list of its members—all men—to whom they sent with him.” Kolbe is happy that he inspires that kind of
sample golf shirts. The penguin logo quickly became loyalty. “I try to respect and treat everybody as I wish to
associated with the men’s pro golf tour. The company be treated, but also I’m very comfortable with pushing
was run as a traditional organization, manufacturing a people and asking a lot of them,” he remarks.
traditional product. But not any more. The free flow of information between Kolbe and
Perry Ellis has made a strategy of acquiring lan- his staff is key to the rejuvenation of Original Penguin.
guishing brands, such as Jantzen bathing suits and Pen- Kolbe makes sure he communicates with every employee
guin golf wear, and breathing new life into them. When the goals and needs of the company. “He has a vision
Chris Kolbe was hired by the company to turn Origi- that he makes clear to everyone,” says Laura
nal Penguin around, he was given a small New York of- Bellafronto.
fice and two staffers. There was no way he could run the Today, Original Penguin products sport an updated,
company as a traditional large corporation, nor did he more youthful look. “[They are] fashionably new, but
not avant-garde,” says Kolbe. If the clothes are vintage Original Penguin’s success as a learning organiza-
inspired, Penguin’s new customers are too young to re- tion? Explain.
member leisure suits or wall-to-wall shag carpeting. 2. Do you think that Kolbe views knowledge among
Kolbe’s management style is as deceptively casual as the his employees as an important resource? Why or
clothing itself—comfortable but made to last. “My au- why not?
thority [really derives] from what I do and how I com- 3. What steps might Original Penguin as a company
municate with people, my directness. I know when to take to ensure the satisfaction of its employees?
have fun and I know when to be serious. I try to strike
that balance.” Sources: Company Web site, http://www.originalpenguin.com, ac-
cessed January 17, 2007; Carl Swanson, “A Senior Moment,” in “Men’s
Fashions of the Times,” The New York Times, Spring 2004, p. 44;
Questions Mary Lisa Gavenas, “Brands on the Run,” DNR, April 28, 2004, p. 17;
1. As the organization has grown from just three em- Stephanie Thompson, “Perry Ellis Banks on Brand Resurrections,”
ployees, Chris Kolbe has had to delegate more deci- Advertising Age, March 15, 2004, p. 14.
sions to others. How important is this transition to
BIZ FLIX VIDEO CASE

Back to the Future Part II
Marty McFly (Michael J. Fox) and his girlfriend Jennifer This scene appears in the fi rst thirty minutes of the
(Elisabeth Shue) time travel to Hill Valley, California, fi lm as part of the sequences “The Future McFlys” and
in the year 2015 with Dr. Emmett Brown (Christopher “Chicken.” The police returned previously unconscious
Lloyd). They want to help prevent their children from Jennifer to the McFlys’ home because her thumbprint
getting arrested for some allegedly illegal acts. While in identified her as Jennifer Parker McFly. The scene shows
the future, Marty buys a sports almanac for the years McFly family interactions thirty years into the future.
1950 to 2000. He plans to make money from betting
on games upon his return to his own time. Biff Tannen What to Watch for and Ask Yourself
(Thomas F. Wilson) steals the almanac and the DeLo- 1. Which technologies shown in these scenes exist
rean time machine with his own plans to return to 1985 today?
to make money, build his power, and turn Hill Valley 2. Which technologies will exist in the future?
into a nightmarish community. 3. Which technologies are still fantasies?
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LEARNING OBJECTIVES
MANAGEMENT After studying this chapter, you should be able to:
ETHICS AND 1 Describe the two broad categories of ethical theories
SOCIAL Explain what individuals need in order to act ethically

RESPONSIBILITY 2
Describe the organizational influences on ethical conduct
3
Discuss three primary ways in which businesses can
4 promote ethical conduct
Describe the relationship between law and ethics

5
Explain the concept of an ethical dilemma
6
Discuss the guidelines for acting ethically
7
Explain the three approaches by businesses to social
8 responsibility
Explain the responsibilities businesses have to

9 stakeholders
Describe government’s role in promoting socially

10 responsible conduct by businesses
Getty Images
Discuss the ways in which businesses can promote

11 socially responsible conduct
Johnson & Johnson: The Right Thing to Do
Robert Wood Johnson II became Chairman of the
William C. Weldon
Board of Johnson & Johnson in 1938. In 1943, he
wrote the company’s famous Credo, a one-page Born: 1948, Brooklyn, New York
document stating the company’s ethical values. The Current Position:
Credo begins, “We believe our first responsibility is Chairman and Chief Executive Officer, Johnson &
to the doctors, nurses and patients, to mothers and Johnson
fathers and all others who use our products and ser- Career Highlights:
vices,” and continues, “We are responsible to the 1971 Salesman, McNeil Pharmaceutical
communities in which we live and work and to the
1982 Manager, ICOM, Southeast Asia
world community as well.”
The Credo has always guided Johnson & 1984 Executive Vice President, Korea McNeil
Johnson’s management decision making. William C. 1986 Executive Vice President, Ortho-Cilag
Weldon, Chairman of the Board of Directors and Chief Pharmaceutical
Executive Officer, says the following about the Credo. 1989 Vice President, Janssen Pharmaceutica
1992 President, Ethicon Endo-Surgery
These principles have guided us for many years
and will continue to set the tone of integrity for 1995 Group Chairman, Johnson & Johnson
the entire Company. At all levels, the employ- 1998 Worldwide Chairman of Pharmaceuticals
ees of Johnson & Johnson are committed to Group
the ethical principles embodied in Our Credo 2001 Vice Chairman Board of Directors
and these principles have been woven into 2002 Chairman and Chief Executive Officer
the fabric of the Company. (Message from our Education: Quinnipiac University, BS, 1971
Chairman and CEO) Personal: Wife, Barbara, and daughter and son
Johnson & Johnson’s Credo sets up a framework in Source: International Directory of Business Biographies http://
which the responsible course of action becomes www.referenceforbusiness.com/biography/S-Z/Weldon-
William-C-1948.html.
obvious to its managers. The most famous incident
involving the Credo occurred in 1982, when seven
deaths in the Chicago area were caused by cyanide-
laced Tylenol capsules. Instead of recalling only the redo
son’s C
bottles in the contaminated lot, Johnson & Johnson n s o n & J o hn o u ld be
h thics w
o n w rote Jo o s e e a n
Vice Chairman David Collins decided to d J o hn
s how th Chairm
recall the entire product line because he R o b e rt Woo v e r im agined rs la te r. V ice id e ly
W hen e a w
bably n y 4 0 ye 8 2 is a
thought it was the right thing to do. , he pro ht nearl f Tylen
ol in 19 e tam -
in 19 4 3 e d ia spotlig c a ll o m ent. Th
A more recent incident involving ethi- in th e m t li n e re m a n a g e
ro duction
c ast
ll in s’s produc c e s s ful cris
is
rf e it drug p , this
cal decision making guided by the Credo is David C
o
le of su
c
of c o u n
te integrity
Johnson & Johnson’s policy to thwart coun- c te d examp a s th e issue p ro te cted its . W il liam
resp e n ts
c id e n t faded o n & J o hnso c k o ff produc v e
terfeits. The problem of counterfeit drugs— pering
in . J o hns of k n o E xecu ti
medicines that may contain incorrect, dan- c e n te r stage c o n s u mption rs a n d Chief c ti n g the
took to e
d is c o uraging o a rd o f Direc g u id e line refl e th ics.
gerous ingredients or improper dosages—is a time by ir m an, B meless ess an
d
, C h a a s a ti o rt h in
taboo topic for many pharmaceutical compa- on do trustw
C. Weld the Cre tion for
nies. They don’t want people to know that ill looks to reputa
O fficer, wa v e ri n g
patients may not be receiving the therapies pre- ny’s un
c omp a
scribed to alleviate their sufferings.
Johnson & Johnson was “the first major
company to openly take action to block a trap-
door counterfeiters have exploited to slip knock-
© Mike Derer/Associated Press
offs into the nation’s supply of medical products”

(Hensley). The company only sells to U.S. whole-
salers that buy directly from Johnson & Johnson.
“We’ll ask end customers to only buy product from
wholesalers and distributors who buy only from
us,” says David Y. Norton, Chairman of J&J’s North
American pharmaceuticals group (Hensley).
Johnson & Johnson continually ranks number
one in the Harris Interactive corporate reputation
study (Alsop). It has held the number one position
since the survey began in 1999. In particular, the company scored highest in being ethical
and trustworthy.
Sources: Ronald Alsop, “Ranking Corporate Reputations,” The Wall Street Journal, December 6, 2005,
http://online.wsj.com/article/SB113382418840814486.html; Scott Hensley, “New J&J Policy Aims
To Thwart Counterfeits,” The Wall Street Journal, December 11, 2003, http://online.wsj.com/article/
0,,SB107110068153078000,00.html; William C. Weldon, “Message from our Chairman and CEO,” http://
www.investor.jnj.com/governance/index.cfm; Johnson & Johnson, http://www.jnj.com.
Introduction
This chapter examines the responsibilities that businesses and their employees
bear to themselves and to others. It concentrates on what is best for all of an
organization’s and an individual’s constituents, including the recipients of their
outputs—their customers. One assumption here is that the best decisions maxi-
mize achievement of legitimate goals, conform to high standards of legal and
ethical behavior, and promote good corporate citizenship. This chapter exam-
ines basic principles and methods through which managers and their organiza-
tions can strengthen their personal and institutional capacities to act in both an
ethical and socially responsible manner.
Managing Ethically
1
Describe the two broad
categories of ethical
theories
Ethics, you will recall from Chapter 1, is the branch of philosophy concerned
with human values and conduct, moral duty, and obligation. Specifically, ethics
is concerned with what constitutes right and wrong human conduct, values, be-
liefs, and attitudes in light of a specific set of circumstances. The best time for
individuals to consider the ethics of their behavior is while they are selecting a
course of action and before they actually take the action. Thus, they can identify
any possible negative consequences and avoid or, at the very least, consider them
before any harm is done.
According to authors Daniel Davidson, et al:
There are two broad categories of ethical theories. Ethical theories may be
based on consequential principles or nonconsequential principles. Con-
sequential principles judge the ethics of a particular situation by the con-
sequences of that action. Consequential ethics determines the “rightness”
or “wrongness” of any action by determining the ratio of good to evil that
the action will produce. The “right” action is that action that produces
the greatest ratio of good to evil of any of the available alternatives. . . .
Nonconsequential principles tend to focus on the concept of duty.
Under the nonconsequential approach, a person acts ethically if that
person is faithful regardless of the consequences that follow from being
faithful to that duty. If a person carries out his or her duties, the greatest
good occurs because the duty of the individual is carried out. If each in-
dividual carries out his or her duty, society knows what to expect from
each individual in any given situation.1
business ethics Business ethics addresses the applications of the preceding theories within
The rules or standards govern- the context of for-profit organizations and is the primary focus of this chapter.
ing the conduct of persons or
members of organizations in the Our main concern is to look at how individuals and their organizations can, in
field of commerce any situation, avoid wrongdoing and do the right thing.
Robert C. Solomon and Kristine R. Hanson, business consultants on ethical
issues, have discovered that
Chapter 3 Management Ethics and Social Responsibility 65
Good business begins with ethics. The most successful people and com-
panies are those that take ethics seriously. This is not surprising, since
ethical attitudes largely determine how one treats employees, suppli-
ers, stockholders, and consumers, as well as how one treats competitors
and other members of the community. Inevitably, this affects how one is
treated in return. Ethical managers and ethical businesses tend to be more
trusted and better treated and to suffer less resentment, ineffi ciency, liti-
gation, and government interference. Ethics is just good business. 2
Managers must continually strive to balance diverse and sometimes contra-
dictory demands of multiple constituencies—employees, owners, customers, sup-
pliers, and their communities (local and regional)—while allocating and manag-
ing limited resources. At the beginning of the twenty-fi rst century, two powerful
factors imperil the balance.
First, never have so many conflicting demands been made so insistently on
those who manage institutions and hold power: the construction industry, cig-
arette companies, the military, environmentalists, nuclear-power advocates,
teachers, school boards, the Baby Boomers. The list of powerful special interests
is matched only by the list of less powerful general interests: children, the poor
and homeless, disadvantaged minorities, the undereducated, and the elderly.
Second, the consequences of management decisions affect far more people
and environments—and more profoundly—than ever before. Whether directing
a medical research laboratory at work on cancer or AIDS, maintaining a fleet
of 747s, commanding transoceanic supertankers, supervising a nuclear reactor
at Chernobyl or an insecticide plant in Bhopal, leading the police department in
Los Angeles, or plotting the future of General Motors, today’s managers wield
unprecedented influence over the world of today and tomorrow.
With the accelerating rate of change in our society and the explosion of in-
formation and technology, the pace of real events approaches that of a video
game—with relentless hazards surfacing almost too fast to manage. Pressures
to improve quality of products and operations, to increase productivity, to stay
close to suppliers and customers, to value diversity, and to react swiftly to global
changes all combine to compress the time managers and their organizations can
take to make decisions and choose courses of action. Managers need guidelines
to help them to cope with these pressures.
See this chapter’s Managing Technology for a list of ethics to consider in
conducting electronic commerce.
Individuals and Ethical Conduct

Few individuals and organizations would openly endorse cheating, stealing, tell-
ing lies, breaking laws, and threatening the physical well-being of others. Each
of these actions is a violation of commonly held standards in most societies, un-
der most circumstances. Yet, as too many of today’s newspaper headlines in-
dicate, people and businesses are accused and convicted of doing these things
2
Explain what individuals
need in order to act
ethically
every day. After a brief look at ethics and individuals, we turn our attention to
the organizational influences that affect the ethical conduct of institutions and
their members.
A person’s ethics are influenced by his or her morality—core values and be- morality
Core values and beliefs that
liefs (i.e., principles and philosophy) that act as a guide (i.e., conscience) when act as a guide (i.e., conscience)
formulating courses of action. Once they are formulated, a person chooses or re- when individuals formulate
jects a course of action based on the action’s anticipated effects on both the per- courses of action
son doing the selecting and others. “Religious beliefs and training, educational
66
MANAGING TECHNOLOGY Part 1 Management Concepts
a g es
Electronic Commerce Ethics
Get t y Im
Clinton Wilder, Editor at Large of InformationWeek, pro- • Make clear that your standards of ethical behavior also
vides the following list so that a manager can make sure apply to third-party contractors and on-site consultants
that his or her company considers ethics in conducting working in your company.
electronic commerce: • If your company doesn’t already have one, push for a
publicly displayed privacy policy regarding customer
• Managers should be proactive. It’s not enough to have
data. Pay attention to how that data is shared within
a great ethics policy that sits on a shelf with the corpo-
the company, as well as with outsiders.
rate mission statement. Institute regular ethics train-
• Above all, emphasize that good ethics makes good
ing and awareness programs. Move ethics away from
business sense. Sacrificing ethics for short-term gain
“rules to be followed” to becoming a way of doing
is sure to lose customers and partners in the long run.
business.
Ethics is not just a matter of moral correctness—it
• Information Technology (IT)-related ethics must be
also means business success.
cross-functional. Work with marketing, human re-
sources, and other departments to determine proper • What ethical issues are managers grappling with in
ethical standards. connection with online business?
• Link ethics policies to real-world scenarios that your • Many businesses have their own standards—
employees may face. Establish clear procedures about sometimes they’re written, sometimes they’re just
who employees should contact with ethics-related understood. Sometimes they’re followed; some-
questions when questionable situations arise. times they’re ignored. And sometimes it comes
• Identify areas where IT management can take the lead down to your own personal standards. Where do
in establishing new ethics guidelines. For example, IT you go for guidance on ethically ambiguous situations?
executives at Praxair Technology Inc. and Aventis Phar- Explain.
maceuticals Inc. have led the charge to establish poli-
Source: Clinton Wilder, “Business Ethics for IT Managers—What You
cies for employees’ safe use of cell phones and wire- Can Do,” InformationWeek.com News, February 19, 2001, http://
less devices while driving. www.informationweek.com/825/ethics_side.htm.
background, political and economic philosophy, socialization through family

and peer group influences and work experience all come together to produce a
personal moral code of ethical values with associated attitudes.” 3 All these fac-
tors are usually referred to as an individual’s code of ethics, or moral code, and
are the primary control device used by individuals to judge and regulate con-
duct—their own and that of others.
Consider the results of two surveys. More than 3000 people participated in
the 2005 National Business Ethics Survey (NBES). Sixty-one percent of employ-
ees said that their organizations have ethics training, but 52 percent of respon-
dents observed discrimination, stealing, or sexual harassment. Twenty-one per-
cent of respondents observed abusive or intimidating behavior, and 19 percent
witnessed lying to customers, vendors, employees, or the public.4
American Management Association (AMA) executive members completed
an online corporate values survey. Ethics and integrity were listed among 76 per-
cent of the respondents’ company corporate values and 72 percent said that they
were practiced most or all of the time. Yet, respondents had seen unethical be-
haviors: micromanagement (70%), hidden agendas (56%), dissension in senior
management ranks (58%), and failure to give proper credit (59%). 5
Human behavior derives from discernible causes or motives that can be

identified, acknowledged, and modified. For this reason, wise individuals culti-
vate a continuous awareness of their personal priorities, goals, values, needs, be-
liefs, attitudes, and assumptions. Such awareness allows individuals to realisti-
cally assess the motivation that underlies their personal choices and actions. All
of us must continuously strive to identify the influences on and causes for our
motivations and those of our leaders.
Leaders’ Ethics
How a leader treats employees influences employee loyalty. The 2005 Walker
Loyalty Report for Loyalty in the Workplace found that about 58 percent of
employees believed their companies’ leaders were people of high integrity. Loy-
alty was defi ned as an employee being committed to the organization and plan-
ning to stay at least two years. Only six percent of employees who believed they
were led by less-than-ethical executives were loyal to the company. Conversely,
40 percent of workers with ethical leaders wanted to remain.6
In his study of leadership, business writer Danny Cox compiled a list of ten
characteristics common to great leaders. The fi rst is “cultivating a high standard
of personal ethics.” 7 Cox feels that “at the core of any high standard of personal
ethics is the declaration of personal responsibility. A person who refuses to ac-
cept responsibility lacks the ethical armor to stand against temptation.” 8
Author Verne E. Henderson adds, “Managers and executives who are . . .
unaware of what motivates them are ethical accidents searching for a place to hap-
pen.”9 Henderson suggests that when colleagues—including a boss—recommend
a course of action, we must consider their motives as well as our own. As rea-
sons unfold, watch for rationalizations (self-satisfying but incorrect justifications
for one’s behaviors) that excuse and bury subtle warnings from our conscience.
Leaders of scandalous corporations such as Enron, Global Crossing, Ar-
thur Andersen, and WorldCom, abdicated responsibility to the community. The
nation’s media showed many of these leaders being arrested and taken away in
handcuffs. Some referred to them as “managers in manacles.” Yet, the humilia-
tion suffered by the CEOs has had a positive impact on corporate culture, says
Arthur Levitt, former Securities and Exchange Commission (SEC) Chairman
and author of Take On the Street: What Wall Street and Corporate America
Don’t Want You to Know and What You Can Do to Fight Back. Mr. Levitt
served as President of the American Stock Exchange before going into govern-
ment. He says, “That cultural change is more significant for investor protection
than any regulatory rules. The smarter CEOs now know they have to care about
the public interest.” 10
In our opening case, William C. Weldon exemplifies a leader with a strong
personal code of ethics. He believes in winning but doing so in the right way.
He “walks his talk” as an example and model for his team to follow. He has
the ethical armor needed to evaluate his choices and balance the competing de-
mands from his constituents.
Organizational Influences on Ethical Conduct

Professors and authors Peter J. Frost, Vance F. Mitchell, and Walter R. Nord be-
lieve that organizations can have a negative impact on an individual’s ability to
act ethically: “[A]s organizations become especially central to people, people face
strong temptations to do what they perceive to be good for the organization even
when it means they act inconsistently with the standards of ethical behavior.” 11
3
Describe the
organizational influences
on ethical conduct
Professor Saul W. Gellerman points out that organizations can encourage

(overtly or covertly) unethical behavior in employees in several ways: 12
• Offering unusually high rewards. “Huge bonuses and commissions can dis-
tort one’s values, in much the same way that too much power can corrupt
one’s standards of decency. You can motivate people without corrupting
them simply by keeping their rewards within the bounds of reason.”
• Threatening unusually severe punishments. “If people are desperate to
avoid what they regard as a calamity, they will go to whatever lengths they
must to avoid it. One’s conscience will be anesthetized by terror, so the dirty
business can be done.”
• Emphasizing results. If a company places too much value on results, man-
agers will tend to avoid concern for the means employed by subordinates to
achieve those results.
In their capacity of setting an example for subordinates, managers teach more
about ethics through their actions than they do through their words or what is
written in a company’s ethics code. An employee who is expected to turn a blind
eye to a superior’s unethical behavior receives the message loud and clear that
ends are more important than means.
One ethics professor at Harvard Business School, Lynn Sharp Paine, con-
nects unethical behavior to corporate culture as well. She believes that
unethical business practice involves the tacit, if not explicit, coopera-
tion of others and refl ects the values, attitudes, beliefs, language, and be-
havioral patterns that define an organization’s operating culture. Ethics,
then, is as much an organizational as a personal issue. Managers who
fail to provide proper leadership and to institute systems that facilitate
ethical conduct share responsibility with those who conceive, execute,
and knowingly benefit from corporate misdeeds.13
Just as organizations can exert negative influences, they can also exert positive
ones.
Importance of Organizational Controls
4
Discuss three primary
ways in which businesses
can promote ethical
conduct
Corporate cultures promote values and beliefs that govern the ways in which
people interact with others. Several subcultures exist in most organizations,
reflecting different work groups or discrete ethnic groups that arise from the
workforce. Although these subcultures may display differing sets of values and
perceptions, they can achieve a unity of viewpoint: “In a pluralistic society, busi-
ness is the one place where different cultures and personal values are forced to
cooperate and compromise. It is the one place where a single and unifying ethic
is essential.” 14 To achieve this unified view, organizations rely on the commit-
ment of top management, codes of ethics, and compliance programs.
Commitment of Top Management

It is top management’s job to ensure that its organization’s cultures support eth-
ical conduct and social responsibility. To do this, top management must make
organizational integrity a core value. Ethics Professor Paine provides the follow-
ing explanation of this concept:
[O]rganizational integrity is based on the concept of self-governance in

accordance with a set of guiding principles. From the perspective of in-
tegrity, the task of ethics management is to defi ne and give life to an
organization’s guiding values, to create an environment that supports
ethically sound behavior, and to instill a sense of shared accountability
among employees.15
To determine if a corporate culture and its subcultures support or oppose
ethical conduct, see Figure 3.1. It is a checklist for examining a company’s cul-
ture. Every “no” response indicates that some change is necessary to foster ethi-
cal as well as socially responsible behavior.
Gellerman asserts that the “fi rst line of defense against unethical conduct
is each individual’s conscience.” Managers “have to do everything [they] can
to keep it awake. The second line of defense is to eliminate or minimize the cir-
cumstances that can overwhelm a conscience, or deceive it, or put it to sleep.”
He recommends three steps that top managers can take to discourage unethical
behavior in their areas of responsibility:
• Draw a clean line between the behavior you’ll tolerate and the behavior
you’ll have to punish. This step means establishing a code of ethics or con-
duct that management is willing to commit to and enforce.
• Invest the time and money in making sure that those distinctions are under-
stood and remembered. This step requires training, constant oversight, and
the establishment of rewards for ethical behavior.
• Put the fear of God into would-be violators by conspicuously raising the
risk of exposure. This step means punishing wrongdoers fairly and swiftly.
People will learn from each example of misbehavior and how it is handled
by management.16
Figure 3.1 Checklist for determining if a corporate culture supports ethical behavior
and social responsibility
IS THE COMPANY: YES NO

1. Concerned about quality in its services, products, and operations? ❑ ❑
2. Concerned about its employees’ quality of life? ❑ ❑
3. Proud of its reputation in the industry? ❑ ❑
4. Proud of its reputation in the community? ❑ ❑
5. Focused on the needs of its customers? ❑ ❑
6. Honest in its dealings with you? ❑ ❑
7. Honest in its dealings with customers? ❑ ❑
8. Honest in its dealings with others? ❑ ❑
9. Fair and equitable in the ways in which it decides on promotions? ❑ ❑
10. Fair and equitable in the ways in which it compensates employees? ❑ ❑
11. Open in its communications? ❑ ❑
12. Trusting in its relationships with employees? ❑ ❑
13. Concerned with developing and keeping its employees? ❑ ❑
14. Actively promoting ethical conduct in all its operations and ❑ ❑
employees?
15. Actively searching for ways to better serve its stakeholders? ❑ ❑
16. Carefully monitoring how decisions are made and checking ❑ ❑
them for their concern for ethical behavior?
Codes of Ethics
Although there is no generic code of ethics for business, individual organizations
often fi nd such codes useful. The Center for the Study of Ethics in the Professions
(CSEP) at the Illinois Institute of Technology has posted more than 850 codes of
ethics online (visit http://ethics.iit.edu/codes).
To be effective and influential in an organization’s culture and command
structure, codes of ethics must be specific enough to give concrete guidance and
must be reinforced by the examples set by key corporate figures. They must be
written in such a way as to develop a clear understanding of a company’s val-
ues and commitment to ethical behavior, both inside the organization and in
relation to key outside stakeholders. Codes should deal directly with situations
known by a company to have been problematic in the past.
Authors Solomon and Hanson outline the following characteristics for codes
of ethics:
• They are visible guidelines for behavior at all levels.
• They are an unchallengeable basis for firing an unethical employee, even
when his or her action is not, strictly speaking, against either the law or the
specific terms of the job.
• They protect all personnel from the pressures of the market, which tend to
incite desperation and unethical behavior.
• They remind employees to look beyond the bottom line, and they provide a
touchstone for appeals through the hierarchy.17
Compliance Programs
Without some means to communicate and enforce codes of ethics and conduct,
they will be just words on paper. David Gebler, President and Principal of the
Working Values Group, a Boston corporate governance strategy fi rm, said, “An-
dersen and Enron had written codes of business conduct, but there were tremen-
dous cultural gaps. Everything was focused on profits and arrogance.” 18 Peter
Madsen, Executive Director at Carnegie Mellon University’s Center for the Ad-
vancement of Applied Ethics, separates ethics training into two areas:
1. Compliance training alerts people to policies, regulations, and laws that es-
tablish acceptable behavior within a company, and
2. Cognitive thinking develops skills to allow people to think through various
“moral mazes” with which they may be confronted in the workplace.19
According to Andrew D. Sigler of Champion International, “You need a
culture and peer pressure that spells out what is acceptable and isn’t and why
[and a program] involving training, education, and follow-up.” 20 To make such
a program effective, the Business Roundtable, an advisory and research group
comprising the chief executives of 200 major corporations, recommends that
top management devote a greater commitment to ethics programs, boldly assert
management’s expectations through clearly written and communicated codes,
and conduct surveys to monitor compliance.21
Measuring something makes it important even if it wasn’t before. In the
U.S. Army, the phrase is “don’t expect what you don’t inspect.” The cor-
porate equivalent is, “what the boss watches well gets done well.” The
same principle applies to the ethical side of enterprise. It only becomes
important if and when it’s measured. 22
Several trends are in evidence today. A growing number of corporate boards

of directors have ethics committees. The majority of large companies have eth-
ics or compliance officers who are members of top management or report di-
rectly to a member. The Ethics & Compliance Officer Association (ECOA) was
founded in 1992 by a dozen officers and as of 2007 had grown to more than
1000 members representing every industry. On July 27, 2004, the ECOA Board
of Directors endorsed the following standards of conduct, “which are aspira-
tional in nature and represent ideals of exemplary professional conduct” (see
Figure 3.2). 23
A growing number of companies have employee toll-free hotlines through
which any employee can report wrongdoing anonymously or request ethical as-
sistance in resolving an issue.
Two of the nation’s largest firms that maintain hotlines for other compa-
nies report a noticeable increase in employee calls. At Pinkerton Consult-
ing and Investigations, which handles hotlines for about 1,000 compa-
nies, calls have risen by 12 percent since the Enron scandal came to light.
At Network Inc., which operates toll-free lines for about 650 companies,
there’s been an even larger spike, with calls up 35 percent. 24
Figure 3.2 The ECOA standards of conduct for business ethics

and compliance professionals
RESPONSIBILITIES TO MY EMPLOYING ORGANIZATION

• Be a role model in adhering to my employer’s code of conduct.
• Proactively advocate the integration of ethical business practices and a commit-
ment to compliance into all aspects of my employer’s business.
• Ensure to the best of my abilities that my employer upholds all relevant laws and
regulations wherever it conducts business.
• Be a leader in the formation of ethical business practices in support of evolving
business strategies and opportunities, taking into consideration legal require-
ments, customs, and best practices.
• Raise and escalate, as necessary, significant business ethics and compliance
issues.
• Protect confidential information obtained in the course of my professional activi-
ties unless disclosure of such information is required by law, applicable regula-
tion, or company policy, or if maintaining the confidentiality of such information
would create an appreciable health or safety risk.
• Avoid any actual, potential, or perceived conflicts between my personal and
business responsibilities, and promptly disclose and resolve any issues that
may arise.
RESPONSIBILITIES TO THE PROFESSION

• Maintain exemplary standards of personal and professional integrity.
• Strive to continually advance my knowledge of business ethics and
compliance.
• Work both individually and collectively with other members of the business eth-
ics and compliance profession to advance the development of business ethics
and compliance.
• Take advantage of opportunities to improve public understanding of business
ethics and compliance and their importance to sound business management.
Sources: Ethics & Compliance Offi cer Association, http://www.theecoa.org; About the ECOA, Standards of
Conduct, http://www.theecoa.org/Standards.asp.
72
GLOBAL APPLICATIONS Part 1 Management Concepts
a g es
Bill and Melinda Gates
Get t y Im
Foundation
William H. Gates Sr. is the Cochairman of the Seattle- Bill Gates is proud of his dad. He relates the following
based Bill and Melinda Gates Foundation, the largest (Bock).
philanthropy in the world with an endowment of ap-
It’s fun to have something that’s very complex and that
proximately $28.8 billion. He is the father of Bill Gates,
engages my dad’s deep abilities and experience and gets
Cofounder and Chairman of Microsoft, and “first an-
at issues that are a deep part of our lives. Growing up, we
swered his son’s request for help in using his resources
always talked about society, what’s going on in the coun-
to improve reproductive and child health in the develop-
try and what we’re reading about. [Working on foundation
ing world by directing the William H. Gates Foundation,
projects], he and I have been able to talk together about
which was established in 1994. It merged with the Gates
broader things. . . . I make sure the resources are availa-
Learning Foundation to create the Bill & Melinda Gates
ble and he works to wisely spend the money. . . . Anybody
Foundation in 2000” (Gates Foundation, About Us, Quick
who’s really exposed to the world would be doing what
Facts, Leadership).
we’re doing. That’s just humanitarian instinct.
Mr. Gates Sr. is a retired attorney. He knew that his
son and daughter-in-law did not have time for another ad- Bill and Melinda Gates were named TIME Magazine’s
ministrative duty. So, he “suggested they could just send “Persons of the Year 2005.” “For being shrewd about do-
me the mail and I would expedite the responses. They ing good, for rewiring politics and re-engineering justice,
thought that was a really good idea” (Bock). At a speech for making mercy smarter and hope strategic and then
to the Seattle Rotary Club, Mr. Gates Sr. said about his daring the rest of us to follow, Bill and Melinda Gates and
son, Bill, “I never imagined this young and argumentative Bono are TIME’s Persons of the Year” (Gibbs). TIME Inc.
fellow who was eating my food and using my name would Managing Editor James Kelly said, “The three had been
be my future employer” (Bock). chosen as the people most effective at finding ways to
The Gates family knows that an orderly society has eradicate such calamities as malaria in Africa, HIV and
been important to the growth of Microsoft. Mr. Gates Sr. AIDS and the grinding poverty that kills 8 million people a
says, “Nobody makes it alone. A person’s physical com- year” (Reuters).
fort and opportunity have almost everything to do with the
• How has William H. Gates Sr. set an example for his
society into which he is born. Lucky if it’s America; un-
son?
lucky if it’s Bangladesh or Botswana” (Bock).
• Why does the Gates family find health in the
The library program provides public libraries across the
developing world to be the world’s most pressing
United States (especially in low income regions) with com-
problem?
puters, Internet access, and training. The education pro-
• Do the rich have a moral obligation that comes with
gram seeks access to college for all students, especially
wealth? What is that obligation?
those historically underserved. Priority areas for global
health include infectious diseases, HIV/AIDS, tuberculosis, Sources: Paula Bock, “As activist, volunteer, and dad, William
Gates, Sr. leads by doing,” The Seattle Times, January 26, 2003;
and reproductive and child health. An example of global Nancy Gibbs, “The Good Samaritans,” TIME, December 19, 2005,
health priorities is the vaccine fund, created to ensure that http://www.time.com/time/magazine/article/0,9171,1142278,00
.html; Reuters, “TIME Names Gateses, Bono, Persons of 2005,”
all of the world’s peoples have access to lifesaving vac- December 18, 2005; Bill & Melinda Gates Foundation, http://www
cines (The Vaccine Fund, http://www.gavialliance.org). .gatesfoundation.org; The Vaccine Fund, http://www.gavialliance.org.
Ethics programs can be creative. 25

• Lockheed Martin employees play a board game, “DILBERT ® Ethics Chal-
lenge,” in an interactive workshop where players are faced with a selection
from different ethical problems.
• Pharmacia employees can tap into specially designed interactive software on
their personal computers to get training and answers to ethical questions.
• Raytheon employees interact with a video featuring fi lm critic Roger
Ebert using familiar workplace scenes to illustrate the differences between
compliance-based actions (one thumb up) and values-based actions (two
thumbs up).
The University of Maryland’s Robert Smith School of Business requires stu-
dents to participate in a field trip to a minimum-security prison, where they come
face-to-face with former corporate executives doing time for white-collar crimes.
Stephen Loeb, who teaches accounting and business ethics at the school says,
“Students fi nd it pretty memorable. They talk to prisoners who were once execu-
tives but made errors, and they see how they would live if they made a mistake.”26
Legal Constraints
Competent managers cultivate an informed awareness of the role of the law in
organizational and individual conduct. Because ours is a nation of laws, cer-
tain presumptions influence decision making at several levels. From the broadest
context of constitutional rights to the minutest municipal regulation, companies
and their managers are witting and unwitting creatures of the law. One group of
5
Describe the relationship
between law and ethics
business law experts views the relationship of the law to ethics in this way:
There is a basic problem facing any business in its efforts to be “ethical”:
there are no fi xed guidelines to follow, no formal codes of ethics to set
the standards. The legal profession has a Code of Professional Respon-
sibility; the medical profession has its Hippocratic Oath; the account-
ing profession has a code of ethics; the real-estate industry has a code of
conduct; other professions have codes to guide them. But business has
no ‘road map’ of ethical conduct. The closest thing business has is the
law. If a business obeys the law, it is acting legally, and it is seemingly
meeting its minimum social requirements. 27
Those minimum requirements offer only a structure, however, void of content
and context. Says Peter Madsen,
Laws and policies form an ethical foundation. But the law is a moral
minimum. And no law or policy is going to cover every situation. Sooner
or later organizations will have to rely on people to make choices when
there is no on-point law or policy to follow. The best ethics training goes
beyond legal compliance. 28
Author Vincent Barry adds,
Although useful in alerting us to moral issues and informing us of our
rights and responsibilities, law cannot be taken as an adequate standard
of moral conduct. Conformity with law is neither requisite nor sufficient
for determining moral behavior, any more than conformity to rule[s] of
etiquette is. By the same token, nonconformity with law is not necessar-
ily immoral, for the law disobeyed may be unjust. 29
Every leader should understand by now that sexual harassment is illegal

and is governed by strict Equal Employment Opportunity Commission (EEOC)
guidelines. But day after day we read about people in positions of power who ha-
rass employees. The EEOC reports that in Fiscal Year 2004, it received 13,136
charges of sexual harassment, of which 15.1 percent of those charges were fi led by
males. EEOC resolved 13,786 sexual harassment charges in FY 2003 and recov-
ered $37.1 million in monetary benefits for charging parties and other aggrieved
individuals (not including monetary benefits obtained through litigation). 30
Legal sanctions against individual and corporate criminal behavior can be
significant. Since 1909 when the U.S. Supreme Court held that corporations can
be “held liable, as individuals can be, for crimes involving intent,” corporate li-
ability has translated into fines and jail terms for corporate officials. More than
half of the 50 states now have some form of corporate criminal liability law un-
der which business owners can be prosecuted for criminal negligence. According
to New York attorney Steven Alan Reiss, during the past ten years the trend has
been toward escalating criminal penalties that “can be drastically reduced if the
company can show it has in place [a legal] compliance program.” 31
In November 1991, the trend toward harsh penalties for white-collar crime
continued, as new federal guidelines went into effect. They “cover many of-
fenses that can be committed by employees without a business owner’s knowl-
edge. Some of the new penalties (base fi nes range from $5000 to $72.5 million)
may be enough to destroy a small company.” 32 Heavy penalties for a variety of
offenses “including serious misrepresentation of a product by a salesperson and
bribery of a public official by a subcontractor” are included. “If high-level man-
agers were not involved in the crime and [they] have taken steps to ensure em-
ployees’ compliance with the law, a fi rm could pay as little as 5 percent of the
base fi ne.” On the other hand, if senior managers “have encouraged or taken
part in the law breaking, fi nes can reach 400 percent of the base rate.” 33
In July 2002, President George W. Bush called for a “new ethic of corpo-
Sarbanes–Oxley Act of 2002 rate responsibility” as he signed into law H.R. 3763, the Sarbanes–Oxley Act
(SOX) of 2002 (SOX). This act adopts tough new provisions to deter and punish cor-
Law requiring publicly traded
companies to disclose in their porate and accounting fraud and corruption, ensures justice for wrongdoers,
financial reports any “material and protects the interests of workers and shareholders. Under this law, chief
weaknesses” in their financial- executive officers (CEOs) and chief fi nancial officers (CFOs) must personally
reporting systems. The CEO and
CFO must certify that those re- vouch for the truth and fairness of their company’s disclosures. SOX requires
ports are accurate enhanced and timelier disclosures by public companies and mandates signifi -
cantly increased criminal penalties for violations of the federal securities laws.
Corporate officers face prison time if they do so knowing the statements are
wrong. Penalties include up to ten years in prison and a $1 million fi ne for state-
ments certified knowing they are inaccurate; and up to 20 years in prison and a
$5 million fi ne for willfully false certification.
In 2005, harsh penalties for white-collar crime were demonstrated by sen-
tences given to convicted U.S. executives. For example, former executives at
Tyco International (Dennis Kozlowski and Mark Swartz), WorldCom (Bernard
Ebbers), and Adelphia (John Rigas and Timothy Rigas) were sentenced to up to
25 years in prison. Thus, managers see self-regulation as a way to avoid legisla-
tive or judicial intrusions into their operations. Ethics codes also help promote
tolerance of diverse practices and customs while doing business abroad.
Figure 3.3 is a simple grid with four quadrants representing the four pos-
sible combinations when balancing ethical issues with the law or the absence of
a law. Position 1 (upper left) shows a legal and ethical position for the issue in
Figure 3.3 Legal/ethical behavior model applied to the issue of smoking in

the workplace
1. Ethical/Legal 2. Ethical/Illegal
A decision to allow A decision to allow

employees to smoke on smoking on the job with
the job with no no secondhand smoke
secondhand smoke affecting others but in
affecting others violation of laws
3. Unethical/Legal 4. Unethical/Illegal
A decision to allow A decision to allow

secondhand smoke to secondhand smoke to
affect others without affect others in
violation of laws violation of laws
question—smoking in the workplace. Position 4 (lower right) shows an illegal

and unethical treatment of the issue. The other two positions represent ethical
or legal concerns to a manager.
Ethical Dilemmas
Ethics is not prescriptive. No simple set of rules tells us how to behave morally
or ethically in all situations. Codes of conduct—when they are documented—
are written in the manner of company policies as brief, general guidelines. Inter-
pretation varies from one individual to the next. Like policies, codes are meant
to give freedom of action within certain boundaries and require interpretation.
6
Explain the concept of an
ethical dilemma
Saul W. Gellerman, retired Dean of the University of Dallas Graduate School of

Management, queries and replies:
How can you tell if a rule “really” applies to what you are doing? How
can you avoid crossing a line that is almost never defi ned precisely? The
only safe answer is not even to move in the direction of the line. Here
is where the real ethical dilemma begins to emerge, however. Because
if you constantly played it safe, and never tested the limits of what you
could and couldn’t get away with, you’d risk being considered ineffi -
cient, or even gutless, by your superiors. 34
Managers constantly face dilemmas—situations that require a choice be-
tween options that are or seem equally unfavorable or mutually exclusive. Di-
lemmas involve uncertainty and risk over the rightness or wrongness of actions.
Besides uncertainty about which course of action is ethical, an ethical dilemma ethical dilemma
also arises when all courses of action open to a manager are judged to be un- A situation that arises when all
courses of action open to a de-
ethical. For example, a company’s plant is simply unable to bring work in at a cision maker are judged to be
profit. Managers are considering three possible alternatives: (1) shut the plant unethical
down and outsource the work to subcontractors who will give the fi rm the costs
it needs, (2) invest in technology that will eliminate half the jobs but make the
plant productive enough to continue to operate, or (3) seek wage and benefit
concessions from all employees to bring costs into line. Any of these choices will
impose immediate hardship on the employees of the plant and those who de-
pend on them—families, local merchants, and others.
Because of technology’s central role in business, opportunities, and innova-
tion, the role of technology managers has become more critical in setting and
enforcing ethical standards. In an InformationWeek Newsletter, Stephanie Stahl
poses several ethical dilemmas:
• It’s Monday morning, and you’re studying up on a large-scale project that
your company intends to bid on. You’re well into the details when you real-
ize the company issuing the request for proposals has accidentally included
confidential information that could give you a serious leg up on your com-
petitors. What do you do? Pretend you didn’t see it? Take advantage of it
and act on it? Alert the company to the mistake and remove yourself from
the negotiations?
• You fi nd out an employee has been circulating pornographic files via the
company e-mail system. Do you ignore it? Give the employee a warning?
Fire the employee?
• One of your business partners offers to pay you big bucks for access to your
customer data. You’ve assured customers that such data will remain confi-
dential, but your company is cash-hungry. Do you sell it? Keep your prom-
ise to customers? 35
When managers face such gray areas, Professor Gellerman offers the following
suggestions:
• When in doubt, don’t.
• Don’t try to find out “how far is too far.”
• Superiors who push you to do things better, faster, cheaper will turn on you
when you cross the line between right and wrong. 36
Gellerman offers this practical, concrete stratagem:
When what you might or might not do is questionable, let the burden of
the decision rest on someone who is paid to make the tough decisions.
Make your boss earn his [or her] pay. You can’t openly condone what
policy prohibits. Neither can your boss. That’s why bringing the ques-
tion into the open keeps both of you honest. 37
Guidelines for Acting Ethically
7
Discuss the guidelines for
acting ethically
Someone struggling with a decision, torn between one or another course of ac-
tion, may well be confronting an issue that involves ethics. The time to consider
the ethical dimensions of an act is before acting. Companies and individuals
must strive to make ethics a priority in the processes by which they make their
decisions.
Different people and groups invoke different criteria for determining if an
intended action (or inaction) is the ethical course to follow. The Golden Rule
states that we should treat others as we ourselves want to be treated. A varia-
tion is to do to others what they want you to do to them. Both work well if the
people involved are moral and aware of prevailing social conventions. The utili-
tarian standard of the greatest good for the greatest number of people provides
another ethical test, which works well if the consequences and circumstances
surrounding the intended act are fully foreseen and understood.
Authors Solomon and Hanson offer the following rules for contemplating
the ethical implications of intended actions:
• Consider other people’s well-being, including the well-being of nonpartici-
pants.
• Think as a member of the business community and not as an isolated
individual.
• Obey, but do not depend solely on, the law.
• Think of yourself—and your company—as part of society.
• Obey moral rules.
• Think objectively.
• Ask the question, “What sort of person would do such a thing?”
• Respect the customs of others, but not at the expense of your own ethics. 38
These rules remind us that we are all part of a larger community and that our
actions affect others, whose interests must be considered. Keeping these rules in
mind can help managers analyze the consequences of their actions before they
take any steps. When an individual makes decisions without a moral and ethical
base, he or she is adrift and may rely solely on self-interest and economics. Peo-
ple lacking a moral foundation put themselves, their organizations, and others
at great risk. Risk taking shows up in most managers’ job descriptions. “[T]hey
are paid to know which risks are worth taking. One risk that is defi nitely not
worth taking is the risk of ruining the rest of your career.” 39
Management Professor Kenneth Blanchard and the late, noted cleric Nor-
man Vincent Peale (author of The Power of Positive Thinking) wrote a cogent
book, The Power of Ethical Management. In it they offer a simple sequence of
three tests for determining the ethical implications of intended actions: 40
1. Is it legal? Will I be violating either civil law or company policy?
2. Is it balanced? Is it fair to all concerned in the short term as well as the long
term? Does it promote win–win relationships?
3. How will it make me feel about myself? Will it make me proud? Would I
feel good if my decision were published in a newspaper? Would I feel good if
my family knew about it?
With these inquiries a manager can examine his or her intentions in private
and with complete objectivity. When judging the ethical facets of a decision, a
person must take ample quiet time, away from pressures and the biases of oth-
ers, for unhurried reflection on the facts and implications of the decision.
Nature of Social Responsibility

The notion that individuals and organizations have certain obligations, in addi- social responsibility
The notion that, in addition to
tion to their business interests, to protect and benefit others and to avoid actions their business interests, indi-
that could harm them is what constitutes social responsibility. 41 One reason for viduals and organizations have
the prevalence of this belief in the developed countries of the world is that soci- certain obligations to protect
and benefit other individuals
eties have given businesses tremendous power and rely on them to meet various and society and to avoid ac-
individual and societal needs. tions that could harm them
Businesses are open systems, and most of what they do generates direct ben-
efits and costs for their societies. At one time, businesses did only what they had
to do. Today society demands that businesses join in the urgent task of solv-
ing societies’ problems. Corporations must nourish cultures that promote ethi-
cal conduct, and their owners and employees must act with an ethical perspec-
tive in order to be socially responsible. Being socially responsible does not mean
making everyone happy. Businesses face conflicting demands, and at times a
socially responsible action puts the needs of one group of stakeholders ahead
of the needs of others—such as donating money to charity rather than paying
stockholders higher dividends or giving employees higher raises. Such issues re-
quire managers to consider their duty (the course of action required of them by
their position or by law) and the priorities of their specific obligations.
Author Rogene A. Buchholz expresses the need for businesses to act in a so-
cially responsible way: “Corporations are more than economic institutions and
have a responsibility to devote some of their resources to helping to solve some
of the pressing social problems, many of which corporations helped to create.” 42
Benjamin Franklin may have been the fi rst American businessperson to advo-
cate such responsible conduct for businesses. Franklin believed that “public ser-
vice and philanthropy were legitimate concerns . . . because it is good business
to improve the health of the communities from which wealth is derived and be-
cause public problems can benefit from private solutions.” 43
Robert D. Haas, President and CEO of Levi Strauss, persuasively argues the
case for businesses to cultivate social responsibility:
Corporations can be short-sighted and worry only about our mission,
products, and competitive standing. But we do it at our peril. The day
will come when corporations will discover the price we pay for our in-
difference. We must realize that by ignoring the needs of others, we are
actually ignoring our own needs in the long run. We may need the good-
will of a neighborhood to enlarge a corner store. We may need well-
funded institutions of higher learning to turn out the skilled technical
employees we require. We may need adequate community health care to
curb absenteeism in our plants. Or we may need fair tax treatment for
an industry to be able to compete in the world economy. However small
or large our enterprise, we cannot isolate our business from the society
around us. Nor can we function without its goodwill. 44
The Harris Interactive/The Wall Street Journal Reputation Quotient SM (RQ)
identifies public perceptions of corporate reputability. It is used as an assessment
tool to measure a company’s reputation, based on several key areas—social re-
sponsibility, emotional appeal, quality of products and services, vision and lead-
ership, workplace environment, and fi nancial performance (see Figure 3.4).45
Johnson & Johnson, the subject of this chapter’s Management in Action, is one
of the most visible companies in America, with seven consecutive years of the
best reputation (highest RQ).
Approaches to Social Responsibility
8
Explain the three
approaches by businesses
to social responsibility
American businesses adopt different approaches to the demands made on them.
Some businesses eagerly seek ways to accommodate societal needs, whereas oth-
ers vehemently resist external obligations. Businesses can adopt any of three pri-
mary strategies to manage the issue of social responsibility: to resist, to react,
and to anticipate.
Resistance Approach Companies adopt the resistance approach when they resistance approach
actively fight to eliminate, delay, or fend off the demands being made on them. A social responsibility strategy
in which businesses actively
In the earliest days of the Industrial Revolution, businesses were relatively un- fight to eliminate, delay, or
affected by government regulation. Labor was cheap and plentiful. Businesses fend off demands being made
behaved pretty much as they wanted, exerting tremendous influence over their on them
towns, industries, and governments. Resistance to government interference and

active opposition to demands from both insiders and outsiders marked this early
phase of business history. The emphasis was on maximizing profits and the self-
interests of owners. The prevailing attitude was that managers owed their alle-
giance to owners, a view reinforced by the courts. In a 1919 decision, a Michigan
court refused to let Henry Ford divert stockholder dividend payments to “certain
socially beneficial programs.” The court held that directors had an obligation to
stockholders and could not renege on that duty.46 Regulatory agencies were vir-
tually nonexistent. No laws protected consumers or the environment, and both
suffered as a consequence.
Even in today’s regulatory environment and with so many of society’s needs
vividly apparent, some businesses persist in doing as little as possible—only
what the law demands—and even that they do reluctantly. An example occurred
on November 29, 2005, when MBI Distributing, Inc. (MBI), also known as Mo-
lecular Biologics signed a consent decree with the U.S. Food and Drug Admin-
istration (FDA) agreeing to cease manufacturing and distributing drugs until it
corrects manufacturing deficiencies and other violations at its Benicia, Califor-
nia, facility. MBI, an OTC drug manufacturer of eyedrops and other products,
encountered problems with its eye drop brands (Oxydrops, Bright Eyes, Bright
Eyes II, Clarity Vision for Life, Visitein, and Can-C). The fi rm lacked manufac-
turing controls to ensure that its eyedrops were sterile. MBI never admitted it
had done anything wrong.47
reactive approach Reactive Approach Businesses taking a reactive approach wait for demands
A social responsibility strat- to be made on them and then respond to those demands by weighing their
egy in which businesses wait
for demands to be made and options. In 2005 Anadarko Petroleum, Apache Corp., ChevronTexaco, Tesoro
then react to them, choosing a Corp., Marathon Oil, and Unocal bowed to public pressure and acknowledged
response by evaluating alter- that global warming is a serious issue. “Most of the oil and gas companies are
natives
taking climate change much more seriously than they were just a year ago,” said
Mindy Lubber, President of Ceres, an investor coalition that has helped coordi-
nate the shareholder resolution fi lings with the oil and gas companies.48
proactive approach Proactive Approach Companies taking the proactive approach continually
A social responsibility strategy look to the needs of their constituents, constantly staying in touch, sensing their
in which businesses continu-
ally look to the needs of con- needs, and trying to fi nd ways to meet them. Many companies have a variety of
stituents and try to find ways to programs to help their communities. Some, like the small California sportswear
meet those needs producer Patagonia, encourage their employees to give of their talents in a vari-
ety of ways, such as community cleanups, tutoring local schools’ students, and
sponsoring fundraisers to assist local environmental groups. Most companies
support the national United Way campaigns and other community-based char-
itable drives. Some of America’s small and most of its largest businesses have
established funds or foundations that donate money to worthy causes such as
education, the arts, environmental and ecology groups, and various communi-
ties’ human services agencies. According to the American Association of Fund-
raising Counsel (AAFRC) Trust for Philanthropy’s 2004 estimates of charitable
giving in the United States, total giving was $248 billion. Of this total, individu-
als contributed $187 billion to charitable causes, whereas total corporate giving
reached $12 billion.49
Strategic philanthropy or fi nancially sound goodwill refers to corporate do-
nations that provide a return to the giver. Dollars given must support specific
efforts, and the results must be monitored. The Conference Board’s research
indicates that when companies adopt this approach they gain “a better image,
increased employee loyalty, and improved customer ties.” 50
One example is General Electric’s GE Foundation, which has a $30 million
College Bound Program at high schools in 20 communities to help increase the
number of students going on to college. It gauges the program’s success by how
many students go to college and has been independently evaluated by RAND in
1994 and a team from Brandeis University in 2000. 51 In 2005, GE Foundation
announced the expansion of the program with a commitment to invest $100 mil-
lion over five years in targeted U.S. school districts. Nike, a sports products
manufacturer, supports tax-exempt organizations, which provide opportunities
for sports, youth action, education, and after-school programs in the cities and
communities where Nike employees live and work. 52
Responsibilities to Stakeholders
Stakeholders are those who have an interest in or who are affected by how a
business conducts its operations. In general, the stakeholders in most businesses
include their owners and stockholders, employees, customers, suppliers, and
communities. Society as a whole can be considered a stakeholder, as well, if the
business is large enough to affect people and environments beyond its physical
9
Explain the responsibilities
businesses have to
stakeholders
location.
Owners and Stockholders A business and its employees owe their best ef-
forts to owners. Assets must be conserved and used effectively and efficiently.
Employees must do their best to maximize the return on invested capital and
to generate a reasonable profit. Owners and employers should have the right to
hire, train, reward, promote, discipline, and remove employees in accordance
with ethical, moral, and legal restraints. Owners and employers should have the
right to expect ethical, moral, and legal conduct from their employees.
Employees Employees should enjoy equal access to the rights, responsibilities,

and privileges afforded by employers. Employees need to receive fair and equita-
ble compensation, to be dismissed only for just cause, and to be treated without
discrimination. Employees should experience a quality of work life that provides
satisfying jobs. They should receive competent guidance and direction in their
work and be accorded due process in disputes.
Employees hold certain rights to freedom of expression, safety, adequate
information, and privacy and confidentiality in regard to personal concerns. A
growing trend in several areas of the country is to fi re employees for their con-
sumption of alcohol or tobacco (both on and off the job), and for working a sec-
ond job (moonlighting).
Most states and dozens of municipalities have laws that ban discrimina-
tion, and many offer greater protection than federal law. In addition,
29 states and the District of Columbia restrict employers’ ability to fi re
employees for various forms of off-duty conduct. The most common
state statutes protect employees’ right to use tobacco products. Some
states extend the protection to alcohol use, too. Rarest are laws found
in four states that protect all legal activities away from the employer’s
premises. 53
82
VALUING DIVERSITY Part 1 Management Concepts
a g es
Diversity’s Link to Social
Get t y Im
Responsibility—The Abbott
Approach
Abbott Laboratories is an international leader in advanc- we conduct ourselves in ways that will continue to earn
ing health care. Doing business in more than 130 coun- the trust of our many stakeholders and the millions of peo-
tries places Abbott in an enviable position and offers it a ple we touch every day” (2004 Global Citizenship Report).
specific challenge: how to take full advantage of the enor- The company’s initial efforts at valuing the diver-
mous pool of talent that its worldwide workforce repre- sity of its employees focused solely on race and gender.
sents. It has a program designed to increase the effective- Management soon realized that this focus would have
ness of the ways in which all employees work together. to be broadened to include the nationalities and customs
Its central purpose is to create a culture of inclusion. Ab- not only of its employees, but of its customers as well.
bott CEO Miles White heads Abbott’s Executive Inclusion Mr. White says, “Fostering a diverse and inclusive work-
Council, which meets once per quarter to track major ini- place has helped us cultivate a more innovative and wel-
tiatives and to decide which new ones to support. coming environment that makes us a better employer,
Diversity is included in Abbott’s business strategy as business partner and corporate citizen” (Prince).
part of the “Promise for Life,” its statement of purpose.
• How has Abbott’s globalization influenced issues of
We value our diversity—that of our products, technolo- ethics?
gies, markets, and people—and believe that diverse per- • Identify and discuss the social responsibility approach
spectives combined with shared goals inspire new ideas that Abbott appears to have adopted.
and better ways of addressing changing health needs.
Sources: C.J. Prince, “Paying More than Lip Service to Diversity,”
Chief Executive, October 2002; Abbott Laboratories, “2004 Global
Mr. White says that the Promise for Life “reflects how we Citizenship Report,” http://abbott.com/en_US/content/document/
responsibly deploy our expertise and resources, and how 2004gcr.pdf; Abbott Laboratories, http://www.abbott.com.
Customers Businesses and their employees owe fair and honest representa-
tion of their products and services to their customers. Such products and services
should encompass quality of design, manufacture, distribution, and sales. Con-
sumers have a right to be warned of any hazards they may encounter while us-
ing a product or receiving a service. In short, customers have a right to be treated
fairly and with respect. Many laws have been passed to protect consumers; gov-
ernment inspection of food, drugs, and cosmetics is one result of such consumer
protection legislation. Nolo discusses Consumer Protection Laws by giving sev-
eral examples. 54
Hundreds of cases have been brought under consumer protection laws.
Some examples follow:
• A man sued a department store that ran out of an advertised waffle iron and
didn’t give him a rain check—a violation of the consumer protection law in
his state.
• A homeowner sued a roofi ng contractor who falsely advertised that it could
arrange fi nancing for roof repair jobs.
• A woman sued a health spa that reneged on its promise to return her deposit
and cancel her contract if she changed her mind within three days.
Suppliers Suppliers and businesses should build relationships based on mutual

trust. Suppliers deserve to receive needed information in time to render quality
service and supplies. They, like all parties to business contracts, have the legal
right to be treated according to the terms of their agreements.
Fifteen years of combined research into over 1200 organizations published
by LogicaCMG and Warwick Business School found that “well managed out-
sourcing arrangements based on mutual trust can create a 20 per cent to 40 per-
cent difference on service, quality, cost and other performance indicators over
outdated power-based relationships.” 55 Thus, contracts with trust-based relation-
ships (flexible working arrangements, willingness to change, and frequent and ef-
fective communication), rather than power-based relationships (punitive service
level agreements and penalties), have a huge impact on return on investment.
Communities Those environments and their governments that are affected by a

company’s operations constitute its community. The quality of life in a commu-
nity; its air, land, and water quality; and its specific needs all come into play. All its
constituents, many of whom may be customers, deserve ethical, legal, and moral
treatment. A suburban restaurant owner got complaints from neighbors about
food-packaging debris on lawns and streets. He now employs a person full-time
to patrol the neighborhood and pick up all litter within a square mile of the
restaurant.
Pollution is a growing concern around the world, with mounting pressure
to produce green products—those that minimize energy consumption and pol- green products
lutive by-products connected with their manufacture and disposal. Automakers Those products with reduced
energy and pollution connected
have developed more fuel-efficient and cleaner-burning engines, encouraged in with their manufacture and
no small measure by California’s tough environmental laws and the Clean Air disposal
Act of 1990. 56 Americans have embraced the idea of hybrid cars, which Honda
and Toyota launched in 1999 and 2000. Hybrid engines boost fuel efficiency by
combining a traditional gasoline motor with an electric one. GM and Ford em-
braced the hybrid strategy in 2004.
The music-recording industry bowed to pressures from several sources and
agreed to phase out its “long box” packaging for compact discs (CDs). In a prac-
tice initiated in 1993, most CDs are now sold in simple plastic “jewel cases”; the
only waste is plastic shrink-wrap to prevent tampering. 57 McDonald’s reduced
its packaging for similar reasons in the late 1980s. The fast-food chain has also
made attempts to help individuals with vision, hearing, and speech impairments
by adding Braille menus in 1979 and picture menus in 1988. 58
Government Regulation: Pros and Cons

Corporations have committed acts that harm the environment, consumers, com-
munities, and society as a whole. Laws now in existence were brought about
largely by these abuses. When society can’t depend on the perpetrators to act
appropriately, it must compel such action. But the enforcement of many laws
depends more on individuals’ commitments to social responsibility than it does
10
Describe government’s
role in promoting socially
responsible conduct by
businesses
on government agencies. Governments simply do not have enough money or
people to adequately enforce their regulations. Society’s best protection rests
in an informed citizenry and a formed conscience in each and every owner and
employee.
As noted in Appendix C, concerned employees who bring company wrong-

doing to the attention of authorities who can do something about it are called
whistle-blowers. Research shows that people become whistle-blowers for a va-
riety of reasons. Some blow the whistle because of their strong moral and ethi-
cal codes. Some do so because they feel a strong obligation to protect others
and their communities. Some are participants in the wrongdoing and may blow
the whistle out of fear that disclosure may be made by others. 59 Many whistle-
blowers believe that their superiors, like themselves, do not want to let their
companies or customers be harmed by unethical or illegal conduct and will take
action to stop the wrongdoing.
TIME Magazine called 2002 the “Year of the Whistle-Blower,” and desig-
nated three whistle-blowers as “TIME 2002 Persons of the Year.”
Sherron Watkins is the Enron vice president who wrote a letter to chair-
man Kenneth Lay in the summer of 2001 warning him that the compa-
ny’s methods of accounting were improper. Coleen Rowley is the FBI
staff attorney who caused a sensation in May with a memo to FBI Di-
rector Robert Mueller about how the bureau brushed off pleas from her
Minneapolis, Minn., field office that Zacarias Moussaoui, who is now
indicted as a Sept. 11 co-conspirator, was a man who must be investi-
gated. One month later Cynthia Cooper exploded the bubble that was
WorldCom when she informed its board that the company had covered
up $3.8 billion in losses through the prestidigitations of phony book-
keeping. 60
According to Stephen M. Kohn, Chairman of the Washington, D.C.-based
National Whistle-blower Center, “There are 20 federal laws that protect whis-
tle-blowing in certain areas and there are now about 40 states with laws to pro-
tect whistle-blowers.” 61 Unfortunately, all too often the bearer of bad news be-
comes a victim of retaliation by those individuals and companies that suffer
from his or her disclosures. Research shows that they are often isolated, verbally
denigrated, harassed, demoted, and even fi red.62 Because these things occur,
Mike Cavallo, a commodities trader from Boston, established the Cavallo Foun-
dation. For ten years, its nine-member board selected three significant whistle-
blowers and awarded them $10,000 each.63
Ben & Jerry’s is an example of a company committed to social welfare. It
has taken a stand against the use of a genetically engineered bovine growth hor-
mone. The U.S. Food & Drug Administration has approved the hormone, but
many consumers are concerned about its possible long-term effects on the safety
of dairy products and their users’ health. Although it contends that the hor-
mones are perfectly safe, the dairy industry has resisted efforts to label which of
its products are produced by cows that are given the hormone. Thus, consumers
who wish to avoid these products must rely on their neighborhood food retailers
to inform them as to which products do and do not come from such cows.
The costs of regulation are high and getting higher. Businesses spend bil-
lions of dollars and millions of hours reporting to governments and complying
with legal mandates. Although regulations, many argue, have made the United
States less competitive around the world, they have also brought about needed
reforms. It must be remembered that society grants businesses the right to oper-
ate. In return, society retains the right to proper treatment and a clean environ-
ment. When these fundamental rights are abused, we all suffer.
Unfortunately, after their products are produced and sold, too many busi-
nesses do not consider the costs placed on society. Such costs include cleanups of
all kinds and the pressing need to recycle. Our nation has created a Superfund
to clean up the worst cases of toxic waste; in fact, it spends hundreds of millions
of dollars each year to right the wrongs of irresponsible businesses and individu-
als. Some environmental damage can never be repaired, or will take more than
money to make right. Cleaning up such environmental hazards as nuclear waste,
toxic dumps, and oil spills will take years of commitment by dedicated individ-
uals willing to invest the energy and talent required to remedy what has been
done. All of us bear the costs through taxes.
Times, however, are changing. A growing number of individuals and corpo-
rations are moving from a reactive to a proactive approach and becoming more
socially responsible. These people are redesigning processes and products, recy-
cling and repackaging for reduced waste, anticipating needs, and facing prob-
lems up front to become sustainable communities. Businesses are finding that sustainable communities
being good citizens pays off, with dividends that contribute to corporate bottom Healthy, livable communities
effectively using resources—
lines. Many companies have found that pollution prevention is better than pol- economic, social, and environ-
lution control. These organizations have made profits through their efforts to mental—to meet today’s com-
both prevent and reduce pollution. In addition, a growing number of consum- munity needs while ensuring
that these resources are avail-
ers are showing their willingness to pay a premium for products that are enviable to meet the community’s
ronmentally friendly. This chapter’s Valuing Diversity feature discusses Abbott’s future needs.
proactive approach to valuing diversity and how it links with being socially
responsible.
Managing for Social Responsibility

Managers today must anticipate society’s concerns and actively forecast and
plan to meet its needs. They must make social responsibility a priority and, as
with ethics, build a concern for it as a priority in their cultures and employees
as well.
11
Discuss the ways in which
businesses can promote
socially responsible
conduct
Top-Management Commitment
Executives in top management must commit the time and money necessary to
make their organization socially responsible. They need to act as well as talk.
They set the tone for their entire operation and establish its priorities. Authors
Christopher B. Hunt and Ellen R. Auster recommend the following key elements
to top managers who want to make their organizations proactive:
• Top-level commitment and support
• Corporate policies that integrate environmental issues
• Effective interfaces between corporate and business-unit staff
• High degree of employee awareness and training
• Strong auditing programs
• Establishment of responsibility for identifying and dealing with real and
potential environmental problems 64
Figure 3.5 provides components and elements of a generic environmental
management system (EMS).
Figure 3.5 Components and elements for generic EMS
COMPONENT ELEMENT
Policy Develop, document, and communicate policy
Planning Identify and track requirements
Identify vulnerable assets and business and management
practices that may impact them
Identify pollution prevention (P2) opportunities
Identify, document, and rank environmental impacts
Develop objectives and targets based on environmental
impacts
Establish programs to meet objectives and targets
Implementation Provide resources (funding, manpower, technical, material)
Identify training needs and provide training
Develop and control EMS documentation
Develop and document standard operating procedures (SOPs)
for practices associated with impacts
Develop and test emergency procedures
Evaluation Identify, characterize, and document problems (compliance
and management system)
Develop corrective/preventive actions (solutions)
Secure management approval for solutions
Implement solutions
Review EMS
Improvement Aim for continual improvement
Source: U.S. Navy Environmental Quality Assessment Guide, Au gust 31, 1999, http://www-nehc.med.navy
.mil/downloads/ep/eqaguide.pdf.
Many organizations have built in a variety of safeguards to promote social

responsibility. They usually start with the commitment in words and deeds of
top management. Policies are written or revised to include concerns for social
responsibility as well as ethics. They create programs for promoting an active
role for their organizations in meeting societal needs. It is important for com-
panies to write ethical policies for conducting electronic commerce, the sub-
ject of this chapter’s Managing Technology feature. Training is given to employ-
ees, emphasizing how they can contribute. They encourage people to participate
in their communities by granting time off and other incentives. Managers on
leave, whose salaries are paid by their business employer, for instance, staff
most United Way campaigns. General Electric has had a public policy commit-
tee staffed by members of its board of directors since 1970. It seeks to create so-
cial programs and keep track of their progress and achievements.65 The larger
the enterprise, the more likely it is to have a separate department to plan for and
oversee organizational efforts to be socially responsible and to see to it that en-
vironmental, fair employment, and safety and health regulations are followed.66
Managers are the key to making ethics and social responsibility realities in
their organizations. They need fully formed consciences based on sound values.
They need to understand the motives that support their decisions and those of
others. They need principles, rewards, examples, and other forms of guidance
and support to keep their commitments to ethical and socially responsible ac-
Chapter 3 Management Ethics and Social Responsibility
a g es
BuildingBlocks International,
Get t y Im
1000 Challenge
Jennifer Anastasoff, Founder and CEO of BuildingBlocks United Nations Millennium Development Goals
International, in collaboration with The Millennium
1. Eradicate extreme poverty and hunger
Initiative, launched the “1000 Challenge.” She called
2. Achieve universal primary education
on leading Fortune 1000 companies to commit at least
3. Promote gender equality and empower women
ten employees for as many as 1000 hours each of hands-
4. Reduce child mortality
on experience of international service by 2010. (Fortune
5. Improve maternal health
magazine prepares a list of the 1000 largest public
6. Combat HIV/AIDS, malaria, and other diseases
American companies, ranked on revenues alone.) “A
7. Ensure environmental sustainability
sort of Peace Corps for corporations, BuildingBlocks
8. Develop a global partnership for development
places professionals with community organizations in
48 countries for between six weeks and a year” (Hoij • What is the value in taking six months off work to
and Haley). volunteer in a developing country?
Each employee works directly with the world’s • What would the employee volunteer gain?
most vulnerable populations to accomplish the first • What would the company sponsoring the volunteer
seven United Nations Millennium Development Goals. gain?
Ms. Anastasoff says that volunteering will “prepare
Sources: Magnus Hoij and Fiona Haley, “Wishful Thinking—Volunteer
21st century leaders who can work across different sec- Overseas,” FastCompany, issue 89, p. 38, December 2004, http://
tors” (Hoij and Haley). All 191 United Nations Member www.fastcompany.com/magazine/89/open_gear.html; 2005 Fast
Fifty, “She appealed to the best in corporations,” FastCompany,
States have pledged to meet the goals, listed below, http://www.fastcompany.com/fast50_05/profile/?anastasoff707; UN
by 2015. Millennium Development Goals, http://www.un.org/millenniumgoals.
tions. See this chapter’s Ethical Management feature for an example of ethical
leadership by Jennifer Anastasoff, CEO of BuildingBlocks International. When
an organization is truly committed to meeting its social responsibilities, it re-
flects this commitment in routine management decision making and ongoing
planning efforts; and it monitors those efforts to ensure compliance.
Social Audit
To be truly effective, social responsibility needs the backing of all owners, man-
agers, and employees. It must be a consideration in daily decisions, not second-
ary to those decisions. Managers and owners need to know what is being done
to meet social obligations, what will be expected in the future, and what past re-
sults and contributions have been.
The social audit is a report on the social performance of a business. No social audit
uniform format currently exists, but most proactive fi rms have devised some A report on the social perfor-
mance of a business
method for auditing their efforts and for disclosing the results to both insid-
ers and outsiders. Such an audit usually summarizes corporate activities under
the following headings: charitable contributions, support of local community
groups and activities, employment of protected groups, political contributions,
pollution control and cleanup, health and safety measures, and efforts to im-
prove the quality of work life for employees.
Progress may be stated in terms of goals set and met, in monetary terms, or
both. Those who benefit are clearly labeled, and the extent to which they ben-
efit is quantified when possible. A company should share the results of the social
audit with all constituents and stakeholders so that it can reinforce awareness
of and commitment to the programs. Management should continue programs
that have been successful, expand them if the need still persists, and eliminate
programs that yield few positive results so that it may institute more produc-
tive ones. Finally, management should cite and reward people who contribute to
successes.
CHAPTER SUMMARY
Describe the two broad categories of ethical ing clear guidelines and limits are all part of an ethical
1 theories. Ethical theories can be grouped under
two main headings: consequential and nonconsequen-
culture. A variety of mechanisms are used by companies,
including hotlines, committees, ethics and compliance
tial. The fi rst deals with the ratio of good to evil flowing officers, and the encouragement of whistle-blowing.
from an action. The “right” course is the one that yields
Describe the relationship between law and
the highest good-to-evil ratio.
The nonconsequential theories deal with the obliga- 5 ethics. The law is an ethical and moral minimum.
Individuals must take care to think beyond the law to
tion to do one’s duty to the best of one’s ability. If one is
faithful to one’s duty, the greatest good occurs because what is best for all concerned and the effects of their ac-
the duty of the individual is carried out. tions. Conforming to the law cannot guarantee ethical
conduct. Some laws may be immoral or unjust. No law
Explain what individuals need in order to act
2 ethically. Individuals need a personal moral and
ethical code. Morality provides a set of core values and
may exist to forbid an action that can result in unethical
behavior.
Explain the concept of an ethical dilemma. An
beliefs that act as a guide for evaluating intended ac-
tions. This code is acquired through life experiences. In 6 ethical dilemma exists when people are required to
make a choice between options that are or seem equally
addition, individuals must be able to cultivate a continu-
ous awareness of their personal priorities, goals, values, unfavorable or mutually exclusive. An ethical dilemma
needs, beliefs, attitudes, and assumptions and how these also arises when all courses of action open to a manager
influence their personal choices. are judged to be unethical.
Discuss the guidelines for acting ethically.
3 Describe the organizational influences on ethi-
cal conduct. In addition to individuals’ moral 7 Many ethical tests exist. Most rely on an individ-
ual’s personal morals and on a focus beyond the indi-
and ethical codes, environmental influences affect their
choices within the context of their organizational affi li- vidual or organization. People must think as members
ations. An organization’s culture, the person’s superi- of a broad community. They need to recognize that ac-
ors, and the core values and working climate send value tions can affect many in subtle and not so subtle ways.
messages as to what is essential to survive. Individuals Consideration for others’ welfare is a must. Start with
are tempted to place the good of the organization above the law and move beyond it. Respect your moral code
their personal ethics and the interests of other stakehold- and those of others. Ask yourself, “What sort of person
ers. Ethics, thus, becomes as much an organizational is- would take the action I intend to take?” Consider bal-
sue as a personal one. ance: Is there a win–win situation? Finally, ask your-
self if you would be willing to tell those you love and the
Discuss three primary ways in which busi-
4 nesses can promote ethical conduct. Organiza-
tional controls on employee behaviors and practices can
public in general about your intended actions.
Explain the three approaches by businesses to
be summarized as a commitment of top management to
promote an ethical culture based on organizational in-
8 social responsibility. The three approaches are
resistance, being reactive, and being proactive. In the re-
tegrity through the establishment of codes of ethics and sistance approach, an organization fights to eliminate,
compliance programs. Training, “walking the talk,” delay, or fend off the demands being made on it. In the
providing rewards as well as punishments, and establish- reactive approach, organizations wait for demands to
be made and then respond to them by evaluating their obligations. Finally, to the communities on which it has
alternatives. The proactive approach leads organizations an impact, a business owes socially responsible behav-
to actively seek ways to be socially responsible. They ior and ethical conduct. It must, at a minimum, obey all
continually look at their operations for ways in which laws affecting its interactions.
to make them more environmentally friendly. They
Describe government’s role in promoting
encourage their employees to be active in community
causes. They look at the needs of constituents, con-
10 socially responsible conduct by businesses.
Businesses exist because government allows them to.
stantly staying in touch, sensing their needs, and trying
Government is the referee in a capitalist society, setting
to fi nd ways to meet them. An emerging trend, called
rules and boundaries for economic activity. It must seek
strategic philanthropy or fi nancially sound goodwill,
a balance between the rights of the individual and those
encourages businesses to get something in return for
of the various groups in the society it represents. For its
what they give.
laws to be effective, governments depend on individuals
Explain the responsibilities businesses have to throughout society to know and obey them and assist in
9 stakeholders. Stakeholders are owners, employ-
ees, external customers, suppliers, and the communities
their enforcement. Additionally, it must put in place var-
ious sanctions that will encourage compliance.
affected by business operations. To owners, a business
Discuss the ways in which businesses can
owes its most effective and efficient use of resources and
an adequate return on owners’ investments. To employ-
11 promote socially responsible conduct. As
with ethical conduct, businesses must have leadership at
ees, it owes respect for their legal rights, fair and equi-
the top that makes socially responsible behavior a core
table treatment, competent guidance, and due process.
value. If top management is committed, then awareness
To external customers, a business owes quality and safe
training, auditing, and rewards for those who act on the
products and services, honest dealings, warnings about
core value will follow. Quality of working life will im-
any hazards, and fair and equitable treatment. To suppli-
prove, and the company will reap the benefits that result
ers, a business owes relationships built on integrity and
from being a good corporate citizen.
mutual trust, conformance to the law governing busi-
ness dealings, and honest conformance to all contractual
KE Y TERMS
business ethics proactive approach social audit
ethical dilemma reactive approach social responsibility
green products resistance approach sustainable communities
morality Sarbanes–Oxley Act of 2002 (SOX)
RE VIE W QUESTIONS
1. How can simply doing your duty be considered to be people. What are the possible ethical dilemmas you
acting ethically? may face?
2. In what ways are a person’s morals and ethics 7. What guidelines do you use to determine if an in-
linked? Can an individual’s moral code be an ethical tended action is ethical?
code as well?
8. When a company hires lawyers to fi nd ways around
3. How can an organization’s culture influence the eth- a new environmental law, what approach to social
ics of its members? responsibility is it exhibiting?
4. What can organizations do to promote ethical con- 9. Who are a company’s stakeholders? What obliga-
duct from their members? tions does the company have to each?
5. What, if anything, is wrong with this statement: “If 10. How does government promote socially responsible
it’s legal, it’s ethical.” conduct on the part of businesses?
6. You have been ordered to reduce your ten-person 11. How can a business ensure its socially responsible
staff, all of whom are quite competent, by two conduct?

1. A car wash in your neighborhood has decided to in- or cease doing business. The ordinance is a response
crease its business by showcasing bikini-clad ladies to calls for action by church-sponsored community
drying cars as the cars exit the washing operations. groups and parent–teacher associations. What are the
The company proposes to begin offering the new ethical and social responsibility issues here?
process next week. As a neighborhood resident, what
3. For both ethical and socially responsible behavior to
are the ethical and social responsibility issues here?
take place within organizations, their top manage-
As an alderman in the city government that must ap-
ment must commit to making this happen. Why is
prove the proposed change, would you give it your
top management’s commitment essential?
approval? Why or why not?
4. Your boss has asked you to alter your time sheets so
2. A city ordinance has been proposed for your commu-
that more of your time can be allocated to a govern-
nity. It would require that all sales of alcoholic bever-
ment project and less of it allocated to business cus-
ages take place no closer to churches or schools than
tomers. What will you do in response to this request?
two city blocks. If it is enacted into law, six businesses
(restaurants and taverns) would be forced to relocate
Links are provided for all Internet exercises at 2. Describe an ethical dilemma that you might encoun-
http://plunkett.swlearning.com. ter in the classroom. Use the “TI Ethics Quick Test”
1. In a confidential employee survey at TDIndustries to make your decision. Be sure to share your re-
(a mechanical contracting and service company), sponses to each question.
94 percent of employees agreed with the statement, 3. Read “Seven Steps For Changing The Ethical Cul-
“Management is honest and ethical in its business ture Of An Organization” by Frank Navran. Explain
practices.” TDIndustries garners that sort of loyalty the steps that an organization, especially one facing
with a management philosophy of servant leader- ethical concerns, can take to change its culture to
ship, which emphasizes the leader’s role in helping one that promotes and rewards ethical behavior.
employees develop their careers. Are you a servant
leader? Give examples of your servant leadership.
How can you become a servant leader?

The Business and Company Resource Center (BCRC) JOHNSON & JOHNSON AT A GLANCE
is an online database and research tool published by Headquarters:
Thomson/Gale. Most college and university librar- Founded:
ies subscribe to electronic databases, as well as print. Top Executive:
Check to see if your library subscribes to BCRC. If so, Revenues for past year:
you may access the database. (Also, you may have access 52-week stock price high/low:
to it through this textbook. Check with your instruc- Number of Brands:
respected.
Use the BCRC to fi nd the following information
about Johnson & Johnson. Add any other interesting
information that you fi nd.
APPLICATION CASE
Tenet: Does Getting Lean Mean Getting Mean? tions that one of its facilities improperly billed Medicare
Tenet Healthcare Corporation grew to become the for millions of dollars for referrals provided by doctors
nation’s second-largest hospital chain by acquiring with whom the hospital had prohibited fi nancial ar-
other health care providers and turning them into profit rangements.” This settlement is the largest False Claims
centers. When Tenet decided to enter a geographic Act recovery the United States has obtained from a sin-
area, it typically purchased two or more health care gle hospital arising out of alleged violations of the Stark
providers, consolidated their services, pooled their tal- Statute. The Stark Statute prohibits hospitals from bill-
ent, and reduced their costs. One tactic for improving ing Medicare for services rendered to patients by doctors
efficiency was to replace high-skilled jobholders, such with whom the hospital has a fi nancial relationship,
as registered nurses, with lesser-skilled and lower-paid unless the fi nancial relationship falls within specified
nurse’s aides. Because of its size—69 general hospitals in exceptions.
13 states—Tenet negotiated price concessions from many
of its suppliers, saving it millions each year. Although Questions
Tenet’s stockholders and managers seemed happy, many 1. In what ways might Tenet’s drive for profits place
of its competitors believed the company’s tactics ignored patient care in jeopardy?
what was best for patients and their communities. 2. What ethical issues do you see in this case?
Tenet hospital CEOs are given an incentive plan, 3. What issues relating to social responsibility exist for
thus enlisting their help in and commitment to gener- Tenet and its rivals?
ating revenues. Such incentives put pressure on execu-
tives to raise their hospital prices to collect money from Sources: Victoria Colliver, “Tenet Healthcare posts $2 billion loss,
a special Medicare “outlier” fund. This fund compen- Analysts blame legal woes and asset write-downs,” San Francisco
Chronicle, March 9, 2005, http://sfgate.com/cgi-bin/article.cgi?fi le/
sates hospitals for caring for sicker-than-average patients chronicle/archive/2005/03/09/BUG5EBMFFN1.DTL; U.S. Department
by granting extra payments when the cost of a patient’s of Justice, “Tenet Healthcare To Pay U.S. $22.5 Million For Improp-
care exceeds a threshold. erly Billing Medicare,” March 24, 2004, http://www.usdoj.gov/opa/
On March 24, 2004, the Justice Department an- pr/2004/March/04_civ_183.htm; Tenet Healthcare, http://www
.tenethealthcare.com.
nounced, “Tenet Healthcare Corporation has agreed to
pay the United States $22.5 million to resolve allega-

Organic Valley Plants the Seeds Nearly two decades ago, a few farmers who be-
lieved strongly in the value to society of practicing or-
of Social Responsibility ganic agriculture and saving family farms got together
Many organizations treat social responsibility as if it
to form a cooperative. By acting together, these farm-
were a separate division—the department of good deeds.
ers could better control their fate. They could control
They support volunteerism among employees, use en-
supply, negotiate with larger customers, and reach more
vironmentally friendly packaging, and sponsor special
consumers who wanted their products. And they could
programs in the community. All of these activities are to
set their own milk prices. Instead of being forced to ac-
be commended. But very few commercial organizations
cept prices subject to wild fluctuations in the open mar-
can actually claim to be based on the principles of social
ketplace, these farmers began to set their own. This
responsibility. The Organic Valley Cooperative is an ex-
practice alone may be the single most important factor
ception. Based in Wisconsin, Organic Valley is a cooper-
in the ability of family farms to survive. In one recent
ative of small farmers whose products are certified to be
year, the milk price paid to Organic Valley farmers was
produced without pesticides, synthetic hormones, or an-
60 percent higher than the price paid to conventional
tibiotics, including organic milk, cheese, butter, spreads,
dairy farmers. Organic Valley has actually received criti-
creams, eggs, vegetables, juice, and meat.
cism for this practice, particularly from its creditors. But sumer Reports studies and the National Academy of
the cooperative holds fi rm. “Lowering the milk price Science reports and know that organic for their kids is
would have been as easy as falling off a log,” argues Or- like seatbelts in a car,” notes Theresa Marquez, Organic
ganic Valley’s CEO George Siemon. “But one of our ob- Valley’s director of sales and marketing. “The organic
jectives is to pay our farmers a good price. . . . We have a category has been growing steadily at 20 percent, and
pay program the farmers expect us to deliver on. These organic milk, with 27+ percent annual growth, is driv-
relationships are the most important thing.” ing the growth of the category. The implementation of
Today, Organic Valley is being called the most the National Organic Program in the U.S. . . . further es-
successful organic cooperative in the world. The co- tablished the organic market as one that is here to stay.
operative has 630 members farming 100,000 acres in Consumers want organic.”
16 states, with a waiting list. Sales are hitting upwards Organic Valley has helped the economies of several
of $200 million per year and growing. Member farmers rural areas. When a large federal dam project in south-
are the cooperative’s major stakeholders. With assistance western Wisconsin was cancelled after displacing more
from Organic Valley employees, the farmers govern the than 140 local farmers from their land, many lost their
cooperative by serving on the board and executive com- livelihoods. As Organic Valley became established, it
mittees. Organic Valley’s structure is designed so it will created employment opportunities—both on the farms
be able to sustain itself from one generation to the next, and in the cooperative offices—for hundreds of residents
ensuring the survival of family farms and sustainable, in the area. “Going organic saved our farm,” says coop-
organic agriculture. erative farmer Mike Gehl, whose family has operated a
Sweet Ridge Organic Dairy is one of the coopera- Wisconsin farm for 154 years and five generations. Now
tive’s farms, operated by Paul Deutsch in Westby, Wis- Gehl and others like him can look forward to the next
consin. Deutsch owns twenty-six cows that are milked generation of farming.
twice a day and allowed to graze over pastureland the
rest of the time—unlike cows in many larger, conven- Questions
tional dairy farms, which are kept in stalls 24 hours 1. In addition to the farmers, who are Organic Valley’s
a day and may be given hormones or antibiotics. It other stakeholders?
costs more to run an organic dairy farm, where in ad- 2. Describe at least one ethical challenge that Organic
dition to grass the cows are fed organic corn, alfalfa, Valley may face during turbulent times.
and other grains, and the cows need more grazing land.
But Deutsch isn’t spending money on chemicals or vet Sources: Company Web site, http://www.organicvalley.coop, accessed
bills. He estimates that he makes about 30 percent profit January 18, 2007; Judy Ettenhofer, “Organic Valley a Big Success,” The
Capital Times, July 29, 2004, http://www.madison.com; “Organic Val-
each year because consumers are happy to pay more for ley Posts Record Level Pay Price to Farmers,” OFARM, December 30,
products they know are more healthful for themselves 2003, http://www.ofarm.org; Organic Valley press kit.
and their families. “Many parents have read the Con-
BIZ FLIX VIDEO CASE

Emperor’s Club tate. Depaak Mehta (Rahul Khanna), Bell, and Louis
William Hundert (Kevin Kline), a professor at Saint Masoudi (Patrick Dempsey) compete in a reenactment
Benedict’s preparatory school, believes in teaching his of the Julius Caesar competition. Bell wins the compe-
students about living a principled life as well as teach- tition, but Hundert notices that Bell is wearing an ear-
ing them his beloved classical literature. Hundert’s prin- piece. Earlier in the fi lm Hundert had suspected that the
cipled ways are challenged, however, by a new student, young Bell also wore an earpiece during the competi-
Sedgewick Bell (Emile Hirsch). Bell’s behavior during tion, but Headmaster Woodbridge (Edward Herrmann)
the 73rd annual Julius Caesar competition causes had pressed him to ignore his suspicion.
Hundert to suspect that Bell leads a less than princi- This scene appears at the end of the film. It is an
pled life. edited portion of the competition reenactment. Bell an-
Years later Hundert is the honored guest of his for- nounced his candidacy for the U.S. Senate just before
mer student Sedgewick Bell (Joel Gretsch) at Bell’s es- talking to Hundert in the bathroom. He carefully de-
scribed his commitment to specific values that he would 2. Does Sedgewick Bell lead that type of life? Is he
pursue if elected. committed to any specific ethical view or theory?
3. What consequences or effects do you predict for
What to Watch for and Ask Yourself Sedgewick Bell because of the way he chooses to live
1. Does William Hundert describe a specifi c type of life his life?
that one should lead? If so, what are its elements?
O LIST
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LEARNING OBJECTIVES
MANAGEMENT’S After studying this chapter, you should be able to:
COMMITMENTS 1 Discuss how customers influence the quality of goods and

services
TO QUALITY AND Explain why quality must be cost-effective
PRODUCTIVITY 2
Relate quality, productivity, and profitability to one another
3
Determine the commitments required to improve quality and
4 productivity at the following:
a. The top of organizations
b. The middle of organizations
c. The bottom of organizations
Describe the external commitments required to improve an

5 organization’s quality and productivity
Getty Images
Toyota: A Learning Organization
Toyota is the world’s most profitable automobile man-
ufacturer and is on track to become the largest. The Hiroshi Okuda
company is probably the best example of a learning Born: 1932 in Mie Prefecture, Japan
organization wherein groups and individuals within the Current Position:
organization challenge existing models of behavior Senior Advisor and Board of Directors Member,
and learn to rapidly and creatively adapt to a changing Toyota Motor Corporation
environment. Kiichiro Toyoda, an engineer who liked
Career Highlights:
to try new things, founded Toyota in central Japan
in 1933. His family owned a mechanical loom busi- 1955 Accounting Division, Toyota Automobile
ness and his father provided the capital for him to get Sales Company, Japan
started. “The name was changed to Toyota, which is 1972 Over Toyota Operations, Manila, Philippines
written with eight brush strokes, an auspicious num- 1979 General Manager, Asia and Oceania Division,
ber in Japan” (Dawson). Toyota Motor Corporation
Taichi Ohno, Toyota Plant Manager and a manu- 1982 Director, Supervised international operations,
facturing engineer, was charged with increasing pro- including preparations for the construction of
ductivity. Ohno studied Henry Ford’s production sys- major plants in Taiwan and North America
tem and the U.S. supermarket system. 1987 Managing Director
He combined the Toyota concept of jidoka (auto- 1988 Senior Managing Director
mation with a human touch), first developed in the 1992 Executive Vice President
Toyoda family’s loom business, with Ford’s con- 1995 President
tinuous-flow assembly line and the pull system be- 1999 Chairman
ing used in supermarkets and developed the Toy- 2006 Senior Advisor and Board of Directors
ota Production System (TPS). TPS soon became
Member
known as lean manufacturing: Toyota’s dramatic
successes were achieved with fewer people, less Education: Business Degree, Hitotsubashi Univer-
space, less inventory, and less money while main- sity, Japan, 1955
taining a high quality standard and competitive pric- Personal: Black belt in judo
ing. (Sharma).
nd -
TPS revolutionized the manufacturing process f its fou
s in g sight o o pil -
worldwide. ever lo . The tw
e n t, while n a n d grow th p e c t
Today, Toyota is a global company and e m y re s
n to improv ’s p ro fitabilit v e m e nt a n d e lp s
op e ta h
expands by building manufacturing plants Being ls Toyo s impro rment
locally. Toyota started its U.S. sales opera- ri n c ip les, fue y — c o ntinuou T h is e m p o we a n u fa ctur-
ing p a yees. otor M
yota W s emplo ip at Toyota M rk force
tions in 1957 at a former Rambler dealer- The To ower it a . A wo
lars of e m p a d e rs h In d ia n d to
ship in Hollywood. Then, in 1984, Toyota be- ple — local le west credite
for peo d s upport n e in south ange can be es
p a n th is o h ti n u
gan manufacturing as a joint venture with GM develo u c h as apt to c ta con
in California. In 1988, Toyota opened its first c . p lants s re a ti vely ad iz a ti o n. Toyo w it h its
In c a n
ing ly and ing org dwide
n quick a learn ss worl
North American plant in Georgetown, Ken- that ca
x c e ll e nc e as p le a n d proce
tucky, the beginning of Toyota’s globalization. Toyota
’s e f peo tem.
cess o o n Sy s
the suc roducti
Today, manufacturing plants also are located in to weld o y o ta P
onary T
Indiana and Texas. Furthermore, research and revoluti
development (R&D) to design and build vehicles
for the North American market is performed by
the Toyota Technical Center which began in 1977
in California. Also, it has evolved with operations
© Greg Ahrens/Associated Press
in Michigan, California, and Arizona. (See remarks

by Cho.)
Fujio Cho was sent from Japan to manage
the first plant in Kentucky. But, today as Toyota
expands rapidly, it trains local managers and engi-
neers. This is accomplished by empowering employ-
ees with its philosophy known as “The Toyota Way,”
based on two pillars: continuous improvement and
respect for people. Continuous improvement princi-
Fujio Cho
Born: 1937, in Tokyo, Japan
Current Position:
Chairman, Toyota Motor Corporation
Career Highlights:
1960 Production Specialist, Toyota Motor Corporation (TMC)
1984 General Manager of Logistics Administration and Project General Manager of
Production Control Division
1985 Project General Manager of North America Project Preparation Department
1987 TMC Project General Manager of North America Project Department, Executive
Vice President of Toyota Motor Manufacturing (TMM)
1988 TMC Director, President of TMM, S.A. Inc. (now Toyota Motor Manufacturing,
Kentucky, Inc.)
1994 Managing Director of TMC in charge of Government and Public Affairs, IT &
Telecom Business, Japan
1996 Senior Managing Director of TMC
1998 Executive Vice President of TMC in charge of Cooperate Planning, IT and Tele-
com Business and Information Systems, and Industrial Vehicle and Equipment
1999 President, Toyota Motor Corporation
2006 Chairman, Toyota Motor Corporation
Education: Tokyo University, Law degree, 1960
Sources: Nikkei Global National Forum, http://www.nikkei.co.jp/hensei/ngmf/pdf/htm/en_okuda.htm; Interna-
tional Directory of Business Biographies, http://www.referenceforbusiness.com//biography/A-E/Cho-Fujio-
1937.html; Japan Petrochemical Industry Association, http://www.jpca.or.jp/english/index.htm.
ples include challenge, kaizen (improvement), and Genchi Genbutsu (go there and see for
yourself). Respect for people principles include respect and teamwork.
Few people have done more to perfect “the Toyota Way” than Senior Advisor and
Board member Hiroshi Okuda and Chairman Fujio Cho, Toyota’s first two CEOs not from
the company’s founding Toyoda family. Both learned the Toyota Production System (TPS)
from its creator, Taichi Ohno. Okuda (former Chairman of Toyota) and Cho (Chairman since
Okuda stepped down in 2006) have taught hundreds of companies the TPS secrets. From
1995 to 1999, when Okuda was President, he had a plan for Toyota’s global expansion.
Cho, former President of Toyota Motor Manufacturing USA, executes Okuda’s plan. Cho
says, “[former] Chairman Okuda showed us what Toyota should do. My job is to figure out
how to reach the goals surely and speedily” (JAMA).
Sources: Fujio Cho, Toyota Motor Corporation, Traverse City, MI, Remarks, “Re-inventing Toyota,” August 3,
2004, http://www.cargroup.org/mbs2004/documents/ChoTraversespeech-handout.pdf; Japan Automobile
Manufacturers Association (JAMA), “Executive Highlights,” vol. 3, number 4, December 1999, http://www
.jama.org/autoTrends/previousissue190a.html?id17; Chester Dawson, “Kiichiro And Eiji Toyoda: Blazing
The Toyota Way,” BusinessWeek, May 24, 2004, http://www.businessweek.com/magazine/content/04_21/
b3884031_mz072.htm; Anand Sharma, “Toyota’s tenacity,” The Manufacturer.com, July 15, 2005, http://www
.themanufacturer.com/us/detail.html?contents_id3549.
Introduction
From the beginning of mass production in America, producing quantity and
controlling costs were the major concerns. In early factories a large number of
unskilled laborers performed narrowly defi ned tasks, producing goods com-
posed of interchangeable parts for mass markets under the supervision of engi-
neers. Workers were taught their tasks and expected to perform them exactly;
they were not asked for their opinions or suggestions. Because the demand for
goods in most industries exceeded supply until the late 1920s, nearly everything
produced could be sold.
Chapter 4 Management’s Commitments to Quality and Productivity 97
Until the early 1970s, quality was defi ned in most companies as the pro-
duction of goods and services without defects and was primarily the concern
of production engineers. “In its early days quality control was a dimension of
cost control, with the emphasis on eliminating waste.” 1 By the early 1900s, in-
spection and inspectors were standard fi xtures in most industrial plants. Inspec-
tors were charged with the duty of weeding out defective parts before the prod-
ucts were shipped to customers. 2 Often, operations were not inspected until they
were out of control and producing defective outputs.
The primary difference between today’s managers and their counterparts
of the past is their definition of quality and the recognition that quality and ef-
ficiency are primary concerns affecting every operation and employee, not just
those involved with production. Quality is now defi ned as the ability of a prod-
uct or service to meet or exceed customer expectations and needs. Consider Toy-
ota, the company in this chapter’s Management in Action case. The company’s
management recognizes that the product must be satisfying in terms of quality,
design, and price to its customers. “Production is based on demand. Pull, not
pushing it out in the market. Processes are based on doing things just-in-time. If
there is demand for a product, then it is made. Products aren’t made in an antici-
patory mode. That would be a form of waste. Of muda.” 3 At Toyota, concern
for quality begins with the customer.
Also, the defi nition of a customer has been expanded to include those in-
side organizations. Concern for meeting customers’ needs now begins with the
inception of a new product, service, and process. It is linked to how effectively
and efficiently each person and process functions.
Quality, Productivity, and Profitability

Joseph M. Juran, a pioneer thinker on and advocate for quality, advises compa-
nies to focus on “product performance [which generates] product satisfaction” 4
and to produce products and services free of deficiencies that create external and
internal customers’ dissatisfaction. Performance can mean the ability of a ma-
chine to deliver flawless output, the capability of a department or team to fi ll an
1
Discuss how customers
influence the quality of
goods and services
order quickly and without errors, or the handling characteristics of an automo-

bile. Deficiencies cause users and customers to reject or complain about prod-
ucts and services.
For example, when internal customers’ (employees’) needs for information
are not met, their ability to perform may be adversely affected. They may waste
time and other resources while they search for what they need. In turn, they may
provide inadequate inputs to their internal customers. External customers often
compare competing products’ performance characteristics as one step in their
buying decisions. “A product may have no deficiencies and yet be unsaleable be-
cause some competing product has better product performance.” 5 Figure 4.1
shows that product design should begin with consumer research.
Quality features originate with an organization’s internal and external de-
signers, producers, users, and customers. Features and characteristics are those
aspects of the product, service, process, or project that lead to satisfaction or
dissatisfaction. Satisfaction depends on the users’ or customers’ perceptions that
a product or service will meet or exceed their needs or expectations.
The American Customer Satisfaction Index (ACSI) is a national economic
indicator of satisfaction with the quality of products and services available to
Figure 4.1 Hypothetical customer satisfaction model
Quality Component Satisfaction Performance
“Rating” 69
for Quality Handle
Component 1.2 “Impact” of
Complaints
Component on
Satisfaction
64
Company’s 70
Representative 1.3
Recommendation
84 2.3
Product 0.4
Availability 72
Customer
1.8 Retention
Satisfaction
70
0.2 75
Services
2.0
12%
68 Profitability
“Impact” of
Billing 0.6 Satisfaction on
Performance
83
Price and
0.9
Contracts
Source: http://www.cfigroup.com.
U.S. household consumers. It was introduced in 1994, and scores for one or two
sectors of the U.S. economy have been updated each quarter since. The index is
produced by asking customers of specific companies to rate their overall satis-
faction which is then compared to their expectations. Customer satisfaction and
fi nancial returns can be correlated. In general, fi rms with the top ACSI scores
generate greater shareholder wealth than fi rms with the lower scores. Professor
Claes Fornell, key ACSI faculty member at the University of Michigan, said, “If
accounting were to incorporate customer satisfaction as an asset on the balance
sheet, we would have a better understanding of the relationship between a com-
pany’s current condition and its future capacity to produce wealth.” 6
quality function deployment
(QFD) Quality Function Deployment
A disciplined approach to solv-
ing quality problems before the Designing quality into a product is key to quality function deployment (QFD),
design phase of a product a disciplined approach to solving quality problems before the design phase of a
product. The purpose of QFD is to assure that the customer obtains high value
from a product.
To be competitive, we must satisfy the customer. In order to be more
competitive, we must delight the customer. Quality is defi ned here as the
measure of customer delightment. Note that customer satisfaction is a
region on the scale of customer delightment. To delight the customer, we
must design for quality.7
Professor Yoji Akao of Japan introduced QFD in 1966. However, the book
was not translated from Japanese into English until 1994.8 Professor Akao de-
fi nes QFD as a method for developing a design quality aimed at satisfying the
consumer and then translating the consumer’s demand into design targets and
major quality assurance points to be used throughout the production phase.9 It
is a way to assure the design quality while the product is still in the design stage.
QFD uses a matrix that relates customer requirements and features of competi-
tors’ products to functional design characteristics and customer satisfaction.
The process begins with surveys to identify what features and performance
characteristics customers value. For example, at Sewell Automotive Company
in Dallas, Texas, each customer is surveyed about how he or she wants to be
treated, and the ongoing customer surveys are used to develop a customer satis-
faction index (CSI). Several changes have been implemented as a result of what
was learned from the surveys. Hours of operations for car servicing include Sat-
urdays and evenings. Customers are given choices while having their cars ser-
viced, such as the availability of loaner cars or someone to pick up their car. The
job is done right the fi rst time.
If a competing product already exists, a sample is purchased and disassem-
bled to determine its particular characteristics. The best of the competing prod-
ucts becomes a benchmark—the product to meet or beat in terms of design, benchmark
manufacture, performance, and service. “Benchmarking is an improvement pro- The product to meet or beat in
terms of design, manufacture,
cess in which a company measures its performance against that of best-in-class performance, and service
companies, determines how those companies achieved their performance levels,
and uses the information to improve its own performance. The subjects that can
be benchmarked include strategies, operations, processes, and procedures.” 10
A benchmark for the Sewell Automotive Company is Disney World. In the
chapter “Selling Should Be Theater” of his book with Paul B. Brown, Custom-
ers for Life: How to Turn That One-Time Buyer into a Lifelong Customer, Carl
Sewell says:
I love Disney World. . . . [It’s] the image we keep in mind when we’re
thinking about how our stores should look. We make sure the grass is al-
ways cut. I picked out every tree and bush. And we make sure the build-
ings are freshly painted. . . . (We even bought a street sweeper so that
we’d be able to clean the roads in front of our dealerships.) Why devote
all this attention to the grounds? Because we’re setting a tone. . . . And it
tells people what our values are; it’s in keeping with the kind of customer
we want to attract.11
Toyota used QFD to design and build the Lexus LS 400. In the initial stages
of product design, Toyota purchased competing cars from Mercedes, Jaguar,
and BMW. Toyota engineers tested the cars rigorously, disassembled them, and
studied the parts. The engineers were convinced that Toyota could match or ex-
ceed 11 performance goals, including goals relating to weight, fuel economy,
GLOBAL APPLICATIONS
a g es
The Toyota Way
Get t y Im
In the United States and globally, Toyota expands without 8. Use only reliable, thoroughly tested technology that
acquisitions. Unlike Ford buying Volvo, Jaguar, and Land serves your people and processes.
Rover or General Motors (GM) buying Saab, Toyota sets 9. Grow leaders who thoroughly understand the work,
up assembly plants without local partners. It teaches the live the philosophy and teach it to others.
locals how to build Toyotas. 10. Develop exceptional people and teams who follow
Jeffrey K. Liker, Professor of Industrial and Operations your company’s philosophies.
Engineering at the University of Michigan, is author of The 11. Respect your extended network of partners and
Toyota Way: 14 Management Principles from the World’s suppliers by challenging them and helping them to
Greatest Manufacturer, (McGraw-Hill). It is the first book improve.
for a general audience explaining the management prin- 12. Go and see for yourself to thoroughly understand the
ciples used by Toyota. In the book, Professor Liker dis- situation (Genchi Genbutsu).
cusses these principles, listed below. 13. Make decisions slowly by consensus, thoroughly con-
sidering all options; implement decisions rapidly.
14 Management Principles From the World’s Greatest
14. Become a learning organization through relentless re-
Manufacturer
flection (hansei ) and continuous improvement (kaizen).
1. Base your management decisions on a long-term phi-
losophy, even at the expense of short-term goals. • Toyota’s formula for success rests in its corporate
2. Create continuous process flow to bring problems to philosophy and its ability to hire individuals who em-
the surface. body that philosophy. Toyota hires employees early
3. Use “pull” systems to avoid overproduction. in their careers before they are exposed to another
4. Level out the workload (heijunka). (Work like the tor- company’s culture. The first step in the hiring process
toise, not the hare.) for prospective managers is to view a video about
5. Build a culture of stopping to fix problems, to get qual- Toyota’s culture. How does this practice ensure em-
ity right the first time. ployees will learn the Toyota Way?
6. Standardized tasks are the foundation for continuous • Why does Toyota describe prospective employees as
improvement and employee empowerment. open and flexible with a willingness and a desire to
7. Use visual control so that no problems are hidden. learn the Toyota Way?
aerodynamics, and noise. Toyota continued to refi ne the design and the manu-
facturing process that would produce the LS 400. The company spent $500 mil-
lion in development costs, which included expenditures for new, more precise
machine tools and innovative use of materials. The result was a quality product;
according to J. D. Power & Associates, a consumer polling service, Lexus mod-
els continue to be top-rated for quality and customer satisfaction.
QFD works for services as well. Managers at UPS, a large package deliv-
ery company, used to assume that external customers prized on-time delivery of
packages above all else. Like its competitors, UPS concentrated on providing on-
time delivery. The company was obsessed with time and motion studies, exact
scheduling of drivers, and delivery before 10:30 a.m. until its customer surveys
revealed that “Customers wanted more interaction with drivers. . . . If drivers
were less [rushed] and more willing to chat, customers could get some practical
advice on shipping.” 12 As a result, UPS hired more drivers, gave them 30 extra
minutes per day to visit with customers, and began paying them a commission
on any leads that created sales.
External customers’ needs and wants keep changing. “Customers today want
more of those things they value. If they value low cost, they want it lower. If
they value convenience or speed when they buy, they want it easier and faster.” 13
Customers are “moving targets” who can quickly travel out of sight. Organiza-
tions cannot attract and keep customers with thinking rooted in the past—by
failing to think “outside the box” of past practices—and products and services
that are mere clones of others’. This chapter’s Global Applications feature high-
lights The Toyota Way—the management principles behind Toyota’s worldwide
reputation for customer satisfaction and quality.
Consultants and authors Michael Treacy and Fred Wiersema believe that
the companies that please their customers best, commit to one or a combina-
tion of three long-term value disciplines: (1) operational excellence, (2) product
leadership, and (3) customer intimacy.14 PetSmart and Wal-Mart exemplify the
fi rst. They provide low prices, inviting environments, and unique and depend-
able service. Rubbermaid (a maker of household products), Nike (the athletic
shoes maker), and 3M (the maker of office and consumer products) demonstrate
the second discipline. All three thrive on generating vast numbers of cutting-
edge products annually that truly delight their users.
An example of the third discipline is a relative newcomer to the car-rental
business—the small but growing Enterprise Rent-A-Car Company. Such a com-
pany tailors its offerings to meet customers’ needs at reasonable costs. “They are
adept at giving the customer more than he or she expects. By constantly upgrad-
ing offerings, customer-intimate companies stay ahead of customers’ rising ex-
pectations—expectations that, by the way, they themselves create.” 15
Total Quality Management Robert Costello, an engineer and former GM ex-

ecutive, was the Undersecretary of Defense for Acquisitions when he built on the
work of Deming, Juran, Crosby, and others to create total quality management total quality management
(TQM) for the Department of Defense. The department’s TQM Master Plan, is- (TQM)
“A strategy for continuously
sued in August 1988, defi ned TQM as improving performance at
every level, and in all areas of
a strategy for continuously improving performance at every level, and in responsibility”
all areas of responsibility. It combines fundamental management tech-
niques, existing improvement efforts, and specialized technical tools un-
der a disciplined structure focused on continuously improving all pro-
cesses. Improved performance is directed at satisfying such broad goals
as cost, quality, schedule, and mission need and suitability. Increasing
user satisfaction is the overriding objective.
Figure 4.2 is the seven-step model the Department of Defense developed to il-
lustrate TQM. In step 1, the organization establishes the TQM environment. Step
2 defi nes the mission for each component or subsystem of the organization. Step 3
requires the setting of performance improvement opportunities; it establishes the
strategic planning process. In step 4, managers or managers and their subordi-
nates defi ne improvement projects and plans for action. In step 5, the projects are
implemented through use of the appropriate tools and techniques. (You will read
more about implementation later in this chapter.) Step 6 is the evaluation phase,
in which results—cycle times, costs, efficiency, and innovation—are evaluated.
Step 7 mandates feedback so that processes can be continuously improved.
Figure 4.2 The seven-step TQM model
Step 1
Establish the TQM
management and
cultural environment.
Vision
• Long-term commitment
• People involvement
• Disciplined methodology
• Support systems
• Training
Step 2
Define mission of each
component of the organization.
Step 3
Set performance
improvement opportunities,
goals, and priorities.
Step 4
Establish improvement
projects and plans for action. Step 7
Review and
recycle.
Step 5
Implement projects by using
improvement methodologies.
Step 6
Evaluate.
Improved performance
• Reduced cycle time
• Lower cost
• Innovation
Source: U.S. Department of Defense, Quality and Productivity Self-Assessment Guide for Defense Organiza-
tions (Washington, D.C. Department of Defense, 1990).
TQM Principles TQM is also known by and practiced under several other la-
bels. At not-for-profit colleges, universities, and hospitals, it is known as contin-
uous quality improvement, or CQI; at 3M, it is known as managing total qual-
ity; at Xerox, the large office equipment maker, it is called leadership through
quality. In Japanese companies, it is called total quality control (TQC). No mat-
ter what the name is, its concepts and principles are usually the same: 16
• Quality improvements create productivity gains.
• Quality is defi ned as conformance to requirements that satisfy user needs.
• Quality is measured by continual process and product improvement and user
satisfaction.
• Quality is determined by product design and achieved by effective process
controls.
• Process-control techniques are used to prevent defects.
• Quality is part of every function in all phases of the product life cycle.
• Management is responsible for quality.
• Relationships with suppliers are formed for the long term and are quality-
oriented.
As Thomas J. Barry wrote, “TQM/TQC is a journey, not a destination. It is a
systematic, strategic process for organizational excellence.” 17
Cost-Effective Quality
As the previous three chapters indicate, meeting and exceeding customers’ needs
and expectations should be a primary aim of any organization. Those that do
this both effectively and efficiently will succeed in their markets and surpass
their rivals. But organizations and their people must “make sure that the quality
they offer is the quality their customers want. . . . [Q]uality that means little to
2
Explain why quality must
be cost-effective
customers doesn’t produce a payoff in improved sales, profits, or market share.

It’s wasted effort and expense.” 18 Satisfying customers while focusing on the
bottom line helps to guarantee that companies will not price products and ser-
vices out of their markets.
Money spent on quality leads to efficiencies if it saves an organization from
having to spend a relatively greater amount on repairing defects. “The cost of
quality is the cost of avoiding nonconformance [to company and customer] stan-
dards and failure. Maintaining quality helps you avoid compounding costs you
would incur from the deviation of not doing the right thing the fi rst time.” 19
When quality is viewed as conformance to standards, then lack of quality means
a conformance failure has occurred.
Philip B. Crosby, manager, author, and consultant, wrote, “Quality im-
provement is built on getting everyone to do it right the fi rst time (DIRFT). But
the key to DIRFT is getting requirements clearly understood and then not put-
ting things in people’s way.” 20 Crosby identified the cost of quality as, basically,
inefficiency or “the expense of doing things wrong. It is the scrap, rework, ser-
vice after service, warranty, inspection, tests, and similar activities made neces-
sary by nonconformance problems.” 21
At Xerox Corporation, managers take three measurements to determine the
cost of quality. They compute the cost of conformance, the cost of nonconfor-
mance, and the cost of lost opportunities.22 Conformance requires continual
measurement of work outputs against known customer requirements. Noncon-
ages
MANAGING TECHNOLOGY
Technologically Literate Managers
Get t y Im
Technology, especially personal computers (PCs) and the content, and present information. For example, the man-
Internet, supports the work of managers. They are basic ager should use the Internet to visit his or her own com-
to communication within and between organizations. To pany’s Web site, compare it to the competition’s Web
be considered computer literate, managers must have a site(s), and analyze them from a customer’s point of view.
basic knowledge of computer terminology, hardware and In order to browse and read content on the Internet, man-
software components, as well as be able to perform basic agers must be able to use a browser, such as Microsoft’s
computer applications. Internet Explorer.
The PC user should be able to do the following: Many managers possess more than basic computer
application skills. A Nation Online: How Americans Are
• Describe the basic hardware and software compo-
Expanding Their Use of the Internet provides an insightful
nents of the computer.
look at how managers use a computer at work. Managers
• Start the computer, run programs, and shut down the
are the most active users of the Internet and e-mail, word
computer.
processing, spreadsheets and databases, and calendar and
• Control program windows and menus.
scheduling.
• Use dialog boxes.
• Get help in Windows and in programs. • How would you rate yourself as technologically liter-
• Create new text documents. ate? Explain your rating.
• Name files. Source: Kathleen Cooper and Nancy Victory, A Nation Online: How
• Copy, cut, and paste text. Americans Are Expanding Their Use of the Internet, U.S. Census
Bureau, February 2002, http://www.ntia.doc.gov/ntiahome/dn/
• Open and save files. anationonline2.pdf.
Managers must be able to use the Internet (referred to

as Internet literacy) to search for information, evaluate
computer literate formance costs are those connected with not meeting customer needs and time
Managers must have a basic lost by having to go back and do things over. Lost opportunities are customers
knowledge of computer termi-
nology, hardware and software and profits lost due to lack of quality.
components, as well as the abil-
ity to perform basic computer
applications, such as word pro- Productivity
cessing, use of a spreadsheet Productivity, in its most common form, is the relationship between the amount
and a database, development of
Web pages, and development of of input needed to produce a given amount of output and the output itself. Pro-
multimedia presentations ductivity is usually expressed as the ratio of inputs to outputs.
Internet literacy Output (inputs produced)/Input (hours of human labor, machining time,
The ability to use the Internet
to search for information, or dollars invested) ⫽ Productivity Index (PI)
evaluate content, and present
information Such a ratio is a measure of efficiency that can be used to make comparisons
and identify trends.
productivity
The relationship between the Productivity can be improved by increasing the amount of output generated
amount of input needed to pro- by a fi xed amount of input, or reducing the amount of input required to generate
duce a given amount of output a fi xed amount of output, or a combination of both approaches. Through both
and the output itself; usually
expressed as a ratio kaizen (gradual) and reengineering (revolutionary) approaches, processes and
their related activities can be made more efficient or eliminated.
By measuring the productivity of the U.S. automotive industry (the num-

ber of labor hours worked divided by the actual number of vehicles produced), a
Troy, Michigan-based consulting group, Harbour Consulting, determined that
Toyota is the most efficient automotive manufacturer in North America. Ron
Harbour, President of Harbour Consulting, said the following about Toyota’s
5.5 percent productivity gain in 2004. “They may have the most cash in the in-
dustry, they may be the most profitable, but they have convinced themselves that
they’re paupers. They are every day looking for how they can squeeze another
dime out.” 23
Efforts to improve productivity must improve product and process qual-
ity, and vice versa. Improving productivity in an organization paves the way
for improvements in its employees’ standards of living and quality of life. Com-
puters make workers more productive, resulting in faster, better, and less ex-
pensive products and services. This chapter’s Managing Technology feature
discusses mastering the personal computer and the Internet. The money saved
through increased productivity can be allocated to further improve organiza-
tional operations.
Quality–Productivity–Profitability Link
Profitability results when income received by a fi rm exceeds the cost of paying
its bills. The profitability of a fi rm depends on its ability to efficiently produce
goods and services that please its customers. “No matter how high the quality, if
the product is overpriced it cannot gain customer satisfaction.” 24
W. Edwards Deming believed that companies that focused on improving
3
Relate quality, productivity,
and profitability to one
another
quality would accrue fundamental benefits. Such companies decrease costs by
reducing mistakes and waste, reducing the need to rework parts, and improv-
ing productivity. Improving quality, said Deming, can also help companies cap-
ture markets, ensure their future, and provide more jobs. To Deming, improving
quality caused a chain reaction of benefits: “Continual reduction in mistakes,
continual improvement of quality, mean lower and lower costs. Less rework
in manufacturing. Less waste—less waste of materials, machine time, tools,
human effort.” 25 Figure 4.3 provides a visual representation of Deming’s chain
reaction.
U.S. automakers have improved their quality, but still have not caught up
with the Japanese automakers.
This lingering gap prefigures a continuing slide in market share, but now
another dimension may be of greater concern to the Big Three: over the
past few years, consumers have changed their ideas about what defi nes
quality—a shift that is making the uphill climb for U.S. automakers
even more steep. Though buying decisions once emphasized quality de-
fined as minimizing the number of defects in a car, consumers are now
focusing more on maximizing the appeal of a handful of core product at-
tributes—for example, whether the car is fun to drive, well designed, or
stylish. 26
Thus the defi nition of quality for the consumer is evolving to include intan-
gible attributes such as design. Today, products must have high quality and their
designs must appeal to the consumer. Since design attributes are intangible, they
are much harder to measure than defects.
Figure 4.3 Deming’s chain reaction: the quality-productivity-profi tability link
Improve
quality.
Costs decrease
because of fewer mistakes,
delays, and snags; less
need to rework materials;
better use of machine time
and materials.
Productivity
improves.
Capture the market

with better quality and
lower price.
Stay in
business.
Provide jobs
and more jobs.
Source: W. Edwards Deming, Out of the Crisis (Cambridge, Mass.: Massachusetts Institute of Technology
Press, 1988), p. 3.
Improving Quality and Productivity

To produce significant, ongoing quality and productivity gains requires a 100 per-
cent commitment from everyone involved. Raytheon, the subject of this chap-
ter’s Ethical Management, is committed to providing quality to its customers
while maintaining ethics and integrity. As many organizations have discovered,
efforts to improve have failed for two main reasons—the changes were neither
companywide nor committed and they were too dependent on too few people.
As Townsend and Gebhardt, writers who address quality issues, observed,
Partial understanding of and involvement in quality can produce only
partial success or total failure. The only chance for a quality process to
truly succeed is for a company to simultaneously attack all the issues:
Leadership, participation, and measurement. 27
The same can be said as well for the pursuit of productivity gains.
Commitment to productivity and quality improvements means changes in
employee thinking, methods, and approaches to the identification and solution
of problems. These modifications mean changes to widely held attitudes, beliefs,
ETHICAL MANAGEMENT
a g es
Raytheon’s Approach to Quality
Get t y Im
and Ethics
Raytheon’s Business Ethics and Compliance office has ties. A change in the contract requirements—product sub-
assembled a library of ethics booklets for its employ- stitution without disclosure to government—is a crime. It
ees to use to increase awareness and as guidelines to be includes such activities as:
used when faced with ethical challenges on the job. In
• Substituting equivalent materials without notifying
the booklet, “Quality, Ethics and You,” Raytheon defines
the customer.
quality as “doing the job right, on time, and always to the
• Delivering similar goods that have been made from
total satisfaction of the customer.”
lower quality materials.
Each individual employee is held responsible for qual-
• Delivering materials that have not been tested as
ity. Raytheon believes that commitment to quality work is
required.
tied directly to an individual’s ethical standards. “[Quality]
• Providing foreign-made materials when domestic
is part of the work ethic of every person who has an im-
materials are required by contract.
pact on the product. One fact common to all successful
companies is that a commitment to quality reaches into Raytheon believes that its reputation is dependent
every corner of the organization.” upon its commitment to quality and work ethics.
Employees involved in government contract work are
subject to government laws and regulations. Raytheon • Why does Raytheon need to publish an ethics booklet
tells employees: on quality?
Source: Raytheon, “Quality, Ethics and You,” http://www.raytheon
Non-compliance with these requirements could subject .com/about/stellent/groups/public/documents/legacy_site/cms01
both you and the company to criminal and financial penal- _023522.pdf.
values, philosophies, and habits of interacting. For example, an undated pub-

lication by Motorola, The New Truths of Quality, lists “old truths” and “new
truths.” The old truth said: “To err is human.” The new truth says: “Perfec-
tion—total customer satisfaction—is the standard.” And companies have dis-
covered a new truth for productivity as well: “Never be satisfied with efficiency
improvements.”
Joseph Juran cautions that moving toward improvement means change;
change breeds resistance and fear. The existing, usually diverse ways of doing
things in an organization provide support and social networks. “Any proposed
changes are a potential threat to the stability of the pattern and thereby a poten-
tial threat to the well-being of the members.” 28 Juran’s list of rules to minimize
resistance to change within an organization include these seven:
1. Provide participation.
2. Provide enough time.
3. Keep proposals free of excess baggage.
4. Work with the recognized leadership.
5. Treat people with dignity.
6. Take the other person’s point of view.
7. Look at the alternatives.
Business Process Reengineering (BPR) Approaches

Defi ned in Chapter 2, reengineering is an approach for making changes that in-
evitably affects quality and productivity improvements. Reengineering requires
that individuals and organizations “think in terms of processes—order fulfi ll-
ment, for example—that may extend across many departments, and that they or-
ganize their work accordingly. . . . The goal, in addition to reducing costs, must
be to . . . respond quickly and effectively to [one’s] customers.” 29 But changes
in anything and anywhere in a company have ripple effects, as Michael Ham-
mer’s words indicate: “A sales [representative] has to recognize that his job . . . is
acquiring orders, and that’s a process in which he is only one player—it’s a pro-
cess that includes the fi nance people, the marketing people and others.” 30
Remember that the kaizen approach to improvement calls for gradual but
continual efforts. Reengineering calls for an ongoing questioning of the need to
do everything through a continuing investigation of its why and how. The aims
are to determine what no longer needs to be done, what must be done, and how
to better execute those processes. Says Michael Hammer, “We have to teach ev-
erybody in the organization to be creative, out-of-the-box thinkers. They need
to think creatively about how they do their work.” 31 Toyota’s surge in produc-
tivity indicates that its management thinks “out of the box.” So, too, do the
managers at 3M by encouraging all their employees to research their own ideas
on company time and with company resources.
Reengineering changes fundamental ways in which people and their orga-
nizations handle their processes. Typical results of reengineering have been to
change organizations’ missions, visions, values, activities, and structures. Out-
sourcing has transferred internal operations to external suppliers, downsizing
or rightsizing the organization through the process. Both have led to the loss of
thousands of jobs. The results can be increased efficiency, quality, and profit-
ability or the opposite, depending on how top management manages change and
its aftermath. Any tool used incorrectly can deliver more harm than good.
A study by consultants at the Wyatt Company examined the results experi-
enced by 531 companies that downsized. “Only 46 percent increased earnings,
34 percent increased productivity, and 33 percent improved customer service.” 32
Some companies have tried to practice reengineering by blindly cutting jobs, not
necessarily the work they contained. The result has been more work for fewer
people and the resulting insecurity, fear, and stress.
James Champy says that this should not happen. “Reengineering and down-
sizing are not synonymous. . . . But the two do overlap because in most reengi-
neering, you learn to do work with dramatically fewer people.” 33
Michael Hammer wrote the book Beyond Reengineering to build on his
earlier work and to advance the concept of the process-centered enterprise. He
explains why companies have only limited success with their process redesign
efforts: “Reengineering enables a company to create greatly improved opera-
tional processes; to harness their power, however, the company itself must be-
come a process-centered enterprise.” 34
To determine which processes have customer value and which do not, Ham-
mer says
simply map the process end to end, including both what you do and what
the customer does. Then ask yourself, ‘Are there redundancies here? Is
anything being done more than once? What could be eliminated without
affecting the ultimate outcome? Are there things that have only indirect
value and need to be minimized?’ 35
Thus, business process reengineering is a diagnostic tool that can point to long-
term opportunities, eliminating all non-value-added activities.
The remainder of this section focuses on the essential commitments and ele-
ments needed by any organization to improve its quality, productivity, and prof-
itability. We begin with top management’s role.
Commitments at the Top

Starting with their own commitments, managers at every level must try to ob-
tain every employee’s personal commitment to participate in both quality and
productivity improvement efforts. Once gained, personal commitments are sus-
tained as long as progress toward improvement continues. Therefore, the need
exists to continually carry on the struggle. Leadership begins at the top, but, as
4a
Determine the commit-
ments required to improve
quality and productivity at
the top of organizations
Chapter 1 indicates, it must exist at every organizational level, in every unit, and
in every team.
Mission Every organization needs a clear, concise, written declaration of its

central and common purpose. This reason for its existence is called its mission. mission
Created by top management, missions act as “the operational, ethical, and fi- A clear, concise, written decla-
ration of an organization’s cen-
nancial guiding lights of companies.” 36 America’s largest software company, tral and common purpose, its
Microsoft, began in 1975 with a one-sentence mission statement: “A computer reason for existence
on every desk and in every home.” This mission is interesting because Micro-
soft makes software, not computers. In addition, in 1975, almost no one had a
personal computer at work, much less at home. Missions unite organizational
members and are amplified by both a vision and values. The organization as a
whole and all its subsystems need a clear, commonly understood mission and
properly funded programs to achieve it. Top management’s primary job is to
continually reexamine this mission and to plan for the future. Microsoft’s new
mission is, “We work to help people and businesses throughout the world real-
ize their full potential.” 37
Vision Changing an organization in any significant way is a primary respon-

sibility of top management. Every CEO must sense the need for a change, cre-
ate a clear statement as to where the organization wants to be in the future—its
vision—sell that vision to organizational members, create plans to achieve it, com- vision
mit organizational resources to the effort, lead the effort by removing obstacles, A clear statement as to where
an organization wants to be in
and make certain that the organization’s progress is monitored. In 2002, Toyota the future
announced its “Global Vision 2010—Innovation into the Future,” a long-range
plan to reinvent itself. The company wants to create a better society through
manufacturing and technological innovation. The hybrid gasoline/electric Prius
is a direct result of this vision. Another example of a vision is from America’s
largest aircraft company, Boeing. It has a one-sentence vision statement: “People
working together as one global company for aerospace leadership.” 38
Core Values James Collins, consultant and coauthor of Built to Last: Success-
ful Habits of Visionary Companies, believes that there are some things orga-
nizations should not change—their core values. “Any great and enduring hu- core values
man institution must have an underpinning of core values . . . that should never Values that should never
change, “bedrock principles”
change.” 39 According to Collins, great companies are great because they have
and hold on to, regardless of the costs, their “bedrock principles—[their] ‘what
we stand for’ ” cores. One core value any organization should embrace is the con-
tinual search for quality and productivity improvement. The U.S. Navy’s core
values are honor, courage, and commitment.
Patagonia, a small California-based sportswear maker, has at its core a deep

respect for the individual. Patagonia experienced rapid growth, which brought
with it a loss of the sense of family that its owner had worked so hard to create.
After significant soul-searching, its employees agreed to reduce the size of the
company and refuse any new business that would harm this core value. The de-
cision fostered greater loyalty among Patagonia’s employees.
Ford Motor Company redesigned itself in the 1980s through the efforts of
top management. In 1981 Ford’s President at that time, Donald E. Petersen, in-
vited W. Edwards Deming to speak to Ford executives. Refusing to talk about
quality as it related to automobiles, Deming insisted on talking about Ford’s
management philosophy and corporate culture. Deming cross-examined ex-
ecutives to learn their thinking about quality. When asked to defi ne quality,
none could. When asked about their roles in quality assurance, managers talked
about administration, not what Deming had in mind: commitment from the top
to facilitate quality improvement. When asked by managers why America was
having trouble competing with the Japanese, Deming answered with rage, “The
answer is—MANAGEMENT!” 40
Ford was one of the fi rst American companies to embrace Deming’s teach-
ings about quality. As Donald E. Petersen wrote, “I agree with Dr. Deming’s
philosophy of management, and I especially liked the emphasis he placed on the
importance of people. In fact, we hired him as a consultant, and I made a point
of meeting with him myself roughly once a month.” 41 Early efforts at imple-
menting TQM at Ford included teaching all employees, not just quality control
inspectors, how to use statistical process control (a technique discussed later in
the chapter). As Petersen observed, “When something’s going wrong, 80 percent
of the time there’s something wrong with the way your production system or
process is functioning.” 42
Later, Ford’s TQM program dealt with removing fear from the workplace,
developing trust in people, and building a supportive structure for the concept
of continuous improvement. Ford executives began to ask questions: “What’s
our culture?” “What do we stand for?” As Petersen put it, “Dr. Deming’s phi-
losophy, expressed in his [14 points for improving quality], helped many of us
zero in on some of the key concepts we wanted to express.” 43 See Figure 4.4 for
Deming’s 14 points. After their many meetings with Deming, Ford’s top man-
agement rewrote their mission, values, and guiding principles. Ford’s current vi-
sion, mission, and values are shown in Figure 4.5.
open-book management Open-Book Management Open-book management commits organizations

Commits organizations and their and their people to continual learning and requires that well-trained people be
people to continual learning and
requires that well-trained peo- allowed to apply, without fear, what they learn. “In an open-book company, em-
ple be allowed to apply, without ployees understand why they’re being called upon to solve problems, cut costs,
fear, what they learn reduce defects, and give the customer better service. And they have a reason to
do so.” 44 Through information-sharing techniques and training sessions, em-
ployees learn the calculation methods and meanings of the critical numbers used
to measure a company’s processes and guarantee its success. The technique of
scoreboarding scoreboarding routinely keeps employees aware of changes in these numbers as
A technique that routinely operations progress. Employees are kept informed through meetings, the post-
keeps employees aware of
changes in the critical numbers ing of these numbers in strategic places, and the networking of individuals and
used to measure a company’s groups via computers and other means. “Employees learn that, whatever else
processes they do, part of their job is to move those numbers in the right direction.” 45 And
whatever the savings, employees will receive a share of them.
Says Robert H. Rosen, President of the Healthy Companies research group,

You have to link people to organizational performance in an adult con-
text of communication. You must listen to them, and they must have ac-
cess to information, because sharing more information will lead to trust
and an open dialogue that will lead to better solutions. . . . Without that,
Figure 4.5 Ford’s vision, mission, and values
Our Vision
To become the world’s leading consumer company for automotive products and
services.
Our Mission
We are a global family with a proud heritage passionately committed to providing
personal mobility for people around the world.
We anticipate consumer need and deliver outstanding products and services that
improve people’s lives.
Our Values
Our business is driven by our consumer focus, creativity, resourcefulness, and entre-
preneurial spirit.
We are an inspired, diverse team. We respect and value everyone’s contribution.
The health and safety of our people are paramount.
We are a leader in environmental responsibility. Our integrity is never compromised
and we make a positive contribution to society.
We constantly strive to improve in everything we do. Guided by these values, we
provide superior returns to our shareholders.
Source: http://www.mycareer.ford.com/ourcompany.asp?cid23.
employees are not able to take responsibility for their behavior because
of the differences in power levels between managers and employees. . . .
[M]ore and more companies are recognizing that developing a leader-
ship vision and strategy that involves workers is fundamental to achiev-
ing changes. 46
Springfield ReManufacturing Corporation, a small Missouri diesel engine
rebuilder, practiced open-book management when its owner, Jack Stack, turned
intrapreneurs employees, individually and in teams, into intrapreneurs—employees who think
Employees who think and act and act like owners (entrepreneurs)—thus changing the ways in which the orga-
like owners
nization conducted operations. Stack has written a book with Bo Burlingham, A
Stake in the Outcome, to help managers learn how they can practice its brand of
open-book management in their organizations.
Empowerment An open-book organization fosters continual learning and

helps to create committed individuals who, both in and out of teams, perceive
themselves to be partners working toward a common purpose. The next step is
empowerment empowerment, the sharing of information and decision making. Empower-
The sharing of information and ment gives employees ownership of their tasks and the freedom to experiment
decision making
and even fail, without fear of reprisals. “Toyota’s philosophy of empowering its
workers is the centerpiece of a human resources management system that fos-
ters creativity and innovation by encouraging employee participation, and that
likewise engenders high levels of employee loyalty.” 47 Managers must be willing,
in James Champy’s words, “to let go of control, in terms of letting other people
make decisions, particularly when they affect customers. You’ve got to do that
in order to grow.” 48 Empowerment requires managers to develop relationships
built on mutual trust and respect, provide needed training and resources, listen
to their people, and act on the recommendations they receive.
Empowered individuals and teams give enormous flexibility to organizations.

Decisions are made at the lowest level possible, allowing for quick responses to
users’ and customers’ demands. But empowered individuals and teams will only
get the most from their autonomy when they represent diverse points of view,
value one another, and respect each other’s contributions. See this chapter’s Valu-
ing Diversity feature for a look at how Toyota’s guiding principles get the most
from its empowered employees.
Commitments at the Middle

Commitment to improvements must involve mid-level managers, those hardest
hit in downsizing, outsourcing, and reengineering efforts. Middle managers are
most active in planning and coordinating quality and productivity efforts. They
must make certain that any breakthroughs are shared with others to enable any
benefits to be shared throughout the organization. Because most processes are
4b
Determine the commit-
ments required to im-
prove quality and produc-
tivity at the middle of
horizontal, cross-functional cooperation and communication must take place. organizations
Various methods can be used to facilitate this, including rearranging work flow,
reassigning tasks, having regular meetings for individuals and teams, develop-
ing incentives and rewards for cooperation and breakthroughs (gain-sharing,
for example), and teaming.
Teams Teams may exist at every level, and they all need trained leaders, mem-
bers with complementary and required skills, a supportive environment, and
clear goals and guidelines. Teams create synergy, which makes their efforts more
effective than the individual efforts of the team’s members would be. Three spe-
cific types of empowered teams are used by middle managers to improve organi-
zation-wide quality and productivity: teams focusing on improving quality, pro-
cesses, and projects.
A quality improvement team is usually a group of people from all the func- quality improvement team
tional areas of a company. The group meets regularly to assess progress toward Usually a group of people from
all the functional areas of a
goals, identify and solve common problems, and cooperate in planning for the company who meet regularly
future. The purpose of such a team is to facilitate operations by providing the to assess progress toward
support needed and enhancing coordination efforts. Team leaders should enjoy goals, identify and solve com-
mon problems, and cooperate
quick and easy access to top managers so that management strategies can be ad- in planning for the future
justed to meet changing conditions. Members “should represent the company to
the outside world, schedule the education program [to bring quality improve-
ment to internal operations], and create company-wide events [to highlight the
importance and successes of efforts at quality improvement].” 49 Large corpora-
tions may have several quality improvement teams, one for each operation or
operational area. Small companies may have just one.
A process improvement team is made up of members who are involved with process improvement team
a process—getting the payroll out, making a part, or sorting the mail, for ex- A team, made up of members
who are involved with a pro-
ample. Team members meet to analyze how they can improve the process. They cess, who meets to analyze
focus on measuring the effectiveness and efficiency of each step, reducing cycle how they can improve the
times, and identifying and correcting causes for variations in the quality of in- process
puts and outputs.
A project improvement team is usually composed of a group of people involved project improvement team
in the same project—installing a new computer system or creating a new prod- A team, usually composed of a
group of people involved in the
uct, for example. Members of the team determine how to make the project better. same project, who determines
Project improvement teams usually include those who are or will be customers how to make the project better
or consumers of the project’s output. These users may be insiders or outsiders.
VALUING DIVERSITY
a g es
Empowerment at Toyota
Get t y Im
Taichi Ohno is referred to as the Father of the Toyota • Respect the culture and customs of every nation
Production System (TPS), also known as lean manufac- and contribute to economic and social development
turing and just-in-time (JIT). “Ohno was legendary for through corporate activities in the communities.
his zeal. His commitment. His dedication to process • Dedicate ourselves to providing clean and safe prod-
improvement. His asking of ‘why’ five times” (Vasilash). ucts and to enhancing the quality of life everywhere
The key to TPS success is empowering production through all our activities.
associates. • Create and develop advanced technologies and pro-
Stephen Covey—author of best-selling The 7 Habits vide outstanding products and services that fulfill the
of Highly Effective People and Cofounder of the personal needs of customers worldwide.
organizer retailer FranklinCovey—says his favorite ex- • Foster a corporate culture that enhances individual
ample of empowerment is Toyota. “Any worker can shut creativity and teamwork value, while honoring mutual
down that assembly line,” he explains. “They think of trust and respect between labor and management.
themselves as part of a major partnership to serve trans- • Pursue growth in harmony with the global community
portation needs. Toyota’s using the knowledge-worker through innovative management.
model, which is why they’re eating Detroit’s lunch. Every • Work with business partners in research and creation
employee is trained to ask the question: Why? Why to achieve stable, long-term growth and mutual bene-
aren’t we doing it this way? Why do we do it that way?” fits, while keeping ourselves open to new partnerships.
(Hartman). • Most production lines are computerized with sensors
Toyota’s guiding principles, listed below, were estab- that can turn them off or signal when an adjustment
lished in 1990 and revised in 1997. is needed. Why is personal involvement essential for
quality?
Guiding Principles at Toyota Motor Corporation
Sources: Mitchell Hartman, “Managing From Within,” Oregon
• Honor the language and spirit of the law of every na- Business, February 2005, http://www.mediamerica.net/obm_0205
_MH.php; Gary S. Vasilash, “Oh, What A Company!”, Automotive
tion and undertake open and fair corporate activities Design & Production, March 2005, http://www.autofieldguide.com/
to be a good corporate citizen of the world. articles/030501.html.
Investigations by all three types of teams may lead to contact with outsiders,
especially if they are the source of a problem or its possible solution. Customers
and suppliers are two of the likely groups of outsiders.
Audits The U.S. Army has an old saying: “Don’t expect if you don’t inspect!”
Usually a duty of middle managers, audits monitor progress—or lack of it—
quality audit toward goals. A quality audit determines if customer requirements are being
Determines if customer require- met. If they are not, the auditors discover why not. A quality audit can focus on
ments are being met
a particular product, process, or project. A team of insiders or outsiders—a con-
sultant or quality improvement team, for example—can perform the audit.
quality control audit A quality control audit asks two basic questions: How are we doing? and
A check of quality control ef- What are the problems? It focuses on “the way . . . the factory builds quality
forts that asks two questions:
How are we doing? and What into a given product, control of subcontracting, the manner in which customer
are the problems? complaints are handled, and the methods of implementing quality assurance at
each step of production, starting from . . . new product development.” 50
Measurements Efforts to improve quality and productivity include various
statistical measurements and scientifi c methods during both audits and when
monitoring ongoing operations. As early as the 1930s, Bell Laboratories was us-
ing what is now called statistical quality control (SQC) and statistical process statistical quality control
control (SPC). SQC is the use of statistical tools and methods to determine the (SQC) and statistical pro-
cess control (SPC)
quality of a product or service. SPC is the use of SQC to establish boundaries SQC is the use of statistical
that determine if a process is in control (predictable) or out of control (unpre- tools and methods to determine
dictable). 51 Figure 4.6 shows one of these tools—a control chart used to regu- the quality of a product or ser-
vice. SPC is the use of SQC to
larly monitor a process that yields frequent outputs. Operations are considered establish boundaries that de-
to be in control as long as their outputs fall safely between the upper and lower termine if a process is in control
control limits established for them. Cost accounting uses various types of tools (predictable) or out of control
(unpredictable)
and methods to similarly track and analyze expenses connected to all opera-
tions. More will be said about measuring performances in Chapters 10 and 16.
Commitments at the Bottom

Empowered workers, individually and in teams, feel a dedication and obligation
to continually work for improvements, especially when they share in the gains
that result. Through process and product teams (cross-functional groupings),
they combine talents and energies to identify and solve problems. Such teams
may be permanent or temporary. A permanent team is usually in charge of an
4c
Determine the
commitments required
to improve quality and
productivity at the bottom
ongoing process like customer billing or customer service. A quality circle is a of organizations
temporary team. Consisting primarily of workers who share a problem, it meets
regularly until the problem is solved. Members of a circle are usually volunteers quality circle
A temporary team, consisting
who agree to use their knowledge and experience to eliminate barriers to both primarily of workers who share
quality and productivity. a problem, who meets regularly
Motorola is a recognized leader in America’s quality revolution. Motorola until the problem is solved
won the fi rst Malcolm Baldrige National Quality Award in 1988 and is commit-
ted to aggressive programs for quality and product innovations. The Baldrige
Award is presented to U.S. organizations in recognition of their achievements
in quality and overall performance. Motorola has developed a “philosophy that
Figure 4.6 Control chart used to monitor performance of a process
Upper Control Limit
Average of Samples
Lower Control Limit
1 5 10 15 20
Time
Note: Control limits define the range of expected variations in the

normal operations of a process. What is important in control charts is
the trends that they indicate toward exceeding the upper or lower limits.
Once these trends are spotted, managers must investigate the process
to discover the causes of the trends toward defects.
allows each employee to contribute insights to the achievement of quality stan-

dards. The Participative Management Program (PMP) assumes that under the
right conditions, employees will suggest better ways to do their jobs.” 52 All em-
ployees below top managers are members of PMP teams. Each is continuously at
work to reduce defects and cycle times, either the time from order receipt to ship-
ment for existing products, or the time from conception to delivery for new prod-
ucts. Targets to reduce defects and cycle times are the basis for rewards.53
Like many forward-looking companies, Motorola sponsors competitions
among its teams. They compete in projects designed to raise quality, reduce
production time, and improve efficiency. Each year the company showcases the
teams’ ideas and presents awards to those that created the best innovations.54
Such competitions can be an excellent way to foster productivity and continuous
improvement.
Former CEO Robert Frey led a small Ohio-based packaging company, Cin-
Made Corporation, and knows the value of empowered worker teams. To over-
come union-management strife, poor quality and productivity, and excessive
costs, he developed a unique approach to changing his company. When a strike
closed one of his plants, Frey discontinued the practice of annual pay increases.
Instead,
he offered to set aside 30% of all pretax earnings as a bonus pool
and delegated to the workers—most of them high-school dropouts—
authority to schedule production, control inventories, choose their own
team leaders and screen every new hire. Some were sent out to learn such
techniques as statistical process control, which they then taught to team-
mates. Frey also began giving everyone detailed updates on Cin-Made’s
finances at monthly meetings. Since 1989, workers’ bonuses have added
30% to their annual compensation. 55
Frey knew that nothing would change in any significant way without all work-
ers being committed to seeking a turnaround. Once he had won their trust and
respect through open-book management and empowerment, his gamble be-
gan to pay off handsomely for both employees and the company. In 2006, Cin-
Made was purchased by the Sonoco Products Company. Robert Frey is Sonoco’s
President.
In the fi nal analysis, company efforts to raise quality and productivity de-
pend on committed workers and associates who do not waste time, steal from
their employers, withhold efforts, use forbidden substances on the job, nor resist
needed change. Management’s best efforts and millions of dollars cannot over-
come such barriers. People are both the causes of and the cures for most of a
company’s productivity and quality problems.
External Commitments
5
Describe the external
commitments required to
improve an organization’s
quality and productivity
Various groups outside an organization have direct and indirect bearing on both
the quality of its product or service and its productivity. Companies must con-
tinually interact with their customers and various partners. Customers exert
by far the greatest influence. Whether an organization has individual consum-
ers or industrial users as its customers, it must develop learning relationships—
continuing connections to meet their needs and gain their loyalty. 56
Most companies rely on input from valued customers through surveys (see
Figure 4.7), e-mails, 1-800 numbers, regular sales force interactions, and their
involvement in evaluations of those who serve them and of proposed new prod-
ucts or services. These examples of maintaining customer contact help produc-
ers keep their best customers and acquire new ones. According to the journalist/
editor of The Marketing Report, “[W]inning a new customer typically costs a
company up to five times as much as keeping a current one and the average busi-
ness loses 20 percent of its accounts each year.” 57
Customers can also assist producers’ search for added efficiency. Varian
Medical Systems, Inc., a maker of scientific equipment, has enhanced its produc-
tivity, profitability, and customer-service quality by listening to its customers.
“When customers complained about the long time that was needed to set up its
radiology equipment at hospitals, the company . . . took its time identifying sev-
eral hundred possible solutions.” 58 Its solutions included dozens of changes that
made both its customers and the company more efficient. “The changes saved
95 hours in setup time, worth as much as $50,000 per order to hospitals. Varian
also saved $1.8 million a year.” 59
Close connections with suppliers is also essential. Ross Controls, a Michi-
gan-based maker of pneumatic control devices, serves the needs of industrial
users such as GM and Reynolds Aluminum. Nearly all of Ross’s customers de-
mand specialized, tailored products, necessitating close working relationships.
These involve continuous communications and plant visitations. “And once a
system is designed to solve the customer’s problem, Ross gets feedback from
prototypes and encourages the customer to make continuous upgrades to its
valve designs, yielding more precisely tailored designs over time.” 60 Ross learns
from its customization efforts and often finds other customers and applications
for the designs it has created.
Toyota and dozens of other companies with hundreds of outside sources of
supply must maintain close relationships with their suppliers to guarantee timely
arrival of merchandise so as to avoid running out of stock. Factories, retailers,
and wholesalers routinely link their operations to those of their suppliers, many
by satellite communications linkups.
Partnerships with vendors and suppliers are based on openness and mu-
tual trust. Information flows freely between the partners. Today, companies are
turning increasingly to outside sources for vital materials and services. The pri-
mary reason for outsourcing is that others can do what you need done better,
faster, cheaper, and with better quality and greater efficiency. Companies are
also concentrating on partnering with fewer but more reliable sources for what
they need. Both buyer and seller, however, must have the same commitment to
quality of output and efficiency of operation for the partnership to last.
In addition to audits of their own operations, companies that outsource
need to continually check on their outsiders’ operations. Do they know their
costs? Do we know them? Are their costs out of line or in check? Are they
working on cost reduction? Can we help them to reduce costs? Companies work
with their suppliers to reduce costs and, like General Motors, regularly renegoti-
ate contracts on the basis of the savings generated. CommonSense Management’s
President and management consultant, Gary T. Snyder, adds that outsourc-
ing “can be an effective way to acquire expertise and economies of scale. . . .
But remember that you can’t just let go of functions that are outsourced:
someone in your business must keep tabs on how the [outside source] is
performing.” 61
Additional Internal and External Influences

on Quality and Productivity
Systems have a number of internal components or subsystems. (Recall Chapter
2’s discussion of the systems school of management thought.) Changes in any
one of these can have an impact on one or more of the others. In like manner,
significant changes that occur outside a system may have an impact on the sys-
tem and its subsystems. Carl Sewell applies the works of Deming and Taguchi to
his auto dealerships. For example, in his book Customers for Life: How to Turn
That One-Time Buyer into a Lifelong Customer, the second commandment on
Sewell’s list is, “Systems, not smiles. Saying please and thank you doesn’t insure
you’ll do the job right the fi rst time, every time. Only systems guarantee you
that.” 62 In addition to the concepts already discussed in this chapter, we must
briefly consider several internal elements and external forces and their possible
impacts on quality and productivity.
Internal Influences
Nonhuman resources and how they are processed are the primary concerns un-
der the heading of internal influences. These essential resources include informa-
tion, facilities, machinery and equipment, materials and supplies, and fi nances.
Each has a direct bearing on profitability, productivity, and the quality of
outputs.
Information about both internal and external events must be continually
gathered, generated, and put to good use by all people of an organization. Know-
ing the state of things through such mechanisms as audits and regular progress
reports keeps people informed and well prepared to plan, organize, staff, lead,
and control quality and productivity improvement efforts.
Facilities and information are united through research and development research and development
(R&D) projects, which uncover information useful to create a variety of new (R&D)
Projects that uncover informa-
materials, processes, and products. They represent a sizable investment of time tion useful to create a variety of
and money that helps to guarantee an organization’s future through a steady new materials, processes, and
stream of customer-pleasing goods and services. Companies can practice R&D products
in research centers like Chrysler’s billion-dollar Technology Center in Michigan
or by the unleashing of the creativity of individuals through empowerment and
open-book management approaches.
3M chooses to make R&D part of every employee’s job. The company en-
courages each person to become a product champion—to spend part of every
working day attempting to create something new and different. The best ideas
(those promising the greatest opportunity for fi nancial returns) are given top
priority and brought to market as quickly and efficiently as possible.
Machinery and equipment are used in R&D and manufacturing operations.
The more efficient the tools and methods, the more quality and productivity will
benefit. World-class manufacturing has the following characteristics:
• Direct links to customers and suppliers
• Flexible production lines capable not only of handling large or small runs of
specialized products, but also, within minutes, of being reconfigured to pro-
duce another product
• Short cycle times
• Horizontal product, project, and process teams

• Just-in-time delivery of vital materials
• Cleanliness
• Empowered teams and individuals performing many varied tasks
• Intense focus on efforts to improve quality and productivity at every level
and throughout every process
In addition, manufacturing facilities are becoming showrooms for outsiders and
laboratories for insiders, as is the case at Springfield ReManufacturing Corpora-
tion discussed earlier.
Materials and supplies represent the inputs needed for any process. The
quality of outputs is directly related to the quality of inputs. Poor-quality mate-
rials and supplies used anywhere in a process can cause defects. These, in turn,
affect productivity. Careful coordination through regular interactions with sup-
pliers is vital to satisfying internal needs and external customers.
Finally, quality and productivity affect the fi nancial health of organizations
and vice versa. Cost-effective quality pleases and attracts customers and gener-
ates income. The more inefficient the producer, the less competitive its products
and services.
External Influences
Constantly changing external influences on quality and productivity include the
economic, legal/political, sociocultural, natural, and technological conditions
existing in an organization’s domestic and foreign markets. The actions of a
business’s competitors and the demands of its owners are additional influences.
The levels of prices in any economy affect businesses’ plans and internal op-
erations. Falling prices for needed raw materials can translate into lower produc-
tion costs and higher profits. The reverse is true as well. Rising interest rates can
cause a company to postpone borrowing and making the improvements those
funds could generate.
Laws can make a company’s products more expensive to produce or more
difficult to sell. Federal antipollution and safety laws are but two examples. Both
have increased production and administrative expenses for many fi rms; the ex-
tra costs are often passed along to the consumers of these products and services
in the form of higher prices.
Sociocultural elements influence product quality because products must con-
tain different features, in line with the requirements of different ethnic groups.
McDonald’s is one of several fast-food chains that adjusts its menu to different
locations and customer preferences. As menu offerings change, so too will some
of a company’s processes and costs.
Natural forces can make things cheaper or more expensive. Locating manu-
facturing and distribution facilities close to inexpensive sources of raw materi-
als can greatly reduce a producer’s costs. Chicago, with its relatively cheap and
plentiful supply of fresh water, is a case in point. And, as many of the residents
and owners of businesses on the island of St. Thomas can attest, hurricanes
can make living in the Virgin Islands and other hurricane-prone areas more
expensive.
Technology affects productivity and quality through its proper application.
For instance, programmable robots can perform many operations more quickly
and efficiently than people can. Fewer defects will usually result. Once the ro-
bots are purchased, they can be reprogrammed to meet the demands of chang-
ing but similar applications.
As a company’s competitors get more efficient, so may the company have to.
Outsourcing and downsizing are generally responses to the need of their prac-
titioners to stay efficient and profitable by passing work to those who are more
efficient at performing it. A company must continually strive to stay ahead of its
competition through innovation and research and development.
Business owners demand a reasonable return on their investments and a
share of their companies’ profits. Money distributed to owners, however, is not
available for other uses, such as improving output quality and productivity or
making the investments in training and equipment that will help to guarantee
the future of their businesses.
How all the above factors influence managers and their organizations in ad-
ditional ways—beyond their influences on quality and productivity—is the con-
cern of Chapter 5.
CHAPTER SUMMARY
Discuss how customers influence the qual- Relate quality, productivity, and profitability to
1 ity of goods and services. Customers evaluate
goods and services by comparing the quality features
3 one another. According to Crosby, Juran, Dem-
ing, and others, quality must promote effi ciency, and
and costs of the goods and services against their require- vice versa. If they do not promote one another, some-
ments. Defects cause customers to reject goods and ser- thing is wrong. If quality improves, costs decrease; as
vices or complain about them. Customer requirements costs decrease, productivity improves; customers are
must be determined and considered in the design phase kept and gained, additional sales take place, company
of product development (QFD). The appropriate fea- profits increase, and more jobs can be provided.
tures and dimensions can then be designed into goods
Determine the commitments required to
and services. Often some tailoring is needed to meet spe-
cific user requirements. Since customer/user needs and
4a improve quality and productivity at the fol-
lowing: The top of organizations. Top management
requirements keep changing, so too must products and
must sense the need for change, create a vision of it, enlist
services. Producers need to stay ahead of customer ex-
support for it, and drive the movement to bring change
pectations if their next generation of products and ser-
about. Top management must articulate the company’s
vices is to succeed in the market. A product may be
core values, determine the approaches—kaizen or reen-
defect free but still lose out to others who offer more
gineering—it wishes to authorize, and commit the entire
or different features that better fit the customers’
organization and all its members to the continual journey
expectations.
toward quality and productivity improvements. To get
Explain why quality must be cost-effective. everyone’s commitment, top management must use the
2 Quality is cost-effective when providers of goods
and services deliver the level of quality that satisfies their
tools of open-book management and empowerment.
The middle of organizations. Mid-level man-
customers at a reasonable price—one that yields prof-
its as well as customer approval. Delivering quality that
4b agers usually have the primary monitoring du-
ties and oversee most of a company’s projects and func-
isn’t desired results in waste and lost revenues. Efforts to
tions. They are responsible for creating teams, training
produce quality should also lead to efficiency improve-
their people to function properly in teams, and provid-
ments. If they do not, too much is being spent to deliver
ing the support both individuals and teams require. They
quality, or the standards being met are too demanding.
are most responsible for implementing and encouraging
If efficiency improvements are met, costs are reduced
open-book management and empowerment initiatives.
and profits increase accordingly.
The bottom of organizations. Without com- productivity. A commitment to partners is of great im-
4c mitted employees at every level, something less
than success will result. People are the key. Their knowl-
portance. True partners have no secrets. They interact
continually and keep working to improve their relation-
edge, experience, skills, ideas, and energy must be given ships. A learning relationship must be developed and
willingly for the best results to occur. When workers are maintained between companies and their suppliers and
truly empowered and can share in the gains they help customers. Gaining feedback from partners and helping
create, they usually have the motivation to give their customers to solve their particular problems is a learning
best. To be effective, all employees and their teams must experience that can lead to both quality and productiv-
have relationships built on mutual respect and trust. ity improvements.
Describe the external commitments required
5 to improve an organization’s quality and
KE Y TERMS
benchmark process improvement team research and development (R&D)
computer literate productivity scoreboarding
core values project improvement team statistical process control (SPC)
empowerment quality audit statistical quality control (SQC)
Internet literacy quality circle total quality management (TQM)
intrapreneurs quality control audit vision
mission quality function deployment (QFD)
open-book management quality improvement team
RE VIE W QUESTIONS
1. What influence over the quality of a product or ser- 5. How do middle managers contribute to their
vice do customers really have? organizations’ efforts to improve both quality and
productivity?
2. How can a company make the quality of its goods
and services cost-effective? 6. In what ways do workers affect productivity and
quality? In what way do they affect the efforts to
3. Why must efforts to improve quality lead to im-
improve both?
provements in both productivity and profits?
7. What external commitments affect quality and pro-
4. What must top management commit to if it wants its
ductivity improvement efforts?
organization to improve its productivity and quality
and, therefore, its profits?

1. In what ways does this chapter’s Management in Ac- be done better, cheaper, and faster by an outsider.
tion case illustrate how companies can exceed cus- What changes does this practice create for the out-
tomers’ needs and expectations? What advantages sourcer and those receiving the work?
does Toyota give customers that other car makers
4. What does this sentence mean to you? “The effort
do not?
to improve quality is a continual journey.” Can the
2. How can a company’s suppliers affect its quality and same be said for improving productivity? Why or
productivity? Its profits? why not?
3. A common reengineering approach within many
companies today is to outsource any activity that can
Links are provided for all Internet exercises at http:// 3. Unfortunately, there are many more examples of re-
plunkett.swlearning.com. engineering failures than successes. The Software
Engineering Institute (SEI), a federally funded re-
1. The quality requirement is a determining factor of
search and development center sponsored by the
competitiveness, and the standard is a unanimously
U.S. Department of Defense and operated by Car-
recognized quality reference. World Standards Ser-
negie Mellon University, was founded in 1984, at
vices Network (WSSN) is a network of publicly ac-
least in part to investigate why so many software-
cessible World Wide Web servers of standards or-
intensive systems development efforts failed to meet
ganizations around the world. One of these is ISO
their stated requirements, were late, and went over
9000 Standards, created to promote consistent qual-
their budgets. Read the SEI’s report, “Why Reengi-
ity practices across international borders and to fa-
neering Projects Fail.” What are some of the most
cilitate the international exchange of goods and ser-
common reasons for reengineering failures? How
vices. What is ISO? Is ISO an acronym? What are
can managers avoid the failures represented in this
standards? Why is international standardization
report?
needed? For which technologies is international stan-
dardization well established? 4. Some people believe that we should “forget about
quality, it’s an old-fashioned idea; concentrate in-
2. What is the “Baldrige Index Stock Study”? How
stead on innovation.” What is your viewpoint? Is
does the Baldrige Index prove the link between cus-
quality now a commodity?
tomer satisfaction and fi nancial returns?

The Business and Company Resource Center (BCRC) TOYOTA AT A GLANCE
to it through this textbook. Check with your instruc- Number of Manufacturing Plants:
respected.
about Toyota. Add any other interesting information
that you fi nd.
APPLICATION CASE
Russian Consumers Prefer Quality Automobiles are similar in price to new cars manufactured by Rus-
Both Americans and Russians appreciate the quality of sian car makers. Russians import the used cars directly
Japanese cars. The United States imports the most new from Japan, even though the steering is on the opposite
Japanese automobiles, while the Russians import the side. Russians even drive Japanese vehicles advertising
most used Japanese automobiles. In the past, Russian- Japanese companies, such as coffee companies, univer-
made cars, known for their poor quality and clunky de- sities, and tour companies. A Toyota dealer in Vladivos-
sign, sold because they were cheap. Japanese used cars tok once repaired a car that was painted with the slogan
in Japanese: “Return the Northern Territories!” The slo- a Kremlin drive to revive Russia’s ailing auto industry,
gan referred to four disputed islands, claimed by Japan, which is rapidly losing market share to Western imports
but occupied by Russia as the southern Kurile and locally assembled foreign models, through direct
Islands since the end of World War II (Brooke). state intervention” (Chazan).
Russia is one of the fastest growing auto markets in
the world. Today, new and used foreign cars are selling Questions
better than Russian cars. “Consumer interest is grow- 1. What problems face Russian automotive manufac-
ing in more expensive and higher-quality cars, with im- turers?
ported brands the primary beneficiaries. This reflects the 2. How is each problem you identified in Question 1
growth in disposable incomes, the aggressive sales strat- related to the quality of Russian-made autos?
egies of international brands, the increasing prices of 3. How can Russian automobile manufacturers be-
Russian vehicles and the gradual development of credit come customer driven?
for the purchase of cars,” Stanley Root, partner at Price-
Sources: Guy Chazan, “GM Venture in Russia Stops Production
waterhouseCoopers, said in an automotive industry re-
After Plant Seizure,” The Wall Street Journal, February 17, 2006,
port released in 2005 (Dranitsyna). http://online.wsj.com/article/SB114019360508877069.html;
In February 2006, Russia’s largest carmaker, OAO Yekaterina Dranitsyna, “Ford Sales Reflect Richer Taste,” The
AvtoVAZ, suspended production of the Chevy Niva St. Petersburg Times, January 17, 2006, http://www.sptimes.ru/
sport utility vehicle. Two months earlier in De cember index.php?action_id2&story_id16567; James Brooke, “Japan’s
Used Cars Find New Lives on Russian Roads,” The New York Times,
2005, the Russian government seized control of the February 12, 2003; PRAVDA.Ru, “Russian car-makers in despair over
plant, a joint venture between AvtoVAZ and General Russians’ fondness for foreign-made cars,” Oc tober 15, 2005, http://
Motors (GM). “The takeover appeared to be the start of english.pravda.ru/main/18/89/357/16308_cars.html.

Peapod Delivers Convenience and Quality perature to maintain their freshness and avoid mold.
From the company’s beginning, Peapod cofounder Peapod’s executives ordered the pepper room.
Thomas Parkinson insisted that his fi rm’s Web site be Peapod’s two freestanding, 75,000-square-foot
inviting—packed with images of bright carrots, fresh- warehouses located in Illinois and Maryland now con-
baked bread, deep red tomatoes, fl avorful beef. But none tain five separate refrigerated areas designated exclu-
of these images would have credibility if the food deliv- sively for produce. Bananas and bread share their own
ered to customers who shopped online at Peapod didn’t room—and it’s not because they both begin with the
live up to expectations. All it would take to turn a cus- letter b. It’s because they both require the exact same
tomer away from placing a second order would be one conditions. Strawberries, grapes, and melons are stored
overripe banana, one slightly gray piece of meat, or a in another area. Tomatoes and other vegetables that do
carton of ice cream with freezer burn. So Peapod has to best at warmer temperatures are in still another room.
get it right the fi rst time and every time. Each room is set to a specific temperature and humid-
Peapod decided to start from the ground up, de- ity level, so produce items ripen more slowly and there-
signing and building a state-of-the art warehouse for its fore stay fresh longer. Produce sold in traditional gro-
fresh-foods inventory. The company hired Tony Stallone, cery stores is usually kept at room temperature so that
Vice President of Fresh Markets, to handle the process. consumers can examine each item. But that is not opti-
Stallone has worked with produce for 40 years, and his mal for the fruits and vegetables, and much of this pro-
family has been in the produce business for a century. duce will ripen and go bad quickly. Stallone notes that
This history made him a good choice for Peapod. Stal- Peapod’s new customers are surprised at how long their
lone also happens to be a stickler for perfection. When produce lasts—usually a week after delivery. Once they
the warehouse design plans were nearly finalized and the experience this kind of value, they come back for more.
fi nancing secured, he stopped everything. He informed Being able to serve customers well—offering greater con-
Peapod’s executives that the warehouse needed a “pep- venience and more superior products than the conven-
per room” because peppers, cucumbers, and other veg- tional supermarket—is a great source of pride for Stal-
etables need to be kept in a consistent 45-degree tem- lone and Peapod’s managers.
Produce isn’t the only product that gets special that customers get the same quality and value they
treatment from Peapod. Frozen foods such as ice cream, receive when orders are fi lled from the giant Peapod
frozen yogurt, popsicles, and frozen juices all get their warehouses.
own freezer area to ensure that nothing melts or softens. Peapod’s operations—from pepper room to ware-
The company has a separate section for frozen dinners, room—are tied closely to customer service. When shop-
pizza, vegetables, and the like. “Our warehouses and pers click onto Peapod’s Web site, they can be assured
warerooms maintain different climate zones for each that they will receive the best bananas, broccoli, and
food category,” explains Peapod CEO Marc van Gelder. bread available today.
“It is quality assurance that frozen items like ice cream
will arrive rock hard but that delicate perishables like Questions
produce won’t.” 1. How does Peapod combine characteristics of manu-
Part of managing operations successfully is keep - facturing and service organizations?
ing costs down. In the produce business, waste is typi- 2. At which stage would you place Peapod in the evo-
cally a significant contributor to costs. But at Peapod, lution of operations strategy? Why?
Stallone and his staff keep waste to a minimum by se- 3. Peapod has two freestanding warehouses and eight
lecting the very best produce and storing it in optimal warerooms located in the Midwest, Mid-Atlantic,
conditions. Achieving this high quality also requires de- and southern New England states. What factors
veloping good relationships with distributors who cull might the fi rm’s managers consider in selecting a
the best products from those available on the market. In site for a new warehouse or wareroom in
addition, Peapod partners with two major supermarket California?
chains, Giant Food and Stop & Shop, to fulfi ll orders
quickly and efficiently. Peapod and its supermarket part- Sources: Company Web site, http://www.peapod.com, accessed Janu-
ners operate special warerooms—smaller than ware- ary 19, 2007; “Peapod Grocery Delivery Service Coming to Baltimore,”
Baltimore Business Journal, August 11, 2004.
houses—adjacent to the supermarkets themselves so
BIZ FLIX VIDEO CASE

Apollo 13 move into the LEM (Lunar Exploration Module), which
This fi lm re-creates the heroic efforts of astronaut Jim becomes their lifeboat for return to earth.
Lovell (Tom Hanks), his crew, NASA, and Mission Con-
trol to return the damaged Apollo spacecraft to earth. What to Watch for and Ask Yourself
Examples of both problem solving and decision making 1. What triggers the confl ict in this scene?
occur in almost every scene. 2. Is this intergroup confl ict or intragroup confl ict?
This scene takes place during day five of the mis- What effects can such confl ict have on the group
sion about two-thirds of the way through the fi lm. dynamics on board Apollo 13?
Early in Apollo 13’s mission Jack Swigert (Kevin Bacon) 3. Does mission commander Jim Lovell successfully
stirred the oxygen tanks at the request of Mission Con- manage the group dynamics to return the group to a
trol. After this procedure, an explosion occurred, caus- normal state?
ing unknown damage to the command module. Before
the scene takes place, the damage has forced the crew to
2 CHAPTER 5
PLANNING AND The Manager’s Environment
DECISION MAKING
CHAPTER 6
Planning and Strategy
CHAPTER 7
Making Decisions
Getty Images
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LEARNING OBJECTIVES
THE MANAGER’S After studying this chapter, you should be able to:
ENVIRONMENT 1 Discuss why organizations are open systems
Identify the elements in an organization’s internal environment

2
Describe the directly interactive forces in an organization’s
3 external environment
Determine the indirectly interactive forces in an organization’s

4 external environment
Discuss the means available to managers for boundary

5 spanning
Explain how managers can influence their external

6 environments
Describe the obligations that organizations have to their

7 stakeholders
Getty Images
❈
Wal-Mart: Response to the Environment

Wal-Mart became the world’s largest retailer by
selling products people want to buy at the lowest H. Lee Scott
possible prices. Sam Walton, founder of Wal-Mart, Born: 1949, Joplin, Missouri
changed retailing with his empowering management Current Position: Chief Executive Officer,
techniques, pioneering retailing concepts, and use of Wal-Mart
information technology. “A variety of Wal-Mart inno- Career Highlights:
vations, both large and small, are now industry stan- 1972 Dispatcher, Yellow Freight System
dards. Wal-Mart created the large-scale, or ’big-box,’
1979 Assistant Transportation Director, Wal-Mart
format; ’everyday low prices’; electronic data inter-
change (EDI) with suppliers; and the strategy of 1993 Executive Vice President, Wal-Mart logistics
expanding around central distribution centers” (John- 1995 Executive Vice President, Wal-Mart
son). Mr. Walton believed that the customer was num- merchandising
ber one and his stores should deliver “high value, low 1998 Executive Vice President, Wal-Mart stores
prices, and a warm welcome” (The Wal-Mart Story). division
The first Wal-Mart opened in 1962 in Rogers, Ar- 1999 Vice Chairman and Chief Operating Officer
kansas. “That same year, S.S. Kresge launched Kmart, 2000 Chief Executive Officer
F.W. Woolworth started Woolco, and Dayton Hudson Education: Pittsburg State University, Kansas,
began its Target chain” (Huey). In 1966, Walton real- BA, 1971
ized that to grow, he would have to add computerized
Personal: Wife, Linda, and son
merchandise controls. “Wal-Mart went on to become
the icon of just-in-time inventory control and sophisti- Source: Ann Zimmerman, “Wal-Mart Boss’s Unlikely Role:
Corporate Defender-in-Chief,” The Wall Street Journal,
cated logistics—the ultimate user of information as a July 26, 2005, http://online.wsj.com/article/
competitive advantage. Today Wal-Mart’s computer 0,SB112233130519995432,00.html.
database is second only to the Pentagon’s in capac-
ity, and though he is rarely remembered that way,
Walton may have been the first true information-age pare prices online. Organizational adaptability is a
CEO” (Huey). By 1991, Wal-Mart surpassed Sears to function of the ability to learn and to perform accord-
become the biggest retailer in the U.S. In April 2002, ing to changes in the environment. Wal-Mart is able
Wal-Mart became the largest retailer in the world. to adapt and respond to change better than
CEO H. Lee Scott, the top manager at Wal-Mart,
rices
understands the business environment. Wal-Mart’s ttom p
li a b ly rock-bo y a p plica -
re vv
success is due to its ability to adapt and respond to
il e y fa ce and W a lt on’s sa e his
d
change. However, its size and success has led to hing sm hoppers. Sam nguish
’s p ri ce -slas a in s c o n tr ol disti in dustr y
art rg ventory d established
attacks by its critics. Controversies about Wal- M e a c o n s to ba a n d in sp on -
Wal-Mart include wages and benefits for iliar b logistic
s ers an cy of re
are fam n o logy to ta il in g pione M a rt ’s lega n ta l and
c h t re a l- e
employees and wasting of natural resources. tion of
te iscoun nu e s W nvironm s
om o th e r d
tt c o n ti
addres
s in g e e er ha
ll
Mr. Scott is devoting an increasing amount of chain fr H . L ee S c o c ti v e ly a s e d supers e r’s
rds. CE
O by proa is A rka
nsas -b
is the c
o nsum
his time convincing outsiders that Wal-Mart standa ptation cism, th er, and
e s s a nd ad a e c ri ti rp o w
is doing the right thing. “For instance, he re- siven s. Des
p it il sup e
oncern ide reta
cently called on Congress to increase the fed- labor c in to a worldw e v e ry where.
med markets
eral minimum wage, and he offered Wal-Mart blosso ti ti v e
compe
employees, called associates, a lower-cost pick in
health-care program” (The Wall Street Journal).
In order to conserve natural resources, Wal-Mart
has opened several experimental stores that
© Jae C. Hong/Associated Press
save energy, conserve natural resources, and re-

duce pollution. “Mr. Scott has said Wal-Mart’s
goal is to eliminate 30% of the energy used in its
existing stores and eventually to rely 100% on re-
newable energy and to create no solid waste” (The
Wall Street Journal).
Another criticism of Wal-Mart is that it causes
small business failures in local communities. Yet,
no one is forced to shop at Wal-Mart. Consumers
have an abundance of product choices and can com-
130 Part 2 Planning and Decision Making
most retailers. Many consumers choose to shop at Wal-Mart and buy the products on its
shelves. Most of the time, consumers choose Wal-Mart over the smaller, hometown retail-
ers, which have not adapted as well.
Sources: John Huey, “Discounting Dynamo Sam Walton,” TIME, December 7, 1998, http://www.time.com/
time/time100/builder/profile/walton.html; The Wall Street Journal, “Gauging the Wal-Mart Effect,” December 3,
2005, http://online.wsj.com/article/SB113357107143413041.html; Bradford C. Johnson, “Retail: The Wal-Mart
Effect,” McKinsey Quarterly, Number 1, 2002, http://www.mckinseyquarterly.com/article_abstract_visitor
.aspx?ar1152; Wal-Mart, http://www.walmart.com.
Introduction
Chapter 4 listed the major internal and external influences on customer satis-
faction and the efficiency of organizational activities. In this chapter we expand
our examination of these major influences and answer two questions: (1) How
do both internal and external influences affect organizational activities (other
than those affecting quality and productivity)? (2) What can managers do to
sense and cope with them?
The Organization as a System
1
Discuss why organizations
are open systems
Chapter 2 introduced the systems school of management thinking. A systems
perspective of organizations provides a useful framework for examining the re-
lationship between an organization and its environment. It is the element that
integrates the other disciplines together in the learning organization.1 Manag-
ers, like those at Wal-Mart in this chapter’s Management In Action case, think
of their organization as systems: interrelated subsystems that process various in-
puts to generate various outputs, pleasing users and customers as they do so.
Systems consist of sets of subsystems (interrelated parts) that act as a whole
to generate outputs and function according to a plan or design. Any change in a
subsystem can mean change to other subsystems and to the system as a whole.
In this context, all of an organization’s units and personnel affect and are af-
fected by all others to some extent.
An organization must be concerned not only with what happens within and
among its subsystems and people, but also with what happens outside of itself.
No organization exists or operates in a vacuum. Management decisions must
fit within the surrounding environment, which is divided into two components:
internal and external. These forces influence conditions of every organization;
however, the most influential force in one organization may have little impact
on other organizations. Managers must continually scan and monitor the envi-
ronment. Scanning is the process by which the organization acquires informa-
tion for decision making. The modes (surveillance and search) of scanning are
primarily determined by the external environmental stimuli and by the magni-
tude and the direction of the discrepancy between the goal and its realization. 2
Although surveillance is useful for the information-gathering process, search is
oriented toward finding a satisfactory solution to a specific problem.
environmental scanning Environmental scanning is the process of collecting information about the
The process of collecting infor- external environment to identify and analyze trends. This allows managers to de-
mation about the external envi-
ronment to identify and analyze termine their organization’s best response to an environmental change. Organi-
trends zational adaptability is a function of the ability to learn and to perform according
to changes in the environment. Scanning identifies signals of change and moni-
toring follows these signals. For example, “the onset of lawsuits and legislation
Chapter 5 The Manager’s Environment 131
surrounding repetitive stress injuries was signaled loud and clear by more than
1,200 newspaper and magazine articles on the topic in 1993. Some organizations
paid attention and prepared, and others ended up in the courtroom.” 3
L. von Bertalanffy was the fi rst to call systems, which interact with their
environments, open systems.4 These systems take in inputs from their environ-
ments, process them, and return outputs back into the environment. Open sys-
tems depend on their environments to survive. Even modest environmental shifts
can alter the results of management decisions. Figure 5.1 depicts an organization
Figure 5.1 The organization as an open system
External Environment
Indirectly Interactive Forces
Economic Legal/Political Sociocultural
Technological Natural
Directly Interactive Forces
Owners Suppliers/Partners Competitors
Customers Labor Force
Inputs Processing Outputs
People Products
Information Transformation
Services
through
Facilities applications of
Profits or Losses
Equipment workforce
expertise and
Machinery Customer
technology
Satisfaction
Materials
Ethical Behavior
Supplies
Finances Social
Responsible
Infrastructure Behavior
Feedback
Internal Environment
open system as an open system—one that regularly affects and is affected by various and
A system that regularly affects
and is affected by various and
constantly changing forces (elements and components) outside itself. Open sys-
constantly changing forces (el- tems remain efficient and effective by adapting to shifts in their environments.
ements and components) out- At the center of Figure 5.1 is an organization consisting of an internal
side itself
environment shown as the basic inputs–processing–outputs model introduced
internal environment in Chapter 2. Every organization’s internal environment is composed of elements
Composed of elements within within its borders that managers create, acquire, and utilize. These elements in-
an organization’s borders that
managers create, acquire, and
clude the organization’s mission, vision, core values, core competencies, leader-
utilize, including the organiza- ship, culture, climate, structure, and available resources.
tion’s mission, vision, core val- Notice the two colored bands surrounding the organization. Together these
ues, core competencies, leader-
ship, culture, climate, structure,
represent any organization’s external environment and include all the forces out-
and available resources side its borders that interact directly or indirectly with it. Originally, W. Church-
man defi ned external environment as those factors that not only are outside the
external environment
Includes all the forces outside
system’s control but that determine in part how the system performs. 5 In any or-
an organization’s borders that ganization external forces may have a significant impact on the organization but
interact directly or indirectly are outside the control of the manager. The boundary that separates the organi-
with it
zation from its external environment is not always clear and precise. The two-
headed arrows, connecting the external environment to the organization’s inter-
nal one, represent the influences that an organization exerts on outside forces
and the influences they exert on the organization. After an examination of the
elements within an organization’s internal environment, this chapter explores
the forces in any organization’s external environment.
2
Identify the elements in
an organization’s internal
environment
An organization’s internal environment contains elements it acquires and absorbs
from outside and elements created by its people. Once inside, these elements are,
for the most part, under management’s control. An organization’s internal envi-
ronment makes it unique and is revealed by several tangible as well as intangible
expressions. We examine this next.
Mission, Vision, and Core Values

The concepts of mission, vision, and core values were defi ned in Chapter 4. But
clearly they are important for many additional reasons, as they affect how every
person and process will operate. A company’s mission is its primary reason for
existence.
The mission statement is the touchstone by which all offerings are judged. In
addition to the organization’s purpose, other key elements of the mission state-
ment should include whom it serves, how, and why. The most effective mission
statements are easily recalled and provide direction and motivation for the or-
ganization. Since an organization exists to accomplish something in the larger
environment, its specific mission or purpose provides employees with a shared
sense of opportunity, direction, significance, and achievement. An explicit mis-
sion guides employees to work independently and yet collectively toward the re-
alization of the organization’s potential. Thus, a good mission statement gets the
emotional bonding and commitment needed. It allows the individual employee
to say, “I know how I should do my job differently.”
For example, many people might think that The Walt Disney Company’s
mission is to run theme parks. But Disney’s mission is always moving toward an
expanded view. Disney provides entertainment. “Since its founding in 1923, The
Walt Disney Company has remained faithful in its commitment to producing

unparalleled entertainment experiences based on its rich legacy of quality cre-
ative content and exceptional storytelling.” 6 Also, many people might think that
Revlon’s mission is to make cosmetics. Yet, Revlon provides glamour, excite-
ment, and innovation. Charles Revson, Revlon’s founder, understood the impor-
tance of mission. He is rumored to have said “In the factory, we make cosmetics;
in the store, we sell hope.”
A company’s vision states what it wants to evolve into over time or in the
future. Visionary companies that set a purpose beyond making money were
found to have outperformed other companies in the stock market from 1926 to
1990 by more than six to one.7 Managers require more vision than ever because
change is coming faster than ever. Leaders have the ability to make their vision
real by engaging the minds, as well as the hearts, of others.
A company’s core values are the fundamental principles it will not com-
promise. Values serve as a baseline for actions and decision making and guide
employees in the organization’s intentions and interests. The values driving be-
havior defi ne the organizational culture. A strong value system or clearly de-
fi ned culture turns beliefs into standards such as best quality, best performance,
most reliable, most durable, safest, fastest, best value for the money, least ex-
pensive, most prestigious, best designed or styled, and easiest to use. If asked,
“What do we believe in?” or “List our organization’s values,” all employees in
the organization should write down the same values. For example, McDonald’s
values are captured in its motto of “QSC,” which stands for quality, service, and
cleanliness.
Core Competencies
The most significant cause for an organization’s success is a continuing focus on
what it knows and does best—its core competencies. Core competencies are a core competencies
company’s expertise, and they evolve over time. Wal-Mart knows what it does What an organization knows
and does best
best. The selection at each Wal-Mart store is tailored to the interests of the lo-
cal community it serves. Each Wal-Mart store also focuses on local, children,
and community efforts. Conversely, a major cause for company failure is senior
management’s failure “to ask central questions, such as what precisely is their
company’s core expertise, what are reasonable long-term and short-term goals,
what are the key drivers of profitability in their competitive situation?” 8 Every
day senior managers must ask themselves, “What is our business?” and “What
should it be?” They must continually assess where they have been, where they
are now, and where they wish to go in line with where their expertise lies.
As Wal-Mart watched upscale customers go to its competitor, Target, its se-
nior management eventually realized that the company had to refocus. Now Wal-
Mart is fighting back. Its heritage of “always low prices” has evolved to a value
proposition, where it offers better quality products at cheaper prices than its com-
petitors. Wal-Mart has added more fashionable apparel, shoes, and jewelry. In-
stead of individual products, Wal-Mart is emphasizing customer solutions, such
as selling housewares in a kitchen setting and selling furniture in a living-room
setting.
An organization’s core competencies, along with other intangibles, make up
its intellectual capital—its collective experiences, wisdom, knowledge, and ex- intellectual capital
pertise. Intellectual capital is “embedded in the personal skills, brain power, and An organization’s collective ex-
periences, wisdom, knowledge,
experience of a company’s employees. It’s in a company’s libraries, its fi ling cabi- and expertise
nets, electronic data bases and patents, copyrights, trademarks, [and] skills.” 9
Along with its tangible assets, intellectual capital constitutes the current worth
of a company and its future prospects. All organizational members must effec-
tively utilize the intellectual capital if it is to yield the greatest benefits and advan-
tages. One method of capturing intellectual capital is knowledge management
(KM), as depicted in Managing Technology. This system allows individuals and
groups across an organization to leverage their information resources into orga-
nization value.
organizational culture
Dynamic system of shared val- Organizational Culture
ues, beliefs, philosophies, expe- All organizations are dynamic systems of shared values, beliefs, philosophies,
riences, customs, and norms of
behavior that give an organiza- experiences, customs, and norms of behavior. The combination of these elements
tion its distinctive character gives an organization a distinctive character called organizational culture. Top
management provides a primary framework for an organization’s culture. Man-

agement establishes and articulates the company’s values and norms of behav-
ior. Especially in large companies, top management may invest substantially to
familiarize employees with these values. McDonald’s Hamburger University is
an example of such an investment, as are the ritual celebrations for top sellers
sponsored by Mary Kay Cosmetics and Avon Corporation.
A fi rm’s culture is also shaped by employees. They shape the culture by
bringing their own values and norms to the organization and by the extent to
which they accept the management-defi ned culture. Delta Air Lines’ culture
thrives on the many and often-told stories about coworkers who go to extraordi-
nary lengths to care for customers. Newsletters, in-flight magazines, and world-
wide advertising emphasize the airline’s people, and all these communications
reinforce the attitude that management and employees prize.
Moreover, within a company’s formal and social subsystems, distinctive
minicultures usually flourish. Such subcultures develop spontaneously, and man-
agement encourages some. The marketing department may have a unique culture
(formed in part by past successes as well as failures), separate from and parallel
to the organization’s culture. Such a subculture influences the corporate culture.
Members of ethnic groups bring their cultures with them and often create,
within the workplace, subcultures based on their languages, customs, traditions,
values, and beliefs. These subcultures contribute to the corporate culture. Some-
times they blend, sometimes they remain distinct. If management values diver-
sity, it will do more than respect such subcultures; management will seek to de-
rive from them benefits for the entire organization.
Organizational Climate
An outgrowth of a corporation’s culture is its organizational climate—how em- organizational climate
ployees feel about working there. Successful organizations often have climates An outgrowth of a corporation’s
culture showing how employees
that feel open—they foster the individual’s creative energies and take advantage feel about working there
of employees’ eagerness to participate. Employees are empowered through the
practice of open-book management and other means and have the freedom to
fail. For example, at 3M everyone “is encouraged to call up any other employee
and tap into that person’s expertise . . . on the phone, by e-mail, in person, or any
other way. . . . The company fosters an environment where happy accidents can
happen.” 10 The company stages many celebrations where “peers cheer peers.”
The 55,000-plus diverse 3M products came from the equally diverse minds of its
people whom 3M encourages and rewards for taking risks.
Leadership
Defi ned in Chapter 1, leadership means influencing others to set and achieve
goals. Every leader should encourage and enable followers to give their best.
The exercise of leadership, however, is influenced by elements both inside and
outside an individual. Each person has a set of beliefs, attitudes, and values—
acquired through experience—that composes his or her personality, conscience,
and philosophy. An organization’s mission, vision, core values, culture, and cli-
mate also influence those in leadership positions within that organization. Lead-
ership involves setting an example through both words and deeds.
Leaders must “walk like they talk.” Nothing can derail efforts for change
and improvements more effectively than a leader’s hypocrisy, according to Peter
Scott-Morgan, a business consultant with Arthur D. Little. “They preach the im-
portance of teamwork—then reward individuals who work at standing out from
the crowd. They encourage risk taking—then punish good-faith failures.” 11 It

takes leadership, not necessarily the traditional type, to cultivate learning. Lead-
ership will create a generative shared vision and will provide the catalyst for per-
petual learning.12 Chapter 13 examines leadership in more detail.
Organizational Structure
The formal structure of a company, a component of the company’s internal en-
vironment, determines how its activities are conducted. Within each of the three
management tiers—top, middle, and first-line—teams may be created to execute
such basic tasks as design, production, marketing, fi nance, and human resource
management. The formal structure also determines how authority and commu-
nications flow from management to employees. Variations in structure are de-
termined by the tasks a company performs, how management wishes to perform
them, and external factors. External determinants include customer demands,
competitors’ strategies, and government regulations.
The trend today is toward less-pyramidal structures, staffed with empowered
individuals, empowered teams, and autonomous business units. Such structures
facilitate more flexibility and a quicker response to customers. Some companies
have gone so far as to depend on loose, temporary collections of freelance experts
and consultants to create a specific project; the freelancers and consultants then
move on to other jobs once they complete their task. The movie industry creates
many of its films by using this model. Others, like Bechtel, a worldwide construc-
tion company, function with teams of in-house experts brought together to man-
age projects. Once each project is completed, team members are reassigned to
new project teams. Thus, its organizational structure is continually changing.
boundaryless organizations Boundaryless organizations are not defi ned or limited by horizontal, verti-
Organizations not defined or cal, or external boundaries imposed by a predetermined structure. They share
limited by horizontal, vertical, or
external boundaries imposed by many of the characteristics of flat organizations, with a strong emphasis on
a predetermined structure teams. Cross-functional teams dissolve horizontal barriers and enable the orga-
nization to respond quickly to environmental changes and to spearhead innova-
tion. Boundaryless organizations can form relationships (joint ventures, intel-
lectual property, distribution channels, or fi nancial resources) with customers,
suppliers, and/or competitors. Teleworking, strategic alliances, and customer-
organization linkages break down external barriers, streamlining work activi-
ties. In order to facilitate interactions with customers and suppliers, Jack Welch,
former CEO of General Electric, fi rst used this un-structure.
A boundaryless environment is required by learning organizations to facili-
tate team collaboration and the sharing of information. When an organization
develops the capacity to adapt and survive in an increasingly competitive envi-
ronment because all members take an active role in identifying and resolving
work-related issues, it has developed a learning culture. This design empowers
employees because they acquire and share knowledge and apply this learning to
decision making. They are pooling collective intelligence and stimulating cre-
ative thought to improve performance. Managers facilitate learning by sharing
and aligning the organization’s vision for the future and sustaining a sense of
community and strong culture. Organizational structure is continually chang-
ing. Chapters 8 and 9 explore organizational issues.
Resources
The primary resource of any organization is its people. Chapter 10 focuses on the
management of human resources. An organization needs resources in addition to
people to continue its mission and reach specific objectives, however. These re-
sources are the inputs to the system—the elements processed, transformed, or
used—and they influence the internal environment. Such resources include in-
formation, facilities and infrastructure, machinery and equipment, materials and
supplies, and fi nances.
Information The word information refers to the facts and knowledge that pro-
vide vital nourishment for all the operations of an organization. Without accu-
rate, timely, up-to-date information, neither employees nor managers can make
daily decisions effectively and efficiently, nor can they plan ahead. Information
from insiders and outsiders is needed to coordinate and execute tasks at every
level. Keeping others informed of problems and progress is every employee’s
duty. Chapter 15 will deal with information management in depth.
Facilities and Infrastructure Facilities consist of the physical structures—the

work and office spaces and their layouts—required to accomplish the fi rm’s mis-
sion and goals. The location, appearance, and condition of an organization’s fa-
cilities can significantly influence how employees view their company. The term
infrastructure refers to the surrounding region or community’s permanent frame-
work. The framework might include dams, power stations, roads, railways, har-
bors, and airports.
General Motors’ Lansing Grand River manufacturing complex in Detroit,
Michigan, is an example of the latest in lean and flexible manufacturing facili-
ties. The factory can be used to build cars and trucks simultaneously. Bob An-
derson, Plant Manager, said, “Lansing Grand River’s commitment to support
its people is reflected in the plant layout, which focuses on people needs, such as
well-lit workstations and climate-controlled buildings.” 13
Infrastructure resources support not only individual companies but the com-
munity at large. Such resources are generally built at public expense or with gov-
ernment support of one kind or another. Their extent and quality are basic to
most businesses, especially manufacturing. From freeways and airports to sew-
age systems and power grids, the operation of modern factories depends on all
these and more. Although it is based in Japan, Toyota chose to build its truck-
manufacturing plant in San Antonio, Texas. Beginning in 2006, Toyota will build
150,000 Tundras (full-size pickup trucks). According to reporter Terry Box, the
location was selected due to Texas being the largest market for pickups, having a
qualified workforce, a favorable tax code, and a local willingness to provide sig-
nificant support for the company’s hiring and training efforts.14 Texas authorities
agreed to provide $133 million in incentives.
KPMG, an international accounting fi rm, surveyed 617 foreign companies
with headquarters in Illinois to determine how they decided on a location for
their U.S. facilities.15 Most of the fi rms—which together offered 41,439 jobs—
chose to locate in the suburbs of Chicago because of “proximity to key industries
and markets; [proximity] to air transportation; distribution advantages; living
conditions and environment; and quality and cost of [the] work force.”
Machinery and Equipment General Motors’ computer-directed dollies and

all other hardware used to process inputs are part of an organization’s machin-
ery and equipment, the tools used in offices, factories, and other workplaces.
Furniture, fi xtures, telephones, copiers, fax machines, computers, and robots are
but a few examples. The quality of machinery and equipment is a function of its
maintainability, efficiency, dependability, and speed of operation. Its compatibil-

ity with other equipment influences how effectively and efficiently people work
together. Current, reliable, and easy-to-use equipment helps to prevent stress to
workers. In addition, high-quality equipment encourages people to do their best,
freed from interruptions caused by mechanical breakdowns.
Materials and Supplies Taken together, the services, raw materials, and parts
(components and subassemblies) needed to produce goods or services make up
an organization’s materials and supplies. The division of General Electric that
produces home appliances consumes an astounding amount of goods in this cat-
egory: miles of wiring; tons of sheet metal, nuts, and bolts; motors; coolants and
solvents; plastic; and glass. The division needs all of these items to keep produc-
tion machinery clean and running. At the facility of a service industry—the home
office of Aetna Insurance, for example—the materials and supplies list calls for
reams of letterhead and multipart forms, printer ribbon cartridges, staples, paper
clips, file folders, and cleaning supplies.
Materials and supplies may be acquired outside the company or within. Gen-
eral Motors buys windshields and windows from Pittsburgh Plate Glass and tires
from Goodyear. But GM’s Chevrolet, Buick, Cadillac, and Pontiac divisions
build most of their engines and transmissions in their own facilities. GM assem-
bly plants are the customers for GM engine and transmission factories. The qual-
ity of materials and supplies greatly affects the quality of the goods and services
a company can produce. The same can be said for the other resources discussed
so far.
Finances The term finances means the money available. Finances, which can
be generated directly from the sale of the organization’s goods and services, can
be in the form of cash in bank accounts or a line of credit negotiated with a fi-
nancial institution (usually a commercial bank). Trade credit is the most signifi-
cant source of short-term fi nances. Suppliers grant trade credit whenever they
agree to provide materials and supplies in exchange for an organization’s prom-
ise to pay the invoice, plus interest, within a specified number of weeks.
An important fi nancial resource for U.S. corporations is the sale of stocks
and bonds on the open market. Investment brokers and public stock exchanges
facilitate such sales. Another source of cash may be the sale of assets. During the
last years of Pan Am, the airline was hard pressed to repay massive bank loans.
Pan Am managers repeatedly raised needed cash by selling off valuable assets,
including its corporate headquarters building in New York and the worldwide
routes it had pioneered during better days.
Money is the basis for all of an organization’s operations, from acquiring re-
sources to honoring employee paychecks to compensating investors. Money is the
lifeblood of an organization. It flows to all operatives and, in turn, allows work
to flow. A company’s fi nancial health affects its ability to function at every level.
External forces exert influences on and are influenced by organizations and their
subsystems and present both challenges and opportunities to them. The effects of
these influences vary from immediate, constant, and of daily concern, to infre-
quent, modest, and of more long-range concern.
As changes occur in both their internal and external environments, organi-

zations adapt and evolve. In this chapter’s Management in Action feature, Wal-
Mart started the every day low price concept because that market was moving
toward its focus—expanding the Wal-Mart brand. Its entry to the Internet was
a response to changing external economic and market conditions, as was trans-
forming its Web site to make purchasing products easier for its customers.
Directly Interactive Forces

Of most immediate concern to managers are the directly interactive forces shown
as the closest colored band surrounding the organization in Figure 5.1. Members
of these groups regularly make contact with organization members and subsys-
tems, usually on a daily basis. The major directly interactive forces are an orga-
nization’s owners, customers, suppliers and partners, competitors, and external
3
Describe the directly
interactive forces in an
organization’s external
environment
labor pool.
directly interactive forces
Owners Owners may actively participate in managing (as they normally do in An organization’s owners, cus-
tomers, suppliers and partners,
sole proprietorships and some kinds of partnerships). In other cases they may competitors, and external la-
play no active role at all. This is the case with stockholders who do not work for bor pool
the corporations in which they own stock. Both kinds of owners, however, ex-
pect a return on their investments and look to all the employees to preserve and
advance their interests. From the owners comes the formal authority needed to
run the business. In corporations, the board of directors is responsible for pro-
tecting the owners’ investments and ensuring that management earns an ade-
quate return on them.
Customers The individuals and groups that use or purchase the outputs of an
organization are customers. Customers can be either internal or external. Inter-
nal customers are employees or work units that receive the work of other employ-
ees or units. Internal customers process the work further, use it within their work
groups, or deliver it outside. The surgeon anxiously awaiting a biopsy report is
the customer for a hospital lab. The Delta passenger-service agent checking the
computer screen at the airport is a customer of the reservation department. Ex-
ternal customers may be manufacturers, wholesalers, retailers, suppliers, or cor-
porate or individual consumers. Ensuring the satisfaction of both internal and
external customers is vital in a highly competitive marketplace.
Suppliers and Partners Suppliers provide a company with many of the re-
sources it needs. These resources range from expertise and raw materials to
money and part-time employees. Suppliers may be separate, autonomous parts
of a company or unaffiliated organizations. Suppliers may also be independent
companies brought together through a joint venture or temporary partnership.
Information technology (IT) companies, for instance, adopt partner-based strat-
egies to gain new products and new markets.
Several continuing trends in supplier practices emerged during the 1980s.
First, companies increased their use of outsourcing. They selected as suppliers
small, efficient businesses that could make resources of higher quality at lower
cost than the companies themselves could make.
Second, to enhance the effectiveness of working relationships, companies de-
veloped close alliances with outside suppliers. To hasten decision making, suppli-
ers were and continue to be brought into projects early, often at the design stage.
Chrysler did this to produce its LH models. Many companies have merged with
140
ETHICAL MANAGEMENT Part 2 Planning and Decision Making
a g es
Cola Wars on Campus
Get t y Im
Coca-Cola and Pepsi have extended their market share that his school is considering an offer from one of the cola
war to colleges and universities. They offer schools makers to replace lost state funds. One university profes-
money if they become the sole beverage provider on sor adds that colleges set a bad example when they de-
campus. The exclusive contracts are the result of bidding prive students of any freedom in selecting soft drinks and
wars between the cola giants. Schools have received re- that such exclusive contracts actually present state legisla-
wards ranging from commissions as high as 65 percent tors with an additional reason for cutting college funds.
to the funding of intercollegiate athletic programs. While A standard for judging exclusionary contracts is that
in some cases this additional funding is necessary, some they also must have foreclosed a rival’s ability to get to
school officials feel that it ultimately hurts the university market with its product in some other way. A key to a
when asking for public money. company’s defense is to claim that its rival wasn’t fore-
Such contracts are attractive to many schools. Most closed from the market by the company’s exclusive con-
have been hit hard by their states’ funding cutbacks and tracts with partners.
are looking for alternate sources of income to help them
• What do you think about these exclusive contracts?
keep their fees and tuition in check. The cola companies
• Are exclusive contracts an attack on the basic con-
like the school contracts because they create captive mar-
sumer right of freedom of choice? Why or why not?
kets and help to form the soft-drink habits of thousands
of students. Sources: USDA Food & Nutrition Service Resources, “What does it
mean to influence vending contracts?”, http://www.fns.usda
One university vice president in charge of develop- .gov/tn/Resources/g_app2.pdf; Cornell University Law School Legal
ment indicates that his school would not consider such a Information Institute, “Antitrust: An Overview,” http://www.law
.cornell.edu/topics/antitrust.html.
deal if it were not for state funding cutbacks. He indicated
suppliers or have bought them outright to guarantee a reliable source of quality

goods and services. To strengthen its capabilities in office products, for exam-
ple, Boise Cascade acquired OfficeMax. The merger allows the new company to
serve individuals, small businesses, and large businesses.
Third, companies are seeking these “deep” alliances with fewer, more de-
pendable suppliers. And fourth, companies are more willing to procure needed
supplies from anywhere in the world, turning more frequently to foreign sources
to meet their needs for high quality and low price. This chapter’s Ethical Man-
agement feature highlights a growing arrangement between companies: partner-
ing in order to exclude one’s competitors.
Competitors An organization’s competitors are those firms that offer similar

products and services in the organization’s marketplace. Businesses compete on
the basis of price, quality, selection, convenience, product features and perfor-
mance, and customer services. Customer services include delivery, financing, and
warranties. Competition is not merely a contest between Toyota and Ford, NBC
and CBS, or JetBlue and Southwest. Instead, competition is an irresistible force
at work at every level of commerce in free enterprise systems. Aluminum com-
petes with steel as a manufacturing material; railroads with trucks; network tele-
vision with cable broadcasters; and long-distance telephone companies with cell-
phone service.
For most companies, how managers deal with competition determines

whether their companies succeed or fail. In the early 1990s, IBM was struggling
to recover leadership in its industry. Many experts said the company’s decline
derived from the failure of IBM’s management to counter the competition. The
experts said IBM clung too long to mainframe computers and did not pursue the
PC market as aggressively as did other companies.
Labor Force The term labor force (sometimes used interchangeably with labor
pool or workforce) applies to the people in the community from which an orga-
nization can recruit qualified candidates. The key word in the preceding defi ni-
tion is, of course, qualifi ed.
The needs of businesses are changing. Jobs in the crafts and trades, which
traditionally provided work for the members of labor unions, are giving way to
jobs that require proficiency in math, verbal communication, and computer sci-
ences. Elaine L. Chao, U.S. Secretary of Labor reports, “Our economy is mak-
ing an unprecedented transition into high-skilled, information-based industries.
This has created a disconnect between the jobs that are being created and the
current skills of many workers.” 16
America’s workforce is changing, becoming more culturally segmented and
diverse. The notion of cultural diversity applies to communities whose members
represent distinctly different ethnic and national backgrounds, language, reli-
gious beliefs, lifestyles, and age groups. Patterns of social change and widespread
immigration are the principal agents of this change. In recent decades, women
have entered the U.S. labor force in historic numbers and in every calling, from
medicine to heavy construction. Since 1970, the number of women as a percent-
age of the total labor force has doubled.
[T]he women’s labor force will grow more rapidly than the men’s, and
the women’s share of the labor force will increase sharply from 47 per-
cent in 2000 to 48 percent in 2010. . . . The Asian and other share of the
labor force will increase from 5 to 6 percent and the Hispanic share from
11 to 13 percent. White non-Hispanics accounted for 73 percent of the
labor force in 2000. Their share of the labor force in 2010 will decrease
to 69 percent.17
Indirectly Interactive Forces

An organization’s indirectly interactive forces are more remote and generally be-
yond the ability of managers to control or influence to any great extent. They
do, however, affect the execution of all management functions to some degree.
The major indirectly interactive forces are both domestic and foreign economic,
legal/political, sociocultural, technological, and natural forces.
4
Determine the indirectly
interactive forces in an
organization’s external
environment
Economic Forces The levels of taxes, wages, prices, interest rates, personal indirectly interactive forces
spending and saving, business spending and profits, inflation, and the state an Domestic and foreign economic,
legal/political, sociocultural,
entire economy is in at any given time—recession, recovery, boom, and depres- technological, and natural
sion—are called economic forces. Economic conditions influence management forces
decisions as well as the costs and availability of needed resources. A large chem-
economic forces
ical producer, Union Carbide (now a subsidiary of The Dow Chemical Corpo- Conditions in an economy that
ration), made almost no profits from its core businesses during the 1991–1993 influence management deci-
recession. The demand for two of its products—ethyl glycol and polyethylene— sions and the costs and avail-
ability of resources
was flat until 1994, when it rapidly increased. The company responded by
raising prices for the former by 25 percent and raising its prices for the latter by
more than 50 percent. This placed the company—the low-cost producer of these
chemicals—in an enormously profitable position.18
Legal/Political Forces The general framework of statutes enacted by legisla-

tures; precedents established by court decisions; regulations and rulings created
by various federal, state, and local regulatory agencies; and agreements between
and among governments and companies from different nations constitute legal/
legal/political forces political forces. The U.S. Office of Management and Budget (OMB) released its
The general framework of stat- 2005 Report to Congress on the Costs and Benefits of Federal Regulations and
utes enacted by legislatures;
precedents established by court Unfunded Mandates on State, Local, and Tribal Entities. Both benefit and cost
decisions; regulations and rul- estimates for the years 1992 to 2004 are included in the report. It estimates that
ings created by various fed- “the benefits of the major regulations issued from 1992 to 2004 exceed the costs
eral, state, and local regulatory
agencies; and agreements be- by over three fold. Furthermore, the average yearly net benefit of the major regu-
tween and among governments lations issued between 2001 and 2004 is over double the yearly average for the
and companies from different previous eight years.” 19
nations
Laws at all levels of government in every country in which a company does
business affect all that company’s activities. Some regulations, such as antipollu-
tion laws, are intended to provide protection for society as a whole; others protect
consumers in a variety of ways and preserve or restrict competition in markets.
This chapter’s Global Applications feature focuses on the impact that Britain’s
membership in the European Community has had on its traditional means of
weighing and measuring.
In support of South Africa’s struggle to abolish apartheid, many American
companies abandoned their operations there for a number of years and now wish
to return. Ironically, they are fi nding things difficult. McDonald’s, Toys ‘R’ Us,
and others have “lost the rights to their trademarks, which have been usurped
by local competitors. In other cases, competitors from Europe and Asia took ad-
vantage of U.S. departures to entrench themselves.” 20 Coca-Cola never fully left
South Africa—it kept a presence through a licensing agreement with a South Af-
rican company—whereas Pepsi did leave. Coke now has 75 percent of that cola
market.
Sociocultural Forces The influences and contributions from diverse groups

sociocultural forces outside an organization constitute sociocultural forces. We have already men-
The influences and contribu- tioned the value of diverse employees and their subcultures. People don’t leave
tions from diverse groups out-
side an organization “who they are” at home when they report to work. They bring with them their
ethnicity, culture, beliefs, and attitudes. In like fashion, groups of diverse peo-
ple in an organization’s external community influence and react to its plans and
actions.
When the Walt Disney Company bought 3000 acres near the Manassas Na-
tional Battlefield in Virginia, it intended to spend about $650 million to develop
a Civil War theme park and related businesses. Its plans met strong local and
national resistance. “Critics, including some historians, argued that the . . . park
and adjacent developments would pollute the area and detract from true historic
sites only a few miles away.” 21 Rather than fight the public’s outrage, the project
was eventually abandoned.
Technological Forces Processes, materials, knowledge, and other discover-

ies resulting from research and development activities sponsored or conducted
by governments, private fi rms, and individuals around the globe give rise to
Chapter 5 The Manager’s Environment
a g es
Britain and the Measure of Things
Get t y Im
Although many countries have adopted the metric sys- imperial measures with metric ones until 2009. “Come
tem, it took Britain 800 years. The metric system is a 2009, this will no longer be the case, with pounds and
decimal-based system of measurement units created by ounces set to vanish from supermarkets and stalls. The
the French in the seventeenth century. Like our money only exemptions will be pints of beer, cider and milk;
system, units for a given quantity (e.g., length) are related miles, so long as they relate to transport matters, and
by factors of ten. Calculations involve the simple process acres—when used for the measurement and sale of land”
of moving the decimal point to the right or to the left. (Summers).
(The United States is the only industrialized country in
• In the 1980s, Britain converted its money to a decimal
the world not officially using the metric system.)
system (at the heart of the metric system), abandoning
Since the thirteenth century, Britain has used pounds,
the pounds, shillings, and pence it had used for nearly
gallons, feet, and inches as weights and measures. In
700 years. So, why won’t Britain ever go completely
1965, Great Britain, as a condition for becoming a member
metric?
of the European Common Market, began a transition
to the metric system in its trade and commerce. On Oc- Sources: The United States and the Metric System: A Capsule
History, http://www.pueblo.gsa.gov/cic_text/misc/usmetric/metric
tober 1, 1995, Britain was forced to adopt the metric .htm; Chris Summers, “Will we ever go completely metric?”, BBC
system’s units of weights and measures as a condition News Online, September 2, 2004, http://news.bbc.co.uk/1/hi/
magazine/3934353.stm.
of the European Trade Agreement. Retailers can print
technological forces. Research and development have created the technologies technological forces
that have led to telecommunications, digitizing audio and video, photocopying, The combined effects of pro-
cesses, materials, knowledge,
satellites, fiber-optic networks, and virtual reality, to name but a few. Break- and other discoveries resulting
throughs in technology influence how efficiently businesses operate, as well as from research and development
the competitiveness and quality of their products and services. activities
The Internet is considered a new technology, and it has brought new ways
of doing business. Electronic commerce—the worldwide purchases of products
and services across the Internet—has changed buying and selling. It has forced
prices down and resulted in some companies going out of business. Yet, new
companies, such as Google, Amazon, eBay, and Yahoo!, have become house-
hold names. The business rules for selling and buying books, music, and travel
have been rewritten. Today more than ever, a business’s success can be directly
linked to how rapidly and effectively it absorbs and adjusts its operations and
outputs to the latest technologies.
Natural Forces Forces such as climate, weather, geography, and geology that
affect how businesses operate and locate their operations are known collectively
as natural forces. The climate of a region determines a firm’s need for energy for natural forces
such uses as heating and air conditioning. Storms and other natural disasters Forces such as climate,
weather, geography, and
can disrupt a fi rm’s production and flow of supplies. geology that affect how busi-
In 2005, Hurricane Katrina struck Louisiana and Mississippi. It curtailed nesses operate and locate their
U.S. energy production by damaging Gulf of Mexico oil rigs and refi neries. As operations
a result, energy prices were raised. Higher energy prices mean that businesses
have less money to spend on hiring and consumers have less money to spend on
discretionary purchases. Furthermore, the hurricane disrupted the Mississippi

River, a vital transportation artery. Companies had to seek alternative meth-
ods of transportation. Rail and road are more expensive than water. Consum-
ers faced higher prices and shortages of popular products, such as Folgers coffee
and Chiquita bananas.
Environments and Management

Environmental forces create challenges, risks, opportunities, and changes for ev-
ery organization. Managers must remain alert to their internal and external en-
vironments, sensing changes or shifts, reacting and adapting quickly and imag-
inatively. They must forecast and plan for the changes they suspect will come
and for the changes they wish to initiate. Managers must cultivate a sensible
and controlled reactive behavior toward changes that may affect them with lit-
tle or no warning, and an imaginative program to manage and capitalize on the
changes they can foresee and over which they have some control.
Sensing and Adapting to Environments
5
Discuss the means
available to managers for
boundary spanning
Staying in touch with environments requires that managers monitor events and
trends that develop outside their specific areas of influence. The areas could be
other departments or divisions within the company, the competition, the econ-
omy, and all the other forces that can influence their system or subsystem. This
surveillance of outside areas and factors is called boundary spanning.22 The prac-
boundary spanning tice requires current information about what is happening or likely to happen.
The surveillance of outside Boundary spanners look for developments that can influence plans, forecasts,
areas and factors that can in- decisions, and organizations. Sources of information include feedback from cus-
fluence plans, forecasts, deci-
sions, and organizations. Some- tomers and suppliers, competitors’ actions, government statistics, professional
times called environmental and trade publications, industry and trade associations, and colleagues and pro-
scanning fessional associates inside and outside the organization. Through boundary
spanning, managers keep up to date, establish networks to facilitate the gather-
ing and dissemination of information, and build personal relationships that can
lead to increased power and influence over people and events.
Sometimes the challenges posed by the environment are clear to everyone.
The key to gaining a competitive advantage is how a fi rm adapts to the chal-
lenges. The intensely competitive field of electronics provides an example. In the
twentieth century, Samsung was thought of as a cheap producer of copied, elec-
tronic products. In the twenty-fi rst century, Samsung is known for its sophisti-
cated product design, especially televisions, cellular phones, and other personal
electronics. The turnaround at Samsung happened when management began
to scan the environment and use this information to produce what consumers
wanted. Now, the company can answer the questions, “Who is our customer?”
and “What do they want?”
Influencing Environments
6
Explain how managers can
influence their external
environments
Although managers must sense and adapt to environments, they and their or-
ganizations can also influence their environments in several ways. In a demo-
cratic society, citizens—alone and in groups—have the right to attempt to influ-
ence legislation and the rules that determine how the game of business is played.
Lobbying allows people to present their points of view to legislators and to push
for changes that they see as beneficial. Whether by personal letter to a city
alderman or through a paid professional who lobbies legislators, managers and
individual citizens’ groups will continue to play vital roles in the shaping of our
society.
Managers and organizations use the power of the media to influence public
opinion and public policy. Their viewpoints and agendas are constantly reported
in advertising, public relations announcements, press releases, and in-depth in-
terviews. Industry and trade groups allow businesses to conduct research, build
alliances, and raise funds to push their agendas for or against change.
Meeting Responsibilities to Stakeholders

Stakeholders are the groups that are directly or indirectly affected by the ways
in which business is conducted and managers conduct themselves. Stakeholders
include owners, employees, customers, suppliers, and society—people in local
communities, our economy, and the world at large. Members of each of these
groups lose or gain depending on how businesses operate. Chapter 3 examined
7
Describe the obligations
that organizations have to
their stakeholders
the responsibilities that managers and businesses have to these groups. stakeholders
Groups directly or indirectly
affected by the ways in which
Owners To owners, businesses owe a fair return on investment. Managers are business is conducted and
obligated to make their best effort to use resources effectively and efficiently. managers conduct themselves.
Managers must also give an honest accounting of their stewardship over the own- Stakeholders include owners,
employees, customers, suppli-
ers’ assets and interests. Most states require by law that corporations give a finan- ers, and society
cial accounting in quarterly and annual reports to their shareholders.
In most sole proprietorships and small partnerships, owners are the man-
agers. In corporations, however, owners depend on elected representatives who
sit on the board of directors. One of the board’s primary duties is to ensure that
managers consider owners’ interests when they make corporate decisions.
Employees As the most important asset of a business, employees need a safe

and psychologically rewarding environment. Such an environment supports hon-
est and open communication and shows evidence of real concern for employees’
values, goals, and welfare. Employees need nurturing environments that help
them grow and become more valuable to themselves and their organizations.
Frito-Lay, the snack maker unit of PepsiCo, knows how to provide a nurturing
environment to employees. This chapter’s Valuing Diversity feature takes you
inside one of its celebrations and indicates some of the accomplishments diverse
groups can achieve.
Employees deserve to know the risks, values, rules, and rewards to which
they are exposed. They have the right to ethical treatment, to fairness, and to eq-
uity in their relationships with management. Their legal rights must be granted
and respected. Businesses that stay focused on the needs of their employees will
attract and hold on to them, thus helping to guarantee future success. To most
customers, employees are the business in the sense that employees are as impor-
tant as the product or service in establishing the reputation of the business in the
customer’s mind.
Customers As stakeholders, customers depend on businesses as places of em-

ployment and sources for needed goods and services. By law, they have the right
to safe work environments, services, and products. Ethically, they have the right
to fair, honest, and equitable treatment.
146
VALUING DIVERSITY Part 2 Planning and Decision Making
a g es
Frito-Lay Cultural Festival
Get t y Im
Frito-Lay encourages its employees to celebrate Martin All of Frito-Lay’s employees are encouraged to form
Luther King Jr. Day with a weeklong cultural festival. Mar- organizations based on their cultural heritages and to par-
tin Luther King Jr. Day is a federal holiday celebrated on ticipate. Charles Nicolas, a spokesman for Frito-Lay, says,
the third Monday in January. The holiday honors the late “It’s reflective of America today. There are a lot of differ-
civil rights leader by remembering his dream for equality ent cultures out there, a lot of different ideas. They bring
of all races and peoples. the richness of their culture to the business” (Souder). The
Frito-Lay’s Black Professional Association organizes the organizations came up with two recent products: guaca-
events, which include a diversity network fair and cultural mole-flavored Doritos and wasabi-flavored Funyuns.
showcase. In addition to providing entertainment and in-
• Why is it important for employees to share knowledge
formation about African American culture, the showcase
and viewpoints about their cultural traditions?
allowed the Black Professional Association to announce
that the organization had completed 1500 hours of com- Source: Elizabeth Souder, “Frito-Lay Builds on MLK Day,” The
Dallas Morning News, January 16, 2006, http://www.dallasnews
munity service and to grant thousands of dollars in scholar- .com/sharedcontent/dws/bus/stories/DN-mlk_16bus.ART.State
ships in honor of Martin Luther King Jr. .Edition2.911f300.html.
Suppliers Suppliers provide the services, materials, and parts needed to carry
on the vital operations of business. Quality begins with an understanding of its
importance and is designed into products and services from their conception.
Most suppliers today are involved in product and service design and determine
to a great extent the performance capabilities of the end result. Suppliers need
honest and open communication from the managers and organizations they
serve. They deserve to be paid for the goods and services rendered and to have
the terms of their contracts honored. Reliable sources of dependable supplies are
difficult to fi nd; once found, every effort should be made to keep them.
Society A business’s obligations to society begin with its employment base and
spread out to the communities in which it does business. A mom-and-pop bak-
ery in Muncie, Indiana, can call the neighborhood in which it operates its piece
of society. When the parents in the neighborhood call on the bakery to support
a Little League baseball team, the bakery owners are expected to respond with
some kind of assistance.
Every business needs to defi ne the portions of society that it must serve. It
can serve society in a variety of ways, from following fair employment practices,
to donating funds and equipment, to preventing pollution. The United Way char-
ity program is staffed locally by volunteers from businesses whose salaries are
donated by their regular employers. Many businesses adopt a school to assist in
a variety of ways. Businesses usually concentrate on serving their communities
in ways that enrich both the givers and receivers. In this effort, as in all under-
takings, businesses need to be both reactive and proactive. They must sense the
needs of their communities and plan to implement the kinds of assistance they
are best able to provide.
CHAPTER SUMMARY
Discuss why organizations are open systems. and levels of spending, saving, taxation, inflation, and
1 An open system must interact with its external
environments (both directly and indirectly interactive
interest rates. Economics affects nearly every manage-
ment decision in some way. Legal/political forces include
ones) and is regularly influenced by the forces in them. regulatory agencies, legislatures, courts, and law en-
Any organization depends on its directly interactive ex- forcement groups at the federal, state, and local levels,
ternal environment to obtain needed resources. Custom- along with international agreements between companies
ers exist in that external environment and they dictate, and governments. Laws govern every aspect of business
in part, quality standards. operations and must be complied with to avoid harming
the organization, its people, its customers, and society
Identify the elements in an organization’s in-
2 ternal environment. An organization’s internal
environment contains the following elements: its mis-
at large. External sociocultural forces include an orga-
nization’s diverse customer groups, the communities in
which it does business, and society as a whole. Techno-
sion, vision, core values, core competencies, leadership,
logical forces include the state of the art in manufactur-
culture, climate, structure, and available resources. A
ing and methodologies used in any process. To be com-
mission states an organization’s central purpose for ex-
petitive, one’s technology must be competitive. Natural
isting. Its vision is the destination it chooses to reach in
forces include climate, weather, geography, and natu-
the future. Core values are the key concepts that guide
ral resources, such as oil and coal. Each country and its
managers and their actions and that do not change in
markets have their own unique history, language, cus-
spite of adversity. Core competencies are what a com-
toms, legal and economic system, and culture. All must
pany does best; they rest in part in the organization’s
be understood and considered when operating outside
intellectual capital. Leadership makes things happen by
one’s native country.
encouraging and supporting people to give their best and
set and achieve goals. The culture of an organization Discuss the means available to managers for
contains its shared values, beliefs, philosophies, experi-
ences, habits, expectations, norms, and behaviors that
5 boundary spanning. The practice of boundary
spanning, or scanning one’s external environments, is
give it a distinctive character or personality. Structure necessary to gather current information about what is
refers to the formal arrangements between all the orga- happening or is likely to happen. Boundary spanners
nization’s members and details who will perform which look for reliable sources of information on customers,
tasks. Available resources include people, information, suppliers, competitors, government regulators and regu-
intellectual capital, facilities and infrastructure, machin- lations, and the state of the economies in which they op-
ery and equipment, supplies, and fi nances. erate. Sources include customers, competitors’ actions,
government statistics, professional and trade publica-
Describe the directly interactive forces in an
3 organization’s external environment. These
forces are owners, customers, suppliers and partners,
tions, and industry and trade associations. Professional
managers also network through a variety of human con-
tacts to keep themselves in touch.
competitors, and the labor force. Owners create busi-
nesses and share in their profits. They make demands Explain how managers can influence their
and contributions. Some are active in management;
others are merely investors with a stake in the organi-
6 external environments. Managers, like any
other individual or groups of individuals, can influ-
zation’s future. Customers exist inside and outside or- ence government at every level by letting their voices be
ganizations. Their needs are paramount. Meeting and heard. They have the right to try to influence legislation
exceeding their expectations is the primary function of through lobbying efforts, either individually or collec-
any organization. Suppliers and partners help organiza- tively, through industry or trade groups. They use pub-
tions obtain needed resources. An organization’s com- lic relations and advertising to get their messages to the
petitors challenge and threaten; they are after the same public. Industry and trade groups allow businesses to
customers and resources. The labor force is the source conduct research, build alliances, raise funds for worthy
for needed human resources. causes, and help their communities in various ways.
Determine the indirectly interactive forces
4 in an organization’s external environment.
These domestic and foreign forces are economic, legal/
7 Describe the obligations that organizations
have to their stakeholders. Several groups, al-
ready discussed, compose an organization’s stakehold-
political, sociocultural, technological, and natural. Eco- ers: its owners, employees, customers, suppliers and
nomic forces include the general state of an economy partners, and society as a whole. Owners are owed a
fair and honest accounting of how the resources are used partners are owed honest and fair dealings, based on
and of continual efforts to improve productivity and continuing and open communications. Bills must be paid
profitability. Employees are owed ethical, legal treat- in full and on time. Finally, society as a whole is owed
ment and a safe, psychologically rewarding environ- compliance with all the laws that protect the environ-
ment. Customers are owed safe products and services ment and ethical behavior toward all those outside the
that meet or exceed their expectations. Suppliers and organization.
KE Y TERMS
boundary spanning external environment open system
boundaryless organizations indirectly interactive forces organizational climate
core competencies intellectual capital organizational culture
directly interactive forces internal environment sociocultural forces
economic forces legal/political forces stakeholders
environmental scanning natural forces technological forces
RE VIE W QUESTIONS
1. In what ways does your school or place of employ- 6. Which forces in an organization’s external environ-
ment demonstrate the fact that it is an open ments are general or indirectly interactive? Why are
system? they so?
2. What are the elements in an organization’s internal 7. How can managers stay in touch with their external
environment? environments?
3. What is a boundaryless organization? 8. What can managers and their organizations do to
influence their external environments?
4. How does a learning organization empower
employees? 9. What groups compose an organization’s stakehold-
ers? What obligations does an organization have to
5. Which forces in an organization’s external environ-
each group?
ments are task or directly interactive? Why are
they so? 10. Discuss the importance of customer satisfaction to
quality.

1. How does Wal-Mart differentiate itself from its 4. How would your rankings from Question 3 change
competitors? for a not-for-profit organization? Why the change?
2. Considering the elements in an organization’s inter- 5. Now that the Internet has opened up the opportu-
nal environment, which ones do you think are most nity for borderless business transactions, in your
important for an organization to grow and prosper? opinion what impact will the Internet have on how
Why? organizations compete?
3. In terms of their importance to any business, what
ranking (fi rst, second, etc.) would you give to each of
the groups in the task environment?
Links are provided for all Internet exercises at http:// intelligence (CI) as the process of monitoring
plunkett.swlearning.com. the competitive environment. Visit the society’s
Web site. How could a manager use competitive
1. Read Effectiveness vs. Efficiency by Ken Blanchard.
intelligence?
What is the difference between efficiency and effec-
tiveness? Which is more important? 3. Write your representative in Congress and ask,
“What current legislation are you supporting to
2. The Society of Competitive Intelligence Professionals
ensure economic growth?”
(SCIP) was founded in 1987 and defi nes competitive

is an online database and research tool published by Wal-Mart. Add any other interesting information that
Thomson/Gale. Most college and university librar- you fi nd.
Check to see if your library subscribes to BCRC. If so, WAL-MART AT A GLANCE
you may access the database. (Also, you may have access Headquarters:
to it through this textbook. Check with your instruc- Founded:
tor.) The BCRC will give you more up-to-date, targeted, Top Executive:
and proprietary information than any Internet search Revenues for past year:
engine. Furthermore, the information you fi nd is highly 52-week stock price high/low:
respected. Number of Stores:
APPLICATION CASE
Barnes & Noble Refocuses court. By the mid-1990s Riggio was sitting masterfully
Leonard Riggio, Founder and Chairman of Barnes & atop the American publishing industry” (St. John).
Noble, Inc., opened his fi rst bookstore in 1965 while Then in 1995, Amazon.com emerged as a formi-
still a student at New York University. “He saw book- dable competitor, selling books online over the Internet.
stores as community centers, places where people could Amazon.com operates a virtual storefront, maintain-
be and become.” By 1971, he owned six bookstores and ing little or no inventory. Instead, it orders directly from
bought the troubled Barnes & Noble, which was located manufacturers to fi ll customer orders received via elec-
on Fifth Avenue in New York City. (Barnes & Noble, tronic communications. Barnes & Noble was “Ama-
Inc., Our Company.) zoned.” That’s the industry word for a traditional store
Mr. Riggio changed bookselling. Barnes & Noble chain, such as Barnes & Noble, getting trounced by an
was the fi rst bookstore to sell books at a discount, to ad- Internet startup such as Amazon.com.
vertise on television, and to pioneer the superstore con- Mr. Riggio realized that in order to compete with
cept. Its stores had restrooms, public seating, magazines, Amazon.com, Barnes & Noble had to have an online
cafes, and community events. “The rapid expansion of presence, so barnesandnoble.com was launched in May
Barnes & Noble superstores came at a severe price to 1997. He boasted that the company’s Web site would
the independents, and Len Riggio became identified as a “dominate the online book business” (St. John). How-
kind of publishing Antichrist, a scorn he seems almost to ever, Amazon.com was much more successful online
than barnesandnoble.com. Steve Riggio, Leonard’s Questions

brother and CEO of Barnes & Noble, Inc., said, “I 1. To which environmental forces is Barnes & Noble
would characterize our fi rst year as a humbling expe- responding?
rience” (St. John). 2. What is appealing to customers about ordering
In 2000, barnesandnoble.com refocused and was online?
relaunched. It integrated online and in-store elements in 3. What are the advantages to a fi rm of selling online?
an effort to increase sales both online and in the stores.
Customers were allowed to return books ordered on- Sources: Warren St. John, “Barnes & Noble’s Epiphany,” Wired, Issue
line to the stores. They could go to the store and check 7.06 (June 1999), http://www.wired.com/wired/archive/7.06/barnes
.html; Barnes & Noble, Inc., Our Company, http://www.barnesand
inventory on the Web. The Web site became easier for nobleinc.com; Barnes & Noble, http://www.barnesandnoble.com.
customers to use. Today, Barnes & Noble.com says it is
“The Internet’s Largest Bookstore.”

Lonely Planet Creates an Adventurous Culture mat to the guides, the voices of individual travel writers
When you think of corporate culture, the image of suits are valued, which is unusual among travel publishers.
and ties, pantyhose and pumps often springs to mind. Lonely Planet’s informal culture lends itself read-
But at Lonely Planet, the values, beliefs, understand- ily to adapting quickly to an ever-changing external en-
ings, and norms of the fi rm are expressed by staff mem- vironment. Not only do staff members have a broader
bers and managers who wear T-shirts, khakis, soft view of the world because of their travel experience, but
skirts, and sandals or clogs to work. Lonely Planet is they are also sensitive to changes in the environment
a publishing company based in Australia with offices in that signal changes Lonely Planet should make to cap-
several other countries—including the United States— ture new markets. For instance, Lonely Planet’s books
that produces series of travel books, guides, and lan- were originally geared toward Australian, European,
guage phrasebooks for people who want adventure. and Asian markets, where travelers tend to take longer
Founded in 1971 by Tony and Maureen Wheeler, trips. Europeans often have a month to six weeks of va-
who admit that they started the company as a way to cation, so they take off on long jaunts. But Americans
fund their own travel dreams, Lonely Planet has grown take shorter trips, for a variety of reasons. One is that
to become a major force in the travel publishing indus- they only get an average of two weeks’ vacation from
try. The company publishes books—like South Amer- work per year. Another factor is the economy—only re-
ica on a Shoestring—for travelers who want to visit off- cently have American consumers begun show confidence
beat places, often on a budget. To do so, Lonely Planet in the U.S. economy after the recession. A third factor is
employs people who love to travel and who love books. the practice of “cocooning,” or staying close to home in
They are happy wending their way through a jungle path the wake of the terrorist attacks of September 11, 2001,
or along an ancient, cobblestone street as part of the job. and the ensuing war on terrorism.
They also delight in putting together the photos and text In addition, Americans still love to drive their cars—
that will entice other travelers to explore. “I would say despite a recent spike in gasoline prices. Even if gasoline
that the culture of Lonely Planet is sort of embodied in is more expensive than it used to be, it is still less expen-
a sense of pioneering,” observes Cindy Cohen of Lonely sive—at least for a family—to drive to a destination than
Planet’s public relations department. “We like to give to fly to it. So, Lonely Planet has refocused in the United
people a scoop on the ‘inside’ places to be.” Lonely Planet States, developing a series of guidebooks to the National
describes trips for the curious, nonmainstream traveler. Parks, including the Grand Canyon, Yosemite, Yellow-
Lonely Planet fosters an internal culture in which stone, and Grand Teton. In addition, the series includes
employees are free to be themselves—to exchange ideas popular parks in Canada that are accessible by car, such
and try new approaches to problems. The work space it- as Banff, Glacier, and Jasper. Then there are the Road
self is informal and open, so that people can communi- Trip Guides—a series of guides to destinations around
cate easily with each other. Successes are celebrated by the United States that are off the beaten path but still ac-
everyone with office parties, and employees are naturally cessible for weekend getaways. Travelers can drive the fa-
friends who socialize together outside of work. In addi- mous Route 66 or California Highway 1; they can cruise
tion, although there is a Lonely Planet approach and for- up the Hudson River Valley; or they can follow one of
Lonely Planet’s hottest new guides—Blues and Barbe- 3. Give an example of Lonely Planet’s corporate
cue—through the South. In short, just about anywhere a culture at each of the three levels identified in
traveler wants to go, Lonely Planet is ready to guide. Exhibit 3.5.
Questions Sources: Company Web site, http://www.lonelyplanet.com, accessed

1. Describe the task environment for Lonely Planet. January 23, 2007; “Lonely Planet Publications Company Profi le,”
Hoover’s Online, http://www.hoovers.com; Lonely Planet press
2. Describe factors in the external environment that packet.
could create uncertainty for Lonely Planet.
BIZ FLIX VIDEO CASE

Blue Crush earlier accident. The judges gave her a score of 4.6,
Anne Marie Chadwick (Kate Bosworth) and her friends enough to move her into this second round. She now
Eden (Michelle Rodriguez) and Lena (Sanoe Lake) work competes against top surfer Keala Kennelly (herself).
as hotel maids to support their commitment to surfi ng Anne Marie has not yet had a scoring ride in this round.
the magnificent waves of Hawaii’s North Shore. They Kennelly has more points than Anne Marie but encour-
live in a simple beach shack where Anne Marie also ages and coaches her to catch a wave and have no fear.
cares for her sister Penny (Mika Boorem). Anne Marie This section of the scene follows Kennelly’s efforts to en-
trains daily to compete in the Pipe Masters surf competi- courage Anne Marie to successfully ride “The Pipe.”
tion. She also must fight off nagging fears from a nearly
fatal surfi ng accident. Professional quarterback Matt What to Watch for and Ask Yourself
Tollman (Matthew Davis) asks her to teach him to surf, 1. Describe the level of risk in Anne Marie’s strategy.
and their romance soon presents another distraction for 2. What level of competitive advantage does Anne
Anne Marie. Blue Crush is easy to watch and features Marie have?
some extraordinary surfi ng sequences including many 3. What parallels do you see between Anne Marie’s in-
with professional surfers. volvement in the competition and a modern manag-
This scene comes from the “No Fear” sequence er’s experience in the competitive business environ-
near the end of the fi lm. Anne Marie was thrown from ment? Perform a SWOT analysis for Anne Marie.
her board during her fi rst ride, almost re-creating her
O LIST
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LEARNING OBJECTIVES
PLANNING AND After studying this chapter, you should be able to:
STRATEGY 1 Explain the importance of planning
Differentiate between strategic, tactical, operational, and

2 contingency plans
List and explain the steps in a basic planning process

3
Discuss various ways to make plans effective
4
Distinguish between strategic planning, strategic
5 management, strategy formulation, and strategy
implementation
Explain the steps involved in the strategic planning process

6
Explain the formulation of corporate-level strategy, business-
7 level strategy, and functional-level strategy.
Getty Images
Southwest Airlines: Low-Fare, High Customer
Satisfaction Strategy
Southwest Airlines, one of America’s largest and
most successful airlines, was founded by Rollin King Colleen Barrett
and Herb Kelleher. “They began with one simple no- Born: 1944, Bellows Falls, Vermont
tion: If you get your passengers to their destinations Current Position: President, Southwest Airlines
when they want to get there, on time, at the lowest Career Highlights:
possible fares, and make darn sure they have a good 1968 Legal Secretary, Mathews & Branscomb
time doing it, people will fly your airline” (Southwest
Law Firm
Airlines History). This low-fare, high customer satis-
faction strategy is implemented by operating short- 1978 Corporate Secretary, Southwest Airlines
haul, high frequency, point-to-point flights on one type 1986 Vice President of Administration
of airplane—Boeing 737s—with a fast aircraft turn- 1990 Executive Vice President of Customers
around time while avoiding congested, hub-and-spoke 2001 President, Southwest Airlines
airports and interline agreements. Education: Becker Junior College, Worcester,
Southwest’s major internal strength is its corpo- MA, 1964
rate culture, where employees come first, customers Personal: Divorced, one son
second. Colleen Barrett, President of Southwest and Source: Southwest Officer Biographies, http://www.swamedia
the top-ranked female executive in the airline indus- .com/swamedia/bios/colleen_barrett.html.
try, explains
Our entire focus is culture based—a focus on
the family. It’s a popular theme these days, but method is a straightforward method of isolating and
when we were young and energetic, we made the analyzing the effects of several competing trends on
decision in the late ’60s—we had no area of exper- future demand for air travel. Through the use of sce-
tise—to concentrate on what we knew we did nario generation, Southwest chooses its future, rather
well, and that was treat people with respect and than being forced to passively watch changes in the
use Golden Rule behavior. We knew if we did that, airline industry.
did it well, and held people accountable, we would The strategic management of Southwest Air-
be successful (Barrett). lines differs dramatically from those of
-
g employ
Southwest Airlines is proud of its employees, and d puttin aid off
m p e ti tion an t it ’s p
the employees are proud of Southwest. Employees o u
mary c tegy, b e fring
e
of Southwest see themselves in the busi- o rt a s the pri g a ir li ne stra g o n th
tr a n s p w in n in H o v e ri n c ie n cy,
g c ar like a irlines. me effi
ness of giving people the freedom to fly at V iewin a y n ot s e e m u th we s t A c o s t and ti n o tice of
t m S o o n o k
low prices. They want record numbers of ees firs r miles
for
has foc
use d mers to ss limita -
ng fl ye C o nsu
consumers to be able to go, see, and do the in soari S o u thwest in t routes. li ne to b
ypa
s , -p o a ir a ve
things they have always wanted to do. Upon m a jo r airline rte r p oint-to e n a b led the m p lo ye e s h
o f
e d , s h o
v e a ls o th w e s t e
ic e — b ut
plifi hich ha e d S ou ry serv
entering the lobby of corporate headquarters, and sim c e s , w S a ti s fi o rd in a
if feren rriers. ex tra
visitors see the following message written by these d rger ca ver into
p la c ed on la th a t c arries o
Herb Kelleher. tion s e
orkplac f- w
a in pri pride -o c e.
The people of Southwest Airlines are the a barga
still at
creators of what we have become—and
© Marcio Jose Sanchez/Associated Press
what we will be. Our people transformed an

idea into a legend. That legend will continue
to grow only so long as it is nourished—by our
people’s indomitable spirit, boundless energy,
immense goodwill and burning desire to excel.
Our thanks—and our love—to the people of
Southwest Airlines for creating a marvelous fam-
ily and a wondrous airline.
External threats faced by Southwest Airlines include
terrorism, war, and rising fuel prices. Instead of us-
ing traditional strategic planning, Southwest Airlines
prepares for the future by generating scenarios. This
its competitors in the airline industry. Gary Kelly, CEO of Southwest Airlines, explains that
Southwest saw its competition as automobile transportation. “Southwest Airlines was
created to meet a need that was previously being ignored—short-haul, affordable air travel.
The idea was to operate inside Texas and to compete, not against the industry airline gi-
ants, but with the car” (Kelly). Whenever Southwest Airlines enters a new city, air traffic
increases and customers get lower fares.
Sources: Colleen Barrett, “Family, Love, and Golden Rule Behavior,” Speech to Texas Society of Association
Executives, September 21, 2004, http://www.swamedia.com/swamedia/speeches/040921_overheard.html;
Gary Kelly, “Reviving—and Revising—the Warrior Spirit,” Speech to the Houston Forum, October 27, 2004,
http://www.swamedia.com/swamedia/speeches/041027_overheard.html; Kevin Freiberg and Jackie Freiberg.
Nuts! Southwest Airlines’ Crazy Recipe for Business and Personal Success. Bard Press, 1996.
Introduction
This chapter begins our examination of the planning function with an overview.
After arriving at defi nitions of planning and planning terminology, we examine
the types of plans that managers create, the process used to create plans, com-
monly used techniques to make planning effective, and barriers to planning. Our
examination extends by analyzing the processes and techniques involved in long-
term planning for both an organization and its various subsystems. Through
strategic planning, managers, their organizations, and the autonomous units or
divisions of the organization identify and evaluate how they intend to effectively
compete in their markets.
Planning Defined
1
Explain the importance of
planning
planning
Planning is preparing for tomorrow, today. It provides direction and a unity of
purpose for organizations and their subsystems. When planning, managers have
five key responsibilities:
1. Construct, review, and/or rewrite their organization’s mission.
Preparing for tomorrow, today 2. Identify and analyze their opportunities.
3. Establish the goals they wish to achieve.
4. Identify, analyze, and select the course or courses of action required to reach
their goals.
5. Determine resources they will need to achieve their goals.1
Mission Statement
As defi ned in Chapter 4, an organization’s mission explains its central pur-
pose—its primary reason(s) for existence. When a mission is formalized in writ-
ing and communicated to all organizational members, it becomes the organiza-
mission statement tion’s mission statement. It usually includes references to an organization’s core
When a mission is formalized in values and principles and serves as an operational and ethical guide. A mission
writing and communicated to all
organizational members statement should also be the foundation and coordinating device for the execu-
tion of management functions, the behaviors of organizational members, and
the shaping of the organization’s culture. 2
“The mission of Southwest Airlines is dedication to the highest quality of
Customer Service delivered with a sense of warmth, friendliness, individual
pride, and Company Spirit.” Notice the emphasis on quality—meeting customer
needs that the organization can meet—in this statement. The mission statement
serves as a template against which decisions can be measured. The organiza-
tion’s values should be easily apparent in the mission statement.
Chapter 6 Planning and Strategy 155
While creating a mission statement, management expert Peter Drucker states

that two questions must be answered: What is our business? What should it be? 3
These questions must be raised and answered periodically, not just when forming
a business. The answer to the fi rst question is determined in part by the custom-
ers an organization currently serves. Meeting their demands and needs has made
the organization what it is. The answer to the second question is determined, in
part, by the customers that an organization wishes to serve. The specific needs
of identified customers, along with the firm’s experience and expertise, will dic-
tate what products and services it creates and/or sells, what processes it uses, and
what their levels of quality will be.
Once Drucker’s two questions are answered, the existing mission statement
must be confi rmed as valid or rewritten. The challenge for management is to
transform its concepts and principles into something that anchors everything
an organization does. Keep in mind that the leadership challenge for top man-
agement is to create a mission that captures the commitment of organizational
members.4
When companies do not ask Drucker’s two basic questions regularly or
answer them in a less-than-satisfactory manner, they usually experience some
rather costly results. For example, before fi ling one of the biggest-ever corpo-
rate bankruptcy cases, Enron had admirable value statements, which included,
“We treat others as we would like to be treated ourselves.” And, “We work with
customers and prospects openly, honestly and sincerely.” In reality, Enron kept
hundreds of millions of dollars in debt off the company’s books in partnerships
that were paying millions of dollars in fees to the Enron executives who ran
them. Obviously, these values meant little to the company’s top managers.
Goals
Goals may be long term or short term. Long-term goals require more than one
year to achieve. Southwest Airlines’ President Colleen Barrett began her planning
by studying her company’s mission statement and determining where its expertise
lay. She assessed Southwest’s strengths and market opportunities. Only then did
she establish the long-term goal of frequent, low-cost flights. This goal capitalized
on Southwest’s experience, expertise, and reputation with existing customers.
Short-term goals can be reached within one year, and many are directly con-
nected to long-term goals. Barrett had several such goals, including expanding
service to Philadelphia, its sixtieth airport, offering online boarding passes, and
reaching a target of 34 consecutive years of profitability in 2007. They’ve earned
a title no other airline in the industry can claim: The only short-haul, low-fare,
high-frequency, point-to-point carrier in America. Figure 6.1 defines the charac-
teristics that make goals effective.
Plans
A plan—the end result of the planning effort—commits individuals, depart- plan
ments, entire organizations, and the resources of each to specific courses of ac- The end result of the planning
effort—commits individuals,
tion for days, months, and years into the future. It provides specific answers to departments, entire organiza-
six basic questions in regard to any intended activity—what, when, where, who, tions, and the resources of each
how, and how much. to specific courses of action for
days, months, and years into
• What identifies the specific goals to be accomplished. the future
• When answers a question of timing: each long-term goal may have a series
of short-term objectives that must be achieved before the long-term goal can
be reached.
Figure 6.1 Characteristics of effective goals and strategies

CHARACTERISTIC EXPLANATION
Specific and measurable Not all objectives can be expressed in numeric
terms, but they should be quantified when possi-
ble. Specific outcomes are easier to focus on than
general ones, and performance can be more easily
measured when then task is defined precisely.
Realistic and challenging Impossibly difficult objectives demotivate people.
Objectives should be challenging but attainable,
given the resources and skills available. The best
goals require people to stretch their abilities.
Focused on key result areas It is neither possible nor good practice to set ob-
jectives for every detail of an employee’s job.
Goals should focus on key results—sales, profi ts,
production, or quality, for example—that affect
overall performance.
Cover a specific period A measurable objective is stated in terms of
the time in which it is to be completed. Sales
objectives, for example, may cover a day, month,
quarter, or year. The period should be both real-
istic (managers should not require 10 months of
work in 5) and productive (a requirement for ex-
cessive reporting can be debilitating, for exam-
ple). Short-term goals should complement long-
term goals.
Reward performance Objectives are meaningless if they are not directly
related to rewards for performance. Individuals,
work groups, and organization units should re-
ceive prompt rewards for achieving objectives.
• Where concerns the place or places where the plan will be executed.
• Who identifies specific people who will perform specific tasks essential to a
plan’s implementation.
• How involves the specific actions to be taken to reach the goals.
• How much is concerned with the expenditure of resources needed to reach
the goals—both short- and long-term.
In setting goals, more businesses are “junking business-as-usual incremen-
tal objectives—moving a few grains of sand—and striving instead to hit gigan-
tic, seemingly unreachable milestones called stretch targets.” 5 On one hand,
top managers are recognizing that achieving incremental improvements invites
middle- and lower-level managers as well as workers to perform the same com-
fortable process a little bit better each year. However, even the best-maintained
stretch goals equipment can become obsolete.
Goal that requires great leaps
forward on such measures as On the other hand, stretch goals (dubbed “Big Hairy Audacious Goals” or
product development time, BHAGS [pronounced bee-hags] by management analyst James Collins) require
return on investment, sales great leaps forward on such measures as product development time, return on
growth, quality improvement,
and reduction of manufacturing investment, sales growth, quality improvement, and reduction of manufacturing
cycle times cycle times.6
Strategies and Tactics

A course of action created to achieve a long-term goal is called a strategy. Strat- strategy
egies may exist for an entire organization or for its autonomous units or func- A course of action created to
achieve a long-term goal
tional areas. A course of action designed to achieve a short-term goal—an
objective—is called a tactic. As with Southwest Airlines, mission defi nes strat- tactic
egy. Objectives must be achieved in order to reach a long-term goal. Therefore, A course of action designed to
achieve a short-term goal—an
strategies influence and often dictate the choice of tactics. objective
At Southwest Airlines, creating and successfully managing the company’s
growth required achieving a sequential set of objectives through a variety of
tactics. A strong management team had to be built. People had to be recruited
and hired to facilitate the logistics and daily operations of a successful airline.
Money had to be raised to finance related activities. New customers had to be
adequately served.
One additional example illustrates the connection between a strategy and
tactics. An individual seeking a two- or four-year college degree has a strategy
(and a goal) that requires two or more years to complete. The strategy requires a
sequence of tactics that, semester after semester, will yield the short-term goals—
successful completion of courses in their proper sequences—that ultimately lead
to the achievement of the strategic goal—a college degree.
Determining Resource Requirements

The best-made plans will not be executed if they lack the resources required.
Most plans need various resources, including people, money, facilities, equip-
ment, supplies, and information. Among other things, companies need technol-
ogy to accomplish their plans. An investment in technology can improve busi-
ness processes and give companies a competitive advantage.
Types of Plans
For an organization to accomplish its goals at all organizational levels—top, mid-
dle, and fi rst-line—it must develop three types of mission-based plans: strategic,
tactical, and operational (as shown in Figure 6.2). Each must work in harmony
with the others if the organization’s mission and long-term goals are to become
reality.
2
Differentiate between
strategic, tactical,
operational, and
contingency plans
Strategic Plans
A strategic plan contains the answers to who, what, when, where, how, and how strategic plan
much for achieving strategic goals—long-term, companywide goals established Contains the answers to who,
what, when, where, how, and
by top management. Strategic goals focus on the changes desired in such areas how much for achieving strate-
as productivity, product innovation, and responsibilities to stakeholders.7 Ac- gic goals—long-term, com-
centure has made valuing the diversity of its employees a strategic goal and—as panywide goals established by
top management
this chapter’s Valuing Diversity feature points out—a duty for all its managers.
The strategic plan is concerned with the entire organization’s direction and pur-
pose—how it intends to grow, compete, and meet its customers’ needs—over the
next few years.
Strategic planning draws heavily on the leadership abilities of managers. As
we have seen at Southwest Airlines, President Colleen Barrett’s business philoso-
phy has three key ingredients: (1) defi ne your mission, (2) execute, and (3) “Treat
people like you would want to be treated.” Regardless of whether a company is
large or small, leaders are required to see—have a vision—where the company
Figure 6.2 The relationship between goals, objectives, and plans in organizational planning
Mission
Top Strategic Strategic

Management Plans Goals
Middle Tactical Tactical

Management Plans Objectives
First-Line Operational Operational

Management Plans Objectives
Plans Objectives/Goals
(Means to Targets) (Targets)
needs to go and to design the fabric of actions—organize, staff, lead, and con-
trol—so the future becomes a reality.
Just how far into the future a strategic plan will stretch is determined by the
degree of certainty that managers have about the external environmental con-
ditions and the availability of needed resources. Every strategic plan deals with
many hard-to-predict but important future events in their external environments:
Will there be a recession? Will inflation continue at its current rates? What will
be the situation in our industry with regard to local, state, and federal regula-
tions? What will the competition do? These things are difficult enough to predict
over a one-year period, let alone a five-year span. For this reason strategic plans
must be regularly reviewed and adjusted for changes that occur over their time
frames. They must be viewed as works in progress.
Just as one person’s ceiling can be another person’s floor, the completion
of one manager’s plan marks the beginning of planning efforts by another. Top
management’s strategic plan becomes the foundation for middle-level managers’
planning efforts that produce tactical plans. Figure 6.3 illustrates how tactical
tactical plan
Developed by middle manag- and then operational objectives evolve from strategic goals.
ers, this plan has more details,
shorter time frames, and nar- Tactical Plans
rower scopes than a strategic
plan; it usually spans one year Developed by middle managers, a tactical plan is concerned with what each of
or less the major organizational subsystems must do, how they must do it, when things
Figure 6.3 An organization’s mission and level of goals
Mission
CEO and Board
of Directors
Strategic
Goals
Top-Level
Management
Tactical
Objectives
Middle-Level
Management
Operational Operational
Objectives Objectives
First-Line First-Line
Management Management
must be done, where activities will be performed, what resources are to be uti-
lized, and who will have the authority needed to perform each task. Tactical
plans have more details, shorter time frames, and narrower scopes than strate-
gic plans; they usually span one year or less.
Strategic and tactical plans are usually but not always related. Every strategy
requires a series of tactical and operational plans linked to each other to achieve
strategic goals; middle managers, however, do create plans to reach what are
uniquely department, division, or team goals, both for the short and long term.
The tactical plans discussed in the Southwest Airlines case are all related to
reaching the company’s strategic goals. Two such plans involved the following:
• To reduce fourth quarter 2004 year-over-year unit costs (operating expenses
per ASM), excluding fuel, by 4.5 percent without sacrificing the safety and
quality of our outstanding Customer Service.
• To consolidate our Reservations Centers from nine to six by February 2004.
Following logically from the strategic goals are tactical objectives: short-term
goals set by middle managers that must be achieved in order to reach top man-
agement’s strategic goals and the short- and long-term goals of middle manag-
ers. Once Southwest devised the tactical plan focused on reducing costs, it prob-
ably formed teams and assigned team members specific duties.
160
VALUING DIVERSITY Part 2 Planning and Decision Making
a g es
Planning for Diversity
Get t y Im
Accenture—a global management consulting, technology says, “Accenture is leveraging International Women’s
services and outsourcing company—moved women’s is- Day to celebrate our people and to increase awareness of
sues onto the company’s global agenda. Each year, Accen- our women’s initiatives. We are providing a global forum
ture participates in International Women’s Day. The com- through which our people will have the opportunity to con-
pany’s Global Women’s Initiative offers programs such as nect and learn from one another, to develop and enhance
mentoring and networking opportunities to ensure that their skills and to give back to their communities” (2005
Accenture’s women continue to succeed. CEO William D. News Releases).
Green said, “Our goal was to share experiences and raise Like any business goal, there must be quantifiable mea-
awareness around the advancement of women in the sures to gauge the progress being made toward achieving
workplace and beyond” (Message from our CEO). it. Accenture uses geographic scorecards, global surveys,
Accenture was named the “best company advancing and performance appraisals to ensure that management
women in technology” in the 2005 Women & Technology remains accountable for the initiative’s success. Women
Awards, hosted by BlackBerry and women’s network- at Accenture have advanced since the inception of the ini-
ing group Aurora. Also, Working Mother magazine named tiative. The percentage of female promotions and female
Accenture to its annual list of “100 Best Companies for “partners,” or senior-level executives, has increased.
Working Mothers” in 2003, 2004, and 2005. In addition,
• Diversity includes the full range of talents, skills, and
Accenture won the 2003 Catalyst Award for its innovative
experiences in a set of individuals. How does Accen-
“Great Place to Work for Women” program.
ture benefit from diversity?
Accenture integrates its diversity initiative with its stra-
tegic planning. Gill Rider, Accenture’s Chief Leadership Sources: Accenture, “Accenture Supports International Women’s Day
with Series of Events Celebrating Women in Business,” http://www
Officer and a member of the company’s Management .accenture.com, 2005 News Releases; 2006 Working Mother “100
Committee, globally manages the program. Ms. Rider Best Companies,” Working Mother, http://www.workingmother.com.
Operational Plans
operational plan An operational plan is developed by first-line managers—supervisors, team lead-
The first-line manager’s tool for ers, and team facilitators—in support of tactical plans. It is the fi rst-line manag-
executing daily, weekly, and
monthly activities. Operational er’s tool for executing daily, weekly, and monthly activities. Operational plans
plans fall into two major cat- fall into two major categories: single-use and standing plans.
egories: single-use and stand- A one-time activity—an activity that does not recur—requires a single-use
ing plans
plan. Once the activity is completed, the plan is no longer needed. Two examples
program of single-use plans are programs and budgets. A program is a single-use plan for
A single-use plan for an op- an operation from its beginning to its end. An example would be to gain influ-
eration from its beginning to
its end ential reviews for a company’s new line of computers. Once the reviews were ob-
tained, the plan would cease to be of value. In addition, an example would be a
program to handle a company’s participation in an industry trade show where it
could meet the head buyers for the computer superstores.
budget Another single-use plan is a budget. It is a plan that predicts sources and
A single-use plan that predicts amounts of income that will be available over a fixed period of time and how
sources and amounts of income
that will be available over a those funds will be used. Southwest Airlines needs several budgets. The com-
fixed period of time and how pany’s total operations require a budget each year, and it requires others to back
those funds will be used efforts to hire new personnel and to launch new routes. Budgets prepared at var-
ious levels help to control spending in an organization and in its autonomous
subsystems. When the specified period for a budget ends, it becomes a historical
document and often proves useful for future budgeting efforts.
Unlike budgets and programs, a standing plan specifies how to handle con-
tinuing or recurring activities, such as hiring, granting credit, and maintaining
equipment. Once constructed, they continue to be useful over many years but
are subject to periodic review and revision. Examples of standing plans include
policies, procedures, and rules.
A policy is a broad guide for organizational members to follow when deal- policy
ing with important and recurring areas of decision making. They set limits and A broad guide for organizational
members to follow when deal-
provide boundaries for decision makers. Policies are usually general statements ing with important and recur-
about the ways in which managers and others should attempt to handle their ring areas of decision making.
routine responsibilities. Figure 6.4 presents a policy governing the making of They set limits and provide
boundaries for decision makers
hiring and other human resource decisions that was created to conform to fed-
eral antidiscrimination guidelines issued by the Equal Employment Opportunity
Commission. Policies are not prescriptive. They state a viewpoint the company
wants its managers to adopt when conducting ongoing operations. Policies can
sometimes be controversial and create ethical issues, as this chapter’s Ethical
Management feature points out.
A procedure is a set of step-by-step directions for carrying out activities or procedure
tasks. Companies create procedures for such things as preparing budgets, pay- A set of step-by-step direc-
tions for carrying out activities
ing employees, preparing business correspondence, and hiring new employees. or tasks
Like policies, they help to guarantee that recurring, identical activities will be
done in a uniform way regardless of who executes them. When followed, proce-
dures give precise methods for completing a task.
Consider the following six-step procedure required to process a customer’s
return of merchandise at a local discount chain store:
1. Determine customer’s need: return and refund, or exchange.
2. Verify that purchase (cash or charge) was made at this store.
3. Inspect merchandise for damage.
4. Consult store return policy; apply information obtained in steps 1 to 3.
5. Issue exchange, refund, or credit as applicable.
6. Deny return and explain reason(s) in line with store policy.
Only after performing each step in the proper sequence can an employee
grant an exchange, refund, or credit to a customer.
A rule is an ongoing, specific guide for human behavior and conduct at work. rule
Rules are usually “do” and “do not” statements established to promote employee An ongoing, specific guide for
human behavior and conduct
safety, ensure the uniform treatment of employees, and regulate civil behavior. at work. Rules are usually “do”
Unlike policies and like procedures, rules tell employees what is expected in given and “do not” statements es-
tablished to promote employee
safety, ensure the uniform
Figure 6.4 Human resources policy treatment of employees, and
regulate civil behavior
There shall be no discrimination for or against any applicant or for or against any cur-
rent employee because of his or her race, creed, color, national origin, sex, marital
status, age, handicap, or membership or lawful participation in the activities of any
organization or union, or refusal to join or participate in the activities of any organiza-
tion or union. Moreover, in each functional division, the company shall adhere to an
affirmative action program regarding hiring, promotions, transfers, and other ongoing
human resource activities.
162
ETHICAL MANAGEMENT Part 2 Planning and Decision Making
a g es
Privacy: Company Policy
Get t y Im
and the Law
Federal law allows companies to monitor their employ- “Three-quarters of companies monitor employees’ web-
ees’ behaviors and conversations, where the communi- site connections in large part due to concern about inap-
cations relate to the employer’s business. Many of these propriate Internet surfing, according to a 2005 survey by
laws rule practically nothing out. Employers are creating the American Management Association (AMA). More than
policies to keep a tighter rein on employees for a variety half retain and review messages. Most also have policies
of reasons, the least of which determines how they use regarding personal e-mail use, and more than a quarter
their time on the job. These policies tell employees that have fired workers for misusing the Internet. Thirty-six per-
they will be, are being, or can be monitored at work and cent track content, keystrokes and time spent at the key-
authorize a variety of monitoring techniques: listening board” (Amour). Although some companies have clearly
to employees’ business-related telephone calls, hiring told their employees about monitoring and have received
private investigators to pose as workers, and reading their consent as a condition for being hired, others have
computer-to-computer messages. For example, not done so.
the city of Pittsburgh is rolling out a policy that will even- • What ethical questions are raised when companies
tually limit almost all of the city’s 1,300 employees to create policies authorizing the monitoring of
30 minutes a day on the Internet. Currently the policy ap- employees?
plies to public works employees. The restriction is handled • As a manager, under what circumstances would you
through a Web-filtering program that tracks the amount of create a policy authorizing the recording of employee
time employees spend online (Amour). telephone calls and e-mails?
Privacy advocates worry that most state laws do not Sources: Stephanie Amour, “Companies keep an eye on workers’
Internet use,” USA Today, February 20, 2006, http://www.usatoday
specify how information gathered by employers on em- .com/money/industries/technology/2006-02-20-internet-abuse
ployees can be used or with whom it can be shared. _x.htm
sets of circumstances. A rule that prohibits smoking on company premises allows

for no exceptions.
Procedures and rules offer the advantage of standardizing behavior but re-
strict individual creativity and encourage blind obedience. The more of both that
exist, the less freedom employees have to adjust to changing situations. Figure 6.5
offers some additional insights into policies, programs, procedures, and rules.
First-level managers, work groups, and individuals in these groups have spe-
cific results expected from them in the form of operational objectives. The Boe-
ing fi rst-line manager in charge of a specific assembly operation has regular daily,
weekly, and monthly objectives to achieve in areas such as scheduling overtime,
completing work on time and on budget, protecting and allocating various re-
sources, and reducing waste and scrap.
Unified Hierarchy of Goals

The result of planning should generate a unified framework for the accomplish-
ment of the organization’s purposes. The use of the traditional management pyr-
amid as a model for the planning process results in a hierarchy of objectives in
which the work of each subsystem complements that of the next; goals at each
level mesh with or fit into each other. In Figure 6.6, for illustrative purposes, a
single goal occupies each subunit; in reality, multiple goals are the norm. The
Figure 6.5 The advantages of and requirements for policies, programs, procedures, and rules
ADVANTAGES
POLICIES PROGRAMS PROCEDURES RULES
Promote uniformity Provide a plan for an Provide the detail for Promote safety
operation from beginning effective performance
Save time to end Promote acceptable
Promote uniformity conduct
Outline an approach Name participants and
detail their duties Save time Provide security
Set limitations on manage-
ment conduct Coordinate efforts of Provide assistance in Provide standards for
those seeking the same training appraising performance
Promote effectiveness for goal and conduct
managers and the Provide security in
organization operations Save time
Promote effectiveness and Aid in disciplinary

efficiency situations
REQUIREMENTS
Should be in writing Should be in writing in at Should be in writing Should be in writing
least an outline format
Need to be Should be sufficiently Must be communicated to
communicated and Should answer who, when, detailed and understood by all
understood where, how, and how much those affected
Should be revised
Should provide some Should have clear goals, periodically Should be reviewed and
flexibility tactics, and timetables revised periodically
Should be communicated to
Should be consistent throughout Need to be communicated and understood by those Should serve needed
the organization and consistently to all those affected by them who need to know them purpose
applied
Should support the

organization’s strategy
Need to be based on the

mission
figure shows that top management has determined the strategic goal for the en-
tire organization. Middle management has established tactical objectives for the
functional areas of marketing and manufacturing. Finally, the fi rst-line manag-
ers within each functional area have created objectives for their work groups.
The outcome is a coordinated hierarchy of objectives.
But what happens if an individual manager chooses not to plan within this
framework? If a manager develops a set of objectives based on his or her own am-
bitions, values, or goals that oppose or contradict top management’s goals, con-
flicting objectives will result. In the example of the shoe company in Figure 6.6,
imagine that the marketing manager has misinterpreted top management’s ob-
jective. Instead of reaching all potential sources of profitable sales, the marketing
manager asks the operating sales manager to seek out all potential buyers. Thus,
Figure 6.6 Hierarchy of unified goals and objectives
To become
the nation’s most
profitable producer
Mission of children’s shoes Board of
Directors
Strategic CEO Top

Goal Management
To achieve a
12% net profit
Marketing Manufacturing
Tactical Middle
To reach all To manufacture
Objectives Management
potential sources of the highest-quality
profitable sales product at the
lowest possible cost
Sales Operations Manufacturing Operations

Operational First-Line
Objectives To obtain 200 To lower production costs Management
new profitable by 10% and to manufacture
accounts shoes with zero quality defects
salespersons will call on and sell to every potential buyer, regardless of the po-
tential size of the order or the cost that the company will incur in servicing that
order. The result is bound to be sales to some small or bad-credit accounts that
will cause the company losses.
Contingency Plans
Planning should provide the ability to adjust to rapidly changing situations. In
most companies, environments change so rapidly that plans must be continually
altered as they are being made; at worst, they may actually become useless be-
fore they have been totally constructed or fully implemented. To remain as flex-
contingency plan ible and open to change as possible, managers should create a contingency plan:
An alternative goal and course an alternative goal and course or courses of action to reach that goal if and when
or courses of action to reach
that goal if and when circum- circumstances and assumptions change so drastically as to make an original plan
stances and assumptions unusable.
change so drastically as to Through contingency planning, managers recognize and prepare for emer-
make an original plan unusable
gencies and other unexpected events that have both positive and negative im-
pacts on their organizations. Examples of contingency plans include those
that deal with the need to conduct a product recall, natural and human-made di-
sasters that disrupt normal operations, and rapidly increasing demand for prod-
ucts and services that can outstrip the ability of current facilities to accommo-
date. A manager who says, “What will I do if . . . ?” and, “If this happens, then
I will . . .” is a contingency planner.
Basic Planning Process

When developing a plan, all managers, regardless of their organizational level,
follow some kind of step-by-step process to guide their efforts. Figure 6.7 de-
tails a recommended basic planning process that can be used to create tactical
and operational plans. As each step is explained, consult Figure 6.8 for applica-
tions. The latter highlights how an operating-level manager applied each step in
the process to achieve the objective of keeping the office staffed during extended
business hours.
3
List and explain the
steps in a basic planning
process
Setting Objectives
When setting objectives, middle and operating managers focus and commit the
attention and energies of their respective personnel, divisions, and departments
for several months into the future. The selection of objectives (and the courses
of action to achieve them) is influenced in part by the organization’s mission and
values; the strategic plans and goals; the standing plans; the environmental con-
ditions; the availability of resources; and the philosophies, ethics, accumulated
experience, and expertise of its managers. Before being fi nalized, each objective
should possess the characteristics outlined in Figure 6.1.
Note the fi rst-line manager’s objective in Figure 6.8—to ensure that the office
is staffed from 8 a.m. to 9 p.m., Monday through Thursday. A date for its achieve-
ment has been established. The goal has the characteristics for effective objectives
previously listed in Figure 6.1. The objective is specific, measurable, realistic, and
probably challenging. It focuses on a key result area, covers a specific time period,
and will likely lead to some form of reward for the manager involved.
Figure 6.7 Steps in a basic planning process
Step 1: Setting Objectives

Establishing targets for the short- or long-range future
Step 2: Analyzing and Evaluating the Environments
Analyzing the present position, the internal and external environments, and resources available
Step 3: Identifying the Alternatives
Constructing a list of possible courses of action that will lead to goal achievement
Step 4: Evaluating the Alternatives
Listing and considering the advantages and disadvantages of each possible course of action
Step 5: Selecting the Best Solution
Selecting the course of action that possesses the most advantages and the fewest serious disadvantages
Step 6: Implementing the Plan
Determining who will be involved, what resources will be assigned, how the plan will be evaluated, and
how reporting will be handled
Step 7: Controlling and Evaluating the Results
Ensuring that the plan is proceeding according to expectations and making necessary adjustments
Figure 6.8 A first-level manager applies the basic planning process
Objective
To ensure that the office is staffed from 8:00 A .M. to 9:00 P.M., Monday through Thursday. Target date: January 1.
Analysis and Evaluation of the Environment
1. Current staffing situation. Office is staffed by two full-time hourly employees. One works from 8:00 A .M. to
4:30 P.M. and the other works from 8:00 A .M. to 5:00 P.M.
2. Financial resources. Operating budget has sufficient funds to support additional staff at a range of $8 to $10 per
hour, but benefits are restricted.
3. Labor supply. The potential number of part-time applicants is uncertain based on the rate of pay available.
4. Company policy. (1) Severe limits are placed on the use of overtime and compensatory time, and (2) a part-time
employee becomes eligible for a limited benefi t package when he or she works 15 hours per week.
Alternatives
1. Use current office staff by developing a combination package involving overtime and compensatory time.
2. Use the current office staff by altering the work hours of one or both.
3. Hire a part-time staff member to work 5:00 P.M. to 9:00 P.M., Monday through Thursday.
4. Hire two part-time staff members to work two nights each, from 5:00 P.M. to 9:00 P.M.
Evaluation of Alternatives
Alternative 1 Current staff/combination package. Problems with company pay policy and potential reaction of
present staff.
Alternative 2 Current staff/altered work hours. Would provide coverage but would affect daytime productivity.
Staff reaction—No!
Alternative 3 One part-time staff member. Would provide office coverage but stretch financial resources because
the new employee would be eligible for limited benefits.
Alternative 4 Two part-time staff members/two nights each. Would provide coverage and not exceed fi nancial re-
sources or benefits restriction (neither will work 15 hours). Only question: Can labor supply produce
two qualified applicants?
Selection of Best Solution
The alternative with the fewest questions and most promise is Alternative 4. The only problem lies in attracting
candidates.
Implementation
1. To overcome the potential limitation (supply of qualifi ed candidates), pay the proposed employees the top
authorized rate, $10 per hour.
2. Develop advertising by October 1.
3. Advertise the position internally to attract internal referrals.
4. Advertise the position externally, through newspaper advertisements and job placement offices at colleges,
private business schools, and high schools.
5. Establish November 1 as the cut-off date for applications.
6. Complete screening and interviews by November 21.
7. Make hiring offers by December 1.
Control and Evaluation
1. Check daily to determine the number of applications.
2. Extend the advertising deadline until a suffi cient number (20 to 30) of applications are received.
3. If two candidates cannot be found, obtain additional funds and implement Alternative 3.
Analyzing and Evaluating the Environment

Once objectives are established, managers must analyze their current situations
and environments to determine what resources they will have available and what
other limiting factors such as company policies they must consider as they eval-
uate possible courses of action or tactics. When assessing the internal environ-
ment, managers must consider what human, material, fi nancial, time, and in-
formational resources are available and the needs of internal customers. When
assessing the external environment, managers must consider such elements as
the strengths and weaknesses of suppliers and partners, the availability of addi-
tional labor and technology, and the needs of external customers. Choices and
commitments made by managers as they plan must not jeopardize efforts to
continually improve quality, productivity, or profitability.
Returning to Figure 6.8, the supervisor has listed the results of an environ-
mental analysis and states limits as well as resources available. The office must
be staffed for at least four additional hours, four days per week. Company poli-
cies limit overtime and compensatory time and require a limited benefit package
for part-time employees working 15 hours per week.
Identifying the Alternatives

Courses of action available to a manager to reach a goal represent alternate
paths to a destination. When developing alternatives, a manager should try to
create as many roads to each objective as possible. These alternatives may be en-
tirely separate ways to reach a goal, as well as variations of one or more separate
alternatives. When listing alternatives, managers usually invite any persons who
have the relevant knowledge and experience to contribute suggestions. Allow-
ing those who will have to execute a chosen alternative to be part of the process
helps to ensure a commitment on their part to make the alternative work.
Notice that in Figure 6.8 the manager has listed four potential alternatives
from which to choose. Each alternative represents a possible way to achieve the
staffi ng objective. Which alternative is best, given the situation as outlined, is
determined in the next step and should not be determined until then. Attempt-
ing to analyze courses of action in this step will only inhibit a free flow of alter-
natives and thus result in an incomplete listing of possible alternatives.
Evaluating the Alternatives

Each alternative must be evaluated to determine which one or which combina-
tion is most likely to achieve the objective effectively and efficiently. Most man-
agers begin their evaluation by constructing a list of advantages (benefits) and
disadvantages (costs) for each alternative. Managers then return to the second
step to make certain that each alternative fits with the resources available and
within the identified limits.
Managers need to know the kind and amount of resources, including time,
that each alternative will require. They must create an estimate of the costs for
each course of action and relate these to the dollar value of the benefits expected.
If, for example, $1000 will be spent to gain an objective valued at a lesser amount,
the alternative is inefficient and an unlikely choice.
In addition to fi nancial factors, managers consider the effects each alterna-
tive is likely to have on organizational members, the organizational unit, and
others outside the area of operations in which the planning is taking place. Possi-
bly, certain side effects, both good and bad, will result from the implementation
of an alternative. Managers should determine these effects before they fi nalize
the plan.
Notice the evaluation of each alternative in Figure 6.8. All of them have
positives and negatives. The manager should choose the one with the greatest
number of positives and the fewest or least serious negatives.
Selecting the Best Solution

The analysis of each alternative’s benefits and costs should result in determin-
ing one course of action that appears better than the others. If no single alterna-
tive emerges as a clear winner—the one with the most advantages and the few-
est serious disadvantages—managers should consider combining two or more of
them, either in part or in their entirety. The alternatives not selected may be con-
sidered as possible fallback positions—as choices for a contingency plan.
The supervisor in Figure 6.8 decided on alternative 4. The unanswered ques-
tion is whether available funds will attract the needed two part-timers. If not,
the supervisor should choose one of the other alternatives to achieve the staffi ng
objective.
Implementing the Plan

After they have completed the tactical or operational plan, their creators need to
develop an action plan to implement it. Among the issues to be resolved: Who
will do what? By what date will each task be initiated and completed? What re-
sources will each person have to perform the tasks? In Figure 6.8, the super-
visor has listed a time frame by which all necessary activities must be initiated
or completed. He or she will do many of the activities with the assistance of the
organization’s human resources manager, if the latter exists.
Controlling and Evaluating the Results

Once the plan is implemented, managers must monitor the progress being made
and be prepared to make any necessary modifications. Since environmental con-
ditions are constantly changing, plans must often be modified. Modifications
may also be required because of problems with a plan’s implementation. In Fig-
ure 6.8, the manager has developed monitoring duties to provide for control and
evaluation of the plan. The manager has another alternative ready if the fi rst
choice does not work.
Making Plans Effective
4
Discuss various ways to
make plans effective
All planning is based on assumptions (what planners believe to be true and real)
and forecasts (predictions about the probable state of relevant conditions over
the span of time covered in their plans). All assumptions and forecasts appear
to be reasonable and valid at the time planners make the plans. Managers exam-
ine available current data and historical records, consult with others as appropri-
ate, and generate required information they may need to make their assumptions
and forecasts. Contingency planning requires the same managers to plan for the
“what if?” The assumption behind contingency planning is that circumstances
can and are likely to change, and organizations must be ready for the changes.
Managers make assumptions and forecasts. They provide the leadership to
grow the business by looking for opportunities that will capitalize on the compa-
ny’s reputation and expertise. Through continual research and the help of knowl-
edgeable outsiders, the manager can successfully predict the future for its prod-
ucts and create most of the company’s long-term goals and strategies to become a
major player in its market. The top manager must create and execute several addi-
tional strategic and tactical plans related to marketing, fi nance, production, and
human resources management as he or she gains wisdom and insights through
experience.
When done properly, planning should enable managers to avoid making

mistakes, wasting resources, and experiencing surprises. However, all risks and
threats may not be foreseen. The airlines did not expect the terrorist attacks on
9/11 (September 11, 2001).
There are two obvious approaches to making planning more effective: Im-
prove the quality of both assumptions and forecasts. After briefly examining
these approaches, two planning tools are discussed. Chapter 7 examines several
additional ones as they relate to both planning and decision making.
Improving the Quality of Assumptions and Forecasts

Managers increase the probability of success in planning by beginning the pro-
cess with quality information. To do so, they must acquire facts and informa-
tion that are as current and reliable as possible. They must also develop multiple
sources for acquiring or generating needed information. By acquiring informa-
tion internally from various departments and externally from industry research
groups, government reports, trade journals, customers, and suppliers, managers
can include multiple viewpoints in a plan and thus improve the quality of assump-
tions and forecasts. Information from marketing, sales, and customer service can
be integrated into a database to estimate (or calculate) the value of each customer.
Database applications are the subject of this chapter’s Managing Technology.
In forecasting, the organization’s managers concentrate on developing pre- forecasting
dictions about the future. Along with internally generated budgets, managers A planning technique used by
an organization’s managers to
must develop forecasts that will predict with some degree of certainty the condi- concentrate on developing pre-
tions likely to exist in all areas of the internal and external environments. dictions about the future
In developing forecasts, managers rely on both internal information and out-
side resources. This chapter’s Global Applications feature, which illustrates both,
speaks to the assumptions and forecasts behind the expansion of Mercedes-Benz
into the U.S. market.
Planning Tools
Managers can also improve the quality of their planning by applying a variety of
planning tools and techniques. Two that apply to tactical and operational plan-
ning are management by objectives and linear programming.
Management by Objectives One of the most effective aids to help managers

set objectives originated with management expert Peter Drucker.8 Management management by objectives
by objectives (MBO) is a technique that emphasizes collaborative objective set- (MBO)
A technique that emphasizes
ting by managers and their subordinates. The idea behind MBO is that the man- collaborative setting by manag-
ager and the subordinate jointly determine objectives for the subordinate. The ers and their subordinates
subordinate proposes objectives to be reached over some agreed-on time period.
The manager gives his or her approval or recommends modifications and addi-
tional objectives. MBO usually results in employees who are more committed to
the achievement of the objectives than they might be if they were not involved in
setting them.
Some of the objectives chosen by subordinates are directly linked to those of
the manager—that is, the accomplishment of the objectives will assist the man-
ager in reaching his or her goals. Other objectives set by subordinates are for their
own growth and development. A set of verifi able, written objectives for the subor-
dinate to achieve should be created, along with priorities and timetables for each.
Although employees are working toward the accomplishment of their objec-
tives, managers should hold periodic review sessions. A supervisor may authorize
170
MANAGING TECHNOLOGY Part 2 Planning and Decision Making
a g es
Database
Get t y Im
Database applications are used to help manage customer Step 2. Walk through your selling process. Define how
relationships more effectively. Information from market- leads come in, how you get an initial appointment, and
ing, sales, and customer service can be integrated into a what happens next.
database. For example, sales representatives take their Step 3. Choose the database software program, such as
laptop database to appointments loaded with historical Microsoft Access.
sales data—what, where, how often, and how much a cus-
Step 4. Choose the information you track. Resist going
tomer buys. Salespeople out in the field use “remote syn-
overboard. Plan how names should be entered, so that a
chronization” to receive leads and updates automatically
customer like GE isn’t also entered as General Electric.
from headquarters and then send their responses back to
If you have international clients, allow for differences in
headquarters at regular intervals. The database may be
mailing addresses.
used by the manager to measure sales productivity—for
example, a salesperson’s calling pattern. Another use of Step 5. Develop a simple rating system. As you enter
this database is that the information provided can be used more information, you must be able to tell at a glance how
to estimate (or calculate) the value of each customer since important each customer is to your company’s growth.
customers can be segmented into high value and low Assign each customer a score of one to three on several
value. variables, such as sales, future sales, and referrals.
You can build a database! Step 6. Rank leads. Put questionable prospects into a
“holding” database and dead leads into a purge file. To
Step 1. Define the purpose of your database. Will you use
sort out older leads, conduct a search by the date that the
it to improve existing client relationships? To sort leads in
information was last edited.
order to turn them into prospects and customers? To en-
hance customer service? • How could you use a database to help you manage
employees?
modifications to the objectives or their timetables as circumstances dictate. At

the end of the agreed-on time period, the manager and subordinate hold a final
review session to evaluate the results and repeat the process. The subordinate is
evaluated on the basis of whether the objectives were accomplished, how effec-
tively and efficiently they were achieved, and what was learned in the process.
Rewards are usually linked to each of these elements.
Linear Programming Linear programming is a planning tool that can be used

to determine the optimum combination of resources and activities. Consider the
situation faced by many small manufacturers such as Armco Products, a producer
of patio chairs, loungers, and footstools. Although these products share some
basic components (metal framing, fabric webbing, and plastic feet) and manu-
facturing processes, they each deliver different costs and profit margins and sell
in different quantities. Due to facilities limitations, small companies like Armco
usually produce only one product line at any given time (chairs, loungers, and so
on). Determining just how much to manufacture can be complex, and making
the transition from the production of one product line to another is costly and
time consuming. Such factories have software programs available to help with
linear programming and other types of planning. The programs factor in the
effects of dozens of variables and provide a limitless number of optimum solu-
tions for a variety of market conditions.
Chapter 6 Planning and Strategy
a g es
Forecasting Leads Mercedes
Get t y Im
to Alabama
The 570,000th Mercedes-Benz M-Class rolled off the Mercedes its expected 30,000 vehicles sales—about
production line in 2005. Back in 1993, original projections one-half of its projected production. (The remainder of its
called for 65,000 M-Class vehicles to be built per year at cars would be sold in other countries.) Mercedes plan-
Mercedes-Benz’s Tuscaloosa plant, the first Mercedes- ners believed that the company name, its selling price of
Benz passenger vehicle factory outside of Germany. After around $30,000, and its quality reputation would be more
two expansions totaling $80 million, the plant produced than adequate to gain the foothold it sought in the United
more than 80,000 vehicles in 2000. According to the orig- States and to build on it.
inal plans, the 250,000th vehicle wouldn’t have occurred Planning by Mercedes for its newest manufacturing fa-
for another year. cility began in the early 1990s. The Alabama site was cho-
Beginning in 2005, two new Mercedes-Benz models sen in 1993, and construction began in 1994. The one-
were produced at the plant: the next generation M-Class million-square-foot facility was 75 percent complete by
sport utility and the all-new Grand Sports Tourer (GST). In December 1995. Based on their own assumptions and
order to accommodate the production of these models, forecasts, several major Mercedes suppliers built facto-
a $600-million plant expansion was undertaken to dou- ries nearby—ZF Industries built a $15 million facility—
ble the size of the factory, double production capacity to or geared up to produce greater supply amounts, as did
160,000 vehicles per year, and double the workforce to ap- Dunlop Tire in Huntsville, Alabama. All this activity oc-
proximately 4000. curred even though the production version of the vehicle
What led giant Mercedes-Benz to build its first U.S. had not been finalized! How’s that for faith in assump-
manufacturing facility in Alabama? The answer lies, in part, tions and forecasts?
with its economic and business forecasts for the U.S. mar-
• What internal information and outside resources do
ket for all-purpose utility vehicles (APUVs), such as the
you think the Mercedes-Benz planners used to de-
Jeep Cherokee and Ford Explorer. Mercedes research-
velop the forecast for the M-Class?
ers estimate that the APUV segment is the fastest grow-
ing part of the automotive market. Mercedes planners saw Sources: Mercedes-Benz U.S. International Press Release, “Next
Generation Mercedes-Benz M-Class ‘Job One’ Rolls off Production
the United States as the largest and fastest growing mar- Line in Tuscaloosa,” June 29, 2005, http://www.mbusi.com/
ket for APUVs with 2 million APUVs projected for sales in Applications/NewsManager/Default.asp?ItemID134&rcid82&pcid
73&cid82; Sara Lamb and Sherri Chunn, “Mercedes Rolls in with
the United States in 1997. New Age,” Chicago Tribune, December 3, 1995, sec. 12, p. 7.
Mercedes planners discounted auto analysts who pre-
dicted the market would be too crowded by 1997 to give
Barriers to Planning
All managers want their plans to be effective and efficient—to yield the desired
results with a minimum of resources. They must be aware of the potential barri-
ers to successful planning and work to avoid or overcome them.
• Inability to Plan—People are rarely born with the ability to plan. Until they
gain experience, their planning efforts will usually require some improve-
ments. Most people, however, can improve their planning efforts with train-
ing and practice.
• Lack of Commitment to the Planning Process—Another barrier to effective
planning is the lack of commitment to planning. Some managers prefer to re-
act to situations, rather than trying to anticipate events through planning.
Another possible reason for a lack of commitment can be fear of failure. This
outcome can result if the organizational environment discourages innova-
tion and punishes failures.
• Inferior Information—Out-of-date or inaccurate information can have dev-
astating effects on plans. An effective information management system can
help prevent such deficiencies (see Chapter 15). Identifying and tracking key
variables—indicators that predict “coming business conditions”—is a char-
acteristic of many good management planners.9
• Lack of Focus on the Long Term—Failure to consider the long term because
of emphasis on short-term problems and results will lead to trouble in the fu-
ture. Too much emphasis on the current year’s sales and profits can turn the
manager’s attention away from long-range goals needed to guarantee survival
and future profits. The remedy lies, in part, with evaluating how well manag-
ers engage in long-term planning as a portion of their regular performance
evaluations. Unless the emphasis on planning long term comes from the top,
however, strategic planning will be ignored in favor of tactical planning.
• Overreliance on the Planning Department—Many large organizations like
General Motors have planning departments to help managers plan and pro-
vide more professional presentations of plans to higher levels. Although these
departments may use the latest tools and techniques to conduct studies, build
models, and generate forecasts, they may ignore the managers they exist to
serve. The value of the vast experience acquired by managers outside the
planning department gets ignored. Planning departments may assume that
the more sophisticated the planning tools and methods, the more reliable
the plans. Planning can become, in such cases, an end in itself rather than a
means to an end—goal achievement.
• Overemphasis on Controllable Variables—Managers may fi nd themselves
concentrating on the things and events within their control and failing to ad-
equately consider those factors beyond their control. They may see little value
in attempting to devise a plan that includes such variables as future technolo-
gies, economic forecasts, and possible moves by competitors, because these
variables are too difficult to accurately predict. Managers who ignore future
developments in these areas, however, risk being surprised and pushed into a
reactive planning mode. Managers must make educated guesses about the fu-
ture, remain flexible by reviewing their plans at regular intervals, and make
adjustments to the plans as needed.
Nature of Strategic Planning

and Strategic Management
5
Distinguish between
strategic planning,
strategic management,
strategy formulation,
All companies engage in strategic planning as an element of strategic manage-
ment. Strategic management is top management’s responsibility; it defines the
fi rm’s position, formulates strategies, and guides the execution of long-term
organizational functions and processes. The ultimate purpose of strategic plan-
ning and strategic management is to help position the organization to achieve a
and strategy superior competitive fit in its environment in order to achieve its goals.10
implementation Companies both large and small undertake strategic planning to respond to
competitors, cope with rapidly changing environments, and effectively manage
their resources—all within the context of their missions.11 With a sharp strategic
focus, a company can accomplish all of its goals, a point recognized by South- strategic management
A responsibility of top manage-
west Airlines. Low-fare air service is Southwest’s easily articulated strategy. ment, it defines the firm’s posi-
tion, formulates strategies, and
Elements of Strategic Planning guides the execution of long-
term organizational functions
Strategic planning is designed to help managers answer critical questions in a and processes
business:
• What is the organization’s position in the marketplace?
• What does the organization want its position to be?
• What trends and changes are occurring in the marketplace?
• What are the best alternatives to help the organization achieve its goals?
The processes involved in strategic planning provide the answers through
the development of a strategic plan, which provides the course of action (strat-
egy) required to reach a strategic goal and identifies the resources required to
do so. The strategy developed should contain four elements: scope, resource de-
ployment, distinctive competitive advantage, and synergy.12
Scope The scope of a strategy specifies the position or size (number one in the
world or $6 million in profits) the fi rm wants to achieve, given its environments.
It includes the geographical markets it wants to compete in as well as the prod-
ucts and services it will sell.
Resource Deployment Resource deployment defines how the company in-

tends to allocate its resources—material, fi nancial, and human—to achieve its
strategic goals.
Distinctive Competitive Advantage As discussed in Chapter 5, a firm’s core

competencies—what it knows and what it does best—gives it a distinctive com-
petitive advantage, a unique position in relationship to its competition.
Customer-driven companies find out what customers value, align it with
their core competencies, and thrive on it; others don’t. For example:
• Why does it take only a few minutes and no paperwork to pick up or drop
off a rental car at Hertz but three times as long and several forms to check
into some hotels?
• Why can FedEx “absolutely, positively” deliver a package overnight but sev-
eral major airlines can’t take off or land on schedule?
• Why does Lands’ End remember your last order and your family members’
sizes but after ten years of membership you are still being solicited for mem-
bership by your credit-card company? 13
Instead of trying to be all things to all people, successful companies focus
on their competitive edge.
Synergy As discussed in Chapter 2, synergy is the increased effectiveness that

results from combined action or cooperation. It is sometimes described as the
2 2 5 effect because the result of a synergistic partnership actually exceeds
the sum of the production each partner can achieve when acting alone. Synergy
occurs when the parts of a single organization or two separate organizations in-
teract, draw on each other’s strengths, and produce a joint effort greater than
the sum of the parts acting alone can achieve. With synergy, companies can
achieve a special advantage in the areas of market share, technology application,
cost reduction, or management skill.14
Responsibility for Strategic Planning

Just who is responsible for strategic planning depends on the organization. As
mentioned previously, some companies, like General Motors, hire strategic plan-
ning experts and have strategic planning departments. Most often, however, the
responsibility for strategic planning belongs to those members of top manage-
ment who lead the organization’s product divisions and regions.
The core group of strategic planners usually includes the senior executives—
chief executive officer, division chiefs, and chief financial officer. Increasingly,
though, large organizations, such as the pharmaceutical maker GlaxoSmith-
Kline, Xerox, the insurer USAA, and PepsiCo, want their middle- and lower-
level line managers to think and act strategically.15 They encourage managers at
all levels to take the long-term view about where their parts of the organization
are going, what major changes will likely occur, and which major decisions will
have to be made now to achieve their organization’s long-term goals. By encour-
aging lower-level managers to think and act strategically (it is a significant part
of their evaluations), the company not only develops a unified plan but develops
its managers.16
Strategy Formulation Versus Strategy Implementation

Another important element in understanding the nature of strategic planning is
recognizing the difference between strategy formulation and implementation.
strategy formulation Strategy formulation includes the planning and decision making that goes into
The planning and decision mak- developing the company’s strategic goals and plans. It includes assessing the en-
ing that goes into developing
the company’s strategic goals vironments, analyzing core competencies, and creating goals and plans. On the
and plans, including assess- other hand, strategy implementation refers to means associated with executing
ing the environments, analyzing the strategic plan. These include creating teams, adapting new technologies, fo-
core competencies, and creat-
ing goals and plans cusing on processes rather than functions, facilitating communications, offering
incentives, and making structural changes.17 Both of these concepts are discussed
strategy implementation in more detail later in this chapter.
The means associated with
executing the strategic plan.
These include creating teams, Levels of Strategy
adapting new technologies, fo- A fi nal aspect concerned with the nature of strategic planning involves the levels
cusing on processes rather than
functions, facilitating communi- of strategy. As highlighted in Figure 6.9, managers think in terms of three strat-
cations, offering incentives, and egy levels: corporate, business, and functional.
making structural changes
corporate-level strategy Corporate-Level Strategy The purpose of corporate-level strategy is to an-

Answers the questions: “What swer two questions posed earlier: “What business are we in?” and “What busi-
business are we in?” and “What ness should we be in?” The answers help to chart a long-term course for the en-
business should we be in?”
tire organization.
Small companies face the same questions as do large ones. Veda International
was an Alexandria, Virginia, maker of fl ight simulators, focusing its energies on
serving commercial customers—American Airlines, Southwest, and so on. In ex-
ploring the question, “What business should we be in?”, Veda International de-
cided to branch into the consumer market by developing a fl ight simulator that
could be sold to amusement parks, resulting in tremendous growth potential.
Veda merged with Calspan to become Veridan, which was acquired by General
Dynamics in August 2003.
Figure 6.9 Corporate-level strategy
“What
Corporate-Level business
Strategy are we in?”
“What business
should we be in?”
Business-Level
Strategy “How do we compete?”
“How do we support business-level strategy?”

Functional-Level
Strategy Human
R&D Finance Marketing Production
Resources
Business-Level Strategy A business-level strategy answers the question, business-level strategy

“How do we compete?” It focuses on how each product line or business unit Answers the question, “How
do we compete?” It focuses on
within an organization competes for customers. The decisions at this level de- how each product line or busi-
termine how much will be spent on such activities as advertising and product re- ness unit within an organization
search and development, what equipment and facilities will be needed and how competes for customers
they will be used, and whether to expand or contract existing product lines.
Functional-Level Strategy The strategy concern for major functional depart-

ments is “How can we best support the business-level strategy?” Functional- functional-level strategy
level strategy focuses on the major activities of the company: human resource Focuses on the major activi-
ties of the company: human re-
management, research and development, marketing, fi nance, and production. sources management, research
To compete successfully with frequent-flyer programs at other airlines, and development, marketing,
Southwest Airlines’ functional-level marketing strategy called for a pricing in- finance, and production
centive for consumers. In addition to a frequent-flyer program, Southwest cre-
ated Friends Fly Free. For each round-trip ticket purchased at regular full fare at
least one day before departure, a ticket holder’s friend flies free.18
Strategic Planning Process

At all levels in an organization, the strategic planning process can be divided
into several steps, as shown in Figure 6.10. For new ventures, strategic planning
begins with the creation of a mission statement and goals. This is the fi rst step
(1) shown in Figure 6.10. For ongoing ventures, strategic planning requires
managers to continually (2) analyze the internal and external environments
6
Explain the steps involved
in the strategic planning
process
by assessing strengths, weaknesses, opportunities, and threats; (3) reassess the

organization’s mission statement, goals, and strategies for continued relevance,
making adjustments as necessary; (4) formulate a strategic plan containing goals,
Figure 6.10 Strategic planning process
1.
Create
Mission Statement
and Goals
2.
Analyze Internal Environment Analyze External Environment
• Strengths • Opportunities
• Weaknesses • Threats
3.
Reassess
Mission and
Goals
4.
Formulate Strategies
• Corporate
• Business
• Functional
5.
Implement Strategies
• Leadership
• Structure
• Human Resources
• Information and
Control Systems
6.
Monitor and
Evaluate Results
strategies, and resources; (5) implement the strategy or strategies; and (6) moni-
tor and evaluate the results.
• The fi rst step for a new enterprise or one considering a total redefinition
of itself is to create a mission statement and strategic goals, as discussed
previously.
• In executing the second step—analyzing the internal and external environ-
ments—strategic planners in established companies scan their internal and
external environments (the subjects of Chapter 5). They perform a situa- situation analysis (SWOT)
tion analysis—a search for strengths and weaknesses (primarily the result A search for strengths, weak-
nesses, opportunities, and
of the internal environment) and opportunities and threats (primarily due threats
to factors in the external environment). This process is often called a SWOT
(strengths, weaknesses, opportunities, and threats) analysis. Planners can
use the results obtained to reassess the company’s mission statement for its
continued relevancy and to develop a strategic plan.
Planners can gather external information about threats and opportunities from
customers, suppliers, partners, government reports, consultants, trade and pro-
fessional journals, and industry associations. Planners can gather information
about internal strengths and weaknesses through fi nancial statements and anal-
yses, employee surveys, progress reports on ongoing operations, and statistical
analyses of data on such areas as employee turnover and safety. Often by regu-
larly interacting with and observing others, strategic planners can build an ad-
equate assessment of their organization’s strengths and weaknesses. Managers
often use the expertise of outside consultants to help them obtain as well as ana-
lyze the information gathered from both environments.
An organization’s internal strengths—its core competencies and intellectual
capital—are factors the company can build on to reach its goals. Weaknesses in-
hibit performance capabilities; they are gaps in managers’ or organizations’ ex-
perience and expertise and the unavailability of needed resources. Plans should
be designed to compensate for them if they cannot be eliminated. In determin-
ing strengths and weaknesses, a company’s strategic planners should consider
the following:
• Management factors—management structure and managers’ philosophies
and capabilities
• Marketing factors—distribution channels, market share, competitive chal-
lenges, and levels of customer service and satisfaction
• Production factors—manufacturing efficiency, levels of obsolescence for
equipment and technology, production capacity, and quality control
• Research factors—research and development capabilities, new product de-
velopment, consumer and market research, and the prospects for technolog-
ical innovation
• Human resource factors—the quality and depth of employee talent and ex-
pertise, degrees of employee job satisfaction and morale, turnover rate, and
union status
• Financial factors—profit margin, return on investment, and various finan-
cial ratios
Management’s external assessment focuses on identifying both threats and op-
portunities. Threats are factors that can prevent the organization from achieving
its goals. Opportunities are the opposite; they can help the organization achieve
its goals. The following factors should be assessed:
• The threat of new competitors entering the marketplace
• The threat of substitute products
• The opportunity resulting from entering new marketplaces
• The threat or opportunity created by strategy changes of major competitors
• The threat or opportunity resulting from the potential actions and profit-
ability of customers
• The threat or opportunity created by the actions of suppliers
• The threat or opportunity resulting from new (or abandoned) government
regulations
• The threat or opportunity created by new technology
• The threat or opportunity from changes in the state of the economy
In reassessing the mission statement and goals step, management leadership is
critical. As noted by management consultant Warren Bennis, “The indispens-
able fi rst quality of leadership is a strongly defi ned purpose. When people are
aligned behind that purpose, you get a powerful organization.” 19 The analysis
of the external opportunities and threats and the internal strengths and weak-
nesses can produce one of two outcomes: to reaffirm the current mission state-
ment, goals, and strategies or to lead to the formulation of new ones. once the
mission statement is reaffi rmed or rewritten, goals and strategies at the corpo-
rate, business, and functional levels can be formulated. When a new strategy is
formulated, it must be implemented. Strategy formulation and strategy imple-
mentation are two distinct tasks. If either or both are handled incorrectly, a
strategic plan will fail or at least create problems.
Figure 6.10 lists the elements in the “Implement Strategies” step as leader-
ship, structure, human resources, and information and control systems. 20
• Leadership—When implementing strategy, the leadership challenge involves
the ability to influence others in the organization to embrace the new strat-
egy and adopt the behaviors needed to put it into action. All managers con-
tinually face the challenge of convincing people to accept new goals and
strategies. To accomplish this, strategic planners create teams and involve
lower-level managers and workers in the strategy-formulation process, thus
building coalitions that will support change.
• Organizational Structure—Implementation can be assisted by change in the
structure of the organization as reflected in its organizational chart. Man-
agers can greatly facilitate the implementation of new strategies by chang-
ing reporting relationships, creating new departments or business units, and
providing the opportunity for autonomous decision making.
• Human Resources—People are the key to implementing any decision, strat-
egy, or plan. Howard Schultz, former CEO and now Chief Global Strategist
for Seattle-based Starbucks Coffee Company, has a simple philosophy about
the role of human resources in implementing his plans for the gourmet cof-
fee purveyor’s expansion both at home and abroad: “I believe in the adage:
‘Hire people smarter than you are and get out of their way.’ ”21 To manage
his company-owned outlets, Schultz recruits experienced fast-food managers
from such outlets as Taco Bell and Burger King. These store managers in turn
receive and give their staffs—recruited from colleges and community groups,
not high schools—“24 hours of training in coffee making and lore—key to
creating the hip image and quality service that build customer loyalty.”22
• Information and Control Systems—Management needs to create a proper
blend of information and control systems that make use of policies, proce-
dures, rules, incentives, budget, and other financial statements to support
the implementation phase. Organizational members must be rewarded for
adhering to the new system and making it successful. 23
Once the strategy is implemented, performance must be monitored and evalu-
ated, and modifications must be made as necessary.
Having examined the strategic planning process, let us take an in-depth
look at strategy formulation at all three levels of a traditional organization.
Formulating Corporate-Level Strategy

As discussed earlier, corporate-level strategy involves determining in what busi-
ness or businesses the fi rm expects to compete. For companies with a single mar-
ket or a few closely related markets, the corporate-level strategy involves devel-
oping an overall strategy. However, most large corporations have complicated
organizational structures with stand-alone, often unrelated, business units or di-
7
Explain the formulation of
corporate-level strategy,
business-level strategy,
and functional-level
visions each with different products, markets, and competitors. The corporate- strategy
level strategy then involves making decisions on whether to add divisions and
product lines—to manage the corporation’s portfolio of businesses. A discussion
of both types of corporate-level strategy follows.
Grand Strategies
A grand strategy is the overall framework or plan of action developed at the cor- grand strategy
porate level to achieve an organization’s objectives. There are five basic grand The overall framework or plan
of action developed at the cor-
strategies—growth, integration, diversification, retrenchment, or stability. porate level to achieve an orga-
nization’s objectives. There are
• A growth strategy is adopted when the organization wants to create high five basic grand strategies—
levels of growth in one or more of its areas of operations or business units. growth, integration, diversifica-
Growth can be achieved internally by investing or externally by acquiring tion, retrenchment, or stability
additional business units.
• An integration strategy is adopted when the business sees a need (1) to stabi-
lize its supply lines or reduce costs or (2) to consolidate competition. In the
fi rst situation the company creates a strategy of vertical integration—gain-
ing ownership of resources, suppliers, or distribution systems that relate to
a company’s business. The world’s largest pork processor and hog producer,
Smithfield Foods, has a vertical integration strategy. The company partici-
pates in both the hog production and meat processing of the business. Hori-
zontal integration, on the other hand, is a strategy to consolidate competi-
tion by acquiring similar products or services. Cadbury Schweppes’ purchase
of Dr. Pepper/7-Up and A&W Root Beer is an example of this strategy.
• A diversification strategy is adopted if the company wants to move into
new products or markets. This strategy is normally achieved through the
acquisition of other businesses and their brands. Philip Morris has diversi-
fied through the purchase of food companies.
• A retrenchment strategy is used to reduce the size or scope of a fi rm’s activi-
ties by cutting back in some areas or eliminating entire businesses. Xerox
and Sears have recently pursued retrenchment strategies. Xerox chose to di-
vest itself of its real estate business ventures and focus on its core competen-
cies. Since the early 1990s, Sears has systematically eliminated virtually all
of its nonretail business from its corporate family.
• When the organization wants to remain the same it adopts a stability strat-
egy. Sometimes the reason is to have the organization grow slowly; other
times such a strategy is adopted to recover immediately after a period of
sharp growth or retrenchment. After a growth period that saw expansion to
Texas and acquisition of banks in Florida and Ohio, Bank of America, for-
merly NationsBank and North Carolina National Bank, adopted a strategy
of stability.
Portfolio Strategy
Once the managers of a large, diversified organization decide on a grand strat-
portfolio strategy egy, they develop a portfolio strategy. A portfolio strategy determines the mix
Determines the mix of business of business units and product lines that will provide a maximum competitive
units and product lines that will
provide a maximum competitive advantage. Developing a portfolio begins by identifying strategic business units
advantage (SBUs), autonomous businesses with their own identities but operating within
the framework of one organization. The SBU concept originated at General
strategic business units
(SBUs) Electric in the 1970s to provide managers with a framework for directing GE’s
Autonomous businesses with many diverse businesses. Typically, an SBU has its own product lines, markets,
their own identities but operat- and competitors.
ing within the framework of one
organization Fortune Brands serves as a case in point. Growing from its roots as the
American Tobacco Company, Fortune Brands is now a collection of several com-
panies—autonomous divisions totally unrelated to its original business. Some of
these companies include Jim Beam bourbon, Moen faucets, DeKuyper cordials,
Titleist golf equipment, Day-Timer date calendars, and Master Lock’s family of
security devices.
Managing a portfolio of business units is like managing a portfolio of un-
related investments, such as stocks, bonds, and real estate. Each SBU must be
continually evaluated as to its performance and relevance to the overall grand
strategy. Xerox sold its China operations, Xerox Engineering Systems and por-
tions of Fuji Xerox, but kept its famed Palo Alto Research Center, home of such
historic innovations as the personal computer and the mouse. A technique often
employed by organizations to help them evaluate their portfolios is the Boston
Consulting Group (BCG) Growth-Share Matrix.
The matrix combines growth rates and market share dimensions to identify
four types of strategic business units:
1. Stars. A star is a high-growth market leader. It has a large market share in

a rapidly growing industry. The star is important because it has potential to
grow and it will generate profits.
2. Cash cows. The cash cow is a principal source of net cash generated. It has a
large market share in a stable, slow-growth industry. Because the industry is
in slow growth, the business unit can maintain its position with little or no
investment. It is in a position to generate cash for the expansion or acquisi-
tion of additional SBUs.
3. Question marks. The question mark has a small share of the market in rap-
idly expanding industry. Question marks are risky. A business in this cate-
gory could become a star, but it could also fail.
4. Dogs. The dog is a business with small market share in a low-growth or de-
clining industry.
The BCG Growth-Share Matrix provides a valuable tool for corporate-level
strategists. It indicates where expansion should and can take place. It also indi-
cates which business units should be sold off.
Formulating Business-Level Strategy

A business-level strategy is the strategy managers formulate for each SBU (or for
the fi rm itself if it is a single-product business), defining how it intends to com-
pete. The many possible strategies available can be grouped as either adaptive
strategies or competitive strategies.
Adaptive Strategies
The philosophy behind the adaptive strategies developed by Raymond Miles and
Charles Snow is that a business’s strategy should be a fit between the internal
characteristics of the company—its core competencies—and the external envi-
ronment. 24 The four adaptive strategies include prospector, defender, analyzer,
and reactor.
• The prospector strategy is one based on innovation, taking risks, seeking
out opportunities, and expansion. This strategy is appropriate in a dynamic
and fast-growing climate, if the organization is fl exible, innovative, and cre-
ative. The prospector strategy has been a good one for 3M Company, maker
of Scotch brand products. It has led to cutting-edge products, new applica-
tions of technology, and market leadership.
• The defender strategy is based on holding current market share or even re-
trenching. It is almost the exact opposite of the prospector strategy. The de-
fender strategy is appropriate in a stable environment if the organization is
concerned with internal efficiency to produce reliable products for regular
customers. ExxonMobil and Royal Dutch/Shell use the defender strategy.
• With the analyzer strategy an organization attempts to maintain the cur-
rent market share while innovating in some markets. It asks managers to
perform a kind of balancing act: maintaining the organization in some mar-
kets while being aggressive in others. This strategy is appropriate in an envi-
ronment in which growth is possible, and the organization is both efficient
and creative. Examples of analyzers include Frito-Lay and Anheuser-Busch.
Each has a reliable product base yet innovatively brings new products to the
market.
• An organization adopting the reactor strategy could be said to have no strat-
egy. Rather than formulating a strategy to fit a specific environment, reac-
tors respond to environmental threats as they occur. With no clear sense
of internal direction, a reactor is doomed until it changes strategies—it
simply flails away. Many companies that fail do so because they follow a re-
actor strategy. Without a strategy, companies fall victim to their competi-
tors and to market changes. They cling to past practices too long, believing
that those that worked well in the past will continue to do so. They fail to
regularly analyze their environments and reassess their missions, goals, and
strategies, until changing customer demands overwhelm them. Northwest
Airlines got into fi nancial trouble because it was constantly reacting to its
competitors’ strategies and had none of its own.
Competitive Strategies
The second set of business-level strategies an organization can initiate—the
competitive strategies—were developed by author and management professor
Michael Porter. 25 Whereas adaptive strategies are based on fit between the orga-
nization and its environment, competitive strategies are dictated by how the or-
ganization can best compete based on its core competencies—internal skills, re-
sources, and philosophies. Porter refers to these strategies as generic, as depicted
in Figure 6.11, because they can be applied to a fi rm in any industry. The three
potential strategies are differentiation, cost-leadership, and focus. 26
• With a differentiation strategy an organization attempts to set its products
or services apart from those of other companies. To accomplish this, an orga-
nization focuses on basic, core business processes, such as customer service,
product design and development, total quality control, and order processing.
Lexus and Rolex focus on quality; FedEx and McDonald’s focus on service.
• A cost-leadership strategy is one focused on keeping costs as low as possi-
ble through efficient operations and tight controls. In turn, the company can
compete by charging lower prices. Target and Wal-Mart apply this strategy
in the growing discount business. Southwest Airlines and JetBlue focus on
this strategy in the airline industry.
• When the managers of a fi rm target a specific market—a particular re-
gion or group of potential customers—they are applying a focus strategy. It
can be either a cost leadership or differentiation strategy aimed toward a
narrow, focused market. One example might be a specialty hospital, such
as a heart hospital or a children’s hospital. Some companies manufacture

products for certain buyers. Pro-Line Corporation produces health and

beauty aids for African American markets.
Formulating Functional-Level Strategy

The fi nal level of strategy in the organization is the strategy developed by the
major functional departments. These action plans support the accomplishment
of the business-level strategies. The major functions include marketing, produc-
tion, human resources, fi nance, and research and development.
• Marketing strategy involves satisfying the customer with decisions on pric-
ing, promotion, distribution, and products/services of the organization.
When taken together, the decisions in each area become a firm’s marketing
strategy. Nike has committed itself to promote its golf apparel and equip-
ment with Tiger Woods. Frito-Lay’s Doritos can be purchased in several fla-
vors, such as ranch, nacho cheese, barbecue, or regular. Celestial Seasonings
has multiple distribution channels—through grocery-store chains, wholesal-
ers, and health food stores. Wal-Mart has built its inventories around the
fastest-moving merchandise in major consumer goods categories. In the area
of marketing services, CVS/pharmacy is offering Internet and telephone or-
dering, as well as home delivery. Supercuts has a low price to attract vol-
ume. Banks have placed ATMs on college campuses to better serve their
young customers.
• Functional-level strategy for production involves manufacturing goods and
providing services. Decisions in this area influence how the organization
will compete. Such decisions include choices about plant location, inventory
control methods, use of robotics and computer-aided manufacturing tech-
niques, commitments to quality and productivity improvement, and the se-
lection and use of outside suppliers.
• For many businesses, such as hotels, restaurants, health care, and profes-
sional sports, the human resources strategy is the fundamental key to sur-
vival. These businesses need a specific strategy to execute nearly every em-
ployment decision area, such as recruiting, training, and developing human
resources. Recruiting must result in attracting people who adequately reflect
a fi rm’s customer base and the community’s workforce. Once acquired, hu-
man resources must be trained and developed in order to take advantage of
the potentials they have to offer.
• The financial strategy of a fi rm involves decisions about the actions to be
taken with profits (distribution to stockholders or retention for future invest-
ments), how funds will be spent or invested, and how any additional funds
will be raised (through borrowing or by attracting new investor capital).
• The functional-level strategy for research and development involves the in-
vention and development of new technologies, or new applications for exist-
ing technologies, that lead to new products and services. Each year companies
invest millions of dollars in R&D projects, many of which lead to few if any
breakthroughs. Investment for the future, however, is critical so that there
will be a future for the enterprise. R&D has led to such breakthroughs in the
auto industry as side-mounted airbags, four-wheel antilock brakes, and dent-
and chip-resistant body panels, found on the Saturn and other GM products.
All R&D results from strategic management and strategic planning.
CHAPTER SUMMARY
Explain the importance of planning. Planning • Evaluating the alternatives. Listing and considering
1 helps managers avoid errors, waste, and delays. It
provides direction and a common sense of purpose for
the advantages (benefits) and disadvantages (costs) of
each possible course of action.
the organization. Planning sets goals and objectives and
• Selecting the best solution. Selecting the course
selects the means to reach them. It is part of every other
or combination of courses of action that pos-
management function. Planning allows managers the
sesses the most advantages and the fewest serious
opportunity of adjusting to, rather than reacting to, ex-
disadvantages.
pected changes in both their internal and external envi-
ronments. The planning process for all organizations is • Implementing the plan. Determining who will be
built on a framework of an organization’s mission, with involved, what resources will be assigned, how the
its accompanying values and principles. An organiza- plan will be evaluated, and what the reporting struc-
tion’s mission statement explains why it exists—what its ture will be.
primary purpose is. Once the mission is defi ned, all plan-
• Controlling and evaluating the results. Ensuring that
ning efforts must be governed by the mission and should
the plan is proceeding according to expectations and
not contradict or oppose it in any way. It becomes an an-
making necessary adjustments.
chor for everything a company does or plans to do.
Discuss various ways to make plans effec-
2 Differentiate between strategic, tactical, op-

erational, and contingency plans. Plans—the
4 tive. Aids to effective planning include improving
the quality of assumptions and forecasts through the
end result of planning—provide answers to the six ba- following:
sic questions: what, when, where, who, how, and how
• Effective communication. As managers establish
much. Strategic plans establish the steps by which an or-
their objectives and begin to flesh out their strategic,
ganization achieves its strategic objectives. They are con-
tactical, and operational plans to achieve them, it re-
cerned with the entire organization’s direction and the
quires constant communication and exchange of in-
primary responsibility of top management.
formation, ideas, and feedback.
Tactical plans are concerned with what the major
subsystems within each organization must do, how they • Quality of information. A manager increases the
must do it, and who will have the responsibility for do- probability of success by beginning planning with
ing it. As the primary responsibility of middle manag- current, factual, and verifiable information.
ers, tactical plans develop the shorter-term activities and
• Involvement of others. Opening the planning pro-
goals needed to achieve a strategy.
cess to others can result in better plans, a higher
First-line supervisors develop operational plans as
level of commitment to the plan, and the long-range
a means to achieve operational objectives in support of
development of employees who understand planning
tactical as well as strategic plans.
is a way of life.
Contingency plans are developed to cope with
events that, if they occur, will render primary plans in- Two planning tools can also improve planning efforts:
effective or obsolete. By planning for changes that have • Management by objectives (MBO). Mutually-
both positive and negative impacts, managers will re- agreed-on objectives are set through planning ses-
main able to deal with worst-case situations and events. sions involving a manager and a subordinate.
Whether the objectives are achieved, how they are
List and explain the steps in a basic planning
3 process.
achieved, and what the subordinate learns through
his or her achievement efforts become the founda-
• Setting objectives. Establishing targets for the short- tion for evaluating the subordinate’s work and for
or long-range future. developing the subordinate’s skills.
• Analyzing and evaluating the environments. Analyz- • Linear programming. Mathematics, equations, and
ing the current position, analyzing the internal and formulas that factor in the effects of many variables
external environments, and determining the kind of help managers determine an optimum course of ac-
resources that will be available to evaluate courses of tion and the best combinations of resources.
action and implement plans. There are several major barriers to effective planning:
• Identifying the alternatives. Constructing a list • Inability to plan. Some managers lack experience or
of possible courses of action that will lead to goal do not have the skills. These deficiencies can be over-
achievement. come by training and practice.
• Lack of commitment to the planning process. Some 1. Create mission statement, goals, and strategies.
managers claim they do not have time to plan; others For new enterprises and those desiring to totally
fear failure. One way to overcome this is to make the redefi ne themselves, all planning begins with the
attempt. Experience helps. creation of a mission statement. It is the anchor for
every strategy.
• Inferior information. Information that is out-of-date,
of poor quality, or insufficient can be a major bar- 2. Analyze the environments. Internal and external
rier to planning. Having an effective organizational environments must be assessed and analyzed. In
management information system as well as prioritiz- completing this phase, managers perform a situa-
ing and promoting the importance of providing reli- tional analysis and search for internal strengths and
able information can help to overcome this barrier. weaknesses as well as external opportunities and
threats.
• Lack of focus on the long term. Failure to consider
the long term because of emphasis on short-term 3. Reassess mission statement and goals. The analy-
problems can lead to troubles in coordinating plans sis of the external opportunities and threats and the
and preparing for the future. A remedy can be found internal strengths and weaknesses can produce two
by including long-term planning as an element of a outcomes: to reestablish the current mission, goals,
manager’s performance appraisal. and strategies or to defi ne a new mission and sup-
porting goals.
• Overreliance on the planning department. Planning
specialists often focus on process and lose contact 4. Formulate strategies. Once the mission and goals
with reality and with line managers. An emphasis are reestablished or redefi ned, strategies at the cor-
needs to be placed on translating the planning de- porate, business, and functional levels can be
partment’s output into programs for achieving spe- formulated.
cific goals at defi ned times.
5. Implement strategies. Once strategies are formu-
• Overemphasis on controllable variables. Managers lated, they must be implemented. Implementation in-
can fi nd themselves concentrating on factors within volves the use of four elements: leadership, structure,
their control and failing to consider outside factors. people, and information.
Variables such as future technology, economic fore-
6. Monitor and evaluate results. Once the strategy
casts, and expectations about government restric-
is implemented, performance must be monitored
tions must be considered.
and evaluated and modifications must be made, if
Distinguish between strategic planning, stra- necessary.
5 tegic management, strategy formulation, and
strategy implementation. Strategic planning is the de-
The assessment of the internal and external environ-
ments identifies factors that shape the development of
cision making and planning processes that chart an or-
the strategic plan. The analysis (SWOT) of the external
ganization’s long-term course of action. All companies
opportunities and threats and the internal strengths and
engage in strategic planning as an element of strategic
weaknesses can produce two outcomes: to reestablish
management. Strategic management is top-level man-
the current mission, goals, and strategies or to define a
agement’s responsibility for defi ning the fi rm’s position,
new mission and supporting goals.
formulating strategies, and guiding long-term organiza-
In the strategic planning process, managers must
tional activities. The ultimate purpose of strategic plan-
have information from external as well as internal
ning and strategic management is to help position the or-
sources. External information about opportunities and
ganization to achieve a superior fit in the environment in
threats can be gained from customers, suppliers, gov-
order to achieve its objectives.
ernment reports, consultants, professional journals,
Strategy formulation includes the planning and de-
and meetings. Internal information about strengths and
cision making that goes into developing the company’s
weaknesses may come from profit and loss statements,
strategic goals and strategic plans. It includes assessing
ratio analysis, employee morale surveys, and budget
the environment—analyzing the internal and external
printouts.
situation—and creating goals and plans. Strategy imple-
The implementation of a strategy will depend to a
mentation refers to the processes associated with ex-
great extent on having a good fit between the organiza-
ecuting the strategic plan. These processes may include
tional strategy and culture. The implementation may
communication, incentives, structural changes, or new
require changes in the organization’s behavior and cul-
technology.
ture. It achieves implementation through the collabo-
Explain the steps involved in the strategic ration of four key elements: leadership, organizational
6 planning process. The strategic planning process
involves six steps:
structure, human resources, and information and con-
trol systems.
Explain the formulation of corporate-level (or within the fi rm itself if it is a single-product busi-
7 strategy, business-level strategy, and
functional-level strategy.
ness) defi ning how to compete. Many possible strat-
egies can be chosen; they can be grouped as either
adaptive strategies or competitive strategies. Adap-
• Corporate-level strategy. For companies with a
tive strategies—prospective, defender, analyzer, and
single market or a few closely related markets, the
reactor—try to match organizational assets to the
corporate-level strategy involves developing a grand
external environment. Competitive strategies—dif-
strategy. A grand strategy is the overall framework
ferentiation, cost leadership, and focus—are dictated
for the organization. Grand strategies include five
by how the organization can best compete based on
types: growth, integration, diversification, retrench-
its core competencies—internal skills, resources, and
ment, and stability. Large companies that have com-
philosophies.
plicated organizational structures with unique busi-
ness divisions or that have strategic business units, • Functional-level strategy. Functional-level strategies
each with different products, markets, and com- are the action plans developed by the major func-
petitors, need a portfolio strategy. After the grand tional departments to support the accomplishment of
strategy is developed, the portfolio strategy involves business-level strategies. The major functions include
determining the power mix of business units and marketing, production, human resources, fi nance,
product lines to provide a maximum competitive and research and development.
advantage for the strategic business unit.
• Business-level strategy. A business-level strategy is
the strategy managers formulate within each SBU
KE Y TERMS
budget operational plan strategic business units (SBUs)
business-level strategy plan strategic management
contingency plan planning strategic plan
corporate-level strategy policy strategy
forecasting portfolio strategy strategy formulation
functional-level strategy procedure strategy implementation
grand strategy program stretch goals
management by objectives (MBO) rule tactic
mission statement situation analysis (SWOT) tactical plan
RE VIE W QUESTIONS
1. How does planning affect the success of a business? 6. What is the purpose of strategic planning?
2. How are mission statements, goals, objectives, and 7. Why is it important to assess the internal and exter-
plans related? nal environments in strategic planning? What four
factors are assessed?
3. What are the purposes of strategic, tactical, opera-
tional, and contingency planning? In what situation 8. What is the difference between corporate-level strat-
would an organization use each? egies for growth, retrenchment, and stability? What
is the purpose of the BCG Growth-Share Matrix in
4. How can managers make planning efforts more
the development of business-level plans? What are
effective?
three of the five functional-level areas of planning?
5. What are the six barriers to effective planning? How What needs to be considered in each area?
does each interfere with effective planning?

1. What specific examples can you give that demon- 5. Which of the barriers to successful planning have
strate the importance of a mission statement to you encountered while making your plans? What
the success of a business and a not-for-profit was their impact on your plans?
organization?
6. What specific examples can you give that demon-
2. In what ways can you apply strategic, tactical, and strate grand strategies? Competitive strategies?
operational objectives and plans to your mission of Functional-level strategies?
gaining a college education?
7. How can you apply a SWOT analysis to your strate-
3. What evidence can you cite from your experience to gic plan for gaining a college education?
prove the value of contingency planning in today’s
8. What specific examples can you cite of organiza-
organizations?
tions capitalizing on their distinctive competitive
4. Would you like to work in an organization that uses advantage?
management by objectives? Why or why not?
Links are provided for all Internet Exercises at http:// track your progress by checking off specific tasks and
plunkett.swlearning.com. milestones as you go. The site sends e-mail reminders
to help keep you on schedule. Read through some of
1. Stephen R. Covey wrote the best seller, “The 7
the premade GoalPlans® for popular goals. Choose
Habits of Highly Effective People™.” Franklin
one. Explain how you would adjust the obstacles
Planner ® joined with Covey to become the Franklin-
and tasks for this goal. Would you recommend this
Covey Company. Its mission is to inspire change by
method for setting goals? Why or why not?
igniting the power of proven principles so that peo-
ple and organizations achieve what matters most. 3. Royal Dutch/Shell pioneered the system of scenario
As one way to fulfi ll its mission, FranklinCovey pro- planning. Describe how Royal Dutch/Shell uses
vides a mission formulator so that people can create TINA (There Is No Alternative) to develop strategy
their own Personal Mission Statement™. Answer- in an uncertain economy.
ing the questions helps people to defi ne their values,
4. Political (and legal) forces, economic forces, socio-
principles, and what matters most to them in their
cultural forces, and technological forces are known
lives. Create your Personal Mission Statement.
as PEST factors. Use the questions found online to
2. Many people set goals, but few implement them with perform a PEST analysis for Southwest Airlines.
action plans. That’s where myGoals.com can help. http://www.marketingteacher.com/Lessons/lesson
The site offers detailed plans for achieving goals in _PEST.htm/
areas ranging from personal to professional. You can http://www.southwest.com/about_swa/

is an online database and research tool published by Southwest Airlines. Add any other interesting informa-
Thomson/Gale. Most college and university librar- tion that you fi nd.
Check to see if your library subscribes to BCRC. If so, SOUTHWEST AIRLINES AT A GLANCE
respected. Number of Cities Served:
APPLICATION CASE
Turnaround at IBM other. IBM had a “networked world” model of comput-
How can one of the most successful companies in the ing and embraced the Internet. By 1995, it formed an
world almost go out of business? It happened to IBM. Internet division, “which was not a product group, but
Competitors and environmental changes threatened more a corporate SWAT team to make sure the entire
IBM. The company was known as a computer maker, es- company was marching toward the Internet. Then, it
pecially for its mainframes. Computer prices were falling carved out its niche, trumpeted in a massive advertising
and IBM’s sales were declining. “In 1993, when Louis V. and marketing campaign, beginning in 1997, to push
Gerstner Jr. became chairman and chief executive, the e-business” (Lohr).
question asked about IBM was whether it would survive. Under Gerstner’s leadership, from 1993 until 2002,
And in choosing him, the IBM board had taken a his- IBM went from “the fallen icon of American technology”
toric gamble on a professional manager with no experi- to an industry leader. The company survived and quickly
ence in the computer industry” (Lohr). returned to profitability. IBM helps its customers, who
Mr. Gerstner was not a technologist, but he was an are companies, to do business. As a result, today IBM is
unabashed champion of the new technology. He trav- the world’s largest information technology company.
eled all over the world to meet with customers, believ-
ing that IBM decisions should be market driven. He Question
found that IBM had two distinct competencies: research 1. What strategy changes did Gerstner use to solve
and integrated computer solutions (hardware, software, IBM’s situation? Develop your answer by selecting
consulting, and maintenance) to solve business prob- specific strategies relating to corporate, business, and
lems (like manufacturing, purchasing, or marketing) for functional strategy options.
companies. In 1994, based on feedback from customers,
Mr. Gerstner decided that IBM would adopt open sys- Sources: Steve Lohr. “He Loves to Win. At I.B.M., He Did.” The New
tems so that standard software protocols would allow York Times, March 10, 2002, http://www.nytimes.com/2002/03/10/
business/yourmoney/10LOUU.html; IBM: Louis V. Gerstner Jr., http://
different hardware and software products to talk to each www.ibm.com/lvg/.

Timbuk2: The Message Is in the Bag “Our goal for the future is to remain faithful to our
Picture yourself on a bike, weaving in and out of city working-class urban roots, while expanding our unique
traffic, pedaling as fast as you can through a maze of qualities and design sensibilities to a broader range of
streets, dodging taxicabs and pedestrians, carrying your products and a wider audience,” states Timbuk2’s Web
cargo on your back. Now picture yourself making doz- site. Mark Dwight, CEO of the fi rm, echoes this senti-
ens of deliveries in a day, pedaling an eight- or nine-hour ment. Dwight’s job as CEO is to focus on the big pic-
shift in blazing sun, pouring rain, stinging sleet, or even ture—overall goals and how to achieve them. “The
blowing snow. This is the life of a bicycle messenger. difference between strategy and goals is, goals are the
Timbuk2, founded in San Francisco more than 15 years endpoint and strategy is the way to get there. The actual
ago by former bicycle messenger Rob Honeycutt, manu- steps you take would be the tactics,” Dwight explains.
factures what seems to be a specialized product: mes- Timbuk2’s current goal is to move from a tiny, special-
senger bags for cyclists who make their living delivering ized market into a broader market. “Our roots are in the
documents door to door. Today, Timbuk2 still manu- bicycle messenger market . . . a subculture that is very
factures professional bags for bike messengers. But the interesting. . . . However, it isn’t really a market; there’s
fi rm has expanded its offerings to include fashion bags no growth there. So what we’re trying to do is build
for other consumers—and its goals and plans are much from that heritage, that authenticity that gives value to
broader than they were fi fteen years ago. our brand as a lifestyle brand,” says Dwight.
Formulating the strategies to achieve the goals re- with the addition of custom features, consumers can pay
quires careful planning. “We are building a lifestyle $100 or more for their Timbuk2 bags. But a good purse
brand; we are [also] trying to build brand equity be- or travel bag from another maker can cost just as much
cause that ultimately is the value of this company,” notes or more.
Dwight. “Then, when we go to sell the company or take Timbuk2 hasn’t forgotten bicycle messengers, even
it public, there’s value there.” So every effort, from the with its new focus. The professionals can still visit the
development of new products to the marketing of exist- Timbuk2 Web site and “build” customized professional
ing ones, focuses on strengthening the Timbuk2 brand bags—selecting from four different sizes, several fab-
in consumers’ minds. Dwight and his staff plan to “de- rics, and an array of colors. In addition, as part of a cel-
velop a product portfolio that asserts our position in ebration of the fi rm’s heritage, Timbuk2 has planned to
existing markets, moves into new markets, and really collaborate with Joe Urich, San Francisco bike messen-
creates a sense of lifestyle . . . so when you think of Tim- ger and design student at the California College of Arts
buk2 . . . you think of an emotional concept, a brand, a (CCA), to design two new, industrial-strength messenger
lifestyle.” bags for his colleagues. These new bags will be designed
Timbuk2 is already moving rapidly toward its specifically to meet requirements of working messengers.
goals. Sit in on a Timbuk2 planning meeting, and you’ll “I hope it goes well,” says Urich. The project should
hear lots of ideas and opinions flying back and forth— succeed—after all, who knows better how to design a
how to design a new bag, how to market it, how to offer messenger bag than the messenger himself?
it over the Web. “I don’t want to see any of this hard-
ware,” says Dwight, pointing to a sketch in one design Questions
meeting. “That’s Coach. We’re not Coach.” When re- 1. Do Timbuk2’s goals have the characteristics of ef-
minded that chrome hardware is popular among today’s fective goals? Why or why not?
consumers, he does not back down. He wants Tim- 2. Does Timbuk2 represents a high performance ap-
buk2’s bags to have a look that is distinctive. So far, they proach to planning? Why or why not?
has managed to offer a variety of bags for a variety of 3. Using what you know about Timbuk2, write a brief
needs—without chrome hardware. Consumers can pick mission statement for the organization.
up a water-resistant bag with quick-release buckles that
allow yoga followers to snap out their practice mats with Sources: Company Web site, http://www.timbuk2.com, accessed Janu-
ease, weatherproof travel bags with destination stick- ary 26, 2007; “Timbuk2’s Groovy Bag,” Yoga Journal, July/August
2004, http://www.yogajournal.com; Larry Armstrong, “Make Your
ers superimposed on the flaps, and colorful, messenger- PC Green with Envy,” BusinessWeek, June 7, 2004, http://www
style laptop computer bags for commuters who want to .businessweek.com/magazine/content/04_23/b3886156.htm; “In
blend durability with style. The bags don’t come cheap; Style Every Mile,” Organic Style, May 2004.
BIZ FLIX VIDEO CASE

The Bourne Identity Jason. Jason uses the dead man’s cell phone after return-
Jason Bourne (Matt Damon) cannot remember who ing to his apartment in Paris, France. He presses the
he is, but others believe he is an international assassin. redial button, which connects him to Conklin (Chris
Bourne tries to learn his identity with the help of his Cooper), the CIA manager who is looking for him. Lis-
new friend and lover Marie (Franka Potente). Mean- ten carefully to Jason’s conversation with Conklin as he
while, while CIA agents pursue him across Europe try- walks along the right bank of the Seine River in Paris.
ing to kill him, Bourne slowly discovers that he is an ex-
tremely well-trained and lethal agent. The story, which What to Watch for and Ask Yourself
is loosely based on Robert Ludlum’s 1981 novel, was 1. Does Jason Bourne describe a plan to Conklin?
previously fi lmed in 1988 as a television miniseries star- If he does, what are the plan’s elements? What is
ring Richard Chamberlain. Bourne’s goal?
This scene is an edited version of the “Bourne’s 2. Does Bourne assess the plan’s execution to determine
Game” sequence near the end of the film. Jason Bourne if it conforms to his goal? If so, what does he do?
kills the hired assassin who tried to kill him the day af- 3. Was Bourne’s plan successfully carried out? Why or
ter Jason and Marie arrived at the home of Eamon (Tim why not? How does this scene relate to organiza-
Dutton). Eamon is Marie’s friend but is a stranger to tional strategic planning?
O LIST
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LEARNING OBJECTIVES
MAKING After studying this chapter, you should be able to:
DECISIONS 1 Recognize that decision making is performed at all

management levels
Distinguish between formal and informal approaches

2 to decision making
List the steps in the decision-making process

3
Identify the environmental factors that influence decision
4 making
Describe the personal attributes of a manager that influence

5 decision making
Discuss the value of group decision making, and identify three

6 techniques of group decision making
Explain three quantitative techniques for decision making,

7 and describe the situations in which each is appropriate
Determine strategies a manager can use to create a more

8 effective decision-making environment
Getty Images
Microsoft: Life-Changing Decisions
Individuals are often the driving force behind a suc-
cessful organization. Bill Gates, Cofounder, Chairman, Bill Gates
and Chief Software Architect of Microsoft, had a clear Born: 1955, Seattle, Washington
vision for the future evolution of personal computers Current Position:
(PCs). The nation’s number-one software company Chairman and Chief Software Architect,
was founded in 1975, when Microsoft’s Bill Gates Microsoft Corporation
and Paul Allen created and sold the first computer lan-
Career Highlights:
guage program for a personal computer—BASIC for
the Altair 8800. At that time, when few people had 1975 Cofounder, Chairman, and CEO, Microsoft
a personal computer, Microsoft’s vision was “A per- 1992 President and CEO, Microsoft
sonal computer on every desk and in every home.” 1998 Chairman and CEO, Microsoft
How did this revolutionary vision come about? The an- 2000 CEO and Chief Software Architect, Microsoft
swer can be found in two major decisions and a will- Education: Harvard University, Boston, MA,
ingness to follow through on those decisions. These did not finish
decisions not only changed lives, “but they also made Personal: Married, three children
far-reaching economic changes possible for genera- Source: Biography of Bill Gates, http://www.microsoft.com/
tions to come” (Bloomberg News). presspass/exec/billg/bio.mspx.
Decision Number One—After developing
BASIC, Gates and Allen set up the first software com-
pany aimed at personal computers. In order to do
this, Bill Gates had to drop out of Harvard. As Gates
phrased it, “the industry wasn’t going to wait on us
while I finished my degree at Harvard.” In addition, he
said, “I felt the window of opportunity to start a soft-
ware company might never open again. So I dove into
the world of business” (Bill Gates bio).
Decision Number Two—In 1980, Microsoft g
e wron
bought an operating system called QDOS or 86-DOS
ht ti m e, but th to drop out
rig ion f
from Seattle Computer Products, tailored g in the ar decis ense o
it for the PC market, renamed it MS-DOS, n e s s of bein s’ billion -doll st time his s ct both
Aware r
ill Gate rhaps the fi n, would affe nce
and licensed it to IBM. The new IBM PC led to B e e
place, rd. This was p a key decisio His early influ le,
was released in August 1981. That same a by . sib
of Har v it y, followed of humankind entirely pos
year, Bill Gates became Microsoft’s Presi- n t de o use -
oppor tu stiny and tha d, if not ma mputers in h p -
dent and Chairman of the Board. In 1983, s’ d e le r a te a l c o le o
Gate ac ce er s o n Ripp
an extension of the MS-DOS operating it h M S -DOS d power of p e v e r y where. rdware
w an es rh a
sen c e orkplac untless othe ting sys -
© Microsoft Corporation/Feature Photo Service (NewsCom)
system—Windows—was unveiled. Win- the pre hools, and w fo r co o p era al

dows is an operating system that provides holds,
s c crea te d indo w s univers
basic functions such as drawing windows tu n it ie s were ators. The W products are will con -
p or inno v t ware ight
ft ware oft sof d fores
and menus on the screen, managing network and so other Micros tes’ vision an
d Ga e.
communications, and accessing disk drives tem an s today, and to com
rd r ations
on which all PC software can draw. Windows st and a g e n e
impact
resulted in Microsoft’s dominance of the PC tinue to
marketplace.
“Gates’ foresight and his vision for personal
computing have been central to the success of
Microsoft and the software industry” (Bill Gates
bio). Bloomberg News chose Bill Gates as Wealth
creator, one of 20 business leaders of the millen-
nium. “Bill Gates’ Microsoft Corp. brought order
to chaos to hasten the digital information age. The
company’s Windows operating system made it
vastly easier for hardware and software companies
to create mutually compatible products” (Bloomberg
News).
In 2005, Bill Gates made Fortune’s billionaire list as the richest man in the world, for
the twelfth year in a row. Fortune named him the second-most powerful person in busi-
ness. “More than anyone, he changed the economics of IT by creating software and hard-
ware standards that transformed computers into commodity products. Along the way he
achieved an effective monopoly in Microsoft’s primary business of operating systems
software, and he weathered the most aggressive federal antitrust challenge in decades”
(Useem).
Gates’ vision about computers has evolved into opportunities presented by the Inter-
net. He believes—and is convincing others—that Microsoft software should be extended
through the Internet to every device, such as PCs, servers, cell phones, television set-top
boxes, and gaming consoles. People will be able to get immediate access to their informa-
tion online or offline with small, mobile devices like a mobile phone or the Tablet PC, which
can read and record handwriting. In remarks at the 2006 Microsoft Office System Devel-
opers Conference, Mr. Gates said, “Portable machines are an increasing percentage of the
systems that people are using. They’re taking them on trips, into meetings, and over time
we even see the arrival of the portable device turning into a tablet type device, so ink and
speech, those things become a natural element of the interaction.”
Sources: Bloomberg News, “Kings of Commerce,” December 25, 1999; Jerry Useem, “The 25 Most
Powerful People in Business,” Fortune, p. 61, August 11, 2003; Remarks by Bill Gates at the Microsoft Office
System Developers Conference 2006, March 21, 2006, http://www.microsoft.com/presspass/exec/billg/
speeches/2006/03-21OfficeDevCon.mspx; Bill Gates’ Web site, http://www.microsoft.com/presspass/exec/
billg/default.mspx; Microsoft, http://www.microsoft.com.
Introduction
Microsoft is the world’s number-one software company because of solid deci-
sion making by Chairman and Chief Software Architect Bill Gates and his man-
agement team. As with Microsoft, every organization succeeds or fails based on
decisions by its managers. Although many of their critical decisions determine
strategic directions, managers make decisions about all aspects of the organi-
zation, including organization structures, staffi ng, and control systems. This
chapter will thoroughly examine managerial decision making—the steps in the
decision-making process, the nature of the decision-making environment, influ-
ences on decision making, decision-making techniques, and the way managers
can create an environment for effective decision making. If you dread decisions,
postpone them, or simply feel you could use some extra help on the subject, this
chapter is for you. When you fi nish reading its ideas, examples, and suggestions,
your approach to decision making should be more confident.
What You Need to Know About Decisions

For many years you have been making decisions. You are reading these words as
a direct result of a decision you made to study management. Your entire life is a
result of your decisions and those of others. Many decisions are simple: deciding
what to eat or what clothes to wear. Others are much more complex: what col-
lege to attend or what area in which to major. Regardless of how simple or com-
decision plex the decision, it is a choice made from alternatives.
A choice made from available Managers face the same range of decisions; but unlike our individual deci-
alternatives
sions, the ones managers make in organizations can affect profitability, the lives
of thousands of people, or the location of a company’s operations. For exam-
ple, the decision made by Bill Gates and his Cofounder Paul Allen—licensing its
16-bit operating system, MS-DOS 1.0, to IBM—was the inspiration that set Mi-
crosoft apart from its competitors and made it the number-one software seller
in the country.
Chapter 7 Making Decisions 193
What Decision Making Is

Decision Making, Problem Solving, and Opportunity Management
Decision making is the process of identifying problems and opportunities, de- decision making
veloping alternative solutions, choosing an alternative, and implementing it.1 The process of identifying prob-
lems and opportunities, de-
Decision making is a process, not a lightning bolt occurrence. In making the developing alternative solutions,
cision, a manager is reaching a conclusion—based on considering a number of choosing an alternative, and
options or alternatives. implementing it
Many times, in management the terms decision making and problem solv-
ing are used interchangeably because managers constantly make decisions to
solve problems. For example, when an account representative resigns at Verizon,
the sales manager has a problem—the difference between the current and de- problem
sired performance or situation. 2 Replacing the person requires a decision— The difference between the
current and desired perfor-
promote from within, hire an experienced person, or recruit an inexperienced mance or situation
college graduate. Each alternative could solve the problem.
But all decision making is not aimed at solving problems; many decisions are
made to seize opportunities. Managers see a chance, occasion, event, or break- opportunity
through that requires a decision to be made. Such was the case with Reed Has- A chance, occasion, event, or
breakthrough that requires a
tings, Cofounder of Netflix, an innovative online service renting DVDs by mail. decision to be made
Mr. Hastings found that many movie rental customers were dissatisfied with
their shopping experience. Seizing the opportunity and addressing consumer
needs, Netfl ix was created. Customers don’t have to drive to a store, stand in
line, or pay late charges. Netflix has more than four million subscribers paying
$17.99 a month to rent as many DVDs as they want, with three movies out at a
time. DVDs are delivered directly to the subscriber’s address by fi rst-class mail
with a postage-paid return envelope. 3 Subscribers are offered fi lm recommenda-
tions based on how highly other subscribers who rent similar movies have rated
them. Netflix saw an opportunity and took it. Other examples of successful on-
line retailers taking advantage of an opportunity are discussed in this chapter’s
Managing Technology.
Universality of Decision Making
As noted in Chapter 1, decision making is a part of all managers’ jobs. A man-
ager constantly makes decisions when performing the functions of planning,
organizing, staffi ng, leading, and controlling. (For example, Bill Gates’ 1995
decision to support and enhance the Internet was an element of planning—to
respond to what customers needed and wanted.) Decision making is not a sep-
1
Recognize that decision
making is performed at all
management levels
arate, isolated function of management but a common core to the other func-
tions, a fact illustrated by Figure 7.1.
Managers at all levels of the organization engage in decision making. The
decisions made by top managers, dealing with the mission of the organization
and strategies for achieving it, have an impact on the whole organization. Mid-
dle-level managers, in turn, focus their decision making on implementing the
strategies, as well as on budgeting and allocating resources. Finally, fi rst-level
managers deal with repetitive, day-to-day operations. Decision making is indeed
universal.
Managers make big and small decisions daily. Whether they realize it or not,
they go through a process to make those decisions. Whether planning a budget,
organizing a work schedule, interviewing a prospective employee, watching a
worker on the assembly line, or making adjustments to a project, the manager is
taking part in a decision-making process.
Figure 7.1 Decision making in the five management functions
Planning What is the mission of the organization? What should it be?

What are the needs of the customers?
What are the organization’s strengths, weaknesses, threats, and
opportunities?
What are the strategic, tactical, and operational goals?
What strategies will achieve the goals?
Organizing What organizational option will best achieve the objectives?
What type of departmental structure will result in teamwork?
How many employees should report to a manager?
When should a manager delegate authority? How much?
Staffing How many employees will we need this year?
What skills are necessary to do this job?
What type of training will best prepare the employee?
How can we improve the quality of the performance appraisal
system?
Leading What can we do to have motivated employees?
What style of leadership is the most effective with an individual?
What strategies are available to manage conflict?
How can we build teams?
Controlling What tasks in the organization need to be controlled?
Which control technique is the most effective for monitoring
finances?
What is the effect of controls on employee behavior?
How do we establish acceptable standards of performance?
Approaches to Decision Making
2
Distinguish between
formal and informal
approaches to decision
making
Not all decision-making situations are identical. The nature of the decision of-
ten dictates to a manager what approach to take. The more complex or uncer-
tain the problem to be solved, the more effective the manager will be if the for-
mal decision-making process, described in detail later in this chapter, is used.
Less complicated problems or those that a manager has a great deal of expe-
rience in solving can be handled less formally by following habit or relying on
past solutions. Whether the decision is a programmed or nonprogrammed one
depends on the nature of the situation.
Programmed and Nonprogrammed Decisions

programmed decisions Programmed decisions involve problems or situations that have occurred of-
Decisions that involve problems ten enough that both the circumstances and solutions are predictable.4 In other
or situations that have occurred
often enough that both the cir- words, programmed decisions are made in response to recurring organizational
cumstances and solutions are problems. Examples of programmed decisions include the programmed inven-
predictable; made in response tory reorder point at Wal-Mart, the forms necessary to add a person to payroll,
to recurring organizational
problems and the handling of routine correspondence. This chapter’s Ethical Management
feature identifies a situation in which a programmed decision may have solved a
large problem for WorldCom. Figure 7.2 presents a model of a programmed de-
cision for processing payroll.
Chapter 7 Making Decisions
MANAGING TECHNOLOGY 195
a g es
Breakthrough Business Models
Get t y Im
Electronic commerce, as a business opportunity, is still tory with a team of experts to classify Web sites by sub-
evolving. The Internet has allowed breakthrough busi- ject and insert them into an orderly hierarchy that was
ness models that were never possible before. A business easy to browse. It now uses Google as its search engine.
model is the method by which a company makes money. Today Yahoo! is a portal, a starting point with lots of ancil-
The most successful sites are more than just places to lary services from lots of content partners. The objective
buy and sell. They add value by providing useful informa- changed from “Where can we send you?” to “Why don’t
tion, entertainment, and community. Some unique and you stay here?” Yahoo! offers a vast number of services—
successful Internet businesses are Amazon, Priceline, free e-mail, free homepages, message boards, personal-
Yahoo!, and eBay. ized news, chat services, electronic shopping, and Internet
Amazon pioneered selling books on the Web. When access—to Web surfers.
Jeff Bezos, Amazon’s Founder, first heard about the EBay started as a place for trading Pez dispensers. It is
Web’s high growth potential, he reputedly drew up a list an online auctioneer and now lists more than four million
of 20 potential products he could sell over the Internet be- items for sale—everything from cars to computer parts to
fore he chose books. The books that Amazon sells are ex- cosmetics. Of course, eBay itself doesn’t actually carry the
actly the same as the books consumers can buy in their inventory; it just hosts the auctions, charging the sellers a
local bookshops. Amazon’s site focuses on community, is small fee for its services. EBay leveraged Internet technol-
interactive, and tailors itself to each individual shopper. ogy in a new way by bringing together buyers and sellers
Priceline.com pioneered “name your price” for airline of collectibles and creating an online “garage sale.”
tickets. The customer sets the price and Priceline commu-
• Amazon, Priceline, Yahoo!, and eBay saw how to use
nicates that demand directly to participating sellers or to
the Internet to create new kinds of businesses. For
their private databases. Consumers agree to hold their of-
each of these companies, identify one or more com-
fers open for a specified period of time to enable priceline
panies that failed to innovate adequately, and saw its
.com to fulfill their offers from inventory provided by par-
business suffer as a result.
ticipating sellers.
• What decisions should the managers, at the compa-
Yahoo!, one of the world’s most popular Web sites,
nies identified above, have made?
was one of the first search engines. It started as a direc-
Nonprogrammed decisions are made in response to problems and oppor- nonprogrammed decisions
tunities that have unique circumstances, unpredictable results, and important Decisions made in response to
problems and opportunities that
consequences for the company. Managers often fi nd themselves in situations have unique circumstances,
that have never occurred before or in which the problem is not thoroughly de- unpredictable results, and im-
fi ned. Examples can be seen in breakthrough business models, the subject of this portant consequences for the
company
chapter’s Managing Technology. The decisions made by Bill Gates for Microsoft
are examples of nonprogrammed decisions. There are no programmed decision
steps for making software, buying a “shopping experience,” or for creating a
dazzling marketing strategy. To make these choices, Bill Gates spent hours an-
alyzing the customer, developing and analyzing the alternatives, and making
choices. When managers face these difficult, significant choices, they must use
a sound decision-making process. Furthermore, in these days of turbulent envi-
ronments and fierce competition, it becomes even more important to make good
decisions.
Figure 7.2 A programmed decision outline for completing a routine payroll
Start
Input
Name, payroll no.,
wage per hour,
hours worked
Processing
Subtract 40 from Yes Hours
hours worked greater than
40?
No
Multiply
additional hours
by overtime rate
Multiply hours
worked by
hourly pay
Multiply 40 by
hourly pay
Calculate
Add overtime withholding and
and regular pay net pay
Output
Print name,
payroll no., and
net pay
End of No
payroll?
Yes
Stop
a g es
Questionable Decision Making
Get t y Im
at WorldCom
WorldCom, a telecommunications firm, called itself the In 2005, Myers was sentenced to one year and one
preeminent global communications company for the day in prison. Sullivan was sentenced to five years in
digital generation. Its assets included “MCI, the second- prison. At his sentencing, Sullivan told the judge, “I am
largest long-distance service provider, and UUNet, a sorry for the hurt that has been caused by my cowardly
high-speed network that handles about half of the world’s decisions. I stand before you today ashamed and embar-
Internet traffic—including about 70 percent of all e-mails rassed. I deeply regret my actions and apologize for the
sent within the United States and half of all e-mails sent pain I have caused” (Johnson).
in the world” (Delio). WorldCom joins a growing list of companies struck
WorldCom’s strategy had been to expand its fiber-optic by accounting scandals that have shaken public faith in
network. Unfortunately, the market did not exist. Internet business.
demand did not materialize. Long-distance charges de- Charles Niemeier, chief accountant for the Securities and
clined. Instead of reporting losses, WorldCom overstated Exchange Commission’s Enforcement Division, said, “No
its profits for 2000 and 2001 by illegally transferring billions one starts out to be the biggest fraud in history.” Rather,
of dollars of expenses throughout the company’s capital he explained, fraudulent activity tends to escalate from
expenditure accounts. When spending is listed as a capi- a small misdeed that then needs to be repeated and ex-
tal expense, a company can delay applying it against earn- panded to account for expected growth rates. Once
ings and spread its effect over many years, thus keeping you’ve told your first white lie, more shading is inevitably
its profits on paper higher. required to protect the first misstep (Liesman).
In June 2002, the Securities and Exchange Com-
• What ethical questions are raised by WorldCom?
mission (SEC) filed civil fraud charges against WorldCom,
• As a consumer, what would be your response to
naming “accounting improprieties of unprecedented
WorldCom’s ethical practices?
magnitude.” On July 22, 2002, WorldCom filed for the
Sources: Carrie Johnson, “Ex-WorldCom CFO Gets 5-Year
largest bankruptcy in U.S. history. On August 1, 2002, Term,” Washington Post, August 12, 2005, p. D01, http://www
two of WorldCom’s former finance executives—Chief .washingtonpost.com/wp-dyn/content/article/2005/08/11/
AR2005081100788.html; Michelle Delio, “As WorldCom Goes,
Financial Officer Scott D. Sullivan and Controller David F. Will Net Also?”, Wired News, July 4, 2002, http://www.wired
Myers—were charged with securities fraud and led off .com/news/business/0,1367,53650,00.html; Steve Liesman,
“Most Fraud Follows Failure, As CEOs Confront Pressure,” The
in handcuffs by the FBI. The executives were shown in Wall Street Journal, August 2, 2002, http://online.wsj.com/article/
handcuffs, over and over again, on national TV. 0,,SB1028236446272554840.djm,00.html.
Seven-Step Decision-Making Process

The decision-making process has seven steps, as shown in Figure 7.3. Each one
is essential to the entire process. The sections that follow will examine each step.
Defining the Problem or Opportunity

The initial and most critical step is to defi ne the problem or opportunity. The ac-
3
List the steps in the
decision-making process
curacy of this step affects all the steps that follow. If the problem or opportunity
is incorrectly defined, every other step in the decision process will be based on
that false start. If a company is losing market share, is the problem poor product
quality, technical inferiority, a slow warehouse, or an inadequate sales force?
Managers must pinpoint the problem correctly, because each of these problems
requires a different solution.
Figure 7.3 The decision-making process
Step 1 Defining the Problem or Opportunity
Step 2 Identifying Limiting Factors
Step 3 Developing Potential Alternatives
Step 4 Analyzing the Alternatives
Step 5 Selecting the Best Alternative
Step 6 Implementing the Decision
Step 7 Establishing a Control and Evaluation System
In problem solving, a manager must differentiate between a problem and a

symptom symptom. In the previous example, the symptom is dwindling market share; the
Signals that something is wrong problem may be poor quality. A symptom signals that something is wrong. 5 It
and draws the manager’s atten-
tion to finding the cause—that should draw the manager’s attention to finding the cause—that is, the problem.
is, the problem To isolate the problem from the symptoms, a manager needs to develop a sound
questioning process and to ask the right questions. According to Peter Drucker,
“The most common source of mistakes in management decisions is the empha-
sis on fi nding the right answer rather than asking the right questions.”6 In the
process of asking questions, the manager gathers relevant and timely data about
the problem. The best way to get good data is for managers to tune in to the
work environment. According to management expert Tom Peters, the source of
the most relevant and accurate information for a manager is the people in the
workplace.7
To assist in defi ning the problem, Charles Kepner and Benjamin Tregoe,
who conducted detailed studies of managerial decision making, recommend that
managers ask a series of questions using the funnel approach to distinguish be-
tween symptoms and problems.8 Figure 7.4 illustrates how the funnel approach
can aid in defi ning the problem. Initially, a manager notices a problem, such as
unmet production quotas. He or she then begins to apply the funnel approach
by asking questions to identify the real problem, not just the symptom.
• Are hours worked decreasing? No, absenteeism is normal.
• Is material needed for operations unavailable? No, material is flowing at a
normal pace.
Figure 7.4 The funnel approach to defining a problem
Loss of Production:
Why?
Daily Quota Not Being Met.
Absenteeism? No
Lack of Material? No
Employee Morale? Maybe
Wages? No
Working Conditions? No
Supervision? Maybe
Technical
Supervision?
Yes
Develop
Technical
Skills
• How is employee morale? Are there complaints or concerns? Well, as a mat-

ter of fact, there are some rumors of discontent.
• Is it wages? No.
• Is it working conditions? No.
• Is it supervision? Some workers are concerned about the supervision they
receive.
• What are their concerns? The supervisor does not answer their questions
about technical aspects of the job.
By using the funnel approach, the manager fi nds out that the supervisor
lacks technical skills.
Identifying Limiting Factors

Once the problem is defi ned, the manager needs to identify the limiting factors
of the problem. Limiting factors are those constraints that rule out certain al- limiting factors
Those constraints that rule out
ternative solutions. One common limitation is time. If a new product has to be certain alternative solutions;
on the dealer’s shelves in one month, any alternative that takes more than one one common limitation is time
month will be eliminated. Resources—personnel, money, facilities, and equip-

ment, as well as time—are the most common limiting factors that narrow down
the range of possible alternatives.
Developing Potential Alternatives
At this point, the manager should look for, develop, and list as many possi-
alternatives ble alternatives—potential solutions to the problem. These alternatives should
Potential solutions to the eliminate, correct, or neutralize the problem or maximize the opportunity. Al-
problem
ternative solutions for a manager faced with the problem of trying to maintain
scheduled production may be to start an extra work shift, to regularly schedule
overtime, to increase the size of the present workforce by hiring employees, or
to do nothing. Doing nothing about a problem sometimes is the proper alterna-
tive, at least until the situation has been thoroughly analyzed. Occasionally, just
the passing of time provides a cure. Of course, the more serious or long term the
problem, the less likely that is to be the case.
Sources for alternatives include the manager’s own experience; other per-
sons whose opinions and judgments the decision maker respects; group opinions,
obtained through the use of task forces and committees; and outside sources, in-
cluding managers in other organizations. (Group decision making will be dis-
cussed in detail later in the chapter.)
When building this list of alternatives, a manager should avoid being critical
or judgmental about any alternative that arises. Censoring ideas at this stage can
needlessly limit the number of alternatives developed.9 Initially, each alternative
identified should be a separate solution to the problem or a separate strategy for
seizing the opportunity. Alternatives that are simply variations of one another pro-
vide less choice in the final analysis. After the initial brainstorming process, vari-
ations of the listed ideas will begin to crystallize and combinations will emerge.
When developing alternatives, the goal is to be as creative and wide-ranging
as possible. Any decision for which a manager cannot identify more than one al-
ternative is by defi nition not a decision since more than one choice does not ex-
ist. Decision makers must always seek out alternatives to ensure that there are
choices to be made, and it is to be hoped that the best choice will result in the
best decision.
Analyzing the Alternatives

The purpose of this step is to evaluate the relative merits of each alternative, to
identify the positives and negatives or the advantages and disadvantages of each.
To assist in this process the manager should ask two questions:
1. Does the alternative fit within the limiting factors?
2. What are the consequences of using this alternative?
If any alternatives confl ict with the limiting factors identified earlier, they
must be automatically discarded or a variation must be found—one that does
not confl ict with those limiting factors. For example, the department has to pro-
duce 1000 motors by the end of the month—an increase of 500 over the normal
quota—and this increased quota needs to be accomplished with a maximum
of $10,000 of increased expenditures for employee wages. One alternative is to
schedule overtime at night and on Saturdays. When the manager evaluates the
suggestion, the calculations reveal that this alternative will result in 1000 addi-
tional units produced—but at a cost of $17,000. As a result, this alternative ei-
ther needs to be rejected or combined with another alternative. Note the fate of
Alternatives 1 and 2 in Figure 7.5.
Figure 7.5 Analyzing alternatives
Does the alternative Are there undesirable

fit within guidelines? consequences?
Retain Alternative Retain Alternative

Alternative 1
Alternative 2 Yes Alternative 3 Alternative 3 No

Alternative 4
Alternative 3 Alternative 4 Alternative 4
Alternative 4
Yes
No
Eliminate Eliminate
Alternative 1 Alternative 3
Alternative 2
Second, the manager needs to identify the consequences of using an alterna-

tive. Some alternatives, even though they fall within the guidelines established
by the limiting factors, have consequences that make them undesirable. For in-
stance, in order to increase the output of one department, an alternative is to
hire more employees; to fund that hiring requires taking money from the oper-
ating budgets of other departments. Even though the alternative solves the prob-
lem, the political and morale problems caused may require it to be eliminated, as
is the case with Alternative 3 in Figure 7.5.
Depending on the type of problem, the manager’s analysis of the alternatives
can be supported by the application of nonquantitative methods—experience and
intuition—or quantitative methods—such as payback analysis, decision trees,
and simulations. These methods will be discussed in detail later in the chapter.
Selecting the Best Alternative

By this step, the remaining alternatives have been listed, along with their corre-
sponding advantages and disadvantages. Which one(s) should be selected?
The best choice is the one that offers the fewest serious disadvantages and
the most advantages. Take care not to solve one problem and create another
with your choice. Sometimes the optimal solution is a combination of several
of the alternatives. A classic example is the actions taken by Anne Mulcahy
when she was named CEO of Xerox, the company that introduced the copier
that transformed office work. Faced with crippling debt and facing bank-
ruptcy, Mulcahy made some hard decisions. To solve the problem she (1) raised
cash by selling assets; (2) slashed costs by reducing the number of employees;
(3) changed inefficient business processes; and (4) focused on what the company
did well.
Another excellent example is the topic of this chapter’s Global Applica-
tions feature. Jochen Zeitz, faced with a company that was almost insolvent,
made a series of bold decisions that made Puma a worldwide leader in sports
lifestyle.
Implementing the Decision

Managers are paid to make decisions and to get results from these decisions.
A decision that just sits there, hoping someone will put it into effect, may as
well never have been made. Everyone involved with carrying out the decision
must know what he or she must do, how to do it, and why and when it must be
done. Like plans, solutions need effective implementation to yield the desired re-
sults. Additionally, a good alternative halfheartedly implemented will often cre-
ate problems, not solve them. People must know the importance of their roles.
Finally, programs, procedures, rules, or policies must be thoughtfully put into
effect. Figure 7.6 provides some tips on how to translate decisions into actions.
Establishing a Control and Evaluation System

The fi nal step in the decision-making process is to create a control and evalu-
ation system. This system should provide feedback on how well the decision is
being implemented, what the positive and negative results are, and what adjust-
ments are necessary to get the results that were desired when the solution was
chosen. (And point number 6 in Figure 7.6 suggests that the feedback be pro-
vided early enough to do something about it.) Often, too, the implementation of
a decision produces outcomes that create new problems or opportunities that re-
quire new decisions. An evaluation system can help identify those outcomes.
Following these steps gives a manager a greater probability of making suc-
cessful decisions. Because it provides a step-by-step road map, the manager can
move logically through decision making and is unlikely to miss an important
point. Also, the care taken in identifying and evaluating alternatives helps en-

a g es
Making the Right Decisions
Get t y Im
at Puma
A decade ago, Puma, a Herzogenaurach, Germany-based Based on these successes, Puma has had rapid
company, was one of Europe’s also-rans. It was on the growth. “Puma’s recent success also highlights another
brink of insolvency; but when Jochen Zeitz took over aspect of successful companies: luck. For her world tour
in 1993 as CEO and Chairman of the Board, Puma’s in 2001, Madonna picked up 15 pairs of Puma Mostros
fortunes began to change. Zeitz made a number of critical at a Puma store in Los Angeles. Soon after the tour be-
decisions that has Puma grabbing sales from the giants. gan, Puma was flooded with e-mails and phone calls from
Initially, Zeitz decided to cut costs and debt. He was around the world demanding the shoes” (Rhoads).
convinced that the company had the expertise to become Puma has continued to achieve record sales and earn-
a major player, if it continued to make the right decisions; ings by reaching younger buyers. “The company’s prod-
and Puma did: ucts, including shoes, shirts and sporting accessories, use
hip designers with an eye toward emulating MTV’s buzz
• It focused on the Puma brand. “Recognizing that most among young buyers. It’s not uncommon to see musicians
buyers of sneakers use them not for sports but for cas- and rappers wearing clothes with a Puma logo prominently
ual wear, the company placed its money on a corpo- displayed” (Moore).
rate strategy combining sports and lifestyle” (Rhoads).
• It made investments in research and development “to Sources: Matt Moore, “Puma Posts 15 Percent Rise in 4Q Profit,”
build brand identity and reposition Puma as the brand ABC News, February 10, 2006; Christopher Rhoads, “Success
Stories,” The Wall Street Journal, September 22, 2003, http://online
that mixes the influences of sport, lifestyle and fash- .wsj.com/article/0,,SB106382338364356500,00.html; Puma, About,
ion” (About Puma). http://www.puma.com.
sure that the best choice is made. Finally, the creation of a control system helps
ensure that the decision is correctly implemented and subsequent outcomes are
handled effectively.
To be successful in decision making, though, the manager must also be
aware of the environment in which he or she makes decisions. The following
section examines the decision-making environment.
Environmental Influences on Decision Making

Decision making, like planning, does not take place in a vacuum. Many factors
in the environment affect the process and the decision maker.
Degree of Certainty
In some situations, the manager has perfect knowledge of what to do and what
4
Identify the environmental
factors that influence
decision making
the consequences of the action will be. In others, the manager has no such
knowledge. Decisions are made under the conditions of certainty, risk, and un-
certainty. As Figure 7.7 illustrates, each condition brings degrees of ambiguity
and potential for failure.
In conditions of certainty, the manager has what is known as perfect knowl-
edge—he or she knows all the information to make the decision.10 The manager
has made this decision before, knows the alternatives, and fully understands the
consequences of each alternative. In this type of situation, the manager simply
Figure 7.7 Degrees for ambiguity and potential for failure in decision making
Low Degree of Ambiguity High
Certainty Risk Uncertainty
Low Possibility of Failure High
chooses the alternative known to get the best results. Ambiguity and fear of fail-
ure do not exist. As an example, consider a manager at Nortel who has two new
employees and has to provide a desk, chair, and related office equipment for
each. Only four companies have been approved to bid on the equipment. Each
has provided bids in similar situations in the past. The manager knows the prod-
uct line, quality, price, terms, and service offered by all four vendors. The man-
ager needs only to identify the most important factors to him or her and choose
the vendor who best supplies these factors. Under conditions of certainty, the
manager can rely on a policy or standing plan; the decisions will be made rou-
tinely. In other words, these can be programmed decisions.
Risk provides a more complex environment. In this situation, the manager
knows what the problem is and what the alternatives are but cannot be sure of
the consequences of each alternative. Therefore, ambiguity and risk are associ-
ated with each alternative. For example, a manager has three candidates for a
position. All come from inside the company and have known performance histo-
ries, but all three worked in other jobs, so their performance in the new position
is unknown. After extensive interviewing, the manager must make a decision.
The dilemma facing the manager is that each candidate has strengths, but none
is a perfect fit for the job. The manager has an idea of the probability that they
will succeed, but each one has a degree of risk associated with him or her.
Uncertainty is the most difficult condition for a manager. This situation is
like being a pioneer. The manager cannot determine the exact outcomes of the
alternatives available, either because there are too many variables or too many
unknown facts. In addition to the uncertainty associated with the probability of
the known alternatives, the manager may not be able to identify all the possible
alternatives to be considered.11 As Figure 7.7 shows, there is high ambiguity and
high possibility of failure.
To illustrate this condition, picture a person who has just been promoted into
a management position. On the fi rst day an employee reports that a shipment to
a highly valued customer has not arrived, and the customer wants the goods—
now! The manager can identify some alternatives: send another shipment (but it
will take three days) or wait to see if the goods arrive. Unfortunately, the proba-
bility of either alternative satisfying the customer is uncertain, and there may be
other alternatives the manager has not considered. What can be done? Reliance
on experience, judgment, and other people’s experiences can assist the manager
in assessing the value of the alternatives and identifying others.
Imperfect Resources
All managers want to maximize their decisions: they want to make the perfect maximize
ones. To accomplish this, they need ideal resources—information, time, person- Managers want to make the
perfect decisions
nel, equipment, and supplies. Managers, however, operate in an environment
that normally does not provide ideal resources.
Managers in the real world do not always have, for example, the time they
need to collect all the information they desire about a problem. They may lack
the proper budget to buy printers for every PC or give raises to every employee.
Faced with these limits, they choose to do something more realistic: to satisfice— satisfice
that is, to make the best decision possible with the time, resources, and informa- To make the best decision pos-
sible with the time, resources,
tion available. If a manager always tries to maximize decisions, the result may and information available
be a great deal of time spent gathering information and not making the decision.
In addition, managers in organizations typically cannot justify the time and ex-
pense of acquiring complete information.12
Decisions cannot solve problems or seize opportunities unless they receive ac-
ceptance and support. A manager’s decision-making environment is influenced
by support (or lack of support) from superiors, subordinates, and organizational
systems.
Superiors A major factor in the manager’s decision-making environment is his

or her boss. Does the manager’s superior have confidence in subordinates, want
to be informed on progress, and support logical decisions after receiving the in-
formation? If so, then the boss can help create a good decision-making environ-
ment for the subordinate manager by providing guidance and ongoing feedback.
In contrast, insecure managers may fear the success of their subordinates
and may jealously guard the helpful knowledge they possess. Additionally, some
superiors are so afraid of being held accountable for failures that they are reluc-
tant to let their subordinates make any decision of consequence. In such an en-
vironment, the subordinate manager faces tough choices. He or she can either
work over the long run to create a climate of mutual trust, live with the frustra-
tion and be ineffective as a decision maker, or leave the environment to fi nd a
more acceptable situation.
Subordinates Subordinates affect a manager’s decision-making environment

in important ways. Many of the decisions a manager has to make directly af-
fect employees—when they work, who they work with, how they work. There-
fore, without their subordinates’ support, input, and understanding of decisions,
managers cannot be effective. This situation, in turn, creates a dilemma and
thus challenges a manager’s leadership ability. When decisions have to be made,
what level or degree of involvement should employees have from the range of op-
tions shown in Figure 7.8? 13
Which option should the manager use? Two criteria suggested by Norman
Maier influence the choice: the objective quality of the decision needed and the
degree to which subordinates must accept the decision for it to succeed.14 A de-
cision has a high degree of objective quality if it is made in a logical, rational,
step-by-step approach. In other words, a decision made by following the for-
mal decision-making process illustrated in Figure 7.3 meets the objective-quality
criteria.
Figure 7.8 Five levels of subordinate involvement
1. The manager makes the decision himself or herself, using information available
to him or her at that time. Employees provide no input or assistance.
2. The manager obtains the necessary information from subordinates, and then
makes the decision. When obtaining information from them, the manager may or
may not tell the subordinates what the problem is. The role played by the subordi-
nates is clearly one of providing the necessary information to the manager, rather
than generating or evaluating alternative solutions.
3. The manager shares the situation with relevant subordinates individually, getting
their ideas and suggestions without bringing them together as a group. Then
the manager makes the decision, which may or may not refl ect the subordinates’
influence.
4. The manager shares the situation with the subordinates as a group; collectively
obtains their ideas and suggestions. Then the manager makes the decision,
which may or may not reflect the subordinates’ influence.
5. The manager shares the situation with the subordinates as a group. Together
they generate and evaluate alternatives and attempt to reach agreement (consen-
sus) on a solution. The manager’s role is much like that of chairperson. He or she
does not try to influence the group to adopt a particular solution and the manager
is willing to accept and implement any solution that has the support of the entire
group.
Source: Reprinted from Organizational Dynamics (Spring 1973), Victor H. Vroom, “A New Look at Managerial
Decision Making,” p. 67. Copyright 1973 with permission from Elsevier Science.
A decision has a high degree of acceptance if it has been made with the in-
put of those affected by it. Decisions whose success requires the understanding
and support of those affected by them are the kinds of decisions that must meet
the acceptance criteria. Examples include decisions about changing procedures,
altering the work environment, or scheduling vacations.
How can a manager know which factors are important in a given decision,
especially when both acceptance and quality criteria can apply to the same deci-
sion? Victor Vroom and Phillip Yetton have provided managers with a series of
questions that guide the manager to the appropriate option.15 The model is the
Vroom and Yetton decision Vroom and Yetton decision tree shown in Figure 7.9. As each question is asked
tree and answered, the manager learns more about the nature of the decision. When
A series of questions that guide
the manager to the appropri- the manager reaches the circled number at the end of each series of questions, the
ate option most effective decision-making method is identified. Those numbers correspond
to the options identifying the levels of subordinate involvement in Figure 7.8.
As an example, suppose Kimberly Holland, Barnes & Noble’s store man-
ager in Plano, Texas, is developing work schedules. Holland begins the process
by asking these questions:
A Is there a quality requirement that might make one solution more rational
than another? Since the answer is no; Holland moves to D.
D Is acceptance of the decision by subordinates critical to effective imple-
mentation? The answer is yes, the subordinates are very concerned; Hol-
land now moves to E.
E If Holland makes the decision alone, will subordinates be likely to accept
it? Since the answer is no, Holland should use option 5 (from Figure 7.8).
Figure 7.9 Applying the Vroom and Yetton decision tree for choosing a decision-making style
A B C D E F G
Is there a quality Do I have Is the Is subordinates’ If I were to make Do subordinates Is conflict

requirement that sufficient problem acceptance of the decision by share the among
renders one information to structured? the decision myself, would organizational subordinates
solution more make a high- critical to its subordinates goals to be likely in
rational than quality decision? implementation? accept it? obtained in preferred
another? solving this solution?
problem?
1
No
1
Yes Yes
No
1 5
No
1
Yes
Yes 5
No Yes
No 3
4
No Yes
Yes No
Yes
No 3
No Yes 2
No 4
Yes 2
Yes 4
Yes
5
No
No Yes
No
No
Yes 4
4
Source: Adapted and reprinted from Leadership and Decision-Making by Victor H. Vroom and Philip W. Yetton, by permission of the University of
Pittsburgh Press. © 1973 by University of Pittsburgh Press.
Thus, Holland would share the problem with the subordinates as a group.
Together they would generate and evaluate alternatives and attempt to reach
agreement (consensus) on a solution. Holland should not try to influence the
group to adopt her solution, and she must be willing to accept and implement
any solution that has the support of the entire group, as long as it fits within
Barnes & Noble’s policies. In this situation, as in most situations in a work en-
vironment, working with and cultivating the support of employees for decisions
is critical to a manager. Even the highest-quality decisions will not be effectively
implemented if employees do not support them.
Organizational Systems The organizational system is the final element of the

internal environment that affects decision making. Every organization has pol-
icies, procedures, programs, and rules that serve as boundaries for a manag-
er’s decision making. Sometimes these factors may be obsolete or may cause
delays—red tape. If they pose major barriers, it may be wise for a manager to
delay a decision and try instead to modify the system.
As we noted in Chapter 5 and discussed in Chapter 6, the external environ-
ment strongly influences a manager’s actions, especially in decision making.
Customers, competitors, government agencies, and society in general can and
do influence decisions. Customers, as has been consistently noted, are a driving
force in decisions. The decisions for new products, improved service, and longer
and more accessible hours of operations are all made as companies respond to
meet or exceed customer expectations. Competitors force companies to adjust—
Coca-Cola and Pepsi; Domino’s, Pizza Hut, and Little Caesars; McDonald’s,
Burger King, and Wendy’s. The decisions to improve the quality of products and
services have been made in response to customer expectations.
In addition, government actions can alter or even reverse the decisions
companies make—as Jack Welch, former CEO of GE found out. Welch had
postponed his retirement to complete the merger agreement between GE and
Honeywell International. When the proposed transaction drew the attention of
the European Union, pressure was applied to derail the decision.
Influence of Managerial Style on Decision Making
5
Describe the personal
attributes of a manager
that influence decision
making
In addition to the environment in which decisions take place, other factors influ-
ence managerial decision making. These are the manager’s personal attributes:
his or her decision-making approach, ability to set priorities, timing of deci-
sions, tunnel vision, previous commitments, and degree of creativity.
Personal Decision-Making Approaches

Not all managers approach decisions the same way. Many have a bias for one of
the following three approaches.
Rational/Logical Decision Model This step-by-step approach, illustrated in

Figure 7.3, is the one recommended in this chapter. This process focuses on facts
and logic and minimizes intuitive judgments. The manager using this method
tries to thoroughly examine a situation or problem in an orderly fashion. The
manager relies on the decision-making steps and on decision tools such as pay-
back analysis, decision trees, and research, which will be discussed later in the
chapter.
Intuitive Decision Model Some managers prefer to avoid statistical analysis

and logical processes in making a decision. These gut decision makers rely on
their feelings and hunches about the situation. Although it is hard to eliminate
all elements of intuition from decision making, the manager who relies on intu-
ition alone for long-range decision making could be courting disaster. The best
decisions are often the result of a blend of the decision maker’s intuition (based
on experience and hindsight) and the rational step-by-step approach.
Predisposed Decision Model A manager who decides on a solution and then

gathers the information to support the decision illustrates this approach. A man-
ager with this tendency is likely to ignore critical information. Such a manager
may face the same decision again later.16
Another related trait is the tendency of some managers to infl uence the fi nal
solution by favoring specific alternatives. In this way, the manager can distort
the value of the preselected alternative.
The critical element is for the manager to know what his or her decision-
making tendencies are and to move toward the rational model. A serious prob-
lem can result if a manager believes he or she is using one approach but in real-
ity is using a different model.
Ability to Set Priorities

The old saying, “When it rains it pours,” seems to be true about decisions. They
have a tendency to be called for continuously, possibly in bunches. Thus, a fac-
tor that can influence a manager’s success at decision making is the ability to es-
tablish priorities. Each manager may have a different set of criteria for prioritiz-
ing. Some managers may give priority to the decision having the greatest impact
on the organization’s goals. Others may assign priorities in terms of what their
bosses think is important. A third group of managers may make decisions based
on likes and dislikes. No matter what criteria are used, managers need to assign
priorities and to know why those were the priorities assigned.
For some managers the ability to set priorities may be limited by procrasti-
nation—or putting off—difficult decisions. For a procrastinator, decisions don’t
have a priority; they are made when the procrastinator gets around to them.
Avoiding the difficult decisions creates their own priority system—easy deci-
sions are fi rst and difficult decisions are second. Such a practice is dangerous.
Tough decisions often cannot be delayed.
Timing of Decisions
After a decision is made, it must be translated into action. Good timing plays
an important part in successfully implementing a decision, and improper tim-
ing can harm the best decision. A manager should be sensitive to the influence
of timing to increase the possibility of success. One example of the importance
of timing is provided by Cadbury Schweppes’ decision to purchase Adams. This
decision was timed to focus on chocolate, sugar, and gum brands. The result—
Cadbury Schweppes is now the leader in the confectionery market.17
Starbucks Coffee Company provides another example. Starbucks decided
to grow by adding more stores nationally, by entering new markets, and by ex-
panding abroad. The reason was timing. Starbucks’ success brought in a host of
new competitors each with an eye on Starbucks. In turn, Starbucks wanted to
beat the competitors to the punch.18 Today, Starbucks has more than 7600 retail
locations in the U.S. and operates in 36 countries outside the U.S.19
Tunnel Vision
A manager who approaches a problem with an extremely narrow viewpoint will
develop a limited choice of alternatives. 20 This narrow view, or tunnel vision, can tunnel vision
result from bias or limited experience. The “glass ceiling” that continues to pre- Having a narrow viewpoint
vent women from rising in corporate management might result from the tunnel vi-
sion of male managers. 21 In other instances, managers can’t “see” another way—
another alternative—because they have little or no familiarity with a situation.
Commitment to Previous Decisions

Managers must frequently make decisions that relate to previous decisions. Con-
sider the CEO who has committed substantial fi nancial resources to the devel-
opment of a product that could revolutionize the marketplace. He or she might
be strongly influenced to commit additional resources, even if the decision seems
not to be working. It is difficult to undo a decision, especially with reputations
and personal pride at stake. In such instances the implementation of a control
mechanism, with benchmarks for follow-up actions, may be helpful.
Creativity
Being innovative and able to see new ways of doing things aid the manager’s de-
cision making. Most people possess creativity, but they don’t always apply it, of-
ten because of situational factors. For example, a shift manager at McDonald’s
has specific policies, procedures, and systems that dictate how and when tasks
will be completed. In addition, this same manager works in an environment that
can best be described as chaotic during peak times. Neither of the characteris-
tics of the environment provides opportunity for reflection and innovation.
To counter the lack of innovation and creativity, organizations like 3M pro-
outside-the-box thinking mote outside-the-box thinking. Instead of approaching a problem with precon-
To adopt a new perspective and ceived ideas and limitations, managers give employees the freedom to take risks
see it work; not get caught up in
the old ways and try new ideas. “What we need to do as managers is not get caught up in the
old ways, rather we need to tap our corporate brainpower.” 22
Group Decision Making
6
Discuss the value of group
decision making, and
identify three techniques
of group decision making
Earlier in the chapter we noted how subordinates influence a manager’s deci-
sion-making process. Workers who participate in making decisions are likely
to support them. As more organizations and managers accept that real partic-
ipation in decision making produces ownership of the job and better-quality
products, the concept of group decision making will become an increasingly
important part of the work environment. Many management experts feel that
such involvement is not a maybe, but a must. Front-line employees must become
partners with the manager in the decision-making process.23 Such partnerships
are a primary goal of team management, the topic of Chapter 14. But for now,
the next section will examine three proven techniques for involving groups
in the decision-making process: brainstorming, the nominal group technique,
and the Delphi technique.
Brainstorming
brainstorming Brainstorming is a group effort at generating ideas and alternatives that can
A group effort at generating help a manager solve a problem or seize an opportunity. 24 It helps overcome tun-
ideas and alternatives that can
help a manager solve a problem nel vision by encouraging any and all ideas while withholding criticism. The fol-
or seize an opportunity lowing elements are part of a successful brainstorming session:
• A half dozen to a dozen people are gathered in a comfortable setting for a
specified time—free from outside interruptions.
• Participants are given the problem (barriers to advancement in the company)
or opportunity (new products or new markets) and told that no idea or sug-
gestion is too ridiculous to be voiced.
• The facilitator encourages the free flow of ideas until all opinions have been
presented.
• A person acting as the designated scribe records the ideas on a chalkboard

or flipchart. After the session, the ideas are sorted and examined in more
detail by the manager or another group.
An example of using brainstorming to generate problem-solving ideas can be
seen at Deloitte & Touche, the national accounting fi rm. Top management dis-
covered a sudden and rapid decrease in the number of women who were seeking
employment in the company. Women were leaving because there were barriers to
career advancement. After a series of brainstorming sessions, the company de-
veloped a separate career program for women. In addition, it created a company-
wide task force to recommend policies to support the advancement of women. 25
Brainstorming works well when the problem is straightforward and well de-
fi ned and the atmosphere is supportive of a solution; but it is only a process for
generating ideas. The next two techniques offer ways to arrive at a solution.
Nominal Group Technique

Group discussion sessions can be ineffective when only a few people talk and
dominate the discussion. The nominal group technique eliminates this problem nominal group technique
by creating a structure to provide for equal—but independent—participation by Creating a structure to provide
for equal—but independent—
all members. 26 As shown in Figure 7.10, the process involves seven steps: participation by all members
1. Problem defi nition. When the nominal group is assembled, the group leader
defi nes the problem. No discussion is permitted, although questions to clar-
ify the problem may be asked.
Figure 7.10 Steps in the nominal group technique
Problem Definition
Development of Ideas
Round-Robin Presentation
Clarification of Ideas
Initial Voting
Evaluation of Revised List
Final Voting
2. Development of ideas. Each participant writes down his or her ideas about
the problem. Once again, there is no discussion.
3. Round-robin presentation. Each member of the group presents his or her
ideas to the group. The group leader records the ideas on a flipchart or black-
board. The process continues without discussion until all ideas are recorded.
4. Clarification of ideas. The group conducts an open discussion of the ideas
with members providing explanations when needed.
5. Initial voting. In a secret ballot, each member independently ranks what he
or she thinks are the best solutions. The solutions with the lowest average
ranking are eliminated.
6. Evaluation of revised list. The group members question each other on the
remaining solutions.
7. Final voting. In another secret ballot, all the ideas are ranked. The idea re-
ceiving the highest vote total is adopted.
In addition to providing a structure for equal participation, the nominal
group technique encourages individual creativity. The environment created by
the structure provides the opportunity to have an idea developed and presented
without interference. The negative associated with this process is that it is time-
consuming.
Delphi Technique
Delphi technique Similar to the nominal group technique is the Delphi technique. It, too, pro-
Group decision making vides a structure, leads to consensus, and emphasizes equal participation—but
conducted by a group leader
through the use of written the Delphi participants never meet. Rather, the decision making is conducted by
questionnaires; it provides a a group leader through the use of written questionnaires. The process works as
structure, leads to consensus, follows:
and emphasizes equal
participation 1. The problem is stated to a group of experts through a questionnaire. Each
person is asked to provide solutions. The experts do not interact.
2. Each participant completes the questionnaire and returns it.
3. A summary of opinions is developed from the answers received. The sum-
mary is distributed to the experts along with a second questionnaire.
4. The experts complete the second questionnaire. In this stage, participants
have the benefit of other people’s opinions and can change their suggestions
to reflect this.
5. The process continues until the experts reach consensus.
Although it is expensive and time-consuming, the Delphi technique works
well. It also provides for a thorough, unrushed analysis of information, a fac-
tor that aided Sheraton in solving a problem—lower sales caused by a sales force
that wasn’t viewed as helpful or as knowledgeable as its competitors. To ad-
dress the problem, Sheraton used its Meetings Advisory Board. By following
the Delphi process, the board’s experts identified that the major difference be-
tween Sheraton and its competitors was that Sheraton was a generalist, whereas
the competitors were specialists. The competitors broke business down accord-
ing to corporate transient, corporate group, and association group travel, each
of which has different needs. The solution dealt with refi ning general categories
into specific market segments. Sales increased by 31 percent. 27
a g es
Not Old . . . Wise
Get t y Im
Jim Tighe will be the first to admit he hasn’t always and you are willing to pitch in, whatever issues there
done the right thing when it comes to managing older might be get resolved very quickly.”
workers. He has been managing older workers since he Cindy Hawes, Office Manager, reports to the much
was 28 years old. In many cases they were old enough younger Tighe. Hawes said she quickly adjusted. “This
to be his parents. Admittedly, Tighe made plenty of is my first experience with the software industry, which
mistakes—assuming that everyone thought as he did. is typically a young industry,” she said. “Coming from a
After several years as a supervisor, Tighe has a differ- background where most of the people were the same
ent perspective. As the Corporate Controller for Pathlore age, and then going to an industry that is youthful, has
Inc.’s Chicago office, Tighe values the diversity. Pathlore meant that there is a lot of energy that is contagious.”
is based in Ohio and provides learning management soft-
• One in five of the mature workers surveyed in a 2004
ware and solutions. Individuals look at things differently,
study by the New York-based Families and Work In-
regardless of age, culture, or race. Older workers are par-
stitute said they’d had problems with their young
ticularly valuable in the operation. They can sometimes
bosses. How can young mangers get along with older
point out landmines that are obvious to them from their
workers?
many years on the job. In full agreement, Tighe knows
that older workers have good ideas and may know more.
Source: Diane E. Lewis, “Younger bosses, older workers seek
He adds, “I was aware of the age difference, but I found balance on the job,” The Boston Globe, January 30, 2005, http://
out that if you show that you know what you are doing bostonworks.boston.com/globe/articles/013005_movie.html.
Advantages and Disadvantages of Group Decision Making

Regardless of what group techniques a manager chooses to use for decision mak-
ing, the manager should be aware of the advantages and disadvantages.
Advantages Groups bring a broader perspective to the decision-making pro-

cess. The rich diversity found in today’s organizations broadens the views on
any topic. The differences in cultures, ethnicity, national origin, gender, and age
found within provide valuable perspectives in defi ning a problem and in devel-
oping alternatives (a factor emphasized at Pathlore Inc.’s Chicago offi ce in this
chapter’s Valuing Diversity feature). When people participate in decision mak-
ing they are more likely to be satisfied with the decision and to support it, thus
facilitating its implementation. Group decision making provides the opportu-
nity for discussion to help answer questions and reduce uncertainty for decision
makers who may not be willing to take risks alone.
Disadvantages disadvantage—besides the fact that group decision making is

time-consuming—is the possibility that the decision reached will be a compro-
mise rather than the optimal outcome. At times individuals can become guilty
of groupthink. The members become so committed to the group that they be- groupthink
come reluctant to disagree with other members. Additionally, groups have dif- Group members becoming
so committed to the group that
ficulty in performing certain tasks. Specifically, groups struggle when assigned they become reluctant to
to draft policies and procedures; they do much better at editing or commenting disagree
on documents. Also, most groups have difficulty in taking the initiative, instead
they tend to react rather than initiate action. A fi nal disadvantage is that in
group decision making, no one person has responsibility for the decision. 28
Quantitative Decision-Making Techniques
7
Explain three quantitative
techniques for decision
making, and describe the
situations in which each is
A manager has several quantitative tools available to help improve the overall
quality of decisions. Depending on the type of problem, the application of deci-
sion trees, payback analysis, and simulations provide several choices.
Decision Trees
appropriate Earlier in the chapter, Barnes & Noble store manager Kimberly Holland used
a version of a decision tree (Figure 7.9) to help her decide to what degree her
employees needed to be involved in developing a new work schedule. Kimberly
decision tree chose this tool because a decision tree shows a complete picture of a potential
A graphical representation of decision. It allows a manager to graph alternative decision paths, observe the
the actions a manager can take
and how these actions relate to outcomes of the decisions, and see how the decisions relate to future events.
other events To illustrate the value and flexibility of this tool, a decision tree has been
developed to help Lisa, a Marketing Manager for Pizza Hut. She must decide
whether to spend money either test-marketing in a new market or improving the
company’s marketing performance in an existing market—the kind of situation
that McDonald’s, Taco Bell, and TGI Friday’s face constantly. If the venture into
the new market succeeds, Pizza Hut will have a competitive edge. If it fails, com-
petitors (Little Caesars, Domino’s) may enter the market and gain so much mo-
mentum that Pizza Hut may lose its overall position. The danger stems from the
potential lack of success in the new market and the vulnerability created in the
old market by diverting funds and attention away from it.
Lisa’s decision tree comprises branches from decision points (squares) and
chance or competitive moves (circles). In Figure 7.11, the decision path starts
with Lisa’s initial decision: to test-market or not to test-market. If the outcome
of the decision (shown to the right of the decision point) is to authorize the proj-
ect, point B is the second point for a decision. At point B the test-market has
been successful. Then Lisa must decide between entering the market with a full-
scale advertising program or waiting until a later date. With each alternative she
will face competitive actions by Little Caesars and Domino’s.
Decision trees require a manager to include only important decisions and
events or results—that is, ones having consequences that need to be compared.
Note that Figure 7.11 also projects an outcome if Lisa chooses not to begin test-
marketing at all.
Payback Analysis
“Out of these three models, which one should I buy? They all have different
prices and features. How do you compare apples and oranges?” Sometimes man-
agers face a dilemma in making capital-purchasing decisions. To evaluate alter-
payback analysis natives, an excellent strategy is payback analysis, a technique that ranks alterna-
A technique that ranks alter- tives according to how long each takes to pay back its initial cost. The strategy
natives according to how long
each takes to pay back its ini- involves choosing the alternative that has the quickest payback.
tial cost Quick Copy owner Tim Collins plans to purchase a computerized printing
system. Three suppliers have given him prices for three different systems. Each
system has unique features that will affect the revenue to be earned. Which one
Figure 7.11 Decision tree with chains of activities and events
Competition enters Try to expand,

market hold market share
Expand into
new market
Decision Points immediately
Competition Expand market and
does not enter market expand market share
B
Test
marketing Enter market late,
succeeds Wait to Competition enters
Chance or market small market loss
Competitive enter new
market
Competition No change in market,

Test does not enter market cost only in testing
marketing
Test
marketing
fails Enter market late,
Competition enters
market moderate market loss
A
No test Competition No change in

marketing does not enter market situation
Competition enters Enter market late,

market large market loss
Competition No change in
does not enter market situation
Source: Adapted and reprinted by permission of Harvard Business Review. An exhibit from “Decision Trees for Decision Making,” by John F. Magee
(July–August 1964), p. 129. Copyright © 1964 by the Harvard Business School Publishing Corporation. All rights reserved.
should Collins choose? To be able to compare systems, Collins prepares a pay-

back analysis as shown in Figure 7.12. For each system, Collins lists the initial
cost along with the projected annual revenues derived from the system until that
cost is paid back. As Figure 7.12 shows, System A takes seven years to recover
Collins’s investment; System B takes six years. In this case System C’s four-year
payback makes it the best investment—even though it has the highest initial cost.
Simulations
Chapter 2 described the quantitative school of management theory. It focused
on the development of mathematical techniques to solve management problems
and aid decision making. These techniques are generally referred to as simu-
lations and include the specific applications of queuing models or waiting-line
models and game theory. Initially this section examines the general concept of
simulations and then explores queuing and game theory.
Figure 7.12 An example of a payback analysis
Computerized Printing System

A B C
Initial Cost $14,000 $12,000 $17,000
Revenues Year 1 0 500 2,000
Year 2 1,000 1,000 3,000
Year 3 1,500 1,500 5,000
Year 4 2,000 2,500 7,000
Year 5 2,500 3,000
Year 6 3,000 3,500
Year 7 4,000
$14,000 $12,000 $17,000
Payback Period ——— 7.0 ——— 6.0 ——— 4.0

$2,000 $2,000 $4,250
simulation A simulation is a model of a real activity or process. When a process is sim-

A model of a real activity or ulated, a model is created that will behave like that process. For example, the
process
federal government and many private corporations and universities have com-
puter simulations to tell how the economy might respond when various changes
are introduced into it. Data on a proposed tax cut or increases in the interest
rates can be fed into a computer; what will emerge is a view of the areas of the
economy that will be affected and how they will change.
Models may be physical or abstract. The computer model just mentioned is
an example of an abstract model, as are a designer’s drawings or mathematical
or chemical equations. Most of us are more familiar with physical models, be-
cause they are tangible and three-dimensional. Manufacturers’ prototypes (one-
of-a-kind, handmade models), architectural models of finished structures, and
Detroit’s dream cars are just a few examples. As you will soon see when queuing
and game theory are discussed, a simulation or model is used in decision mak-
ing because it allows managers to
• See the results much more quickly than would be the case if actual changes
were made in the real world.
• Anticipate competitive responses to strategy decisions.
• Make decisions under a wide variety of changing conditions.
• Avoid the interruptions of normal business operations that real-life experi-
mentation can cause.
• Avoid the time loss and expense associated with experimenting with actual
company assets.
• Avoid annoying the customers and taking facilities out of service while
training or experimentation is being conducted.
If you have ever stood in line at a restaurant, movie theater, grocery store,
queuing models or waiting- or discount store, you will appreciate the value of queuing models or waiting-
line models line models. These help managers decide what length of waiting line or queue
Models that help managers de-
cide what length of waiting line would be optimal. At Wal-Mart, managers have a continuing concern about
or queue would be optimal the length of the checkout line at the cash register and the subsequent time cus-
tomers must wait in that line. Customers forced to wait too long might take
their business to Target or Kmart. Management must weigh the cost of opening
other checkout areas to provide faster service against the risk of losing custom-
ers. They must decide what balance between customer dissatisfaction and oper-
ating costs is the best.
To help achieve the proper balance, managers can create a model simulat-
ing the bottlenecks that form in checkout lines. The neighborhood supermar-
ket opens additional checkout counters when two to three customers are in line.
Most movie theaters have created a ticket window where tickets may be pur-
chased hours before a show.
Queues also form in manufacturing, as goods are funneled through a pro-
duction run. To help solve the problem, companies have devised the just-in-time just-in-time inventory
inventory approach. At Texas Instruments, parts used in manufacturing are de- Delivery of raw materials or
other kinds of normal invento-
livered several times each day, and the goods are sent immediately to where they ries to correspond to produc-
are needed in the production line. This just-in-time (JIT) delivery of raw materi- tion schedules, leading to the
als or other kinds of normal inventories to correspond to production schedules elimination of the need to ware-
house items
has led to the elimination of the need to warehouse items.
Game theory attempts to predict how people or organizations will behave game theory
in competitive situations. It allows managers to devise strategies to counter the Attempts to predict how people
or organizations will behave in
behavior of competitors. Managers apply game theory in situations in which or- competitive situations
ganizations compete against one another in regard to price, product develop-
ment, advertising, and distribution systems. If managers at Procter & Gamble
were able to predict with a degree of accuracy whether and within what time
frame Unilever would initiate a price decrease, the managers at Procter & Gam-
ble could decide whether or not to decrease their own prices.
The use of game theory has been exploding in the last few years in corpo-
rate takeovers, negotiations, and competitive bidding. Before moving to acquire
Medco, a mail-order distributor of low-priced generic drugs, drugmaker Merck
hired a game theorist to study the impact of health reform on Merck’s drug
prices—both with and without Medco. In another situation General Reinsur-
ance, worried that it was being used to extract a higher price from a rival, was
advised by a game theorist to change the rules—that is, refuse to participate un-
less there was only a single round of bids. Then General Reinsurance was ad-
vised to make unconditional bids that forced the seller to make quick responses.
It also gave its rival, General Electric, little time to come up with counteroffers.
The rules gave an equal chance to the smaller bidder, and General Reinsurance
won the contest in a quick, one-week decision. 29
Creating an Environment for Effective

Decision Making
Because managers in today’s organizations face complex, challenging, and stress-
ful decision-making demands, it is critical that they create an effective decision-
making environment for themselves. The following hints can help them do so: 30
1. Provide time for decisions to be made. Don’t be pushed—or push others—
into making a decision too rapidly. If necessary, negotiate for more time to
8
Determine strategies a
manager can use to create
a more effective decision-
making environment
make a quality decision.
2. Have self-confi dence. Courage and self-confidence are required for a man-
ager to make the risk-laden decisions called for in today’s rapidly changing
business environment.
3. Encourage others to make decisions. Trust subordinates and allow them the
freedom to act.
4. Learn from past decisions. The confidence of others is gained by not mak-
ing the same mistake. Study decisions to see why they worked—and why
they didn’t.
5. Recognize the difference in decision-making situations. All decisions do
not have the same degree of risk or priority, nor should all decisions be ap-
proached the same way.
6. Recognize the importance of quality information. Assume that quality in-
formation is available and insist that subordinates support their decisions
with data.
7. Make the tough decisions. Don’t procrastinate or avoid dealing with deci-
sions that could be unpopular. Once the decision is made—whether yes or
no—provide an explanation to everyone.
8. Know when to hold off. Recognize that sometimes the best decision is no
decision; it may be necessary for events to play themselves out or for more
information to be gathered.
9. Be ready to try things. Today’s excellent companies are those that act—that
try things. Rather than debating a new product idea, they test-market it.
Managers who change the status quo, even on a small scale, can learn more
about their market or workforce by watching the effects of those changes
than can those who simply observe the status quo.
10. Be ready to ask for help. Everyone needs help at some time or another; it
isn’t a sign of weakness to ask for assistance. In fact, knowing when to ask
for help is a sign of wisdom.
CHAPTER SUMMARY
Recognize that decision making is performed alternatives, (4) analyzing the alternatives, (5) selecting
1 at all management levels. Decision making is
a part of all managers’ jobs. At all levels of the organi-
the best alternative, (6) implementing the decision,
(7) establishing a control and evaluation system.
zation, managers are engaged in decision making. Top
Identify the environmental factors that influ-
managers make decisions dealing with the mission of the
organization and strategies for achieving it. Middle-level
4 ence decision making. Decision making is influ-
enced by the following environmental factors:
managers focus their decision making on implement-
ing the strategies, as well as budgeting and allocating re- • Degree of certainty. Managers make decisions under
sources. First-level managers deal with repetitive day-to- three conditions of knowledge and ambiguity—
day operations. certainty, risk, and uncertainty.
Distinguish between formal and informal • Imperfect resources. Managers do not make deci-
2 approaches to decision making. Not all deci-
sion-making situations are identical. The nature of the
sions with ideal resources—information, time, per-
sonnel, equipment, and supplies.
decision often dictates what approach to take. Com-
• Internal environment. A manager’s decision is influ-
plex problems or situations require the use of a formal
enced by superiors, subordinates, and organizational
decision-making process. Less complicated problems
systems.
or those that a manager has had a great deal of experi-
ence in solving can be handled less formally by following • External environment. Customers, competitors, gov-
habit or relying on past situations. ernment agencies, and society in general are forces
that can and do influence decisions.
List the steps in the decision-making process.
3 There are seven steps in the formal decision-
making process: (1) defi ning the problem or opportunity, 5 Describe the personal attributes of a manager
that influence decision making. The personal at-
(2) identifying limiting factors, (3) developing potential tributes of a manager that influence decision making are
• Personal decision-making approaches. Managers • A decision tree shows a complete picture of a po-
may prefer to use the rational/logical decision model, tential decision. It allows a manager to graph alter-
the nonrational/intuitive model, or the predisposed native decision paths, observe the outcomes of the
decision model. decision, and see how the decision relates to future
events. Decision trees help the manager think care-
• Ability to set priorities. Each manager may have a
fully through situations.
different set of criteria for prioritizing—greatest im-
pact on organizational goals, what the boss wants, • Payback analysis can be used in making capital pur-
likes or dislikes. chasing decisions. It helps the manager rank each
alternative according to how long each takes to pay
• Timing of decisions. Timing plays an important part
back its initial cost.
in successfully implementing a decision, and im-
proper timing can harm the best decision. • Simulations develop models of a real activity. They
allow managers to see results much more quickly
• Tunnel vision. A manager who approaches a prob-
than would be the case if actual changes were made
lem with an extremely narrow viewpoint will de-
in the real world. Types of situations include queuing
velop a limited choice of alternatives. This tunnel vi-
models or waiting-line models, used to help managers
sion may be caused by bias or limited experience.
decide what length of waiting line is optimal. A sec-
• Commitment to previous decisions. Managers must ond type of simulation, game theory, attempts to pre-
frequently make decisions that relate to previous dict how people or organizations will behave in com-
decisions. In such situations the manager may be petitive situations. It then allows managers to devise
strongly influenced to commit additional resources strategies to counter the behavior of competitors.
even if the decision seems not to be working.
Determine strategies a manager can use to
• Creativity. Although most people possess creativity,
they don’t always apply it.
8 create a more effective decision-making envi-
ronment. To create a more effective learning environ-
ment a manager can do the following:
Discuss the value of group decision making,
6 and identify three techniques of group deci-
sion making. Groups bring a broader perspective to the
• Provide time for decisions to be made.
• Have confidence.
decision-making process. In addition, people who par-
ticipate in decision making are more likely to be satisfied • Encourage others to make decisions.
with it and support it, thus facilitating implementation.
• Learn from past decisions.
Group decision making provides the opportunity for dis-
cussion, which helps answer questions and reduces un- • Recognize the difference in decision-making
certainty for decision makers who may not be willing to situations.
take risks alone. Group decision-making techniques in-
• Recognize the importance of quality information.
clude brainstorming, the nominal group technique, and
the Delphi technique. • Make the tough decisions.
Explain three quantitative techniques for de- • Know when to hold off.
7 cision making, and describe the situations in
which each is appropriate.
• Be ready to try things.
• Be willing to ask for help.
KE Y TERMS
alternatives limiting factors programmed decisions
brainstorming maximize queuing models
decision nominal group technique satisfice
decision making nonprogrammed decisions simulation
decision tree opportunity symptom
Delphi technique outside-the-box thinking tunnel vision
game theory payback analysis Vroom and Yetton decision tree
groupthink problem waiting-line models
just-in-time inventory
RE VIE W QUESTIONS
1. For each managerial level, provide examples of the 5. What are the three personal decision-making ap-
kinds of decisions that managers make at that level. proaches a manager may use? What are the charac-
teristics of each?
2. What factors influence whether a manager should use
a formal or informal approach to decision making? 6. What are three group decision-making techniques?
What is the value of each?
3. Identify each step in the decision-making process,
and describe briefly what should happen in each 7. Under what circumstances would you use payback
step. analysis? What purpose does payback analysis serve?
4. What four factors in the decision-making environ- 8. What are three strategies a manager can use to cre-
ment influence the decision-making process and the ate a more effective decision-making environment?
decision maker?

1. What example can you provide to demonstrate the 3. How do you set priorities for making decisions?
application of the seven-step decision-making pro- What rationale can you give to support your priority
cess? Take a problem or opportunity you have had setting?
and apply the seven-step process.
4. What specific applications can you give where or-
2. Provide evidence that shows which personal ganizations have applied queuing models? What ex-
decision-making approach or approaches you use. amples can you give of companies that need to apply
queuing models?
Links are provided for all Internet Exercises at obstacles to creativity? What action steps will you
http://plunkett.swlearning.com. take to improve your creativity?
1. Briefly describe a decision you need to make. Use 3. Mind Mapping, a visual representation of informa-
Plus/Minus/Interesting (PMI), a development by Ed- tion, is a recognized creativity technique developed
ward de Bono. Did it help you make your decision? by Tony Buzan in 1974 (while he was the editor
Why or why not? of Mensa magazine). Create a mind map for this
2. Skill in decision making is enhanced by creativity. chapter.
What does it mean to be creative? What are some http://www.mindtools.com/pages/article/newISS_01.htm

is an online database and research tool published by Microsoft. Add any other interesting information that
Check to see if your library subscribes to BCRC. If so, MICROSOFT AT A GLANCE
respected. Number of Software Titles:
APPLICATION CASE
Apple Inc—Failing and Succeeding Apple’s largest commercial success has been the
Apple and Microsoft were founded within a year of each iPod, a digital music player. It was introduced in Oc to-
other. Apple was a pioneer in the personal computer in- ber 2001. “Though it quickly garnered critical acclaim,
dustry. Its Macintosh was the fi rst successful home com- however, the iPod didn’t become a smash business suc-
puter with a graphical interface. In contrast to Micro- cess until Apple added a Windows version, and shortly
soft’s decision to license its operating system, leadership thereafter a Windows version of iTunes” (Fried). Today,
at Apple decided not to license Macintosh technology. Apple dominates the music player market.
Bill Gates sent a secret memo, dated June 25, 1985, to
Apple in which he recommended that Apple license its Questions
software to other computer companies. 1. How would you classify each of Apple’s two deci-
sions—programmed or nonprogrammed? Explain
Apple’s lack of leadership, however, left the
your answer.
decision on whether to license, ultimately, up to
2. What type of decision-making environment—
the engineers. Not surprisingly, the engineers,
certainty, risk, uncertainty—did Apple have for
led by the enigmatic Jean-Louis Gassée, proved
each decision? Explain your answer.
far more interested in hoarding a technology
3. What internal and external factors might have influ-
they created than in establishing a standard the
enced the success of each decision?
rest of the industry could follow. That mistake
4. What quantitative decision techniques might have
sealed Apple’s fate, dooming the company to a
helped Apple in making its decision to license its
downward spiral that it is still trying to overcome
software to other computer companies? Explain
today (Carlton).
your answer.
Businesses wanted to save money and preferred
Microsoft’s Windows software, which could be run on Sources: Jim Carlton, “They Coulda Been a Contender.” Wired, Novem-
several different manufacturers’ machines. According to ber 11, 1997; W3C, Browser Statistics, March 30, 2006, http://www
.w3schools.com/browsers/browsers_stats.asp; Ina Fried, “Celebrating
W3C, which monitors online activity, Microsoft’s share Three Decades of Apple,” CNET News.com, March 28, 2006, http://
of the operating system market, as measured by online news.com.com/Apple+celebrates+30+years/2009-1041_3-6053869
activity, is over 90 percent. Apple’s share is less than .html.
3 percent.

Timbuk2: CEO Sets a Course fully, people think I make educated, informed decisions.
Making decisions is a big part of any manager’s job. That’s my job.”
Making the decisions that determine the direction a Most of the decisions Dwight is referring to are
company will take is the job of a CEO. Mark Dwight, nonprogrammed decisions—such as the design of a new
CEO of Timbuk2, is comfortable with this role, even product or the type of fabric to use. These decisions can
though it means sometimes making unpopular deci- affect sales, the brand image, and even the overall per-
sions—or even making mistakes. Timbuk2’s 45 work- formance of the company. During one recent meeting
ers tend to be young, so Dwight sees himself as the on the new Tag Junkie bags (whose working name may
senior manager in more ways than one. “I’m the experi- be changed, requiring another decision), Dwight and his
enced executive here, and it’s my charter to manage the managerial staff discussed whether to invest in a costly,
company,” he explains. “It’s not a democracy. I ask the high-performance fabric for the bag. The cost of the
people that I think have a good perspective on [an] is- fabric could potentially put the price of the bag out of
sue, who are affected by the issue, we discuss it, and I reach for the average professional bike messenger. But in
make a command decision based on those inputs. Hope- talking about it, the group speculated that the bag could
successfully reach the motorcycle market. With night we make mistakes, but it’s better to move to a new place
reflectors and highly durable, weatherproof fabric, the than sit around and talk about it.” One recent decision
bag could be very appealing to motorcyclists—and could involved moving the production of certain bags to China
be offered at a higher price. Then the group discussed to cut production costs. Despite receiving criticism for
the working name of the product line—Tag Junkie, a the move, particularly because so many textile facto-
term used by bike messengers and also the name of the ries surrounding Timbuk2’s hometown of San Francisco
original Timbuk2 messenger bag. Did they want to res- have been closed, Dwight hung tight to his decision, in-
urrect the name for the fi nal product or try something sisting that transferring some production overseas would
new? The group tossed around the name Pro Series— actually help the San Francisco factory stay open. So
and everyone liked the ring of it. “It sounds fast,” ob- far, Dwight has been able to maintain the San Francisco
served marketing manager Macy Allatt. But the decision plant. Increased orders for the fi rm’s artistic Graphic
was not yet fi nal, since the group wanted to weigh the Messenger Bags have actually resulted in hiring more
consequences of a name change in the bike messenger employees at the San Francisco facility.
market. As a leader, Dwight doesn’t mind taking the heat.
“Mark is the guy with the vision,” says Allatt. “He “I’m a strong personality. . . . It’s my job to call the
will drive the decision making, but he’s very open to tak- shots, and I can be very dictatorial about it.” If he’s
ing input from other people. When decisions need to be right, future success for Timbuk2 is in the bag.
made, everyone sits down and we hash it out, and when
we come out of the room, we feel like we’re going to Questions
make some progress.” 1. What part do you think intuition plays in Mark
Just about every decision facing Mark Dwight has Dwight’s decision making? Why?
some degree of uncertainty. He knows that he wants 2. How would you categorize Dwight’s leadership par-
Timbuk2 to achieve $25 million in sales in five years; he ticipation style on the Vroom-Jago model? Why?
knows he wants the fi rm to reach new markets such as 3. Which of the new “decision approaches for turbu-
motorcycle riders and yet rejuvenate the bike messenger lent times” that are described in the chapter does
market; he knows the fi rm needs to fi nd new distribution Dwight use?
channels. But there’s no guarantee that a single decision
is the right one. Still, Dwight believes he is ultimately Sources: Company Web site, http://www.timbuk2.com, accessed Janu-
responsible for deciding which way to go. “We have to ary 29, 2007; Brad Stone, “Homegrown,” Newsweek, April 19, 2004,
http://www.msnbc.com.
make a decision and move on,” he remarks. “Sometimes
BIZ FLIX VIDEO CASE

Dr. Seuss’ How the Grinch Stole Christmas Whobilation One-thousand Celebration. In typical
Readers and lovers of Dr. Seuss’s original tale may be Grinch fashion, he pulls the trap door on Cindy Lou
put off by Ron Howard’s loose adaptation of the story. who unceremoniously slides out of his lair to land on
Whoville, a magical, mythical land that exists inside a snowy Whoville street. The Grinch now must decide
a snowflake, features two types of life: the Whos who whether to accept the invitation. The fi lm continues with
love Christmas and the Grinch (Jim Carrey) who hates the Cheermeister award ceremony.
it. Cindy Lou Who (Taylor Momsen) tries to bring the
Grinch back to Yuletide celebrations, an effort that What to Watch for and Ask Yourself
backfi res on all involved. Sparkling special effects will 1. What are the Grinch’s decision alternatives or
dazzle most viewers and likely distract them from the options?
fi lm’s departures from the original story. 2. What decision criteria does the Grinch use to
This scene is an edited version of the “Second choose from the alternatives?
Thoughts” sequence early in the fi lm. Just before this 3. Describe the steps in the Grinch’s decision-making
scene, fearless Cindy Lou entered the Grinch’s lair to process.
invite him to be the Holiday Cheermeister at the
ORGANIZING CHAPTER 8
Organizing Principles
CHAPTER 9
Organizational Design, Culture, and Change
Getty Images
O LIST
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ctives
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■ A n s 8 p. 2 3 5
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LEARNING OBJECTIVES
ORGANIZING After studying this chapter, you should be able to:
PRINCIPLES 1 Explain the relationship between planning and organizing
Determine the importance of the organizing process

2
List and discuss the five steps in the organizing process
3
Describe and give an example of the four approaches
4 to departmentalization
Define authority, and explain how line, staff, and functional

5 authority differ
Explain the concept of power and its sources

6
Discuss the following major organizing concepts and how
7 they influence organizing decisions
• Unity of direction • Responsibility
• Chain of command • Accountability
• Line and staff departments • Span of control
• Unity of command • Centralization and
• Delegation decentralization
Explain the term “informal organization”

8
Getty Images
Compare the informal organization to the formal organization

9
UPS: Enabling Global Commerce
United Parcel Service (UPS) is the world’s largest
package-delivery company, transporting millions Michael L. Eskew
of packages and documents every business day Born: 1949, Vincennes, Indiana
throughout the United States and in over 200 other Current Position:
countries and territories. The fastest-growing seg- Chairman and Chief Executive Officer (CEO),
ment of the company’s business is its business unit, United Parcel Service (UPS)
UPS Supply Chain Solutions, which offers an exten-
Career Highlights:
sive range of options to businesses for synchronizing
the movement of goods, information, and funds. 1972 Manager, Industrial Engineering, UPS
The architect of the organization structure at 1982 Manager, Northwest Region UPS Airlines
UPS is Chairman and Chief Executive Officer (CEO) 1991 District Manager, Central New Jersey, UPS
Michael Eskew. He believes that synchronized com- 1994 Vice President, Industrial Engineering, UPS
merce is a significant strategy and innovation. He ex- 1996 Group Vice President, Engineering, UPS
plains it in a speech to a group of business and indus- 1998 Board of Directors, UPS
try leaders, academics, and members of the media 1999 Executive Vice President, UPS
in his keynote address at Longitudes. 2000 Executive Vice President and Chairman, UPS
Synchronized commerce is about coordinating 2002 Chairman and Chief Executive Officer, UPS
the transport of goods, information and funds Education: Purdue University, BS, Industrial
up and down the supply chain in order to better Engineering, 1972; Wharton School of Busi-
optimize demand and supply cycles. It requires ness, Advanced Management Program, 1972
high degrees of collaboration, trust, precision, Personal: Married, four children
and accountability among all suppliers and part-
Source: UPS Management Committees, Michael L. Eskew
ners in the process—from sourcing, to delivery, http://ups.com/pressroom/us/bios/bios/0,2262,38,00.html.
to returns. It’s also about synchronizing every
aspect of the order management cycle with
the customer in mind. From order-entry to ful-
Copyright © 1994–2006 United Parcel Service of America, Inc. All rights reserved.
fillment, billing, returns, claims, and post-sale

nomy
service. g g lo b al e c o
p an d in er vice
UPS took advantage of the Internet to s s a n d an ex to be both s wide.
e
et acc arcel Ser vice panies world et-
synchronize and enable global com- f Intern n
Ease o bled United P ar tner to com knowledge
merce. Products must be available to na p a ation
have e and business ons taps into t also inform le
customers, who want to purchase them v id e r S o lu ti g e s b u t a n gib
pro in
ly Cha moves packa ommodit y is ain for
conveniently, quickly, and with minimal S u p p
UP S
at n ot o
nly ss’s c ll supp
ly ch
effort. This involves a series of business busine mer.
work th s. Whether a hronize the fu er and consu
activities that add value, such as design- fu n d s y n c s u p p li a fa miliar
ing, producing, marketing, delivering, and
and
a l, U PS can on bet ween b e n e fit from focus on
or vir tu ss transacti umer s s c an
le t , c o ns mpanie erever
servicing products. The parties in this value a seam rder fulfillmen ipper, and co the rest, wh
chain are interdependent enterprises collab- o s h ndle s
During and trusted U P S ha
orating and sharing data. The supply chain inter fa
ce
p ete ncies.
re co m
is the complete sequence of suppliers that their co be.
contribute to creating and delivering a prod- t m a y
tha
uct. The parties in the supply chain include
supplier, manufacturer, distribution intermedi-
ary, and customer. UPS is using the Internet to
connect the company’s supply chain with the
supply chains of suppliers and customers to-
gether in a single vast network.
Furthermore, UPS Supply Chain Solutions
is offering this service to other organizations,
which can contract all of their logistics functions
to UPS. These services offer smaller compa-
nies significant economies of scale. An organiza-
tion can instantly set up a worldwide distribution
system without incurring the costs and facing the
226 Part 3 Organizing
problems of setting up its own system. UPS has integrated its software with clients’ Web
sites to allow purchasers to arrange for shipment of goods at the same time electronic pur-
chases are made. Customers also are able to track the progress of their shipments (self-
service order tracing) through the merchants’ sites rather than logging onto the UPS Web
site. In this way, clients can focus on their core competencies and outsource support work
that doesn’t produce revenue.
Sources: Michael L. Eskew, “Mapping the New World of Synchronized Commerce,” Keynote address at
Longitudes 04 in New York, NY, April 29, 2004, http://www.pressroom.ups.com/execforum/speeches/speech/
text/0,1403,512,00.html; UPS, http://www.ups.com.
Introduction
“You can’t tell me what to do; only Larry can—he’s my boss!”
“When did the research and development department start reporting to
marketing? I thought it was part of the production group.”
“All I want is a decision on this engineering drawing. Can’t anyone make a
decision? Who’s in charge here, anyway?”
The second managerial function is organizing. Every enterprise continually
wrestles with the problem of how to organize or reorganize to pursue a new
strategy, to respond to changing market conditions, or to successfully respond
to customer expectations. It wants to achieve systematic, continuing improve-
ment—what the Japanese call kaizen (Chapter 2).
In Chapters 6 and 7, you learned that an organization’s success begins with
thorough and integrated planning and decision making—mission, goals, objec-
tives, strategy, and tactics. Planning provides the beginning. Organizing con-
verts plans into reality; it makes things happen.
A company that has taken the time, energy, and money to develop quality
plans needs to organize its employees to attain these objectives and needs man-
agers who understand the importance of organizing. Organizing, like planning,
is a process that must be carefully worked out and applied. This process involves
deciding what work is needed, assigning those tasks, and arranging them into a
decision-making framework (an organizational structure). This framework pro-
vides a structure for all jobs, making clear who has responsibility for what tasks
and who reports to whom. An organization without structure can result in con-
fusion, frustration, loss of efficiency, and limited effectiveness.
This chapter will examine the fundamental organizing concepts to include
the organizing steps, the types of departmentalization, authority, delegation, the
span of control, and the decentralization that managers use to organize. Chapter 9
will apply the concepts to the problems of organizational design and change.
The Formal Organization

Remember that a business is an organization. As with UPS, owners and manag-
ers create businesses to achieve specific goals and objectives: to provide a qual-
ity product or service to a customer at a profit. When managers create an orga-
nization, then, they are actually developing a framework in which to create the
desired product or service and provide a profit. This framework establishes the
operating relationships among people: who supervises whom, who reports to
whom, what departments are formed, and what kind of work each department
Chapter 8 Organizing Principles 227
performs. This framework is known as a formal organization—the official or- formal organization
ganizational structure that top management conceives and builds. A formal or- The official organizational
structure that top management
ganization does not just happen; managers develop it through the organizing conceives and builds
function of management.
Organizing Process
Organizing is the management function that establishes relationships between organizing
activity and authority. It has five distinct steps that will be examined later in The management function that
establishes relationships be-
the chapter. The result of the organizing process is an organization—a whole tween activity and authority
consisting of unified parts (a system) acting in harmony to execute tasks that
achieve goals effectively and efficiently and accomplish the company’s mission.1
Relationship Between Planning and Organizing
The managerial functions of planning and organizing are intimately related. Or-
ganizing begins with and is governed by plans that state where the organization
is going and how it will get there. An organization must be built or an existing
one modified to ensure that those plans are executed and objectives achieved.
The organization must be able to concentrate its resources in a unified way to
1
Explain the relationship
between planning and
organizing
translate plans from intentions to realities.
An organizational structure is a tool of management to achieve plans. As
the plans change, the structure should be responsive. The ability to change and
keep up with the global society is the way to profits and existence. Examples
of the relationship between planning and organizing—more specifically, how
changes in plans affect the organization—can be seen in the changes taking
place throughout business and industry.
Although these plans and organizational changes are primarily aimed at
growth strategies, sometimes plans call for downsizing. Also known as rightsiz- downsizing
ing, downsizing calls for shrinking both the size of the company and the num- Also known as rightsizing, it
calls for shrinking both the size
ber of employees. Companies like General Electric used this strategy to fuel of the company and the number
strategic turnarounds. GE literally restructured—it pulled layers of middle man- of employees
agement out of the organization, eliminated jobs, and changed reporting rela-
tionships. 2 Also, American Airlines downsized to save “$4 billion in annual
expenses through steep labor concessions, cutting fl ights, retiring nearly 100 air-
planes and smoothing out schedules at its hub airports.” 3
Other times, plans call for outsourcing, the use of outside resources to per- outsourcing
form a business process. UPS Supply Chain Solutions lets companies outsource The use of outside resources
to perform a business process,
everything from computer repairs to customer call centers. In this way, a com- such as payroll, insurance rec-
pany can focus on its core competencies and outsource support work that doesn’t ords, health claims, or credit
produce revenue. Sometimes outsourcing is moved offshore to save money. Off- card applications
shore employees receive information over the Internet, input the information
into databases, and send the processed information back over the Internet. The
flow of an outsourced health insurance claim is depicted in this chapter’s Man-
aging Technology.
Before we move on to examine the benefits of the organizing process, re-
member that organizational changes influence the staffi ng, leading, and control-
ling functions. Hiring and training plans are quite different when a structure is
expanding and when it is downsizing. The same is true for leading, if the com-
pany reorganizes into teams. Control systems, too, will need to be created to
monitor effectiveness.
MANAGING TECHNOLOGY
a g es
How an Outsourcing Company
Get t y Im
Handles a Health Insurance Claim
Workers at an outsourcing company data
entry center in New Delhi, India, look at
digital images of medical claim forms and
enter the information into a database.
The client’s system can decide whether
to approve or deny the claim. The hos-
pital and the insurance company are in-
formed of the decision.
Benefits of Organizing
As noted, the organizing process is important as a way to help the organization
attain its mission. It has four primary functions: 4
1. It clarifi es the work environment. Everyone understands what to do. The
tasks and responsibilities of all individuals, departments, and major organi-
zational divisions are clear. The type and limits of authority are determined.
2
Determine the importance
of the organizing process
2. It creates a coordinated environment. Confusion is minimized and obsta-

cles to performance are removed because it defines the interrelationships
of the various work units and establishes guidelines for interaction among
personnel.
3. It achieves the principle of unity of direction. The principle of unity of di-
7
Discuss the following
major organizing concepts
and how they influence
organizing decisions
rection calls for the establishment of one authority figure for each desig- • Unity of direction
nated task of the organization; this person has the authority to coordinate • Chain of command
all plans concerning that task. The importance of this principle can be illus- unity of direction
trated by the following example of its absence: various government agencies The establishment of one au-
develop separate plans on the same topic because no one agency or person is thority figure for each desig-
nated task of the organization
in control of the task or can coordinate plans.
4. It establishes the chain of command. The chain of command is the unbro- chain of command
The unbroken line of reporting
ken line of reporting relationships from the bottom to the top of the organi- relationships from the bottom
zation. It defi nes the formal decision-making structure and provides for the to the top of the organization
orderly progression up and down the hierarchy for both decision making
and decision-making communication. As a result, the confusion highlighted
by the question, “Who’s in charge here, anyway?” should not occur.
By applying the organizing process, management will improve the possibili-
ties of achieving a functioning work environment.
Five-Step Organizing Process

Figure 8.1 illustrates the organizing process at the Excelsior Table Saw Corpora-
tion. At Excelsior—as in all organizations—organizing includes five steps:
1.
2.
Reviewing plans and goals
Determining work activities
3
List and discuss the five
steps in the organizing
process
3. Classifying and grouping activities

4. Assigning work and delegating authority
5. Designing a hierarchy of relationships
As you read and study the following description of the five-step process, re-
fer to Figure 8.1 to see an example of how you build an organizational structure.
Reviewing Plans and Goals

A company’s goals and its plans to achieve them dictate its activities. Excelsior
Table Saw plans to make and sell a top-quality table saw, which will dictate its
activities. Some purposes, and thus some activities, are likely to remain fairly
constant once a business is established. For example, the business will continue
to seek a profit and it will continue to employ people and other resources. In time
and with new plans, however, the ways in which it carries out basic activities
will change. The company may create new departments; it may give old ones
Figure 8.1 The organizing process in action
Step 1
Reviewing Plans Excelsior Table Saw Corporation
and Goals Our aim: To manufacture and
market the Mark IV Table Saw at a
10% return on investment
Step 2 Hiring Training Assembly Sales

Determining
Work Grinding Shipping Payroll Collections
Activities
Bookkeeping Inspection Recruiting Compensation
Machining Pricing Advertising Packaging
Step 3
Marketing Finance Human Res. Production
Classifying
and Grouping Sales Pricing Recruiting Machining
Activities Advertising Payroll Hiring Grinding
Packaging Bookkeeping Training Assembly
Shipping Collections Compensation Inspection
Step 4 Benny Salazar Marcia Padilla Pat McCormick

Assigning Sales Bookkeeping Payroll
Work and
Delegating Jacob Finsterbush Sanjay Patel Lee Mai
Authority Hiring Collections Advertising
Melody Kwan Renée Montaigne Bill Vlasic

Assembly Recruiting Machining
Joyce Sabha Frank Peña Celeste Golushko

Training Shipping Grinding
Step 5
Designing a
Hierarchy of
Relationships
GLOBAL APPLICATIONS
a g es
Rightsizing Vanguard Info
Get t y Im
Solutions
When many people think of outsourcing, they think of BPO sector is unheard of in India.” When contacted by ET,
India-based offshore outsourcing companies. Many Rajesh Gupta, CEO of Vanguard Info Solutions, said, “We
American-based companies maintain that outsourcing did not find the process profitable. That’s why we decided
business processes—such as call centers and account- to close it down.”
ing processes—to low-cost, low-wage countries helps to
• A former employee, who was part of the closed pro-
keep down their own cost of doing business. India is at-
cess, told ET, “We were initially asked not to come for
tractive because it has a vast pool of college-educated,
work for a few days due to problems in the dialer net-
English-speaking, low-wage workers.
work. Then most associates were put on paid leave till
One such company is Vanguard Info Solutions. It pro-
the time the company formally closed the process.” In
vides information technology (IT) solutions and busi-
the U.S., downsizing has wiped out hundreds of thou-
ness process outsourcing (BPO) services. The company
sands of jobs, disrupted the lives of employees, and
has offshore centers in New Delhi and Bangalore, India.
changed the face of employment. How might rightsiz-
Employees in India include engineering graduates with
ing affect employment in India?
bachelor’s, master’s, and doctoral degrees from presti-
gious Indian institutions. Source: Indiatimes/The Economic Times, “And Now Rightsizing in
BPO,” January 23, 2006, http://economictimes.indiatimes.com/
Instead of growing, The Economic Times (ET) reports articleshow/1381626.cms.
that Vanguard Info Solutions is rightsizing, which “in the
additional responsibilities; some departments may cease to exist. New relation-

ships between groups of decision makers may come into being as well. Organiz-
ing will create the new structure and relationships and modify the existing ones.
Businesses adjust their organizational structures in response to new plans.
When UPS seeks new opportunities, it does so as well. Business magazines and
daily newspapers frequently carry announcements about companies making
structural changes. Each company is adjusting structures to mesh with plans
aimed at helping it compete in the world economy. Another example is Van-
guard Info Solutions, the subject of this chapter’s Global Applications.
Determining Work Activities

In the second step, managers ask what work activities are necessary to accom-
plish these goals. Creating a list of tasks to be accomplished begins with identi-
fying ongoing tasks and ends with considering the tasks unique to this business.
Hiring, training, and record keeping are part of the regular routine for running
any business. What, in addition, are the unique needs of this organization? Do
they include assembling, machining, shipping, storing, inspecting, selling, and
advertising? Identifying all necessary activities (as Figure 8.1 illustrates for Ex-
celsior Table Saw) is important.
Specialization or Division of Labor An important concept in specifying

tasks is specialization of labor or division of labor. Both terms refer to the degree specialization of labor or
to which organizational tasks are subdivided into separate jobs.5 When using division of labor
Breaks a potentially complex
specialization of labor, a manager breaks a potentially complex job down into job down into simpler tasks or
simpler tasks or activities. The result is that one person or group may complete activities
Figure 8.2 Degrees of specialization in producing a DVD player
High Efficiency Low
High
Each employee
completes a few
basic operations,
such as assembling the
DVD player frame.
Specialization
Each employee
assembles one component
of a DVD player.
Each employee
assembles a complete
DVD player.
Low
Low Job Satisfaction High
only that activity or a related group of activities. Figure 8.2 shows three dif-
ferent degrees of work specialization in the job of producing a DVD player—
low, moderate, or high specialization. The shaded bars at the side, top, and bot-
tom of Figure 8.2 illustrate the relationship of specialization, efficiency, and job
satisfaction.
An advantage of work specialization is that work can be performed more
efficiently if employees are allowed to specialize. 6 In addition, because employ-
ees are allowed to specialize in one area, they can gain skill and expertise. Spe-
cialization facilitates the process of selecting employees as well as decreasing
training requirements. Finally, it allows managers to supervise more employees.
Because each job is simplified, managers know what performance standard to
expect and can detect job-related performance problems quickly.
Disadvantages of Work Specialization Despite its advantages, specializa-

tion can create problems. When specialization is overdone, jobs can become too
simplified. When employees do one simple task—for example, tightening a nut—
for eight hours a day, five days a week, they become bored and tired. In turn,
when employees become bored and tired, safety problems and accident rates in-
crease, absenteeism rises, and the quality of work may suffer.7 Some companies
have tried to overcome this disadvantage by job redesign (Chapter 12 describes
this approach). Other companies have moved to the development of teams re-
sponsible for an entire product (Chapter 14 describes teams).
The process of specialization leads to designing a job. This job and the abili-
ties required of a person to do the job are clearly stated in a job description and
a job specification. These documents serve as the basis for staffi ng the organiza-
tion (see Chapter 10).
Classifying and Grouping Activities
Once managers know what tasks must be done, they classify and group these
activities into manageable work units. This third step takes the jumble of Ex-
celsior’s tasks and creates four related and identifiable groups of like activities
(Figure 8.1). When managers group tasks that are similar in terms of tasks, pro-
cesses, or skills, they are grouping them by the principle of functional similarity,
4
Describe and give
an example of the
four approaches to
departmentalization
or similarity of activity. This guideline is simple to apply and logical.
Managers apply the principle in three steps:
1. They examine each activity identified to determine its general nature. Nor-
mally, identifiable areas include marketing, production, finance, and human
resources.
2. They group the activities into these related areas.
3. They establish the basic department design for the organizational structure.
In practice, the fi rst two steps occur simultaneously. Sales, advertising, pack-
aging, and shipping can be considered marketing-related activities. Thus, they
are grouped under the marketing heading. Machining, grinding, assembly, and
inspection are manufacturing processes; they can be grouped under production.
Personnel-related activities include recruiting, hiring, training, and compensa-
tion; they are grouped under human resources.
As the tasks are classified and grouped into related work units (production,
marketing, fi nance, and human resources), the third step, departmentalization, departmentalization
is being fi nalized; that is, a decision is being made on the basic organizational The basic organizational format
or departmental structure for
format or departmental structure. Groups, departments, and divisions are being the company
formed on the basis of the organization’s objectives. Management can choose
one of four departmental types. Although Chapter 9 will describe these in de-
tail, we will briefly discuss the options here.
Functional departmentalization involves creating departments on the basis functional
of the specialized activities of the business—fi nance, production, marketing, hu- departmentalization
Creating departments on the
man resources. Note in Figure 8.1, Step 3, that the managers at Excelsior Table basis of the specialized activi-
Saw used this type of departmentalization. For most businesses the functional ap- ties of the business —finance,
proach is the logical way to organize departments. It is simple, groups the same or production, marketing, human
resources
similar activities, simplifies training, allows specialization, and minimizes costs.8
Geographical departmentalization groups activities and responsibilities ac- geographical
cording to territory. To be near customers, expanding companies often locate departmentalization
Grouping activities and respon-
production plants, sales offices, and repair facilities in their market areas. This sibilities according to territory
grouping allows the company to serve customers quickly and efficiently and
helps the company stay abreast of the changing needs and tastes of the customer.
Disney—with theme parks in Anaheim, Orlando, France, and Japan—uses geo-
graphical departmentalization for that aspect of its business. FedEx pursues its
mission by using a geographic design, as shown in Figure 8.3.
Product departmentalization assembles the activities of creating, producing, product departmentalization
and marketing each product into a separate department. This option is adopted Assembling the activities of
creating, producing, and mar-
when each product of a company requires a unique marketing strategy, produc- keting each product into a sepa-
tion process, distribution system, or fi nancial resources. As shown in Figure 8.4, rate department
United Technologies has six product categories and capitalizes on this approach.
Figure 8.3 Geographical departmentalization
Southern Western Eastern Northern

Region Region Region Region
Figure 8.4 Product departmentalization
Heating and Air Aerospace and

Power Elevator Aircraft
Helicopter Conditioning Industrial
Systems Products Engine
Division Systems Systems
Division Division Division
Division Division
customer Customer departmentalization groups activities and responsibilities in de-

departmentalization
Grouping activities and respon-
partments based on the needs of specific customer groups. As shown in Figure 8.5,
sibilities in departments based a company like Johnson & Johnson that markets products to three different
on the needs of specific cus- customer groups—pharmaceutical, professional, and final consumer—faces an
tomer groups
extremely difficult task. Because each customer group has its own demands,
needs, and preferences, Johnson & Johnson must use tailored strategies that
are not necessarily compatible. Another example can be found at the Hoffman
Agency, a small public relations firm that is the subject of this chapter’s Valuing
Diversity feature. By using customer departmentalization, Hoffman was better
able to focus on customer needs and eliminate problems caused by functional
departmentalization.
Although these department types have been presented individually, in real-
ity most companies use a combination of types to meet their needs.
Figure 8.5 Customer departmentalization
Pharmaceutical Professional Consumer

Products Products Products
VALUING DIVERSITY
a g es
Reorganizing to Maximize Talent
Get t y Im
“Delegation and empowerment are great words,” states In a recent e-mail, Mr. Hoffman evaluates the “Out to
Lou Hoffman, “but they don’t have much meaning if peo- Lunch” campaign. “It was more about helping our staff
ple don’t know one another well enough to resolve things members get to know each other [since people tend
on their own” (Fenn). That was the problem at Hoffman’s to gravitate towards those on their respective account
San Jose, California, public relations firm. The number of teams]. The ‘Out to Lunch’ campaign was particularly ef-
employees at the Hoffman Agency had doubled in two fective since we had one large client which constituted
years, and Hoffman found himself dealing with issues roughly 40 percent of our revenue. As a result, it was
that were a direct by-product of two factors—the depart- only as if there were two agencies within our company.
mental structure and the increasing ethnic diversity of The ‘Out to Lunch’ campaign helped to break down this
the staff. If someone from the accounting department barrier.”
was dissatisfied with something coming out of the edit- Today, Hoffman’s client revenue is nicely spread
ing group, it wound up on Hoffman’s desk. All the talent across about 15 clients, so this dynamic no longer exists.
brought by the diverse staff was being short-circuited by Hoffman says, “As a professional services firm, it’s all
the departmental structure. about the people. We’ve continued to implement things
Hoffman’s solution: He restructured his departments out of the norm to cultivate what we’d like to think is a
to mesh the different functions and the staff’s diversity. unique culture. For example, we implemented what we
The new departmental design, focused on the customer call ‘Building Bridges’ in which a person takes a two-week
base, not only combined accounting, editing, and cre- assignment in one of our overseas offices in Europe or
ative elements but also captured the diversity in each for- Asia. While less grand, our summer hours in which we
mer functional department. The teams were purposely shut down the office early on Friday afternoon so folks can
designed to incorporate young and old, as well as differ- get an early start on their weekend was a hit last year and
ent genders, ethnicities, and cultures. To nudge the new will be repeated this year.”
structure along and help develop camaraderie and coop-
• What are some of the major concerns or problems
eration, Hoffman offered to pick up the tab for any two
a manager might face in a culturally diverse
employees on the team who dined at the restaurant down
organization?
the road. Moreover, he offered a special prize to anyone
• How did Lou Hoffman advance the idea of diverse
who lunched with every other person on the team. Over
employees getting to know each other better?
a two-month period, Hoffman spent $2100. The results:
• Which of these ideas did you like the best? Why?
Delegated authority was used more effectively, all employ-
ees developed a better understanding of the workings of
Sources: E-mail interview with Lou Hoffman, April 5, 2006; Donna
the agency, and the diverse backgrounds were combined Fenn, “Out to Lunch,” Inc., June 1995, 89; Hoffman Agency, http://
to meet customer needs. www.hoffman.com.
There is no such thing as the one right organization. There are only orga-
nizations, each of which has distinct strengths, distinct limitations and
specific applications. It has become clear that organization is not an ab-
solute. It is a tool for making people productive in working together. As
such, a given organizational structure fits certain tasks in certain condi-
tions and at certain times. . . . In any enterprise . . . there is need for a
number of different organizational structures coexisting side by side. 9
Companies like General Motors and AT&T incorporate departments ar-
ranged by function, geography, product, and customer to meet their objectives.
Assigning Work and Delegating Authority

After identifying the activities necessary to achieve objectives and classifying
and grouping them departmentally, managers must assign these activities to in-
dividuals and give these employees the appropriate authority to accomplish the
task. This step, critical to the success of organizing, is based on the principle of
functional definition functional definition—in establishing a department, its nature, purpose, tasks,
The activities to be performed and performance must fi rst be determined as a basis for authority. This principle
determine the type and quantity
of authority necessary means that the activities to be performed determine the type and quantity of au-
thority necessary. How much is needed to accomplish the tasks?
Designing a Hierarchy of Relationships

The last step requires managers to determine the vertical and horizontal operat-
ing relationships of the organization as a whole. In effect, this step puts together
all the parts of the organizing puzzle.
The vertical structuring of the organization results in a decision-making hi-
erarchy that shows who is in charge of each task, each specialty area, and the or-
ganization as a whole. Levels of management are established from bottom to top
in the organization. These levels create the chain of command, or hierarchy of
decision-making levels, in the company.
The horizontal structuring has two important effects: (1) it defi nes the work-
ing relationships between operating departments, and (2) it makes the fi nal de-
span of control cision on the span of control of each manager. Span of control is the number of
The number of subordinates un- subordinates under the direction of a manager.
der the direction of a manager
The result of this step is a complete organizational structure. An organiza-
organization chart tion chart shows this structure visually. Look closely at Excelsior Table Saw’s
The complete organizational organization chart (Figure 8.6). As do all organization charts, it tells us the
structure shown visually
following:
1. Who reports to whom. This specifies the chain of command.

2. How many subordinates work for each manager. This is the span of control.
3. The channels of official communication. Communication channels are
shown by the solid lines that connect each job.
4. How the company is departmentalized. This could be by function, cus-
tomer, or product, for example.
5. The work being done in each position. The labels in the boxes describe each
person’s activities.
6. The hierarchy of decision making. This details where the ultimate decision
maker for a request, problem, appeal, or grievance is located.
7. The types of authority relationships. Solid connections between boxes illus-
trate line authority, dotted lines show staff authority, and broken lines trace
functional authority. These types of authority will be explained in the next
section.
In addition, the chart serves as a troubleshooting tool. In the design (or re-
design) stage, managers can create alternative structures to study their effec-
tiveness and spot difficulties. In the operational stage, it can help managers lo-
cate duplications and confl icts that result from awkward arrangements. The
chart does not, however, show the degrees of authority, informal communica-
tion channels, and informal relationships—all keys in managing successfully.
We will discuss these later in the chapter.
Figure 8.6 Organization chart of Excelsior Table Saw Corporation
President
Vice President Vice President

Marketing Production
General General General General General

Manager Manager Manager Manager Manager
Sales Advertising Research Manufacturing Quality Control
Division Sales Division Sales Manager Manager

Manager Manager Product Consumer
Appliances Electronics Research Research
Line Authority
Manager Manager Manager
Staff Authority
Operations Manufacturing Shipping
Functional Authority
The organizing process draws heavily on the leadership skills of the man-
agement group. Very much like building a ship to carry the company across the
ocean, the initial application of the process results in the company’s fi rst orga-
nizational structure and organization chart. Then, like a launched ship, the or-
ganization begins its journey in pursuit of its goals. Management is called on to
monitor and control its actions, successes, or failures. Leadership will also be
necessary—as was the case at the Hoffman Agency—to realign or redesign the
structure in a new application of the organizing process.
Major Organizational Concepts

The organizing process requires managers to draw on and integrate a number of
major organizational concepts. To organize effectively, leaders/managers need
to master concepts, including authority, power, delegation, span of control, and
centralization/decentralization.
5
Define authority, and
explain how line, staff, and
functional authority differ
Authority
One hears a great deal today about “the end of hierarchy.” This is bla-
tant nonsense. In any institution there has to be a fi nal authority, that is,
a “boss”—someone who can make the fi nal decision and who can then
expect to be obeyed in a situation of common peril—and every institu-
tion is likely to encounter it sooner or later. If the ship founders, the cap-
tain does not call a meeting; the captain gives an order. And if the ship is
to be saved, everyone must obey the order, must know exactly where to
go and what to do and do it without “participation” or argument. Hier-
archy, and the unquestioning acceptance of it by everyone in the organi-
zation, is the only hope in a crisis.10
Because authority plays so central a role in organizations, managers should

fully understand its nature, sources, importance, variations, and relationship to
power.
Nature, Sources, and Importance of Authority All managers in an or-

ganization have authority in different degrees, based on the level of manage-
authority ment they occupy. Authority is the formal and legitimate right of a manager to
The formal and legitimate right make decisions, give orders, and allocate resources. It holds the organization to-
of a manager to make deci-
sions, give orders, and allocate gether, because it provides the means of command. How does a manager acquire
resources authority?
It has been said that “authority comes with the territory,” meaning that au-
thority is vested in a manager because of the position he or she occupies in the
organization. Thus, authority is defi ned in each manager’s job description or job
charter. The person who occupies a position has its formal authority as long as
he or she remains in that position. As the job changes in scope and complexity,
so should the amount and kind of formal authority possessed. As Albert Ber-
sticker, former CEO of Ferro Corporation, a diversified organization composed
of 100 SBUs, noted, “The Ivory Tower isn’t dictating all corporate moves. What
I stress from my management team is that they make the decisions. I won’t tell a
divisional manager what to do—I want him to decide how to fix it, tweak it, or
get rid of it. The authority for decisions is theirs—that’s what their job is.” 11
Johnson & Johnson’s former CEO Ralph Larsen sings the same tune. When
Robert Croce took over the reins at Ethicon Endo-Surgery, a Johnson & John-
son SBU, Larsen did not tell Croce what the latter’s growth and earnings tar-
gets should be but let Croce decide instead. Croce was far more ambitious than
Larsen expected, claiming he would control half of the world’s staple and endo-
surgery business and be profitable in three years.12
Types of Authority In an organization, three different types of authority are

created by the relationships between individuals and departments.
line authority Line authority defi nes the relationship between superior and subordinate.
The relationship between supe- Any manager who supervises operating employees—or other managers—has
rior and subordinate; any man-
ager who supervises operating line authority, allowing the manager to give direct orders to those subordinates,
employees—or other manag- evaluate their actions, and reward or punish them. At Johnson & Johnson, Wil-
ers—has line authority liam C. Weldon, has line authority over the CEOs of the 168 SBUs, who, in
turn, have line authority over their vice presidents. In an organization, line au-
thority, shown by solid lines with arrows in Figure 8.7, flows downward directly
from superior to subordinate.
Figure 8.7 Line authority: the relationship between superior and subordinate
Manager
Employee Employee
Line Authority
Staff authority is the authority to serve in an advisory capacity. Managers staff authority
who provide advice or technical assistance are granted advisory authority. This The authority to serve in an ad-
visory capacity; it flows upward
staff or advisory authority provides no basis for direct control over the subordi- to the decision maker
nates or activities of other departments with which the person holding staff au-
thority consults; however, within the staff manager’s own department, he or she
can exercise line authority over subordinates. Staff authority—in the form of ad-
vice or assistance—flows upward to the decision maker. In Figure 8.8, both the
legal department and the research and development department provide advice
to the president, as shown by the dotted lines.
Functional authority permits staff managers to make decisions about specific functional authority
activities performed by employees within other departments. Staff departments The authority that permits staff
managers to make decisions
about specific activities per-
Figure 8.8 Staff authority: advice and information fl ow upward formed by employees within
other departments
President
Legal Research and

Development
Manufacturing Finance Marketing
Line Authority
Staff Authority
often use functional authority to control their procedures in other departments.

For example, as Figure 8.9 illustrates, the human resources manager monitors
and reviews compliance of recruiting, selecting, and evaluation systems in oper-
ating departments. Functional authority, however, applies only to those systems;
the human resources manager does not have the authority to tell the advertising
manager which products to promote or the manufacturing manager which prod-
ucts to manufacture. At Johnson & Johnson, the chief financial officer has func-
tional authority over all of the SBUs for budgeting and fi nancial reporting.
Line and Staff Departments Line and staff authority describe the authority
7
granted to managers; line and staff departments are terms for different roles or
positions for various functions in the organizational structure.
Line departments, headed by a line manager, are the departments estab-
lished to meet the major objectives of the business and directly influence the suc-
cess (profitability) of a business. Examples include production (of goods and ser-
vices for sale to a market), marketing (to include sales, advertising, and physical
• Line and staff
departments distribution), and fi nance (acquiring capital resources). The line managers who
head such departments exercise line authority.
Staff departments, headed by a staff manager, provide assistance to the line
departments and to each other. They can be viewed as making money indirectly
Figure 8.9 Functional authority: managers make decisions about activities performed by personnel
in other departments
President
Marketing Production Finance Human

Resources
Funds
Advertising Sales Credit
Acquisition
Quality
Manufacturing
Control
Line Authority
for the company—through advice, service, and assistance—rather than directly line departments
The departments established
contributing to achieving the company’s major objectives. Traditional staff de- to meet the major objectives of
partments include legal, human resources, computer services, and public rela- the business and directly influ-
tions. Staff departments meet the special needs of the organization. As an organi- ence the success (profitability)
of a business
zation develops, its need for expert, timely, and ongoing advice becomes critical.
If the organization’s resources can support the existence of a staff department, staff departments
one can be created to fill the special needs gap. Staff departments can play a vital The departments—including le-
gal, human resources, computer
role in the success of a company. Staff department heads have line authority over services, and public relations—
their subordinates but staff authority in relation to other departments. that provide assistance to the
Line–staff interactions offer some real dangers of which all managers should line departments and to each
other, making money indirectly
be aware. Because staff people must sell their ideas, line personnel may view them for the company through advice,
as pushy or, in extreme cases, as undermining the line managers. Staff managers service, and assistance
need to develop tact and persuasive skills along with ideas. They also need to fos-
ter credibility for their ideas to be accepted. Bad advice can result in no audience
the next time. Another problem is that line managers are inclined to feel that “the
buck stops” with them. In other words, because staff personnel are not respon-
sible for the performance results of the line managers’ unit and the line managers
ultimately make the decisions, they don’t have to take staff advice seriously.
Unity of Command
A concern of all managers in applying staff and functional authority is violation
of the principle of unity of command, one of Henri Fayol’s management princi-
ples (Chapter 2). The principle requires that each person within the organization
take orders from and report to only one person.13
Unity of command should guide any attempt to develop operating relation-
7
ships. Although each person should have only one boss, the operating relation- • Unity of command
ships developed through staff departments mean that workers may have more
than one supervisor in a given situation—or at least perceive that they do from unity of command
The organizing principle that
the style with which advice is given. A departmental manager or subordinate states that each person within
may receive guidance or directives on a given day from human resources on em- an organization should take
ployment practices, from fi nance on budget time frames, and from data process- orders from and report to only
one person
ing concerning computer procedures. If possible, these situations should be min-
imized, or at least clarified, for the sake of all affected.
It is a sound general principle for all kinds of organizations that any
member of the organization should have only one “master.” There is
wisdom in the old proverb of the Roman law that a slave who has three
masters is a free man. It is a very old principle of human relations that
no one should be put into a conflict of loyalties—and having more than
one master creates such a conflict.14
Power
Two managers could occupy positions of equal formal authority, with the same
degree of acceptance of this authority by their employees, and still not be equally
effective in the organization. Why? Because one manager possesses more power
than the other.
Power is the ability to exert influence in the organization. As Figure 8.10
6
Explain the concept of
power and its sources
power
The ability to exert influence
shows, having power can multiply managers’ effectiveness to influence people
in the organization; power is
beyond what they can attain through formal authority alone. Authority is posi- personal
tional—it will be there when the incumbent leaves; and, as Figure 8.10 shows, it
is part of the larger concept of power. Power is personal; it exists because of the
person. A person does not need to be a manager to have power. Some administra-
Figure 8.10 Power increases a manager’s ability to influence
Legitimate
Power
Expert Reward
Power Power
Referent Coercive
Power Power
Power from the manager’s position

Power sources that increase a manager’s legitimate power
tive assistants of top managers have considerable power, but no authority. Man-
agers can acquire power from several different sources.
Legitimate or Position Power Holding a managerial position with its accom-

panying authority provides a manager with a power base. The manager has the
legitimate power right to use this legitimate power because of the position. The higher a manager
The power possessed by man- sits in the organization hierarchy, the greater is the perceived power (or, power
agers and derived from the po-
sitions they occupy in the for- thought by the subordinates to exist—whether or not it really does). Vice presi-
mal organization dents wield or can wield a lot of power.
reward power Reward Power The opposite of coercive power, reward power comes from
The power that comes from the ability to promise or grant rewards. Managers have the ability to decide
the ability to promise or grant
rewards on raises, promotions, favorable performance appraisals, and preferred work
shifts.
coercive power Coercive Power Coercive power is dependent on fear. A person reacts to this
The power dependent on fear power out of the fear of the negative results that may happen if one fails to com-
of the negative results that may
happen if one fails to comply ply. Managers, because of their position, have the ability to punish by assigning
unpleasant or boring work, withholding raises or promotions, and suspending
or dismissing an employee.
referent power Referent Power Referent power is based on the kind of personality or cha-
The power that is based on the risma an individual has and how others perceive it. A manager who is admired
kind of personality or charisma
an individual has and how oth- by others—the latter perhaps demonstrating this admiration by their desire to
ers perceive it identify with or emulate the manager—has referent power. The manager can use
this power effectively to motivate and lead others.
expert power
Influence due to abilities, skills, Expert Power Persons who have demonstrated their superior skills and knowl-
knowledge, or experience edge possess expert power. They know what to do and how to do it. Others
hope to stay on this expert’s good side to be able to benefit from his or her ex-
pertise. A seasoned manager exercises power with newcomers. Knowledge of
budgets, systems, or company culture that others need provides a basis for the
manager’s power. Later in the chapter, in our discussion of the informal organi-
zation, the concept of power will be discussed. Chapter 13 also provides a dis-
cussion on power as a basis of leadership.
Delegation
Delegating authority takes place as a company grows and more demands are
placed on a manager or because a manager wishes to develop subordinates’
skills. Delegation is the downward transfer of formal authority from one person
to another. Superiors delegate, or pass, authority to subordinates to facilitate the
accomplishment of work.
7
• Delegation
Importance of Delegation No person can do it all in an organization. There-
delegation
fore, managers should delegate authority to free themselves from some manage- The downward transfer of for-
ment areas to be able to focus better on more critical concerns. Having capable mal authority from one person
subordinates can increase the ability of a manager. Delegation is also a valuable to another
tool in training subordinates.
When authority is truly shifted to the hands of nonmanagers and is accom-
panied by shared information, needed training, and relationships based on mu-
tual trust and respect, delegation becomes empowerment. Employees are given
ownership of their tasks, along with the freedom to experiment and even fail,
without fear of reprisal. As noted in Chapter 4, empowerment is a key to quality
and customer service.
Armstrong World Industries empowered employees in steps. “The fi rst steps
were taken in the 1960s and 1970s when they began recognizing and reward-
ing employees through pay-for-knowledge or pay-for-skills systems. The 1980s
shifted the focus from individual workers to high-performance work teams. The
1990s pushed empowerment even further by emphasizing the work, or output,
itself rather than the job.” 15
Bob Price, a 7-Eleven store manager in The Colony, Texas, now tracks daily
orders and leftovers of fresh sandwiches and pastries; then he figures in weather
reports, special events in the area, and other factors that could affect demand.
Using the information he has gathered, he maps out future orders. “Before this,
we had no say about what we needed in our store. Either you had a field consul-
tant come in and say we need to have more of something, or else they’d automat-
ically ship the stuff. Now we have to make the decisions.” 16
Fear of Delegation “When you fail to delegate, the monkey on your back gets
fatter and fatter until it squashes you,” says Paul Maguire, a senior partner of a
management consulting fi rm.17 Even when they know the potential of empow-
erment, some managers still do not delegate. Some managers fear giving up au-
thority or lack confidence in subordinates. Others worry that the employee may
perform the job better than they can, are impatient, or are too detail oriented to
let go. Some managers simply don’t know how to delegate. Learning how to del-
egate is like learning to ride a bicycle—you have to learn to let go.18 Delegation
is not only a tool for survival, it is recognized as one of the key factors in a man-
ager’s success or failure.19 The process involves two of the most critical concepts
in management: responsibility and accountability.
Delegation Process When managers choose to delegate authority, they create
7
a sequence of events.
• Assignment of tasks. The manager identifies specific tasks or duties to as-
sign to the subordinate, then approaches him or her with those tasks. As an
example, at Grimpen Advertising, Sharon’s manager assigns her the task of
designing an advertising campaign for the company’s new client, a styling
• Responsibility salon called The Hair Connection.
• Accountability
• Delegation of authority. For the subordinate to complete the duties or tasks,
the manager should delegate to the subordinate the authority necessary to do
them. A guideline for the amount of authority to be delegated is that it be ad-
equate to complete the task—no more and no less. In Sharon’s case, she re-
ceives the authority to spend $10,000 on the campaign and to hire a graphic
designer.
responsibility • Acceptance of responsibility. Responsibility is the obligation to carry out
The obligation to carry out one’s one’s assigned duties to the best of one’s ability. A manager does not dele-
assigned duties to the best of
one’s ability gate responsibility to an employee; rather, the employee’s acceptance of an
assignment creates an obligation to do his or her best. When Sharon takes
on The Hair Connection account and agrees to complete it by the deadline
and within the budget, she becomes responsible to her boss for the project.
accountability • Creation of accountability. Accountability is having to answer to some-
The need to answer to someone one for your actions. It means accepting the consequences—either credit or
for your actions; it means ac-
cepting the consequences—ei- blame—of these actions. When a subordinate accepts an assignment and the
ther credit or blame—of these authority to carry out that assignment, he or she is accountable, or answer-
actions able, for his or her actions.
Delegation does not relieve managers of responsibility and accountability.
Managers are responsible and accountable for the use of their authority and for
their personal performance as well as for the performance of subordinates. If
Sharon goes beyond the deadline, spends more than the budgeted amount, or
does not develop an acceptable advertising campaign, she must answer to her
boss. Her boss, in turn, is accountable to his or her boss for assigning the proj-
ect to Sharon. On the positive side, if Sharon completes the project as designed,
she will receive the credit and the praise, and so will Sharon’s boss—for having
delegated authority well. This chapter’s Ethical Management feature focuses on
the nature of responsibility and accountability for companies involved in payoffs
and kickbacks.
The sequence of events outlined here should ensure that the process of del-
egation produces clear understanding on the part of the manager and the sub-
ordinate. The manager should take the time to think through what is being as-
signed and to confer the authority necessary to achieve results. The subordinate,
in accepting the assignment, becomes obligated (responsible) to perform, know-
ing that he or she is accountable (answerable) for the results. Figure 8.11 pro-
vides some quick tips for successful delegation of authority.
Span of Control
7
As managers design the organizational structure, they are concerned with the
span of control—the number of subordinates a manager directly supervises.
Wide and Narrow Spans of Control As a general rule, the more complex
a subordinate’s job, the fewer subordinates with those jobs should report to a
• Span of control manager. The more routine the work of subordinates, the greater the number of
ETHICAL MANAGEMENT
a g es
Payoffs and Kickbacks—
Get t y Im
Who Pays?
Some of the managers at Enron and Merrill Lynch have Howard, Kopper’s lawyer, stated, “Michael has ad-
something in common. They got caught. mitted that he misused his position at Enron to enrich
himself and others, and in so doing violated his duties
• James A. Brown, Daniel Bayly, and Robert Furst—
as an Enron employee” (Flood and Fowler).
former Merrill Lynch executives—were on the losing
side of a battle with federal investigators probing
charges that the company helped Enron show a profit Questions
on its books in 1999. The battle ended when Merrill 1. How do these two situations relate to the concept of
Lynch “accepted responsibility for its employees’ ac- responsibility?
tions and pledged to avoid any similar problematic 2. Who (middle-level or top-level management) will be
transactions, form a committee to ensure strict com- held accountable?
pliance, report to independent outside auditors and al- 3. How could these actions be known but go uncorrected
low a prosecutor-appointed lawyer to monitor their by management?
work” (Flood). Sources: Mary Flood, “Merrill Lynch Accepts Reforms,” Houston
• Michael J. Kopper, former Enron executive, paid kick- Chronicle, September 18, 2003, http://www.chron.com/cs/CDA/
ssistory.mpl/special/enron/2106506; Mary Flood and Tom Fowler,
backs to Enron ex-Chief Financial Officer Andrew “Kopper Admits Kickback,” Houston Chronicle, August 22, 2002,
Fastow to make Enron look more profitable. David M. http://www.chron.com/cs/CDA/story.hts/special/enron/1544330.
subordinates that can be effectively directed and controlled by one manager. Be-
cause of these general rules, organizations always seem to have narrow spans at
their tops and wider spans at lower levels. 20 The higher one goes in the organiza-
tion’s hierarchy, the fewer subordinates, as Figure 8.12 illustrates.
Figure 8.12 Narrow and wide spans of control
President
Narrow Span of Control
Vice President Vice President Vice President

Human
Marketing Production Resources
Manager Manager
Manufacturing Quality Control
Production Production
Supervisor Supervisor
Wide Span of Control
Employee Employee Employee Employee Employee Employee Employee Employee
Employee Employee Employee Employee Employee Employee Employee
Finding a factory production supervisor with fifteen or more subordinates

is not uncommon. Workers who can be well trained to follow procedures will,
once they master their tasks, require less of their supervisor’s time and energies.
They will know what they must do and exactly how to do it to meet their per-
formance standards.
Conversely, looking again at Figure 8.12, finding a corporate vice president
with more than three or four subordinates is uncommon. 21 Middle and upper
managers perform little that is routine. Their tasks usually require ingenuity
and creativity; and, because the problems are more complex, they are more dif-
ficult to resolve. Managers at these levels require more time to plan and organize
their efforts. When they turn to their bosses for help, those bosses need to have
the time available to render the assistance required. The only way to ensure hav-
ing that time is to limit the number of people who will approach that boss for
help—thus creating a narrow span of control. 22
Proper Span of Control Given these general rules, how many subordinates
should any one manager have? The answer depends on many factors and must
be determined in terms of a specific manager:
• The complexity and variety of the subordinates’ work
• The ability of the manager
• The ability and training of the subordinates themselves
• The supervisor’s willingness to delegate authority
• The company’s philosophy for centralization or decentralization of decision
making
Setting an effective span of control for each manager is crucial to effective-
ness. If a manager has too many people to supervise, his or her subordinates
will be frustrated by their inability to get immediate assistance from or access
to their boss. Time and other resources could be wasted. Plans, decisions, and
actions might be delayed or made without proper controls or safeguards. On
the other hand, if a manager has too few people to supervise, the subordinates
might be either overworked or oversupervised and could become frustrated and
dissatisfied.
Two managers who hold jobs at the same level in the organization should
not automatically be assigned identical spans of control because their abilities
and those of their subordinates will differ. Managers’ and subordinates’ qual-
ifications and experience must be considered when spans of control are cre-
ated. The more capable and experienced the subordinates, the greater the num-
ber who can be effectively supervised by one competent manager. The less time
needed to train and acclimate employees, the more time is available to devote to
producing output. In general, spans can be widened as the experience and com-
petence of personnel grow—thus the continuing need for training and develop-
ment. Of course, this generalization applies only up to the middle-management
level of the organization; once there, the need for limited spans of control due to
complexity becomes paramount.
The company’s philosophy toward centralization or decentralization for de-
cision making can also influence the span of control of a manager. We will next
examine the concept of centralization and then explain how it relates to span of
control.
Centralization Versus Decentralization

The terms centralization and decentralization refer to a philosophy of organiza-
tion and management that focuses on either systematically retaining authority
in the hands of higher-level managers (centralization) or systematically delegat-
ing authority throughout the organization to middle- and lower-level managers
(decentralization). 23 Management’s operating philosophy determines where au-
7
thority resides. Management can decide either to concentrate authority for de- • Centralization and
cision making in the hands of one or a few or to force it down the organization decentralization
structure into the hands of many. Johnson & Johnson’s extraordinary success is
centralization
attributed to the art of decentralized management. Behind the art is the philoso- A philosophy of organization
phy held by CEO William C. Weldon and three of his predecessors, Jim Burke, and management that focuses
Robert Wood Johnson, and Ralph Larsen. Decentralized decision making is a on systematically retaining au-
thority in the hands of higher-
core value and a core competency at Johnson & Johnson. level managers
Centralization and decentralization are relative concepts when applied to
organizations. Top management may decide to centralize all decision making:
decentralization purchasing, staffi ng, and operations. Or it may decide to decentralize in part—
A philosophy of organization
and management that focuses
setting limits on what can be purchased at each level by dollar amounts, giving
on systematically delegating fi rst-level managers authority to hire clerical workers, and letting operational
authority throughout the orga- decisions be made where appropriate. 24
nization to middle- and lower-
level managers
Why Decentralize? To be effective, authority should be decentralized to the

management level best suited to make the decision in question. A company pres-
ident should not decide when to overhaul the engine in a forklift. Authority for
that decision should be decentralized to the lowest possible level, in this case the
plant maintenance manager or, if the company believes in empowerment, to the
worker. Empowerment is the maximum expression of a decentralized philoso-
phy. More companies are decentralizing authority to the people who know the
jobs the best—the workers. This is especially true with team management, the
topic of Chapter 14.
More and more organizations see decentralization as a means to achieving
greater productivity and rebuilding the organization. Decentralization allows
managers to be closer to the action and get closer to the consumer. As more or-
ganizations move toward “flatter” organizational structures, with fewer levels
of management, decentralization and accountability are becoming watchwords
for management success. 25 For example, Staples, an office-supply retailer, has
committed to the principle of decentralization to develop “customer intimacy.”
Staples already provides great prices on papers, pens, fax machines, and other
office supplies; however, it plans to grow by providing customers with the best
solutions to their problems. With a level of management removed, Staples en-
courages and empowers store managers and employees to solve customers’ prob-
lems. 26 For example, when a customer wanted to buy an unusual variety of map
pins, a salesclerk was empowered to
• Telephone the manufacturer of a similar pin

• Fax the information on the pins to the customer after the customer returned
to his own place of business
• Deliver the $20 order of pins to the customer
Guidelines for Judging Decentralization Research and experience have de-

veloped guidelines to follow in determining the degree to which a company is
decentralized:
1. The greater the number of decisions made at the lower levels of manage-
ment, the more the company is decentralized.
2. The more important the decisions made at lower levels, the greater the de-
centralization. Purchasing decisions are a good measure. A company with a
purchasing limit of $100,000 at the first level is more decentralized than an-
other company in the same industry with a fi rst-level limit of $1000.
3. The more flexible the interpretation of company policy at the lower levels,
the greater the degree of decentralization.
4. The more widely dispersed the operations of the company geographically,
the greater the degree of decentralization.
5. The less a subordinate has to refer to his or her manager prior to making a
decision, the greater the decentralization.
Relationship of Centralization to Span of Control A company’s philosophy

of centralization or decentralization in decision making can influence the span
of control of lower and middle managers. It also can influence the number of
levels in an organization. Centralized decision making produces narrow spans
of control and more levels of management. With centralized management, top-
level managers delegate little authority and must closely supervise those who
report to them. Recall from our discussion on span of control, if a manager
closely supervises subordinates, the manager has committed his or her time to
a limited few. Given the philosophy of centralization, successive levels of man-
agers will follow the same practice. Thus, there will always be narrow spans of
control and the company will need many levels of management to reach first-line
supervisors (see Figure 8.13).
Conversely, a philosophy of decentralized decision making generally means
that the company will have wider spans of control and fewer levels of manage-
ment. Such fi rms delegate authority and decision making down the organization
to lower levels of management. Decentralization relieves managers of time com-
mitments and allows them to spend time with more subordinates. As managers
at each successive level follow this philosophy, two outcomes should be predict-
able: (1) a manager can supervise more subordinates and thus can have a wider
span of control, and (2) a company needs fewer management levels to do the
same job because people operate more independently. Review Figure 8.13 to ex-
amine an organization chart of a decentralized organization.
Despite the logic of this interrelationship of decision making and span of
control, it does not often happen in practice. Managers with wide spans of con-
Figure 8.13 Structures of centralized and decentralized organizations
Centralized (Tall) Organization Narrow Span of Control
Decentralized (Flat) Organization Wide Span of Control

trol may choose not to delegate authority, and they are frequently not as effec-
tive as they could be if they did delegate. Another problem with this general-
ization is that other factors, as noted in the discussion on span of control, can
influence how many subordinates report to a manager.
The Informal Organization
8
Explain the term “informal
organization”
Functioning within the formal organization designed by management—the or-
ganization of departmental structure, designated leaders (managers), decision-
making guidelines, policies, procedures, and rules—is a system of social rela-
tionships. These relationships, collectively, constitute the informal organization.
Managers need to understand this informal organization because it influences the
productivity and job satisfaction of all members of the organization—managers
as well as nonmanagers. Managers fi nd out through experience that not every-
thing in an organization takes place within the squares on the organization chart.
People by nature refuse to “stay in the boxes” as drawn. They choose to operate
within the confi nes of and with the support of the informal organization.
Informal Organization Defined

informal organization The informal organization is a network of personal and social relationships that
A network of personal and so- arise spontaneously as people associate with one another in a work environ-
cial relationships that arise
spontaneously as people as- ment. 27 It consists of all the informal groupings of people within a formal orga-
sociate with one another in a nization. Memberships in most informal organizations change with time. Mem-
work environment bers join together through the need for or enjoyment of one another’s company;
they fi nd membership beneficial to them in one or more ways.
The informal organization challenges a manager because it consists of ac-
tual relationships that have real consequences on workers’ behavior but that are
not prescribed by the formal organization and, therefore, not shown on the com-
pany’s organization chart.
The informal organization knows no boundaries. It cuts across the organi-
zation because it results from personal and social relationships, not prescribed
roles. When two workers, at break or after work, gossip and share their per-
ceptions of company affairs and fellow workers, their action is an example of
the informal organization. Another example is an employee assisting someone
in another department in solving a work problem. The informal organization
should not be thought of as the domain of only workers. Managers form infor-
mal groups that cut across departmental lines. In addition, they actively partici-
pate in other groups with nonmanagers. The informal organization exists every-
where. The lunch bunch, the coffee break group, and the employees who run,
jog, or walk together at lunch are other examples of informal groups.
Informal and Formal Organizations Compared
9
Compare the informal
organization to the formal
organization
The informal organization puts emphasis on people and their relationships; the
formal organization puts emphasis on official organizational positions. The le-
verage or clout in the informal organization is informal power that attaches to the
individual. In the formal organization, the formal authority comes directly from
the position; and the person has it only when occupying that position. Informal
power is personal and authority is organizational, as noted in Figure 8.14.
Informal power does not come from within a person but is, instead, given
by group members; informal power does not follow the official chain of com-
mand. Authority, in contrast, is delegated by management and creates a chain of
command. Workers may grant power to a coworker at the same level or to some-
Figure 8.14 Comparison of informal and formal organizations
INFORMAL ORGANIZATION FORMAL ORGANIZATION

Unofficial organization created by relationships Official organization created by management
Primary area of emphasis is on people and their Primary area of emphasis is official
relationships organization positions
Leverage is provided by power Leverage is provided by authority
Source of power: given by the group Source of authority: delegated by management
Functions with power and politics Functions with authority and responsibility
Behavior guidelines provided by group norms Behavior guidelines provided by rules, policies, and
procedures
Sources of control over the individual are positive or Sources of control over the individual are rewards and
negative sanctions penalties
one in another department. Power is much less stable than authority; it comes
from how people feel about each other and may change rapidly.
A manager probably has some informal power along with his or her formal
authority, but the manager does not necessarily have more informal power than
does anyone else in the group. The manager and the informal leader can be—
and often are—two different individuals.
Formal organizations may grow to be extremely large, but informal organi-
zations tend to remain smaller in order to maintain the personal relationships.
As a result, large corporations like UPS tend to have hundreds of informal orga-
nizations operating within them. 28
Emergence of the Informal Organization

The informal organization emerges within the formal organization. Because of
the relationships and alliances in the informal group, workers’ behavior differs
from what managers may have expected based on the reporting relationships,
procedures, and rules established in the formal organization. Several factors
contribute to these differences. First, employees sometimes act differently than
anticipated. They may work faster or slower than expected, or they may modify
a work procedure based on their experience and knowledge. Second, employees
often interact with people other than those the formal organization specifies or
with specified people more or less often than their job requires. Gene may seek
advice from Joy instead of Larry, for example. Cindy may spend more time help-
ing Buddy than she does helping Maceo. Third, workers may adopt a whole set
of beliefs and attitudes that differ from those the organization expects of them. norms
The company may expect loyalty, commitment, and enthusiasm, but some em- Values or attitudes that em-
ployees may become totally unenthusiastic; whereas others may act rebellious ployees as a group accept as
standards of behavior and that
and alienated. Values or attitudes that employees as a group accept as standards serve as a guideline of behavior
of behavior are known as norms. A norm serves as a guideline of behavior and and an internal control device
an internal control device on members. Fourth, the groups of workers that form on members
begin to display cohesion. Cohesion is a strong attachment to the group and a cohesion
closeness measured by a singleness of purpose and a high degree of cooperation. A strong attachment to the
As a result, a manager has dual sets of behavior to monitor—the activities, in- group and a closeness mea-
sured by a singleness of pur-
teractions, and beliefs required by the formal organization and the ones that de- pose and a high degree of
velop as people interact. 29 cooperation
Structure of the Informal Organization

Because individuals constantly enter and exit an informal organization, it con-
tinually changes. Its structure can be identified through the communication and
interaction chart contact people have with each other. Figure 8.15, an interaction chart, aids in
A diagram that aids in identify- identifying the informal organization structure by spotlighting the informal in-
ing the informal organization
structure by spotlighting the interactions people have with one another. Notice that the contacts don’t always
formal interactions people have follow the formal organizational chart. The arrows indicate which person initi-
with one another ates contact with others.
Leadership of the Group As in a formal organization, the informal group de-

velops leader–follower relationships. Because of the number of informal groups
in an organization, a person may be a leader in one group and a follower in an-
other. To determine why a person assumes the leadership role, you have to look
at the groups and the individual members.
When you look at a group, each member has identifiable characteristics
that distinguish him or her from the others—for example, age, seniority, level
of earnings, and technical ability. Each of these elements can provide status to
its holder, based on what the group members value. The employee with the most
status in the informal organization emerges as its informal leader. This person
possesses great informal power. In some groups, charismatic leadership (leader-
ship based on the person’s personality) is common. In others, the leader may be
the most senior person or the person holding the highest position in the formal
organization.
A group might have several leaders of varying importance to perform dif-
ferent functions. The group might look to one person as the expert on organiza-
tional matters and to another as its social leader. A third might be consulted on
technical questions. Even in a situation of multiple leaders, however, one leader
usually exerts more influence on the group than do the others.
Nonleader Roles for Members Members of an informal group play other

roles besides leader. As Figure 8.16 illustrates, an informal group normally has
Figure 8.15 Interaction chart indicating interaction of informal communication

Figure 8.16 Composition of an informal group
C
F
B
Primary Fringe Out-Status
Group Group Group
A
D
an inner core, or primary group; a fringe group, which functions within and out-
side of the larger group; and an out-status group, which, although identified with
the larger group, does not actively participate in the larger group’s activities.30
Working with the Informal Organization The three steps a manager must
take in order to work with the informal organization are as follows:
1. Recognize that informal groups exist.
2. Identify the roles members play within those groups.
3. Use that information to work with the informal groups.
Managers need to understand the personality, values, and culture of each
group. They need to know how the groups’ values and norms differ from those
of the formal organization—if, indeed, they do. Managers also need to be able
to identify the leaders of these groups and work with them to influence the to-
tal group. Trying to influence a group by appealing to a fringe member will fail.
Managers need to approach the leaders at the core of decision making. Manag-
ers can also use the communication network of the informal organization to
spread the word about a new company policy or to learn about how workers
perceive a new company head.
Impact of the Informal Organization

The informal organization can affect the formal organization positively and
negatively, as shown in Figure 8.17.
Positive Impact The informal organization has the potential to be helpful to

managers in the following ways: 31
• Makes the total system effective. If the informal organization blends well
with the formal system, the organization can function more effectively. The
ability of the informal group to provide flexibility and instantaneous reac-
tions can enhance the plans and procedures developed through the formal
organization.
• Provides support to management. The informal organization can provide
support to the individual manager. If the manager will accept assistance, the
informal organization can fi ll in gaps in the manager’s knowledge through
advice or through actually doing the needed work. When the group per-
forms effectively and positively, it builds a cooperative environment. This,
in turn, can lead the manager to delegate more tasks to the employees.
• Provides stability in the workplace. The informal organization provides ac-
ceptance and a sense of belonging. These feelings of being wanted and part
of the group can encourage employees to remain in the workplace environ-
ment, reducing turnover. Additionally, the informal organization provides a
place for the person to vent frustrations. Being able to discuss them in a sup-
portive environment may relieve emotional pressures.
• Provides a useful communication channel. The informal organization pro-
vides employees with the opportunities for interacting socially, for dis-
cussing their work, and for understanding what is happening in the work
environment.
• Encourages better management. Managers should be aware of the power of
the informal organization in what is actually a checks-and-balance system.
Planned changes should be made with an awareness of the ability of the in-
formal group to make the plan successful or unsuccessful.
Negative Impact There are potential problem areas associated with the infor-
mal organization: 32
• Develops pressure for conformity. The norms of informal groups strongly
pressure group members to conform. The more cohesive the group, the more
accepted are the behavioral standards. An informal group often uses re-
Figure 8.17 Positive and negative potential of informal organizations
POSITIVES NEGATIVES
Makes the total system effective Develops pressure for conformity
Provides support to management Creates conflicts
Provides stability in the workplace Resists change
Provides a useful communication channel Initiates rumors and processes
false information
Encourages better management Exposes weak management
wards or penalties, called sanctions, to persuade its members to conform sanctions

Rewards or penalties used by
to its norms. Nonconforming can result in gentle verbal reminders from the an informal group to persuade
group, but such a situation can escalate to outright harassment—ostracism, its members to conform to its
hiding supplies, or sabotaging computer fi les. norms
• Creates conflict. The informal group can create two masters for an em-
ployee. In an attempt to satisfy the informal group, the employee may come
in confl ict with the formal organization. The lunch bunch enjoys going to-
gether as a group, eating a leisurely meal, and analyzing the company. The
lunch bunch enjoys its 60-minute lunch each day even though management
has authorized only a 30-minute lunchtime. The employees’ social satisfac-
tion confl icts with the employer’s need for productivity.
• Resists change. The informal organization can resist change. In an effort to
protect its values and beliefs, the informal group can place roadblocks in the
path of any work modifications. Establishing a four-day workweek or hir-
ing younger workers could infringe on the values of the informal group, re-
sulting in resistance to the change.
• Initiates rumors and processes false information. The informal communi-
cation system—the grapevine—can create and process false information or
rumors. Rumors can upset the balance of the work environment.
• Exposes weak management. Although skilled managers can see the rela-
tionships of the informal organization, less practiced managers can be sty-
mied by them. The result may be a work group that does not perform and a
manager who does not last.
CHAPTER SUMMARY
Explain the relationship between planning and objectives. Both ongoing and unique tasks need to be
1 organizing. Planning and organizing are inti-
mately related. Organizing begins with and is governed
determined.
3. Classifying and grouping activities. Once manag-
by plans that state where the organization is going and
ers know what tasks must be done, they classify and
how it will get there. An organization must be built, or
group these activities into manageable work units—
an existing one modified, to ensure that those plans are
departments. Grouping tasks is accomplished by
executed and objectives achieved.
applying the principle of functional similarity. De-
Determine the importance of the organizing partmentalization may be functional, geographical,
2 process. The organizing process results in the
creation of an organization—a whole consisting of uni-
product, or customer.
4. Assigning work and delegating authority. After
fied parts (a system) acting in harmony to execute tasks
grouping the activities into departments, managers
that achieve goals effectively and efficiently and accom-
must assign the units to individuals and give them
plish the company’s mission. Additionally, the organiz-
the appropriate authority to accomplish the task.
ing process clarifies the work environment, creates a co-
ordinated environment, achieves the principle of unity of 5. Designing a hierarchy of relationships. The last step
direction, and establishes the chain of command. requires managers to determine the vertical and hor-
izontal operating relationships of the organization
List and discuss the five steps in the organiz-
3 ing process.
as a whole. Vertical structuring results in a decision-
making hierarchy. Horizontal structuring defi nes
1. Reviewing plans and goals. A company’s goals and working relationships between operating depart-
its plans to achieve them dictate its work activities. ments and makes the fi nal decision on the span of
control of each manager.
2. Determining work activities. Managers need to ask
what work activities are necessary to accomplish the
Describe and give an example of the four ap- • Chain of command. The unbroken line of report-
4 proaches to departmentalization. Approaches
to departmentalization:
ing relationships from the bottom to the top of the
organization. It defi nes the formal decision-making
structure and provides for the orderly progression
• Functional departmentalization is logical and sim-
up and down the hierarchy for both decision making
ple; it involves creating departments on the basis of
and communications.
specialized activities of the business—fi nance, pro-
duction, marketing, and human resources. • Line and staff departments. Organizations operate
• Geographical departmentalization groups activities with line and staff departments. Line departments
and responsibilities according to territory—for ex- meet the major objectives of an organization and di-
ample, northern region, southern region. It allows rectly influence its success. Staff departments con-
companies to be close to, and adapt to, the needs of tribute indirectly—through advice, service, and
customers. assistance.
• Product departmentalization assembles the activities • Unity of command. Each person within the organi-
of creating, producing, and marketing each prod- zation takes orders and reports to only one person.
uct into a separate department—for example, eleva- It should guide any attempt to develop operating
tor products division, aircraft products division. It is relationships.
adopted when each product requires unique market-
• Delegation. The downward transfer of formal au-
ing strategies, production processes, distribution sys-
thority from one person to another. It involves assign-
tems, or fi nancial resources.
ment of tasks, delegation of authority, acceptance of
• Customer departmentalization groups activities and responsibility, and creation of accountability. Dele-
responsibilities in departments organized on the gation frees managers from some management areas
needs of specific customer groups—for example, to be able to focus on more critical concerns. It can
pharmaceutical, professional, or fi nal consumer. increase the ability of a manager.
Define authority, and explain how line, staff,
5 and functional authority differ. Authority is the
formal and legitimate right of a manager to make deci-
• Responsibility. The obligation to carry out one’s as-
signed duties to the best of one’s abilities. Responsi-
bility cannot be delegated to an employee; rather, the
sions, give orders, and allocate resources. employee’s acceptance of an assignment creates an
• Line authority is supervisory authority. It allows obligation to do his or her best. Responsibility is a
managers to give direct orders to subordinates, eval- step in the delegation process.
uate their actions, and reward or punish them. • Accountability. Having to answer to someone for
• Staff authority is the authority to serve in an advi- your actions. Accountability means accepting the
sory capacity. Managers who provide advice or tech- consequences—either credit or blame—for these
nical assistance are granted advisory authority. actions. Accountability is a step in the delegation
process.
• Functional authority permits staff managers to make
decisions on specific activities performed by person- • Span of control. Refers to the number of employees
nel within other departments. a manager directly supervises. There is no correct
number for the span of control, but it is normally
Explain the concept of power and its sources.
6 Power is the ability to exert influence in the or-
ganization. Whereas authority is positional, power is
narrower at the top of the organization than at the
bottom. Generally, the more complex a subordinate’s
job, the fewer such subordinates should report to a
personal—it exists because of the person. There are five manager. The more routine the work, the greater the
sources of power: legitimate or position power, coercive number to be supervised.
power, reward power, referent power, and expert power.
• Centralization and decentralization. A philosophy
Discuss the major organizing concepts and
7 how they influence organizing decisions. The
major organizational concepts include:
of organization and management that focuses on ei-
ther the concentration (centralization) or disposal
(decentralization) of authority within the organiza-
• Unity of direction. A principle of organizing that tion. Management determines where authority re-
calls for the establishment of one authority figure sides in an organization—either to concentrate au-
for each designated task of the organization. This thority for decision making in the hands of the few
person has the authority to coordinate all plans con- or to force it down the organization structure into
cerning that task. the hands of many.
Explain the term “informal organization.” The ganization is informal power—it attaches to the person.
8 informal organization is a network of personal and
social relationships that arise spontaneously as people as-
In the formal organization, the formal authority comes
directly from the position, and the person has it only
sociate in a work environment. It consists of all the infor- when occupying that position. Informal power is given
mal groupings of people within a formal organization. by group members; management delegates authority. In-
formal power does not follow the chain of command;
Compare the informal organization to the for-
9 mal organization. The informal organization
puts emphasis on people and their relationships; the for-
authority does. Power is much less stable than authority.
Formal organizations may grow to be extremely large,
but informal organizations tend to remain smaller. As a
mal organization puts emphasis on official organiza-
result, large corporations tend to have hundreds of infor-
tional positions. The leverage or clout in the informal or-
mal organizations operating throughout them.
KE Y TERMS
accountability formal organization outsourcing
authority functional authority power
centralization functional defi nition product departmentalization
chain of command functional departmentalization referent power
coercive power geographical departmentalization responsibility
cohesion informal organization reward power
customer departmentalization interaction chart sanctions
decentralization legitimate power span of control
delegation line authority specialization of labor
departmentalization line departments staff authority
division of labor norms staff departments
downsizing organization chart unity of command
expert power organizing unity of direction
RE VIE W QUESTIONS
1. How do the functions of planning and organizing 6. What is power? What are its sources? How does it
relate to each other (a) in the initial development of differ from authority?
a company, and (b) during the modification of the
7. Explain the importance to managers of each of these
company’s structure?
organizing concepts or principles:
2. Identify and explain three important benefits of the a. Unity of direction
organizing process. b. Chain of command
c. Line and staff departments
3. List the five steps in the organizing process. Draft a
d. Unity of command
one-sentence description of each.
e. Delegation of authority
4. Identify the four popular approaches to departmen- f. Responsibility
talizing. Specify which approach you would recom- g. Accountability
mend for each of the following organizations and de- h. Span of control
fend your choices: i. Centralization/decentralization
a. A retail hardware store
8. What does the term informal organization mean? Of
b. A company that manufactures and markets one
what does the informal organization consist?
product
c. A company with sales offices in forty states 9. How does the formal organization differ from the
d. A retail department store informal organization?
5. Identify and explain the three types of authority.

1. What type of departmentalization does your com- zation function without either of them? Why or
pany or school use in its organizational structure? why not?
Diagram the structure and explain your answer.
4. At your company or school, what is the span of con-
2. Develop a different way to departmentalize your trol for the president? A vice president? A fi rst-line
company or school. What are the specific advantages supervisor or chair of a department? Why do differ-
of your form of departmentalization over the current ent spans of control exist among these managers?
departmentalization design?
3. Which type of department (line or staff) is most im-
portant to an organization? Why? Could an organi-
Links are provided for all Internet Exercises at http:// 2. Read “Managing in a World that Is Round” by
plunkett.swlearning.com. Frances Hesselbein. How does the new organiza-
tion structure differ from the organization chart dis-
1. “Driven by a set of radical changes in their internal
cussed in this chapter? How can fi rst-level and mid-
and external environments, large global corporations
dle managers free up the organization and make the
are innovating a new organizational form. Premised
changes Ms. Hesselbein talks about?
on knowledge and expertise rather than capital or
scale as the key strategic resources, this new form 3. Read “How to delegate work to other people.” What
is fundamentally different from the multidivisional are the benefits of effective delegation? What are the
organization that emerged in the 1920s and became obstacles to delegation? What work should be del-
the dominant corporate model in the postwar years.” egated? What are four essential points that may help
Read “Beyond the M-Form: Toward a Managerial you in delegating jobs?
Theory of the Firm” by Christopher A. Bartlett, Pro-
4. Use a search engine to fi nd an organization chart.
fessor of Business Administration, Harvard Business
Identify the company and the URL for the organiza-
School, and Sumantra Ghoshal, Professor of Strategy
tion chart. List the pros and cons of the organization
and Management, INSEAD. Describe this new orga-
chart.
nization and highlight its differences from the classic
M-form by contrasting its structure, processes, and
decision-making mechanisms.

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Check to see if your library subscribes to BCRC. If so, UPS AT A GLANCE
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APPLICATION CASE
Merlin Needs a Magician duction run began, the person in charge of purchas-
After getting a master’s degree in business, spending ing insisted on rehashing the decision. It turned out
time as a stockbroker on Wall Street, and working as that the new design would lead to a series of new ex-
a manager in a traditionally organized manufacturing penses—adding up to more than the expected
company, Ashley Korenblat was hired as President of savings.
Merlin Metalworks. Korenblat, fresh from her experi-
• In an effort to have the employees make decisions
ence at a large company, was anxious to try out her own
and be more independent, the machine department
theories at the small, Albany, New York-based producer
was developing the production schedule, determining
of bicycles. In short order, Korenblat had to contend
the size of the production runs, and coordinating the
with the following organizational problems:
35 operations in any given production run—some
• Two welders, unable to get a decision from their su- of which were linear, others of which proceeded si-
pervisor, requested time off. One welder had a den- multaneously. All went well until the company ap-
tist appointment and the other needed to leave early proached a six-month backlog in a seasonal busi-
to pick up an anniversary present. ness. To respond, Korenblat kept increasing the size
of the runs—“I know you made 200 57-centimeter
• A review of the previous day’s shipping log revealed
road bikes last week, but this week we need 250
that nothing had been shipped. The reason: a cus-
58-centimeter bikes.” The result: the machine shop
tomer had called about a problem bottom bracket—
came to a standstill, waiting for the next command.
the place where the bicycle pedals attach—which
made the customer’s $4000 bike useless. The cus-
tomer service department had the authority to stop Questions
everything to solve a customer’s problem. In this 1. For each of the four situations noted, what organi-
case, it meant turning off the fi nal threading machine zational concepts apply? Identify the concept and
for a day, which brought the shipments to a halt. explain the related problem.
2. As an adviser to President Ashley Korenblat, how
• After little discussion, Korenblat made a decision
would you resolve each problem?
to redesign the brakes on road bikes, believing it
would be less expensive. Shortly after the fi rst pro-

P.F. Chang’s Serves Its Workers Well putting the right person in the right job, creating a team
Have you ever sat down in a restaurant and immediately that works well together, fostering positive work atti-
thought, “This place is great”? You can tell by the at- tudes, and helping employees manage stress. Managers
mosphere that diners are happy and staff members enjoy at P.F. Chang’s, which owns and operates 97 full-
their jobs. Your server seems genuinely glad to see you. service, casual dining Asian bistros and 33 contempo-
On the fl ip side, you’ve probably been to at least one res- rary Chinese diners across the country, greet these chal-
taurant where the staff was rushed or surly, the service lenges with gusto.
slow—and you don’t even recall the food because the Founded in 1993, P.F. Chang’s prides itself in be-
service was so poor. You’re likely to return to the fi rst ing able to offer “fresh, contemporary, and consistently
restaurant and recommend it to others. However, you’re outstanding” fare at every one of its restaurants. Selec-
unlikely to give the second restaurant another chance. tions of rice, noodles, grains, dumplings, vegetables,
Restaurant managers face the challenge every day of meat, poultry, and seafood are served at each restaurant,
with mixtures of traditional Chinese foods and innova- cuisine—the server can ask a busboy to run to the near-
tive dishes from Southeast Asia. P.F. Chang’s strives to est market to buy butter for the customer’s meal. Giving
create an exceptional dining experience for every cus- employees the freedom to make decisions has had a huge
tomer—and that includes a friendly, knowledgeable impact on their attitude and performance, says Pronk.
staff. Whether guests choose the full-service casual Of course, workers are also held accountable for their
dining experience at P.F. Chang’s bistros or the quick- behavior and their performance, but they welcome the
service, limited-menu option of the Pei Wei Asian diners, responsibility.
they receive the same high quality of food and service. Managers at P.F. Chang’s restaurant receive exten-
How does an organization this large—and spread sive training in how to create and nurture a positive at-
out—foster positive attitudes and high performance titude among their employees, and all workers receive
among its workers? Roxanne Pronk, Regional Vice Pres- an employee handbook, which clearly spells out exactly
ident of Operations, explains P.F. Chang’s approach. what is expected of them. In addition, every work shift
First, she notes, restaurant workers are typically young, at P.F. Chang’s begins with a staff meeting which acts as
working for hourly wages (and tips), and struggling to a sort of pep rally to motivate workers to head into their
establish themselves in their lives and careers. So, when shifts with an upbeat outlook.
they arrive at work, they are not necessarily thinking The Chang’s culture is made up of trust, respect,
about the needs of customers but are thinking about accountability, commitment, and passion. “We believe
themselves. According to Pronk, most restaurants deal that every employee and member of our management
with these problems through the use of discipline and team must embody our messages as well as our values,”
negative reinforcement—which results in unhappy em- explains the Web site. That’s a recipe for some delicious
ployees and a high degree of turnover. But P.F. Chang’s dining.
takes a different approach. If a worker begins to exhibit
a pattern of poor behavior, such as arriving late to work, Questions
his or her manager sits down with the employee, asks 1. Managers at P.F. Chang’s address the affective com-
whether everything is all right and how the manager ponent of workers’ attitudes. Why is this an impor-
might be able to help turn things around. Pronk notes tant step for them to take?
that this caring and respectful treatment has a profound 2. In what ways does P.F. Chang’s create organiza-
effect on workers’ attitudes about their jobs. tional commitment among its workers?
By treating employees with respect, restaurant man- 3. How might a manager at P.F. Chang’s use the Big
agers fi nd that they can expect more from their staffs— Five personality factors to assess whether a candi-
and get it. Unlike many hourly restaurant employees, date for a position on the wait staff would be
those at P.F. Chang’s have the authority to make deci- suitable?
sions that benefit customers. For example, if a customer
is dissatisfied with a meal, the server has the authority Sources: Company Web site, http://www.pfchangs.com, accessed Febru-
to offer a replacement or a free meal. If a customer re- ary 18, 2007; “Work Force Still Top Concern for CEOs,” The Phoenix
quests butter—which is not an ingredient found in Asian Business Journal, May 24, 2004, http://phoenix.bizjournals.com.
BIZ FLIX VIDEO CASE

Babe Farmer Hoggett’s sheepdogs Rex (voiced by Hugo
A charming Australian fi lm featuring eccentric, quiet Weaving) and Fly (voiced by Miriam Margolyes), along
Farmer Hoggett (James Cromwell) who trains a pig he with Babe (voiced by Christine Cavanaugh) the pig, ac-
won at the fair to herd his sheep. His eccentricity turns company him to his sheep herd. Hoggett needs to gather
to determination when he enters the pig in the Austra- the sheep into a pen so he can shear their wool. Before
lian National Sheepdog Championships. The Academy leaving for the pasture, Farmer Hoggett saw Babe care-
Award-winning visual effects include a seamless mix- fully divide some chickens into two groups based on
ture of animatronic doubles, computer images, and live their color. Hoggett suspects that perhaps Babe might
animals. have some herding skills.
What to Watch for and Ask Yourself 2. Does Babe discover that he cannot successfully herd
1. Are Babe’s methods of herding sheep different from sheep as a sheepdog herds them? What does he do?
those used by the sheepdogs? If yes, what are the 3. Does Farmer Hoggett accept Babe for what he is—
differences? a pig not a sheepdog?
O LIST
✓ TO D in g Obje
ctives
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LEARNING OBJECTIVES
ORGANIZATIONAL After studying this chapter, you should be able to:
DESIGN, CULTURE, 1 Define organizational design and describe the four

objectives of organizational design
AND CHANGE Distinguish between mechanistic and organic
2 organizational structures
Discuss the influence that contingency factors—
3 organizational strategy, environment, size, age, and
technology—have on organizational design
Describe the characteristics, advantages, and
4 disadvantages of functional, divisional, matrix, team,
and network structural designs
Define organizational culture and describe the ways that
5 culture is manifested
Explain the role of managers and employees in creating
6 culture and making a culture effective
Define change and identify the kinds of change that can
7 occur in an organization
Explain the steps managers can follow to implement
8 planned change
Identify the organizational qualities that promote change
9
Explain why people resist change and what managers can
10 do to overcome that resistance
Getty Images
Explain why change efforts fail

11
Explain the purpose of an organizational development
12 program
❈
Motorola: Quality and Style

Motorola invented the cellular phone, but lost mo-
bile phone market share to leader Nokia and style- Edward J. Zander
conscious Samsung. “Its share of the handset market Born: 1947, Brooklyn, New York
slid from 54% in 1995 to 11% in 2000” (Corcoran). Current Position: Chairman and Chief Executive
The Motorola organization needed a change to recap- Officer (CEO), Motorola
ture the success it had known in the past. Career Highlights:
The company was founded in 1928 by Paul Galvin 1968 Engineer, Raytheon Company
as Galvin Manufacturing Corporation which produced
1973 Senior Marketer, Data General Corporation
a battery eliminator. When the company started sell-
ing car radios, Paul Galvin coined the term “Motorola.” 1982 Vice President Marketing, Apollo Computers
The company’s engineers invented two-way radios, 1988 Vice President Corporate Marketing, Sun
and it was one of the first semiconductor manufactur- Microsystems
ers. Paul’s son, Robert, ran the company from 1959 to 1991 President, SunSoft
1990. Then, it was run by long-tenured Motorola em- 1995 President and COO, SunSoft
ployees and Robert’s grandson, Chris. In 2004, the 2003 Managing Director, Silver Lake Partners
first outsider, Edward J. Zander, became Chairman of 2004 President and CEO, Motorola
the Board and Chief Executive Officer of Motorola, Inc. Education: Rensselaer Polytechnic Institute,
Before Zander was hired, customers were com- BS, 1968; Boston University, MBA, 1975
plaining about the quality and timely delivery of Mo-
Personal: Wife, Mona, two children
torola’s products. So, Zander refocused Motorola.
“I spent a lot of time in the field with customers and Source: International Directory of Business Biographies,
http://www.referenceforbusiness.com/biography/S-Z/
making sure to our employees that customer satisfac- Zander-Edward-1947.html
tion was No. 1,” Zander said (Bartash). He held em-
ployees accountable by tying their compensation to
product quality and customer satisfaction. Motorola Sources: Jeffry Bartash, “CEO Ed Zander brings back the
downsized by selling its semiconductor group, lay- Motorola moxie,” MarketWatch, December 6, 2005, http://www
ing off employees, reorganizing around customers .marketwatch.com/News/Story/Story.aspx?guid{20A72060-
2EE6-4BF3-A4E9-CA8F2EDA7229}; Elizabeth Corcoran, “Making
instead of products, and consolidating processes. Over Motorola,” Forbes, December 13, 2004, http://www
Collaboration was encouraged by forming teams. In .forbes.com/forbes/2004/1213/102_print.html; Roger O. Crockett,
the past, divisions had competed with each other. “Reinventing Motorola,” BusinessWeek Online, August 2,
Now, they were expected to work together and help 2004, http://www.businessweek.com/magazine/content/04_31/
b3894122_mz063.htm?chandb; Jyoti Thottam, “The Spark
each other. Zander “dismantled Motorola’s debili- Plug,” TIME, November 10, 2005, A22–A29.
tating bureaucracy and ended a culture of interne-
cine rivalries so intense that Motorola’s own employ-
ees referred to its business units as warring tribes” a rev -
(Crockett). et with
fi rs t- to -mark d sn’t
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Introduction
Managers in companies like Motorola frequently must rethink and reorganize
to pursue their mission and strategic goals. As companies focus or refocus their
attention on the customer—whether in manufacturing or marketing a product
or providing a service—it becomes necessary to modify structures or, as in the
case of Motorola, drastically overhaul the organization.
Chapter 8 identified and examined the concepts and process of organiz-
ing. This chapter will focus on organizational structure as a tool. It will exam-
ine how managers integrate departmentalization, decentralization, and span of
control into an organizational design to achieve specific objectives. Initially the
chapter will examine the nature of organizational design and its objectives and
then introduce potential design outcomes. A discussion of the organizational
structure options available to a designer are discussed. Then, the nature of or-
ganizational culture, manifestations of culture, and how culture is created are
explored. The chapter will conclude with a discussion of the nature of change—
sources of change, types of change, rates of change, and how to successfully
manage and implement change.
Designing Organizational Structures
1
Define organizational
design and describe
the four objectives of
organizational design
Organizational Design Defined
What is organizational design? Quite simply, when managers create or change an
organization’s structure, they engage in organizational design.1 They develop the
overall layout of the positions and departments as well as the interrelationships
of the departments. Most importantly, these managers create the means to im-
plement plans, achieve goals and objectives, and ultimately accomplish the orga-
organizational design
The creation of or change to an nization’s mission—to satisfy the customer. Designers make decisions critical to
organization’s structure success. As management consultant Frank Ostroff rightly noted, “The right or-
ganizational structure can take you from 100 horsepower to 500 horsepower.” 2
For organizational designers at Motorola, organizational design is like put-
ting together a giant jigsaw puzzle, with two differences. Unlike a jigsaw puz-
zle, an organization offers no picture to tell the designer what the final outcome
should look like; and organizational design involves billions of dollars for put-
ting the correct pieces together.
Objectives of Organizational Design

Organizations have certain common elements: they operate with authority, they
have departments, and they use line and staff positions. As alike as they might
seem, however, no two organizations are exactly the same. Some, like Starbucks,
rely on functional departmentalization; others, like Nortel Networks, choose
product groups. Some, like Sears, centralize decision making; others, like Honda,
decentralize. Some, like Matsushita, have narrow spans of control; others, like
American Airlines, have developed wide spans. The decisions made by managers
on the various elements determine the organizational design; and organizations
continually evolve to suit their operational requirements.
Regardless of whether managers are responsible for organizational design
work for ExxonMobil or Campbell’s Soup, they have the same objectives: re-
spond to change, integrate new elements, coordinate the components, and en-
courage flexibility.
a g es
Profits and Layoffs
Get t y Im
Palo Alto, California-based Hewlett-Packard (HP) reor- Director with the Sacramento Regional Research Institute,
ganized after buying Compaq Computer Corporation. By said, “High-tech companies such as Hewlett-Packard pay
2005, the mammoth restructuring shaved ten percent of higher wages than a retailer, and thus pump more money
the company’s global workforce and shuttered plants to into communities where it operates” (Larson).
maintain profitability (Spooner). Furthermore, the reorga-
• Are layoffs used as a management tool a matter of
nization resulted in numerous job cuts by HP’s subcon-
ethical concern?
tractors. HP concluded that it could save money by mov-
• Does HP’s management owe a greater duty to its
ing assembly jobs used in manufacturing to other states
stockholders than to its employees?
and countries.
• What ethical guidelines would you recommend to HP’s
Even in an industry plagued by massive cutbacks,
management to use when determining which opera-
HP’s downsizing appeared drastic. Michael Indiveri, Site
tions, offices, and jobs to eliminate?
Manager for the Golden Sierra (California) Job Training
Agency, said the Hewlett-Packard layoffs created a “re- Sources: John G. Spooner, “HP Announces Massive Job Cuts,”
eWeek, July 19, 2005, http://www.eweek.com/article2/0,1895,
verse multiplier effect.” When a company takes away 1838423,00.asp; Mark Larson, “Aftershock: Vendors hit hard by
jobs, the reverse multiplier effect removes additional sup- H-P layoffs,” Sacramento Business Journal, October 3, 2003, http://
sacramento.bizjournals.com/sacramento/stories/2003/10/06/story7
port and service jobs throughout the community, and eco- .html?page1.
nomic developers are concerned. Ryan Sharp, Research
Responding to Change “Nothing lasts forever” could be the slogan of organi-

zational designers. For a fi rm to stay competitive, it must respond to changes in
the environment—competition, technology, the global economy, and consumer
needs—as well as to changes that emerge from the company’s evolutionary devel-
opment. To remain static in the face of warning signals could eventually result in
making change an arduous process. A company that needed to trim down to be
competitive in a changing environment was Hewlett-Packard. Sometimes meet-
ing the objective, however, creates consequences for employers, as this chapter’s
Ethical Management feature illustrates.
Integrating New Elements As organizations grow, evolve, and respond to

changes, they add new positions and new departments to deal with factors in
the external environment or with new strategic needs. The objective of orga-
nizational design is seamlessness—that is, integrating these new elements into
the overall fabric of the organization. Accomplishing this objective may mean
adding a department to a level in the organization or virtually restructuring the
company, as at Nokia, the subject of this chapter’s Global Applications feature.
There, the strategic need to provide quality customer service required the dis-
mantling of functional departments, creating teams, and redelegating authority.
Coordinating the Components Simply placing a department in a structure

is not enough. Managers need to fi nd a way to tie all the departments together
to ensure coordination and collaboration across the departments. If this objec-
tive is not accomplished, the departments might not work together. Whether
266
GLOBAL APPLICATIONS Part 3 Organizing
a g es
Nokia: Reorganized Business
Get t y Im
Nokia, a world leader in mobile communications, reorga- • It designed phones to be as similar as possible to hold
nized to strengthen its position. The restructured com- down manufacturing costs. With this, all phones can
pany has four business divisions: mobile phones, multi- be made on the same production line, allowing Nokia
media, networks, and enterprise solutions. Also, the to shift rapidly from one model to another to meet
company includes two horizontal groups: customer and changes in demand.
market operations and technology platforms. Nokia’s or-
Based on these successes, Nokia decided to go global.
ganization structure changes with its customers. Yet,
When the world market for digital phones took off, Nokia’s
Nokia hasn’t always reorganized to take advantage of
hot products, low-cost manufacturing, and we-try-harder
opportunities. In 1992, Nokia, a Helsinki, Finland-based
attitude gave it the dominant market share worldwide in
company, was one of Europe’s also-rans. It racked up $40
mobile phones.
million in losses, selling everything from television tubes
to toilet paper; but when Jorma Ollila took over as CEO, • Management at Nokia is team oriented. Here is how
Nokia’s fortunes began to change. Ollila made a number it is explained in their (FAQs) Frequently Asked Ques-
of critical decisions that enabled Nokia to grab markets tions. “Nokia’s success so far has been very much a
from the giants. team effort. Our management environment nurtures
Initially, Ollila decided to sell off dozens of product lines discussion and openness as well as encouraging en-
and focus in on Nokia’s core strength—mobile phone tech- trepreneurism and risk-taking. At Nokia one is allowed
nology. He was convinced that the company had the ex- to make mistakes. Furthermore, if mistakes are made
pertise to become a major player if it continued to make early enough we can learn from them, and even turn
the right decisions; and Nokia did: them around to our advantage.” What characteristics
of teams does Nokia exhibit?
• It made investments in research and development. As
a result, Nokia was the first to achieve error-free cellu- Sources: John Blau, “Nokia Reorganizes into Four Divisions,”
Wireless, September 26, 2003, http://wireless.itworld.com/4273/
lar data transmission. 030926nokiareorg/page_1.html; Gail Edmonson, “Grabbing Markets
from the Giants,” BusinessWeek, January 9, 1995, p. 156.
through reporting relationships, teams, or task forces, departments must collab-

orate to avoid conflict and problems and to meet customer needs.
Encouraging Flexibility The final objective of organizational designers is

flexibility. Designers want to build into the organization—with all its author-
ity, chains of command, and bases of departmentalization—flexibility for deci-
sion making, for responding and redirecting energies, and for spotlighting peo-
ple’s talents. Flexibility for decision making differs from the aim of responding
to change.
Range of Organizational Design Outcomes

Remember that the organizational designer creates a structure to accomplish
the company’s objectives and mission. The elements that a designer has to work
with—chain of command, centralization/decentralization, formal authority,
types of departments, and span of control—fit together to form an overall struc-
tural approach. Depending on the balance of the elements, the design outcome
can be very different. Some organizations see the need to use the formal, vertical
Chapter 9 Organizational Design, Culture, and Change 267
hierarchy as a means of control and coordination. Other organizations decen-

tralize decision making, create teams, and provide managers with loosely struc-
tured jobs. The range of options can be described as tight (mechanistic) struc-
tures or loose (organic) structures.
Mechanistic Organizational Structures

A tight, or mechanistic, structure is characterized by rigidly defi ned tasks, for-
malization, many rules and regulations, and centralized decision making (Fig-
ure 9.1) shows the characteristics of a mechanistic structure). In an organization
with a mechanistic structure, the vertical structure is very tight, with emphasis
on control from top levels down. Tasks are broken down into rigidly defi ned,
2
Distinguish between
mechanistic and organic
organizational structures
routine jobs. Many rules exist, and the hierarchy of authority is the major form mechanistic structure
of control. Decision making is centralized, and communication is vertical—it A tight organizational structure
follows the chain of command. 3 The most vivid example of a mechanistic struc- characterized by rigidly defined
tasks, formalization, many rules
ture is the military. In the private sector, Sears with its tight controls, rigidly de- and regulations, and centralized
fi ned tasks, and numerous rules and regulations is mechanistic. decision making
Organic Organizational Structures

A flexible, or organic, structure is free flowing, has few rules and regulations, organic structure
and decentralizes decision making right down to the employees performing the A flexible, free-flowing orga-
nizational structure that has
job. Often referred to as the horizontal structure, the organic structure is a highly few rules and regulations and
adaptive form that is as loose and workable as the mechanistic organization decentralizes decision making
structure is rigid and stable. Rather than having standardized jobs and regula- right down to the employees
performing the job
tions, the organic structure allows changes to be made rapidly as the needs re-
quire. Organic structures have a division of labor, but the jobs people do are not
standardized. Organizations with organic structures frequently redefine tasks to
fit employee and environmental needs.4 They have few rules, and base authority
on expertise rather than on the hierarchical position of the person. Decision mak-
ing is decentralized and communication is horizontal, rather than being vertical
up and down the chain of command. They empower employees to make deci-
sions. Figure 9.1 contrasts the characteristics of organic organizations with those
of mechanistic structures.
Although the companies we have identified represent mechanistic and
organic organizations, it is difficult to categorize an organization as purely
Figure 9.1 Mechanistic structures versus organic structures
Vertical Structure Dominant Horizontal Structure Dominant
• Fixed and Specialized Tasks • Adaptable and Shared Tasks

• Centralized Decision Making • Decentralized Decision Making
• Formal Vertical Communication • Informal Horizontal Communication
• Rigid Hierarchical Relationships • Vertical and Horizontal Collaboration
• Many Rules • Few Rules
• Strict Hierarchy of Authority • Relaxed Hierarchy;
Authority by Expertise
Mechanistic Structure Organic Structure

mechanistic or organic. In actuality, organizations favor one or the other, de-

pending on how designers have integrated contingency factors—the topic of our
next section.
Contingency Factors Affecting

Organizational Design
3
Discuss the influence that
contingency factors—
organizational strategy,
environment, size, age,
The dilemma facing managers charged with the responsibility for organizational
design is to determine how mechanistic or organic the structure should be, for
either could be successful. Studying the contingency factors that affect organiza-
tional design provides the solution: strategy, environment, size of the organiza-
tion, age of the organization, and technology. The manager designs a structure
and technology—have on to fit these contingency factors. If the organization structure is incorrect, prob-
organizational design lems occur. 5
Strategy
Managers build organizational structures to achieve objectives. Logically then,
structure follows strategy; and when strategy changes, structure must change.
Motorola serves as an example. At the corporate level, the foundation for strat-
egy is the mission and strategic goals. Ed Zander, Chairman and CEO of Mo-
torola said, “We’ve been steadily building on our vision of Seamless Mobility
and evolving our strategy to achieve that vision.”6 For Motorola, seamless mo-
bility is providing “products and solutions across broadband, embedded sys-
tems and wireless networks. In your home, auto, workplace and all spaces in
between, seamless mobility means you can reach the people, things and infor-
mation you need, anywhere, anytime. Seamless mobility harnesses the power of
technology convergence and enables smarter, faster, cost-effective and flexible
communication.”7
Then to carry out strategic goals, a company develops a business-level strat-
egy. Chapter 6 introduced different business-level strategies that companies can
adopt to achieve their goals. For example, if Dell Inc. chooses to pursue a pros-
pector strategy, it must innovate, seek new markets, grow, and take risks. An or-
ganic structure providing for flexibility and decentralization matches best with
this strategy.8 In contrast, if a top manager at ExxonMobil adopts a defender
strategy—holding on to its current market and protecting its turf—a mechanis-
tic structure providing for tight control, stability, efficiency, and centralization
would be the best fit.9
Firms can also select differentiation or cost-leadership strategies.10 With a
differentiation strategy, the company attempts to develop new products for the
market. Internally, it requires coordination, fl exibility, and communication. The
proper fit is an organic structure, like the one at Johnson & Johnson. A strat-
egy of cost leadership, in contrast, focuses on internal efficiency. A mechanistic
structure is appropriate to achieve these objectives because it provides structured
organization and responsibilities. Figure 9.2 provides a comparison of strategy–
structure alternatives.
Environment
Chapter 7 showed the impact of environment on decision making—specifically,
the difficulty of making decisions in an uncertain or unpredictable environment.
As in decision making, the organizational environment provides a major influ-
Figure 9.2 Influence of strategy on structure
Strategic Goals Strategic Goals

• Efficiency • Innovation
• Stability • Flexibility
• Cost Leadership • Differentiation
Mechanistic Structure Organic Structure
ence on the design of organizational structure. The stability and predictability

of the environment have a direct bearing on the ability of the organization to
function effectively. An unstable environment that changes rapidly and is less
predictable raises two requirements:
1. The organization must be able to adapt to change. It needs to be flexible and
responsive.
2. The organization needs greater coordination between departments. The in-
dividual departments cannot become isolated, creating their own goals and
ignoring each other. In fact, departments tend to work more autonomously
during periods of instability, which creates barriers.
As seen in Figure 9.3, the organizational structure must fit the environment
for the organization to succeed. In a stable and predictable environment, the or-
ganization should have a mechanistic structure. Centralized decision making,
wide spans of control, and specialization “fit” in such an atmosphere. An uncer-
tain environment calls for an organic structure that emphasizes fl exibility, coor-
dination, and less formal procedures.11
Size of the Organization

The size of an organization is normally measured by the number of employees.
Research has found that large organizations differ structurally from small ones.
Small organizations—for example, De Mar Plumbing and Tony’s Café—have
little division of labor, few rules and regulations, and informal performance ap-
praisals and budget development procedures. These characteristics describe an
organic system. Large organizations, with tens of thousands of employees—for
example, ExxonMobil and American Airlines—are mechanistic. They have a
greater division of labor, more rules and regulations, and more elaborate internal
Figure 9.3 Relationship between environment and structure
Stable Environment Unstable Environment
Organic Structure
Incorrect Fit: Correct Fit:
Organic Structure in a Organic Structure in an
Stable Environment— Unstable Environment
Structure Too Loose
Mechanistic Structure
Correct Fit: Incorrect Fit:

Mechanistic Structure in a Mechanistic Structure in an
Stable Environment Unstable Environment—
Structure Too Tight
systems to control performance appraisals, rewards, and creativity.12 These large

organizations—including Ford Customer Service Division and DuPont—have,
however, begun to recognize the limitations of mechanistic structures and are
moving toward more organic structures. In some cases they accomplish change
by shifting structures; but more often, by downsizing. Although downsizing
normally results in helping the organization in the long run, it does cost employ-
ees’ jobs.
Age of the Organization

The longer an organization operates, the more formalized it is likely to become.
With age comes standardized systems, procedures, and regulations. Therefore,
older companies take on characteristics of mechanistic structures.
Organizations, like people, evolve through stages of a life cycle. Within this
organizational life cycle organizational life cycle, businesses follow observable and predictable patterns.
The stages an organization Figure 9.4 presents the four stages: birth, youth, midlife, and maturity. Each
goes through: birth, youth,
midlife, and maturity, where stage involves changes in the overall structure.13
each stage involves changes in
overall structure Birth Stage In the birth stage, an entrepreneur creates the organization. The
informal organization has no professional staff, no rules, and no regulations.
Decision making is centralized with the owner, and tasks are not specialized.
Frito-Lay was in the birth stage when Elmer Doolin, making corn chips with his
family in his mother’s kitchen from a Mexican proprietor’s recipe, began to sell
to the neighborhood grocery store.
Youth Stage In the youth stage, the organization is growing—its product suc-
ceeds, and it hires more employees. A division of labor begins to emerge, as do
a few formal rules and policies. Decision making is still centralized with the
owner, although it is shared with an inner circle. Frito-Lay was in the youth
stage when Elmer Doolin began a partnership with Herman W. Lay. They com-
bined their resources, opened two plants, and began regional distribution.
Midlife Stage In the midlife stage, the company has done well and grown quite
large. It now has an extensive set of rules, regulations, policies, and systems to
guide specialized employees. Control systems are put in place. Professional and
clerical staff are hired to undertake specialized support activities. Top manage-
ment decentralizes many tasks and assigns authority to functional departments;
but in the process, it loses flexibility and innovation. Frito-Lay moved into this
stage when it was purchased by PepsiCo and became one of its SBUs. PepsiCo,
in turn, provided professional management to expand the product line, perk up
promotions, and expand national distribution.
Maturity Stage In the maturity stage, the organization is large and mechanis-
tic. The vertical control structure becomes overwhelming. Rules, regulations,
specialized staffs, budgets, a refi ned division of labor, and control systems are
in place. The company—as happened with GM and DuPont—faces stagnation.
Innovation and aggressiveness can only come with moves to decentralize and
increase flexibility through reorganization. When Frito-Lay entered the matu-

rity stage, it had layers of management and specialists and was not responding
to competitors. The company underwent a major downsizing and restructuring,
which reshaped its fortunes and competitiveness.
The critical point of these discussions is for managers to shape and adjust
the structure to minimize or eliminate the mechanistic outcome of the maturity
stage. As we have seen, Motorola reached this stage but was able to restructure
to gain flexibility and responsiveness.
Technology
Every organization uses some form of technology to convert its resources into
technology outcomes. Technology includes the knowledge, machinery, work procedures,
The knowledge, machinery, and materials that transform the inputs into outputs.14 The technology required
work procedures, and materials
that transform the inputs into by ExxonMobil to produce oil differs from the technology employed by Revlon
outputs to produce cosmetics, but both use some kind of technology. Production technol-
ogy directly influences organizational structure. The structure must fit the tech-
nology, as well as work with an organization’s strategy, external environment,
age, and size.
British industrial sociologist Joan Woodward related the three basic types of
work flow technology to elements of structure (small batch, mass production, or
continuous process).15 Firms that produce goods in small quantities to customer
small batch technology or specifications use small batch technology, or unit production technology. Hu-
unit production technology man labor plays a large part in small batch technology. Examples of this tech-
A type of technology that pro-
duces goods in small quantities nology include making custom clothing or space satellites or doing the work of
designed to customer specifi- a small print shop.
cations When a company produces a large volume of standardized products, it em-
large batch technology or ploys large batch technology, or mass production technology. Such technology
mass production technology makes greater use of machines than does small batch production. Some auto-
A type of technology that pro- makers’ assembly lines use mass production. In continuous-process production,
duces a large volume of stan-
dardized products as at an ExxonMobil refinery or Coors brewery, the entire conversion process is
completed through a series of mechanical or chemical processes. Employees’ pri-
continuous-process mary roles are to fi x equipment and oversee the process.
production
A technology in which the en- In general, the form of organizational design appropriate for a company de-
tire conversion process is com- pends on its dominant technology. As shown in Figure 9.5, organizations that
pleted through a series of merely on small batch or unit production should employ an organic structure. A
chanical or chemical processes
large batch or mass production system works more readily with a mechanistic
Figure 9.5 Relationship between production technology and organizational structure
PRODUCTION TECHNOLOGY
SMALL MASS CONTINUOUS
ELEMENTS OF STRUCTURE BATCH PRODUCTION PROCESS
Complexity of technology Low Medium High
Organizational structure:
Degree of formal control Low High Low
Centralization Low High Low
Typical span of control 23 48 15
Overall structure Organic Mechanistic Organic
Source: Based on Joan Woodward, Industrial Organization: Theory and Practice (London: Oxford University
Press, 1965). Reprinted by permission of Oxford University Press.
structure, where centralized decision making and well-defi ned rules exist. A con-
tinuous-process production calls for organic structure because it needs flexibility
to oversee the complex technology.16
Since Woodward conducted her studies, manufacturing technology has
changed significantly. Computer systems allow for the automating and integrat-
ing of manufacturing elements such as product design, production equipment,
robotics, and performance analysis. These systems, known as flexible manufac- flexible manufacturing
turing systems (FMS) (discussed in detail in this text’s Appendix A, Operations system (FMS)
The automating and integrating
Management), are revolutionizing the traditional perception of mass assembly of manufacturing elements such
line operations and small batch production—both can now be done simultane- as product design, production,
ously in the same facility. equipment, robotics, and per-
formance analysis
The technology associated with flexible manufacturing places this system in
a higher position of complexity than any of the three technologies Woodward
studied. Because of this complexity, the approach associated with it focuses on
low formal control, high decentralization of decision making, a very narrow span
of control, and an organic structure.17
Structural Options in Organizational Design

Because no single organizational design suits all circumstances, managers must
carefully consider their company’s situation—strategy, environment, age, size,
and technology—before designing a structure for it. When the contingency fac-
tors favor a more mechanistic design, there are options from which to choose. If
the need is for an organic design, there are other viable choices.
4
Describe the
characteristics,
advantages, and
disadvantages of
Before discussing the options, we must make one other point. Some options functional, divisional,
are more clearly mechanistic or organic in practice, but the majority of them matrix, and network
structural designs
are not purely one way or the other. Figure 9.6 arranges the five options—func-
tional, divisional, matrix, team, and network—on a continuum from mechanis-
tic to organic. As you can see, most fall in the middle rather than reflecting ei-
ther extreme.
Functional Structure
The functional structure groups positions into departments based on similar functional structure
skills, expertise, and resources. Functional structure is an expanded version of An organizational design that
groups positions into depart-
functional departmentalization, introduced in Chapter 8. In an organization with ments based on similar skills,
functional structure, activities are grouped under headings common to nearly expertise, and resources
every business—headings such as fi nance, production, marketing, and human
Figure 9.6 Structural options on the mechanistic–organic continuum
Functional Divisional Matrix Team Network

Structure Structure Structure Structure Structure
Mechanistic Organic
Structure Structure
Figure 9.7 Functional organizational structure
President
Marketing Finance Human Production

Resources
Sales Research Credit Funds Benefits Wage and Machining Inventory

Acquisition Administration Salary Process
Advertising Accounting Training Assembly
resources. The entire organization is then divided into areas such as the one shown
in Figure 9.7.
Advantages of the Functional Structure Putting specialties together results

in economies of scale and minimizes duplication of personnel and equipment.
Employees tend to feel comfortable in a functional structure because it gives
them the opportunity to talk the same language with their peers. Because the
structure acknowledges occupational specialization, it also simplifies training.
Organizationally, the functional structure offers a way to centralize decision
making and provide unified direction from the top. Within each department,
communication and coordination are excellent. Finally, the functional structure
increases the quality of technical problem solving because it gives workers quick
access to those with technical expertise.
Disadvantages of the Functional Structure The functional structure also

has inherent disadvantages. Because functions are separate from one another,
employees may have little understanding of and concern for the specialty ar-
eas outside their own functional area. This narrowness can lead to barriers in
communication, cooperation, and coordination. Departments may develop their
own focus rather than a company focus. Also, because a functional structure
has rigid and separate chains of command, response time to changes in the envi-
ronment may be slow.
Managers in a functional structure also become focused on their functional
area, both long and short range. Problems are seen from one perspective, and
individuals become isolated. In addition, this narrowness carries over to long-
range development. The specialization does not give managers a broad perspec-
tive on the company or other functional areas. This lack of a broad general per-
spective minimizes the training for future chief executives.
divisional structure
An organizational design that
groups departments based on Divisional Structure
organizational outputs; these An alternative to the functional structure is the divisional structure, which groups
divisions are self-contained
strategic business units that departments based on organizational outputs. As shown in Figure 9.8, divisions
produce a single product are self-contained strategic business units that produce a single product. As we
Figure 9.8 Divisional organizational structure
President
SBU SBU SBU

Division A Division B Division C
Marketing Finance Marketing Finance Marketing Finance
Production Production Production
noted in Chapter 6, each SBU or division is responsible for the management of a

given product or product family. Within each division, diverse departments—for
example, production and marketing—are brought together to accomplish the di-
vision’s objective.
The divisional structure creates a set of autonomous minicompanies. In
a large company such as PepsiCo, each division has its own market, competi-
tors, and technologies. At PepsiCo, the divisions include Frito-Lay, Pepsi-Cola,
Quaker Oats, Gatorade, and Tropicana. In addition to organizing by product,
a company can organize divisions by customer or geography. A customer divi-
sional structure is called for when customers are distinct enough in their de-
mands, preferences, and needs to justify it. For large customers—say, state and
federal governments—as well as for commercial accounts with a certain line of
products, the company can group all the skills necessary and establish divisions
to serve those customers full time. The structure provides a company focus for
the employees. To better serve the distinct customer groups, three divisions were
established at Johnson & Johnson: consumer, medical devices and diagnostics,
and pharmaceutical. One focuses on fi nal consumers, a second on professionals,
and the third on pharmaceutical buyers.18
Managers create geographic divisions when a company needs to group func-
tional skills for a specific region—international, national, or regional. This
structure tries to capitalize on situations in which the geography dictates dif-
ferences in such factors as laws, currencies, languages, and taxation. Some de-
partment stores, such as J. C. Penney and Sears, have created regional divisions.
On an international scale, McDonald’s has structured geographically based on
continent—European, North American, and Asian divisions.
Advantages of the Divisional Structure The divisional structure focuses

the attention of employees and managers on results for the product, the cus-
tomer, or the geographical area. Divisional structure is flexible and responsive to
change, because each unit focuses on its own environment. Coordination among
different functions within the division benefits from singleness of purpose. Be-
cause each division is a self-contained unit, responsibility and accountability for
performance are easier to target. The divisional structure is also an excellent ve-
hicle for developing senior executives. Division managers gain a broad range of
experience in running their autonomous units, which are, in essence, compa-
nies. An organization that has a large number of divisions is developing a num-
ber of generalists for the company’s top positions.
Disadvantages of the Divisional Structure The major disadvantage of di-

visional structure is duplication of activities and resources. Instead of a single
marketing or research department, each division maintains its own. The struc-
ture loses efficiency and economies of scale; and a lack of technical specializa-
tion, expertise, and training can result. Interdivisional coordination may suffer,
and employees in different divisions may feel they are competing with one an-
other—a mixed blessing.
Historically, General Motors (GM) has operated with a divisional product
structure, and its inherent limitations. For each automobile division—Buick,
Chevrolet—a separate marketing, manufacturing, and research area exists. The
duplicate activities lose overall corporate efficiency. Divisions compete with each
other with almost identical car designs.
Matrix Structure
matrix structure The matrix structure combines the advantages of functional specialization with
An organizational design that the focus and accountability of the divisional structure. A matrix utilizes func-
utilizes functional and divisional
chains of command simultane- tional and divisional chains of command simultaneously in the same part of
ously in the same part of the the organization.19 To achieve this combination, the matrix structure employs
organization dual lines of authority. As Figure 9.9 shows, the functional hierarchy of author-
ity runs vertically from the functional departments—production, materials pur-
chasing, human resources, and so on—and project authority runs laterally from
group to group. This combination of function and project authority creates a
grid, or matrix. As a result each employee has two bosses, with a dual chain of
command based on both the department and individual projects. 20
A matrix structure can be created when any division established for a specific
product, program, or project is combined with a functional structure. In general,
a matrix design will most likely be used in one of two situations. 21 First, it is used
when a fi rm offers a diverse set of products, has a complex environment, and re-
quires functional expertise. With a matrix, the company can bring important
functional skills to bear on each product while simultaneously responding to the
changing environment.
Second, the matrix organization is used when managers want to maximize
economies of scale and shared resources. Resource duplication is minimized by
having employees work for more than one division or by transferring employ-
ees among divisions as requirements change. The manager in charge of the en-
gineering department shown in Figure 9.9 can assign engineers as the needs of
each project demand.
Advantages of the Matrix Structure Monsanto, Dow Chemical, and Asea-

Brown Boveri (ABB) have used the matrix structure successfully. It has proven
to be flexible; teams can be created, changed, and dissolved without a major
problem. Communication and coordination are increased. Lars Ramquist was
so impressed with the advantages of the matrix structure that his fi rst move as
Figure 9.9 Matrix organizational structure
President
Aerospace
Division
Production Materials Human Legal Engineering Finance

Purchasing Resources
Delta Production Materials H.R. Legal Engineering Finance

Project Support Support Support Support Support Support
Manager Group Group Group Group Group Group
Triton Production Materials H.R. Legal Engineering Finance

Corsair Production Materials H.R. Legal Engineering Finance

Line Authority
CEO of Sweden’s L. M. Ericsson Corporation was to solve organizational prob-

lems by installing a matrix structure.
The matrix structure increases the motivation of individual employees. The
achievement of goals can bring a sense of commitment and satisfaction. The
structure also provides training in functional and general management skills.
People within functional departments receive technical training, and team coor-
dination provides the opportunity to develop a general perspective.
Disadvantages of the Matrix Structure The most obvious disadvantage is

the potential confl ict, confusion, and frustration created by the dual chain of
command. Employees have two bosses—the functional manager and the project
manager. Also, the matrix often pits divisional objectives against functional ob-
jectives, creating confl ict. Another disadvantage directly relates to the previous
one: the productive time lost to meetings and discussions to resolve this confl ict.
The structure places a premium on interpersonal skills and human relations

training—conflict management, working with two bosses, and open commu-
nication. Finally, the matrix structure may create a problem with a balance of
power between the functional and divisional sides of the matrix. If one side has
more power, the advantages of the matrix—coordination and cooperation—will
be lost.
Team Structure
The newest and most potentially powerful approach to organizational structure
team structure has been the attempt by organizations to implement a team structure. The team
An organizational design that structure—organizing separate functions or processes into a group based on
places separate functions or
processes into a group accord- one overall objective—takes direct aim at the traditional organization hierarchy,
ing to one overall objective whether functional, divisional, or matrix, and flattens it. Although the vertical
chain of command is a powerful control device, it requires passing decisions up
the hierarchy and takes too long. Such an approach also keeps responsibility at
the top. Companies adopting the team structure are pushing authority down to
lower levels through empowerment and holding the team accountable.
Successful teams use collaboration. Most people agree that face-to-face col-
laboration is important for business. Yet it is difficult to achieve. Many cowork-
ers are too busy to meet on a regular basis. They talk on the phone, but they
cannot see each other’s facial expressions nor can they share work documents.
E-mail allows discussions and sharing documents, but not in real time. Collab-
oration software, depicted in this chapter’s Managing Technology feature, also
known as groupware or teamware, can be placed on an intranet, a company’s
private part of the Internet. It allows employees to post messages, share fi les,
and schedule meetings in a virtual office.
Rather than departments being structured by functional specialty, team de-
partments are created. Team members representing different functions or pro-
cesses are grouped together: a number of such teams report to the same supervi-
sor. Although variations of the team concept occur—some teams are responsible
for a product, others for a process—the result is the same. The traditional func-
tions are reorganized, layers of management are removed, and the company be-
comes decentralized. Figure 9.10 illustrates the reorganization of a vertical func-
tional structure to a horizontal team product structure. Teams will be discussed
in detail in Chapter 14.
Advantages of the Team Structure The team concept breaks down barri-
ers across departments because people who know one another are more likely to
compromise than would strangers. The team structure also speeds up decision
making and response time. Decisions no longer need to go to the top of a hierar-
chy for approval. Employees are strongly motivated. They take responsibility for
a project rather than for a narrowly defined task, and the result is enthusiasm
and commitment. Decentralization of authority is accompanied by the elimina-
tion of levels of managers, which results in lower administrative costs. Finally,
team structure is an improvement over the matrix structure in that it does not
involve the problem of double reporting. Each worker believes he or she is part
of a team rather than an individual who performs a designated function.
Disadvantages of the Team Structure The team structure depends on em-

ployees who learn and train for success. If the company won’t provide training,
performance suffers. Also, a large amount of time might be required for team
meetings, thus increasing coordination time.
Figure 9.10 Development of a team structure
From a Vertical Functional Structure . . . President
Research Production Marketing Finance
R R P P M M F F
R R R R P P P P M M M M F F F F
To a Horizontal Team Structure President
Team A Team B Team C

R P M F R P M F R P M F
R R P P M M F F R R P P M M F F R R P P M M F F
Network Structure
The fi nal approach to structure is known as the dynamic network organiza-
tion. In the network structure a small central organization relies on other orga- network structure
nizations to perform manufacturing, marketing, engineering, or other critical An organizational design option
in which a small central organi-
functions on a contract basis. 22 In other words, rather than these functions be- zation relies on other organiza-
ing performed under one roof, they are really free-standing services. Nike and tions to perform manufacturing,
Esprit Apparel, both of whom have booming businesses even though they own marketing, engineering, or other
critical functions on a contract
no manufacturing facilities, use the network structure concept (see Figure 9.11). basis
Rather than create the functions internally, they connect independent designers,
manufacturers, and sales representatives to perform needed functions on a con-
tract basis. 23
Advantages of the Network Structure The network structure provides flex-

ibility because a company purchases only the specific services needed. Adminis-
trative overhead remains low because large teams of staff specialists and other
administrative personnel are not needed. E-mail is a common method used by a
network to communicate.
Disadvantages of the Network Structure The major shortcoming of this

type of structure is lack of control. The management core must rely on contrac-
tors. This limitation can be minimized if management is willing and able to work
closely with the suppliers. The reliability of supply, however, is less predictable
than it would be if the company owned the means of supply. If a supplier fails
to deliver, goes out of business, or suffers a plant breakdown, the central hub of
Figure 9.11 Network organizational structure
Research and Design Manufacturing Company

Company (France) (Korea)
Management
Transportation Core Sales Representatives
Company (Germany) Group (Canada)
Advertising Agency
(New York)
the network is endangered. Also, if an organization relies on contract work, cen-

tral managers may lack technical expertise to resolve problems effectively.
Organizational Culture
5
Define organizational
culture and describe
the ways that culture is
manifested
Organizational Culture Defined
Chapter 5’s discussion of the manager’s environments introduced a critical con-
cept in the successful management of a company—organizational culture. Orga-
nizational culture is a dynamic system of shared values, beliefs, philosophies, ex-
periences, habits, expectations, norms, and behaviors that give an organization
its distinctive character. More importantly, that system—the organizational cul-
ture—defi nes what is important to the organization, the way decisions are made,
the methods of communication, the degree of structure, the freedom to func-
tion independently, how people should behave, how they should interact with
each other, and for what they should be striving. Sharing these beliefs, values,
and norms helps employees develop a sense of group identity and pride—both
valuable contributors to organizational effectiveness. The norms for behavior de-
velop around a set of values and create an invisible hand—a consensus and driv-
ing force for goal accomplishment.
Because each organization has its own beliefs, values, and norms, each has
a unique culture. At Nordstrom, the department store chain, the organizational
culture makes a crusade of providing customer service. Procter & Gamble’s cul-
ture stresses quality and competitive marketing. Although organizational cul-
ture might seem suspiciously like a company’s mission, there is more to it than
that. “At Southwest, culture is purposeful, not accidental. It’s something people
work hard at every day.” 24 The organizational culture provides a means through
which each employee can translate the core values of the mission into his or her
own guiding passion.
Management writers Tom Peters and Robert Waterman related the words of
a business executive who had worked at McDonald’s as a 17-year-old. In describ-
ing his experience at McDonald’s, the exec pointed out the importance of the
company credo of quality: “If French fries were overdone, we threw them out.”
Though they were young, inexperienced workers on the burger assembly line, he
and his coworkers had fully absorbed the company’s chief value—quality—and
the norms for defect handling. 25
The young workers absorbed those values and norms because McDonald’s
has a strong culture. The more a culture’s values are intensely held and widely
shared throughout the organization, the stronger the culture. McDonald’s cul-
ture is also highly functional. The factors that influence culture are all consis-
tent with and supportive of the organization’s strategy.
Factors Shaping Culture

Although each company’s special blend of elements develops a unique culture, a
comparison of many organizations identifies seven culture-shaping factors:
• Key organizational processes
• Dominant coalition
• Employees and other tangible assets
• Formal organizational arrangements
• Social system
• Technology
• External environment
As shown in Figure 9.12, these factors interact with each other. In fact,
no single ingredient is independent of the others. Let us examine each of these
factors. 26
Key Organizational Processes At the core of every organization, and fun-

damental to it, are the processes people follow to gather information, commu-
nicate, make decisions, manage work flow, and produce a good or service. How
managers communicate to employees, how they share decision making, and how
they structure the flow of work defi ne the organization. These processes affect
and are affected by the other six factors that influence organizational culture.
Dominant Coalition An organization’s culture is greatly affected by the objec-

tives, strategies, personal characteristics, and interrelationships of its managers,
who form the dominant coalition. Managers’ leadership styles determine how
employees are treated and how they feel about themselves and their work. The
dynamic energy and vision of Bill Gates at Microsoft have made his company
the world leader in computer software. Herb Kelleher of Southwest Airlines cre-
ated a culture that values having fun at work and that stresses the importance of
the contribution of each employee. Deloitte & Touche, the subject of this chap-
ter’s Valuing Diversity feature, launched its Initiative for the Retention and Ad-
vancement of Women and changed a culture that spurned women to one that
valued and retained them.
Figure 9.12 Factors that shape organizational culture
Employees and
Other Tangible
Assets
Formal
Dominant Organizational
Coalition Arrangements
Organizational
Culture
Technology Social System
Key
Organizational
Processes
External
Environment
Employees and Other Tangible Assets An organization uses its resources—

employee population, plant and offices, equipment, tools, land, inventory, and
money—to carry out its activities. These assets are the most visible and complex
of the factors that influence organizational culture. Their quantity and quality
have a major effect on organizational culture and performance. For example,
Procter & Gamble attributes much of its success to the quality of its people—who,
in turn, are proud to be part of an organization that describes itself as “special,”
“great,” “excellent,” and “unique among the world’s business institutions.”
Formal Organizational Arrangements The formal arrangements that orga-

nize tasks and individuals constitute another factor that affects organizational
culture. These arrangements include the structure of the organization and its
procedures and rules. Specific mandated behaviors are also a part of organiza-
tional arrangements.
Social System The social system, which contributes norms and values to orga-
nizational culture, includes the set of employee relationships that relate to power,
affiliation, and trust. It also includes the grapevine and the informal organiza-
tion, thus helping render it one of the most important factors of organizational
culture. Because people are the organization, their relationships are crucial to
defi ning what the organization is like.
a g es
Deloitte & Touche Changes
Get t y Im
the Culture
For ten years, Cynthia Turk inched her way up the lad- also involved more flexible work arrangements, including
der at the accounting firm of Deloitte & Touche. Eventu- the possibility of becoming a partner on a part-time basis.
ally she became a partner—when fewer than ten percent Partners are also monitored to ensure they give their fe-
of the partners were women—but she wasn’t welcomed male managers challenging, growth-oriented assignments,
openly. “I walked into a culture that wasn’t used to having rather than clerical work. “Deloitte’s gender gap in turn-
women in very senior positions. It wasn’t warm, welcom- over has now nearly vanished, and the number of women
ing, or nurturing” (Lawlor). Three years later, Turk left, still partners and directors is the highest among the Big Five.
feeling unaccepted. These cultural changes weren’t easy, but they’ve en-
Since Turk, together with many other women, left, few abled Deloitte to grow faster than any of its competitors”
firms have made a more public commitment to top-to- (McCracken).
bottom cultural change than has Deloitte & Touche.
• Sharon Allen (Chairman of the Board, Deloitte & Tou-
Following a fact-finding study to determine why, after
che USA LLP) addressing the Wharton Women in
years of hiring women for 50 percent of the entry-level
Business Conference, November 3–4, 2005, said,
jobs, fewer than ten percent of those promoted to part-
“Forget the negative things you might read and hear
ner were female, a task force was formed. A strategic plan
and forget the statistics that detail a tough business
with top-down accountability was developed.
world where success is hard to come by. There’s
To change a culture where women, once they had
never been a better time to be a woman in business.”
a family, were perceived as less committed, Deloitte
Do you agree with Ms. Allen? Explain your answer.
& Touche embarked on an ambitious program in 1993,
known as the Women’s Initiative (WIN). Focused at all Sources: http://www.us.deloitte.com, About Deloitte, Women’s
Initiative; Douglas M. McCracken, “Best Practice—Winning the
parts of the culture, the program included gender- Talent War for Women: Sometimes It Takes a Revolution,” Harvard
awareness training for partners and managers, formal ca- Business Review, November–December, 2000; Angela Briggins,
“Win-Win Initiatives for Women,” Management Review, June 1995,
reer planning for all female partners and senior managers, 6; Julia Lawlor, “Executive Exodus,” Working Woman, November
and succession planning for senior women. The program 1994, 39–41, 80–87.
Technology The major technological processes and equipment that employees

use and how they use them also affect organizational culture. Is a machine or
process intended to replace human labor or enhance workers’ skills and produc-
tivity? The answer sends a message about the values of employees in the organi-
zation. Assembly-line technology promotes an impersonal, uninvolved culture.
Many years ago, Volvo of Sweden embraced quality and worker satisfaction as
corporate values. As a result, Volvo managers adopted team organizations and
unconventional layouts in Volvo facilities. These changes helped shift the orga-
nizational culture away from the mechanistic values of the assembly line.
External Environment The discussions on the external environment in Chap-

ters 5, 6, and 7 related how suppliers, markets, competitors, the economy, regu-
lators, and other factors outside an organization affect its goals, resources, and
processes. Clearly these factors influence a fi rm’s culture in many ways. For ex-
ample, when a company expands globally, the international employees bring
their values, beliefs, and attitudes to the organization. This infusion of diversity
alters the culture.
Manifestations of Culture
An organization’s culture is nurtured and becomes apparent to its members in
various ways. Some aspects of culture are explicit; some must be inferred. The
chief evidences of culture include statements of principle, stories, slogans, he-
roes, ceremonies, symbols, climate, and the physical environment.
Statements of Principle
Some corporations have developed written expressions of basic principles cen-
tral to organizational culture. Many years ago Forrest Mars developed the “Five
Principles of Mars,” which established fundamental beliefs for the company. 27
Mars’s principles still guide the company today:
1. Quality. No one at Mars has the word quality in his or her job title; quality
control is everywhere, and everyone is responsible for it.
2. Responsibility. All employees are expected to take on direct and total re-
sponsibility for results, exercising initiative and making decisions.
3. Mutuality. In all dealings—with the consumer, other employees, a supplier
or distributor, or the community at large—employees are to act so that ev-
eryone can win.
4. Efficiency. All of the company’s factories operate 24 hours a day, 7 days a
week. As a whole, the company uses 30 percent fewer employees than its
competitors do.
5. Freedom. The company provides freedom to allow employees to shape their
futures, and profits that allow employees to remain free.
Stories
Shared stories illustrate the culture. Telling stories acquaints new employees
with the culture’s values and reaffi rms those values for existing employees. For
example, all new employees at Nordstrom learn the importance of being a “cus-
tomer service hero” by seeing, hearing, and reading “true tales of incredible cus-
tomer service.”28 This gives Nordstrom employees a standard to aspire to—and
even surpass.
Slogans
A slogan is a phrase or saying that clearly expresses a key organizational value.
The late Sam Walton’s slogan, “The customer is the boss,” keeps the culture of
Wal-Mart focused on providing high-quality customer service. A slogan, how-
ever, should not be confused with a company’s advertising campaign, unless the
slogan is genuinely backed by the actions of the company and becomes a com-
pany value.
Heroes
A hero is a person in the organization who exemplifies the values of the culture,
as Southwest Airlines former CEO Herb Kelleher does. To his employees, Kelle-
her embodied what Southwest stands for—customers fi rst, quality service, and
have fun while doing it. A true hero? All of Southwest’s employees secretly con-
tributed to buying a full-page ad in USA Today for National Boss Day. 29
Ceremonies
Managers hold ceremonies to exemplify and reinforce company values. Awards
ceremonies for outstanding service, top producers, or high-performance teams
promote the values of the culture and allow recipients and colleagues to share
the experience of achievement. Awards ceremonies at Mary Kay Cosmetics are
legendary in the cosmetics industry. At these lavish affairs, high-achieving sales
representatives receive furs, pins, and cars. Whereas ceremonies at Mary Kay
are simmering with sophistication, the same could hardly be said at Henkel
Consumer Adhesives. Henkel’s celebrations are raucous and fast moving. To cel-
ebrate successes, people in yellow duck outfits (“duct” sounds like “duck”) wad-
dle through the halls; do the Henkel Consumer Adhesives cheer at the beginning
of every meeting; and celebrate at the Duck Challenge Day each year. 30
Many companies use a ceremony to mark the advancement of a new hire
from trainee to full-fledged employee. Ceremonies also include rituals that honor
promotions. These events increase the employee’s identification with the organi-
zation’s values.
Symbols
An object or image that conveys meaning to others is a symbol. Some organi-
zations use symbols to embody their core values. Walt Disney created an entire
symbolic language to reinforce his company’s core values. At the Disney theme
parks:
• Employees are “cast members.”
• Customers are “guests.”
• A crowd is an “audience.”
• A work shift is a “performance.”
• A job is a “part.”
• A uniform is a “costume.”
• The personnel department is “casting.”
• Being on duty is “on stage.”
• Being off duty is “off stage.” 31
At Nordstrom each employee receives a copy of the employee handbook,
which consists of a single 5½ by 8½ inch card. As shown in Figure 9.13, the sym-
bolic handbook embodies the core values of customer service and autonomy.
Symbols may include job titles and perks, such as the location of a reserved park-
ing space, the size and location of the office, or the size of the desk.
Climate
As defi ned in Chapter 5, organizational climate is the quality of the work envi-
ronment experienced by employees—that is, how it feels to work there. Climate
is largely a function of how workers feel about the organization. Do they work
hard and apply themselves to the task, cooperating with management goals and
directives; or do they drag their feet, resenting management instructions and re-
sisting demands for output?
A company with a healthy climate encourages everyone to tap into the other
person’s expertise, empowers people and rewards them for taking risks, and
Figure 9.13 Nordstrom’s handbook symbolizes its core values
WELCOME TO NORDSTROM
We’re glad to have you with our Company.
Our number one goal is to provide
outstanding customer service.
Set both your personal and professional goals high.

We have great confidence in your ability to achieve them.
So our employee handbook is very simple.
We have only one rule. . .
Our one rule: Use good
judgment in all situations.
Please feel free to ask your department Manager,
Store Manager or Human Resource Office
any question at any time.
Source: Used with permission of Nordstrom, Inc.
provides lots of celebrations where peers cheer peers. An unhealthy climate is

found in enterprises where management has different values, is in confl ict, and
has widely divergent goals.
Physical Environment
Last but not least in the discussion of culture-shaping factors is a simple but pow-
erful force: the physical environment of an organization. It is no coincidence that
Sears & Roebuck, a hierarchical organization, built the world’s tallest building.
The Sears Tower dominates the Chicago skyline and reflects the multilayered
structure and centralized culture of the organization that it built. A software de-
veloper or computer maker, on the other hand, may create a campuslike environ-
ment to promote the free exchange of ideas. Such enclaves are common in Cali-
fornia’s Silicon Valley.
Creation of Culture
6
Explain the role of
managers and employees
in creating culture and
making a culture effective
The efforts of managers and employees create organizational culture. Managers
like Walt Disney deliberately set out to instill certain values. In other cases the
culture simply emerges from a pattern of behaviors that may not be consciously
planned.
Role of Managers
Managers at all levels in an organization help develop the culture. Quite simply,
managers set the tone, control the resources, and have the means to influence
the results. Management helps create culture in the following ways:
• Clearly defi ning the company’s mission and goals
• Identifying the core values
• Determining the amount of individual autonomy and the degree to which
people work separately or in groups
• Structuring the work in accordance with the corporation’s values to achieve
its goals
• Developing reward systems that reinforce the values and goals

• Creating methods of socialization that will bring new workers inside the
culture and reinforce the culture for existing workers
The task of defining the culture often begins with the organization’s founder.
Both Walt Disney and Sam Walton created and put their stamp on strong orga-
nizational cultures. Sometimes, though, managers in charge of existing organi-
zations wish to change that organization’s culture. For example, a new manager
might fi nd a culture that is hierarchically oriented and frowns on confrontation.
Decisions are made too slow. People don’t take risks.
Such an organization needs a new spirit with a willingness to compete. To
begin the transformation, a new mission focusing on fulfilling the needs of the
customer is required. Core values—such as respect for the individual, integrity,
trust, credibility, and continuous improvement—will help build the culture.
Regardless of whether the manager is the organization’s founder, a second
generation CEO, or a newly positioned chief executive, James C. Collins and
Jerry I. Porras point out that truly visionary managers and companies “translate
their ideologies into tangible mechanisms aligned to send a consistent set of re-
inforcing signals. They indoctrinate people, impose tightness of fit, and create a
sense of belonging to something special.” 32 Figure 9.14 presents a summary of
practical ways Collins recommends for building culture.
Role of Employees
Employees contribute to organizational culture to the extent that they accept
and adopt the culture. Workers at Disney theme parks are renowned for their

sunny disposition and friendliness to patrons. The training they receive after
hiring clearly succeeds in making them see themselves as performers who give
enjoyment.
Also, workers contribute to organizational culture by helping to shape the
values it embodies. Employees who shirk the tasks at hand—and influence new-
comers to do the same—have a significant effect on quality, regardless of what
top managers may say about quality as a value. Employees who give each other
a hand to meet a deadline create a feeling of teamwork that exists regardless of
management’s decisions about structuring work.
Finally, workers play a role in influencing organizational culture by form-
subculture ing subcultures. A subculture is a unit within an organization that is based on
A unit within an organization the shared values, norms, and beliefs of its members. The values of the subcul-
that is based on the shared val-
ues, norms, and beliefs of its ture may or may not complement those of the dominant organizational culture.
members Unionized employees constitute a subculture. Groups of workers who share a
common background or interest or who work in the same department may also
form subcultures. When workers form a subculture, their shared experiences
take on a deeper meaning because they also share values, norms, and beliefs.
Subcultures influence their members’ behavior; managers should, therefore, con-
sider them important. If a subculture’s values and norms conflict with those of
the dominant culture, managers must take action.
Factors Contributing to the Effectiveness of Culture

Culture affects performance. In a study of hundreds of fi rms, John P. Kotter
and James Heskett found a dramatic difference between effective and ineffec-
tive cultures:
We found that firms with cultures that emphasized all the key manage-
rial constituencies (customers, stockholders, and employees) and lead-
ership from managers at all levels outperformed fi rms that did not have
those cultural traits by a huge margin. 33
Kotter and Heskett went on to warn that managers must do more than pro-
mote an effective culture; they must be constantly on the lookout for the signs of
an ineffective culture.
Corporate cultures that inhibit strong long-term financial performance
are not rare; they develop easily, even in firms that are full of reason-
able and intelligent people. Cultures that encourage inappropriate be-
havior and inhibit change to more appropriate strategies tend to emerge
slowly and quietly over a period of years, usually when firms are per-
forming well. 34
Three factors help determine the effectiveness of an organizational culture:
(1) coherence, (2) pervasiveness and depth, and (3) adaptability to environment.
Coherence In discussions of organizational culture, coherence refers to how

well the culture fits the mission and other organizational elements. A culture
like the one at Wal-Mart, which values customer service and a low-cost strategy,
must train employees to recognize customer needs. It must also empower them
to make decisions to meet those needs, create processes and structures that will
achieve the goals of low inventory cost and low overhead, and employ technology
to meet those goals. If decision-making authority at Wal-Mart were centralized,
the culture would be less coherent, because such a design does not mesh with
other aspects of the culture.
Pervasiveness and Depth The phrase pervasiveness and depth refers to the
extent to which employees adopt the culture of an organization. The greater the
acceptance of and commitment to organizational values, the stronger the cul-
ture. 35 By insisting that all employees take responsibility for quality, Motorola
ensures that quality, as a value, is pervasive. By training theme-park employees
extensively, Disney helps guarantee that employees deeply hold its values. In ap-
plicant interviews, Southwest Airlines’ employees ask the interviewee, “What
did you do on your last job to have fun?” This perpetuates the fun-loving envi-
ronment at Southwest.
Adaptability to the External Environment If organizational culture fits the

external environment, managers and employees have the mind-set they need to
compete. For decades, American Telephone & Telegraph (AT&T) enjoyed a mo-
nopoly on long-distance telephone service. In the 1980s, when long-distance ser-
vice was deregulated, AT&T employees found they did not have the mind-set to
compete in their new environment; their organizational culture had a poor de-
gree of fit in terms of the real world. The new external environment had created
new demands, and it required a new way of thinking—a new culture.
Of the three factors that determine the effectiveness of organizational cul-
ture, the degree of fit with the external environment is perhaps the most critical.
Its importance lies in the fact that the environment changes. Just ask managers
at Sears, IBM, or General Motors about the importance of change in the exter-
nal environment. These three organizations fell on hard times because they were
not adaptable enough. Each organization possessed an effective culture. Indeed,
IBM provided a model of strong corporate culture. The true measure of the ef-
fectiveness of a culture, then, is its ability to adapt. Managers must achieve the
difficult task of building a culture strong enough to compel commitment and
unwavering support but flexible enough to allow change in the face of emerging
external demands.
Meeting that challenge will likely become even more important to organi-
zational survival in the future. In the current volatile business world, environ-
mental change is a constant. We now turn to understanding change and learning
how to manage change.
Nature of Change
Not since the Industrial Revolution has U.S. business experienced so much
change. In the past decade, almost every industry has been rocked by change.
Telecommunications has been changed by divestitures. Pharmaceuticals and
banking have undergone consolidation. The banking and transportation indus-
tries have had to adjust to deregulation as investment brokers and health care
7
Define change and identify
the kinds of change
that can occur in an
organization
providers have had to adjust to increasing regulation. Manufacturers battle an
increase in foreign competition, and the computer industry must constantly ac-
commodate technological innovation. The Internet has affected every single in-
dustry. Managers are assaulted by change. Furthermore, as soon as they adjust
to one change, they must readjust to accommodate another.
change Change is any alteration in the current work environment. The shift may be
Any alteration in the current
work environment
in the way things are perceived or in how they are organized, processed, created,
or maintained. Every individual and organization experiences change. Some-
times change results from external events beyond the control of a person or an
organization. Other times the change results from planning. When a company
lowers its prices to increase market penetration, for example, the change in price
is purposeful.
The example about lowering prices indicates how complex a change can
be. Lowering prices may seem to be a simple matter, but it involves more than
just printing a new price list. A company lowers prices to increase sales. If sales
increase, the company may need additional staff or equipment (phone lines or
computers) to handle the volume of orders. It might need more production ca-
pacity to fi ll the orders, a more efficient technology to meet the needs, and so on.
Furthermore, the information system must communicate the new price through-
out the organization, and employees must receive briefi ngs so they will know
how to handle the increase. Even an apparently mechanical change calls for ad-
justments throughout an organization.
This section explores change by discussing its sources and types. The sec-
tions that follow will examine the kinds of changes that confront an organiza-
tion during its typical life span and how change affects managers at each level.
Sources of Change
Change originates in either the external or internal environments of the organi-
zation.
External Sources Change may come from the political, social, technological,
or economic environment. Externally motivated change may involve government
action, technology, competition, social values, and economic variables. Devel-
opments in the external environment require managers to make adjustments.
New government regulations, for example, can require that a manufacturer in-
stall pollution-control devices or that a restaurant raise the wages of its workers
to meet a new minimum. The actions of competitors certainly put demands on
a business. When one U.S. airline launches new low fares, other domestic air-
lines in the same markets feel compelled to follow suit. Companies successful at
coping with change take advantage of new technologies earlier rather than later.
Internal Sources Internal sources of change include managerial policies or

styles; systems and procedures; technology; and employee attitudes. When man-
agers change the standards by which they measure job performance or when a
new manager takes over a department or company, employees must adapt their
behavior to fit the new situation.
New conditions in the external environment clearly can bring about changes
within the organization; internal change can also cause external change. Whether
internal change affects the external environment depends on the extent of the in-
ternal change and on whether the change affects a part of the organization that
has impact on the environment. New internal policies requiring employees to
check their e-mail at least once each day will unlikely have any impact on the ex-
ternal environment.
Types of Change
Change can also be understood on the basis of its focus, which can be strate-
gic, structural, process oriented, or people centered. Such changes can have dra-
matic impact on the organizational culture.
Strategic Change As discussed in Chapter 6, sometimes managers find it nec-

essary to change the strategy or the mission of the organization. Organizations
that decide to focus on a single mission often need to divest themselves of un-
related businesses, as Motorola did when it sold off its semiconductor group.
Managers who want to expand operations to new areas may move to acquire
another company, as eBay did in its purchase of PayPal.
Achieving strategic changes can require, in turn, a change in organizational
culture or other elements. When Motorola adopted quality as a key to its com-
petitive strategy, it had to adopt quality work as a corporate value.
Structural Change Managers often find it necessary to change the structure

of their organizations, as has been the case in recent years, with the prevalence
of team building and downsizing. These changes have usually been made to
make operations run more smoothly, improve overall coordination and control,
or empower individuals to make their own decisions. Because structural change
has a major impact on an organization’s social system and climate, it greatly af-
fects organizational culture.
Process-Oriented Change Many changes aim at processes, such as using

new technology, shifting from human to mechanical labor in plants that employ
robotics for manufacturing, or adopting new procedures. If process-oriented
change takes the form of reengineering, it may have dramatic effects on the or-
ganization and its culture. As defi ned in Chapter 2 and discussed in Chapter
4, reengineering is the fundamental rethinking and radical redesign of business
processes to achieve dramatic improvements in critical, traditional measures of
performance, such as cost, quality, service, and speed. Reengineering first deter-
mines what process is necessary, then how to do it. 36
As illustrated in Figure 9.15, most business processes involve activities in
more than one department. When the steps have been completed in one depart-
ment, the process continues as additional activities are undertaken in the next
department. In most instances the result is an inefficient and ineffective pro-
cess. 37 Reengineering takes aim at these processes to optimize the workflow and
productivity. Changing or reengineering the processes may change the entire
organization. 38
Businesses processes are becoming integrated electronically, as technology is
used to aid in the conduct of business. Early adopters of the Internet were those
businesses willing to innovate and to take some risks. Michael Dell of Dell Inc.
is considered the leading architect of the Internet-enabled, thoroughly digital
business enterprise. Dell helped pioneer the end-to-end use of digital networks
to communicate with its customer, take orders, and then pull together products
from suppliers. Dell did this by surpassing traditional distribution channels (mid-
dlemen) and going directly to customers. Today, Dell is the leading online com-
puter seller.
Figure 9.15 Processes wind throughout the organization
CEO
Operations Finance/
Marketing Admin
Customer Order
Request Fulfillment
People-Centered Change Many changes are directed at the attitudes, behav-

iors, skills, or performance of the company’s employees. These changes can be
achieved through retraining, replacing current employees, or increasing the per-
formance expectations of new employees. The task of changing attitudes and
behaviors falls into the domain of behavioral training. As an aspect of organi-
zational development, behavioral training will be discussed later in this chapter.
Rates of Change
Change can also be viewed based on its pace—that is, either evolutionary or
evolutionary change revolutionary. Evolutionary change focuses on the incremental steps taken to
The incremental steps taken bring about progress and change. Organizations like Johnson & Johnson show
to bring about progress and
change a strategy for incremental change. Visionary companies have a philosophical
commitment to constant change, but at a measured pace.39 Motorola and John-
son & Johnson were among the fi rst to commit to incremental change tech-
niques defi ned and discussed in Chapter 4: kaizen, total quality management,
quality circles, and benchmarking. Each technique has at its core a belief in con-
tinuous, gradual change. Figure 9.16 illustrates evolutionary changes.
revolutionary change Revolutionary change focuses on bold, discontinuous advances. To the ob-
Bold, discontinuous advances server, these “leaps” bring about dramatic transformations in organizational
that bring about dramatic trans-
formations in organizational strategies and structure. Organizations and managers involved in revolutionary
strategies and structure change push the envelope and practice outside-of-the-box thinking. By his ac-
tions, Jack Welch, former CEO of General Electric, was a supporter of revolu-
tionary change. In transforming General Electric, Welch opted for immediate
Figure 9.16 Examples of evolutionary and revolutionary change
FACTORS EVOLUTIONARY CHANGE REVOLUTIONARY CHANGE

Time Period Longer Shorter
Strategy Strategy refocused on core Strategy focused on
business downsizing
Noncore businesses sold Older plants closed
Jobs eliminated
Structure New unit created Large percentage of headquarters
staff eliminated
Reorganize several units Large percentage of management
into one unit eliminated
Experienced manager Many nonmanagerial
hired to lead new unit employees eliminated
Culture Core values identified Organization focused on cost cutting
Culture reshaped to stress Cultural change bypassed
accountability, quality, and
cycle time
People Morale positive Morale negative
Future bright Future uncertain
Communication open Communication sporadic
Finance Debt reduced by sale Debt eliminated by the stream-lining
of noncore businesses of operations and the selling of assets
rather than incremental change. Welch, using a tool of revolutionary change,

challenged the company by setting a BHAG (as described in Chapter 6, a BHAG
is a Big Hairy Audacious Goal). GE was “to become #1 or #2 in every market
[it] serves and revolutionize the company to have the speed and ability of a small
enterprise.”40
As previously discussed, business process reengineering (BPR), another tool
of revolutionary change, takes nothing for granted. It ignores what is and con-
centrates on what should be. It calls everything into questioning—what no longer
needs to be done, what must be done, and how better to execute the latter. Reen-
gineering changes the fundamental ways in which people and their organization
handle their processes. Typical results of BPR have been to dramatically change
organization’s missions, visions, values, activities, and structures. Figure 9.16
illustrates revolutionary changes.
Management and Change

Each level of management faces change in a different way. Top-level managers
tend not to address minute details; instead, they focus on the broad outlines of
the desired change. Top-level managers are more likely to be involved in changes
of strategy, structure, and process. Because such changes have a major impact
on culture and on the way an organization does business, the effects of change
decisions made by top managers ripple throughout an organization. Top manag-
ers must be sensitive to the external environment; that is, they need to stay at-
tuned to changes in that environment. By scanning the external environment,
they may be able to see when internal changes are needed to fit new circum-
stances and meet new opportunities.
Middle managers will likely face structural, process-oriented, or people-

centered changes, although they may well have some input into decisions about
strategic change. To achieve greater efficiency or higher quality, they might re-
organize staff or work flow. They might develop training programs to introduce
new technology. In any case, the changes implemented by middle managers are
likely to have a wide impact. They could affect all members of a division.
Although fi rst-line managers might participate in discussions about strate-
gic or structural changes, they are unlikely to make decisions about these issues.
First-line managers institute process-oriented and people-centered change. They
implement all types of changes developed higher in the hierarchy. Because they
come into close contact with their employees, these managers must understand
how to manage change.
How to Manage Change

A company can deal with change by trying to anticipate the need for it and plan
for it. A company and its managers can adopt a philosophy of planned change, planned change
which involves trying to anticipate what changes will occur in both the external Trying to anticipate what
changes will occur in both the
and internal environments and then developing a response that will maximize external and internal environ-
the organization’s success. When managers plan for change—whether employment and then developing a re-
ing an evolutionary approach or a revolutionary style—they more likely can pre- sponse that will maximize the
organization’s success
dict the results and control events. The alternative—management by reaction—
can invite disaster. management by reaction
The change agent implements planned change. The change agent could be A management method that
does not anticipate change but
the manager who conceived of the need to change; it could be another manager merely reacts to it
within the organization who is delegated the task; it could be an outsider, a con-
sultant brought in specifically to help an organization adopt a new way of do- change agent
A person who implements
ing things; or it could be someone other than a consultant, hired from the out- planned change
side to change the organization. Jack Welch at GE and Lou Gerstner at IBM fall
into this last category. An outside change agent is considered to be more objec-
tive, less influenced by existing politics and people, and committed to the goals
agreed to upon hiring. Inside change agents often cannot see the correct actions
to take or are reluctant initiators.41
The next section will examine planned change by looking at the kinds of
changes that managers can expect throughout the life of the organization, the
steps involved in planned change, and the attitudes that underlie an effective ap-
proach to change.
Need for Change: Diagnosing and Predicting It

Managers can diagnose and predict the need for organizational change by study-
ing the typical phases of change. Recall the organizational life cycle of birth,
youth, midlife, and maturity and some of the crises commonly experienced by
organizations at each stage. Management consultant Larry Greiner has graphed
these predictable phases of organizational evolution (see Figure 9.17).42 Antici-
pating these phases can help managers prepare for change rather than simply re-
acting to it. Greiner has identified five phases of growth.
Phase 1: Creativity This birth stage of the organization is marked by con-

cerns for product and market, by an informal social system, and by an entrepre-
neurial style of management. Soon the need for capital, new products, new mar-
kets, and new employees forces the organization to change. A crisis of leadership
occurs when management becomes incapable of reacting to the growing organi-
zation’s need for structure. The organization enters a new phase.
Phase 2: Direction The second phase is characterized by the implementation

of rules, regulations, and procedures. A functional organizational structure is
introduced; an accounting system is created; incentives, budgets, and work stan-
dards are established; and formal, impersonal communications begin. Eventu-
ally, lower-level managers demand greater decision-making authority, which
brings on another crisis and launches the organization into the next phase.
Phase 3: Delegation Decentralization is the key to the third phase, in which

top management creates profit centers under territorial managers who are given
leeway to act and held accountable for the results. Communication from the top
Figure 9.17 Model of organizational growth and change
Growth Phases
Phase 1: Phase 2: Phase 3: Phase 4: Phase 5:
Creativity Direction Delegation Coordination Collaboration
Large
5. Crisis of ?
4. Crisis of
Coordination
Size of Organization
3.Crisis of
Control
2.Crisis of
Autonomy
1. Crisis of
Leadership
Small
Young Age of Organization Mature
Evolution Phase Crisis Phase
Source: Reprinted and adapted by permission of Harvard Business Review from “Evolution and Revolution as
Organizations Grow,” by Larry E. Greiner, Harvard Business Review (July–August 1972): 55–64. Copyright ©
1972 by the Harvard Business School Publishing Corporation. All rights reserved.
becomes less frequent. Eventually, top managers sense that they have lost con-
trol of the organization. This realization brings on another crisis and another
major change.
Phase 4: Coordination Responding to their sense of loss of control, managers

attempt to seize control by emphasizing coordination. Decentralized work units
are merged, formal organizationwide planning is introduced, capital expendi-
tures are restricted, and staff personnel begin to wield greater power. The price
of this phase: Red tape and interpersonal distance between line and staff and
between headquarters and the field develop. A new crisis takes place.
Phase 5: Collaboration The final phase introduces a new people-oriented and

flexible system, with managers exhibiting more spontaneity. Characteristics of
this phase include problem solving by teams, reductions in headquarters staff,
simplification of formal systems, and encouragement of an attitude of risk tak-
ing and innovation.
The heart of Greiner’s model shows a key point about change. The solution
to one set of problems eventually creates another set of problems that require
solving. In other words, the need for change is constant.
Figure 9.18 Nine steps for implementing planned change
Recognition of Development Selection of

the Need for of Goals of Change Agent Diagnosis
Change Change
Selection of
Intervention
Method
Follow-up and Planning for Development

Implementation
Evaluation Implementation of a Plan
Steps in Planned Change

Once committed to planned change, a manager or an organization must create
a step-by-step approach to achieve it. Figure 9.18 presents the steps that a man-
ager can use to implement change.43 As an example, the following paragraphs
will show how Wendy, a manager, can use this process to change her company’s
policy about smoking.
8
Explain the steps
managers can follow
to implement planned
change
Recognizing the Need for Change The first step in the change-implementation
process is to identify the need for a change. Recognition can come as a result of
factors inside or outside an organization. In Wendy’s case, suppose the compa-
ny’s health insurance carrier notifies her that it will conduct a rate-structure re-
view in light of research about the effects of smoking. Meanwhile, an internal
force, a group of employees, requests a policy statement about smoking in the
workplace. In this case, external and internal forces contribute to the recogni-
tion of the need for change.
Developing Goals As in any planning process, a key step is the identification

of goals. Managers must ask what they wish to achieve. In Wendy’s case, the
manager’s goals become (1) to develop a smoking policy for the organization
that will be widely accepted, and (2) to prevent insurance costs from rising.
Selecting a Change Agent With goals in mind, the next issue is to determine
who will manage the change. Wendy asks the leader of the group concerned about
smoking to assist her as a change agent.
Diagnosing the Problem In the next step, the manager gathers data about the
problem and analyzes the data to identify the key issues. The two change agents
in the current example fi nd that other companies control health insurance costs
by instituting smoking restrictions. They also learn that whether employees sup-
port or oppose smoking in the workplace, smoking is an emotional issue.
Selecting the Intervention Method In the fifth step, the manager must de-
cide how to achieve the change. Because smoking is such an emotionally charged
issue, the change agents in the current example decide not to create the needed
policy themselves. Instead, they form a task force that includes representatives
from all departments. They believe that large-scale participation will help en-
sure the facilitation of the change.
Developing a Plan This step involves actually putting together the “what” of
the change. The task force must decide if the company will have a no smoking
policy or will designate areas that permit smoking.
Planning for Implementation In this phase, the decision maker must decide
the “when,” “where,” and “how” of the plan. The task force in Wendy’s case
must decide when the policy will go into effect, how it will be communicated,
and how its impact will be monitored and evaluated.
Implementing the Plan After a plan is created, it must be put into effect. Im-
plementing the plan requires notifying the employees who will be affected by the
change. Notification may consist of written messages, briefi ngs, or training ses-
sions. The choice depends on the depth of the change and the impact it will have
on people. With a major change, such as the adoption of work teams, training
might be necessary for some time. In Wendy’s case, the task force decides to set-
tle the smoking issue by announcing the plan and holding briefi ngs.
Following Up and Evaluating Once a change has been implemented, the man-
ager must follow up by evaluating it. Evaluation consists of comparing actual re-
sults to goals. If the new smoking policy receives widespread employee accep-
tance and holds the line on insurance costs, then the change was worthwhile.
Qualities Promoting Change
9
Identify the organizational
qualities that promote
change
Managers can help create a climate that promotes change by developing a phi-
losophy toward change that includes three elements: mutual trust, organiza-
tional learning, and adaptability.
Mutual Trust
Creating an environment of mutual trust between managers and employees is vi-
tal for managers who wish to implement change. Many research studies indicate
that trust is the most important factor in creating an effective, well-run organi-
zation.44 In this context, mutual trust is the ability of individuals to rely on each
other based on their character, ability, and truthfulness. In a period of uncer-
mutual trust tainty and hard times, mutual trust allows individuals to continue to function
The ability of individuals to rely while maintaining a hope that things will improve.
on each other based their char-
acter, ability, and truthfulness Mutual trust includes two essential ingredients: sense of adequacy and per-
sonal security. Adequacy means that each employee feels that he or she counts
for something in the organization and that his or her presence makes a differ-
ence in the overall performance of the fi rm. Personal security is the degree to
which each person feels safe when speaking honestly and candidly.
Mutual trust can lessen fear of change, which can help managers implement
change. When trust is present, employees will feel comfortable as the organiza-
tion moves through change even though change is threatening.
Organizational Learning
The term organizational learning refers to the ability to integrate new ideas into organizational learning
an organization’s established systems to produce better ways of doing things. the ability to integrate new
ideas into an organization’s es-
A manager can view organizational learning as either single looped or double tablished systems to produce
looped.45 better ways of doing things
A single-looped learning situation is one in which only one way of making
adjustments exists. An organization with single-looped learning has a prescribed
way of doing things. When actions do not follow the prescription, the actions are
adjusted to meet the standards. An organization with this belief is inflexible; it
does not change its attitude, only its responses.
Double-looped learning, on the other hand, is based on the realization that
more than one alternative exists. Double-looped learning facilitates change be-
cause they allow for more than one way to do something. If a manager believes
there are numerous ways of reaching a goal, each employee can freely share ideas
and the assumptions underlying the ideas. Double-looped learning provides for
a change in both attitude and behavior.
Adaptability
Managers can either plan for change or react to it. Being adaptive takes energy,
commitment, and caring, but the wear and tear of the reactive approach is far
worse. Adaptiveness means being open to new and different ways of doing things;
it means being flexible rather than rigid.
According to James C. Collins, adaptiveness means changing without losing
the company’s core values. Companies have done so by grasping the differences
between timeless principles and daily practices.
Implementation of Change
To implement a program of change, a manager must be aware of why people re-
sist change, why change efforts fail, and what techniques can be used to modify
behavior.
Resistance to Change
10
Explain why people
resist change and what
managers can do to
overcome that resistance
One of the greatest difficulties faced by managers trying to institute change in-
volves overcoming the resistance of those who must change. In his book, The
Reengineering Revolution, MIT professor-consultant Michael Hammer calls
people’s innate resistance to change “the most perplexing, annoying, distress-
ing, and confusing part” of the change process.46 Nevertheless, resistance must
be overcome or the change cannot take place.
Sources of Resistance People resist changes for many reasons. The follow-
ing list includes some of them:
• Loss of security. Change scares people. Individuals tend to fi nd security in
traditional methods; the familiar is comfortable. New technology, new sys-
tems, new procedures, and new managers can threaten that security and thus
cause resistance.
• Fear of economic loss. Sometimes people resist change because they foresee,
or fear, an economic loss. Workers might disapprove of new processes be-
cause they feel that the result will be layoffs or reduced wages.
• Loss of power and control. Change often poses problems of power and con-
trol. “Will my influence still exist?” “Where will I end up in the pecking or-
der?” These questions reflect the anxiety caused by change. Some reorgani-
zations clearly indicate that specific people will lose power. These people are
likely to wish to preserve the status quo.
• Reluctance to change old habits. Habits provide a programmed method for
decision making and performing. Someone who needs no initiative to solve
problems might think, “I can do this job blindfolded.” Learning new pro-
cesses requires rethinking or learning to think again; it’s hard work.
• Selective perception. A person who has a biased interpretation of reality is
guilty of selective perception. To someone with selective perception, reality
is what the person thinks it is. Employees prone to selective perception tend
to think in terms of stereotypes, and these stereotypes can permeate their
logic. Faced with a change at work, a person with selective perception might
think, “It’s a management plot to do away with us.” An employee with such
an attitude is difficult for a manager to deal with. If the employee’s views
are extreme, he or she regards all actions of management as suspect.
• Awareness of weaknesses in the proposed change. Sometimes employees re-
sist change because they see that the change may cause problems. This type
of resistance can be constructive. By listening to the objections of these em-
ployees, managers can help the organization avoid problems and save time,
money, and energy. For employees to have a constructive effect, however,
they must communicate their concerns effectively and early.47
Techniques for Overcoming Resistance Managers can use five techniques

to overcome resistance to change:
1. Participation. Participation can be as simple as saying “we changed” instead

of “they changed.” A person involved in the process of change understands
the goals and feels more strongly committed to the change than someone
who did not participate. Organizations have recognized and have responded
by implementing cross-functional teams (one of the topics in Chapter 14).
2. Open communication. Uncertainty breeds fear, which creates rumors, which
causes more uncertainty. Managers can reduce the likelihood of this unset-
tling cycle by providing timely, complete, and accurate information. Holding
back information destroys trust.
3. Advance warning. Sudden change can have the same effect as an earth-
quake. People adapt better to change if they are prepared for it. As manag-
ers sense a need for change or know that change is imminent, they should
inform the employees who will be affected. Continuous education and train-
ing help people prepare for change. Continuous learning seems to enhance
adaptability.
4. Sensitivity. When implementing change, managers must work with those
affected to learn each employee’s concerns and respond to them. In other
words, managers must be sensitive to the effects the change has on each per-
son. Sensitivity minimizes resistance to the change.
5. Security. People are much more willing to accept change if the fear of
dire consequences can be removed. In many cases, managers can reassure
workers simply by explaining that the change will not affect income and
job security. Of course, such a commitment is meaningful only if it’s true.
When managers break promises, they are taking the first step to employee
discontent.
Why Change Efforts Fail

Not all change efforts are successful. Even when they undertake change for the
best of reasons, managers cannot always bring about desired changes. Normally,
failure can be traced to one of the following causes.
Faulty Thinking Managers can fail to achieve change by not analyzing the sit-
11
Explain why change
efforts fail
uation properly. “In the past Motorola had built technology for a particular
place: phones for the car, the home, the office. Now, it’s going to serve up tech-
nology that matches people’s living, delivering services without interruption no
matter where they go.” 48
Inadequate Process Sometimes change efforts fail because of the process

used to bring them about. A change might fail because the manager did not fol-
low the steps for change shown in Figure 9.18 or because he or she did not follow
the steps properly. Perhaps the manager chose an inappropriate change agent or
neglected a step in the process. In any case, an incomplete approach usually leads
to failure.
Lack of Resources Some changes require a significant expenditure of time

and money. If those resources aren’t available, the change effort may be doomed
from the beginning.
Lack of Acceptance and Commitment If individuals, both managers and

employees, do not accept the need for change and commit to it, change will not
occur. Lack of commitment typically occurs in an organization whose managers
frequently announce change but do not follow through to implement it. In such
a situation, employees begin to see each new announcement as merely a pro-
gram of the month—entertaining perhaps, but nothing to be taken seriously.
Lack of Time and Poor Timing Some situations do not allow enough time for
people to think about the change, accept it, and implement it. In other instances,
the timing is poor—for example, an economic downturn might lower revenue,
employees might be occupied with other commitments, or a competitor might
release a new product. A company might invest years and millions of dollars
into a change, only to fi nd that the environment has evolved so much that the
plan devised for success no longer applies.
A Resistant Culture In some cases the cultural climate of an organization

needs to be changed before anything else can be.
Methods of Effecting Change

This section will explore how to change behavior on the individual level. Most
fi rst-line managers need to understand this kind of change, because their change
efforts will be directed at modifying or altering their subordinates’ behavior.

Change in individuals usually relates to a change in skills, knowledge, or attitude.
The paragraphs that follow explore two approaches: the three-step approach and
force-field analysis.
Three-Step Approach Many psychologists and educators have observed that

different people react differently to pressures to change. Most will accept the
need to learn new skills and update their knowledge, but most resent efforts to
change their attitudes. Accordingly, workplace efforts to change attitudes meet
the least success of any change efforts. Yet if attitudes are not changed, the be-
haviors that grow out of attitudes cannot change. Kurt Lewin provided a useful
approach to changing attitudes in a lasting way.49 His method, called the three-
three-step approach step approach, consists of three phases: unfreezing, change, and refreezing.
a technique of behavior modi- In the fi rst step, unfreezing, managers who spot deficiencies in a subordi-
fication to change attitudes
in lasting ways; it consists nate’s behavior must identify the causes of that behavior. They confront the in-
of three phases: unfreezing, dividual with the behavior and the problem it causes; they then begin trying to
change, and refreezing convince him or her to change by suggesting methods and offering incentives.
This step may include pressure on the individual that makes him or her uncom-
fortable and dissatisfied. When the person is upset enough, step two may begin.
For example, say that Jessica wants to improve the productivity of Jane,
a staff member in the Information Center. By spending too much time on her
work, Jane increases the workload of others in the department. To resolve the
problem, Jessica must fi rst explain to Jane that her work is inadequate and that
her coworkers must unfairly carry her burden. She may mention that the oth-
ers are starting to complain about Jane. Having reviewed Jane’s work, Jessica
thinks that the basic problem is lack of training. As a result, she suggests that
Jane undertake a special weeklong training course offered by the company. She
could offer an incentive, too—pointing out that the higher productivity could
mean a better chance at a salary increase.
In the second step, change, the individual’s discomfort level rises. When it
rises high enough, he or she will look for ways to reduce the tension. This leads
the employee to question his or her motives for the current behavior, and this
questioning provides the manager with the opening to present new role models
that promote the desired behavior. As the individual adopts that behavior, per-
formance will improve; but the manager must support and reinforce that behav-
ior if it is to last.
In our example, Jane might begin to notice the disapproving looks or whis-
pered comments from coworkers. Uncomfortable in this unfriendly atmosphere,
she might decide she will undertake the needed training.
In step three, refreezing, the manager recognizes and rewards new and ap-
proved attitudes and behaviors. If any new problems arise, the manager must
identify and discourage them; in other words, the process begins again. After
Jane takes the training, Jessica should closely monitor Jane’s productivity. When
Jessica sees output increase, she must be sure to congratulate Jane on the im-
provement. For the desired behavior to continue, positive reinforcement should
come fairly frequently, especially at fi rst. If a salary increase was promised, that
promise must be kept.
The three-step process is continuous. Managers must watch that the new
behaviors do not become counterproductive. If they do, the behaviors must be
unfrozen and replaced by a new, more desirable behavior.
Figure 9.19 Forces that contribute to a force field
Equilibrium
(Status Quo)
Driving Forces Restraining Forces

(Forces for Change) (Forces Resisting Change)
Force-Field Analysis Kurt Lewin also developed force-field analysis, another force-field analysis
useful tool for managing change. As Figure 9.19 shows, to achieve change a man- A technique to implement
change by determining which
ager must overcome the status quo—the balance between forces that favor change forces drive change and which
and forces that resist change. The change forces are known as driving forces, forces resist it
and the resisting forces are known as restraining forces. Managers trying to
implement a change must analyze the balance of driving and restraining forces,
then attempt to tip that balance by selectively removing or weakening the re-
straining forces. The driving forces will then become strong enough to enable the
change to be made.
To see how force-field analysis works, return to the example of Jane, the
worker in the Information Center. To convince Jane to change, Jessica must first
identify the driving forces: self-esteem, the regard of peers, and increased mon-
etary compensation. The key restraining forces might be Jane’s lack of desire
to expend the effort to improve and her unfamiliarity with the computer. Jes-
sica can weaken the restraining forces by having one of Jane’s coworkers tell
Jane how the training program helped the coworker. This information may
strengthen the driving forces and alter the balance of the forces, leading Jane to
accept the change.
Organizational Development
Managing change is an ongoing process. If a manager does it well, he or she
can maintain a positive organizational climate. Some organizations make thor-
ough analyses of their problems and then implement long-term solutions to solve
them. Such an approach is called organizational development (OD).
12
Explain the purpose
of an organizational
development program
organizational Purposes of Organizational Development

development (OD)
A process of conducting a thor- The main purpose of OD, according to one management writer, is “to bring
ough analysis of an organiza- about a system of organizational renewal that can effectively cope with envi-
tion’s problems and then imple-
menting long-term solutions to ronmental changes. In doing so, OD strives to maximize organizational effec-
solve them tiveness as well as individual work satisfaction.” 50 Organizational development
is the most comprehensive strategy for intervention. It involves all the activities
and levels of management in ongoing problems that respond to external and in-
ternal sources. The OD process is cyclical, as Figure 9.20 shows.
Strategies of Organizational Development

Managers may choose one or more of the tools and strategies of OD described
in Figure 9.21. The choice depends on the circumstances. Restrictions the man-
agers might have to take into account include limits on time and money and lack
of skill at implementing a strategy.
The choice of a strategy usually results from conferences and discussions in-
volving those who will be most directly affected. The experiences, feelings, and
perceptions of conference participants help determine if their parts of the or-
ganization are ready for change and for OD techniques. The success of OD de-
pends on a high level of receptiveness to change.
Figure 9.20 Model of the organizational developmental process
Forces for
Change
Organizational
Diagnosis
Identification of
Feedback Alternative
Strategies
Development of
Measurement
the Change
and Evaluation
Strategy
Implementation
of the Change
Strategy
Source: Gene E. Burton, “Organizational Development—A Systematic Process,” Management World, March
1976. Reprinted with permission from the Administrative Management Society, Willow Grove, PA. Copyright
1976 AMS.
Figure 9.21 Tools and methods for applying organizational development strategies
DIAGNOSTIC STRATEGIES
Consultants This strategy consists of bringing in objective outsiders (consultants) to ana-
lyze and conduct audits of existing policies, procedures, and problems. Con-
sultants can be individuals or groups and may act as change agents as well.
Surveys Surveys consist of interviews or questionnaires used to assess the attitudes,
complaints, problems, and unmet needs of employees. Surveys are usually
conducted by outsiders and guarantee anonymity to participants.
Group discussions Group discussions are periodic meetings conducted by managers to uncover
problems and sources of their subordinates’ discomfort and dissatisfaction.
CHANGE STRATEGIES
Training programs Training programs are ongoing or special efforts to improve or increase skill
levels, change or instill attitudes, or increase the knowledge needed to per-
form jobs more effectively and efficiently.
Meetings and seminars As change strategies, meetings or seminars are gatherings held to explore
mutual problems and seek mutually agreeable solutions. Such group sessions
may be chaired by insiders or outsiders and may be used to prepare people for
changes in advance of implementation.
Grid OD Grid OD is a six-phase program based on the Leadership Grid. Its purpose is
management and organizational development. The first two phases focus on
management development. The last four phases are devoted to organizational
development. The six phases are laboratory training, team development,
intergroup development, organizational goal setting, goal attainment, and
stabilization.
Evaluating the Effectiveness of Organizational Development

Since OD requires an ongoing, long-term effort to bring about lasting change in
an organization’s technology, structure, and people, a successful OD program
takes a significant investment of money and time. Both are needed for managers
to adequately diagnose the problem, select the strategy, and evaluate the effec-
tiveness of the program.
Managers can measure the effectiveness by comparing the results of the pro-
gram to the goals before it was implemented. Were the goals met? If not, why
not? Perhaps they were too rigid and too hard to achieve. Perhaps the problems
were inadequately defi ned, and the inadequate defi nition resulted in the choice
of an inappropriate solution. Perhaps managers tried to institute changes before
people were prepared for them. Regardless of the cause, the results of the OD
analysis will provide feedback needed for later changes.
In the fi nal analysis, as is the case with any other management effort, the
effectiveness of OD depends on the quality of its inputs and the skills of those
making the analysis. Successful OD depends on solid research, clear goals, and
implementation by effective change agents who use appropriate methods.
OD is an expression of managers’ efforts to stay flexible. Managers recog-
nize that events inside and outside the organization can happen quite suddenly
and can create pressure for change. OD provides the personnel and mechanisms
to deal with change; control its evolution; and direct its impact on organiza-
tional structure, technology, and people.
CHAPTER SUMMARY
Define organizational design and describe the 4. Organization age. Older, mature companies tend to
1 four objectives of organizational design. Or-
ganizational design is the creation of or change to an
have mechanistic structures. New or young organi-
zations tend to have organic structures.
organization’s structure. It involves developing the over-
5. Organization technology. Every organization uses
all layout of the positions and departments as well as es-
some form of technology to convert resources to out-
tablishing the interrelationships among the positions and
puts. The type of technology—small batch, mass
departments.
production, or continuous process—influences the
The managers responsible for organizational design
type of structure. Small batch and continuous pro-
have four objectives in creating organizational struc-
cess favor organic structures. Mass production tech-
tures. They design structure to
nology favors a mechanistic structure.
1. Respond to change. To stay competitive the com-
Describe the characteristics, advantages, and
pany must respond to changes in the environment as
well as to changes that emerge from its evolutionary
4 disadvantages of functional, divisional, matrix,
team, and network structural designs. The organiza-
development.
tional design alternatives include a functional structure,
2. Integrate new elements. As organizations grow, divisional structure, matrix structure, team structure,
evolve, and respond, new positions and new depart- and network structure.
ments must be integrated into the fabric of the
• The functional structure groups positions into de-
organization.
partments based on similar skills, expertise, and
3. Coordinate the components. Managers need to fi nd resources used. The functional structure has the
a way to tie all departments together to ensure coor- advantages of economies of scale, minimizes dupli-
dination and collaboration across the departments. cation of personnel and equipment, makes employees
comfortable, and simplifies training. Disadvantages
4. Encourage fl exibility. Designers need to institution-
include the lack of understanding and concern for
alize the ability to respond to change.
other specialty areas, communication barriers, lack
Distinguish between mechanistic and organic of cooperation and coordination, and slow response
2 organizational structures. Depending on how or-
ganizational concepts are balanced, the design produced
time to changes in the environment.
• The divisional structure groups departments based
can be a tight, or mechanistic, structure, or a flexible, or
on organizational outputs. Divisions become self-
organic, structure. A mechanistic structure is character-
contained strategic business units (SBUs). The divi-
ized by rigidly defi ned tasks, formalization, many rules
sional structure focuses the attention of the employ-
and regulations, and centralizes decision making right
ees and managers on the results for the product,
down to the employees performing the job.
customer, or geographical area. It is flexible and re-
Discuss the influence that contingency sponsive to change, performance is easier to target,
3 factors—organizational strategy, environment,
size, age, and technology—have on organizational
and it aids in developing senior executives. Disad-
vantages include duplication of activities and re-
design. Whether an organization will be mechanistic or sources; lack of technical specialization, expertise,
organic is influenced by the meshing of five factors: and training; lack of coordination across positions;
and competition among divisions.
1. Organization strategy. The mission, corporate-level
strategy, and business-level strategy influence design. • The matrix structure combines the advantages of
Structure is a tool to accomplish strategy. functional specialization with the focus and ac-
countability of the divisional structure. It utilizes the
2. Organization environment. Whether a company
functional and divisional chains of command simul-
operates in a stable or in a dynamically changing
taneously in the same part of the organization. To
environment influences structure. A mechanistic
achieve this, the matrix structure uses dual lines of
structure functions well in a stable environment; an
authority. The matrix organization is flexible, com-
organic structure functions better in a changing
munication and coordination are increased, moti-
environment.
vation is increased for the individual employee, and
3. Organization size. Large companies tend to have technical training is provided for both functional
mechanistic structures. Small companies have or- and general management skills. Disadvantages in-
ganic structures. clude potential confl ict, confusion, and frustration
created by the dual chain of command, the danger • Climate—the quality of the work environment expe-
of creating conflict by pitting divisional objectives rienced by employees
against functional objectives, time lost in meetings
• Physical environment—the structure of the work
to resolve confl icts, and the problem of balance of
setting, which often reflects the cultural values
power between the functional and divisional sides
of the matrix. Explain the role of managers and employees
• The team structure organizes separate functions or 6 in creating culture and making a culture effec-
tive. Managers help develop culture by identifying core
processes into a group based on one overall objec-
tive. The team concept breaks down barriers across values, defi ning the company’s mission, determining the
departments; speeds up decision making and re- amount of individual autonomy and the degree to which
sponse time; motivates employees by developing em- people work separately or in groups, structuring the
ployee responsibility; eliminates levels of managers, work in accordance with the corporation’s values, devel-
resulting in lower administrative costs; and elimi- oping reward systems that reinforce values, and creat-
nates the double reporting problem associated with ing methods of socialization that will bring new workers
the matrix structure. Disadvantages include the de- inside the culture and reinforce the culture for existing
pendence on employee learning and training for the workers. Employees contribute to defi ning the culture by
system to succeed and the large amount of time re- the extent to which they accept and adopt it, by shap-
quired for meetings. ing the organization’s norms and values, and by forming
subcultures.
• The network structure features a small central or- Three factors that make a culture effective:
ganization that relies on other organizations to
perform critical functions on a contract basis. The 1. Coherence—how well the culture fits the organiza-
network structure provides flexibility and reduces tion’s mission and other organizational elements
administrative overhead. Disadvantages include the
2. Pervasiveness and depth—the extent to which em-
lack of control, the unpredictability of supply, and
ployees adopt the culture of an organization
the lack of internal managerial technical expertise
to effectively resolve technical problems. 3. Adaptability to the external environment—the
degree to which a culture is flexible enough to
Define organizational culture and describe
5 the ways that culture is manifested. Organiza-
tional culture is the distinctive character of an organiza-
allow change in the face of emerging external
demands
tion comprising its shared values, beliefs, philosophies, Define change and identify the kinds of
experiences, habits, expectations, norms, and behav-
iors. Seven factors influence organizational culture: key
7 change that can occur in an organization.
Change is any alternative in the current work environ-
organizational processes, the dominant coalition, em- ment. Change can occur in strategy, structure, process,
ployees and other tangible assets, formal organizational and people.
arrangements, the social system, technology, and the ex- Evolutionary change focuses on incremental steps
ternal environment. to bring about progress. Its techniques include kaizen,
The culture becomes apparent through the follow- total quality management, quality circles, and bench-
ing manifestations: marking. Revolutionary change focuses on bold, discon-
• Statements of principle—written expressions of ba- tinuous advances. Its techniques include BHAGS and
sic principles central to the organizational culture reengineering.
Planned change involves trying to anticipate
• Stories—illustrations of the culture used to acquaint what changes will occur in both external and internal
new employees with the cultural values and to reaf- environments and then developing a response that
fi rm those values to existing employees will maximize the organization’s success. Unplanned
• Slogans—a phrase or saying clearly expressing a key change involves reacting to events rather than anticipat-
organizational value ing them.
• Heroes—people in the organization who exemplify Explain the steps managers can follow to
the values of the culture 8 implement planned change. To implement
planned change, managers should follow these steps:
• Ceremonies—presentation of awards to provide ex-
amples of and reinforce company values recognize the need for change, develop goals, select a
change agent, diagnose the problem, select the interven-
• Symbols—objects or images that convey meaning to tion method, develop a plan, plan for implementation,
others implement the plan, and follow up and evaluate.
Identify the organizational qualities that pro- Explain why change efforts fail. Change
9 mote change. The organizational qualities that
promote change include mutual trust, organizational
11 efforts fail for a number of reasons, includ-
ing faulty thinking or an inadequate process, lack of re-
learning, and adaptiveness. sources or commitment, poor timing, or a resistant cul-
tural climate.
Explain why people resist change and what
10 managers can do to overcome that resis-
tance. People resist change because of loss of security, 12 Explain the purpose of an organizational
development program. The purpose of an
fear of economic loss, loss of power and control, reluc- organizational development program is to bring about
tance to change old habits, selective perception, and a system of organizational renewal that can effectively
awareness of weaknesses in the proposed change. To cope with environmental changes. In doing so, OD
overcome resistance, managers might develop techniques strives to maximize organizational effectiveness as well
including participation, open communication, advance as individual work satisfaction.
warning, sensitivity, and security.
KE Y TERMS
change management by reaction organizational life cycle
change agent mass production technology planned change
continuous-process production matrix structure revolutionary change
divisional structure mechanistic structure small batch technology
evolutionary change mutual trust subculture
flexible manufacturing system network structure team structure
(FMS) organic structure technology
force-field analysis organizational design three-step approach
functional structure organizational development (OD) unit production technology
large batch technology organizational learning
RE VIE W QUESTIONS
1. When managers are engaged in organizational de- 6. What are the seven factors that influence culture?
sign, what are they developing? Use specific examples to explain how they interact.
2. Identify and discuss the four objectives of organiza- 7. How is culture evidenced?
tional design.
8. What is the role of managers in creating culture?
3. What are the characteristics of a mechanistic orga- What is the role of employees in creating culture?
nization? What are the characteristics of an organic
9. How does culture influence organizational effective-
organization?
ness? What factors contribute to an effective culture?
4. Name factors that influence organizational design.
10. What are the four kinds of change that can occur in
How does an organization’s strategy influence orga-
an organization?
nizational design? What types of structure are ap-
propriate for the three types of technology? What 11. What are the steps of planned change?
two needs in organizational design result from a vol-
12. What organizational qualities promote change?
atile environment?
13. Describe three reasons that people resist change,
5. What are the characteristics of a functional organi-
and explain what managers can do to overcome that
zation structure? What are the advantages of a di-
resistance.
visional structure? What are the characteristics of a
matrix organizational structure? What are the char- 14. What are three reasons that change efforts fail?
acteristics of teams? What are the advantages and
15. Why do organizations adopt an organizational
disadvantages of networks?
development program?

1. In which structural design options—functional, divi- ple, stories, slogans, symbols, heroes, etc.) in an or-
sional, or matrix—would you prefer to work? Least ganization with which you have been involved?
prefer? Explain your answers.
5. Can a change made in one area of a company—in
2. What examples can you provide to demonstrate the strategy, for instance—lead to a change in other
application of the team structure? Was the team or- areas? Why or why not?
ganized by process or by function?
6. If appointed CEO of your company, would you
3. The discussion on contingency factors affecting or- adopt a revolutionary or evolutionary change agent
ganizational design states that organizational struc- style? Why? Which would be more effective?
ture follows strategy. Other observers suggest that
7. Demonstrate your understanding of force-field anal-
strategy should fit the organization’s structure. With
ysis by applying it to a change with which you have
which position do you agree? Why?
been involved.
4. What specific examples can you give to demonstrate
the manifestations of culture (statements of princi-
Links are provided for all Internet Exercises at http:// 2. Read “21st Century Organizational Trends” by Ste-
plunkett.swlearning.com. phen P. Borgatti. Briefly discuss the key trends af-
fecting organizational structures today.
1. Team structure breaks down barriers across depart-
ments, speeds up decision making and response time, 3. Read “Managing in a World that is Round” by Fran-
motivates employees, and lowers administrative ces Hesselbein. How will you free up your organiza-
costs by eliminating levels of managers. Understand- tion and make changes while you are in an entry-
ing different personality types is important to un- level management position?
derstanding team dynamics and interactions. Read
4. In order to be proactive, instead of reacting to
the background on the Keirsey Temperament Sorter,
change, managers must anticipate and make change
then take and score the test. What is your person-
happen. List some rules for leading change.
ality profi le? Describe how you might make use of
what you have learned from your personality test 5. For most of us, change is uncomfortable and threaten-
to work better with a team. Describe ways in which ing. Read “How to Overcome Resistance to Change”
you might be able to use information about the per- by Ken Blanchard. What are the best ways for compa-
sonality test results of others on your team. nies to deal with the natural opposition to change?

is an online database and research tool published by Motorola. Add any other interesting information that
Check to see if your library subscribes to BCRC. If so, MOTOROLA AT A GLANCE
respected. Products:
APPLICATION CASE
A Cultural Mismatch • Chrysler’s workers make decisions from the bottom
North American Chrysler merged with Germany’s up. Daimler-Benz’s managers make decisions from
Daimler-Benz AG to form DaimlerChrysler in May top down.
1998. Chrysler’s core management, engineering, manu-
• Chrysler’s management is low key and creates auton-
facturing, purchasing, and design operations were lo-
omy. The management at Daimler is intense, precise,
cated at one place in Auburn Hills, Michigan, facilitat-
and controlling.
ing decentralized and quick decision making. Its profit
performance and leadership in minivans during the • Germans head all divisions. Americans expect lay-
1990s made it an attractive partner for Daimler. offs and worry the company will be sold.
Daimler-Benz AG’s Mercedes Benz brand stood as
a symbol of Germany’s economic might. “Chrysler’s pri- Questions
mary reason for teaming with Daimler-Benz is to extend 1. Based on the experiences of Chrysler and Daimler-
its international reach” (Smith). Daimler-Benz AG was Benz AG, what is the importance of culture in the
known as an autocratic decision maker. “From the be- change process?
ginning, the high command in Stuttgart issued orders to 2. What specific cultural factors caused problems in
Detroit about everything from where the headquarters the change process? Cite examples to support your
would be located (Germany) to what kind of business answer.
cards would be used” (Jamieson). 3. What specific mistakes did Chrysler and Daimler-
Chrysler was successful before the merger but began Benz AG make in the change process? Cite examples
to flounder soon after the merger. In fact, many began to to support your answer.
believe that the deal was not a merger of equals but was 4. Using as your guide the nine steps for planned
really an acquisition. Soon after the merger, top Amer- change discussed in this chapter, construct a
ican managers at Chrysler were replaced by German change process to successfully merge Chrysler with
managers and plants were closed. Daimler-Benz AG.
Chrysler immediately had major problems with the
change: Sources: David C. Smith, “Is Bigger Really Better—DaimlerChrysler
merger faces hurdles,” Ward’s Auto World, June 1, 1998; Bob
• It was hard to imagine two more different cultures Jamieson, “Far From a Merger of Equals,” ABC News, January 25,
than those of Chrysler and Daimler-Benz AG. 2001.
• Chrysler is based in the heart of an American indus-

trial neighborhood. Daimler-Benz AG sits an ocean
away in Europe.

Lonely Planet: Structure That Makes Sense
When travelers Tony and Maureen Wheeler founded book, Across Asia on the Cheap; it was an instant best
Lonely Planet in the early 1970s, they didn’t intend to seller among world wanderers.
create a globe-spanning company. They didn’t necessar- With just two people, the Wheelers naturally didn’t
ily plan to start a publishing company. As newlyweds, think about organization. They traveled, wrote, and
they had just completed an overland trip from London published whatever they wanted. By the mid 1970s, they
through Asia, winding up in Australia. All they really had completed Nepal and Trekking in the Himalayas
wanted to do was fi nance their next trip—it never oc- and were working on a group of guides covering Austra-
curred to them to stop traveling around the world. So lia, Europe, Africa, and New Zealand. In 1981, Lonely
they wrote and published the fi rst Lonely Planet guide- Planet India was published and became a travel best
seller. By then, Lonely Planet had a staff of ten. It was produces all of the books. This centralization stream-
time to get organized. lines the production process, reduces costs by keeping
Today, Lonely Planet publishes more than 650 cartographers and designers under one roof, and ensures
guidebooks, including specialized activity guides, “shoe- that the books are designed and produced in a consis-
string” or budget guides, international food guides, and tent fashion. In addition, negotiations with the printers
phrasebooks. The fi rm is still owned by the Wheelers, in Hong Kong are more effi cient and effective if they are
employing 400 workers in offices in Melbourne, Lon- conducted from a single location.
don, Paris, and Oakland, California. In addition, there People who work at Lonely Planet love to travel,
are about 150 authors traveling and writing around the and they like the way the company is organized. “It’s
world. Lonely Planet has people to create maps, take got all the excitement of working for a multinational . . .
photos, design book covers, sell books, and create mar- but without any of the . . . complexity of bureaucracy,”
keting campaigns. There are also finance people and explains one employee. “Working with other offices—
people who work with and manage the freelancers who Melbourne, Paris, London—as a global company and
are roaming the world. Managing all of these activities still being independently owned” is a positive experi-
in four countries on three continents requires communi- ence, notes another. “It’s a large company, but it’s really
cation and coordination. small,” he continues. Tony and Maureen Wheeler are
For example, each office is responsible for all sales still very much a presence in the company, visiting its
and marketing efforts for its own region in order to ad- worldwide offices and maintaining contact with many
dress cultural and other environmental differences. In employees. There are some drawbacks to this far-flung
addition, a regional warehouse distributes all of that method of managing; sometimes staffers grumble about
office’s book titles to booksellers within the geographi- the challenges of dealing with time differences, but they
cal area. Because Lonely Planet publishes books about concede that this is a minor inconvenience. After all, if
world travel, having a presence in several key countries you work at a travel publisher because you love to travel,
enhances the fi rm’s credibility among readers. This or- think about the possibilities. Perhaps you’ll work in Aus-
ganization gives the individual offices more flexibility in tralia this year and Paris next year. Maybe you’ve got
directing marketing messages to specific audiences and the urge to set up shop in London. At Lonely Planet,
ensures that workers in each office know their region there’s almost always an opportunity to hit the road—
thoroughly. In addition, one of Lonely Planet’s greatest and get paid for it.
assets is its local writers, according to David Zingarelli,
Managing Editor for Lonely Planet USA. Being able to Questions
meet with them in person and cultivate a relationship is 1. In what ways is Lonely Planet decentralized? In
a great advantage. Despite their relative independence, what ways is it centralized?
the offices must communicate with each other. So, man- 2. Does Lonely Planet have a tall structure or a flat
agers rely on the Internet for regular communication and structure? Explain briefly.
to create consistency among marketing messages. 3. In what ways does Lonely Planet achieve horizontal
Although regional offices may commission books coordination across departments or offices?
for their areas—Lonely Planet USA commissions all the
books for North and South America, as well as Central Sources: Company Web site, http://www.lonelyplanet.com, accessed
America—the headquarters in Australia actually February 1, 2007; Lonely Planet press kit.
BIZ FLIX VIDEO CASE

Backdraft Chicago fi res. Add a plot element about a mysterious
Two brothers follow in the footsteps of their late father, arsonist and you have the basis of an ordinary fi lm. The
a legendary Chicago fi refighter, and join the department. fi lm, however, rises above its otherwise formulaic plot
Stephen “Bull” McCaffrey (Kurt Russell) joins fi rst and thanks to great acting and amazing special effects. The
rises to the rank of lieutenant. Younger brother Brian intense, unprecedented special effects give the viewer an
(William Baldwin) joins later and becomes a member of unparalleled experience of what it is like to fight a fi re.
Bull’s Company 17. Sibling rivalry tarnishes their work Chicago fi refighters applauded the realism of the fi re
relationships, but they continue to successfully fight scenes. 51
This scene appears early in the fi lm as part of “The What to Watch for and Ask Yourself
First Day” sequence. Brian McCaffrey has graduated 1. What elements of the Chicago fi re department cul-
from the fi re academy, and the fi re department has as- ture does this scene show? Does the scene show any
signed him to his brother’s company. This scene shows cultural artifacts or symbols? If it does, what are
him fighting his fi rst real fi re at a garment factory. The they?
fi lm continues with Company 17 fighting the fi re and 2. Does the scene show any values that guide the fi re-
Brian receiving some harsh fi rst-day lessons. fighters’ behavior?
3. What does Brian McCaffrey learn on his fi rst day at
work?
STAFFING CHAPTER 10
Staffing the Workforce
CHAPTER 11
Communication: Interpersonal
and Organizational
CHAPTER 12
Human Motivation
Getty Images
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LEARNING OBJECTIVES
STAFFING THE After studying this chapter, you should be able to:
WORKFORCE 1 Determine the importance of the staffing function
List and explain the eight elements of the staffing process

2
Describe the three primary staffing environments
3
Identify the four activities related to human resource planning
4
List and describe the primary screening devices used in the
5 selection process
Explain the differences and similarities between training and

6 development
Discuss the purpose of a performance appraisal

7
Describe the four primary employment decisions
8
Determine the purposes and components of compensation
9
Getty Images
Monster: Evolutionary Recruiting
Monster brings job seekers and potential employ-
ers together online and is the leading global careers Andrew McKelvey
Web site. The company began in 1994 with a site Born: 1934 or 1935
on the Internet (The Monster Board) and captured a Most Recent Position: Founder and Chairman
large percentage of the Web’s career audience. Jeff Emeritus, Monster Worldwide
Taylor, Founder, explains Monster’s business model. Career Highlights:
“We make almost all of our money from the recur-
1967 Founder, Telephone Marketing Programs
ring transactional business of posting jobs and search-
ing the résumé database” (Layne). Monster was the (TMP)
first company on the Web to post online job listings. 1993 Acquires, The Monster Board and Online
It charges companies for job listings and access to its Career Center
resumes. 1999 Forms Monster.Com
Andrew McKelvey, Founder and Chairman Emeri- 2003 TMP name is changed to Monster World-
tus of Monster, has always been an entrepreneur. He wide, Inc.
started selling eggs door-to-door in his Maplewood, Education: Westminster College, New Wilming-
New Jersey, neighborhood when he was 12 years ton, PA
old. In college, he leased a movie theater. After col- Personal: Divorced 5 times, remarried, 4 children
lege, he moved to Australia and distributed jukeboxes.
Sources: Monster Worldwide, Andrew J. McKelvey, Chairman
He returned to the U.S. and started Telephone Mar- Emeritus; Forbes, “Web Crawlers (top Internet Services execu-
keting Programs (TMP), a company selling nationwide tives, Forbes 400),” October 9, 2000, v166, i10, p. 206.
Yellow Page ads to large corporations (Trachtenberg).
Monster altered the job-search industry forever.
Companies using Monster to recruit employees are
saving money by posting jobs online. In the past,
most companies ran help-wanted classified advertise- In addition to posting resumes, individuals can
ments in newspapers. Mr. McKelvey discusses how visit Monster.com and explore various career ideas.
the company is hurting the newspaper industry. “The Professional-specific message boards can be found
FORTUNE 1000, the companies with at least 2,500 on Monster at http://discussion.monster.com/
employees, by and large have stopped doing business messageboards. Reading these discus-
with the newspapers. That’s about a third of their to-
h . T he
tal help-wanted classifieds right there. The newspa-
th e jo b searc the
pers were slow in responding. The Sunday Boston u t of s on
scare o ster capitalize rs. Em -
Globe in 2000 had around 100 pages of lp s t a ke the , M o n p lo ye
e ite em ge
help-wanted classifieds. Now they have r.com h Web s r s an d d vant a
Monste lobal careers for job seeke s by taking a mploy-
g e r . E
fewer than 25. What happened? IBM tends leading medium of their care er resources n
ferred e re t rely o
not to run full-page ads anymore. They now -pre an take charg and useful ca tial hires tha Andrew
spend their money online instead. That’s typ- s c g te n s
ployee sumé postin e pool of po man Emeritu t would
ré rg ir a
ical” (Caplan). Companies pay Monster to list of free fit from the la b source. Cha ext medium th
e jo en
jobs and to get access to resumes. ers ben as the go -to to th w a y.
r looking call — a
Monster has online competitors. Com- Monste y was always a click— or a
panies use their own Web sites to recruit em- lv e ju s t
McKe ation
inform
ployees and many newspapers now have their put this
own online sites. Three of the largest newspa-
© Feature Photo Service (NewsCom)
per companies in the country—Gannett, Knight-

Ridder, and Tribune—jointly own CareerBuilder
.com, an online job site.
Many people looking for a job think of Mon-
ster as the place to post their resumes online, be-
cause they can post their resumes for free. “Most
of those résumés belong to passive job seekers—
people who realize that their employers are not go-
ing to take care of them for life. Employees must
be proactive to stay alive today. And Monster helps
people take control of their careers” (Layne).
316 Part 4 Staffing
sions can help people gain a basic understanding of a particular career. Job profiles, indus-
try descriptions, and professional organizations are a few of the topics discussed. General
career advice can be found on Monster at http://content.monster.com.
Mr. McKelvey believes that in the future people will use their cell phones to look for
jobs. In fact, Monster’s research and development is working on this. Mr. McKelvey says,
“You’ll one day be able to look for jobs using your cell phone and get notified of new open-
ings” (Caplan).
Sources: Monster, http://www.monster.com; Jeremy Caplan, “Résumé Mogul,” TIME, February 2006, p. A12;
Anni Layne, “Report From the Past—Jeff Taylor,” Fast Company, February 2001, http://www.fastcompany
.com/articles/2001/02/rftp_taylor.html; Jeffrey A. Trachtenberg, “The jig’s up?”, Forbes, October 22, 1984,
v134, p. 226(2).
Introduction
1
Determine the importance
of the staffing function
staffing
The primary purposes of staffing are to attract, hire, train, develop, reward,
and retain the required number of good people, helping them meet their needs
while they help the organization meet its needs. Texas entrepreneur Courtland
L. Logue has created or managed 28 companies—running them for a time, then
selling some and acquiring others. Here is what he thinks about the importance
Efforts designed to attract, hire, of fi nding and hiring the right number of good people:
train, develop, reward, and re-
tain the people needed to ac- First, get good people. If you don’t have good people, that’s your fault.
complish an organization’s goals Remember, .200 hitters don’t win championships. Overpay and get .300
and promote job satisfaction
hitters. Just don’t hire more of them than you need.1
“Good” people are those with proven performance records or potential
that demonstrates they will or do fit into the organization’s culture and climate.
Frank Sonnenberg, business author and consultant, adds this insight: “The
point is, you don’t just hire bodies, but seek employees that you value enough
to invest in.” 2 Since most job applicants have some deficiencies, the key issue is
the employer’s willingness and ability to help applicants remedy their deficien-
cies. Providing needed investments (training, for example) makes good people
even better, making them more confident and capable and more valuable to their
organizations.
Once good people are on board, organizations must retain them. This goal
leads to the second part of staffing: helping employees meet their needs while
they help the organization to meet its needs. Lorry Lokey, Founder and CEO
of Business Wire, a wireless news provider, believes the following: “My people
spend a fourth of their lives—or more—working for this company, so they de-
serve to have their needs taken care of.” His financial chief, Constance Cum-
mings, adds, “There’s no fear here because we believe in doing everything we
can to hold on to good employees and to improve the quality of their lives.”
These few words sum up the essence of the company’s staffing philosophy. 3
Staffi ng, which follows organizing, links people and processes. People cre-
ate an organization’s intellectual capital—that which makes the organization
unique and separates it from its competition. Without dedicated, knowledge-
able, and motivated employees, the best-laid plans cannot bear fruit. Empow-
ered people working in a diverse and open climate—one based on mutual trust
and respect—can make bad plans work and good plans better.
This chapter examines many major investments that organizations make in
their human resources, along with the laws, principles, and processes that affect
staffi ng in the United States. Appendix B includes staffi ng concerns for organi-
zations operating in an international environment.
Chapter 10 Staffing the Workforce 317
Responsibility for Staffing

In small organizations, every manager is responsible for the staffi ng function;
even worker teams can participate. A large fi rm usually establishes a separate de-
partment dedicated to staffi ng. A subunit that focuses on staffi ng is usually called
a personnel or human resource department. Managers of such a department—
human resource managers, or personnel managers—assist others by planning, human resource manager or
organizing, staffi ng, coordinating, controlling, and sometimes executing specific personnel manager
A manager who fulfills one or
personnel and human resource (P/HR) management functions. more personnel, or human re-
Some human resource managers and practitioners are specialists who focus source, functions
on a specific aspect of P/HR management—compensation, training, or recruit-
ing, for example. Others are generalists who are responsible for several func-
tions. This book will use the terms human resource manager and human re-
source specialist to refer to both groups.
Staffing Process
Figure 10.1 summarizes the eight elements of the staffing process. The list that
follows briefly describes each element:
1. Human resource planning. This aspect of staffi ng involves assessing cur-
rent employees, forecasting future needs, and making plans to add or re-
move workers. To adapt to changing strategies and changing needs, manag-
2
List and explain the eight
elements of the staffing
process
ers must continually update their plans.

2. Recruiting. In this step, managers with positions to fill look for qualified
people inside or outside the company.
3. Selection. This step involves testing and interviewing candidates and hiring
the best available.
4. Orientation. In this phase of staffing, new employees learn about their sur-
roundings, meet their coworkers, and learn about the rules, regulations, and
benefits of the company.
5. Training and development. To train and develop employees, employers es-
tablish programs to help workers learn their jobs and improve their skills.
6. Performance appraisal. As part of the controlling function of management,
managers must establish the criteria for evaluating work, schedule formal
sessions to discuss evaluations with employees, and determine how to re-
ward high achievers and motivate others to become high achievers. All these
tasks are part of the performance-appraisal element of staffi ng.
Figure 10.1 Eight elements of the staffing process
1. Human Resource Planning

2. Recruiting
3. Selection
4. Orientation
5. Training and Development
6. Performance Appraisal
7. Compensation
8. Employment Decisions
7. Compensation. This aspect of staffi ng relates to establishing pay and, in

some cases, benefits.
8. Employment decisions. Workers’ careers involve transfers, promotions, de-
motions, layoffs, and fi rings. Making decisions about these career develop-
ments is part of the staffi ng process.
Not all the elements of the staffing process are components of every staff-
ing problem. Recruiting, for example, is not necessary unless new employees are
needed. Some elements are constants, however. Planning, training, and appraisal
accompany the primary management functions. Therefore, every manager must
be concerned about staffi ng.
Staffing Environments
3
Describe the three primary
staffing environments
Staffi ng, like other managerial functions, is subject to outside influences. Events
and pressures from many sources in an organization’s external environment—
customers, suppliers, and competitors, for example—influence staffi ng and dic-
tate the human resource plans and strategies necessary to carry them out.
Legal Environment
The laws and principles that govern a community inevitably affect the way com-
panies do business. Consider just a few of the legal issues that pertain to even
the smallest company: contracts, criminal law, negligence, and equity. A legal
concept that has a great impact on organizations today is the idea that the law is
a tool to correct and prevent wrongs to individuals and groups. Laws and legal
principles act as controls on managers who discharge staffi ng responsibilities.
Executive orders and laws generated by federal, state, county, and city agen-
cies regulate how companies, usually those with 15 or more employees, must
conduct staffi ng. So complex are these regulations, and so great is the potential
for harm due to noncompliance, that many large companies and institutions hire
attorneys and specialists to deal with reporting and disclosure requirements.
Figure 10.2 highlights federal laws regarding three topics: equal employment
opportunity, affi rmative action, and sexual harassment. The following para-
graphs discuss these topics in more detail.
Equal Employment Opportunity Federal laws prohibit discrimination in em-

discrimination ployment decisions. Discrimination means using illegal criteria in staffi ng. Laws
Using illegal criteria when mak- that prohibit discrimination are designed to guarantee equal employment op-
ing employment decisions.
Discrimination results in an portunity. The Equal Employment Opportunity Commission (EEOC) enforces
adverse impact on members of antidiscrimination laws. In 2005, 77,352 claims of discrimination filed with the
protected groups U.S. Equal Employment Opportunity Commission based on race/color, national
equal employment origin, gender, religion, age, or disability were resolved.4
opportunity According to the U.S. Senate, it is unlawful for an employer to do either of
Legislation designed to protect the following: 5
individuals and groups from
discrimination 1. To fail or refuse to hire or to discharge an individual solely on the basis of
race, color, religion, sex, age, national origin, or handicap
2. To limit, segregate, or classify employees or applicants for employment in
any way that would tend to deprive the individual of employment opportu-
nities solely on the basis of race, color, religion, sex, age, national origin, or
handicap
Figure 10.2 U.S. federal legislation related to staffi ng
FEDERAL LEGISLATION DESCRIPTION OF PROVISIONS
Equal Pay Act of 1963 Prohibits paying employees of one sex less than employees of the opposite
sex for doing roughly equivalent work. Applies to private employers.
Title VI 1964 Civil Rights Act In staffing decisions, prohibits discrimination based on race, color, religion, sex,
or national origin. Applies to employers receiving federal financial assistance.
Title VII 1964 Civil Rights Act Prohibits discrimination based on race, color, religion, sex, or national
(amended 1972) origin. Applies to private employers of 15 or more employees; federal, state,
and local governments; unions; and employment agencies.
Executive Orders 11246 In staffing decisions, prohibits discrimination based on race, color, religion,
and 11375 (1965) sex, or national origin. Establishes requirements for affirmative action plans.
Applies to federal contractors and subcontractors.
Age Discrimination in Prohibits age discrimination in staffing decisions against people over
Employment Act of 1967 40 years of age. Applies to all employers of 20 or more employees.
(amended 1978)
Title I 1968 Civil Rights Act Prohibits interference with a person’s exercise of rights with respect to race,
color, religion, sex, or national origin.
Rehabilitation Act of 1973 In staffing decisions, prohibits discrimination based on certain physical and
mental handicaps. Applies to employers doing business with or for the federal
government.
Vietnam Era Veterans In staffing decisions, prohibits discrimination against disabled veterans and
Readjustment Act of 1974 Vietnam-era veterans.
Privacy Act of 1974 Establishes the right of employees to examine letters of reference concerning
them unless the right is waived.
Revised Guidelines on Employee Establishes a single set of guidelines that defi ne discrimination on the basis
Selection (1976, 1978, and 1979) of race, color, religion, sex, and national origin. The guidelines provide a frame-
work for making legal employment decisions about hiring, promoting, and de-
moting and for the proper use of tests and other selection procedures.
Pregnancy Discrimination Prohibits discrimination in employment based on pregnancy, childbirth,
Act of 1978 or related medical conditions.
Equal Employment Opportunity Prohibits sexual harassment when such conduct is an explicit or implicit con-
Guidelines of 1981— dition of employment, if the employee’s response becomes a basis for em-
Sexual Harassment ployment or promotion decisions, or if it interferes with an employee’s perfor-
mance. The guidelines protect men and women.
Equal Employment Opportunity Identifies potential national-origin discrimination to include fl uency-in-English
Guidelines of 1981— job requirements and disqualification due to foreign training or education.
National Origin Identifies national-origin harassment in the work environment to include ethnic
slurs and physical conduct with the purpose of creating an intimidating or hos-
tile environment or unreasonable interference with work.
Equal Employment Opportunity Determines that employers have an obligation to accommodate religious
Guidelines of 1981—Religion practices of employees unless they can demonstrate that doing so would re-
sult in undue hardship. Accommodation may be achieved through voluntary
substitutes, flexible scheduling, lateral transfer, and change of job assignment.
Mandatory Retirement Act Determines that employees may not be forced to retire before age 70.
(amended 1987)
Americans with Disabilities Prohibits discrimination on the basis of physical or mental handicap.
Act of 1990
Civil Rights Act of 1991 Permits women, persons with disabilities, and persons who are religious mi-
norities to have a jury trial and sue for punitive damages if they can prove inten-
tional hiring and workplace discrimination. Also requires companies to provide
evidence that the business practice that led to the discrimination was not dis-
criminatory but was job related for the position in question and consistent with
business necessity.
A company’s best defense against accusations of discrimination or bias in

hiring is to be certain that any employment practice or device adheres to the
following:
• It is job related—that is, it is predictive of success or failure on a specific job.

• It is a business necessity—that is, the company must do what it does to pro-
vide for its continued existence.
• It acknowledges a bona fi de occupational qualifi cation (BFOQ)—for exam-
ple, a licensing or age requirement.
• It honors a bona fide seniority system (BFSS)—that is, a seniority system es-
tablished and maintained that does not have the intent to illegally discrimi-
nate.6
Protected Groups The federal government has created several protected

groups—people against whom it is illegal to discriminate. These groups are
women, the disabled or differently abled, and minorities. Federal guidelines list
minorities as follows:
• Hispanic-surnamed Americans
• Asians and Pacific Islanders
• African Americans not of Hispanic origin
• Native Americans
• Native Alaskans
As defi ned under federal law, the differently abled in America are those who
have a physical or mental impairment that substantially limits one or more ma-
jor life activities, have a record of such impairment, and are regarded as having
such an impairment.
Two major laws govern the protection of people with such disabilities: the
Rehabilitation Act of 1973 (covering fi rms doing business with the federal gov-
ernment) and the Americans with Disabilities Act of 1990 (covering nearly every
fi rm with 15 or more employees). Protection is extended to people with current
or past physical and mental conditions. Examples of those protected are people
with dependency on legal drugs whose dependency does not impair work per-
formance; people with a history of cancer, heart trouble, or a contagious dis-
ease, providing that their conditions do not pose a significant risk to coworkers
or render them unable to perform their work; and people who have undergone
or who now are undergoing rehabilitation for their drug dependencies.
Under both laws employers must make reasonable accommodations (that
cause no undue hardship) for the disabled. Jobs may have to be redefined, re-
moving those tasks that the person with a disability cannot perform. Prerequi-
sites such as passing a physical exam may have to be waived when parts of that
exam are not job related. Physical facilities may have to be altered to accommo-
date access by persons with disabilities. Signs in Braille and wheelchair ramps
are but two examples.
The Job Accommodation Network (JAN) has conducted a survey on the
cost of accommodation since October 1992. As of May 2005 the survey
continues to indicate that the cost of accommodation in dollars is usu-
ally not expensive. JAN surveys employers who call for accommodation
information to obtain feedback on the cost and benefit of accommoda-

tion. Study results show that more than half of accommodations needed
by employees and applicants with disabilities cost absolutely nothing.
Of those accommodations that do cost, the typical expenditure by em-
ployers is $600.7
Also, according to JAN:
The most frequently mentioned direct benefits were (1) the accommoda-
tion allowed the company to retain a qualified employee, (2) the accom-
modation eliminated the costs of training a new employee, and (3) the
accommodation increased the worker’s productivity. 8
In 1998, the U.S. Supreme Court ruled that Title VII of the 1964 Civil
Rights Act covers claims of same-sex sexual harassment but does not include
claims of “sexual orientation discrimination” (Bibby v. The Philadelphia Coca-
Cola Bottling Co.). Several states, counties, and municipalities have added the
category of sexual orientation to fair housing, employment, public accommo-
dations, and credit laws that already protect people in the preceding categories
from discrimination. The 11 states with laws protecting lesbians and gay men
against workplace discrimination are California, Connecticut, Hawaii, Massa-
chusetts, Minnesota, Nevada, New Hampshire, New Jersey, Rhode Island, Ver-
mont, and Wisconsin; the District of Columbia also has these protection laws in
place. In addition, many companies, including Microsoft, Levi Strauss, Hewlett-
Packard, Fox Inc., Ben & Jerry’s, and Disney, have adopted nondiscrimina-
tion policies with regard to sexual orientation. A few states and cities, however,
specifically exclude protecting people from discrimination on the basis of their
sexual orientation.
By law, managers must refrain from employment decisions that produce a
disparate impact on these protected groups. A disparate impact is any result that disparate impact
harms one group more than another. Not hiring an applicant because she is a The result of using employment
criteria that have a significantly
woman causes a disparate impact. Using an employment test that eliminates a greater negative effect on some
significantly greater percentage of protected groups than unprotected groups also groups than on others
causes a disparate impact. The actions in both these cases are considered discrim-
inatory under law. The organization and the managers involved in the discrimi-
natory decisions would be subject to criminal penalties.
Title VII of the 1964 Civil Rights Act requires parties who file discrimina-
tion complaints to do so within 180 days of the alleged violation. It provides
two basic remedies when discrimination is proved: reinstatement and recovery
of lost pay. The Civil Rights Act of 1991 amended the 1964 Civil Rights Act to
allow for the recovery of punitive damages if it can be proved that a company
engaged in a discriminatory practice with malice or with reckless indifference to
the law. Limits placed on these damages are as follows:
• Between 15 and 100 employees: $50,000
• More than 500 employees: $300,000
Affirmative Action Some laws go beyond prohibiting discrimination. Laws affirmative action
A plan to give members of spe-
that mandate affi rmative action require employers to make an extra effort to cific groups priority in hiring or
employ protected groups. Affi rmative action laws apply to employers that have, promotion
in the past, practiced discrimination or failed to develop a workforce that is rep-

resentative of the whole population of their community. (Under current laws, af-
fi rmative action is not required with regard to disabled Americans.)
The fact that an organization has an affi rmative action plan does not neces-
sarily mean that the organization practiced unfair employment practices in the
past, however. Managers of many organizations choose to develop affi rmative
action plans even when the law does not require them to do so. Affi rmative ac-
tion plans must include goals and timetables for achieving greater representation
of and equity for protected groups.
Sexual Harassment Title VII of the 1964 Civil Rights Act and guidelines es-
sexual harassment tablished by the EEOC prohibit sexual harassment. Sexual harassment includes
Unwelcome verbal or physi- unwelcome sexual advances, requests for sexual favors, and other verbal or phys-
cal conduct of a sexual nature
that implies, directly or indi- ical conduct of a sexual nature when any of these three conditions are present:
rectly, that sexual compliance
is a condition of employment or 1. Submission to such conduct is an explicit or implicit term or condition of
advancement or that interferes employment
with an employee’s work
performance 2. Submission to or rejection of such conduct is used as a basis for any employ-
ment decision
3. Such conduct has the purpose of unreasonably interfering with the individu-
al’s work performance or creating an intimidating, hostile, or offensive work-
ing environment
Sexual harassment creates anger, suspicion, fear, stress, mistrust, victims,
and costs in a workplace. Costs are both psychological and fi nancial. Compa-
nies experience losses in employee morale, loyalty, company reputation, and,
correspondingly, reductions in quality and productivity. According to research
by Ellen Bravo and Ellen Cassedy:
• In general, men and women have different views of what constitutes harass-
ment.
• Most harassers are men, but most men are not harassers.
• Intentional harassment is an exercise of power, not romantic attraction.
• Ninety percent of harassment cases involve men harassing women; 9 percent
involve same-sex harassment; 1 percent involve women harassing men.9
Preventing sexual harassment is no easy task; efforts to do so begin with top
management. They must create a clear policy and communicate to everyone that
sexual harassment will not be tolerated. Every employee must be made aware
of what sexual harassment is and is not. In most organizations, creating aware-
ness means bringing in outside experts who will conduct training. The National
Association of Working Women, 9 to 5, offers these guidelines for creating a
meaningful policy:
• Involve all employees.
• Clearly defi ne procedures to protect the complainant and the accused.
• Investigate promptly, using a team of impartial investigators.
• Give several options for reporting, including informal channels.
• Indicate appropriate discipline, including counseling.10
An option for reporting sexual harassment is e-mail. E-mail flattens hierar-
chies within the bounds of an office. Many employees fi nd it far easier to com-
municate to their supervisor and colleagues via e-mail than in a pressure-fi lled
meeting room. Whenever an employee has something diffi cult to say, e-mail can
make it easier.
Sociocultural Environment
The U.S. labor force is becoming more diverse (see Figure 10.3). In 2006, accord-
ing to the U.S. Bureau of Labor Statistics, the civilian labor force, those 16 years
old and over, numbered approximately 150 million. Former Secretary of Labor,
Alexis M. Herman, delivered a report titled “Futurework—Trends and Chal-
lenges for Work in the 21st Century.” This report examined where the United
States has been, where the United States is, and where the country is going.
In 1995, the United States was estimated to be 83 percent white, 13 per-
cent black, 1 percent American Indian, Eskimo, and Aleut, and 4 per-
cent Asian and Pacific Islander. Ten percent of Americans, mostly blacks
and whites, were also of Hispanic origin. Nearly one in eleven Ameri-
cans was foreign born. . . . Trends show that whites will be a declin-
ing share of the future total population while the Hispanic share will
grow faster than that of non-Hispanic blacks. By 2050, minorities are
projected to rise from one in every four Americans to almost one in
Figure 10.3 How workplace demographics are evolving
The U.S. work force of the future will be:

SMALLER LESS MALE MORE ETHNICALLY DIVERSE
Elderly population will Women will comprise By 2025, nearly 40% of

increase 80% by 2025, 48% of the work force workers will be Hispanic,
working age adults and by 2015. African American, or Asian.
children by only 15%.
Source: U.S. Department of Commerce
Source: From “Meeting the Challenge of Tomorrow’s Workplace,” in CEO Perspectives, an online supplement to Chief Executive, August/
September 2002. Reprinted with permission.
324
VALUING DIVERSITY Part 4 Staffing
a g es
“Avoid This Workplace”
Get t y Im
Top-10 List
G. Neil, a provider of human resources solutions based 5. “What are you, crippled or something?”
in Florida, has developed a “Harassment Prevention Pro- 6. “These numbers don’t sound kosher to me.”
gram” to be used for training. Part of the training includes 7. “That’s a man’s job.”
a list of things that wrongheaded people have said. 8. “You’re in no condition to travel.”
What harassment allegations might be brought against 9. “Speak English. This is America.”
a manager for saying the following? To check your re- 10. “With a name like Jeff Chang, I’m sure he’s good with
sponses, check the answer key that follows. computers.”
1. “This report is retarded.” Answer Key: (1) disability; (2) age; (3) gender; (4) gender;
2. “What are you, senile or something?” (5) disability; (6) religion; (7) gender; (8) disability (preg-
3. “What’s wrong with you? Are you on your period or nancy); (9) national origin; (10) national origin
something?” Source: G. Neil, http://www.gneil.com. Used with permission.
4. “Men. They’re all pigs!”
every two. The Asian and Pacifi c Islander population is also expected to
increase.11
Nearly 83 percent of all adults ages 25 and over have completed high
school, and 24 percent have obtained a bachelor’s degree or more.12
Since 1950, the proportion of men in the labor force has declined
from 86 percent to 75 percent. In contrast, the trend for women is on the
rise. In 1950, one-third of women worked outside the home. Almost 50
years later, 60 percent of women are in the labor force.13
Cultural Diversity Differing sociocultural groups both inside and outside or-
ganizations make demands on and contribute to those organizations. They con-
stitute any organization’s stakeholders, help shape its culture and climate, and
must have adequate representation in all staffing activities.
In the past, most managers tried to create a homogeneous workforce—to
treat everyone in the same way and make people fit the dominant corporate cul-
ture. These efforts did not always build a stable, committed group of employees.
What was needed—and what is rapidly appearing in enlightened corporations—
is respect for what workers from different backgrounds bring to the workplace.
Across America, managers are participating in workshops designed to facilitate
understanding among diverse groups, not just tolerance of one another’s exis-
tence. See this chapter’s Valuing Diversity feature for an example.
Glass Ceilings and Glass Walls The terms glass ceiling and glass wall re-
fer to invisible barriers of discrimination that block the careers of women and
other protected groups.14 A glass ceiling is discrimination that keeps individuals
from protected groups out of upper-level management jobs; a glass wall prevents
them from pursuing fast-track career paths. Do these invisible barriers really
exist? The American government appointed the Glass Ceiling Commission, and
its recommendations were published in 1995. The data indicate that something
was keeping protected groups out of the top jobs.
According to the 1995 report of the Glass Ceiling Commission, only
six-tenths of one percent of senior management positions in the nation’s
largest companies were held by blacks, four-tenths of a percent by His-
panics, and three-tenths of a percent by Asian Americans. Women held
between three and fi ve percent of these positions. White males made up
43 percent of the work force but held 95 percent of the senior manage-
ment jobs.15
Women have begun to break through the glass ceiling. By 2006, ten of the
Fortune 500 largest U.S. companies had female chief executive officers. “Bar-
ron’s estimates that one in seven powerful posts will be held by women by 2010,
based on evidence that the trend is getting only stronger. By 2020, it could be one
in five.” 16 Yes, women in top management positions make less money than men.
“Female managers’ earnings now average 72% of their male colleagues’.” 17
Catalyst, a nonprofit research organization that focuses on women’s issues
in the workplace, updated the Glass Ceiling Commission study, Cracking the
Glass Ceiling: Strategies for Success. Stereotyped as support providers, women
end up in staff positions. One reason for the perpetuation of the stereotype is
that many men, especially those in the upper ranks of management, feel uncom-
fortable dealing with women. Below are Catalyst’s Top Ten Tactics to Cracking
the Glass Ceiling.18
• Measure women’s advancement
• Move women into line positions
• Find mentors for women
• Create women’s networks
• Make culture change happen
• Promote women
• Get women into nontraditional work
• Promote women in professional fi rms
• Support customized career planning
• Make flexibility work
Many companies recognize that glass ceilings and glass walls exist and have
worked hard to eliminate them. American Airlines requires corporate offi cers to
submit detailed, cross-functional plans regarding the development of all high-
potential women in middle management and above.19 Anheuser-Busch has a
management-development program that moves women and minorities from jobs
in inventory to jobs as coordinators and then to supervisory positions. Johnson
& Johnson, the pharmaceutical giant, operates workshops to sensitize managers
and supervisors to the problems of those striving for the top. The company has a
significant number of women and minorities in high positions.20
AIDS and Drug Testing Acquired immune deficiency syndrome (AIDS) is a

frightening condition that—until medical progress can prevent it—eventually
leads to death. HIV, the virus that causes AIDS, cannot be casually transmitted,
but fear of AIDS is a reality in the workplace.
Companies need policies telling employees and managers how to deal with
the issue. Federal law prohibits discrimination against employees suffering from
AIDS and any other contagious diseases. 21 Will a company accommodate the
employee who does not want to work with an employee who has HIV? What
will management do when an employee’s routine physical reveals that he or she
is HIV positive?
Most of America’s largest companies have had experience with employees
who are suffering from some sort of drug addiction. Employees with drug or
alcohol dependencies can and do cause losses to their companies, themselves,
and others. A Substance Abuse and Mental Health Services Administration
(SAMHSA) study revealed that workers reporting current drug use were more
likely to have worked for three or more employers, to have voluntarily left an em-
ployer in the past year, and skipped one or more days of work in the past month.22
Workers with drug problems compromise safety, quality, and productivity.
Many companies require drug testing for all applicants, and some require
random testing of current employees involved in work that is potentially hazard-
ous to themselves or others. Figure 10.4 shows why the lingering effects of drugs
are of such concern to many companies. (Where a workforce is unionized, it is
wise to involve the union in any drug-testing efforts before they are instituted.)
Workplace safety is the most common reason given by employers for drug test-
ing. In those occupations identified with the highest rates of drug information
and policies in the workplace, employees reported significantly lower rates of
current drug use and heavy drinking. 23 The percentages of companies which
conduct drug tests can be seen in Figure 10.5.

According to the 1990 Americans with Disabilities Act, drug-addicted em-

ployees are protected from discrimination if they are currently enrolled in le-
gitimate drug-intervention programs or have completed such programs and are
drug free. Testing for drugs raises issues about employee privacy, because most
drug tests involve blood and urine analysis. These tests can reveal conditions
that an employer has no business knowing about. In addition, drug tests can
produce false positive results.
Genetic Screening Medical tests of a person’s genetic makeup can identify

his or her predisposition to diseases like heart disease and certain types of can-
cer. Such tests can be used to deny employment, insurance, and advancement. 24
Few bans on genetic screening currently exist. Those that do are state and lo-
cal efforts; no federal laws address the issue. To prevent confusion and injustice,
however, employers must develop policies about the use of genetic screening.
In the American Medical Association’s “Use of Genetic Testing by Employ-
ers,” the Council on Ethical and Judicial Affairs points out that employers, in-
surers, and law enforcement agencies all have uses for genetic information and
techniques. It concludes that generally it is inappropriate to exclude workers be-
cause of risk, but a limited testing might be done (1) if a disease were so rap-
idly serious and irreversible that monitoring could not prevent harm; (2) if data
demonstrate that abnormality results in many susceptible persons; or (3) if the
cost of lowering the toxic substance to protect the susceptible is too high. Test-
ing must be done only with the informed consent of the employee or applicant
for employment. 25
Union Environment
According to the U.S. Bureau of Labor Statistics, in 2005, nearly 15.7 million or
12.5 percent of wage and salary workers were union members, unchanged from
2004. The union membership rate has declined from a high of 20.1 percent in
1983, the fi rst year for which comparable union data are available. Some of the
highlights of the data are listed below.
• Black workers were more likely to be union members than were white,
Asian, or Hispanic workers.
• Men were more likely than women to be union members.
• Workers in the public sector had a union membership rate more than four
times that of private-sector employees. 26
Most union members belong to unions affi liated with the American Federa-
tion of Labor and Congress of Industrial Organizations (AFL–CIO). The AFL–
CIO had about 10 million members in 2006. 27
Companies that employ unionized workers must bargain collectively to create
a contract, to enforce that contract, and to process complaints (called grievances)
about how the contract is enforced. Unions typically bargain for their members’
wages, hours, and working conditions. Whether the issue is employment, work
methods, equipment, safety, or productivity improvement, a union can impede or
support changes that managers want to make.
collective bargaining Collective Bargaining In collective bargaining, negotiators from management

Negotiation between a union and a union sit down together and try to agree on the terms of a contract that
and an employer in regard to
wages, benefits, hours, rules, will apply to the union’s members for a fixed period of time. Both parties prepare
and working conditions for these negotiations by analyzing past problems and agreements, polling their
constituents, building a list of demands, and creating strategies. Both want what
they perceive to be the best deal for themselves, given their respective needs and
priorities. Negotiations usually begin before an existing contract expires, and ne-
gotiators try to reach a new agreement while the contract is still in effect.
Grievance Processing A labor agreement (contract) provides a process by

which managers and workers can fi le grievances, complaints alleging that a con-
tract violation has taken place. The process of fi ling a grievance usually begins
at the lowest level. If no settlement can be reached at that level, the complaint
is brought before those at successively higher levels. A grievance can progress
to the point that it becomes a focus for top managers and union officials. When
these parties cannot agree, a third party may be called in. Third parties are usu-
ally neutral professionals hired to recommend or enforce a settlement. A third
party can be a mediator or an arbitrator. Mediators make recommendations.
Arbitrators suggest settlements that are enforced. Arbitrators have the power
to hold hearings, gather evidence, and render a decision to which both parties
agree in advance to adhere.
Human Resource Planning
4
Identify the four activities
related to human resource
planning
In planning to meet staffi ng needs, managers must know their organization’s
plans and what human resources are available. They study existing jobs by per-
forming job analyses. They review their fi rm’s past staffi ng needs, inventory cur-
rent human resources, forecast personnel needs in light of strategic plans, and
compare their human resource inventory to the forecast. Then, with line manag-
ers, they construct plans to expand the company’s employee roster, maintain the
status quo, or reduce the number of jobs. Figure 10.6 illustrates this process.
Job Analysis
job analysis Before managers can determine personnel needs, they must perform a job analy-
A study that determines the du- sis for each job. The fi rst step in a job analysis is to prepare up-to-date descrip-
ties associated with a job and
the human qualities needed to tions that list the duties and skills required of each jobholder. Then managers
perform it must compare all the analyses to ensure that some jobholders are not duplicat-
ing the efforts of others. This comparison enhances effectiveness and efficiency
in the organization.
Figure 10.6 Human resource planning process
Plans for
Employee Strategic
Growth
History Plans
in Jobs
Prepare Prepare Compare

Prepare Job Human Resource Human Resource Inventory and Status Quo
Analysis Inventory Forecast Forecast
Plans for
Reduction
in Jobs
To prepare an in-depth study of jobs, some companies employ job analysts.

To do their work, job analysts (1) observe the jobholder executing his or her
duties; (2) review questionnaires completed by the jobholder and supervisor;
(3) conduct interviews with both; or (4) form a committee to analyze, review,
and summarize the results. Job analysts may study more than one jobholder in a
job category over several months.
The job analysis produces two coordinated documents: a job description
and a job specification. Figure 10.7 presents an example of a job description. A
job description cites the job title and the purpose of the job. It lists major work
activities, the levels of authority above and below the jobholder, the equipment
and materials the jobholder must use, and any physical demands or hazardous
conditions the job may involve.
Figure 10.8 presents an example of a job specification. A job specification
lists the human dimensions that a position requires. These include education,
experience, skills, training, and knowledge. To avoid even the appearance of dis-
crimination, those who create job specifications must take care to list only those
factors directly linked to successful work performance.
Managers should review job descriptions and specifications regularly (usu-
ally each year) to ensure that they continue to reflect the positions to which they
refer. Jobs evolve with time as changes in duties, knowledge bases, and equip-
ment take place; the documents should refl ect that evolution. When new posi-
tions are added to the organization, job descriptions and specifications must be
created.
Human Resource Inventory

The human resource inventory provides information about an organization’s cur-
rent personnel. The inventory is a catalog of the skills, abilities, interests, train-
ing, experience, and qualifications of each member of its current workforce. A
human resource inventory tells managers the qualifications, length of service, re-
sponsibilities, experiences, and promotion potential of each person in the fi rm.
Figure 10.7 Example of a job description
I Job Identification
Position Title: Customer Service Representative
Department: Policyholders’ Service
Effective Date:
II Function
To resolve policyholders’ questions and make corresponding adjustments to policies if necessary after the
policy is issued
III Scope
(a) Internal (within department)
Interacts with other members of the department in researching answers to problems
(b) External (within company)
Interacts with Policy Issue in regard to policy cancellations, Premium Accounting in regard to accounting
procedures, and Accounting in regard to processing checks
(c) External (outside company)
Interacts with policyholders, to answer policy-related questions; client-company payroll departments, to
resolve billing questions; and carriers, to modify policies
IV Responsibilities
The jobholder will be responsible for
(a) Resolving policyholder inquiries about policies and coverage
(b) Initiating changes in policies with carriers (at the request of the insured)
(c) Adjusting in-house records as a result of approved changes
(d) Corresponding with policyholders regarding changes requested
(e) Reporting to the department manager any problems he or she is unable to resolve
V Authority Relationships
(a) Reporting relationships: Reports to the manager of Policyholders’ Service
(b) Supervisory relationship: None
VI Equipment, Materials, and Machines
Personal computer, calculator, and video display terminal
VII Physical Conditions or Hazards
95 percent of the duties are performed sitting at either a desk or video display terminal
VIII Other
Other duties as assigned
This information is updated periodically and supplemented by the most recent

appraisals given to jobholders. What emerges is something similar to Figure 10.9,
a plan for staffi ng changes in management ranks. Developing such a chart makes
managers aware of strengths and weaknesses in the current personnel base and
allows them to develop a managerial succession plan.
Human Resource Forecasting

When forecasting an organization’s personnel requirements, managers need to
consider the strategic plans of the company and its normal level of attrition. Stra-
tegic plans determine the company’s direction and its need for people. A long-
term plan to stabilize the company at its current employment level will mean the
need to replace those who leave.
Consider how a fictional furniture-making company translates strategic
plans into actual personnel requirements. Suppose managers decide to increase
Figure 10.8 Example of a job specification
I Job Identification
Position: File/Mail Clerk
Department: Policyholders’ Service
Effective Date:
II Education
Minimum: High school or equivalent
III Experience
Minimum: Six months of experience developing, monitoring, and maintaining a fi le system
IV Skills
Keyboarding skills: Must be able to set up own work and operate a computer. No minimum WPM.
V Special Requirements
(a) Must be flexible to the demands of the organization for overtime and change in work load
(b) Must be able to comply with previously established procedures
(c) Must be tolerant of work requiring detailed accuracy (the work of monitoring fi le signouts and filing files,
for example)
(d) Must be able to apply systems knowledge (to anticipate the new procedures that a system change will
require, for example)
VI Behavioral Characteristics
(a) Must have high level of initiative as demonstrated by the ability to recognize a problem, resolve it, and
report it to the supervisor
(b) Must have interpersonal skills as demonstrated by the ability to work as a team member and cooperate
with other departments
production by 30 percent to meet a forecast increase in long-term demand. They

analyze current capabilities, reject the use of overtime, and decide to add a third
shift within three months. Using up-to-date job descriptions and specifications
for the jobs to be added, managers determine how many and what kinds of em-
ployees to hire: nine production workers. Then the managers look at anticipated
turnover in the existing shifts and support personnel. They decide to hire two
new employees over the next three months to replace retiring employees. There-
fore, the managers must acquire 11 new hires over the next three months.
Inventory and Forecast Comparison

By comparing the inventory and the forecast, managers determine who in the or-
ganization is qualified to fi ll the projected openings and which personnel needs
must be met externally. At the furniture company, managers decide that most
of the needed personnel must come from outside, because many of the positions
are entry-level jobs and members of the existing workforce will be needed to re-
place retiring workers.
If the managers decide to try to fi ll some of the vacancies from within, the
fi rst question is whether current employees qualify. If so, the managers must ad-
vertise the jobs within the company and encourage employees to apply for them.
If current employees do not qualify, the next question is whether, through train-
ing and development, they can achieve the qualifications. If so, and if the com-
pany can afford the money and time, managers should prepare a plan to provide
the needed training and development.
Figure 10.9 Abbreviated human resource inventory
Codes
President/CEO
Years with Company:
(numbers)
Present Promotion Potential: Vice President

+ Ready Manufacturing
– Not Ready
K.Yu 12 + A
Current Appraisal:
P. Winslow 5+B
A Outstanding
B Above Average
C Average
Director Director
Appliances Industrial Products
W. Mason 4–B P. Winslow 5+B

F. Warren 11 + B
Personnel Manager Finance Manager

A. Johnson 8–C F. Warren 11 + B
T. Ling 2+B J. Morales 3 +A
Recruitment, Selection, and Orientation

With the forecast and inventory complete and job descriptions and specifications
recruiting in hand, managers begin recruiting—the process of locating and soliciting a suf-
Efforts to find qualified people ficient number of qualified candidates. Sources of applicants should include em-
and encourage them to ap-
ply for positions that need to ployed and unemployed prospects and temporary-help services. Managers may
be filled also want to investigate the option of leasing employees. This option involves
working with a company that hires workers to lease to a client fi rm. The lease
company hires, fi res, complies with all government regulations, pays the leased
employees, and is responsible for all human relations functions.
Company policies defi ne strategies for and limits on filling vacancies. Among
the concerns many companies have are the issues of nepotism—employing
spouses or other relatives of existing employees—and of employing friends of em-
ployees. See this chapter’s Ethical Management feature for some recent research
in this area.
Strategies for Recruiting

At our fictitious furniture-making company, managers decide to look outside
for the needed applicants. This decision presents several options. They can call
Chapter 10 Staffing the Workforce
a g es
Coping with Workplace Romances
Get t y Im
Many organizations have policies that prevent the hiring Society for Human Resource Management (SHRM) and
of an existing employee’s spouse. Others forbid two em- CareerJournal.com, found that while the majority of hu-
ployees, once they marry, from continuing to work at the man resource professionals (81 percent) and corporate
organization; one of them must quit or be fired. But Mi- executives (76 percent) believe that workplace romances
crosoft, like a growing number of companies, sees advan- are dangerous because they can lead to organizational
tages to employing married couples. “The company’s conflict, most companies do not have formal written poli-
Seattle headquarters has at least a dozen married couples cies. Respondents included 558 human resource profes-
who met and courted during their 18-hour workdays. Peo- sionals polled by SHRM and 663 corporate executives
ple who work together have, almost by definition, similar surveyed by the CareerJournal.com Web site. The most
backgrounds, talents, and aspirations.” Microsoft ought to likely outcome is marriage of the people involved in the of-
know. Its billionaire CEO, Bill Gates, married one of his ex- fice romance. Other outcomes with less favorable results
ecutives in 1993. include complaints of favoritism by workers outside of the
A 2005 “Office Romance Survey” by Vault.Com, a jobs relationship, claims of sexual harassment, and decreased
and career Web site, found that 58 percent of respon- productivity of those involved in the office romance.
dents said they had been in an office romance. A 2003
• What experiences that relate to this ethical issue can
“Workplace Dating Survey” by the American Management
you share with your classmates?
Association (AMA) found that 30 percent of managers and
• If you were a manager, what would you do if you found
executives have dated someone from work. Twelve per-
out about an office romance?
cent of managers married someone that they started dat-
ing at work. Less than one quarter of the managers think Sources: Vault, “Cupid in the Cubicle, Says New Vault Survey,” Febru-
ary 1, 2005, http://www.vault.com/nr/newsmain.jsp?nr_page3&ch
that it is acceptable to date a superior or subordinate. _id420&article_id23513899; “AMA’s 2003 Survey on Workplace
Results released in February 2002 of the joint Dating,” http://www.amanet.org; “The 2001 SHRM ®/CareerJournal
.com Workplace Romance Survey,” http://www.shrm.org/surveys or
“Workplace Romance Survey,” conducted by the http://www.CareerJournal.com.
private or state-operated employment services. They can run ads on the Inter-
net, in newspapers, and in other publications, including trade journals and pa-
pers that appeal to racial and ethnic minorities. They can ask current employees
to recommend qualified friends and relatives. (Many companies offer bonuses to
employees who refer people who are eventually hired.) They can contact schools
and offer a training program, and they can participate in job fairs. The manag-
ers can ask neighborhood and community groups to help them reach minorities
and other protected groups and encourage them to apply for the jobs. If the com-
pany employs union labor, managers can contact trade unions in their search for
skilled workers.
Many companies like to recruit for entry-level positions through internship
programs. These offer a person, usually a student, a chance to gain some full-
or part-time experience in his or her specialty area while assisting an employer.
Networking with associates in various professional groups and trade associa-
tions often leads to referrals of likely prospects. Another option involves the use
of public and private employment agencies. Industry-specific search fi rms may
help companies locate the best employees in the field, despite the price. 28 Fees for
hiring through private search fi rms can run as high as a new hire’s first year’s
salary.
Selection Process
5
List and describe the
primary screening devices
used in the selection
process
Selection is the process of deciding which candidate out of the pool of applicants
possesses the qualifications for the job to be fi lled. Selection begins where re-
cruiting ends. Its goal is to eliminate unqualified candidates through use of the
screening devices shown in Figure 10.10.
Application Form Usually, a prospective employee must fi ll out an application

selection form as part of the selection process. An application form summarizes the can-
Evaluating applicants and find- didate’s education, skills, and experiences relating to the job for which he or she
ing those best qualified to per-
form a job and most likely to is applying. To avoid discrimination in the selection process, employers must not
fit into the culture of the ask for information that is unrelated to the candidate’s ability to perform the job
organization successfully. Questions regarding home ownership, marital status, age, ethnic or
racial background, and place of birth are usually irrelevant. When used properly,
Figure 10.10 Screening devices of the selection process
Applicant
Pool
Application Reject
Form
Preliminary Reject
Interview
Testing Reject
(if appropriate)
In-Depth Reject
Interview(s)
Reference Reject
Checks
Physical Reject
Exams
Offer of
Employment
the completed application yields needed information. In addition, it indicates a

person’s ability to follow simple instructions and use basic language skills.
Preliminary Interview In small firms, a job candidate’s first interview at a

fi rm may be conducted by the very manager for whom the person hired will
work. In large companies, someone from the human resource staff may be the
designated screening interviewer. In very large or sophisticated firms, a human
relations specialist may conduct the preliminary interview. If a team has author-
ity to hire, several team members may question each applicant. This procedure
is usually the case if the team is self-managing.
Technology can be used to prescreen candidates, as seen in this chapter’s
Managing Technology. A preliminary interview may be structured—scripted
with specific questions—or unstructured. An unstructured format allows an ap-

plicant relative freedom to express thoughts and feelings. An interviewer uses
the preliminary meeting to verify details from the application form and to ob-
tain information needed to continue the selection process. Interviewers must
avoid topics that are not related to the applicant’s abilities to perform success-
fully on the job. An ability necessary to perform a job is called a bona fide oc-
cupational qualification. For example, if a job involves work in a men’s locker
room, a question about the gender of the applicant is probably not discrimina-
tory because it asks about a bona fide occupational qualification.
Employers and job candidates must be particularly sensitive to the potential
for discrimination in interviews. Both parties must avoid sensitive issues; Fig-
ure 10.11 presents some interviewing guidelines prepared by one state employ-
ment agency.
Testing According to Equal Employment Opportunity Commission guidelines,

test a test is any criterion or performance measure used as a basis for any employ-
Any criterion or performance ment decision. Such measures include interviews, application forms, psychologi-
measure used as a basis for an
employment decision cal and performance exams, physical requirements for a job, and any other de-
vice that is scored and used as a basis for selecting an applicant.29 All tests used
for screening should attempt to measure only performance capabilities that have
been or can be proven to be essential to successful performance of the job. 30
Regardless of the tests used, employers must avoid producing a disparate
impact—that is, creating a test that one demographic group is more likely to
perform better on than another. Employers must also ensure that each test has
validity. A test with validity is a predictor of future performance on a specific
job. A person receiving a high score on a valid test will be able to perform the
related job successfully. Those who perform poorly on the test would perform
poorly on the job. If test performance does not correlate to job performance, the
test is probably invalid.
assessment center Assessment centers specialize in screening candidates for managerial posi-
A place where candidates are tions. Tests administered at assessment centers attempt to analyze a person’s
screened for managerial posi-
tions, which usually involves ability to communicate, decide, plan, organize, lead, and solve problems. The
extensive testing and hands-on testing techniques used include interviews, in-basket exercises (tests that pre-
exercises sent a person with limited time to decide how to handle a variety of problems),
group exercises intended to uncover leadership potential and the ability to work
with others, and a variety of hands-on tasks. The assessments usually last sev-
eral days and take place away from the usual job site. Many large companies, es-
pecially Japanese employers, use assessment centers to determine who will make
it into a company or up its corporate ladder. The results from assessment centers
are usually more accurately predictive than paper-and-pencil exercises that as-
sess managerial ability.
In-Depth Interview An in-depth interview is almost always conducted by the

person or persons for or with whom the applicant will work if hired. The goal
of an in-depth interview is to determine how well the applicant will fi t into the
organization’s culture and the subsystem in which he or she would work. Eaton
Corporation, for example, screens its applicants to be certain they will be will-
ing to share authority. In-depth interviews may or may not be structured. They
can be used to relay information specifically related to the job and its environ-
ment, as well as to talk about benefits, hours, and working conditions. Appli-
cants who have passed through the initial screenings and progress to in-depth
Figure 10.11 Employment application forms and interviews: Potentially discriminatory inquiries
The best general guideline to follow on employment application forms and in interviews is to ensure that informa-
tion elicited relates to qualifi cations for effective performance on the job. The topics listed in bold in this fi gure are
especially sensitive.
Age? Date of birth? In general, asking whether a candidate is under 18 or over 70 is permissible.
Arrests? Since an arrest is no indication of guilt and because, proportionally, minorities are arrested more than
those in other segments of the population, questions about arrests are probably discriminatory. Such an inquiry is
prohibited by the Illinois Department of Human Rights.
Convictions (other than traffic violations)? Military record? Questions about convictions are generally inad-
visable, though they may be appropriate for screening candidates who have been convicted of certain offenses
and are under consideration for certain kinds of jobs. Questions about less-than-honorable military discharges are
likewise inappropriate unless the job involves security issues. In general, a candidate can be asked what branch
of service he or she served in and what kind of work the candidate did. If information about convictions or military
discharge is necessary, exercise care in how it is used; avoid possible discrimination.
Available for Saturday or Sunday work? Although knowing when employees are available to work is important,
a question about availability on certain days may discourage applicants from certain religious groups. If business
requirements necessitate such a question, indicate that the employer will make an effort to accommodate the reli-
gious needs of employees.
Age and number of children? Arrangements for child care? Although the intent of these questions may be to
explore a source of absenteeism or tardiness, the effect can be to discriminate against women. Do not ask ques-
tions about children or their care.
Credit record? Own a car? Own a home? Unless the person hired must use personal credit, a personal car, or
do business from a home he or she owns, avoid these questions. They could discriminate against minorities and
women.
Eyes? Hair color? Eye and hair color are not related to job performance and may serve to indicate an applicant’s
race or national origin.
Fidelity bond? Since a bond may have been denied for an arbitrary or discriminatory reason, use other screening
considerations.
Friends or relatives? This question implies a preference for friends or relatives of employees and is potentially
discriminatory because such people are likely to reflect the demography of the company’s present workforce.
Garnishment record? Federal courts have held that wage garnishments do not normally affect a worker’s ability
to perform effectively on the job.
Height? Weight? Unless height or weight relates directly to job performance, do not ask about it on an application
form or in an interview.
Maiden name? Prior married name? Widowed, divorced, separated? These questions are not related to job
performance and may be an indication of religion or national origin. These inquiries may be appropriate, however, if
the information gained is needed for a preemployment investigation or security check.
Marital status? A federal court has held that refusal to employ a married woman when married men occupy simi-
lar jobs is unlawful sex discrimination. Do not ask about an applicant’s marital status.
Sex? State and federal laws prohibit discrimination on the basis of sex except where sex is a bona fi de occupa-
tional qualification necessary to the normal operation of business.
NOTE: If certain information is needed for postemployment purposes, such as in the administration of affirmative
action plans, the employer can obtain it after the applicant has been hired. Keep this data separate from data used
in career advancement decisions.
Source: Illinois Department of Employment Security

interviews need the endorsement of the person for whom they will work. With-
out this person’s commitment to the success of the new hire, the applicant’s fu-
ture at that fi rm is in doubt. As is the case with application forms and prelimi-
nary interviews, interviewers must take care to avoid topics that could lead to
accusations of employment discrimination.
Reference Checks Since September 11 (9/11/01), employers are conducting

more rigorous reference checks. “In some cases, employers may look at credit
reports, civil court records, driving records, workers’ compensation claims and
criminal records going back 10 or more years. Some are conducting background
checks on current employees as well as new hires.” 31
Checking an applicant’s past can present problems. First, employers must
avoid background checks that could be discriminatory. Checks of credit history
and arrest records, for example, are discriminatory. Second, checking references
can be difficult because most former employers refuse to cooperate. They may
avoid saying anything negative for fear of a defamation-of-character lawsuit
by the ex-employee. Background checks must comply with the Fair Credit Re-
porting Act. “The employer must obtain consent for a check, and if a company
wants to check a current employee, they must get permission from the employee
at the time they intend to do the investigation. The employer must provide the
employee with the results of the check.” 32
David Blumenthal, who owns Flash Creative Management, a small com-
pany focused on information technology, provides an interesting twist to refer-
ence checking. He requires applicants to “call his references (most of whom are
customers) in order to really understand what kind of company they are try-
ing to enter.” Why? Blumenthal believes that by doing so, job candidates will
truly “understand his commitment to customer service and what he expects of
employees. . . . Blumenthal asks his customers for their opinions of prospective
hires. . . . Would the customer feel comfortable working with that applicant?” 33
Physical Exam Employers use physical exams and medical histories to prevent
insurance claims for illnesses and injuries that occurred prior to employment.
Physical exams also detect communicable diseases and certify that an applicant
is physically capable of performing his or her job. If the job description cites
physical demands, they must be valid. According to the Americans with Disabil-
ities Act, employers must make reasonable accommodations for the physically
impaired and not use physical barriers as an excuse for not hiring.
Offer of Employment At this point in the selection process, the manager or

team offers the job to the top-rated applicant. This step may involve a series of
negotiations about salary or wages, work schedule, vacation time, types of bene-
fits desired, and other special considerations. With the diversity of today’s work-
force, an employer might have to accommodate an employee’s disability, make
time for him or her to get children off to school or be at home when they return,
or to arrange for day care. Federal law requires that within 24 hours from the
time of hiring, the new employee must furnish proof of U.S. citizenship or the
proper authorization needed to work in the United States as a legal alien.
Orientation
The previous steps in the selection process have done much to familiarize the
newcomer with the company and the job. What the new hire needs now is a
warm welcome so he or she can begin contributing as soon as possible. The new-
comer needs to be introduced to his or her workstation, team, and coworkers.
Managers and coworkers should answer the new employee’s questions promptly
and openly. Someone should explain work rules, company policies, benefits, and
procedures and fill out the paperwork necessary to get the new person on the
payroll. All employee assistance programs should be explained, and the new
hire should be told how to take advantage of them.
All this can be done in stages and by several different people. Human re-
source specialists may handle the paperwork; team members or a supervisor
may take charge of introductions to the work area and coworkers. All equip-
ment, tools, and supplies that the newcomer needs should be in place when he or
she reports for work.
A new employee’s fi rst impressions and early experiences should be realistic
and as positive as possible. Orientation is the beginning of a continuing social- orientation
ization process that builds and cements employees’ relationships, attitudes, and Introducing new employees to
the organization by explaining
commitment to the company. Orientation should be thoroughly planned and their duties, helping them meet
skillfully executed. their coworkers, and acclimat-
ing them to their work
environment
Training and Development

Training teaches skills for use in the present and near future. Development fo-
cuses on the future. Both involve teaching the particular attitudes, knowledge,
and skills a person needs. Both are designed to give people something new, and
both have three prerequisites for success: (1) Those who design training or devel-
opment programs must create needs assessments to determine what the content
6
Explain the differences
and similarities between
training and development
and objectives of the programs should be; (2) the people who execute the pro- training
grams must know how to teach, how people learn, and what individuals need to Giving employees the knowl-
edge, skills, and attitudes
be taught; and (3) all participants—trainers, developers, and those receiving the needed to perform their jobs
training or development—must be willing participants.
In most U.S. businesses, training and development are continual processes.
According to the American Society for Training and Development (ASTD) re-
search report, Training for the Next Economy: An ASTD State of the Indus-
try Report, total training expenditures on a per-employee basis were $761 in
2001. Expenditures were 1.9 percent of annual payroll, with 78 percent of eli-
gible employees receiving training. Total training hours per employee averaged
23.7 hours. 34
Purposes of Training
Training has five major aims: to increase knowledge and skills, to increase moti-
vation to succeed, to improve chances for advancement, to improve morale and
the sense of competence and pride in performance, and to increase quality and
productivity. To understand just how important training is and will be, consider
the following quote from U.S. Secretary of Labor, Elaine L. Chao, in her report
on the American workforce.
Our economy is making an unprecedented transition into high-skilled,
information-based industries. This has created a disconnect between the
jobs that are being created and the current skills of many workers. 35
Today’s corporate emphasis on downsizing and flattening hierarchies only
leads to greater efficiency and customer satisfaction when it is accompanied by
redesigning organizational processes. If it is otherwise, all that will happen is

that the same amount of work must be done by fewer people, who will quickly
become stressed out and overburdened.
Reengineering the right way inevitably means “better technology, better
processes, and fewer, better workers. The ideal: technology that actually helps
workers make decisions, in organizations that encourage them to do so. 36 Mov-
ing to open-book management and empowering workers, however, means pre-
paring people for these changes through training. Also, since technology keeps
changing, both workers and managers need to continually train to become and
remain technically competent.
Technically competent, multiskilled workers are the nucleus of both tempo-
rary and permanent, empowered cross-functional teams that are so pervasive
today. Before people can function effectively in team environments; however,
team members, team leaders, and team facilitators need various types of train-
ing to gain the skills, knowledge, and attitudes necessary for teaming.
Challenges of Training
Findings from the U.S. Department of Labor indicate that more than 20 percent
of America’s workforce has serious problems with basic literacy skills (see Fig-
ure 10.12). 37 For this reason, many fi rms need to conduct remedial training so
that workers can cope with job demands and prepare themselves for positions of
greater responsibility.
Figure 10.12 Workers aren’t ready for tomorrow’s jobs
Source: U.S. Department of Labor
Source: From “Meeting the Challenge of Tomorrow’s Workplace,” in CEO Perspectives, an online supplement to Chief Executive, August/
September 2002. Reprinted with permission.
One answer to language and illiteracy problems is job redesign. The rede-
signed jobs avoid, as much as possible, the need to rely on English and math.
“Some warehouses use computers with speech capability to tell forklift opera-
tors who cannot read where they should go in the warehouse. Some construc-
tion fi rms rely on portable computers with touch-activated display screens that
allow workers to record their reports by touching appropriate pictures on the
screens.” 38
Another challenge is America’s increasingly diverse workforce, which, by the
year 2000, was 25 percent. In the culturally diverse workforce of today, employ-
ees often need to improve their ability to handle English, to gain an appreciation
of the organization’s diverse cultures, and to learn how to cope with the many
changes that occur on the job, such as new technologies, methods, and duties.
Immigrants, many highly educated in their home countries, bring motiva-
tion and skills to the workplace. They also bring cultural values and norms that
may make it difficult for them to fi nd well-paying jobs. Aside from their lan-
guage difficulties, their views about the value of time, the relative importance of
work and family, and how people should interact at work, may not mesh with
those of the dominant culture or the current mix of cultures.
Techniques of Training
A company can train employees in various places. A trainee can be sent to a job
site, a corporate training center, a college classroom, or various workshops, sem-
inars, and professional gatherings. When the employer does training in house, it
commonly takes the following forms:
• On-the-job training (OJT). In this approach, an employee learns while per-
forming the job. Training proceeds through coaching or by the trainee ob-
serving proficient performers and then doing the work. Apprenticeships and
internships are on-the-job training programs.
• Machine-based training. In this technique, trainees interact with a com-
puter, simulator, or other type of machine. The environment is usually con-
trolled and the interaction is one-on-one. The trainees proceed at their own
pace or at a pace set by the training equipment.
• Vestibule training. This system simulates the work environment by provid-
ing actual equipment and tools in a laboratory setting. The noise and dis-
tractions of a real work area and the pressure of meeting production goals
are absent, so the trainee can concentrate on learning.
• Job rotation. In a job-rotation program, trainees move from one job to an-
other. The temporary assignments allow them to learn various skills and ac-
quire an awareness of how each job relates to others. In the process, trainees
become more valuable because they develop the flexibility to perform many
tasks. Internships utilize this form of training. (Job rotation is also used as a
development technique.)
• Internet-based training. In this technique, training is delivered over the
Internet. The trainees proceed at their own pace or at a pace set by the
instructor.
Regardless of the techniques used, training must be realistic. It must teach
what is necessary in ways that can be applied directly to the work setting once
training ends. Progress must be monitored to determine how well trainees are
mastering the material.
Purposes of Development
development Development is a way of preparing someone for the new and greater challenges
Efforts to acquire the knowl- he or she will encounter in another, more demanding job. Workers seek devel-
edge, skills, and attitudes
needed to move to a job opment opportunities to prepare for management positions; supervisors need
with greater authority and development to prepare to move into middle management. All development is
responsibility really self-development. Without a personal commitment, development cannot
occur. People can be pressured into training just to keep their jobs, but develop-
ment, when offered, can be rejected.
Employees cannot depend on their employers for development opportuni-
ties. Small companies cannot afford it, and many large employers will not pay
for development when it is not directly related to an employee’s current job or
career track.
Techniques of Development
Development techniques include job rotation, sending people to professional
workshops or seminars, sponsoring memberships in professional associations,
paying for an employee’s formal education courses, and granting a person a
sabbatical (leave of absence) to pursue further education or engage in commu-
nity service. An employee should regard a company-sponsored program as a re-
ward and as a clear statement about his or her worth to the company. Such pro-
grams are conduits through which workers can gain prestige, confidence, and
competence.
Development efforts should never end; indeed, they can be part of a daily
routine. By reading professional journals and business publications regularly and
by interacting with experts at professional meetings, employees can help keep
themselves up to date. Another approach to development involves volunteering
for difficult assignments. Meeting tough challenges encourages a person to ex-
pand his or her abilities.
Mentoring is another form of development that can be extremely significant.
Mentors are professionals who are one or two steps above a person in his or her
profession. Mentors can come from a person’s current environment or from an-
other organization. Whatever their affiliation, mentors are willing to share ex-
periences and give competent advice about handling advancement opportunities,
company politics, and self-development.
Performance Appraisal
7
Discuss the purpose of a
performance appraisal
performance appraisal
In most organizations, some assessment of job performance takes place every
day, at least informally. When results for a given period are summarized and
shared with those being reviewed, performance appraisal becomes a formal,
structured system designed (in line with legal limits) to measure the actual job
performance of an employee by comparing it to designated standards. These
A formal, structured compari- standards are introduced and reinforced in the selection and training processes.
son between employee perfor-
mance and established quantity Purposes of Performance Appraisal
and quality standards
Most organizations use appraisals to
• Provide feedback about the success of previous training and disclose the need
for additional training
• Develop individuals’ plans for improving their performance and assist them
in making such plans
• Determine whether rewards such as pay increases, promotions, transfers, or

commendations are due or whether warning or termination is required
• Identify areas for additional growth and the methods that can be utilized to
achieve it
• Develop and enhance the relationship between the person being evaluated
and the supervisor doing the evaluation
• Give the employee a clear understanding of where he or she stands in rela-
tion to the supervisor’s expectations and in relation to the achievement of
specific goals
Company policy establishes the frequency and form of the appraisal. What-
ever form evaluations take, managers should provide daily feedback to an em-
ployee about performance. The employee’s team members should do the same. If
feedback is continual, the formal annual or semiannual performance appraisal
will contain no surprises.
Components of Appraisal Systems

Performance appraisal systems include three major components:
• The criteria (factors and standards) against which the employee’s perfor-
mance is measured. Criteria could include quality of work, efforts at im-
provement, specific attitudes, and quantity of output.
• The rating that summarizes how well the employee is doing.
• The methods used to determine the ratings. Methods could involve specific
forms, people, and procedures.
Different personalities, jobs, organizations, and subsystems call for differ-
ent criteria, ratings, and methods. According to Susan Resnick-West, coauthor
of Designing Performance Appraisal Systems, the major predictor of the effec-
tiveness of a performance system is whether it is tailored for individuals. Factors
that system designers should consider include task competency, previous experi-
ence, educational levels, and individual preferences. 39
Appraisal systems can be classified as subjective or objective. Subjective sys-
tems allow raters to operate from their own personal points of view. Raters may
be allowed the freedom to create factors, define what each factor means, and
determine the employee’s proficiency in each category. Figure 10.13 shows how
Figure 10.13 Subjective performance appraisal system
Excellent Good Fair Poor
Time Management ✔
Attitude ✔
Knowledge of Job ✔
Communication ✔
one rater uses a simple matrix of four categories—Time Management, Attitude,

Knowledge of Job, and Communication—and the proficiency categories Excel-
lent, Good, Fair, and Poor. What do these words mean? How is the rater defin-
ing each? In comparison to another person or to an ideal? Defi nitions used by
one rater using this form may vary from those of another. Worse, the evalua-
tor’s stereotypes of and prejudices against an employee may become factors in
the evaluation. Subjective methods and forms are difficult to justify when faced
with accusations of discrimination. An employer should make every effort to
keep subjectivity out of ratings.
Objective performance appraisals attempt to remove rater biases. Criteria
are clearly defi ned and shared with the employee well in advance of the actual
rating. Figure 10.14 shows just how concrete standards can be. An objective ap-
proach causes little confusion about the factors used for evaluation.
Appraisal Methods
Four appraisal methods dominate current practice: management by objectives,
behaviorally anchored rating scales, computer monitoring, and 360-degree feed-
back. After a brief look at each type, this chapter will examine the legal con-
straints on all rating methods.
Management by Objectives Recall from Chapter 6 that a management by

objectives (MBO) system requires a manager and subordinate to meet periodi-
cally to agree on specific performance goals for the subordinate over a fixed pe-
riod. At the end of that period, an employee working under MBO is evaluated in
regard to the number of goals met, how effectively and efficiently each one was
achieved, and the growth that took place during the effort. Evaluators take into
account the difficulties that the employee had to overcome to reach those goals.
Behaviorally Anchored Rating Scales BARS, or behaviorally anchored rat-

ing scales, identify specific behaviors that correspond to different levels of per-
formance. Each behavior corresponds to a numeric rating. Figure 10.14 illus-
trated a behaviorally anchored rating scale. The employee’s overall rating is the
sum of the points earned in each category.
Computer Monitoring A computer monitoring system tracks an employee’s

performance as it is taking place. The performance of those who work with
computers or computerized equipment can be evaluated in terms of the amount
of time their machines are operating productively, the number of keystrokes per
minute, or total output. Managers can compare the ratings of various employ-
ees in similar jobs and rank workers according to productivity. Performance
averages can be used by managers to set or confi rm existing standards. Retail-
ers, banks, insurance companies, telephone companies, and transport fi rms use
computer monitoring as one objective measure of employee performance.
360-Degree Feedback Feedback is sought from all or most of the constitu-

encies with which an employee has contact, particularly coworkers and custom-
ers. The goal of 360-degree feedback is to increase employees’ self-awareness so
that they can improve their work performance. This is also known as multirater
feedback, multisource feedback, full-circle appraisal, and group performance
review.
Figure 10.14 Portion of an objective performance appraisal system
PERFORMANCE ASPECT RATING

1 2 3 4 5
1. SELF-IMPROVEMENT Has no interest Has limited interest Has demonstrated Has shown extra Is very inquisi-
Consider the desire in learning in expanding job interest in addi- effort to learn tive concerning
to expand current additional assignments. Has tional assignments. additional duties. all phases of
capabilities in both duties. little interest in Has shown some Has undertaken job-related
depth and breadth. preparing for interest in and advancement assignments.
❑ No opportunity advancement. preparation for preparation. Has undertaken
to observe. advancement. advancement
preparation.
2. ATTENDANCE Excessively Frequently Occasionally Rarely Almost never
Consider the absent absent absent absent absent
regularity with
which the
employee
reports to work.
3. PUNCTUALITY Excessively Frequently Occasionally Rarely Almost never
Consider number tardy tardy tardy tardy tardy
of occasions late.
❑ Punctuality is
not essential
to this job.
4. WORK PLANNING Unsystematic, Fair on routine, Effi cient under Skillful in Exceptional
Consider how unable to but unable to normal condi- organizing and effi ciency.
the work load is organize organize tions. Gives pri- planning work. Keeps
planned and work load. variations ority to impor- Meets priority items
organized for effectively. tant jobs. emergencies in proper
maximum promptly. perspective.
efficiency.
❑ No opportunity
to observe.
Legality of Appraisals
An analysis of U.S. Supreme Court rulings over the past 25 years reveals that
performance appraisals are likely to be illegal if any of these situations hold:
• The instruments used are invalid.
• Standards are not job related and objective (quantifiable and observable).
• The results of the process have a disparate impact on women, the disabled,
or minorities.
• The scoring method is not standardized.
• People who are performing similar jobs are evaluated differently, using dif-
ferent forms, factors, or processes.
• Evaluative criteria are not developed according to EEOC guidelines.
• Employees are not warned of declining or substandard performance.
• The evaluation is not based on the employee’s current duties.
Also, women, disabled people, and minorities in a proportion that is rep-
resentative of the community at large should fill the ranks of performance
appraisers.
Raters must be trained to carry out performance appraisals consistently and
in accordance with legal requirements. Lawrence H. Peters, Professor of Man-
agement at Texas Christian University, gave practical advice to raters and ratees:
“It’s hard to remember what the employee did 12, 11, or 10 months ago. It’s im-
portant for managers to keep information as it occurs, and if you don’t, stop
and take time to collect your thoughts before the performance review. Employ-
ees should do the same.” 40 In addition, raters need to reserve adequate facilities
and time to review appraisals with subordinates.
Implementation of Employment Decisions
8
Describe the four primary
employment decisions
As you recall, employment decisions include decisions about promotions, trans-
fers, demotions, and separations (voluntary or involuntary). These changes are
influenced by appraisals and by how an organization recruits, hires, orients, and
trains. All employment decisions mean change—change that has a ripple effect
throughout an organization’s subsystems and its ability to interact with the ex-
ternal environment.
Promotions
promotion Promotions are job changes that lead to higher pay and greater authority and
A job change that results in in- that reward devoted, outstanding effort. They serve as incentives as well, offer-
creased status, compensation,
and responsibility ing the promise of greater personal growth and challenges to those who seek
them. Employees usually earn a promotion by exhibiting superior performance
and going beyond that which is expected.
Sometimes past performance is not the sole criterion for a promotion. Af-
fi rmative action requires that underrepresented groups such as women and mi-
norities be better represented at all levels within an organization. Therefore, af-
fi rmative action goals may dictate that members of these groups be given special
status in hiring and promoting decisions. In many union agreements, seniority is
the most significant factor influencing promotion decisions.
Transfers
Opportunities for promotion are not as available now as they were only a few
years ago. The leaner, flatter management structures of today and the trend to-
ward teams mean there simply are not a large number of openings. According to
Marilyn M. Kennedy, Editor of the newsletter Kennedy’s Career Strategist, trans- transfer
fers—lateral moves that require new skills—may be a company’s only means of Moving an employee to a
job with similar levels of
retaining talent: status, compensation, and
responsibility
Companies that have restructured have taken steps to make sideways
moves more palatable. RJR-Nabisco’s Nabisco Foods Group (in New
Jersey) recently added tiers to its pay scales so that workers who move
sideways have a better chance of getting pay raises instead of cuts. Corn-
ing Inc., which has long wooed recruits by promising them they can
“change careers without changing companies,” recently began offering
5 percent raises to managers who make lateral moves. The policy comes
on the heels of restructuring. 41
For years companies have used lateral moves in attempts to train and de-
velop employees. Job rotation is one way of exposing people to different aspects
of an operation and helping them see the big corporate picture. Transfers can
help people advance by moving them from an area where few opportunities ex-
ist to an area that offers a less-congested career track.
Demotions
A demotion is a reassignment to a lower rank in an organization’s hierarchy. In demotion
today’s business climate, demotions are rarely used as punishment. (Ineffective A reduction in an employee’s
status, pay, and responsibility
performers are fi red, not retained.) Demotions are used to retain employees who
lose their positions through no fault of their own. Some people prefer taking a
lower-status, lower-paying job to the alternative of being laid off. Others choose
a demotion to decrease stress, allow them more freedom to pursue outside inter-
ests, or meet challenges such as having to care for children or an elderly parent.
Some companies have established what have become known as mommy
tracks—temporary career interruptions for parents. Mommy tracks allow a par-
ent to take care of children from pregnancy through the preschool years. By
offering adjustments such as part-time work, a mix of telecommuting and in-
house office hours, and flexible work schedules, companies help valued employ-
ees cope with new interests and demands on their time. As Joan Beck notes,
however, some of these arrangements have drawbacks:
Unfortunately, many employers still exact a steep price for non-standard
work arrangements. Part-time work typically pays low wages and usu-
ally includes few if any benefits. Even women at middle-management
levels or on fast professional tracks find that cutting back on work hours
and trying other strategies to eke out more time for family cuts chances
for promotion. 42
Separations
A separation, the departure of an employee from an organization, may be vol- separation
untary or involuntary. Voluntary separations include resignations and retire- The voluntary or involuntary
departure of employees from a
ments. Involuntary separations include layoffs and fi rings. Employers sometimes company
encourage voluntary separation by offering incentives to encourage employees
348
GLOBAL APPLICATIONS Part 4 Staffing
a g es
The End of Japan’s Lifetime
Get t y Im
Employment
In the past, three principles dominated Japan’s employ- wide to find supply routes that are faster and cheaper.
ment system: company unions, pay for seniority, and Furthermore, foreigners are now allowed to invest in long-
lifetime employment. The latter was a result of informal shielded sectors of the Japanese economy. When former
industry agreements formed after World War II, which re- General Electric Chairman Jack Welch knew that GE could
stricted competition for labor by companies in the same invest in Japan, he said, “It’s an abuse of management
industry. One could not hire another’s employees. It was rights to try to keep a weak business going in the name of
not so much company loyalty that kept Japanese workers lifetime employment. It’s better for the employees to leave
from job-hopping; it was the lack of opportunity for an- the weak business and have it merged with a stronger
other job in their industries. company” (Larimer).
In the 1980s, Japan became the world’s second-largest
• In Japan, an employee can no longer expect a job for
economy. “Then the bubble burst in 1991, and stock and
life. Do you think that the changes in the Japanese em-
real estate markets tumbled. To recover, leaders jolted
ployment systems will encourage more people to start
Japan’s entrenched corporate culture, giving companies
their own business? Why or why not?
new freedom to replace “lifetime employment” with part-
time and contract laborers” (Osnos). Sources: Evan Osnos, “Behind Japan’s growth lies economic divide,”
The Dallas Morning News, May 7, 2006, p. 36A; Tim Larimer, “Great
Technology and the global economy continue to change News: No More Jobs for Life,” TIME Asia, November 1, 1999.
Japan’s system. The Internet allows manufacturers world-
to retire early. In 2006, GM offered early retirement to about 113,000 employ-

ees to speed up its plan to cut 30,000 jobs in North America by 2008.43 Invol-
untary separations seem to be on the rise in U.S. business. Layoffs due to declin-
ing business, personal performance, or company bankruptcies (as in the cases
of Enron and WorldCom) have cost millions of Americans their jobs. See this
chapter’s Global Applications feature for a discussion of Japan’s custom of life-
time employment.
Layoffs Although downsizing can make companies more competitive, it can

also undermine the loyalty of employees threatened with layoffs. According
to Sanford M. Sherizen, a Massachusetts-based computer security consultant,
downsizing leads to more responsibility for fewer people, which means less time
to devote to the security of information systems. An insecure system practically
invites a disgruntled employee to destroy data or leave behind a computer virus
that will sabotage the system after the employee has left.44 An information secu-
rity consultant, William H. Murray, says that the best way to protect a company
against sabotage is to take steps to prevent employee disaffection—to treat those
who must leave as well as possible before the layoff and compensate remain-
ing employees fairly. According to Murray, most revenge comes from those who
conclude that their contributions are unrecognized. People need to know they
are appreciated day by day.45
As alternatives to layoffs, many companies are implementing other strat-
egies. Some have enacted hiring freezes, which allow normal attrition to re-
duce the workforce. Other strategies include job sharing, restricting the use of
overtime, retraining and redeploying workers, reducing hours, and converting
managers to paid consultants. Southwest Airlines hasn’t had a layoff in its his-
tory. Southwest managers fi nd useful employment for displaced workers by rely-
ing on moves and reassignments.
Southwest Airlines managers and managers everywhere have good reasons
to avoid layoffs. Layoffs can be extremely expensive. Processing paperwork, clos-
ing facilities, and paying severance costs and higher unemployment-insurance
premiums can cost thousands of dollars. The psychological costs are high as well.
Those left behind after layoffs are fearful and insecure; those laid off are more
likely than employed people to experience family problems, suffer divorce, or
commit suicide.
Exit Interviews Exit interviews are voluntary discussions between managers

and employees who are being laid off or who are leaving voluntarily. Because
the costs of laying off and replacing workers are high, a manager should use exit
interviews to fi nd out about factors that could cause employees to leave. Once
the manager identifies a problem, he or she should fi x it. In its Study of Reten-
tion Practices, the Society for Human Resource Management (SHRM) found
that nine out of ten respondents conduct exit interviews.46
The study revealed that more than half of those that conduct exit inter-
views have initiated changes, including reviewing salary structures, form-
ing employee satisfaction/retention committees, establishing alternative
work schedules, providing more training, reimbursing employees for ex-
penses such as cell-phone usage, instituting casual-dress policies and in-
troducing bonus plans.
Managers should realize, however, that exit interviews have a limitation. Be-
cause department employees may not wish to leave a negative impression, they
may not be totally open and honest. The fact that exit interviews do not reveal
a cause for employee dissatisfaction does not necessarily mean that a cause does
not exist.
Compensation
Compensation includes all forms of fi nancial payments to employees: salaries
and wages, benefits, bonuses, gain sharing, profit sharing, and awards of goods
or services. The trend today is to offer increases in compensation in response to
increases in performance that add value to the organization, its services, or its
products. Increasing compensation is a way of retaining employees who have
9
Determine the purposes
and components of
compensation
proved themselves valuable. This response makes sense. As employees become compensation
more valuable, losing them becomes more costly. All forms of financial payments
to employees. Compensation
includes salaries, wages, and
Purposes of Compensation benefits
Compensation has three primary purposes: to attract, help develop, and retain
talented performers. The level of compensation offered by a fi rm can either in-
crease or decrease a company’s attractiveness to job seekers. Compensation
should encourage workers to continually improve their performance and to make
themselves more valuable, both to themselves and to their employers. Also, com-
pensation must anchor valued employees to the company, discouraging them
from leaving to fi nd other employment. People who consider their compensation
fair and adequate feel that they are being treated with recognition and respect.
They feel that the organization is giving them a fair return on their investment of
time, energy, and commitment. Finally, compensation should give employees a
sense of security, freeing them to unleash their full energies without the distrac-
tion that comes with the inability to meet financial needs.
Factors Influencing Compensation

When designing a compensation package for employees, managers should be
concerned about being equitable, meeting legal and strategic requirements, and
linking compensation philosophy to various market factors. When certain types
of workers are in short supply, managers may have to offer premium compensa-
tion to attract or hold them. Similarly, managers who decide to make their orga-
nization a leader in terms of the compensation it offers will probably be able to
attract and keep the best employees.
The U.S. Fair Labor Standards Act, passed in 1938 and amended many
times, relates to the payment of wages and overtime to workers under 18 years
of age. Other federal laws address the level of wages that must be paid to work-
ers in companies doing business with the federal government. Some local and
state laws affect compensation systems, and union contracts set wages and re-
strict compensation decisions in the organizations that are party to them.
Wages and Salaries

To determine the worth of each job and establish a compensation package for
job evaluation each that is fair in relation to all jobs, organizations use a process called job eval-
A study that determines the uation. Human resource compensation specialists usually do job evaluations. To
worth of a job in terms of its
value to an organization complete the evaluation process, the specialist works with a manager with fi rst-
hand knowledge of the job and the employee or employees who hold the job.
One common job evaluation method involves grouping jobs by type and then
choosing factors common to each type. For example, two groups of jobs that job
evaluation specialists often defi ne are manufacturing jobs (wage jobs) and sales
jobs (salary jobs). An evaluation might involve examining each type of job in light
of the responsibility, education, skills, training, experience, and working condi-
tions that are common to it. Then the evaluator assigns various levels within each
factor and assigns point values to each level as measures of achievement.
To illustrate this process, suppose the job being analyzed is that of an indus-
trial products sales professional. The evaluator chooses experience as an evalu-
ation factor and defi nes experience as number of years in the selling profession.
The levels for this factor might be one year or less of experience, one to three
years of experience, three to five years of experience, and more than five years
of experience. By assigning points to each level, the specialist shows the relative
value the organization places on each. If the top level is worth ten points and the
previous one is worth five points, the organization is saying that more than five
years of experience is twice as valuable as three to five years of experience.
Once all jobs have been evaluated, they can be grouped by total points into
what are usually called job grades, or classifications. Evaluators then rank, by
point total, jobs within each grade. For example, all jobs with point totals be-
tween 0 and 200 might be in the same grade. What emerges is a “job ladder”
that shows jobs with the fewest total points at the bottom. At the top are the
jobs with the most points. Evaluators assign a salary range to jobs in the same
grade. Figure 10.15 shows the result of a typical job evaluation.
Job evaluation requires skill, up-to-date job descriptions and specifications,
knowledge, and ample time. Many companies conduct pay surveys within their
Figure 10.15 Result of a typical job evaluation
$800
Job Grade
IV
Job Grade
III
Dollars per Week 600
Job Grade
II
Job Grade
400 I
200
0 200 400 600 800 1,000

Po i n t s
industries as a base for beginning the job evaluation process or as a substitute for
it. Pay surveys show what competitors pay for comparable jobs. These rates of
pay may be available through industry and trade associations as well as from the
federal government. Not all jobs must be compared with the survey results; the
evaluator compares only those that are representative of their grades or classes.
Compensation for the other jobs is established in relation to the jobs that are
compared.
In the fi nal analysis, the minimum and maximum compensation assigned
to a job are determined by an organization’s ability to pay, market conditions
for specific types of jobs, and the organization’s strategies and philosophy about
employee compensation.
Benefits
Each year employers spend about an additional 40 percent of their payroll costs
on employee benefits—the additional or indirect compensation employees re- benefi t
ceive beyond their direct compensation (wages and salaries). Benefits can be di- Legally required or voluntary
compensation provided to em-
vided into two general types: legally required and voluntary. The fi rst type in- ployees in addition to their sala-
cludes Social Security, unemployment compensation, and worker’s compensation ries or wages
insurance. The second type includes variable work schedules, life and health in-
surance, pension and savings plans, payment for hours not worked (sick days),
leaves of absence, profit-sharing and bonus plans (usually one-time payments),
and employee assistance programs (EAPs).
EAPs have gained in popularity over the years. Most can be classified as
health and wellness programs that deal with either prevention of health-related
problems or coping with chronic work-related problems. Stop-smoking clinics,

weight-loss programs, and exercise facilities are examples of prevention efforts.
Stress-reduction workshops, day-care facilities, and fi nancial and psychological
counseling concentrate on coping with work-related problems.
In the 1990s the Highsmith Company, a Wisconsin-based provider of library
products, saw its health-related expenses climbing. Its 240 employees exhibited
a variety of unhealthy conditions (high blood pressure, smoking, high choles-
terol levels) along with work stress and work-related injuries. Then, the com-
pany created a variety of EAPs—“on-site exercise, weight control, nutrition, and
smoking-cessation classes”—under its “Wellpower Plus program,” which have
paid for themselves through savings on health insurance premiums and other
health-related expenses. According to the company’s President, Duncan High-
smith, “Qualitatively, we have much more energetic and self-reliant employees,
and that’s the best investment.” 47
An organization offers benefits, like other forms of compensation, so that
it can attract, develop, motivate, and retain talented and committed workers.
As with wages and salaries, managers plan benefits according to their organiza-
tions’ fi nancial resources and strategies and the market conditions the organiza-
tion faces. An organization should provide tailored benefits to appeal to a vari-
ety of needs for its diverse workforce. Tailored benefits can help an organization
achieve its goals; among them, developing a core of committed managers and
workers. As with wages and salaries, however, benefits must be constantly re-
viewed for their relevance and economic feasibility.
Executive Compensation
In addition to salaries and the benefits all other employees in their fi rm receive,
executives—members of top management—may also receive benefits unique to
perk their status. These benefits are called perquisites, commonly known as perks.48
A payment or benefit received Most perks are fi nancial—actual cash or goods and services that have a mea-
in addition to a regular wage
or salary surable cash value. Such items include shares of the company’s stock, stock op-
tions (rights to purchase a company’s stock at a discount), bonuses based on
overall company performance, use of a company’s airplane and regional residen-
tial suites, generous travel and lodging allowances, paid-for housing, no-interest
loans, and memberships in various clubs and associations. In recent years, dis-
cussion of “excessive” executive compensation has appeared in popular periodi-
cals and the business press.
According to a preliminary analysis by The Corporate Library, in 2005, the
average CEO of a Standard & Poor’s 500 company received $11.75 million in
total compensation.49 The average CEO made 42 times the average hourly work-
er’s pay in 1980, 85 times in 1990, and 431 times in 2004. 50
CHAPTER SUMMARY
Determine the importance of the staffing func- and efficient use of the organization’s other resources.
1 tion. Staffi ng breathes life into an organization.
It acquires and nurtures the human resources needed to
Staffi ng is every manager’s concern.
List and explain the eight elements of the
execute tasks and functions. People are the key to ev-
erything in organizations. They are the organization’s
2 staffing process.
most valuable resources. As such, they must be selected, 1. Human resource planning begins with job analysis.
trained, developed, rewarded, and retained for effective Performing a job analysis involves creating descrip-
tions and specifications of all jobs and their human provides guidelines for conducting all staffi ng activities.
qualifications. Next, an inventory of people on hand Specifically, it attempts to provide protection for em-
and their abilities to meet current and future needs ployees and groups from discrimination and in the areas
is determined. Planning also includes forecasting— of health and safety. The sociocultural environment is
attempting to predict the future human resource a collection of diverse individuals and groups, both in-
needs. Finally, forecasts are compared to the inven- side and outside an organization, that make demands
tory and needs to recruit or reduce personnel are on and contribute to it. The union environment affects
determined. some companies more than others. Union contracts gov-
ern work rules, wages, and conditions of employment.
2. Recruiting brings enough qualified people into a hir-
Wages and benefits established in some industries are of-
ing pool. Care must be taken to fi nd sufficient num-
ten duplicated or exceeded by nonunion organizations.
bers of people from all ethnic and racial groups. Ex-
isting employees must be trained and developed to Identify the four activities related to human
become eligible for future openings. 4 resource planning. In job analysis, groups of
jobs are studied to determine their basic duties and the
3. Selection involves a series of preemployment screen-
human qualities needed to perform them. A human re-
ing devices used to determine each candidate’s abil-
source inventory determines who are on board, along
ity to provide the organization what it needs. Care
with their current qualifications and future prospects.
must be taken to determine a fit with the company’s
The human resource forecast is based on both short- and
cultures and to avoid discrimination.
long-term plans and strategies for the company and its
4. Orientation includes a set of activities designed to in- various parts. Finally, a comparison is made between the
troduce and welcome newcomers to their new com- inventory and the forecasted needs to determine if con-
pany and working environments. Rights and duties traction, expansion, or keeping the status quo is the
are explained, along with the introduction of exist- correct plan to follow.
ing personnel to the new ones.
List and describe the primary screening de-
5. Training and development increase and change em-
ployee knowledge, skills, and attitudes. Training is
5 vices used in the selection process. All selec-
tion devices must be job related and validated in order
focused on the near term; development focuses on to avoid discrimination. The application provides es-
the future. Both help companies to meet their needs sential personal data—job history, education, aspira-
and make employees more valuable to both them- tions—about a person’s suitability for a particular job.
selves and their organizations. Preliminary interviews verify the data on applications
and provide an initial face-to-face encounter for both
6. Performance appraisal measures outcomes and be-
applicant and employer. Testing may include any paper-
haviors of employees against established and taught
and-pencil exercise or performance that will be used to
standards. Appraisals become the basis for rewards,
make a hiring decision. In-depth interviews are usu-
punishments, promotions, and terminations, and af-
ally conducted by the person or persons for whom and
fect nearly every employment decision made by man-
with whom the new person, if hired, will work. Refer-
agers. They provide necessary feedback, helping to
ence checks provide verification of key facts about a job
keep people motivated and focused on their most
applicant such as work history, compensation earned,
essential duties.
and successes in various positions. Physical exams help
7. Compensation includes all fi nancial and psychologi- to avoid bringing newcomers into an environment that
cal rewards and incentives provided to employees. could be injurious to their health.
Direct compensation is largely composed of wages
Explain the differences and similarities be-
and salaries. Indirect compensation includes fi nan-
cial and nonfi nancial rewards and incentives such as
6 tween training and development. Training
increases knowledge and skills, motivation to succeed,
benefits, bonuses, gain and profit sharing, leaves of
chances for advancement, morale, pride in performance,
absence, and employee assistance programs.
and quality and productivity. It is usually provided to
8. Employment decisions include transfers, promotions, keep people current in the jobs and to prepare them
demotions, layoffs, and fi rings. All have their spe- for changes to those jobs. Development focuses on pre-
cific appropriate applications and must be performed paring people for new and different positions, chal-
without discrimination. lenges, and opportunities. It also imparts skills, knowl-
edge, and attitudes. Training is usually provided by
Describe the three primary staffing environ- organizations. Development is each person’s individual
3 ments. The environments are legal, sociocul-
tural, and union. The legal environment sets limits and
responsibility and may or may not be aided by one’s
organization.
Discuss the purpose of a performance ap- Demotions are the opposite of promotions and are pri-
7 praisal. The primary purpose is to provide feed-
back on one’s performances and outputs, enabling
marily used to save good people until more appropri-
ate positions become available. Separations are volun-
rewards and needed improvement efforts to take place. tary and involuntary. Resignations and retirements are
It helps to evaluate the results of previous training and examples of the fi rst; layoffs and fi rings are examples of
to determine any additional training needs. It helps in- the latter.
dividuals and teams plan for their improvement and
Determine the purposes and components of
choose the methods they will utilize. Appraisals also
help to improve the relationships between the evaluator
9 compensation. Compensation in all its forms is
intended to help organizations attract, train, develop,
and the evaluated. People know how they are doing—
reward, and retain good people. Compensation is direct
what’s right and wrong—and the expectations for their
and indirect. Wages, commissions, piece rates, and sala-
future performances.
ries are direct because they link directly to hours or days
Describe the four primary employment deci- worked or outputs achieved. Indirect compensation in-
8 sions. Promotions lead individuals to higher levels
of responsibility, greater demands on their talents, and
cludes fi nancial and psychological rewards beyond the
preceding. Benefits include the largest segment. These in-
improvements in earnings. They are often earned re- clude such items as insurance, pay for time not worked,
wards for current performance and development efforts gain sharing, profit sharing, pensions, and employee as-
undertaken to qualify them for a new, more demanding sistance programs such as wellness programs. Psycholog-
position. Transfers are often temporary lateral move- ical rewards include satisfaction achieved through work
ments to cross train and provide additional experiences. and various alterations to one’s working schedule.
KE Y TERMS
affi rmative action equal employment opportunity recruiting
assessment center human resource manager selection
benefit job analysis separation
collective bargaining job evaluation sexual harassment
compensation orientation staffi ng
demotion performance appraisal test
development perk training
discrimination personnel manager transfer
disparate impact promotion
RE VIE W QUESTIONS
1. Why is staffi ng so important to organizations? 6. How are training and development similar? How
are they different?
2. What are the components of staffi ng, and in what
order do they occur? 7. What are the primary purposes of appraising
employees?
3. Which external environments affect the staffi ng
process most directly? How do they affect it? 8. Under what circumstances would an organization
perform each of the following: promotion, transfer,
4. What takes place under the heading of human
demotion, and separation?
resource planning?
9. What purposes do organizations try to achieve
5. What are the primary screening devices used in
through compensation? What forms can compensa-
staffi ng?
tion take?

1. Why are the concepts of equal employment opportu- 3. What kind of compensation do you think is most
nity and affi rmative action so important to organiza- important to each of the following: People five years
tions today? away from retirement? Single people in their twen-
ties? Young marrieds with their fi rst child on the
2. How would an organization recruit if it is looking
way?
for electrical engineers with a knowledge of the lat-
est technologies? If it is looking for medical techni- 4. How are you appraised in your classes? At work?
cians with at least three years of experience? What value do you fi nd in such appraisals?
Links are provided for all Internet exercises at http:// 2. Discussions of “excessive” executive compensation
plunkett.swlearning.com. have appeared in popular periodicals and the busi-
ness press. Identify a company for which you have
1. The Occupational Outlook Handbook, published
worked or for which you would like to work. What
by the U.S. Bureau of Labor Statistics, is a source
did the CEO of your company make last year? How
of career information. Each job description includes
does his/her pay package compare with that of the
Nature of the Work, Working Conditions, Employ-
average worker, a minimum-wage earner, and the
ment, Training, Other Qualifications, Advancement,
president of the United States? Briefly explain why
Job Outlook, Earnings, Related Occupations, and
you think the CEO deserves or doesn’t deserve that
Sources of Additional Information. Look at the de-
level of compensation.
scription for Human Resources, Training, and Labor
Relations Specialists and Managers. Which of these
jobs interest you? Why?

is an online database and research tool published by Monster. Add any other interesting information that you
Thomson/Gale. Most college and university librar- fi nd.
Check to see if your library subscribes to BCRC. If so, MONSTER AT A GLANCE
respected. Global Locations:
APPLICATION CASE
Nathan G. Conyers, History Maker cant strides; and/or 2) who is associated with a particu-
Nathan G. Conyers, President and Founder of Conyers- lar movement, organization or association and event or
Riverside Ford in Detroit, is a history maker. “A Histo- time that is important to the African American commu-
ryMaker, African American by descent, is a person: 1) nity” (The History Makers, About Us). Mr. Conyers
who by his/her own accomplishments has made signifi- has received numerous awards including: Outstanding
Business Leader 2000, North American Customer Ex- where. Nathan’s response? “He hired more white sales
cellence Award 1998, and Black Enterprises’s 1995 staff and managers to ‘create a comfort level for any
Auto Dealer of the Year. customer that comes in.’ He aggressively marketed his
Conyers Riverside-Ford is the oldest African Ameri- service department to downtown office workers, figur-
can-owned Ford dealership in the country. It has been ing that if they trusted him to fi x their cars, they’d even-
recognized by Ford Motor Company with the coveted tually trust him to sell them a new one” (Holly). More
North American Customer Excellence Award. Also in than half of the dealership’s managers are white. All
2000, Conyers was awarded a Jaguar Motorcar Fran- Conyers employees are constantly focused on customer
chise, only the second black-owned Jaguar franchise in satisfaction and cost control and are appraised accord-
the company’s history. ingly. Both have been driving forces behind change since
In the late 1960s, major metropolitan areas such the dealership began.
as Chicago, Los Angeles, and Detroit were racked with Nathan Conyers has resisted the temptation of
violence and racial unrest. Businesses were fleeing black moving the dealership to the wealthier suburbs. Born
neighborhoods. At this time Ford Motor Company made and raised in Detroit (a city of about 80 percent Afri-
a decision to “get more black auto dealers on board.” can Americans), Nathan has a strong commitment to his
Enter the Conyers family. With fi nancing support community, the city’s economic viability, and “to do-
from Ford, John Conyers Sr. along with his sons John Jr. ing the right thing because it’s the right thing to do.” He
and Nathan, was able to fulfi ll a lifelong dream of own- helped establish the National Association of Minority
ing a family business by investing in a Ford franchise. Automobile dealers and served as its fi rst president.
John Conyers Sr. had worked for Chrysler for many
years. Nathan was a partner in a law fi rm but left it to Questions
join his father as President of Conyers Riverside Ford 1. Why did Conyers initially diversify its staff?
in 1970. Eventually John Sr.’s five children joined the 2. What possible problems may arise in a family-
dealership, holding a variety of jobs. (The dealership owned business that provides employment for
is located near the Detroit River, close to the center of a father and his children?
the city.) 3. How is Detroit’s sociocultural environment affect-
Riding the peaks and valleys of auto sales, hasn’t ing Conyers’ management decisions?
been easy. Many African American-owned businesses
in African American neighborhoods have failed. A Ford Sources: The History Makers, Nathan Conyers, http://www
spokesperson believes that “Conyers endured by know- .thehistorymakers.com/biography/biography.asp?bioindex215&categ
oryBusinessMakers; Dan Holly, “Heads, We Win,” Black Enterprise,
ing his market, being a hands-on manager, and changing June 1995, pp. 134–136, 140; “Conyers-Riverside Ford Auto Dealer
with the times” (Holly). Receives National Business Award,” The Auto Channel, February 11,
Initially his customers were African Americans who 2000, http://www.theautochannel.com/news/press/date/20000211/
knew the Conyers family members. Whites would visit press007745.html; “Conyers Honored by Ford Motor,” The Detroit
News, May 15, 1998.
the dealership, look around, and buy their Fords else-

PepsiCo Puts People First employees worldwide. The company produces and
Whether a company employs five or five thousand peo- markets such brands as PepsiCo beverages, Frito-Lay
ple, its greatest resource is those workers. Many of to- snacks, Gatorade and Tropicana drinks, and Quaker
day’s companies view their workforces as part of their Foods. PepsiCo brand products are available in nearly
overall competitive strategy—the best people producing 200 countries and territories. But recruiting, selecting,
the best products. Human resource managers at large training, and managing more than 100,000 workers re-
fi rms such as PepsiCo may be viewed as strategic busi- quires planning to meet the career needs of so many peo-
ness partners. No longer do they simply sign paychecks, ple. To foster long-term career growth, PepsiCo offers
approve vacations, and process health benefit claims. At a variety of programs and has created its own PepsiCo
PepsiCo HR managers play an integral role in the day- Career Growth Model, which offers job opportunities to
to-day success of the business. promote employees’ knowledge and skills, and abilities
Headquartered in Purchase, New York, PepsiCo in leadership capability, functional excellence, knowing
is a global organization, with more than 143,000 the business, and critical experiences.
PepsiCo’s HR managers follow their own Human ers opportunities such as “exciting career challenges,”
Resources Competency Model, which defi nes four key “world-class training and development,” and “excellent
roles played by the HR department: compensation.” This, in essence, is PepsiCo’s social con-
tract with its employees.
• As a strategic partner, the HR department is charged
Keeping all of this in mind, consider the job of
with aligning the human resource strategy with the
Darryl Claiborne, HR Manager for regional sales at Pep-
business strategy of PepsiCo.
siCo’s Frito-Lay division. Claiborne works with Frito-
• As a change agent, the department focuses on facili- Lay’s route sales reps, who sell and deliver their products
tating and leading organization transformation and directly to retailers. Claiborne and his reps understand
change initiatives. that their success correlates directly with Frito-Lay’s
profitability. So, as an HR strategic partner, Claiborne
• As a technical functional expert, the HR department
looks for ways to help his reps manage and grow their
emphasizes mastering and driving efficiency and ef-
business. Claiborne communicates regularly with his
fectiveness in the core information and administra-
reps, on how well they are doing and where they need
tive processes.
help. He continually reengineers their routes to make
• As an employee champion, the department drives sure they can steadily increase sales. Claiborne embraces
employee satisfaction, commitment, and engagement. the company’s “Know the Business” principles, the set of
guidelines created to help managers understand the com-
Both of these models indicate a high degree of struc-
pany, its mission, and the way its employees achieve suc-
ture within PepsiCo, and the structure helps ensure that
cess. “PepsiCo—Taste the Success!” invites the company
everyone’s career, benefits, and other needs are met.
Web site. Claiborne, his route sales reps, and more than
Employees have a choice of flexible benefits. At Quaker
140,000 other employees intend to do just that.
Oats, workers may select time off for adoption, apply
for a student loan, or take a leave of absence under the
Questions
QuakerFlex benefits program. At many locations, they
1. In what ways could Darryl Claiborne be considered
may even enjoy free oatmeal in the morning!
an employee champion?
Regardless of job level or brand, PepsiCo looks
2. Why is this important to PepsiCo’s efforts to build
for the best workers to contribute to the overall perfor-
human capital?
mance of the company. “Excellent performance . . . does
3. In essence, Darryl Claiborne engages in on-the-job
not happen on its own,” writes Chairman and CEO
training as he communicates with and accompanies
Steve Reinemund on the company’s Web site. “Our peo-
his reps on their sales rounds. How is this an impor-
ple make it happen. In order to sustain this level of suc-
tant part of their effectiveness as a workforce?
cess, we need to ensure that we continue to attract, re-
tain, and develop great people in all of our businesses.”
Sources: Company Web sites, http://www.pepsico.com and http://www
At PepsiCo’s online Career Center, potential job candi- .pepsicojobs.com, accessed February 5, 2007; PepsiCo career and HR
dates will fi nd information on what the company looks materials, “Knowing the Business: Resources Guide” and “Career
for in its employees. In turn, PepsiCo offers its work- Framework: Functional Competency Model.”
BIZ FLIX VIDEO CASE

Bowfinger sequence early in the fi lm. It includes Jiff’s audition, in-
This fi lm, which brought Steve Martin and Eddie Mur- terview, and a brief look at his fi rst day at work.
phy together for the fi rst time, offers a funny look at
Hollywood fi lmmaking. Bobby Bowfi nger (Martin), What to Watch for and Ask Yourself
perhaps the least successful director in fi lms, wants to 1. Does Bobby Bowfi nger have a set of valid selection
produce a low-budget fi lm with top star Kit Ramsey criteria for fi lling the role of a Kit Ramsey look-
(Murphy). Bowfi nger’s problem: how to recruit a crew alike? Does Bowfi nger apply the criteria uniformly
and cast with almost no budget while tricking Kit into to each applicant?
appearing in his fi lm. 2. Is Jiff Ramsey a good person-job fit in the screen
Bowfi nger interviews several candidates for the Kit role of Kit Ramsey?
Ramsey look-alike role. He rejects everyone until Jif- 3. Do you predict that Jiff Ramsey will be successful
ferson (Jiff) Ramsey (also played by Murphy) auditions. as a Kit Ramsey substitute?
This scene is an edited version of the “The Look-alike”
O LIST
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LEARNING OBJECTIVES
COMMUNICATION: After studying this chapter, you should be able to:
INTERPERSONAL 1 Discuss the importance of communication in organizations
AND Diagram the communication process and label all its parts
ORGANIZATIONAL 2
List and explain the barriers to interpersonal communication
3 and suggest remedies to overcome them
Describe the uses of downward, horizontal, and upward

4 communication channels
Explain the informal communication channel known as the

5 grapevine
List and explain the barriers to organizational communication

6 and suggest remedies to overcome them
Describe the responsibilities of senders and receivers during

7 the communication process
Getty Images
American Airlines: Open Communication
American Airlines (AA), the world’s largest airline,
was on the brink of disaster in 2003. A recession Gerard J. Arpey
and the 9/11 (September 11, 2001) terrorist attacks Born: 1958, New York, New York
had slowed air travel. “By the spring of 2003, its Current Position:
business was in a tailspin, hemorrhaging money at President and Chief Executive Officer, AMR
a rate of $10 million each day” (Bustin). At that time, Corporation and American Airlines
Don Carty, Chief Executive Officer of AMR Corpo- Career Highlights:
ration, parent of AA, wanted to avoid bankruptcy 1982 Financial Analyst, AMR and American Airlines
and therefore negotiated $1.62 billion in wage con- 1983 Senior Financial Analyst
cessions from the company’s three labor unions 1985 Manager of Financial Planning and Analysis
(Bustin). Employees agreed to work harder for less 1987 Director of Airline Profitability Analysis
pay to help the company survive. However, Carty 1988 Managing Director of Financial Planning and
had hidden information from employees. American Analysis
Airlines had delayed filing with the Securities and 1989 Vice President of Financial Planning and
Exchange Commission until the union negotiations Analysis
were completed. Once the airline filed, the unions 1992 Senior Vice President of Financial Planning
found that executives were going to receive retention 1995 Chief Financial Officer and Senior Vice
packages worth millions of dollars. Employees of AA President of Financial Planning
were enraged and no longer trusted management. 2000 Executive Vice President of Operations
Carty was terminated. 2002 President and Chief Operating Officer
Gerard Arpey replaced Carty as head of Amer- 2003 President and Chief Executive Officer
ican Airlines on April 24, 2003. When promoted, Education: University of Texas, BBA, 1980;
Arpey’s actions spoke louder than words. He refused MBA, 1982
a raise and stock options, and he took a pay cut. Com- Personal: Wife, three children
munication between management and employees Source: International Directory of Business Biographies, http://
has changed since Arpey took the top leadership role www.referenceforbusiness.com/biography/A-E/Arpey-Gerard-
J-1958.html.
at AA. Arpey says, “It’s vitally important that every
employee knows and understands where the com- he n
she d w
pany is headed and that all our managers make every n A ir li nes cra help keep
rica y to
effort to listen to our employees, because at A me ced p a till re -
ip c re dibilit y reed to redu ement was s is
the people who actually do the work have s h ag g th
L e a d er e s , w h o h a d d mana ot disclosing of
the best ideas for doing it more effectively e iscovere n
employ r airborne, d cial perks and ut at the helm me
and efficiently” (Mahoney). rie n sp sa
the car ignificant fina rd Arpey wa by taking the
Open communication and employee in- g s G e r a il it y g a p ay
ceivin o n . W h en h e d credib ees, includin s now
volvement in decision making are now part a ti li s y e
inform reestab as the emplo ich employe nt,
of AA’s culture. “At the center of Arpey’s ap- an , he h e
Americ responsibilit y a culture in w of involvem abil -
proach are regular meetings among manag- n a n c ia l re a te d p ro c e ss c c o u nt
fi also c ation c h of a
ers, union heads and front-line employees, A r p e y m u n ic p p ro a u r v ive de -
cut. te in a com g. Arpey’s a r ic a n to s
a e
a huge change for an organization that has par ticip n, and sharin s enabled Am
long endured strained labor relations. The best sio ha
discus clusiveness
in
results so far from the sessions have been it y and backs.
et
cost-cutting ideas” (Torbenson). American Air- spite s
lines didn’t bring in consultants to help its busi-
ness; it looked to its employees to improve the
business.
© Mary Altaffer/Associated Press
Arpey requires managers to carry white lami-

nated cards to remind them to be more inclusive.
The card’s three messages are (1) involve before
deciding, (2) discuss before implementing, and
(3) share before announcing (Torbenson). The cards
are helping change the communications at AA.
“When you have people who are used to just decid-
ing how to do things and implementing, without in-
volving, discussing and sharing, it takes awhile for
that atmosphere and culture to permeate an organization,” Arpey says. “This is just com-
mon sense and common courtesy” (Torbenson).
Arpey has opened the lines of communication. He has reestablished trust and team-
work at AA. Employee confidence has increased and financial losses have decreased. The
company has avoided bankruptcy. Arpey does not accept the credit, but credits the turn-
around to the employees.
Sources: Greg Bustin, “Honesty: Still the Best Policy,” Bustin & Co. Bulletin, February 2005, http://www
.bustin.com/ourfirm/news/bulletins/bulletin_february05.pdf; Jerry Mahoney, “Insights from the Top,” Texas
Magazine, Fall/Winter 2004, http://utopia.utexas.edu/articles/texas/insights.html#Arpey; Eric Torbenson, “Arpey,
Americans survive a difficult year,” Dallas Morning News, April 21, 2004.
Introduction
1
of communication in
organizations
Communication is the process through which people and organizations accom-
plish objectives. By communicating with others we share attitudes, values, emo-
tions, ambitions, wants, and needs. Behind most successes is effective commu-
nication—that which is well planned and thoughtfully executed. The process of
communication, however, is difficult. Failed plans are often the result of failed
attempts at communicating.
Successful managers effectively communicate their vision for a work unit
and for the company as a whole. At Wal-Mart, Founder Sam Walton’s vision to
make the customer number one led his company to become the most successful
retailer in American history. The late Sam Walton offered his thoughts about
the importance of communication:
Communicate everything you possibly can to your partners. The more
they know, the more they’ll understand. The more they understand, the
more they’ll care. Once they care, there is no stopping them. If you don’t
trust your associates to know what’s going on, they’ll know you don’t
really consider them partners. Information is power, and the gain you
get from empowering your associates more than offsets the risk of in-
forming your competitors.
Listen to everyone in your company. And fi gure out ways to get
them talking. The folks on the front lines—the ones who actually talk
to the customer—are the only ones who really know what’s going on
out there. You’d better fi nd out what they know. This really is what total
quality is all about. To push responsibility down in your organization,
and to force good ideas to bubble up within it, you must listen to what
your associates are trying to tell you.1
Organizations must continually ask, “How can our customers fi nd us to
communicate with us?” Customers can communicate with American Airlines
through airport kiosks, telephones, and its Web site. This allows AA to respond
instantly in real time to customer needs.
People in organizations need one another. They must coordinate and pool
their efforts to achieve their goals and avoid waste and confusion. They must fo-
cus on the needs of the customers, those inside as well as outside the company.
They must be able to articulate their needs so that they can work cooperatively.
They must be free to express what they know and believe in order to capitalize
on opportunities for meaningful change. Managers who really believe that their
people are the organization’s most valuable resource will make communicating
with those people their most vital process.
Chapter 11 Communication: Interpersonal and Organizational 361
Communication Process
Communication is the transmission of information—data in a coherent, usable
form—from one person or group to another. Rational communicators strive to
achieve a common understanding—agreement about the meaning and intent of
the message—among all parties in each communication. Although much of the
information that managers rely on is in numeric form, the greatest portion of
2
Diagram the
communication process
and label all its parts
managerial activity depends on verbal communication and competent use of lan- communication
guage. Able communicators respect the conventions of language—spelling, gram- The transmission of information
and understanding from one
mar, and punctuation. They know precisely what they wish to say and thought- person or group to another
fully select the best way to say it. In addition, communicators need to be certain
that the people who receive the information actually understand the message. information
Processed data that is useful to
Communication is a process—a set of steps usually taken in a defi nite se- the receiver
quence. The initiator of communication is called the sender; the person or group
that gets the communication is the receiver. The information that the sender understanding
The situation that exists when
wants to transmit is the message. The means chosen by the sender to transmit all senders and receivers agree
the message is the medium, or channel. Finally, the process must provide mech- about the meaning and intent of
anisms through which both sender and receiver can determine if the intended a message
communication has taken place and mutual understanding has been achieved. sender
That mechanism offers feedback—information the receiver provides to show The person or group who
how he or she perceived the sender’s message. In supplying feedback, the re- initiates the communication
process
ceiver becomes a sender and the original sender becomes a receiver; the process
of sending and receiving messages proceeds until both communicators believe receiver
that understanding has taken place. The more carefully crafted and unambigu- The person or group for whom
a communication effort is
ous the message is, the less feedback will be required to achieve understanding. intended
Figure 11.1 provides a model of the communication process.
message
The information the sender
wants to transmit
Figure 11.1 Model of the communication process
medium
The means by which a sender
M ed transmits a message
M essage iu m
Inte rp feedback
Information e
or I m rson
p er al Information about the receiv-
son er’s perception of the sender’s
al
message
Sender Receiver
Person or Group Person or Group
(Re c
eiver Becomes S end e r)
Re ceiver Cla rifies
(S e Feedback )
n der Bec omes Rec ei ve r
S ende r Cla rif ie s

To illustrate the communication process, consider an example involving

Harry Trent, a manufacturing director. Harry calls Anita Raton, the human
resource manager for his company, and says, “I need a replacement employee.”
In response to the message, Anita says, “What kind of skills do you need? For
which department?” The receiver is seeking clarification of the original message
and becomes a sender in doing so. Harry now shifts to being a receiver and must
clarify his original message before responding and becoming a sender again.
Many conversations flow in this manner because the sender transmits an incom-
plete message—one that requires the receiver to ask for additional information
so that understanding can take place. Harry failed to refi ne his message before
he initiated the communication process.
Mediums of Communication
Communication mediums are verbal (spoken or written words) and nonverbal
(images, facial expressions, gestures, and body language).
Verbal Communication
Spoken verbal messages can be delivered face-to-face or by electronic means, such
as telephone, voice mail, and voice messaging. Written verbal mediums fall into
two categories: traditional printed matter and electronic delivery systems. Printed
matter includes memos, letters, manuals, newsletters, and reports. Electronic de-
livery systems include e-mail, facsimiles (faxes), pagers, computer networking,
and groupware—software that allows simultaneous group-member interactions
by networked computers. Individuals connect and communicate with the out-
side world by cable service, cell phone, phone line, long distance, and the Inter-
net. By 2003, more than 90 percent of American households had telephone and
television, and about 56 percent subscribed to a wireless phone service. 2 “About
64 percent of Americans had some form of Internet access at home in 2005.” 3
The sender’s choice of medium is influenced by several factors: the content
of the message, the importance of feedback, the number of intended receivers,
the receiver’s and sender’s preferences and characteristics, the sender’s and re-
ceiver’s locations and environments, and the technologies available. Communi-
cation requiring immediate two-way feedback and a personal touch should be
oral and in person. If the message is complicated and requires a considered re-
sponse, communication should be written. In this chapter’s opening case, AA
chose electronic mediums for their obvious advantages of speed and accuracy.
No human can keep records of suppliers and parts in so many locations, keep
them current, search through them, and then schedule shipments as swiftly as
computers can.
Conversation, perhaps the most common communication medium for man-
agers, takes place on the shop floor, in the office, over the telephone, at lunch,
on the way to meetings, and in group settings. Conversation should be used
when the message is for one person and requires personal contact, or when give
and take is vital. Henry Mintzberg studied five CEOs and found that they spent
78 percent of their time talking with others. These conversations were generally
short—49 percent of their daily encounters lasted less than nine minutes; only
10 percent lasted longer than an hour.4
John Kotter found virtually the same results. The 15 executive general man-
agers he studied spent 76 percent of their time talking with others. 5 As Suzanne
Rinfret Moore, who directs three companies, reported:
Someone can say to me in 30 seconds what it might take 15 minutes to

write in a memo—and it generates the ability to think on your feet. . . .
[Oral communication] fosters creativity for yourself and the people you
work with. Access is critical. I want people who can come to my door.
They’re not time bandits. 6
Oral communication cannot always substitute for the written word, how-
ever. The process of preparing a written document allows careful consideration.
Initiators can precisely determine and control the content, organization, com-
plexity, tone, and style of the message. Receivers can digest such communication
according to their own schedule and at their own pace. They can prepare con-
sidered responses. A written message can be enriched with graphics and other
illustrations. In addition, writing tends to support confidentiality. Among the
countless variations of written communications are e-mails, letters, memos, out-
lines, reports, procedures manuals, press releases, contracts, advertisements,
and forms. Figure 11.2 suggests conventional applications for common written
communication tools.
Written forms of communication have disadvantages. They are impersonal,
do not provide the immediacy of face-to-face contact, and do not elicit immedi-
ate feedback.
Some forms of written communication—such as notices on bulletin boards,
handbooks, and newsletters—are, by their nature, impersonal. Do not rely on
these tools when timely feedback or elaboration is needed, or when the message
is critical. Receivers read these communications casually. If communication is
vital, use tools of this nature as supplements to immediate tools.
Nonverbal Communication
Nonverbal communication consists of messages transmitted without the use of nonverbal communication
words. Nonverbal transmitters include facial expressions, gestures, and body Images, actions, and behaviors
that transmit messages
language (posture, placement of limbs, and proximity to others). Photographs,
charts, and videos also convey information nonverbally. Visual transmitters are
powerful and persuasive tools that enable senders to impart messages that are
nearly impossible to communicate verbally. For example, a product’s distinctive
name, appearance, and packaging communicate messages to consumers. (See
Figure 11.2 Four written forms of communication
Letters For correspondence with persons or groups outside an organization.

Usually produced in a format—a form letter or block-style letter, for
example.
Memos For routine correspondence with superiors, subordinates, and peers.
Memos should contain the date, the names of intended receivers and
their titles, the subject of the correspondence (ideally only one subject
per memo), the message, and the name and title of the sender. The
ideal memo is no more than one page long.
Outlines For indicating the structure of a lecture, report, or agenda and to or-
der major and minor points. Outlines are useful in developing tables of
contents and summaries.
Reports For reporting the results of an investigation or routine and ongoing ac-
tivities. Report formats range from fill-in-the-blank styles to manu-
scripts with or without statistical data. The format is often prescribed.
this chapter’s Ethical Management feature.) To further understand how valuable

images can be, try to convey the drawing in Figure 11.3 using words alone.
A picture can communicate more effectively than words can. Boeing pro-
vides a good example of how computer graphics can be used to aid workers:
Researchers are developing head-mounted displays that put computer
graphics to uses that are . . . helping workers do complex wiring or place
the perfect rivet. . . . Cables connect the headset to a computer, which
generates the image and changes it when the worker turns or proceeds to
a new task; a magnetic or ultrasonic receiver on the helmet helps the sys-
tem track its position . . . so the wearer sees a diagram superimposed on
whatever he’s working.7
Like pictures, gestures and body language convey messages. Research and
your own experiences indicate that a sender’s body language and other nonver-
bal expressions help a receiver to understand the sender’s feelings and intent.
The upset boss communicates emotions through tortured facial expressions,
clenched fists, aggressive gestures, a louder-than-normal voice, closer-than-
normal physical presence, and burning eye-to-eye contact—expressions that are
all direct and intense.
Suppose a manager remains seated behind the desk when a visitor arrives,
refuses to look at the person, and grunts an acknowledgment of the visitor’s
presence. These behaviors transmit one or more of the following messages to the
visitor: “This person is not pleased to see me,” “I have done something to annoy
this person,” “This person does not respect me,” or “Maybe this is not a good
time to visit with this person.” The manager sends quite a different set of mes-
sages if he or she rises and extends a hand, seeks eye contact, smiles broadly,
and says, “It’s great to see you. Have a seat!”
Figure 11.3 Exercise in nonverbal communication
1”
1”
1”
90˚
1”
Chapter 11 Communication: Interpersonal and Organizational
a g es
Profits through Imitation
Get t y Im
How would you like to work for a company that makes company uses technology that helps it reproduce, as pre-
most of its profits by imitating the best that name-brand cisely as possible, the original recipes. Also, Ralcorp’s
cereal makers can create? That’s what Ralcorp Holdings names mimic those of the originals: Tasteeos for Cheer-
Inc., a leader in private-label (or store-brand) foods, does ios, Fruit Rings for Froot Loops, and Apple Dapples for
to earn most its profits. Apple Jacks. Because cereals are made with routine man-
Compared with the high-priced national brands, Ral- ufacturing methods, the legality of copying most types
corp’s knockoffs sell for about $1 less per box at retail, of cereal is not an issue.
while delivering more profit per box to retailers, who get
• Is what Ralcorp does a form of “legalized” theft?
their names on the box as well. Another positive result
• Why does Ralcorp try to imitate the packaging of
of private-label growth has been virtual wholesale price
name-brand cereals?
freezes on name-brand cereals.
• What additional ethical issues do you see in this case?
Ralcorp works hard to simulate the look, taste, and
packaging of the name brands it mimics. In its plants, the Source: Ralcorp Holdings Inc., http://www.ralcorp.com.
Senders and receivers must be aware of the messages inherent in nonver-

bal communication. When nonverbal cues seem to contradict the sender’s verbal
messages, the receiver tends to believe the nonverbal message.
Interpersonal Communication
Interpersonal communication involves real-time, face-to-face, or voice-to-voice interpersonal
(telephone) conversation that allows instant feedback. Transmitting voice and communication
Face-to-face or voice-to-voice
fax over the Internet has become a catalyst in the continuing drop in interna- (telephone) conversations that
tional telecommunications rates. Real-time communication over the Internet take place in real time and al-
adds a customer service dimension, enhances a Web site, and is depicted in Man- low instant feedback
aging Technology. Net2Phone was the fi rst company to bridge the Internet with
telephone networks. Internet telephony, known as VoIP, or voice over Internet
protocol, is the technology that enables the real-time transmission of voice sig-
nals over the IP network. Net2Phone transmits voice and fax over the Internet
by using public telephone switching networks for the minimum portion of the
call and the Internet to carry the call over the widest distance.
A number of companies now use satellite-transmitted videoconferences for
interpersonal communication. A retailer, for example, can regularly run video-
conferences between its managers at headquarters and those in its stores nation-
wide. The managers at headquarters make a presentation, and the store manag-
ers are invited to ask questions.
Interpersonal communication is appropriate for discussing matters that
require give-and-take between participants. Applications include discussions
about a performance appraisal; management by objectives (MBO) sessions; con-
versations in which praise or criticism is given; and coaching, counseling, or
training sessions. Meetings and conferences are useful forms of interpersonal
communication when the issues affect others or require input from more than
one or two parties.
Brainstorming sessions, quality circles, committee meetings, and contract
negotiations are but a few uses for interpersonal communication.8
Communication and Teams

Teams are taking an increasingly large role in organizations. Managers fi nd that
by putting workers together, they can get better work. Chapter 14 will explore
team dynamics in detail; this chapter will focus on the management of team
communication.
Team members generally engage in four kinds of communication. They
exchange views, discuss work, deliberate on a problem or issue, and transmit
information.
Whether a team is a permanent work group or temporarily gathered to ad-
dress an issue, team members share a leader, a goal or goals, related activities
(though each member may have a distinct role), and mutual dependency. Each
individual possesses unique traits, of course, but the shared characteristics build
group identity. In fact, group members often develop common perspectives about
management and the organization. These shared viewpoints arise first from the
fact that group members affect each other but also from the fact that commu-
nications within the group transmit and reinforce similar attitudes. One key to
managing intergroup communication, then, is to ensure that the viewpoints be-
ing shared are positive and match the organization’s culture and goals.
Often disputes arise between group members and must be competently
handled. Ellen Lord leads a team at Textron’s Davidson Interiors plant in New
Hampshire. She has “found that to keep teams happy, managers must have the
patience and presence of mind to act like a parent, teacher, and referee all at
once.” 9 As her team was forming, its members found a variety of issues to argue
over. “A neatnik sitting next to a slob lost his cool. People were becoming emo-
tional about what kind of coffee was brewing in the pot. . . . No matter how bad
it gets you must keep people together and talking until they feel comfortable, a
process that can take months.” 10 See Figure 11.4 for a checklist that covers pro-
ductive group and team communication.
Much team communication revolves around getting the job done—
copywriters talk to product managers about a product’s features and target mar-
ket, and designers discuss page layouts with copywriters. In this kind of com-
munication, a manager is mainly concerned with ensuring that people send and
receive accurate information, that all team members get the information they
need when they need it, and that team members show sensitivity to one anoth-
er’s ideas and issues.
Team communication is vital when a group meets to explore an issue, de-
termine how to implement a procedure, solve a technical problem, or make a
pricing decision. Group decision making offers many benefits. Hearing multiple
perspectives can help a person generate more ideas than he or she could gener-
ate alone; the interaction of people can create a powerful synergy. In addition,
participation increases commitment to the decision (see Chapter 7). Group de-
liberations, however, must be carefully managed to ensure that they are effec-
tive. Managers must set a clear agenda for the meeting and keep the discussion
to the point. They need to ensure that all group members participate by channel-
ing discussion to avoid domination by a few. They must keep an eye on the clock
so the meeting does not waste time.
Figure 11.4 Checklist for ensuring effective communications between groups and
group members
1. Are members clear about the group’s purposes and goals? ———
2. Is each group member clear about his or her role? ———
3. Do members know the procedures? ———
4. Does mutual trust and respect exist between group members? ———
5. Do all members have access to the information they need? ———
6. Are formal discussions properly led and their results recorded? ———
7. Do groups and their members receive prompt feedback on the results
of their efforts? ———
8. Do members periodically evaluate the effectiveness of their group
and individual members’ contributions? ———
9. Are groups and their members given recognition and rewards for
their valuable contributions? ———
Intrateam communication often involves the transmission of information.

Whether a manager is informing team members about a new organizational pol-
icy or a team member is passing on the details of a telephone conversation, a
team meeting is ideal for this kind of communication. Telling five people at once
is far more efficient than seeking out and telling each one individually. Also,
when information is transmitted to several people at a time, the chance of each
team member receiving the same information increases. Finally, having the team
assembled to hear this kind of message provides the opportunity for members to
discuss its implications.11
Barriers to Interpersonal Communication
3
barriers to interpersonal
communication and
suggest remedies to
Leonard R. Sayles and George Strauss identify common barriers to interper-
sonal, or face-to-face, communication.12 The paragraphs that follow summarize
the barriers they define. These barriers can be overcome in large measure by fol-
lowing the guidelines for improving communication that appear toward the end
of this chapter.
overcome them
Diction and Semantics Diction—the choice and use of words in speech and
diction writing—significantly affects communication. Semantics, the study of the mean-
The choice and use of words in ings of words, confi rms that words may possess different meanings for different
speech and writing
people. In everyday usage, abstract words such as liberal, conservative, and mo-
semantics tivate can create different images for senders and receivers. Business terms can
The study of the meanings of cause the same problems. Terms such as discipline and grievance can convey
words
both negative and positive connotations and may elicit a strong emotional re-
sponse. The effective communicator is sensitive to such effects.
In today’s culturally diverse workplaces, English is a second language to
many. To overcome problems related to this situation, companies are providing
basic English courses. They are also capitalizing on America’s racially diverse
population by sharing experiences within teams. (See this chapter’s Valuing Di-
versity feature.)
jargon Jargon—the specialized or technical language that develops in trades, pro-
The specialized or technical lan- fessions, subcultures, and other groups—poses its own set of hazards. Each cor-
guage of a trade, profession,
subculture, or other group porate culture, subculture, unit, and division has its own unique terminology
and slang expressions. Computer experts talk about bits, bytes, and boilerplate.
Financial managers use terms like leverage, equity, and depreciation. When
members of these subcultures use these expressions in an attempt to communi-
cate outside their group, confusion can result.
The lesson for communicators is clear. Strive for language that means the
same thing to both receiver and sender. The sender who has any doubt about the
possible interpretation of unusual, specialized, or vague words should take ex-
tra care to ask receivers if they understand the terms. Newcomers to U.S. culture
and language deserve special attention. Slang can be treacherous to those new to
the United States. A simple phrase like, “Hang on, I’m going to IM Jerrod on my
cell and bounce this idea off him,” will confuse most newcomers. In fact, they
might look at you as if you had just switched to an alien dialect—and in terms of
classroom English, you have.
Expectations of Familiarity How many times have you been in a conversa-

tion and tuned out the speaker because you absolutely knew what he or she was
going to say? People do this because they are familiar with a speaker’s thoughts
on particular topics. The speaker begins with a statement and tone that sounds
Chapter 11 Communication: Interpersonal and Organizational
a g es
Benefits of Racial Diversity
Get t y Im
According to Harvard Business School Professors Robin tween race and the work, but racial bias can end up being
Ely and David Thomas, racial diversity results in a more destructive in the work group.
productive company. Professor Ely defines cultural di- 2. Access and legitimacy perspective. There is diver-
versity as “group differences in identity, particularly con- sity only in certain parts of the organization. People are ef-
cerning groups that are socioculturally distinct and have fectively shunted onto segregated career tracks and told,
different power positions in society.” He further asserts, “This is what you’re good at.”
“Sociocultural distinctions may be race, ethnicity, gender, 3. Integration and learning perspective. Group mem-
religion, nationality, and sexual orientation” (Lagace). Ely bers are encouraged to bring all relevant insights and per-
and Thomas studied racial diversity in work groups in a spectives to bear on their work.
large commercial bank in the northeastern United States. Only the third perspective, integration and learning, re-
Their study yielded three distinct perspectives on racial sulted in performance gains.
diversity in work groups (Lagace): • How can work groups learn from members’ different
1. Discrimination and fairness perspective. The work experiences rather than ignore or suppress them?
groups aspire to being color blind, so conversations around Source: Martha Lagace, “Racial Diversity Pays Off,” HBS Working
race are limited. They believe there is no connection be- Knowledge, June 21, 2004.
similar to openings used in the past. At that moment, listening stops. When a
parent begins by saying, “When I was your age . . . ,” the child tunes out. When
the boss begins with “When I did your job, I . . . ,” the subordinate tunes out.
Failure to listen because of the listener’s expectation of familiarity is a factor
that inhibits communication.
When addressing people on familiar topics, senders should engage their re-
ceivers by asking questions about their understanding and current knowledge
of the topic. If receivers already know what a sender wants to communicate, no
further effort is needed. If what is about to be sent is new, senders should state
that fact and proceed to convey the new data.
Source’s Lack of Credibility If a sender has credibility in the receiver’s mind,

the message will be received more readily than if the sender lacks credibility.
When a person proven to have knowledge and a successful track record speaks
about his or her specialty, people tend to listen. The finance manager is pre-
sumed to have more expertise in budgetary matters than the marketing man-
ager. The experienced plant manager’s ideas about how to handle a maintenance
problem should prevail over those of his or her apprentice. New and inexperi-
enced employees, however, often bring a fresh, unbiased approach to problems.
They may spot more effective or efficient ways to get things done. Their ideas
deserve a hearing. Empowering employees means giving them the freedom and
authority to offer suggestions and devise new solutions.
Preconceived Notions If the new and different viewpoint the receivers hear
contradicts what they “know” to be true, the receivers do not accept it. In re-
acting this way, the receivers close their minds and inhibit growth and change.
They shut others out even though the others could be the means of the receivers’
own growth and development.
Differing Perceptions Most organizations include people from different so-

cial, economic, and cultural backgrounds. These people may hold a variety
of values, beliefs, expectations, and goals. They may even speak different lan-
perceptions guages. These differences contribute to differing perceptions—ways of observ-
Ways in which people observe ing and the bases for making judgments. Predetermined sets of conventional and
and the bases for their judg-
ments about the stimuli they oversimplified beliefs about groups of people—stereotypes—can elicit an ar-
experience ray of typical reactions, both positive and negative, to those groups. “He’s His-
panic, so he must be . . . ,” “Women just don’t . . . ,” and “Germans always . . . ”
stereotypes
Predetermined beliefs about a are expressions of stereotypes. Stereotypes can inhibit interaction and commu-
group of people nication. Everyone needs to keep an open mind.
Conflicting Nonverbal Communication A person who frowns while saying,

“I feel great,” is sending conflicting messages. The manager who squirms in her
seat and keeps checking her watch while telling us to continue a conversation is
really telling us to stop.
A person’s physical appearance and behavior send messages. Suppose a
manager urges employees to strive for thoroughness. The urgings are likely to go
unheeded if the manager always looks sloppy. Whatever a manager says about
the need for continual improvement may be mitigated if he or she is never on
time for meetings. Tardiness says that other things are more important, that the
meeting is unnecessary, or that other people’s time has no value.
Emotions Tempers interfere with reason and understanding; therefore, they

inhibit communication. Sender and receiver become opponent and adversary.
When the head coach of the Chicago Bears lost his temper on the sidelines dur-
ing a football game, sports commentators and some team members claimed
that it turned the momentum in favor of the opposing team. The Bears had a
fourteen-point lead at the time but scored no more points and lost the game.
Attempts at achieving a meeting of the minds dissolved into name calling and
offensive remarks and behaviors. Messages communicated in anger can be dam-
aging to people and their relationships for some time thereafter. Once offensive
words are spoken, they cannot be unsaid. Apologies will not erase the hurt that
receivers feel.
The best way to overcome the barriers to communication emotions can pose
is to develop a sense of timing. This important sense helps a sender know when
best to initiate a communication. Sam shows sensitivity to timing when he says,
“I wouldn’t see the boss today. He’s just heard that his new budget was rejected.”
Similarly, the end of a tiring workday, when people are less open to communica-
tion, is not the best time to attempt to convey complex messages.
Noise Anything in the environment that interferes with the sending and receiv-
noise ing of messages is noise. If you have ever tried to speak over the roar of machin-
Anything in the environment of ery or over a telephone with a bad connection, you know how noise interferes
a communication that interferes
with the sending and receiving with communication. When people have to shout to be heard or are overbur-
of messages dened with irrelevant messages, they are experiencing noise.
Organizational Communication
Now that we understand how people communicate on an interpersonal level,
we are ready to explore organizational communication. This section will be-
gin by discussing the formal communication channels, the channels that re- formal communication
sult from a company’s organizational structure. These designated pipelines for channels
Management-designated pipe-
messages run in three directions: upward, downward, and horizontally. Man- lines—running up, down, and
agers are charged with the responsibility of creating, using, and keeping these across the organizational struc-
channels open and available to organization members. The channels act as con- ture—used for official commu-
nication efforts
nections between members and outsiders and as paths through which official
communications flow.
One look at a company’s formal organization chart will reveal who is con-
nected to whom and, therefore, in which directions communications will flow.
Figure 11.5 shows a formal organization chart and the communication links be-
tween line and staff managers. Remember that communication is a two-way ef-
fort, so these channels carry messages from, as well as to, the persons they link.
In the not-too-distant past, formal communication flowed down from the
top and rarely in any other direction. A strict chain of command existed at each
level in every work unit or subsystem. Feedback efforts were difficult and time-
consuming. A great dependence on paper and written communication was the
norm. Orders were given, procedures were written, and those who received them
obeyed them.
Today organizations emphasize electronic means of communicating, empow-
erment of employees, flexibility, and integrated teams. Therefore, compared with
the past, more communication flows from the bottom up and from side to side.
Communications currently are faster, more direct, and subject to less filter-
ing than in the past. Computer networks, fax machines, satellite communica-
tions, and teleconferencing link those who must work together—even if they are
in another part of town or in another country. With a computer and a connec-
Figure 11.5 Organization’s formal channels for communication
Outsiders President
Marketing Finance Human Production

Resources
Funds Benefits Wage and Machining

Sales Research Credit Administration Salary Process Inventory
Acquisition
Advertising Accounting Training Assembly
Vertical Channels
Horizontal Channels
tion to the Internet an employee is never out of touch. These days, managers and
workers occupy offices that are, in effect, without walls.
Formal Downward Channels
4
Describe the uses of
downward, horizontal, and
upward communication
channels
Downward communication conveys the kinds of information shown in Fig-
ure 11.6. Along with the messages themselves, managers should communicate
the reasoning behind the messages—why things are being done and the advan-
tages and disadvantages that may result. Sharing reasons has the effect of bring-
ing others into the decision-making process. As Chapter 7 reported, the results
can be extremely beneficial.
Downward communication takes place daily, in on-the-job conversations
and interactions between managers or team leaders and their subordinates. It
can be one on one or take place in large meetings. Typical devices used to carry
downward communication are company procedure manuals, newsletters, public
relations announcements, annual statements, and various types of memos, re-
ports, letters, and directives.
The cofounders of Zingerman’s Deli in Ann Arbor, Michigan, began their
company newsletter when the deli got too large for them to talk to all 130 em-
ployees. The cofounders justified the cost of the newsletter because it gave them
a way to communicate with their workers. As Ellen Spragins reports, the co-
founders give three reasons for the newsletter’s positive reception:
1. Nothing gets published that is offensive or a put-down.
2. The editor receives extra pay for producing the newsletter. There-
fore, the editor has an incentive for producing a quality communica-
tion that will appeal to the workers.
3. Some 30 percent of the newsletter’s content is created by the front-
line employees (the remainder comes from the managers and co-
founders).13
Figure 11.6 Subjects for downward, horizontal, and upward communication
DOWNWARD COMMUNICATION
CEO’s vision Job designs
Changes in rules or procedures Performance appraisals
Company mission Policies
Delegation of authority Solutions
Development Staff managers’ advice
Feedback Strategic goals
Incentives Training
HORIZONTAL COMMUNICATION
Coordination efforts Information to and about customers
Efforts to seek assistance Information to and about suppliers
Feedback Group-member interactions
UPWARD COMMUNICATION
Complaints Requests for assistance
Feedback Status reports
Recommended solutions Research results
The newsletter has become so popular that outsiders are willing to pay for a
subscription to it. Zingerman’s writes newsletters and catalogs, teaches classes,
offers tastes, and went online with the zingermans.com Web site. It uses its net-
work to get more and better information about great food out there where peo-
ple can use it.
Formal Horizontal Channels

As Figure 11.6 implies, horizontal channels connect people of similar rank and
status within an organization (such as engineers and team members) and outside
stakeholders (such as dealers and customers) with those insiders who can best
meet their needs. Through horizontal channels, workers and managers provide
feedback, keep teammates informed, coordinate activities, seek assistance, and
stay in contact with customers.
Toll-free, long-distance telephone lines for customers are horizontal chan-
nels that connect consumers with people in the company, no matter what level,
who can best answer their questions or meet their needs. WordPerfect (Corel
Corporation) is renowned in the PC world for the rapid and exhaustive tele-
phone support it supplies for consumers of many of its software products.
Horizontal communication channels are used to set goals; defi ne roles; cre-
ate, examine, and improve methods; enhance working relationships; define, in-
vestigate, and solve problems; and gather, process, and distribute information.
Horizontal communication is becoming increasingly important as manag-
ers institute more and more work teams. One observer pointed out the advan-
tages of horizontal communication and the team approach: “Information moves
straight to where it’s needed, unfiltered by a hierarchy. If you have a problem
with people upstream from you, you deal with them directly, rather than asking
your boss to talk to theirs.” Professor Shoshana Zuboff of Harvard University
calls for all companies to “informate” employees by placing the corporation at
their fi ngertips—giving them real-time access to all the information and experts
in the system.14
Formal Upward Channels

Upward communication provides the feedback required by downward commu-
nication. It allows workers to request assistance in solving some problems, and
it provides a means for workers to recommend solutions to other problems. Up-
ward communication also permits workers to provide status reports and inform
higher authorities about employee complaints. The tools of upward communica-
tion are employee surveys; newsletters; regular meetings between managers and
their subordinates; suggestion systems; team meetings; and an open-door policy,
which offers employee access to managers.
When asked what their companies had done to improve communication and
productivity, CEOs responding to a survey cited several actions that related to
upward communication. These included meeting regularly with employees, de-
layering the organization, broadening participation in decision making, and in-
stituting grievance panels and hotlines.15
Sometimes outside consultants are asked to provide information vital to or-
ganizational matters, such as feedback from customers on their levels of satis-
faction with products and services. All automakers subscribe to reports com-
piled by J. D. Power and Associates, a fi rm specializing in gathering and selling
data on automobile owners’ satisfaction with their new cars. Its most celebrated
survey tracks how well new-car buyers like their choices after owning them for
90 days. The company measures owner satisfaction through thousands of an-
nual survey responses.
When Chrysler vehicles did not rate well in J. D. Power and Associates’ sur-
veys, Chrysler hired Detroit-based Process Development Corporation (PDC) to
help the company improve its ratings. According to Tom Kowaleski, a Chrysler
spokesperson, PDC’s job was to study the survey’s questions—what they rate
and how—and “what we should look at when we build a car.” 16 Chrysler has
learned that such things as the “feel” of a knob, switch, or dial and the “loca-
tion” of cup holders and ashtrays are as important as smooth-running engines
and transmissions. As a result, the company considered removing equipment
that prompted complaints from those interviewed by J. D. Power.17
Formal Communication Networks

formal communication Formal communication networks are electronic links between people and their
networks equipment as well as between people and databases that store information. Or-
Electronic links between people
and their equipment and be- ganizations have linked their desktop computers for years. Since the 1970s, su-
tween people and databases permarkets and other large retailers have maintained computer links between
their stores, headquarters, distribution centers, and suppliers. Xerox Corpora-
tion’s research operations in Palo Alto, California, have videoconferencing links
between employee lounges and various departments and buildings. The links al-
low researchers to confer easily.18
At Boeing, employees engage in brainstorming sessions by computer. Us-
ing special software called groupware, which tracks all brainstormers’ contri-
butions, Boeing has slashed the team size for most projects by 90 percent. One
team designed a control system for machine tools in 35 days—a task that would
have taken a year in the precomputer days.19
According to one observer, electronic links help forge a sense of belonging.
“Researchers fi nd that electronic-mail users are more likely to feel committed to
their jobs than do the unplugged. No similar data yet exist for groupware, but
anecdotal evidence so far suggests it creates an even more powerful sense of be-
longing.” 20 Carl Di Pietro, a human resource executive at Marriott, has used
groupware to run meetings. In describing the experience, he reports: “In my
30 years, it’s the most revolutionary thing I’ve seen for improving the quality
and productivity of meetings. It gets you closer to the truth.” He adds that it
enables a group to come to a consensus and the members to become more com-
mitted to decisions of the group. In addition, Di Pietro reports that groupware
could overcome the difficulties that cultural diversity sometimes presents. “You
don’t know if that idea you’re reading comes from a woman or a man, part of
the minority or majority, or a senior or junior person. People begin to say ‘Hey,
we’ve got a lot in common with each other.’” 21
Informal Communication Channels
5
Explain the informal
communication channel
known as the grapevine
The formal communication channels designed by management are not the only
means of communication in an organization. Informal communication channels
carry casual, social, and personal messages on a regular basis in or around the
workplace. These channels are often called, collectively, the grapevine. Informal
communication channels disseminate rumors, gossip, accurate as well as inac-
curate information, and on occasion, official messages. Anyone inside or out-
side an organization can originate a grapevine message. Grapevine messages are informal communication
transmitted in many ways—face-to-face and by telephone, e-mail, or fax. channels
The informal networks, exist-
Messages transmitted through informal channels usually result from incoming outside the formal channels,
plete information from official sources, environmental influences in the organiza- that are used to transmit cas-
tion or outside it, and the basic human need to socialize and stay informed. When ual, personal, and social mes-
sages at work
changes occur, people like to speculate about what they will mean. When people
feel insecure or fearful because of cutbacks and layoffs, rumors fly about what grapevine
will happen next. When Jill is absent from her job, friends and coworkers want An informal communication
channel
to know why. People who are the fi rst to know something special usually want to
share their new knowledge with others. Figure 11.7 shows how messages might
travel through the grapevine. The grapevine has a number of characteristics:
• It can penetrate the tightest security.
• It is fast (with or without electronic links).
• It tends to carry messages from anonymous sources.
• Its messages are difficult to stop or counter once they get started.
• It is accessible to every person in an organization.
• It can be supportive of or an obstacle to management’s efforts.
In most organizations, a relatively small number of individuals disseminate
most of the grapevine messages. These people create networks through which
the messages are carried. Managers need to be attuned to the grapevine—that
is, they should be aware of the messages it carries and the people who control it.
They should not, however, use it as a formal communication channel. But inac-
curate messages must be countered with the truth as soon as possible.
Figure 11.8 illustrates four common grapevine configurations. The most
common is the cluster chain. Through it, an initiator—A, in this case—sends a
message to a cluster, or group, that consists of B, E, and L. Through their own
connections, these three send the message to others. Each party involved often
distorts the message. Not all recipients carry the message to others. If a recipient
Figure 11.7 Grapevine in action

Figure 11.8 Four common grapevine configurations
Single Chain
A B C D
Gossip
A
B F
C E
D
Random
D
C E
B F
A G
I H
Cluster
A
B D
C
E F
G M
H L
I K
J
has no interest in a grapevine communication or disagrees with it, he or she

probably does not pass it along.
Barriers to Organizational Communication

Communication in organizations can be blocked by interpersonal barriers and
by barriers that are part of the organizational environment. The way worksta-
tions are positioned in an office or factory can enhance or hinder communica-
tion, for example. People who cannot see each other or who are not in close
physical proximity may fi nd it difficult to stay in touch, although telephones,
6
barriers to organizational
communication and
suggest remedies to
e-mail, and fax machines can diminish the difficulty. Some managers have found overcome them
that people seek each other out more often in a building equipped with escala-
tors than in one with stairways or elevators. Escalators, they believe, offer rela-
tive privacy and allow senders and receivers to pay more attention to each other.
The paragraphs that follow will review several barriers to organizational
communication.
Overload In the context of communication, the term overload means too much
information. Everyone receives dozens of pieces of junk mail at home each week.
The same thing occurs in plants and offices every day. People receive informa-
tion they do not want or need. This overload is a type of noise, and employees
are forced to waste time trying to sort through it. One job for a company’s man-
agement information system specialist is to make certain that people receive only
what they need and that they receive it in the form that is most useful to them.
Filtering by Levels The management levels in a company can become barriers

to communication. According to Keith Davis, the more levels information has to
pass through, the more it can be embellished or fi ltered. 22 The message the last
receiver acquires may bear little resemblance to the original communication.
The current trend toward flattened organizational structures should help to pre-
vent such distortion.
Alcoa, the subject of this chapter’s Application Case, reengineered its orga-
nizational structure and working relationships from the mechanistic to the or-
ganic. One reason for this action was to remove physical and structural barriers
that delayed decision making and responses to rapidly changing customer needs.
By reducing levels of management and grouping people together in open work-
space, Alcoa greatly improved communications and coordination.
Timing Communications that must pass through several hands can delay the
process. Anything in an organization that prevents the free and quick flow of
needed information impedes communication. The spread of high-speed com-
munication technologies (such as e-mail) and the growing use of teams (whose
members are trained to recognize the need to share information) are expected to
reduce barriers to prompt communication. For example, employees can connect
and communicate more efficiently with the company, customers, suppliers, and
others with the aid of communication tools. “These include real-time channels
(mobile phones, audio conferences), near-real-time channels (instant messaging,
paging) and messaging (e-mail, fax, voice mail).” 23 Some guidelines for e-mail
courtesy, known as netiquette, can be seen in Figure 11.9.
Lack of Trust and Openness Companies that are secretive about sharing vi-
tal information with employees lack openness; such behavior says that they do
not trust their workers. Insufficient openness in organizational communications

derives from a lack of trust or from the fear that wrongdoing will be exposed.
That’s what happened when AA’s Don Carty, former top manager of American
Airlines, kept information about executive retention packages from the unions.
American issued a statement saying labor leaders had been informed of
the [executive] retention package but did not tell their members. Labor
leaders went ballistic, since it turned out this statement was not true.
When American later retracted its statement, the gap of credibility wid-
ened even further. Carty then issued an apology saying, “it was not my
intent to mislead anyone.” He acknowledged, “my mistake was failing
to explicitly describe these retention benefits, and because of that, many
employees felt they were kept in the dark.” The apology rang hollow.
Carty’s credibility was gone. And within six days of these developments,
so was he. 24
Workers and managers at some companies play games to develop good
working relationships and mutual trust. Everyone from the chairman of the
board to the customer-service representatives undergo the same training pro-
gram. The programs consist of games such as blindfolded dart throwing. Blind-
folded throwers have little chance of hitting the target unless others coach them,
which helps foster a sense of trust and cooperation.
Inappropriate Span of Control If a manager supervises more people than

time and energy permit, communication suffers. The manager who has too few
people to oversee may become overbearing and overwhelm subordinates with
too much contact. The more that leaders empower their people by delegating
authority and providing quick access to needed information, the less they need
to worry about keeping communication effective. Well-trained, self-managing
work teams know that when they require help, all they have to do is seek it. Un-
til then, the manager should observe, track, and facilitate as needed.
Change Changes anywhere in a company can hurt or hinder communication.

When a new manager takes over, he or she invariably introduces changes in
goals, methods, and communication style. What matters is how well people are
prepared to cope with the changes. Larry Senn, head of Senn-Delaney Leader-
ship Consulting Group, in California, has this advice: “Take the time to describe
your expectations to people. In a small organization, one person who’s not open
to change and not a team player can really gum up the works.” 25
Rank or Status in the Company Unfortunately, in too many organizations

the higher a manager is in the hierarchy, the less available he or she seems to be
to others. Faced with rank or status, some subordinates can become timid and
hesitant to communicate, or willing to communicate good news only. Some peo-
ple in high positions begin to imagine that they are something special, an atti-
tude that leads them to avoid listening to what subordinates have to offer.
In Riding the Runaway Horse, Charles C. Kenney examines the fall of Wang
Laboratories. He attributes the company’s decline to, among other things, an
unwillingness to respect diverse opinions and stay close to customers. An Wang,
the Founder, created two classes of stock to avoid stockholder influences on his
decisions. He delayed moving into the personal computer field until that field fell
to others. He announced the development of new products when the products
were nothing but ideas on paper. And, on his deathbed in 1989, he fired his son
and President, Fred Wang, so that Fred would be blamed for the company’s fail-
ures. In the words of a former president at Wang, John Cunningham, An Wang
had become “a humble egomaniac.” 26
Managers’ Interpretations Managers, like everyone else, are people with

biases, stereotypes, values, needs, morals, and ethics. How they perceive their
world determines how they will react to it. Managers will communicate where,
when, what, and to whom they believe they must. As an example, consider the
manager who is facing a crisis and asks for emergency funding for additional
overtime. He needs the approval quickly, but the finance manager who receives
the request is in no hurry. She wants to defer the request until next year’s bud-
get kicks in, a wait of about two months. When pressured for a decision, she
responds: “You’ll get the money you requested when I decide to give it.” Both
managers have different needs and agendas. Both have differing perspectives,
priorities—and notions of courtesy.
Electronic Noise Modern electronics have added yet more noise to the work
environment. Breakdowns, overloads, static on the line, and ill-trained opera-
tors are barriers to organizational communication. Voice-mail systems can be
barriers to communication, especially for people unaccustomed to using them.
American Airlines managers recognized the potential electronic noise it might
experience and before initiating Internet integration, both domestically and in-
ternationally, made certain that its users received the proper training on the ap-
propriate uses of its hardware and software.
Improvement of Communication
Being adept at communicating involves individual skills as well as organiza-
tional frameworks and aids. Both the sender and the receiver have distinct re-
sponsibilities in the communication process. Meeting those responsibilities can
help both parties avoid or overcome barriers to communication.
7
Describe the
responsibilities of senders
and receivers during the
communication process
Responsibilities of Senders
Those who send messages must shape them and be aware of how they are re-
ceived. The paragraphs that follow discuss the sender’s responsibilities.
Being Certain of Intent The sender’s first task is to be clear about the intent
of the message. Figure 11.10 lists some typical goals of communication. As the
exhibit shows, the goals often vary according to the receiver. One goal common
to all messages is that the receiver understands them.
Knowing the Receiver and Constructing the Message Accordingly The

sender should acquire as much information as possible about the individual or
group that is to receive the message. The sender needs to know the receiver’s job,
experience, personality, perceptions, and needs. If the sender and receiver use
different native languages, are from different cultures, or have had significantly
different experiences, the sender must be aware of the barriers these differences
could pose. For instance, pictures and charts may be the best way to communi-
cate when senders and receivers do not speak the same native languages.
The sender must choose, rather than his or her own words, those with the
receiver’s vocabulary in mind. While composing a message, the sender should
try to get into the head of the receiver; would the receiver understand the mes-
sage as conveyed? One basic goal of all communication is to help the receiver
view the content of the message as the sender does. The sender should empha-
size aspects of the message that relate to the receiver. If the message announces
a change, the sender should point out the advantages that will result for the re-
ceiver. If the purpose is to ask for assistance, the sender should cite what the re-
ceiver will gain by providing it.
Selecting the Proper Medium The choice of the medium to carry the mes-
sage depends in part on the content of the message. Confidential information
Figure 11.10 Typical communication goals
WHEN COMMUNICATING WITH SUPERIORS

• To provide responses to requests
• To keep them informed of progress
• To solicit help in solving problems
• To sell ideas and suggestions for improvement
• To seek clarification of instructions
WHEN COMMUNICATING WITH PEERS

• To share ideas for improvement
• To coordinate activities
• To provide assistance
• To get to know them as individuals
WHEN COMMUNICATING WITH SUBORDINATES

• To issue instructions
• To persuade and sell
• To appraise performance
• To compliment, reward, and discipline
• To clarify intentions and instructions
• To get to know them as individuals
and praise always call for a personal touch. If the receiver is in a remote loca-
tion or if the matter is complex and lengthy, putting it in writing might be the
best choice. If the receiver prefers a given medium, the sender should try to use
that method. A sightless person may prefer a voice message or one encoded in
Braille. A person who has a hearing difficulty may prefer a visual presentation.
Finally, the sender must consider the physical and emotional environment to be
faced when attempting to communicate. What kind of noise will there be?
Timing the Transmission The timing of the communication affects its suc-
cess. The sender’s needs, along with the receiver’s, must be considered in de-
termining the best time. A supervisor may want to talk with a subordinate at
4:00 p.m., but if the worker’s day ends at 3:30, another meeting time must be
agreed upon. Business communications should be delivered under the proper
circumstances, and to people who are in a receptive mood. Important discus-
sions about a new budget would be inappropriate at a company picnic or when
people are on their breaks. People who are clearly overwhelmed with work when
a sender contacts them cannot give their full attention to the message.
Seeking and Giving Feedback A sender has the primary responsibility to

make certain that his or her message has been received and understood. The
only way to make certain is to get feedback. The sender cannot settle for the re-
sponse, “I understand.” If the receiver has no questions, then the sender should
pose some. One technique to assess understanding is to ask the receiver to re-
state the message using his or her own words. Another approach is to ask ques-
tions to check on the receiver’s grasp of specifics.
As the receiver engages in feedback, he or she may ask questions that require
responses from the sender. At this time the sender must assess how the receiver
has interpreted the message and then take the actions needed to clear up any
misunderstandings.
Responsibilities of Receivers
Just as senders have specific obligations, so do receivers. The paragraphs that
follow discuss these responsibilities.
Listening Actively Receivers must listen attentively to the message being sent.
Listening attentively requires that receivers block out distractions that can in-
terfere with communication. Because people tend to speak more slowly than lis-
teners can process words, listeners’ minds can often wander. Receivers must not
attempt to pass judgment on the sender or the message until the message has
been completely transmitted. Being critical distracts from listening. According
to John J. Gabarro, a professor of human resource management at the Harvard
Business School, “The greatest barrier to effective communication is the ten-
dency to evaluate what another person is saying and therefore to misunderstand
or to not really ‘hear.’” 27
Active listeners take notes and list any areas where a sender’s meanings are
unclear. Good listeners ask questions to clarify messages. They observe gestures,
tone of voice, facial expressions, and body language, and look for any contradic-
tions that might occur among them. If necessary, they seek explanations for the
contradictions.
382
GLOBAL APPLICATIONS Part 4 Staffing
a g es
Samsung Buys Quality and
Get t y Im
Design Message
South Korea’s Samsung is one of the world’s leading design focus goes well beyond just the look and feel of
brands in electronics and appliances. Yet it wasn’t always its products. The company is working to improve the way
a leader. In 1969, Samsung began making televisions with people use and control gadgets.”
technology borrowed from Sanyo. Its models carried low By 2004, Samsung was the best-selling brand in
sticker prices, but the televisions compared poorly in qual- high-end TVs in the United States. And Samsung devel-
ity to sets made by other manufacturers. oped the first clamshell phone with a hidden antenna—
Then in 1988 the company entered the mobile phone and sold 10 million units, making some $1.2 billion in
market with a commitment to quality. Its mobile phones profits since its debut. “Good design is the most impor-
have helped Samsung overcome its quality and image tant way to differentiate ourselves from our competitors,”
difficulties. In 2001 the company’s Spanish subsidiary, says CEO Kang Yun Je.
Samsung Electronica Espanola SA (SESA), was certi-
• Chung Kook Hyun, the Senior Vice President who
fied in the Hardware category for the quality control sys-
runs design operations for Samsung says, “Just as
tem known as Technology Leadership 9000 (TL9000).
a lizard cuts off its own tail to move on, we will
Samsung Electronica is distinguished as being the first
have to break with the past to move forward.”
company to receive such certification. Based on ISO 9001,
How do you think feedback has helped Samsung
TL9000 is the most advanced quality control system in the
move forward?
telecommunications industry.
Source: David Rocks and Moon Ihlwan, “Samsung Design,”
In 1993, Chairman Lee Kun Hee decided that the com- Business Week, November 29, 2004, http://www.businessweek
pany’s products would emphasize design. “Samsung’s .com/magazine/content/04_48/b3910003.htm.
Being Sensitive to the Sender Senders communicate because they believe

they must. They pick a certain medium, time, and receiver because they see
these elements of communication as appropriate. Receivers should approach
every communication with the assumption that the message is important to the
sender. They should try to discover why that is so and what value the message
has for them as receivers. Being sensitive means not interrupting or distract-
ing the speaker. If a sender is having trouble making the message clear, the re-
ceiver must try to help or act to postpone communication until the sender is better
prepared.
Indicating an Appropriate Medium Receivers can often facilitate commu-

nication by stating a preference for a certain medium. Many managers want to
receive important messages in writing so that they can study and store them.
E-mail, faxes, letters, memos, and reports can meet these requirements. Some-
times the request is for a face-to-face meeting so that two or more people can in-
teract. Expressing a preference speeds up a communication effort and removes
possible guesswork by the sender. Both parties, therefore, should be more com-
fortable. Of course, company rules and procedures or a union contract often
specify preferred mediums for the handling of routine communications.
Initiating Feedback The receiver bears the primary responsibility for provid-
ing feedback. Until the receiver states his or her interpretation of the message,
the sender will never know if it was understood. Similarly, the receiver cannot
be certain that he or she has understood the sender’s intentions until the receiver
summarizes the message and obtains confi rmation that the summary was cor-
rect. When a receiver cannot restate a message, it is a sure sign that he or she did
not understand it. Samsung, the topic of this chapter’s Global Applications fea-
ture, uses customer feedback to improve its product quality and design.
Ten Commandments of Good Communication

The American Management Association International has prepared guidelines
for effective communication that serve as a useful summary of, and offer ad-
ditional insights into, much of what we have examined in this chapter. Fig-
ure 11.11 presents these guidelines.

CHAPTER SUMMARY
Discuss the importance of communication 6. Conflicting nonverbal communication: The noncor-
1 in organizations. Communication is the process
through which people and organizations accomplish ob-
relation of body language, expressions, and gestures
with other messages being sent.
jectives. By communicating with others, we share a com- Remedy: Actions speak louder than words. At the
mon understanding of one another’s attitudes, values, very least, try to determine what might explain
emotions, ambitions, wants, and needs. People must co- the contradiction; stress and emotions can confuse
ordinate and pool their efforts, electronically and other- the process.
wise, to please their customers. Prompt communication
7. Emotions: The clouding of logic and judgment by
about problems is essential for creating and adapting to
emotion. Sender and receiver may become adversar-
change. Quality, productivity, and profitability depend
ies rather than partners in a process.
on accurate and timely communications on a variety of
Remedy: Avoid the communication process when
issues. All employees must have feedback during their
either the sender or receiver is in an emotional, and
communication efforts and work performance.
defi nitely when either is in an irrational, state.
Diagram the communication process and label
2 all its parts. Figure 11.1 illustrates the process. It
begins with the sender (a person or group) planning the
8. Noise: Anything in the communication environment
that can interfere with the sending and receiving of
messages.
effort. The sender’s ideas are formulated into a message.
Remedy: Avoid the process until you can eliminate
An appropriate medium is chosen and used to deliver the
or avoid the sources of noise. Don’t try to compete
message to the intended receiver. Finally, efforts to en-
with those sources for a receiver’s attention.
sure mutual understanding and seek clarification (feed-
back) are engaged in by both sender and receiver. Describe the uses of downward, horizontal,
List and explain the barriers to interpersonal
4 and upward communication channels. Down-
3 communication and suggest remedies to
overcome them.
ward channels send messages from managers to non-
managers and from top management to all others in the
company. Mission, vision, feedback to requests from be-
1. Diction and semantics: The use of words, terms, and low, policies, solutions, goals, and appraisals are typical
symbols that are abstract or have multiple meanings subject areas.
and elicit emotional responses. Horizontal channels connect people of similar rank
Remedy: Choose clear and precise language, keeping and status, insiders connect with outsiders, and team
your receiver’s understanding in mind. members interact with one another.
Upward channels provide feedback required by
2. Expectations of familiarity: The assumption that
downward communication. They provide input for
you know what the sender is sending before you
decisions at higher levels and status reports on the con-
receive the entire message.
ditions throughout the organization.
Remedy: Don’t draw any conclusions until the entire
message has been delivered and received. Read and Explain the informal communication channel
listen with an open mind. 5 known as the grapevine. The grapevine arises
spontaneously through social interactions and carries all
3. Source’s lack of credibility: The receiver’s perception
nonofficial messages between and among organization
that the sender lacks sufficient credibility in the sub-
members. It is usually word of mouth and can penetrate
ject area.
the tightest security. It is fast, difficult to stop, and may
Remedy: Hear the sender out; fresh perspectives of-
be a support for or an obstruction to management efforts.
ten bring new and better suggestions and solutions.
List and explain the barriers to organizational
4. Preconceived notions: The negative reaction to ideas
that differ from your own.
6 communication and suggest remedies to
overcome them.
Remedy: Try to keep an open mind on every subject,
especially those most familiar to you. 1. Overload: The sending and receiving of too much in-
formation, given the circumstances surrounding the
5. Differing perceptions: The different way each person
communication.
observes and makes judgments. Most people stereo-
Remedy: As a sender, deliver only what your best
type other individuals, for better or worse, prejudg-
judgment and observations during the effort suggest
ing their motives as well as who they are.
your receiver can handle. As a receiver, inform the
Remedy: Judge people on their individual merits.
sender when incoming data becomes excessive.
What matters is who they are as individuals.
2. Filtering by levels: The increased embellishment and serve their particular customers’ needs. Downplay
fi ltering of information as it passes through succes- and eliminate artificial barriers.
sive levels.
8. Managers’ interpretations: The perhaps-flawed judg-
Remedy: Try to deliver messages in the most direct
ment of managers. Managers are most often the ini-
way possible; avoid nonessential handling. Use writ-
tiators of the communication process. Like those
ten formats that can pass unaltered through several
they manage, they have their virtues and vices. Their
layers or hands.
judgment about the when, where, how, and why of
3. Timing: The sending of information too late to be the process is not flawless.
of use or without consideration for the receiver’s Remedy: Provide training in how to communicate in
receptivity. all the various media.
Remedy: Use technology to speed the flow and store
9. Electronic noise: Breakdowns, overloads, static on
the message until the receiver is receptive.
the lines, and poorly trained operators, resulting in
4. Lack of trust and openness: The guarding and con- miscommunication. Electronic media both help and
trol of information and access to it by key people, re- hinder communication efforts.
sulting in a closed culture and climate. Such cultures Remedy: Provide training for all in the proper use
and climates ignore individuals and operate on fear and maintenance of various pieces of equipment and
and suspicion. software programs before people are authorized to
Remedy: Training to create trust, ethical behavior, use them.
and “walking your talk” are cures for this barrier.
Describe the responsibilities of senders and
5. Inappropriate span of control: Too many, or too
few, subordinates or team members under any one
7 receivers during the communication process.
Senders have the following responsibilities:
leader.
• Being certain of intent before attempting communi-
Remedy: Reorganize and reassign personnel to more
cation
appropriate groupings.
• Knowing the receiver and constructing the message
6. Change: Change in processes, systems, or leadership
accordingly
that creates new demands for communication; fear
causes resistance. • Selecting the proper medium, given the particular
Remedy: Remove fear through forewarning and by circumstances
making standards and requirements clear. Point out
• Timing the transmission for maximum effect
the positives and similarities to what exists, before
communicating the differences. • Seeking and giving feedback
7. Rank or status in the company: Differences in rank Receivers have the following responsibilities:
and status that inhibit communication when a per-
• Listening actively
son is intimidated by someone of higher position.
Self-image can become distorted if a person is sur- • Being sensitive to the sender
rounded by yes-men and no opposition.
• Indicating an appropriate medium
Remedy: Instituting appraisals by one’s subordinates
and peers using objective, measurable standards is • Initiating feedback
helpful. Hold people accountable for how well they
KE Y TERMS
communication information perceptions
diction interpersonal communication receiver
feedback jargon semantics
formal communication channels medium sender
formal communication networks message stereotypes
grapevine noise understanding
informal communication channels nonverbal communication
RE VIE W QUESTIONS
1. Why is communication so important in 5. How does the grapevine work in organizations?
organizations?
6. What are the barriers that can interfere with organi-
2. What are the essential elements in any effort to zational communication efforts?
communicate?
7. What must a sender do before attempting to commu-
3. What are the barriers that can interfere with inter- nicate?
personal communication efforts?
8. What must a receiver do when entering into the com-
4. What are the major uses for downward, horizontal, munication process?
and upward communication channels?

1. What barriers exist in your working or school envi- 3. Find individuals in class or at work who own a
ronment that inhibit your ability to get information Samsung product. Ask them why they purchased
you need on a timely basis? Are these organizational, their Samsung and whether their motivations match
interpersonal, or both? up with those stated in this chapter’s Global Applica-
tions feature.
2. Referring to this chapter’s Management in Action
case, what kind of barriers to communication is
American Airlines likely to experience with its heavy
reliance on electronic linkages to customers?
Links are provided for all Internet exercises at 2. Organize a speech explaining several instances in
http://plunkett.swlearning.com. which you have personally encountered some of the
1. In your new position, you will manage a team that’s barriers to interpersonal communication discussed
doing business with the Japanese. To be effective, in this chapter. Describe how you overcame them.
you must understand the manners and customs of 3. Review Toastmasters Speaking Tips for Successful
the Japanese. Make a list of Japanese manners and Public Speaking. Which one(s) could help you the
customs that differ from those of Westerners. most? http://www.toastmasters.org/tips.asp/

The Business and Company Resource Center (BCRC) is AMERICAN AIRLINES AT A GLANCE
an online database and research tool published by Thom- Headquarters:
son/Gale. Most college and university libraries subscribe Founded:
to electronic databases, as well as print. Check to see if Top Executive:
your library subscribes to BCRC. If so, you may access Revenues for past year:
the database. (Also, you may have access to it through 52-week stock price high/low:
this textbook. Check with your instructor.) The BCRC Passengers carried:
will give you more up-to-date, targeted, and proprietary Number of planes in fleet:
information than any Internet search engine. Further-
more, the information you fi nd is highly respected.
Use the BCRC to fi nd the following information about

American Airlines. Add any other interesting informa-
tion that you fi nd.
APPLICATION CASE
Alcoa’s Open Work Spaces “The offices at Alcoa are designed around a cen-
Companies increase communication when workers and tral escalator where people can see one another on many
managers alike inhabit open work spaces rather than floors. Elevators do not allow for visibility between
private offices. Marilyn Farrow, member of IIDA: Inter- floors and do not allow for as much visibility of people
national Interior Design Association College of Fellows, coming and going. Companies use their open stairway
explains, space for social interactions and for impromptu knowl-
edge exchange” (Smith).
The ‘Old Thinking’ of entitlement; one person,
Office floors at Alcoa have desk-storage areas and
one workspace, one site; job title, years of ser-
small conference tables with ports (for easy connections
vice, status; square feet per person; windows,
between employees’ laptop computers and the devices of
corners, and level of finish are giving way to
customers and suppliers). Also, it is possible for employ-
‘New Thinking’ which values people as a source
ees to plug in laptop computers randomly at meeting ta-
of knowledge; empowered people contribute
bles and elsewhere, even on the deck near the cafeteria.
more; two heads are better than one; faster, bet-
There are at least two paneled work spaces on each floor
ter, cheaper; open communication is good—‘need
for employees to view videos or to improve their com-
to know’ not the rule; serendipitous talk is not
puter skills away from their desks.
idle talk; informal communications have value.
Workers want to win within this new scenario,
Questions
and enabled by an appropriate workplace, they
1. What barriers to organizational communication are
can (Smith).
overcome by this type of working situation?
Alcoa’s Corporate Center is an example of a build- 2. What problems can arise in such an open environ-
ing with open work spaces. Alcoa is the world’s leading ment?
producer of primary aluminum, fabricated aluminum, 3. What kind of workers or work might suffer in such
and alumina. The corporate center in Pittsburgh is loan environment?
cated on the Allegheny River and houses employees in
a unique open environment. No one has an office, not Sources: Laurie A. Smith, “Space SIG 10: Workspace and Learning
Organizations,” KnowledgeBoard, January 14, 2004, http://www
even the top executives. The organic environment allows
.knowledgeboard.com/item/1181/23/5/3; Donald Miller, “Alcoa Corpo-
employees to meet and form problem-solving groups rate Center: A Triumph over Pretension,” Post-Gazette, September 18,
anywhere within the facility at any time. 1998; Alcoa Inc., http://www.alcoa.com.

NEADS Creates Partnerships between Communication is central to success at NEADS.
People and Dogs Communication between trainer and dog, between in-
Suppose you woke up one day and couldn’t see. Or per- terviewer and client, between trainer and interviewer,
haps you couldn’t hear, couldn’t speak, or couldn’t walk. and among the trio of client, trainer, and dog is a well-
How would you communicate and interact with the established process. Executive Director Sheila O’Brien
world around you? Today’s technology provides solu- describes the importance of the process this way. “The
tions to some of these challenges, but there is a live solu- match of client and dog is the most important thing that
tion as well: assistance dogs. The National Education for we do, because if we make a bad match, we can’t salvage
Assistance Dog Services (NEADS) acquires, trains, and it in any way, shape, or form.” Thus, while a trainer
matches dogs with people who need assistance. Founded begins to work with a dog, developing the skills it will
in 1976 as a nonprofit organization, NEADS is based in need in its new role—such as responding to a doorbell,
the rural community of Princeton, Massachusetts, where ringing telephone, or activated smoke alarm—an inter-
it adopts and trains dogs to serve their new owners. viewer reviews a client’s application and conducts an
in-person interview to learn as much about the client as tion,” says O’Brien. If hearing or speaking is an issue,
possible. If the person has a hearing loss, the interviewer she explains, “We don’t necessarily rely on voice . . . we
will ask how the loss occurred, how severe it is, and rely on body language.” Hand signals are often the best
what the prognosis might be. Clients answer questions means of communication between a dog and a hear-
about lifestyle: Do they live in the city or the country? ing-impaired client, so both are trained for their new
Do they work outside the home? How many people live language. Clients who will be receiving dogs live at the
in the home? Do they travel a lot? and so forth. They NEADS facility for two weeks while they learn how to
also have a chance to describe their expectations and communicate with their new partners. “We have to be
preferences—whether they want a large or small dog, an open to a wide variety of communication skills,” says
energetic or quiet dog, a male or female dog. “The inter- O’Brien. “We’ll do what works. We’ll use any kind of
viewer does have to listen on many levels,” notes Shelia communication we can.”
O’Brien. “[The interviewer must] ask questions and lis- In its three decades of existence, NEADS has trained
ten to the answers.” Once the interview is complete, the more than 650 client-dog teams. Because the program
interviewer and trainers meet to try to match dogs with has been so successful, there is currently a two-year
clients. waiting period for clients who have been accepted into
The match meeting is lively. By now, the trainers NEADS to receive their dogs. But when the match is
know the characteristics of the dogs, and the interview- made, it lasts a lifetime.
ers know the personalities of their clients. “Match
meetings have a lot of give and take,” says O’Brien. Questions
“The lines of communication have got to be open.” 1. How would you describe the capacity and richness
Sometimes, a match may seem close—but needs some of the NEADS match meeting as a communication
tweaking. So a trainer will work further with the dog, channel?
and ultimately the client-dog pair, to create a smooth 2. According to one study, the impact of facial expres-
relationship. sions on message interpretation is 55 percent. How
Because NEADS staffers deal with different types might this fi nding be used at NEADS?
of individuals, ranging from hearing-impaired clients to 3. Why are listening skills so important at NEADS?
dogs in need of training, they are open to all kinds of
communication. They don’t view communication bar- Source: Organization Web site, http://www.neads.org, accessed Feb ru-
riers as an obstacle. “I think my staff is of the opinion ary 2, 2007.
that the sky is the limit when it comes to communica-
BIZ FLIX VIDEO CASE

Patch Adams changing the programmed responses of people they meet
Hunter “Patch” Adams (Robin Williams), a maverick on the street. Along the way, they stumble upon a meat
medical student, believes that laughter is the best medi- packers convention where this scene occurs.
cine. The rest of the medical community believes that
medicine is the best medicine. Unlike traditional doctors What to Watch for and Ask Yourself
who remain aloof, Patch Adams wants to be close to his 1. What parts of the communication process appear
patients. Williams’s wackiness comes through clearly in in this scene? Note each part of the process that you
this fi lm, which is based on a true story. see in the scene.
This scene comes from the fi lm’s early sequence, 2. What type of communication does this scene show?
“The Experiment,” which takes place after the students’ Small group, large audience, persuasive?
medical school orientation. Patch Adams and fellow 3. Do you think Patch Adams is an effective communi-
medical student Truman Schiff (Daniel London) leave cator? Why or why not?
the University Diner. They begin Patch’s experiment for
O LIST
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LEARNING OBJECTIVES
HUMAN After studying this chapter, you should be able to:
MOTIVATION 1 Discuss the factors that stimulate and influence motivation
Differentiate between content and process theories

2 of motivation
List the five levels of needs according to Maslow and give
3 an example of each
Discuss the impact of hygiene and motivation factors
4 in the work environment
Explain the characteristics of a person with high-
5 achievement needs
Identify the needs associated with ERG theory
6
Discuss the relationship between expectations
7 and motivation
Explain the relationship between reinforcement
8 and motivation
Explain how equity influences motivation
9
Explain how goals influence motivation
10
Discuss the importance of a manager’s philosophy of
11
Getty Images
management in creating a positive work environment

Describe how managers can structure the environment
12 to provide motivation
SAS: Investment in People
Many workers fantasize about the perfect job—but
few ever have the opportunity to experience it. For Jim Goodnight
employees of SAS, the world’s largest privately held Born: 1943, Salisbury, North Carolina
software company, that dream is a reality. SAS’s Current Position:
employee-focused philosophy is “satisfied employees President and Chief Executive Officer (CEO), SAS
create satisfied customers.” Mark Britt, a software Career Highlights:
developer at SAS since 1989, says “I just can’t imag-
1966 Computer Programmer, NASA Apollo space
ine leaving SAS, and I’ve felt that way for a very long
time. If somebody offered to double my salary, program
I wouldn’t even think about it” (60 Minutes). 1971 Faculty, North Carolina State University
How does SAS satisfy employees? It pays a 1976 President, CEO, Computer Programmer
competitive wage and offers extraordinary benefits. Education: North Carolina State University, BS,
“SAS employees work in an environment that fos- 1965; MS, 1968; Ph.D., 1972
ters and encourages the integration of the company’s Personal: Wife, three children
business objectives with their personal needs” (SAS, Source: International Directory of Business Biographies,
Company, Work/Life). The work environment includes http://www.referenceforbusiness.com/biography/F-L/
an on-site fitness center, day care center, cafete- Goodnight-Jim-1943.html.
ria, and medical office. Employees are encouraged
to work a 35-hour week, and there is no dress code.
They can get massages, have their cars detailed, and “100 Best Companies to Work for in America,”
use the putting green. Just ten minutes away from earning it a membership in Fortune’s Hall of Fame.
the company headquarters is a country club. Mem- Companies are scored in four areas: credibility (com-
bership costs $30,000, but SAS employees can join munication to employees), respect (opportunities
for $3,000 (60 Minutes). and benefits), fairness (compensation, diversity), and
Jim Goodnight, CEO, Chairman, and President of pride/camaraderie (philanthropy, celebrations). SAS’s
SAS, cofounded the company in 1976. He earned his corporate culture was featured on 60 Minutes, in a
bachelor’s and master’s degrees and doctorate in sta-
tistics from North Carolina State University. He pro-
grammed many of the procedures that compose SAS ted
ut is lis
business analytics software. Goodnight invests in his c o m pany b im Good -
f t wa re loyer. J a-
employees and their families, because he held so a n e m p e s the c om p a c t
believes that the employees are essential is a p rivately xcellence as b e li e v to a t tr
SAS se AS, ar y
to SAS’s success. The company has never e w he re for it ofounder of S ons is necess ees with
els C ti plo y
had a losing year and has never laid off an E O an d yee rela rds em center and
night, C ntion to emplo t. SAS rewa t n e s s h in
n fi
employee. “We’ve made a conscious ef-
ny’s at
te
t h e b est tale g an on -site also ranks hig d
fort to ensure we’re hiring and keeping the re t a in c lu d in p a n y s , a n
and s, in
b e n e fi t s c o d e. T h e
c om irnes
right talent to improve our products and bet- n g ib le s y, r e s pect, fa nal needs
t a re il it r so
e of a d s credib and pe ed by news
ter serve our customers,” says Goodnight. absenc alues such a of business c o g niz
l v n re .
“To attract and retain that talent, it’s essential cultura S’s integrati o
a t h a s been ademics alike
that we maintain our high standards in regard e . S A o d e l th n d a c
prid ym s, a
ductivit agazine
to employee relations” (SAS, News). is a pro , business m
s
Goodnight was inducted into the 2005 program
CRN Industry Hall of Fame, “for his more than
30 years of contributions to the analytic soft-
ware industry, his commitment to education and his
pioneering vision of what a workplace should be”
(Darrow). The CRN Industry Hall of Fame honors the
creators of information technology and those who
steer the high-tech industry, channeling it in innova-
tive directions.
The company’s work-life programs and unique
corporate culture are recognized outside SAS. It has
Getty Images
been included in the list of 100 Best Companies for

Working Mothers 13 times. For nine consecutive
years, SAS has appeared among Fortune magazine’s
segment titled “The Royal Treatment,” and on Oprah as the Best Place to Work (SAS,
Company, Work/Life).
Stanford University Business Professor Jeffrey Pfeffer teaches the SAS model in his
executive seminars. He believes that many companies could benefit from Goodnight’s ex-
ample, and discusses the success of SAS: “It’s completely common sense to understand
the trade-off between time and money. If you take burdens off your employees so that
they do not have to spend time sitting in doctor’s offices, and all this other stuff, then they
will be more productive” (60 Minutes).
Sources: Barbara Darrow, “James Goodnight, SAS Institute,” CRN, December 9, 2005, http://www.crn.com/
sections/special/reports/hof.jhtml?ArticleID5174907141; “Working the Good Life,” 60 Minutes, CBS News,
April 20, 2003, http://www.cbsnews.com/stories/2003/04/18/60minutes/main550102.shtml; SAS, http://www
.sas.com.
Introduction
When you ask people what motivates them at work, most will tell you, in a tone
usually reserved for children and in-laws, that they do it for the money. But this
doesn’t explain people like Warren Buffett or Bill Gates. Their combined net
worth is greater than the GDP of Luxembourg, and yet these billionaires throw
themselves into their jobs as if their next meal depended on it. So if it’s not
about the money, what is it?
This chapter will help provide the answers. First, the chapter presents the
basics of motivation. Then it continues with an analysis of motivation theories
that focus on employee needs and ones that focus on behaviors. The chapter
concludes with a description of how managers can structure the environment to
provide motivation.
Challenge of Motivation
What do Southwest Airlines, Chili’s restaurants, and SAS have in common? One
answer is success. If you entered each workplace, you would notice another sim-
morale ilarity. In each organization the morale is excellent. Morale is the attitude or
The attitude or feelings workers feelings the workers have about the organization and their total work life.1 The
have about the organization and
their total work life CEOs of each company and their management teams have created a positive
work environment. Each, in his or her own unique way, has taken steps to en-
quality of work life (QWL) hance the quality of work life (QWL).2 Efforts at increasing QWL focus on im-
Factors in the work environ- proving workers’ dignity, physical and emotional well-being, and workplace sat-
ment contributing positively or
negatively to workers’ physical isfaction. By developing a positive work environment, managers can capture the
and emotional well-being and commitment of their employees. The result is employees who are truly moti-
job satisfaction vated—they want to do their jobs well. “SAS workers have been very loyal: The
company boasts an employee turnover rate of less than 4 percent a year, a rate
it maintained throughout the notorious dot-com boom-and-bust that decimated
tech startups and public companies alike.” 3 Such commitment, combined with
the skill to do the job, creates an energetic, highly competent labor force to work
in partnership with management. Figure 12.1 shows the factors that contribute
to the quality of work life.
The managers at Southwest Airlines, Chili’s, SAS, and Semco (the latter
the subject of this chapter’s Global Applications feature) have met one of the
great management challenges. They have discovered how to motivate employees.
Chapter 12 Human Motivation 393
Figure 12.1 Factors that enhance the quality of work life
Employee
Commitment
Smooth Union– Absence
Management of Apathy
Relations
Positive Development and

Impact on Utilization of
Personal Life Employees
Absence of Employee
Undue Job Involvement and
Stress Influence
Positive State Quality of Advancement

of Mind Work Life Based on Merit
Economic Career Goal

Well-Being Progress
Pleasant
Good Relations
Physical Working
with Supervisor
Environment
Confidence in Positive
Management Work-Group
Relations
Respect for
Individuals
These managers recognize that motivation is not magic but a set of processes
that influences behavioral choices.4
Basics of Motivation
Modern researchers and enlightened managers have discovered that motivation
is not something that is done to a person. It results from a combination of factors,
including an individual’s needs and his or her ability to make choices, as well as
an environment that provides the opportunity to satisfy those needs and to make
those choices. Motivation is the result of the interaction of a person’s internal
1Discuss the factors that
stimulate and influence
motivation
needs and external influences, which determine how a person will behave.
People make conscious decisions for their own welfare. Why do you do what
you do? Why do you choose to go to school and someone else does not? Why do
you choose to study hard and someone else does not? Why do some employees
GLOBAL APPLICATIONS
a g es
No More Fear at Semco
Get t y Im
When Ricardo Semler took over the family business, shares his title. Six people, including a woman, rotate as
Semco, which makes propellers and rocket-fuel propel- CEO, each putting in six-month tours. In addition, even
lant mixers for satellites, among other products, looked though Semler owns the company, his vote carries no
much like any other old-line Brazilian company. Fear was more weight than anyone else’s.
the governing principle. Guards patrolled the factory floor, In a country that barely blinks at high inflation, mere
timing people’s trips to the bathroom and frisking workers survival is a feat; but Semco has done much better than
who left the plant. Anyone who was unlucky enough to that. Sales per employee are more than four times the av-
break a piece of equipment had to replace it out of his or erage compared with the sales of Semco’s competitors.
her own pocket.
• Semler says, “The desire for uniformity is a major
Semler initially carried on in this style but soon revolted,
problem. But it is a subproduct of the same problems
vowing to remake his company into a “true democracy, a
that plague management, which is the need to feel in
place run on trust and freedom, not fear.” He has created
control, that we’re all on the same page, and every-
an environment where people want to work—Semco gets
one is being treated equally. But what I want to ask is,
one thousand applications for every job opening.
‘Why do we all need to be on the same page?’ And
Now employees are empowered to run the company.
you realize, of course, that no two people are equal
They wear what they want, choose their own bosses, and
in any respect.” What does his statement have to do
come and go as they please. A third of them actually set
with motivation?
their own salaries, with one crucial “hitch.” They have to
reapply for their jobs every six months. Production work- Sources: Brad Wieners, “Ricardo Semler: Set Them Free,”
CIO Insight, April 1, 2004, http://www.cioinsight.com/
ers evaluate their managers once a year and post the article2/0,1397,1569009,00.asp; Ricardo Semler, The Seven Day
score. If a manager’s grade is consistently low, he or Weekend, Viking/Penguin, 2003; Ricardo Semler, Maverick: The
Success Story Behind the World’s Most Unusual Workplace, Warner
she steps down. Books, 1995.
Also, Semler shares company profits. He regularly dis-
tributes 23 percent of profits to the employees. He also
motivation at Southwest Airlines take outside education classes and others do not? Why do
The result of the interaction of
a person’s internal needs and
some Nordstrom employees adopt the culture and become “Nordies” and oth-
external influences—involving ers do not? 5 The study of motivation is concerned with what prompts people to
perceptions of equity, expec- act, what influences their choice of action, and why they persist in acting in a
tancy, previous conditioning,
and goal setting—which deter-
certain way. The starting point is to look at a person’s needs by using a motiva-
mine how a person will behave tion model.
Motivation Model
needs A person’s needs provide the basis for a motivation model. Needs are deficien-
Physiological or psychological cies that a person experiences at a particular time. They can be physiological or
conditions in humans that act
as stimuli for behavior psychological. Physiological needs relate to the body and include requirements
for air, water, and food. Psychological needs include the need for affiliation and
self-esteem. Needs create a tension (stimulus) that results in wants. The person
then develops a behavior or set of behaviors to satisfy his or her wants. The be-
havior results in action toward goal achievement.6
Figure 12.2 offers a rudimentary example of the motivation model. A per-
son feels hunger (a need). Recognition of the need triggers a want (food). The
Figure 12.2 Basic motivation model
Wants
Behavior
Tension
(Stimulus)
Action
Unsatisfied Toward Goal
Needs Achievement
Feedback
Food
Cook a
Hamburger
Tension
(Stimulus)
Eat the
Hunger Hamburger
No More
Hunger
Pangs
person chooses to cook a hamburger (behavior) and then eats it (takes action
to achieve the goal). Satisfied, he feels no hunger (feedback). When the model is
modified to reflect the fact that behavior is subject to many influences, it grows
more complex. Why did the person in the example choose a hamburger, not ce-
real? Why did he prepare the hamburger himself instead of buying it? Has the
person previously practiced the behavior? If so, did it satisfy the need? The in-
tegrated motivation model—by addressing more complex influences on motiva-
tional choices—provides these explanations.
Integrated Motivation Model

Unsatisfied needs stimulate wants and behaviors. In choosing a behavior to sat-
isfy a need, a person must evaluate three factors:
1. Past experiences. All the person’s past experiences with the situation at
hand enter into the motivation model. These include the satisfaction derived
from acting in a certain way, any frustration felt, the amount of effort re-
quired, and the relationship of performance to rewards.
2. Environmental influences. The choices of behaviors are affected by the en-
vironment, which in a business setting make up the organization’s values as
well as the expectations and actions of management.
3. Perceptions. The individual is influenced by perceptions of the expected ef-
fort required to achieve performance and by the value of the reward both
absolutely and in relation to what peers have received for the same effort.
In addition to these three variables, two other factors are at work: skills and
incentives. Skills are a person’s performance capabilities; they result from train-
ing. Incentives are factors created by managers to encourage workers to perform
a task.
Look at the motivation process again, but this time from a business
perspective:
• Unsatisfied needs stimulate wants. In this situation a fi rst-level manager

feels a need to be respected. She wants to be recognized by top management
as an outstanding employee.
• Behavior is identifi ed to satisfy the want. The fi rst-level manager identifies
two behaviors that can satisfy the want: volunteering to write a report or
seeking a special project. To consider which behavior to choose, she con-
sciously evaluates the rewards or punishments associated with the perfor-
mance (incentives); her abilities to accomplish the activities identified (skills);
and past experiences, environmental influences, and perceptions.
• The individual takes action. Based on her analysis, the fi rst-level manager
selects what she considers the best option (behavior) and then takes action.
• The individual receives feedback. The response the manager gets from top
management constitutes the feedback in this case. If the response is positive,
the top manager has done more than help the fi rst-level manager meet her
need. The top manager has increased the likelihood that the first-level man-
ager will behave similarly in the future.
Figure 12.3 presents the integrated motivation model, which shows how ex-
perience, environment, and perception influence decision making.
Figure 12.3 Integrated motivation model
Past Experiences
• Satisfactions
• Frustrations
• Effort Required
• Relationship of Performance to Rewards
Environmental Influences
• Organizational Values
• Managerial Actions and Expectations
Perceptions
• Effort to Achieve Performance
Incentives
• Value of the Reward Skills
Supplied by
Needed
• Potential Equity/Inequity Manager
Wants
Recognition Behavior
from Boss Write Report?
Volunteer?
Tension
(Stimulus)
Action
Unsatisfied Need Toward Goal
Need to Achievement
Be Respected Volunteer
Feedback
Content and Process Theories of Motivation The integrated motivation

model is useful in exploring theories of motivation in two categories: content
theories and process theories. Content theories emphasize the needs that mo-
tivate people. If managers understand workers’ needs, they can include factors
in the work environment to meet them, thereby helping to direct employees’ en-
2
content and process
theories of motivation
content theories ergies toward the organization’s goals. Process theories explain how employ-
A group of motivation theories
emphasizing the needs that
ees choose behaviors to meet their needs and how they determine whether their
motivate people choices were successful.7
process theories
A group of theories that explain
how employees choose behav-
iors to meet their needs and Content Theories: Motivation Theories
how they determine whether
their choices were successful Focusing on Needs
Maslow’s Hierarchy of Needs
3
List the five levels of
needs according to
Maslow and give an
example of each
Psychologist Abraham H. Maslow 8 based his study of motivation on a hierarchy
of needs. His theory is based on four premises:
1. Only an unsatisfi ed need can influence behavior; a satisfi ed need is not a
motivator. Thus, someone who has just eaten is unlikely to want food until
the hunger need arises again.
2. A person’s needs are arranged in a priority order of importance. The hier-
archy goes from the most basic needs (such as water or shelter) to the most
complex (esteem and self-actualization).
3. A person will at least minimally satisfy each level of need before feeling the
need at the next level. Someone must obtain companionship before desiring
recognition.
4. If need satisfaction is not maintained at any level, the unsatisfi ed need will
become a priority once again. For example, for a person who is already feel-
ing a lack of social connectedness, safety could become a priority need once
again if he or she is fi red.
Five Levels of Needs Figure 12.4 displays Maslow’s hierarchy of needs.

The exhibit lists the needs in order of priority, from bottom to top. The fi rst
category is composed of physiological (physical) needs. These are the primary,
or basic-level, needs: the needs for water, air, food, shelter, and comfort. In the
working environment, managers try to satisfy these needs by providing salaries
and wages that allow employees to buy the basic necessities. While the employee
is at work, the manager meets these needs by providing water fountains, clean
air, no objectionable odors or noises, comfortable temperatures, and lunch
breaks.
When physiological needs are met to the individual’s satisfaction, the next
priority becomes safety—the need to avoid bodily harm and uncertainty about
one’s well-being. Safety is closely allied to security, the freedom from risk or
danger. Behaviors that reflect safety needs include joining unions, seeking jobs
with tenure, and choosing jobs on the basis of health insurance and retirement
programs. All of us desire a work environment in which we can be free from
threats to our physical and emotional senses of security.9 Managers attempt to
satisfy safety needs by providing salaries, benefits, safe work conditions, and job
security.
One such manager is Robert M. Thompson, Founder of Michigan’s larg-
est asphalt paving contractor, Thompson-McCully Company. When Thompson
sold his company to Oldcastle Materials, a subsidiary of Ireland’s CRH plc, he
recognized his employees’ contributions to his success by giving the 550 com-
Figure 12.4 Abraham Maslow’s hierarchy of human needs
Self-Realization
Needs • Reaching Your Potential
• Independence
• Creativity
• Self-Expression
Esteem
Needs • Responsibility
• Self-Respect
• Recognition
• Sense of Accomplishment
Social
Needs
• Companionship
• Acceptance
• Love and Affection
• Group Membership
Safety
Needs • Security for Self and Possessions
• Avoidance of Risks
• Avoidance of Harm
• Avoidance of Pain
Physical
Needs • Food
• Clothing
• Shelter
• Comfort
• Self-Preservation
pany employees and retirees a special bonus of $128 million total. Also, he paid
the taxes on the bonus. He chose Oldcastle Materials because of its record of not
dismantling companies or fi ring workers. One of Thompson’s employees happily
reports that his safety needs had been met:
“It was unbelievable. It is hard to tell you how I felt,” says Frank
Azzopardi, quarry manager [of Thompson-McCully] in Newport,
Mich., who received an annuity that kicks in at 55. He says he now has a
“secure feeling” because retirement funding “was always a big worry.”
Azzopardi says he “started on the end of a shovel as a laborer” and
worked his way up. “I never thought 14 years ago that I would be a
manager in this company or that I would share in the proceeds.10
Unfortunately, not all companies treat employees as well, as this chapter’s
Ethical Management feature illustrates.
Social needs become dominant when safety needs have been minimally grati-
fied. People desire friendship, companionship, and a place in a group. Love needs
ETHICAL MANAGEMENT
a g es
A Pink Slip for PeopleSoft
Get t y Im
Companies pay management consultants hundreds of Oracle chose a weekend in which to notify PeopleSoft
thousands of dollars to help them create work environ- employees of their termination: the company sent them
ments in which employees can be productive. One of the pink slips via express mail. Those not terminated received
basic themes promoted by consultants is valuing and re- a package containing new Oracle employment contracts.
specting the individual. For most it is a lesson quietly in-
• What does this situation say about the company’s
ternalized, but evidently not at Oracle.
value system?
Oracle and PeopleSoft are two of the largest sellers
• If you were an employee, what effect would this
of business software applications, and Oracle acquired
action have on your morale?
PeopleSoft. “PeopleSoft fought the deal for more than
• What is your reaction to the company’s statement?
18 months in a bitter battle marked by two court struggles
and public vows by Oracle Chief Executive Larry Ellison Source: Alorie Gilbert, “Oracle to PeopleSoft: The pink slip’s in the
mail,” CNET News.com, January 14, 2005, http://news.com.com/
to shut down PeopleSoft and discontinue its products” Oracle+to+PeopleSoft+The+pink+slips+in+the+mail/2100-1014
(Gilbert). _3-5536612.html.
include the needs for giving and receiving love.11 At work employees meet social
needs by interacting frequently with fellow workers and through acceptance by
others. The familiar gathering at the water cooler reflects employees’ needs to
interact socially as well as in their official business roles. The groups that em-
ployees form at lunchtime are also a result of their need to be social. Managers
can meet these needs by supporting employee get-togethers—birthday parties,
lunches, and sports teams.
The next level in the hierarchy, esteem needs, includes the desire for self-
respect and for the recognition of one’s abilities by others. Satisfaction of these
needs gives one pride, self-confidence, and a genuine sense of importance. Lack
of satisfaction of these needs can result in feelings of inferiority, weakness, and
helplessness. Work-related activities and outcomes that help meet individual
esteem needs include successfully completing projects, being recognized by peers
and superiors as someone who makes valuable contributions, and acquiring or-
ganizational titles. Wal-Mart Founder Sam Walton recognized the importance
of this need in creating Sam’s Rules for Building a Business. He discusses the
esteem need in Rule 5: “Appreciate everything your associates do for the busi-
ness . . . nothing else can substitute for a few well-chosen, well-timed, sincere
words of praise.” 12
Maslow’s highest need level, self-realization, relates to the desire for fulfi ll-
ment. Self-realization (also called self-actualization) represents the need to max-
imize the use of one’s skills, abilities, and potential.
Implications for Managers Maslow’s needs theory applies to all environ-

ments, not specifically to the workplace. Nevertheless, it presents a workable
motivation framework for managers. By analyzing employees’ comments, atti-
tudes, quality and quantity of work, and personal circumstances, the manager
can hope to identify the particular need level that individual workers seek to sat-
isfy. Then the manager can attempt to build into the work environment the op-
portunities that will allow individuals to satisfy their needs. To see how a man-
ager satisfies workers’ needs by applying Maslow’s theory, review Figure 12.5.
Also refer to the figure for ways the manager can facilitate need satisfaction.
Because people are unique in their perceptions and personalities, applying
the needs theory poses some difficulties. Just as one motive may lead to differ-
ent behaviors, similar behaviors in individuals can spring from different mo-
tives. The act of working hard on a new project, for instance, can arise from
many needs. Some people apply themselves in order to grow and develop; oth-
ers do so to be liked; still others wish to earn more money to enhance their sense
of security; and yet others want the recognition that success will bring. For this
reason, managers must use care when assessing motives simply by observing
behavior.
An unmet need can frustrate an employee. It will continue to influence his
or her behavior until it is satisfied, either on the job or off. The means of sat-
isfaction might mesh with the organization’s goals and processes. However, it
could compete or even conflict with them. The esteem need, for example, can
be satisfied by involvement with work-related groups or groups outside the work
environment.
The level of need satisfaction constantly fluctuates. Once a need is satisfied,
it ceases to influence behavior, but only for a time. Needs do not remain satisfied
over the long term.
Figure 12.5 Five common worker needs and appropriate managerial responses
LEVELS OF NEED
DEMANDING
WORKER’S CIRCUMSTANCES SATISFACTION NEED-SATISFYING ACTIONS
Employee has two children Physiological/safety Increase pay or train and promote employee
entering college next year to higher-paying job, if justified; confirm job
security.
Worker feels concern about a Safety If possible, reassure worker that jobs will not be
competitor’s purchase of eliminated; otherwise, frankly admit that certain
the firm jobs will be abolished. Encourage and assist
those affected to seek employment elsewhere.
Worker feels uncomfortable as Social Invite subordinates to a social evening at your
a new addition in a closely knit home creating an opportunity for the newcomer
work group to meet peers in an informal setting. Encourage
the new worker to participate in company
recreational activities. Sponsor the new worker
for membership in professional organizations.
Employee feels unappreciated Ego/self-esteem Examine the employee’s job performance
and find reasons for praise. Accept the employ-
ee’s suggestions where applicable. Build closer
rapport.
Worker wants to get ahead in Self-realization/ Provide specific guidance in pinpointing ultimate
the organization and has a self-actualization goal; help chart career path. Facilitate
general idea of an ultimate educational improvement. Provide opportunities
employment goal in the for job experience and recognition.
company
Herzberg’s Two-Factor Theory
4
Discuss the impact of
hygiene and motivation
factors in the work
environment
Psychologist Frederick Herzberg 13 and his associates developed a needs theory
called the two-factor, or hygiene-motivator, theory. Herzberg’s theory defines
one set of factors that lead to job dissatisfaction; these factors are called hygiene
factors. The theory also defi nes a set of factors that produce job satisfaction and
motivation; these factors are called motivators.
hygiene factors Hygiene Factors According to Herzberg, a manager’s poor handling of hy-
Maintenance factors (such as
salary, status, working condi- giene factors (often referred to as maintenance factors) is the primary cause of
tions) that do not relate directly unhappiness on the job. Hygiene factors are extrinsic to the job—that is, they
to a person’s actual work ac- do not relate directly to a person’s actual work activity. Hygiene factors are part
tivity, but when of low quality
are the cause of unhappiness of the job environment; they are part of the context of the job, not its content.
on the job When the hygiene factors that an employer provides are of low quality, employ-
ees feel job dissatisfaction. Even when the factors are of sufficient quality, they
do not necessarily act as motivators. High-quality hygiene factors are not neces-
sarily stimuli for growth or greater effort. They seek only to prevent employees’
job dissatisfaction.14 Hygiene factors are as follows:
• Salary. To prevent job dissatisfaction, a manager should provide adequate
wages, salaries, and fringe benefits.
• Job security. Company grievance procedures and seniority privileges con-
tribute to high-quality hygiene.
• Working conditions. Managers ensure adequate heat, light, ventilation, and
hours of work to prevent dissatisfaction.
• Status. Managers who are mindful of the importance of hygiene factors pro-
vide privileges, job titles, and other symbols of rank and position.
• Company policies. To prevent job dissatisfaction, managers should provide
policies as guidelines for behavior and administer the policies fairly.
• Quality of technical supervision. When employees are not able to receive
answers to job-related questions, they become frustrated. Providing high-
quality technical supervision for employees prevents frustration.
• Quality of interpersonal relations among peers, supervisors, and subordi-
nates. In an organization with high-quality hygiene factors, the workplace
provides social opportunities as well as the chance to enjoy comfortable
work-related relationships.
motivation factors Motivation Factors According to Herzberg, motivation factors are the pri-
The conditions, intrinsic to the mary cause of job satisfaction. They are intrinsic to a job and relate directly to
job, that can lead to an individu-
al’s job satisfaction the real nature of the work people perform. In other words, motivation factors
relate to job content. When an employer fails to provide motivation, employ-
ees experience no job satisfaction. With motivation, employees enjoy job satis-
faction and provide high performance. Different people require different kinds
and degrees of motivation factors—what stimulates one worker might not affect
another. Motivation factors also act as stimuli for psychological and personal
growth. These factors are as follows:
• Achievement. The opportunity to accomplish something or contribute
something of value can serve as a source of job satisfaction.
• Recognition. Wise managers let employees know that their efforts have been
worthwhile and that management notes and appreciates them.
• Responsibility. The potential for acquiring new duties and responsibilities,

either through job expansion or delegation, can be a powerful motivator for
some workers.
• Advancement. The opportunity to improve one’s position as a result of job
performance gives employees a clear reason for high performance.
• The work itself. When a task offers an opportunity for self-expression, per-
sonal satisfaction, and meaningful challenge, employees are likely to under-
take the task with enthusiasm.
• Possibility of growth. The opportunity to increase knowledge and personal
development is likely to lead to job satisfaction.
Figure 12.6 illustrates the hygiene and motivation factors. The hygiene fac-
tors relate to responses that range from no dissatisfaction to high dissatisfaction.
The motivators, if present in the work environment, can provide low to high sat-
isfaction. If not present, a complete lack of satisfaction can result.
Implications for Managers Herzberg’s theory relates specifically to the work

environment. Managers can use their knowledge to ensure that hygiene factors
are in place in the environment as a foundation on which to build motivation.
The absence of quality hygiene factors can lead to dissatisfaction in the work-
force—a lesson quickly learned by Chuck Mitchell at GTO Inc. The company,
located in Tallahassee, Florida, was a deteriorating five-year-old maker of au-
tomatic gate openers. When Mitchell replaced the founder, who had suffered a
fatal heart attack, he inherited greatly disillusioned workers in a work environ-
ment where hygiene factors had been neglected. It had been common practice
for the founder to do the following:
• Harangue employees for fi ling claims on the company’s health insurance
policy
Figure 12.6 Results of hygiene factors and motivation factors
Hygiene Factors
High Dissatisfaction Low
Absence of Factor Presence of Factor
The quality of each factor present influences each employee’s level of

satisfaction or dissatisfaction
Motivation Factors
Low Satisfaction High
Absence of Factor Presence of Factor

• Begrudge employees ten-minute breaks every two hours

• Have no budget funds available for machine repairs
• Insist that hourly workers work overtime without premium pay
• Direct employees to repair antique cars, install basketball backboards, and
build fences for the owner on company time
• Require employees to bring their own coffee and supplies for the break room
After Mitchell gained a sense of some of the higher-priority items among
the employees, there were certain hygiene factors he knew he could improve im-
mediately. As Mitchell notes, “The little things often mean more to people, and
they show that management cares about everybody.” So for starters, Mitchell
took some high-profi le steps:
• He bought coffee and supplies for the break room.
• He hired a roofer to patch the leaking building.
• He encouraged employees to bring in their personal cars so they could use
some of GTO’s tools to repair them over the weekend.
• He changed the health insurance policy from one with a $300 employee
deductible to one featuring a $5 co-payment.
• He introduced company-paid employee disability insurance.
• He gave employees keys to the building.
• He provided a “blank check” when employees needed money for machine
parts and repairs.
• He instituted a profit-sharing program.15
Once top management has provided satisfactory hygiene factors, it can focus, on
motivation factors, as the founder of Thompson-McCully demonstrates:
Bob Thompson “challenges people to achieve more by giving them more
responsibility,” says Office Manager Marlene Van Patten, an annuity re-
cipient who joined Thompson-McCully when it purchased Spartan As-
phalt in 1985. “He is a demanding person, but extremely fair. He always
has wanted to be the best and he has wanted his people to be the best.” 16
A critical point to note is that nearly all supervisors have the power to in-
crease motivation in the workplaces they manage by granting more responsibility
to employees, praising their accomplishments, and making them feel that they are
succeeding. Top managers at SAS and Southwest Airlines have come to the same
conclusion. Motivated employees believe they have control over their jobs and
can make a contribution.17 This belief provides the basis for team management,
empowerment, and intrapreneurship—to be discussed later in this chapter.
McClelland and the Need for Achievement

In the needs theory developed by psychologist David McClelland, certain types
of needs are learned during a lifetime of interaction with the environment.18 He
described three specific needs:
1. Achievement, or the desire to excel or achieve in relation to a set of
standards
2. Power, or the desire to control others or have influence over them
3. Affiliation, or the desire for friendship, cooperation, and close interpersonal

relationships
Achievement relates to individual performance. Power and affi liation, by
contrast, involve interpersonal relationships.
Studies of achievement motivation have produced two important ideas:
(1) a strong achievement need relates to how well individuals are motivated to per-
form their work, and (2) the achievement need can be strengthened by training.
McClelland’s needs theory recognizes that people may have different mix-
tures or combinations of the needs; an individual could be described as a high
achiever, a power-motivated person, or an affi liator.
High Achiever McClelland and associate David Burnham defined the

characteristics of the high achiever.19 They believed the high achiever does the
following:
• Performs a task because of a compelling need for personal achievement,
not necessarily for the rewards associated with accomplishing the task. The
desire to excel applies to both means and end; the high achiever, in addition
5
Explain the characteristics
of a person with high-
achievement needs
to wanting to do a good job, wants to do the job more efficiently than it has
been done before.
• Prefers to take personal responsibility for solving problems rather than
leaving the outcome to others. Achievers may be viewed as loners. At times
they may appear to have difficulty delegating authority.
• Prefers to set moderate goals that, with stretching, are achievable. For the
achiever, easy goals with a high probability of success provide no challenge
and thus no satisfaction. Difficult goals with a low probability of success
would require an achiever to gamble on success. Because the achiever likes
to be in control, an outcome that depends on chance is unacceptable.
• Prefers immediate and concrete feedback about performance, which assists
in measuring progress toward the goal. The feedback needs to be in terms
of goal performance (rather than personality variables) so the achiever can
determine what needs to be done to improve performance.
Power-Motivated Person The person with a strong desire for power needs
to acquire, exercise, and maintain influence over others. Such persons compete
with others if success will allow them to be dominant. The power-motivated
person does not avoid confrontations.
Affiliator The person with a high need for affiliation wants to be liked by other
people, attempts to establish friendships, and seeks to avoid confl ict. The affili-
ator prefers conciliation.
Implications for Managers Based on McClelland’s theory, managers should

work to identify and encourage the development of high achievers. Managers
should capitalize on high achievers’ goal-setting ability and on their desire for
responsibility. This can be accomplished by providing them with opportunities
for participation, by delegating authority to them, and by using management
by objectives (discussed in Chapter 6). To work effectively with high achiev-
ers, managers should provide immediate, concrete feedback. For example, Tom
Warner, president of Warner Corporation, a Washington, D.C.-based plumbing,

heating, ventilation, and air-conditioning contractor, structured a unique pro-
gram to capitalize on his high achievers. 20 Considered revolutionary in the mun-
dane world of stopped-up sinks and balky furnaces, Warner appointed 80 area
technical directors (ATD) in his 260-person business. The directors have their
own businesses to manage within their assigned zip codes. Warner prepares the
ATD with training in sales and marketing, budgeting, negotiating, cost estimat-
ing, and customer service. Then he empowers them to build up the business in
their assigned locations. Says Warner, “The guys who gravitate to the ATD pro-
gram want more, with more effort. If you want a 9-to-5 job, it’s not for you.”
Because the program is geared toward high achievers, it is not for everyone.
Eight out of the fi rst twelve ATDs decided the program wasn’t for them; they
wanted to remain ordinary mechanics.
When dealing with the power-motivated person of McClelland’s theory,
managers should recognize that the use of power is a necessary part of corpo-
rate life and that those who are motivated by power can serve as necessary and
useful members of the organization. Managers should be aware, however, of the
negative aspect of power as a motivator. Many individuals seek power solely for
personal benefit. The power-motivated person may not, therefore, have the or-
ganization’s best interests at heart.
In working with employees whom McClelland labeled affiliators, managers
must be aware that these employees desire to avoid conflict, which may prevent
them from handling organizational conflict effectively.
Figure 12.7 shows how the three needs theories relate. Each theory provides
the manager with a different viewpoint from which to understand the cause of
Figure 12.7 Comparison of the theories of Maslow, Herzberg, and McClelland
Hygiene Factors Motivation Factors
Job Context T h e Wo r k I t s e l f
• Responsibility
• The Work Itself
• Advancement
• Achievement • Possibility for
• Quality of Growth
Technical
Supervision • Quality of • Recognition Self-Realization
Interpersonal Needs
Relationships
• Working Esteem
Conditions Needs
Social
• Job Security Needs
• Salary Safety
Needs
Physical Affiliation Power Achievement
Needs
behavior. Herzberg’s hygiene factors relate to Maslow’s lower-level needs; Herz-

berg’s motivation factors relate to the higher-level needs, as do McClelland’s
needs for power and achievement.
Alderfer’s ERG Theory

Psychologist Clayton Alderfer proposed a needs theory that compressed
Maslow’s five levels of needs into three: 21
1. Existence. Existence needs relate to a person’s physical well-being. (In

Maslow’s model, existence needs include physiological and safety needs.)
6
Identify the needs
associated with ERG
theory
2. Relatedness. This level includes needs for satisfactory relationships with
others. (Relatedness needs correspond, in Maslow’s model, to social needs.)
3. Growth. Growth needs call for the realization of potential and the achieve-
ment of competence. (In Maslow’s model, growth needs become esteem and
self-realization needs.)
Alderfer’s theory is called the ERG theory. The name derives from the fi rst ERG theory
three letters of each of the needs Alderfer defi ned. A motivation theory establish-
ing three categories of human
Maslow and Alderfer agreed that an unsatisfied need is a motivator, and needs: existence needs, re-
that as lower-level needs are satisfied they become less important. Alderfer be- latedness needs, and growth
lieved, however, that higher-level needs become more important as they are sat- needs
isfied. If a person fails in an attempt to attain a higher need, the individual
might return to a lower-level need. For example, the employee frustrated in an
attempt to achieve more growth could redirect energies to, say, becoming part
of a group. When high-tech computer-related businesses in Silicon Valley be-
gan to retrench after a period of expansion, managers who had been focusing
on furthering their growth needs began to seek new organizations to meet their
existence needs. Figure 12.8 illustrates the relationship between the theories of
Maslow and Alderfer.
Implications for Managers According to Alderfer, managers should realize

that a person may willingly slip down the needs hierarchy if attempts to achieve
needs are frustrated. To maintain high levels of performance, managers should
provide opportunities for employees to capitalize on higher-order needs. Man-
agers can do this by recognizing employees and encouraging participation in de-
cision making. For example, at Silicon Graphics Inc., 40 people are chosen each
year by their peers as the employees who best represent the culture and spirit of
the company. The winners are announced with great fanfare, and each receives
a trip for two to Hawaii. At least equally important to the trip is the recognition
by peers, which meets esteem needs.
The importance of fulfi lling growth and self-realization needs is illustrated
by the comments of Ocelia Williams, an hourly worker at Cincinnati’s Cin-
Made, a small manufacturer of mailing tubes and other cardboard-and-metal
containers, and a practitioner of open-book management. “I couldn’t see how
the company could make it unless we all took our share of responsibility. I now
know what is going on, and where I fit. What I do does make a difference.” What
Ocelia and other employees do is share responsibility. Hourly workers now do
all of Cin-Made’s purchasing and have a voice in every hiring decision. They
schedule their own hours, hire and supervise all temporary employees, oversee
the company’s safety program, and administer its skill-based pay system. 22
Figure 12.8 Comparison of the theories of Maslow and Alderfer
Self-
Reali-
zation
Needs
Growth
Needs
Esteem
Needs
Social Relatedness
Needs Needs
Safety
Needs
Existence
Needs
Physical
Needs
Maslow’s Hierarchy Alderfer’s Hierarchy
Process Theories: Motivation Theories

Focusing on Behaviors
Now that we have examined four motivation theories relating to the individu-
al’s needs, we can explore four theories about why people choose a particular
behavior to satisfy their needs. This section will discuss four behavior-oriented
theories: expectancy theory, reinforcement theory, equity theory, and goal-
setting theory. Each derives from the factors summarized in Figure 12.3: past
experiences, environmental influences, and perceptions.
Expectancy Theory
7
Discuss the relationship
between expectations and
motivation
Developed by Victor Vroom, expectancy theory states that before choosing a
behavior, an individual will evaluate various possibilities on the basis of antici-
pated work and reward. 23 Motivation—the spur to act—is a function of how
badly we want something and how likely we think we are to get it. Its intensity
functions in direct proportion to perceived or expected rewards. Expectancy
theory includes three variables:
1. Effort–performance link. Will the effort achieve performance? How much
effort will performance require? How probable is success?
2. Performance–reward link. What is the possibility that a certain perfor- expectancy theory
A motivation theory stating
mance will produce the desired reward or outcome? that three factors influence
3. Attractiveness. How attractive is the reward? This factor relates to the behavior: the value of rewards,
the relationship of rewards to
strength or importance of the reward to the individual and deals with his or the necessary performance,
her unsatisfied needs. and the effort required for
performance
To see how expectancy theory can be applied, consider an example. Sup-
pose that late one Friday afternoon, John Friedman’s boss asks him to develop a
presentation of the six-month budget results. The presentation is due the follow-
ing Monday. John realizes he can complete the four-hour project in one of two
ways. He can stay at the office and do the work, or he can take the work home
over the weekend.
John evaluates the fi rst option, which involves staying at work for the nec-
essary four hours. He realizes that staying will result in a completed presenta-
tion by Monday (effort–performance link). He knows from past experience that
a completed project will result in recognition by his boss (performance–reward
link). John has a high regard for this recognition, because it will eventually lead
to a promotion. Working late on Friday will, however, interfere with existing
plans and might cause domestic problems. (The domestic problems affect the at-
tractiveness of the reward.)
As John evaluates the second option of having to take work home, he re-
alizes that the effort–performance link and the performance–reward link will
be the same as in the stay-at-work option. By taking the work home, however,
John can avoid the negative consequences of interfering with social plans. (This
makes the reward seem more attractive.) John chooses the second option.
In his decision making, John asked himself a series of questions: “Can I ac-
complish the task?” Yes, it will take four hours, but I can do it. “What’s in it
for me?” When I do the task it can bring both positive and negative results (op-
tion 1), or just positive results (option 2). “Is it worth it?” The positive is, but the
negative isn’t. Study Figure 12.9 and determine the stage of the expectancy the-
ory to which each question pertains.
Figure 12.9 Model of expectancy theory
Organizational
Rewards
Individual
Behavior Individual
Effort
Motivation Performance
Required
Organizational
Rewards
Domestic
Problems
Implications for Managers According to expectancy theory, behavior is heav-

ily influenced by perceptions of the outcomes of behavior. The individual who
expects an outcome, possesses the competence to achieve it, and wants it badly
enough will exhibit the behavior required by the organization. The person who
expects that a specific behavior will produce an outcome perceived as undesirable
will be less inclined to exhibit that behavior. A manager who knows each subor-
dinate’s expectations and desires can tailor outcomes associated with specific be-
haviors to produce motivation.24,25 To motivate behavior, managers must do the
following:
• Understand that employees measure the value associated with the assign-
ment. As a manager, you get from your people what you reward, not what
you ask for.
• Find out what outcomes are perceived as desirable by employees and pro-
vide them. Outcomes may be intrinsic (experienced directly by the individ-
ual) or extrinsic (provided by the company). A feeling of self-worth after do-
ing a good job is intrinsic; the promotion that the job produces is extrinsic.
For an outcome to be satisfying to an employee, the employee must recog-
nize it as an outcome that relates to his or her needs and one that is consis-
tent with his or her expectations of what is due. 26
• Make the job intrinsically rewarding. If the employee feeling good about
successfully completing a job is a valued outcome, it is critical for managers
to provide experiences that enhance an employee’s feeling of self-worth.
• Effectively and clearly communicate desired behaviors and their outcomes.
Employees need to know what is acceptable and what is unacceptable to the
organization.
• Link rewards to performance. Once the acceptable performance level is at-
tained, rewards should quickly follow.
• Be aware that people differ in their goals, needs, desires, and levels of per-
formance. The manager must set a level of performance for each employee
that is attainable by that person.
• Strengthen each individual’s perceptions of his or her ability to execute de-
sired behaviors and achieve outcomes by providing guidance and direc-
tion. The manager trains and coaches, and then must trust employees to do
their jobs.
With these guidelines in mind, some companies incorporate expectancy the-

ory principles in designing incentive pay systems that focus on organizational
goals. The key factor for successful programs is the effort–performance link.
Incentive pay works when workers feel they can meet targets. Therefore, com-
panywide goals must be translated and delivered at the employee level. For ex-
ample, at Black Box Corporation, a Pittsburgh-based marketer of computer
network and other communication devices, the corporate goal is to increase cus-
tomer satisfaction. Workers can help attain the goal by increasing their skill lev-
els—and substantially increasing their pay in the same job. For instance, Black
Box pays starting order takers a competitive wage. As they boost their product
knowledge and customer skills, their pay can increase by several thousand dol-
lars. Those who improve their skills even more, by sharpening their sales skills,
or learning another language to handle international sales, can make more still.
Hence, workers receive a larger profit-sharing bonus because the bonus is based
on annual earnings. 27
Reinforcement Theory
Another theory that examines the reasons for behavior has its foundation in
B. F. Skinner’s work in operant conditioning. 28 Reinforcement theory holds that
a person’s behavior in a situation is influenced by the rewards or penalties expe-
rienced in similar situations in the past. John, the employee who was faced with
the task of preparing a last-minute budget presentation, received praise from his
8
Explain the relationship
between reinforcement
and motivation
boss for expending extra effort in the past. This positive reinforcement influ- reinforcement theory
enced John’s behavior when the boss had another similar request. A motivation theory that states
Reinforcement theory introduces a major point that managers should under- a supervisor’s reactions and
past rewards and penalties af-
stand. Much of motivated behavior is learned behavior. 29 The employee learns fect employees’ behavior
over time what type of performance is acceptable and what is unacceptable.
This learning influences future behavior. Figure 12.10 shows how reinforcement
affects behavior.
Types of Reinforcement Managers can choose from four main types of rein-
forcement: positive reinforcement, avoidance, extinction, and punishment. Of
these four approaches, positive reinforcement most often leads to long-range
growth in individuals by producing lasting and positive behavioral changes.
1. Positive reinforcement. To increase the probability that an individual will
repeat a desired behavior, a manager provides positive reinforcement as
soon as possible after the desired behavior occurs. Positive reinforcers can
be praise, pay, or promotions—elements normally regarded as favorable by
employees.
2. Avoidance. This method of reinforcement attempts to increase the probabil-
ity that a positive behavior will be repeated by showing the consequences
of behavior the manager does not desire. The employee avoids those conse-
quences by displaying the desired behavior. For example, a manager has a
policy of penalizing all employees who do not turn in reports on time. As
long as the threat of punishment is there, employees will be motivated to
meet the required deadline.
Figure 12.10 How the reinforcement process affects behavior
Reinforcement
Consistent
Rewards
Stimulus Response Reward

Manager’s Individual Positive
Request Behavior Recognition
Results
Learned
Behavior
3. Extinction. Managers are using extinction when they choose to ignore the
behavior of subordinates in order to weaken the behavior. This approach is
most effective when behavior is temporary, atypical, and not serious in its
negative consequences. The supervisor’s hope is that the behavior will soon
go away or disappear if it is ignored. Extinction might also be appropriate in
a situation of changed circumstances. Say a manager and an employee have
developed the habit of talking during working hours about off-the-job topics.
After the manager is promoted to another job in another area, the employee
continues to drop by, a practice that makes the manager uncomfortable. If
the manager continues to work while the employee is there, the employee
will eventually get the message and the behavior will be extinguished.
4. Punishment. Managers might attempt to decrease the recurrence of a be-
havior by applying negative consequences, or punishment. Loss of privi-
leges, docked pay, and suspension are forms of punishment. The trouble
with punishment as a response to behavior is that the person will learn what
not to do but will not necessarily learn the desired behavior.
Reinforcement is affected by time. The closer the reinforcement is to the be-
havior, the greater the impact it will have on future behavior.
Implications for Managers Reinforcement theory has several implications

for managers. First, managers should bear in mind that motivated behavior is
influenced by the employee’s learning what is acceptable and unacceptable to the
organization. 30 In addition, in working with employees to develop motivated be-
havior, managers should do the following:
• Tell individuals what they can do to get positive reinforcement. The es-
tablishment of a work standard lets all individuals know what behavior is
acceptable.
• Tell individuals what they are doing wrong. The person who does not know
why rewards are not forthcoming may be confused. Information allows a
person to improve motivated behavior.
• Base rewards on performance. Managers should not reward all individuals
in the same way. If the manager gives the same rewards to all employees for
all degrees of performance, poor or average performance is reinforced and
high performance may be ignored.
• Administer the reinforcement as close in time to the related behavior as pos-
sible. To achieve maximum impact, the appropriate reinforcement should
immediately follow performance.
• Recognize that failure to reward can also modify behavior. If a manager
does not praise a subordinate for meritorious behavior, the subordinate can
become confused about the behavior the manager wants.
By applying these guidelines, managers can, as they help employees focus on
organizational objectives, modify employee behavior at the same time. For ex-
ample, CEO Steve Wilson of Mid-States Technical Staffi ng Services, in Daven-
port, Iowa, used positive reinforcement to develop teamwork, follow-through,
and initiative. After teaching everyone to understand company financial state-
ments and to take responsibility for budget items, Wilson told employees, “Every
time you hit $75,000 in net earnings, I’ll pay a bonus.” As Wilson notes, “The
light dawned slowly. At fi rst employees thought, ‘Great, I don’t have to wait ’til
Christmas for my bonus,’ but when we paid out the second one two months af-
ter the fi rst, that’s when they changed.” Now, employees watch weekly budget
and income numbers like hawks, and move heaven and earth if they think they
are falling behind set goals or are within reach of a target. Salespeople help one
another out instead of hoarding customers. Office workers, each of whom has
responsibility for certain expenses, fi nd other departments eager to cooperate in
cutting spending. 31
Equity Theory
Another view of motivation is found in equity theory. According to this theory,
people’s behavior relates to their perception of how fairly they are treated. Most
professional athletes use equity arguments to support their salary demands.
They point to publicized salaries received by peers as justification for their ne-
gotiating stands. Equity theory also involves the fairness that an individual per-
9
Explain how equity
influences motivation
equity theory
ceives in the relationship between effort expended and reward. A motivation theory in which
People determine equity by calculating a simple ratio: the effort they are ex- comparisons of relative input-
pected to invest on the job (their input) in relation to what they expect to receive outcome ratios influence behav-
ior choices
after investing that effort (their outcome or reward). As Figure 12.11 shows, this
input-outcome ratio should provide a means of comparison with the ratios of
other individuals or groups. Equity exists when the ratios are equivalent. Ineq-
uity exists when, in the employee’s mind, inputs exceed the relative or perceived
values of outcomes. 32
Example of Equity Theory Ellen McCann has been working as a salesperson

for ten months. In this time, she has gone to sales school three times (achiev-
ing superior ratings in all categories), consistently achieved 125 percent of sales
quota, and has won two local sales contests. In recognition of this achieve-
ment, Ellen’s boss has given her a $150 per month raise. Ellen’s motivation has
dropped noticeably in the past month, however. Why? She learned that a sales-
person with no prior experience had been hired at $2,750 per month—$50 more
than Ellen is making! As Ellen said, “It’s not fair! If they can do that, I’m going
to start to look around for an employer who will appreciate me.”
This example leads to two points about equity theory. First, when an in-
dividual perceives himself or herself as the victim of inequity, one of three re-
sponses occurs. The person can decide to escape the situation (“I quit”), put the
Figure 12.11 Equity theory in action
Result: Motivation to
Equity Perform
Comparison:
Self to Others
Result: Motivation to
Inequity Rationalize, Fight
Inequity, or Quit
input-outcome ratios in balance (“I’ll do less” or “I want a raise”), or attempt to

change perceptions (“It’s actually fair because . . . ”).
The second important point about equity theory concerns the referent the
person selects for comparison. There are two categories: other and system. In
the example of professional athletes, the “other” category includes those per-
sons in the same job, same team, or same league, or those with similar back-
grounds or in the same circle of friends. The system is the referent when the in-
dividual recognizes the presence of organization-wide policies and procedures:
“If those people are allowed overtime, I should have overtime when I need it to
complete my work.” 33
Implications for Managers Equity theory emphasizes that employees are mo-
tivated by both the absolute and relative rewards available in the system. More
important, employees make conscious comparisons of equity, and these com-
parisons have the potential to influence employee motivation levels. Therefore,
managers must make conscious efforts to establish and maintain equity in the
work environment. In addition, managers need to recognize that perceptions of
equity are constantly in flux. Current perceptions are affected by past percep-
tions. By bearing this in mind, a manager may be able to identify the incident
that served as the straw that broke the camel’s back.
Organizations like Intel and Genentech have applied equity theory in
the work environment. At Intel everyone has a small open cubicle, including
the chairman; and no one gets a reserved parking spot. At Genentech everyone
gets three weeks of vacation, regardless of position or seniority. 34
Goal-Setting Theory
10
Explain how goals
influence motivation
goal-setting theory
According to the fi nal behavior-oriented theory, goal-setting theory, people’s
behavior is influenced by the goals that are established. In essence, goals tell
an employee what needs to be done and how much effort will need to be ex-
pended. 35 “Other practices that leaders like Robert Thompson, of Thompson-
McCully, tend to endorse include promoting from within and setting achievable
A motivation theory stating that stretch goals for managers and workers alike. When you think that you are do-
behavior is influenced by goals, ing the best you can do, ‘he can get a little more out of you,’ says CFO Gregg
which tell employees what they Campbell.” 36
need to do and how much effort
they need to expend Goal-setting theory is similar to the concepts associated with expectancy the-
ory in that it focuses on the conscious choices a person makes. According to the
theory, there are two approaches to goal setting: (1) managers may set goals for
the employees, or (2) employees and managers develop employee goals together.
Implications for Managers According to goal-setting theory, managers

should
• Work with employees in setting goals. Help them provide targets for
motivation.
• Make goals specific rather than general. The goal “Do your best” is not as
effective as “Complete the project by June 15 with no budget overruns.”
• Provide feedback on performance. Feedback acts as a guide to behavior. It
helps identify shortcomings in performance and provides the means for cor-
rective action.
Jere Stead, former CEO of AT&T’s Global Information Solutions (now NCR
Corporation), has led business transformations five times by relying on goal-
setting theory. Notes Stead, “At GIS all objectives must clearly link to key re-
sults: customer or shareholder satisfaction and profitable growth. The goal-
setting links the organization, provides a basis for gauging progress, and gives
specific measures for rewards.” 37
Building a Philosophy of Management

The theories of Maslow, Herzberg, McClelland, and Alderfer offer valuable in-
sight into the needs that drive motivation. The theories of expectancy, reinforce-
ment, equity, and goal setting reveal the why of motivation—why employees
display different types of motivated behavior. Each theory makes an important
contribution to understanding the motivation of an employee, and each provides
11
Discuss the importance of
a manager’s philosophy of
management in creating a
positive work environment
input for the motivation model. Familiarity with theories of motivation allows a
manager an educated viewpoint from which to consider how to foster motivation
in workers, capture commitment, and develop a positive work environment.
One significant factor that sets the foundation for creating a positive work
environment is a manager’s philosophy of management, or attitude about work philosophy of management
and the people who do the work. A manager’s philosophy of management in- A manager’s attitude about
work and the people who per-
corporates and reflects personal beliefs about human nature in the work set- form it, which influences the
ting—about worker attitudes and characteristics, employee maturity, and the motivation approaches he or
influence of management expectations on behavior. Ed Armatis, an operator she selects
and mechanic at the oil blending facility at Thompson-McCully, describes Bob
Thompson this way: “He is a fair guy, but very demanding. You don’t see him
around much if you do your job.” 38 A manager’s philosophy influences the mo-
tivation approaches he or she will select. Managers who think subordinates are
ambitious and eager, wish to do work well, want to be independent, and enjoy
work will take far different actions than managers who think subordinates are
lazy and work only to attain security.
To develop a philosophy of management, there are three concepts describing
human nature that should be incorporated: Theory X and Theory Y, Argyris’s
maturity theory, and the development of management expectations.
Theory X and Theory Y

Douglas McGregor, a professor of industrial management, said that an individu-
al’s management philosophy reflects one of two sets of assumptions about work-
ers. 39 He called the two sets Theory X and Theory Y. Theory X is a philosophy Theory X
of management that negatively perceives subordinates’ potential for work and A philosophy of management
with a negative perception of
attitudes toward work. It assumes that subordinates dislike work, are poorly subordinates’ potential for and
motivated, and require close supervision. A manager with these beliefs tends to attitudes toward work
control the group, use negative motivation, and refuse to delegate decision mak-
ing. Figure 12.12 lists the components of Theory X.
Theory Y is a philosophy of management that positively perceives subor- Theory Y
dinates’ potential for and attitudes toward work. It assumes, as Figure 12.12 A philosophy of management
with a positive perception of
shows, that subordinates can be self-directing, will seek responsibility, and find subordinates’ potential for
work as natural as play or rest. The outcome of this belief is a manager who en- and attitudes toward work
courages people to seek responsibility, involves people in decision making, and
works with people to achieve their goals.
The important point about Theory X and Theory Y is that a manager’s phi-
losophy influences the kind of work climate he or she endeavors to create and, ul-
timately, shapes how the manager treats people.
Figure 12.12 Assumptions about workers according to Theory X and Theory Y
THEORY X THEORY Y
People basically dislike work and Most people find work as natural as play
avoid it whenever possible. or rest and develop an attitude toward
work based on their experience with it.
Because most people dislike work, People do not need to be threatened with
they have to be closely supervised punishment; they will work voluntarily
and threatened with punishment to toward organizational objectives to which
reach objectives. they are committed.
Most people prefer to be told what The average person working in an
to do, have little ambition, want to environment with good human relations
avoid responsibility, and want will accept and seek responsibility.
security above all else.
Most people have little creativity. Most people possess a high degree of
They are not capable of solving imagination, ingenuity, and creativity with
problems. Rather, they must be which to solve organizational problems.
redirected.
Most people have limited Although people have intellectual
intellectual potential. Contributions potential, modern industrial life utilizes
above basic job performance only part of it.
should not be expected.
Argyris’s Maturity Theory

A manager’s philosophy incorporates his or her attitude toward employee ma-
turity. The work of Chris Argyris, who is most noted for his models of organi-
zational learning, summarized these attitudes.40 Argyris related the development
of individual maturity to the structure of organizations. Argyris believed that
people develop along a continuum from immaturity to maturity. People who
have reached maturity
• Tend to be active rather than passive.
• Are independent rather than dependent.
• Are self-aware rather than unaware.
• Are self-controlled rather than controlled by others.
Argyris’s concern was that a mature personality conflicts with typical orga-
nizations in four ways:
1. The formal chain of command limits self-determination, making individu-
als passive and manager dependent.
2. The span of control decreases a person’s self-determination.
3. Unity of direction places objectives under the control of one manager. It
limits the employee’s ability to define objectives.
4. Specialization of labor limits initiative and self-determination.
Managers who create work environments that are obstacles to mature em-
ployees set up themselves and their organizations for failure. Mature people con-
fronted with rigid, limiting circumstances become passive and dependent. They
cannot grow, and they can rarely see long-term implications. Recognition of
these realities in recent years has fueled the growth of the movement to employee
empowerment, which this chapter will discuss in the next section.
Development of Expectations
In developing a philosophy of management, a manager must consider the im-
portance of expectations. “If the employees are happy, they make the custom-
ers happy,” says SAS CEO Jim Goodnight. “If they make the customers happy,
they make me happy.” 41 A manager must communicate his or her expectations
directly to employees. John L. Single reports that
• Subordinates do what they believe they are expected to do.
• Ineffective managers fail to develop high expectations for performance.
• Managers perceived as excellent create high performance expectations that
their employees can fulfi ll.42
The last point, that employees fulfi ll their manager’s expectations, is often
referred to as the self-fulfi lling prophecy. It is a key management concept. Sam
Walton believed in it so much that it became Rule 3 of Sam’s Rules for Building
a Business: “Motivate your partners. Money and ownership aren’t enough. . . .
Set high goals, encourage competition, and then keep score.” 43
Incorporating expectations into management requires two phases. The fi rst
consists of developing and communicating expectations of performance, group
citizenship, individual initiative, and job creativity. The second involves consis-
tency. The manager must be consistent in his or her expectations and in commu-
nicating them. Consistency will produce reinforcement and, in the end, promote
stability and reduce anxiety. Employees will know what the boss expects.
In order to foster communication and consistency, many companies use an
intranet, a Web site just for employees. Information on the intranet provides cur-
rent company, industry, customer, and supplier information via automated news
feeds and knowledge management repositories. Human resources administra-
tions use the intranet to post employee jobs, internal forms, discussion groups,
and so on. Furthermore, the Web site is personalized for each employee, as de-
picted in this chapter’s Managing Technology.
Managing for Motivation

With a well-rounded, people-centered philosophy in place, a manager is ready
to motivate by creating a positive, supportive work environment. In the next
few pages we will discuss how to manage for motivation: how to treat people as
individuals, offer support, recognize and value diversity, foster empowerment,
provide an effective reward system, redesign jobs, promote intrapreneurship,
12
Describe how managers
can structure the
environment to provide
motivation
and create flexibility in work.
Treating People as Individuals

All of us are different. We think differently; we have different needs and wants;
and we cherish different values, expectations, and goals. Each of us wants to
be treated as a special person because each of us is special. What is more, we
change. Today, a person’s link to others may be paramount; a year from now,
recognition for accomplishment may be the driving passion.
Looking at today’s workforce brings the concept of individuality into sharp
focus. Baby boomers, senior citizens, ethnic minorities, women, and working
mothers bring their own needs, goals, and values to the workplace.44
Successful managers recognize people as individuals and work with their

particular differences. Such recognition goes a long way. The successful man-
ager knows that, because each of us is an individual, each of us is motivated dif-
ferently. The more managers know about motivation, the more successful they
will be in working with people.
Providing Support
To develop motivated employees, a manager must provide a climate in which
each employee’s needs can be met. A starting point is to facilitate attainment of
the employee’s goals. The manager does this by removing barriers, developing
mutual goal-setting opportunities, initiating training and education programs,
encouraging risk taking, and providing stability.
Two other actions can provide support and enhance the environment. The
fi rst is the open appreciation of employees’ contributions. Jill Barad, former Pres-
ident of Mattel USA, has this to say about appreciation:
Taking time to tell people how good they are is one of the best ways man-
agement can reward people for their efforts. We in management tend to
focus on what’s not being done, how people are not performing instead of
recognizing that our people are performing. We must constantly remind
people of their strengths so they can make the most of those behaviors.45
Barad’s point is echoed by Jere Stead, formerly of AT&T Global: “Even
middle managers, who often have little money and few promotions to dispense,
have plenty they can give: Attaboys, letters, notes, trips, cash—really pound out
rewards.” 46
The second action managers can take is to show sensitivity to employees’
needs for equity. Each employee must feel that he or she is receiving a fair ex-
change for his or her input into the company and in comparison to other em-
ployees. This point is supported by Norman Brinker, Chairman of Brinker In-
ternational: “Compensation has to be equitable. From the top to the bottom of
the organization, the program must recognize the value of inputs into the com-
pany. Everyone is aware of everyone else.” 47
Recognizing and Valuing Diversity
As we have discussed throughout the text, part of working with people as indi-
viduals is the ability to recognize and incorporate the value of diversity within the
workplace. The composition of the workforce is changing—and with it, workers’
needs, goals, and values. As noted in Chapter 1, managers are no longer manag-
ing a homogeneous workforce. Rather, the workforce of present-day organiza-
tions manifests a kaleidoscope of diversity: young and old; all races, colors, eth-
nicities, cultures, national origins; male and female—all with differing mental
and physical capabilities—as well as full time, part time, and temporary.48
Managers need to respond to this diversity by understanding, appreciating,
and utilizing the differences. If they do not, according to Xerox Regional Vice
President Tracy Whitaker, “30 percent of your intellectual capital is not partici-
pating in your organization.” 49
As the diversity in the workforce continues to change, traditional programs
for training, monitoring, and compensation may have to be modified. 50 One ex-
ample of an organization that has recognized the need to modify its policies and
practices is GNL, the subject of this chapter’s Valuing Diversity feature. Another
is Umanoff & Parsons, a New York City bakery. Umanoff & Parsons’ senior
management team is composed of three women and three men from five diverse
cultures: they are Jamaican, American, Haitian, Hispanic, and Russian. Half
the bakery’s workforce is foreign born; the workers come from Haiti, Trinidad,
Grenada, the Dominican Republic, and Russia. The diversity brings contrast-
ing viewpoints, experiences, and needs to the work environment. With these in
mind, the company has devised innovative training and mentoring programs, it
has gathered these varied individuals into cross-cultural teams.
VALUING DIVERSITY
a g es
GNL Gets a Wake-up Call
Get t y Im
A diversity audit set off big changes at GNL, Guardian were required to attend, a diversity training session.
Newspapers Limited, headquartered in the United King- The session revealed to managers how and why their
dom. The internal audit revealed that diversity among preconceived notions about ethnicity, gender, and dis-
GNL’s staff was not good. The finding caused top man- ability were affecting hiring and retention.
agement to take a closer look at itself and to think about • Human resources rewrote the company appraisals to
the consequences to the company—that is, whether it reflect GNL’s more aggressive commitment to diver-
would be better or worse off—if top management didn’t sity. Equality and diversity were added to managers’
take diversity into consideration. The managers realized appraisals.
that there was a stark contrast with regard to diversity be- • GNL organized an annual diversity conference, provid-
tween GNL managers and the companies to whom they ing a platform for delegates from the private, public,
were pitching their services (a much more diverse group). and the volunteer organizations to share experiences
They felt that the company would be far less competitive on managing diversity in the workplace.
if it continued to be a white male–dominated firm.
Conduct a diversity audit. First, determine diversity goals.
As a result, GNL’s transformation began. A diversity
Next, determine essential questions to ask in a diversity
committee with representatives from every major depart-
audit, which seeks to identify strong and weak areas with
ment, and chaired by a board director, evaluated GNL’s
regard to where your organization currently stands on its
personnel system. Based on the committee’s recommen-
diversity goals.
dations, GNL took the following actions:
Source: Guardian Unlimited, “Diversity and Inclusion,” 2006, http://
• A diversity awareness workshop was offered. More www.guardian.co.uk/values/socialaudit/story/0,,1600419,00.html.
than half of the employees attended, and all new hires
Empowering Employees
“You want motivated workers?” asks Peter C. Fleming, Vice President of Pru-
dential Insurance Company. 51 “Just empower them and you will see what mo-
tivation and ownership means.” As discussed in Chapter 4, leaders empower
employees by sharing authority and information, providing needed training, lis-
tening to employees, developing relationships based on mutual trust and respect,
and acting on employee recommendations. As noted management consultant
Tom Peters says, empowerment occurs when individuals in an organization are
“given autonomy, authority, trusted, and encouraged to break the rules in order
to get on with the job.” 52
Empowerment is designed to unshackle the worker and make the job—not
just part of the job—the worker’s. In the words of James Champy, 53 manag-
ers must be willing “to let go of control, in terms of letting people make deci-
sions, particularly when they affect customers.” An example of this approach is
Chesapeake Packaging Co.’s Baltimore box plant, which created eight employee-
managed, so-called internal companies. Customer service is the providence of
a “company” called Boxbusters. A “company” called Bob’s Big Boys runs the
flexigraphic-printing department. Like any business, the internal companies
manage their own affairs. Employees track and measure output and figure how
to improve it. They watch costs. If they need new equipment, they order it. They
get involved in the annual plantwide planning and budgeting process. The mem-
bers of each “company” review one another’s performance and take part in hir-
ing and disciplinary decisions. 54
Employees, by being empowered, make decisions that formerly were made
by the manager. Empowerment results in greater responsibility and innovation
and a willingness to take risks. Ownership and trust, along with autonomy and
authority, become a motivational package.
Another company that is reaping the benefits of empowered workers is Re-
flexite Corporation of Avon, Connecticut. CEO Cecil Ursprung says of the em-
ployees, “They wanted more than money—they wanted to be committed to
something, and they wanted power over the decisions affecting their work lives.
Give them that and they would repay the company a thousand times over.” 55
Empowerment, in the form of work teams responsible for production and qual-
ity, has given employees control over the decisions affecting their work lives.
The teams plan the production operation, work with suppliers, respond to cus-
tomer questions, and are accountable for bottom-line decisions. The quality
team, composed of members from all production operations, has established in-
dividual responsibility for quality assurance as an organizational value. At Re-
flexite the results can be seen in increased productivity, attainment of quality
goals, and a committed workforce.
Providing an Effective Reward System

To motivate behavior, an organization must provide an effective reward system.
Given the belief that all people are individuals with different needs, values, ex-
pectations, and goals, the reward system must accommodate many variables.
According to David Van Fleet, an effective reward system has the following
characteristics:
• Rewards must satisfy the basic needs of all employees. Pay, for exam-
ple, must be adequate, benefits reasonable, and vacations and holidays
appropriate.
• Rewards must be comparable to those offered by competitive organizations
in the same area. For example, the pay offered for the same job should be
equal to that offered by a competitive company. In addition, benefit pack-
ages and other programs should be equal to those provided by a competing
company.
• Rewards must be equally available to people in the same positions and be
distributed fairly and equitably. People performing the same job need to
have the same options for rewards and also be involved in the decisions gov-
erning which rewards they receive. When employees are asked to complete
a special task or project, they should have the opportunity to determine the
reward they value—a day off or extra pay.
• The reward system must be multifaceted. Because all people are different,
managers must provide a range of rewards that focus on different aspects—
pay, time off, recognition, or promotion. In addition, managers should pro-
vide several different ways to earn these rewards. 56
This last point is worth noting. With the widely developing trend toward
empowerment in American industry, many people are beginning to view tra-
ditional pay systems as inadequate. In a traditional system, workers are paid
according to the positions they hold, not the contributions they make. As or-
ganizations adopt approaches built on teams, customer satisfaction, and empow-

erment, workers need to be paid differently. Companies like Procter & Gamble
and Monsanto have already responded to this change in perspective. P & G has
a pay system that provides rewards based on skill levels. Monsanto has more
than 60 pay plans at various operations around the world. “Each is different,”
says Barry Bingham, the company’s Director of Compensation. “All have been
built from the bottom up by employee design teams.” 57
Redesigning Jobs
Jobs are important motivational tools because what they contain may provide a
means to meet an employee’s needs. Managers need to know what elements of a
job redesign job provide motivation and then apply the concepts of job redesign—the appli-
The application of motivational cation of motivational theories to the structure of work—to increase output and
theories to the structure of
work, to increase output and satisfaction.
satisfaction
Principles of Job Redesign
Recent trends in management have attempted to increase output and satisfaction
in several ways. Jobs and organizations have been reexamined with the aim of
providing greater challenges and offering other psychological rewards at work.
To this end, managers have assigned less interesting repetitive tasks to robots
and other kinds of computer-assisted machinery. Training and development pro-
grams have been devised that enable people to perform more demanding tasks
and jobs.
Job redesign requires a knowledge of and concern for the human qualities
that people bring with them to the organization—such things as their needs
and expectations, perceptions and values, and levels of skill and abilities.
Job redesign also requires knowledge of the qualities of jobs—their physical
and mental demands and the environment in which they are performed. Job re-
design usually tailors a job to fit the person who must perform it. The beginner
who holds a redesigned job gets pieces of the work in measured increments un-
til he or she masters the tasks required to complete the whole job. Workers who
have more experience and who are becoming bored with their jobs may be given
more challenging tasks and more flexibility or autonomy in dealing with them.
job scope The two approaches to job redesign relate to job scope and job depth. Job
An element of job redesign that scope refers to the variety of tasks incorporated into a job. Job depth refers to
refers to the variety of tasks in-
corporated into a job the degree of discretion the employee possesses to alter the job. Job redesign al-
ternatives include job enlargement, job rotation, and job enrichment.
job depth
An element of job redesign re-
ferring to the degree of discre- Job Enlargement To increase the number of tasks in a job, rather than its
tion an employee has to alter quality or challenge, is to implement job enlargement. Often called horizontal
the job loading, job enlargement may attempt to demand more of the same from an em-
job enlargement ployee or to add other tasks containing an equal or lesser amount of meaning
Increasing the variety or the or challenge. Underworked employees can benefit from job enlargement. These
number of tasks in a job, not people want and need to be kept constantly busy and occupied with routine
the quality or the challenge of
those tasks tasks that they understand and have mastered. Their sense of competence im-
proves as their volume of output does. Some people, however, seek more variety,
not more tasks; job enlargement is not an appropriate strategy for the latter.
job rotation Job Rotation Temporarily assigning people to different jobs or tasks is job ro-
Temporarily assigning people to
different jobs or tasks on a rotation. The idea is to add variety and to emphasize the interdependence of a
tating basis group of jobs. Managers involved in job rotation gain knowledge about the oper-
ations of departments outside their own. Assembly-line workers may be assigned

one set of tasks one month and another set the following month. Office workers
may swap jobs for a time to learn other aspects of the operation, to gain added
insights, and to enable them to substitute for one another in times of need.
At the Tony Lama Company—a boot manufacturer in El Paso, Texas—
customer-service department employees work in the store for one week. Sim-
ilarly, salespeople work a week in the shipping department. The experiences
broaden employees’ perspectives. Job rotation can be used for cross training,
or to facilitate permanent job transfers or promotions. Workers who can bene-
fit from job rotation are those who are interested in or ready for promotion and
those who need variety.
Job Enrichment Frederick Herzberg pointed out that jobs can allow workers
to satisfy some of their psychological needs. 58 Job enrichment results when jobs job enrichment
are designed that can enhance psychological satisfaction. (Herzberg referred to Designing a job to provide more
responsibility, control, feed-
job enrichment as vertical job loading.) Job enrichment should include the fol- back, and authority for decision
lowing elements: making
• Variety of tasks. An enriched job introduces an employee to new and more

difficult tasks he or she has not previously handled.
• Task importance. An employee with an enriched job handles a complete
natural unit of work and also handles specific or specialized tasks that en-
able him or her to become an expert.
• Task responsibility. An employee with an enriched job is accountable for his
or her own work and can exercise authority in the course of job activities.
• Feedback. Workers in enriched jobs receive periodic and specialized reports
that are delivered directly to them.
Experiments with job enrichment vary widely in their approach, scope, and
content. Most efforts at job enrichment increase the workers’ control over work.
For example, Volvo pioneered the concept of having a team take over the entire
automobile-assembly operation to produce a single car. The result was increased
employee commitment and productivity, and fewer quality defects. Many man-
ufacturers have allowed skilled machine operators to set up their machines and
maintain them, to plan their own work flow and pace, and to inspect their own
output. In some companies like Cin-Made, which practice open-book manage-
ment, employees are given the knowledge to help them shape and control their
jobs. As discussed in Chapter 4, in an open-book company employees under-
stand why they are being called on to solve problems, cut costs, reduce defects,
and give the customer better service. Furthermore, employees
• See—and learn to understand—the company’s financial reports, along with
all the other numbers that are critical to tracking performance.
• Learn that, whatever else they do, part of their job is to move the numbers
in the right direction.
• Have a direct stake in the company’s success. If the business is profitable,
they get a cut of the action; if it’s not, they don’t. 59
Regardless of the approach selected, for job enrichment to be successful,
participation must be voluntary and management must be competent in its day-
to-day operations as well as in its efforts at job enrichment. However, managers
and workers can be expected to resist some efforts at job enrichment. (See Chap-
ter 9 for an analysis of resistance to change.) Also, once introduced, changes do
not yield improvements overnight; mistakes can be made in the implementation
of job enrichment programs and setbacks can occur. Nevertheless, companies
that undertake job enrichment fi nd higher morale and improved productivity.
Promoting Intrapreneurship
As an organization grows, it has a tendency to establish rules, policies, and pro-
cedures—to become mechanistic in nature. The formal control systems that be-
come established along with bureaucratic procedures cause it to lose innovative
energy. The corporate environment can stifle the creative spirit of entrepreneur-
ial employees. To meet their need for creativity, these employees often leave and
build their own organizations.
Recognizing this problem—and the losses their organizations suffer as a re-
sult—the top managers of many large corporations are trying to foster environ-
intrapreneurship ments that promote corporate entrepreneurship, or intrapreneurship.60 Intrapre-
Entrepreneurship within an or- neurship occurs when entrepreneurship exists within the boundaries of a formal
ganization, allowing employees
flexibility and authority in pur- organization. It is, in essence, a process whereby an individual pursues an idea
suing and developing new ideas and has the authority to develop and promote it within the boundaries of the
formal organization. As discussed in Chapter 4, these individuals become in-
trapreneurs—employees who think and act like owners. They take responsibil-
ity for an idea or project and are empowered to make it successful. According to
Donald Kuratko and Richard Hodgetts, a manager can foster intrapreneurship
by following these guidelines:
• Encourage action.
• Use informal meetings whenever possible.
• Tolerate—do not punish—failure, and use it as a learning experience.
• Be persistent.
• Reward innovation for innovation’s sake.
• Plan the physical layout to encourage informal communication.
• Reward and/or promote innovative personnel.
• Encourage people to go around red tape.
• Eliminate rigid procedures.
• Organize people into small teams to pursue future-oriented projects.61
Managers who really want a climate of intrapreneurship cannot be timid.
True intrapreneurs are not comfortable with structure—they will figure a way
around orders that block their dreams. They will do any job that will make the
project successful, always being true to their goals. 62
A company that thrives on intrapreneurship is 3M. Its first president, Wil-
liam McKnight, “wanted to create an organization that would continually self-
mutate from within, impelled forward by employees exercising their individual
initiative.” McKnight’s approach is captured in these phrases that are a part of
3M’s culture: 63
• “Listen to anyone with an original idea, no matter how absurd it might
sound at fi rst.”
• “Encourage; don’t nitpick. Let people run with an idea.”
• “Encourage experimental doodling.”

• “If you put fences around people, you get sheep. Give people the room they
need.”
This philosophy created a climate for intrapreneurs to dabble, take chances,
and make mistakes. Spurred along by such traditions as the 15 percent rule
(technical people are encouraged to spend up to 15 percent of their time on proj-
ects of their own choosing) and Genesis Grants (an internal venture capital fund
that distributes parcels of up to $50,000 for researchers to develop prototypes
and market tests), 3M-ers have brought wide-ranging products to the market—
reflective highway signs, electrical connectors, air fi lters, stethoscopes, surgical
drapes and tape, and Post-it® Notes.
Creating Flexibility
Another way managers can motivate workers is to provide them with flexibility
in work through flextime, a compressed workweek, or job sharing. Flexibility in
work is also facilitated through the use of e-mail communication.
Flextime allows employees to decide, within a certain range, when to begin flextime
and end each workday. It thus allows them to take care of personal business be- An employment alternative al-
lowing employees to decide,
fore or after work and to vary their daily schedules, thereby giving them more within a certain range, when to
control over their lives. Companies that have adopted this approach—Northeast begin and end each workday
Utilities, a Hartford, Connecticut, power company, for example—have reported
decreases in absenteeism, lower turnover, less tardiness, and higher morale. Em-
ployees caught in the work–family pressure cooker of juggling confl icting de-
mands are virtually unanimous in choosing flexibility as a solution.64
A compressed workweek allows employees to fulfi ll their work obligation in compressed workweek
fewer days than the traditional five-day workweek. The most often used model A schedule that allows employ-
ees to fulfill weekly time obli-
is four 10-hour days. The approach—like flextime—provides more time for per- gations in fewer days than the
sonal business and recreation. Employees who adopt it report improved job sat- traditional five-day workweek
isfaction. Nevertheless, not all managers are supportive of the idea. Some man-
agers think compressed workweeks make scheduling too difficult. They fear that
providing employee coverage at all times may be impossible if people are in and
out. Other managers fear loss of control.65
Job sharing, or twinning, permits two part-time workers to divide one full- job sharing
time job. Such an occupational buddy system is ideal for parents who are rais- A technique to provide flex-
ibility by permitting two part-
ing school-aged children or people who prefer part-time employment. The bene- time workers to divide one full-
fit from an employer’s standpoint is that creative input comes from two sources, time job
and the cost is only one salary and one set of benefits.
CHAPTER SUMMARY
Discuss the factors that stimulate and influ- person evaluates past experiences, environmental infl u-
1 ence motivation. Motivation results from a com-
bination of factors, including the individual’s needs, the
ences, perceptions, skills, and incentives.
ability to make choices, and an environment that pro- Differentiate between content and process
vides the opportunity to satisfy those needs and make
those choices. In choosing behavior to satisfy a need, a
2 theories of motivation. Content theories em-
phasize the needs that motivate people. Process theo-
ries explain how employees choose behaviors to meet Discuss the relationship between expectations
their work needs and how they determine whether their
choices were successful.
7 and motivation. Motivation is a function of how
badly a person wants something and how likely the per-
son thinks he or she will get it. The intensity of motiva-
List the five levels of needs according to
3 Maslow and give an example of each. The five
levels of needs are physiological (water, food); safety
tion functions in direct proportion to perceived or ex-
pected rewards.
(avoiding bodily harm); social (friendship); esteem (rec- Explain the relationship between reinforce-
ognition); and self-realization (maximizing abilities). 8 ment and motivation. Much of motivated behav-
ior is learned behavior. Learning, in turn, is influenced
Discuss the impact of hygiene and motiva-
4 tion factors in the work environment. Hygiene
factors (salary; job security; working conditions; status;
by the rewards or penalties that individuals have experi-
enced in similar situations in the past. Employees learn
over time what type of performance is acceptable and
company policies; quality of technical supervision; and
what is unacceptable. This learning then influences em-
quality of interpersonal relationships among peers, su-
ployees’ subsequent behavior.
pervisors, and subordinates) are the primary elements
involved in job satisfaction. When present in sufficient Explain how equity influences motivation. Em-
quality, they have no effect; when absent, they can lead
to job dissatisfaction. Motivation factors (achievement,
9 ployees’ behavior relates to their perception of
how fairly they are treated. Employees consciously com-
recognition, responsibility, advancement, the work itself, pare the rewards they receive and their expended effort
and possibility of growth) are the primary elements in- with the rewards and efforts of other employees. These
volved in job satisfaction. When present, they can stimu- comparisons influence their levels of motivation.
late personal and psychological growth.
Explain how goals influence motivation.
5 Explain the characteristics of a person with

high-achievement needs. A person with high-
10 A person’s behavior is influenced by the goals
that are set. The goals tell an employee what needs to be
achievement needs done and how much effort will need to be expended.
• Performs a task because of a compelling need for Discuss the importance of a manager’s phi-
personal achievement, not necessarily for the re-
wards associated with accomplishing the task.
11 losophy of management in creating a posi-
tive work environment. A manager’s philosophy of
management can set the foundation for a positive work
• Prefers to take personal responsibility for solving
environment. Because this philosophy incorporates and
problems rather than leaving the outcome to others.
reflects personal beliefs about human nature in the work
• Prefers to set moderate goals that, with stretching, setting—about worker attitudes and characteristics, em-
are achievable. ployee maturity, and the influence of management ex-
pectations on behavior—it affects the motivation choices
• Prefers immediate and concrete feedback on perfor-
the manager will make.
mance, which assists in measuring progress toward
the goal. Describe how managers can structure the
Identify the needs associated with ERG the-
12 environment to provide motivation. Manag-
6 ory. The ERG theory identifies three categories
of needs: existence, relatedness, and growth. Existence
ers can structure the environment to provide motivation
by treating people as individuals, offering support, rec-
ognizing and valuing diversity, empowering employees,
needs relate to a person’s well-being. Relatedness needs
providing an effective reward system, redesigning jobs,
include needs for satisfactory relationships with others.
promoting intrapreneurship, and creating flexibility at
Growth needs call for realization of potential and the
work.
achievement of competence.
KE Y TERMS
compressed workweek ERG theory goal-setting theory
content theories expectancy theory hygiene factors
equity theory flextime intrapreneurship
job depth job sharing process theories

job enlargement morale quality of work life (QWL)
job enrichment motivation reinforcement theory
job redesign motivation factors Theory X
job rotation needs Theory Y
job scope philosophy of management
RE VIE W QUESTIONS
1. What stimulates motivation? What three factors in- 7. What is the relationship between expectancy and
fluence the behavior an individual will choose to sat- motivation? What is the relationship among effort–
isfy a stimulus? performance link, performance–reward link, and
attractiveness?
2. On what do content theories of motivation focus?
What theories are included in this category? On 8. List and explain the four main types of
what do process theories of motivation focus? What reinforcement.
theories belong in this category?
9. Describe the two factors a person uses to determine
3. List and explain the five categories of human needs equity in a work situation.
identified by Abraham Maslow. Why are the needs
10. What influence on behavior and motivation is the
arranged in a hierarchy?
result of employee goal setting?
4. Defi ne Frederick Herzberg’s hygiene and motivation
11. What is the importance of a manager’s philosophy
factors and give three examples of each. What is the
of management in creating a positive work
importance of each set of factors to a manager?
environment?
5. Why is a high achiever likely to focus on goal setting,
12. How can a manager influence motivation through
feedback, individual responsibility, and rewards?
empowerment, intrapreneurship, and recognition
6. What three needs does Clayton Alderfer’s ERG the- of diversity?
ory identify?

1. Would a person with high-achievement needs be a 3. What two experiences can you cite to demonstrate
good manager? Why or why not? the influence of reinforcement theory on your behav-
ior (motivation)?
2. How does expectancy theory apply to your class-
room experience? Discuss your motivation for grades 4. Which of the eight motivational concepts discussed
in relationship to the value of the reward (grade), the in this chapter’s Managing for Motivation section
relationship of the reward to performance (tests, pa- would be your fi rst priority as manager? Which
pers), and the amount of effort required to receive would be your last priority? Why?
the grade (time spent in class and studying).
Links are provided for all Internet Exercises at process of reinforcement. Apply these steps (When-
http://plunkett.swlearning.com. Do-Get) to a management situation.
1. In reinforcement theory, the rules of consequences 2. Good managers are often compared to coaches.
are used in a three-step sequence that defi nes the What makes a good coach? Relate this to manage-
ment and motivation. http://sportsmedicine.about statements do you practice? To which of the state-
.com/od/tipsandtricks/a/qualitycoach.htm ments will you pay particular attention? http://www
.accel-team.com/_free_4u_/05_coaching.pdf
3. Go to the Web address provided to see a list of
qualities that make a good coach. Which of the

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APPLICATION CASE
Container Store: Intense Employee Commitment mitment. The passion for the company that employees
The Container Store, originator of the storage and orga- at The Container Store feel comes from the top. Garrett
nizational retail concept, has been at the top of Fortune and Kip can be found selling, dusting shelves, and help-
magazine’s list of the 100 Best Companies to Work for ing with customer carry-outs.
in America seven years in a row (2000–2006). To de- One of The Container Store’s core business philoso-
velop the list, Fortune asked randomly selected employ- phies is that three good people equal one great person
ees at several hundred candidate companies to complete in terms of business productivity. Elizabeth Barrett,
The Great Place to Work Trust Index (an employee sur- Vice President of Operations, describes the character-
vey that evaluates trust in management, pride in work istics of an indispensable employee: “One who has tre-
and the company, and camaraderie). The companies pro- mendous vision and relentless dedication to The Con-
vide Fortune with the entry-level salary for both profes- tainer Store’s philosophy, culture and customer service
sional and production or service workers and the num- level. That employee has a great enthusiasm for his or
ber of workers in each category. her job and a work ethic that is equally enthusiastic and
The Container Store operates retail, mail order, comes from loving the job that they do” (Dallas Morn-
and online business devoted to storage products such ing News).
as closet organization systems, decorative shelving, and Most employees at The Container Store were cus-
wire and plastic bins. Garrett Boone, Chairman, and tomers fi rst. Barrett is an example. “I moved to Dal-
Kip Tindell, CEO, opened their fi rst store in Dallas, las from New York immediately after graduation from
Texas, in 1978. By 2006, the company had grown from college. In September of 1981, I went into one of our
a 1600-square-foot space to many stores from coast original stores . . . looking for some part-time work that
to coast, averaging 25,000 square feet. The Container would keep me busy until my ‘real’ career began. I fig-
Store’s philosophy is centered on strict merchandising, ured that I would put my liberal arts degree and my
superior customer service, and intense employee com- French major to use at a later time. I fell in love with the
way The Container Store treats its customers and its em- Provide examples of specific elements of each theory
ployees, and here I am, 19 years later!” (Dallas Morning to support your answer.
News) 3. Do Garrett and Kip focus on content theories, pro-
cess theories, or both? Explain your answer.
Questions
1. Using Figure 12.1 as a guide, evaluate the quality of Sources: “100 Best Companies to Work For,” Fortune, May 15, 2006;
work life at The Container Store. Provide examples The Container Store press release, January 6, 2003, http://www.con-
tainerstore.com; “Employment: Success Story,” Dallas Morning News,
from the case that relate to specific factors contrib- September 3, 2000.
uting to the quality of work life.
2. Which motivation theories do Garrett and Kip ap-
ply in developing their overall motivation strategy?

P.F. Chang’s Employees Taste the Fruits of Motivation the dining room, operating partners have a major stake
What motivates you? Do you run every morning to get in their restaurant’s success. “Managers have a passion
fit, lose weight, or slide into that special pair of jeans? for the business,” explains Operating Partner Jenni-
Do you study because you love what you are learning, fer Olson Hicks, “and we instill that in our employees.”
or because you want good grades? Do you work every Hicks also notes that it is important for managers to be
weekend for money to pay for college or for money to wherever they are needed in the restaurant—whether it
eat out with your friends? All of these motives are real is hosting, taking orders, or washing dishes. Setting this
and legitimate—they are what drive you to do the things kind of example of commitment to the success of the or-
you do. The same is true for workers everywhere, in- ganization can be a powerful motivator to employees.
cluding P.F. Chang’s bistros. It’s easy to see what mo- All of P.F. Chang’s restaurant workers are trained
tivates managers and executives at P.F. Chang’s: they to understand more than just their jobs. They know the
want customers to love the food and atmosphere, they food and the way it is prepared; they know the wine list;
want their business to succeed and grow, and they want they know what their guests want and how to provide
to earn a good living in return for their investment and it for them; and they know how P.F. Chang’s operates
hard work. “We are truly glad you are here,” says P.F. as a company. In addition, the workers themselves are
Chang’s motto, “and we will do everything possible to empowered to do just about whatever it takes to satisfy
make you want to come back again.” This is the biggest their customers. For example, wait staff are trained to
motivation of all—to have customers come back. guide new visitors through the Asian menu—termed the
But what motivates employees at P.F. Chang’s—the “limo ride” in company lingo—so they can select the
wait staff, bartenders, hosts, chefs and kitchen crew, food they will enjoy. Waiters don’t just take orders, they
bus boys and dishwashers? Historically, the restaurant provide a service through their knowledge of the menu,
industry has relied on a rigid hierarchy, with managers the food, and its preparation. In the kitchen, although
meting out punishments and rewards to hourly workers. workers may have specific jobs, ranging from line cook
The result has been a low degree of job satisfaction and to sous chef, all employees understand the total picture.
a high degree of turnover. There might be some use of “Everyone knows what’s going on in the kitchen,” ex-
job rotation or job enlargement, but it is not an industry plains Paul Muller, corporate executive chef. He likens
that is generally known for its embrace of a new work- the performance of the kitchen staff to “a great baseball
place. P.F. Chang’s, however, is different—and some team.”
may argue that the way its workers are treated is a major P.F. Chang’s also motivates by providing opportu-
factor in the company’s success. nity for advancement. Its continued growth “enables us
Throughout the fi rm, Chairman and CEO Rick to promote from within and offer members of our team
Federico introduced the concept of partnerships, rather the opportunity to enter management and further de-
than layers of management. Because they are empowered velop their business skills,” notes CEO Federico. Finally,
to hire their own team of workers, from the kitchen to the fi rm offers a generous array of benefits, ranging from
meal discounts to bonus plans to various retirement 3. In what ways can P.F. Chang’s employees use the
savings plans. P.F. Chang’s sounds like a great place to four elements of empowerment to achieve the high-
eat—and an even better place to work. est level of performance in their jobs?
Questions Sources: Company training materials and company Web site, http://
1. P.F. Chang’s offers a menu of extrinsic rewards to www.pfchangs.com, accessed February 2, 2007; Charles Bernstein,
“Chief Execution Officer,” Chain Leader, September 2004, pp. 62–68;
its workers. What are some of the intrinsic rewards? “Work Force Still Top Concern for CEOs,” The Phoenix Business Jour-
2. In what ways might managers at P.F. Chang’s use nal, May 24, 2004, http://phoenix.bizjournals.com.
positive reinforcement for their kitchen crew or wait
staff?
BIZ FLIX VIDEO CASE

For Love of the Game scene, the Tigers’ catcher Gus Sinski (John C. Reilly)
Billy Chapel (Kevin Costner), a 20-year veteran pitcher comes out to the pitching mound to talk to Billy.
with the Detroit Tigers, learns just before the season’s
last game that the team’s new owners want to trade him. What to Watch for and Ask Yourself
He also learns that his partner Jane Aubrey (Kelly Pres- 1. What is Billy Chapel’s level of esteem needs at this
ton) intends to leave him. Faced with these daunting point in the game?
blows, Chapel wants to pitch a perfect fi nal game. Direc- 2. Do you expect Gus Sinski’s talk to have any effect
tor Sam Raimi’s love of baseball shines through in some on Chapel? If it will, what will be the effect?
striking visual effects. 3. What rewards potentially exist for Billy Chapel? Re-
This scene is a slightly edited version of the “Just member, this is the last baseball game of his career.
Throw” sequence, which begins the fi lm’s exciting clos-
ing scenes in which Chapel pitches his last game. In this
5 CHAPTER 13
LEADING Leadership
CHAPTER 14
Team Management and Conflict
Getty Images
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LEARNING OBJECTIVES
LEADERSHIP After studying this chapter, you should be able to:
Discuss leadership traits, skills, and behaviors

1
Differentiate between management and leadership
2
Describe the five sources of power leaders may possess
3
Differentiate between positive and negative motivation
4
Describe the three decision-making styles used by leaders
5
Explain the two primary approaches leaders can take: task
6 centered and people centered
Describe the three theories of situational leadership

7
Discuss the three challenges facing leaders
8
Getty Images
Starbucks: Benevolent and Competitive
A participative leader rewards, motivates, empowers,
values, is creative, has vision, proposes change, con- Howard Schultz
nects, networks, is flexible, facilitates, teaches, nour- Born: 1953, Brooklyn, New York
ishes growth, reaches out, and provides information. Current Position: Chairman, Starbucks
Howard Schultz, Chairman of Starbucks Coffee Com- Corporation
pany, is an example of a participative leader. “People Career Highlights: 1966 Sales, Xerox Corporation
aren’t interested in how much you know,” he says.
1979 Manager U.S. Operations, Hammarplast
“It’s how much you care” (Meyers).
Schultz’s leadership philosophy is anchored on 1982 Director of Retail Operations and Marketing,
the values of caring and benevolence. He respects Starbucks Corporation
and values employees. 1985 Founder and CEO, Il Giornale
1987 Chairman and CEO, Starbucks Corporation
Being a great leader means finding the balance
2000 Chairman and Chief Global Strategist
between celebrating success and not embrac-
ing the status quo. Being a great leader also Education: Northern Michigan University,
means identifying a path we need to go down BS, 1975
and creating enough confidence in our people Personal: Wife
so they follow it and don’t veer off course Source: International Directory of Business Biographies,
because it’s an easier route to go (Meyers). http://www.referenceforbusiness.com/biography/S-Z/Schultz-
Howard-1953.html.
Schultz’s childhood shaped his values and those of
his company. Schultz grew up in a housing project
in Brooklyn, New York. His father, a driver delivering
diapers, fell on a front porch and broke his leg while acter in the novel Moby Dick.) “When I walked in
working. Schultz remembers, this store for the first time, I know this sounds really
hokey, I knew I was home,” Schultz says (Anderson).
When he fell on the job, he basically was
He quit his job to work in the store and persuaded
turned loose. He was out of work. There was
the owners to add an espresso bar. A few years later,
no hospitalization, no health insurance, no work-
Starbucks had grown to six Seattle stores and Schultz
man’s compensation and we were done as a
was offered a chance to buy the company. Schultz
family and I saw the hopelessness, I saw the
found investors and bought Starbucks. Today, Star-
plight of a working class family, I saw the frac-
bucks coffee shops are found all over the world.
turing of the American dream first hand at the
age of 7. That memory scarred me (Anderson).
s’s
Starbucks was one of the first companies to provide tarbuck
me in S store. T
o-
health insurance to part-time employees, working at fe lt s o at ho h e
t th
c h u lt z y b o u g is e , he
S entuall franch
least 20 hours a week. oward a n d ev coffee
s a le s man H is jo b g n iz e d E m p lo ye e
Starbucks’s mission statement is to A pplian
ce uit h reco pany.
re, he q tionally his com tarbuck
s
“[e]stablish Starbucks as the premier purveyor attle sto of the interna od“ to e s et S
first Se ir m a n b y d o in g g o
r e x p e ri e n c
C h a o we ll e
of the finest coffee in the world while maintain- day, as a of “ d custom
the ide s, and
ing our uncompromising principles while we applies r re la ti onship
, ve n d o joes.”
grow.” Schultz explains, benefits other “
om the
You don’t start out by saying, ‘I’m going to apart fr
create the world’s largest coffee company.’
You start with a sensibility that says, ‘I’m
© Ted S. Warren/Associated Press
going to create a different kind of company.’

And you have to follow the path of doing the
right thing by making decisions that are true
to your mission and cause. You refer to your
heart, conscience, and memory (Meyers).
Schultz was working as an appliance salesperson
and stopped at Starbucks, a small Seattle, Washing-
ton, shop selling coffee beans and machines on the
seafront, to make a sales call. (“Starbuck” is a char-
434 Part 5 Leading
Schultz says, “We’re in the business of human connection and humanity, creating commu-
nities in a third place between home and work” (Anderson).
Sources: Tom Anderson, “Howard Schultz: The Star Of Starbucks,” CBS 60 Minutes, April 23, 2006, http://
www.cbsnews.com/stories/2006/04/21/60minutes/main1532246.shtml; William Meyers, “Conscience in a
Cup of Coffee,” USNews.com, October 31, 2005, http://www.usnews.com/usnews/news/articles/051031/
31schultz.htm.
Introduction
Leading is one of five functions of management. It is vital to the execution of
the other four. Leading people and their organizations requires the ability to do
many of the activities we have discussed so far in this text. The principles gov-
erning communication, decision making, and motivation form the foundation of
leading. At the top of any organization, leading is most concerned with
• Establishing values, culture, and climate
• Defi ning a mission
• Identifying core competencies
• Scanning environments
• Sensing the need for change
• Creating a vision for the future
• Enlisting cooperation and support for that vision
• Keeping people and processes focused on satisfying various customers
• Unleashing the full potential in and soliciting contributions from all the or-
ganization’s human resources through training, development, and empow-
erment
People with the ability to lead, however, must exist at all organizational lev-
els and within each of its units and teams.
In our opening case, Howard Schultz encourages participation from his
employees. He says that people are the secret to Starbucks’s success. Ashley
Woodruff, Analyst at Bear Stearns who follows Starbucks, explains, “Howard
Schultz’s leadership style makes employees feel like partners, not hourly work-
ers. That’s one of the reasons why the people behind the counter in the stores are
so friendly and passionate. They’re not just selling coffee. They have a relation-
ship with customers.” 1
Leadership Defined
leadership Leadership, in its management application, is the process of influencing individ-
The process of influencing in- uals and groups to set and achieve goals. Influence is the power to sway other
dividuals and groups to set and
achieve goals people to one’s will or views. Leaders—those who practice leadership—guide,
direct, persuade, coach, counsel, and inspire others. How well they do this de-
influence pends on several variables.
The power to sway people to
one’s will or views Leadership involves three sets of variables: the leader, those being led, and
the circumstances and situations they fi nd themselves facing. All three are con-
stantly changing. The leader, like those being led, is a human being with various
skills, traits, knowledge, and attitudes developed through experience that shape
his or her personality, personal philosophies, and ethical beliefs—that is, his or
her moral compass. These factors can contribute to or detract from the leader’s
Chapter 13 Leadership 435
ability to influence others. They are the sources of the individual’s strengths or
weaknesses.
What qualities must a leader have? As Carol Kleiman reported, Jeffrey
Christian, President and Chief Executive Officer of a Cleveland-based executive
search fi rm, looks for managers
who are high impact players, change agents, drivers and winners—peo-
ple who are extremely fl exible, bright, tactical and strategic, who can
handle a lot of information, make decisions quickly, motivate others,
chase a moving target and shake things up. Previously, corporate recruit-
ing emphasized credentials [schooling] and experience, which are still
important, but . . . you can’t teach good leadership or how to be excited
about life. 2
Robert Greenleaf, former Director of Management Research at AT&T and
Founding Director of the Center for Applied Ethics, said, “The leader exists to
serve those whom he nominally leads, those who supposedly follow him. He (or
she) takes their fulfi llment as his (or her) principal aim.” 3 The servant–leader
takes people and their work seriously, listens to and takes the lead from the
troops, heals, is self-effacing, and sees himself or herself as a steward.4
Leadership Traits
Early theories about leadership suggested that excellent leaders possessed cer-
tain traits, or personal characteristics, that lay at the root of their ability to lead.
Following World War II, the U.S. Army surveyed soldiers in an attempt to com-
pile a list of traits shared by commanders whom soldiers perceived as leaders.
The resulting list, which included 14 traits, was clearly inadequate to describe
1
Discuss leadership traits,
skills, and behaviors
leadership. No two commanders displayed all the traits, and many famous com-
manders lacked several.
More recently, Gary Yukl constructed a list of traits and skills commonly
associated with effective leaders. 5 Figure 13.1 presents these traits. Yukl’s list
suggests that a leader is strongly motivated to excel and succeed.

436
VALUING DIVERSITY Part 5 Leading
a g es
“Male” and “Female” Approaches
Get t y Im
to Leadership
Do men and women approach leadership differently? terms, expressing the view that organizational leaders
A study of 229 (141 male and 88 female) owners of pri- should command and control their subordinates to achieve
vately held firms with anywhere from six to 325 employ- measurable results for the firm.
ees in a mid-sized North American city presented at the
annual meeting of the Academy of Management (Seattle, The authors, Jennifer E. Cliff of the University of
August 3–6) revealed no significant difference between Alberta, Nancy Langton of the University of British
male and female executive leadership. However, the own- Columbia, and Howard E. Aldrich of the University of
ers describe gender as having an important leadership North Carolina note, “Rather than conforming primarily to
role in management. the masculine model of organizing, it appears that both
As the authors put it: male and female owners manage their firms with a mix of
masculine and feminine approaches.” Men and women
Male and female owners tend to use different—and gen- manage similarly, but talk about it differently.
der-stereotypic—rhetoric to describe their approaches
to business. The female owners were significantly more • Select an image that represents leadership, and then
likely than the male owners to describe their desired rela- write a 100-word essay explaining why you selected
tionship with employees in stereotypically feminine terms, that image. Compare your image to that of your class-
revealing the view that organizational leaders should be mates. Do men and women (in your class) represent
responsive to and empower the personal growth of their leadership differently?
subordinates. . .The male owners were significantly more
Source: Academy of Management Media Release, “When It Comes
likely than the female owners to describe their desired re- to Leadership, Gender Differences are More a Matter of Talk than
lationship with employees in stereotypically masculine Action, Study Finds,” November 6, 2003.
No list of leadership traits and skills can be definitive, however, because no

two leaders are exactly alike. Different leaders working with different people
in different situations need different traits. If people in charge possess what is
needed when it is needed, they should be able to exercise effective leadership.
William Peace, a former executive with Westinghouse and United Technolo-
gies, is currently Director and Executive Consultant with Doctus Management
Consultancy of Chester, England. In the course of his career, Peace learned that
certain traits serve him well in management jobs. In an article for Harvard Busi-
ness Review, Peace noted the importance of intelligence, energy, confidence, and
responsibility. He differed from some observers in his emphasis on candor, sensi-
tivity, and a “certain willingness to suffer the painful consequences of unpopular
decisions.” Peace called using these traits in management “soft management.” 6
As this chapter’s Valuing Diversity feature points out, personal traits are often
perceived as masculine, feminine, or gender neutral.
Leadership Skills
A person’s skills are the competencies and capabilities he or she possesses. Look
again at Figure 13.1 and notice that many of the skills Yukl identified are pri-
marily useful in dealing with others. These skills include diplomacy, fluency in
speech (communication skills), persuasiveness, and social ability. Some of the
traits listed imply the existence of skills. For example, being decisive means that
one has skill in making decisions by both rational and intuitive means.
Chris Carey, former President of Datatec Industries, which makes in-store

computer systems, believes that subordinates should evaluate their bosses in
what he calls reverse performance reviews. He had his 318 employees score
their managers’ skills in areas such as coaching, listening, praising, and respon-
siveness. Employees rated upper managers in terms of support of employees, ar-
ticulation of goals, attention to employee ideas, and fairness. The surveys were
anonymous, and the results were shared. Formal, top-down appraisals followed
within a month. “Scheduling the reviews back to back underscores the fact that
everyone can perform better and everyone has a chance to say how that will
happen.” 7
Leadership Behaviors
Gary Yukl and his colleagues determined 19 categories of “meaningful and
measurable” leadership behavior.8 Figure 13.2 presents the Yukl group’s catego-
ries along with defi nitions and examples. As you examine these behaviors—the
things leaders do in the everyday exercise of leadership—relate them to the traits
and skills discussed earlier. Then link the concepts to what you know about hu-
man behavior and motivation as described in Chapter 12.
The fi rst behavior Yukl listed, performance emphasis, remains a popular fo-
cus for managers and business writers. The movement in business today is to pay
people for what they learn and to reward them for their individual and group
performance. At Lyondell Petrochemical, “Managers and workers tackle new
undertakings in teams, which get bonuses if their ideas fly.” 9 By putting their
emphasis and money where their words are, company managers emphasize per-
formance and productivity.
Management Versus Leadership

Management and leadership are not synonyms. Managers plan, organize, staff,
lead, and control. They might or might not be effective in influencing their sub-
ordinates or team members to set and achieve goals. Ideally, leadership and man-
agement skills combine to allow a manager to function as a leader, as Figure 13.3
suggests. The manager who gives orders and explicit instructions to experienced
2
management and
leadership
people, for instance, is not leading but actually impeding productivity. Planning
effectively helps one to become a manager; enabling others to plan effectively
is leading. Leaders empower—they give people the things they need to grow, to
change, and to cope with change. Leaders create and share visions, generating
strategies to bring the visions to reality.
According to Datatec’s Chris Carey, empowering people requires a corpo-
rate culture that makes empowerment a core value. His company worked hard
to create a culture that has as “its core values: honesty, openness, empowerment,
and acceptance of failure.” 10
John Kotter and James Heskett, in Corporate Culture and Performance,
listed organizations that had made major cultural changes. The leaders of these
organizations fi rst had to realize that change was needed. Then they had to com-
municate to employees the facts that pointed to a crisis or potential crisis so the
employees would perceive the need to change. Finally, as Kotter and Heskett de-
scribed, these leaders
developed or clarifi ed their visions of what changes were needed. . . . Af-
ter perceiving some minimum readiness on the part of their managers,
438 Part 5 Leading
the leaders then began communicating their visions of what changes were
necessary. These visions always carried some general message about key
constituencies, especially customers. . . . [Also] included was informa-
tion about more specific strategies and practices that were seen as needed
to deal with the current business climate or competitive situation.11
Figure 13.2 (continued)
11. Information dissemination: The extent to which a leader keeps subordinates informed about developments
that affect their work, including events in other work units or outside the organization; decisions made by
higher management; and progress in meetings with superiors or outsiders.
Example: The supervisor briefed us about some high-level changes in policy.
12. Problem solving: The extent to which a leader takes the initiative in proposing solutions to serious work-
related problems and acts decisively to deal with such problems when a prompt solution is needed.
Example: The unit was short-handed due to illness, and we had an important deadline to meet. My supervisor
arranged to borrow two people from other units, so we could fi nish the job today.
13. Planning: The extent to which a leader decides how to organize and schedule work efficiently, plans how to
attain work-unit objectives, and makes contingency plans for potential problems.
Example: My supervisor suggested a shortcut that allows us to prepare our fi nancial statements in three days
instead of the four days it used to take.
14. Coordinating: The extent to which a leader coordinates the work of subordinates, emphasizes the impor-
tance of coordination, and encourages subordinates to coordinate their activities.
Example: My supervisor encouraged subordinates who were ahead in their work to help those who were be-
hind. By helping each other, all the different parts of the project will be ready at the same time.
15. Work facilitation: The extent to which a leader obtains for subordinates any necessary supplies, equipment,
support services, or other resources; eliminates problems in the work environment; and removes other obsta-
cles that interfere with the work.
Example: I asked my boss to order some supplies, and he arranged to get them right away.
16. Representation: The extent to which a leader establishes contacts with other groups and important people
in the organization, persuades them to appreciate and support the leader’s work unit, and influences superiors
and outsiders to promote and defend the interests of the work unit.
Example: My supervisor met with the data processing manager to ask for revisions to the computer programs.
The revised programs will meet our needs more effectively.
17. Interaction facilitation: The extent to which a leader tries to get subordinates to be friendly with each other,
cooperate, share information and ideas, and help each other.
Example: The sales manager took the group out to lunch to give everybody a chance to get to know the new
sales representative.
18. Conflict management: The extent to which a leader restrains subordinates from fighting and arguing,
encourages them to resolve conflicts in a constructive manner, and helps settle disagreements between
subordinates.
Example: Two members of the department who were working together on a project had a dispute about it.
The manager met with them to help resolve the matter.
19. Criticism-discipline: The extent to which a leader criticizes or disciplines a subordinate who shows consis-
tently poor performance, violates a rule, or disobeys an order. Disciplinary actions include offi cial warnings,
reprimands, suspensions, and dismissals.
Example: The supervisor, concerned that a subordinate repeatedly made the same kinds of errors, made sure
that the subordinate was aware of expectations concerning quality.
Source: Leadership in Organizations, p. 70 by Gary Yukl. © 1981 by Prentice Hall, Inc. Adapted with permission of Pearson Education, Inc., Upper
Saddle River, NJ 97458.
As the leaders’ visions and strategies were conveyed, they won allies and be-
came role models for other managers. “Their ability to change and play a useful
leadership role signaled that others could also.” 12 Such leaders are often called
transformational leaders because they are able to create fundamental changes in
their organizations’ values, missions, and cultures. Figure 13.4, which is based
440 Part 5 Leading
Figure 13.3 Relationship between management and leadership
People Who Have Both

Leadership Ability and
Management Ability
Leadership Management
Ability Ability
People Who Have People Who Have

Leadership Ability but Management Ability but
Are Not Managers Are Not Leaders
on John Kotter’s work, further differentiates between management and leader-

ship. Notice how Kotter’s list of leadership behaviors emphasizes people skills
and motivational connections.
Kotter notes that “A few . . . corporate change efforts have been very suc-
cessful. A few have been utter failures. Most fall somewhere in between, with
Chapter 13 Leadership
a g es
Peer Reviews at Risk International
Get t y Im
Peers rating peers (workers rating workers and managers gets his or her work out, conducts him- or herself on the
rating other managers of equal rank) is a relatively new job, manages resources, communicates, teams, markets
approach to appraising employees in industry. Many company services, exhibits personal excellence, and un-
employees fear receiving such ratings and having the derstands the company and its operations.
responsibility for rating workmates. Among their ethical The results are tabulated by a temporary employee
concerns are confidentiality and privacy. who receives the forms in sealed envelopes. Who said
Ohio-based Risk International believes it has discov- what is not disclosed. The results are shared with rated
ered a way to make such reviews pay off and is pleased persons through meetings with their supervisors, at which
with the results. The risk-management company employ- time plans are made for improvements. Risk International
ees rate “only those [peers] they work with directly” once has discovered its “quietly competent workers” who are
each year through a standardized form. Eleven specific, no longer ignored; it has identified superstars and those
equally weighted areas are evaluated on a scale of 1 (the who exhibit true leadership traits and behaviors.
highest rating) through 4 (unacceptable) along with an “un-
• What do you think about evaluating and being evalu-
known.” A 3 means improvements are needed; a 2 is a
ated by your peers?
satisfactory rating; a 1 denotes a strength. The first item
• What additional ethical issues can you identify with
on the form asks how well a peer “demonstrates high
such a process?
ethical standards and personal integrity.” The other areas
Sources: Risk International, http://www.riskinternational.com;
deal with how well an employee deals with quality and Stephanie Gruner, “The Team-Building Peer Review,” Inc., July 1995,
customer service, solves problems and makes judgments, 63–65.
a distinct tilt toward the lower end of the scale.” 13 Why so few big successes?
Management can get stuck in the planning phase or be trapped with a culture,
a decision structure, practices, and people who resist change. “A paralyzed se-
nior management often comes from having too many managers and not enough
leaders.” 14
To enlist support for change and gain progress toward it, consultant Peter
Scott-Morgan at Arthur D. Little believes that although “humans are amazingly
adaptable, you have to make it logical for them to want to change.” 15 Integra Fi-
nancial, a Pennsylvania-based holding company, wanted to shift from a super-
star culture to one based on teamwork. It “developed a carefully crafted system
of evaluations and rewards to discourage hot-dogging, grandstanding, fi libus-
tering, and other ego games. The best team players get the goodies; the worst
get a gentle dressing down. . . . One thing that you can count on: Whatever
gets rewarded will get done.” 16 (See this chapter’s Ethical Management feature
for a discussion on how peer reviews can be used to identify true leaders in an
organization.)
As is the case at Starbucks, corporate culture begins with a leader that leads
by example (“walks like they talk”) and creates a vision, a strategy to achieve
it, and a coalition consisting of empowered people at every level committed to
change. Leadership is the ability to articulate a vision and to inspire the best ef-
forts of followers in the service of that vision. Howard Schultz focuses on social
interactions with the people of Starbucks, fostering an atmosphere of mutual
trust and mutual commitment to the interests of the organization as a whole.
442 Part 5 Leading
Power and Leadership
3
Describe the five sources
of power leaders may
possess
Power gives people the ability to exert influence over others, to get them to fol-
low; it makes leadership possible. Leaders possess power, as do all managers
whether or not they are leaders. Possessing power can increase the effectiveness
of managers by enabling them to inspire people—to get them to perform will-
ingly, without relying solely on formal managerial authority. Formal authority
grants a manager legitimate power; but as Chapter 8 has pointed out, coercive,
reward, expert, and referent power exist as well. A brief review of these five
foundation stones of leadership is in order here.
Legitimate Power
Managers’ formal authority derives from their positions in their organizations,
which each position’s job description usually specifies. A manager’s formal au-
thority grants power or influence because it enables the holder to use organiza-
tional resources, including other employees. An employee’s instructor, manager,
or team leader has the right to assign work, establish standards for its execution,
and apply those standards to both outcomes and behaviors of subordinates. All
employees recognize that they have a fundamental duty to comply with lawful
and ethical orders, rules, and standards established by those in formal positions
of authority.
The employees under subcontractors at several of Wal-Mart’s stores re-
spected and feared the managers because of the legitimate power they possessed.
“Wal-Mart officials said it made sense to contract out the cleaning work because
that enabled store managers to concentrate on what they do best, operating stores
that provide low-cost merchandise.” 17 The employees were charged with making
those stores clean. The subcontractors used the power of their formal positions.
(See this chapter’s Global Applications feature.)
Coercive Power
One result of the exercise of legitimate power—a person’s formal authority—is
punishment for a subordinate’s unacceptable outcomes and performances. Peo-
ple with authority and, therefore, influence over others usually have the right to
punish or withhold rewards from them. A few of the possible results from the
exercise of coercive powers include oral and written warnings, suspension, and
fi ring. If these punishments are to act as deterrents for inappropriate behaviors,
however, people subjected to them must believe that they will be administered in
a timely and appropriate manner.
Reward Power
The opposite of coercive power is reward power—the right to promise or grant
rewards, such as raises, praise, promotions, and so on. It, too, is often the result
of exercising legitimate power. As Chapter 12 has pointed out, people usually
work hard to please those who can reward or punish them. The attractiveness
of the reward is important; it must have a strong appeal to the person being in-
fluenced or it may have little impact on that person’s motivation. When rewards
are promised and not granted in a timely manner, however, they can actually
have a negative impact on an individual’s motivation. Finally, rewards must be
Chapter 13 Leadership
a g es
Wal-Mart’s Subcontractors and
Get t y Im
Illegal Immigration
Wal-Mart, the world’s largest retailer, is known for its “al- Americans might have wanted. And taxpayers sometimes
ways low prices.” One way Wal-Mart saves money is by ended up paying for the illegal workers’ emergency health
hiring subcontractors to clean its stores and construct its care or their children’s education in American schools”
buildings. In November 2005, about 125 people were ar- (Greenhouse).
rested on immigration violations at a Wal-Mart Pennsyl- Wal-Mart insists it isn’t responsible for anything a sub-
vania construction location. On October 23, 2003, fed- contractor does wrong. The Immigration and Customs
eral agents raided 60 Wal-Mart stores in 21 states and ar- Enforcement agency says that Wal-Mart managers knew
rested 250 janitors who were in the United States illegally that the contractors had a history of hiring illegal immi-
from Mexico, Costa Rica, El Salvador, Guatemala, and grants. Wal-Mart insists that it will cooperate with the
Honduras. authorities and conduct its own investigation.
“The use of illegal workers appeared to benefit Wal- • Do you think that the immigrants were paid for their
Mart, its shareholders, and managers by minimizing the work during the week that they were arrested?
company’s costs, and it benefited consumers by help- • What do you think about hiring illegal immigrants?
ing hold down Wal-Mart’s prices. Cleaning contractors • What can Wal-Mart do to ensure that subcontractors
profited, and thousands of foreign workers were able don’t hire illegal workers?
to earn more than they could back home. But the sys-
Sources: CNNMoney.com, “Police: Wal-Mart Site Raided,” Novem-
tem also had its costs—janitors said they were forced to ber 18, 2005, http://money.cnn.com/2005/11/18/news/fortune500/
work seven days a week, were not paid overtime, and of- walmart_raid/?cnnyes; Steven Greenhouse, “Illegally in the U.S.,
and Never a Day Off at Wal-Mart,” The New York Times, Novem-
ten endured harsh conditions. Foreigners got jobs that ber 5, 2003.
earned before being granted; to do otherwise is to lessen their value and impor-
tance to the individual.
Expert Power
A person’s abilities, skills, knowledge, and experience can exert influence when
others value them. A seasoned practitioner exercises expert power with newcom-
ers and apprentices. A trainer or coach uses it to impart his or her knowledge,
skills, and attitudes to trainees. Physicians, lawyers, and other licensed profes-
sionals earn their living by selling their expertise. A person in need of legal ad-
vice, however, may find a production manager’s expertise to be of little value.
Unlike legitimate, coercive, and reward power, expert power may reside in and
be exercised by nearly everyone, whether inside or outside an organization.
Referent Power
Power that comes to people because of the kind of personality or personal at-
tractiveness they have to others is known as referent, or charismatic, power; it
creates in people a desire to associate with or emulate the person who has it.
Your personality, sense of humor, openness, honesty, and other endearing traits
can draw others to you. Many of this chapter’s leadership traits generate ref-
erent power in those who possess them. Like expert power, referent power is
444 Part 5 Leading
possessed by nearly everyone to some degree; but not all people are attracted
to the same personalities or traits. Another may consider what one admires
unappealing.
In this chapter’s Management in Action case, Howard Schultz understands
the people he is leading. He gets to know his followers, and the followers see
him as their leader. In other words, they trust him and he trusts them. He is ac-
cepted because he possesses legitimate, referent, and expert power.
Managers can become leaders when they couple their formal authority (le-
gitimate power) with the other types of power. As the foregoing indicates, it is
possible to be a leader without being a manager and a manager without being a
leader. A major goal for many organizations is to develop and tap into the lead-
ership potential that exists in nearly every employee.
Possessing power and using it wisely are two different things. Power gives
individuals and groups the means to influence for both good and evil, as Chap-
ter 3, titled “Management Ethics and Social Responsibility,” points out. Leaders
without moral and ethical values or who disregard the law can do others, them-
selves, and their organizations great harm. The use of power in any organiza-
tion must not contradict its core values. Mickey Mantle, a baseball great, held a
press conference following his liver transplant in 1995. He admitted to years of
alcohol abuse, a primary cause for his liver’s failure. He cautioned all his fans
and admirers to not emulate him, fearful that his behavior had or would become
a model for others.
Leadership Styles
From the discussion of leadership and its power bases, we turn now to the dy-
namic interaction between a leader and other people. The perceived approaches
leadership style and behaviors a manager uses to influence others constitute the manager’s leader-
The perceived approaches and ship style.18 Managers’ leadership styles result from their philosophies about mo-
behaviors a manager uses to in-
fluence others tivation, their choices of decision-making styles, and their areas of emphasis in
the work environment—whether they focus on tasks or people.
Positive Versus Negative Motivation
4
positive and negative
motivation
Leaders influence others to achieve goals through their approach to motivation.
Depending on the style of the manager, the motivation can take the form of re-
wards or penalties.19 Figure 13.5 presents a continuum containing positive and
negative motivations. Leaders with positive styles use positive motivators. They
motivate by using praise, recognition, or monetary rewards or by increasing se-
curity or granting additional responsibilities.
A negative leadership style incorporates coercion known as sanctions—fi nes,
suspensions, termination, and the like. The manager who says, “Do it my way
or else” employs negative motivation. Implied in the statement is the manager’s
willingness to exercise disciplinary powers; the subordinate’s failure to comply
would be an act of insubordination.
Positive leadership styles encourage development of employees and result in
higher levels of job satisfaction. 20 Negative leadership styles are based on the
manager’s ability to withhold items of value from employees. The result of nega-
tive leadership may be an environment of fear, where managers are viewed with
distrust and seen as dictators rather than leaders or team players.
Figure 13.5 Motivation continuum
Opportunities for Advancement
Responsibility
Recognition
Positive
Motivation Financial Rewards
Praise
Status
Threats
Reprimands
Negative
Motivation Financial Penalties
Suspension
Termination
Decision-Making Styles
Another element in a manager’s leadership style is the degree to which he or she
shares decision-making authority with subordinates. Managers’ styles range from
not sharing at all to completely delegating decision-making authority. Figure 13.6
shows the degrees of sharing as a continuum, with the range of styles categorized
in three groups: autocratic style, participative style, and free-rein style. Which
5
Describe the three
decision-making styles
used by leaders
style a manager chooses should relate to the situation encountered.
Autocratic Style A manager who uses the autocratic style does not share autocratic style
decision-making authority with subordinates. The manager makes the decision A leadership approach in which
a manager does not share
and then announces it. Autocratic managers may ask for subordinates’ ideas and decision-making authority with
feedback about the decision, but the input does not usually change the decision subordinates
unless it indicates that something vital has been overlooked. The hallmark of this
style is that the manager, who retains all the authority, executes the entire pro-
cess. Consequently, the autocratic style is sometimes called the “I” approach.
Under certain conditions, the autocratic style is appropriate. When a man-
ager is training a subordinate, for instance, the content, objectives, pacing, and
execution of decisions properly remain in the hands of the trainer. (The manager
should elicit feedback from the trainee, however.) During a crisis—a hazardous-
materials spill or bomb threat, say—leaders are expected to take charge, issue
orders, and make decisions. When a subordinate directly challenges a manager’s
authority, an autocratic response may be needed to preclude acts of insubordi-
nation. In circumstances in which employees have not been empowered to make
decisions, supervisors must make them. Some subordinates do not want to share
446 Part 5 Leading
authority or become involved in any way beyond the performance of their routine
duties. Managers should respect these preferences but also make incentives and
growth opportunities available.
To use the autocratic style effectively, managers must know what needs to be
done, and they must possess expert power. The autocratic style is effective when
managers face issues that they are best equipped to solve, create solutions whose
implementation does not depend on others, and desire to communicate through
orders and instructions. If these conditions do not exist, one of the other two
leadership styles is probably more appropriate.
participative style Participative Style Managers who use the participative style share decision-
A leadership approach in which making authority with subordinates. The degree of sharing can range from the
a manager shares decision-
making authority with manager’s presenting a tentative decision that is subject to change, to letting
subordinates the group or subordinate participate in making the decision. Sometimes called
the “we” approach, participative management involves others and lets them
bring their unique viewpoints, talents, and experiences to bear on an issue. This
style is strongly emphasized today because of the trends toward downsizing, em-
ployee empowerment, and worker teams.
A consultative and democratic approach works best for resolving issues that
affect more than just the manager or decision maker. People affected by deci-
sions support them more enthusiastically when they participate in the decision
making than when decisions are imposed on them. Also, if others in a manag-
er’s unit know more than the manager does about an issue, common sense urges
their inclusion in decisions concerning it.
Before subordinates can be brought into the process, mutual trust and re-
spect must exist between them and their managers. The subordinates must be
willing to participate and be trained to do so. People need training in rational
decision making. They must also possess the related skills and knowledge needed
to cope with the problems they are expected to solve. It takes time to give people
the confidence and competence needed to make decisions. Managers must have
the time, means, and patience to prepare subordinates to participate. When em-
ployees participate, they devise solutions they feel they own. This sense of own-
ership increases their commitment to making the solutions work.
Figure 13.6 Leadership styles and the distribution of decision-making authority
Manager’s Exercise of
Authority
Subordinates’ Share of
Decision-Making Authority
Autocratic Style Participative Style Free-Rein Style

Manager makes Manager makes Subordinate makes
decision, announces it, decision with input decision subject to
and seeks feedback from subordinates limits set by boss
Inc. magazine reported that the participation of Datatec employees is en-

couraged even in the matter of their bosses’ appraisals. Datatec managers believe
that
giving employees the chance to appraise their bosses forces a company to
live up to its commitment to participative management. [Managers are
asked] to conduct one-on-one reverse appraisals with subordinates. Em-
ployees who fi nd appraising their bosses simply too discomforting may
choose to talk to another manager. [President] Carey wants to make sure
that problems don’t get buried just because they’re prickly ones. 21
Limits on subordinates’ participation must be clearly spelled out beforehand;
there should be no misunderstandings about who holds authority to do what.
Mistakes will be made and some waste will occur, but the power of the participa-
tive style to motivate and energize people is great. In many organizations, such as
Datatec, managers must use this style; corporate culture and policies demand it.
Free-Rein Style Often called the “they” approach, or spectator style, the free- free-rein style
rein style empowers individuals or groups to function on their own, without di- A leadership approach in which
a manager shares decision-
rect involvement from the managers to whom they report. The style relies heav- making authority with subor-
ily on delegation of authority and works best when the parties have expert power, dinates, empowering them to
when participants have and know how to use the tools and techniques needed for function without direct involve-
ment from managers to whom
their tasks. Under this style, managers set limits and remain available for consul- they report
tation. The managers also hold participants accountable for their actions by re-
viewing and evaluating performance.
Free-rein leadership works particularly well with managers and experienced
professionals in engineering, design, research, and sales. Such people generally
resist other kinds of supervision.
In most organizations managers must be able to use the decision-making
style that circumstances dictate. Lee is new, so his manager needs to use an au-
tocratic approach until he develops the confidence and knowledge to perform in-
dependently or until he joins a team. Kim, experienced in her job and better at
it than anyone else, will probably do well under a participative or free-rein ap-
proach. Because people and circumstances constantly change and because sub-
ordinates must be prepared for change, the effective manager switches from one
leadership style to another as appropriate.
Task Orientation Versus People Orientation

Yet another element of leadership style is the manager’s philosophy about the
most effective way to get work done. Leaders can adopt a focus on task (a work,
or task, orientation) or a focus on employees (a relationship, or people-centered,
approach). Depending on the manager’s perspective and situation, these two ap-
proaches can be used separately or in combination.
6
Explain the two primary
approaches leaders can
take: task centered and
people centered
A task focus emphasizes technology, methods, plans, programs, deadlines,
goals, and getting the work out. Typically, the manager who focuses on a task uses
the autocratic style of leadership and issues guidelines and instructions to subor-
dinates. A task focus works well in the short run, especially with tight schedules
or under crisis conditions. Used over the long term, however, a task focus can cre-
ate personnel problems. It might cause the best performers, who desire flexibility
and freedom to be creative, to leave the group; and it might increase absenteeism
and decrease job satisfaction. 22
448 Part 5 Leading
The manager who focuses on employees emphasizes workers’ needs. He or

she treats employees as valuable assets and respects their views. Building team-
work, positive relationships, and mutual trust are important activities of the
people-centered leader. By focusing on employees, a manager can increase job
satisfaction and decrease absenteeism. 23
University of Michigan Studies Researchers at the University of Michigan

compared the behaviors of effective and ineffective supervisors. The research-
ers’ fi ndings indicated that supervisors who focused on their subordinates’ needs
(employee-centered leaders) were the most effective, building high-performance
teams that reached their goals. The less-effective supervisors (job-centered lead-
ers) tended to focus on tasks and were more concerned with efficiency and meet-
ing schedules. 24
The Ohio State University Studies Researchers at The Ohio State University
surveyed hundreds of leaders. The researchers studied their behavior in terms of
two factors: consideration and initiating structure. Consideration was defi ned
as concern for subordinates’ ideas and feelings (what the University of Michi-
gan studies referred to as an employee focus). Leaders who rated high in consid-
eration communicated openly, developed teams, and focused on subordinates’
needs. Initiating structure was defi ned as concern for goal achievement and task
orientation (what the Michigan studies called job focus). Leaders who rated high
in initiating structure were concerned with deadlines, planning work, and meet-
ing schedules. 25
The researchers found that leaders had one of four combinations of the two
behaviors: high consideration and low initiating structure, low consideration
and high initiating structure, low consideration and low initiating structure, and
high consideration and high initiating structure. The researchers concluded that
the last combination resulted in the greatest job satisfaction and performance by
subordinates. 26
Since the Ohio State studies, additional research suggests that the approach
a manager takes should vary, depending on the people involved and the situa-
tion. In a crisis, managers should focus on task. When training people to become
a self-managing work team, managers should focus on people—learn their needs
to cooperate, get to know one another, and develop relationships. Managers,
these studies suggest, must be flexible and provide the kind of leadership their
people and situations require.
The Leadership Grid® In its original version, Figure 13.7 was published as
the Managerial Grid by Robert R. Blake and Jane S. Mouton. Along with the
Grid theory itself, the figure has evolved through the years to its present configu-
Leadership Grid ® ration and is now referred to as The Leadership Grid®. It presents two axes: the
Blake and Mouton’s two- vertical axis measures concern for people; the horizontal axis measures concern
dimensional model for visualiz-
ing the extent to which a for production. (The axes correspond to employee- and job-centeredness in the
manager focuses on tasks, University of Michigan studies and to consideration and initiating structure in
employees, or both the Ohio State studies.) The positions on the grid are stated in terms of a 9-point
scale, with 1 representing a low concern and 9 representing a high concern. The
grid effectively summarizes positions that managers and leaders can take under
a variety of circumstances and with different employees.
The Leadership Grid® provides a framework for understanding leadership.

Karen McCormick of Grid International, Inc., gives the following explanation:
The premise behind Grid theory is that there is one basic set of principles
by which to manage that is appropriate to all situations. The different
“styles” in the theory are behavioral generalizations that manifest them-
selves as a result of the axes of “concern” and depict how a person char-
acterized by that style of behavior would react (positively or negatively)
given that same set of basic management principles. Grid theory does
not recommend the use of any particular style but holds up fundamental
principles as a yardstick against which the behavior styles are measured.
When a person is characterized as a certain “style” on the Grid, this is
a characterization of his or her behavior in relation to this ideal set of
principles that remain unchanged.
450 Part 5 Leading
For example, when faced with conflict in the workplace, a 1,9-

oriented person would tend to smooth over conflict and ease feel-
ings and hope it just “goes away.” (But as anyone who has ever expe-
rienced workplace conflict knows, it never does—it just festers.) The
9,9-oriented leader, on the other hand, would confront the conflict, de-
termine the root causes, and create ways to eliminate the source of the
conflict. This represents management by a basic, unchanging set of prin-
ciples across the board, rather than situational management where the
very foundation on which one manages is subject to change at the whim
of external circumstances.
The next section will examine three theories of leadership that incorporate
situational elements: the contingency model, the path–goal theory, and the life-
cycle theory.
Theories of Situational Leadership
7
Describe the three
theories of situational
leadership
Three general theories of leadership address adaptation of leadership to situa-
tions. All have strong roots in the motivational theories discussed in Chapter 12.
Fiedler’s Contingency Model

Fred Fiedler holds that the most appropriate style of leadership for a manager
contingency model depends on the manager’s situation. 27 Fiedler’s model of management, the con-
A leadership theory stating tingency model, suggests that a manager should choose task or employee focus
that a manager should focus
on either tasks or employees, according to the interaction of three situational variables: leader–member rela-
depending on the interaction tions, task structure, and leader position power. Because Fiedler’s model em-
of three variables—leader– phasizes the importance of the situation, Fiedler’s work is sometimes called the
member relations, task struc-
ture, and leader position power theory of situational leadership. Figure 13.8 shows Fiedler’s contingency model.
The solid line plotted at the top of Figure 13.8 reveals the recommended fo-
cus for specific situations. To understand the recommendations and how they
were reached, we must understand the variables the model uses.
The scale of leader–member relations refers to the degree to which the leader
is or feels accepted by the group. Measured by the observed degree of mutual re-
spect, trust, and confidence, this acceptance is rated as good or poor. In a good
relationship, the leader should be able to inspire and influence subordinates. If
the relationship is poor, the manager might have to resort to negotiating or to
promising favors to get performance.
The task structure ratings relate to the nature of subordinates’ jobs or tasks.
A structured task is or can be broken into procedures. It is narrowly defi ned and
may be machine-paced, and it tends to be full of routines that are repeated reg-
ularly. Data entry clerks, file clerks, and supermarket checkers hold structured
jobs. An unstructured job includes complexities, variety, and latitude for cre-
ative expression. Researchers, managers, design engineers, and most profession-
als hold unstructured jobs.
The ratings for leader position power describe the organizational power base
from which the leader operates. To what degree can the leader reward and pun-
ish? With whom is the leader allied? The leader’s connections, legitimate power,
expert power, and referent power determine weakness or strength—the ability
to exercise a little influence or a great deal of influence inside the organization.
Note position I in Figure 13.8. In a situation displaying good leader–member
relations, structured tasks, and strong leader position power, the contingency
Figure 13.8 Fiedler’s contingency model, depicting the interaction of leadership

orientations with structural variables
I II III IV V VI VII VIII
Employee
Orientation
Task
Orientation
Leader–Member
Relations Good Good Good Good Poor Poor Poor Poor
Task Structure Structured Unstructured Structured Unstructured
Leader Position Strong Weak Strong Strong Weak Strong Weak

Weak
Power
Source: Adapted and reprinted by permission of the Harvard Business Review. From “Engineer the Job to Fit
the Manager“ by Fred E. Fiedler (September–October 1965), p. 118. Copyright © 1965 by the Harvard Busi-
ness School Publishing Corporation. All rights reserved.
model tells the leader to adopt a task orientation. At position VII, a nearly equal
blend of employee and task orientation is best. Employee-oriented leaders per-
form best under conditions associated with positions IV, V, and VI. When a man-
ager is promoted or given a temporary assignment—as project leader or product
design team leader, for example—he or she will find a new combination of peo-
ple and circumstances. Each combination calls for a fresh assessment of Fiedler’s
three variables.
House and Mitchell’s Path–Goal Theory

Robert House and Terrence Mitchell developed the path–goal theory of leader- path–goal theory
ship. 28 Their theory relates to the behaviors a leader can use to stimulate sub- A view of management assert-
ing that subordinates’ behaviors
ordinates’ motivation to achieve both personal and organizational goals and re- and motivations are influenced
wards. 29 The path–goal theory suggests that a leadership style is effective or by the behaviors managers ex-
ineffective on the basis of how successfully leaders influence and support their hibit toward them
subordinates’ perceptions of the following:
• Goals that need to be achieved
• Rewards for successful performance
• Behaviors that lead to successful performance
According to the path–goal theory, leaders can influence subordinates’ moti-
vation by (1) teaching employees the competencies they will need to perform suc-
cessfully and gain rewards, (2) tailoring rewards to meet employees’ needs, and
(3) acting to support subordinates’ efforts. Teaching (coaching, development, and
training) builds confidence and competencies. Adapting rewards to the specific
452 Part 5 Leading
needs of individual employees makes them more appealing. Supportive behaviors

assist subordinates as necessary, enabling them to achieve both personal and or-
ganizational goals.
The path–goal theory has its basis in the expectancy theory of motivation.
In that theory, employees’ motivations are influenced by their perceptions of
what a task requires, their confidence in their abilities to perform, the attrac-
tiveness of the reward being offered, and the relationship of the reward to the
accomplishment of the task. The more self-confidence and the greater the desire
for the reward, the more willing employees will be to perform as required. Ac-
cording to the path–goal theory, leadership behaviors and situational factors in-
fluence the motivational process.
Leadership Behaviors House and Mitchell based their theory on the follow-
ing two assumptions: 30
1. A leader’s behavior is acceptable and satisfying to subordinates to the extent
that they view it as either an immediate source of satisfaction or as an in-
strument to some future satisfaction.
2. A leader’s behavior will increase subordinates’ efforts if it links satisfaction
of their needs to effective performance and supports their efforts to achieve
goals.
These two assumptions tell managers to increase the number of ways in
which performance can be deemed successful, to clear away barriers to success-
ful outcomes, and to help subordinates see these outcomes as desirable. 31 To
enable leaders to do these things, the theory provides four kinds of leadership
behavior:
1. Instrumental behavior (task-oriented). This behavior, sometimes called
directive behavior, involves the planning, directing, monitoring, and task-
assignment aspects of leadership. It can be prescriptive. A manager who uses
instrumental behavior establishes precise procedures, goals, and timetables
and utilizes the autocratic style of leadership. This behavior can be used to
increase an employee’s work effort or to clarify outcomes.
2. Supportive behavior (employee-oriented). This behavior creates a climate
of mutual trust and respect between leaders and followers. It involves the
coaching, counseling, and mentoring aspects of leadership. Supportive be-
havior requires open communication and a leader’s honest concern for sub-
ordinates’ needs. This type of behavior builds teams.
3. Participative behavior (employee-oriented). In this behavior a leader solicits
and uses subordinates’ ideas and contributions and involves subordinates in
decision making. During the planning and execution phases of an operation,
the manager tries to obtain input from everyone concerned. Supportive be-
havior promotes participative behavior. The reverse is true as well. Participa-
tive behavior builds team spirit, values individuals and their contributions,
and encourages development through exposure to others’ points of view and
experience.
4. Achievement-oriented behavior (employee-oriented). A leader who shows
this type of behavior helps subordinates grow and increases their competen-
cies through training and development. The leader’s primary aim is to im-
prove subordinates’ abilities and performance, thus making the employees
more valuable to themselves and their organization. Instrumental behavior,

supportive behavior, and participative behavior increase a leader’s ability to
engage in achievement-oriented behavior, which paves the way for subordi-
nates’ advancement.
As former CEO, Wayne Calloway headed up the 480,000 employees of
PepsiCo’s worldwide operations. His regular routines included all four types of
behavior that House and Mitchell described. He used instrumental behavior in
his hands-on approach to hiring, strategic planning, and executive appraisals.
He interviewed all job candidates for positions at the vice-presidential level or
above, and some 75 executives each year. Twice a year, Calloway was personally
involved in evaluating some 600 managers. 32
Calloway used supportive behavior in a companywide drive to build on past
decentralization with renewed efforts at empowerment. His participative behav-
ior included encouraging employees—everyone from route salespeople to restau-
rant workers—to recommend ways to improve the business. For example, Cal-
loway introduced the Great PepsiCo Brainstorm, in which employees won prizes
for contributing ideas. His achievement-oriented behavior included encourag-
ing people to take risks and rewarding them for their initiative, whether it led to
success or failure. 33
Situational Factors Two situational factors are important components in the

path–goal theory: the personal characteristics of subordinates and the work en-
vironment. These two factors influence the behavior a leader should choose.
The personal characteristics of subordinates include their abilities, self-
confidence, personal needs and motivations, and perceptions of their leaders.
When subordinates exhibit low levels of performance, leaders must be ready to
provide coaching, training, and direction. The leader must ensure that the re-
wards offered for outstanding performance are rewards that appeal to employees.
Factors in the work environment include the organization’s culture and sub-
cultures, the philosophy of management, how power is exercised, policies and
rules, and the extent to which tasks are structured. These factors are environ-
mental pressures beyond the abilities of employees to control, but they affect
employees’ abilities to accomplish tasks and achieve goals.
Leaders must know what their people want from work, what their motiva-
tions are, and what stands between them and successful performance. Leaders
must provide to each person the appropriate leadership, depending on the em-
ployees and the environmental conditions. Where skills are weak, instrumental
behavior is called for; when subordinates lack motivation, achievement-oriented
behavior may be appropriate.
Managers at Collins & Aikman, a floor coverings manufacturer, decided
to give their employees what they needed: new technology. Instead of opting for
cheap labor overseas as a means to stay competitive, the company chose to in-
vest in its U.S. workforce and operations and install state-of-the-art equipment.
In their Georgia plant, the primary tufting and shearing machines were to be
linked to computers. But the prospect of working with computers terrified many
of the fi rm’s 560 employees. Almost one-third of the workers had not fi nished
high school; some could not read or write. 34
A needs assessment revealed that only eight percent of the workers possessed
the skills needed to adjust to the new high-tech environment. Collins & Aikman
provided basic literacy training at a cost of about $1200 per worker, and the
454 Part 5 Leading
employer implemented other in-house training programs as well. Productivity

and employee self-confidence rose, and so did a flood of workers’ suggestions
about how to improve just about every phase of the operation. Production re-
jects fell by 50 percent, and workers needed less assistance from supervisors. 35
Hersey and Blanchard’s Life-Cycle Theory

life-cycle theory Paul Hersey and Kenneth Blanchard developed the life-cycle theory of leader-
A view of management that as- ship. The life-cycle theory relates leadership behavior to subordinates’ maturity
serts that a leader’s behavior
toward a subordinate should levels. 36 Immature employees (new and inexperienced) require leadership with a
relate to the subordinate’s ma- high task–low relationship focus. As people learn and mature in their jobs, they
turity level. The focus on tasks become increasingly able to direct themselves and participate in decision mak-
and relationships should vary as
the subordinate matures ing. Employees develop relationships with their coworkers, team members, and
superiors that lead to mutual respect and trust. New skills and knowledge make
employees more valuable to themselves and their organizations. As they pro-
gress in their organizational lives, employees require from their leaders fi rst a
high task–high relationship focus, followed by a high relationship–low task ap-
proach, and fi nally a low task–low relationship focus.
For new employees needing high direction, an autocratic leadership style
would be appropriate. As employees progress, the manager should move to a par-
ticipative style. For experienced employees needing little direction, the free-rein
style is appropriate. Stated in terms of path–goal theory behaviors, new employ-
ees call for instrumental behavior. As employees progress, they call for support-
ive, participative, and achievement-oriented behaviors. By the time employees at-
tain experience, they should be operating in a relatively autonomous way, turning
to the manager or higher authority on an as-needed basis.
Hersey and Blanchard built on and combined ideas from The Leadership
Grid® and path–goal theory. Their theory does not allow for changes in situa-
tions, however, and it assumes that leaders are capable and mature.
Challenges Facing Leaders
8
Discuss the three
challenges facing leaders
Leaders provide vision. They also supply incentives that enlist the support of
others in making the vision a reality. Leaders keep people focused on what is
important and what must be done. They set examples and foster values that be-
come part of their organizations’ cultures. Leaders are change agents, sensing
the need for change and creating strategies that will help to initiate it.
An example of a leader who takes his role as a change agent seriously is Har-
old McInnes, the former CEO of AMP, a business that supplies electronic and
electrical connectors. From its headquarters in Pennsylvania, AMP does business
through its companies located in 45 countries around the globe. While he was
CEO, McInnes’s vision was to build on his company’s position by devoting 11 to
12 percent of sales dollars to R & D each year. He believed this investment would
allow the company to move from being a supplier of connectors to being a pro-
vider of larger, more complete subsystems. McInnes called the process “moving
up the food chain.” One strategy for achieving McInnes’s vision was to couple
AMP’s sales engineers with product-design teams at customers’ locations. “That
way, when computer whizzes sit down to formulate next-generation products,
AMP people are right there determining which AMP subsystems can be designed
into them.” Harold McInnes developed plans to ensure that his company would
thrive in the future. 37
Leadership Throughout an Organization

It is not enough to have a leader at the top of an organization. Leadership must
be exerted at all levels, or change will be resisted and blocked. Leaders must oc-
cupy top, middle, and supervisory ranks. Workers in self-directed teams need
leaders, too. Staff development and training efforts (see Chapter 10) should en-
courage and empower people to become leaders at every level.
If one story illustrates the value of leadership at all levels of a company, it
is the dramatic turnaround of Harley-Davidson, the motorcycle maker. Harley-
Davidson tried various approaches to improving the quality and dependability of
its motorcycles. Results were insignificant until managers discovered the power
within its own workforce.
In the 1980s, Harley-Davidson managers decided to replace the obsolete
manufacturing system in its Pennsylvania plant and introduce a just-in-time in-
ventory system. To implement the new system, the company took a step that was
unusual for that time. Managers involved employees in deciding how to handle
the changeover. Instead of having managers and engineers make all the deci-
sions and announce them to workers, managers spent several months discuss-
ing the desired changes with everyone. After all parties helped decide on the
changes, everyone cooperated to make them work. 38
Employee involvement worked so well that management decided to enlist
employees in solving quality problems. Employees learned how to use statisti-
cal tools for monitoring and controlling the quality of their own work; man-
agers and supervisors were trained as team leaders. Both quality and morale
improved. Employee involvement, just-in-time inventory, and statistical opera-
tor control became part of what Harley-Davidson came to call its productivity
triad. 39 Employees were empowered to monitor their own work, resolve prob-
lems, and implement their own solutions. Managers worked with teams, sharing
authority and supporting team efforts in every way possible.
Leadership and Rapid Response

Constantly changing demands challenge a leader’s effectiveness. As culturally
diverse organizations evolve, the leader’s constituencies grow increasingly com-
plex. Different circumstances and demands call for different kinds of direc-
tion, change, and strategies. In a business world based on high technology,
speed is essential. In Sam Walton’s words, a company must be able to “turn on
a dime.” 40
Marriott Hotels have gained customer loyalty by empowering their frontline
employees—those who have direct contact with guests. Their primary concern
is to delight their guests and turn them into repeat customers. Through careful
screening of new hires, investments in training, sharing of management author-
ity, and reengineering its processes, the hotel giant has lowered its turnover and
costs; increased employee commitment, enthusiasm, and efficiency; and pro-
vided superior service to its guests.41
The company’s First Ten program concentrated on making each guest’s first
ten minutes pleasurable and memorable. Marriott guests can preregister by us-
ing a credit card. When they arrive, a “guest service associate,” or GSA, greets
them at the door. His or her responsibility is to pick “up your key and paper-
work from a rack in the lobby and then [escort] you directly to your room.” 42
No hassles, no waiting in line, no confusion about your reservations. Each GSA
can do what it takes to make a guest happy without clearance from on high.
456 Part 5 Leading
Leadership and Tough Decisions

Anyone can lead when decisions are easy and please constituencies. Leaders
must often, however, make unpopular, difficult decisions that adversely affect
people inside and outside an organization. Leaders need the courage to see their
decisions through and to face the consequences. Leaders must have the abil-
ity to do—within legal, moral, and ethical boundaries—what is best for their
organizations.
Rudolph Giuliani became a global symbol of a leader responding to crisis af-
ter the terrorist attacks of September 11th. The former mayor of New York City
relied on his beliefs to get him through something he never thought he’d expe-
rience—the attacks on the World Trade Center. Giuliani defines a leader in his
book, Leadership: “Someone who has his own ideas. Someone who can see be-
yond today, into tomorrow and the next day. Someone who can see where we
have to be.” 43 TIME magazine selected Giuliani as “2001 Person of the Year” and
cited him “for having more faith in us than we had in ourselves, for being brave
when required and rude when appropriate and tender without being trite, for not
sleeping and not quitting and not shrinking from the pain all around him.”
Top managers must be prepared for a disaster. They make plans for a crisis.
Empire Blue Cross Blue Shield’s disaster recovery worked as planned when its
headquarters in the World Trade Center was destroyed September 11th. (See this
chapter’s Managing Technology feature.)
In a crisis, a company may turn to an outsider for guidance. Niagara Mo-
hawk Power of Syracuse, New York, turned to an insider, Bill Donlon. Mainte-
nance problems had caused the shutdown of a nuclear power station, forcing the
company to buy electricity from rival producers. Cost overruns from the con-
struction of a second nuclear plant were also hurting the bottom line. Donlon
turned the company around by bringing in 20 new senior officers, reassigning
key staff, terminating poor performers, reassessing the functions of all 11,000
employees, and enlisting everyone’s help in establishing changes and productiv-
ity savings. “The whole system just wasn’t working any longer,” said Donlon.
“It was apparent to me that we had to change.” 44
Making tough decisions is how Indra Nooyi, PepsiCo’s President and CFO,
earned her reputation and promotions. The India-born American had to make
a number of hard decisions at PepsiCo. Her overriding concern has always been
to do what’s best for the company, given the people and circumstances. PepsiCo
spin-offs formed two new companies, Yum Brands and Pepsi Bottling Group.
Says Nooyi,
You have to think of a business like any investment. You have to know
when to get in, but more important, when to get out. Getting out can
be a lot tougher, especially if you develop an emotional tie to the busi-
ness. But the world changes, and so should the models we apply to our
businesses. 45
How Managers Can Become Better Leaders

Becoming a better leader begins with efforts to know oneself. Each manager has
diverse values, needs, goals, ethics, strengths, and weaknesses; these determine
how he or she will use the arts of management and leadership. An individual’s
philosophy about work and about the people who perform it will influence ap-
proaches to leadership. Managers who respect individuals will value diversity and
458 Part 5 Leading
treat each person with dignity. Managers who value security above all else may
be too cautious, unwilling to make tough decisions and take the consequences of
those decisions. Conversely, managers who value growth and challenge will seek
new approaches, take on tough assignments, and willingly endure personal sac-
rifice to improve themselves, their subordinates, and their organizations. Such
managers will encourage others to do the same.
Because leadership is situational, leaders must be adaptable. They must build
teams and work with them. Leaders must willingly and ably exercise different
leadership styles and utilize the behaviors discussed in this chapter. Only by do-
ing so will their businesses be able to turn on a dime—a capability that the busi-
ness environment of today requires. Managers must provide a vision and “sell” it
to their constituents. They need to sense the need for change, prepare themselves
and their team members for change, and articulate what is needed for change.
Then they must act as change agents. They can do all these things only by stay-
ing current in their fields, remaining open to what is new and different, and com-
mitting themselves to constant efforts at self-improvement through the adoption
of the kaizen philosophy.
Leaders must be willing to suppress what may seem best for themselves and
implement what is best for others—subordinates, customers, and their organiza-
tions. As a servant who tailors leadership style and behavior to fit others’ needs,
the true leader excels by doing what is best for others. Being a manager is tough;
being a leader–manager is tougher still.
CHAPTER SUMMARY
Discuss leadership traits, skills, and behaviors. individual and group task performances. The key con-
1 Leadership traits are specific personal characteris-
tics possessed by individuals that can both help or hin-
cept is: If what is needed in any situation is available in
an individual or team, leadership can take place.
der their ability to lead and manage. Being dependable,
Differentiate between management and lead-
for example, is a must for building mutual trust and
respect between oneself and others. Without it, people
2 ership. Some managers may be leaders, some lead-
ers may be managers, and leadership can be exhibited
discount or ignore a person and his or her contributions.
by other than management personnel. Leading may be
With a proper mix of traits, given the circumstances and
done in or out of a leadership or management position.
the available resources, a leader can be a source of influ-
Leading is a management function that can be exercised
ence over others.
by any employee. Leadership is based on five sources of
Skills are a person’s ability to demonstrate knowl-
power (discussed in Learning Objective 3), and may be
edge and competencies. They are capabilities to per-
exercised by people regardless of their job descriptions.
form some process or task. Communicating effectively
The key difference between these two concepts is the
requires many skills such as critical thinking, listening
willingness of a person’s subordinates to follow that per-
actively, and fluency with one or more languages. Skills
son’s direction. Leaders persuade, guide, direct, counsel,
represent employment security, provided they are not
coach, and inspire others. They do so because they pos-
obsolete and are in demand. Skills move people from
sess more than one source of power.
knowing to doing. As such, certain types of skills are es-
sential to leading people and are a source of power over Describe the five sources of power leaders
others.
Behaviors for leaders are detailed in Figure 13.2.
3 may possess. The five kinds of power are le-
gitimate, coercive, reward, expert, and referent. Legiti-
Each requires specific knowledge, traits, and skills. mate power flows from a person’s formal authority, as
Praise recognition, for example, requires such traits as denoted in his or her job description. Coercive power
decisiveness, willingness to assume responsibility, and is defi ned as the ability to punish or deny rewards. It
dominance. Skills required are diplomacy and tact, flu- rests in both managers’ job descriptions and in various
ency in speaking and writing, and knowledge about group members who can exert peer pressure. Reward
power, the opposite of coercive power, is the ability to getting their work or the job done, as is the case in a cri-
bestow rewards. Like coercive power, it is held by man- sis. People orientation helps build teams and cooperation
agers and nonmanagers. Expert power is based on a between and among individuals and within groups. In
person’s knowledge and expertise—what one knows or most situations leaders must give some emphasis to both
is able to do. Anyone with skills, knowledge, or capa- people and tasks.
bilities needed by others can exercise this kind of power.
Describe the three theories of situational lead-
Finally, a person’s traits, characteristics, and personality
are a source of influence over others. A person with ref- 7 ership. The three theories are Fiedler’s contin-
gency model, House and Mitchell’s path–goal theory,
erent power is attractive to others—those attracted want
to associate with or emulate the person possessing it. and Hersey and Blanchard’s life-cycle theory. Fiedler
Referent power is the basis for friendships. links focus on task or people to conditions in three vari-
ables: leader–member relations (good or poor), task
Differentiate between positive and negative
4 motivation. Positive motivation is practiced by
true leaders. Using Herzberg’s (Chapter 12) motiva-
structure (structured or unstructured), and leader posi-
tion power (weak or strong). All three relate to a leader’s
situation at any given time and underscore the need to
tional factors, leaders engineer jobs and offer the kinds be flexible in adopting any orientation.
of rewards desired by individuals to bring out their best House and Mitchell’s path–goal theory holds that
and keep them motivated. Challenges and opportunities leaders can influence subordinates’ motivation by
are offered and supports are provided to meet or exceed (1) teaching employees the competencies they need to
those challenges. People are encouraged to take risks, to perform to standards and gain rewards, (2) tailoring re-
welcome responsibilities, and to develop their talents. wards to meet employees’ needs, and (3) acting to sup-
Negative motivation relies primarily on fear. It port subordinates’ efforts. This theory is the basis for
uses coercive power to threaten and punish. It tends to the expectancy theory of motivation (Chapter 12). It
work in a crisis or for the short run but cannot stimulate links subordinates’ success to examples and supports
lasting motivated behaviors. It becomes too stressful and provided by their leaders.
eventually leads to employee dissatisfaction and loss of Hersey and Blanchard’s life-cycle theory states that
commitment. What behavior is not acceptable is made throughout one’s career, the style of leadership he or she
clear; but what behavior is necessary is often vague and requires will change and evolve from the autocratic to
uncertain. the free rein. When employees are new to a job or task,
Describe the three decision-making styles autocratic supervision is appropriate. When they gain
5 used by leaders. The three styles are the auto-
cratic, the participative, and the free rein. The autocratic
experience, employees become more able to contribute
and participate in those decisions affecting them and the
style is an “I” approach to leadership. The leader keeps work. Finally, experienced old-timers and professionals
the decision-making authority but may consult with fol- need a free rein to function most effectively.
lowers when making decisions. This style is appropriate
Discuss the three challenges facing leaders.
when handling crises, instructing others, and exerting
maximum focus on the task.
8 The fi rst challenge has to do with the traditional
way of running an organization—few leaders, many
The free-rein style asks subordinates and followers
followers, and a hierarchy of decision makers. Today’s
to take over the decision-making process—to solve and
fast-moving markets and business climates call for a
resolve the problem. It is the ultimate expression of em-
much more rapid response to challenges and opportuni-
powerment. Experienced experts desire and usually must
ties. This response cannot take place without empow-
have such a style. It treats people as though they were
ered individuals at every layer and in every function and
self-employed—giving them the ultimate authority and
process. As companies downsize and outsource, fewer
responsibility for solving problems. Leaders know they
people are left to do the work; and that work is becom-
must be able to use all three styles as circumstances and
ing increasingly more technical and demanding.
individuals dictate. Using the wrong style with an indi-
The second challenge is one of gaining a rapid-
vidual can inhibit his or her motivation.
response capability. Time is the enemy in most situa-
Explain the two primary approaches leaders tions. Competitors and markets do not remain static.
6 can take: task centered and people centered.
When leading, leaders and managers can take a task-
Customers must be accommodated and their demands
met. Empowering employees through open-book man-
centered approach, a people-centered approach, or an agement, training, authority sharing, and selective hiring
approach that blends the two. Which one they choose is is the key. This allows the frontline to respond rapidly to
usually dictated to them by what their followers or sub- both challenges and opportunities.
ordinates need and what the situation requires. Task ori- The third challenge leaders face is to make tough,
entation is usually practiced when people must focus on unpleasant decisions; they must often bite the bullet and
460 Part 5 Leading
sublimate their egos. Leaders must have the courage to ing these difficult actions, they must obey the law. To do
do what is right in line with the company’s core values otherwise is to put the future of the organization and its
and their personal moral and ethical codes. When tak- members at risk.
KE Y TERMS
autocratic style leadership life-cycle theory
contingency model Leadership Grid® participative style
free-rein style leadership style path–goal theory
influence
RE VIE W QUESTIONS
1. In what ways do a person’s traits and skills give them 6. Under what circumstances should a leader be task
influence over others? centered? People centered? Use a blend of both
approaches?
2. How are management and leadership similar?
Different? 7. What are the basic components of Fiedler’s contin-
gency model of leadership? How do they affect a
3. What are the five sources of influence over others in
leader’s choice to focus on task or people?
organizations?
8. What does the path–goal theory of leadership tell a
4. Do you think it is better to lead through positive or
leader to do?
negative motivational means? Why? What are the
advantages and disadvantages of each approach? 9. What does the life-cycle theory of leadership say
about the use of the three styles of decision making?
5. What set of circumstances can you give that would
require a leader to use an autocratic style? A partici- 10. What are the three challenges facing leaders today?
pative one? A free-rein style? How can leaders deal with each?

1. Who is currently a leader to you, and why is he or 3. Is it essential for a manager to have a “moral com-
she a leader? pass”? Why or why not?
2. Can a manager be a leader by simply relying on his or
her positional or formal authority? Why or why not?
Links are provided for all Internet Exercises at http:// Resource Center Leadership Institute, can help you
plunkett.swlearning.com. assess your strength in the Leadership Empowerment
Principles. Read the statements that describe some of
1. What is your leadership style? Blake and Mouton’s the key skills and actions needed to apply each prin-
Leadership Grid® is famous for determining leader- ciple and then indicate whether this principle is an
ship style. Did it describe your style accurately? Now area of strength for you or one in which you would
that you have a description of your style, what do like to improve.
you plan to do with this information?
3. What are the traits of an effective leader? Which ar-
2. Transformative Leadership, a presentation given eas of your personality do you need to improve to
by Dr. Elizabeth Lolly at the 1996 Ohio Literacy become a leader?

is an online database and research tool published by Starbucks. Add any other interesting information that
Check to see if your library subscribes to BCRC. If so, STARBUCKS AT A GLANCE
respected. Number of Stores:
APPLICATION CASE
The End of Olds By that time, Rock hoped to reach the final goal in his
“Oldsmobile is the only American automobile more plan: his retirement to the wilds of Montana.
than 100 years old” (Wright). Yet, on De cember 12, This strategy did bring in younger buyers, but not
2000, General Motors’s CEO Rick Wagoner announced in the numbers that Oldsmobile had hoped. “Despite at-
that the Oldsmobile Division would be phased out tempts to resurrect Olds with a new lineup and aggres-
over several years. “It is the oldest automotive brand in sive retail incentives, it sold only 265,878 vehicles during
America with a history that is rich with innovation and the fi rst eleven months of 2000, putting it on pace for
success stories, including dozens of legendary cars, and its worst sales year since 1952” (Miller). Oldsmobile
over the years it was one of the jewels in the General production ended with the 2004 models. It is interest-
Motors crown,” he said (Oldsmobile News). “Oldsmo- ing to note that in 2003, auto auction company Kruse
bile’s demise has been a matter of speculation since the International named the 1972 Oldsmobile Cutlass W-30
early 1990s when its annual sales plummeted” (Miller). 4-4-2 convertible muscle car one of the most collectible
Long branded as an “old man’s car” and a “Buick American cars (Valdes-Dapena).
clone,” the Oldsmobile was rumored in the automotive
press to be headed down the road taken by retired auto Questions
brand names Packard, Hudson, and Nash. 1. What kind of leadership style did Rock use with
In 1992, John Rock became Oldsmobile’s new Chief his division’s dealers? What kind of leadership style
Executive Officer. He was previously head of GMC did Rock’s boss probably use with him? Was it
trucks. Given a sense of urgency by the press reports, appropriate?
Rock swung into action. Within one month he had as- 2. Which leadership traits did Rock exhibit? Which
sembled the Olds dealers at the Oldsmobile design center. skills?
He showed them the new models that were in the pipeline 3. Which of Yukl’s leadership behaviors did Rock
and asked for their help in creating a strategy to revital- exhibit?
ize the Olds division. After several meetings and changes 4. How did Rock’s planned retirement help him to
in the mix of members at each, a consensus was reached. make some tough decisions?
“In January 1993, we went to GM’s North American
Automotive Operations with that plan, to throw out old Sources: Peter Valdes-Dapena, “Dead at 106: Oldsmobile,” CNN/
brands and create new ones,” says Rock (Mateja). Money, April 29, 2004, http://money.cnn.com/2004/04/28/pf/autos/
olds_dead; John Richards, “End of Olds Leaves Dealers in Limbo,”
Another goal in Rock’s strategy was to become more The Detroit News, August 24, 2001, http://www.bizjournals.com/
“Saturn-like.” He moved the division toward “value pittsburgh/stories/2001/08/27/story6.html; Joe Miller, “It’s the End of
pricing—offering a particular car with certain options at the Road for Olds,” The Detroit News, December 12, 2000; Richard
a specific discounted price” and getting that price with- A. Wright, “Oldsmobile Was America’s Oldest Surviving Nameplate,”
The Detroit News, November 6, 2000; Jim Mateja, “Scary Wakeup
out “haggling” with customers. Much of Rock’s strategy
Calls Worked for Olds,” Chicago Tribune, July 10, 1995, sec. 4, p. 5;
rested on the success of emerging product lines: Aurora, Oldsmobile News, “GM to Restructure Oldsmobile Division,” http://
Bravada, Ciera, Achieva, and a totally redone Cutlass. www.oldsmobile.com.
462 Part 5 Leading

Leadership at P.F. Chang’s aged to grow. Federico is both philosophical and practi-
How do you manage 97 bistros and 33 diners at once? cal about the obstacles that every restaurant faces during
This isn’t a riddle, it is actually the daily challenge of uncertain times. “While so many of the challenges that
Rick Federico, Chairman and CEO of P.F. Chang’s, face our industry are out of our control, our greatest
which owns and operates a chain of Asian restaurants challenge is also our greatest opportunity: our people,”
across the country. During the time he has been head he says. “We are in the hospitality service industry, and
of the company, Federico has taken on the huge tasks our business is to provide our customers with an out-
of taking the company public and launching Pei Wei, standing dining experience each and every time they
the fi rm’s chain of diners. In addition, he has developed walk through our doors.” One way he accomplishes this
management teams and laid out clear expectations for goal is by empowering employees to make decisions,
his employees. He has earned the respect of his man- such as fulfi lling special requests from customers. And
agers, his workers, his customers, and even his com- because of its success, P.F. Chang’s has been able to cre-
petitors. He has won accolades and leadership awards. ate hundreds of jobs across the country while other res-
“Rick has done a great job of building a strong team taurant chains are laying off workers.
culture and has built an organization that is based upon Federico expects results from every team, manager,
quality of execution,” notes one colleague. “He has built and worker. But he expects no less from himself. “I’m a
P.F. Chang’s into a concept that is craved and loved by reflection of our employees,” he muses. “I surround my-
its customers and team members.” These characteristics self with people better than I am in certain areas.” He
are the attributes of a leader. believes his greatest tasks as a leader involve remaining
Rick Federico knows the restaurant industry. He focused on his customers, his workers, and the food they
began his career as a dishwasher for a steak house and serve. As P.F. Chang’s grows, he wants to be sure that
worked his way up the management chain. So he under- the quality of service, atmosphere, and food are always
stands everyone’s job, from busboy to chef to manager. at their highest. He’s not afraid to look in the mirror for
Perhaps that is why he feels comfortable fostering a team the solution to a problem. “I suppose the day I’m not an
atmosphere at P.F. Chang’s, giving employees the author- effective leader, I’ll be out of here,” he admits. For now,
ity to make decisions to please customers and ultimately he’ll be busy coming up with ways to make P.F. Chang’s
benefit the restaurant. And because he has so many con- bigger, better, and eventually, a household name.
tacts throughout the industry, he is able to attract the
best staff, from hourly employees to restaurant manag- Questions
ers. At the same time, he maintains a clear vision for the 1. Describe some of Rick Federico’s personal leader-
company as a whole. He believes that restaurants based ship traits.
on an Asian menu will continue to grow in popularity— 2. Would you characterize Rick Federico as a charis-
and that developing a recognizable Asian brand is matic or transformational leader? Why?
a huge opportunity. Everything at P.F. Chang’s two 3. Which of the five sources of power does Rick Fed-
types of restaurants—bistros and diners—is designed erico use most?
with this vision of growth in mind. From tableside cook-
ing to replicas of 12th-century Chinese murals, the en- Sources: Company Web site, http://www.pfchangs.com, accessed Feb-
tire P.F. Chang’s dining experience is intended to leave ruary 13, 2007; Charles Bernstein, “Chief Execution Offi cer,” Chain
Leader, September 2004, 62–68; “Work Force Still Top Concern for
astrong impression on customers, which is exactly what CEOs,” The Phoenix Business Journal, May 24, 2004, http://phoenix
Federico wants. .bizjournals.com.
While the restaurant industry in general has suf-
fered during the past few years, P.F. Chang’s has man-
BIZ FLIX VIDEO CASE

U-571 on board. Executive officer Lt. Andrew Tyler (Matthew
This action-packed thriller deals with a U.S. submarine McConaughey) reports on the submarine’s status to Lt.
crew’s efforts to retrieve an Enigma encryption device Commander Mike Dahlgren (Bill Paxton). The film
from a disabled German submarine during World War continues with the S33 fi nding the disabled German
II. After the crew gets the device, the U.S. submarine submarine.
sinks, and they must use the German submarine to es-
cape from enemy destroyers. The fi lm’s almost nonstop What to Watch for and Ask Yourself
action and extraordinary special effects will look and 1. What aspects of leadership does Dahlgren say are
sound best with a home theater system. important for a submarine commander?
This scene is an edited composite of the “To Be a 2. Which leadership behaviors or traits does he
Captain” sequence early in the fi lm. The S33, an older emphasize?
U.S. submarine, is embarking on a secret mission. Before 3. Are these traits or behaviors right for this situation?
departure, the S33’s officers receive a briefi ng on their Why or why not?
mission from Office of Naval Intelligence representatives
O LIST
✓ TO D in g Obje
ctives
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LEARNING OBJECTIVES
TEAM After studying this chapter, you should be able to:
MANAGEMENT 1 Discuss the nature of teams and the characteristics of

effective teams
AND CONFLICT Identify the types of teams that organizations use
2
Discuss potential uses of teams
3
Use decision-making authority as a characteristic by
4 which to distinguish team type
Identify and discuss steps in establishing teams
5
Identify and discuss the roles of team members and
6 team leaders
Describe the four stages of team development
7
Discuss team cohesiveness and team norms and their
8 relationship to team performance
Evaluate the benefits and costs of teams
9
Discuss the positive and negative aspects of conflict
10 in an organization
Identify the sources of conflict in an organization
11
Getty Images
Describe a manager’s role in conflict management and

12 potential strategies to manage conflict
Google: Teams to Success
Today, Google is a very successful business, but it
didn’t start out as a business. Google’s 30-something Eric Schmidt
Cofounders, Larry Page and Sergey Brin, were com- Born: 1955
puter science graduate students at Stanford Univer- Current Position: CEO, Google
sity. Page was interested in the Web and Brin was in- Career Highlights:
terested in data mining. Together they formed a team Software, Bell Labs
and the result of their efforts was a very good search
Research, Xerox PARC
engine, which counts the number of links pointing to
a site as a gauge of its importance. The more links to 1983 Chief Technology Officer and Corporate
a site, the more important or useful the content, keep- Executive Officer, Sun Microsystems, Inc.
ing frivolous links to a minimum. Along with judging 1997 Chairman and CEO, Novell, Inc.
the importance of Web sites, the search engine also 2001 Chief Executive Officer, Google
has the capacity to drill down into minute topic areas Education: Princeton University, BS, Electrical
for hard-to-find information. Page and Brin told their Engineering; University of California-Berkeley,
friends and professors about the search engine and MS in 1979, and Ph.D. in 1982, Computer
before long, thousands of people a day were using it. Science
CEO Eric Schmidt was hired in 2001 to bring Personal: Married, two children
some management experience to Google’s executive
Source: Google Corporate Information, http://www.google.com/
ranks. The company had the number one search en- corporate/execs.html#eric.
gine, but it didn’t make money until it started auction-
ing ads, which appear alongside the search results
tangential products, and 10% on wild fun that
and run down the right side of the Web page labeled
might or might not lead to a product. The result
as “sponsored links.” Graphics are not accepted in
is that lots of tiny teams are working on all
ads since a simple search bar with minimal text on a
sorts of projects, the most promising ones of
white background enables faster downloads. Addi-
which end up on the prestigious “top 100” list
tional product offerings range from e-mail and instant
that Mr. Page (“the product guy”) spends a lot
messaging to maps.
of his time on (The Economist).
When asked about their relationships, Larry
Page says, Wayne Rosing, head of Google’s engineering ranks,
began working at Google in 2001 and says,
Clearly, we have a remarkably good relation-
ship. And if you look at successful companies, o-
t with C
there are often those types of relationships. E ri c Schmid e ye
n jo d
O
gle CE t style
And we’ve had a very good relationship with n s h ip of G o o m a n a gemen to fa il , and
e relati
o rin is a ee d o m
Eric [Schmidt] as well. If you can run the borativ ergey B ownership, fr mploy -
e colla e and S f nable e t
company a bit more collaboratively, you T h
a rr y P a g
s e n s e o
ti v se
it ie withou
founde
rs L n y . A
, and fu
n a c es s
s e
get a better result, because you have t th e c o mp a a te g ic ite a n d su c c b in a ti on
hou l, str d u c t su tic com
throug tactica le’s pro energe d Brin’s
more bandwidth and checking and balanc- amo n g t Goog t. This age an
b alance e ly b o o s
n a g e m e n
s fo rm d P
e
ing going on. I think Sergey and I have had a ti v m a a n
ees to
cre
of midd
le e has tr
remarkably similar views on things, largely erence owledg
e interf in ess kn g verb.
th d b u s h gin
a n
because we’ve spent a lot of time together.
in g e n uit y an to a c u lture -c
of ct in
I can usually predict where we’re going to te proje
gradua
disagree, and we make sure to talk those
things out explicitly (Elgin).
Google has an unusual workplace, nearly devoid
© Paul Sakuma/Associated Press
of middle management. Employees believe that

they are changing the world. The mission is “to
organize the world’s information”; the slogan is,
“Don’t be evil.” Unusual benefits for employees in-
clude free meals, doctors, and washing machines.
Mr. Brin (“the strategy guy”) has calculated
that Google’s engineers should spend 70%
of their time on core products (i.e., the search
and advertising engines), 20% on relevant but
466 Part 5 Leading
For a while, I had 160 direct reports. No managers. It worked because the teams
knew what they had to do. That set a cultural bit in people’s heads: You are the
boss. Don’t wait to take the hill. Don’t wait to be managed. And if you fail, fine. On
to the next idea. There’s faith here in the ability of smart, well-motivated people to
do the right thing. Anything that gets in the way of that is evil (Hammonds).
Sources: Eric Schmidt and Hal Varian, “Google: Ten Golden Rules,” Newsweek, December 2, 2005, http://
www.msnbc.msn.com/id/10296177/site/newsweek; The Economist, “Fuzzy Math,” May 11, 2006, http://www
.economist.com/science/displaystory.cfm?story_id6911096; Keith H. Hammonds, “How Google Grows
. . . and Grows . . . and Grows,” Fast Company, March 2003, Issue 69, p. 74, http://www.fastcompany.com/
magazine/69/google.html; Ben Elgin, “Google’s Goal: ’Understand Everything,’” BusinessWeek Online, May 3,
2004, http://www.businessweek.com/magazine/content/04_18/b3881010_mz001.htm.
Introduction
A not-so-quiet revolution is taking place in American business. At companies
such as Google, Apple Inc., Levi Strauss, Xerox, and General Electric, teams
are emerging as an organizational force. Companies are realizing that the team
approach can ignite superior performance. Scores of service companies, such as
FedEx and IDS, have boosted productivity as much as 40 percent by adopting
self-managed work teams; Nynex, when merging with Bell Atlantic, used teams
to make the difficult transition from a bureaucratic Baby Bell to a high-speed
cruiser on the information highway; and Boeing used teams to cut the number
of engineering hang-ups on its 777 passenger jet by more than half.1 Google’s
teams have helped it achieve the number one search engine position, as discussed
in this chapter’s Management in Action. Teams in all their various forms—self-
managed work teams, task forces, and project teams are but a few—are chang-
ing organizational structures, the way work is approached, the role of manag-
ers, and the involvement of workers. 2
Despite all their successes, the use of high performance teams has not spread
as fast as some experts expected. A survey conducted by the Center for Effective
Organizations at the University of Southern California (USC) and published in
the book Organizing for High Performance, revealed interesting data. Although
72 percent of Fortune 1000 companies use self-managed work teams, only 28
percent of those companies had more than one-fifth of their employees arranged
in such teams. 3 Notes USC’s Edward Lawler, “People are very naive about how
easy it is to create a team. Teams are the Ferraris of work design. They’re high
performance, but high maintenance and expensive.” 4
With Professor Lawler’s comments in mind, we will discuss how to maxi-
mize the potential of teams in this chapter. We will examine types of teams,
how teams are created and managed, and their benefits and costs. We will
also see how to keep teams functioning effectively through the management of
confl ict.
Nature of Teams
Teams Defined
1
Discuss the nature
of teams and the
characteristics of effective
teams
In an organization, a team is a group of two or more people who interact regu-
larly and coordinate their work to accomplish a common objective. 5 Three points
characterize a team:
1. At least two people must be involved. The ultimate size of the group can
vary, depending on the nature of the assignment.
Chapter 14 Team Management and Conflict 467
2. The members must interact regularly and coordinate their work. People who team
A group of two or more people
are in the same department but do not interact regularly are not a team; nor who interact regularly and coor-
are people who have lunch together every day but never actually coordinate dinate their work to accomplish
their work. a common objective
3. Members of a team must share a common objective. Regardless of the objec-

tive—ensuring service quality, designing a new product, or reducing costs—
each member works toward a common, shared objective.
Characteristics of Effective Teams

Teams can and do function throughout organizations. Their effectiveness relates
directly to how well managers engineer team structure and how team members
behave. For example, Boeing’s teams share technical and operational informa-
tion across international borders, time zones, and cultural differences. As Edgar
Schein reported, the characteristics of effective teams include the following:
• Team members are committed to and involved in clear, shared goals.
• All team members feel free to express themselves and participate in discus-
sions and decisions. Each member is valued and heard.
• Members trust each other. In discussions, they openly disagree without fear
of negative consequences.
• When needs for leadership arise, any member feels free to volunteer. Team
leadership varies with the situation.
• Decisions are made by consensus. All team members support final decisions.
• As problems occur, the team focuses on causes, not symptoms. Likewise,
when members develop solutions, they direct them at the causes of the
problem.
• Team members are flexible in terms of work processes and problem solving.
They search for new ways of acting.
• Team members change and grow. All members encourage and support
growth.6
Types of Teams
Many different types of teams are emerging in business organizations. These are
formal teams created by management as a functioning part of the organizational
structure. They are not informal, nor are they created by social interaction. (For
a discussion of informal groups, see Chapter 8.) In terms of origin, not function,
we can identify two types of teams: vertical teams and horizontal teams.
2
Identify the types of
teams that organizations
use
formal team
Vertical Teams A vertical team—sometimes called a command team or a A team created by managers to
functional team—is composed of a manager and his or her subordinates in the function as part of the organiza-
tional structure
formal chain of command. A vertical team may include as many as three or
four levels of management. Examples include the human resources department vertical team
at Citibank, the “wing team” at Boeing, and “skunkworks” at Lockheed Mar- A team composed of a manager
and subordinates
tin. Each fits the defi nition of team: two or more people interacting and coordi-
nating their work for the purpose of achieving a common shared objective. The
marketing department illustrated in Figure 14.1 is a vertical team, as are the fi -
nance, production, and engineering departments.
horizontal team
Horizontal Teams A horizontal team is made up of members drawn from dif- A team composed of employees
ferent departments in an organization.7 In most cases, such a team is created from different departments
468 Part 5 Leading
Figure 14.1 Vertical and horizontal teams
President
Finance Production Engineering Marketing
Vertical Team
Horizontal Cross-Functional Team for Product Design
to address a specific task or objective. The team may disband after the objec-
tive is achieved. Three common kinds of horizontal teams are task forces, cross-
functional teams, and committees.
task force A task force is designed to accomplish a limited number of objectives or
A horizontal team composed tasks, and it is composed of employees from different departments. A task force
of employees from different
departments designed to exists only until it meets its objectives. Master Industries, an injection-molding
accomplish a limited number of company in Ohio, formed a task force to implement a smoke-free policy in the
objectives and existing only workplace within 18 months. When this objective was attained, the task force
until it has met the objectives
disbanded.8
cross-functional team A cross-functional team harnesses the knowledge of people from various
A team with an undefined life functional areas to solve problems. Like task forces, cross-functional teams fo-
span designed to bring together
the knowledge of various func- cus on objectives, but they have a continuous life. At Sequins International, a
tional areas to work on solu- New York-based manufacturer of sequins, two cross-functional teams—one for
tions to operational problems product satisfaction, the other for customer support—have been created. Com-
committee posed of representatives from manpower, machines, methods, and material they
A horizontal team—either ad pursue their ongoing goal to improve product satisfaction or customer service.9
hoc or permanent—designed Figure 14.1 includes a cross-functional product design team.
to focus on one objective; mem-
bers represent functional areas A committee might be ad hoc (set up to do a job and then disbanded) or
of expertise standing (permanent). The work of a standing committee—handling grievances,
for instance—is ongoing. Committee representation may be chosen by func-

tional area to reflect department views. Individuals are not necessarily chosen
for specific technical ability, as members of a task force are. Thus, to ensure par-
ticipation from all areas, a budget committee may have a representative from
each of the major functional areas.10
Philosophical Issues of Team Management

Given the current trend toward the team approach in American business—and
reflecting on Professor Lawler’s words earlier in the chapter—many manag-
ers are asking, “What can teams do?” and “How do they function within the
organization?”
How to Use Teams

The purpose of a team is to accomplish one or more objectives. A team provides
a vehicle for combining skills, securing commitment and involvement, and shar-
ing expertise and opinions in pursuit of a specific objective. The objective could
be to improve quality, design a product, solve a problem, or carry out depart-
mental work. Although managers may choose from unlimited team options, as
3
Discuss potential uses of
teams
Figure 14.2 shows, there are five main categories of teams: product development
teams, project teams, quality teams, process teams, and work teams.
Product Development Teams Whether they are task forces or cross-functional

teams, product development teams are organized to create new products. At Ber- product development team
rios Manufacturing Company, CEO Willis Berrios created teams that combined A team organized to create new
products
Figure 14.2 Potential uses of teams
Product
Development
Teams
? Project
Teams Teams
? Team Quality
Teams Options Teams
? Process
Teams Teams
Work
Teams
470 Part 5 Leading
people from different areas of expertise with the objective of smoothly bringing a
new product to market. The teams included representatives from quality control,
engineering, production, systems design, marketing, and manufacturing. One of
the fi rst times IBM used a product development team, the ThinkPad 701 C lap-
top PC, code-named Butterfly, was created. It became the fi rst on-time product
from the PC group in years. The Butterfly, with two keyboard halves that come
together on a single plane, was designed in one year. In the old system, product
developers, working independently, took years to build a prototype. For exam-
ple, it took six years for an earlier IBM innovation—an eraserlike pointing device
for portables—to hit the market.11
Project Teams Instead of focusing on development of a single product, man-

project team agers often assemble project teams (sometimes called problem-solving teams) to
A team organized to complete a complete a specific task in an organization. Project teams flourish at Xerox, Ap-
specific task in the organization
ple Inc., Texas Instruments, and, as we have seen, at Google. At Boeing, teams
of engineers and operations specialists move in to work out operating problems
in systems and apply their creativity to develop strategic delivery systems.12
Sometimes, to address an important project, teams operate outside the
scope of the organizational structure. Although part of the formal organization,
such teams maintain their own reporting structures. In these cases, members
perceive their team as an independent and separate entity with plenty of “cor-
porate breathing room.” 13 For example, when Chrysler creates a new model or
revamps an old model, it forms a self-contained multidisciplinary project team
from engineering, design, manufacturing, marketing, and fi nance. Senior man-
agers act with the team to sketch a vision for the vehicle and set aggressive goals:
for design, performance, fuel economy, and cost. The goals are transferred into
a contract with the team, after which the team is turned loose. Explains former
CEO Robert Eaton, “The contract simply sets out all the objectives we hope to
achieve. Then they go away and do it, and they don’t get back to us unless they
have a major problem. And so far they aren’t having any major problems.” 14
Team members do not always have to be in the same place at the same time.
virtual team One type of project team is a virtual team where team members primarily inter-
A team where members primar- act electronically. This is a result of computers and the Internet, global compe-
ily interact electronically be-
cause they are physically sepa- tition, and travel time and expenses. Virtual teams may use Web logs or blogs,
rated (by time and/or space) the subject of this chapter’s Managing Technology feature, to share information.
Virtual teams have three defi ning characteristics that separate them from
traditional teams:
• Members are distributed across multiple locations.
• Membership can be extremely diverse in skills and culture.
• Team members can join or depart the team in midstream.15
An example of a very successful virtual team was Boeing’s 777 development
project that included United Airlines’s engineers as well as a horizontal cross-
section of the Boeing organization.
Quality Teams As we have emphasized throughout the text, quality and qual-
ity assurance have become driving forces in U.S. industry. Many fi rms have es-
tablished quality improvement teams that monitor and ensure quality. An early
quality assurance tool was the quality circle. As discussed in Chapter 4, a quality
circle is a group of volunteers from the same or related work areas who meet reg-
MANAGING TECHNOLOGY
a g es
Web Log or Blog
Get t y Im
Many people have personal Web sites, called Web logs recently, Sun has encouraged blogging as a way to create
or blogs, where they journal their thoughts and post them a dialogue with customers and the industry. Sun provides
on the Web. Thus, a Web log or blog is an online journal. the following guidelines for employees (Lewin):
Blogging is frequently updating the Web site with per-
• Don’t tell secrets—make sure information is non-
sonal ideas, thoughts, news, information, or discussions.
proprietary.
“Web logs are regularly (even daily) updated Web pages
• Be interesting and make sure your writing quality re-
offering a blend of commentary and links. They can be
flects well on you and the company.
personality-based, news-oriented or topic-specific, but
• Be aware of financial rules regarding things like reve-
they share the qualities of immediacy, iconoclasm and a
nue and product ship dates.
highly active feedback loop” (Andrews). Most Web logs
• Think about the consequences of what you say and
contain links to other sites. “That’s not to say this is not
write professionally.
important or useful stuff. On the contrary, such sites are
• Include a disclaimer that says who you work for and
lovingly prepared by aficionados who generously pepper
that you’re not speaking officially.
their links with informed comments. This, in my view, is
blogging at its best, since it provides a degree of objective • What’s to keep employees from blogging about the
expertise you’re unlikely to find elsewhere” (Wagstaff). stupidity of their team members, the bad decisions of
One of the first companies to use Web logs was the CEO, or the problems with the new product?
Macromedia. It set them up to foster relationships with Sources: James Lewin, “Blog Risk,” E-commerce in Action, Septem-
its customers. Five of Macromedia’s “community manag- ber 29, 2004, http://www.itworld.com/newsletters; Paul Andrews,
“Web Logging Can Serve Many Roles,” The Seattle Times, May 27,
ers” created Web logs to discuss the new products, give 2000; Jeremy Wagstaff, “Blogging for Beginners: What You Need to
tips for using the products, and to answer questions. More Know to Start a Weblog,” The Wall Street Journal, July 10, 2002.
ularly to identify the quality issues facing the company or department and offer
suggestions for improvement. Other organizations have developed quality assur- quality assurance team
ance teams, whose mission it is to guarantee the quality of services and products A team created to guarantee
the quality of services and prod-
by contacting customers and working with vendors. For example, AT&T Global ucts, contact customers, and
Information Solutions assembled customer service teams consisting of seven to work with vendors
ten employees in the United States and abroad. They were given team training
with customer participation. The teams numbered several hundred, in 110 coun-
tries, and were made up of representatives throughout the organization. Once the
training was completed, members stayed in contact with the customer through
regularly scheduled meetings and customer calls. Says Des Randall, former Vice
President of the Global Sales Program for AT&T Global Information Systems,
In the past you may have had sales and marketing people working to-
gether with specific customers, but what we are talking about here are
representatives from throughout the corporation focused on individual
customers. This transformation represents a total restructuring of how a
corporation does business. Customer-focused teams have access to local
and global resources in order to speed decisions, increase our responsive-
ness, and provide world class solutions.16
process team
A team that groups members
Process Teams The stimulus provided by companies who have reengineered who perform and refine the or-
has led to process teams. A process team groups members who perform the ganization’s major processes
472
GLOBAL APPLICATIONS Part 5 Leading
a g es
Reshaping Siemens
Get t y Im
Step inside the new Siemens AG. After nearly a decade that global managers must think internationally, but act lo-
of hit-or-miss efforts to speed product development, Sie- cally. He says, “In today’s world, knowledge travels faster
mens, a gigantic German electrical and engineering con- than ever before, so if you are talking about a sustainable
glomerate, has finally shed its plodding perfectionism and competitive advantage, probably the only one is the qual-
bureaucracy. Gone are the endless meetings, the aimless ity of the people you have and the way they interact as a
research, and the fear of taking risks. Now, a new genera- team.”
tion of managers is fostering cooperation across the com-
• Kleinfeld’s leadership mantra is, “Nobody’s perfect,
pany: setting up new organizational structures, creating
but a team can be.” What do you think he means?
teams to develop products and attack new markets, and
thriving on accountability. The new emphasis is on rev- Sources: Knowledge at Wharton, “Siemens CEO Klaus Kleinfeld,
Nobody’s Perfect, but a Team Can Be,” April 19, 2006, http://
ving up innovation and pleasing the customer. knowledge.wharton.upenn.edu/index.cfm?faviewArticle&ID1447;
Siemens is an international company, built around Siemens, http://www.siemens.com.
German engineering values. CEO Klaus Kleinfeld believes
organization’s major processes into teams. A process team not only performs the
processes but also refines them. Most organizations like Siemens AG, the sub-
ject of this chapter’s Global Applications feature, developed process teams as
they restructured from a functional organization design. The process teams re-
move departmental barriers and emphasize coordination. For example, Olin In-
dustries transformed 14 functional departments into eight process teams with
names like fulfillment, new products, and sources. Similarly, Zeneca Agricul-
tural Products (now known as Syngenta) former CEO, Bob Wood, took apart
every business process from product development to order fulfi llment to create a
dozen process teams structured to satisfy the customer.17
Work Teams When a company creates a small, multiskilled team that does all
the tasks previously performed by the individual members of a functional de-
work team partment or departments, the group is known as a work team. Work team mem-
A team, composed of multi- bers assume responsibility for the function or tasks, sharing skills and comple-
skilled workers, that does all
the tasks previously done menting each other. After adopting work teams, Frito-Lay’s plant in Lubbock,
by individual members in a Texas, logged double-digit cost cuts and saw its quality jump from the bottom
functional department or 20 to the top 6 of Frito’s U.S. factories. The 11-member work teams are respon-
departments
sible for everything from product processing (potatoes for the potato chip team,
for example) to equipment maintenance, to team scheduling. The team even in-
terviews potential employees for the team. To help them devise ways to produce
and ship products more efficiently, teammates receive weekly reports on cost,
4
quality, and service performance.18
How Much Independence to Give Teams

Use decision-making How much authority and operating freedom should teams have? The continuum
authority as a characteris-
tic by which to distinguish in Figure 14.3 shows the independence that various types of teams have in day-
team type to-day operations.
Figure 14.3 Continuum of an autonomy
Controlled by
Management Independent
Cross- Product Executive Teams,

Task Quality Project
Committees Functional Development Self-Managed
Forces Circles Teams
Teams Teams Work Teams
Low Day-to-Day Decision-Making Independence High
Teams Closely Controlled by Management Teams holding the least au-

thority for decision making are committees, task forces, and quality circles. Al-
though some task forces may make decisions within a normally defi ned charge,
most operating committees and task forces are not decision-making bodies; they
make recommendations to management. Quality circles, with greater latitude in
defi ning quality, still have little authority. Like other closely controlled teams,
quality circles make recommendations to management. They usually work in
a setting in which the circle facilitator is either a manager or a trained worker–
facilitator, and they rely on management to implement their recommendations.19
Teams with Moderate Independence Cross-functional, project, and prod-

uct development teams have more decision-making authority than closely con-
trolled teams. Although empowered to make many decisions about the work
at hand, management appoints the leaders of moderately independent teams.
Therefore, the leaders of these teams tend to make decisions that support man-
agement. In addition, management controls budgetary decisions as well as team
membership. 20
Independent Work Teams Self-managed, or self-directed, work teams and

executive teams are independent. Each controls day-to-day decision making.
A self-managed work team assumes complete responsibility for its work. self-managed work team
The team manages itself, sets goals, takes responsibility for the quality of the A team, fully responsible for
its own work, that sets goals,
output, creates its own schedules, reviews its own performance as a group, pre- creates its own schedules, pre-
pares its own budgets, and coordinates its work with that done by the compa- pares its own budgets, and co-
ny’s other departments or divisions. These teams plan, control, and improve op- ordinates its work with other
departments
erations independent of formal management supervision. 21
Self-managed teams are used anywhere in an organization where work units
exist—in production, customer service, engineering, or design, for example. If
a company has created process teams, they too may be self-managed. Compa-
nies using self-management teams report that team membership gives workers
control over their jobs and a bigger stake in the company, resulting in the blos-
soming of creativity.22 Two examples support these points. First, at Taco Bell
managers discarded an outmoded command-and-control management style that
kept a tight reign on employees. Managers replaced it with team-managed units
in which frontline crews run the day-to-day operations without supervision.
Taco Bell top managers report an increased sense of ownership and responsibil-
ity for customer service and overall unit performance. 23
474 Part 5 Leading
A second example is the self-managed work teams at Published Image, a fi-

nancial newsletter publisher in Boston. Founder and CEO Eric Gresham, frus-
trated with newsletters-in-process hitting bottlenecks from edit to art to produc-
tion, created “little Published Images”—self-managed work teams responsible
for their own client newsletters, start to fi nish. Teams with names like Quality
Matters run their own businesses. Each team has its own editor, art director,
and salesperson, and a couple of junior staffers. As a self-contained business,
teams line up clients and negotiate prices. They take responsibility for produc-
ing their client newsletters, collect their own accounts receivable, and keep their
own books. After the changeover, earnings increased 35 percent and the compa-
ny’s own customer satisfaction measures increased 78 percent. 24
In the executive suites at Nordstrom, managers decided that the jobs of chair
and president were too complex for one person to handle. As a result, these re-
executive team sponsibilities were put into the hands of executive teams. At Seattle-based Nord-
A team consisting of two or strom, three Nordstrom brothers shared the chair and four managers shared the
more people to do the job tradi-
tionally held by one upper-level president’s position. In the case of the chairpersons, the decisions were made by
manager committee, but were generally limited to the control of strategic direction. Day-
to-day management was left to the four presidents. “Like the cochairmen, the
presidents have ample debate, they say, and resolve most disagreements by fo-
cusing on what would be best for the customer. . . . [We] leave our egos at the
doorstop.” Each of the copresidents concentrated on his or her own specialty
area and acted with great autonomy.25
Establishment of Team Organization
5
Identify and discuss steps
in establishing teams
Team management represents a fundamental change from conventional ways of
doing business, thinking, and managing. Consequently, the decision to adopt
team management requires a philosophical commitment by top executives and
careful, systematic implementation. The task of setting up work teams among
employees must begin at the top. 26
Process of Team Building

Successful team building requires a fresh assessment of the organization’s ba-
sics. Figure 14.4 lists the steps involved. 27 The paragraphs that follow will de-
scribe each step in turn.
Assessing Feasibility Will the team approach work? For the organization
new to teams, a feasibility study should be the starting point. The study should
be a thorough, penetrating review of mission, resources (especially personnel),
and current and projected circumstances. It should provide reasonable estimates
of how long it might take to institute teams and what kind of commitment is
required.
Identifying Priorities An assessment of concerns by order of urgency should

reveal the points where teams may be effective. The concerns could include cus-
tomer needs, production processes and capacity, and delivery systems. This step
should eliminate the most common trouble with teams. According to USC’s Ed-
ward Lawler, most companies rush out and form the wrong kind of team for the
wrong job. 28
Figure 14.4 Steps in the process of team building
Step 1: Assessing feasibility. Will team building work? How long will it take? Is there a commitment to teams?
Step 2: Identifying priorities. What are the critical needs of the organization? Where can teams make an
impact?
Step 3: Defining mission and objectives. What is the organization trying to achieve? How can teams help
attain those goals?
Step 4: Uncovering and eliminating barriers to team building. What lack of skills, cultural peculiarities, and
process specifics might limit teams?
Step 5: Starting with small teams. Where can the team approach begin? Which priorities will most benefit
from teams?
Step 6: Planning for training needs. What training or guidance is needed to make teams effective?
Step 7: Planning to empower. Can managers let go? Are they willing to let people make mistakes?
Step 8: Planning for feedback and development time. What type and frequency of feedback is needed? Can
management be patient?
Defining Mission and Objectives Before an organization begins to build

teams, managers should take care that the company’s mission and objectives are
solid, well defi ned, and accepted throughout the organization.
Uncovering and Eliminating Barriers to Team Building Three kinds of

barriers impede teams: subject matter barriers, process barriers, and cultural
barriers.
1. Subject matter barriers arise when employees and managers are not suffi-
ciently knowledgeable or technically proficient. Without adequate expertise,
teams fail.
2. Process barriers stem from unwieldy procedural approaches that limit teams’
ability to do their work. Cumbersome approval processes and communica-
tion channels that follow the chain of command are incompatible with effec-
tive team operation.
3. Cultural barriers are ways of thinking that run counter to the team approach.
Especially in long-established firms, powerful departments are sometimes
unwilling to relinquish authority or to change cherished habits.
Such barriers must be identified and overcome; any one of these can stop
teams cold.
Starting with Small Teams Begin team projects and planning in a pocket of
the company—one of the clear priority areas. A sound idea is to begin by creat-
ing a design team that represents a cross section of the company. The purpose of
the team is not to design a product, but to create other teams.
Planning for Training Needs At the outset, top or middle managers should of-
fer their unreserved help and guidance to teams as those groups refine their ob-
jectives and boundaries (as Google’s top managers do with project teams when
they are in their formative stages). Team members will probably need training in
planning, the effective use of meetings, and team dynamics. Members of cross-
functional teams will need skills training. Recognizing this, when XEL, a manu-
facturer of communications equipment, committed to teams, CEO Bill Sanko set
476 Part 5 Leading
up “XEL University.” The curriculum includes 30 classes on topics from soldering

to problem solving. On average each worker spends five hours a month in class. 29
Planning to Empower Executives and other managers must empower workers

when creating teams. Senior people need to step back and let the team members
make decisions, including making mistakes and failing. Empowering involves
giving team members the opportunities to fail as well as to succeed.
Planning for Feedback and Development Time Teams require feedback.

Eventually, teams develop their own feedback mechanisms. Initially, however, it
is vital that the team builders provide one. Simultaneously, in the team environ-
ment, individuals must have ample opportunity to grow and develop. Managers
must be patient.
Launching teams often raises unfamiliar issues and procedures. The process
can be intimidating as well as confusing. Companies that are beginning a team
program can smooth the process by using consultants who specialize in team
building. Skilled and experienced consultants can design a process, assist the
organization in the implementation, train workers and managers in new roles
and in new ways of thinking, and identify potential barriers. Even with this as-
sistance, however, team building takes time and patience. As management guru
Peter Drucker noted, “You can’t rush teams. It takes five years just to learn to
build a team and decide what kind you want.” The team system requires mas-
sive changes of habits:
• Individuals who used to compete against each other for recognition, raises,
and resources will have to learn to collaborate with each other.
• Workers who used to be paid for their individual efforts will be rewarded
based on their own efforts plus the efforts of coworkers.
• Supervisors who used to be directive in their style will have to become facili-
tative, coaching workers instead of giving orders. 30
Team-Building Considerations
Once top managers have decided to create teams and have prepared a compre-
hensive blueprint of the team-building process, they must make decisions about
the details of specific teams. They must make decisions about team size, member
roles, and team leadership, for example.
Team Size As previously noted, it is best to begin a team program with small
teams—that is, teams having fewer than 12 members. Small teams tend to reach
consensus more readily than do large teams. In addition, small teams allow more
opportunity for interaction and self-expression, and they tend not to break into
subgroups. Small size allows members to use their diverse skills, to cross train,
and to solve problems aggressively.
If possible, small teams should be maintained after the start-up phase. As
teams become larger, team members have more difficulty interacting, becom-
ing a cohesive unit, and communicating. In large teams, subgroups often form
with their own agendas, and conflict occurs more readily than it does in small
teams. 31 Nathan Myhrvold, Microsoft’s Chief Technology Officer, echoes this
point. “Although the temptation is there to throw bodies at a project, 8 people
is right for our teams.” Myhrvold observes that as teams get larger, employees
must spend more time communicating what’s already inside their heads and less
time actually applying knowledge to accomplish their work. The productivity of

each employee diminishes quickly. 32
Member Roles As GB Tech (the subject of this chapter’s Valuing Diversity fea-
6
ture) knows, effective teams display balance. To achieve balance requires peo-
ple with diverse technical abilities and those with complementing interpersonal
skills. Some members play task-oriented roles and others meet team needs for
Identify and discuss the
encouragement and harmony. 33 Glenn Parker reported that the typical team in- roles of team members
cludes roles for task specialists and social specialists. Roles for task specialists and team leaders
include the following:
• Contributor, a data-driven person who supplies needed information and
pushes for high team performance standards
• Challenger, a team player who constantly questions the goals, methods, and
even the ethics of the team
• Initiator, the person who proposes new solutions, new methods, and new
systems for team problems
Roles for the social specialists include the following:
• Collaborator, the “big picture” person who urges the team to stay with its
vision and to achieve it
• Communicator, the person who listens well, facilitates well, and humanizes
the work of the team
• Cheerleader, the person on the team who encourages and praises individual
and team efforts
• Compromiser, the team member who will shift opinions to maintain
harmony34
Having individuals in a team who can perform two or more of these roles
is quite possible—even desirable. Regardless, the objective is to achieve balance.
For sustained effectiveness, each team’s task environments and interpersonal en-
vironments must sustain and energize members.
Team Leadership A key consideration in effective teams is team leadership.

In self-managed teams, the team members provide leadership. For example, at
W. L. Gore & Associates, famous for Gore-Tex waterproof fabric, the leader
evolves from within the team. The leader is not appointed; he or she achieves
the position by assuming leadership, which must be approved in a consensus
reached through discussion—not a vote. 35
Team leaders appointed by management require a special set of skills. The
role must be fi lled by someone with values oriented toward teamwork and coop-
eration. Effective team leaders create a noncompetitive atmosphere, renew trust,
think reasonably, share leadership, encourage members to assume as much re-
sponsibility as they can handle, and positively reinforce even the slightest con-
tributions. At the same time, team leaders need to keep their teams focused on
results. 36
As an effective team leader for a data storage system team on Northrop
Grumman’s B-2 bomber project, Eric Doremus embodies these abilities. The fi rst
time he met with the 40 members of the B-2 bomber team, he admitted he would
not be much help with technical problems. “My most important task was not
trying to figure out everybody’s job. It was to help this team feel as if they owned
the project by getting them whatever information, financial or otherwise, they
478
VALUING DIVERSITY Part 5 Leading
a g es
Experience Counts
Get t y Im
GB Tech Inc., a Houston-based information systems screened for technical as well as team skills. Ten retired
company, needed help in writing bid proposals for sub- technical team members were eventually hired. Each func-
contracts from the National Aeronautics and Space Ad- tioned effectively within teams as an internal consultant.
ministration (NASA). GB Tech managers believed the GB Tech, in turn, has prospered from the experience
solution was to team company staff with experienced diversity brought. The company’s revenues have grown
retirees. The retirees would bring much needed techni- from $160,000—before recruiting began—to $7.8 million
cal expertise to the job of completing the complex paper- in 1994 to $26.4 million in 2001. In 2005, GB Tech ranked
work. The experienced retirees, who used to work for as the eleventh-largest of all Johnson Space Center con-
aerospace corporations, could also help enhance the rep- tractors (GB Tech News). Employment skyrocketed from
utation of GB Tech, a relative newcomer. As Gale Burkett, 14 workers to over 300. CEO Burkett attributed much of
the company’s Chairman and CEO, noted, “We were con- that growth to the efforts and advice of the retirees.
cerned about whether we would be accepted because Sources: GB Tech, http://www.gbtech.com; Houston Chronicle
we were still a fairly new company.” Survey, “Largest Minority-Owned Businesses,” Houston Chronicle,
May 19, 2001; Laura M. Litvan, “Casting a Wider Employment Net,”
The company began advertising for candidates in sev- Nation’s Business, December 1994, 49–51.
eral high-tech disciplines. Respondents were carefully
needed. I knew that if we could charge up the hill together, we would be success-
ful.” Doremus was right. His team shaped the fi rst prototype of the data storage
unit in two years and delivered a fully functional unit in less than three. 37 Dore-
mus and other successful team leaders provide these tips:
• Don’t be afraid to admit ignorance.
• Know when to intervene.
• Learn to truly share power.
• Worry about what you take on, not what you give up.
• Get used to learning the job.
Management of Team Processes

Once teams are in place, managers need to address special concerns regarding
the management of internal team processes. The specific processes, which relate
to the changing dynamics resulting from the team structure, include the stages
of team development, team cohesiveness, team norms, and team personality.
Stages of Team Development
7
Describe the four stages
of team development
forming stage
When a team is created, its members do not come together instantly; rather, the
team goes through distinct stages.38,39 Figure 14.5 shows the four stages of de-
velopment: forming, storming, norming, and performing.
Forming During the forming stage, individual members become acquainted.

The phase of team development Members test behaviors to determine which are acceptable and which are un-
in which team members are be- acceptable to individuals in the group. This stage is marked by a high degree of
coming acquainted uncertainty. As a result, the individuals accept the power and authority of both
Figure 14.5 Stages of team development
Forming Storming Norming Performing
formal and informal leaders. An important task for the team leader in this stage
is to provide sufficient time and a suitable atmosphere for team members to get
to know each other.
Storming In the storming stage, disagreement and conflict occur. Individual storming stage
personalities emerge and team members assert their opinions. Disagreements The phase of team development
characterized by disagreement
could arise over priorities, immediate goals, or methods. Coalitions or subgroups and conflict as individual roles
could emerge as a means to resolve disagreements. The team is not yet unified; and personalities emerge
some unsuccessful teams never get beyond this stage. The team leader’s role dur-
ing this stage is to openly encourage the necessary interaction. With sound lead-
ership, the group can work through its disagreements and enter the next stage.
Norming As the pattern in Figure 14.5 suggests, the team comes together in
the norming stage. With disagreements and confl icts resolved, the team achieves norming stage
unity, consensus about who holds the power, and an understanding of the roles The phase of team develop-
ment in which disagreement
that members will play. The team is now focused; it has oneness—a sense of and conflict have been re-
team cohesion. The team leader builds on this newfound unity and helps to clar- solved and team members
ify the team’s values and norms. enjoy unity and focus
Performing In the performing stage, the team begins to function and moves performing stage
toward accomplishing its objectives. Having accepted the oneness achieved dur- The phase of team development
in which team members prog-
ing the norming stage, team members interact well with each other. They deal ress toward team objectives,
with problems, coordinate work, and confront each other if necessary. During handle problems, coordinate
this stage, the team leader’s role is to provide and maintain the balance between work, and confront each other if
necessary
various members’ requirements.
Ellen Lord, a Team Leader at Davidson Interior (a division of Textron),
found that it takes a good team leader to help teams through the stages. Accord-
ing to Lord, team leaders “must have patience and presence of mind to act like
a parent, teacher, and referee all at once.” When forming her product develop-
ment team, Lord carefully screened workers before inviting them to join; but
this careful selection did not ease the team’s forming process. “We put all the
people in one room and they had to work with each other. The people from dif-
ferent functions didn’t know each other, they couldn’t ask favors, and infi ghting
was pretty intense.” The storming stage brought even more intensity and con-
fl ict. Team members sometimes got into fights. “A neatnik sitting next to a slob
lost his cool. People were emotional about what kind of coffee was brewing in
the pot. The manufacturing types thought the engineering members were fo-
cused on trivia and bluntly let them know.” 40
Eventually, according to Lord, the team came together; it reached the norm-
ing stage. The team members realized that all of them were doers who had a depth
480 Part 5 Leading
of knowledge they could apply. The team then began to perform; and perform
it did. Lord’s product development team created a high-tech coating that makes
plastic for cars look exactly like chrome, but it won’t rust, scratch, or crack.
Team Cohesiveness
8
Discuss team
cohesiveness and
team norms and their
relationship to team
An important dimension of team dynamics is cohesiveness. As discussed in Chap-
ter 8, cohesiveness, or cohesion, is the extent to which members are attracted to
the team and motivated to remain together. In a highly cohesive team, members
are committed to team activities, pull together to accomplish the activities, are
happy with the success of the team, and are committed to staying in the team.
performance
In contrast, members of less cohesive teams are not team focused, are less con-
cerned about team objectives, and are more ready to leave the team.
Factors Determining Team Cohesiveness Teams with few members, fre-

quent interaction, clear objectives, and identifiable success tend to be cohesive.
Teams are less cohesive when groups are large, when team size or members’ lo-
cation prevents frequent interaction, when objectives are ambiguous, and when
team efforts do not achieve success.41 Figure 14.6 illustrates the factors that
determine cohesiveness.
Figure 14.6 Determinants and results of team cohesiveness
High
Morale
Small Size
Frequent Interaction High
Clear Objectives Cohesiveness
Success
Objective
Achievement
Team Factors Degree of Results

Cohesiveness
Low
Morale
Large Size
Infrequent Interaction Low
Unclear Objectives Cohesiveness
Failure
Failure to
Achieve
Objectives
Results of Team Cohesiveness Figure 14.6 also shows the outcome of team
cohesiveness. High cohesiveness contributes to effectiveness and high morale. If
cohesiveness is low, the team is less likely to achieve its objectives and morale
will be low.42
Cohesiveness and success build on each other. High cohesiveness contrib-
utes to high achievement, which makes the team more cohesive. Knowing this,
team leaders should foster cohesiveness by establishing clear direction, provid-
ing for frequent interaction (in regard to work and nonwork topics), and design-
ing small groups.
Team Norms
As discussed in Chapter 8, a team norm is a standard of behavior that all team
members accept. Norms are the ground rules, or guidelines, that tell team mem-
bers what they can or cannot do under certain circumstances; they provide
boundaries of acceptable behavior. Individuals conform to these norms.
The team itself sets team norms. Through an informal process, the key val-
ues, role expectations, and performance expectations emerge as norms. At Lock-
heed Martin, team members developed a set of values and expectations. The
teams believed in open communication and collaborative problem solving. These
norms set the ground rules and were vital to the success of the teams.
A key norm for teams is one that identifies the acceptable level of perfor-
mance—high, low, or moderate. Together with team cohesiveness, this norm is
a critical determinant of team productivity. As Figure 14.7 shows, productivity
Figure 14.7 Effects of cohesiveness and performance norms on productivity
High
B A
Team Performance Norms
Moderate Productivity High Productivity
C D
Low-to-Moderate Low Productivity
Productivity
Low
Low Team Cohesiveness High

482 Part 5 Leading
is highest when the team is highly cohesive and has a high performance norm
(quadrant A). Moderate productivity occurs when cohesiveness is low, because
team members are less committed to performance norms (quadrant B). Low-to-
moderate productivity occurs when cohesiveness is low and the performance
norm is low (quadrant C). The lowest productivity occurs when the team mem-
bers are highly cohesive in their commitment not to perform (quadrant D).
Team Personality
A team’s personality is closely related to its norms.43 A personality for a team re-
sults from team members’ cohesiveness and norms, the pressures they face, their
experiences, and their successes and failures. The team can be enthusiastic, en-
ergetic, and cooperative—or just the reverse. A team leader must monitor the
personality of the team, identify its strengths and weaknesses, and then supply
the leadership to remedy weaknesses and build on strengths.
Measurements of Team Effectiveness
9
Evaluate the benefits and
costs of teams
The decision to create teams, like every management decision, generates benefits
and costs. Team effectiveness is measured by weighing these benefits and costs.
Benefits of Teams
If sound processes and techniques underlie team building and management, an
organization can harness the benefits of a team. These benefits include synergy,
increased skills and knowledge, flexibility, and commitment.
Synergy A team of employees working together develops synergy; it produces

more and has more creativity and energy than do the same number of individu-
als working alone. Working in the team environment provides camaraderie and
sharing that is often absent in normal structures. When using productivity as
a measure of synergy, we find that increases ranging from 30 to 50 percent are
not uncommon, especially in manufacturing and services.44 Chrysler and IBM
reported significant improvement in product development cycles using teams;
moreover, as Sequins International and Published Images can attest, customer
service significantly improves.
Increased Skill and Knowledge In a team, members’ skills and knowledge

increase. This increase is due, in part, to training. In addition to formal train-
ing, when individuals are exposed to jobs other than their own, they naturally
pick up skills and knowledge from other workers. The result is their increasing
worth to themselves and to the company.
Flexibility As team workers become more adaptable in their attitudes and ca-
pacity to perform, the organization gains flexibility. The broader knowledge
base of team members allows them to adjust to changes in work demands and
work flow and to respond positively to emergencies. Moreover, the enhanced
skill of individual team members permits improved response to organizational
demands.
Commitment In an era highlighted by employee demotivation and lack of com-

mitment, teams provide the opportunity for workers to “own” their work. As
more companies move toward self-managed work teams and empowerment, em-
ployee satisfaction and commitment increase. At Goodyear, former CEO Stanley
Gault proudly boasted, “The teams at Goodyear are now telling the boss how to
run things—and I must say, I’m not doing a half-bad job because of it.” 45
Costs of Teams
The major costs associated with implementing a team concept include power-
realignment costs, training expenses, lost productivity, free-riding costs, and
loss of productive workers.
Power-Realignment Costs Implementing a team-centered approach results

in loss of power by lower- and middle-level managers. The power in the organi-
zation shifts from central management to the team and team worker. If adjust-
ment is difficult and resistance occurs, the cost in time and money can be high.
This situation is especially true if former managers who become new team lead-
ers embrace the job in words only. J. D. Bryant of Texas Instruments knows be-
cause that’s what he did. Says Bryant, “I didn’t buy into teams. . . . I never let the
operators do any scheduling or any ordering of parts because that was mine. I
figured as long as I had that, I had a job.” 46
Team-Training Costs Employees most likely will need retraining to be able

to function in teams. The financial costs associated with the retraining fall into
two areas: costs for technical cross training and costs for training individuals to
function as part of a team. Of the two, the technical component is usually eas-
ier to accomplish. Training in team dynamics is often hampered by the fact that
many employees do not know they need it. Recall from Chapter 7 some of the
potential pitfalls associated with group decision making: groupthink, excessive
compromise, lost time, and lack of individual accountability. Team members
need to be trained to avoid these problems through programs like those offered
at XEL by “XEL University.”
Lost Productivity Developing teams takes time, and time spent in team devel-
opment is lost to production. The time spent selecting and retraining team mem-
bers also lowers output of the product or service. In addition, team members
need time to adjust to their new environments and roles. They will not reach
peak performance overnight.
Free-Riding Costs A free rider is a team member who receives the benefits of free rider
team membership but does not do a proportionate share of the work. Free riding A person who receives the ben-
efit of team membership but
occurs because not all people are equally committed to the team goals or exert does not do a proportionate
the same amount of effort.47 Compounding the problem is the dilemma associ- share of work
ated with team compensation, the subject of this chapter’s Ethical Management
feature. Free riders can be compensated for others’ work.
Loss of Productive Workers When companies move to a team system, some

workers will not fit in. They do not want to think about their jobs, and they do
not want increased responsibility. These workers might be forced out or resign
voluntarily. Either way, the organization will lose skilled employees.48
484
ETHICAL MANAGEMENT Part 5 Leading
a g es
The Paycheck Counts
Get t y Im
As more companies embrace teams, team concepts, and Bonus systems must be developed. For service com-
empowerment, the rules of work are evolving. Manag- panies, a key component in surveys is measuring cus-
ers are no longer just managers; they have become facili- tomer approval; but customers can be fickle, and their at-
tators. Employees are transformed from being directed titudes can be highly subjective. As a result, work teams
workers into being full-fledged decision-making partners. might question the measures. Employees may begin to
The roles of managers and employees are being de- wonder, “I don’t know how fair that is. You can work very
fined in the new work environment, but one area lacks hard and a customer may not like what you do or the way
consistency: team compensation. Companies are strug- you do it.” Employees might also think, “I want to be paid
gling with creating programs that measure performances for what I do, not what someone thinks I do.”
accurately.
At a manufacturing facility, accurate performance • Is it ethical to base team compensation on a subjective
measures are easier to determine—output, quality, and performance criterion? Why or why not?
safety, for example. But for service companies, figuring • Should a company convert to a team structure if an
performance can be tough. Many companies make cus- appropriate compensation system has not been
tomer satisfaction a key component of their incentive plan. created?
Metamor Enterprise Solutions, an IT consulting company, • If you were a team member, what would be your
regularly surveys a random sample of clients. “Riding on response in this situation?
the [customer satisfaction survey] answers: 10% of con- Source: Bruce Tulgan, “Pay for Performance, and Nothing Else,” Inc.,
sultants’ salaries and 40% of bonuses” (Tulgan). March 2001, http://www.inc.com/articles/2001/03/22353.html.
Team and Individual Conflict

Whether a manager is working with teams or individuals, confl ict inevitably oc-
conflict curs. Whenever people work together, the potential for confl ict exists. Conflict
A disagreement between two is disagreement between two or more organizational members or teams.49 Con-
or more organizational mem-
bers or teams fl ict occurs because people do not always agree—on goals, issues, perceptions,
and the like—and because people inevitably compete.
Views of Conflict
What does a manager do when confl ict arises? The answer depends on the man-
ager’s views and beliefs about confl ict. 50 Figure 14.8 shows three basic philo-
sophical approaches to confl ict.
Traditional View The manager who views conflict as unnecessary and harm-
ful to an organization fears conflict and eliminates all evidence of it. Such a
manager holds the traditional view of conflict. If confl ict does occur, the man-
ager perceives it as a personal failure.
Behavioral View The behaviorist recognizes that conflict frequently occurs be-
cause of human nature, the need to allocate resources, and organizational life. A
manager who holds the behavioral view expects confl ict. He or she believes that,
on occasion, confl ict can produce positive results. In general, however, a man-
ager with a behavioral view believes that confl ict is usually harmful. With this
Figure 14.8 Philosophical approaches to conflict
BELIEFS REACTIONS
TRADITIONAL VIEW
• Conflict is unnecessary. • Immediately stop conflict.

• Conflict is to be feared. • Remove all evidence of conflict, including people.
• Conflict is harmful.
• Conflict is a personal failure.
BEHAVIORAL VIEW
• Conflict occurs frequently in organizations. • Immediately move to resolve or eliminate confl ict.
• Conflict is to be expected.
• Conflict can be positive but more likely is harmful.
INTERACTIONIST VIEW
• Conflict is inevitable in organizations. • Manage conflict to maximize the positive.

• Conflict is necessary for organizational health. • Manage conflict to minimize the negative.
• Conflict is neither inherently good nor bad.
philosophical foundation, the manager’s reaction to confl ict is to resolve confl ict
or eliminate it as soon as it occurs.
Interactionist View A more current philosophy, the interactionist view, holds

that confl ict is not only inevitable but also necessary for organizational health.
Furthermore, this view maintains that conflict can be good or bad, depending
on how it is managed. A manager with an interactionist view attempts to har-
ness confl ict to maximize its positive potential for organizational growth and to
minimize its negative effects.
Positive and Negative Aspects of Conflict

A manager with an interactionist philosophy is able to identify the positive and
negative aspects of conflict. The manager sees dysfunctional confl ict as that
which limits the organization’s ability to achieve its objectives. Functional con-
flict, however, can support the objectives of the organization, especially when
performance is low. People can be motivated to improve performance by competi-
10Discuss the positive
and negative aspects of
conflict in an organization
tion—a kind of confl ict—if they think their way is better than someone else’s. 51 dysfunctional conflict
Conflict that limits the organi-
Sources of Conflict zation’s ability to achieve its
objectives
Competition is but one of many sources of confl ict. Others include differences
in objectives, values, attitudes, and perceptions; disagreements about role re- functional conflict
quirements, work activities, and individual approaches; and breakdowns in Conflict that supports the objec-
tives of the organization
communication.
Competition Competition can take the form of two individuals trying to out-
perform each other. Competition can also erupt over a struggle for limited re-
sources. The manager of each work unit depends on the allocation of money,
personnel, equipment, materials, and physical facilities to accomplish his or her
objectives. Some managers inevitably receive fewer resources than others. This
can lead not only to a lack of cooperation but to open conflict as well.
11Identify the sources of
conflict in an organization
486 Part 5 Leading
Confl ict can also arise from competition for rewards associated with perfor-
mance. Managed correctly, such confl ict generates positive results.
Differences in Objectives Individual employees’ objectives may differ from

those of the organization. An individual may aim to advance within an organi-
zation over a three-year period, whereas the organization may have a tradition
of seasoning an employee over a longer period. There may be conflict in this
situation.
Individuals might have confl ict with each other. For example, at Rainbow
Printing, the two owners do not see eye to eye. “We just don’t agree on what di-
rection the company should take and how it should be run.” In addition, each
interferes with the other’s work. 52
Departments within the organization may also develop confl icting objec-
tives. For example, if the production department focuses its energies on manu-
facturing a product at the lowest possible cost and the sales department wishes
to promote high quality, confl ict may arise.
Differences in Values, Attitudes, and Perceptions The value systems and

perceptions of each individual differ from those of others. These differences
can lead to confl ict. For instance, an employee may place a high value on time
with family. A manager may request frequent overtime or late hours, not under-
standing the employee’s need for family time. An obvious value-system confl ict
arises.
Groups as well as individuals can have conflicting values, attitudes, and per-
ceptions. Upper-level managers may perceive reports and procedures as valuable
control devices designed to provide information. Line workers may view such
paperwork as needless drudgery.
Disagreements about Role Requirements When employees begin working

in teams, their roles must change. Suppose, for example, that an employee who
has received numerous rewards for individual performance must now play the
unaccustomed role of team player. Confl ict is likely to arise between the team
and the individual.
Line and staff employees may fi nd their new roles uncomfortable at first. In
team interaction of line and staff personnel, the line manager may expect the
staff person to give advice, be supportive of the organization, and be action ori-
ented. The staff person may see himself or herself as one who provides answers,
not advice. The staff person may be analytical (and sometimes critical) of the or-
ganization, and he or she may be reflective in reviewing potential alternatives. In
such a case, confl ict between the line and staff employees is almost certain.
Disagreements about Work Activities Conflict between individuals and

groups can arise over the quantity of work assigned or the relationship among
the work units. In the fi rst situation, the cause of confl ict can be resentment be-
cause one group or individual believes the work load is inequitable.
Conflict over the relationships of work groups can take two forms. One
group or individual may depend on another to complete work before starting its
own. If the work is late or is of poor quality, conflict can result. The other con-
fl ict situation arises when two work groups or individuals are purposely placed
in competition with each other.
Disagreements about Individual Approaches People exhibit diverse styles

and approaches in dealing with others and with situations. One person may be
reflective, speaking little until ready and then speaking wisely. Another person
may be combative, often taking an argumentative approach, giving immediate
responses with little thought, and pressuring for agreement.
Breakdowns in Communication Communication is seldom perfect, and

imperfect communication may result in misperception and misunderstanding.
Sometimes a communication breakdown is inadvertent. Because the receiver is
not listening actively, the receiver might simply misunderstand the sender. The
result can be a disagreement about goals, roles, or intentions. Sometimes infor-
mation is withheld intentionally, for personal gain or to embarrass a colleague.
Strategies for Managing Conflict

A manager must recognize potential sources of conflict and be prepared to man-
age it. A viable strategy for conflict management begins with an analysis of the
confl ict situation and then moves to the development of strategy options.
Analysis of the Conflict Situation

12
Describe a manager’s role
in conflict management
and potential strategies to
manage conflict
By answering three key questions, managers can analyze a confl ict situation.
1. Who is in conflict? The conflict may be between individuals, between indi-
viduals and teams, or between departments.
2. What is the source of conflict? The confl ict may arise from competition, per-
sonal differences, or organizational roles. Answering this question requires
trying to view each situation through the eyes of the parties involved.
3. What is the level of conflict? The situation might be at a stage where the
manager must deal with it immediately; or the confl ict may be at a moder-
ate level of intensity. If the goals of the work group are threatened or sabo-
tage is occurring, the manager must take action immediately. If individuals
or groups are simply in disagreement, a less immediate response is required.
Development of a Strategy
When the situation requires action, what options are available? A manager can
consider seven possibilities: avoidance, smoothing, compromise, collaboration,
confrontation, appeals to superordinate objectives, and decisions by a third
party.
Avoidance Sometimes avoidance is the best solution. The manager can with- avoidance
draw or ignore the conflict, letting the participants resolve it themselves. Avoid- A conflict strategy in which a
manager ignores the conflict
ance is best when the conflict is trivial. The manager should use it simply because situation
he or she does not want to deal with the problem. Letting the parties disagree
may be the best course if disagreement results in no consequences.
Smoothing When using the option called smoothing, a manager diplomatically smoothing
acknowledges conflict but downplays its importance. If there are no real issues to A conflict strategy in which
the manager diplomatically ac-
resolve, the approach may succeed in calming the parties. If there are real issues, knowledges that conflict exists
however, this option will not work. but downplays its importance
488 Part 5 Leading
compromise Compromise With compromise, each party is required to give up something

A conflict strategy in which
each party gives up something in order to get something. Each party moves to fi nd a middle ground. Compro-
mise can be effective when the parties in conflict are about equal in power, when
major values are not involved, when a temporary solution to a complex issue is
desirable, or if time pressures force a quick resolution.
collaboration Collaboration In attempting collaboration, the manager promotes mutual

A conflict strategy in which the problem solving by both parties. Each party seeks to satisfy his or her interests
manager focuses on mutual
problem solving by both parties by openly discussing the issues, understanding differences, and developing a full
range of alternatives. From this, the outcome sought is consensus—mutual agree-
ment—about the best alternative.
confrontation Confrontation If confrontation is used, the conflicting parties are forced to

A conflict strategy that forces verbalize their positions and disagreements. Although this approach can pro-
parties to verbalize their posi-
tions and area of disagreement duce stress, it can also be effective. The goal is to identify a reason to favor one
solution or another and thus resolve the confl ict. Many times, however, confron-
tation ends in hurt feelings and no resolution.
Appeals to Superordinate Objectives Sometimes a manager can identify

superordinate objectives that will allow the disputing parties to rise above their
superordinate objective confl ict. A superordinate objective is a goal that overshadows each party’s in-
An objective that overshadows dividual interest. As an example, suppose individual work groups are vying for
personal interests, to which a
manager can appeal as a strat- budget allocations in the face of an organizational downturn. If the two parties
egy for resolving conflict agree that the reductions are in the best interest of the organization, each will
move beyond the confl ict.
Decisions by a Third Party At times, the manager may turn to a third party
and ask him or her to resolve a confl ict. The third party can be another supervi-
sor, an upper-level manager, or someone from the human resource department. If
the conflict is between two subordinates, the manager might be the third party.
Perhaps of all the confl ict strategy options, collaboration, an appeal to su-
perordinate objectives, and decisions by a third party are the most difficult to vi-
sualize. Applications of these strategies played a significant role in the successful
redesign of the Ford Taurus by Team Taurus. Richard Landraff, Project Team
Leader, was given a clear mandate. The new Taurus was to be the first American
car that truly matched the quality and engineering of Japanese rivals—specifi-
cally the Honda Accord and Toyota Camry. Landraff had to harness the creative
energies of Team Taurus’s 700 engineers, designers, marketers, accountants,
factory-floor workers, and suppliers. 53 For example, Landraff did the following:
• He encouraged the designers in charge of the interior and exterior of the
Taurus to collaborate rather than compete. The two, sitting side by side, con-
stantly exchanged drawings and critiqued each other’s work. As a result, the
new Taurus avoids the mix-and-match dissonance of many American cars.
• He forced designers and manufacturing engineers to focus on a superordi-
nate objective when quality issues kept bumping up against costs. The de-
signers argued that each side of the Taurus body should be fashioned from
a single piece of steel rather than from two panels welded together. The
engineers countered that costs were prohibitive and resisted simply because
this idea was different. Landraff brought the conflicting parties together,
restated the Team Taurus objective, and pointed to a banner that read,
“Beat Accord.” The issue was resolved—the body would be fashioned from
one piece of steel.
• He appealed to a third party when cost issues conflicted with manufactur-
ing performance. Manufacturing engineers lobbied for a new, $90 million
stamping press that would replace six body presses from the 1950s and re-
sult in much higher quality. With Ford in the thick of a cost-cutting frenzy
brought on by slumping car sales, finance managers argued against the pur-
chase. Landraff took the confl ict to then-Ford Chairman, Alexander Trot-
man. After a lengthy debate, Trotman surprised everyone by approving the
purchase. “The quality argument was so persuasive that we all agreed we
had to do it,” he said.
Conflict Stimulation
At times, a manager might wish to increase the level of confl ict and competition
in a work situation. The circumstances in which a manager might wish to stimu-
late conflict are these:
• When team members exhibit and accept minimal performance
• When people appear to be afraid to do anything other than the norm
• When team members passively accept events or behavior that should moti-
vate action
Stephen Robbins reported that managers can choose among five strategies
to stimulate confl ict: 54
1. Bring in an outsider. A person from outside the organization or team—
someone who does not have the same background, attitudes, or values—
may serve to establish the desired characteristics. Chapter 9 noted how GE
and IBM relied on CEOs from outside the organization to stimulate the
environment.
2. Change the rules. In some instances, a manager may choose to either in-
volve people who are not ordinarily included or exclude those who are usu-
ally involved. This alteration stimulates the work environment. For exam-
ple, a manager who is attempting to open up the environment may ask an
informal leader to attend management-only meetings as a full participant.
The result may be that both workers and manager gain new knowledge and
change their actions.
3. Change the organization. Another approach is to realign work groups and
departments. A change in reporting relationships and the composition of
work teams can allow individuals to have new experiences with people and
perceptions. When a company names a new CEO, either from inside or out-
side the company, one of the first actions the new CEO often takes to stimu-
late the environment is to realign work groups.
4. Change managers. Inserting a manager into a work group that can benefit
from his or her style of leadership can be an appropriate response. The prac-
tice of rotating managers of work teams on a regular schedule can also stim-
ulate groups.
5. Encourage competition. Managers can encourage competition between
groups or individuals by offering bonuses, travel, time off, or certificates of
merit to employees who perform best.
490 Part 5 Leading
Edgar Schein reported that the manager who chooses to encourage competi-
tion may reap one of the following benefits: 55
• An increase in cohesion within the competitive group
• An increased focus on task accomplishment
• An increase in organization and efficiency
If he or she doesn’t manage the situation correctly, however, the competition
can produce negative consequences:
• Communication between competitors can decrease or cease to exist.
• The competition may be perceived as an enemy.
• Open hostility may develop between competitors.
• One competitor can sabotage the efforts of another.
The emphasis on competition at Spectrum Associates produced all these neg-
ative consequences. The founders’ strategy for the small software service com-
pany is designed to “make sure no one gets comfortable.” 56 Spectrum is orga-
nized into competitive business groups. The groups compete for customers by
presenting proposals to Founders Tony Baudanza and John Nugent. “Whoever
comes up with the best proposal and best quote wins,” a practice that gives com-
petitors the license to poach. The competition exacts a toll. As one manager
states, “If you put four, five, or six Type-A personalities with an entrepreneur-
ial bent in the same tank, they can end up killing each other.” Not quite, but the
group managers have withheld information from each other and have negotiated
behind the scenes to gain advantage.
CHAPTER SUMMARY
Discuss the nature of teams and the charac- • Team members are flexible in terms of work pro-
1 teristics of effective teams. For a group to be
considered a team, at least two people must be involved,
cesses and problem solving.
• Team members change and grow.
the members must interact regularly and coordinate
their work, and members must share a common Identify the types of teams that organizations
objective.
Effective teams have the following characteristics:
2 use. The two basic types of teams are vertical
teams and horizontal teams. A vertical team is com-
posed of a manager and his or her subordinates in the
• Team members are committed to and involved in
formal chain of command. A horizontal team is made up
clear, shared goals.
of members drawn from different departments in the
• All team members feel free to express themselves organization.
and participate in discussions and decisions.
Distinguish potential uses of teams. Although
• Members trust each other. 3 managers may choose from unlimited team op-
tions, five main categories of teams are common:
• When needs for leadership arise, any member feels
free to volunteer. • Product development teams are organized to create
new products.
• Decisions are made by consensus.
• Project teams are designed to complete a specific
• As problems occur, the team focuses on causes, not
task in an organization.
symptoms.
• Quality teams focus on quality products and ser- 7. Planning to empower. Executives and other manag-
vices. Quality circles identify quality issues facing ers must empower workers when creating teams. Top
the company or department and offer suggestions managers need to step back and let team members
for improvement. Quality assurance teams guaran- make decisions, including making mistakes and
tee the quality of service and products by contacting failing.
customers and working with vendors.
8. Planning for feedback and development time. Teams
• Process teams group members who perform the or- require feedback. Initially team builders should pro-
ganization’s major processes. The team not only per- vide a mechanism to provide feedback.
forms the processes but also refi nes them.
Identify and discuss the roles of team mem-
• Work teams perform all the tasks previously per-
formed by the individual members of a functional
6 bers and team leaders. Effective teams display
balance. Balance requires some people to play task-
department or departments.
oriented roles and others to play social roles. Task spe-
cialists include the contributor, challenger, and initiator.
Use decision-making authority as a character-
4 istic by which to distinguish team type. Teams
may be characterized as teams closely controlled by
Social specialists include the collaborator, communica-
tor, cheerleader, and compromiser.
A key consideration in effective teams is team lead-
management, teams that have moderate independence,
ership. In self-managed teams, leadership is provided by
and independent work teams.
team members. Team leaders appointed by management
• Teams closely controlled by management include focus on teamwork, cooperation, and results. Effective
committees, task forces, and quality circles. team leaders create a noncompetitive atmosphere, re-
new trust, think reasonably, share leadership, encour-
• Teams that have moderate independence include
age members to assume as much responsibility as they
cross-functional teams, project teams, and product
can handle, and positively reinforce even the slightest
development teams.
contributions.
• Independent work teams include self-directed work
teams and executive work teams. Describe the four stages of team develop-
Identify and discuss steps in establishing

7 ment. The four stages of team development are:
5 teams. There are eight steps in building teams:

• Forming. During the forming stage, individual mem-
bers become acquainted. Members test behaviors to
1. Assessing feasibility. A feasibility study should help determine which are acceptable and which are unac-
determine if the team approach will work as well as ceptable.
how long it will take to initiate teams and the type of
• Storming. In the storming stage, disagreement and
commitment it will require.
confl ict occur. Individual personalities emerge and
2. Identifying priorities. An assessment should deter- team members assert their opinions. Disagreements
mine the critical needs of the organization and where may arise over priorities, goals, or methods.
teams can make an impact.
• Norming. In the norming stage, the team comes to-
3. Defi ning mission and objectives. Before an organi- gether. With disagreements and confl icts resolved,
zation begins to build teams, managers should deter- the team achieves unity, consensus about who holds
mine that the company’s mission and objectives are power, and an understanding of the roles members
solid, well defi ned, and accepted throughout the will play.
organization.
• Performing. In the performing stage, the team begins
4. Uncovering and eliminating barriers to team to function and moves toward accomplishing its
building. Three kinds of barriers impede teams: subobjectives.
ject matter barriers, process barriers, and cultural
barriers. Such barriers must be identified and Discuss team cohesiveness and team norms
overcome. 8 and their relationship to team performance.
Cohesiveness is the extent to which members are at-
5. Starting with small teams. Begin team projects and
tracted to the team and motivated to remain together.
planning in a pocket of the company.
Teams with few members, frequent interaction, clear
6. Planning for training needs. Team members will objectives, and identifiable success tend to be cohesive.
probably need training in planning, the effective use High cohesiveness contributes to effectiveness and high
of meetings, and team dynamics. morale.
492 Part 5 Leading
A team norm is a standard of behavior that all team begins with an analysis of the confl ict situation and then
members accept. Norms are guidelines that tell members moves to the development of strategy options. By an-
what they can or cannot do under certain circumstances. swering the following three key questions, managers
Team norms are set by the team itself. can analyze a confl ict situation: (1) Who is in confl ict?
A key norm for teams is one that identifies the ac- (2) What is the source of confl ict? and (3) What is the
ceptable level of performance—high, low, or moderate. level of confl ict?
Together with team cohesiveness, this norm is a critical
determinant of team productivity. Productivity is highest The potential strategies to manage confl ict include
when the team is highly cohesive and has a high perfor- • Avoidance. This strategy calls for a manager to
mance norm. The lowest productivity occurs when the withdraw or ignore the confl ict, letting the partici-
team members are highly cohesive in their commitment pants resolve it themselves.
not to perform.
• Smoothing. When using this option, a manager dip-
Evaluate the benefits and costs of teams. lomatically acknowledges confl ict but downplays its
9 The benefits of teams include synergy, increased
skills and knowledge, flexibility, and commitment. The
importance.
• Compromise. With compromise, each party is re-
costs of teams include power-realignment costs, team-
quired to give up something in order to get some-
training costs, lost productivity, free-riding costs, and
thing.
loss of productive workers.
• Collaboration. In attempting collaboration, the
Discuss the positive and negative aspects
10 of conflict in an organization. Dysfunctional
(negative) confl ict limits the organization’s ability to
manager promotes mutual problem solving by both
parties.
achieve its objectives. Functional (positive) conflict can • Confrontation. If confrontation is used, the confl ict-
support the objectives of the organization. ing parties are forced to verbalize their positions and
disagreements.
Identify the sources of conflict in an organi-
11 zation. The sources of confl ict include com-
petition, differences in objectives, values, attitudes, and
• Appeals to superordinate objectives. When manag-
ers identify goals that overshadow each party’s
individual interests, they appeal to superordinate
perceptions; disagreements about role requirements, objectives.
work activities, and individual approaches; and break-
downs in communication. • Decisions by a third party. At times, the manager
may turn to a third party and ask him or her to
Describe a manager’s role in conflict man- resolve a confl ict.
12 agement and potential strategies to man-
age conflict. A manager’s role in confl ict management
KE Y TERMS
avoidance forming stage self-managed work team
collaboration free rider smoothing
committee functional confl ict storming stage
compromise horizontal team superordinate objective
confl ict norming stage task force
confrontation performing stage team
cross-functional team process team vertical team
dysfunctional confl ict product development team virtual team
executive team project team work team
formal team quality assurance team
RE VIE W QUESTIONS
1. What elements are needed for a group to be consid- 7. What are the four stages of team development? What
ered a team? What are the characteristics of effective occurs in each stage?
teams?
8. What is team cohesiveness? What factors contribute
2. What are vertical teams? What three types of teams to high team cohesiveness?
are considered horizontal teams?
9. What are the benefits associated with teams?
3. What is the purpose of a project team? How does it
10. What are the positive and negative effects of confl ict
differ from a work team?
in an organization?
4. In terms of authority for day-to-day decisions, what
11. What are four potential sources of confl ict in an
is the difference between a self-managed work team
organization? Explain each.
and a product development team?
12. What strategies are available for confl ict manage-
5. What are the eight steps involved in the process of
ment? Explain each.
establishing teams?
6. What two major kinds of roles do team members play
within a team? What is the importance of each role?

1. In what situations do you think individuals, operat- confl ict management strategy would you adopt?
ing independently, outperform teams in an organiza- Why?
tion? Why?
4. When you are a member of a team at work or
2. In your work experience have you ever been a mem- school, do you adopt a task specialist or social spe-
ber of a vertical team? A committee? A task force? A cialist role? In your opinion, which role is more im-
work team? How did your experience differ in each portant to the team’s success? Why?
type of team?
3. If you were a member of a student project team and
one member was not doing his or her share, which
Links are provided for all Internet Exercises at http:// 3. Measure your listening ability by taking the quiz
plunkett.swlearning.com. found at the bottom of the page at the URL listed on
the text Web site. Then, ask a colleague to complete
1. Explain five issues to be considered in team building.
the quiz for you. Briefly discuss how you will use the
Which team-building exercises would you use? Why
results—along with the guidelines in the article—to
or why not?
improve your listening skills.
2. What should you consider before selecting a success-
ful team-building activity for your team?

The Business and Company Resource Center (BCRC) is the database. (Also, you may have access to it through
an online database and research tool published by Thom- this textbook. Check with your instructor.) The BCRC
son/Gale. Most college and university libraries subscribe will give you more up-to-date, targeted, and proprietary
to electronic databases, as well as print. Check to see if information than any Internet search engine. Further-
your library subscribes to BCRC. If so, you may access more, the information you fi nd is highly respected.
494 Part 5 Leading
Use the BCRC to fi nd the following information about GOOGLE AT A GLANCE

Google. Add any other interesting information that you Headquarters:
fi nd. Founded:
Top Executive:
Revenues for past year:
Number of Services:
APPLICATION CASE
Who Needs Teams? teamwork. In addition, the Plantation plant now dis-
Inside Motorola’s glistening telecommunications com- plays lists of star teams; and managers hand out rewards
ponents and equipment plant in Penang, Malaysia, the ranging from “golden attitude” pins to cash bonuses for
atmosphere resembles a high school sports department. good ideas.
Group shots of exuberant Malaysian production work- Nevertheless, getting the Plantation workers to
ers, charts with performance statistics, and morale- match the Malaysians’ enthusiasm has not been easy.
boosting slogans line the walls. A trophy case is filled “The whole plant in Penang had this craving for learn-
with awards hauled back from quality competitions ing,” says Jerry Mysliwiec, Director of Manufacturing
across the United States and Asia by teams with names in Plantation, who spent three years in Penang. “People
like Orient Express and Road Runners. The messages in the U.S. are less trusting and believing.” For example,
are hammered home: We are a family. This is your com- when a Plantation team member shut down a production
pany. Everyone marches in the same direction. line because of defective radio parts, workers watched
In productivity, quality, and innovation, the Penang to see what would happen. To their surprise, she was
plant is regarded as one of the best within Motorola’s handed a $50 reward and an “attitude” pin. Despite this
Land Mobile Division. The plant’s quality-centered pro- response from management, one 10-year Motorola vet-
gram relies in part on recommendations received from eran was not impressed. “I view this all as a headache,”
workers. Employees submit thousands of suggestions for she said, “I don’t even want to come to work.”
improving operations, which result in significant savings.
Motorola is struggling to duplicate Penang’s suc- Questions
cess at its cellular phone factory in Plantation, Florida. 1. What reasons can you cite for the differences in
At the Plantation plant, which makes products similar to team success at the Penang and Plantation plants?
those in Penang, managers are trying to get employees at 2. What causes of confl ict between Motorola manage-
all levels to forget narrow job titles and work together in ment and the workers at the Plantation plant can
teams to identify and act on problems that hinder qual- you identify? Explain your answer.
ity and productivity. 3. What recommendations to resolve the confl ict and
To facilitate the team concept, managers screen help the transition would you make to managers at
new applicants on the basis of their attitude toward the Plantation plant? Explain your answer.

The NEADS Team: People and Dogs vice dogs to meet the needs of people with limited physi-
All the teams you have encountered in this chapter have cal mobility or deafness. A typical service dog may be
been teams of people. NEADS, the National Educa- trained to respond to a blaring smoke alarm or ringing
tion for Assistance Dog Services, functions with teams telephone, nudge a light switch on or off with its nose,
of people as well. But another type of teamwork is cen- or retrieve items for an owner. Since this partnership is
tral to the mission of NEADS: the team of human and intended to last a lifetime, it is important for the match
dog. NEADS acquires, raises, trains, and matches ser- to be perfect.
It takes about two years to train a service dog—and The puppies live in their foster homes until they
that requires a lot of teamwork. Since NEADS is a non- are about a year and a half old—then they return to the
profit organization, it must be creative in the way it re- NEADS farm to continue their education. Here, they re-
cruits and uses volunteers. These volunteers include high ceive advanced training from professional dog trainers.
school students, families, and prisoners. High school When a dog’s training is complete, its new owner arrives
students may help NEADS puppy trainers begin to ex- on campus for a two-week stay, during which the per-
pose the youngest dogs to experiences they will encoun- son and dog become a team. The dog and person have
ter in their lives as service dogs, such as sitting by a been matched through an extensive process that involves
wheelchair or walking next to a cane. Families become a team of people interviewers and dog trainers. During
part of the team when, at four months of age, the pup- this intensive get-acquainted and training period, “they
pies are placed in foster care for the next part of their learn to love each other, respect each other, and work to-
education. Volunteer families agree to feed, love, and gether,” explains O’Brien.
raise the puppies so they become accustomed to the dis- O’Brien emphasizes that, “Even though the concen-
tractions and energy of the real world. Professional dog tration at this point is on the team, meaning two—the
trainers from NEADS visit regularly to work with the dog and the person—there are still many team mem-
families and dogs to ensure that the dogs receive the bers working behind the stage to facilitate this coming
proper training in preparation for their later work. Since together.” She refers to volunteers who raise funds to
1998, prison inmates in Massachusetts and Connecti- cover the cost of receiving a dog, as well as those who
cut have participated in a foster care program as well. greet new clients and help them become familiar and
While a puppy lives at the prison, a small team from comfortable with the NEADS campus. “What makes
NEADS visits regularly to monitor the puppy’s develop- these teams work so cohesively is that everyone knows
ment. Another set of volunteers participate in a program what the outcome should be,” says O’Brien. “Everyone
called Pups on Parole, during which they take the pup- is working toward getting a dog and person together and
pies outside the prison for field trips to shopping malls, making sure this dog provides the independence that
supermarkets, business districts, parks, and the like. In this disabled or deaf person needs. Everyone has that in
addition, a professional trainer works with the prisoners sight. Everyone just works toward that end.”
and puppies. The partnership with prisons has required
another level of teamwork, with state agencies. NEADS Questions
Executive Director Sheila O’Brien says this relation- 1. Describe the characteristics of a typical NEADS
ship has been highly successful. “The commissioner felt team, using the criteria discussed in the chapter.
very strongly that inmates should give back to the soci- 2. What factors determine the cohesiveness of NEADS
ety that they violated, in a safe way.” Working with the teams?
dogs has proved to be a safe and effective program for 3. Describe a situation in which confl ict might arise in
inmates. In fact, the dogs who live with prisoners return a NEADS team.
to NEADS more advanced in their readiness for formal
training than those who live with families. Source: Organization Web site, http://www.neads.org.
BIZ FLIX VIDEO CASE

Apollo 13 causing unknown damage to the command module. Be-
This fi lm re-creates the heroic efforts of astronaut Jim fore the scene takes place, the damage has forced the
Lovell (Tom Hanks), his crew, NASA, and Mission Con- crew to move into the LEM (Lunar Exploration Mod-
trol to return the damaged Apollo spacecraft to earth. ule), which becomes their lifeboat for return to earth.
Examples of both problem solving and decision making
occur in almost every scene. See the earlier Biz Flix exer- What to Watch for and Ask Yourself
cise for more information about this fi lm and a discus- 1. What triggers the confl ict in this scene?
sion of another scene. 2. Is this intergroup confl ict or intragroup confl ict?
This scene takes place during day five of the What effects can such confl ict have on the group
mission about two-thirds of the way through the film. dynamics on board Apollo 13?
Early in Apollo 13’s mission Jack Swigert (Kevin Bacon) 3. Does mission commander Jim Lovell successfully
stirred the oxygen tanks at the request of Mission manage the group dynamics to return the group to a
Control. After this procedure, an explosion occurred, normal state?
6 CHAPTER 15
CONTROLLING Information Management Systems
CHAPTER 16
Control: Purpose, Process, and Techniques
Getty Images
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LEARNING OBJECTIVES
INFORMATION After studying this chapter, you should be able to:
MANAGEMENT 1 Describe the seven characteristics of useful information
SYSTEMS Describe the three functions of an effective information

2 system (IS)
Describe the five guidelines for establishing an information

3 system (IS)
Describe the basic functions of a computerized information

4 system (CIS)
Describe the two basic data-processing modes

5
Discuss the various methods used for linking computer
6 systems
Explain the purposes of decision support systems (DSSs)

7
Discuss the four challenges that must be met by managers
8 of an information system
Getty Images
Boeing: Networked Company
The Boeing Company is the largest aerospace com-
pany in the world, employing more than 153,000 peo- W. James (Jim) McNerney Jr.
ple in some 67 countries. It is the number one U.S. Born: 1949, Providence, Rhode Island
exporter in terms of sales, with customers in 145 Current Position:
Chairman of the Board, President and Chief Executive
countries around the world. W. James (Jim) McNer-
Officer, The Boeing Company
ney Jr. is Chairman of the Board, President, and CEO Career Highlights:
of Boeing. He oversees the strategic direction of the 1975 Brand Manager, Proctor & Gamble
company. 1978 Senior Manager, McKinsey & Company
Technology is being used by Boeing for a stra- 1982 General Manager, GE Mobile Communications
tegic advantage in the highly competitive aerospace 1988 President, GE Information Services
industry. More specifically, Boeing is using technol- 1989 Executive Vice President, GE Financial Services
ogy to transform its manufacturing process. “The and GE Capital
company is no longer just a manufacturer, but also 1991 President and Chief Executive Officer, GE Electrical
Distribution and Control
a high-end systems integrator. We are a technology
1993 President, GE Asia-Pacific
company,” says Scott Griffin, Vice President and CIO 1995 President, GE Lighting
(Cone). 1997 President and Chief Executive Officer, GE Aircraft
A result of this transformation is the superef- Engines
ficient Boeing 787 Dreamliner, Boeing’s first en- 2000 Chairman and Chief Executive Officer, 3M
tirely new model in a decade. The company says the 2001 Chairman of the Board, President and Chief
Dreamliner “provides passengers with a better flying Executive Officer, The Boeing Company
experience and operators with a more efficient com- Education: Yale University, BA, 1971; Harvard
mercial jetliner. Using 20 percent less fuel per pas- University, MBA, 1975
Personal: Married, five children
senger than similarly sized airplanes, the 787 is de-
signed for the environment with lower emissions and Sources: International Directory of Business Biographies,
W. James McNerney Jr., http://www.referenceforbusiness.com/
quieter takeoffs and landings. Inside the airplane, pas- biography/M-R/McNerney-W-James-Jr-1949.html; Boeing,
sengers will find cleaner air, bigger windows, more Executive Biographies, http://www.boeing.com/
stowage space and improved lighting” (Boeing, “787 companyoffices/aboutus/execprofiles/mcnerney.html.
Dreamliner”).
s, and
Teams of customers, suppliers, and employ-
m , fu el c ost ing 787
ees designed the plane. The name “Dreamliner”
e d b y terroris ef fi cient Boe is -
g e h
is the result of an Internet customer survey. challen launch of th l airline de
dustr y e mercia a
“Boeing joined with AOL Time Warner and In an in regulation, th essful in com odel in a dec d op -
m p le x s t s u c c n e w m e r s a n
o g
launched a ‘Name Your Plane’ effort involv- c
b e e n the mo fi r s t e ntirely
e fo r p assen the 787
ing people from around the world to choose h as is the rienc ion of -
he 787 e flying expe plished creat yees. Interna
from among four potential names: Dreamliner, tor y. T v e s t h c c o m m p lo n i-
pro ga de mu
eLiner, Global Cruiser and Stratoclimber” (Talk- and im reatly. Boein ustomers, an d better com and
e r a to r sg te a m s ,c fa c il it a te q u a li t y,
ing Proud). In the past, global partners worked orking ration p roved reamliner”
n e t w o ll a b o s , im
by ic c ake “D
from a common blueprint to produce parts and
lectron er mist e n a me
sections of the airplane. Many times, the sec- tional e sulting in few hips. Even th y.
, re o ns r ve
tions did not fit and delivery of the plane was de- cation orking relati customer su
b e t te rw In te r n et
layed. On the Dreamliner,
rom an
c ame f
parts are designed concurrently by partners,
and virtually “assembled” in a computer model
maintained by Boeing outside its corporate
© Smiths Group/PrimeZone Photos
firewall. “We have different people building dif-

ferent pieces by creating data that is assembled
and checked in real time,” says Griffin, who
is responsible for the computer systems that
make this process possible. Ultimately, com-
pleted sections of the plane will be picked up
by three specially fitted 747s and carried to a
Boeing facility in Everett, Wash. Thanks to the
online modeling, Boeing can now trust its global
500 Part 6 Controlling
partners with the process of creating entire sections of the plane, from concept to
production (Cone).
A global network of collaborators has given Boeing a competitive advantage. The Dream-
liner design involves companies in the United States, Japan, Russia, and Italy. The roles
and responsibilities of each partner are clearly defined. Vern Broomall, Vice President for
Quality, Engineering and Technology at Vought, says, “There is a real difference in the
business approach, with Boeing taking the role of integrator and the interface to the air-
lines, and the partners taking responsibility for the major pieces, including their design. We
work directly with the Japanese and the Italians, and have an excellent working relationship
with them, while Boeing facilitates the work for all of us” (Cone). Expensive mistakes have
been avoided, quality is improved, and speed to market has been accomplished. What is
the result? The Dreamliner is the most successful commercial airplane launch in history.
Sources: The Boeing Company, http://www.boeing.com; Boeing Web site, 787 Dreamliner, http://www.boeing
.com/commercial/787family/background.html; Edward Cone, “Boeing: New Jet, New Way of Doing Business,”
CIO Insight, March 6, 2006, http://www.cioinsight.com/article2/0,1540,1938894,00.asp; Talking Proud, “The
Boeing 7E7 ‘Dreamliner,’ a plane designed for manufacture and the customer,” http://www.talkingproud.us/
ScienceDreamliner.html.
Introduction
Managers continually make decisions that affect and are within the framework
of their organization’s mission, vision, core values, policies, ethical standards,
and culture. As leaders, they implement change and guarantee customer satis-
faction by setting goals, monitoring progress toward them, and creating and
maintaining effective and efficient workers and work environments. To do all
this successfully, they must have support from a variety of sources.
information technology (IT) This chapter examines information technologies (IT)—means for imple-
Manual and electronic means menting business strategy, creating and handling intellectual capital, and facili-
for creating and handling intel-
lectual capital and facilitating tating communication—as they relate to an information system (IS). Information
organizational communication management can be done manually, but most organizations rely on computers,
which are much faster and more accurate than humans. Taking advantage of de-
information system (IS)
An organizational subsystem velopments in technology and methodology to increase the level of decision sup-
enabling an organization to ef- port, the concept of an information system was introduced in the mid-1960s. An
fectively and efficiently share information system enables an organization to effectively and efficiently share
intellectual capital and create
and maintain a working environ- intellectual capital, and create and maintain a working environment in which
ment in which employees can employees can exploit it. Managers “must ensure that all employees have access
exploit it to information. . . . In the information age, a company’s survival depends on its
ability to capture intelligence, transform it into usable knowledge, embed it as
organizational learning, and diffuse it rapidly throughout the company.” 1
Information and the Manager
1
Describe the seven
characteristics of useful
information
Data are unprocessed facts and figures that—until they are gathered, sorted,
summarized, processed, and distributed to those who need them—are of little
value. Data include such things as sales figures, costs, inventory items and quan-
tities, customer complaints, and government statistics on the performance of the
economy.
data Information results from processing data through information technologies.
Unprocessed facts and figures The result must have value and be useful to decision makers everywhere in an
organization. “To have value, information must be linked to other information.
Only then does it become a source of knowledge and the basis of organizational
learning.” 2 For example, Tuesday’s total sales figures become more valuable to a
Chapter 15 Information Management Systems 501
store manager when they are broken down by salesperson, department, and in- information
ventory item. To be useful, information must have value and be understandable, Data that have been deliber-
ately selected, processed, and
reliable, relevant, complete, concise, timely, and cost-effective. These character- organized to be useful to an in-
istics are described in Figure 15.1. Examples of information include quarterly dividual manager
sales projections, annual budgets, daily sales summaries by inventory item, and
an organization’s primary fi nancial statements. Along with its people, any orga-
nization’s most vital resource is information.
Figure 15.1 Characteristics of useful information
• Understandable information is in suitable (correct) form and uses appropri-

ate terms and symbols that the receiver will know and interpret properly. When
jargon, abbreviations, shorthand notations, and acronyms are used, the person
receiving the information must be able to decode them.
• Reliable information is accurate, consistent with fact, actual, and verifi able.
The sources of the information, and the people who gather and process it, must
be trustworthy. Reliable information will be as free from fi ltering and rephrasing
as possible. Sales figures that have not been adjusted for returns and refunds
are not reliable. Stating the value of a company’s assets without showing the
claims against them by others inaccurately portrays the real fi nancial situation.
• Relevant information pertains to a manager’s area of responsibility and is
essential for the manager to have. Information about maintenance costs of
the company’s truck fleet, for example, is needed by only a few managers.
Irrelevant information can waste a manager’s time.
• Complete information contains all the facts that a manager needs to make
decisions and solve problems. Nothing vital is left out. Managers with incom-
plete information are handicapped. Although information cannot always be
complete, every reasonable effort should be made to obtain whatever
information is missing.
• Concise information omits material that is extraneous. Just enough—no
more, no less—is received by those in need. Giving managers a 200-page
computer printout to wade through wastes their time. Summaries of key infor-
mation, leaving out the details and supporting documents, may be all that is
needed. Whenever appropriate, information should be displayed using visual
devices such as charts, graphs, and tables. A standard used in the legal
profession offers a sensible guideline: include only that which is necessary
and sufficient.
• Timely information comes to managers when they need it. Premature infor-
mation can become obsolete or be forgotten by the time it is actually needed.
Information arriving after the time of need is likewise useless. Timeliness is one
reason why so many managers rely on computers; they help managers to moni-
tor events as they happen and obtain the real-time information and instant feed-
back necessary for spotting trends and reacting promptly to circumstances and
events.
• Cost-effective information is gathered, processed, and disseminated at rea-
sonable cost. A weekly detailed survey of all of a company’s customers might
delight the sales manager, at least until the survey costs were matched against
revenues. A scientifically conducted periodic survey of consumers is likely to
yield comparable results at more acceptable cost.
In this chapter’s opening case, Boeing’s global partners use technology to

collaborate in real time on the 787 Dreamliner. “The high-level, real-time col-
laboration with its design partners is ‘the differentiator.’ It’s key to how the trail-
ing edge of the wings, and the place where the wings attach to the body, can be
built halfway around the world from each other and still be parts of a safe and
stable aircraft.” 3 Some of Boeing’s partners and their contributions can be seen
in Figure 15.2. Today, more than ever before, speed is the key to productivity
digital and competitiveness. Adopting digital technologies—converting from atoms to
Data expressed as a string of bits—is giving companies a competitive edge. We discuss going digital in more
0’s and 1’s and transmitted or
stored with electronic technol- detail later in this chapter.
ogy, usually computers and the Managers require a wide variety of information, depending on their posi-
Internet tions. Functional information—about marketing, production, fi nance, and per-
sonnel—is needed by both line and staff managers. Information gathered or gen-
erated by staff personnel—legal, public relations, computer services, or research
and development—may be useful to some line managers as well. Production
managers need timely information about inventories, schedules, materials and
labor costs, and the maintenance and serviceability of machines and equipment.

Supervisors in marketing need sales figures (by stores, departments, and prod-
ucts), order-processing times, inventory levels, delivery schedules, and market-
research fi ndings. Finance and accounting managers need fi nancial statements,
payroll figures, accounts-receivable and accounts-payable numbers, asset valua-
tions, budgets, and cost data. Regardless of the information needed, an organi-
zation’s management system must provide it effectively and effi ciently to those in
need. Says one authority succinctly, “Information provides the substance for co-
ordinating every aspect of the management process.” 4
Top-level managers need information on economic conditions, competitors,
legal and political developments, technological innovations, customers’ needs
for and acceptance of the company’s products and services, and progress of op-
erational units toward the organization’s goals. Middle managers need informa-
tion on their particular divisions’ operations, including sales, costs, production
output, personnel employed, and budget status. The primary difference between
what is needed at the top and what is required in the middle lies in the source
of information. Much of what top management requires comes from external
sources. Most of what middle managers require comes from internal sources—
observations, meetings, and reports.
Lower-level managers and autonomous teams need information and feed-
back about daily, weekly, and monthly activities. The sales manager needs to
know how the salespeople are spending their time and the results they gener-
ate. Production people need to know the figures on waste, quality, productiv-
ity gains, units produced, and schedules met. Personnel may require daily and
weekly figures on safety, attendance, new hires, interviews conducted, and job
openings. With today’s emphasis on empowering workers and staying close to
the customer and supplier, feedback from these sources is essential for quick re-
sponses to the manager’s needs as well as the organization’s.
Besides ensuring that information is useful, managers “must build a net-
work through which all members of the organization can exchange information,
develop ideas, and support one another. To do so, they must nurture the hori-
zontal information flows.” 5 In other words, managers must practice open-book
management. This form of management is essential if an organization’s intellec-
tual capital is to deliver its maximum potential. The term knowledge manage- knowledge management
ment (KM) describes the merging of a company’s human and technical knowl- (KM)
The merging of a company’s hu-
edge assets.6 man and technical knowledge
Knowledge management software, or expertise-profi ling engines, can be assets
purchased or developed by a company. In order to fi nd solutions for hard-to-
fi x problems, Xerox came up with Eureka, an online knowledge-sharing system
designed to help its service engineers with time-consuming and tough-to-tackle
repair problems. Ray Everett, a field engineer for Xerox in the early 1990s and
now Program Manager for Eureka, says that the impact was both powerful and
immediate. “You went from not knowing how to fi x something to being able to
get the answer instantly. Even better, you could share any solutions you found
with your peers around the globe within a day, as opposed to the several weeks
it used to take.” 7 See this chapter’s Managing Technology for a diagram of Xe-
rox’s Eureka.
As the need for new information grows and as the organization evolves, so
too must the ways in which the organization gathers, processes, stores, and dis-
seminates information. The information system must be continually updated to
provide what is needed.
Management Information Systems

An information system (IS) exists to serve all employees, and all employees must
have input into their organization’s IS if the system is to function properly. This
means that workers should be able to effectively access and use the IS and its
management information outputs. A management information system (MIS) is a subsystem within an or-
system (MIS) ganization’s IS. It is designed to serve the specific information needs of all de-
A formal collection of processes
that provides managers with cision makers—managers as well as empowered individuals and teams. It is a
suitable quality information to formal collection of processes that provides managers with the quality of infor-
allow them to make decisions, mation they need to make decisions, solve problems, implement change, and cre-
solve problems, and carry out
their functions and operations ate effective and efficient working environments.
effectively and efficiently Computers and the Internet make the process of gathering intelligence eas-
ier. Yet many managers can’t always get everything they need by using just one
application from one MIS. Instead of going to one central system to retrieve in-
formation, it is more common to have to go to many places to get needed in-
formation. Too much data are coming into most organizations from too many
directions. Hundreds of electronic sources flow into companies separately. In
fact, many companies subscribe to different information products from different
publishers in different formats.
Calling to mind our system model from earlier chapters, we can describe an
IS or an MIS as one that
gathers and transmits data (input); it combines and files data (conver-
sion); and it retrieves, formats, and displays information (output). In ad-
dition, [ISs and] MISs have managers who monitor progress and take
corrective action to solve problems and keep the system[s] going. 8
Information provided to managers through their MIS helps them to control
operations and properly use their resources. Information systems offer input to
monitor ongoing operations as well as measure the results of these operations.
Information helps to highlight actual and potential problems by keeping manag-
ers in touch with current conditions and trends. Information also gives managers
the data they will need to create, and help their MIS create, forecasts and both
strategic plans and operational plans. See Figure 15.3 for an example of an MIS.
Functions of an Effective Information System (IS)

ISs and MISs must be designed with their users’ needs in mind. In addition to
linking individuals and their subsystems, they must link an organization to all
external customers, partners, and suppliers. Besides creating and providing valu-
able and useful information, an IS and an MIS should perform three functions:
1. Assist organizations and their members in achieving their objectives. In-
2
Describe the three
functions of an effective
information system (IS)
formation systems should augment, enable, and facilitate, but not interfere
with processes and operations.
2. Facilitate information access. Ideally, people in need of information should
be able to obtain it directly—that is, in person or with the assistance of ap-
propriate technologies. When access in this manner is not possible, appro-
priate support personnel should provide the access.
3. Facilitate information flow. The proper quantity and quality of information
must flow in the fastest, most direct way to those who need it, when they
need it.
Guidelines for Developing an Information System (IS)

Developing an IS and MIS usually begins with the formation of a task force
or committee that will conduct an organizationwide assessment of existing
technologies and practices. An inventory is taken of equipment on hand; ma-
chine capabilities, along with the skills of the personnel who run them, are de-
termined. A survey of current information practices is conducted to determine
3
Describe the five
guidelines for establishing
an information system (IS)
how effectively and efficiently employees are meeting their needs for informa-
tion. Inefficiencies and unmet needs are recorded. Finally, the organization’s cul-
ture and climate must be analyzed to determine how the two factors support
current practices and how they might affect the implementation of any new sys-
tems. (Overcoming resistance is discussed in the Managing Information Systems
section of this chapter.) By beginning with a knowledge of what is, investigators
can then concentrate on creating an IS and MIS in line with the three functions
listed earlier.
Whether seeking to establish a new IS or MIS, or to improve an existing sys-
tem, an organization should follow these five guidelines:
• Involve users in the system’s design. Where computers will form the heart
of the system, users should be consulted on choices of hardware and soft-
Figure 15.3 A simplified MIS for an oil company
Domino Oil Company

Data Sources Management Information System
Field Production Data

• barrels of oil
• cubic feet of gas
Internal Budget Data Information Users

• revenue data
• expense data Engineering Department
Marketing Department
Partnership
Arrangement Data
• drilling status
• work in progress
Finance Department
Data Analysis/
Entry Filtering
Decision-
Making
Operating Division Data Information Geology Department
• acquisitions
• leaseholds
• operating expenses
Human Resource
Department
Service Bureau Data

Accounting Department
• geological studies
• government statistics
Industry Data
• trends
• competition
ware. Make certain that components are user-friendly and fully compat-
ible—able to communicate with one another. Because the information spe-
cialists (such as system-design people and IS personnel) will not be using the
information they help to prepare and disseminate, they need the guidance of
those they are to serve.
• Establish clear lines of authority and leadership for the IS personnel. If the
group is to operate a centralized IS serving the entire organization’s needs,
place it under the control of a top-level manager—a chief information of-
ficer. If decentralization is chosen, establish unambiguous links and guide-
lines for those on lower levels to use while running their data centers; link
them to the top for control, coordination, and guidance. For this purpose,
many fi rms use a standing committee composed of department heads, IS su-
pervisors, or a mixture of both.
• Establish clear procedures for gathering, sorting, interpreting, displaying,
storing, and distributing data, and for interacting with the system. Struc-
ture reduces fear and helps to guarantee security, uniformity, quality, and
productivity.
• Where technical specialists are used, ensure that both they and the peo-
ple they support fully understand each specialist’s function and role. Many
organizations, such as Hallmark Cards, provide information guides—
information and technical specialists who can direct people to the proper
sources and help them with access problems, thus saving time.
• Build an IS and MIS staff of sufficient quantity and with sufficient skills
needed to adequately provide services. Keep personnel up to date with contin-
ual training and avoid under- and overstaffi ng; both degrade service quality.
Computerized Information Systems

It is difficult to imagine how a company in any industry of any size can effec-
tively operate without the benefits of information technology. When electroni-
cally linked to customers, suppliers, and partners, businesses can conduct oper-
ations at any time, anywhere. The improvements in speed, accuracy, and cost of
operations made possible by computers and their software are just too great for
4
Describe the basic
functions of a
computerized information
system (CIS)
any company to do without. As authors and consultants, James R. Mensching
and Dennis A. Adams report:
[A]lmost all forms of organizations are dependent on digital computer
technology to process information. With the tremendous advances in
microcomputers, office automation, robotics, telecommunications, and
computer-aided manufacture and design, computer technology is affect-
ing almost all aspects of business. . . . Computers have become so impor-
tant to some firms that the successful administration of the information
system can mean life or death for the organization.9
A computerized information system (CIS) is an IS built on computers and computerized information
their related hardware (peripherals) and software. According to Price Pritchett system (CIS)
An MIS built on computer hard-
in New Work Habits for a Radically Changing World, from 1983 to 1998 the ware and software to collect
workforce in the United States added more than 25 million computers.10 Gart- and process data and store
ner Dataquest statistics tell us that the billionth computer was shipped sometime and disseminate the resulting
information
in April 2002, “which means roughly one for every six souls on the planet. And
climbing. The same fi rm estimates that PC No. Two Billion will ship sometime
in 2007. . . . And Gartner estimates that of the billion shipped, about half are in-
stalled, and most connected to the Internet.” 11
Computers began as an engineering tool and later as a means of storing
data. Today they are essential to business. Software for word processing and
spreadsheets has changed the way business is conducted.
Below is a timeline of business applications for which the computer was

used.
1960s—Computers were used by banks to automate check processing, with

Electronic Recording Machine Accounting (ERMA).
1970s and 1980s—Computers were used to send and receive purchase or-
ders, invoices, and shipping notifications electronically via Electronic Data
Interchange (EDI), a standard for compiling and transmitting information
between computers, often over private communications networks called
value-added networks (VANs). However, the expenses related to installa-
tion and maintenance of VANs put electronic communication out of the
reach of many small and medium-sized businesses.
1980s—The computer enabled engineers, designers, and technicians to ac-
cess and work on design specifications, engineering drawings, and tech-
nical documentation via internal corporate communications networks—
computer-aided design (CAD), computer-aided engineering (CAE), and
computer-aided manufacturing (CAM).
1990s—The Internet made electronic commerce affordable to even the
smallest home office. Companies of all sizes began communicating with one
another electronically, through the public Internet, intranets (networks for
company use only) or extranets (a company and its business partners), and
private value-added networks.
A U.S. Department of Commerce Report, “A Nation Online: How Ameri-

cans Are Expanding Their Use of the Internet,” provides an insightful look at
how managers use a computer at work:
The proportion of people using a computer at work was 80.5 percent for
people in managerial and professional specialty occupations. . . . Work-
ers in managerial and professional specialties, as well as technical, sales,
and administrative support, are the most active users of the Internet and
e-mail, word processing, spreadsheets and databases, and calendar and
scheduling.12
Figure 15.4 depicts the top four computer uses by occupation.

Computerized information systems may be centralized or decentralized. Af-
ter a brief explanation of each, we examine computer operations.
The centralized CIS is under top management’s direction and control, usu-
ally through the office of a chief information officer (CIO). This CIS serves to
assist other units of the organization to function in a more effective and

efficient manner. Unless the information systems area also sells comput-
ing services to external users, it will not produce an end product or gen-
erate external revenue. Hence, it is of the utmost importance that the
managers within the information systems area understand the opera-
data center
A unit of a decentralized CIS tions of their client departments and the company as a whole.13
that operates to serve its unit’s
members with their own sets of A CIS functioning both at the top and at other management levels is said to
hardware, software, and spe-
cialists (machine operators and be decentralized. Each unit of a decentralized CIS is called a data center and op-
programmers) erates to serve its unit’s members by providing them with their own sets of hard-
Figure 15.4 Top four computer uses by occupation (percent of employed persons 25 & over)
Word
Processing, Spread-
Internet, Desktop sheets, Calendar,
E-mail Publishing Databases Scheduling
Total 41.7 38.8 35.9 30.4
Managerial and Professional Specialty 66.8 63.2 56.6 48.8
Technical, Sales, and Administrative Support 49.2 45.5 43.1 34.7
Service 13.9 14.3 11.8 12.3
Precision Production, Craft, and Repair 19.0 14.8 16.6 14.6
Operators, Fabricators, and Laborers 9.2 7.6 8.7 7.0
Farming, Forestry, and Fishing 14.6 13.0 13.2 9.2
Source: NTIA and ESA, U.S. Department of Commerce, using U.S. Census Bureau Current Population Survey Supplements.
ware, software, and specialists (machine operators and programmers). The ba-
sics for operating a decentralized CIS include the following:
At a minimum there must be data exchange standards established so that
files can be easily transferred. For the sake of economy and efficiency,
many firms find it best to establish company-wide standards such as
those for hardware and software compatibility. Not only does this allow
for the exchange of data but, more importantly, it encourages the shar-
ing of resources and the uniformity of reports.14
Centralized or decentralized, a CIS must deliver the basic functions shown end-user computing
in Figure 15.5. The use of information technol-
ogy (IT) by people who are not
Decentralized CISs result in end-user computing: the use of information controlled and directed by top
technology (IT) by people who are free from control by top management. Al- management
Figure 15.5 The basic function of a CIS
FUNCTION DESCRIPTION
Computer Operations Runs the system; involves starting jobs, mounting the proper input
and output volumes, and responding to problem conditions
System Programming Installs and maintains the operating system and associated system
software
Data Entry Enters data in machine-readable form
Application Program Development Writes new application systems
Application Program Maintenance Corrects and updates existing application systems
Data Management Assures data security, access, integrity, and usability
Communications Management Configures and maintains the network
End-User Computing Helps and educates users
Source: From Managing an Information System by James R. Mensching and Dennis A. Adams, p. 56. © 1991 by Prentice Hall Inc. Reprinted by
permission of Pearson Education Inc. Upper Saddle River, NJ, 97458.
though end-user computing can stimulate innovative problem solving and deci-
sion making, it does present managers with collateral problems.
The fi rst problem concerns control. Efforts must be made to coordinate mul-
tiple end-users’ computing efforts in order to avoid duplication of work and con-
sequent waste. Top management and other units must be encouraged to share
useful approaches with one another and keep one another informed of projects
and processes.
A second problem concerns possible duplication of expensive software and
hardware. Planners must ensure that such components are fully compatible—able
to efficiently share and exchange data through suitable interfaces and networks.
The third problem lies in the challenge of obtaining orderly, authorized ac-
database cess to both the organization’s systems and to its database—a collection of data
A collection of computerized arranged for ease and speed of retrieval. In today’s business environment, em-
data arranged for ease and
speed of retrieval; sometimes ployees and customers want immediate access to information. So, successful
called a data bank Web sites have databases, which involve the exchange and sorting of informa-
tion. As long as users have a Web browser and an Internet connection, they can
access data via the Internet. A database might simply be a list of names and ad-
dresses to which are added all the facts the organization thinks might be relevant
for communicating better with its customers. Another database might be the
catalog of products offered. Databases help organizations to explore and answer
questions. Users interact directly with the database to retrieve information.
Much of the selling on Amazon.com is based on the effective use of data-
base technology. For example, repeat Amazon customers are greeted by name
and are given personalized book recommendations. The technology is called
collaborative filtering. It looks at the customer’s past purchases and compares
them with other customers in aggregate. It makes a reasonably insightful guess
as to what other things might interest the customer.
Databases rank among some organizations’ most valuable assets: loss or im-
pairment may shut down the enterprise cold. Imagine American Express or the
New York Stock Exchange or Verizon with their computers down. A lack of
trained users or inadequate controls over access and scheduling renders systems
and components vulnerable to damage or compromise.
Databases may be created internally, by outsiders, or both. Accessing out-
side databases can be useful but expensive. Because external users are com-
monly billed by the amount of time they are in contact with a commercial data
source, one of a fi rm’s database users may be able to acquire information and
then share it with others within the organization, thus avoiding duplication in
time and billing. Also, external users may subscribe to a service. An example of
an outside database is LexisNexis, a provider of information to professionals in
the legal, risk management, corporate, government, law enforcement, account-
ing, and academic markets.
The remainder of this chapter concentrates on management information
systems that are at least partially computerized and thereby qualify as fully or
partially computerized information systems.
Computer Operations
operating system
Computer hardware consists of input devices, a control unit, a central processing
An extensive and complex set unit (CPU), storage devices, and output devices. A computer system also includes
of instructions that manages software—the programs that give the hardware the instructions for processing
the operation of a computer and
the application programs that
and storing data. Computer software encompasses two fundamental classes of
run on it programs: operating systems and application programs. An operating system
comprises “an extensive and complex set of programs that manages the opera-
tion of a computer and the application [programs] that run on it.”15 In other
words, it is the collection of computer programs that controls how the computer
works.
Computer manufacturers design their computers to run on one or more op-
erating systems. The PC was introduced by IBM in 1981 and revolutionized
communication. It was built over an Intel processor (8088) and fitted to Mi-
crosoft’s operating system MS-DOS. The great majority of the IBM-compatible
PCs use a graphical user interface based on Microsoft’s Windows. Apple Macin-
tosh computers employ a different operating architecture altogether, and large
IBM machines (mainframes and minicomputers) run on MVS, DOS/VSE, and
Linux operating systems.
Application programs are software programs designed to execute specific application program
sets of tasks, such as word processing, graphic design, accounting and finance, A computer program designed
to execute specific sets of tasks
production operations and marketing, personnel and inventory control, and such as word processing
many more. Some are specially designed (and programmed) in house, whereas
others may be purchased commercially from a vast array of options. Among
well-known off-the-shelf programs are Adobe Photoshop, Quicken, and Micro-
soft Office (Word, Excel, PowerPoint, and Access). Microsoft Outlook is a pop-
ular e-mail program.
Custom-developed programs include many of Boeing’s design and engineer-
ing packages, Norfolk Southern’s computer-aided reporting system, and the
SABRE travel reservation system. System designers fi rst consider the software
that will meet the company’s needs and then select equipment that can run that
software. Care must be taken to ensure that user groups and units within the
company can use all equipment and software interchangeably. In the case of the
SABRE reservation system, outside users, such as travel agents, must be able to
access it as well.
Data-Processing Modes
Two data-processing modes are commonly used in the business setting: batch
processing and transactional processing. In batch processing, data are collected
over time and entered into data banks according to prescribed policies and pro-
cedures. For example, a clerk may collect orders from outside salespeople and
enter them into the order database at the end of each week.
5
Describe the two basic
data-processing modes
batch processing
In transactional processing, data are received about a company’s ongoing A computer procedure in which
operations and entered into data banks as each transaction occurs. In order to data are collected over time and
accomplish the intended utility of transactional processing, certain kinds of in- entered into databases accord-
ing to prescribed policies and
formation must be entered into the system in real time, or as close to real time as procedures
possible. Without such immediacy, these data would be unavailable to users and
managers when needed. Bank automated-teller machines (ATMs) record trans- transactional processing
A computer procedure in which
actions in the computer’s memory as they occur; travel agents book reservations data are received about a com-
directly into the database. Most CISs are built around transactional processing pany’s ongoing operations and
to yield the best results. entered into data banks as each
transaction occurs
Linking Computer Systems
In an ideal world, all companies and their employees would have identical and
up-to-date computers and software and be able to communicate with one an-
other effortlessly. The reality, however, is that companies, as well as their cus-
tomers, suppliers, and partners, use a great variety of information technologies,
each with differing capabilities and operating standards.
6
Discuss the various
methods used for linking
computer systems
How, then, do you get hundreds of computers, made by dozens of manufac-

turers, operating on scores of different networks, and using many different soft-
ware programs to communicate with one another? The answer lies in making
them compatible through the use of middleware—software that creates compat-
ibility links between similar networks, software programs, and their computers.
In banking, for example, “middleware lets each computer—at a credit reporting
agency or at a branch—continue operating independently yet, without repro-
gramming, cooperate intimately with the others.” 16
networking The electronic linking of two or more computers is called networking. Such
The electronic linking of two linkage—supported by servers, bridges, PBXs, gateways, and modems—allows
or more computers
computers to communicate directly—for example, by e-mail and fi le sharing—
through cables, wires, microwaves, cellular or radio networks, or fiber optics.
A network is a group of interconnected computers, including the hardware
and software used to connect them. Local area networks (LANs) link computers
throughout a facility, allowing for the transmission of data at about ten million bits
(megabits) per second; they can be linked through the use of a bridge. Wide area
networks (WANs) link computers and their LANs to those at remote locations,
including computers linked to the Internet—a worldwide network of computers
linked by phone lines. Most businesses use WANs to link their remote operations
and to connect them to the operations of their customers, partners, and suppliers.
The Internet is an open network of computers providing a worldwide means
of information exchange and communication. The Internet allows people who are
often significantly removed from each other in time, space, thought, and emotion
to connect with others and to be contacted by others, almost anywhere and any-
time. Voice, video, and data signals can be carried simultaneously over one phone
line. A modem links the line, through a gateway, to a computer and its LAN.
The Internet exists wherever devices communicate over publicly accessible
networks that use a protocol called TCP/IP (Transmission Control Protocol/
Internet Protocol). Protocol refers to the rules and standards for transferring
information between computers. Some of the most common TCP/IP protocols
are SMTP for e-mail, NNTP for Usenet news groups, FTP for file transfer, and
DNS for servers exchanging directions with each other. The World Wide Web is
another such subset of the overall Internet, a system in which hypertext infor-
mation, in a format called HTML, or hypertext markup language (a standard
language for creating documents), is exchanged via a protocol called HTTP, or
hypertext transfer protocol. TCP/IPs are also widely used to build private net-
works, called intranets, that may or may not be connected to the Internet.
Metcalfe’s Law explains the viral growth of the Internet. It says that as more
and more people connect to a system, the network of contacts gains value, en-
ticing even more people in . . . and so on. As this text has so often pointed out,
“The biggest payoff from networking comes when companies use it to do better
by their customers [and suppliers].” 17 For example, at a hotel Web site, Internet
users link directly to a reservations database. Actual reservations can be made
by credit card; various security devices protect users. See this chapter’s Ethical
Management feature concerning security and privacy issues.
7
CIS Management Tools
Effective managers use every available asset to accomplish their jobs. Few assets
rival the computer for sheer utility in helping managers plan, organize, staff,
Explain the purposes of
decision support systems lead, and control. Among the great strengths of computer technology is the abil-
(DSSs) ity to automate the data processing that underlies a sound MIS. The power and
Chapter 15 Information Management Systems
a g es
Staying Close to Customers Can
Get t y Im
Get You Too Close
In an effort to get and stay close to their customers, com- be used for future sales efforts when smart, aggressive
panies are moving deeper into what is called database salespeople ask you specific marketing-driven questions.
marketing—collecting all the information available about Customer feedback of all kinds is sought and used to help
customers into a central database and using that infor- improve operations, products, and services. Companies
mation to drive targeted marketing efforts, such as prod- store this information in their databases and often share it
uct development and advertising messages. After all, the with other merchants. Your state’s department of motor
more companies know about you and your needs, the bet- vehicles might sell your driver’s license information. Credit
ter they can help you to meet them. Many companies re- bureaus specialize in selling your credit history.
quire a customized approach. Off-the-shelf won’t do. For • What privacy issues are raised here?
this reason and others, many companies routinely practice • What safeguards do you want businesses with
open-book management with their suppliers and partners. information about you to exercise?
When you shop by mail, in person, or on the Internet, • What laws are you aware of that deal with protecting
you distribute a lot of personal information to others—your your privacy?
name, address, phone number, e-mail address, credit card Source: U.S. Federal Trade Commission, Privacy Initiatives, http://
numbers, and so on. In addition, you provide data that can www.ftc.gov/privacy/index.html.
flexibility of most computer systems is limited only by the imagination of their

users. However, it’s important to remember, as the editors of a respected man-
agement handbook caution their readers, “Computers do not have the feelings,
perceptions, or flexibility of the human mind.” 18
Decision Support Systems To harness the immense quantities of data now

accessible to managers, imaginative thinkers have devised a specialized variant
of a CIS, the decision support system (DSS). In general, the MIS produces a
standard report according to a schedule. Unlike with an MIS, a decision maker
can interact directly with the decision support system (DSS), which adds speed decision support system
and flexibility to the decision-making process. This analytic model joins the (DSS)
A specialized variant of a CIS;
manager’s experience, judgment, and intuition with the computer’s data access, an analytic model that joins a
display, and calculation strengths.19 Decision makers can access databases to manager’s experience, judg-
produce nonstandard reports that can be used on a problem-to-problem basis. ment, and intuition with the
computer’s data access, dis-
Managers can analyze, manipulate, format, display, and output data in different play, and calculation processes;
ways. The DSS provides a modeling function to help interpret the information allows managers to interact
retrieved. Each DSS is developed and adapted to support a fi rm’s own decision with linked programs and data-
bases via the keyboard
problems. DSS programs are available off the shelf or may be tailored in house.
With such a system, a marketing manager may ask the computer, “What hap-
pens to sales if we lower prices by 10 percent?” The system will manipulate the
model and stored data, then present likely outcomes: production volume, sales,
expert system
inventories, revenues, and costs. A specialized end-user decision
Specialized end-user decision support programs include the expert system, support program that stores the
software that stores the knowledge of a group of authorities for access by non- knowledge of a group of author-
ities for access by nonexperts
experts faced with the need to make topic-related decisions. 20 To build such a faced with the need to make
system, information specialists study an expert’s way of analyzing an issue or topic-related decisions
solving a problem; then they write a program that simulates the expert’s meth-
ods and techniques.
artificial intelligence (AI) Expert systems are a kind of artificial intelligence (AI)—the capability of
The ability of a machine to per- computers to learn, sense, and think for themselves. Other branches of AI in-
form those activities that are
normally thought to require include voice-recognition systems, speech synthesis programs, computer vision
telligence; giving machines the programs, and neural networks. According to Purdue University engineering
capability to learn, sense, and and computer technology professor Ray Eberts, “A neural network is a com-
think for themselves
puter program modeled after the brain that can learn to perform tasks and make
decisions based on past examples or experience.” 21 Basic variations of expert
systems using neural networks currently help to diagnose and analyze medical,
legal, and mechanical problems for doctors, lawyers, and garage mechanics.
group decision support Yet another variant decision support system is the group decision support
system (GDSS) system, or GDSS. The GDSS allows a group focusing on a problem, like a prod-
A variant decision support sys-
tem that allows groups focusing uct or process design team, to interact with one another and exchange informa-
on a problem to interact with tion, data, and ideas. GDSSs are used in brainstorming and problem-solving
one another and to exchange in- sessions and to facilitate conferencing of all kinds. For example, a group of par-
formation, data, and ideas
ticipants, working anonymously from terminals in their offices or in remote lo-
cations, may interact in real time under the direction of a moderator, as ideas
and questions are presented.
A GDSS requires networking and meetingware or groupware software pro-
grams. “Meetingware products support ‘same time, same place’ and ‘same time,
different place’ meetings, which can be held at a single location or at several loca-
tions via videoconferencing. Groupware products like Lotus Notes let people share
a workspace for discussion, message exchange, and collaboration.”22 Lotus Notes
runs on a variety of computers and operating systems; but “it’s a development
platform that forces companies to build or buy all types of collaborative applica-
tions before users can share documents, exchange data, update databases . . . and
more.”23 The growing popularity and demand for network technology is just
one reason why IBM bought Lotus Development Corporation for $3.5 billion,
in 1995. It competes with Microsoft’s Exchange, a messaging and collabora-
tion server designed to help businesses communicate more effectively via Micro-
soft Office Outlook, which offers mobile, remote, and desktop e-mail access.
It should be emphasized that a DSS is an analytical support system, not a
maker of decisions. 24 As two experts observe, a “DSS allows the manager to ex-
amine more thoroughly a problem and experiment with many different solu-
tions. This tends to give the manager more confidence in the decision. But, due
to the multitude of possibilities to explore, it usually does not make the decision
process any quicker.” 25
General Mills utilizes a DSS by making appropriate data available to auton-
omous factory teams so that they can make their own decisions:
At some beverage plants, for example, four shifts of 20-person teams are
informed of marketing plans and production costs. “They have at their
fingertips all the data that would normally be held by management,”
says Daryl D. David, a human resources director. The self-managed
teams do everything from scheduling production to rejecting products
not up to quality standards, and they receive bonuses based on plant
performance. Some 60 percent of General Mills’ plants have been con-
verted to such high-performance work systems. The approach has pro-
duced significant gains in productivity, and the company is now moving
to spread it to all operations. 26
Executive Information Systems An executive information system (EIS) is a executive information

system (EIS)
decision support system custom designed to facilitate executive decision making. A decision support system cus-
Typical executive uses include forecasting; strategic planning; performing risk tom designed to facilitate ex-
and cost–benefit analyses; running business game simulations; linear program- ecutive decision making; may
include forecasting, strategic
ming; monitoring quality, productivity, ethics, and social responsibility efforts; planning, and other elements
and tracking critical success factors and stakeholder expectations. 27 EISs and
DSSs “are particularly useful when they are able to access the databases used by
other organizational information systems as well.” 28
A sophisticated EIS can integrate many levels of information and abstrac-
tion. Users may draw on data from a division, department, function, individual
employee, or discrete transaction. Moreover, the exponentially expanding re-
sources of external databases may be accessed electronically.
For meetingware and groupware to be used most effectively, a company cul-
ture that values and rewards teams and has a horizontal process focus must ex-
ist. Boeing demonstrates this kind of company culture:
Boeing maintains ten multimedia rooms at the Everett complex for the
use of collaboration teams, says John La Porta, a Boeing team leader.
“They are open 365 days a year, 24 hours a day,” he says. “It’s always
daytime somewhere.” On a recent afternoon, meetings were under-
way between one group of engineers at Boeing and their peers at Mit-
subishi Heavy Industries Ltd., in Japan, while another group worked
with teams at Japan’s Kawasaki Heavy Industries Ltd. and Australia’s
Hawker de Havilland, a Boeing subsidiary. A visualization application
developed by Boeing allows the teams to do real-time design reviews of
complex geometry without any lag time as the models load. “The tone
is cordial, it’s engineers talking to engineers,” says La Porta. Meetings
are conducted in English, with sidebar conversations as needed in native
languages around the world. 29
See this chapter’s Valuing Diversity feature for a look at how networking
can contribute to getting the best from diverse groups and individuals.
Managing Information Systems

To manage an IS effectively, an organization must confront four basic chal-
lenges: overcome resistance to the new and different, enable employees to use
the system, decide what operations to keep and what to outsource, and evaluate
the results of the system’s operations. Many companies, after merging, face the
task of enabling their inherited employees to use a more advanced CIS. As a re-
8
Discuss the four
challenges that must be
met by managers of an
information system
sult, a company may outsource some initial training until a base of newcomers
becomes technically proficient. These newcomers can then train others.
Overcoming Resistance
Getting people to use their IS or MIS effectively can be difficult. Thomas H. Dav-
enport, a professor and consultant, believes this is so because managers “glorify
information technology and ignore human psychology.” 30 They build elaborate
IT systems and then wonder why people don’t use them properly. What’s miss-
ing is a concern for the organization’s culture and “how people in organizations
actually go about acquiring, sharing, and making use of information.” Daven-
port further says that “research conducted since the mid-1960s shows that most
managers don’t rely on computer-based information to make decisions.” 31
516
VALUING DIVERSITY Part 6 Controlling
a g es
Meetings and Diversity
Get t y Im
Although communication in the business setting can be PowerPoint slides, privately direct messages between par-
difficult for almost anyone, ethnic minorities face particu- ticipants, list attendees, conduct polls, share files and ap-
lar challenges. Individuals from certain cultural and eth- plications, archive sessions, and piggyback voice and video
nic backgrounds are reluctant to voice their true opinions over the connection.
to others, face to face, particularly their elders. They have The experiences of the many companies that use
been taught that conflict of any kind is undesirable, and to groupware prove that most employees will express them-
defer to people older than they are. . Of course, there are selves more candidly through it. Contributions can be
individuals, no matter what their cultural background, who made without fear of receiving negative feedback or con-
experience embarrassment when asked to speak in front tradicting others. People can step out of their cultures for
of others. And there are those who are never asked for the duration of a meeting, knowing that their contributions
their opinions or are ignored when they offer them. Infor- will be considered and recorded. One’s concern about
mation technology in the form of groupware can help peo- “saving face” and deferring to elders is effectively elimi-
ple to overcome such problems by concealing the iden- nated. Since no one really knows who contributed what,
tity of both contributors and their contributions. Examples contributions must stand or fall on their own merits; thus,
of this software include Lotus Notes and Microsoft Ex- many will receive more serious consideration than they
change, both of which facilitate calendar sharing, e-mail otherwise might.
handling, and the replication of files across a distributed
• It is far easier to make a suggestion to your super-
system so that all users can view the same information.
visor and colleagues via e-mail than it is to do so in
The beauty of holding meetings and interacting with
a pressure-filled meeting room. Any time you have
others electronically is that face-to-face communications
something that is difficult to say, e-mail can make it
are not necessary. The exception, of course, is Web con-
easier. Do you agree with these statements? Explain.
ferencing, in which, for example, a CEO delivers a live
• What are the business benefits of Web conferencing
video and audio talk to worldwide office locations. Web
for meetings?
conferencing options might include the ability to share
Electronic Data Systems’ Director of Client/Server Technical Services adds

another dimension: “The problem is not with the technology, but with the cor-
porate processes. Companies must fundamentally change the way they do busi-
ness, and that’s hard.” 32 For example, a company with a traditional functional
organization and vertical command structure will find it difficult to change the
ways in which information is gathered and shared. Such structures impede the
flow of and access to information; these structures have too many levels and fi l-
ters for swift dissemination and use of vital facts and figures.
People fear change and often become irrational when faced with machines,
technology, and terminology that they do not understand. Just as many custom-
ers are intimidated and annoyed by an organization’s voice-mail system, em-
ployees react in similar fashion to technology that complicates or eliminates
their established routines. Information technologies encourage and depend on
information sharing. But all too often people have learned that information is
a precious commodity and needs to be protected, especially when there are re-
wards attached to its generation and use. “Changing a company’s information

culture requires altering the basic behaviors, attitudes, values, management ex-
pectations, and incentives that relate to information.” 33
Chapter 9 discussed culture and change in detail, but a few words are in or-
der here about training employees before making changes. First, for change to
be effective, those who will have to implement the change should be involved
in the making of decisions. Second, people need to be kept informed and fore-
warned about impending changes and given time to adequately prepare for them
through either training or development programs. Additional information on
this issue appears later in this chapter.
Enabling Users
A study funded by the U.S. Department of Labor and conducted by a consult-
ing fi rm and two universities “indicates that using information technology to
improve business practices brings the biggest benefits to the corporate bottom
line when workers are well-trained.” 34 What this chapter has already said about
overcoming resistance applies here as well. Once those who will be served by an
IS and its IT have participated in building the systems, they must be adequately
trained to use its technology and support services.
Support personnel need constant training. FedEx, the air freight company,
knows this and takes its IS training seriously. Training focuses on three spe-
cific areas: technology, business, and “personal process enabling” skills, all of
which can be developed through core business courses as well as through FedEx-
specific business classes. Course work specific to the development of FedEx’s
personal process–enabling skills includes project management, leadership train-
ing, and creative thinking. In addition to staying current in technologies, IS em-
ployees at FedEx must know what their customers know and need in order to
serve them effectively.
Outsourcing
Massachusetts-based Computer Sciences Corporation conducted the Critical Is-
sues Survey of senior IT managers, from 1988 to 2001. The survey tracked the
strategic and technical issues businesses confront as they adapt to the evolution
of information technology. Over the years, the responses to “why outsource” re-
mained constant: to reduce costs and improve services. 35
Among the giants that furnish outsourcing services are EDS, Perot Systems,
Computer Sciences Corporation, AT&T, IBM, and Unisys. These companies,
and their smaller counterparts, specialize in providing the latest technologies,
usually at lower cost, to all kinds of IT/IS services; thus, they offer their clients
greater control and efficiency.
For many companies, the decision to outsource IT/IS operations, in part or
in total, is made by asking a simple question: “Does the particular IT operation
provide a strategic advantage or is it a commodity that does not differentiate us
from our competitors?” 36 Commodities are outsourced when more efficient pro-
viders are found; other operations are kept in house. But research suggests that
such measures should be secondary; a “company’s overarching objective should
be to maximize flexibility and control so that it can pursue different options as
it learns more or as its circumstances change.” 37
518
GLOBAL APPLICATIONS Part 6 Controlling
a g es
IT Outsourcing at BP
Get t y Im
Information Technology outsourcing at BP has become a provide “a single seamless service to [its] 42 businesses
case study for managers to better oversee their outsourc- around the globe.”
ing. British Petroleum Exploration (BPX) is a division of One contractor is the primary provider and coordinates
BP plc., the holding company of one of the world’s largest the services of the others. The contractors outsource and
petroleum and petrochemical groups. In 1993, BPX made manage whatever services they cannot themselves pro-
the decision to stop focusing on supporting business op- vide. The company’s IT department, in turn, manages
erations and start focusing on performing them. The re- the primary contractor. Business units may contract with
sult was the outsourcing of all IT operations and a reduc- IT suppliers for customized services. British Petroleum
tion in IT personnel of nearly 1150 people. Exploration has the right to audit suppliers, and it evalu-
After some experimenting with managing multiple ates each every year. Periodically, the suppliers are bench-
service providers and investigating companies using a marked against others in the industry. Suppliers who re-
single-provider approach, the company formulated an out- duce their costs below BPX’s targets keep one-half of the
sourcing vision. It looked for firms that knew their mar- funds saved.
kets and capabilities, and were dedicated to innovation, • Outsourcing, moving inside activities to outside pro-
customer service, and cost containment. The company viders, is a tool that gives a company the ability to im-
created a list of six possible service providers by care- prove operations while cutting costs. How can out-
fully screening 65. The six were asked to create alliances sourcing be cost-effective when you can no longer
that would meet BPX’s cost objectives and IT/IS needs. exercise direct control over the providers?
Three managed to do so to BPX’s satisfaction and were Source: John Cross, “IT Outsourcing: British Petroleum’s Competitive
hired, under initial two-year contracts, to work together to Approach,” Harvard Business Review, May–June 1995, pp. 94–102.
Geoffrey Moore, the Chairman and Founder of the Chasm Group and a
venture partner at Mohr Davidow Ventures, differentiates between outsourcing
core and context operations:
Whatever differentiates you, whatever gives you competitive advantage,
is core. Everything else is context. Context still has to be done, because
your customers, the government, or your own employees require it, and,
moreover, it has to be done well. But it won’t give you competitive ad-
vantage even if you did it brilliantly. Worse, you can do damage to that
advantage if you do it badly. Because context activities have a downside
but no upside, companies should do everything they can to insource core
and outsource context. 38
Before outsourcing an IT/IS operation, a company must know what its op-
erations are and what IT/IS needs exist for each. It must then analyze how effi-
ciently and effectively these needs are being met. If improvements are called for,
it must then ask who is best able to provide them—in-house or outside person-
nel? If the answer is outsiders, is it absolutely the case that in-house staff can-
not be effectively upgraded to provide the service? If not, under what terms and
conditions will service be provided by an outsider, and what consequences could
result if the provider fails to offer adequate support? Can we afford to live with
those consequences? One key to outsourcing is to retain some measure of con-

trol and flexibility over the outside provider and the service it provides. Another
is to recognize that all these situations and the answers to them will continually
change. Constant auditing of IT/IS operations is, therefore, a necessity. See this
chapter’s Global Applications feature for BP’s approach to IT outsourcing.
Evaluating Results
The Connecticut-based consulting fi rm Gartner Group Inc. has estimated that
about one-half of the costs associated with owning and operating PCs in cor-
porate America represents waste. “Companies waste money by duplicating PC
equipment, providing ineffective training, losing productivity, and failing to
take advantage of volume discounts.” 39 Cost-cutting programs focus on total
cost of ownership.
Gartner says that total cost of ownership (TOC) consists of the costs in-
curred throughout the life cycle of an asset, including acquisition, deploy-
ment, operation, support, and retirement. Gartner organizes costs into
two major categories: Direct (budgeted) costs comprise capital; fees; and
labor costs, including hardware and software expenses, IT operations la-
bor, service desk labor, IT finance and administration labor, outsourced
management, and support fees. Indirect (unbudgeted) costs measure the
efficiency of the IT organization in delivering expected services to end
users. Because they are indirect, these costs are often hidden. 40
Because information technology changes so swiftly, many companies con-
sider their desktops and laptops to be expendable equipment, with a usable life
of around two to three years, and they replace them nearly as often. When com-
panies adopted Microsoft’s Windows 95, for example, “it required at least twice
as much memory as most corporate PCs had at that time.” 41 In order to run the
latest software and software upgrades, computer manufacturers had to include
Intel’s Pentium chip or NexGen’s Nx chip in their new models; both of these
chips were eventually made obsolete by newer models.42
The results of a survey by InformationWeek magazine show why IT/IS costs
can explode. The survey revealed that about one-half “of all PCs used in organi-
zations were bought by the central IS department.” 43 Managers in strategic busi-
ness units bought about 45 percent; individuals purchased about 8 percent. Soft-
ware purchases were handled in a similar way.
Auditing by both insiders and outsiders—outside users being customers and
consultants—will bring to light just what should and should not be happening
with both MIS and CIS operations. First, users of the system must evaluate it; they
are the ones who know whether their needs are being met. Second, the CIO and
information technology managers must perform audits as well. Their primary fo-
cus is on meeting needs effectively and efficiently—within or below their budgets.
Their audits should include a periodic analysis of IT policies and the costs con-
nected with delivering MIS/CIS services. They should also conduct an annual in-
ventory of all personnel and equipment to determine needs and capabilities.
The Gartner Group has developed a Total Cost of Ownership (TCO) Life-
cycle model (see Figure 15.6) for assessing costs and associated operational
processes. The model reveals IT operational costs by evaluating the people, pro-
cesses, and technology involved, and it provides a method for reducing those
costs.
Figure 15.6 Gartner Group TCO lifecycle model
TCO Analysis
TCO Management • Asset survey
• Implement on a • Industry average cost
continuous basis analysis
• Repeat every 6–9 months • Cost & qualitative surveys
• Measure trends and • Actual cost analysis and
validate processes comparison
TCO Improvement
• Select technology and
practices improvements
• Model ROI and value
• Select best alternative
Source: HP Web site, “TCO Models and Approaches.”
CHAPTER SUMMARY
Describe the seven characteristics of useful Describe the three functions of an effective
1 information. To be useful to decision makers, in-
formation must have value—be linked to other informa-
2 information system (IS).
• Assisting organizations and their members in achiev-
tion—and must be
ing their objectives
• Understandable: presented in a suitable form, using
• Facilitating information access through people and
appropriate terms and symbols that a receiver will
technology
know and interpret properly
• Facilitating information flow by using the fastest,
• Reliable: accurate, consistent with fact, actual, and
most direct way to disseminate and share information
verifiable
Describe the five guidelines for establishing
• Relevant: pertains to a decision maker’s area of
responsibility, and is essential
3 an information system (IS).
• Involve users in the system’s design.
• Complete: containing all the facts that a person or
group of people needs to make decisions and solve • Establish clear lines of authority and leadership for
problems IS personnel.
• Concise: just enough, omitting material that is not • Establish clear procedures for gathering, sorting, in-
needed terpreting, displaying, storing, and distributing data,
and for interacting with the system.
• Timely: available when needed, in real time when
possible • Where technical specialists are used, ensure that
both they and the people they support fully under-
• Cost-effective: created and disseminated at a reason-
stand each specialist’s function and role.
able cost; this characteristic relates to most of the
others as well
• Build an IS staff of sufficient quality and quantity puters internally as well as inside computers with those
and with sufficient skills needed to adequately pro- outside an organization. Most businesses can use their
vide services. local telephone lines to simultaneously transmit voice,
video, and data.
Describe the basic functions of a computer-
4 ized information system (CIS).
7 Explain the purposes of decision support sys-
tems (DSSs). Decision support systems are ana-
• Computer operations: Runs the system; involves
lytical models that join the manager’s experience, judg-
starting jobs, mounting the proper input and output
ment, and intuition with the computer’s data access,
volumes, and responding to problem conditions
display, and calculation strengths. They may be off-the-
• System programming: Installs and maintains the op- shelf or tailored for in-house use. DaimlerChrysler’s new
erating system and associated system software manufacturing software is tailored to meet its needs.
The French company that developed it is now tailoring
• Data entry: Enters data in machine-readable form
it for use by other manufacturers.
• Application program development: Writes new ap- Expert systems are a kind of artificial intelligence
plication systems and are specialized end-user decision support programs.
Software stores the knowledge of a group of authorities
• Application program maintenance: Corrects and up-
for use by nonexperts faced with the need to make topic-
dates existing application systems
related decisions.
• Data management: Assures data security, access, in- Group decision support systems allow groups focus-
tegrity, and usability ing on a problem to interact with one another and ex-
change information, data, and ideas. Such systems make
• Communications management: Configures and
use of both meetingware and groupware.
maintains the network
Discuss the four challenges that must be met
• End-user computing: Helps and educates users
Describe the two basic data-processing
8 by managers of an information system. To
manage an IS effectively, an organization must confront
5 modes. The two most common modes are batch
processing and transactional processing. In the fi rst,
four challenges: overcoming resistance to change, en-
abling employees to use the system, deciding which op-
data are collected over time and entered into data banks erations to keep and which to outsource, and periodi-
according to prescribed policy and procedures. In the cally evaluating the system’s effectiveness and efficiency.
second, data are received about a company’s ongoing The fi rst and second challenges are usually dealt with
operations and entered into data banks as each transac- through training and development programs and by in-
tion occurs. The two cases presented in this chapter are volving users in the design of the system and the choice
about companies using transactional processing. of its equipment. The third is made after carefully con-
sidering in-house capabilities and efficiencies; operations
Discuss the various methods used for linking
6 computer systems. Networking and middleware
allow for computers to communicate with one another.
and functions that can be performed better by outsid-
ers are usually outsourced. The fourth challenge is a ba-
sic element of control. All operations need periodic re-
Networks use servers, bridges, PBXs, gateways, and mo-
view by both insiders and outsiders. Just as conditions
dems. Cables, wires, microwaves, cellular and radio net-
change, so too will the ways in which IS functions and
works, and fiber optics allow for transmissions. Local
ITs are dealt with.
and wide area networks (LANs and WANs) link com-
KE Y TERMS
application program decision support system (DSS) information system (IS)
artificial intelligence (AI) digital information technology (IT)
batch processing end-user computing knowledge management (KM)
computerized information system executive information system (EIS) management information system
(CIS) expert system (MIS)
data group decision support system networking
data center (GDSS) operating system
database information transactional processing
RE VIE W QUESTIONS
1. What makes information valuable to decision mak- vations, (b) handling total sales by department for
ers? What makes it useful? each day of operations, (c) measuring the quality of
cookies coming off an assembly line.
2. How should an organization and its strategic busi-
ness units go about establishing their information 6. How do local area networks (LANs) operate? Wide
systems? area networks (WANs)? Why do most companies
usually require both?
3. How can an organization decide on the effectiveness
of its information systems? 7. What is a decision support system (DSS)? What
kinds exist?
4. What basic functions must any CIS perform for its
users? 8. How does a company decide whether an IS or IT
function should be outsourced? Whether the IS or
5. What data-processing modes would you prescribe
IT is operating effectively? Whether people are using
for each of the following? (a) handling airline reser-
them to their best advantage?

1. You are the chief information officer for a neighbor- you go about selecting members for your commit-
hood bank that has just been absorbed into a larger tee? What issues should you deal with at your fi rst
bank. Each institution has different hardware and meeting?
software. What must you do in order for your IS to
3. How do information needs differ at the various lev-
properly network with the parent’s?
els of management? Why should all of management’s
2. You have been asked to build and lead a committee computers be networked to both insiders (intranet)
to evaluate your company’s ISs and ITs. How would and outsiders (Internet)?
Links are provided for all Internet exercises at Drucker described it this way: “Economic theory is
http://plunkett.swlearning.com. still based on the scarcity axiom, which doesn’t ap-
ply to information. When I sell you a phone, I no
1. Peter Drucker coined the term knowledge worker
longer have it. When I sell information to you, I have
in his 1959 book, Landmarks of Tomorrow. Read
more information by the very fact that you have it
“The Age of Social Transformation” (Atlantic
and I know you have it.”
Monthly, November 1994). What is a knowledge
Visit the American Library Association’s Web site
worker? How can you become a knowledge worker?
on Information Literacy. What is information liter-
http://www.providersedge.com/docs/leadership
acy? Explain its importance to managers.
_articles/Age_of_Social_Transformation.pdf
2. In the Digital Age, a dominant role is played by in-
formation. In Wired magazine (March 1998), Peter

The Business and Company Resource Center (BCRC) Check to see if your library subscribes to BCRC. If so,
is an online database and research tool published by you may access the database. (Also, you may have access
Thomson/Gale. Most college and university librar- to it through this textbook. Check with your instruc-
ies subscribe to electronic databases, as well as print. tor.) The BCRC will give you more up-to-date, targeted,
and proprietary information than any Internet search BOEING AT A GLANCE

engine. Furthermore, the information you fi nd is highly Headquarters:
respected. Founded:
Use the BCRC to fi nd the following information Top Executive:
about Boeing. Add any other interesting information that Revenues for past year:
you fi nd. 52-week stock price high/low:
Number of Products:
APPLICATION CASE
Distribution at VF Corporation Customers love the VF system. It helps them to
VF Corporation is the largest apparel company in the avoid overstocking and leads to faster inventory turns,
world and a leader in jeans, intimate apparel, knits, which saves them money: networked dealers can invest
work clothes, casual clothes, and swimwear. It has its less in inventory and have fewer clearance sales. VF is
own branded retail stores and sells its wares to such re- happy, too. The system has helped the company to in-
tail giants as Wal-Mart, JCPenney, and Federated De- crease income and sales (VFC, Investor Relations).
partment Stores. Along with its stable of brands— While its competitors, like Levi Strauss, are strug-
Lee, Wrangler, Riders, Rustler, Vanity Fair, Vassarette, gling to catch up with VF’s restocking system, VF is
Bestform, Lily of France, Nautica, John Varvatos, building its system to track groups of goods, such as
JanSport, Eastpak, The North Face, Vans, Reef, jeans of various sizes, styles, and colors, to fi nd sales pat-
Napapijri, Kipling, Lee Sport and Red Kap—VF is add- terns that can help retailers forecast ideal supply levels.
ing to its rivals’ envy because of its state-of-the-art com-
puter-driven distribution system. Its “Retail Floor Space Questions
Management process enables VF to determine the opti- 1. What major advantages does VF Corporation have
mal product mix for individual stores, replenish goods over its competition?
rapidly and efficiently, and keep the right products in 2. Will such a distribution system work as well for
stock with minimal inventory. Higher sales on less in- lesser-known brands made by smaller companies?
ventory is a winning formula for success in today’s retail Why or why not?
environment” (VFC, Letter to Stockholders). 3. What data must be shared by retailers with VF to
The system depends on networking with the stores make the system work? How do you suppose the
being supplied. Networked stores send data gathered retailers gather these data?
through their ISs to VF, which then uses the data to deter-
mine stock levels and create an order for restock, all auto- Source: VF Corporation, Annual Report, Overview and FAQ, http://
matically. In-stock merchandise is shipped immediately; www.vfc.com.
when merchandise is not available, VF automatically cre-

ates an order for itself and ships within one week.

Peapod Takes Grocery Shopping Online ter its sale to Royal Ahold. Thomas Parkinson remains
It’s hard to imagine a time before e-commerce. The dot. with the company today as its Chief Technology Officer
com boom and bust seems to be ancient history, particu- (CTO) and Vice President. Peapod offers consumers a
larly because so many start-up fi rms didn’t survive. But relatively simple service—online grocery shopping with
a few of them did, and one that not only survived—but delivery—but its success depends on a great deal more.
thrived—is a company with the unlikely name of Pea- Peapod wouldn’t exist without Internet technology,
pod. Peapod was founded in 1989 by brothers Andrew the vehicle for e-commerce. But this technology alone
and Thomas Parkinson, several years before the dot.com isn’t enough for a business to run smoothly, satisfy cus-
boom began. Both brothers stayed with the fi rm af- tomers, and grow. Thomas Parkinson explains that Pea-
pod isn’t selling goods, or whiz-bang technology; it sells strictly regulated diets, such as low sugar or low carbo-
time to busy consumers. A customer who logs onto Pea- hydrates, can use a special search tool to streamline their
pod for grocery shopping spends an average of 15 min- selection process so they don’t have to scroll through
utes instead of the 1 to 2 hours usually spent at the lo- endless foods they don’t need or want. The site also in-
cal supermarket. That’s a huge savings of time. It means creases the efficiency of grocery shopping by creating a
that a parent with a sick child doesn’t have to leave list of previously purchased items—a kind of ongoing
home to shop for groceries, that a professional with a grocery list. Consumers can access the list and check off
deadline doesn’t have to take time off work to buy food, the items they need. Then they can add or subtract from
or that a person without a car doesn’t have to wait for the order until the night before their order is scheduled
public transportation. to be delivered. In addition, the IT team is working on
How does the typical shopping experience at Pea- technology that will remind regular customers when to
pod work? The Peapod Web site is set up to guide new replenish milk or eggs or cat food.
visitors through the process with ease. On the sec- Skeptics who can’t imagine ordering fresh tomatoes,
ond visit, shoppers encounter a different interface that sirloin steak, or milk online because they can’t squeeze
streamlines the process. Subsequent visits are tailored or sniff or see the goods may be surprised when they
to meet the needs of each customer, with coupons, tar- visit the Peapod site for the fi rst time. Parkinson says his
geted marketing messages, and the like. Registered shop- team’s goal is to make the site as “luscious” as the real
pers may receive e-mail reminders and other direct-mail thing. Shoppers can scroll through delicious photos of
promotions. When shoppers are ready to check out, they inventory—colorful produce, protein-rich meats, fresh-
have the option to pay by credit card or with an elec- baked bread. When they realize they can have any of
tronic check that automatically withdraws the correct those products with a click of the mouse, they’re sold.
amount from an authorized checking account. Either
choice is convenient for the customer. Questions
Parkinson explains that Peapod’s information tech- 1. What type of data might the Peapod IT department
nology (IT) department continually tries to balance a obtain about consumers who visit the Web site?
streamlined interface with a sophisticated one that pro- 2. In what ways might Peapod managers use a
vides loyal customers with more options. For example, decision-support system?
customers can select thick or thin deli slices, or yellow 3. In what ways might Peapod use a CRM system to
or green bananas. They can browse through weekly spe- maintain its competitive advantage in the market-
cials or supermarket “aisles,” read recipes, or fi nd out place?
about new products. In the end, however, speed and sim-
plicity are the highest priorities, because those features Source: Company Web site, http://www.peapod.com; accessed Febru-
are valued most by customers. Even those who are on ary 8, 2007.
BIZ FLIX VIDEO CASE

Lorenzo’s Oil showed positive effects of fatty acid manipulation in
This fi lm tells the true story of young Lorenzo Odone rats. Convinced that a panel of experts could systemati-
who suffers from adrenoleukodystrophy (ALD), an in- cally focus on their problem, they help organize the First
curable degenerative brain disorder. (Six actors and ac- International ALD Symposium. This scene is an edited
tresses play Lorenzo throughout the fi lm.) Physicians version of the symposium sequence that appears about
and medical scientists offer little help to Lorenzo’s des- midway through the fi lm. The fi lm continues with the
perate parents, Michaela (Susan Sarandon) and Augusto Odones’ efforts to save their son.
(Nick Nolte). They use their resources to learn about
ALD to try to save their son. Director George Miller What to Watch for and Ask Yourself
cowrote the script, which benefited from his medical 1. Do the scientists present data or information during
training as a physician. the symposium?
Six months after Lorenzo’s ALD diagnosis, his con- 2. If it is information, who transformed the data into
dition fails to improve with a restricted diet. Michaela information? Speculate about how such data be-
and Augusto continue their research at the National In- came information.
stitutes of Health library in Bethesda, Maryland. Mi- 3. What do you predict will be the next course of ac-
chaela fi nds a report of a critical Polish experiment that tion for the Odones?
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LEARNING OBJECTIVES
CONTROL: After studying this chapter, you should be able to:
PURPOSE, 1 Describe the relationship between controlling and

the other four functions of management
PROCESS, AND List and describe the four steps in the control process
TECHNIQUES 2
Describe the nature and importance of feedforward,
3 concurrent, and feedback controls
Describe the importance of a control system
4
Explain the characteristics of effective controls and the
5 steps managers can take to make controls more effective
Describe the content of the three primary financial
6 statements and how managers use them
Explain ratio analysis and four types of ratios used
7 by managers
Describe the five types of financial responsibility centers
8 and their relationships to budgeting
Describe the four approaches to creating budgets
9
Explain the two major types of budgets used in
10 businesses
Describe the five major marketing control techniques used
11
Getty Images
in businesses
Describe the six major human resource control techniques
12 used in businesses
Harrah’s: Getting Control
Gary Loveman left a teaching job at Harvard Univer-
sity to work for Harrah’s Entertainment. He is now the Gary Loveman
company’s CEO. At Harvard, Loveman taught M.B.A. Born: 1960, Indianapolis, Indiana
students how retailers, like Wal-Mart and Taco Bell, Current Position:
increase profits by selling more to their current, most Chief Executive Officer, Harrah’s Entertainment
profitable customers. About the nature of profit, Career Highlights:
W. Edwards Deming, regarded by many as the lead-
1989 Associate Professor, Harvard University
ing quality expert in the United States, said, “Profit
in business comes from repeat customers, custom- 1998 Chief Operating Officer, Harrah’s
ers that boast about your project or service, and that Entertainment
bring friends with them.” 2000 Member Executive Board of Directors,
Loveman was offered the job of Chief Operat- Harrah’s Entertainment
ing Officer once he shared his business theories with 2001 President, Harrah’s Entertainment
Harrah’s then-CEO Phil Satre. Just five years later, 2003 Chief Executive Officer, Harrah’s
Loveman himself became CEO. Loveman uses com- Entertainment
puter marketing control techniques to increase profits. Education: Wesleyan University, BA in Econom-
The techniques are important elements in Harrah’s ics, 1982; Massachusetts Institute of Technol-
Total Rewards program, a customer relationship
ogy, Ph.D. in Economics, 1989
management (CRM) strategy. “Since arriving in Las
Vegas, he’s lured mathematicians and computer jocks Personal: Married, three children
to help him create a high-tech marketing program that Source: David O. Becker, “Gambling on Customers,” McKinsey
Quarterly, February 1, 2003, http://www.marketingpower.com/
tries to perfectly match the perks they offer frequent aevent_event24809.php%22%20www.marketingpower.com/
gamblers with those customers’ idealized prefer- content17906.php.
ences” (McGinn).
Marketing research is used to determine attri-
butes desired by Harrah’s best customers. These
preferences, as well as other customer information,
are stored in the company’s national customer data-
ing
base, the Patron Database. Harrah’s winner’s infor- ce prov
mation network (WINet) consolidates all of the com- n t ifi c eviden rogram,
r scie ion p
pany’s information technology systems so thing fo televis c us -
a g e nts sleu ’t only on the use a detailed -
that all properties can communicate, in real e g a s a re n n t s a t re
L as V
d o ne w
hat” ice age RM) th
time, with one another and share informa- er ser v nt system (C ues to track
“who’s ah’s custom m e n iq
tion about customers. ar r nag e l tec h t cus -
C SI. H lationship ma eting contro am. Frequen rks
r k r and p e
tomer
re e ma s prog
A customer who receives a promotion in
o n q u antitativ Total Reward t promotions any’s
the mail will call Harrah’s to inquire about lies the b es o mp
ants in fi ne t h e l. The c prop -
it, and as soon as the customer service par ticip ferences de ach individua ects Harrah’s as
pre e nn h
agent gets on the phone, a slew of infor- tomer ah’s offers to n net work co hare data suc
th a t H ar r fo r m atio e nt s to s
b il it y.
mation identifying the customer pops up dated in wing a
g g availa
on the agent’s computer screen. It indi- consoli tionwide, allo r y and lodgin
n a is to
er ties ings h
cates the tier (platinum, gold or diamond) er winn
the customer falls into, where he usually custom
plays, how much he’s won or lost, and even
what he might be worth. The agent then asks
© Isaac Brekken/Associated Press
the customer where he wants to make a res-

ervation and for what dates, and at the same
time can bring up Harrah’s reservation system
to see if a room is available. The agent asks if
the customer is responding to an offer, which
he doesn’t even have to have in his hand at the
time, as the Patron Database contains informa-
tion on what offers have been sent to him. The
reservation system then automatically searches
the Patron Database to see if the customer has already received or redeemed the offer
and if it is still valid (Levinson).
Harrah’s focuses on measuring and monitoring customer satisfaction. Loveman says, “We
have the capacity to know rather than guess at something because we collect so much
information about our customers” (Becker). Loveman’s transformation of Harrah’s has in-
creased customer satisfaction, which in turn has increased profitability and revenues.
Sources: Daniel McGinn, “From Harvard to Las Vegas,” Newsweek, April 18, 2005, E8–E14; David O. Becker,
“Gambling on Customers,” McKinsey Quarterly, February 1, 2003, http://www.marketingpower.com/aevent
_event24809.php%22%20www.marketingpower.com/content17906.php; Meridith Levinson, “Jackpot!” CIO,
February 1, 2001, http://www.cio.com/archive/020101/harrah.html.
Introduction
Because controlling is a management function that applies to all of the other
functions, this book tackles it last. Without some way to monitor the execution
of plans, managers would not know whether their work was effective or efficient.
People and processes must be monitored to prevent, or detect and correct, unac-
ceptable differences between managers’ expectations and actual results.
controlling In its most basic form, controlling is the management function in which man-
The process through which agers set and communicate performance standards for people, processes, and de-
standards for the performance
of people and processes are vices. A standard is any guideline or benchmark established as the basis for the
set, communicated, and applied measurement of capacity, quantity, content, value, cost, quality, or performance.
Whether quantitative or qualitative, standards must be precise, explicit, and for-
standard
Any established rule or basis mal statements of the expected result. Once those who must abide by standards
of comparison used to measure understand and can apply them, standards serve as mechanisms to prevent, or
capacity, quantity, content, identify and correct, unacceptable deviations from plans. Standards may be ap-
value, cost, quality, or
performance plied to people and processes before, during, and after work is performed.
Controlling is about managing risks. Since companies regularly face a vari-
ety of risks, they are moving toward “the development of comprehensive, com-
panywide programs that target the entire array of a company’s risks.” 1 In many
companies these programs are formulated by and make use of a relatively new,
risk manager high-level management position, that of risk manager. This person must moni-
A high-level person in charge tor people and processes and help transform functional managers (such as those
of planning for and overseeing
efforts to control the manage- who oversee fi nance) into advisers and consultants, enabling them to teach oth-
ment of all the risks an organi- ers how to deal with the risks that haunt their areas of expertise. “Internal au-
zation faces ditors, once regarded as moles who ferreted out waste and fraud, are enjoying
expanded roles as monitors of such ‘soft’ items as ethical standards, which, if vi-
olated, can increase a company’s vulnerability.” 2
control technique Later in this chapter, important control techniques—devices designed to
Device designed to measure measure and monitor specific aspects about the performances of an organiza-
and monitor specific aspects
about the performances of an tion, its people, and its processes are examined. Within these techniques are
organization, its people, and its characteristics of feedforward, concurrent, and feedback controlling. As we
processes present each technique, consider how it helps managers set and achieve goals
and at which management level each technique is most useful.
Keep in mind that control techniques depend on the proper interpretation
and understanding of both the quantitative and qualitative information they
generate by those in charge of various activities and processes. Thus the type,
design, and number of control techniques will vary with each level of manage-
ment and with each manager and operation. However, control techniques must
Chapter 16 Control: Purpose, Process, and Techniques 529
be integrated into a system to promote maximum effectiveness and efficiency. In

our opening case, Harrah’s measures marketing performance with a variety of
techniques: sales volume, repeat customers, profits, and levels of customer satis-
faction were but a few. Top management uses the results to provide performance
data that show results.
Controlling and the Other Management Functions

As Lester Bittel noted, “Controlling is the function that brings the management
cycle full circle. It is the steering mechanism that links all the preceding func-
tions of organizing, staffi ng, and [leading] to the goals of planning.” 3 The plan-
ning process determines the goals and objectives that eventually become the
foundation of controls. As the fi rst function, planning is at the heart of all the
1
Describe the relationship
between controlling and
the other four functions
of management
others. The strategic goals and plans made at the top level in an organization
are derived from the organization’s purpose and mission. From these plans flow
the objectives to be achieved by successively lower levels of management.
As these plans and goals are developed, managers must establish controls
to monitor progress toward them. The feedback from these controls should tell
managers how each level of the organization—indeed, each individual—is pro-
gressing toward the relevant goals and objectives. The feedback may indicate
that progress is proceeding as planned. If progress falls short of the plan, how-
ever, the feedback should indicate that managers need to change the plan.4
By looking at Harrah’s, we can briefly examine how controlling affects and
is affected by the other four management functions. After years of expanding,
Harrah’s growth stagnated in the mid-1990s. Traditionally, more is better in the
hotel and casino industry. Costs seem to be unimportant; what matters is pleas-
ing, even wowing, customers with luxury surroundings and accommodations.
The early 1990s was a boom time and the era of huge, expansive spaces and el-
egant fi xtures. The bubble burst, however, with the arrival of the cost-conscious
late 1990s and the value-conscious consumer. Recession and fierce competi-
tion contributed to Harrah’s radically different approach of treating gambling
like smart retailing. The role of controlling in other management functions was
evident in these circumstances:
• Planning and controlling. Harrah’s could not act responsibly when making
its needed changes without adequate feedback from customers and the gen-
eral managers of its properties. Both sources helped to provide the company
with the data it needed to decide which services should be emphasized and
which could be modified or eliminated without compromising service qual-
ity. In addition, Harrah’s reexamined every operation; it calculated costs
and brought them into line with the new standards set to guarantee effi-
ciency and growth. The company needed plans to eliminate the superfluous
employees. Those remaining had to be taught the new and modified proce-
dures, thus necessitating the creation of training programs. Managers had
to design controls to make certain that all of the changes took place effec-
tively and efficiently. Once properly positioned fi nancially, the company was
ready to continue planning its customer loyalty efforts.
• Organizing and controlling. Harrah’s former president, Phil Satre, had to
create his own top-management team to help him reorganize and reevaluate
all of Harrah’s operations. In 1998, he hired Gary Loveman as COO. Top

management had to delegate authority and define reporting relationships.
The decision to centralize information technology and marketing activities
resulted in bringing the customer loyalty strategy to fruition.
• Staffing and controlling. The reorganization of marketing caused Harrah’s
to make many personnel changes, including replacing industry veterans with
customer-relationship-management specialists. Along with replacing the in-
dustry veterans, Harrah’s had to equip people to handle change efforts. It
had to create teams to analyze customers and decide what to do in each area
under scrutiny. The company had to combine numerous duties and reas-
sign them to people and teams, necessitating a reevaluation of compensation
levels. Harrah’s also had to staff and execute additional training efforts so
that both new employees and employees with new duties could be taught the
standards that would govern their behaviors and outputs.
• Leading and controlling. Loveman was chosen by Harrah’s president to lead
the change effort at Harrah’s. New leadership was also required in the mar-
keting area because of its reorganization. Leadership changes involved per-
suading Harrah’s property general managers to improve their already excel-
lent customer service. In short, each organizational unit affected by changes
underwent some kind of leadership change. Leadership needed to handle
the change efforts and conduct the required training to develop and enforce
new standards and controls for both people and processes.
In addition to its relationship to the other four functions, controlling meets
a very practical need. Organizations have limited resources. The successful ac-
quisition and use of these resources determine a firm’s survival. No person or
organization should expend resources to achieve a goal without arranging to
monitor the use of these resources.
Control Process
2
List and describe the
four steps in the control
process
We are now ready to examine the four steps of the control process. As Fig-
ure 16.1 shows, the steps are (1) establishing performance standards, (2) mea-
suring performance, (3) comparing measured performance to established stan-
dards, and (4) taking corrective action.
control process Establishing Performance Standards

A four-step process that con-
sists of establishing perfor- As you know, a standard is a quantitative or qualitative measuring device de-
mance standards, measuring signed to monitor people, money, capital goods, or processes. The exact nature
performance, comparing mea- of a standard depends on several factors:
sured performance to estab-
lished standards, and taking • Who designs, works with, and receives the output from controls
corrective action
• What is being monitored
• Where monitoring efforts will take place (location and functional area)
• When controls will be used (before, during, or after operations)
• How monitoring will be used
• What resources are available to expend on the controls
Figure 16.1 Steps in the control process
Inputs
Step 1
Mission Establishing
Statement performance
standards
Strategic
Plans
Tactical
Plans Step 2
Measuring
Past performance
Experience
Feedback from
Step 3
Control System Comparing measured
Design performance to
established standards
Step 4
Taking
corrective action
Feedback/Adjustment
Standards and the controls they are part of usually focus on measuring and
monitoring productivity (cost control through effective resource management)
and quality (internal and external customer/user satisfaction). Thomas Barry, of
the American Society for Quality, stresses the importance of measurement and
standards:
Measurement is the springboard to involvement, allowing the organiza-
tion to initiate corrective action, set priorities, and evaluate progress.
Standards and measures should refl ect customer requirements and ex-
pectations. Each employee must be a partner in achieving quality goals.
Teamwork involves managers, supervisors, and employees in improving
service delivery, solving systemic problems, and correcting errors in all
parts of work processes. 5
All standards and their controls must be continually reexamined to ensure

that they are still required and operating effectively and efficiently. Also, as
Chapter 4 points out, efforts to improve quality and productivity must not inter-
fere with each other and must enhance profitability.
Productivity Productivity is the amount of output achieved from the use of a

given amount of inputs. Productivity can be measured quantitatively and qual-
itatively. Examples of quantitative measures include the number of customers
served per hour and the total units produced per machine hour of operation.
Qualitative measures incorporate such factors as customer/user feedback—
feedback about how well a product or service meets their needs or how a service
provider treats them. Harrah’s uses both measures.
Quality Concern for quality, that is, customer satisfaction, begins with the
standards and methods used to recruit, hire, train, evaluate, and reward employ-
ees. Concern for quality must exist within every person and process. It must be a
core value within an organization’s culture and within the cultures of its suppli-
ers and partners.
To control quality, companies create standards and quality assurance (QA)
systems—a validation process to ensure measurement accuracy and standardiza-
tion, focusing on constant incremental quality improvement (kaizen) measure-
ments and results. At times, QA is promoted by such reengineering approaches as
empowered individuals and teams, stretch goals, and process redesign. Harrah’s
employs both approaches.
Six Sigma Six Sigma is a process quality goal. It is a highly disciplined process that
A highly disciplined process helps companies focus on developing and delivering near-perfect products and
that helps companies focus on
developing and delivering near- services. The statistical goal is to operate with only 3.4 defects per million trans-
perfect products and services actions. Motorola and other industrial companies developed the quality manage-
ment method in an effort to cut costs, build revenues, and eliminate manufactur-
ing errors. General Electric applied it to fi nancial services. “One of Motorola’s
most significant contributions was to change the discussion of quality from one
where quality levels were measured in percentages (parts per hundred) to a dis-
cussion of parts per million or even parts per billion. Motorola correctly pointed
out that modern technology was so complex that old ideas about acceptable qual-
ity levels were no longer acceptable.” 6
Measuring Performance
After standards are established, managers must measure actual performance to
determine variation from standard. The mechanisms for this purpose can be ex-
tremely sensitive, particularly in high-tech environments. Building modern air-
liners, for example, requires extraordinarily refi ned measurement and control
systems. Along with visual inspections, technicians induce electric current in the
metal surfaces to create magnetic fields. Any distortion in the fields indicates a
problem.7
Computers are important as tools for measuring performance. They monitor
people and operations as they occur, and they store data to be used later. Retail
stores use computerized scanning equipment that simultaneously accesses prices
and tallies sales and then tracks inventory by department, vendor, and branch
store. The computerized scanning systems can also track the sales personnel, re-
cording transactions, and salesclerk activity. The displays and reports that these
systems produce often show current standards and actual performance measure-
ments. Computerized systems of all kinds give managers the up-to-the-minute
information they need to make sound decisions.
Comparing Measured Performance to Established Standards

The next step in the control process is to compare actual performance to
the standards set for that performance. If deviations from the standards ex-
ist, the evaluator must decide whether they are significant—whether they re-
quire corrective action. If so, the evaluator must determine what is causing the
variance.
To understand variance in regard to manufacturing, consider an operation
that mills a billet of titanium into a complex shape to be used as an engine part.
The established tolerance, or standard of variance, for the part is plus or minus
one-thousandth of an inch from the specified dimensions. Periodically through-
out the milling process, the machinist measures the part to be sure that it re-
mains within tolerance. Any part milled beyond the tolerance must be rejected,
in which case a search for the cause of the unacceptable variance begins.
The source of a deviation may lie beyond the employee who first discovers
it. (See this chapter’s Ethical Management feature for a look at how top man-
agers’ greed led to Enron’s demise.) Suppliers may have shipped faulty materi-
als. Previous operators may have been poorly trained, dishonest about results,
or misinformed about applicable standards. If equipment is in poor condition, it
may be incapable of producing output that meets the standards—no matter how
hard the operator tries. Determining the cause of substandard performance in-
volves going beyond an examination of task performance, however. It involves
examining the standards being applied and the accuracy of the measurement
and comparison processes. As Lester Bittel and Jackson Ramsey explain, the
control may be too loose or too tight:
If control is too loose, a deviation between actual and planned perfor-

mance may result in poor coordination among organizational subunits
and the failure to respond in time to unforeseen problems or opportu-
nities. Loose control may also reduce some of the incentives for man-
agers to meet their plans. On the other hand, tighter control generally
calls for additional data collection, information processing, and man-
agement reporting. The cost and inconvenience of the “red tape” associ-
ated with tight control is likely to be resented by the persons being con-
trolled. Tight control may restrict the ability of lower-level managers to
exercise imagination and initiative in response to changed conditions. 8
In today’s productivity- and quality-centered environment, workers and

managers are often empowered to evaluate their own work for quality, produc-
tivity, and cost improvements. Individuals and groups throughout organizations
are being given the responsibility to control their own behaviors and operations.
By putting the authority to make decisions in the hands of those who are best
equipped to carry them out, employees can respond almost instantly to substan-
dard performance.
ETHICAL MANAGEMENT
a g es
Enron Loses Customer Trust
Get t y Im
In order to earn customers’ trust and respect their privacy, The company became one of the world’s dominant en-
managers must value honesty and integrity. “In corporate ergy firms by reshaping the way natural gas and electric-
America, it is the chief executive who sets the tone for ity were bought and sold. “Enron adopted an identity as
character. The CEO establishes a corporate culture that a trader and market maker in everything from high-speed
will either foster character or create trouble. In the recent Internet access to wholesale power. But this online trad-
spate of downfalls, CEOs’ biggest failure has been their ing platform is virtually worthless if customers aren’t will-
inability to demonstrate and nurture character” (Kansas). ing to use it” (Oldham).
Enron’s CEO was greedy. A Senate report stated that Customers lost confidence in Enron. “Executives made
“Enron’s former chief executive officer, Kenneth Lay, repeated public assurances that Enron’s finances and busi-
used his credit line to withdraw $77 million in cash from ness operations were healthy, only to have those state-
the company in one year, replaced the cash with company ments refuted by subsequent revelations” (Emshwiller
stock, and never mentioned his borrowings or stock sales and Smith). The company filed for bankruptcy protection
to the board or the public” (U.S. Senate). from creditors in one of the largest such filings in history.
Enron undermined customers’ trust. When custom- Kenneth Lay was convicted of conspiracy and fraud in a
ers found out that “Enron kept hundreds of millions of dol- Houston courtroom on May 25, 2006.
lars in debt off the company’s books in partnerships which
• Enron stated its core values to be respect, integrity,
were paying millions of dollars in fees to the Enron execu-
communication, and excellence. Why do you think
tives who ran them” (Oldham), customers stopped doing
these values could not overcome individual and collec-
business with the company.
tive greed?
Enron, the United States’ seventh-largest company in
revenue in 2000, was established in 1985, after federal de- Sources: Enron, http://www.enron.com; John Emshwiller
and Rebecca Smith, 24 Days: How Two Wall Street Journal
regulation of natural gas pipelines. The gas pipeline com- Reporters Uncovered the Lies That Destroyed Faith in Corporate
pany evolved into a high technology trading business. America, HarperBusiness, August 5, 2003; Dave Kansas, “A
Restoration of Character Should Top the Reform List,” The Wall
EnronOnline, the first Web-based global commodity- Street Journal, July 2, 2002, http://online.wsj.com/article_print/
trading site, was launched in November 1999. “Enron 0,,SB1025562994393019280,00.html; Charlene Oldham, “Enron’s
fall promises a legal mess,” Dallas Morning News, Decem-
prospered on the Net not so much because it had good ber 5, 2001, 1D; Robert Preston, “The Internet Didn’t Kill Enron,”
technology—though the proprietary EnronOnline platform InternetWeek.com, November 30, 2001; U.S. Senate, Senate Report:
The Role of the Board of Directors in Enron’s Collapse, July 8, 2002,
is considered leading-edge—but because online custom- http://www.senate.gov/⬃gov_affairs/070702enronreport.pdf; Bill
ers trusted the company to meet its price and delivery Thomas, “The Rise and Fall of the Enron Empire,” Today’s CPA, v. 28,
no. 2, Spring 2002.
promises” (Preston).
Taking Corrective Action

When an employee determines the cause, or causes, of a significant deviation
from a standard, he or she must take corrective action to avoid repetition of
the problem or defect. Policies and procedures may prescribe the actions. Such
guidelines help shorten the time needed to react to deviations.
Policies and procedures cannot be employed in all instances, however. In
some cases, pressures and controls imposed from outside an organization dic-
tate the nature of corrective action. Some corrective actions are automatic. Just
as a thermostat can activate a heating or cooling system automatically, assem-
bly operations with computer-guided equipment can sense deviations and take
corrective actions without the need for human involvement. Managers must not
overlook automatic controls when searching for the causes of substandard per-
formance. Even automatic controls can malfunction on occasion.
Some corrective actions call for exceptions to prescribed modes of behavior.
To retain the goodwill of a valued customer, for example, a manager may autho-
rize an exception to the fi rm’s refund policy. Some hotel and restaurant chains
empower customer-service employees to “do whatever it takes” to guarantee
customer satisfaction. If managers direct employees to do whatever it takes, the
employees must be allowed to use their discretion and judgment. The employ-
ees will face problems for which no guidelines exist—problems that will demand
unique and creative solutions. Procedures, rules, and policies should not be sub-
stitutes for good judgment and employee initiative. This chapter’s Valuing Di-
versity feature points out a problem for mature workers.
Types of Controls and Control Systems

In this section we begin by discussing three types of controls: feedforward con-
trols, concurrent controls, and feedback controls. Each focuses on a different
point of a process—before the process begins, during the process, and after it
ceases. Most experts agree that controls “are most economic and effective when
applied selectively at the crucial points most likely to determine the success or
3
Describe the nature
and importance of
feedforward, concurrent,
and feedback controls
failure of an operation or activity.” 9 A restaurant must focus on controlling the
quality, preparation, and presentation of its ingredients. All these control points
are critical to the restaurant’s safe and effective operation. Poor ingredients will
yield a bad meal, as will poorly cooked food. Poor customer service will alien-
ate diners. Figure 16.2 shows how the three types of controls apply to restaurant
operations.
Feedforward Controls
Controls that focus on operations before they begin are called feedforward con- feedforward control
trols. (These are sometimes called preliminary, screening, or prevention con- A control that prevents defects
and deviations from standards
trols.) Feedforward controls are intended to prevent defects and deviations from
standards. Locks on doors and bars on windows, safety equipment and guide-
lines, employee-selection procedures, employee-training programs, and bud-
gets are all feedforward controls. When a manufacturer works closely with its
suppliers to ensure that the suppliers deliver goods and services that meet stan-
dards, the manufacturer is implementing a feedforward control. A maintenance
procedure that keeps equipment in top-notch shape is also a feedforward con-
trol. McAfee VirusScan and Norton AntiVirus computer software are examples
of feedforward control. The software, which can detect and remove known vi-
ruses from computers, is continually updated.
Concurrent Controls
Controls that apply to processes as they are happening are called concurrent concurrent control
controls, or steering controls. Consider word processing software, which allows A control that applies to pro-
cesses as they are happening
a writer to change a document before storing or printing it. The software pro-
vides concurrent control. A word processor’s spelling checker also provides con-
current control.
VALUING DIVERSITY
a g es
Reliable Mature Workers
Get t y Im
Age discrimination is a problem for mature workers. The In reality, mature workers have more experience than
Age Discrimination in Employment Act prohibits age dis- younger workers. In a joint study conducted by AARP and
crimination in employment and is enforced by the U.S. the Society for Human Resource Management, the ma-
Equal Employment Opportunity Commission. It protects jority of employers agreed that older workers tend to be
an employee from discrimination based on age if he or more reliable and have higher levels of commitment to the
she is over 40. “While race, sex and retaliation com- organization than younger workers (Lommel). The National
plaints to the Equal Employment Opportunity Commis- Council on Aging reports that extensive research shows
sion (EEOC) decreased in 2001, age discrimination in the no relationship between age and on-the-job performance.
workplace complaints increased” (Payne). From now until 2010, the fastest-growing age group will
The Chicago Tribune reported that the numbers prove a be people between 55 and 64. Most of those in this group
harsh new reality (Lommel). plan to work at least part time after the age of 65 (National
Council on Aging).
As the economy slows, older workers are feeling more
than their share of the pain. Perceived as less productive • How long do you think you will want to work after you
than younger employees and earning relatively high sala- turn 50? Develop a vision of how you want to see your-
ries, these workers are often targeted for termination or self at work in your fifties, sixties, and seventies.
denied promotion, advocates tell the newspaper. Rightly Sources: Melanie Payne, “Jobless Pool,” Bakersfield Cali -
or wrongly, they think that gray hair and experience mean fornian, Sacramento Bee, March 18, 2002, http://www
.discriminationattorney.com/jobless_pool.html; Jane M. Lommel,
that 50-plusers are reluctant to try new ways of doing their Ph.D., “The New Definition of ‘Older’ and the New Dilemmas
work or to tackle the relentless stream of new technology. in the Workplace for the Older Worker,” NewWork News, Septem-
ber 2001, http://www.newwork.com/Pages/Networking/2001/
In other words, “older” means the proverbial old dogs, un- Older%20workers.html; National Council on Aging, http://www
willing or unable to learn new tricks that will help employ- .ncoa.org.
ers deal with the hurly burly of the modern workplace that
is cutthroat and unforgiving.
Some concurrent controls are designed to provide readouts or audible warn-

ings. Most photocopiers and computer printers, for example, have display pan-
els that alert their users to malfunctions during operation. Many of the devices
on the dashboard of an automobile are concurrent controls. The odometer keeps
track of miles traveled; the speedometer tracks the speed of the vehicle. Vari-
ous warning lights alert the driver to impending or actual problems, such as a
low fuel or oil level and problems with the brakes or computerized systems. The
steering wheel is a concurrent control that allows a driver to make adjustments
in the course of the vehicle. If you try to exit a newly built automobile with-
out turning off the headlights, a warning device, perhaps even a gently scolding
electronic voice, may concurrently control you.
Actual and Projected Increase in Mature Worker Population, by Labor Force Status, 1998–2008
(in thousands)
Labor Market Status 1998 1999 2008 Change
and Age Group (actual) (actual) (projected) 1999–2008
LABOR FORCE PARTICIPANTS
45–49 15,920 16,330 19,473 3,143

50–54 12,450 13,058 17,317 4,259
55–59 8,490 8,895 13,093 4,198
60–64 4,720 4,787 7,495 2,708
65–69 2,110 2,137 2,732 595
70 and older 1,740 1,868 1,913 45
Total 45 and older 45,430 47,075 62,023 14,948
EMPLOYED
45–49 15,510 15,904 18,965 3,061

50–54 12,130 12,731 16,884 4,153
55–59 8,270 8,656 12,741 4,085
60–64 4,600 4,659 7,294 2,635
65–69 2,060 2,065 2,640 575
70 and older 1,690 1,817 1,861 44
Total 45 and older 44,260 45,832 60,385 14,553
UNEMPLOYED
45–49 410 426 508 82

50–54 320 327 433 106
55–59 220 239 352 113
60–64 120 128 201 73
65–69 60 72 92 20
70 and older 50 51 52 1
Total 45 and older 1,180 1,243 1,638 395
Source: Actual and projected labor force and employment data from Bureau of Labor Statistics tabulations dated 12/99.
Unemployment for 1999 and 1998 from BLS published table, “Employment status of the civilian non-institutional popula-
tion by age, sex, and race.” For 2008, this exercise assumes a national unemployment rate of 4.0; and employment and
unemployment by age are estimated by applying 1999 rates for each age group. Numbers shown may not total exactly,
due to rounding.
The most important concurrent control in any undertaking is often the

skilled and experienced operator, whose eyes, ears, and “feel” for the operation
give timely warnings that things are not as they should be. Recognizing the im-
portance of experienced employees as control mechanisms, many companies are
enhancing workers’ power to influence operations.
Feedback Controls
Controls that focus on the results of operations are called feedback controls. feedback control
They are after-the-fact, or postperformance, controls. They are called feedback A control that focuses on the
outputs or results of operations
controls because the information they provide is fed back into the process or to
the controller, who must then make any necessary adjustments. “On a larger
Figure 16.2 Three types of controls applied to restaurant operations
Feedforward Concurrent Feedback

Controls Controls Controls
Inputs Work in Process Outputs
Plan menus, select Monitor kitchen, Ensure on-time

vendors, select bar, and restaurant delivery of
ingredients, arrange processes and finished product
delivery schedules, personnel and customer
train personnel performance satisfaction
Information to Management
Feedback for Corrections
scale, however, measurements and comparisons made after an operation has

been concluded (postperformance) serve to guide future planning, goals, inputs,
and process designs.” 10 At the end of the year, for example, a manager should
carefully review the budget control report. Which accounts were overdrawn?
Which accounts retained a surplus? Were priorities established through the bud-
get proper and in line with organizational demands? Why or why not? Lessons
learned from historical information can be used to perform every task more ef-
fectively and efficiently. Everyone can learn from past performance.
Control Systems
4
Describe the importance
of a control system
control system
Feedforward, concurrent, and feedback controls should be viewed as part of an
overall control system. Able managers integrate suitable control combinations
to enforce standards, make sure elements function smoothly with one another,
and ensure that resources are used effectively and efficiently. Today companies
are emphasizing feedforward and concurrent controls. They are avoiding depen-
A system in which feedfor- dence on feedback controls, which often provide information when it is too late
ward, concurrent, and feedback to avoid losses.
controls operate in harmony to Change agent Gary Loveman instituted a rigorous overall control system for
ensure that standards are en-
forced, goals are reached, and Harrah’s by using the three techniques of control. At Harrah’s, feedforward, or
resources are used effectively prevention, controls include surveying of customers before making changes. The
and efficiently company’s emphasis on feedback, or postperformance, controls included return
on investment, cash-flow management, and a form of economic value added.
Harrah’s managers and employees at all corporate levels use a variety of concur-
rent controls, including scrutinizing processes, analyzing and rectifying errors,
and putting measures in place to ensure errors do not reoccur.
Characteristics of Effective Controls

Controls at every level focus on inputs, processes, and outputs; but what charac-
teristics make controls effective? Effective controls are focused on critical points
and integrated into the corporate culture. They are timely and accepted by those
who use them or abide by them. In addition, effective controls are economically
feasible, accurate, and comprehensible.
5
Explain the characteristics
of effective controls and
the steps managers can
take to make controls
more effective
Focus on Critical Points
Critical control points are all the operations that directly affect the survival of critical control point
an organization and the success of its most essential activities. Critical control An area of operation that di-
rectly affects the survival of a
points exist in many areas of business activity—production, sales, customer ser- firm and the success of its most
vice, and fi nance, for example. Controls should focus on those points at which essential activities
failures cannot be tolerated and where time and money costs are greatest.
The objective is to apply controls to the essential aspects of a business, not
the peripheral ones. Having a salesperson report on all the activities undertaken
during a long sales trip would be one method of control. The resulting report
would probably obscure the important issues, however, and the task of writing
it would burden the salesperson. A simple report of actual sales calls and sales
revenues would be far more relevant and effective.
The organizations in this chapter’s opening and closing cases focus on gain-
ing control over costs—an area critical to a company’s success. Harrah’s focuses
on controlling computers and on instituting preventive measures in developing,
for example, a customer relationship management system that can meet cus-
tomer demand. Toshiba eliminates some costs and reduces others through care-
ful analysis and comprehensive actions, such as realigning itself around a few
core areas and spinning nonessential business units into joint ventures.
Integration
Controls exhibit integration when the corporate culture supports and enforces
them and when they work in harmony, not at cross-purposes. When controls
and the need for them are consonant with the organization’s values, the controls
will be effective. Coordinated controls do not impede work; they function har-
moniously to give people what they need to make informed judgments.
At Harrah’s, Loveman realized that risk management would mean more
than rules. It would require reforming the company’s culture and instilling in in-
dividuals the commitment to customer service and the desire to act ethically and
responsibly in all their undertakings.
When managers and employees trust each other, and workers at all levels
believe that the controls are necessary, employees can be relied on to implement
the controls. When everyone accepts the organization’s mission and culture, the
corporate climate nourishes self-discipline and commitment. Work teams are
self-policing and share values that are consistent with those of the organization.
As workers enter these supportive environments, managers and coworkers take
care to ensure that the newcomers “buy into” the culture.11
Acceptability
People must agree that controls are necessary, that the particular kinds of con-
trols in use are appropriate, and that the controls will not negatively impact in-
dividuals or their efforts to achieve personal goals. Controls that appear to be
arbitrary, subjective, or an invasion of privacy will not elicit the support of those
they affect. Likewise, controls that are redundant (except when necessary for
health and safety) or too restrictive will go unsupported. In fact, such controls
will stimulate covert and overt opposition. Too many or too few controls, as
well as those that are confusing, create stress and resistance. Frustration, fear,
and loss of motivation and initiative can result.
Through fl extime, a motivational technique introduced in Chapter 12, em-
ployees gain more control over how and when they work. Although more than
40 percent of U.S. employers offer some kind of flexible work schedules, their
employees perceive that a request for such an accommodation may put their
careers and job security at risk. In many cases when employees seek such
changes, their bosses view them as being in some kind of trouble, putting their
private lives ahead of their working ones, or asking for “special” treatment at an
inconvenient time. To prevent such biases from sabotaging efforts to accommo-
date its employees, WFD Consulting “does not ask the reason for the request, so
the request is easier to approve or deny strictly on business grounds.” 12 The de-
cision is made on the basis of how the new work arrangement being requested
“will benefit the company.” Thus acceptance of the program by all parties is
enhanced.
Timeliness
Controls must ensure that information reaches those who need it when they
need it; only then can a meaningful response follow. One reason for setting
deadlines is to ensure that information flows promptly. If deadlines are treated
casually or unrealistically (if the manager always wants things yesterday), peo-
ple will soon come to ignore them. In such a case, deadlines are totally ineffec-
tive as controls.
Economic Feasibility
The costs of a control system must be weighed against its benefits. If the re-
sources expended on the controls do not return an equal or greater value, the
controls are better left unimplemented. Suppose a costly security system is com-
posed of highly trained personnel, sophisticated electronic surveillance equip-
ment, and fi ngerprint scanning. Such a system is suitable for valuable capital
equipment and facilities, but not for ensuring the security of the office supply
cabinet.
Sometimes controls are necessarily costly and redundant. Jet aircraft, nu-
clear power plants, and hospital operating and intensive care facilities need re-
dundant, or back up, systems so that a potentially life-threatening failure of the
primary system can be overcome. Redundant and expensive controls are often
required to prevent problems that, if they occur, would mean irrecoverable loss
or irreparable damage far more costly than the controls.
Accuracy
Information is useful if it is accurate. Accuracy relates particularly to concur-
rent controls used to diagnose deviations from standards. Controls that offer in-
accurate assessments feed decision makers the wrong input, which causes them
to give inappropriate responses. When a project manager reports that produc-
tion is two weeks behind schedule because of poor team attendance, her boss
begins an investigation. It turns out that, though several people have been ab-
sent, they were not key to production. The delay was actually caused by the fail-
ure to properly plan the flow of work and set meaningful deadlines.
Comprehensibility
The more complex a control becomes, the more likely it is to create confusion.
The simpler the control, the easier it will be to communicate and apply. Anyone
who has struggled with assembly instructions for a hobby kit knows firsthand
how rare well-written instructions are. Controls in the form of instructions are
often complex because more than one person created, implemented, and inter-
preted them. Complexity can also result when the people creating the controls
lose sight of the purposes of the controls.
Too many controls can lead to confusion. (The notion that if one control is
good, two must be better, is common but incorrect.) Refi nements in reporting
procedures often lead to the proliferation of controls. The result can be a profu-
sion of data that sidetracks control efforts.
Computers are reducing complexity and confusion in many environments.
Bar codes attached to inventory items and to materials moving along an assem-
bly line simplify the process of tracking. Radiofrequency identification technol-
ogy (RFID) is used to track goods as they move from suppliers to warehouses to
distribution centers to stores. The use of RFID in casinos is depicted in this chap-
ter’s Managing Technology. Some computer software allows voice commands—
even commands in a foreign language—to activate or access processes. Machines
that use symbols rather than words further overcome language barriers. “Smart”
software and a few keystrokes or flicks of a light pen can get things on track.
All these innovations to enhance communication and reduce confusion help keep
control efforts simple.
Control Monitoring
Controls are effective as long as they do what they are intended to do, do not
generate opposition, and do not result in costs greater than the benefits they pro-
vide. Changing circumstances require organizations to monitor controls to en-
sure that they remain effective.
Monitoring Organizational Impacts

Managers need to know the impacts of controls. Controls can generate support
or antagonism. Involving employees in the design of controls can help ensure
support. Controls that employees believe are equitable seldom encounter resis-
tance. When monitoring the impact of controls, managers can use the following
techniques:
• Before-and-after comparisons. This approach assesses the organization’s
environment before and after implementation of the control and notes dif-
ferences that have occurred. If defects were 10 per 100 before the control
and then dropped to 1 per 1000 after the control was implemented, the or-
ganization should obviously retain the control and keep working on reduc-
ing the defects.
• Surveys of employees affected by the controls. A manager who wants to de-
termine the impact of a control should collect relevant data at several points
in time. Multiple surveys will not only reveal perceptions, but also show
when the perceptions were formed. Positive feedback indicates that controls
are accepted and integrated. Negative feedback requires that the causes of
resistance be determined. Factors other than controls may affect percep-
tions. The manager must take care to consider all the changes that have
taken place between measurements.
• Controlled experiments. To form a sound assessment of the effect of a

change, scientific practice requires a survey of the changed group as well as
of a group that works without the change. The unchanged group is called
the control group. Both groups are studied to determine significant differ-
ences in their results, norms, values, perceptions, and behaviors. The tech-
nique of the controlled experiment isolates those effects that can be specifi-
cally linked to the change.
Updating Controls
Controls are designed to deal with specific people, processes, and circumstances.
When any of these variables changes, managers need to reevaluate the controls.
Figure 16.3 presents a list of changes that usually call for a reexamination of an
organization’s controls.
Figure 16.3 Typical changes that require reexamination of controls
CHANGES TO MISSION
What is the present purpose of the organization?
Was the recent change planned?
If not, how much of the change was driven by controls and the control system?
Are the changes good? How will current plans affect the mission?
Should the mission be changed again? If so, how?
How will changes to the mission affect controls and the control system?
STRUCTURAL CHANGES
Have the changes altered the organization’s ability to meet its goals?
What roles did controls and the control system play in making these changes come
about?
Have efforts at controlling affected the organization’s span of control, chain of
command, degree of decentralization, and job definitions? If so, have the effects
been positive or negative?
Are the controls worth any difficulties they have created?
Have structural changes made changes to controls or the control system necessary?
CHANGES IN DECISION MAKING

Did the control system alter the information flow required for decision making?
Is there more decentralized decision making now than in the recent past?
Is the quality of decisions being made today equal to that of the past?
Is the management information system adequate?
What roles have controls played in any of these issues?
Do changes in decision making require changes in controls, the control process, or
the control system?
CHANGES IN HUMAN RELATIONS

Do people enjoy working in the organization?
Is there an unacceptable level of waste?
Are high costs or frequent disciplinary actions, tardiness, or absenteeism related to
personnel actions?
Have quality and productivity been affected?
Have there been changes to group norms and cultures?
Has the interaction between managers and their subordinates improved or
worsened?
Are controls or control systems contributing factors to improvements or declines?
Are changes needed in either the controls or the control system?
TECHNOLOGICAL CHANGES
What is the effect of recent technological change on controls and the control
system?
Are any changes in technology being planned?
What will be their impacts on controls and the control process?
Are the controls, control process, and control system using the latest beneficial
technology? Should they be?
Are the costs of using the latest technology worth its adoption?
People tend to get comfortable with the way things are. Once controls are
introduced, implemented, and yield results, people become complacent; the con-
trols become a part of daily routine. A continual repetition of the past, however,
means lost opportunities and delays in implementing needed changes. By sim-
ply relying on controls and systems that are in place, managers fail to make full
use of the preventive nature of the controlling process. The instant that com-
pany changes occur or are planned, managers should begin to determine if pres-
ent controls will be adequate and applicable to the new situation. Invariably,
changes are needed to the controlling effort as well. Controls themselves need to
be controlled!
Subsystem Controls
An organization needs an overall control system, as do its subsystems. A fi rm’s
strategic plan guides the creation of its overall control system; the plans of sub-
systems (most often functional areas or processes) do the same at or throughout
their levels.
The functional subsystems that require integrated and flexible control tech-
niques are fi nance, marketing, operations (production), human resources, man-
agement information systems, and other management support activities. Among
the management support subsystems are legal services, public relations, and cen-
tralized computer services. This chapter examines several control techniques
used by fi nance, marketing, and human resource managers (see Figure 16.4).
(Control techniques for operations managers are discussed in Appendix A;
Chapter 15 addressed techniques appropriate for those in charge of information
management systems.)
Finance Controls
Finance managers need to gather as well as generate information about all aspects
of the organization’s operations to determine its current and future ability to
meet its fi nancial obligations. Based on the organization’s strategic plan, financial
managers measure and monitor ongoing operations and prepare their estimates
and forecasts for future sources and uses of funds. All organizational operations
affect and are affected by the work of fi nancial managers; thus, close working re-
lationships are necessary between them and all other managers. The organiza-
tion must measure and monitor all processes to properly assess their fi nancial im-
pacts. It must gather, analyze, and disseminate the fi nancial data generated in a
timely manner. It must also establish and enforce standards in the form of limits
on spending in each unit, department, and in the organization as a whole.
Marketing Controls
As with fi nance, the organization’s strategic plan dictates in part the plans of
marketing managers. Like fi nance managers, marketing managers must work
closely with others—fi nance and operations in particular—in designing, pric-
ing, promoting, and distributing products and services. They must gather re-
search on the composition and location of potential as well as current customers.
They must determine product and service features and performance character-
istics that meet or exceed customer expectations, but they must build these in at
a price consumers are willing to pay and in line with allocated funds. Projected
sales will determine, in part, production scheduling.
Figure 16.4 Control techniques for common functional areas of a business
FINANCIAL CONTROL TECHNIQUES
• Plans • Financial responsibility • Ratio analysis • Audits

centers
• Financial statements • Financial ratios • Budgets
MARKETING CONTROL TECHNIQUES
• Plans • Test-marketing • Sales quotas • Budgets

• Market research • Marketing ratios • Stockage models • Audits
OPERATIONS CONTROL TECHNIQUES
• Plans • Cost centers • Inventory reordering • Budgets

and delivery systems
• Quality assurance • Material requirements • Maintenance • Audits
planning scheduling
• Productivity indexes • Production scheduling • Inspection and
and routing sampling
HUMAN RESOURCE CONTROL TECHNIQUES
• Plans • Human asset valuation • Attitude surveys • Budgets

• Statistical analysis • Performance appraisals • Training and • Audits
development
programs
MANAGEMENT INFORMATION SYSTEMS CONTROL TECHNIQUES
• Prototype and pilot • Decision support • Expert systems • Budgets

testing systems
• Security systems • Networks • Software programs • Audits
Harrah’s knows its market and the number of gamers it reaches; the typi-
cal age, gender, and income for its users; and the number of repeat visitors it
draws. Gary Loveman says, “Our approach is different. We stimulate demand
by knowing our customers.” 13
Human Resource Controls

Although Chapter 10 discussed staffing functions and their various controls, a
brief summary of the major human resource control techniques is in order here.
The organization’s strategic plan tells HR managers whether staffi ng require-
ments will increase or decrease over the short and long term. Managers need
plans to acquire or reduce personnel. They must continually review existing jobs
to keep the job descriptions and specifications up to date. Plans for expansion or
decisions to reorganize anywhere in the organization may create new jobs and
activities. Human Resources must establish and conduct training and develop-
ment programs to teach the new and different procedures and prepare people
for job changes. Managers must also periodically review each employee’s morale
and performance, as well as the climate and culture, to determine what, if any-
thing, needs changing.
We now turn our attention to specific functional control techniques used to
some extent by every business. We begin with the area of fi nancial controls, ex-
amining, in turn, fi nancial statements, ratio analysis, responsibility centers, and
audits. Following these we examine budget, marketing, and human resource
control techniques.
Financial Controls
6
Describe the content of
the three primary financial
statements and how
managers use them
Financial resources are central to management. Without control over adequate
funds, an organization cannot survive. Each fi nancial activity requires specific,
relevant control techniques. Some types of organizations (banks, for instance, or
the Internal Revenue Service) require unique and elaborate fi scal controls. The
controls such organizations use are unlike those of manufacturers and retailers.
This chapter will examine control techniques common to all types of businesses.
Financial Statements
Nearly all organizations use two primary fi nancial statements, the balance sheet
balance sheet and the income statement. The balance sheet identifies the assets of an organi-
A listing of the assets of a busi- zation—what it owns and the nature of the ownership—at a fi xed point in time.
ness and the owners’ and out-
siders’ interests in them. The The income statement presents the difference between an organization’s income
equation that describes the and its expenses to determine whether the enterprise operated at a profit or a loss
content of a balance sheet is over a specified period of time. Each provides a measure of feedback and concur-
Assets Liabilities + Stock-
holders’ equity rent control over fi nancial and related activities. Both are used to prepare bud-
gets and other kinds of plans and controls and to monitor the organization’s fi-
income statement nancial health.
A report that presents the dif-
ference between an organiza-
tion’s income and expenses to Balance Sheet Figure 16.5 presents the balance sheet for one full year—or fis-
determine whether the firm op-
erated at a profit or a loss over cal year—of operations for the Excel Corporation, a hypothetical medical sup-
a specified period ply company. (Like a calendar year, a fiscal year contains 365 days; however, it
can begin at whatever time an organization dictates. The fiscal year for the U.S.
government, for example, runs from October 1 to September 30.) The balance
sheet presents three categories of fi nancial data—assets, liabilities, and stock-
holders’ equity—as they exist on a specific date. The word balance in the term
“balance sheet” derives from the fact that the total assets must equal (balance)
the sum of liabilities and stockholders’ equity. Thus, the equation that describes
a balance sheet is
Assets Liabilities Stockholders’ Equity
Assets are the resources owned by a business. They usually fall into one of two
categories—current or fi xed. Current assets are cash, or items that are normally
converted into cash, within one year from the date of the balance sheet. Fixed as-
sets are assets not intended for sale or conversion to cash. Fixed assets include land,
buildings, and the equipment used to conduct the activities of the business.
Liabilities are what a company owes—its current and long-term debts. Cur-
rent liabilities are debts due and payable within one year of the date of the bal-
ance sheet. Long-term liabilities are those due after one year from the date of the
balance sheet. Included as liabilities are the claims by outsiders (creditors) on the
assets of a business.
Figure 16.5 Balance sheet of the Excel Corporation
EXCEL CORPORATION
Balance Sheet
December 31, 200—
ASSETS
Current Assets
Cash $ 17,280
Accounts Receivable 84,280
Inventory 41,540
Prepaid Expenses 12,368
Total Current Assets $155,468
Fixed Assets
Building (Net) $ 33,430
Furniture and Fixtures (Net) 13,950
Land 14,000
Total Fixed Assets 61,380
Total Assets $216,848
LIABILITIES
Current Liabilities
Notes Payable $ 10,000
Trade Accounts Payable 41,288
Salaries Payable 400
Taxes Payable 14,000
Total Current Liabilities $ 65,688
Long-Term Liabilities
Mortgage Payable $ 8,000
Bonds Payable 3,280
Total Long-Term Liabilities 11,280
Total Liabilities $ 76,968
STOCKHOLDERS’ EQUITY
Common Stock (1000 shares
at $100 par value) $100,000
Retained Earnings 39,880
Total Stockholders’ Equity 139,880
Total Liabilities and Stockholders’ Equity $216,848
The difference between the value of an organization’s assets and its liabili-
ties equals the owners’ interests in the assets of the business—their equity. Since
stockholders own a corporation, its equity is called stockholders’ equity. In a
sole proprietorship or partnership, the equity portion of the balance sheet is
usually called owner’s equity. To illustrate, assume that a sole proprietor buys
a delivery truck that costs $10,000. The proprietor puts down $3000 in cash
for the truck and arranges to borrow the remaining $7000. The business owner
now possesses an asset worth $10,000 but has also incurred a liability, or debt,
of $7000. The difference between the truck’s value and the debt created to pur-
chase it is $3000—the amount of the proprietor’s money that was used to pur-
chase the truck. The proprietor’s equity is $3000.
Even as the balance sheet is being prepared, of course, changes occur that
alter the mix of assets, liabilities, and equity. The utility of the balance sheet lies
in the fact that it allows analysts to make comparisons from year to year and
identify trends. In addition, the balance sheet yields information used to calcu-
late various measures of the company’s fi nancial health and of its management
effectiveness. We will discuss some of these measures later in this chapter.
Income Statement Figure 16.6 presents the Excel Corporation’s income state-
ment, which summarizes the fi rm’s accumulated income and expenses for a one-
year period. The content of an income statement, like the content of a balance
sheet, can be expressed as an equation. The equation that describes an income
statement is
Income Expenses Profit or Loss
Managers use income statements as tools for reviewing the expenses and
revenue of a business on an ongoing basis. They can prepare these tools to re-
flect any necessary time frame—a day, a week, a month, and so on. An income
statement includes seven important categories:
1. Net sales, or the revenue from sales minus returns and allowances
2. Cost of goods sold, or the costs connected with making or acquiring goods
that the organization has sold
Figure 16.6 Income statement of the Excel Corporation
EXCEL CORPORATION
Income Statement
Year Ended December 31, 200—
REVENUE
Sales $ 778,918
(Less Returns and Allowances) (14,872)
Net Sales $764,046
COST OF GOODS SOLD

Beginning Inventory, January 1 $ 37,258
Plus Net Purchases 593,674
Goods Available for Sale $630,932
(Less Ending Inventory, December 31) (41,540)
Cost of Goods Sold 589,392
Gross Profit on Sales $174,654
OPERATING EXPENSES
Selling Expenses $ 69,916
General and Administrative 45,100
Research and Development 9,970
Total Operating Expenses (124,986)
Net Income Before Taxes $ 49,668
(Less Federal and State Income Taxes) (18,315)
Net Income $ 31,353
3. Gross profit, or the measure of operating profits (obtained by subtracting

the cost of goods sold from net sales)
4. Operating expenses, or overhead expenses (such as rent, advertising, utili-
ties, insurance, and compensation paid to personnel not engaged in produc-
ing goods) that reduce gross profit
5. Net income (or loss) before taxes, or the profit or loss of the business (ob-
tained by subtracting operating expenses from gross profit)
6. Taxes, or the percentage of net income paid to governments
7. Net income, or the profit left after paying taxes (the literal “bottom line”)
Like a balance sheet, an income statement yields information needed to

track the health of the organization it describes. The major purpose of the in-
come statement is to measure trends in costs and income, noting growth or de-
cline in each category.
Sources and Uses of Funds Statement A summary of the cash flowing into
an organization and how it is used over a fi xed period is called its sources and sources and uses of funds
uses of funds statement. Sometimes called a cash flow statement, this document statement
A summary of the cash flowing
tracks a company’s cash receipts (from sales revenue and asset disposal, for ex- into an organization and how
ample) and payments (for such items as reducing accounts payable and interest it is used over a fixed period of
on debt). Financial managers use it as a control technique to measure net in- time. This statement is often
called a cash flow statement
creases or decreases in cash over a period and to spot cash flow trends through
comparisons to previous cash flow statements. A sources and uses of funds state-
ment for Excel Corporation is shown in Figure 16.7.
Figure 16.7 Sources and uses of funds statement for the Excel Corporation
EXCEL CORPORATION
Sources and Uses of Funds Statement
December 31, 200—
CASH FLOW FROM OPERATING ACTIVITIES

Net Income after Tax $31,353
Decrease in Accounts Receivable 5,400
Increase in Inventory (6,200)
Decrease in Accounts Payable (2,550)
Cash Provided by Operations $28,003
CASH FLOW FROM INVESTMENT ACTIVITIES

Increase in Gross Fixed Assets $ (4,300)
Cash Used for Investments (4,300)
CASH FLOW FROM FINANCING ACTIVITIES

Decrease in Notes Payable $ (3,200)
Decrease in Long-Term Debt (2,150)
Cash Used for Financing (5,350)
Net Increase in Cash $18,353
Using fi nancial data generated from Excel’s activities throughout one year,
we can construct the statement in Figure 16.7. Note that cash flow is divided
into three main groupings: operating, investment, and fi nancing activities. Num-
bers shown in parentheses represent uses of funds—that is, decreases to cash re-
ceipts because of dollars invested or dollars used to pay debts. All other num-
bers are sources of funds. The sources and uses of funds statement shows a net
increase of $18,353 for the one-year period covered by its balance sheet and in-
come statement. It also shows that Excel had the cash needed to acquire new in-
ventory and fi xed assets and to reduce accounts payable, notes payable, and long-
term debt.
Financial Ratio Analysis
7
Explain ratio analysis and
four types of ratios used
by managers
A ratio expresses the relationship between numbers. The fraction 1 ⁄2 is a ratio.
Ratios can be used to express the relationship between numbers in several ways:
in words (as in “one to two” or “one part of two parts”), as a percentage (50%),
or as a decimal (0.5).
A financial ratio involves selecting two critical figures from a fi nancial state-
financial ratio ment and expressing their relationship as a ratio or percentage. Financial ratios
The relationship of two criti- help accountants and others measure a company’s progress toward goals and as-
cal figures from financial state- sess its fi nancial health. On the surface a firm may appear to be sound, its bal-
ments—expressed in terms of a
ratio, decimal, or percentage— ance sheet reflecting impressive assets. But if the ratio of current assets to cur-
that helps managers measure a rent liabilities is poor (less than 2 to 1), the company may have difficulty raising
company’s financial health and enough cash to meet short-term debts. Ratios can be involved in one of two
its progress toward goals
types of comparisons. First, this year’s ratio can be compared with the same
kind of ratio for a past year. Or, a ratio describing one company can be com-
pared with the same kind of ratio that describes a competitor.
Figure 16.8 lists frequently used ratios, describing how they are calculated
and for what purposes they are used. This chapter will focus on four of the most
common types: liquidity, profitability, debt, and activity ratios.
Liquidity Ratios To measure the ability of a firm to raise enough cash to meet
short-term debts, managers use liquidity ratios. To derive the most common li-
quidity ratio—the current ratio—the manager simply divides the figure for cur-
rent assets by the figure for current liabilities (both figures are available on the
company’s balance sheet). To calculate the current ratio for the Excel Corpora-
tion by using the balance sheet shown in Figure 16.5, divide total current assets
($155,468) by total current liabilities ($65,688). The result is 2.37 to 1. This ra-
tio means that Excel possesses $2.37 in cash (liquid assets) for each dollar in-
curred in current debt. Because most experts consider any ratio higher than 2 to 1
to be adequate, Excel may be considered fiscally healthy. Ratios lower than 2 to 1
indicate that a company is overburdened with short-term debt.
Profitability Ratios Managers use profitability ratios to study a company’s

profits from several perspectives. To determine profits generated from sales, di-
vide net profits after taxes by net sales. To calculate the profit generated from
the owner’s investment, divide net profits after taxes by tangible net worth. Us-
ing Excel’s income statement, the company’s profit ratio on sales ($31,353 in
profit divided by $764,046 in net sales) is 0.041, which translates to 4.1 percent
profit. In other words, the owners of Excel kept $4.10 for every $100 in sales
their fi rm generated. To determine the adequacy of this ratio, Excel managers

may compare it with the profitability ratios of competitors. During a recession-
ary period in which competitors are losing money, a 4.1 percent return on sales
is probably more than adequate.
Debt Ratios A debt ratio expresses an organization’s capacity to meet its debts.
To calculate a debt ratio, divide total liabilities by net worth (total stockhold-
ers’ equity). In terms of the Excel Corporation, this means dividing $76,968 by
$139,880 to yield a ratio of 0.55, or 55 percent. This result means that Excel is
fi nanced by 55 percent debt. If the industry average is 65 percent, Excel should
be able to borrow additional funds on the commercial market. But if the indus-
try average is considerably below this level, borrowing may be diffi cult. Any
banker that Excel approaches for a loan might think that Excel was overde-
pendent on other people’s money. Of course, when deciding to approve a loan,
creditors consider other factors besides ratios—including the company’s man-
agement and competitiveness.
Activity Ratios Activity ratios reveal a company’s performance by shedding

light on key internal areas. If managers wish to assess inventory levels, for ex-
ample, several different activity ratios are helpful: inventory to net working cap-
ital, current liabilities to inventory, and average inventory levels to total sales.
These relationships indicate whether inventory levels are too high in relation to
sales and whether too much money is tied up in inventories. When inventories
are high, managers are often tempted to make hasty sales that yield a less-than-
normal profit.
Activity ratios can monitor many important activities. The manager wish-
ing to know how quickly orders are being processed, for example, can select a
week and divide the number of orders fi lled by the number of orders received. By
recording ratios for particular activities over extended time periods, the man-
ager can spot trends and plan needed changes.
Financial Responsibility Centers

All management control relies on responsibility accounting, a simple idea: Each
manager is responsible for a part of the company’s total activity. A manager’s
unit and its related activities should contribute to the enterprise. A unit’s contri-
butions could be vital services, revenues, or the manufacturing of a product. A
financial responsibility center is any organizational unit that contributes costs,
8
Describe the five types
of financial responsibility
centers and their
relationships to budgeting
revenues, investments, or profits. The unit manager who accepts the obligation
to achieve certain goals is responsible for reporting progress toward them. The
author of a respected planning handbook summarized the notion of fiscal con- financial responsibility
trol and responsibility this way: center
An organizational unit that con-
Internal fi nancial reports should follow management’s lines of respon- tributes to an organization’s
costs, revenues, investments,
sibility. Careful evaluation is necessary to determine whether present fi - or profits
nancial reports track the results that are controllable by the individual
held responsible for them. Reasonable assurance should exist that re-
ported information is reliable, that transactions are recorded appropri-
ately, and that corporate assets are safeguarded.14
Figure 16.8 Commonly used financial ratios
RATIO OBTAINED BY PURPOSE

Current assets to Dividing current assets by current To determine a fi rm’s ability to pay its
current liabilities liabilities short-term liabilities
Net profits to net sales Dividing net profits after taxes by net To measure the short-run profi tability of
sales the business
Net profits to tangible Dividing net profits after taxes by To measure profitability over a relatively
net worth tangible net worth (the difference long period
between tangible assets and total
liabilities)
Net profits to net Dividing net profits after taxes by net To measure the ability of a business to
working capital working capital (operating capital carry inventory and accounts receivable
on hand) and to finance day-to-day operations
Net sales to tangible net Dividing net sales by the firm’s tangible To measure the relative turnover of
worth net worth investment capital
Net sales to net working Dividing net sales by net working capital To measure how well a company uses its
capital working capital to produce sales
Collection period First, dividing annual net sales by 365 to To analyze the collectibility of receivables
(receivables to credit determine daily credit sales; then,
sales) dividing notes and accounts receivable
by average daily credit sales
Net sales to inventory Dividing annual net sales by the value of To provide a yardstick for comparing the
the firm’s merchandise inventory as firm’s stock-to-sales position with that of
carried on the balance sheet other companies or with industry averages
Fixed assets to tangible Dividing fi xed assets (the depreciated To show what proportion of a firm’s
net worth book value of such items as buildings, tangible net worth consists of fixed
machinery, furniture, physical assets (Generally, this ratio should not
equipment, and land) by the firm’s exceed 100% for a manufacturer and
tangible net worth 75% for a wholesaler or retailer.)
Figure 16.9 defi nes the principal fi nancial responsibility centers in large
businesses. Each manager’s organizational unit within a fi rm’s fiscal structure
functions as a fi nancial responsibility center. For each center, top managers
must specify the specific fi nancial objective and then decide how to measure
progress toward it. Because each manager contributes to unit as well as compa-
nywide cost control and profitability, selection of each objective is important.
Profit, for instance, should be used as a measure of fi nancial responsibility only
when profit increases as the direct result of actions for which the manager is
responsible. 15
Figure 16.9 indicates that the sales manager who manages a revenue center
is responsible for profits generated by sales, not by cost reductions. Similarly, the
production manager who leads a cost center is responsible for costs, not reve-
nue. Only the manager of a production division, who is responsible for both rev-
enues and costs, can be held accountable for the unit’s generated profits. Iden-
tifying responsibility centers, then, focuses managers’ energies on controlling
those factors actually within their scope of influence.
Figure 16.8 (continued )
RATIO OBTAINED BY PURPOSE

Current liabilities to Dividing current liabilities by the firm’s To measure the degree of indebtedness
tangible net worth tangible net worth of the firm (Generally, a business is in
financial trouble when this ratio exceeds
80%.)
Total liabilities to Dividing current plus long-term liabilities To determine the fi nancial soundness of
tangible net worth by tangible net worth the business (When this ratio exceeds
100%, the equity of the firm’s creditors
in the business exceeds that of the
owners.)
Inventory to net working Dividing merchandise inventory by net To determine whether a business has too
capital working capital much or too little working capital tied up
in inventory (Generally, this ratio should
not exceed 80%.)
Current liabilities to Dividing current liabilities by inventory To determine whether a business has
inventory too little or too much current debt in rela-
tionship to its inventory (If current debt is
excessive, the firm may have to dispose
of inventory quickly, at unfavorable prices,
to meet its obligations.)
Funded liabilities to Dividing funded liabilities (long-term To determine whether the fi rm’s long-
working capital obligations such as mortgages, bonds, term indebtedness is in proper proportion
serial notes, and other liabilities that to its net working capital (Generally, this
will not mature for at least one year) ratio should not exceed 100%.)
by net working capital
Source: Adapted from 1970 Key Business Ratios. New York: Dun & Bradstreet, 1971. Reprinted by permission of The Dun & Bradstreet
Corporation.
Financial Audits
Financial information is only as good as the data and interpretation on which
it is based. Audits are formal investigations conducted to determine whether fi - audit
nancial data, records, reports, and statements are correct and consistent accord- A formal investigation con-
ducted to determine whether
ing to existing laws and the policies, rules, and procedures of the organization. records and the data on which
Insiders or outsiders may conduct audits. they are based are correct and
conform to policies, rules, pro-
cedures, and laws
Internal Audits Most companies maintain controls to determine whether peo-
ple are handling corporate financial activities according to policy and procedural,
legal, and ethical guidelines. A superior’s regular appraisal of a subordinate’s
functions is a kind of internal audit. Most accounting systems incorporate con-
trols to guarantee adherence to procedures, as do regular reviews by teams of in-
ternal auditors.
During May 2002, Cynthia Cooper, Vice President of WorldCom (now
MCI), the nation’s second-largest long-distance carrier, began an internal audit
Figure 16.9 Principal financial responsibility centers
• Standard cost centers. A production department in a factory is an example of a standard cost center. In a stan-
dard cost center, the standard quantities of direct labor and materials required for each unit of output are speci-
fied. The supervisor’s objective is to minimize the variance between actual costs and standard costs. In addition,
he or she is usually responsible for a flexible overhead expense budget that is used, once again, to minimize the
variance between budgeted and actual costs.
• Revenue centers. A sales department in which the manager does not have authority to lower prices to increase
volume is an example of a revenue center. The resources at the manager’s disposal are rejected in the expense
budget. The sales manager’s objective is to spend no more than the budgeted amount and produce the maxi-
mum amount of sales revenue.
• Discretionary expense centers. Most administrative departments are discretionary expense centers. There
is no practical way to establish the relationship between inputs and outputs in a legal department or informa-
tion processing department, for example. Managers can only use their best judgment to set budgets. The de-
partment manager’s objective is to spend the budgeted amount to produce the best (though still unmeasurable)
quality of service possible.
• Profit centers. A profit center is a unit, such as a product division, in which the manager is responsible for
achieving the best combination of costs and revenues. The objective is to maximize the bottom line, the profi t
that results from the manager’s decisions. A great many variations on this theme can be achieved by defi ning
“profit” as only those elements of cost and revenue for which the manager is responsible. Thus, a sales man-
ager who is allowed to set prices may be responsible for gross profi t (actual revenue less standard direct manu-
facturing costs). Profit for the marketing manager of a product line, on the other hand, might reject deductions
for budgeted factory overhead and actual sales-promotion expenses.
• Investment centers. An investment center is a unit in which the manager is responsible for the magnitude of
assets employed. The manager makes trade-offs between current profits and investments to increase future
profits. To help themselves appraise the desirability of new investments, many managers of investment centers
think of their objective as maximizing return on investment or residual income (profi t after a charge for the use of
capital).
Source: Reprinted by permission of the Harvard Business Review. Adapted from “What Kind of Management Control Do You Need?” by Richard F.
Vancil, (March–April 1973). Copyright © 1973 by the Harvard Business School Publishing Corporation; all rights reserved.
of the company’s books, focusing on its capital expenditures. She found ques-
tionable transfers into the capital accounts in 2001 and 2002 that had previ-
ously been treated as expenses. In this way, the expenditures could be written
off over long periods instead of when they were incurred.
The accounting sleight-of-hand was concocted by Scott D. Sullivan, who
at the time was WorldCom’s powerful chief financial officer. He report-
edly rebuffed Cooper’s efforts to bring the $3.8-billion maneuver to
light. Cooper persisted and took the matter to Max Bobbitt, chairman
of the audit committee of WorldCom’s board. He delayed taking action
on her findings but eventually passed them along to the company’s out-
side accountants.16
Management delayed because the accounting fraud increased the company’s
profit. Eventually, the fraud and mismanagement led WorldCom Inc. to the larg-
est bankruptcy-court filing in U.S. history.
Internal audits are meant to keep problems in house, and they are likely to
be conducted by people who know operations well. Cooper’s actions set in mo-
tion a chain of events that resulted in the fi ring of CFO Scott Sullivan. Those
who conduct internal audits may lack objectivity, however, and they may also
lack the power to penetrate cover-ups.
External Audits The annual external audit is an American business tradition.

An independent public accounting fi rm conducts an external audit. Such fi rms
are staffed with certified public accountants (CPAs) who provide expert account-
ing and management services. Federal regulations require publicly traded com-
panies to conduct certified external audits each year. The managers of many non-
public companies choose to have their companies undergo external audits. The
presumed objectivity of the audit enhances the organization’s credibility with
stockholders, creditors, investors, and key insiders, and such audits often un-
cover important information.
A certified external audit includes thorough inspection and analysis of poli-
cies, procedures, and records, and such tests as the auditors believe may be ap-
plicable to the situation. When all the parameters are satisfied, the audit team
manager certifies that the fi nancial data presented in the fi rm’s fi nancial reports
are in keeping with generally accepted accounting practices and procedures and
government regulations.
Budget Controls
The primary financial control used to manage operating organizations is a bud-
get. As both a plan and feedforward control, a budget provides estimates (pro- budget
jections) of revenues and expenses for a given period of time. A budget serves as A plan and control for the re-
ceipt and spending of income
the standard for measuring the firm’s performance, because it allows managers over a fixed period
to compare actual revenues and expenses to projections.
When forecasted revenue is insufficient to support projected spending (ex-
penditures), revenue must be increased or supplemented by borrowing or the use
of savings (reserves). The alternative is to reduce expenditures. Conversely, if ex-
penditures rise more quickly than the revenue needed to support them, spending
must be reduced to avoid the need to borrow or to deplete reserves.
Budgets serve managers in four important ways:
1. They expedite allocation and coordination of resources for programs and
projects.
2. They operate as powerful monitoring systems when supplemented with peri-
odic budget updates.
3. They provide rigorous control guidelines for managers by setting limits on
expenditures.
4. They facilitate evaluation of individual and department performance.
Budget status reports allow managers to make timely activity adjustments.
Figure 16.10 presents a sample budget status report. It includes the approved
budget for certain items and actual expenditures for the first two quarters. Note
that spending for long-distance telephone calls (line 5) is 25 percent over bud-
get at the end of the second quarter. The manager of this department must take
timely corrective action to avoid a shortfall during the last quarter.
Budget Development Process

Budgeting requires (1) setting goals, (2) planning and scheduling to reach the
goals, (3) identifying and pricing resources, (4) locating needed funds, and (5)
adjusting goals, plans, and resources to match actual fund availability. Some or-
ganizations involve all their people in these tasks. Others involve managers only.
9
Describe the four
approaches to creating
budgets
Figure 16.10 Sample budget status report
APPROVED BUDGET BUDGET

LINE BUDGET REPORT REPORT
NO. CATEGORY JANUARY 1 APRIL 1 JULY 1
Salary Expense Actual Actual % Used Actual % Used
1 Professional $160,000 $40,000 25% $ 80,000 50%
2 Administrative 60,000 15,000 25% 30,000 50%
3 Clerical Support 32,000 8,000 25% 16,000 50%
Total Salary Expenses $252,000 $63,000 25% $126,000 50%
Operating Expense
4 Basic Telephone Service $ 2,000 $ 500 25% $ 1,000 50%
5 Long-Distance Telephone Service 2,000 1,000 50% 1,500 75%
6 Insurance 8,000 2,000 25% 4,000 50%
7 Utilities 12,000 4,000 33% 9,000 75%
8 Printing 9,000 1,500 17% 3,000 33%
9 Copying 15,000 3,000 20% 6,000 40%
10 Software 15,000 10,000 67% 10,000 67%
11 Office Supplies 5,000 1,000 20% 2,000 40%
Total Operating Expense $ 68,000 $23,000 34% $ 36,500 54%
Total Salary and
Operating Expenses $320,000 $86,000 27% $162,500 51%
Either way, budgets must be prepared and adhered to at each level and in each
unit of an organization.
Budget preparers can follow one or more of the four standardized ap-
proaches: (1) top-down, (2) bottom-up, (3) zero-based, or (4) flexible budgeting.
Following a standardized approach helps ensure consistency in the process.
Top-Down Budgeting In top-down budgeting, senior managers prepare bud-

gets and distribute them to lower levels, with or without input from below.
Managers who use this method may plan and control without cooperation and
knowledge of their subordinates. These managers may miss or neglect signifi-
cant information about opportunities and risks—information that others could
provide and that should be assessed during budget building.
Bottom-Up Budgeting Sometimes called grassroots budgeting, the bottom-

up system taps the knowledge and experiences of all organization members. The
men and women closest to the planned activities contribute to building the bud-
get that affects them. In harmonious dialogue, participants come to understand
one another’s priorities, limits, perspectives, and goals. They negotiate the in-
evitable compromises. (Few departments get all the resources their managers
would like.) As input moves up the hierarchy, various views are consolidated to
create an inclusive framework. A compelling advantage of this process is that it
earns support for the budget from the people who will be governed by it.
Many companies today are decentralizing, forming autonomous units and
divisions. Corporate headquarters provides overall guidance and goals, but the
divisions set their own priorities and run their own operations. They also con-
struct their own budgets, partly because downsized organizations no longer
maintain the large staffs required for top-down budgeting.
Zero-Based Budgeting In some companies, budget preparers begin their job

by looking at last year’s budget and building on the numbers it contained. The
preparers factor in relevant recent experience, and a new budget emerges. Some
managers simply increase last year’s numbers by some percentage, on the as-
sumption that what went before should continue. Such budgeting does not force
managers to examine their operations and explore more efficient ways of do-
ing things. Zero-based budgeting eliminates such complacency by requiring pre-
parers to launch each new budget from a clean sheet of paper (or, more likely,
a blank computer spreadsheet). The head of each fi nancial responsibility center
must justify every dollar requested in light of the coming year’s strategic plans
and goals, not simply explain changes from previous years.
Zero-based budgeting requires managers to list their goals for the fiscal pe-
riod and then identify the people and other resources they need to achieve the
goals. They must also list the costs of all resources. The managers choose priori-
ties and create alternatives for accomplishing the unit’s objectives as part of its
contribution to the overall strategic plan. In discussions with higher-level man-
agers, requests and plans from each unit are studied in light of the overall avail-
ability of resources and the organization’s strategic objectives. Once agreement
about resource allocation is reached, the budget is created. The key to zero-
based budgeting is that the process is repeated for each fiscal period.
Flexible Budgeting All approaches to budget building can utilize flexible bud-
geting, in which set levels of expense are correlated with specified output levels.
The expense levels permit managers to judge whether expenses are acceptable at
a given level of output. Managers can then adjust expenses accordingly.17
Flexible budgeting sets “meet or beat” standards with which expenditures
can be compared. Incentives should be provided to managers at every level to
meet and beat budget targets. Unit expenses within budgeted amounts are usu-
ally permitted. Managers who exceed guidelines must present compelling rea-
sons or face curbs on their spending.
Sam Walton used flexible budgeting to build his Wal-Mart empire:
I tried to operate on a 2 percent general office expense structure. In other
words, 2 percent of sales should have been enough to carry our buying
office, our general office expense, my salary, Bud’s salary—and after
we started adding district managers or any other officers—their sala-
ries too. Believe it or not, we haven’t changed that basic formula from
5 stores to 2,000 stores. In fact, we are actually operating at a far lower
percentage today in office overhead than we did 30 years ago.18
Rumor has it that when asked how he arrived at his 2 percent rule, Walton
admitted that he just “pulled it out of the air.” Wal-Mart’s success is due in no
small measure to its founder’s obsession with controlling costs.
Operating Budgets
Operating budgets are fi nancial plans and controls for each fi nancial responsi-
bility center’s revenues, expenses, and profits.
Revenue Budgets The organization as a whole, as well as each revenue center,

uses revenue budgets, which forecast total revenues from all anticipated sources
10
Explain the two major
types of budgets used in
businesses
over a given time. Sears may forecast its revenues by store, line of merchandise,
operating budget and region. States and cities forecast revenues from various taxes and fees—
A financial plan and control for
each financial responsibility
license and permit fees, sales tax, and property tax, for example.
center’s revenues, expenses,
and profits
Expense Budgets Like revenue budgets, expense budgets are developed for
each cost center and the whole organization. Expense budgets refer to several
standard categories of costs.
Fixed costs are facility-related expenses that an organization incurs regard-
less of the amount of activity in any function. Fixed costs include rent, real es-
tate taxes, insurance premiums, wages and salaries of administrative and sup-
port personnel, interest payments, and payments on long- and short-term debts.
Variable costs relate directly to operations and vary with revenue and pro-
duction levels. The cost of utilities (typically, telephone, electricity, gas or heat-
ing oil, waste disposal, and water) is a variable cost. Other variable costs include
the costs of raw materials and supplies, wages and salaries paid to people en-
gaged in production and marketing, and advertising expenses.
Mixed costs are costs that contain fi xed and variable elements. For example,
suppose a janitor maintains office and factory buildings. Part of the janitor’s sal-
ary will be allocated to administration as a fixed cost and part will be allocated
to production as a variable cost. Travel expenses are sometimes mixed costs.
The travel expenses of administrators may be fi xed expenses, whereas those of
sales and production people may be variable expenses.
Profit Budgets Profit budgets simply merge revenue and expense budgets to
calculate derived profit for the organization and each profit center. IBM operates
product and service profit centers, as do most large retailers. Commercial bank
profit centers are established according to the types of loans they grant—real es-
tate, consumer, or commercial, for example. Profit budgets are useful in gauging
manager performance. In whatever the business, where profits fail to reach pro-
jected levels, the responsible manager must increase profits or risk losing his or
her line, department, or division.
Financial Budgets
financial budget Financial budgets detail how each fi nancial responsibility center will manage its
The details of how a financial cash and capital expenditures. Financial budgets include cash budgets and capi-
responsibility center will
manage its cash and capital tal expenditures budgets.
expenditures
Cash Budgets Often called cash flow budgets, cash budgets project the
amount of cash that will flow into and out of an organization and its subsystems
during a fi xed period. Line items include cash left over from the previous period,
cash revenue from sales, and monies secured through borrowing. A cash bud-
get also accounts for outlays—cash payments for all resources, including bor-
rowed funds. Cash flow budgets project time frames during which managers ex-
pect expenses to outstrip revenues. Such periods call for a dip into investments
or for the securing of loans. Any excess cash on hand during any period can be
invested, thus yielding additional revenue.
Capital Expenditures Budgets Managers use capital expenditures budgets

to project the short- and long-term funding needed to acquire capital goods.
Capital goods include machinery, office equipment, buildings, vehicles, comput-
ers, and other expensive assets that will take more than one year to pay for.
Only sound coordination of capital goods expenditures with ongoing ex-

penses sustains operations. When sufficient funding cannot be found from the
cash budget or from borrowing, managers may lease needed capital items. Rais-
ing capital can be an exercise in creativity. Aircraft maker Boeing helps both
small airlines and small countries raise the capital they need to purchase airlin-
ers by giving marketing assistance to its would-be customers. Boeing representa-
tives actively solicit U.S. buyers for the products or services its customers offer,
and the representatives bring the sellers and buyers together.
Marketing Controls
Under the marketing umbrella are product design, packaging, pricing, sales,
distribution, and customer service. Among the control techniques marketing
managers use to prevent problems and monitor operations, this chapter will
examine market research, test-marketing, marketing ratios, sales quotas, and
stockage.
11
Describe the five major
marketing control
techniques used in
businesses
Marketing Research
Marketing research is a feedforward control technique. It consists of gathering marketing research
and analyzing geographic, demographic, and psychographic data. The analy- A feedforward control tech-
nique that consists of gathering
sis helps planners decide what potential and current customers want and need and analyzing geographic, de-
so that the planners can design products and services to meet those needs.19 mographic, and psychographic
Market researchers gather information from varied public and private sources. data to help planners decide
what potential and current cus-
These sources include published materials; personal, telephone, and Internet in- tomers want and need
terviews; direct-mail questionnaires; and focus groups.
One of Samsung’s design teams, the CNB (Creating New Business) Group,
“constantly runs focus groups and user research to gauge consumer taste as far
as five years into the future.” 20 The research is paying off for the Korean com-
pany. Samsung’s products, especially phones and televisions, are popular with
trend-conscious customers.
Market research draws on data developed by professionals in academic,
government, and commercial settings. Demographic data refer to a person’s age,
gender, marital status, education, occupation, and income. Geographic data de-
scribe where people live by region, neighborhood, or type of housing. Psycho-
graphic data relate to cultural origin, religion, political philosophy, and personal
interests. Researchers study needs, wants, and the buying habits and motives
of different population segments. Possessing such knowledge about current and
potential customers allows managers to tailor products, advertising, sales, and
distribution systems to individuals and groups.
Market research has generated many product innovations and identified dis-
crete target markets. Imaginative research led pet food companies to formulate
dog and cat food to appeal to owners with pets of different ages. Where Henry
Ford once offered only a single standard model in a single hue: “any color so
long as it’s black,” market research has spawned a dizzying array of vehicles—
from Rolls-Royce limousines and zippy Miata convertibles to SUVs of every de-
scription, all with an array of options.
Test-Marketing
Suppose a new product or service has been conceived and a prototype developed.
Planners may decide to test-market the new item—that is, introduce it to a lim-
ited market on a small scale to assess its acceptance. McDonald’s launches new
menu items on a limited basis through careful test-marketing. First, candidate
states, cities, and towns are chosen. Next, advertising and in-store displays pro-
mote the new offerings. Then, customers who try the new product are asked for
their opinions.
3M Corporation began test-marketing for Post-it ® Notes in house. The pro-
gram began with the distribution of custom-made packets of the product to man-
agers throughout the home office. Also, the CEO sent samples of Post-it ® Notes
to other CEOs of Fortune 500 companies. Soon, demand outstripped 3M’s ca-
pacity to supply the product; then marketing took over. This product now con-
tributes more than $400 million to 3M sales each year.
One disadvantage of extensive test-marketing is that it can tip a company’s
hand to competitors. A smaller version of the practice has become popular for
companies in highly competitive industries. These fi rms enlist small groups of
users, or potential users, and restrict their sampling of options. Working closely
with users in a controlled environment, marketing and production people assess
the marketability of a new product and make decisions on the basis of the users’
feedback, however limited. Managers at Panasonic, Motorola, and Sony favor
this method. Honda managers consider dealers and customers to be the compa-
ny’s most reliable source of marketing information.
No matter which test-marketing methods are employed, planners ana-
lyze the results of testing to determine whether the company should proceed
with manufacturing and distribution, and whether modifications to the new
product or service are needed. Test-marketing limits the risks a company faces
when introducing something new, and it increases the new item’s prospects for
success.
Marketing Ratios
As heads of financial responsibility centers who are responsible for profitability,
marketing managers must track and control their costs. Along with supervising
the sales force and reviewing income statements, marketing managers regularly
calculate various ratios to monitor ongoing operations and determine needs for
improvement. There are several frequently used measures: ratio of profit to sales;
costs of selling to gross profit; sales calls to orders generated, and profitability of
each order; and changes in sales volume to price changes. Marketing managers
also calculate the ratio of bad debts to total credit granted, and sales volume to
production capacity, for the entire organization and its individual product lines.
Two other common measures are market share and order turnaround time.
In many industries, total market share ranks as the critical standard of suc-
cess. Market share performance often shapes a marketing manager’s decision
making. General Motors is propelled by market share and makes decisions on
brands based on market share. The automaker decided to discontinue the oldest
U.S. auto brand, Oldsmobile, because of poor sales.
Foreign companies may aim to dominate the U.S. market, sometimes at the
cost of little or no profit. This strategy can lead to charges of dumping—selling
goods in an external market at less than the cost of manufacture or less than
fair market value at home. America’s carmakers frequently charge their Japa-
nese rivals with dumping, and global trade negotiators wrestle with the topic
in tariff negotiations. The focus on total market share has paid off in consumer
electronics, an area in which large Japanese fi rms have all but eliminated U.S.
manufacturing.
Sales Quotas
In many organizations each salesperson operates with a sales quota—a mini-
mum dollar amount of sales within a specific time period to justify his or her sal-
ary. Many salespeople work on a commission-only basis, earning money in di-
rect proportion to and as a fi xed percentage of the value of the goods or services
they sell. If commissioned salespeople make no sales, they get no pay. Commis-
sions and quotas stimulate salespeople to meet or exceed specific quantity goals,
but commissions can also lead to abuses. Overly aggressive salespeople may ha-
rass customers or sell them things they cannot afford or do not want. But man-
agers usually favor quotas. Quotas ensure that professionals try their best and
feed the ambition of those who want to succeed and advance.
Stockage
The level of inventory for any item is called stockage. Stockage is important to
business success. You cannot sell what you do not have, and you cannot produce
when components are not on hand. In addition, maintaining inventories is ex-
pensive, as Figure 16.11 shows. Money tied up in inventories is unavailable for
other uses. Retailers and manufacturers must track their inventories to ensure
that they do not run out of needed items. They must reduce the number of slow-
moving items or eliminate the items altogether. Retailers quickly learn to devote
most of their best display areas to the items that yield the largest profits, either
individually or by volume. By tracking stockage levels, managers can determine
normal usage rates, and therefore set efficient reorder points and maintain mini-
mum levels.
Today large retailers and manufacturers endeavor to keep as little stock as
possible. Many now rely on just-in-time (JIT) inventory control—that is, they
require their suppliers to deliver inventory just in time to meet production or
sales demands. Wal-Mart, Kmart, and Sears maintain computer links that al-
low their suppliers to track sales of the items they produce and to ship items as
needed to prevent stores from running out. On the manufacturing floor, JIT sys-
tems forward items to each production stage as necessary. The notification to
move materials along comes from operator signals or computerized inventory
control processes.
In 1966, Sam Walton realized that to grow, he would have to add comput-
erized merchandise controls. “Wal-Mart went on to become the icon of just-
in-time inventory control and sophisticated logistics—the ultimate user of in-
Figure 16.11 Costs of maintaining inventories
1. Costs of producing or acquiring inventory items

2. Costs of loss to obsolescence, damage, or theft
3. Freight charges
4. Security costs (guards, alarm systems, insurance)
5. Storage costs (buildings and maintenance)
6. Administrative expenses (wages and salaries of those who run storage facilities,
keep track of inventory, and inspect and move inventory)
7. Costs of computerized inventory control system
8. Costs of maintenance and operation of storage equipment
9. Costs connected with procurement and inspection of and payment for inventory
items
formation as a competitive advantage. Today, Wal-Mart’s computer database is

second only to the Pentagon’s in capacity, and though he is rarely remembered
that way, Walton may have been the fi rst true information-age CEO.” 21
Human Resource Controls
12
Describe the six major
human resource control
techniques used in
businesses
Human resource managers employ diverse control techniques. Among the most
frequently used are statistical analysis, human asset valuation, training and de-
velopment, performance appraisals, attitude surveys, and management audits.
Each is intended to provide information about the productivity of the workforce
and the quality and quantity of individual and group performance.
Statistical Analysis
Companies need to gather and store data about the composition of their work-
force, compliance with equal opportunity guidelines, employee turnover and ab-
senteeism, and effectiveness of recruiting and compensation efforts. Companies
need data about managerial and individual effectiveness, levels of job satisfac-
tion and motivation, and employee safety and health. Many companies create
databases containing facts about employee skills, training levels, evaluations,
formal education, and job experiences. Such information facilitates recruiting,
promotion, and other employment decisions. Although data in all these catego-
ries are important, this section will focus on two standard measures: turnover
and absenteeism. (Workforce composition and safety will be discussed in rela-
tion to management audits.)
Turnover The number of employees who leave an organization during a specific

period of time is known as employee turnover. Some turnover occurs through
attrition—retirement, resignation, illness, and death. Some turnover is seasonal
and planned—farm laborers are hired to harvest a crop, and many salesclerks are
hired only for the holiday shopping rush. Some turnover results from economic
conditions and competitors’ actions that decrease a firm’s sales and its ability to
support its workforce. Resulting layoffs may be permanent or temporary. Sub-
stantial turnover results from bad management. In many cases, people lost to
turnover must be replaced, and replacing people is costly. It is normally in a com-
pany’s best interest to retain its most valuable employees for as long as possible.
The rate of turnover often serves as a measure of an organization’s internal
environment—its morale, stress, and managerial skill levels. Each organization,
and each subsystem, needs to determine its acceptable turnover, or an acceptable
number of people who must be replaced compared to the total workforce. To de-
termine an acceptable ratio, most companies study their own past and the expe-
riences of other companies in their industries. Some businesses, such as the fast
food and hospitality industries, experience unusually high turnover rates. Man-
agers must analyze the causes of turnover carefully and determine which among
them are signs of trouble. Then managers must act to eliminate those causes.
Absenteeism Absenteeism is the percentage of an organization’s employees

who are not at work on any given day. All organizations must maintain a realis-
tic standard for absenteeism—say, 5 percent. As with turnover, managers must
assess the causes for absences and judge their validity. Many companies find that
90 percent of their absenteeism is caused by less than ten percent of their work-
force members. At any given time, absenteeism that exceeds the standard may or
may not be a sign of trouble. Circumstances such as a widespread flu outbreak
or a natural disaster that prevents people from getting to work may temporarily
and legitimately raise absenteeism. Many managers try to prevent absenteeism
by encouraging 100 percent attendance; they offer financial rewards and set re-
alistic and equitable attendance policies.
Human Asset Valuation

Various monitoring devices help managers assess the value of each employee to
a company. One approach focuses on accounting. Another projects the long-
range potential (promotability) of each person. Human asset accounting tracks human asset accounting
the money spent to recruit, hire, train, and develop employees. This type of ac- Treating employees as assets,
not expenses, by recording
counting treats each person as an asset, not an expense. Expenditures for the money spent on people as in-
development of human assets are considered investments, not unlike the invest- creases in the value of those
ments made to build an office or factory building. Managers who use human as- assets
set accounting realize that each person represents a sizable investment of com-
pany resources, and these managers tend to be committed to retaining good
people. Many managers with this view keep balance sheets that list employees
as assets. (These balance sheets are not for tax purposes.) When someone leaves,
the corresponding investment is deducted from the total, showing a net loss of
assets.
In an approach less common than human asset accounting, managers at-
tempt to assign a dollar value to each employee’s contribution to company prof-
its. Such calculations are not easy to make. They consist of creating general
categories of employees and assigning dollar amounts to each category on a per-
centage basis. Arbitrary as such an approach may be, it does attempt to focus at-
tention on people as resources, not simply expenses.
Training and Development (T&D)

As Chapter 10 (on staffi ng) has indicated, training and development (T&D)
imparts knowledge, skills, and attitudes necessary for successful job perfor-
mance. The standards necessary for effective and efficient operations must be
taught and then enforced, usually by those closest to these standards. T&D is a
control techniques concerned with preventing problems from arising and deal-
ing with them quickly when they do. T&D gets people ready for changes before
those changes arrive. The subject matter or areas of training become the stan-
dards by which employees are appraised, rewarded, or punished.
Performance Appraisals
Perhaps the most important control device employed by human resource man-
agers is the use of a regularly scheduled legal, objective, and equitable appraisal
system. The focus of such a system must be on comparing employee performance
to established standards, and then sharing the results with each individual. Ap-
praisal standards are feedforward control devices; the appraisals themselves are
concurrent and feedback devices.
Domino’s Pizza uses a computer test to gauge employees’ effectiveness and
alertness before they are allowed to take on their duties. When drivers are hired,
they are given a hand-eye coordination test. The results are recorded as that
person’s standard for acceptable performance. On reporting to work each day,
the driver takes the same machine-based test. The results (answers and reaction
times) are compared to those for their first test. The driver who fails to meet
those standards may be assigned to alternative duties, or asked to leave, for the
day. The point is to keep people away from potentially dangerous and difficult-
to-operate equipment when they are not in top form.
Attitude Surveys
An attitude survey shows how employees feel about their employer. It can high-
light what is going right in the workplace and where problems exist. Top man-
agers usually hire an outside consulting fi rm to conduct such a survey. The fact
that outside surveys are objective and can be answered anonymously encourages
employees to respond to them.
Attitude surveys ask questions about key processes, units, and personnel
in an organization, and they can be tailored to the specific unit being evalu-
ated. Questions should help companies pinpoint areas of dissatisfaction and
gather suggestions about how to improve people, procedures, and policies. Sam-
ple questions are, “How well does your boss respond to your requests for assis-
tance?” and “What are the sources of stress for you on your job?”
After the answers are collected and analyzed, the results are given to man-
agement. For the best outcome, the results should be shared (with nothing held
back) with all employees. Data gathered from the surveys—facts about employee
gender, marital status, age, and job categories—become useful for determining
which programs or changes are best for which group.
Management Audits
The Occupational Safety and Health Administration (OSHA) and the Equal
Employment Opportunity Commission (EEOC) require regular recording, re-
porting, and disclosure of statistics about employment. Both agencies set na-
tional standards and procedures for the workplace. In many cases, managers
must also comply with state regulations about employment.
To ensure that regulations are being followed, managers should conduct
regularly scheduled management audits, or compliance audits. In addition, they
must continually track and record statistics about safety, health, and compliance
with equal employment opportunity guidelines. Violations of government em-
ployment regulations are punishable by significant sanctions.
Computers and Control

One of the major revolutions in the control function has been the application of
computers to nearly every business process. More than two-thirds of employees
now work to some degree with a computer as part of their daily routines, and all
employees are affected by computer use.
The most important contribution that computers have made to the con-
trol process is data. Computers can provide data more quickly, cheaply, and
accurately than can traditional means. Computers facilitate communications
throughout and among organizations and their members, placing data in the
hands of anyone who needs it. Moreover, they can do so in real time.
Control needs served by computers include data collection; data analysis, re-
duction, and reporting; statistical analysis; process control; test and inspection;
and systems design. The activities of data analysis, reduction, and reporting can
be programmed to occur automatically as the data are collected or to occur on
command. Decision rules can be employed in the program that will automati-
Chapter 16 Control: Purpose, Process, and Techniques
a g es
Vietnam Controls Bird Flu
Get t y Im
Vietnam was one of the first countries in the world to con- The WHO has a Global Outbreak Alert and Response
tain bird flu, the disease that has killed more than half of Network of public health specialists who stand ready to
the nearly two hundred people infected, and frightened help contain outbreaks around the world. After the WHO
millions, since it appeared in Southeast Asia. Avian influ- met with Vietnamese health officials, an international
enza occurs naturally among birds. A subtype of the virus, team of epidemiologists and pathologists was gathered,
H5N1, can infect people who come into direct or close as well as a Vietnamese ministry of health task force. The
contact with infected birds or contaminated surfaces. Ac- international team and the ministry of health review the
cording to the Centers for Disease Control, “If [the] H5N1 situation daily and set up new measures as appropriate.
virus were to gain the capacity to spread easily from per- Hans Troedsson, WHO representative in Vietnam, says,
son to person, an influenza pandemic [worldwide out- “We are actually disease-free in Vietnam for the moment.
break of disease] could begin” (CDC). We’re probably not virus-free, but what the mass vacci-
Vietnam accomplished this by educating its citizens, nation has done is reduce the virus load in the environ-
vaccinating millions of birds, slaughtering millions of chick- ment—we have less virus circulating” (Mason).
ens and ducks, and by being honest with the World Health
• What elements linked to controlling and control tech-
Organization (WHO). Small farmers, raising chickens and
niques can you see in the case of bird flu?
ducks in their backyards, make up most of Vietnam’s poul-
try industry. Slaughtering and vaccinating birds are recom- Sources: Margie Mason, “Vietnam Temporarily Stamps Out Bird
Flu,” Dallas Morning News, April 2, 2006, 25A; Centers for Disease
mended to slow the virus. Farmers want their chickens Control, http://www.cdc.gov.
and ducks to be immunized. Furthermore, they are disin-
fecting their farms every week.
cally signal the onset of a problem for which corrective action can be taken. The
collection, utilization, and dissemination of control information is best accom-
plished when the information is incorporated into a management information
system (MIS), which maintains relationships with other activities, such as inven-
tory control, purchasing, design, marketing, accounting, and production con-
trol. This chapter’s Global Applications feature presents the World Health Or-
ganization (WHO) centers linking and collaborating via the Internet through a
searchable database.
CHAPTER SUMMARY
Describe the relationship between control- Organizing is affected by controls known as the
1 ling and the other four functions of manage-
ment. Planning is part of every function. Management
principles of organizing. Different levels within any
company require different controls and standards. As or-
must create standards to govern people and operations. ganizations change their structures, they must eliminate,
To prevent, or identify and correct, deviations from modify, or create standards and controls to accommo-
standards, management must design controls. Managers date the changes.
must also teach people what controls are supposed to do Staffi ng and controlling are linked because people
and how to use them effectively and efficiently. create controls and must be taught to use them correctly.
Changes in job descriptions usually mean shifts in direc- signed and used properly, they can prevent, or identify
tives and the controlling process. Alterations in person- and correct, deviations from established standards.
nel through such actions as downsizing, promotions, and
Describe the importance of a control system.
transfers mean changes to controlling efforts as well.
Leading is linked to controlling because leaders at
4 For an organization to achieve the maximum ben-
efit from its controls, it must design all controls so they
every level must be capable of labeling critical control
operate in harmony with one another, with no overlap
points, gathering needed information, creating and mod-
or duplication of effort. A control system is composed of
ifying their controls, and overseeing those who are re-
subsystems operating in integrated and cooperative ways.
sponsible for controlling activities.
Productivity control, for example, must not impede the
List and describe the four steps in the control goal achievement of quality control. Controls operating
2 process. in harmony will lead to increases in profitability.
1. Establishing performance standards. Organizations Explain the characteristics of effective controls
create standards to help measure and monitor both
productivity and quality efforts. People and pro-
5 and the steps managers can take to make con-
trols more effective.
cesses are governed by qualitative and quantitative
• Focus on critical control points. Present in all opera-
standards. An organization uses these standards to
tions, they are the most vital points at which a fail-
teach, train, and evaluate; they function as the link
ure cannot be tolerated or at which the costs in time
between planning and controlling.
and money are the greatest. All three types of con-
2. Measuring performance. An organization measures trols are needed to monitor and measure cash flow,
actual performances of people and processes to as- probably the most important, or critical, area in any
certain if they are functioning according to plans organization.
and expectations. Performance can be measured (di-
• Integration. Controls are supported by the organiza-
agnosed) as it takes place (in real time) or after it has
tion’s culture and work in harmony with one another
taken place. Either way, what is happening must be
in a control system approach. Controls are coordi-
monitored.
nated and do not impede operations.
3. Comparing measured performance to established
• Acceptability. Those who must apply, interpret, and
standards. This step asks the question: Is “what is”
react to controls recognize their importance, accept
the same or better than the “what should be”? If the
them, and do not resist effective use of them. Unless
answer is yes, things are going well. If the answer is
people are willing to enforce and live by the controls
no, corrective action is usually called for.
in their environments, the controls will not be effec-
4. Taking corrective action. When significant devia- tive or efficient.
tions from established standards occur, the organi-
• Timeliness. Measurements provided through con-
zation must determine the cause by identifying the
trols reach the proper decision makers at the time
nature and scope of the problem. Deviations may be
they are needed. Only then can managers properly
caused by internal or external factors and may or
respond to the information provided. Deadlines are a
may not be within the power of a controller to con-
means to guarantee timeliness in control efforts.
trol. Solutions are often prescribed by procedures
and policies. Some corrective actions are automatic, • Economic feasibility. Control costs must be mea-
but even automatic controls can malfunction on sured against the benefits they provide. When ben-
occasion. efits outweigh, in a substantial way, the costs in-
curred, economic feasibility exists.
Describe the nature and importance of feed-
3 forward, concurrent, and feedback controls.
Feedforward controls are preventive in nature. They are
• Accuracy. Accuracy exists when controls provide
a precise enough view of what they were set up to
created to screen out possible causes of problems. Proce- measure. In some instances, a ballpark view is suf-
dures and training can be preventive as well as remedial. ficient; however, most efforts to control people and
Concurrent controls monitor ongoing operations as they processes require exactness and precise measures.
occur in real time, allowing for instant reactions and the
• Comprehensibility. A control is comprehensible
spotting of trends. Feedback controls are after-action
when people understand everything they need to in
controls. Inspecting output after an operation has been
relation to that control. The simpler, the better; as
performed and soliciting customer feedback are examples
controls pile on top of controls, or become too high-
of after-action control. All three types of controls are im-
tech for their users, they lose comprehensibility.
portant to managers and their organizations. When de-
An organization must continually monitor and re- have to create and live within a budget for nonpro-
evaluate controls to see if they are still needed and are duction-related expenses.
operating effectively and efficiently. Managers can use
• Revenue centers generate income for an organiza-
before-and-after comparisons to judge continued effec-
tion, but their managers, while charged with maxi-
tiveness. They can survey employees affected by controls
mizing revenues, do not have the authority to adjust
to guarantee that employees accept and comprehend the
prices for goods or services sold to the fi rm’s custom-
controls. Managers can also conduct controlled experi-
ers. Each center has a budget and must spend within
ments (for example, when judging the effects of new
its limits while conducting its activities. Center man-
medications) to determine whether the controls are do-
agers may or may not participate in the preparation
ing what they are designed to do. When controls need to
of the budget.
be dropped, redesigned, or created, those affected must
be enlisted to help fashion them. • Discretionary expense centers are usually adminis-
trative service providers, such as staff departments.
Describe the content of the three primary fi-
6 nancial statements and how managers use
them. The three statements are the balance sheet, in-
These centers and their managers exist to serve all
organization personnel with their particular exper-
tise. These centers must prepare their own budgets,
come statement, and sources and uses of funds state-
usually on the basis of past performance experi-
ment. The fi rst lists the assets of an organization and
ences, and do their best to live within them.
points out who owns them and to what extent—the pro-
prietors, partners, stockholders (equity), or creditors • Profit centers generate revenues but also have the au-
(liabilities). It is a snapshot of a company’s situation at thority to manipulate pricing and offer other incen-
a given moment in time. The income statement lists in- tives to customers. Managers seek to obtain the best
come from all sources and the amount of money actually possible combination of costs and revenues. Such
paid out during the time period covered by the state- centers also prepare budgets and must live within
ment. It is a historical summary. The sources and uses their limits.
of funds statement is a summary for a given time of the
• Investment centers put a fi rm’s cash to work in vari-
flow of cash into and out of an organization. All state-
ous ways, including short- and long-term fi nancial
ments help fi nancial managers to make comparisons,
instruments. The managers of such centers must
spot trends, and forecast future fi nancial activities.
struggle to maintain an appropriate balance among
Explain ratio analysis and four types of ratios the fi rm’s assets, given its immediate and future
7 used by managers. Ratio analysis takes key fig-
ures and compares them to others. The purpose of ratio
needs. The goal is to maximize the return on in-
vested capital through the manipulation of a fi rm’s
calculations and comparisons is to gauge the financial assets. Each center prepares its budget in light of pre-
health of the organization and its ability to meet its obvious experience and is charged to do its best to live
ligations. Liquidity ratios measure the ability of a fi rm within it.
to raise enough cash to meet its near-term debts. Profit-
Describe the four approaches to creating
ability ratios are used to study a company’s profits af-
ter taxes. They answer such questions as “What is the
9 budgets.
return on capital invested?” and “What departments, • Top-down budgeting is a budgeting approach in
products, and services return the best profits?” Debt ra- which senior managers prepare, with or without in-
tios express an organization’s capacity to meet its liabili- put from below, budgets for the entire organization
ties, or debts. Activity ratios help measure and moni- and its various subsystems. This approach is most of-
tor all internal activity areas such as inventory turnover, ten used in not-for-profit and government organiza-
sales per department, and personnel costs related to hu- tions. Such systems usually depend on large support
man resource activities. staffs, or expense centers.
Describe the five types of financial responsi- • Bottom-up budgeting taps into the knowledge and
8 bility centers and their relationships to
budgeting.
experience of subsystem managers and relies on them
to create efficient budgets, which, when consolidated
as the budgets move to the top, will govern the fi rm’s
• Standard cost centers are production units that have
fiscal period. This system is based on compromise
standard, or prescribed, quantities of direct labor
and trade-offs; priorities become the driving force.
and materials required for each unit of output. The
unit supervisor’s job is to minimize the variance be- • Zero-based budgeting is an approach in which
tween the actual costs in labor and materials and the managers start the budgeting process by making no
standard costs. In addition, unit supervisors usually assumptions and by disregarding past practices.
Every dollar requested is justified in light of the a small enough audience, test marketers can effec-
coming time period, not based on last year’s expe- tively measure and analyze the audience’s reactions.
riences. Starting with unit goals and priorities for
• Marketing ratios are used to measure, monitor, and
each, managers calculate the minimum they believe
project activities and trends. Frequently used ratios
will be required to achieve those goals. In defending
are profit to sales, changes in sales volume to price
their requests to the higher-ups, managers must be
changes, costs of selling to gross profits, and sales
willing to compromise in accordance with available
calls to orders generated.
resources.
• Sales quotas are specified revenue targets, for a given
• Flexible budgeting may be used with the previous
time period, to be achieved by sales activities and
approaches to budgeting. It utilizes standard costs
personnel. They are often the basis for salespeople’s
that can be correlated to specified output levels. The
compensation. A minimum sales volume must be met
manager projects output for a unit and calculates
each pay period to justify the salesperson’s salary or
expected expenses by using standard costs assigned
draw. Sales in excess of quota may be rewarded with
to each output activity. The manager’s job is to meet
bonuses or commissions in addition to salary.
or beat the standards set for operations. Exceeding
budgeted cost is permitted only under exceptional • Stockage, or inventory, levels must be measured and
circumstances. monitored. Too much inventory represents waste and
cash unavailable for other uses. Also, inventories
Explain the two major types of budgets
10 used in businesses.
must be safeguarded, housed, insured, handled, and
counted. All these activities are expenses that may
• Operating budgets are fi nancial plans and control be excessive or unnecessary if inventories are better
techniques for each fi nancial responsibility center’s managed.
revenues, expenses, and profits. They include rev-
Describe the six major human resource
enue budgets and expense budgets. Revenue budgets
are forecasts and projections of the amount of in-
12 control techniques used in businesses.
come expected from all sources over a given period. • Statistical analysis helps HR managers determine
Expense budgets project the outflow of dollars for a and control costs. By collecting and analyzing vari-
given period. ous data on such things as employee absenteeism,
turnover, safety, and performance, HR managers
• Financial budgets detail how each fi nancial respon-
can measure and improve the effectiveness and effi-
sibility center will manage its cash and capital ex-
ciency of the company’s operations.
penditures. Thus, a cash budget and a capital ex-
penditures budget are called for. Cash budgets are • Human asset valuation is a control technique that
also known as cash flow budgets. They predict the views people as assets, not as expenses. Money
amount of money from all sources that will flow into spent on recruiting, hiring, training, developing,
and out of an organization over a fi xed period. In and rewarding people is considered an investment
this way they are similar to their feedback control in them. Therefore, their worth to an organization
counterpart, the sources and uses of funds state- increases steadily over time, and their departure
ment. This document, however, represents fi nancial represents a considerable loss to the company. The
reality, rather than a projection. emphasis shifts from arbitrarily laying off and down-
sizing burdensome liabilities to retaining valuable
Describe the five major marketing control
11 techniques used in businesses.
assets.
• Training and development represent a considerable
• Marketing research is a feedforward technique.
expenditure for most companies, and those dollars
It consists of gathering and analyzing geographic,
need to be spent wisely. The best way to adjust to
demographic, and psychographic data. After being
change and prevent problems is through training.
interpreted, these data become information needed
People are given the knowledge, skills, and attitudes
to tailor products and services to specific market
needed to perform to standards. The subject mat-
segments.
ter or areas of training also become the basis for ap-
• Test-marketing is the introduction of new prod- praising people. They will be expected to exhibit the
ucts and services to a specific identifiable population skills they were taught.
group to determine their marketability. The effects
• Performance appraisals monitor and measure how
of various marketing activities, such as sales promo-
people carry out their duties. How well they do so is
tion and advertising, can also be gauged through
the basis for either rewards or punishments. Apprais-
test-marketing. By limiting what a company does to
als help to measure the effectiveness of all human analyzed, the results are given to management. In
resource activities. They are both feedback and con- turn, the results can highlight what is going right in
current controls. the workplace and where problems exist.
• Attitude surveys show how employees feel about • Management audits are performed to ensure that
their employer. Attitude surveys ask questions about regulations (OSHA, EEOC) and policies (ethics) are
key processes, units, and personnel in an organiza- being followed. These compliance audits provide
tion, and they can be tailored to the specific unit be- management with data to determine how well the
ing evaluated. After the answers are collected and company is meeting established standards.
KE Y TERMS
audit critical control point marketing research
balance sheet feedback control operating budget
budget feedforward control risk manager
concurrent control fi nancial budget Six Sigma
control process fi nancial ratio sources and uses of funds statement
control system fi nancial responsibility center standard
control technique human asset accounting
controlling income statement
RE VIE W QUESTIONS
1. How is planning related to controlling? In what 8. What do the four primary fi nancial ratios measure?
ways is controlling part of the other management Why is ratio analysis used by managers?
functions?
9. What is a standard cost center? A revenue center? A
2. What happens fi rst in the control process? How are discretionary expense center? A profit center? An in-
its Steps 1 and 3 related? What will happen in the vestment center? How do all five centers enter into
process if no deviations from established standards the budget process?
are discovered?
10. How does top-down budgeting work? Bottom-up
3. Can organizations function without controls? budgeting? Zero-based budgeting? Flexible budget-
Explain. ing? What are operating budgets? Financial budgets?
4. Why must controls be integrated into a coherent sys- 11. What are the five major marketing control tech-
tem to work most effectively? niques? How does each serve the needs of marketing
managers?
5. To be effective, what characteristics should feedfor-
ward, concurrent, and feedback controls have? 12. What are the six major human resource control tech-
niques? How does each serve the needs of human re-
6. What can managers do on a regular basis to increase
source managers?
the effectiveness of the controls they are using?
7. What does a balance sheet tell managers? An income
statement? A sources and uses of funds statement?

1. What kind of controls do you use regularly? What 2. What are the critical control points in the effective
areas of your life seem to be “out of control”? What and efficient operation of a motel? A fast-food
can you do to bring them into control? restaurant?
3. You are the chief fi nancial officer for a video rental As the above numbers point out, your division ranks
store. How will this year’s balance sheet, income below average on the basis of the most recent sta-
statement, and sources and uses of funds statement tistics for our industry. Your employee turnover
help you budget for next year’s operations? is twice the normal rate and your absenteeism has
risen by 50 percent since one year ago. Finally, your
4. You are the owner and manager of a neighborhood
department’s recent injuries have been the primary
restaurant. Your chef has created what she calls “a
cause of a 15 percent increase in our workers’ com-
delicious, fat-free cheesecake, that can be made with
pensation insurance premiums.
a variety of fresh fruit toppings.” He wants to add
What control devices do you think were used to
his creation to the menu. Before approving the new
reach these conclusions? Are these increases related
menu item, what do you think you should do?
to one another? If so, in what ways?
5. You have just received the following in a memo from
your boss:
Links are provided for all Internet exercises at 3. What is a control chart? How would you integrate it
http://plunkett.swlearning.com. into your management process? Explain.
1. GE calls Six Sigma “The Roadmap to Customer 4. A balance sheet is a summary of what the business
Contact.” Results have exceeded GE’s most optimis- (and individual) owns (assets) and owes (liabilities).
tic predictions. Briefly list and explain the three key Prepare your own balance sheet.
elements of quality. How would you set about estab-
5. List and diagram the seven quality control tools.
lishing performance standards for these key elements
Explain how a manager might use each tool.
of quality?
2. What are the key concepts of Six Sigma? As a man-
ager, would you use Six Sigma? Explain.

The Business and Company Resource Center (BCRC) HARRAH’S AT A GLANCE
to it through this textbook. Check with your instruc- Number of Properties:
respected.
about Harrah’s Entertainment. Add any other interest-
ing information that you find.
APPLICATION CASE
Toshiba Adopts Six Sigma late 1990s. Cost-consciousness, recession, and fierce
After decades of leading the world in productivity, Ja- competition had taken hold. Toshiba had needed a
pan’s giant companies began to lose momentum in the makeover for years. Taizo Nishimuro, then-Director and
Chairman of the Board, was faced with the challenge of originate from either Toshiba or its partners. A partner’s
getting control of the company without reducing quality. assessment committee determines the feasibility of a rec-
“If we do not change, the fi nal destination is the ommendation, assigns in house responsibility, and be-
collapse of the company,” he told management and em- gins the investigation process. The recommendations are
ployees (Guth). He proposed that Toshiba adopt the Six evaluated and either approved or denied by Toshiba and
Sigma method of measuring performance. “Six Sigma its appropriate partner” (Tronnes). Recommendations
was devised by U.S. fi rm Motorola Inc. to slash the rate include attention to or improvements in the following
of inferior goods produced to less than three or four in areas: cost, quality, and delivery; lead-time parameters;
a million” (Industry Search). Some managers at Toshiba productivity and design system improvements; materials
argued that Six Sigma was a “U.S. version of Japanese handling and sourcing as a factor in purchasing; busi-
quality control.” ness practices; logistics and transportation; accounting
Gradually, managers began to believe Nishimuro’s practices; and electronic data interchanges and elec-
warning. “In March 1998, Toshiba reported an 89 per- tronic commerce.
cent plunge in net income for the fiscal year” (Guth). Tronnes reports that Partners Plus has led to a di-
Efforts at gaining control began by the reexamination rect bottom-line improvement of 20 percent. “After its
of everything. The relative performances of Toshiba’s fi rst year of operation, the program added 6 percent to
businesses were assessed. After careful analysis of each our division’s bottom line. Last year, we met our target
business, some were kept, and others were modified or of 4 percent overall reduction in material costs. In the
eliminated. Toshiba’s most valuable sectors included in- process, our partners experienced similar benefits.”
formation and Internet services, semiconductors, elec-
tronic components, and information technology goods Questions
like PCs and DVDs. 1. What caused the general lack of control at Toshiba
In late 1998, all upper-management personnel be- and who do you think was primarily responsible
gan training in Six Sigma methodology, with a directive for it?
for all employees to apply Six Sigma to their everyday 2. What kinds of controls did the new Toshiba
job functions. Toshiba cut costs and boosted productiv- institute?
ity and profits by introducing Six Sigma into its culture. 3. What characteristics of effective controls did the
The measures contributed to saving the company new Toshiba have? What controls did the company
130 billion yen in 2000 (Industry Search). lack?
Toshiba also helped its suppliers get control. David
Tronnes, Vice President of Manufacturing (Toner Prod- Sources: David Tronnes, “Case Study: Toshiba Division Substantially
ucts Division), explains the Partners Plus program that Improves Its Bottom Line Through an Aggressive Supply Chain Man-
agement Program,” Manufacturing & Technology News, 2001, http://
began in May 1998: “The Partners Plus program is a re- www.manufacturingnews.com/news/editorials/tronnes.html; Rob
engineering initiative launched between Toshiba and Guth, “Restructuring a Behemoth: How Mr. Nishimuro Reinvented
19 suppliers responsible for 80 percent of the Toner Div- Toshiba,” Wall Street Journal, December 27, 2000; “Quality Control
ision’s annual purchases.” Teams from Toshiba make Plan Hoped to Save Toshiba 130 Billion Yen in FY 2000,” Industry
Search, July 11, 2000; Toshiba, http://www.toshiba.com.
on-site partner visits and recommend improvements.
“The recommendations for change (proposals that
can effectively be implemented for mutual benefit) can

Control Is Key to Peapod’s Online Grocery Service original dot.com storm. Those are daunting challenges
Imagine a big food fight—tomatoes, peanut butter, eggs, for any fi rm. But Peapod, the online grocery service
bread flying across the room. The grocery industry is a founded in 1989 by brothers Andrew and Thomas Par-
like a food fight without the mess. It is so competitive kinson, is succeeding on all three fronts.
that only the strongest survive. Now imagine trying to Peapod introduced a new concept 15 years ago: the
survive in the online grocery industry, where custom- convenience of shopping for groceries online. Plenty of
ers can’t see, smell, or touch the goods, and they expect skeptics said the idea wouldn’t fly, but some consumers
their orders to be accurate and arrive on time. Finally, and businesses were intrigued and began to order their
picture being one of the few companies to ride out the groceries online. When many dot.coms of the era began
to fail, Peapod hung on. Mike Brennan, Vice President out a truck with ten customer orders than it is to send
of Marketing for Peapod, explains that the fi rm was able out the same truck with four orders. To control some of
to survive because its founders focused on controlling these fi xed transportation costs, Peapod developed the
the quality of their goods and services, as well as their Smart Mile program, which sets a minimum number of
costs. Meanwhile, competitors that entered the mar- deliveries each truck must make. Under the program,
ket with far more investor funding fell by the wayside. each truck must have on board between 14 and 25 de-
A company called Webvan actually raised $1 billion in liveries before it can leave the distribution center. How-
capital—and is nowhere to be seen today. HomeRuns. ever, Peapod must still coordinate delivery times with
com and Streamline.com are also gone. its customers, or its service will begin to falter. That’s
Quality and service have been Peapod’s highest pri- why Peapod offers customers a discount in delivery fees
orities since the beginning. “The biggest hurdle was if they agree to choose certain time slots. Mike Brennan
convincing consumers they could shop online and still believes that the Smart Mile program is vital to Peapod’s
maintain control over the quality of their picks,” notes profitability and ultimate success.
CEO Marc van Gelder. “That’s been Peapod’s corner- Finally, Peapod’s growth must be controlled. Al-
stone all along. Today, customers see us for what we are: though the fi rm is still based in Chicago, it has expanded
a lifestyle solution for their busy lives.” Whether an or- into markets where its grocery partners are located. Pea-
der is fulfi lled through one of Peapod’s own freestanding pod began serving the Washington, D.C., area several
warehouses or in any of its eight smaller “warerooms,” years ago, in partnership with Giant Food. Recently, de-
which are adjacent to Peapod’s supermarket partners livery was expanded to the Baltimore area, making the
Stop & Shop and Giant Food, it must be accurate; con- service available to nearly 250,000 additional house-
tain the highest quality meats, seafood, and produce; holds. With industry research revealing that online gro-
and be completed quickly. Peapod works closely with its cery shopping is a growing trend, Peapod plans to grow,
suppliers to select the best fresh foods and store them in too. By keeping its costs, quality, and service in control,
controlled climates to ensure the longest freshness with this dot.com survivor could win the ultimate food fight.
minimal waste.
Customer service is controlled on a daily basis. Questions
When a call comes in from a customer, it is immediately 1. What types of feedforward controls might Peapod
routed to the department best equipped to deal with it. use in the next few years?
If there is a problem, it is corrected within 24 hours, 2. Using the feedback control model, identify at least
which reduces the number of subsequent calls. Fewer two standards that Peapod might establish.
customer service calls means more satisfi ed customers, 3. Do you think decentralized control would be effec-
better service, and less money spent on staffi ng the cus- tive at Peapod? Why or why not?
tomer service department.
Transportation is one of Peapod’s largest costs. Sources: Company Web site, http://www.peapod.com, accessed Febru-
Mike Brennan explains that when a delivery truck goes ary 9, 2007; “Peapod Grocery Delivery Service Coming to Baltimore,”
Baltimore Business Journal, August 11, 2004, http://baltimore
out on a route, the costs are fi xed no matter how many .bizjournals.com; “Online Groceries Keep Expanding, Quietly,”
deliveries the truck actually makes. That’s because the MSNBC News, May 16, 2004, http://www.msnbc.com; “Online
truck requires maintenance and fuel, and the driver Grocery Shopping Finally Becoming Profitable,” Food & Drink
needs to be paid. So, it is more cost effective to send Weekly, April 28, 2003, http://www.fi ndarticles.com.
BIZ FLIX VIDEO CASE

Casino destroy the mob’s gambling empire. The fi lm includes
Martin Scorsese’s lengthy, complex, and beautifully strong performances by Robert De Niro, Joe Pesci, and
fi lmed Casino offers a close look at the gambling casinos Sharon Stone. The violence and expletive-fi lled dialogue
of Las Vegas and their organized crime connections in give Casino an R rating.
the 1970s. It completes his trilogy that began with Mean This scene, which comes from the beginning of
Streets (1973) and continued with Goodfellas (1990). “The Truth about Las Vegas” sequence, opens the fi lm
In Casino, ambition, greed, drugs, and sex ultimately and establishes important background about casino op-
erations. Listen carefully to Sam Rothstein’s (De Niro) does their involvement have on the casino’s opera-
voice-over. He quickly describes the casino’s operation tion and its management?
and explains how it tries to reach its goals. 3. Does the casino have independent or interdependent
operations processes?
What to Watch for and Ask Yourself
1. What type of operations management does this Source: J. Craddock, ed. VideoHound’s Golden Movie Retriever,
scene show—manufacturing operations manage- (Farmington Hills, MI: The Gale Group, Inc.), 2000.
ment or service operations management?
2. Are the customers directly involved in this opera-
tion? If they are, in what way? What likely effects
APPENDICES APPENDIX A
Operations Management
APPENDIX B
International Management
APPENDIX C
Succeeding in Your Organization
Getty Images
O LIST
✓ TO D in g Obje
ctives
a r n
n Le in Actio
n
■ Sc a e me nt
a n a g
dM
■ Rea
d t ex t
■ Rea ey Ter
ms
r a p h rase K a ry
■ P a S u mm
A p p endix
iew ns
■ R ev uestio
view Q
A
w e r R e
■ Ans
LEARNING OBJECTIVES
OPERATIONS After studying this chapter, you should be able to:
MANAGEMENT 1 Discuss the nature and importance of operations strategy

and operations management
Discuss the nature and importance of product and

2 service design planning
Describe the four main strategies for facilities layout

3
Discuss the nature of process and technology planning
4
Explain the factors in facilities location planning and
5 capacity planning
Describe the role of operations control in achieving quality

6 and productivity
Discuss the purpose of design controls

7
Discuss the importance of managing and controlling
8 materials purchasing
Explain how EOQ, MRP, MRPII, and JIT differ

9
Discuss the importance and methods of schedule
10 controls
Getty Images
Describe the importance and methods of product control

11
Knitting at a Record Pace
Brenda French remembers the day. “I just couldn’t ting machines, Rasic designed a program that pro-
take my eyes off it.” The “it” refers to the gleaming duced portable templates. The templates contain in-
$80,000 used German-made Stoll knitting machine. structions about which color yarns should be loaded
Unlike the traditional weaver’s loom, which creates on which spools atop one of the knitting machines as
fabric in long serpentine stretches, the Stoll knitting the machine is about to knit a particular garment. The
machine employs thousands of precisely angled nee- templates dramatically decrease the time it takes to
dles to do things the old-fashioned way—one stitch at go from an on-screen design to the start of produc-
a time—while moving at a pace a stadium full of dot- tion. Thanks to the Stoll–template union, an elaborate
ing grandmothers could never hope to equal. knit jacket that used to take a skilled craftsperson a
The machine’s mix of new technology and time- day and a half to knit by hand can now be produced in
less craft presented Brenda French, CEO of French less than an hour.
Rags, with a dazzling possibility: mass customization. Rasic is also responsible for the 500 MB Silicon
She realized it would now be possible to churn out Graphics workstation that is the heart of the opera-
custom-made garments at virtually the same speed tion. Another engineer helps in the developing pro-
needed to produce the cookie-cutter offerings of cess with the Sirix computers. The workstation (a
the industrial age. Although her 200 hand knitters combination of CAD and CAM) turns Brenda French’s
produced quality custom-made products, this technol- clothing sketches into full-color graphic images. Then
ogy would enable French to respond immediately to it programs each of the 11 Stoll knitting machines to
customer desires. She no longer would produce hun- develop what the customer wants.
dreds of products that might or might not be sold. French Rags is leading the industry in direct-to-
Instead, French could respond to trends as well as consumer merchandising by selling its designer col-
individual needs and give her customers more lection through independent wardrobe consultants,
choices at better prices. The customer could choose via trunk shows throughout the country. As the key-
from more than 100 colors, and could choose the fab- note speaker at the Women’s Leadership Exchange,
ric, the length of jacket, pants, skirts, and sleeves. French said, “I learned that if I listened to what
French Rags is a classic study in the power of women—my customers—had to say, and I was pre-
technology to reinvent a company and of the rewards pared to change and adjust depending on what I was
that accrue to those who champion technical innova- told, then I found my business would keep going suc-
tion along with new ways of thinking. French’s deci- cessfully and keep re-inventing itself.” The next tech-
sion to buy the Stoll knitting machine was the first in nological decision is to have wardrobe consultants
a series of technically driven leaps that transformed place orders over the Internet. In an e-mail, French
the scarf-making company French founded in a spare says, “Our reps do not place orders over the Internet,
bedroom in 1978 into a $5 million full-line clothing (orders are sent via fax) but we are in the process of
manufacturer with net profits that range from ten per- integrating the placement of orders through Internet.”
cent to fifteen percent. French Rags is an example of technology, innovation,
Another decision was to use computer-aided and creativity focused on customer satisfaction.
design/computer-aided manufacturing (CAD/CAM)
technology. At French Rags’s 60,000 square-foot Sources: Brenda French, keynote speaker, The Fourth an d
miliarWomen’s
a r ie t y of fa
West Los Angeles factory, French’s business partner Leadership Exchange conference, v
res a Westin Long Beach, July 23,
Milé Rasic developed and integrated the manufactur- 2003; Brenda French factu
manuand Milé Rasic, e-mail interview with
a m b le
ing system. The factory has 20 computerized knitting r & G Allen,
Gemmy November 19, 2003; Hal Plotkin, “Riches
ProctefromroRags,” . March 1995, pp. 62–68, http://www.inc
ductsInc,
machines running approximately 20 hours per day. To s te d p
tru .com/magazine/19950315/2564.html; French Rags, http://
supplement the software Stoll provided to run its knit- www.frenchrags.com.
578 Appendices
Introduction
French Rags, like many companies involved in the competitive world of busi-
ness, is refi ning and restructuring its technology to gain the upper hand in the
marketplace. The companies making these changes have discovered that strate-
gic success is directly related to the efficiency and responsiveness of their pro-
duction operations.1 In turn, these companies are going on the offensive by
using their operations management strategy (as did French Rags with its com-
puter-controlled Stoll knitting machines) as a competitive weapon to change the
way they develop superior products and services.
Innovative managers don’t just manage people; they also manage the tech-
nical resources and processes associated with the production of goods and ser-
vices. This chapter is devoted to a discussion of the processes, decisions, and
systems involved in manufacturing and service operations. After defi ning opera-
tions management, this appendix will discuss how companies plan operations.
The second part of the appendix will discuss operations control.
Nature of Operations Management
1
Discuss the nature and
importance of operations
strategy and operations
management
Operations Strategy and Operations Management Defined
Operations strategy is the part of a strategic plan that defi nes the role, capabil-
ities, and expectations of operations. Operations management consists of the
managerial activities and techniques used to convert resources (such as raw ma-
terials and labor) into products and services. 2 The terms production and opera-
operations strategy
tions are commonly applied to manufacturing operations. Remember, however,
The element of the strategic that operations management applies to all organizations, not just manufacturers.
plan that defines the role, ca- Every organization produces something. Some companies, such as French
pabilities, and expectations of
operations
Rags, Allen-Bradley, Caterpillar, and Nike, produce physical goods. Others,
such as Sheraton Hotels, American Airlines, and the University of Michigan,
operations management produce services. Except for the fact that a service business does not produce
The managerial activities di-
rected toward the processes
a physical product to be placed in inventory, organizations that produce goods
that convert resources into and services have similar operational problems:
products and services
• Each is concerned with converting resources into something saleable.
• Each must acquire materials or supplies to achieve that conversion.
• Each must schedule the process of conversion.
• Each must control processes and ensure quality.
With these similarities in mind, examine Figure A.1, which illustrates the
flow of operations. Notice that every organization takes inputs and transforms
them into outputs, either products or services.
Importance of Operations Management

The heart of an organization is its production of goods or services to sell. Some
managers, such as Brenda French at French Rags, have discovered that their suc-
cess is directly related to the effectiveness of their operations strategy and opera-
tions system. In addition, managers now realize that when developing strategic
plans, they must include a component that consists of an operations strategy.
Without an effective operations strategy and operations management, few orga-
nizations would survive. 3
No matter the company, the goal is to squeeze the bottom line for more
profits. Managers cannot increase profits if operations management is left out of
Appendix A Operations Management 579
Figure A.1 Flow of operations
Inputs Outputs
• Raw Materials
• Human Resources Transformation • Products
Processes
• Land, Buildings • Services
• Information
• Technology
Feedback to Provide Control
strategic planning or if the goal of operations is simply to keep pace with the in-
dustry. Operations management must be viewed as a competitive weapon to be
used with marketing and fi nance. In this capacity the process of strategic man-
agement often leads to new strategic concepts.4 The results can be (as proven
by French Rags) lower prices or better quality, performance, or responsiveness
to consumer demand. When operations management receives proper emphasis,
marketing and fi nancial strategies are not the only tools of competition. 5
Figure A.2 illustrates the pervasive role that operations management plays in
an organization. Note that operations management embraces product, facilities,
and process design; implementation structure; and control processes. In all areas
of operations management, the focus is on improving productivity and quality.
Operations Planning
The starting point of any undertaking is planning. In the case of an organiza-
tion’s operations, the planning stage involves decisions about product or service
design, facilities layout, production processes and technology, facilities location,
and capacity planning.
2
Discuss the nature and
importance of product and
service design planning
Product or Service Design Planning

Historically, product and service design has not been acknowledged as part of
operations management. Managers have discovered, however, that the goals of
operations management (competitiveness, response time, and production effi-
ciency) are well served by two design concepts called design for manufacturabil-
ity and assembly (DFM/A) and design for disassembly (DfD). These concepts
involve designing products for effective performance while considering how they
will be manufactured, assembled, and disassembled.
Design for Manufacturability and Assembly In the past, design engineers

designed products with a complete lack of thought—some would even say with
disdain—for product manufacture and assembly. Design engineers handed fi n-
ished designs to manufacturing engineers. More often than not, the products the
designs specified could not be assembled easily, and they had to be inspected for
quality during production. The design-centered approach also led to products
that contained a greater number of parts than necessary. “[T]he main point of
DFM/A is to discover problems long before the design gets to that stage.” 6
580 Appendices
Figure A.2 Role of operations strategy and operations management
Operations
Strategy
Operations
Management
Products, Facilities, Implementation Control

and Processes Structures Processes
Product or Scheduling Design Control

Service Design
Relationships Purchasing Control
Facilities Layout
Decentralization Inventory Control
Inputs Production Processes Outputs
and Technology Teams Scheduling Control
Facilities Location Productivity Product Control
Capacity Planning Quality Productivity
Productivity
Quality
Quality
design for manufacturability Design for manufacturability and assembly (DFM/A) calls for design teams
and assembly (DFM/A) consisting of designers, manufacturers, and assemblers. Because these special-
Considering, during the design
stage, how products will be ists all have a say in product design, actual production of the product becomes
manufactured and assembled more efficient. General Motors has transformed its operations management by
incorporating DFM/A. Not only have the number of parts per car been reduced,
but vehicles are easier to assemble. A strategic initiative, as a result of DFM/A, is
its use of common parts and the same engineering and manufacturing processes
regardless of where the product is manufactured or sold. As one GM manager
observed
We now have a much more effective functional execution of car build-
ing. It makes engineering more effective. It makes materials management
more effective and the assembly center more effective. That is because
we are using the total technical voice of the division plus the knowledge
of outside suppliers.7
DFM/A product design involves four criteria: producibility, cost, quality,
and reliability. Producibility is the degree to which the product or service can be
manufactured for the customer within the organization’s operational capacity.
The criterion of cost includes the costs of labor, materials, design, overhead,
and transportation. Quality, in the eyes of the producer, is the excellence of the
product or service. In the eyes of the consumer, quality is the serviceability and
value gained by purchasing the product. Reliability is the degree to which cus-
tomers can count on the product or service to fulfill its intended purpose. Fig-
ure A.3 summarizes the eight possible major benefits of DFM/A against which
all new designs are evaluated at General Motors. (Notice that the last three re-
late to operations.)
Automakers are not the only companies using DFM/A. At FedEx and UPS,
teams that include members from materials handling, transportation, computer
services, and customer service now make service design decisions. The results
of DFM/A include fewer questions when the services begin and fewer modifica-
tions after service has been implemented for a while.8
The criteria of producibility, cost, quality, and reliability should apply to
the design of services as well as the design of products. In addition, service de-
sign calls for another criterion: timing. This criterion relates to the customer’s
requirements for timeliness. At FedEx, the customer wants the envelope the next
day, not two days later.
Design for Disassembly (DfD) Another design technique is design for dis- design for disassembly (DfD)
assembly (DfD). The goal of DfD is to conceive, develop, and build a product Considering, during the design
stage, how products will be re-
with a long-term view of how its components can be refurbished and reused— furbished, reused, or disposed
or disposed of safely—at the end of the product’s life.9 In a world where the of at the end of the product’s
costs of disposal are rising, ease of destruction becomes as important as ease of life cycle
construction.
Xerox photocopiers and Kodak cameras are already being designed for dis-
assembly and component reuse. By designing with fewer parts and materials as
well as reusable components, companies are producing products that are more ef-
ficient to build and distribute than are conventionally built ones. This is the case
because DfD meshes with manufacturing strategies: DFM/A and total quality.
Facilities Layout
After design, the next step in operations is to plan the actual production. This
step involves, among other things, determining the facilities layout—the physi-
cal arrangement of equipment at the manufacturing site and how the work will
flow. There are four main types of layouts from which to choose: process, prod-
uct, cellular, and fi xed position. Figure A.4 illustrates these four options.
3
Describe the four main
strategies for facilities
layout
facilities layout
The element of operations plan-
Figure A.3 Major benefits of the DFM/A approach, against which GM evaluates ning concerned with the physi-
new designs cal arrangement of equipment
and work flow
Quality Excellence of the car, including serviceability
Reliability The degree to which the car fulfills its intended purpose
Durability The degree to which the car withstands performance demands
Mass The total weight of the car
Safety The degree to which the car increases the protection of
occupants
Manufacturability The degree to which the car can be manufactured and
assembled within existing operational capacity
Time to market The time from product design until the car is ready for sale to
the consumer
Total cost The total amount of materials, labor, transportation, design,
and overhaul expenses associated with the design
Figure A.4 Four options of facilities layout
(a) Process Layout
Receiving Dept. Molding Welding Assembly
Storage
Wiring Insulating Painting Testing
Product A Product B Product C
(b) Product Layout

Molding Welding Testing
Receiving
Dept. Molding Wiring Painting Assembly Storage
Molding Insulating Painting Assembly
(c) Cellular Layout
Painting Welding
Wiring
Testing
Assembly
Molding
(d) Fixed-Position Layout
Labor
Machines Supplies
Equipment Product Materials

Process Layout In a process layout, all the equipment or machines that per- process layout
form a similar task or function are located together (see Figure A.4a). A prod- A facilities layout option in
which all the equipment or ma-
uct is moved from process to process as needed—all products may not require chines that perform a similar
all processes. The major advantage of this layout is its potential for reducing task are placed together
costs. Because all similar work is done in one area, the process layout requires
fewer people and pieces of equipment than does a decentralized arrangement.
One limitation of the process layout is the need to move the product through
several different processes. Each move costs time and money. In manufacturing,
process layouts are used in print shops, settings in which many different prod-
ucts (such as business cards, color brochures, and bound books) do not require
the same processes. A hospital is a service-oriented business that uses a process
layout. The layout is appropriate because patients receive many different types
of services.
Product Layout In a product layout, machines and tasks are arranged accord- product layout
ing to the progressive steps by which the product is made (see Figure A.4b). This A facilities layout option in
which the machines and tasks
layout is efficient when the business produces large volumes of identical prod- are arranged according to the
ucts. Car manufacturing on an assembly line is the best-known example of a progressive steps by which the
product layout. Other examples include computer manufacturing and appliance product is made
assembly. A hospital might use a product layout when doctors are undertaking a
large-scale vaccination effort, for example. In this case many patients are moved
through a line, each receiving the same treatment.
Cellular Layout The cellular layout combines some of the characteristics of cellular layout
process and product layouts. In a cellular arrangement, all the equipment re- A facilities layout option in
which equipment required for
quired for a sequence of operations on the same product is placed together in a a sequence of operations on
group called a cell (see Figure A.4c). The cellular groupings allow efficient han- the same product is grouped
dling of materials and inventory. In addition, the cellular layout facilitates team- into cells
work; workers are physically close enough to work together to solve problems.10
In service settings, the cellular layout is used where many workers, as teams, see
to the needs of a group. A hospital ward is an example of a cellular layout.
Fixed-Position Layout Figure A.4d shows a fixed-position layout. It is used fi xed-position layout
when, because of size or bulk, the product remains in one location. Tools, equip- A facilities layout option in
which the product stays in one
ment, and human skills are brought to the product. Organizations that build place and the equipment, tools,
planes and ships use this form of layout. The fixed-position approach is sound and human skills are brought
for bulky products and custom-ordered goods, but not for high-volume man- to it
ufacturing. This type of layout is used in a hospital operating room, where a
number of specialists gather to work on a single patient.
Production Processes and Technology

The challenge facing operations managers is to identify the proper blend of peo-
ple and technology to use in transforming inputs into fi nished products and ser-
vices. For any given production task, several conversion methods are available—
some labor intensive, others equipment intensive. The nature of the product and
the objectives and resources of the organization are critical factors in choosing
4
Discuss the nature of
process and technology
planning
one method over another.
The growing trend today is toward the use of more sophisticated technol-
ogy in manufacturing. This type of manufacturing, associated with the “factory
of the future,” relies increasingly on equipment that works almost unaided by
employees.
584 Appendices
The technologies most responsible for revolutionizing manufacturing pro-

cesses include robotics, CAD/CAM, flexible manufacturing systems, computer-
integrated manufacturing, soft manufacturing systems, and agile manufacturing.
Robotics The use of programmed machines to handle production constitutes

robotics robotics. The machines, or robots, are constructed to do the work of employ-
The use of programmed ma- ees. They weld, deliver materials and parts, load and unload, and more. Robots
chines to handle production
provide greater precision than do humans; therefore, they enhance quality. The
disadvantages of robots include capital expenditures, maintenance costs, and
malfunctions.
The International Federation of Robotics (IFR) reports that at the end of
2005, 914,000 industrial robots worked worldwide. In 2005, approximately
146,000 robots were working in America.11 In 1994, there were about 45,000
robots at work at U.S. factories, up dramatically from the 6000 in place just a
dozen years before.12 Once the province of giant corporations like Apple Inc.
and Caterpillar, robots are taking their place in the manufacturing operations of
far smaller companies.
CAD/CAM Among the most widely adopted technologies in manufacturing

computer-aided design are computer-aided design (CAD) and computer-aided manufacturing (CAM).
(CAD) CAD allows engineers and designers (such as Brenda French of French Rags) to
A design technique that uses
a computer monitor to display develop new products by using a computer monitor to display and manipulate
and manipulate proposed de- three-dimensional drawings. The assistance of the computer helped cut some
signs for the purpose of evalu- engineers’ design time in half. In addition, the CAD system allows the engineer
ating them
to visualize the effects of any design change. Using CAD, the design engineers
computer-aided manufac- at Chrysler can call up on the computer screen a semitransparent view of a car
turing (CAM) door being worked on, operate the latch and run the windows up and down to
A technology in which comput-
ers coordinate people, informa- check how they work, experiment with lighter materials by adjusting the under-
tion, and processes to produce lying equations, and use the same data to direct machinery to make prototypes
quality products efficiently of the parts.
CAM involves the use of computers to guide and control manufacturing
processes. The computer is programmed to direct a piece of equipment to per-
form a certain action, such as drilling holes or pouring steel. Compared with
human control, computer control results in less waste, lower costs, higher qual-
ity, and improved safety.
flexible manufacturing Flexible Manufacturing Systems A flexible manufacturing system (FMS) is

system (FMS) an automated production line. Computers coordinate the machinery. The auto-
A technology in which an auto-
mated production line is coor- mated line controls assembly, welding, tightening, and adjusting. In addition,
dinated by computers and can an FMS allows rapid adjustment of the assembly process, so the production line
produce more than one product can produce more than one model. For example, General Motors was able to
mass produce four different car models when it installed an FMS at its Lords-
town, Ohio, plant.
An FMS automates the entire production line by controlling and provid-
ing instructions to all the machines. The greatest advantage of an FMS is that
through computer instructions, a single manufacturing line can be adapted
to produce different products. (The adaptability of an FMS is the characteris-
tic that distinguishes it from CAM.) The computer instructs the machines to
change parts, machine specifications, and tools when a new product must be
produced.
Computer-Integrated Manufacturing Originally, computer-integrated man-

ufacturing meant controlling machinery through a system of interconnected
computers. Such a system was supposed to make human labor unnecessary. To-
day, however, computer-integrated manufacturing (CIM) is a computerized sys- computer-integrated
tem that orchestrates people, information, and processes to produce quality out- manufacturing (CIM)
Using computers to guide
puts efficiently. For example, CIM systems can handle business functions such and control manufacturing
as order entry, cost accounting, customer billing, employee time records, and processes
payroll. Thus, the scope of CIM technology is more comprehensive and includes
all activities that are concerned with production.
Soft Manufacturing Systems Soft manufacturing systems were designed as

an answer to the struggle of businesses to respond to the demand for custom-
ized products. A soft manufacturing system (SMS) relies on computer software soft manufacturing system
to continuously control and adjust the manufacturing processes. Rather than (SMS)
A manufacturing system that
mammoth installations like FMS or CIM, a soft manufacturing system groups relies on computer software to
machines into smaller, more manageable cells and spreads computers literally continuously control and adjust
around the plants. the manufacturing processes
Soft manufacturing systems bring unheard-of agility to the factory. Com-
panies can customize products in quantities of one, while churning them out at
mass production speeds. SMS blurs the boundaries of the traditional factory by
bringing production closer to the customer.
Agile Manufacturing “Agile manufacturing is a conceptual framework for agile manufacturing

more efficient manufacturing, which is now resulting in mass customization. . . . A manufacturing system incor-
porating ultraflexible production
The basic idea (in mass customization) is to get the right product to the right per- facilities; computer technol-
son, at the right time. . . . This high-quality yet flexible way of producing goods ogy; alliances among suppliers,
involves both the manufacturer and the customer.” 13 The customized goods are producers, and customers; and
direct sales data to custom-
made as fast and as cheaply as mass-produced products. ize goods at the speed of mass
production
Agile manufacturing includes modularization and virtual manufactur-
ing. Modularization involves building products from components cho-
sen by customers. GE sells railroad car “components” in a choice of
color combinations. Virtual manufacturing means a company doesn’t
do all its own manufacturing, but outsources some or all the work to
subcontractors. Most car companies adhere to the virtual manufactur-
ing model, allowing them to focus on services like product design and
marketing. “Car companies have become auto assemblers, as opposed to
auto manufacturers,” Goldman says. DaimlerChrysler is already manu-
facturing less than 30% of the parts used in its cars; Volkswagen AG,
less than 12%. U.S. manufacturers are feeling pressure to reduce their
current production cycle of about six weeks to one week or less.14
Computers and the Delivery of Services Computers and the Internet have
revolutionized delivery as well as manufacturing. The widespread access to in-
formation that computers and the Internet provide has allowed businesses to im-
prove the quality of customer service. “Thanks to global networks and telecom-
munication capabilities, businesses can deal with customers and suppliers on
an individual basis.” 15 For example, computerized point-of-sale terminals con-
stantly update inventory records; the up-to-date records facilitate rapid response
to customers’ needs. At Schneider National, a major trucking firm, data sent
from computers in the cabs of trucks allow dispatchers to monitor the load sta-
586 Appendices
tus and location of each rig. Dispatchers know which trucks are in the vicinity
of a customer and when each will be empty. Computers and the Internet also en-
hance the ability to track orders. At UPS and FedEx, computerized monitoring
of shipments has allowed both companies to improve delivery time and quality
of service.
Facilities Location
5
Explain the factors in
facilities location planning
and capacity planning
In considering the placement of facilities, managers must ask two important
questions: Should the fi rm have one or two large plants, or several smaller ones?
Where should the facilities be located?
The decision about the number of plants depends on the company’s long-
range objectives and distribution strategies, fi nancial resources, and equipment
costs. The choice regarding location depends on a number of factors: the location
of the market where the product will be sold, availability of labor skills, labor
costs, proximity to suppliers, tax rates, construction expenses, utility rates, and
quality of life for employees.16 To make the decision, the company must under-
take a cost-benefit analysis. When TRW chooses among two or more potential
locations, it analyzes the costs of land, transportation, relocation, construction,
zoning, and taxation. Then planners examine perceived benefits—proximity to
customers, quality of work life for employees, and labor supply.17 Finally, they
divide total benefits by total costs for each potential location.
Capacity Planning
capacity planning A critical element in operations management is capacity planning— determining
An element of operations man- an organization’s capability to produce the products or services necessary to
agement that determines an
organization’s capability to pro- meet demand. Capacity planning is essentially a matter of trying to convert sales
duce the number of products forecasts into production capabilities. Decisions about capacity should be made
or services necessary to meet carefully. Too little capacity means that the organization cannot match demand
demand
and that it will lose customers. The reverse—excess capacity—results in facili-
ties and equipment that sit idle while incurring costs.
To increase capacity, companies have a number of options. They can build
new facilities, create additional shifts and hire new staff, pay present staff over-
time, subcontract work to outside firms, or refit existing plants. If a company
has to decrease capacity, its options include laying off workers, reducing the
hours of operation, and closing facilities.
Capacity is a dynamic variable in operations management. It changes from
month to month as well as year to year. Producers attempt to plan capacity to
avoid boom-and-bust cycles of plant expansion followed by layoffs and the re-
duction of operations. The key determinant in capacity planning is the demand
for goods and services. (As discussed in Chapter 7, managers can determine de-
mand by using forecasting techniques.) If a company is operating with stable de-
mand, managers should provide plant capacity equal to the monthly demand.
Suppose, however, those seasonal fluctuations, uncertain economic conditions,
or other factors result in unstable demand. In this situation, managers should
build a small plant to meet normal demand and add extra shifts or subcontract
work during peak periods.18
Management of Operations
Once managers have made the strategic planning decisions about design, lay-
out, process and technology, location, and capacity, the operations management
team needs to develop specific plans for the overall production activities. This
involves aggregate planning, master scheduling, and structuring for operations.
Aggregate Plan
Aggregate planning involves planning production activities and the resources aggregate planning
needed to achieve them. It draws the “road map” for operating activities for a An element of operations man-
agement that involves the plan-
period of time up to one year. ning of production activities
Aggregate planning begins with consideration of the demand forecast for and the resources needed to
products or services and study of the capacity of the operations. By examining achieve them
demand and capacity, the operations management team sets production rates,
inventory levels, materials requirements, and labor needs. The result of this pro-
cess is a general operating (aggregate) plan. For a restaurant, such a plan would
show the total number of customers to be served but not the specific meals each
would consume. For a facility that makes cooking ranges, the plan would show
the total number of ranges to be produced but not the color of each one. Details
come later. When completed, the aggregate plan serves as the basis for the mas-
ter schedule.19
Master Schedule
The master schedule, derived from the aggregate plan, specifies the quantity and master schedule
type of each item to be produced and how, when, and where it should be pro- An element of operations
management that specifies the
duced. 20 Figure A.5 illustrates the development of a master schedule from an ag- quantity and type of each
gregate plan. Materials requirements are derived from the master schedule, and item to be produced and how,
the schedule affects inventory levels. These two points will be discussed later in when, and where it should be
produced
this chapter.
Figure A.5 Development of a master schedule from an aggregate plan
Aggregate Plan (Units per Month)
January February March April May

Electric Ranges 1,000 1,250 1,200 1,300 1,200
Gas Ranges 750 800 700 1,000 1,000
Total 1,750 2,050 1,900 2,300 2,200
Master Schedule for Electric Ranges (Units per Week)
January February
1 2 3 4 5 6 7 8
3,600 100 100 50 50 100 100 50 100
3,665 100 100 50 100 100 50 100 100
3,670 100 50 100 100 150 150 150 100
January Total 1,000 February Total 1,250
Note: Another master schedule will be developed for the gas ranges
588 Appendices
Structure for Implementing Production

One more element of operations remains to be planned: the structure for im-
plementing production. In this regard, the operations management team must
decide how to organize the department, what type of employees are needed and
how they should be trained, whether and how to incorporate teams, the au-
thority of relationships, and the extent of decentralization. The operations man-
agement team must address each one of these concepts (which were discussed
in earlier chapters) in the context of operations. The desired result is an inte-
grated, flexible organization structure that can respond to changes in the aggre-
gate plan.
Controls for Quality and Productivity
6
Describe the role of
operations control in
achieving quality and
productivity
As discussed in Chapter 4, the driving forces in today’s organizations are pro-
ductivity and quality—or quality and productivity. The order is irrelevant; the
two cannot be separated.
Traditionally, managers viewed productivity in terms of greater output.
They did not give much thought to whether the units of output were usable or
not. Enlightened managers now realize that productivity is related to saleable,
high-quality units of output, whether the outputs are products or services.
The costs associated with poor productivity relate to quality. These include
the costs of scrap, repair, and downtime. Such costs are directly observable dur-
ing production. Quality is also related to costs incurred before manufacturing
begins. These expenses include the cost of incoming materials, purchasing, and
inventory. 21
All these factors fall within the purview of operations management. To
achieve high quality and productivity, managers use a number of operational
controls. These include control of design, materials, inventory, scheduling, and
products.
Design Control
7
Discuss the purpose of
design controls
design control
The team approach to product design, discussed earlier in the chapter, provides
an opportunity for designers to insert quality and performance controls before
a product is produced. Design control focuses on creating new products engi-
neered for reliability, functionality, and serviceability.
For example, the characteristics of materials to be used in manufacturing
can be examined to ensure up front that they meet production standards. This
An area of operations control
that involves incorporating reli- orchestrated process should ensure a well-functioning fi nal product. In creat-
ability, functionality, and ser- ing the Ford Taurus, Team Taurus included triple rubber seals and insert doors
viceability into product design in the car’s design plans. Both innovations were in response to customer com-
plaints. Now, the Taurus’s doors fit together and the interior is quieter.22
The team approach can be expanded to integrate marketing research spe-
cialists who can provide the connection between consumer needs and produc-
tion capabilities; or the team may work directly with the consumer, as Team
Taurus did. Regardless of the approach, the team can then incorporate quality,
as defi ned by the consumer, at the design stage.
8
Materials Control: Purchasing
An integral component of an operations management control system, materi-
Discuss the importance of
als control is achieved through effective purchasing. Purchasing is the acquisi-
managing and controlling tion of needed goods and services. The goal of the purchasing agent is to acquire
materials purchasing them at optimal costs from competent and reliable sources. What an organi-
zation produces depends on the inputs—the materials and supplies. Therefore, purchasing
purchasing is critical for the following reasons: The acquisition of goods and
services at optimal costs from
• If the materials are not on hand, nothing can be produced. competent and reliable sources
• If the right quantity of materials is not available, the organization cannot

meet demand.
• If the materials are of inferior quality, producing quality products is diffi-
cult or costly.
The goal of purchasing control is to ensure the availability and acceptable
quality of material while balancing costs. Maintaining relationships with reliable
sources is one strategy to achieve this goal. The advent of total quality manage-
ment (see Chapter 4) has shifted the emphasis of materials purchasing control.
Traditionally, controls focused on—in order of emphasis—quantity, time, and
quality specifications. Now, quality has the same priority as quantity.
Managers are initiating two practices to reflect this change. First, they are
building long-term relationships with suppliers. This creates a partner for the
producer and a sure source of sales for the supplier. The practice of building
long-term relationships contrasts starkly with the traditional practice of pitting
vendors against one another. The traditional practice was a short-term approach
that often led to fi nancial savings and quality reductions.
Supplier relationship management (SRM) software enables companies and supplier relationship
their suppliers to collaborate on sourcing and procurement for supply manage- management (SRM)
An information system that
ment. SRM applications take advantage of the capabilities of Internet technolo- quantifies and manages re-
gies to provide direct, personalized communications from businesses to their lationships with suppliers;
suppliers. Partners are given visibility into customer demand early enough to re- SRM involves consolidating
and classifying procurement
spond to changes and synchronize internal operations to support the change. data to provide an understand-
Buyer and seller relationships are being transformed by the Internet. The ing of supplier relationships
world is increasingly interconnected 24 hours a day, 7 days a week. The Web has and developing procurement
strategies
made it easier for companies to form partnerships. Competition is giving way to
co-opetition as business entities fi nd themselves as each other’s customers, sup- co-opetition
pliers, and partners. Automating the procurement process helps “manufacturers A word coined by Ray Noorda,
Founder of the networking soft-
carry less inventory, reduce time to market, and eliminate costly paperwork.” 23 ware company Novell, mean-
The second practice is the shifting of responsibility for quality to suppliers. ing that businesses have to
Contracts are developed based on materials and equipment being preinspected compete and cooperate at the
same time
and guaranteed to have minimum defects.
Outsourcing In addition to the quality movement, purchasing has been in-

fluenced by management decisions to focus on core competencies. Rather than
manufacturing or assembling component parts, companies like GM, Daim-
lerChrysler, Cisco, and General Mills are outsourcing. Companies that employ
outsourcing as a strategy contract with suppliers to perform functions in lieu of outsourcing
performing the functions themselves. Outsourcing for some companies may in- A purchasing strategy in which
a company contracts with a
clude marketing, accounting, or shipping; but in manufacturing, outsourcing supplier to perform functions in
encompasses suppliers who design, engineer, manufacture, or integrate parts— lieu of the company
or perform all these activities.
Paying someone else to handle all or part of a company’s operations can re-
duce costs and avoid headaches. Outsourcing can be a successful option if man-
agers take the following steps to minimize risk and maintain control: 24
• Do not outsource functions critical to the company’s operation. The idea
is to protect the core business from delays or problems with the outside
source.
590 Appendices
• Minimize cost fluctuations by outsourcing only functions whose costs do

not vary much from month to month. This way, outsourcing expenses are
predictable.
• Be wary of extremely low fees. They may have been set low to get the busi-
ness, then will increase dramatically next year.
• Share the risk with the vendor. Make fees contingent on meeting deadlines.
Include this in the contract.
• Find out if the vendor has a heavy commitment to one large company, which
signals the vendor’s priorities.
• Have a backup plan that includes a list of other vendors.
• Stipulate, by contract, that all data pertaining to the business is owned by
the company, not the vendor.
Outsourcing thrives in the fluid, fast-changing world of computers. Many
big companies don’t manufacture anything. Dell concentrates on marketing.
They buy circuit boards, disc drives, and other modules—designed specifically
for them from outside manufacturers—and assemble the computers in their own
warehouses. 25 Planning and execution functions are driven by demand in real
time, rather than companies building products to a forecast of future demand.
Instead of outsourcing like other computer manufacturers, Dell manufactures
computers (after the orders have been placed).
Inventory Control
inventory The goods an organization keeps on hand are called inventory. Inventory control
The goods an organization is critical to operations management because inventory represents a major invest-
keeps on hand
ment. The aim is to get the parts in and out of the factory as fast as possible. Many
of the machines used for manufacturing can communicate with one another elec-
tronically, which gives manufacturers real-time data about their inventories.
Most organizations have three types of inventory: raw materials, work-in-
process, and fi nished goods. Each type is associated with a different stage of the
production process, as Figure A.6 shows.
raw materials inventory The raw materials inventory includes the materials, parts, and supplies an
Inventory consisting of the raw organization uses as inputs to production. The raw materials for a Hewlett-
materials, parts, and supplies
used as inputs to production Packard laser printer include the printer engine, the circuit boards, and the
power supply. At a Wendy’s fast-food restaurant, the inventory includes meat
Figure A.6 Three types of inventory
Inputs Transformation Outputs

Processes
Raw Materials Work-in-Process Finished Goods

Inventory Inventory Inventory
patties, buns, tomatoes, and lettuce. Raw materials inventory is the least expen-
sive type of inventory because the organization has not yet invested any labor in
it. Nevertheless, an excessive raw materials inventory ties up cash unnecessarily.
Work-in-process inventory consists of the materials and parts that have be- work-in-process inventory
gun moving through the production process but are not yet a completed prod- Inventory consisting of materi-
als and parts that have begun
uct. At Hewlett-Packard, the toner and drum assembly and the shell of a laser moving through the production
printer are work-in-process inventory. Because labor has been expended to pro- process but are not yet assem-
duce work-in-process inventory, this type of inventory represents a greater in- bled into a completed product
vestment than raw materials inventory.
The finished goods inventory consists of the products that have completed finished goods inventory
the entire production process but have not yet been sold. Assembled and boxed Inventory consisting of products
that have not been sold
Hewlett-Packard printers, for example, stored in a warehouse before shipping
are fi nished goods inventory. This inventory, of course, represents the greatest
investment of all three types.
Importance of Inventory Control At one time, managers prided them-

selves on maintaining large inventories. Inventories were regarded as measures
of wealth. Today, managers realize that a large inventory can indicate wasted
resources. Money not tied up in inventory can be used elsewhere. The goal of
inventory control is to sustain the proper flow of materials while maintaining
adequate inventory levels and minimum costs.
Many companies let customers use the Web to cut the ordering time for
parts. “When you let customers order on the Web with speed, you have to be
able to manufacture and deliver the product with speed.” 26
Improvements in manufacturing have shortened production time and al-
lowed manufacturers to respond quickly to signs of slackening demand.
In fact, in its recent decision to cut its discount rate by half a percentage
point, the Federal Reserve suggested the rapid slowdown in manufactur-
ing was the result of ‘new technologies’ appearing to have accelerated
the response of production and demand to high inventories. New tech-
nologies for supply-chain management and fl exible manufacturing im- supply-chain management
ply that businesses can perceive imbalances in inventories at a very early Includes managing supply and
demand, sourcing raw materi-
stage—virtually in real time. Quicker production means manufacturers als and parts, manufacturing
need to keep less inventory on hand. 27 and assembly, warehousing and
inventory tracking, order entry
Traditionally, organizations have four specific techniques for inventory and order management, distri-
management. They are: economic order quantity, materials requirement plan- bution across all channels, and
delivery to the customer
ning, manufacturing resource planning, and just-in-time inventory systems.
Economic Order Quantity The economic order quantity (EOQ) is the order
quantity that minimizes ordering and holding costs based on the rate of inven-
tory use. Ordering costs are the costs of placing the order. Ordering costs in-
clude, for example, the costs of postage, receiving, and inspections. Holding
costs are the costs of keeping the inventory on hand. These expenses include the
costs of storage space, fi nancing, and taxes. 28
The EOQ may be derived by calculation. The formula for EOQ is
9
Explain how EOQ, MRP,
MRPII, and JIT differ
economic order quantity
(EOQ)
An inventory technique that
2×D× C helps managers determine
H how much material to order by
minimizing the total of ordering
where D represents demand, or annual usage rate; C represents ordering costs; costs and holding costs based
and H represents holding costs. on the organization’s usage rate
592 Appendices
Suppose the manager of a small shop that manufactures valves needs to or-
der 1-inch valve gaskets. A review of records indicates that ordering costs for the
gaskets amount to $20, the annual holding cost is $12, and the annual demand
for the gasket is 1,815. The formula to calculate the EOQ in this case is
2 × 1, 815 × $20
= 77.8
$12
The best order quantity, then, is 78.
The next question facing the manager is when to order. This is determined
reorder point (ROP) by calculating the reorder point (ROP). The formula for ROP is
The most economical point at
which an inventory item should D
Lead Time
be reordered Time
Assuming that gaskets can be delivered five days after the order is placed,
the manager determines the ROP by using the following calculation:
1, 815
× 5 = 24. 86 , or 25
365
This formula tells the manager that, because the time to receive new orders
is five days, at least 25 gaskets should be in inventory at all times. Any time the
number of gaskets drops to 25, a new order for 78 gaskets should be placed.
EOQ can result in substantial savings and improvement in inventory man-
agement. It forces managers to evaluate usage rates, ordering costs, and holding
costs. The major disadvantage of EOQ is that it focuses on optimal order quan-
tity while ignoring quality. Another disadvantage of EOQ is that it does not take
into account supplier performance.
Materials Requirement Planning EOQ is useful so long as each inventory

item, as in the valve example, is independent of others. When demand for one
inventory item depends on other inventory items, however, EOQ is no longer
applicable. Such is the case for the Boeing Company, for example. To produce
one hundred 747 aircraft, each of which includes some 3,000,000 parts, Boeing
must have a vast number of discrete components on hand. One technique for
materials requirement managing such an inventory is materials requirement planning (MRP). This
planning (MRP) production planning and inventory system uses forecasts of customer orders to
A production planning and in-
ventory system that uses fore- schedule the exact amount of materials needed to support the manufacture of
casts of customer orders to the desired number of products.
schedule the exact amount of An MRP program begins with a master schedule of planned production.
materials needed for production
(Recall that a master schedule uses sales forecasts to determine the quantities
of fi nished goods required in a specific time period.) The next step is to use a
computer to analyze product design and determine all the parts and supplies
needed to manufacture the fi nished product. This information is then merged
with existing inventory records. The quantities of each item on hand are iden-
tified, and usage rates are calculated. Then the system can determine ordering
times and quantities. In essence, MRP incorporates EOQ, perpetual inven-
tory control, and statistics to provide a comprehensive system for purchasing
materials and scheduling various production activities to meet projected cus-
tomer orders. 29
MRP results in purchasing on time and according to actual needs. In most
cases, MRP means a reduction in inventory and fewer production stops due to
lack of stock. The changes save money. The major limitation associated with
MRP is the extensive organizational commitment it requires. To use MRP prop-
erly, an organization must develop adequate support systems and skilled person-
nel. The system cannot be implemented in a piecemeal fashion.
MRP solved Boeing’s inventory problems. The system that preceded MRP
at Boeing was designed to keep track of the several million parts that went into
each plane, rather than following the development of the plane itself. The sys-
tem worked when Boeing was building 10,000 identical planes, but it became a
major problem when each airline wanted its planes to be slightly different. More-
over, the lists of parts produced by engineering for a given airplane was config-
ured differently from the list put together by manufacturing, customer service,
or other Boeing operations. So the parts list had to be broken down, converted,
and recomputed as many as 13 times during the construction of a single plane.
Today, instead of treating most airplane parts as unique, Boeing’s MRP sys-
tem groups them into three categories, depending on how frequently they are
used. Boeing also assembled a complete parts list that every division can use
without modification or tabbing. In place of defi ning a plane by the parts that
go into it, Boeing defi nes the parts by the plane they are in. 30
Manufacturing Resource Planning Even more sophisticated than MRP is

manufacturing resource planning (MRPII). MRP is used to manage inventory; manufacturing resource
MRPII, on the other hand, is a comprehensive planning system. It emphasizes planning (MRPII)
A comprehensive planning sys-
planning and controlling all of a fi rm’s resources—its fi nances, capital, and mar- tem that controls the total re-
keting strategies—as well as production and materials management.31 MRPII sources of a firm
creates a model of the overall business, allowing top managers to control pro-
duction scheduling, cash flow, human resources, capacity, inventory, purchas-
ing, and distribution. Because of its comprehensiveness, MRPII can be used ef-
fectively for strategic planning.
The value of MRPII lies in its comprehensiveness. It is a strategic manage-
ment system that links the entire organization. Because it is very expensive to
implement, only large companies can afford to use it. In addition, it must be cus-
tom designed for the user, which involves a major commitment of the organiza-
tion’s time and human resources.
Just-in-Time Inventory Systems Another technique for inventory control is

designed to reduce inventory by coordinating supply deliveries with production.
Lean manufacturing or manufacturing without waste requires inventory reduc- Lean manufacturing
tion. This technique, called the just-in-time (JIT) inventory system, originated Originally developed by Toy-
ota, adaptations are now used
in Japan. The JIT concept is sometimes referred to as the kanban system, the around the world to reduce
stockless system, or zero-inventory system. waste or anything that does
With the JIT approach, suppliers deliver exact quantities of materials di- not add value in the production
stream
rectly to manufacturers, as the manufacturers need them. There is no buffer of
“safety” inventory. There is no warehousing or in-process handling. The ben-
efits managers expect to receive from JIT include reduced inventory and setup
time, better workflow, shorter manufacturing time, and less consumption of
space. They often reap unexpected benefits, however. When a company changes
to a JIT system, managers are often able to identify problems that were masked
by inventory reserves, slack schedules, and devices that workers developed to
keep up the required flow. 32
A JIT system depends on reliable suppliers who must meet strict delivery
schedules. When the system works, it works well. At Behlen Manufacturing
Company, within two years from adopting a just-in-time inventory system, in-
ventory costs were down $10 million, work flow improved, and delivery time for
594 Appendices
fi nished goods improved 20 percent. 33 But when the supplier has troubles, the
result is production stoppages. In the mid-1990s the Saturn plant in Lordstown,
Ohio, was shut down as a result of labor strikes against suppliers.
Scheduling Control
10
and methods of schedule
controls
Another important element of operations control is schedule control— techniques
for scheduling operations and tracking production. There are two basic schedul-
ing techniques: Gantt charts and network scheduling.
Gantt Charts Henry L. Gantt, an early pioneer in scientific management, was

the fi rst to devise a reliable method for reserving machine time for jobs in pro-
duction. The method promotes the orderly flow of work from one process to the
next, with a minimum of lost time or delays. His method involved a tool called
Gantt chart a Gantt chart. As you can see by examining Figure A.7, a Gantt chart tracks a
A scheduling and control tool project from beginning to end, comparing the time estimates for the steps in-
that helps managers plan and
control a sequence of events volved with the actual time they require and adjusting the starting and ending
times of steps if necessary.
Figure A.7 shows a Gantt chart for a manufacturing department. The pro-
cesses it tracks are machining, assembling, and shipping. To aid the production
manager in monitoring the progress of each process and making any required
adjustments, the chart presents two sets of information: (1) the planned time for
each task, represented by the area enclosed in brackets; and (2) the actual com-
pletion time, represented by a solid bar within each set of brackets. The length
of the line indicates how much of the task is complete.
Gantt charts work best for scheduling and tracking sequential events, the
completion times of which will determine the total time for an entire project.
Gantt charts are not appropriate for highly complex projects requiring many
different kinds of sequential operations that begin or run simultaneously.
Figure A.7 Gantt chart for a manufacturing department
Today
January February March April May June
Machining Assembling Shipping

Project A

Project B

Project C
Plan
Accomplishment
Network Scheduling Managers use network scheduling to schedule and network scheduling
A scheduling technique used to
track projects in which the events or activities are interrelated. This technique track projects in which events
for scheduling and controlling uses events and activities that have time estimates or activities are interrelated
assigned to them. Figure A.8 presents a network diagram. Events, represented and have time estimates as-
signed to them
by circles, indicate the starting point of some production operation, such as de-
livery of materials. Activities, or processes, are represented by lines with arrows.
The lines indicate the time required to complete the event.
The network diagram in Figure A.8 shows the schedule for a project that
involves 15 events and 18 activities. Event Number 1 marks the start of Activi-
ties A and B. The notation “A.10” means that Activity A is scheduled for ten
days. Event Number 2 marks the end of Activity A and the beginning of Activity
C, which is scheduled to take 2 days. To construct this network, the managers
had to list each activity, estimate the time for each, and identify the immediate
predecessors for each activity. Note that an activity cannot be started until its
predecessor has been completed. Note, too, that some activities can take place program evaluation and
simultaneously. review technique (PERT)
A network scheduling technique
The program evaluation and review technique (PERT), an adaptation of for planning and charting the
network scheduling, assigns four time estimates to activities: optimistic, most progress of a complex project
likely, pessimistic, and expected. The expected time (the amount of time the in terms of the time it is ex-
pected to take—an estimate
manager thinks the activity will actually take) is based on a probability analysis that is derived from probability
of the other three time estimates. analysis
Figure A.8 Network diagram showing how to replace a pipeline
H.1 I.6 L.6

5 6 9 10 13 Q.1
O.4
M.2 R.1
B.28 11 14 15
J.5
E.2 N.1 P.1
12
1 7
K.1
A.10 F.30
2 3 4 8
C.2 D.1 G.45
Immediate Immediate
Predecessor Predecessor
ID Activity Activities ID Activity Activities
A. Assemble crew for job...............................None J. Prefab new pipe........................................................F

B. Use old line to build inventory.................None K. Place valves..................................................................E, G, H
C. Measure and sketch old line....................A L. Place new pipe...........................................................I, J
D. Develop list of materials............................C M. Weld pipe ...................................................................L
E. Erect scaffold................................................D N. Connect valves.........................................................K, M
F. Procure pipes................................................D O. Insulate .......................................................................K, M
G. Procure valves...............................................D P. Pressure-test..............................................................N
H. Deactivate old line......................................B, D Q. Remove scaffold.........................................................N, O
I. Remove old pipe..........................................H, E R. Clean up and turn over to operating crew.........P, Q
Source: Production-Inventory Systems: Planning and Control, 3rd edition by Elwood S. Buffa and Jeffrey G. Miller, pp. 614, 622.
Copyright Richard D. Irwin, Inc., Homewood, IL. Reprinted by permission of The McGraw-Hill Companies.
596 Appendices
The PERT method, originally devised at Lockheed Corporation for plan-

ning complex aerospace development projects, provides managers with a graphic
view of the details of the project from initiation to completion. It functions as a
control device by helping the manager spot trouble areas and see when a project
is falling behind schedule. The manager can take corrective action before the de-
lay becomes critical.
critical path
The longest sequence of events
One benefit of a PERT network is that it helps managers identify the critical
and activities in a network pro- path—the longest possible path or least direct route from the beginning to the
duction schedule or the longest end of a network diagram. Given current time estimates the critical path shows
time a job could take
the longest time a job could take. Figure A.9 shows the calculations that defi ne
the critical path for the pipeline project introduced in Figure A.8. The critical
path represents the earliest possible completion time for the project—65 days—
assuming that the worst combination of events occurs.
Awareness of the critical path equips a manager with the ability to really
control a project. For example, a delay in the completion of Activity B by 1 day
will not affect the total project’s completion time. If, however, Activity G takes
47 days instead of 45, the entire project will be 2 days off schedule, unless the
manager takes some corrective action. By maneuvering to ensure that the length
of the critical path does not increase, the manager can maintain effective control
of the project.
Product Control
11
Describe the importance
and methods of product
control
At one time, the entire concept of operations control focused on inspection of
the physical product. With the advent of TQM, inspection was placed in a new
perspective, as only one part of controlling. Now, product control encompasses
controls from purchasing to end use. It involves reducing the probability and
costs of poor quality and unreliable products. Product controls focus on inspec-
product control tion and testing techniques.
A component of operations con-
trol that reduces the probability Acceptance Sampling Any inspection of a representative group of products
and costs of poor quality and
unreliable products by imple- that takes place prior to the beginning of a new phase of production constitutes
menting controls from purchas- acceptance sampling. The inspection may occur prior to the receipt of raw ma-
ing to end use terials, when subassemblies are completed, after critical processes of manufac-
acceptance sampling turing, and prior to shipping fi nished goods. The data from the sample are used
A product control technique in- to evaluate all items in the group. Organizations use acceptance sampling to
volving a representative group make cost-effective evaluations on large numbers of items. The evaluations de-
of products before a new stage
of production termine whether they accept or reject entire batches.
Figure A.9 Calculation of the critical path
ACTIVITY TIME IN DAYS

A 10
C 2
D 1
G 45
K 1
O 4
Q 1
R 1
Critical Path 65 Days

Detailed Inspections and Tests Rather than a sampling approach to product

control, some operations conduct detailed inspections and tests on every fi nished detailed inspections and
item. Medicines, for example, are tested this way. The goal of the technique is tests
A product control technique in
to identify all parts not meeting standards. The inspection or test may consist of which every finished item re-
an examination of attributes or variables. The inspection and classification of ceives an examination or per-
items as acceptable or unacceptable is called attribute inspection. Potato chips formance test
and nail polish are evaluated this way. An inspector compares the items against attribute inspection
a standard and rates their quality as acceptable or unacceptable. In comparison, A product control technique
variable inspection involves taking a measurement to determine how much an that compares items against a
standard and rates their quality
item varies from standards. Any item that measures within the range is accepted, as acceptable or unacceptable
and those outside are rejected. For example, Ross/Flex might test a valve to see
whether a valve would hold between 300 and 350 pounds of pressure per square variable inspection
A product control technique
inch. If it did not, the valve would not meet tolerance standards. that involves taking measure-
ments to determine how much
Process Control Sampling With process control sampling the purpose is to an item varies from standards
and, therefore, whether it will
detect variations in production processes. The technique involves periodic tests be accepted or rejected
to uncover problems with equipment, worn tools, bad parts, or personnel. When
managers know about problems, they can correct them. For example, a process process control sampling
A product control technique de-
control procedure at Frito-Lay would be able to detect if a bagging machine was signed to detect variations in
out of adjustment because it was fi lling 32-ounce bags with only 16 ounces of production processes
potato chips. Managers could then stop the process and adjust the machine.
Qualification Testing In qualification testing, a sample product is checked for qualification testing
performance on the basis of reliability and safety. New car models are driven A product control technique in
which products are tested for
hundreds of thousands of miles so engineers can test the overall car and its com- performance on the basis of
ponents. Thousands of golf balls are hit by automated golf clubs so that engi- reliability and safety
neers can check on the quality of the balls and the reliability of their fl ight. The
goal of qualification testing is to ensure that a product, as a class, performs as
it should. The purpose of detailed testing is to ensure that each version of the
product meets established standards.
APPENDIX SUMMARY
Discuss the nature and importance of opera- ity during production. Adopting a concept called de-
1 tions strategy and operations management.
Operations strategy is the part of a strategic plan that
sign for manufacturability and assembly (DFM/A) can
reduce the problems. DFM/A calls for design by teams
defi nes the role, capabilities, and expectations of opera- consisting of designers, manufacturers, and assemblers.
tions. Operations management consists of the manage- Because these specialists have a say in product design,
rial activities and techniques used to convert resources actual production of the product becomes more effi cient.
into products and services. Without an effective opera- Design for disassembly (DfD) is another design con-
tions strategy and operations management, few orga- cept. Its goal is to close the production loop—that is, to
nizations would survive. Together they are viewed as a conceive, develop, and build a product with a long-term
competitive weapon to be used with marketing and fi- view of how its components can be refurbished and re-
nance. When this is the case, the results can be lower used at the end of the product’s life cycle.
prices or better quality, performance, or responsiveness
Describe the four main strategies for facilities
to consumer demand.
Discuss the nature and importance of prod-
3 layout. The four main strategies for facilities lay-
out are
2 uct and service design planning. In the past,
engineers designed products with a complete lack of
• Process layout. In a process layout all the equipment
and machines that perform a similar task or function
thought for product manufacture and assembly. The
are located together. A product is moved from pro-
products could not be assembled easily, contained more
cess to process as needed.
parts than necessary, and had to be inspected for qual-
598 Appendices
• Product layout. In a product layout the machines ment. To achieve high quality and productivity, manag-
and tasks are arranged according to the progressive ers can use a number of operations controls. These in-
steps by which the product is made. clude control of design, materials, inventory, scheduling,
and products.
• Cellular layout. The cellular layout combines the
characteristics of process and product layouts. In a Discuss the purpose of design controls. Design
cellular arrangement all the equipment required for a
sequence of operations on the same product is placed
7 control focuses on creating new products engi-
neered for reliability, functionality, and serviceability.
together in a group called a cell.
Discuss the importance of managing and con-
• Fixed-position layout. A fi xed-position layout is
used when, because of bulk or size, the product re-
8 trolling materials purchasing. What an organi-
zation produces depends on the inputs—the materials
mains in one location. Tools, equipment, and human and supplies. Therefore purchasing is critical for the fol-
skills are brought to the product. lowing reasons:
Discuss the nature of process and technology • If the materials are not on hand, nothing can be
4 planning. The challenge facing operations manag-
ers is to identify the proper blend of people and technol-
produced.
• If the right quantity of materials is not available,
ogy to use in transforming inputs into fi nished products
demand cannot be met.
or services. For any given production task, several con-
version methods are available—some labor intensive, • If the materials are of inferior quality, producing
others equipment intensive. The nature of the product quality products is difficult or costly.
and the objectives and resources of the organization are
The goal of purchasing control is to ensure the
critical factors in choosing one method over another.
availability and acceptable quality of material while
The growing trend today is toward the use of more so-
balancing costs.
phisticated technology in manufacturing. The tech-
nology responsible for revolutionizing manufacturing Explain how EOQ, MRP, MRPII, and JIT
processes includes robotics, CAD/CAM, flexible manu-
facturing systems, computer integrated manufacturing,
9 differ.
• EOQ. The economic order quantity (EOQ) is the or-
soft manufacturing systems, and agile manufacturing.
der quantity that minimizes ordering and building
Explain the factors in facilities location plan- costs based on the rate of inventory use. EOQ is use-
5 ning and capacity planning. In considering the
location of facilities, managers must ask two important
ful as long as each inventory item is independent of
others.
questions: Should the fi rm have one or two large plants
• MRP. When the demand for one inventory item de-
or several smaller ones? Where should the facilities be
pends on other inventory items, materials require-
located? The decision on the number of plants will de-
ment planning (MRP) is applicable. This production
pend on the company’s long-range objectives and dis-
planning and inventory system uses forecasts of cus-
tribution strategies, fi nancial resources, and equipment
tomer orders to schedule the exact amount of materi-
costs. The choice of location depends on the location of
als needed to support the manufacture of the desired
the market where the product will be sold, availability
number of products.
of labor skills, labor costs, proximity to suppliers, tax
rates, construction expenses, utility rates, and quality • MRPII. Even more sophisticated than MRP is manu-
of life for the employees. Capacity planning is a matter facturing resource planning (MRPII). MRP is used to
of trying to convert sales forecasts into production fa- manage inventory; MRPII is a comprehensive plan-
cilities. Too little capacity means that the organization ning system. It emphasizes planning and controlling
cannot match demand and that it will lose customers. all of a fi rm’s resources—its fi nances, capital, and
The reverse results in facilities and equipment sitting idle marketing strategies as well as its production and
while incurring costs. materials management. MRPII creates a model of the
overall business, allowing top managers to control
Describe the role of operations control in
6 achieving quality and productivity. The costs
associated with poor productivity relate to quality.
production scheduling, cash flow, human resources,
capacity, inventory, purchasing, and distribution.
These include the costs of scrap, repair, and downtime. • JIT. The just-in-time inventory system is designed
Such costs are directly observable during production. to reduce inventory by coordinating supply deliver-
Quality is also related to costs incurred before manufac- ies with production. With the JIT approach, suppliers
turing begins. These expenses include the cost of incom- deliver exact quantities of materials directly to manu-
ing materials, purchasing, and inventory. All of these facturers as the manufacturers need them. There is no
factors fall within the purview of operations manage- buffer of “safety” inventory or in-process handling.
Discuss the importance and methods of Describe the importance and methods of
10 schedule controls.Schedule controls are
techniques for scheduling operations and tracking
11 product control. Product control encompasses
controls from purchasing to end use. It involves reducing
production. There are two basic scheduling techniques: the probability and cost of poor quality and unreliable
Gantt charts and network scheduling. products. There are four methods of product controls.
• A Gantt chart tracks a project from beginning to • Acceptance sampling. Any inspection of a repre-
end, comparing the time estimates for the steps in- sentative group of products that takes place prior to
volved with the actual time they require and adjust- the beginning of a new phase of production consti-
ing the starting and ending times of steps if nec- tutes acceptance sampling. Organizations use accep-
essary. Gantt charts work best for scheduling and tance sampling to make cost-effective evaluations of
tracking sequential events. Gantt charts are not ap- large numbers of items. The evaluations determine
propriate for highly complex operations requiring whether they accept or reject entire batches.
many different kinds of sequential operations that
• Detailed inspections and tests. Rather than a sam-
begin or run simultaneously.
pling approach, some operations conduct detailed
• Network scheduling is used to schedule and track inspections and tests on every fi nished item. The in-
projects in which events or activities are interre- spections may consist of an examination of attri-
lated. This technique uses events and activities that butes or variables.
have time estimates assigned to them. An adaptation
• Process control sampling. With process control sam-
of network scheduling is program evaluation and
pling, the purpose is to detect variations in produc-
review technique (PERT). PERT assigns four time
tion processes. The technique involves periodic tests
estimates to activities: optimistic, most likely, pes-
to uncover problems with equipment, worn tools,
simistic, and expected. The expected time is based
bad parts, or personnel.
on probability analysis of the other three time esti-
mates. One benefit of a PERT network is that it helps • Qualification testing. In qualification testing, a sam-
managers identify the critical path—the longest path ple product is checked for performance on the ba-
or least direct route from beginning to the end of a sis of reliability and safety. The goal of qualification
network diagram. The critical path equips a man- testing is to ensure that a product, as a class, per-
ager with the ability to really control a project. By forms as it should.
maneuvering to ensure that the length of the critical
path does not increase, the manager can gain effec-
tive control of the project.
KE Y TERMS
acceptance sampling economic order quantity (EOQ) process control sampling
aggregate planning facilities layout process layout
agile manufacturing fi nished goods inventory product control
attribute inspection fi xed-position layout product layout
capacity planning flexible manufacturing system program evaluation and review
cellular layout (FMS) technique (PERT)
computer-aided design (CAD) Gantt chart purchasing
computer-aided manufacturing inventory qualification testing
(CAM) Lean manufacturing raw materials inventory
computer-integrated manufacturing manufacturing resource planning reorder point (ROP)
(CIM) (MRPII) robotics
co-opetition master schedule soft manufacturing system (SMS)
critical path materials requirement planning supplier relationship management
design control (MRP) (SRM)
design for disassembly (DfD) network scheduling supply-chain management
design for manufacturability and operations management variable inspection
assembly (DFM/A) operations strategy work-in-process inventory
detailed inspections and tests outsourcing
600 Appendices
RE VIE W QUESTIONS
1. What is operations management? Why is operations 6. What is the role of operations control in achieving
strategy important? quality and productivity?
2. Why is design for manufacturability and assembly 7. What is the purpose of design controls?
important in terms of overall operations
8. Why is it important for an organization to control
management?
materials purchasing?
3. When should a process layout be used? Why?
9. How do EOQ and JIT systems control inventory?
4. What benefits can CAD or CAM technology provide
10. What is the purpose of a Gantt chart? What is the
for a manufacturer?
purpose of PERT scheduling?
5. What factors should managers consider when select-
11. What is the difference between acceptance sampling
ing a facility location? What is the role of a cost-
and process control sampling?
benefit analysis in the decision?

1. Are operations management and operations strategy 3. Of the three types of inventory, which of these is
most closely related to corporate-level, business-level, most likely to be affected by the just-in-time inven-
or functional-level strategy? Why? In what way? tory system? Why?
2. You have been asked by the owner of a local video 4. If you were the manager of a donut shop, what prod-
store to identify a possible location for a second uct control would be the most critical? What would
store. How would you proceed? How would you be the least critical? Why?
help the store owner determine the new store’s
capacity?
O LIST
✓ TO D in g Obje
ctives
a r n
n Le in Actio
n
■ Sc a e me nt
a n a g
dM
■ Rea
d t ex t
■ Rea ey Ter
ms
r a p h rase K a ry
■ P a S u mm
A p p endix
iew ns
■ R ev uestio
view Q
B
w e r R e
■ Ans
LEARNING OBJECTIVES
INTERNATIONAL After studying this chapter, you should be able to:
MANAGEMENT 1 Explain the primary reasons why businesses become

international
Describe the characteristics of multinational corporations

2
Discuss the political, legal, economic, sociocultural, and
3 technological elements of the international environment
Describe the major strategies for going international

4
Explain the phases a company goes through when moving
5 from domestic operations to a multinational structure
Discuss the major staffing concerns for an international

6 corporation
Describe the major concerns relating to leading a cross-

7 cultural workforce
Discuss the major concerns relating to controlling an

8 international corporation
Getty Images
Haier: China’s Global Brand
When most people think of a company becoming McDonald’s, and Ford. Most Chinese manufacturers
international, they think of an American company ex- produce products for other companies. “By creating
panding overseas by building factories to take advan- one of China’s first genuine brands, Zhang himself has
tage of cheap labor. But do they think about a Chi- become a marquee attraction. He is invited to speak
nese company building a factory in the United States at conferences here and abroad. His views are sought
staffed by Americans? That is what China’s Haier by government officials and journalists. And the story
Group did. The name Haier means “the sea” and of how he built Haier from the ruins of a state-owned
symbolizes profit in Chinese (Spors). factory has become a legend” (Landler).
Zhang Ruimin became a Chinese business leg- In order to become a household name (like Whirl-
end shortly after being appointed Director of Qing- pool or Maytag) in the United States, Haier built a
dao (China) Refrigerator Factory, now known as Haier plant in Camden, South Carolina. “The factory, com-
Group. In 1984, when Zhang took over, the govern- pleted in 2000 at a cost of $40 million, is designed to
ment-controlled factory was “a lethargic, nearly bank- respond nimbly to American retailers, who stock little
rupt plant where erratically paid, demoralized workers inventory but want to replenish supplies quickly when
turned out shoddy products” (Landler). Today, Haier is products run out, said David Parks, a senior vice presi-
China’s largest home appliance manufacturer and one dent of Haier’s American unit” (Zhao).
of its largest exporters. Haier has found success in a couple of Ameri-
Zhang is known for a relentless pursuit of quality. can niche markets. According to a McKinsey report,
“Early in Zhang’s tenure at the company, a customer Haier has one-third of the compact refrigerator market
complained about a broken refrigerator, prompting the and one-half of the refrigerated wine cabinets mar-
boss to stalk through the factory pulling out 76 defec- ket in the United States. Haier products are sold at
tive ones. He piled them up and handed sledgeham- Wal-Mart, Costco, Target, and Best Buy. “Consumers
mers to the workers who had assembled them. At his have found them to be generally reliable, and they are
signal, they all set upon the fridges, reducing them to cheaper than similar refrigerators selling under Ameri-
shards” (Landler). This act symbolized the company’s can brand names” (Zhao).
turnaround. A movie was even made about Zhang’s
Sources: Kelly K. Spors, “Against the Grain,” The Wall Street
early days at Haier. Journal, September 24, 2004, p. R6, http://online.wsj.com/
After improving the quality, Haier began export- article/0,,SB109596188232526188,00.html; Mark Landler,
ing products to developing countries and then to de- “In China, a Management Maverick Builds a Brand,” The
veloped countries all over the world. It is important to New York Times, July 23, 2000, http://www.bebeyond.com/
KeepCurrent/Recommended/Haier.htm; Yilu Zhao, “When Jobs
note that Haier (pronounced ‘higher’) puts its name Move Overseas (to South Carolina),” The New York Times,
as the brand on all of its products. Well-known world October 26, 2003, http://www.nytimes.com/2003/10/26/business/
brands include General Electric, Nokia, Coca-Cola, yourmoney/26chin.html?pagewanted1&th.
604 Appendices
Introduction
American businesses are part of a global economy regardless of how large or
small they are. Most U.S. businesses have discovered that significant portions
of their inputs come from other nations. Today, companies need the flexibility
to acquire needed inputs from sources offering the highest quality, greatest de-
pendability, and lowest cost, whether located overseas or down the street.
As probably never before in our nation’s history, managers must pay atten-
tion to what is going on in economies around the globe. The world is changing
more rapidly every day, and the changes are monumental. After communism
lost its hold in the Soviet Union, many of its former satellite republics became
independent nations and opened their borders to foreign investment and inter-
national trade. Soon after East Germany merged with West Germany, the re-
public of Czechoslovakia split into two nations. Twenty-five European Commu-
nities (EC) formed an economic union referred to as the European Union (EU)
and created a common currency (the euro) and banking system. EU citizens
will eventually carry one passport. China opened its doors to foreign invest-
ment and is investing in the United States, as discussed in this chapter’s Manage-
ment in Action. Great Britain and countries in Central and South America are
moving steadily away from socialist economies with the privatization of many
government-owned operations. (The sale of Telmex, Mexico’s telephone com-
pany, to private investors is but one example.) These events and others discussed
throughout this text and chapter mean vast economic challenges to and oppor-
tunities for both businesses and individual consumers around the world.
Companies in every country need the freedom and flexibility to act quickly
in anticipation of or in reaction to changes taking place around the world. Each
day the values of countries’ currencies fluctuate, offering advantages and disad-
vantages. As the value of the dollar falls against a foreign currency, U.S. goods
and services become cheaper and more appealing to the citizens in that country.
As the value of the U.S. dollar rises against that of another country’s currency,
that country’s products and services become more appealing to U.S. consumers
and companies.
Why Businesses Become International
1
Explain the primary
reasons why businesses
become international
As this chapter’s Management in Action case points out, companies such as
Haier see expansion into new foreign markets as a primary strategy for survival,
as well as for boosting sales and profits. McDonald’s is America’s best-known
global food-service retailer. It expands through various means from building
company-owned outlets to licensing and partnership agreements. McDonald’s
is but one U.S. company that has found domestic sales slowing due to saturated
domestic markets, thus leaving it little choice about how to increase earnings.
PepsiCo is another U.S. company that is pursuing overseas markets to over-
come disappointing domestic sales growth. “International beverage volume rose
16 percent on demand for Pepsi and other sodas in China, the Middle East,
Argentina and India.” 1
In general, companies go international for two basic sets of reasons or mo-
tives: proactive and reactive. Proactive motives include the search for new cus-
tomers, new markets, increased market share, increased return on investments,
needed raw materials and other resources, tax advantages, lower costs, and econ-
omies of scale. This last reason, economies of scale, encourages companies to
Appendix B International Management 605
fi nd foreign partners to share the costs connected with building factories, con-
ducting research, and expanding one’s sales and presence in additional markets.
The drive to reduce costs has led to setting up operations in countries with
lower wages and fewer restrictions on business. Many businesses from around
the world have chosen northern Mexico for its proximity to American custom-
ers and lower cost of wages and benefits—on average one-fourth to one-fifth
those of the United States, Germany, and Japan.
Reactive motives include the desire to escape from trade barriers and other
government regulations, to better serve a customer or group of customers (many
Japanese auto parts suppliers, for instance, have moved to the United States to
be near the Japanese companies they supply), and to remain competitive. Fear of
potential trade restrictions has led U.S. automakers to expand their presence in
Europe, Asia, and Latin America and has led Japanese and German automak-
ers and their suppliers to build plants in the United States. Nearly every major
foreign producer of automobiles has established subsidiaries in the United States
to escape actual or potential American trade restrictions. One example is Mer-
cedes-Benz, with its manufacturing operations in Alabama.
The desire to escape government regulation is not limited to automobile man-
ufacturers. Hundreds of U.S. companies such as GE and Motorola have estab-
lished their own foreign subsidiaries. Likewise, Japan’s largest cosmetics maker,
the Shiseido Company, entered U.S. and European markets in response to gov-
ernment actions. Shiseido had long enjoyed a comfortable dominance of Japan’s
cosmetics market. Lax antitrust enforcement let it keep retail prices high, while
import regulations insulated it from cheap foreign products. But since mid-1995,
Japan has clamped down on Shiseido’s business practices and deregulated cos-
metics imports. Shiseido planned a number of foreign acquisitions to wean itself
from the Japanese market, which accounted for 91 percent of its sales.2 Shiseido’s
overseas sales data by region breakdown are: the Americas, 30 percent; Europe,
40 percent; and Asia/Oceania, 30 percent. 3
The Multinational Corporation

Many fi rms around the world, large and small, have become involved in interna-
tional business over the past decade. The managers of these businesses conduct
international trade and are engaged in international management—managing
resources (people, information, funds, inventories, and technologies) across na-
tional boundaries and adapting management principles and functions to the de-
2
Describe the charac-
teristics of multinational
corporations
mands of foreign competition and environments. international management

These international companies can do business in foreign countries in sev- The process of managing re-
sources (people, information,
eral ways. Some simply maintain sales offices in other lands; others only buy funds, inventories, and technol-
materials from companies in other countries. Those companies with operating ogies) across national bound-
facilities, not just sales offices, in one or more foreign countries are classified as aries and adapting management
principles and functions to the
multinational corporations.4 demands of foreign competition
In general, there are two kinds of multinational companies: those that mar- and environments
ket their product lines in relatively unaltered states throughout the world (stan-
multinational corporation
dardization), and those that modify their products and services along with the A company with operating fa-
marketing of them to appeal to specific groups of consumers in specific geo- cilities, not just sales offices, in
graphical areas (customization). Products that illustrate the first group are sport- one or more foreign countries;
where management favors a
ing goods, soft drinks, cigarettes, chemicals, oil products, liquors, and certain global market and strategy, and
types of clothing—Lee Jeans, for example. Both Pepsi and Wrigley’s chewing sees the world as its market
606 Appendices
gum are sold around the world with only their packaging, promotion, and label-
ing altered to suit foreign requirements. Examples of customization include com-
puter software programmed to work in foreign languages; cars manufactured
to meet a country’s safety, pollution, and drivers’ preferences (right-hand drive,
for example); fast-food menus altered to cater to cultural tastes; and cosmetics
formulated to complement the skin tones and coloring of different populations.
McDonald’s, for example, adjusts its menus and food services to suit the tastes
of foreign customers (black currant shakes in Poland, salads with shrimp in Ger-
many, veggie burgers in Switzerland); Mary Kay cosmetics are specially formu-
lated to suit foreign preferences as well. 5
Customization is often the best strategy to adopt. Companies that attempt
to sell the same product to different nationalities soon discover that there will be
problems. With regard to laundry products, “Germans, for example, demand a
product that’s gentle on lakes and rivers and will pay a premium for it. Spaniards
want cheaper products that get shirts white and soft. And Greeks want smaller
packages that allow them to hold down the cost of each store visit.” 6 Whirl-
pool Corporation has discovered in its European experience that “[n]ot only are
kitchen appliances different from one country to another, but consumers also
react differently to advertising messages from one country to the next.” 7
Characteristics of Multinationals
Even though multinationals around the world differ in sales volumes, profits,
markets serviced, and the number of their subsidiaries, they do share some com-
mon traits. One common trait is the creation of foreign affi liates, which may be
wholly owned by the multinational or jointly held with one or more partners
from foreign countries. Arvind Phatak describes the relationship of multination-
als to their affi liates in this way:
The foreign affiliates are linked with the parent company and with each
other by ties of common ownership and by a common global strategy
to which each affiliate is responsive and committed. The parent com-
pany controls the foreign affiliates via resources that it allocates to each
affiliate—capital, technology, trademarks, patents, and [people]—and
through the right to approve each affiliate’s long- and short-range plans
and budgets. 8
McDonald’s, Daewoo, Whirlpool, and Motorola are examples of multina-
tionals with affi liates in foreign countries.
Another common characteristic of multinationals is that their management
operates with a global vision and strategy—viewing the world as their market.
Top managers coordinate long-range plans and usually allow the foreign affil-
iates to work with great autonomy, leaving the day-to-day management deci-
sions to those closest to the problems in foreign markets. Affi liates’ operations
are integrated and controls are exercised through management reports; frequent
meetings and communications between headquarters staff and those in the af-
fi liates; and the setting of objectives both alone and with headquarters’ inputs.
Foreign affiliates become the training grounds for company managers as well
as the sources for them. Johnson & Johnson provides managers of its far-flung
empire with autonomy. Its top management believes “the people closest to the
action have the best view.” As former CEO Ralph Larsen explains, “Decentral-
ization is at the heart of Johnson & Johnson. With decentralization you get tre-
mendous speed at the local level.” 9
A third characteristic is the tendency of multinationals to choose certain
types of business activities. Most multinationals are engaged in manufacturing.
The rest tend to cluster around the petroleum industry, banking, agriculture,
and public utilities.10
Also shared by multinationals is the tendency to locate affi liates in the de-
veloped countries of the world—EU nations, Canada, South Korea, Taiwan, Ja-
pan, and the United States. “It is estimated that about two-thirds of the world’s
direct investments are in the developed countries.” 11 Less-developed countries
(LDCs) tend to be seen as sources for raw materials and cheap labor, and as
markets for fairly inexpensive consumer products that can be mass-produced to
standardized designs. Motorola’s operations in China exemplify this latter cat-
egory. Motorola produces cellular phone components made to standardized de-
signs and available to most of the citizens at a relatively modest cost.
A fifth characteristic is the adoption of one of three basic strategies regard-
ing staffi ng. The fi rst is to decide to adopt a high skills strategy, in which the
company exports products, not jobs. “Rather than push pay to the lowest com-
mon denominator, companies such as Deere, Ford, and Motorola are training
workers to improve their skills, boost productivity [and quality]—and keep jobs
at home.” 12 The second is to dumb down jobs and shift the work to cheap-
labor countries. This has been the choice for the majority of companies around
the world. The third strategy is to mix the preceding two strategies: “for every
Motorola or Ford, a trendsetter such as AT&T is turning high-paying jobs into
low-wage ones. Even those that upgrade worker skills, such as Ford Motor Co.
and General Electric Co. . . . still shift work to cheap-labor countries—thus pur-
suing both approaches.” 13
International Environment
The environment in which managers in an international company function
is far more complex than its domestic management settings. The key task for
top management in a multinational company is to develop and maintain an in-
depth understanding of the environments of every country in which it has op-
erations, affiliates, suppliers, and customers. Five basic environments must be
3
Discuss the political, legal,
economic, sociocultural,
and technological ele-
ments of the international
monitored: political, legal, economic, sociocultural, and technological.14 Each environment
environment is constantly undergoing change. Figure B.1 summarizes the com-
ponents of each environment. The discussion that follows focuses on the key is-
sues of each.
Political Environment
Political environments can foster or hinder economic development and invest-
ment by native and foreign investors and businesses. The political philosophy
and type of economic philosophy held by a nation’s leaders can give rise to laws
that promote domestic commerce and raise barriers to trade with the outside
world. The stability of a government and its support by the people will affect de-
cisions to seek commercial opportunities or to avoid investments in a nation. “As
the fast-food industry’s superpower, McDonald’s is a global symbol of Western
pop culture, Yankee know-how and American corporate cunning. But promi-
nence on the world stage can be a lightning rod for trouble, and the company is
608 Appendices
Figure B.1 Components of the international environment
POLITICAL ENVIRONMENT
Form of government Social unrest

Political ideology Political strife and insurgency
Stability of government Governmental attitude toward foreign fi rms
Strength of opposition parties Foreign policy
and groups
LEGAL ENVIRONMENT
Legal tradition Patent and trademark laws

Effectiveness of legal system Laws affecting business firms
Treaties with foreign nations
ECONOMIC ENVIRONMENT
Level of economic development Membership in regional economic blocks

(EU, LAFTA, CIS)
Population Monetary and fiscal policies
Gross domestic product Nature of competition
Per-capita income Currency convertibility
Literacy level Inflation
Social infrastructure Taxation system
Natural resources Interest rates
Climate Wage and salary levels
SOCIOCULTURAL ENVIRONMENT
Customs, norms, values, and beliefs Social institutions

Languages Status symbols
Attitudes Religions
Motivations Demographics and psychographics
TECHNOLOGICAL ENVIRONMENT
State-of-the-art in various industries CAD, CAM, and CIM

Research and development Host countries’ levels of acceptance and
utilization
Recent innovations Presence of educated workforce in host
countries
Robotics Potential partners around the globe
Source: From International Dimensions of Management, 4th edition, by Phatak. Copyright © 1995.
Reprinted with permission of South-Western, a division of Thomson Learning: www.thomsonrights.com.
Fax 800-730-2215.
often exposed to outbursts of anti-American sentiment and a myriad of political

grievances.” 15
Various groups of citizens with vested interests—farmers, manufacturers,
distributors, and political parties—can create civil protests and promote protec-
tionist legislation to safeguard their particular interests. Japanese farmers pres-
sured their government successfully for years to keep foreign agricultural com-
modities such as rice out of the country. They didn’t want competition because
they could sell their domestic rice for six times the price of California rice.16
When the Tokyo discount liquor store chain, Kawachiya Shuhan Co., imported
sake—the traditional Japanese rice wine—made in California with California
rice, the chain was able to sell the wine cheaper than the Japanese product. The
company soon encountered resistance from Japanese brewers. The President of
the chain, Yukio Higuchi, said that “all five U.S. brewers, which are affi liates of
Japanese sake makers and wholesalers, refused to supply his stores—or any Jap-
anese liquor store—with the U.S.-made sake.” Higuchi suspected “liquor mak-
ers, fearing that the cheaper sake would threaten the high prices of Japanese
sake, joined forces against him.” 17
Prior to its 2002 bankruptcy, Enron Corporation suffered a huge blow to
its global ambitions with the cancellation of a $2.9 billion power project by
the Maharashtra (India) state government. Enron found itself in the middle of
a power struggle between the Bharatiya Janata party (BJP) and the ruling Con-
gress party. Long in search of a way to counter the Congress party, the BJP
formed a coalition with the Shiv Sena party. After its actions crushed Enron,
BJP President, L. K. Advani, delivered a nationalistic message. The party “has
no objection to foreign investment as long as it doesn’t compromise the nation’s
economic sovereignty.” 18
Legal Environment
Each country has its own unique set of laws that have an impact on commerce.
Laws designed to protect the rights of individuals and labor unions differ as
well. Just as managers working in America need to be certain that their actions
will not violate any of the many laws bearing on commerce, so, too, must inter-
national managers in each host country.
Some countries erect trade barriers, such as quotas, tariffs, and embargoes.
Quotas limit the import of a product to a specified amount per year. The Japa- quota
nese automakers agreed to restrict their imports into America and the EU na- A government regulation that
limits the import of a product to
tions to a specific number of cars each year for several years. a specified amount per year
Tariffs are taxes placed on goods in order to make them more expensive
and less competitive. Under the 1992 North American Free Trade Agreement tariff
A tax placed on imported goods
(NAFTA) between Mexico, Canada, and the United States, Mexican tariffs to make them more expensive
on imported agricultural commodities are being phased out over a period of and thus less competitive in
years. Under the terms of the treaty, the United States has until 2008 before order to protect domestic
producers
markets will be totally open to Mexican sugar, peanuts, and frozen orange juice
concentrate.19
Embargoes keep a product out of a country for a time or entirely. Under embargoes
the terms of NAFTA, Mexico can bar U.S. exports of soybeans for three months Government regulations en-
acted to keep a product out of a
annually, when Mexican farmers are harvesting their crops. 20 On the other side country for a time or entirely
of the border, the United States barred the import of Mexican avocados. Al-
though the official reason for the embargo was stated as “fear of infestation
from Mexican pests harbored in the avocados,” Mexican growers were not con-
vinced. Said one grower, “We buy American apples, American peaches, all kinds
of American goods, every day. If we are to have free trade, then it must be in
both directions.” 21
Economic Environment
When companies analyze their options for going multinational, they must con-
sider factors such as the stability of a country’s currency, its infrastructure, its
availability of needed raw materials and supplies, its levels of infl ation and taxes,
its citizens’ levels of income, its closeness to customers, and its climate. When
610 Appendices
the U.S. appliance maker Whirlpool wanted to expand its operations overseas, it
used “many factors, including ease of access, growth potential and government
regulation. Europe got the green light in 1987, when the Netherlands-based con-
glomerate Philips N.V. made overtures about spinning off its appliance busi-
ness.” 22 In 1988, Whirlpool formed a partnership with Philips and eventually
bought out its partner’s interests in 1991, by which time 37.5 percent of Whirl-
pool’s sales came from Europe, up 5.5 percent since 1988. 23 By fourth quarter
2005, Whirlpool Europe’s sales were $849 million. 24
Today, the distant regions of Asia are proving irresistible to businesses.
Once written off as remote, areas in rural Malaysia and Thailand are attracting
major corporations because of improved infrastructure, lower costs, and fat gov-
ernment incentives. (For instance, Thailand has an eight-year exemption on cor-
porate income tax and an exemption on import duties for machinery.) In 2006,
Intel invested 230 million to set up an additional assembly and test plant in Ma-
laysia, in addition to its “innovation center” in Taipei, Taiwan, a center to design
and develop technology in Penang, Malaysia, and an assembly plant in Chengdu,
China. 25
Sociocultural Environment
The sociocultural environment for the international manager includes such con-
cerns as a people’s traditions, languages, customs, values, religion, and levels of
education. To accomplish the company’s objectives, the international manager
works daily in the cultures of different nations and regions, which differ from
his or her own culture.
Understanding the host country’s people and their values (and how to re-
spond to them) has helped Amway expand its overseas operation. Capitalizing
on the Hungarian population’s “long-time habit of moonlighting, the govern-
ment’s benign view of Amway’s training in free enterprise and the cachet of be-
ing a typically American import,” Amway recruited 44,000 Hungarians to be
its distributors. 26 Many of these distributors sell Amway products in Slovakia,
Romania, Poland, and within Hungary, with half of sales made online at Am-
way’s Internet store. 27 According to Klaus Tremmel, the head of Amway Hun-
garia Marketing Ltd, the company is using the same appeals that have brought
150,000 former East Germans into the company’s family—“namely, that in a
time of growing unemployment and falling living standards, this business gives
people the opportunity to influence their income. . . . Success through individual
initiative is our byword.” 28
Before American managers go abroad, it is imperative that they understand
the cultures of countries in which they must operate and how those cultures
compare to America’s. To gain this understanding, the manager must fi rst un-
derstand what makes American culture what it is. Figure B.2 shows five dimen-
sions of American society.
After analyzing American culture, the international manager must evaluate
the cultures in the countries and regions where he or she will be doing business.
One suggested approach is to use the following five dimensions:
1. Material culture. The international manager needs to evaluate the technol-
ogy and the technological know-how for producing goods in a country, the
manner in which the country makes use of these abilities, and the resulting
economic benefits to the society.
2. Social institutions. The international manager needs to analyze the influ-
ence on individuals of social institutions—schools, family, social class, re-
Figure B.2 Five characteristics of American culture pertaining to business
Individualism The attitude of independence of people who feel that a large

degree of freedom in the conduct of their personal life consti-
tutes their individualism. The effects of individualism can be
seen in self-expression and individual accomplishment. This
value may not be shared in other cultures.
Informality Informality has two components. First, American culture does
not place a great deal of importance on tradition, ceremony,
or social rules. Second, the “style” in American culture is to
be direct and not waste time in the conduct of meetings and
conversation. Neither of these values may be signifi cant when
conducting business in Latin America or the Middle East.
Materialism There are two elements in American materialism. First, there
is a tendency to attach status to physical objects—certain
types of cars or designer clothing, for example. Second, be-
cause of vast natural resources, Americans are inclined to buy
objects and then discard them while they still have a functional
value. Both of these behaviors, if exhibited in other societies,
may create problems for the international manager.
Change Although viewed as part of American culture, change is also
perceived as something an individual can influence. That one
person can bring about significant change is a fundamental
tenet of American culture. In other societies, this same cul-
tural value might not exist. Change is seen as inevitable but
as a phenomenon that occurs naturally—a part of the overall
evolution of people and their world. Change is accepted; it is
predetermined. There is no deliberate attempt to infl uence it
or bring it about.
Time orientation Time in American culture is seen as a scarce and precious re-
source. As a result, there is an emphasis on the effi cient use
of time. This belief dictates the practices of setting deadlines
and of making and keeping appointments. But in other soci-
eties, time is often viewed as an unlimited and never-ending
resource. This attitude explains why people in some cultures
tend to be quite casual about keeping appointments or meet-
ing deadlines.
Fax 800-730-2215.
ligions, political parties. These strongly affect individuals’ work ethics and
their abilities and willingness to work in groups.
3. Humans and the universe. The values and beliefs of people in other cultures
may be influenced greatly by religion, customs, and superstitions. The inter-
national manager needs to understand that these elements are an integral
part of the culture.
4. Aesthetics. This dimension is composed of the art, folklore, myths, music,
drama, and native traditions in a culture. These factors can be important in
interpreting the symbolic meanings of artistic expressions and various kinds
of communications, such as gestures and visual representations. Failure to
interpret these signals as the natives do is bound to cause problems.
612 Appendices
5. Languages. The most difficult dimension for the international manager is

languages and their various dialects. Not only does the manager need to
speak the language of the host country, an international manager must also
understand the interpretations and nuances of the languages as their words
have more than dictionary meanings. This dimension logically extends to
understanding which groups within a society are at odds with one another
and which traditionally get along. 29
Technological Environment
This environment contains the innovations that are rapidly occurring in all types
of technologies, from robotics to cellular phones. In the global environment,
American technology companies are forging strategic alliances with Swiss, Japa-
nese, German, Chinese, and Indian rivals at an unprecedented rate in an effort
to survive and remain competitive in the global marketplace. The name of the
game is to achieve world-class product development and delivery. The goal is to
deliver—not necessarily build—the highest-quality products and bring them to
market in the shortest possible time.
Unless companies want to go it alone with all the expenses in money, time,
and bricks and mortar that such a decision carries with it, they must join forces
with others to quicken the pace and to cut the costs connected with this goal.
Sony and Samsung created a joint venture to develop and manufacture LCD
(liquid crystal display) panels. Sony and Samsung are vying with other LCD
panel manufacturers such as LG.Philips LCD, a joint venture between Royal
Philips Electronics of the Netherlands and Korea’s LG Electronics.30 Sony is Ja-
pan’s number-two consumer electronics company and Samsung Electronics Co.
Ltd. is one of the world’s largest makers of LCD panels. The LCD can be used in
just about every product requiring a visual display. As its price comes down and
its size increases, LCD will rival television cathode ray tubes.
Regardless of the kind of business a company is in, it must choose partners
and locations that have what it lacks. The best equipment and state-of-the-art
technology will be wasted unless those chosen to employ it in manufacturing
have the know-how and the willingness to learn how to use it properly. Many
companies have chosen Mexico and Mexican partners because they fi nd a will-
ing and capable workforce. GM has plants in Toluca, State of Mexico; Silao,
Guanajuato; Ramos Arizpe, Coahuila; and in Mexico City that rival its North
American ones in quality.
Planning and the International Manager
4
Describe the major
strategies for going
international
Regardless of whether a manager is planning for domestic or international oper-
ations, forecasts for the future depend on assumptions. Planning on an interna-
tional level involves the same planning elements that we discussed earlier in this
text: assessing the environment, developing assumptions, and then forecasting
based on those assumptions. Although the process is the same, planning in an
international company will be more difficult because many more variables and
environments must be considered.
Choosing Strategies
There are basically four ways to get involved in overseas trade. When deciding to
“go international,” a company may consider any combination of the following
strategies:
1. Export your product or service.

2. License others to act on your behalf (as sales agents, franchisees, or users of
your processes and patents).
3. Enter into joint ventures (partnerships) for mutual benefit to produce, to
market or to do both.
4. Build or purchase facilities outside your home country to conduct your busi-
ness on your own.
Most companies begin by exporting their goods through foreign distribu-
torships that can successfully place the products on dealer shelves or in consum-
ers’ hands. Before deciding on one or another course, however, a company must
choose a target market.
In 1987, Recreational Equipment Incorporated (REI), a Seattle-based con-
sumer co-op, successfully used the fi rst strategy. REI began to fi nd unsolicited
cash flowing from Japanese consumers looking for the company’s lines of sport-
ing goods. It got the message and began offering its catalog (printed in English
and with prices in dollars) “through ads in Japanese outdoor publications.” By
1991, it had quadrupled its sales to the Japanese market and had 10,000 Japa-
nese members. 31 Today, in addition to ordering by catalog, Japanese members
can order online. Japanese direct sales are supported by an REI customer service
desk in Tokyo.
Coca-Cola Company of Atlanta used the second strategy to expand into
Central and Eastern Europe. It invested more than $1 billion with its licensed
affi liates to achieve the expansion. Harley-Davidson is using strategy number
three. It has formed several partnerships around the world to market its motor-
cycles and its line of sportswear. McDonald’s uses licensing, partnerships, and
stand-alone operations in its international operations. London-based ebookers
plc, a travel agency, is using strategy number four to outsource call center jobs
and the workers who perform them to India. 32
Assessing the External Variables

In an international company, the managers must assess and monitor the changes
in the five environments of the countries in which the company has operations
to determine the presence of threats and opportunities. They must determine
how these independent external environments will have an impact on and influ-
ence each other, and how these impacts and influences will affect the company’s
internal environment—the areas for which individual managers are responsible
and over which they have control. They must then choose goals and strategies
and create programs to bring them to reality. In developing plans, the interna-
tional manager is monitoring and assessing a set of unique external issues and
problem areas, including the following seven:
1. Political instability and risk. Changes in both governments and their poli-
cies can and do affect commerce, company plans and strategies, and the
ability to conduct trade within and outside of the host country’s borders.
2. Currency instability. Changes in the exchange rates of currencies mean
changes in the ways in which companies conduct their operations. Large
sums are at stake because a company’s earnings are in local currencies and
must be spent around the globe as well as within the borders of a host coun-
try. Large multinationals are dealing with millions of dollars, yen, euros,
and pounds daily.
614 Appendices
3. Competition from national governments. State-owned or controlled com-

panies and industries often operate with sizable government assistance and
subsidies and are often not expected or required to earn profits. This policy
places any international competitor at a great disadvantage. It gives the host
country monopoly powers to use for or against both domestic and foreign
competitors.
4. Pressures from national governments. Companies have been and can be ac-
cused of sending unsafe or environmentally unsound technologies and prod-
ucts to a host country, exporting technology and jobs, and interfering with
domestic industries. It is important for corporations, like individuals, to be
good citizens.
5. Nationalism. In developing countries and developed nations, national pride
creates political ideologies that can inhibit commerce, especially from for-
eign-owned operations. From such ideologies can come trade restrictions, lo-
cal ownership restrictions, and limits on how much money can be exported.
6. Patent and trademark protection. Some countries will offer no protection,
and anyone’s property is fair game. Others offer limited protection to for-
eign-owned enterprises. Some countries and industries are known for their
piracy of ideas and technology.
7. Intense competition. Lucrative markets will always exhibit intense compe-
tition from both the domestic and foreign sectors. Companies should ex-
pect competition in the best markets and most profitable product areas to
increase. 33
A factor that will continue to expand competition is the quality of a com-

pany’s products or services. In this regard, a set of quality standards is rapidly
becoming the passport for success in the international marketplace. The stan-
dards were created in the late 1980s by the International Organization for Stan-
ISO 9000 dardization. The set of technical standards, known collectively as ISO 9000,
The set of five technical stan- was designed to offer a uniform way of determining whether manufactur-
dards, known collectively as
ISO 9000, designed to offer a ing plants and service organizations implement and document sound quality
uniform way of determining procedures.
whether manufacturing and To register, a company must undergo an audit of its manufacturing and cus-
service organizations imple-
ment and document sound qual- tomer service processes, covering everything from how it designs, produces, and
ity procedures installs its goods to how it inspects, packages, and markets them. More than
140 countries, including the United States and those in the European Union
(EU), have endorsed the standards.
There is no legal requirement that companies adopt the standards, but some
experts say the guidelines eventually will largely determine what may be sold to
and within the EU. Several EU industries—toys, construction products, gas ap-
pliances, machinery, and some medical devices—have already announced time-
tables for adopting ISO standards. The regulations would apply to EU compa-
nies making those goods, as well as to the manufacturers that supply parts or
materials to those companies. 34
As we can see from these variables, planning in the international market-
place is extremely complicated and surrounded by many issues and uncertain-
ties. The consequences of inadequately assessing the variables will usually mean
failures in such things as timing, selection of strategies, and financial decisions.
The effectiveness of the assessment efforts depends on whether a company can
decide how to (1) apportion responsibility for gathering and analyzing informa-
tion between line and staff managers and between in-house personnel and out-
side consultants, (2) build credibility and effectiveness into the analysis so that
the organization takes it seriously, and (3) bring an understanding of the impor-
tance of analysis into corporate operations, particularly capital budgeting and
long-term planning. 35
Assessments lead to forecasts, which managers then use to construct their
plans. The aim of all the efforts at assessing, interpreting, forecasting, and cre-
ating goals, strategies, and tactics is to create a unity within management of the
multinational and to be a decent corporate citizen in the host countries. Corpo-
rate strategy determines how the organization will deploy its resources in order
to achieve its objectives. It will become the framework for the formulation of
strategies in the affiliates around the world. Figure B.3 highlights the major ar-
eas in which global corporate objectives are needed and the areas toward which
strategies are directed.
Organizing and the International Manager

Companies develop organizational structures to achieve objectives. As the objec-
tives of the organizations change, so too will their organizations. As companies
extend their operations to host countries, their internal organization structures
must evolve. The structures a fi rm chooses at any time in its evolution depend on
the extent of the operations of these companies abroad, their locations and con-
5
Explain the phases a
company goes through
when moving from
domestic operations to a
tributions to the parent company, and the degree of experience and competence multinational structure
possessed by both the parent and host-country managers. The structure chosen
must be able to cope with sociocultural, political, legal, and economic differences
between the host-country and parent-country operations. The structure devel-
oped to simply market a product overseas will have to change when the company
moves to actually produce the product overseas. A decision about the degree of
decentralization must be made and continually reexamined as time and opera-
tions unfold.
When a fi rm attempts to establish an international organization, it must ad-
dress traditional issues, including the following:
• Achieving operational efficiencies

• Creating flexibility to respond to national and global changes
• Allowing units to share information and technology quickly
• Coordinating activities from various cultures
• Responding swiftly to changes in consumer needs and demands
• Differentiating operations by function, product, customers, or geography
• Developing management teams with common goals and shared visions
Although the organization structure utilized by a company depends on its

objectives, the typical evolution for a company becoming multinational takes
it through three phases: pre-international division phase, international division
phase, and global structure phase. 36 A major point to note as we trace the evo-
lution of these phases is that in a domestic company, a two-dimensional struc-
ture—functional and product or functional and territorial—is often used to
meet objectives. In the international arena, a three-dimensional structure is
eventually required. It combines functional, product, and territorial patterns to
Figure B.3 Areas to be addressed by the objectives of a multinational manager
PROFITABILITY
• Level of profits
• Return on asset, investment equity, sales
• Annual profit growth
• Annual earnings per share growth
MARKETING
• Total sales volume

• Market share—worldwide, region, country
• Growth in sales volume and growth in market share
• Integration of host-country markets for marketing efficiency and effectiveness
PRODUCTION
• Economies of scale via international production integration

• Quality and cost control
• Introduction of cost-efficient production methods
FINANCE
• Financing of foreign affiliates—retained earnings or local borrowing

• Taxation—minimizing tax burden globally
• Optimum capital structure
• Foreign exchange management—minimizing losses from foreign fluctuations
TECHNOLOGY
• Type of technology to be transferred abroad—new or old generation

• Adaptation of technology to local needs and circumstances
HOST GOVERNMENT RELATIONS
• Adapting affiliate plans to host-government developmental plans

• Adherence to local laws, customs, and ethical standards
PERSONNEL
• Development of managers with global orientation

• Management development of host-country nationals
RESEARCH AND DEVELOPMENT
• Innovation of patentable products

• Innovation of patentable production technology
• Geographic dispersion of research and development laboratories
ENVIRONMENT
• Harmony with the physical and biological environment

• Adherence to local environmental legislation
Fax 800-730-2215.
provide the functional expertise, product and technical know-how, and host-
country knowledge for a company. 37
Pre-International Division Phase

Companies with a unique product, a product that incorporates the latest tech-
nology, a superior product (in features, performance, or price), or a totally new
product should consider themselves ready for entry into the international arena.
For many companies, the fi rst strategy used to introduce the product to a new
nation or nations of consumers is to fi nd a way to export the product. The re-
sult is typically the addition of an export manager to the marketing department.
Companies with a broad line of products—such as a chemical company—might
establish an export manager who reports directly to the CEO and works in a
staff capacity with the individual product divisions to coordinate production
and marketing. The export manager will establish the methods chosen for for-
eign distribution and marketing—whether to place parent company employees
in a host country or to work through agents (importers, distributors, or retail-
ers) already established there. Figure B.4 shows the addition of the export man-
ager to an established domestic management structure.
Figure B.4 Organizational structures with export manager engaged in exporting to foreign markets
A. Company with Narrow Product Line

Chief Executive
Officer
Production Marketing Finance Human R&D

Resources
Export
Manager
B. Company with Broad Product Line

Chief Executive
Officer
Production Marketing Finance Human R&D Export

Resources Manager
Product Division: Product Division: Product Division: Product Division:

Dyestuffs Chemicals Pesticides Plastics
Source: From International Dimensions of Management, 4th edition, by Phatak. Copyright © 1995. Reprinted with permission of South-
Western, a division of Thomson Learning: www.thomsonrights.com. Fax 800-730-2215.
618 Appendices
International Division Phase

In time, pressures might mount from host-country laws, trade restrictions, and
competition, placing the company at a cost disadvantage. In such an event, the
company often decides to defend and to expand its foreign market position by
establishing marketing or production operations in one or more host countries.
international division Figure B.5 shows the establishment of an international division, with its head
A parent company’s corporate reporting directly to the CEO.
unit, commonly a marketing or
production operation, located The international division structure works well for companies in the early
in a host country offshore from stages of international involvement. These firms typically have certain charac-
the parent headquarters and teristics: “limited product diversity, comparatively small sales (compared to do-
whose head reports directly to
the CEO mestic and export sales) generated by foreign subsidiaries, limited geographic
diversity, and few executives with international expertise.” 38
In the early stages, companies often practice centralization to keep a tight
control over the establishment and staffi ng of the international facilities. In time,
decentralization begins, giving those closest to the problems and opportunities
the authority they need to respond quickly to customer, political, and economic
demands and challenges. As those on site gain expertise, they pass it on for fu-
ture planning purposes and become trainers for those who will follow them in
current or future overseas ventures. Many managers will pass through the inter-
national divisions on their way to regional and corporate headquarters jobs.
Global Structure Phase

As the international operations gain success, top management makes a greater
commitment to them and begins to view the company in a global perspective.
Most companies, as is the case with McDonald’s, fi nd that as their international
operations expand, a greater percentage of revenues and profits begin to flow
from them. With its international division, the company fi nds itself better able
to serve many more markets than it could without them. It becomes nearly im-
mune from most trade restrictions and is closer to its customers. It usually fi nds
itself with an ever-increasing amount of foreign nationals on its payrolls and
Figure B.5 International division of a company in the early stages of global involvement
President/
CEO
Robotics Automotive
Division Products Division International
United States United States Division
Rubber- Electronics
Products Plant Plant
Brazil Hong Kong
running its operations, both in foreign markets and in the fi rm’s various head-
quarters. The company’s culture begins to change as these forces for change are
absorbed and take power.
According to the research done by Business International, a company is
ready to move away from an international division phase when it meets the fol-
lowing criteria:
• The international market is as important to it as the domestic market.
• Senior officials in the company have both foreign and domestic experience.
• International sales represent 25 to 35 percent of total sales.
• The technology used in the domestic division has far outstripped that of the
international division. 39
The shift to a global structure means a change in the ways in which deci- global structure
sion making will take place. Typically, decisions that previously were made by The arrangement of an organi-
zation’s management decision
separate and autonomous divisions will, after the shift, be made at the corpo- making to efficiently and effec-
rate headquarters for the total enterprise. Corporate decisions now need a total- tively operate in a multinational
company perspective. The fi nal structure will contain functional, product, and context; form may contain func-
tional, product, and geographic
geographic features and may be based on worldwide product groups, worldwide features based on worldwide
area groups, or a mixture of these two. Each group becomes a profit center, with product or area units
command and control passing from the president/CEO to a group vice president.
The product group structure works best for diverse and widely dispersed
product lines and for those with relatively high levels of technology or research
and development operations. Figure B.6 illustrates product group structure.
Figure B.6 Simplified global structure integrating worldwide product groups
President/
CEO
Personal
Agricultural Grooming
Products Group Products Group
North Asia Africa Europe South

America America
Marketing Production Finance

620 Appendices
Johnson & Johnson has capitalized on the product group structure by organiz-
ing its more than 230 operating companies that manufacture and market thou-
sands of branded health care products in hundreds of categories in 57 countries
into three worldwide customer product groups: pharmaceutical products, medi-
cal devices and diagnostics, and consumer products.40
The regional or area approach works best with a narrow group of similar
products and those that are closely tied to local consumer markets. Oil com-
panies, specialty food manufacturers, and rubber products companies tend to
adopt this structure. The functions of the international division are carried out
by the regional managers, who report directly to the parent headquarters (see
Figure B.7). Mobil Corporation was an example of the regional approach struc-
ture when it aligned its 11 business groups, or strategic business units (SBUs),
into three categories:
1. North American businesses, comprising exploration, production, refining,
and marketing
2. Integrated regional businesses, combining Mobil’s exploration, production,
refi ning, and marketing in four areas: Africa and the Middle East, Asia-
Pacific, Europe, and South America
3. Worldwide businesses that consist of chemicals, liquefied gas, and indepen-
dent power projects; new exploration and production ventures; and supply
trading and transportation 41
Figure B.7 Simplified global structure integrating regional divisions
President/
CEO
Latin American Asian

Division Division
Condiments Cereals Fertilizers Chemicals
Marketing Production Finance

Staffing and the International Manager

The role of the staffi ng function in an organization is to identify and acquire
qualified human resources to ensure the success of the organization. In an in-
ternational company, staffi ng becomes far more complex because the search for
talent knows no national boundaries.
6
Discuss the major
staffing concerns for an
international operation
Staffing Problems and Solutions

Finding qualified persons to fi ll jobs in host countries can be difficult, especially
when a company attempts to find qualified managerial and technical people in
developing or less-developed countries. In the initial stages of expansion into
overseas markets, positions in host-country operations may have to be fi lled
from those already on board in domestic operations. But, this is not always an
adequate approach.
Companies face a tougher time these days persuading U.S. managers
to accept certain international assignments and, occasionally, to travel
abroad. A key reason: intensifi ed jitters about safety. They’re an out-
growth of the continuing Iraq hostilities, post-Sept. 11 terrorism at-
tacks, possible resurgence of the SARS outbreak and more executive kid-
nappings in South America. Employers attempt to allay staff anxieties
through extra pay, predeparture security briefings, computerized moni-
toring of trouble spots—along with armored cars, 24-hour guards, at-
tack dogs and walled housing compounds for the riskiest areas. 42
Eventually, through training and development programs conducted by a
company or by outsiders, host-country citizens and others can be groomed for
various jobs.
Different companies take different approaches to staffi ng their foreign op-
erations, as well as their domestic ones. Minnesota Mining & Manufacturing
(3M) “brings dozens of foreigners every year from overseas units for stints at its
St. Paul, Minnesota, headquarters. These ‘inpatriates’ become accustomed to
the business climate in the U.S. and receive valuable training in corporate cul-
ture.” 43 Honda, by contrast, sends managers from its home office to the host
countries. While they are on these assignments, Honda believes that these “man-
agers dispatched from the head office should be encouraged to become part of
the community by understanding local culture and ways of thinking; to delegate
authority to local personnel; and to create a sense of unity between management
and labor so that everyone is working toward a common goal.” 44
Although the Japanese prefer to send a core of Japanese executives to head
their foreign operations, many other multinational companies are moving to-
ward giving host-country citizens, especially Americans, more important roles.
Ronald G. Shaw is one of the new breed of Americans who serve as presidents
and CEOs of Japanese subsidiaries in the United States. “He was elected to the
board of directors of the parent company, Pilot Corporation, becoming one of
only six Americans ever elevated to the board of any publicly held Japanese com-
pany. The following year he was promoted to chief executive officer of Pilot Pen
Corporation of America, making him one of a select number of Americans to
serve as CEO of a Japanese company based in the United States.” 45
George Varga, the former manager of General Electric’s lighting manufac-
turing plant in Hungary, is an example of an ideal international manager. He
622 Appendices
is a veteran of overseas assignments. A native of Hungary, he left as a teenager

and has worked in the United States, Spain, Holland, Switzerland, and Mexico.
He speaks six languages and has Western know-how in marketing and fi nancial
management. While he was at GE Hungary one of his fi rst decisions was to re-
place half the Hungarian managers with seasoned GE executives (his managers
averaged over eighteen years of service). “We didn’t want the young tigers. We
needed people with sensitivity to perform a cultural marriage. We had the ideal
team to sell our ideas to the Hungarians.” 46
Whereas Ronald Shaw is an American in a Japanese company and George
Varga is an expatriate Hungarian who returned home, many foreign nationals
have risen through the ranks to head up the headquarters staffs of American
multinationals. Past CEOs of Coca-Cola include E. Neville Isdell, an Irish citi-
zen, and Douglas Daft, an Australian citizen. Before becoming U.S. Secretary
of Commerce, Carlos Miguel Gutierrez, was Chairman of the Board and CEO
of the Kellogg Company. He was born in Cuba and began his career in Mexico
City. Alain J. P. Belda was born in French Morocco, became a Brazilian citi-
zen, and worked for Alcoa in Brazil before becoming Chairman of the Board
and CEO of Alcoa. Fred Hassan, Chairman of the Board and CEO of Schering-
Plough Corporation, was born in Pakistan. “In [the 1990s] and beyond, as more
and more [U.S.] companies are forced to be global companies, you are going to
see more mixing of nationalities at the top,” predicts Joseph Canion, Founder of
Compaq Computer Corp. in Houston. He ought to know. He lost his job to his
second in command, Eckhard Pfeiffer, a native of Germany.47
For managers who would like to duplicate the success of Shaw, Varga,
Isdell, and others, Kathryn A. Vegso, Director of the Career Services Center of
the American Graduate School of International Management in Glendale, Ari-
zona, has sound advice: “You need to learn the culture, speak the language,
have the connections, and know how to do the job.” 48 Scott A. Scanlon, an Edi-
tor of the monthly newsletter Executive Search Review, reinforces Vegso’s ad-
vice by noting that three qualities are needed to be an international manager:
being able to speak the language, knowing the country’s culture and business
environment, and being trained in Western management techniques.49
Compensation
Compensating host-country personnel in line with parent-company practices sel-
dom works. Traditions, legally mandated pay scales and benefits, differing tax
rates and levels of inflation, differing standards of living, the relative values of
currencies, and host-country competitors all combine to make compensation a
difficult issue. The U.S. customs of rewarding individuals and groups on the ba-
sis of short-term performances and rewarding managers for their departments’
or divisions’ successes must be tempered with the contributions they make to
the whole enterprise and the kinds of barriers they have had to overcome. Some
cultures shun group compensation plans; others live by them. Some countries
have strong unions (Germany, for example); others have none. In addition, fac-
tors such as the value of seniority, the cost of living in a host country (Japan has
the highest), and the level of status a manager has as perceived by peers must be
considered, and compensation plans must be adjusted accordingly.
Perks for managers and salespeople working abroad—things provided in
addition to voluntary and legally mandated benefits—include the following:
In Belgium, as elsewhere in Western Europe, a car and a cellular phone along
with a discretionary expense account; in Japan, a company car for executives; in
Great Britain, company cars equipped with telephones; in South Korea, pickup
by a car pool, graduating to a company car and driver, and a generous expense
account; in Hungary, a company car for managers and salespeople and payment
in hard (Western) currency. Average paid vacation for workers in Denmark is 30
days; for those in France, 26; for those in Spain, 22.
ORC Worldwide, a compensation consulting fi rm, analyzes taxes, goods
and services, and housing between home countries and assignment locations.
A sample compensation analysis for transferring an executive from Australia to
New York City can be seen in Figure B.8.
Leading and the International Manager

People are not the same around the world. They have different languages, cul-
tures, traditions, and attitudes that affect the ways in which they work, how they
want to be approached, and how they approach others. These differences make
directing foreign nationals a challenge for the international manager. Managers
who are not natives of the countries in which they manage need to pay particu-
7
Describe the major
concerns relating to
leading a cross-cultural
workforce
lar attention to the ways they communicate and interact with foreign nationals.
What should be kept in mind throughout this section is that most nations today
are blends of nationalities. their workforces reflect cross-cultural influences just
as the American workforce does. Most European nations are hosts to many peo-
Figure B.8 Sample of a compensation analysis
Source: Reprinted with permission of ORC Worldwide, New York, NY.

624 Appendices
ples from around the world—Turks, Arabs, and Asians—as well as other Europe-
ans. Many Asians, particularly Koreans, work in Japan. Blending of populations
can be expected to continue as European, Asian, and Latin American countries
continue to attract foreign labor and as multinational businesses expand their
operations to more and more nations.
The key for organizations “going international” is to recognize and value
the contributions that diversity will bring to the organization. Companies that
will be successful in the decades to come will continue to change their defi nition
of diversity as they evolve.
Employee Attitudes
John E. Rehfeld has worked in an executive capacity for two major Japanese
companies in the United States. He points out two differences between tradi-
tional U.S. and Japanese management attitudes. First, when something goes
wrong in a Japanese company, the emphasis is on solving problems, not plac-
ing blame. Japanese managers want to know what went wrong and how to fi x it.
Second, when Japanese managers set a goal and achieve it, they keep going and
don’t wait for praise. “The Japanese simply are not interested only in absolute
results; they are equally interested in the process and in how you can do it better
next time. . . . [T]hey not only plan something and do it but also stop to see the
result to determine how it could be done better.” 50
When GE took over the management of the Tungsram works in Hungary,
it found 18,000 workers—about as many as it had in the rest of its lighting di-
vision in the United States, which generated seven times the sales volume. “In
the West the solution would be huge layoffs. But the Hungarians’ deep fear of
joblessness [prompted] GE to take a more modest approach.” It chose to reduce
worker ranks by early retirements and normal attrition. Hungarians are also
used to being paid in cash and few have checking accounts. GE chose to con-
tinue to keep stuffi ng pay envelopes with cash. 51
At Ahlstrom Fakop (now Foster Wheeler Energy Fakop), a boiler manufac-
turing facility in Poland that had 400 employees, the same attitude about job
security proved a key to turning the company around. Conventional business
wisdom in the West believes an effective way to motivate workers is through in-
centive pay. But, the incentive pay failed to revive low employee morale; so the
company responded by offering to maintain staffing at current levels if sales tar-
gets were met. The result: an increase in sales and morale. Turned inside out by
the transition to a market economy, the employees were more concerned with
keeping their jobs than getting a bonus. 52
Communication Problems
An international manager may be presented with a number of communication
dilemmas. Not only words, but body language as well differs from one culture to
another. For example, it is considered an insult by Arabs to cross your feet or legs
or to show the bottoms of your shoes to them. In Spain, the “okay” sign using
the thumb and the forefi nger is considered to be a vulgar gesture. Seating your-
self at a formal meeting before those of a higher rank are seated is acceptable in
American businesses, but it is viewed as disrespectful in many other cultures.
Money might even cause communication problems. The parent company
might wish to transact business in English and in dollars, but it will have to ad-
just to Japanese, Korean, German, Spanish, and other languages and curren-
cies. Also, a manager at headquarters may be Swiss and speak German and meet
with host-country managers who are Italian, German, American, and Mexican
or mixtures of several nationalities. One solution used by some companies is to
have all company correspondence and conversations among managers take place
in one language—usually English or French in American and Western European
companies, and Japanese in Japanese companies. Relying on translators can be
tricky. Host-country nationals might pretend to lack understanding when it is in
their interest to do so. Also, many words in one language have no direct transla-
tion into others.
Even though English is becoming more and more the language of interna-
tional business, and most educated people around the world must learn it, host-
country managers must have a fi rm grounding in their host country’s language.
There just is no good substitute for language fluency when it comes to directing
the host-country’s workforce, dealing with in-country unions and government of-
ficials, keeping abreast of local commercial and political affairs, and negotiating
with suppliers and customers from several nations. Motorola, for example, gives
language instruction to its managers before placing them in foreign countries.
As a fi nal word on communications, consider the messages sent by the choice
of a gift for a foreign colleague or business associate. This is an area with many
potential problems. The choice of a gift can cause embarrassment or trouble
for the gift giver if a country’s customs and traditions are not understood. Fig-
ure B.9 outlines a few rules for giving gifts to foreign associates.
Cross-Cultural Management
Culture has been defi ned earlier in this text as a societal group’s shared beliefs,
traditions, customs, behaviors, and values. A relatively new field called cross- cross-cultural management
cultural management “studies the behavior of people in organizations around An emerging discipline focused
on improving work in organiza-
the world and trains people to work in organizations with employee and client tions with employee and cli-
populations from several cultures.” It describes and compares organizational ent populations from several
behavior within and across countries and cultures and “seeks to understand and cultures
improve the interaction of coworkers, clients, suppliers, and alliance partners
from different countries and cultures.” 53
Managers of global enterprises interact regularly with people of differing
backgrounds, educational systems, business training, and personal perspectives
and biases. “Diversity exists both within and among cultures; but within a sin-
gle culture, certain behaviors are favored and others repressed. The norm for a
society is the most common and generally most acceptable pattern of values, at-
titudes, and behavior.” 54 We have mentioned a few of these in our discussion of
communication differences. In this section, we look briefly at what can be said
collectively about the norms that international managers must recognize and
with which they must cope.
Individualism Versus Collectivism In general, Americans and citizens

of many Western countries like to think and act as individuals, preferring to
gain their personal identities through personal achievements and individual
efforts. Many societies, such as Japan and several Latin American countries,
however, are more group oriented. From an early age, children are taught to
work in groups and to obtain a large portion of their personal identity through
group membership and efforts. Working with teams, especially those that need
to be empowered and autonomous, may not be so easy in cultures that foster
individualism.
626 Appendices
Figure B.9 Tips on how to avoid common pitfalls of gift giving among foreign associates
• Don’t rely on your own taste.

• Don’t bring a gift to an Arab man’s wife; in fact, don’t ask about her at all. Bringing
gifts for the children is, however, acceptable.
• In Arab countries, don’t admire an object openly. The owner might feel obligated
to give it to you.
• Do not bring liquor to an Arab home. For many Arabs, alcohol is forbidden by
religious law.
• Don’t try to out-give the Japanese. It causes great embarrassment and obligates
them to reciprocate even if they cannot afford it.
• Do not insist that your Japanese counterpart open the gift in your presence. This
is not their custom and can easily cause embarrassment on the part of the
recipient.
• As a courtesy, hold your gift with two hands when presenting it to a Japanese
businessperson, but do not make a big thing of the presentation.
• Be careful when selecting colors or deciding on the number of items. The color
purple is inappropriate in Latin America because it is associated with Lent.
• Avoid giving knives and handkerchiefs in Latin America. Knives suggest the cut-
ting off of the relationship, and handkerchiefs imply that you wish the recipient
hardship. To offset the bad luck, the recipient must offer you money.
• Logos should be unobtrusive.
• In Germany, red roses imply that you are in love with the recipient. Perfume is too
personal a gift for business relationships.
• In the People’s Republic of China, expensive presents are not acceptable and
cause great embarrassment. Give a collective gift from your company to theirs.
• In China, a banquet is acceptable, but you will insult your hosts if you give a more
lavish banquet than the one given you.
• A clock is a symbol of bad luck in China.
• The most important rule is to investigate fi rst. After all, no one laughs at gift
games. True, it is the thought that counts: the thought you give to understanding
the culture and the taste of the people with whom you plan to negotiate.
Source: Reprinted by permission of the Harvard Business Review. Excerpt from “It’s the Thought that
Counts,” by Kathleen K. Reardon, September–October 1984. Copyright © 1984 by the Harvard Business
School Publishing Corporation. All rights reserved.
Doing Versus Being A doing orientation is an action orientation. Western

culture fosters this orientation; citizens like to be rewarded for individual ac-
tions and behaviors. “Managers in doing-oriented cultures motivate employees
with promotions, raises, bonuses, and other forms of public recognition.” 55 By
contrast, a being orientation “fi nds people, events, and ideas flowing spontane-
ously; the people stress release, indulgence of existing desires, and working for
the moment . . . they will not work strictly for future rewards.” 56
Asian cultures foster the being orientation. Individual performance rewards
are not popular. Employers are often viewed as surrogate parents and usually
offer job security and collective benefits to encourage a family atmosphere and
long-term commitments from employees. Progression in such companies is me-

thodical, slow, and through the ranks, with few if any shortcuts or fast-track
careers.
Value of and Focus on Time Some cultures value time more than others. To
many people in the Middle East, time is not considered a precious commod-
ity. Many people see work as a means to support life, not as a reason for liv-
ing. Some cultures promote precise timetables and deadlines; others see precise
deadlines and the need to meet them as relatively unimportant. Some cultures
emphasize planning for the long term; others focus on the present or the past
and the following of traditions.
Masculinity Versus Femininity Geert Hofstede defines masculinity as the

extent to which the dominant values in a society emphasize assertiveness and
the acquisition of money and things, while not emphasizing concern for people.
He defi nes femininity as the extent to which the dominant values in society em-
phasize relationships among people, concern for others, and the overall quality
of life. 57 Hofstede sees the Scandinavian countries as feminine; he sees Mexico,
Japan, and much of Western Europe as masculine. Societies with feminine cul-
tures “tend to create high-tax environments, extra money often fails to strongly
motivate employees. . . . Conversely, masculine societies tend to develop into
lower-tax environments in which extra money or other visible signs of success
effectively reward achievement (Mexico, for example).” 58
Once these values, attitudes, and behaviors are identified, training can be
developed. Training programs typically deal with such areas as understanding
cultures, language training, managing one’s family life in the host country, and
career development. 59 Motorola offers its employees and their spouses a formal,
predeparture course tailored to the countries to which the people will be go-
ing. In addition, it has a worldwide network of experienced expatriates—home expatriates
country nationals with overseas experience—to help the newcomers settle in Home-country nationals with
overseas experience
overseas.
When employees return to their home bases from foreign assignments, the
training is not necessarily over. They often require programs to help them ad-
just. For example, the purposes of a repatriation program might include revers-
ing the effects of any culture shock for both expatriates and their families, help-
ing them adjust to their new home assignment, and facilitating the sharing of
their knowledge and experiences.
Controlling and the International Manager

The management function of control involves setting standards, measuring per-
formances, applying standards to performances, and taking corrective actions
as needed. These fundamentals do not change with multinational operations,
but some of the specifics about controlling do. We look next at control charac-
teristics and problems for international managers.
8
Discuss the major
concerns relating to
controlling an international
corporation
Characteristics of Controls
Multinationals use a variety of controls to monitor and to adjust the perfor-
mances of their foreign affi liates. These controls fall into two groups: direct
628 Appendices
and indirect controls. Direct controls include the use of such devices as peri-
odic meetings, visits by the home office top-management teams to foreign opera-
tions, and the staffi ng of the foreign affi liates by home-country nationals. Meet-
ings are often held using the Internet, satellite communications linkups, and by
teleconferencing between both foreign affi liates and the company’s top man-
agement. Periodically, host-country managers are called to headquarters to give
fi rst-hand reports on strategic progress. Such is the case with McDonald’s inter-
national managers.
Indirect controls include the various kinds of reports sent daily, weekly,
monthly. The main criteria used to measure performances are the costs being ex-
perienced, the return on invested capital, the market share held by an affi liate,
and the profits earned by each affi liate by product line and areas of operations. In
the same family of reports are whole arrays of budgetary and fi nancial controls
that are imposed by both local and corporate headquarters managers.
Control Problems
International controlling is made difficult by everything from language to legal
restrictions. Most companies rely on the following methods of controlling:
1. Regular reporting procedures and communications between affi liates and
their headquarters
2. Progress reports toward goals established with local input by strategic
planners
3. Regular screening of reported data by area and functional experts
4. Regular on-site inspections by a variety of corporate personnel, both staff
and line
At Thomson, S.A., a French electronics giant, controlling international op-
erations means touching bases with key managers on a regular schedule (in much
the same way that Wal-Mart keeps track of its far-flung operations). Thomson
has four major product groups and operations in the United States, Canada,
Central America, Europe, Australia, and the Pacific Rim of nations. Regular
meetings and seminars are held in France each year involving employees from all
the company’s divisions.
The CEO of the consumer electronics division spends at least one week
in the United States every month, plus a week in Asia every second
month, plus, of course, commuting inside Europe. Two of the executive
vice presidents in charge of the four world product groups are based in
Indianapolis, while the other two are in Paris. They have to meet regu-
larly as well as travel to their sales organizations. 60
A fi nal note on controlling human resources abroad. In many countries,
bonuses, pensions, holidays, and vacation days are legally required and con-
sidered by many employees to be their right. Particularly powerful unions exist
in many parts of the world, and their demands restrict management’s free-
dom to operate. Many countries have laws requiring that money be paid regu-
larly into funds to provide for employee separations and terminations. Also, it
can be expensive to fi re or lay off a manager in many countries, as a study by
Mercer, a New York-based management consulting fi rm has discovered. The
cost of fi ring
a 45-year-old middle manager with 20 years of service and a $50,000

annual salary, for example, varies in cost from $13,000 in Ireland to
$130,000 in Italy. The amount is often much more than in the United
States where a comparable worker doesn’t have the same statutory pro-
tection . . . in Germany, managers receive . . . six months’ notice-period
pay after working 12 years. 61
APPENDIX SUMMARY
Explain the primary reasons why businesses labor countries, and (3) a strategy to mix the preced-
1 become international. Companies go interna-
tional for two basic sets of reasons or motives: proactive
ing two strategies
Discuss the political, legal, economic, socio-
and reactive.
• Proactive motives include the search for new custom-
3 cultural, and technological elements of the in-
ternational environment. The five environments of the
ers, new markets, increased market share, increased international manager are the political, legal, economic,
return on investments, needed raw materials and sociocultural, and technological.
other resources, tax advantages, lower costs, and
• Political environment: This environment can fos-
economies of scale.
ter or hinder economic development and investment
• Reactive motives include the desire to escape from by native and foreign investors and businesses. The
trade barriers and other government regulations, to political philosophy and type of economic philoso-
better serve a customer or group of customers, and phy held by a nation’s leaders can give rise to laws
to remain competitive. that promote domestic commerce and raise barriers
to trade with the outside world. The stability of the
Describe the characteristics of multinational
2 corporations. Multinational corporations are
companies with operating facilities, not just sales offi ces,
government and its support by the people will af-
fect decisions to seek commercial opportunities or to
avoid investments in a nation.
in one or more foreign countries. In general, there are
two kinds of multinational companies: those that market • Legal environment: Each country has its own unique
their product lines in relatively unaltered states through- set of laws that have an impact on commerce. Laws
out the world (standardization), and those that modify designed to protect the rights of individuals and la-
their products and services along with the marketing of bor unions differ as well. In addition, some coun-
them to appeal to specific groups of consumers in spe- tries erect trade barriers, such as quotas, tariffs, and
cific geographic areas (customization). embargoes. International managers must be aware of
Even though multinationals around the world differ these legal constraints.
in sales volumes, profits, markets serviced, and the num-
• Economic environment: When companies analyze
ber of their subsidiaries, they do share some common
their options for going multinational they must con-
characteristics. These include
sider such factors as the stability of a country’s cur-
• Creating foreign affi liates, which may be wholly rency, its infrastructure, its availability of needed
owned by the multinational or jointly held with one raw materials and supplies, levels of inflation and
or more partners from foreign countries taxes, citizens’ level of income, closeness to custom-
ers, and climate.
• Viewing the world as the market
• Sociocultural environment: This environment in-
• Choosing specific types of business activities (manu-
cludes such concerns as a people’s traditions, lan-
facturing, petroleum, banking, agriculture, public
guages, customs, values, religion, and levels of edu-
utilities)
cation. The international manager can analyze the
• Locating affi liates in the developed countries of the cultures in countries following these dimensions:
world material culture, social institutions, humans and the
universe, aesthetics, and languages.
• Adopting one of three basic strategies regarding
staffi ng: (1) a high skills strategy in which the com- • Technological environment: This environment con-
pany exports products, not jobs, (2) a strategy to tains all the innovations that are rapidly occurring in
“dumb down jobs” and shift the work to cheap- all types of technologies. Regardless of what kind of
630 Appendices
a business a company is in, it must choose partners relates to compensating host-country personnel. Tradi-
and locations that have what it lacks. tions, legally mandated pay scales and benefits, differing
tax rates and levels of inflation, differing standards of
Describe the major strategies for going inter-
4 national. There are basically four ways to get in-
volved in overseas trade:
living, the relative values of currencies, and host-country
competitors all combine to make compensation a
difficult issue.
1. Export your product or service.
Describe the major concerns relating to lead-
2. License others to act on your behalf (as sales agents,
franchisees, or users of your processes or patents).
7 ing a cross-cultural workforce. The major con-
cerns relating to leading a cross-cultural workforce are
employee attitudes, communication problems, and cul-
3. Enter into joint ventures (partnerships) for mutual
tural norms.
benefit to produce, to market or to do both.
• Employee attitudes: Attitudes about work are differ-
4. Build or purchase facilities outside your home coun-
ent throughout the world. For example, when some-
try to conduct business on your own.
thing goes wrong in a Japanese company, the em-
Explain the phases a company goes through phasis is on solving problems, not placing the blame.
5 when moving from domestic operations to a
multinational structure. The evolution of a company
Japanese managers want to know what went wrong
and how to fi x it. Second, when Japanese managers
becoming multinational takes it through three phases: set a goal and achieve it, they keep going and don’t
pre-international division phase, international division wait for praise. Also, in both Hungary and Poland
phase, and global structure phase. job security are prime motivators.
• Pre-international division phase: The fi rst strat- • Communication problems: An international man-
egy used to introduce the product to a new nation ager may be presented with a number of commu-
is to fi nd a way to export it. The result is typically nication dilemmas. Both words and body language
the addition of an export manager to the market- differ from one culture to another. The decision on
ing department. The export manager will establish what language to use (English, French, Japanese) in
the methods for foreign distribution and market- a meeting can present problems.
ing—whether to place parent-company employees in
• Cultural norms: The norm for a society is the most
a host country or to work through agents (importers,
common and generally most acceptable pattern of
distributors, or retailers).
values, attitudes, and behavior. International man-
• International division phase: Pressures from host- agers must recognize and cope with the following
country laws, trade restrictions, and competition norms: individualism versus collectivism, doing ver-
may place the company at a cost disadvantage. In sus being, value of and focus on time, and masculin-
response, the company establishes marketing or pro- ity versus femininity.
duction operations in one or more countries. This in-
Discuss the major concerns relating to con-
ternational division reports directly to the CEO.
• Global structure phase: As the international opera-
8 trolling an international corporation. Control-
ling is made difficult by everything from language to le-
tions gain success, top management makes a greater gal restrictions. As a result, most companies rely on the
commitment to them and begins to see the com- following:
pany in a global perspective. Decisions that previ-
1. Regular reporting procedures and communications
ously were made by separate and autonomous divi-
between affi liates and their headquarters
sions need a total-company perspective. The fi nal
structure will contain functional, product, and geo- 2. Progress reports toward goals established with local
graphic features and may be based on worldwide input by strategic planners
product groups, worldwide area groups, or a mix-
3. Regular screening of reported data by area and func-
ture of these two.
tional experts
Discuss the major staffing concerns for an in-
6 ternational corporation. One major staffi ng con-
cern for an international corporation involves fi nding
4. Regular on-site inspections by a variety of corporate
personnel
qualified persons to fi ll jobs in host countries, especially An additional concern focuses on controlling human
fi nding qualified managerial and technical people in de- resources abroad. In many countries, bonuses, pensions,
veloping or less-developed countries. A second concern holidays, and vacation days are legally required and con-
sidered by many employees to be their right. Particularly regularly into funds to provide for employee separations
powerful unions exist in many parts of the world, and and terminations. Also, it can be quite expensive to fi re
their demands restrict management’s freedom to operate. or lay off a manager in many countries.
Many countries have laws requiring that money be paid
KE Y TERMS
cross-cultural management international division quota
embargoes international management tariff
expatriates ISO 9000
global structure multinational corporation
RE VIE W QUESTIONS
1. What are two reasons why a company becomes 5. What are the three organizational phases that a com-
international? pany passes through in going multinational?
2. What are the major characteristics of the multina- 6. What are two concerns faced when attempting to
tional company? staff international affi liates?
3. What are the major components of each of the fol- 7. What are three problems connected with directing a
lowing international environments: political, legal, cross-cultural workforce?
economic, sociocultural, and technological?
8. What are the major control problems for a multina-
4. What are the major strategies for going tional corporation?
international?

1. You are the CEO of a rapidly growing video rental vironments. What aspect of each environment has
company and have plans to go international in the changed or will change the way in which businesses
very near future. What steps would you take to enter select and train managers?
the international marketplace? How would you or-
4. How might the cultural norms of individualism/col-
ganize your company? Why?
lectivism and masculinity/femininity affect the man-
2. Which of the four strategies for going international agement process and organizational design in an
require the greatest commitment by management? international company?
Why? What factors should be considered when se-
lecting a strategy? Which is the most important?
3. An organization that is seeking to expand into in-
ternational operations needs to monitor several en-
O LIST
✓ TO D in g Obje
ctives
a r n
n Le in Actio
n
■ Sc a e me nt
a n a g
dM
■ Rea
d t ex t
■ Rea ey Ter
ms
r a p h rase K a ry
■ P a S u mm
A p p endix
iew ns
■ R ev uestio
e r R e view Q
w
■ Ans
LEARNING OBJECTIVES
SUCCEEDING After studying this chapter, you should be able to:
IN YOUR 1 Discuss the nature of careers
ORGANIZATION Describe what is meant by having a career perspective

2
Describe the changes that have occurred in the career
3 environment
Identify and describe the four stages of career development

4
Identify and discuss the five steps for career planning
5
Discuss how a manager can understand his or her
6 organization and why it is important to do so
Identify and describe the abilities and actions that

7 organizations value in managers
Discuss the strategies associated with career advancement

8
Discuss the organizational dilemmas experienced when
9 personal and organizational interests are in conflict
Getty Images
Intel: Mentoring Movement
To be considered eminently successful in a career, a the mentoring process should be formal. Top manage-
manager needs multifaceted experiences and must ment was asked to support the program with money
seek opportunities. One way to do this is to seek a and to put in time as mentors. In this way, knowledge
mentor—an older, experienced manager who guides could be passed on to others. A database was devel-
a younger manager in work and career areas. Yet, this oped to match partners with mentors.
traditional approach to mentoring was not appropriate Intel lists mentoring on its Web site under “Jobs
for Intel, the innovative technology company. at Intel, The Workplace.” It says, “Managers and
peers, including senior staff, mentor employees with
It was an approach that seemed best suited for
an interest in learning new skills in a less formal way.
slow-moving industries operating in more stable
Mentors draw from personal experience and their
times. But Intel took the idea of mentoring and
own education to support on-the-job learning for
reinvented it to fit a competitive environment
colleagues.”
where what matters most is an employee’s
Potential mentors list their top skills at Circuit,
ability to do the right things right away. Intel’s
Intel’s intranet (internal employee Web site). “Part-
version matches people not by job title or by
ners click on topics that they want to master, such as
years of service but by specific skills that are
leadership, Intel culture, or networking. Then, an algo-
in demand. “This is definitely not a special
rithm computes all of the variables, and the database
program for special people,” says Lory Lanese,
spits out a list of possible matches.” The mentor is
Intel’s mentor champion in New Mexico. Nor
chosen and e-mailed. Then, the mentor and partner
is the company’s mentoring-with-a-difference
attend a class to learn the program guidelines. Next,
approach all about face time and one-on-one
they work together.
counseling. Instead, Intel’s program uses an
Intel wants to ensure that its employees have
intranet and e-mail to perform the matchmak-
the skills and tenacity to succeed in today’s turbu-
ing, creating relationships that stretch across
lent career environment. Mentoring illustrates three
state lines and national boundaries. That
major points of career management. First, the man-
enables Intel to spread best practices quickly
ager must take risks. Risk is associated with change.
throughout the far-flung organization. Finally,
Second, the manager must evaluate his or her career
Intel uses written contracts and tight deadlines
and position and make moves that are best for him or
to make sure that its mentoring program gets
her. Third, he or she must be in control of his or her
results—fast.
career.
Intel first used mentoring as a way to train new man-
agers quickly. The company was growing and its man-
Source: Fara Warner, “Inside Intel’s Mentoring Movement,”
agers were being promoted to run new factories. Its Fast Company, March 2002, issue 57, p. 116, http://www
Albuquerque, New Mexico, plant wanted mentoring .fastcompany.com/magazine/57/chalktalk.html; Intel, http://www
to be more successful. Human Resources thought .intel.com.
634 Appendices
Introduction
Lory Lanese, Intel’s mentor champion in New Mexico (mentioned in this chap-
ter’s Management in Action feature), managed to achieve success in two areas:
job and career. Lanese is knowledgeable and gets results. Successful managers
develop their own career plans by focusing on the key elements: planning, prep-
aration, and understanding the workings of organizations.
New managers need support. They need ongoing professional development.
They need a sense of belonging, of common cause, and the knowledge that over
time they will make a difference not only in the lives of individual employees
they manage, but in their organizations. The need for this support is the focus of
career development and the mentoring process.
Mentoring is not a new idea. People have always sought the wisdom and
counsel of those with more experience. In Homer’s epic poem, The Odyssey, a
wise old sea captain named Mentor gives Odysseus’s son, Telemachus, guidance
in coping with his father’s long absence. Mentor teaches Telemachus the values
he will need to rule Ithaca.
Not all companies have a formal mentoring program, pairing younger man-
agers with older managers to help the younger ones excel. Yet, each employee
can develop his or her career by fi nding a mentor.
In fact, suggests Kathy Kram, an associate professor of organizational be-
havior at Boston University School of Management, putting all your men-
tor eggs in one basket can be a mistake. ‘I think people really ought to think
in terms of multiple mentors instead of just one,’ concludes Kram, the
author of Mentoring at Work. And they don’t all have to be grizzled busi-
ness veterans. ‘Peers can be an excellent source of mentorship,’ she says.1
This chapter is about being successful in career management. First, the
chapter will examine the nature of careers and then discuss the elements of ca-
reer planning. The remainder of the chapter will examine career management
and some associated dilemmas.
Managing to Success
1
Discuss the nature of
careers
job
A specific position a person
Nature of Careers
One observer of the workplace puts the matter succinctly, “Some people have
jobs, others have careers—it all depends on what you want, and how you ap-
proach it.” 2 For some people, work is a job—a specific position they hold in
an organization. They take pride in it and do well; but a job does not take on a
holds in an organization long-term perspective nor imply that the person doing it extends himself or her-
career self beyond its requirements.
The series of jobs a person holds
over a lifetime and the person’s
A career, on the other hand, is the sequence of jobs a person holds over a life-
attitude toward the involvement time and the person’s attitude toward his or her involvement in those jobs. 3 A ca-
in those job experiences; in- reer is a person’s entire life in a work setting or settings. Because it encompasses a
cludes a long-term perspective,
a sequence of positions, and a
lifetime, a career reflects a long-term perspective and includes a series of jobs.4 A
psychological involvement career also denotes involvement. People who have careers are so psychologically
involved in their work that they extend themselves beyond its requirements.
2
Describe what is meant
by having a career
perspective
Career Perspective
Adopting a career perspective can increase an individual’s probability of success
in his or her career. A career perspective, as illustrated in Figure C.1, is a proac-
tive strategy that involves a global view of career progress or growth over time. It
Appendix C Succeeding in Your Organization 635
Figure C.1 Taking a career perspective
Career Perspective
Career Career
Planning Management
• Career • Analyzing and

Development Understanding the
Stages Organization
• Career • Aligning with the

Planning Organization
Steps
• Strategies for Career
Advancement
requires a person to adopt a broad vision that includes all the elements involved career perspective
in a successful career: objectives, timetables, career stages, skills improvement, A proactive strategy that in-
volves a global view of career
organizational politics, power, stress, and values. Adopting such a broad vision progress or growth over time
can be accomplished through career planning, which emphasizes the activities
involved in making career decisions, and career management, which emphasizes
the activities and behaviors involved in career advancement.
New Career Environment

As a prerequisite for career planning, a manager must understand the new ca-
reer environment. In recent years, many facets of careers have radically changed.
“The notion that you can work for one company and be guaranteed that you
will retire from there at age 62 is not so reasonable anymore,” says economist
Michael Podursky of the University of Massachusetts. 5 “The relationship isn’t
3
Describe the changes
that have occurred in the
career environment
what it was. The new contract between company and worker dismisses pater-
nalism and embraces self-reliance.” 6
Gone are the days of “unconditional lifetime employment, even at the bluest
of blue-chip companies . . . that clearly is no longer the name of the game,” says
Kevin Becraft, Director of Employee Relations and Resources at IBM. “Instead,
it’s lifetime employability.” The key difference: shared responsibility. Employers
have an obligation to provide opportunity for self-improvement; employees have
to take charge of their careers.7
The economy and industries are changing so rapidly that no company
can really know what it will be doing one or more years in the future. The
emphasis now is on gaining a competitive edge. Downsizing, restructuring,
empowering, telecommuting, employee leasing, teaming, decentralizing, out-
sourcing, and business process reengineering are all changing the complexion
of work and the workplace. All these efforts bring sudden and often painful
changes to a company’s employees and careers. Business process reengineering
has eliminated many of the old “career pathways”; the middle-manager stair-
case is gone in most organizations. Businesses have redrawn their boundaries
as they focus on core competencies and outsource noncore work. As a result,
work follows a contractor–subcontractor model, not one of vertical integration.
636 Appendices
Project-based (versus position-based) work, long the norm in industries like con-
struction and many professional services, has changed companies with career
hierarchies.8
For the career manager, the message is clear. The rules indeed have changed.
Now instead of security, seek opportunity. Instead of position, chart your
contribution. Careers will be defi ned less by companies (“I work for IBM”) and
more by profession (“I am a professional manager”). Harvard Business School
Professor John Kotter has taken a new look at success in this dynamic envi-
ronment. In his book The New Rules, Kotter identifies seven rules for career
success:
1. Do not rely on convention. Career paths that were winners for most of the
twentieth century are often no longer providing much success.
2. Keep your eyes on globalization and its consequences. With competition
and opportunity arising all over the world, success comes to the alert and
agile.
3. Move toward the small and entrepreneurial organization and away from
the big and bureaucratic.
4. Do not just manage; now you must also lead. Managers cope with change;
leaders cause it and make the competition cope.
5. Never stop trying to grow. Lifelong learning is increasingly necessary for
success.
6. Increase your competitive drive. Driven people reap the greatest rewards.
7. Wheel and deal if you can. Take chances and seek opportunities.9
The new environment, with its new rules, makes it even more important to
plan and monitor a career.
Career Planning
One of the most important principles about careers is that you alone are respon-
sible for your career. Although you may be fortunate to work for organizations
and managers who help you develop your career and help you to advance, the
hard fact is that you cannot sit back and wait for that to happen. Employees at
Intel in the Management in Action case take charge of their careers. It is simply
not enough to work hard and be good at work. Those people who plan their ca-
reers greatly improve the chance of long-term success.
career planning Career planning is the process of developing a realistic view about how one
The process of developing a wants one’s career to proceed and then making plans to ensure that it follows
realistic view about how indi-
viduals want their careers to that course. The process includes a series of activities to help make informed de-
proceed and then taking steps cisions: performing a self-assessment, identifying opportunities, matching skills
to ensure that they follow that to career-related activities, developing objectives and timetables, and evaluat-
course
ing progress. The process is important because it links personal needs and skills
with career goals and opportunities.
Planning one’s career is a successful process because it is systematic. Such
planning involves linking long-term and short-term objectives, developing per-
sonal capabilities en route, and performing a focused analysis of progress. It is
not, however, a one-time process. Career planning is ongoing; as the environ-
ment and organizations change, you need to review, update, and adjust career
plans on a continuous basis.10
Stages of Career Development

To understand how to plan a career, it is helpful to view how careers unfold.
Most careers go through four distinct stages, each dealing with different issues
and tasks.11 Figure C.2 illustrates these four stages, and Figure C.3 lists the tasks
for each stage.
4
Identify and describe
the four stages of career
development
Figure C.2 Four stages of career development
Exploration Establishment
and Trial and Mid-Career Late Career
Advancement
Growth?
Career Growth
Leveling?
Decline?
15 20 25 30 35 40 45 50 55 60 65 70
Approximate Age
Figure C.3 Characteristics of the four stages of career development
STAGE TASK NEEDS
Exploration and Trial • Varied job activities

• Self-exploration
Establishment and • Job challenge
Advancement • Developing competence in a specialty area
• Developing creativity and innovation
• Rotating into new area after three to five years
Mid-Career • Technical updating
• Developing skills in training and coaching others
(younger employees)
• Rotating into new job requiring new skills
• Developing broader view of work and role in
organization
Late Career • Shifting from power role to one of consultation and
guidance
• Identifying and developing successors
• Beginning activities outside the organization
• Planning for retirement
Source: D. T. Hall and M. A. Morgan, “Career Development and Planning,” Contemporary Problems in
Personnel, revised edition. W. C. Hammer and Frank L. Schmidt, editors (Chicago: St. Clair Press), 1977.
638 Appendices
Stage 1: Exploration and Trial This first stage usually occurs between the
ages of 15 and 25. For most people, it begins with the decision to become se-
rious about employment after having concentrated on education. This stage is
a learning process because it includes many firsts—the fi rst job interview, fi rst
part-time job, and fi rst full-time job—and introduces the individual to the chal-
lenges associated with working. People in this stage face the issue of staying
with an organization or moving to a job with another company.
Stage 2: Establishment and Advancement In this second stage—normally

occurring between the ages of 25 and 35—people are involved in their fi rst “real
job.” They experience success as well as frustrations and receive promotions and
transfers. In this period, most people take stock and begin to develop a career
strategy—they begin to identify a field of specialization and weigh long-term
success. For many, this stage includes new specialties and offers for new jobs
outside the organization.
Stage 3: Mid-Career The mid-career stage most often occurs between the ages
of 35 and 50. Most people don’t face their fi rst career dilemma until they reach
this stage. In the modern-day organization, a career may take one of three pos-
sible directions at this point: growth, leveling, or decline.
If the direction is growth, the person is valued by the organization and is re-
ceiving promotions and increased responsibility. Career growth is the direct re-
sult of a strategy focused on enhancing skills and continual learning.
If the career levels off, the individual may receive transfers but not promo-
tions. The person may be secure, but with no growth in sight, he or she should
consider the option of developing a second career.
If the career is in decline, the person is seen as surplus in the eyes of the
organization; he or she feels insecure and has a growing sense of failure. Tac-
tically, such a person should try to move to a different company. Switching
careers can pay off, both in money and satisfaction.
Obviously, the mid-career stage is critical. In today’s business environment,
companies have little patience or tolerance for individuals who allow their skills
and careers to level or decline. Being proactive and committed to continuous
quality improvement is imperative.12
Stage 4: Late Career The late career stage—occurring between the ages
of 50 and retirement—is marked by a peak in prestige for those who experi-
enced growth in the prior stage. Their value to the organization lies in their
judgment and experience and their ability to share this knowledge with oth-
ers. Such managers become reliable trainers of the next generation of managers.
Normally, plans are made to slow down, develop outside interests, and prepare
for retirement.
Steps in Career Planning
5
Identify and discuss
the five steps for career
planning
A person should use the career planning model continuously in his or her em-
ployment life. Regardless of whether a person is on the outside looking in—just
beginning a career—or trying to advance within an organization, the same steps
apply.13 Figure C.4 illustrates the steps in career planning.
Step 1: Self-Assessment Performing a realistic self-assessment is the fi rst

step to career planning. A thorough data-gathering process includes evaluating
your values, interests, skills, abilities, experience, likes, and dislikes. This step
Figure C.4 Steps in career planning
Step 1 Step 2 Step 3 Step 4 Step 5
Self- Exploring Establishing Developing a Executing and

Assessment Opportunities Objectives Plan of Action Evaluating
and Options the Plan
requires a clear and objective view of what you believe is important (values),
what makes you happy at work, and what rewards you expect. Figure C.5 pro-
vides an assessment checklist that a person can use to identify skills and values.
At the beginning of a career, this step involves identifying initial skills and
interests. For an aspiring manager in today’s business environment, being inde-
Figure C.5 Assessment checklist for identifying skills and values
WHAT DO I DO WELL?
Check the items that apply to you:
❑ Organizing ❑ Innovating
❑ Handling details ❑ Making decisions
❑ Making things ❑ Teaching others
❑ Researching ❑ Supervising
❑ Creating ❑ Dressing well
❑ Reasoning / logic ❑ Persuading
❑ Writing ❑ Communicating
❑ Drawing / painting ❑ Dealing with criticism
❑ Computing / mathematics ❑ Coordinating activities
❑ Dealing with others ❑ Developing new skills
❑ Other (specify)_____________________________________________________________
My five most important abilities are: ____________________________________
_____________________________________ ____________________________________
_____________________________________ ____________________________________
WHAT IS IMPORTANT TO ME?

Check the items that apply to you:
❑ Helping others ❑ Fast pace
❑ Working alone ❑ Gaining knowledge
❑ Working with others ❑ Creativity
❑ Making decisions ❑ Change and variety
❑ Chance for advancement ❑ Security
❑ Monetary reward ❑ Recognition
❑ Physical challenge ❑ Excitement
❑ Power and authority ❑ Independence
❑ Improving society ❑ Responsibility
❑ Competition ❑ Intellectual challenge
❑ Other (specify)_____________________________________________________________
My five most important abilities are: ____________________________________
_____________________________________ ____________________________________
_____________________________________ ____________________________________
Source: W. Richard Plunkett, Supervision, 6/e, 1992, p. 39. © 1992 by Prentice Hall, Inc. Reprinted by
permission of Pearson Education, Inc., Upper Saddle River, NJ 07458.
640 Appendices
pendent, flexible, and a team player are points against which to benchmark. The
person who likes to learn, is self-reliant, and thrives on change meets the pre-
scription for the future.14 Figure C.6 outlines ten attributes that organizations
look for in filling management positions.
As a career progresses, a person should continue to undertake self-
assessments to ensure that he or she has retained his or her focus and to see
what additional skills and training are needed. Avoiding obsolescence is essen-
obsolescence tial. Obsolescence exists when a person is no longer capable of performing up
A state or condition that exists to job standards or management’s expectations.15 A person can become obsolete
when a person is no longer ca-
pable of performing up to job in attitudes, knowledge, skills, and abilities. Obsolescence in any of these areas
standards or to management’s marks a person as a potential candidate for the scrap heap. Such a person may
expectations become too costly to maintain. Figure C.7 provides a short quiz a person can
continue to use to identify areas of obsolescence.
For managers, personal obsolescence can happen quite suddenly. Reengineer-
ing that shifts a company from vertical layers of management to cross-functional
teams can render an individual’s performance inadequate or unnecessary. If a
company decides to outsource, positions are eliminated. When a manager re-
fuses to learn new technology, he or she is left standing at the train station.
Avoiding obsolescence is critical in career management. Later in the chapter we
will discuss strategies for avoiding obsolescence.
Figure C.6 Ten attributes that organizations look for in applicants for management
positions
1. Oral communication skills: Effective expression in individual or group situa-

tions (includes gestures and nonverbal communication).
2. Oral presentation skills: Effective expression when presenting ideas or tasks
to an individual or group when given time for presentation (includes gestures
and nonverbal communication).
3. Written communication skills: Clear expression of ideas in writing and in
correct grammatical form.
4. Job motivation: The extent to which activities and responsibilities available
in the job correspond with activities and responsibilities that result in personal
satisfaction.
5. Initiative: Active attempts to influence events to achieve goals; self-starting
rather than passive acceptance; taking action to achieve goals beyond those
called for; instigating change.
6. Leadership: Utilizing appropriate interpersonal styles and methods in
guiding individuals (subordinates, peers, superiors) or groups toward task
accomplishment.
7. Planning and organization: Establishing a course of action for self and/or oth-
ers to accomplish a specific goal; planning proper assignments of personnel and
appropriate allocation of resources.
8. Analysis: Relating and comparing data from different sources, identifying
issues, securing relevant information, and identifying relationships.
9. Judgment: Developing alternative courses of action and making decisions that
are based on logical assumptions and reflect factual information.
10. Management control: Establishing procedures to monitor and/or regulate pro-
cesses, tasks, or the responsibilities of subordinates; taking action to monitor
the results of delegated assignments or projects.
Source: From William C. Byham, “Starting an Assessment Center,” Personnel Administrator (February 1980).
Reprinted with the permission of HR Magazine, published by The Society for Human Resource Management,
Alexandria, VA.
Figure C.7 Twenty questions to help assess the degree of personal obsolescence
Ask yourself the following questions to determine your degree of personal

obsolescence:
ATTITUDES
1. Is my mind free from anxiety over personal matters while I work?
2. Do I believe in myself—my knowledge, skills, and abilities—and in my
associates?
3. Am I open and receptive to advice and suggestions, regardless of their sources?
4. Do I look for the pluses before looking for the minuses?
5. Am I more concerned with the cause of management’s action than with its
effect?
KNOWLEDGE
1. Am I curious—do I still seek the why behind actions and events?
2. Do I read something and learn something new every day?
3. Do I question the old and the routine?
4. Do I converse regularly with my subordinates, peers, and superiors?
5. Have I a definite program for increasing my knowledge?
SKILLS
1. Is what I am able to do still needed?
2. In light of recent trends and developments in my company and industry, will my
skills be required one year from now?
3. Do I practice my skills regularly?
4. Do I regularly observe how others perform their skills?
5. Have I a concrete program for acquiring new skills?
ABILITIES
1. Do my subordinates, peers, and superiors consider me competent?
2. Do I consistently look for a better way of doing things?
3. Am I willing to take calculated risks?
4. Do I keep morally and physically fit?
5. Have I a specific program for improving my performance?
Source: W. Richard Plunkett, Supervision, 7th ed., 1995, p. 40. © 1995 by Prentice Hall, Inc. Reprinted by
permission of Pearson Education, Inc., Upper Saddle River, NJ 07458.
Step 2: Exploring Opportunities and Options The second step in career

planning requires examining the opportunities that exist in the industry and
within a company. At the beginning of a career, this step involves determining
the following:
• What are the future prospects for the industry?
• What career opportunities exist in the industry?
• What jobs are available?
• What jobs relate to a career path?
For a person in mid-career, the emphasis shifts to evaluating options both
inside and outside the organization:
642 Appendices
• What are the future prospects for the company?

• What positions will open up in the company?
• What skills does the company value?
• What training and development are available?
• Who is being promoted?
• When are they being promoted?
• What is the job market?
In the new business environment, which emphasizes flatter organization
structures and team orientation, this step becomes even more critical. The answers
to many of the questions—what opportunities exist, what jobs are important
to the company, what positions will open up in a company, who is being pro-
moted—evolve on a day-to-day basis. For the career planner the implications are
clear: research thoroughly, build in flexibility, constantly evaluate, and update.
Remember, times have changed. It takes more personal energy and vigilance
to see signs of career trouble and to identify opportunities. According to Richard
Moran, a consultant at PricewaterhouseCoopers, “The rule used to be incremen-
tal promotions every year or two. If you missed one . . . that was a warning. You
don’t get the little clicks now.” 16 Warnings are subtler; many are available to only
the person, not the boss or colleagues. Warning signs include the following: 17
• Are you learning? If you can’t say what you’ve learned in the past six months
or what you expect to learn in the next, beware. Says Harvard’s John Kotter,
“When there is nothing you can learn where you are, you’ve got to move on
even if they give you promotions.”
• If your job was open, would you get it? Benchmark your skills regularly.
Says Betsy Collard, Program Director at the Career Action Center, “Look at
the want ads and see what they are looking for in your field.”
• What would you do if your job disappeared tomorrow? The answer to the
question identifies marketable skills. More and more people have to sell
themselves inside the company.
Step 3: Establishing Objectives Once the opportunities are identified, the

career planner has to make short- and long-term decisions. The key is to make
the long-term decisions fi rst and then derive the short-term decisions from them.
Traditionally, according to Professor Sal Davita, “The two issues of paramount
importance once were: what position do you want to hold the day you retire,
and in what industry do you want to make a career?” The decision on the indus-
try is still critical for a few reasons. First, an individual’s abilities and interests
are more or less suited to work in different industries. Second, industries vary
in their future prospects.18 The decision on the fi nal position is not as relevant
as it once was because many career paths will not exist in the future. Instead,
according to management consultant Michael Hammer, the second objective is
for “you to think of yourself as self-employed—think of yourself as a business.19
Then, the next decision is to define the business’s product or service: the area of
expertise. This leads directly to a crucial, career-defi ning choice: specialist or
generalist?” The answer means the person concentrates on one area of expertise
or instead develops a broad range of skills.
Opinions on the best decision vary. The conventional wisdom is that gener-
alists are better off. Says Dan Burnham of Allied-Signal, “A marketing manager
can’t be just a marketing manager. He needs a broader dimension of skill.” Adds

headhunter Gary Knisely, “Never narrow your options. To the extent that tech-
nical expertise narrows your market, you’ve made a bad career decision. Com-
panies may love you at the moment, but if you’ve got that good of a crystal ball,
get out of a job and into investing.” 20 Betting your career on a specialty is like
putting all your money in one stock.
On the other hand, says David Hatch, a Human Resources Vice President at
PepsiCo, “It’s a little dangerous to be esoteric, but companies treat specialists very
well—as the scarce resource they are—compared to people who are more inter-
changeable.” One company who does is PricewaterhouseCoopers. Instead of the
traditional “up or out,” twelve-years-to-partner timetable, the structure creates
three levels—consultant, principal consultant/director, and managing director/
partner—with no clock. The purpose: to make it easier for specialists to stay. 21
Once these long-term objectives are established, other decisions follow:
• Which functional or specialty area of the organization needs to be learned?
• What jobs and experiences will lead to the ultimate objective?
• What skills are needed to attain the objective?
• What people and other resources are necessary to achieve the objectives?
• What work assignments will be valuable?
Step 4: Developing a Plan of Action This step provides the detailed map to
accomplish the objectives. It requires thinking through specifically how to ac-
quire the skills—whether the career planner needs formal education or whether
he or she can learn the skills by seeking a special project. The plan should in-
clude establishing specific timetables for completing training, reaching a new
job level, and gaining new exposure in a company. This stage also identifies
potential barriers and resources to work around the barriers.
Step 5: Executing and Evaluating the Plan Once the plan is in place, it must
be put into action. In this step, the career planner takes charge of his or her ca-
reer, rather than waiting for things to happen. The second part of this step is to
follow up and evaluate progress on the plan. As the environment changes, ad-
justing the plan may become necessary. The evaluation also needs to consider in-
dividual growth, career progress, and new assignments—those items that were
targeted by objectives and developed in the action plan. This execution phase—
career management—is the next topic of discussion.
Before we move on to the topic of career management, however, let us look
at Beth Randolph, who provides us with an excellent example of how the steps
in career planning unfold. Randolph, a self-motivated achiever, put herself
through two-year Hocking College by working in a call center facility operated
by Choice Hotels. “I was a sponge,” says Randolph, who managed the center
when her boss was away. “I love travel. I absolutely love the hospitality indus-
try.” Randolph had found her industry and the start of her career.
After graduation, Randolph worked as a travel agent. Then Choice, which
operates Quality Inns and Comfort Inns, called to say that the company planned
to open a large reservation center in North Dakota: would she like to manage
it? She hurriedly moved to Minot and built a business from scratch. She inter-
viewed most job candidates, trained the supervisors, and negotiated contracts
for office equipment, cleaning supplies, and even food for the kitchen.
644 Appendices
Randolph overcame early fears of supervising people older than herself. She
built a cohesive team and received recognition from top management. Building
on success, Randolph told Don Brockway, Choice’s Vice President of Reserva-
tion Operations, “I’m ready to be more creative and solve problems on a higher
level.” In response, Brockway chose Randolph over three older candidates to
oversee Choice’s rapidly expanding reservations system across Europe. “This
was a huge decision,” says Brockway, “she’s a fi reball who always gets the job
done.” Beth Randolph is in charge of her own career. 22
Career Management
6
Discuss how a manager
can understand his or her
organization and why it is
important to do so
The key to success is to be self-reliant: to take charge and actively manage
your career. Career management involves three elements—understanding the
organization, aligning yourself with the organization, and implementing career-
enhancing strategies.
Analyzing and Understanding the Organization

career management
The planning, activities, and As noted in Chapter 9, all organizations are unique. Each develops its own meth-
behaviors involved in executing ods, values, rewards; each makes clear what it accepts and does not tolerate. Be-
a career fore a person can develop strategies for career growth, he or she must know the
company—what abilities it values, what actions it rewards, how it compensates
achievers. He or she must both accept the organization’s way and be accepted by
it. This critical phase has been identified by organizational psychologist Edgar H.
Schein as the organizational socialization process.
Organizational Socialization Regardless of whether it is a new employee’s

organizational socialization fi rst or fi fth company, he or she undergoes organizational socialization. In this
A process through which new process new members of an organization gain exposure to its values, norms,
members of an organization
gain exposure to its values, policies, and procedures. At the same time, they discover who wields power,
norms, policies, and procedures what restrictions there are on behavior, and how to succeed and survive.
Figure C.8 presents Schein’s model for the process through which an em-
ployee becomes an accepted and conforming member of the organization. In
Phase I, a job seeker forms impressions and expectations of the company. Phase
II is the period of adjustment in which the new employee matches individual
needs to those of the organization. Phase III marks the mutual acceptance of
employee and organization. Not all employees survive these last two phases;
faced with conflicts and compromises too great to overcome, employees who
cannot adjust and conform may quit voluntarily or be asked to leave. 23
psychological contract At the end of Phase III, the employee and the organization enter into a psy-
The unspoken contract that chological contract, an unspoken agreement defi ning what people are expected
marks the end product of the
organizational socialization pro- to give the organization and what they can expect to receive in return. Formed
cess and defines what people in the mind of the employee, it is based on experiences, promises, and personal
are expected to give to the or- observations of how the organization operates. The terms of the contract are the
ganization and what they can
expect to receive result of the interaction between the employee and boss, the employee and co-
workers, and the employee’s fi rst-hand experience with the organization’s efforts
to enforce the rules and behaviors it considers essential. A sense of fairness or eq-
uity must exist between employee and employer—each must believe the other is
doing his or her part and giving in proportion to what he or she expects to receive.
The psychological contract today is often far different from one in the past.
“In the days of the Organization Man, job security, raises, and promotions
were exchanged for hard work, loyalty, and a job-first philosophy.” 24 In the new
Figure C.8 Schein’s model of the phases of organizational socialization
PHASE I
ENTRY
• Occupational choice
• Occupational image
• Anticipatory socialization to occupation
• Entry into labor market
PHASE II
SOCIALIZATION
• Accepting the reality of the human organization
• Dealing with resistance to change
• Learning how to work: coping with too much or too little organization and too
much or too little job definition
• Dealing with the boss and deciphering the reward system—learning how to get
ahead
• Locating one’s place in the organization and developing an identity
PHASE III
MUTUAL ACCEPTANCE: THE PSYCHOLOGICAL CONTRACT

Organizational acceptance Individual acceptance
• Positive performance appraisal • Continued participation in organization
• Pay increase • Acceptable job performance
• New job • High job satisfaction
• Sharing organizational secrets
• Initiation rites
• Promotion
Source: Edgar H. Schein, Career Dynamics, © 1978 by Addison-Wesley Publishing Company, Inc. Reprinted
by permission of Pearson Education, Inc., Upper Saddle River, NJ 07458.
employer–employee contract, “you are responsible for your own career; we,
your employer, will help provide you the experience and training to keep you
marketable, but not necessarily a job forever.” 25 In practice, this contract is best
represented by the sentiments of William Paine, Bond Salesman at Gruntal &
Company: “I’m very loyal. I’ll remain loyal if they supply me phones, a com-
puter, execution, and inventory. I owe them integrity and production.” 26
Determining What Is Valued and Rewarded Organizational socialization
7
provides the employee with the opportunity to identify and focus on what the
organization values and rewards—what abilities are associated with advance-
ment and what actions are seen as valuable. Although it is critical to identify
Identify and describe the
the abilities that a specific organization values, a survey of major organizations abilities and actions that
and leading CEOs identified a number of abilities that are associated with career organizations value in
success in a broad spectrum of companies: 27 managers
• Communications skills. The ability to communicate one-to-one, in groups,

and in writing
• Interpersonal skills. The ability to work with others, relating well to people
at all levels of the organization, understanding how others feel, and estab-
lishing networks
646 Appendices
• Competence. The ability to produce quality work, get results, be account-

able, know the field, perform consistently, and upgrade skills
• Conceptual skills. The ability to focus on the big picture and understand all
the interlocking pieces
• Decision skills. The ability to handle more and more complex problems
• Flexibility. The ability to adjust to rapid change, new variables, and new
environments
Interviews conducted at Fortune 500 companies revealed that the actions
most likely to be valued and rewarded in today’s organization include the
following:28
• Hard work. Working hard means being willing to accept more responsibil-
ity, being committed, and being dedicated. It also involves working more
hours than the standard workweek and producing high-quality work.
• Risk taking. This action includes a willingness to move into unfamiliar
areas of the business, take on new assignments, and accept increases in
responsibility.
• Making contributions. Making contributions involves focusing on the criti-
cal parts of a job—quality and innovation. It also involves looking at the
company’s objectives and seeing how the current position fits in and how it
affects the bottom line.
• Being a team player. Being a team player means being dedicated to making
the organization run more effectively rather than focusing on just a job or a
department. It involves a person’s being able to step back and align his or her
objectives with those of others, rather than trying to dominate or isolate.
In commenting on the team player, Professor Leonard Greenlaugh notes,
“The action today is all about connectedness, about forming effective teams,
and building strategic alliances.” Robert L. Smith, of the executive search fi rm
that bears his name, agrees:
In the past a lot of people looked for what I would call the equivalent
of the singles tennis pro, the individual who could move mountains and
catch bullets in his teeth. In the market today, not only is that no longer
desired, it’s shunned. We’re looking for the team player because in to-
day’s environment an executive can’t get the job done without support
from everyone else. 29
Assessment and Alignment

After individuals have identified the abilities and actions that are valued and re-
warded by the organization, they need to assess both of these and possibly make
a mid-course correction. Their actions and abilities must align with those the
organization values. To assist this process, the individual must ask the follow-
ing questions:
• How do my skills match those the organization values?
• Am I capable of the actions necessary?
• What other preparation—education or training—do I need?
Becoming committed to continuous evaluation and skill building is equally
important for the employee.
Strategies for Career Advancement

Knowing and understanding the organization provide the basis on which to de-
velop and implement strategies for career advancement. As shown in Figure C.9,
these strategies focus on committing to lifelong learning, creating visibility, de-
veloping mentor relationships, developing networks, understanding power and
politics, working with the boss, and managing stress.
8
Discuss the strategies
associated with career
advancement
Figure C.9 Strategies for career advancement
Creating
Visibility
Developing
Managing
Mentor
Stress
Relationships
Career
Advancement
Developing Working with
Networks the Boss
Understanding Committing
Power and to Lifelong
Politics Learning
Committing to Lifelong Learning

“I’ve got people who report to me who need to learn how to type, because if they
can’t get on the Internet, they’re going to be obsolete,” states former Raychem
CEO Robert Saldich. The key to avoiding obsolescence—and creating a success-
ful career—is a commitment to lifelong learning. Just as corporations are chang-
ing, managers must accept the fact that multiple career changes will become in-
creasingly common. In the early 1990s, one university president told incoming
freshmen that as many as 85 percent of the jobs that would be available by 2010
have not been thought of yet. He also predicted that the students should expect
to have four to five career—not job—changes during their working life. 30
What this situation clearly indicates is the need for constant preparation, for
learning new technology, and for packaging new skills. To avoid obsolescence
(and to resolve the generalist/specialist dilemma discussed earlier), Walter
Kiechel advises that you have to be both a generalist and a specialist. “From the
very fi rst day on the job managers have to bring some special expertise to the
party. In the new economy, managers will have to add content.” Even as a man-
ager you have to add value. “And as managers of technical teams, they will need
648 Appendices
to understand the different technologies and disciplines to be able to mediate

among them.” 31
To upgrade skills and balance the generalist-specialist scale, former Dean
John Rau of Indiana University’s School of Business has this advice:
[Focus] along each of three dimensions. On what [is called] traditional
content: the classic choices are functions like marketing or fi nance, but be-
cause more companies are thinking of their businesses as processes, per-
haps some focus on that—distribution, say, or customer acquisition. Then
overlay a concentration on a particular industry or sector—publishing for
instance, or health care. Finally, you will of course need process skills—
team leadership, team membership, the ability to communicate. 32
Creating Visibility
Of course, one way to create visibility on the job is to perform effectively. People
who do a good job get noticed. Unfortunately, performance evaluations and rec-
ommendations for promotion may involve a substantial degree of subjectivity.
To make yourself stand out, a major strategy for career advancement is creating
organizational visibility.33
organizational visibility Organizational visibility is the spotlighting and highlighting of a person’s
A strategy for career advance- abilities, talents, and contributions for those people in the organization who in-
ment that involves the high-
lighting of a person’s abilities, fluence promotion and advancement. In addition to the subjective nature of eval-
talents, and contributions for uation, many individuals perform jobs that have low visibility—they work in re-
those people in the organization mote locations or have limited contact outside a department. For your talent to
who influence promotions and
advancements be recognized and rewarded, you must be observed. Not all companies support
employees by giving them jobs with visibility. Most people must seek visibility
on their own.
Documenting Contributions Making others—your immediate supervisor

and upper-level managers—aware of your accomplishments is often necessary.
Therefore, an approach to gaining visibility is to document contributions. One
method is to follow the example of a technician at the Battelle Memorial Insti-
tute who told Gene Dalton of the Novations Group that “he made sure he could
give anyone who asked a two-minute summary of what he did, why it mattered,
and what he accomplished.” Another approach is to identify accomplishments
through progress reports to the boss.
Documentation is especially important for teleworkers or telecommuters.
During the Industrial Revolution, people moved to the cities to be near their
work. This led to the centralization of work and the growth of large organi-
zations and cities. Before the Industrial Revolution, craftspeople worked from
their homes or cottages and had a certain control over their working hours. To-
day, we could be witnessing the opposite, as telecommuters begin to operate
from home. Telecommuters can choose to live away from the cities, with all their
noise, pollution, and traffic. They work from their homes or electronic cottages
telecommuting on their computers and send the work to their employers over the Internet.
The partial or total substitution
of telecommunications technol- According to the Smart Valley Telecommuting Guide:
ogy (such as computers, mobile
phones, fax machines, and the Telecommuting is the partial or total substitution of telecommunica-
Internet) for the trip to and from tions technology for the trip to and from the primary workplace along
the primary workplace. Simply with the associated changes in policy, organization, management, and
put, it’s moving the work to the
workers, instead of the work- work structure. Simply put, telecommuting is moving the work to the
ers to work workers, instead of the workers to work. Computers, cellular phones,
fax, and advanced communications links such as ISDN and dial-up ac-
cess have removed the physical barriers that once required workers to be
in their offices. 34
The term telecommuters has broadened to include teleworkers who work
from alternative offices. Figure C.10 shows how the number of teleworkers and
other off-site employees grew significantly from 1999 to 2004.
The trend toward telework—an umbrella term for all kinds of remote telework
work from home, satellite offices, and the road—is stretching forecast- Remote work in which corpo-
rate employees work outside
ers’ definitions. “There are modes of telework I never thought of years the office at least two days a
ago,” says Jack Nilles of Jala International, Los Angeles, who invented week
the term “telecommuting” in 1974. Some examples: Wireless e-mail from
Starbucks, videoconferencing from Kinko’s and home, and even telework
centers in remote villages in India, served by wireless computer links. 35
Telework builds resiliency into the organization. It is a component in the
emergency management plan for weather-related downtime or disasters for
many companies. “In the aftermath of the September 11, 2001, attacks, tele-
work was immediately recognized as the single best way for companies formerly
housed in the World Trade Center complex and nearby buildings to resume some
semblance of normal operations.” 36 Furthermore, employees should be able to
Figure C.10 The way we work is changing
Off-site 1999
Workers
2004
Satellite
Offices
36 million More people

55 million off-site, more
teleworking, 1 million
more mobility 1.6 million
Teleworkers
Mobile
Professionals
5 million
7 million 9.2 million
19 million
Sources: U.S. Department of Labor, International Telework Association and Council, and The Gartner Group.
650 Appendices
telework if they have car trouble, a sick child, or encounter bad weather, such as
a snowstorm.
Telework can provide employees with more personal balance between their
professional and personal life. “Working from home, in particular, offers well-
documented benefits, including increased job satisfaction, commitment and pro-
ductivity.” 37 It is important that employees be trained to telework, mentored by
current teleworkers, and given guidelines for setting up alternative offices. On
any given project when employees require any given expertise, they have the op-
portunity to work seamlessly and electronically with whoever in the world is
best at that particular activity.
Volunteering for Visibility Another approach to obtaining visibility is to vol-

unteer for projects, task forces, and other high-profi le assignments. 38 These as-
signments not only highlight talents and abilities, but also provide young ex-
ecutives with developmental opportunities. To reach general management
responsibilities, individuals should, preferably, spend time in two of the major
functions of an organization. Getting that range of experience can be accelerated
through volunteering. 39 According to Mary Herbert, Vice President and Director
of Quality for International Operations at Motorola, “You have to go to manage-
ment and say here’s what I can do; here’s why; let me try it.” 40
Not every task force, project, or extra task should be targeted for volunteer-
ing. Rather, for career spotlighting, the decision to volunteer should come after
you consider the following points:
• What new experience or knowledge can be gained?
• What will be the impact on your immediate boss and the boss’s success?
• What will be the impact on the organization?
• What will be the exposure to multilevel management?
sponsor Sponsorship Yet another approach for gaining visibility is to find a sponsor—
An individual in the organization a person who will actively promote a subordinate’s talents and look out for his
who will promote a person’s tal-
ents and look out for his or her or her organizational welfare. A sponsor is someone in the organization who is
organizational welfare at least one position higher than the immediate boss, is successful, and who has
a promising future.
Developing Mentor Relationships

Another key strategy for career advancement is to fi nd a mentor. Whereas a
sponsor actively promotes the abilities of and seeks opportunities for a pro-
mentor tégé, a mentor is a skilled employee who acts as a guide, teacher, counselor, and
A senior employee who acts as coach. A mentor takes a less-experienced person under his or her wing and helps
guide, teacher, counselor, and
coach for a less-experienced that person navigate the organization. A mentor should be someone who is suc-
person in the organization cessful and well thought of in the organization.41
For individuals working in companies without formal mentoring programs,
Joyce Lain Kennedy offers the following advice:
• At your own company, find a leader to learn from. Ask a supervisor if you
can assist or ‘shadow’ one with interesting projects. Or choose a hero and
directly communicate your appreciation of that individual’s work and tal-
ents; start informally and, if you’re receiving the help you need, propose a
regular mentorship—perhaps an interactive meeting at lunchtime every two
weeks—to take stock of your progress.
• At your own company and in your professional community, discover mul-

tiple mentors, each of whom excels in a different area where you need
growth. Florence Stone identifies examples: market knowledge, researching
capability, writing skills, organizational talent, and technical knowledge.
• Internet savvy? Look online for mentors in your field.
• Ask at your college alumni office, women’s group, or minority organiza-
tion. The right headhunter can be a treasure.42
Mentor Programs Mentoring is seen as so critical for success that many large
organizations—like Intel, for example—have implemented formal mentor-
ing programs. Students will be future employees, and many companies know
that they’ve got to recruit early and create leadership opportunities. Thus, in
Hewlett-Packard’s Telementor Program, HP employees volunteer as e-mail men-
tors to motivate students to excel in math and science and help students improve
their communication and problem-solving skills. The International Telementor
Center (ITC) is built on the success of HP’s program.
Telementoring is an electronic version of the proven practice of mentor-
ing, in which an older, more experienced person shares his or her ex-
perience and expertise with a younger ‘protégé’ in a way that helps the
protégé achieve a goal or gain entry into the mentor’s world. In telemen-
toring, this exchange of information and inspiration takes place in the
electronic world of e-mail and secured online discussion forums. 43
Several key statistics have been published on the importance of mentoring: 44
• More than 60 percent of surveyed college and graduate students list men-
toring as a criterion for selecting an employer after graduation (Source:
MMHA).
• 77 percent of companies report that mentoring programs were effective in
increased retention (Source: Center for Creative Leadership).
• A survey of CEOs states that one of the top three key factors in their career
was mentoring (Source: Account Temps Survey of Fortune 500).
• On 11 job-essential skills, protégés increased skills by an average of 61 per-
cent through a successful mentor program (Source: MMHA).
• Gains were reported in 9 of 11 generic career and life effectiveness skills af-
ter 13 months (Source: MMHA).
• 75 percent of overall executives said mentoring played a key role in their ca-
reer (Source: ASTD).
Mentors for Women and Men The conventional model of mentoring that
was created by and for men has not been as successful for women. First, there
are few female senior executives, making it difficult to fi nd a woman mentor.
Second, when acting as mentors for women, men normally provide advice and
information but not the emotional support needed. “It almost killed me,” notes
CFO Carol Bartz of Autodesk, in recalling her fi rst mentoring experience while
at Digital Equipment. Bartz tried to mimic the way she was supposed to act ac-
cording to her male mentor, but the relationship did not work for Bartz. Without
the proper support, the pressure got so bad, she said, that one day she thought
she was having a heart attack.45
652 Appendices
One solution has been to move to a dual-mentor relationship in which

women identify both a male and female mentor. Rather than receiving only one
type of support, the dual mentor relationship provides a balance—advice, infor-
mation, and emotional support.46
Developing Networks
Some managers still view networking as a short-term activity leading to a specific
networking goal like a new job or a career change. Today, however, networking is viewed as
A strategy for career advance- a long-term, two-way interaction, based on shared ideas, personal relationships,
ment that involves building
long-term, two-way interaction and common experiences. Successful networking for the twenty-fi rst century
based on shared ideas, personal means assembling a focused, highly select group of advisers who can help assess
relationships, and common situations, refi ne strategies, make decisions, and defi ne management style.
experiences
In today’s business climate, downsizing and fl attened corporate hierarchies
have resulted in managers with significantly less career security. At the same
time, managers often face intense pressure to make decisions and perform suc-
cessfully. A network can help managers perform better in their current assign-
ments and manage their careers more successfully.
According to Andrew Olson, when developing the network, keep these qual-
ities in mind:
• Diversity. Include people from a variety of industries and functions. Seek
balance in ethnicity and gender.
• Candor. Require candor. These individuals do not necessarily have to be close
friends, but they should be candid and willing to challenge assumptions.
• Clout. Include some individuals who might hold positions one or two levels
above your own.
• Confi dentiality. Keep the career network separate from other internal
organizational relationships, to ensure confidentiality and provide a broader
perspective.47
Understanding Power and Politics
In an ideal world, everybody would receive raises, promotions, and a fair share
of desirable and undesirable assignments—based on merit. But in real life, many
organizational politics of these decisions are decided by organizational politics—the unwritten rules of
The unwritten rules of work life work life and informal methods of gaining power or advantage.48 The politics of
and informal methods of gain-
ing power and advantage any organization result from the interaction between those in positions of influ-
ence and those seeking influence. These interactions are evidenced by power be-
ing acquired, transferred, and exercised on others.
The term politics offends many people—organizational veterans and nov-
ices alike—because it connotes deceit and deception. But engaging in politics is
simply a matter of seeking an advantage. As noted management consultant and
author Tom Peters says, “If you want to escape organizational politics—forget
it. Politics is life. Politics involves investing in a relationship—investing time, en-
ergy, and emotions.” 49 Although this sentiment has probably always been true,
in today’s fiercely competitive corporate environment, rife with justifi able inse-
curity and radically shifting power bases, it is even more important. Now a per-
son will need every bit of political moxie that he or she can muster. According
to Dorry Hollander in Managerial Reality, “the newly restructured organiza-
tions . . . are competitive playing fields without referees, cluttered with confus-
ing ambiguities, and competing factions. . . . It’s hard for most of us to know
what’s expected anymore. All this calls for greater ability to read between the
lines. . . . If you don’t activate your political horse sense, you might as well park
your career in a time capsule.” 50
Identifying the Power Structure Knowing that politics is a way of life, the
fi rst strategy is to identify the power structure in the organization. Doing so
means examining both the formal organizational structure and the workings of
the informal organization. In this process you determine the following:
• Who are the people on whom the leaders of the organizations rely?
• What skills and knowledge do these people provide?
• Are you able to supply the same skills and knowledge?
• Could these people help you as sponsors or mentors?
Once you identify the key people, the next step is to acquire power.
Acquiring Power From a career management viewpoint, people obtain

power—the ability to influence—in four ways:
1. Developing expertise in areas critical to the company. Knowledge and repu-
tation in a specific area can provide the opportunity to participate in proj-
ects and lend advice. In today’s marketplace, expertise is valued in quality
control, understanding consumer preferences, making teams successful, and
working with ailing organizations to cure problems. 51
2. Developing a network of contacts. As previously discussed, by developing
a network, you can acquire information, you can gather support for new
ideas, and you can make expertise for solving problems available. Being a
lone wolf will not get you ahead in organizational politics.
3. Acquiring line responsibility. The position a person holds in an organiza-
tion automatically carries certain power. But line managers—those whose
work is tied directly to the primary purpose of the organization—have
more power than staff groups. Nicole Williams, Executive Vice President of
Worldwide Operations of SPSS, a software manufacturer in Chicago, claims
that moving from a staff to a line position solidified her career. “It provided
exposure and responsibility.” 52
4. Solving others’ problems. Career advancement is associated with positive
support from as many areas as possible. A good way to acquire power and
support is to help someone else by solving his or her problems. Whether the
person is a colleague, someone in another department, or a superior, the re-
sult is the same—positive reviews and endorsements. 53
Working with the Boss

A major strategy in career management involves learning to work with the boss. A
career can be extinguished by not developing a positive alliance with a superior. 54
Understanding the Boss To work with the boss, you must spend time deter-
mining and understanding your boss’s priorities, objectives, and negative “hot
buttons.” The valued subordinate is one who understands that his or her job is
to relieve the boss’s pressure, not add to it.
Making the Boss Successful The second element of working with the boss
is to add to his or her success. After identifying the boss’s objectives and priori-
ties, you should develop a set of subobjectives that support the accomplishment
654 Appendices
of these major objectives. Doing so will keep the objectives aligned, which is not
only a good strategy for career advancement, but sound management.
Supporting versus Bucking the Boss No boss–subordinate relationship is

ideal. An expectation in any working relationship is that there will not always
be agreement, operations won’t always run smoothly, and problems will inevita-
bly surface. In such situations, the subordinate can take several approaches:
• Provide solutions rather than register complaints. Identifying a problem is
only the fi rst step. The people who advance are those who develop an array
of alternative solutions to problems.
• Practice constructive disagreement rather than rebellion. This is disagree-
ment focused on a problem—not on a person—with the aim of identify-
ing weaknesses and solutions. Once the discussion is over—win or lose—
the job gets done. In contrast, rebellion says “my way only.” Rebellion also
means that the disagreement doesn’t end with the discussion—it will con-
tinue in other places with other people.
• Support the decision. Once the boss makes a decision, the subordinate
should carry it out with the intention of making it work. Ignoring the deci-
sion or sabotaging it by not implementing it effectively will not endear the
subordinate to the manager. In situations in which the decision may counter
the organization’s goals or be ethically questionable, the subordinate may
need to take the issue to someone other than the boss. In such a situation,
having a mentor can be valuable.
Managing Stress
Another cornerstone of career management is stress management. A rapid pace,
confl icting deadlines, and multiple events characterize a manager’s job. In addi-
tion, all managers have responsibility for planning, organizing, and controlling
the actions of their departments; and the amount of this responsibility increases
as the manager moves up in an organization. Given these realities, stress is obvi-
ously a part of the job.
Nature of Stress
stress Stress is the physiological and psychological reaction of the body as a result of
The physiological and psycho- demands made on it. 55 The demands may be emotional (role conflict, fear of un-
logical reaction of the body as a
result of demands made on it employment, sexual harassment) or environmental (noise, a lack of privacy, or
improper ventilation).
People experiencing stress perceive, through their body’s reactions, that the
stressful situation is demanding beyond their ability to cope. People experience
stress when they aren’t fi nished with a project and the deadline looms, or when they
are trying to solve a customer’s problem but cannot reach a key decision maker.
Positive and Negative Stress Although stress is always discussed in a nega-

tive context, not all stress is negative. Moderate stress is a normal part of a man-
ager’s work. A deadline—determined three months earlier—to submit the year’s
budget forecast for approval causes stress as the date approaches. As shown in
Figure C.11, a moderate amount of stress has a positive effect on performance,
as it provides motivation.
Extreme levels of stress, on the other hand, are negative and contribute to
performance decline. As shown in Figure C.11, if the periods of high stress are
Figure C.11 Manager’s stress level and performance
Burnout
Point
High
Performance Level
Low
Low Stress Level High
extended over a long period of time the result can be burnout—a state of emo- burnout
tional exhaustion as a result of overexposure to stress.56 A state of emotional exhaus-
tion as a result of overexposure
The many possible causes of negative stress for managers are summarized in to stress
Figure C.12. For career managers the most critical include the following:
• Incongruence of values between the manager and the company
• Downsizing or layoffs that threaten security or long-range plans
• Limited opportunities for advancement
• Role ambiguity
• Incompatibility with the immediate supervisor’s leadership style
In addition, George Gendron reports that in today’s organization one of
the major causes of stress for managers is the growing complexity of business.57
There really is no simple business anymore. Thanks to technological change, the
globalization of markets, and the rise of government regulation, even the small-
est businesses have become enormously complicated. As complexity increases, so
have the time and energy required to manage a company’s internal functions.
This situation, in turn, has enormous consequences for managers. They are
forced to focus more narrowly on their specific parts of the business process. As
a result, “they feel isolated, insecure, and unsure—or [they may even question]
whether they are contributing to the well-being of the business as a whole. In-
creased stress is the result.” 58
Although the manager may be stressed by these situations, it is important to
remember that he or she may, in turn, be the source of stress for others by caus-
656 Appendices
Figure C.12 Causes of negative stress for managers
• Downsizing or other threats to security

• Limited opportunities for advancement
• Role ambiguity
• Interpersonal conflict
• Limited decision-making responsibility
• Incompatibility with immediate supervisor’s leadership style
• Incongruence of values between the manager and the company
• Boredom or underutilization
• Take-home work and erratic work schedule
• Constant change
• Task or work overload
• Unrealistic deadlines
• Sexual harassment
• Physical environment: noise, lighting, privacy, and climate
ing these situations. When employees develop the following perceptions, manag-
ers are the source of stress:
• Uncertainty about the specific responsibilities of the job
• Inability to make decisions or have decisions made when needed
• Unrealistic deadlines
• Lack of control over the things that affect the person in the work
environment
• Work overload
The last point, work overload, is the primary cause of employee stress in
the work setting. In a survey conducted by Harris Research, more than half
of the 5300 respondents claim they have too few staff or their level of activity
and responsibility has increased. In commenting on the situation, Catherine Ro-
mano states, “corporate anorexia resulting from management downsizing and
restructuring seems to be producing significant numbers of overworked, and
overstressed employees.” 59 The situation is such that one-third of the respon-
dents would not choose the same career again if they had the chance. Manage-
ment has caused this situation and must address it if stress is to be managed.
Symptoms of Stress What are the signs that might indicate an excessive stress
level? Common symptoms include anxiety, increased blood pressure, headache,
backache, fatigue, insomnia, depression, irritability, muscular tightness, and in-
attention. What these signs don’t indicate is the degree of wear and tear on the
individual—emotionally and physically. The hidden effects can cost the organi-
zation through loss of productivity, absenteeism, and health care expenses. Ex-
cessive stress can also cost the individual his or her health and future.
Three types of strategies available for managing stress relate to the manag-
er’s own stress, that of employees, or organizationwide stress management pro-
grams. A manager’s own strategy involves developing a balanced approach to
life that includes plenty of rest, good eating habits, exercise, and anticipating
personal stressors. Research on stress points to the importance of relaxation,
nutrition, and regular exercise as keys to stress management.
American Media Inc. Executive Vice President and Chief Editorial Direc-
tor Bonnie Fuller scores well in each category. Fuller oversees 20 publications,
including Shape, Men’s Fitness, Star, and the National Enquirer. She sleeps six
hours, starts the day with a one-hour workout, and watches her diet closely. In
addition, she has started eating more fish, meat, and vegetables and less pasta.60
The other key to combating stress is to identify personal stressors. Not all
people react the same way to a situation. Knowing what causes stress allows a
person to develop preventive maintenance. A manager must also learn to dele-
gate, to disagree constructively with the boss, and to try consciously to limit the
hours of work.61 Managers help themselves by learning to say no to workloads
that are unacceptable and unrealistic.
Managers have an obligation to monitor employees and the work environ-
ment for signs of stress. A manager can minimize employees’ stress by provid-
ing clear and current job descriptions and expectations, initiating timely and rel-
evant feedback, facilitating employees’ control over their own jobs, recognizing
employee contributions, and encouraging work and personal support groups. 62
Many companies have chosen to institute formalized stress management
programs. Control Data’s “Stay Well” program uses a combination of exercise,
smoking cessation, hypertension screening and control, and nutrition counsel-
ing. Johnson & Johnson’s “Live for Life” program emphasizes exercise, relax-
ation, and nutrition. Other organizations have provided the following to help
manage employees’ stress:
• Facilities for physical exercise, ranging from jogging tracks to full gyms with
instructors and organized classes
• Quiet rooms for meditating and reading
• On-site and off-site clinical psychologists or counselors
• Courses focusing on stress reduction and coping techniques 63
Organizational Dilemmas
Within career planning and management, an individual is often confronted with
organizational dilemmas. The four dilemmas involve value conflicts, loyalty de-
mands, decisions on advancement, and concerns for independence.
Conflicts Between Personal and Organizational Values
9
Discuss the organizational
dilemmas experienced
when personal and
organizational interests are
To have a successful career, a person’s value system needs to fit that of the or- in conflict
ganization. Figure C.13 shows how the values of America’s workforce have
changed over time. Despite socialization, there are times when a person’s values
do come in confl ict with the organization’s, resulting in dissatisfaction.64
To minimize this possibility, managers need to do periodic self-analyses
to determine their personal values and to select an organization that ensures a
match. In addition, they should constantly analyze the demands of the organi-
zation against their values to monitor any conflict. But even when individuals
are vigilant, the organization may evolve and its values may change. Or indi-
viduals may not have completely analyzed the value system and a confl ict can
occur.65 For example, a job that initially required minimal travel now requires
the manager to be out of town for two weeks each month. This change creates a
confl ict in the manager’s values of home and family. Of course, each individual
will resolve this situation differently. Some will accept the development, thriving
on the travel or hoping that the situation will change again shortly; others will whistle-blower
switch jobs, feeling that the new demands are unacceptable. Individual who takes action to
In other instances, when the values conflict touches on ethical or illegal inform bosses, the media, or
government agencies about
practices, managers may opt to inform their bosses, the media, or government unethical or illegal practices
agencies. These managers are referred to as whistle-blowers.66 Because circum- within an organization
658 Appendices
Figure C.13 The emerging workforce has different values
Source: “Meeting the Challenges of Tomorrow’s Workplace,” August/September 2002, http://www.chiefexecutive.net/ceoperspectives/

workplace.html.
stances do change, managers must be ready to consult their own values—and

goals—in developing a response to those changes.
Loyalty Demands
A dilemma intimately related to a person’s value system is the question of loy-
alty. Often, early in a career, loyalty demands are made on a person by the im-
mediate supervisor, who may convey messages such as, “Don’t make me look
bad, protect me,” or “Trust me, tell me about. . . .”
Both of these messages are requests for loyalty. In both cases, the subordi-
nate faces a dilemma. The fi rst loyalty demand—don’t make me look bad, pro-
tect me—may not seem so unusual. Employees should naturally try to make the
boss look good by doing excellent work. Likewise, protecting the boss by keep-
ing him or her informed—no surprises—is a sound practice. But these demands
go beyond that; they may involve covering up for weak performance or holding
back information that would place a superior in a bad light. In such situations,
the subordinate needs to acknowledge what is happening and not be drawn into
that behavior. A demand for loyalty—trust me, tell me about . . .—potentially
places the subordinate in the position of being an informant on someone or of
violating a confidence. The superior has gained information but at the same time
has caused the subordinate to compromise his or her values. Such a demand for
loyalty should be recognized for what it is and avoided.
Advancement Decisions
Another set of dilemmas is met in regard to advancement. They fall into two
categories: (1) whether to take a position when it is offered, and (2) what to do
when advancement does not occur.
Taking a new job offer may be problematic if it requires a person to move,
uproot a family, or relocate to an undesirable location. The situation may be
complicated as well by a spouse’s career. The offer may come at a time when
the manager believes that he or she is not really ready. In this case, the man-
ager should talk to his or her mentor to get an objective appraisal of current
skills and competence in regard to the new job. Having planned a career from
the start, the manager is probably not surprised by the offer; he or she should be
prepared for the possibility. Still, the manager needs to make the decision, and
that decision can come only after a thorough discussion with his or her spouse
and a complete analysis of the costs and benefits—both professionally and per-
sonally—of the alternatives.
A situation in which advancement does not occur may simply mean that the
organization’s timetable for advancement does not match the manager’s timeta-
ble—three years between promotions. Nonadvancement may also mean that the
organization believes the person is not promotable. In either case, the manager
is faced with a dilemma—stay and possibly lose time if a promotion is not forth-
coming or leave and lose security and familiarity. Again, the best approach is a
complete analysis of the costs and benefits. The manager should give consider-
ation to his or her stage in career development. How much does he or she have
invested in the organization? What are the chances of moving to another organi-
zation with immediate opportunity?
Independence and Sponsorship

A fi nal dilemma faced by individuals is striking the balance between the need
for independence and the advantages of sponsorship. The support of a sponsor
sometimes carries a negative price tag; the person sponsored gives up a degree of
independence to be on the team. Worse, if a sponsor is fired, the person who was
sponsored may suffer similar consequences.67 A possible solution to the dilemma
is to build relationships with many individuals and groups in the organization.
APPENDIX SUMMARY
Discuss the nature of careers. A career com- constantly update and upgrade skills, seek opportunity
1 prises the series of jobs a person holds over a
lifetime and the person’s attitude toward involvement
rather than security, and chart contributions.
Identify and describe the four stages of career
in these job experiences. It includes a long-term perspec-
tive, a sequence of positions, and a psychological
4 development. A person’s career normally evolves
through four stages: exploration and trial, establishment
involvement.
and advancement, mid-career, and late career.
Describe what is meant by having a career
2 perspective. A career perspective is a proactive
strategy that takes a global view of career progress or
• Exploration and trial. This fi rst stage usually occurs
between the ages of 15 and 25. It begins with the
decision to become serious about employment; this
growth over time as it develops. It requires a person to
stage is a learning process.
adopt a broad vision that includes all the elements in-
volved in a successful career—objectives, timetables, • Establishment and advancement. In this stage, nor-
career stages, skills improvement, organizational poli- mally between ages 25 and 35, people are involved
tics, power, stress, and values. in their fi rst real job. This is the stage when most
people take stock and begin to develop a career
Describe the changes that have occurred in
3 the career environment. A person can no longer
be guaranteed a career with one organization. Gone are
strategy.
• Mid-career. The mid-career stage most often oc-
the days of lifetime employment and paternalism. In- curs between the ages of 35 and 50. There are three
stead, the individual can expect to have many jobs and possible directions a career may take at this point:
careers in a lifetime. The person must be self-reliant, growth, leveling, or decline.
660 Appendices
• Late career. The late career stage—between the ages The process by which this mutual acceptance is ac-
of 50 and retirement—is marked by a peak prestige complished is known as organizational socialization. In
for those who experienced growth in the prior stage. this process, new members of an organization gain ex-
These people become trainers for the next generation posure to its values, norms, policies, and procedures. At
of managers. In addition, plans are made to slow the same time, they discover who wields power, what re-
down, develop outside interests, and prepare for strictions there are on behavior, and how to succeed and
retirement. survive. Eventually, through this process an employee
either becomes an accepted and conforming member of
Identify and discuss the five steps for career
5 planning. Career planning involves five steps: self-
assessment, exploring opportunities and options, estab-
the organization or leaves the organization.
Identify and describe the abilities and actions
lishing objectives, developing a plan of action, and ex-
ecuting and evaluating the plan.
7 that organizations value in managers. The
abilities that organizations value in managers include
communication, interpersonal, conceptual, and decision
• Self-assessment. Performing a realistic self-assess-
skills; competence; and flexibility. Organizations also
ment involves gathering and analyzing data on your
value individuals who make contributions, take risks,
values, interests, skills, abilities, experiences, likes,
work hard, and are team players.
and dislikes. This step is not only critical for an as-
piring manager but should be done on a continuous Discuss the strategies associated with career
basis to avoid obsolescence. 8 advancement. To advance in an organization an
individual must develop and implement strategies that
• Exploring opportunities and options. This step re-
focus on committing to lifelong learning, creating vis-
quires examining the opportunities that exist in the
ibility, developing mentor relationships, developing net-
industry and a company.
works, understanding power and politics, working with
• Establishing objectives. Once the opportunities are the boss, and managing stress.
identified, the career planner has to make short- and
• Committing to lifelong learning is the key to avoid-
long-term decisions. The fi rst decision involves select-
ing obsolescence. Managers must reengineer them-
ing an industry. The next major decision is to choose
selves through constant preparation, learning new
between being a specialist or generalist. Once that
technology, and packaging new skills.
decision is made, other decisions involve identifying
needed skills, resources, assignments, training, and • Creating organizational visibility involves the spot-
experiences that will help accomplish the objectives. lighting and highlighting of a person’s abilities, tal-
ents, and contributions for those in the organization
• Developing a plan of action. This step provides the
who influence promotion and advancement. Organi-
detailed map to accomplish the objectives. The plan
zational visibility can be obtained by documenting
should include establishing specific timetables for
contributions, volunteering, and fi nding a sponsor.
training, reaching a new job level, and gaining new
exposure in a company. This stage also identifies po- • By developing a mentor relationship, a person has
tential barriers and the resources to work around the available a senior employee who acts as a guide,
barriers. teacher, counselor, and coach. The mentor helps the
person navigate the organization.
• Executing and evaluating the plan. Once the plan is
in place, it must be put into action. This is a matter • Developing a network involves assembling a focused,
of taking charge of your career, rather than waiting highly select group of advisers. These advisers help
for things to happen. The second part of this action assess situations, refi ne strategies, make decisions,
is to follow up and evaluate progress. You may need and refi ne management style.
to adjust the plan as the environment changes and
• Understanding power and politics is necessary for
there is individual growth, career progress, and new
career success. Organizational politics are the un-
assignments.
written rules of work life and informal methods of
Discuss how a manager can understand his gaining power and influence. Individuals need to not
6 or her organization and why it is important to
do so. All organizations are unique. Each develops its
only understand politics but also become adept at it.
The fi rst strategy is to identify the power structure;
own methods, values, rewards; each makes clear what the next is to acquire power.
it accepts and does not tolerate. Before a person can de-
• Working with the boss is a major strategy in career
velop strategies for career growth, he or she must know
management. Three elements of the strategy involve
the company—what abilities it values, what actions it re-
understanding the boss, making the boss successful,
wards, how it compensates its achievers; he or she must
and supporting the boss.
both accept the organization and be accepted by it.
• Managing stress is another cornerstone of career demands are unacceptable. In other instances in
management. Stress, the physiological and psycho- which the values confl ict touches on ethics or illegal-
logical reaction of the body as a result of demands ity, managers may opt to become whistle-blowers
made on it, is a part of all managers’ jobs. Managers and inform their bosses, the media, or government
must learn the causes and symptoms of stress as well agencies.
as strategies for managing it.
• Loyalty demands. Often loyalty demands are made
Discuss the organizational dilemmas experi- on a person by the immediate supervisor. Requests
9 enced when personal and organizational in-
terests are in conflict. There are four organizational
for loyalty take the form of “Don’t make me look
bad, protect me” or “Trust me, tell me about. . . .”
dilemmas experienced when personal and organizational Each creates a dilemma for the manager.
interests are in confl ict. The four dilemmas involve value
• Advancement decisions. These dilemmas fall into
confl icts, loyalty demands, decisions on advancement,
two categories: (1) whether to take a position when
and concerns for independence.
it is offered, and (2) what to do when advancement
• Conflicts between personal and organizational val- does not occur.
ues. There are times when a person’s values come in
• Independence and sponsorship. Many individuals
confl ict with the organization, resulting in dissatis-
face a dilemma caused by trying to strike a balance
faction. When this situation occurs, some will accept
between the need for independence and the advan-
the development hoping the situation will change
tages of sponsorship.
shortly; others may switch jobs, feeling that the new
KE Y TERMS
burnout mentor psychological contract
career networking sponsor
career management obsolescence stress
career perspective organizational politics telecommuting
career planning organizational socialization telework
job organizational visibility whistle-blower
RE VIE W QUESTIONS
1. What is the difference between a job and a career? 6. Why is it important for a manager to understand his
or her organization?
2. What is meant by the statement, “A manager should
have a career perspective”? 7. What abilities do organizations typically value in
managers seeking advancement?
3. What changes have occurred in the career environ-
ment? How do the changes affect career planning 8. What is the importance of organizational visibility?
and management? How can it be achieved?
4. What are the four stages of career development? 9. How does a decision on advancement present an or-
ganizational dilemma?
5. What are the five steps involved in career planning?

1. What satisfaction might come from having a career 3. What career-planning steps have you taken? What
rather than a job? additional steps will you take based on educational
progress or career progress?
2. Although you are responsible for your career, what
obligation does the organization have for a plateaued 4. Which two of the strategies suggested for career ad-
employee whose skills have become obsolescent? vancement are the most valuable to you? Why?
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1992), 64. ment (NAFTA). <http:// 38 See note 8. Bohlander, and Scott Snell.
www.fas.usda.gov/itp/Policy/ 39 Business International, 1970, Managing Human Resources,
NAFTA/nafta.asp>. source unknown. 10th ed. Cincinnati: South-
Appendix B 20 Arndt, Michael. “Key Issues 40 Johnson & Johnson. “Our Western, 1996, 695–706.
1 The New York Times. Remain in North American Company: Fast Facts.” 60 McCormick, Janice, and Nan
“PepsiCo Profit Rises on Trade Talks.” Chicago Tri- <http://www.jnj.com/our Stone. “From National Cham-
Overseas Sales.” (April 27, bune (August 11, 1992), _company/fast_facts/history pion to Global Competitor:
2006). sec. 3, 3. .htm>. An Interview with Thomson’s
2 Shirouzu, Norihiko. “Deregu- 21 Corchado, Alfredo. “Avocado 41 Davidson, Dale. “Mobil Alain Gomez.” Harvard
lation Jolts Shiseido’s Founda- Ban Pits Mexican Exporters Realigns Operations into Business Review (May– June
tion.” The Wall Street Journal Against U.S.” Dallas Morn- 11 Business Groups.” Dallas 1990), 135.
(June 14, 1996), A7. ing News (June 16, 1996), Morning News (June 4, 61 “Goodbyes Can Cost Plenty
3 “Shiseido Facts & Figures 1H, 3H, 4H. 1996), 7D. in Europe.” Fortune (April 6,
2003.” Shiseido Co. Ltd. 22 Adler, Alan L. “Whirlpool 42 Lublin, Joann S. “Sending 1992), 16.
<http://www.shiseido.co.jp>. Puts Its Brand on Europe.” Employees Abroad Becomes
4 Baker, Stephen. “Along the Chicago Tribune (March 30, Tougher Than Ever.” The
Border, Free Trade Is Becom- 1992), sec. 4, 5. Wall Street Journal (Novem- Appendix C
ing a Fact of Life.” Business- 23 See note 22. ber 7, 2003). 1 Welles, Edward O. “The
Week (June 18, 1992), 41. 24 Whirlpool Corporation 43 “3M Tries to Scotch Inpatri- Mentors.” Inc (June 1, 1998).
5 Morris, Betsy. “The Brand’s Press Release. “Whirlpool ate Problems.” The Wall 2 Vreeland, Leslie. “Managing
the Thing.” Fortune (May 4, Corporation Reports Record Street Journal (June 16, the Risks.” Working Woman
1996), 84. Results: Annual Revenues 1992), B1. (April 1992), 61– 63.
6 Browning, E. S. “In Pursuit Increase to $14.3 Billion, 44 Sigiura, Hideo. “How Honda 3 Feldman, Daniel C. “Careers
of the Euroconsumer.” The Earnings Improve to $6.19 Localizes Its Global Strat- in Organizations: Recent
Wall Street Journal (April 23, Per Share.” (February 2, egy.” Sloan Management Re- Trends and Future Direc-
1992), B1. 2006). http://www view (Fall 1990), 78. tions.” Journal of Manage-
7 Nelson, Mark M. “Whirlpool .whirlpoolcorp.com/news/ 45 Shaw, Ron, and Richard ment 15 (1989), 135–156.
Gives Pan-European Ap- release.asp?rid325. Krevolin. Pilot Your Life.
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GLOSSARY
A autocratic style A leadership approach in which a manager
does not share decision-making authority with sub-
acceptance sampling A product control technique involv- ordinates (p. 445)
ing a representative group of products before a new avoidance A confl ict strategy in which a manager ignores
stage of production (p. 596) the confl ict situation (p. 487)
accountability The need to answer to someone for your
actions; it means accepting the consequences—either B
credit or blame—of these actions (p. 244)
affirmative action A plan to give members of specific balance sheet A listing of the assets of a business and
groups priority in hiring or promotion (p. 321) the owners’ and outsiders’ interests in them. The
aggregate planning An element of operations management equation that describes the content of a balance
that involves the planning of production activities sheet is Assets Liabilities Stockholders’ equity
and the resources needed to achieve them (p. 587) (p. 546)
agile manufacturing A manufacturing system incorporating batch processing A computer procedure in which data are
ultraflexible production facilities; computer technol- collected over time and entered into databases ac-
ogy; alliances among suppliers, producers, and cus- cording to prescribed policies and procedures (p. 511)
tomers; and direct sales data to customize goods at behavioral school Recognized employees as individu-
the speed of mass production (p. 585) als with concrete, human needs, as parts of work
alternatives Potential solutions to the problem (p. 200) groups, and as members of a larger society (p. 43)
application program A computer program designed to ex- benchmark The product to meet or beat in terms of de-
ecute specific sets of tasks such as word processing sign, manufacture, performance, and service (p. 99)
(p. 511) benefi t Legally required or voluntary compensation pro-
artificial intelligence (AI) The ability of a machine to per- vided to employees in addition to their salaries or
form those activities that are normally thought to re- wages (p. 351)
quire intelligence; giving machines the capability to boundary spanning The surveillance of outside areas and
learn, sense, and think for themselves (p. 514) factors that can influence plans, forecasts, decisions,
assessment center A place where candidates are screened and organizations. Sometimes called environmental
for managerial positions, which usually involves ex- scanning (p. 144)
tensive testing and hands-on exercises (p. 336) boundaryless organizations Organizations not defi ned or
attribute inspection A product control technique that com- limited by horizontal, vertical, or external bound-
pares items against a standard and rates their quality aries imposed by a predetermined structure (p. 136)
as acceptable or unacceptable (p. 597) brainstorming A group effort at generating ideas and alter-
audit A formal investigation conducted to determine natives that can help a manager solve a problem or
whether records and the data on which they are seize an opportunity (p. 210)
based are correct and conform to policies, rules, pro- budget A single-use plan that predicts sources and
cedures, and laws (p. 553) amounts of income that will be available over a
authority The formal and legitimate right of a manager to fi xed period of time and how those funds will be
make decisions, give orders, and allocate resources used (p. 160); A plan and control for the receipt and
(p. 238) spending of income over a fi xed period (p. 555)
675
676 Glossary
bureaucracies Rational organizations based on the con- coercive power The power dependent on fear of the nega-
trol of knowledge (p. 41) tive results that may happen if one fails to comply
burnout A state of emotional exhaustion as a result of (p. 242)
overexposure to stress (p. 655) cohesion A strong attachment to the group and a close-
business ethics The rules or standards governing the con- ness measured by a singleness of purpose and a high
duct of persons or members of organizations in the degree of cooperation (p. 251)
field of commerce (p. 64) collaboration A confl ict strategy in which the manager
business-level strategy Answers the question, “How do we focuses on mutual problem solving by both parties
compete?” It focuses on how each product line or (p. 488)
business unit within an organization competes for collective bargaining Negotiation between a union and an
customers (p. 175) employer in regard to wages, benefits, hours, rules,
and working conditions (p. 328)
C committee A horizontal team—either ad hoc or perma-
nent—designed to focus on one objective; members
capacity planning An element of operations management represent functional areas of expertise (p. 468)
that determines an organization’s capability to pro- communication The transmission of information and un-
duce the number of products or services necessary to derstanding from one person or group to another
meet demand (p. 586) (p. 361)
career The series of jobs a person holds over a lifetime compensation All forms of fi nancial payments to employ-
and the person’s attitude toward the involvement in ees. Compensation includes salaries, wages, and
those job experiences; includes a long-term perspec- benefits (p. 349)
tive, a sequence of positions, and a psychological in- complexity theory A theory that emphasizes the ways in
volvement (p. 634) which a factory resembles an ecosystem, responding
career management The planning, activities, and behaviors to natural laws to fi nd the best possible solutions to
involved in executing a career (p. 644) problems (p. 35)
career perspective A proactive strategy that involves a compressed workweek A schedule that allows employees to
global view of career progress or growth over time fulfi ll weekly time obligations in fewer days than the
(p. 634) traditional five-day workweek (p. 425)
career planning The process of developing a realistic view compromise A confl ict strategy in which each party gives
about how individuals want their careers to proceed up something (p. 488)
and then taking steps to ensure that they follow that computer-aided design (CAD) A design technique that uses
course (p. 636) a computer monitor to display and manipulate pro-
cellular layout A facilities layout option in which equip- posed designs for the purpose of evaluating them
ment required for a sequence of operations on the (p. 584)
same product is grouped into cells (p. 583) computer-aided manufacturing (CAM) A technology in which
centralization A philosophy of organization and manage- computers coordinate people, information, and pro-
ment that focuses on systematically retaining author- cesses to produce quality products efficiently (p. 584)
ity in the hands of higher-level managers (p. 247) computer-integrated manufacturing (CIM) Using computers to
chain of command The unbroken line of reporting relation- guide and control manufacturing processes (p. 585)
ships from the bottom to the top of the organization computer literate Managers must have a basic knowledge
(p. 229) of computer terminology, hardware and software
change Any alteration in the current work environment components, as well as the ability to perform basic
(p. 290) computer applications, such as word processing, use
change agent A person who implements planned change of a spreadsheet and a database, development of Web
(p. 295) pages, and development of multimedia presentations
chaos theory The mathematical study of complex, un- (p. 104)
stable systems (p. 35) computerized information system (CIS) An MIS built on com-
classical administrative school Emphasized the flow of in- puter hardware and software to collect and process
formation and how organizations should operate data and store and disseminate the resulting infor-
(p. 38) mation (p. 507)
classical management theory A theory that focused on fi nd- conceptual skills The mental capacity to conceive and ma-
ing the “one best way” to perform and manage tasks nipulate ideas and abstract relationships (p. 25)
(p. 37) concurrent control A control that applies to processes as
classical scientific school Focused on the manufacturing they are happening (p. 535)
environment and getting work done on the factory conflict A disagreement between two or more organiza-
floor (p. 38) tional members or teams (p. 484)
Glossary 677
confrontation A confl ict strategy that forces parties to cross-functional team A team with an undefi ned life span
verbalize their positions and area of disagreement designed to bring together the knowledge of various
(p. 488) functional areas to work on solutions to operational
content theories A group of motivation theories emphasiz- problems (p. 468)
ing the needs that motivate people (p. 397) customer Any person or group, both inside and outside
contingency model A leadership theory stating that a man- an organization, who uses or consumes outputs from
ager should focus on either tasks or employees, an organization or its members (p. 6)
depending on the interaction of three variables— customer departmentalization Grouping activities and re-
leader– member relations, task structure, and leader sponsibilities in departments based on the needs of
position power (p. 450) specific customer groups (p. 234)
contingency plan An alternative goal and course or courses customer relationship management (CRM) A long-term man-
of action to reach that goal if and when circum- agement approach to customer relations that at-
stances and assumptions change so drastically as to tempts to strengthen the bond between the customer
make an original plan unusable (p. 164) and the organization (p. 8)
contingency school A theory based on the premise that
managers’ preferred actions or approaches depend D
on the variables of the situations they face (p. 50)
continuous-process production A technology in which the data Unprocessed facts and figures (p. 500)
entire conversion process is completed through a se- data center A unit of a decentralized CIS that operates to
ries of mechanical or chemical processes (p. 272) serve its unit’s members with their own sets of hard-
control process A four-step process that consists of es- ware, software, and specialists (machine operators
tablishing performance standards, measuring per- and programmers) (p. 508)
formance, comparing measured performance to es- database A collection of computerized data arranged for
tablished standards, and taking corrective action ease and speed of retrieval; sometimes called a data
(p. 530) bank (p. 510)
control system A system in which feedforward, concur- decentralization A philosophy of organization and man-
rent, and feedback controls operate in harmony agement that focuses on systematically delegating au-
to ensure that standards are enforced, goals are thority throughout the organization to middle- and
reached, and resources are used effectively and effi- lower-level managers (p. 247)
ciently (p. 538) decision A choice made from available alternatives
control technique Device designed to measure and monitor (p. 192)
specific aspects about the performances of an organi- decision making The process of identifying problems and
zation, its people, and its processes (p. 528) opportunities, developing alternative solutions,
controlling The process through which standards for the choosing an alternative, and implementing it (p. 193)
performance of people and processes are set, com- decision support system (DSS) A specialized variant of a CIS;
municated, and applied (p. 528) an analytic model that joins a manager’s experience,
co-opetition A word coined by Ray Noorda, Founder of judgment, and intuition with the computer’s data ac-
the networking software company Novell, meaning cess, display, and calculation processes; allows man-
that businesses have to compete and cooperate at the agers to interact with linked programs and databases
same time (p. 589) via the keyboard (p. 513)
core competencies What an organization knows and does decision tree A graphical representation of the actions a
best (p. 133) manager can take and how these actions relate to
core values Values that should never change, “bedrock other events (p. 214)
principles” (p. 109) delegation The downward transfer of formal authority
corporate-level strategy Answers the questions: “What from one person to another (p. 243)
business are we in?” and “What business should we Delphi technique Group decision making conducted by a
be in?” (p. 174) group leader through the use of written question-
critical control point An area of operations that directly af- naires; it provides a structure, leads to consensus,
fects the survival of a fi rm and the success of its most and emphasizes equal participation (p. 212)
essential activities (p. 539) demotion A reduction in an employee’s status, pay, and re-
critical path The longest sequence of events and activities sponsibility (p. 347)
in a network production schedule or the longest time departmentalization The basic organizational format or de-
a job could take (p. 596) partmental structure for the company (p. 233)
cross-cultural management An emerging discipline focused design control An area of operations control that involves
on improving work in organizations with employee incorporating reliability, functionality, and service-
and client populations from several cultures (p. 625) ability into product design (p. 588)
678 Glossary
design for disassembly (DfD) Considering, during the de- empowerment The sharing of information and decision
sign stage, how products will be refurbished, reused, making (p. 112)
or disposed of at the end of the product’s life cycle end-user computing The use of information technology
(p. 581) (IT) by people who are not controlled and directed
design for manufacturability and assembly (DFM/A) Consider- by top management (p. 509)
ing, during the design stage, how products will be environmental scanning The process of collecting informa-
manufactured and assembled (p. 580) tion about the external environment to identify and
detailed inspections and tests A product control technique analyze trends (p. 130)
in which every fi nished item receives an examination equal employment opportunity Legislation designed to pro-
or performance test (p. 597) tect individuals and groups from discrimination (p.
development Efforts to acquire the knowledge, skills, and 318)
attitudes needed to move to a job with greater au- equity theory A motivation theory in which comparisons
thority and responsibility (p. 342) of relative input-outcome ratios influence behavior
diction The choice and use of words in speech and writ- choices (p. 413)
ing (p. 368) ERG theory A motivation theory establishing three cat-
digital Data expressed as a string of 0’s and 1’s and trans- egories of human needs: existence needs, relatedness
mitted or stored with electronic technology, usually needs, and growth needs (p. 407)
computers and the Internet (p. 502) ethical dilemma A situation that arises when all courses of
directly interactive forces An organization’s owners, cus- action open to a decision maker are judged to be un-
tomers, suppliers and partners, competitors, and ex- ethical (p. 75)
ternal labor pool (p. 139) ethics The branch of philosophy concerned with what
discrimination Using illegal criteria when making employ- constitutes right and wrong human conduct, in-
ment decisions. Discrimination results in an adverse cluding values and actions, in a given set of circum-
impact on members of protected groups (p. 318) stances (p. 10)
disparate impact The result of using employment criteria evolutionary change the incremental steps taken to bring
that have a significantly greater negative effect on about progress and change (p. 292)
some groups than on others (p. 321) executive information system (EIS) A decision support system
diversity Includes people from differing age groups, gen- custom designed to facilitate executive decision mak-
ders, ethnic and racial backgrounds, cultural and na- ing; may include forecasting, strategic planning, and
tional origins, and mental and physical capabilities other elements (p. 515)
(p. 10) executive team A team consisting of two or more people to
division of labor See specialization of labor do the job traditionally held by one upper-level man-
divisional structure An organizational design that groups ager (p. 474)
departments based on organizational outputs; these expatriates Home-country nationals with overseas experi-
divisions are self-contained strategic business units ence (p. 627)
that produce a single product (p. 274) expectancy theory A motivation theory stating that three
downsizing Also known as rightsizing, it calls for shrink- factors influence behavior: the value of rewards,
ing both the size of the company and the number of the relationship of rewards to the necessary per-
employees (p. 227) formance, and the effort required for performance
dysfunctional conflict Confl ict that limits the organization’s (p. 408)
ability to achieve its objectives (p. 485) expert power Influence due to abilities, skills, knowledge,
or experience (p. 242)
E expert system A specialized end-user decision support pro-
gram that stores the knowledge of a group of author-
economic forces Conditions in an economy that influence ities for access by nonexperts faced with the need to
management decisions and the costs and availability make topic-related decisions (p. 513)
of resources (p. 141) external environment Includes all the forces outside an or-
economic order quantity (EOQ) An inventory technique that ganization’s borders that interact directly or indi-
helps managers determine how much material to or- rectly with it (p. 132)
der by minimizing the total of ordering costs and
holding costs based on the organization’s usage rate F
(p. 591)
embargoes Government regulations enacted to keep facilities layout The element of operations planning con-
a product out of a country for a time or entirely cerned with the physical arrangement of equipment
(p. 609) and work flow (p. 581)
Glossary 679
feedback Information about the receiver’s perception of free-rein style A leadership approach in which a manager
the sender’s message (p. 361) shares decision-making authority with subordinates,
feedback control A control that focuses on the outputs or empowering them to function without direct involve-
results of operations (p. 537) ment from managers to whom they report (p. 447)
feedforward control A control that prevents defects and de- free rider A person who receives the benefit of team mem-
viations from standards (p. 535) bership but does not do a proportionate share of
financial budget The details of how a fi nancial responsibil- work (p. 483)
ity center will manage its cash and capital expendi- functional authority The authority that permits staff man-
tures (p. 558) agers to make decisions about specific activities
financial ratio The relationship of two critical figures from performed by employees within other departments
fi nancial statements—expressed in terms of a ratio, (p. 239)
decimal, or percentage—that helps managers mea- functional conflict Confl ict that supports the objectives of
sure a company’s fi nancial health and its progress to- the organization (p. 485)
ward goals (p. 550) functional definition The activities to be performed deter-
financial responsibility center An organizational unit that mine the type and quantity of authority necessary
contributes to an organization’s costs, revenues, in- (p. 236)
vestments, or profits (p. 551) functional departmentalization Creating departments on the
finished goods inventory Inventory consisting of products basis of the specialized activities of the business—
that have not been sold (p. 591) fi nance, production, marketing, human resources
first-line management Supervisors, team leaders, and team (p. 233)
facilitators who oversee the work of nonmanagement functional-level strategy Focuses on the major activities
people, often called operating employees, associates, of the company: human resources management, re-
or team members (p. 15) search and development, marketing, fi nance, and
fi xed-position layout A facilities layout option in which the production (p. 175)
product stays in one place and the equipment, tools, functional managers Managers whose expertise lies pri-
and human skills are brought to it (p. 583) marily in one or another of the specialty areas
flexible manufacturing system (FMS) The automating and (p. 15)
integrating of manufacturing elements such as prod- functional structure An organizational design that groups
uct design, production, equipment, robotics, and positions into departments based on similar skills,
performance analysis (p. 273); A technology in expertise, and resources (p. 273)
which an automated production line is coordinated
by computers and can produce more than one prod- G
uct (p. 584)
flextime An employment alternative allowing employees game theory Attempts to predict how people or organiza-
to decide, within a certain range, when to begin and tions will behave in competitive situations (p. 217)
end each workday (p. 425) Gantt chart A scheduling and control tool that helps man-
force-field analysis a technique to implement change by agers plan and control a sequence of events (p. 594)
determining which forces drive change and which geographical departmentalization Grouping activities and re-
forces resist it (p. 303) sponsibilities according to territory (p. 233)
forecasting A planning technique used by an organiza- global structure The arrangement of an organization’s
tion’s managers to concentrate on developing predic- management decision making to efficiently and effec-
tions about the future (p. 169) tively operate in a multinational context; form may
formal communication channels Management-designated contain functional, product, and geographic features
pipelines—running up, down, and across the organi- based on worldwide product or area units (p. 619)
zational structure—used for official communication goal An outcome to be achieved or a destination to be
efforts (p. 371) reached over a period of time through the exercise
formal communication networks Electronic links between of management functions and the expenditure of re-
people and their equipment and between people and sources (p. 5)
databases (p. 374) goal-setting theory A motivation theory stating that behav-
formal organization The official organizational structure ior is influenced by goals, which tell employees what
that top management conceives and builds (p. 227) they need to do and how much effort they need to
formal team A team created by managers to function as expend (p. 414)
part of the organizational structure (p. 467) grand strategy The overall framework or plan of action
forming stage The phase of team development in which developed at the corporate level to achieve an or-
team members are becoming acquainted (p. 478) ganization’s objectives. There are five basic grand
680 Glossary
strategies—growth, integration, diversification, re- working environment in which employees can exploit
trenchment, or stability (p. 179) it (p. 500)
grapevine An informal communication channel (p. 374) information technology (IT) Manual and electronic means for
green products Those products with reduced energy and creating and handling intellectual capital and facili-
pollution connected with their manufacture and dis- tating organizational communication (p. 500)
posal (p. 83) intellectual capital An organization’s collective experi-
group decision support system (GDSS) A variant decision sup- ences, wisdom, knowledge, and expertise (p. 133)
port system that allows groups focusing on a prob- interaction chart A diagram that aids in identifying the
lem to interact with one another and to exchange in- informal organization structure by spotlighting the
formation, data, and ideas (p. 514) informal interactions people have with one another
groupthink Group members becoming so committed to the (p. 252)
group that they become reluctant to disagree (p. 213) internal environment Composed of elements within an or-
ganization’s borders that managers create, acquire,
H and utilize, including the organization’s mission,
vision, core values, core competencies, leadership,
horizontal team A team composed of employees from dif- culture, climate, structure, and available resources
ferent departments (p. 467) (p. 132)
human asset accounting Treating employees as assets, not international division A parent company’s corporate unit,
expenses, by recording money spent on people as in- commonly a marketing or production operation,
creases in the value of those assets (p. 563) located in a host country offshore from the parent
human resource manager or personnel manager A manager headquarters and whose head reports directly to the
who fulfi lls one or more personnel, or human re- CEO (p. 618)
source, functions (p. 317) international management The process of managing re-
human skills The abilities to interact and communicate sources (people, information, funds, inventories, and
successfully with other persons (p. 25) technologies) across national boundaries and adapt-
hygiene factors Maintenance factors (such as salary, sta- ing management principles and functions to the
tus, working conditions) that do not relate directly demands of foreign competition and environments
to a person’s actual work activity, but when of low (p. 605)
quality are the cause of unhappiness on the job Internet literacy The ability to use the Internet to search
(p. 402) for information, evaluate content, and present infor-
mation (p. 104)
I interpersonal communication Face-to-face or voice-to-voice
(telephone) conversations that take place in real time
income statement A report that presents the difference and allow instant feedback (p. 365)
between an organization’s income and expenses to intrapreneurs Employees who think and act like owners
determine whether the fi rm operated at a profit or (p. 112)
a loss over a specified period (p. 546) intrapreneurship Entrepreneurship within an organization,
indirectly interactive forces Domestic and foreign economic, allowing employees flexibility and authority in pur-
legal/political, sociocultural, technological, and nat- suing and developing new ideas (p. 424)
ural forces (p. 141) inventory The goods an organization keeps on hand
influence The power to sway people to one’s will or views (p. 590)
(p. 434) ISO 9000 The set of five technical standards, known col-
informal communication channels The informal networks, lectively as ISO 9000, designed to offer a uniform
existing outside the formal channels, that are used way of determining whether manufacturing and ser-
to transmit casual, personal, and social messages at vice organizations implement and document sound
work (p. 374) quality procedures (p. 614)
informal organization A network of personal and social re-
lationships that arise spontaneously as people associ- J
ate with one another in a work environment (p. 250)
information Processed data that is useful to the receiver jargon The specialized or technical language of a trade,
(p. 361); Data that have been deliberately selected, profession, subculture, or other group (p. 368)
processed, and organized to be useful to an individ- job A specific position a person holds in an organization
ual manager (p. 500) (p. 634)
information system (IS) An organizational subsystem en- job analysis A study that determines the duties associated
abling an organization to effectively and efficiently with a job and the human qualities needed to per-
share intellectual capital and create and maintain a form it (p. 328)
Glossary 681
job depth An element of job redesign referring to the de- legal/political forces The general framework of statutes en-
gree of discretion an employee has to alter the job acted by legislatures; precedents established by court
(p. 422) decisions; regulations and rulings created by vari-
job enlargement Increasing the variety or the number of ous federal, state, and local regulatory agencies; and
tasks in a job, not the quality or the challenge of agreements between and among governments and
those tasks (p. 422) companies from different nations (p. 142)
job enrichment Designing a job to provide more responsi- legitimate power The power possessed by managers and
bility, control, feedback, and authority for decision derived from the positions they occupy in the formal
making (p. 423) organization (p. 242)
job evaluation A study that determines the worth of a job life-cycle theory A view of management that asserts that
in terms of its value to an organization (p. 350) a leader’s behavior toward a subordinate should re-
job redesign The application of motivational theories to late to the subordinate’s maturity level. The focus on
the structure of work, to increase output and satis- tasks and relationships should vary as the subordi-
faction (p. 422) nate matures (p. 454)
job rotation Temporarily assigning people to different jobs limiting factors Those constraints that rule out certain al-
or tasks on a rotating basis (p. 422) ternative solutions; one common limitation is time
job scope An element of job redesign that refers to the (p. 199)
variety of tasks incorporated into a job (p. 422) line authority The relationship between superior and sub-
job sharing A technique to provide flexibility by permit- ordinate; any manager who supervises operating
ting two part-time workers to divide one full-time employees—or other managers—has line authority
job (p. 425) (p. 238)
just-in-time inventory Delivery of raw materials or other line departments The departments established to meet the
kinds of normal inventories to correspond to produc- major objectives of the business and directly influ-
tion schedules, leading to the elimination of the need ence the success (profitability) of a business (p. 240)
to warehouse items (p. 217)
M
K management One or more managers individually and col-
lectively setting and achieving goals by exercising
kaizen A Japanese term used in business to mean incre-
related functions (planning, organizing, staffi ng,
mental, continuous improvement for people, prod-
leading, and controlling) and coordinating various
ucts, and processes (p. 51)
resources (information, materials, money, and peo-
knowledge management (KM) The merging of a company’s
ple) (p. 5)
human and technical knowledge assets (p. 503)
management by objectives (MBO) A technique that empha-
sizes collaborative setting by managers and their sub-
L ordinates (p. 169)
management by reaction A management method that does
large batch technology or mass production technology A type of not anticipate change but merely reacts to it (p. 295)
technology that produces a large volume of standard- management hierarchy The top, middle, and fi rst-line levels
ized products (p. 272) of management (p. 13)
leadership The ability to get people to follow voluntarily management information system (MIS) A formal collection of
(p. 9); The process of influencing individuals and processes that provides managers with suitable qual-
groups to set and achieve goals (p. 434) ity information to allow them to make decisions,
Leadership Grid® Blake and Mouton’s two-dimensional solve problems, and carry out their functions and op-
model for visualizing the extent to which a manager erations effectively and efficiently (p. 504)
focuses on tasks, employees, or both (p. 448) management science The study of complex systems of
leadership style The perceived approaches and behaviors people, money, equipment, and procedures, with the
a manager uses to influence others (p. 444) goal of understanding them and improving their ef-
Lean manufacturing Originally developed by Toyota, ad- fectiveness (p. 46)
aptations are now used around the world to reduce managers People who allocate and oversee the use of re-
waste or anything that does not add value in the pro- sources (p. 5)
duction stream (p. 593) manufacturing resource planning (MRPII) A comprehensive
learning organization A process whereby groups and in- planning system that controls the total resources of a
dividuals within the organization challenge exist- fi rm (p. 593)
ing models of behavior and learn to rapidly and cre- marketing research A feedforward control technique that
atively adapt to a changing environment (p. 36) consists of gathering and analyzing geographic, de-
682 Glossary
mographic, and psychographic data to help planners mutual trust The ability of individuals to rely on each
decide what potential and current customers want other based their character, ability, and truthfulness
and need (p. 559) (p. 298)
mass production technology See large batch technology
master schedule An element of operations management
that specifies the quantity and type of each item to N
be produced and how, when, and where it should be
natural forces Forces such as climate, weather, geography,
produced (p. 587)
and geology that affect how businesses operate and
materials requirement planning (MRP) A production planning
locate their operations (p. 143)
and inventory system that uses forecasts of customer
needs Physiological or psychological conditions in hu-
orders to schedule the exact amount of materials
mans that act as stimuli for behavior (p. 394)
needed for production (p. 592)
network scheduling A scheduling technique used to track
matrix structure An organizational design that utilizes
projects in which events or activities are interrelated
functional and divisional chains of command si-
and have time estimates assigned to them (p. 595)
multaneously in the same part of the organization
network structure An organizational design option in
(p. 276)
which a small central organization relies on other or-
maximize Managers want to make the perfect decisions
ganizations to perform manufacturing, marketing,
(p. 205)
engineering, or other critical functions on a contract
mechanistic structure A tight organizational structure
basis (p. 279)
characterized by rigidly defi ned tasks, formalization,
networking The electronic linking of two or more com-
many rules and regulations, and centralized decision
puters (p. 512); A strategy for career advancement
making (p. 267)
that involves building long-term, two-way interac-
medium The means by which a sender transmits a mes-
tion based on shared ideas, personal relationships,
sage (p. 361)
and common experiences (p. 652)
mentor A senior employee who acts as guide, teacher,
noise Anything in the environment of a communication
counselor, and coach for a less-experienced person
that interferes with the sending and receiving of mes-
in the organization (p. 650)
sages (p. 370)
message The information the sender wants to transmit
nominal group technique Creating a structure to provide for
(p. 361)
equal—but independent—participation by all mem-
middle management Includes managers below the rank
bers (p. 211)
of vice president but above the supervisory level
nonprogrammed decisions Decisions made in response to
(p. 14)
problems and opportunities that have unique circum-
mission A clear, concise, written declaration of an orga-
stances, unpredictable results, and important conse-
nization’s central and common purpose, its reason
quences for the company (p. 195)
for existence (p. 109)
nonverbal communication Images, actions, and behaviors
mission statement When a mission is formalized in writing
that transmit messages (p. 363)
and communicated to all organizational members
norming stage The phase of team development in which
(p. 154)
disagreement and confl ict have been resolved and
morale The attitude or feelings workers have about the
team members enjoy unity and focus (p. 479)
organization and their total work life (p. 392)
norms Values or attitudes that employees as a group ac-
morality Core values and beliefs that act as a guide (i.e.,
cept as standards of behavior and that serve as a
conscience) when individuals formulate courses of
guideline of behavior and an internal control device
action (p. 65)
on members (p. 251)
motivation The result of the interaction of a person’s inter-
nal needs and external influences—involving percep-
tions of equity, expectancy, previous conditioning, O
and goal setting—which determine how a person
will behave (p. 393) obsolescence A state or condition that exists when a
motivation factors The conditions, intrinsic to the job, that person is no longer capable of performing up to
can lead to an individual’s job satisfaction (p. 402) job standards or to management’s expectations
multinational corporation A company with operating fa- (p. 640)
cilities, not just sales offices, in one or more foreign open-book management Commits organizations and their
countries; where management favors a global mar- people to continual learning and requires that well-
ket and strategy, and sees the world as its market trained people be allowed to apply, without fear,
(p. 605) what they learn (p. 110)
Glossary 683
open system A system that regularly affects and is affected each stage involves changes in overall structure
by various and constantly changing forces (elements (p. 270)
and components) outside itself (p. 132) organizational politics The unwritten rules of work life and
operating budget A fi nancial plan and control for each fi- informal methods of gaining power and advantage
nancial responsibility center’s revenues, expenses, (p. 652)
and profits (p. 557) organizational socialization A process through which new
operating system An extensive and complex set of instruc- members of an organization gain exposure to its val-
tions that manages the operation of a computer and ues, norms, policies, and procedures (p. 644)
the application programs that run on it (p. 510) organizational visibility A strategy for career advancement
operational plan The fi rst-line manager’s tool for executing that involves the highlighting of a person’s abilities,
daily, weekly, and monthly activities. Operational talents, and contributions for those people in the or-
plans fall into two major categories: single-use and ganization who influence promotions and advance-
standing plans (p. 160) ments (p. 648)
operations management The branch of management science organizing The management function that establishes
that applies to manufacturing or service industries relationships between activity and authority
(p. 46); The managerial activities directed toward the (p. 227)
processes that convert resources into products and orientation Introducing new employees to the organiza-
services (p. 578) tion by explaining their duties, helping them meet
operations research An area of management science that their coworkers, and acclimating them to their work
commonly uses models, simulations, and games (p. 46) environment (p. 339)
operations strategy The element of the strategic plan that outside-the-box thinking To adopt a new perspective
defi nes the role, capabilities, and expectations of op- and see it work; not get caught up in the old ways
erations (p. 578) (p. 210)
opportunity A chance, occasion, event, or breakthrough outsourcing The use of outside resources to perform a
that requires a decision to be made (p. 193) business process, such as payroll, insurance records,
OR/MS Operations research (OR) and the management health claims, or credit card applications (p. 227);
sciences (MS) are the professional disciplines that A purchasing strategy in which a company contracts
deal with the application of information technology with a supplier to perform functions in lieu of the
for informed decision making (p. 46) company (p. 589)
organic structure A flexible, free-flowing organizational
structure that has few rules and regulations and de- P
centralizes decision making right down to the em-
ployees performing the job (p. 267) participative style A leadership approach in which a man-
organization An entity managed by one or more persons ager shares decision-making authority with subordi-
to achieve stated goals (p. 5) nates (p. 446)
organization chart The complete organizational structure path– goal theory A view of management asserting that
shown visually (p. 236) subordinates’ behaviors and motivations are influ-
organizational climate An outgrowth of a corporation’s enced by the behaviors managers exhibit toward
culture showing how employees feel about working them (p. 451)
there (p. 135) payback analysis A technique that ranks alternatives ac-
organizational culture Dynamic system of shared values, cording to how long each takes to pay back its initial
beliefs, philosophies, experiences, customs, and cost (p. 214)
norms of behavior that give an organization its dis- perceptions Ways in which people observe and the bases
tinctive character (p. 134) for their judgments about the stimuli they experience
organizational design The creation of or change to an orga- (p. 370)
nization’s structure (p. 264) performance appraisal A formal, structured comparison be-
organizational development (OD) A process of conducting a tween employee performance and established quan-
thorough analysis of an organization’s problems and tity and quality standards (p. 342)
then implementing long-term solutions to solve them performing stage The phase of team development in which
(p. 303) team members progress toward team objectives, han-
organizational learning The ability to integrate new ideas dle problems, coordinate work, and confront each
into an organization’s established systems to produce other if necessary (p. 479)
better ways of doing things (p. 299) perk A payment or benefit received in addition to a regu-
organizational life cycle The stages an organization goes lar wage or salary (p. 352)
through: birth, youth, midlife, and maturity, where personnel manager See human resource manager
684 Glossary
philosophy of management A manager’s attitude about work product layout A facilities layout option in which the
and the people who perform it, which influences the machines and tasks are arranged according to the
motivation approaches he or she selects (p. 415) progressive steps by which the product is made
plan The end result of the planning effort—commits in- (p. 583)
dividuals, departments, entire organizations, and productivity The relationship between the amount of input
the resources of each to specific courses of action for needed to produce a given amount of output and the
days, months, and years into the future (p. 155) output itself; usually expressed as a ratio (p. 104)
planned change Trying to anticipate what changes will oc- program A single-use plan for an operation from its be-
cur in both the external and internal environment ginning to its end (p. 160)
and then developing a response that will maximize program evaluation and review technique (PERT) A network
the organization’s success (p. 295) scheduling technique for planning and charting the
planning Preparing for tomorrow, today (p. 154) progress of a complex project in terms of the time it
policy A broad guide for organizational members to fol- is expected to take—an estimate that is derived from
low when dealing with important and recurring ar- probability analysis (p. 595)
eas of decision making. They set limits and provide programmed decisions Decisions that involve problems or
boundaries for decision makers (p. 161) situations that have occurred often enough that both
portfolio strategy Determines the mix of business units and the circumstances and solutions are predictable;
product lines that will provide a maximum competi- made in response to recurring organizational prob-
tive advantage (p. 180) lems (p. 194)
power The ability to exert influence in the organization; project improvement team A team, made up of members
power is personal (p. 241) who are involved in the same project, who deter-
proactive approach A social responsibility strategy in mines how to make the project better (p. 113)
which businesses continually look to the needs of project team A team organized to complete a specific task
constituents and try to fi nd ways to meet those needs in the organization (p. 470)
(p. 80) promotion A job change that results in increased status,
problem The difference between the current and desired compensation, and responsibility (p. 346)
performance or situation (p. 193) psychological contract The unspoken contract that marks
procedure A set of step-by-step directions for carrying out the end product of the organizational socialization
activities or tasks (p. 161) process and defi nes what people are expected to give
process control sampling A product control technique de- to the organization and what they can expect to re-
signed to detect variations in production processes ceive (p. 644)
(p. 597) purchasing The acquisition of goods and services at op-
process improvement team A team, made up of members timal costs from competent and reliable sources
who are involved with a process, who meets to ana- (p. 588)
lyze how they can improve the process (p. 113)
process layout A facilities layout option in which all the Q
equipment or machines that perform a similar task
are placed together (p. 583) qualification testing A product control technique in which
process team A team that groups members who per- products are tested for performance on the basis of
form and refi ne the organization’s major processes reliability and safety (p. 597)
(p. 471) quality The features and characteristics of a product or
process theories A group of theories that explain how em- service that allow it to satisfy requirements of those
ployees choose behaviors to meet their needs and who use or consume them (p. 6)
how they determine whether their choices were suc- quality assurance team A team created to guarantee the
cessful (p. 398) quality of services and products, contact customers,
product control A component of operations control that re- and work with vendors (p. 471)
duces the probability and costs of poor quality and quality audit Determines if customer requirements are be-
unreliable products by implementing controls from ing met (p. 114)
purchasing to end use (p. 596) quality circle A temporary team, consisting primarily of
product departmentalization Assembling the activities of cre- workers who share a problem, who meets regularly
ating, producing, and marketing each product into a until the problem is solved (p. 115)
separate department (p. 233) quality control audit A check of quality control efforts that
product development team A team organized to create new asks two questions: How are we doing? and What
products (p. 469) are the problems? (p. 114)
Glossary 685
quality function deployment (QFD) A disciplined approach to revolutionary change bold, discontinuous advances that
solving quality problems before the design phase of bring about dramatic transformations in organiza-
a product (p. 98) tional strategies and structure (p. 292)
quality improvement team Usually a group of people from reward power The power that comes from the ability to
all the functional areas of a company who meet reg- promise or grant rewards (p. 242)
ularly to assess progress toward goals, identify and risk manager A high-level person in charge of planning for
solve common problems, and cooperate in planning and overseeing efforts to control the management of
for the future (p. 113) all the risks an organization faces (p. 528)
quality of work life (QWL) Factors in the work environment robotics The use of programmed machines to handle pro-
contributing positively or negatively to workers’ duction (p. 584)
physical and emotional well-being and job satisfac- role A set of expectations for a manager’s behavior (p. 21)
tion (p. 392) rule An ongoing, specific guide for human behavior and
quality school The essence of the quality of any output is conduct at work. Rules are usually “do” and “do
its ability to meet the needs of the person or group not” statements established to promote employee
(p. 51) safety, ensure the uniform treatment of employees,
quantitative school Emphasized mathematical approaches and regulate civil behavior (p. 161)
to management problems (p. 46)
queuing models or waiting-line models Models that help man- S
agers decide what length of waiting line or queue
would be optimal (p. 216) sanctions Rewards or penalties used by an informal
quota A government regulation that limits the import of group to persuade its members to conform to its
a product to a specified amount per year (p. 609) norms (p. 255)
Sarbanes– Oxley Act of 2002 (SOX) Law requiring publicly
R traded companies to disclose in their fi nancial re-
ports any “material weaknesses” in their financial-
raw materials inventory Inventory consisting of the raw ma- reporting systems. The CEO and CFO must certify
terials, parts, and supplies used as inputs to produc- that those reports are accurate (p. 74)
tion (p. 590) satisfice To make the best decision possible with the
reactive approach A social responsibility strategy in which time, resources, and information available (p. 205)
businesses wait for demands to be made and then re- scoreboarding A technique that routinely keeps employ-
act to them, choosing a response by evaluating alter- ees aware of changes in the critical numbers used to
natives (p. 80) measure a company’s processes (p. 110)
receiver The person or group for whom a communication selection Evaluating applicants and fi nding those best
effort is intended (p. 361) qualified to perform a job and most likely to fit into
recruiting Efforts to fi nd qualified people and encour- the culture of the organization (p. 334)
age them to apply for positions that need to be fi lled self-managed work team A team, fully responsible for its
(p. 332) own work, that sets goals, creates its own schedules,
reengineering Business processes are redesigned to achieve prepares its own budgets, and coordinates its work
improvements in performance (p. 52) with other departments (p. 473)
referent power The power that is based on the kind of per- semantics The study of the meanings of words (p. 368)
sonality or charisma an individual has and how oth- sender The person or group who initiates the communi-
ers perceive it (p. 242) cation process (p. 361)
reinforcement theory A motivation theory that states a su- separation The voluntary or involuntary departure of
pervisor’s reactions and past rewards and penalties employees from a company (p. 347)
affect employees’ behavior (p. 411) sexual harassment Unwelcome verbal or physical conduct
reorder point (ROP) The most economical point at which an of a sexual nature that implies, directly or indirectly,
inventory item should be reordered (p. 592) that sexual compliance is a condition of employment
research and development (R&D) Projects that uncover infor- or advancement or that interferes with an employee’s
mation useful to create a variety of new materials, work performance (p. 322)
processes, and products (p. 119) simulation A model of a real activity or process (p. 216)
resistance approach A social responsibility strategy in situation analysis (SWOT) A search for strengths, weak-
which businesses actively fight to eliminate, delay, or nesses, opportunities, and threats (p. 177)
fend off demands being made on them (p. 79) Six Sigma A highly disciplined process that helps compa-
responsibility The obligation to carry out one’s assigned nies focus on developing and delivering near-perfect
duties to the best of one’s ability (p. 244) products and services (p. 532)
686 Glossary
small batch technology or unit production technology A type of mine if a process is in control (predictable) or out of
technology that produces goods in small quantities control (unpredictable) (p. 115)
designed to customer specifications (p. 272) stereotypes Predetermined beliefs about a group of people
smoothing A confl ict strategy in which the manager dip- (p. 370)
lomatically acknowledges that confl ict exists but storming stage The phase of team development character-
downplays its importance (p. 487) ized by disagreement and confl ict as individual roles
social audit A report on the social performance of a busi- and personalities emerge (p. 479)
ness (p. 87) strategic business units (SBUs) Autonomous businesses with
social responsibility The notion that, in addition to their their own identities but operating within the frame-
business interests, individuals and organizations have work of one organization (p. 180)
certain obligations to protect and benefit other indi- strategic management A responsibility of top management,
viduals and society and to avoid actions that could it defi nes the fi rm’s position, formulates strategies,
harm them (p. 77) and guides the execution of long-term organizational
sociocultural forces The influences and contributions from functions and processes (p. 172)
diverse groups outside an organization (p. 142) strategic plan Contains the answers to who, what, when,
soft manufacturing system (SMS) A manufacturing system where, how, and how much for achieving strategic
that relies on computer software to continuously con- goals—long-term, companywide goals established by
trol and adjust the manufacturing processes (p. 585) top management (p. 157)
sources and uses of funds statement A summary of the cash strategy A course of action created to achieve a long-term
flowing into an organization and how it is used over goal (p. 157)
a fi xed period of time. This statement is often called strategy formulation The planning and decision mak-
a cash flow statement (p. 549) ing that goes into developing the company’s strate-
span of control The number of subordinates under the di- gic goals and plans, including assessing the environ-
rection of a manager (p. 236) ments, analyzing core competencies, and creating
specialization of labor or division of labor Breaks a potentially goals and plans (p. 174)
complex job down into simpler tasks or activities strategy implementation The means associated with execut-
(p. 231) ing the strategic plan. These include creating teams,
sponsor An individual in the organization who will pro- adapting new technologies, focusing on processes
mote a person’s talents and look out for his or her rather than functions, facilitating communications,
organizational welfare (p. 650) offering incentives, and making structural changes
staff authority The authority to serve in an advisory capac- (p. 174)
ity; it flows upward to the decision maker (p. 239) stress The physiological and psychological reaction of
staff departments The departments—including legal, the body as a result of demands made on it (p. 654)
human resources, computer services, and public stretch goals Goal that requires great leaps forward on
relations—that provide assistance to the line depart- such measures as product development time, return
ments and to each other, making money indirectly on investment, sales growth, quality improvement,
for the company through advice, service, and assis- and reduction of manufacturing cycle times (p. 156)
tance (p. 240) subculture A unit within an organization that is based on
staffing Efforts designed to attract, hire, train, develop, the shared values, norms, and beliefs of its members
reward, and retain the people needed to accomplish (p. 288)
an organization’s goals and promote job satisfaction superordinate objective An objective that overshadows per-
(p. 316) sonal interests, to which a manager can appeal as a
stakeholders Groups directly or indirectly affected by the strategy for resolving confl ict (p. 488)
ways in which business is conducted and managers supplier relationship management (SRM) An information sys-
conduct themselves. Stakeholders include owners, tem that quantifies and manages relationships with
employees, customers, suppliers, and society (p. 145) suppliers; SRM involves consolidating and classify-
standard Any established rule or basis of comparison used ing procurement data to provide an understanding
to measure capacity, quantity, content, value, cost, of supplier relationships and developing procurement
quality, or performance (p. 528) strategies (p. 589)
statistical process control (SPC) See statistical quality control supply-chain management Includes managing supply and
(SQC) demand, sourcing raw materials and parts, manu-
statistical quality control (SQC) and statistical process control facturing and assembly, warehousing and inventory
(SPC) SQC is the use of statistical tools and methods tracking, order entry and order management, distri-
to determine the quality of a product or service. SPC bution across all channels, and delivery to the cus-
is the use of SQC to establish boundaries that deter- tomer (p. 591)
Glossary 687
sustainable communities Healthy, livable communities ef- telework Remote work in which corporate employees
fectively using resources—economic, social, and work outside the office at least two days a week
environmental—to meet today’s community needs (p. 649)
while ensuring that these resources are available to test Any criterion or performance measure used as a
meet the community’s future needs (p. 85) basis for an employment decision (p. 336)
symptom Signals that something is wrong and draws the theory Part of an art or science that attempts to explain
manager’s attention to fi nding the cause—that is, the the relationships between and among its underlying
problem (p. 198) principles (p. 37)
synergy The increased effectiveness that results from Theory X A philosophy of management with a negative
combined action or cooperation (p. 49) perception of subordinates’ potential for and atti-
system A set of interrelated parts that work together to tudes toward work (p. 416)
achieve stated goals or to function according to a Theory Y A philosophy of management with a positive
plan or design (p. 47) perception of subordinates’ potential for and atti-
systems school The theory that an organization comprises tudes toward work (p. 416)
various parts (subsystems) that must perform tasks three-step approach a technique of behavior modifica-
necessary for the survival and proper functioning of tion to change attitudes in lasting ways; it consists
the system as a whole (p. 48) of three phases: unfreezing, change, and refreezing
(p. 302)
T top management The chief executive officer (CEO) and/or
president and his, her, or their immediate subordi-
tactic A course of action designed to achieve a short-term nates, usually called vice presidents (p. 14)
goal—an objective (p. 157) total quality management (TQM) “A strategy for continuously
tactical plan Developed by middle managers, this plan improving performance at every level, and in all ar-
has more details, shorter time frames, and narrower eas of responsibility” (p. 101)
scopes than a strategic plan; it usually spans one year training Giving employees the knowledge, skills, and atti-
or less (p. 158) tudes needed to perform their jobs (p. 339)
tariff A tax placed on imported goods to make them transactional processing A computer procedure in which
more expensive and thus less competitive in order to data are received about a company’s ongoing opera-
protect domestic producers (p. 609) tions and entered into data banks as each transaction
task force A horizontal team composed of employees from occurs (p. 511)
different departments designed to accomplish a lim- transfer Moving an employee to a job with similar levels
ited number of objectives and existing only until it of status, compensation, and responsibility (p. 347)
has met the objectives (p. 468) tunnel vision Having a narrow viewpoint (p. 209)
team A group of two or more people who interact regu-
larly and coordinate their work to accomplish a com- U
mon objective (p. 466)
team structure An organizational design that places sepa- understanding The situation that exists when all senders
rate functions or processes into a group according to and receivers agree about the meaning and intent of
one overall objective (p. 278) a message (p. 361)
technical skills The abilities to use the processes, prac- unit production technology See small batch technology
tices, techniques, and tools of the specialty area a unity of command The organizing principle that states that
manager supervises (p. 23) each person within an organization should take or-
technological forces The combined effects of processes, ders from and report to only one person (p. 241)
materials, knowledge, and other discoveries resulting unity of direction The establishment of one authority
from research and development activities (p. 143) figure for each designated task of the organization
technology The practical application of knowledge (p. 24); (p. 229)
The knowledge, machinery, work procedures and
materials that transform the inputs into outputs V
(p. 272)
telecommuting The partial or total substitution of tele- variable inspection A product control technique that in-
communications technology (such as computers, mo- volves taking measurements to determine how
bile phones, fax machines, and the Internet) for the much an item varies from standards and, therefore,
trip to and from the primary workplace. Simply put, whether it will be accepted or rejected (p. 597)
it’s moving the work to the workers, instead of the vertical team A team composed of a manager and subordi-
workers to work. (p. 648) nates (p. 467)
688 Glossary
virtual team A team where members primarily interact ethical or illegal practices within an organization
electronically because they are physically separated (p. 657)
(by time and/or space) (p. 470) work-in-process inventory Inventory consisting of materi-
vision A clear statement as to where an organization als and parts that have begun moving through the
wants to be in the future (p. 109) production process but are not yet assembled into a
Vroom and Yetton decision tree A series of questions that completed product (p. 591)
guide the manager to the appropriate option (p. 206) work team A team, composed of multiskilled workers,
that does all the tasks previously done by individual
W members in a functional department or departments
(p. 472)
waiting-line models See queuing models
whistle-blower Individual who takes action to inform
bosses, the media, or government agencies about un-
INDEX
Note: page numbers in italics refer to figures and features
1000 Challenge (Building- Advani, L. K., 155 Americans with Disabilities attitude surveys, 564
Blocks International), 87 aesthetics, international, 611 Act (1990), 319, 320, attractiveness of a reward,
360-degree feedback, 344 Aetna Insurance, 138 327, 338 409
3M Corporation affi liates, foreign, 606 AMP, 454 attribute inspections, 597
international management, affi liators, 405 Amway, 610 audits, 114, 553–555, 564
621 affi rmative action, 321–322 Anadarko Petroleum, 80 Auster, Ellen R., 85
intrapreneurship at, 424– age, 213, 478, 536, 537 analyzer strategy, 181 authority
425 Age Discrimination in Em- Anastasoff, Jennifer, 87 decentralization of, 248
organizational climate, 135 ployment Act, 536 Anderson, Brad, 3, 4–5, 14 Fayol on, 42
quality, 101, 103 age of an organization, 270– Anheuser-Busch, 181, 325 informal organization and,
R&D at, 119 272 Apache Corp., 80 251
strategy, 181 aggregate planning, 587 Apollo 13 (fi lm), 125, 495 nature, sources, and impor-
test-marketing, 560 agile manufacturing, 585 Apple Inc., 221 tance of, 238
7-Eleven, 243 Ahlstrom Fakop, 624 application forms, 334– 335, teams and, 472– 473, 473
8 Mile (fi lm), 33 AI (artificial intelligence), 337 types of, 238–240, 239,
514 application programs, 511 240
AIDS (acquired immune appraisal systems, 343, 343– unity of command and, 241
A deficiency syndrome), 344, 345 autocratic style, 445– 446,
Abbott Laboratories, 82 325–326 arbitrators, 328 446
absenteeism, 562–563 Akao, Yoji, 99 area technical directors avoidance, 411, 487
Accenture, 160 Alcoa, 377, 387 (ATD), 406 Azzopardi, Frank, 399
acceptance Alderfer, Clayton, 407, 408 Argyris, Chris, 416
of change, 301 Aldrich, Howard E., 436 Armatis, Ed, 415
of controls, 539–540 Allen, Paul, 191, 192 Armco Products, 170
B
of decisions, 206 Allen, Sharon, 283 Armstrong World Industries, Babbage, Charles, 38
acceptance sampling, 596 alliances with suppliers, 243 Babe (fi lm), 260
access and legitimacy per- 139–140 Arpey, Gerard J., 359, 359– Backdraft (fi lm), 311–312
spective, 369 alternatives, 167, 200–201, 360 background checks, 338
accommodation, 320–321 201 Arthur D. Little, 135–136, Back to the Future, Part II
accuracy of control systems, Amazon.com, 149–150, 195, 441 (fi lm), 61
540 510 artificial intelligence (AI), 514 balance sheet, 546–548, 547
achievement needs, 404– 407 ambiguity in decision mak- assessment centers, 336 Ballard, Shari, 14
achievement-oriented behav- ing, 203–204, 204 assets, 546 Barad, Jill, 419
ior, 452– 453 American Airlines assumptions in planning, Barnard, Chester, 41
acquired immune deficiency communication, 359–360, 168, 169 Barnes & Noble, Inc., 149–
syndrome (AIDS), 325– 378 AT&T, 56, 289 150, 206–207, 214
326 downsizing, 227 AT&T Global Information Barrett, Colleen, 153, 155,
active listening, 381 electronic noise and, 379 Solutions, 414– 415, 419, 157
activity ratios, 551 organizational design, 264 471 Barrett, Elizabeth, 428– 429
Adams, Dennis, A., 507 women at, 325 ATD (area technical direc- Barry, Thomas J., 103, 531
adaptability, 299 American culture, 610, 611, tors), 406 BARS (behaviorally anchored
adaptive strategies, 181–182 625– 627 At Network, Inc., 71 rating scales), 344
advance warning and change, American Management Asso- attendance, 345 Bartlett, Christopher, 39
300 ciation, 12, 383 attitudes, 302, 486, 624 Bartz, Carol, 651
689
690 Index
batch processing, 511 inventory control, 593 C centralization, 42, 247–250,

Baudanza, Tony, 490 operational objectives, 162 249
Bayly, Daniel, 245 teams, 467, 470, 515 CAD (computer-aided decentralized CIS, 508
Bechtel, 136 vision, 109 sign), 508, 577, 584 CEOs. See top management
Beck, Joan, 347 bona fide occupational quali- Cadbury Schweppes, 179, 209 ceremonies, 285
Becraft, Kevin, 635 fication (BFOQ), 320, CAE (computer-aided engi- certainty, 203–204
before-and-after compari- 336 neering), 508 chain of command, 229
sons, 541 bona fide seniority system Callahan, Donna, 53 Champy, James, 52, 56, 108,
behaviorally anchored rating (BFSS), 320 Calloway, Wayne, 453 112, 420
scales (BARS), 344 Boone, Garrett, 428 CAM (computer-aided manu- change, 289–303
behavioral school, 43– 45. See boss, working with, 653– 654 facturing), 508, 577, 584 communication and, 378–
also process theories Boston Consulting Group Canion, Joseph, 622 379
behavioral view of team con- (BCG) Growth-Share capacity planning, 586 and controls, reexamina-
fl ict, 484– 485, 485 Matrix, 180–181 capital, intellectual, 133–134, tion of, 543
Behlen Manufacturing Com- bottom-up budgeting, 556 316 defi ned, 290
pany, 593 boundaryless organizations, capital expenditure budgets, implementation of, 299–
being vs. doing, 626– 627 136 558–559 303
Belda, Alain J. P., 622 boundary spanning, 144 career advancement, 647, informal organization and,
Bellafronto, Laura, 60 Bourne Identity, The (fi lm), 647– 650, 658– 659 255
Bell Atlantic, 466 189 career development stages, managers and, 6
Bell Laboratories, 56 Bowfi nger (fi lm), 357 637, 637– 638 managing, 295–298
benchmarks, 99 BPR (business process reengi- CareerJournal.com, 333 nature of, 289–294
benefits, 351–352 neering), 108–109, 293 career management, 632– 661 organizational design and,
Ben & Jerry’s, 84 BPX (British Petroleum Ex- analyzing and understand- 265
Bennis, Warren, 9–10 ploration), 518 ing the organization, organizational develop-
Bergson, Lisa, 53 brainstorming, 210–211 644– 646 ment (OD), 303–305,
Berrios, Willis, 469– 470 Bravo, Ellen, 322 assessment and alignment, 304, 305
Berrios Manufacturing Com- breakthrough business mod- 646 qualities that promote,
pany, 469– 470 els, 195 boss, working with, 653– 298–299
Bertalanffy, L. von, 131 Brenna, Mike, 572 654 resistance to, 107, 255,
Best Buy, 3, 4– 8, 14–15, 31 Brin, Sergey, 465 dilemmas, organizational, 299–301
Beyond Reengineering Brinker, Norman, 419 657– 659 Chao, Elaine L., 339
(Hammer), 108–109 British Petroleum Exploration documenting contribu- chaos theory, 35– 36
BFOQ (bona fide occupa- (BPX), 518 tions, 648 Charan, Ram, 27
tional qualification), 320, Britt, Mark, 391 new career environment, Chesapeake Packaging Co.,
336 Brockway, Don, 644 635– 636 420– 421
BFSS (bona fide seniority Broomall, Vern, 500 power and politics, 652– ChevronTexaco, 80
system), 320 Brown, James A., 245 653 Chicago Bears, 370
Bill and Melinda Gates Foun- Brown, Paul B., 99 stress management, 654– Chili’s, 392
dation, 72 Bryant, J. D., 483 657, 655 Cho, Fujio, 95–96
Bingham, Barry, 422 Buchholz, Rogene A., 78 telecommuting and tele- Choice Hotels, 643– 644
BiosGroup, 36 Buckingham, Marcus, 3 work, 648– 649 Christian, Jeffrey, 435
bird flu, 565 budgets, 160, 555–559, 556 volunteering, 650 Chrysler, 310, 374, 470, 482.
birth stage, 270–271, 271 Buffett, Warren, 392 career perspective, 634– 635, See also DaimlerChrysler
Bittel, Lester, 45– 46, 529, BuildingBlocks International, 635 Chung Kook Hyun, 382
533 87 career planning, 636– 644 Churchman, W., 132
Black Box Corporation, 410 bureaucracies, 41– 42 careers, nature of, 634 CIM (computer-integrated
Blake, Robert R., 448 Burke, Jim, 247 Carey, Chris, 437 manufacturing), 585
Blanchard, Kenneth, 77, 454 Burkett, Gale, 478 Carty, Don, 359, 378 Cin-Made Corporation, 116,
blogs, 471 Burlingham, Bo, 112 cash budgets, 558 407, 423
Blue Crush (fi lm), 151 Burnham, David, 405, 642– cash cows, 180 Circuit City, 31
Blumenthal, David, 338 643 Cassedy, Ellen, 322 CIS. See computerized infor-
Bobbitt, Max, 554 burnout, 655 Catalyst, 325 mation systems
Boeing Bush, George W., 74 Cavallo, Mike, 84 Citibank, 467
787 Dreamliner, 499–500, business ethics. See ethics Cavallo Foundation, 84 Civil Rights Act (1964), 40,
502, 502 business-level strategy, 175, Celestial Seasonings, 183 319, 321
capital expenditure budget- 181–183 cellular layout, 582, 583 Civil Rights Act (1968), 319
ing, 559 business models, break- Center for Effective Organi- Civil Rights Act (1991), 319,
communication networks, through, 195 zations (USC), 466 321
374 business process reengineer- Center for the Study of Eth- Claiborne, Darryl, 357
computer graphics and ing (BPR), 108–109, 293 ics in the Professions classical administrative
communication, 364 Business Wire, 316 (CSEP), 70 school, 38, 41– 43
Index 691
classical management theory, purposes of, 349– 350 confrontation, 488 control systems, 538
37– 43 team compensation, 484 consumer protection laws, 82 control techniques, defi ned,
classical scientific school, wages and salaries, 350– Container Store, The, 428– 528
38– 41 351 429 conversation, 362
Cliff, Jennifer E., 436 competition, 485– 486, 489, content theories, 397– 408 Conyers, John, Sr., 356
climate, organizational, 135, 614 contingency model, 450– 451, Conyers, Nathan G., 355–
285–286 competitive advantage, 173 451 356
Coca-Cola Company, 140, competitive strategies, 182– contingency plans, 164–165 Conyers-Riverside Ford,
142, 613 183 contingency school, 50–51 355–356
codes of ethics, 70 competitors as directly inter- continuous-process technol- Cooper, Cynthia, 84, 553–
coercive power, 242, 442 active forces, 140–141 ogy, 272, 272–273 554
Coffman, Curt, 3 complexity theory, 35– 36 continuous quality improve- coordination, 296
coherence, 288–289 compliance programs for eth- ment. See total quality core competencies, 133–134,
cohesion, 251, 480, 480– 481, ical conduct, 70–73 management (TQM) 173
481 comprehensibility of control contract, psychological, 644– Corel Corporation, 373
collaboration systems, 541 645 core values, 109–110, 133,
in confl ict management, compressed workweek, 425 control chart to monitor pro- 287
488 compromise, 488 cess performance, 115 corporate culture. See organi-
as growth phase, 296 computer-aided design Control Data, 657 zational culture
team structure and, 278 (CAD), 508, 577, 584 controlled experiments, 542 Corporate Culture and Per-
technology and, 294, 294 computer-aided engineering Control of Quality in Manu- formance (Kotter and
collaborative fi ltering, 510 (CAE), 508 facturing (Radford), 56 Heskett), 437– 438
Collard, Betsy, 642 computer-aided manufactur- control process, 530–535, corporate-level strategy, 174,
collective bargaining, 328 ing (CAM), 508, 577, 531 175, 179–181
collectivism vs. individual- 584 controls and controlling, corrective action, 534–535
ism, 625 computer graphics, 364 526–573 cost-benefit analysis, 167–168
Collins, David, 63 computer-integrated manu- overview and defi nitions, cost effectiveness, 103–104
Collins, James C., 5, 109, facturing (CIM), 585 528–529 Costello, Robert, 101
156, 287, 299 computerized information budget controls, 555–559 cost-leadership strategy, 182
Collins, Tim, 214–215 systems (CIS) case studies, 527–528, costs of teams, 483
Collins & Aikman, 453– 454 overview, 507–510, 509 570–573 Covey, Stephen, 114
commitment, 301, 482– 483 computer operations, 510– computers and, 564–565 Cox, Danny, 10, 67
committees, 468– 469 511 control process, 530–535 Cracking the Glass Ceiling:
communication, 358–388 data-processing modes, 511 control systems, 538 Strategies for Success
overview, 360 management tools, 512– decision making and, 194, (Glass Ceiling Commis-
case studies, 359–360, 515 202–203 sion), 325
387–388 networking, 511–512 effective, 539–541 creativity, 210, 295
confl ict from breakdowns computer literacy, 104 ethics and, 68–74 credibility, 369
in, 87 computer monitoring, 344 feedforward, concurrent, criminal behavior, 74, 197
improvement of, 379– 383 computers and control, 564– and feedback controls, critical control points, 539
informal organization and, 565 535–538, 538 critical path, 596, 596
254 Computer Sciences Corpora- fi nancial controls, 546–555 CRM (customer relation-
international, 612, 624– tion, 517 human resource controls, ship management), 8, 8,
625 computer technology. See in- 562–564 54, 527
interpersonal, 365– 370 formation systems (IS); international management, Crosby, Philip B., 56, 103
mediums of, 362–365 Internet and electronic 627– 629 cross-cultural management,
open communication and commerce; technology as management function, 625– 627
change, 300 conceptual skills, 25 19–20 cross-functional teams, 468
organizational, 371–379 concurrent controls, 535–537, marketing controls, 559– CSEP (Center for the Study
process of, 361, 361–362 538 562 of Ethics in the Profes-
rumors, 255 confl ict monitoring, 541–544 sions), 70
communities, responsibilities analysis of situation, 487 operations control, 588– cultural diversity in the
to, 83 functional vs. dysfunc- 597 workforce, 324. See also
compensation tional, 485 other management func- diversity
benefits, 351–352 informal organization and, tions and, 529–530 culture. See organizational
defi ned, 349 255 product control, 596–597 culture
effective reward systems, sources of, 485– 487 statistical quality and pro- cultures, American and inter-
421– 422 stimulation of, 489– 490 cess controls, 56 national, 610– 612, 611,
executive, 352 strategy development, in strategy implementa- 625– 627
factors influencing, 350 487– 489 tion, 179 Cummings, Constance, 316
Fayol on renumeration, 42 teams and, 484– 487 subsystem controls, 544– Cunningham, John, 379
international, 622– 623, 623 conformity pressure, 254–255 546 currency instability, 613
692 Index
customer departmentaliza- problem solving vs. oppor- disaster recovery, 457, 457 Donlon, Bill, 456
tion, 234, 234 tunity management, 193 discipline, 42 Do Not Call list, 9
customer-driven companies, programmed and nonpro- discretionary expense cen- Doolin, Elmer, 270–271
173 grammed decisions, 194– ters, 554 Doremus, Eric, 477– 478
customer relationship man- 195, 196 discrimination double-looped learning, 299
agement (CRM), 8, 8, quantitative techniques, age discrimination, 536 downsizing, 227
54, 527 214–217 application forms and, 334 downward communication
customer response surveys, seven-step process of, 197– glass ceilings and glass channels, 372, 372–373
116, 117 203 walls, 209, 324–325 Dr. Seuss’ How the Grinch
customers styles of, 445– 447, 446 mommy tracks, 347 Stole Christmas (fi lm),
defi ned, 6 decision support systems staffi ng and, 318–323, 337, 222
as directly interactive (DSSs), 513–514 338 driving forces, 303
forces, 139 decision trees, 206–207, 207, See also diversity; sexual Drucker, Peter F., 3, 5, 155,
internal and external, 6–7 214, 215 harassment 169, 198, 476
responsibilities to, 82, 145 defender strategy, 181 discrimination and fairness drug testing, 326, 326–327,
satisfaction of, 6– 8, 53, Defense Department, U.S., perspective, 369 327
97–98, 98 (see also 101, 102 Disney, Walt, 285, 286, 287 DSSs (decision support sys-
quality) delegation, 236, 243–244, Disney Company. See Walt tems), 513–514
customization, 418, 606 245, 295–296 Disney Company dumping, 560
CVS, 183 Dell, Michael, 291 Disney World, 99 Dwight, Mark, 188–189,
Dell Inc., 291 disparate impact, 321 221–222
Deloitte & Touche, 211, 283 disseminator, 22 dynamic network organiza-
D Delphi technique, 212 disturbance-handler role, 23 tions, 279
Daft, Douglas, 622 Delta Air Lines, 135 diversification strategy, 179 dysfunctional confl ict, 485
DaimlerChrysler, 310, 585. Delta Technology, Inc., 15 diversity
See also Mercedes-Benz Deming, W. Edwards, 55, 56, age and mature workers,
Dalton, Gene, 648 105, 106, 110, 111, 527 213, 478, 536, 537
E
data, defi ned, 500–501 demotions, 347 benefits of racial diversity, EAPs (employee assistance
database marketing, 513 departmentalization, 233– 369 programs), 351–352
databases, 170, 510 235. See also organiza- defi ned, 10 Eaton, Robert, 470
data centers, 508–509 tional design employee attitudes toward, Eaton Corporation, 336
data collection, 564 design. See organizational 40 eBay, 195, 291
data-processing modes, 511 design GNL diversity audit, 420 Eberts, Ray, 514
Datatec Industries, 437, 447 design control, 588 groupware and web confer- ECOA (Ethics & Compliance
Davenport, Thomas H., 515 design for disassembly (DfD), encing and, 516 Officer Association), 71
David, Daryl D., 514 581 male vs. female leadership, economic environment, inter-
Davidson, Daniel, 64 design for manufacturing and 436 national, 608, 609– 610
Davidson Interior, 479– 480 assembly (DFM/A), 579– managers and, 10–11, 11 economic forces, 141–142
Davis, Keith, 377 581, 581 MTV Networks and, 13 economic order quantity
Davita, Sal, 642 detailed inspections and tests, planning for, 160 (EOQ), 591–592
debt ratios, 551 597 recognizing and valuing, EDI (Electronic Data Inter-
decentralization, 247–250, Deutsch, Paul, 92 419 change), 508
249, 606– 607 development, 339, 342, 563 reorganization and, 235 EEOC. See Equal Employ-
decentralized CIS, 508–509 Dexter, Billy, 13 social responsibility and, ment Opportunity
decision, defi ned, 192 DfD (design for disassem- 82 Commission
decisional roles, 22, 23 bly), 581 sociocultural environment effectiveness
decision making, 190–222 DFM/A (design for manufac- and, 323, 323–324 of controls, 539–541
case studies, 191–192 turing and assembly), training and, 341 of culture, 288–289
controls and, 543 579–581, 581 See also discrimination of decision making, 217–
defi ned, 192 diction, 368 diversity audits, 420 218
effective environment for, differentiation strategy, 182 divisional structure, 274– of goals and strategies, 156
217–218 Digital Equipment, 651 276, 275 informal organization and,
environmental influences digital technologies, 502 division of labor, 231–233, 254
on, 203–208 dilemmas, organizational, 232 of information systems,
in groups, 210–214, 367 657– 659 division of work, 42 505
leadership and tough deci- Di Pietro, Carl, 374 documenting contributions, of organizational develop-
sions, 456 DirectFit, 335 648– 650 ment, 305
managerial style and, 208– direction, 295 “dogs,” 181 of planning, 168–169
210 directly interactive forces, doing vs. being, 626– 627 of teams, 467, 482– 484
other management func- 139–141 dominant coalitions, 281 effort-performance link,
tions and, 193, 194 disability, 320–321 Domino’s Pizza, 563–564 408– 409
Index 693
EIS (executive information case studies, 129–130, layoffs and profitability at defi ned, 132
systems), 515 149–151 HP, 265 directly and indirectly in-
electronic commerce. See international, 607– 612, of leaders, 67 teractive forces, 138–
Internet and electronic 608 legal constraints, 73–75, 75 144
commerce management and, 144– Oracle’s layoffs at People- international, 613– 615
Electronic Data Interchange 146 Soft, 400 planning and, 18
(EDI), 508 new career environment, organizational influences quality and, 116–118, 117,
Electronic Data Systems, 516 635– 636 on, 67– 68 120–121
electronic noise, 379 organizational design and, peer reviews at Risk Inter- staffi ng and, 318–328
Electronic Recording Ma- 268–269, 270 national, 441 strategic plans and, 158
chine Accounting organization as system and, privacy policy, 162 See also environments;
(ERMA), 508 130–132 quality and customer alien- stakeholders
Ely, Robin, 369 physical, 286 ation, 53 extinction, 412
e-mail, 322–323, 377, 378 See also external en- at Raytheon, 107 ExxonMobil, 181
embargoes, 609 vironment; internal team compensation and,
emotions and communica- environment 484
tion, 370 EOQ (economic order quan- telemarketing and, 9
F
Emperor’s Club (fi lm), 92–93 tity), 591–592 top management, commit- facilities layout, 581–583,
Empire Blue Cross Blue equal employment opportu- ment of, 68– 69 582
Shield, 456, 457, 457 nity, 40, 318 workplace romances, 333 facilities location, 586
employee assistance programs Equal Employment Op- WorldCom fraud, 197 facilities resources, 137
(EAPs), 351–352 portunity Commission Ethics & Compliance Officer Fagiano, David, 12
employees (EEOC) Association (ECOA), 71 Fair Credit Reporting Act,
culture and, 282, 287–288 antidiscrimination guide- Eupsychian Management 338
loyalty of, 67 lines, 161, 318, 319 (Maslow), 44 Farrow, Marilyn, 387
at P.F. Chang’s, 260 management audit require- evaluation, 27–28, 202–203. Fastow, Andrew, 245
responsibilities to, 81, 145 ments, 564 See also measurement Fayol, Henri, 41, 42, 49, 241
at Southwest Airlines, 153 sexual harassment guide- of performance; perfor- feasibility studies, 474, 540
training and development, lines, 74, 319 mance appraisal Federal Trade Commission
339–342. See also diver- Equal Pay Act (1963), 319 Everett, Ray, 503 (FTC), 9
sity; empowerment; mo- equipment and machinery, evolutionary change, 292, Federico, Rick, 429, 462
tivation; staffi ng 137–138 293 FedEx, 182, 233, 517, 581
employment decisions, imple- equity, 42 Excel Corporation, 546–551, feedback
mentation of, 346–349 equity theory, 413, 413– 414 547, 548, 549 in communication, 361,
empowerment ERG theory, 407, 408 Excelsior Table Saw Corpora- 381, 382–383
leadership and, 437 ERMA (Electronic Record- tion, 229–231, 230, 233, in decision making process,
motivation and, 420– 421 ing Machine Account- 236, 237 202–203
quality and, 112–113 ing), 508 exclusionary contracts, 140 motivation and, 396, 423
teams and, 115–116 Eskew, Michael L., 225 executive compensation, 352 feedback controls, 537–538,
at Toyota, 112, 114 Esprit Apparel, 279 executive information sys- 538
EMS (environmental manage- esprit de corps, 42 tems (EIS), 515 feedforward controls, 535,
ment systems), 85, 86 ethics, 62–77 Executive Orders 11246 and 538
end-user computing, 509–510 overview, 10, 64– 65 11375 (1965), 319 Feigenbaum, Armand V., 56
Enron Corporation, 155, 245, 1000 Challenge (Building- executive teams, 474 feminine vs. masculine socie-
534, 609 Blocks International), 87 exit interviews, 349 ties, 627
Enterprise Rent-A-Car Com- blogs and, 471 expatriates, 627 Fiedler, Fred, 450
pany, 101 “business ethics,” 64 expectancy theory, 408– 410, figurehead role, 21
enterprise resource plan- case studies, 63, 91–93 409, 452 fi ltering by levels, 377
ning (ERS) systems, 52, codes of, 70 expectations, development fi nance managers, 17
54, 54 compliance programs, 70– of, 417 fi nancial audits, 553–555
entrepreneur role, 23 73, 71 expectations of familiarity, fi nancial controls, 544, 545,
environmental management database marketing, 513 368–369 546–555, 547, 548, 549
systems (EMS), 85, 86 defi ned, 10 expense budgets, 558 fi nancial ratios, 550–551,
environmental responsibili- dilemmas, 75–76 expert power, 242–243, 443 552–553
ties, 83, 85– 86 electronic commerce and, expert systems, 513–514 fi nancial resources, 138
environmental scanning, 66 external customers, 7. See fi nancial responsibility cen-
130–131 Enron and trust, 534 also customers ters, 551–552, 554
environments, 128–151 exclusionary contracts, 140 external environment fi nancial statements, 546–
analyzing and evaluat- guidelines for, 76–77 changes and, 290 550, 547, 548, 549
ing, in planning process, individuals and, 65– 67 culture and, 283, 289 fi nancial strategy, 183
166–167 knockoffs and, 365 decision making and, 208 fi nished goods inventory, 591
694 Index
fi rst-line management Frey, Robert, 116 General Electric (GE) unified hierarchy of, 162–
change and, 294 fringe groups, 253, 253 decision making, 208 164, 164
defi ned, 15 Frito-Lay international management, See also objectives
functions of, 20, 21 cultural festival, 146 621– 622, 624 goal-setting theory, 414– 415
in hierarchy, 14, 16 HR management, 357 manufacturing system, 585 Golden Rule, 76
fi xed costs, 558 life cycle of, 270–272 materials and supplies, 138 Goodnight, Jim, 391–392,
fi xed-position layout, 582, strategy, 181, 183 restructuring, 227 417
583 teams, 472 revolutionary change at, Goodyear, 483
Flash Creative Management, Frost, Peter J., 67 292–293 Google, 465– 466, 475
338 FTC (Federal Trade Commis- social responsibility and, government regulation, 83–
Fleming, Peter C., 420 sion), 9 81, 86 85, 605
flexibility Fuller, Bonnie, 656– 657 strategy, 180 grand strategies, 179–180
motivation and, 425 functional authority, 239– general managers, 15 grapevine, 374–377, 375, 376
in organizational design, 240, 240, 276, 277 General Mills, 514 grassroots budgeting, 556
266 functional confl ict, 485 General Motors (GM) Great Place to Work Trust
teams and, 482 functional defi nition, 236 DFM/A at, 580–581 Index, 428
flexible budgeting, 557 functional departmentaliza- divisional structure, 276 Green, William D., 160
flexible manufacturing sys- tion, 233 early retirement, 348 Greenlaugh, Leonard, 646
tems (FMS), 273, 584 functional information, 502 market share, 560 Greenleaf, Robert, 435
flextime, 425, 540 functional-level strategy, 175, Oldsmobile Division, 461 green products, 83
FMS (flexible manufacturing 183 resources, 137, 138 Greiner, Larry, 295–296
systems), 273, 584 functional managers, 15–17 strategy, 183 Grid International, 449– 450
focus-leadership strategy, 182 functional similarity, 233 General Reinsurance, 217 grievance processing, 328
Follett, Mary Parker, 41, functional structure, 273– genetic screening, 327 Griffi n, Scott, 499
43, 44 274, 274 geographical departmental- Grimpen Advertising, 244
force-field analysis, 303, 303 Functions of the Executive, ization, 233, 234 group decision making, 210–
Ford, Bill, 59– 60 The (Barnard), 41 geographic divisions, 275 214, 367
Ford, Henry, 59, 80, 95, 559 funnel approach, 198, 199 Gerstner, Louis V., Jr., 25, group decision support sys-
Ford Motor Company Furst, Robert, 245 188, 295 tems (GDSSs), 514
confl ict management, 488– Ghoshal, Sumantra, 39 groups. See teams
489 gift giving, international, groupthink, 213
Deming speaking to, 110
G 625, 626 groupware, 514–515, 516
design control at, 588 Gabarro, John J., 381 Gilbreth, Frank, 39 growth phases, 295–296, 296
management theories at, 59 Galvin, Chris, 263 Gilbreth, Lillian, 39 Growth-Share Matrix, BCG,
vision, mission, and val- Galvin, Paul, 263 Gillette, 49 180–181
ues, 112 Galvin, Robert, 263 Gioia, 27 growth strategy, 179
forecasting, 168, 169, 330– Galvin Manufacturing Cor- Giuliani, Rudolph, 456 GTO Inc., 403– 404
331. See also budgets poration, 263 Glass Ceiling Commission, Guardian Newspapers Lim-
foreign affi liates, 606 Gamble, James, 35 325 ited (GNL), 420
foreign management. See in- game theory, 217 glass ceilings and glass walls, Gutierrez, Carlos Miguel,
ternational management Gantt, Henry L., 39, 594 209, 324–325 622
For Love of the Game (fi lm), Gantt charts, 594, 594 Global Information Solu-
430 Garcia, Frank, 53 tions (AT&T), 414– 415,
formal communication chan- Gartner Dataquest, 507 419, 471
H
nels, 371, 371–374 Gartner Group Inc., 519 global management. See in- Haas, Robert D., 78
formal communication net- Gassée, Jean-Louis, 221 ternational management Hair Connection, The, 244
works, 374 Gates, Bill, 72, 191, 191– global structures, 618– 620, Hammer, Michael, 52, 56,
formal organization, 226– 192, 195, 221, 281, 333, 619, 620 108–109, 299, 642
227, 251 392 GM. See General Motors Hanson, Kristine R., 64– 65,
formal teams, 467 Gates, Melinda, 72 GNL (Guardian Newspapers 70, 77
forming stage, 478– 479, 479 Gates, William H., Sr., 72 Limited), 420 “Harassment Prevention Pro-
Fornell, Claes, 98 Gault, Stanley, 483 goals gram,” 324
Fortune Brands, 180 GB Tech, 477, 478 of communication, 380 Harbour, Ron, 105
Fortune magazine, 428 GDSSs (group decision sup- defi ned, 5 Harley-Davidson, 455, 613
Foster Wheeler Energy port systems), 514 effective, 156 Harrah’s, 527–528, 529–530,
Fakop, 624 Gebler, David, 70 long-term vs. short-term, 538, 539
Franklin, Benjamin, 78 Gehl, Mike, 92 155 Hassan, Fred, 622
free-rein style, 446, 447 Gellerman, Saul W., 68, 75, mission and, 159 Hastings, Reed, 193
free riders, 483 76 organizing and, 229–231 Hatch, David, 643
French, Brenda, 577 Gendron, George, 655 plans, objectives, and, 158 Hawes, Cindy, 213
French Rags, 577, 578 Genentech, 414 stretch, 156 Hawker de Havilland, 515
Index 695
Heil, Gary, 44 human resources policy, 161 management information See also environments; or-
Henderson, Verne E., 67 human resources strategy, systems (MIS), 47, 504– ganizational culture
Henkel Consumer Cosmet- 183 507, 506 international divisions, 618,
ics, 285 Human Side of Enterprise managing, 515–520 618
Herbert, Mary, 650 (McGregor), 44 in strategy implementa- International Federation of
Herman, Alexis M., 323 human skills, 25 tion, 179 Robotics (IFR), 584
heroes and culture, 284–285 Hunt, Christopher B., 85 information technology (IT), international management,
Hersey, Paul, 454 Hurricane Katrina, 143–144 66, 500, 517–519 602– 631
Herzberg, Frederick, 423 Huy, Quy Nguyen, 15 INFORMS (Institute for Op- overview, 604– 605
Heskett, James, 288, 437– hygiene factors, 402, 403 erations Research and bird flu in Vietnam, 565
438 the Management Sci- Boeing 787 Dreamliner,
Hewlett, Syliva Ann, 11 ences), 46 500, 502, 502
Hewlett-Packard (HP), 265,
I infrastructure resources, 137 business process outsourc-
590–591, 651 “I” approach, 445 initiative, Fayol on, 42 ing (BPO) in India, 231
Hicks, Jennifer Olson, 429 IBM (International Business input-outcome ratios, 413– China’s Haier Group, 603
hierarchy of needs, 44, 398– Machines Corporation) 414 communication, 612, 624–
401, 399, 401 culture, 289 inspections, 597 625
hierarchy of relationships, Gerstner at, 25 Institute for Operations Re- controlling, 627– 629
236–237 Lotus Development Corpo- search and the Man- defi ned, 605
high achievers, 405 ration and, 514 agement Sciences environments, 607– 612,
high skills strategy, 607 MS-DOS and, 511 (INFORMS), 46 608
Highsmith, Duncan, 352 strategic planning, 188 instrumental behavior, 452 IT outsourcing, 518
Highsmith Company, 352 teams, 470, 482 Integra Financial, 441 Japan’s lifetime employ-
Higuchi, Yukio, 609 IFR (International Federation integrated motivation model, ment, 348
history of management, 37 of Robotics), 584 396 Japan’s Ministry of Inter-
Hodgetts, Richard, 424 illegal immigration, 443 integration and learning per- national Trade and In-
Hoffman, Lou, 235 illiteracy, 340–341, 453– 454 spective, 369 dustry (MITI), 55
Hoffman Agency, 235 immigrants, 341, 443 integration of controls, 539 leading, 623– 627
Hofstede, Geert, 627 income statement, 546, 548, integration strategy, 179 managers and global chal-
Holland, Kimberly, 206–207, 548–549 Intel, 414, 633 lenges, 11–13
214 independent work teams, intellectual capital, 133–134, Mercedes-Benz in Ala-
Hollander, Dorry, 652 473– 474 316 bama, 171
Homer, 634 in-depth interviews, 336–338 intent of communications, multinational corporations,
Honda, 264, 621 India and BPO, 231 380 605– 607
Honeycutt, Rob, 188 indirectly interactive forces, interaction chart, 252, 252 organizing, 615– 620, 617,
Honeywell International, 208 141–144 interactionist view of team 618, 619, 620
horizontal communication Indiveri, Michael, 265 confl ict, 485, 485 planning, 612– 615
channels, 372, 373 individualism vs. collectiv- interests of organization vs. Puma, 203
horizontal integration, 179 ism, 625 individual, 42 staffi ng, 621– 623
horizontal job loading, 422 individuals, treating people internal audits, 553–554 See also outsourcing
horizontal structure, 236, as, 417– 418 internal customers, 6 International Telementor
267, 278, 279 Industrial Revolution, 36, internal environment Center (ITC), 651
horizontal teams, 467– 468, 37–38, 648 changes and, 290 International Women’s Day,
468 influence, 434 core competencies, 133– 160
House, Robert, 451– 452 informal communication 134, 173 Internet and electronic
Howard, David M., 245 channels, 374–377, 375, decision making and, 205– commerce
HP (Hewlett-Packard), 265, 376 208 Amazon.com and, 149–
590–591, 651 informal organization, 250– defi ned, 132 150
human asset accounting, 563 255, 251, 252, 253 ethical conduct and, 67– 68 blogs, 471
human relations and controls, information, 172, 361, 500– leadership as, 135–136 breakthrough business
543 501 mission, 109, 132–133, models and, 195
human resource controls, informational roles, 22, 22 475, 543 communication over the
545, 545–546, 562–564 information resources, 137 organizational culture and Internet, 365, 366, 366
human resource inventory, information systems (IS), climate as, 134–135 customer relationship man-
329–330, 331, 332 498–525 organizational structure agement and, 8
human resource management. overview, 500–503 as, 136 databases on, 510
See staffi ng case studies, 499–500, planning and, 18 delivery systems and, 585–
human resource managers, 523–525 quality, influences on, 586
17, 317, 356–357 computerized information 119–120 electronic commerce eth-
human resources in strategy systems (CIS), 507–515, resources, 136–138 ics, 66
implementation, 178–179 509 vision, 109, 133 e-mail, 322–323, 377, 378
696 Index
Internet and electronic job enlargement, 422 Korenblat, Ashley, 259 Leadership Grid ®, 448– 450,
commerce (continued ) job evaluation, 350–351, 351 Kotter, John, 9, 288, 362, 449
history of business applica- job redesign, 341, 422– 423 437– 444, 636, 642 leaders position power, 450,
tions, 508 job rotation, 341, 422– 423 Kowaleski, Tom, 374 451
inventory control and Web job scope, 422 KPMG, 137 Lean Manufacturing, 53, 593
ordering, 591 job sharing, 425 Kram, Kathy, 634 learning organizations, 36.
MIS and, 504 job specification, 329, 331 Kuratko, Donald, 424 See also organizational
netiquette, 377, 378 Johnson, Robert Wood, II, learning
as network, 512 63, 247 Lee Kun Hee, 382
personalization and, 418, Johnson & Johnson L legal environment
418 authority, 238, 240 L. M. Ericsson Corporation, appraisals and, 346
process-oriented change change, 292 276–277 of ethics, 73–75, 75
and, 291 decentralization, 247 labor force, 141, 323– 324, international, 608, 609
SRM and, 589 departmentalization, 234 537. See also diversity staffi ng and, 318–323, 319
as technological force, 143 divisional structure, 275 Lafley, A. G., 35 legal/ethical behavior model,
training, Internet-based, ethical values, 63– 64 Landraff, Richard, 488– 489 75
341 international management, Lanese, Lory, 633, 634 legal/political forces, 142
web conferencing, 516 606– 607, 620 Langton, Nancy, 436 legitimate power, 242, 442
See also technology Live for Life program, 657 languages, 612 levels of management
Internet literacy, 104 women and minorities at, LANs (local area networks), functions and, 20–21
interpersonal communica- 325 512 management hierarchy,
tion, 365–370 Juran, Joseph M., 55, 56, 97, La Porta, John, 515 13–17, 14
interpersonal roles, 21, 22 107 large batch technology, 272, skills and, 25–26
interviewing, 335, 335–338, just-in-time (JIT) inventory 272–273 typical titles in, 16
337, 349 systems, 114, 217, 561– Larsen, Ralph, 247, 606– 607 See also fi rst-line manage-
intranets, 417 562, 593–594 Lawler, Edward, 466 ment; middle manage-
intrapreneurs, 112 Lay, Herman W., 271 ment; top management
intrapreneurship, 424– 425 Lay, Kenneth, 84, 534 Levitt, Arthur, 67
intuitive decision model, 208
K layoffs, 348–349 Lewin, Kurt, 302, 303
inventory, defi nition and kaizen, 51–52, 56 LCD panels, 612 Lexus, 182
types of, 590, 590–591 kanban system. See just-in- leader-member relations, 450, LG Electronics (LGE), 55, 612
inventory control, 561, 561– time (JIT) inventory 451 LG.Philips, 612
562, 590, 590–594 systems leadership, 432– 463 liabilities, 546
investment centers, 554 Kang Yun Je, 382 overview, 434– 435 liaison role, 21
involuntary separations, Katz, Robert, 23 case studies, 433– 434, life cycle of an organization,
347–348 Kauffman, Stuart, 36 461– 463 270–272, 271
IS. See information systems Kawachiya Shuhan Co., 609 challenges facing, 454– 456 life-cycle theory, 454
Isdell, E. Neville, 622 Kawasaki Heavy Industries controlling and, 530 lifelong learning, 647– 648
ISO 9000 standards, 614 Ltd., 515 decision making and, 194 lifetime employability, 635
IT (information technology), Kellam, Larry, 35 defi ned, 9 Liker, Jeffrey K., 100
66, 500, 517–519 Kelleher, Herb, 25, 153, 281, improving, 456– 458 limiting factors, 199–200
284 informal organization and, linear programming, 170
Kelly, Gary, 154 252 line authority, 238, 239
J Kelly, James, 72 as internal environment, line departments, 240–241
J. D. Power and Associates, Kennedy, Joyce, Lain, 650 135–136 Linton, Michael, 14
373–374 Kennedy, Marilyn M., 347 international management, liquidity ratios, 550
Jackson, Darren, 14 Kenney, Charles C., 379 623– 627 listening actively, 381
JAN (Job Accommodation Kepner, Charles, 198 as management function, 19 literacy, 340–341, 453– 454
Network), 320–321 Kiechel, Walter, 647 management vs., 437– 441, lobbying, 144–145
Japan, 51–52, 55, 56, 348, King, Rollin, 153 440 local area networks (LANs),
605 Kleiman, Carol, 435 need for, 9–10 512
jargon, 368 Kleinfeld, Klaus, 472 power and, 442– 444 Lockheed Martin, 467, 481
Jet Blue, 182 Knisely, Gary, 643 as role, 21 Logue, Courtland L., 316
JIT (just-in-time) inventory knockoffs, 365 in strategy implementa- Lokey, Lorry, 316
systems, 114, 217, 561– knowledge management tion, 178 Lonely Planet, 150–151,
562, 593–594 (KM), 134, 134, 503, styles of, 444– 450 310–311
Job Accommodation Net- 504, 504 theories of situational lead- Longenecker, Clinton, 27
work (JAN), 320–321 Kodak, 581 ership, 450– 454 Lord, Ellen, 367, 479– 480
job analysis, 328–329 Kohn, Stephen M., 84 traits, skills, and behaviors Lorenzo’s Oil (fi lm), 524
job depth, 422 Kolbe, Chris, 32, 60– 61 of, 435– 437, 438– 439, Lotus Development Corpora-
job description, 329, 330 Kopper, Michael J., 245 452– 453 tion, 514
Index 697
Loveman, Gary, 527–528, myths and realities, 26–27 McDonald’s minorities. See diversity
530, 538, 539, 545 organizational need for, core values, 133 Mintzberg, Henry, 21, 26,
loyalty, 67, 658 5– 6 culture, 281 362
Lubber, Mindy, 80 planning and, 168, 174 environmental responsibil- MIS. See management infor-
Lyondell Petrochemical, 437 roles of, 21–23 ity and, 83 mation systems
skills required of, 23–26 international management, mission
“Manager’s Job: Folklore and 604, 613 controls and, 543
M Fact, The” (Mintzberg), strategy, 182 defi ned, 132–133
machine-based training, 341 26–27 test-marketing, 560 quality and, 109
machinery and equipment, Manchester Partners Inter- McGrath, Judy, 13 teams and, 475
137–138 national, 27–28 McGregor, Douglas, 44– 45, mission statements, 132–133,
Macromedia, 471 Mandatory Retirement Act, 415 154–155
Madsen, Peter, 70 319 McInnes, Harold, 454 Mitchell, Chuck, 403– 404
Maguire, Paul, 243 Mantle, Mickey, 444 McKelvey, Andrew, 315–316 Mitchell, Terrence, 451– 452
Maier, Norman, 205 manufacturing resource plan- McKnight, William, 424– 425 Mitchell, Vance F., 67
maintenance factors, 402 ning (MRPII), 593 McNerney, W. James, Jr. Mitsubishi Heavy Industries
Malcolm Baldridge National Marathon Oil, 80 (Jim), 499 Ltd., 515
Quality Award, 115 marketing controls, 544, 545, measurement of performance, mixed costs, 558
management, defi ned, 5 559–562 114–115, 532–533. Mobil Corporation, 620
management audits, 564 marketing managers, 17 See also performance mommy tracks, 347
management by objectives marketing ratios, 560 appraisal monitor role, 22
(MBO), 169–170, 344 marketing research, 559 mechanistic structure, 267, Monsanto, 422
management by reaction, 295 marketing strategy, 183 267–268, 273, 273 Monster Worldwide, Inc.,
management hierarchy, 13– Marquez, Theresa, 92 Medco, 217 315–316
14, 14, 16 married couples in the work- mediators, 328 Moore, Geoffrey, 518
management information place, 333 medium, 361, 380–381, 382 Moore, Suzanne Rinfret,
systems (MIS), 47, 504– Marriott Hotels, 374, 455 MEECO Inc., 53 362–363
507, 506, 515–520, 545. Mars, Forrest, 284 meetingware, 514–515, 516 morale, 392
See also information sys- Mars, Inc., 284 Mensching, James R., 507 morality, 65– 66. See also
tems (IS) Mary Kay Cosmetics, 285 mentors, 342, 633, 650– 652 ethics
management science (MS), masculine vs. feminine socie- Mercedes-Benz, 171. See also Moran, Richard, 642
45– 46 ties, 627 DaimlerChrysler motivation, 390– 430
management theory. See theo- Maslow, Abraham, 44, 398, Merck, 217 overview, 392–394
ries of management 407, 408 mergers and synergy, 49 case studies, 391– 392,
Managerial Reality Maslow on Management Merlin Metalworks, 259 428– 430
(Hollander), 652 (Stephens and Heil), 44 Merrill Lynch, 245 content theories, 397– 408
managers, 2–33 mass production technology, message, defi ned, 361 managing for, 417– 425
overview, 4–5 272, 272–273 Metamor Enterprise Solu- models of, 394–396, 395,
case studies, 3, 31–33 Master Industries, 468 tions, 484 397
change and, 293–294 master schedules, 587, 587, Metcalf, Henry, 39 philosophy of management,
communication and, 379 592 Metcalfe’s Law, 512 building, 415– 417
culture, role in, 286–287 material culture, 610 metric system in Britain, 143 process theories, 408– 415
customers, need to please, materials and supplies, 138 Microsoft motivation factors, 402– 403,
6– 8 materials control, 588–590 culture, 281 403
diversity, valuing, 10–11 materials requirement plan- decision making, 191–192, Motorola
environments and, 144–146 ning (MRP), 592–593 195, 221 change, 291, 292, 301
ethics and, 10 matrix structure, 276–278, married couples at, 333 international management,
evaluation of, 27–28 277 teams, 476– 477 307, 627
functional, 15–17 Matsushita, 264 middle management organizational design, 263,
functions of, 17–21, 23 Mattel USA, 419 change and, 294 264, 268
global challenges, coping mature workers, 478, 536, defi ned, 14–15 quality at, 107, 115–116
with, 11–13 537 functions of, 20, 21 Six Sigma program, 532,
informal organization and, maturity stage, 271, 271–272 in hierarchy, 14, 16 571
254, 255 maturity theory, 416– 417 information needs, 503 teams, 494
leadership and, 9–10, 456– maximizing decisions, 205 quality and productivity, Moussaoui, Zacarias, 84
458 Mayo, Elton, 44 commitment to, 113–115 Mouton, Jane S., 448
levels of management, 13– MBI Distributing, Inc., 80 midlife stage, 271, 271 movies
17, 20–21 MBO (management by objec- Mid-States Technical Staffi ng 8 Mile, 33
motivation and, 400– 401, tives), 169–170, 344 Services, 412– 413 Apollo 13, 125, 495
403– 404, 405– 406, 410, McCann, Ellen, 413 Miles, Raymond, 181 Babe, 260
412– 413, 414 McCormick, Karen, 449– 450 Millennium Initiative, The, 87 Backdraft, 311–312
698 Index
movies (continued) comparison among, 406, objectives capacity planning, 586

Back to the Future, 408 in career planning, 642– controls, 588–597
Part II, 61 Herzberg’s two-factor the- 643 design for disassembly
Blue Crush, 151 ory, 402– 404, 403 defi ned, 5 (DfD), 581
The Bourne Identity, 189 Maslow’s hierarchy, 44, hierarchy of, 162–164, 164 design for manufacturing
Bowfi nger, 357 398– 401, 399, 401, 408 in international manage- and assembly (DFM/A),
Casino, 572–573 McClelland’s need for ment, 616 579–581, 581
Dr. Seuss’ How the Grinch achievement, 404– 407 management by objectives facilities layout, 581–583,
Stole Christmas, 222 negative leadership style, (MBO), 169–170 582
Emperor’s Club, 92–93 444, 445 mission and, 159 facilities location, 586
For Love of the Game, 430 negotiator role, 23 operational, 162 flow of operations, 579
Lorenzo’s Oil, 524 Neil, G., 324 plans, goals, and, 158 importance and role of,
Patch Adams, 388 Netfl ix, 193 setting, 165 578–579, 580
U-571, 463 netiquette, 377, 378 superordinate, 488 product and service design,
MRPII (manufacturing re- networking, 511–512, 652 tactical, 159 579
source planning), 593 network scheduling, 595, of teams, 475 production activities plan-
MTV Networks, 13 595–596 See also goals ning, 586–588
Mueller, Robert, 84 network structure, 279–280, O’Brien, Sheila, 387–388, technology and production
Mulcahy, Anne, 201 280 495 processes, 583–586
Muller, Paul, 429 New Rules, The (Kotter), 636 obsolescence, 640, 641, 647 operations managers, 17
Murray, William H., 348 Niagara Mohawk Power, 456 Occupational Safety and operations research (OR), 46
mutual trust, 298 Nicolas, Charles, 146 Health Administration operations strategy, 578
Myers, David F., 197 Niemeier, Charles, 197 (OSHA), 564 opportunities
Myhrvold, Nathan, 476– 477 Nike, 101, 183, 279 OD (organizational develop- in career planning, 641–
Mysliwiec, Jerry, 494 Nilles, Jack, 649 ment), 303–305, 304, 642
Nishimuro, Taizo, 570–571 305 in decision making, 197–
noise, 370 Odyssey, The (Homer), 634 199
N Nokia, 266 offers of employment, 338 defi ned, 193
NAFTA (North American nominal group technique, Ohio State University leader- in situation analysis, 177–
Free Trade Agreement), 211, 211–212 ship studies, 448 178
609 nonprogrammed decisions, Ohno, Taichi, 95, 114 options, in career planning,
National Association of 195, 196 Okuda, Hiroshi, 95, 96 641– 642
Working Women, 322 nonverbal communication, Oldcastle Materials, 398–399 Oracle, 400
National Business Ethics Sur- 363–365, 364, 370 older workers, 213, 478, 536, ORC Worldwide, 623
vey (NBES), 66 Nooyi, Indra, 456 537 order, 42
National Do Not Call regis- Nord, Walter R., 67 Oldsmobile, 461 organic structure, 267, 267–
try, 9 Nordstrom, 280, 284, 285, Olin Industries, 472 268, 273, 273
National Education for As- 286, 474 Ollila, Jorma, 266 Organic Valley Cooperative,
sistance Dog Services norming stage, 479, 479 Olson, Andrew, 652 91–92
(NEADS), 387– 388, norms, 251, 280, 481, 481– On the Economy of Machin- organization, defi ned, 5
494– 495 482 ery and Manufactures organizational climate, 135,
national governments, com- Norris, Elizabeth, 35 (Babbage), 38 285–286
petition and pressures Norris, Olivia, 35 on-the-job training (OJT), organizational culture, 280–
from, 614 Nortel Networks, 264 341 289
nationalism, 614 North American Free Trade open-book management, case studies, 310–312
National Whistle-blower Agreement (NAFTA), 110–112 change and, 301
Center, 84 609 open communication and classical school and, 39
“Nation Online, A” (U.S. De- Northeast Utilities, 425 change, 300 creation of, 286–289, 287
partment of Commerce), Northrop Grumman, 477– openness, 377–378 defi ned, 134–135, 280–283
508 478 open systems, 130–132, 131. ethics and, 68– 69
natural forces, 143–144 Northwest Airlines, 181– See also systems of Lonely Planet, 150
Nature of Managerial Work, 182 operating budgets, 557–558 manifestations of, 284–286
The (Mintzberg), 21 Norton, David Y., 63 operating management. See subcultures, 135, 288
NEADS (National Educa- Nugent, John, 490 fi rst-line management See also external environ-
tion for Assistance Dog Nynex, 466 operating systems, 510–511 ment; motivation
Services), 387–388, operational objectives, 162 organizational design, 263–
494– 495 operational plans, 160–162 280
needs, 394–396
O operations controls, 545 overview, 264–268
needs theories OAO OvtoVAZ, 124 operations management, case studies, 263, 310–312
Alderfer’s ERG theory, 407, objective quality of a deci- 575– 600 contingency factors in,
408 sion, 205 overview, 46, 578 268–273
Index 699
structural options in, 273, span of control and, 244– Peace, William, 436 philosophy of management,
273–280 247 Peale, Norman Vincent, 77 415– 417
training and, 339–340 in strategy implementa- Peapod, 124–125, 523–524, physical environment, 286
organizational development tion, 178 571–572 physical exams, 338
(OD), 303–305, 304, team structure, 278, 279 peer reviews, 441 Pilot Corporation, 621
305 See also organizational de- Penguin division of Perry Pinkerton Consulting and
organizational learning, sign Ellis, 32, 60– 61 Investigations, 71
299. See also learning Organizing for High Perfor- Penske, Roger, 13 Piquette Project, 60
organizations mance (Center for Effec- people-centered change, 292 Pizza Hut, 214
organizational life cycle, tive Organizations), 466 people orientation vs. task planned change, 295, 297,
270–272, 271 orientation, 338–339 orientation, 447– 450, 297–298
organizational politics, 652– Original Penguin, 32, 60– 61 452 planning, 152–189
653 OSHA (Occupational Safety PeopleSoft, 400 barriers to, 171–172
organizational socialization, and Health Administra- Peppers, Don, 31 basic process, 165, 165–
644– 645 tion), 564 PepsiCo 168, 166
organizational systems, .208 Ostroff, Frank, 264 divisional structure, 275 capacity planning, 586
organization chart, 236, 237 outside-the-box thinking, 210 exclusionary contracts and, career planning, 636– 644
organizing and organiza- outsourcing 140 case studies, 153–154,
tional structure, 224– business process outsourc- Frito-Lay and, 271 188–189
260 ing (BPO) in India, 231 human resource managers, controlling and, 529
authority and, 238–241 increased use of, 139 356–357 decision making and, 194
benefits of, 229 in IS, 517–518 international management, defi ned, 154–157
boundaryless, 136 planning and, 227 604 effective, 168–169
case studies, 225–226, purchasing and, 589–590 leadership, 453, 456 human resource planning,
259–260 quality and, 118 South Africa and, 142 328–331, 329
centralization vs. decen- technology and, 228 perceived power, 242 international management,
tralization, 247–250, Wipro and, 7 perceptions, 370, 396, 486 612– 615
606– 607 out-status groups, 253, 253 perfect knowledge, 203–204 as management function,
change, structural, 291 overload, 377 performance appraisal, 342– 18–19
controlling and, 529–530, Owen, Robert, 43– 44 346, 343, 345, 563–564. operations planning, 579–
543 owners and stockholders, 81, See also measurement of 588
decision making and, 194 139, 145 performance organizing and, 227–231
defi ned, 227 owner’s equity, 547 performance-reward link, types of, 157–165
delegation and, 243–244 409 See also strategic planning
divisional structure, 274– performing stage, 479, 479– planning departments, 172
276, 275
P 480 plans
five-step process, 229–237 Page, Larry, 465 perks, 352, 622– 623 contingency, 164–165
formal organizations, 226– Paine, Lynne Sharp, 68 Perry Ellis International, 32, defi ned, 155–156
227 Paine, William, 645 60– 61 goals, objectives, and, 158
formal structure, 136 Pan Am, 138 personalization, 418, 418 operational, 160–162
functional structure, 273– Parker, Glenn, 477 personnel manager, defi ned, strategic, 157–158
274, 274 Parkinson, Andrew, 523 317. See also staffi ng; en- tactical, 158–159
informal organizations, Parkinson, Thomas, 124, tries at human resource PMP (Participative Manage-
250–255 523–524 PERT (program evaluation ment Program), 116
international management, participation and change, 300 and review technique), Podursky, Michael, 635
615– 620, 617, 618, 619, participative behavior, 452 595–596 policies
620 Participative Management pervasiveness and depth, 289 advantages and require-
as management function, Program (PMP), 116 Peters, Lawrence H., 346 ments for, 163
19 participative style, 446, 446– Peters, Thomas J., 56, 198, for corrective action, 534–
matrix structure, 276–278, 447 281, 420, 652 535
277 partnership with suppliers, Peterson, Donald E., 110 privacy, 162
mechanistic vs. organic 139–140 PetSmart, 101 as standing plans, 161
structure, 267, 267–268, Patagonia, 80, 110 P.F. Chang’s, 259–260, 429– political environment, inter-
273, 273 Patch Adams (fi lm), 388 430, 462 national, 607– 609, 608
network structure, 279– Patel, Kal, 14 Pfeffer, Jeffrey, 392 political instability, 613
280, 280 patent protection, 614 Pfeiffer, Eckhard, 622 politics, organizational, 652–
planning, relationship path-goal theory, 451– 454 P&G. See Procter & Gamble 653
with, 227 Pathlore Inc., 213 Phatak, Arvind, 606 pollution. See environmental
power and, 241–243 payback analysis, 214–215, philanthropy, 80– 81 responsibilities
production implementa- 216 Philip Morris, 179 Porras, Jerry, 287
tion, planning for, 588 Payne, P. L., 37 Philips N.V., 610 Porter, Michael, 182
700 Index
portfolio strategy, 180–181 process teams, 471– 472 Pro-Line Corporation, 183 quality of work life (QWL),
position power, 242 process theories promotions, 346 392, 393
positive leadership style, 444, equity theory, 413, 413– Pronk, Roxanne, 260 quality school, 51–57
445 414 prospector strategy, 181 quality teams, 470– 471
positive reinforcement, 411 expectancy theory, 408– protected groups, 320– 321 quantitative decision-making
postperformance controls, 410, 409 Prudential Insurance Com- techniques, 214–217,
537–538 goal-setting theory, 414– pany, 420 215, 216
power 415 psychological contract, 644– quantitative school, 45– 47
career management and, reinforcement theory, 411, 645 “question marks,” 180
652– 653 411– 413 Published Image, 474, 482 queuing models, 216–217
defi ned, 241–242 Procter, William, 35 Puma, 203 Quick Copy, 214–215
informal organization and, Procter & Gamble (P&G) punctuality, 345 quotas, 561, 609
251 culture, 280 punishment, 412 QWL (quality of work life),
leadership and, 442– 444 decision making, 217 purchasing, 588–590 392, 393
in needs theory, 404– 405 Gillette merger, 49
sources of, 242, 242–243 management theories and,
power-motivated person, 405 35–36
Q R
Power of Ethical Manage- quality of employees, 282 QA (quality assurance) sys- race. See discrimination;
ment (Blanchard and reward system, 422 tems, 532 diversity
Peale), 77 producibility, 580 QFD (quality function de- Radford, G. S., 56
power-realignment costs, 483 product control, 596–597 ployment), 98–101 radiofrequency identifica-
preconceived notions, 369– product departmentalization, Quaker Oats, 357 tion technology (RFID),
370 233, 234 qualification testing, 597 541, 542
predisposed decision model, product design planning, 579 quality, 94–125 Rainbow Printing, 486
209 product development teams, overview, 96–97 Ralcorp Holdings, Inc., 365
Pregnancy Discrimination 469– 470 business process re- Ramquist, Lars, 276–277
Act (1978), 319 product group structure, engineering (BPR) ap- Ramsey, Jackson, 45– 46,
pre-international division 619– 620 proaches, 108–109 533
phase, 617 production processes. See case studies, 95–96, 123– Randall, Des, 471
preliminary controls, 535 operations management 125 Randolph, Beth, 643– 644
preliminary interviews, 335– production strategy, 183 commitments to, 106–107, rank and communication,
336 productivity 109–118 379
Premji, Azim H., 7, 13 overview, 104–105 controlling, 532 rapid response, 455
pressures from national gov- commitment to, 106–107 cost-effective, 103–104 Rasic, Milé, 577
ernments, 614 controlling and, 532 customer satisfaction and, rational/logical decision
prevention controls, 535 internal and external influ- 6, 7, 97–98, 98 model, 208
Price, Bob, 243 ences on, 119–121 defi nitions, 6 Raton, Anita, 362
Priceline.com, 195 operations management DFM/A and, 580–581 Rau, John, 648
PricewaterhouseCoopers, and, 588 improving, 106–118 raw materials inventory,
642, 643 quality and profitability internal and external influ- 590–591
primary groups, 253, 253 linked to, 105, 106 ences on, 119–121 Raytheon, 106, 107
principle, statements of, 284 teams and, 481, 481– 482, Lean Manufacturing and, R&D (research and develop-
priority setting, 209, 474 483 53 ment), 119–120
Pritchett, Price, 507 See also quality operations management reactive approach, 80
privacy, 327, 513 product layout, 582, 583 and, 588 reactor strategy, 181–182
Privacy Act (1974), 319 profitability, 105, 106, 265, productivity and profitabil- receivers, 361, 381–383
privacy policy, 162 365 ity linked to, 105, 106 Recreational Equipment In-
proactive approach, 80– 81 profitability ratios, 550–551 QFD approach, 98–101 corporated (REI), 613
problem solving, 193, 197– profit budgets, 558 at Samsung, 382 recruiting, 332–333
199. See also decision profit centers, 554 TQM approach, 101–103, reengineering
making program evaluation and re- 102 business process reengi-
procedures, 161, 163, 534– view technique (PERT), quality assurance (QA) sys- neering (BPR), 108–109,
535 595–596 tems, 532 293
process control sampling, 597 programmed decisions, 194, quality audits, 114 defi ned, 52
processes, organizational, 196 quality circles, 115, 470– 471, process-oriented change,
281 programming, linear, 170 473 291
process improvement teams, programs, 160, 163 quality control audits, 114 as quality management
113 project-based work, 636 quality function deployment approach, 52
process layout, 582, 583 project improvement teams, (QFD), 98–101 training and, 340
process-oriented change, 291, 113–114 quality improvement teams, Reengineering Revolution,
292 project teams, 470 113 The (Hammer), 299
Index 701
Reengineering the Corpo- Rider, Gill, 160 SAS, 391–392 Sharp, Ryan, 265
ration (Hammer and Riding the Runaway Horse satellite-transmitted video- Shaw, Ronald G., 621
Champy), 52, 56 (Kenney), 379 conferenences, 365 Sheraton, 212
reference checks, 338 Riggio, Leonard, 149–150 satisficing, 205 Sherizen, Sanford M., 348
referent power, 242, 443– 444 Riggio, Steve, 150 Satre, Phil, 527, 529–530 Shewhart, Walter A., 56
Reflexite Corporation, 421 risk, 204 Saturn, 183 Shiseido Company, 605
Rehabilitation Act (1973), Risk International, 441 Sayles, Leonard R., 368 SHRM (Society for Human
319, 320 risk managers, 528 SBUs (strategic business Resource Management),
Rehfeld, John E., 624 RJR-Nabisco, 347 units), 180, 274–275, 275 333, 349
REI (Recreational Equipment Robbins, Stephen, 489 scalar chain, 42 Siemens AG, 472
Incorporated), 613 robotics, 584 Scanlon, Scott A., 622 Siemon, George, 92
Reinemund, Steve, 357 Rock, John, 461 scanning, 130–131 Sigler, Andrew D., 70
reinforcement theory, 411, Rogers, Martha, 31 scheduling control, 594, Silicon Graphics, 407
411– 413 roles 594–596 simulations, 215–217
Reiss, Steven Alan, 74 confl icting demands, 23, Schein, Edgar H., 490, 644 Single, John L., 417
reliability, 581 24 Schmidt, Eric, 465 single-looped learning, 299
reorder point (ROP), 592 confl ict over, 486 Schneider National, 585–586 single-use plans, 160–161
reorganization. See organiza- defi ned, 21 Schoonover, Philip, 31 situational leadership theo-
tional design; organiz- of managers, 21–23, 22 Schultz, Howard, 433– 434, ries, 450– 454
ing and organizational of team members, 477 441, 444 situation analysis (SWOT),
structure Rolex, 182 Schulze, Richard, 4 177–178
Reputation Quotient (RQ), romances in the workplace, scientific school, classical, Six Sigma, 532, 570–571
78, 79 333 38– 41 size of an organization, 269–
research and development Romano, Catherine, 656 scoreboarding, 110 270
(R&D), 119–120 Root, Stanley, 124 Scott, H. Lee, 129 skills, management, 23–26
research and development ROP (reorder point), 592 Scott-Morgan, Peter, 135– Skinner, B. F., 411
strategy, 183 Rosen, Robert H., 111–112 136, 441 slogans and culture, 284
resistance approach, 79– 80 Rosing, Wayne, 465– 466 seamlessness, 263, 265 small batch technology, 272,
Resnick-West, Susan, 343 Ross Controls, 118 Sears & Roebuck, 179–180, 272–273
resource-allocator role, 23 round-robin presentations, 264, 286 Smart Valley Telecommuting
resources 212 Securities and Exchange Guide, 648– 649
change and lack of, 301 Rowley, Coleen, 84 Commission (SEC), 197 Smith, Robert L., 646
culture and, 282 Royal Dutch/Shell, 181 security and change, 300– Smithfield Foods, 179
decision making and, 205 Royal Philips Electronics, 612 301 smoothing, 487
deployment of, 173 RQ (Reputation Quotient), selection, 334, 334–338 SMS (soft manufacturing sys-
as internal environment, 78, 79 selective perception, 300 tems), 585
136–138 Rubbermaid, 101 self-assessment, 638– 640, Snow, Charles, 181
planning and, 157 rules, 161–162, 163 639, 640, 641 Snyder, Gary T., 118
restraining forces, 303 rumors, 255 self-improvement, 345 social audits, 87– 88
retirees, hiring, 478 Russian automobile industry, self-managed work teams, socialization, organizational,
retrenchment strategy, 179– 123–124 473– 474 644– 645
180 semantics, 368 social responsibility, 77–92
Return on Customer: Cre- Semco, 394 case studies, 91–92
ating Maximum Value
S Semler, Ricardo, 394 managing for, 85– 88
from Your Scarcest Re- SABRE travel reservation senders, 361, 379– 381 nature of, 77– 85
source (Peppers and Rog- program, 511 Senn, Larry, 378–379 social system, 282
ers), 31 salaries and wages, 350– 351 Senn-Delaney Leadership society as stakeholder, 146
revenue budgets, 557–558 Saldich, Robert, 647 Consulting Group, 378 Society for Human Resource
revenue centers, 554 sales quotas, 561 sensitivity, 300, 382 Management (SHRM),
reverse performance reviews, SAMHSA (Substance Abuse separations, 347–349 333, 349
437 and Mental Health Ser- Sequins International, 468, sociocultural environment
Revised Guidelines on Em- vices Administration), 482 international, 608, 610–
ployee Selection, 319 326 service design planning, 579 612
revolutionary change, 292– Samsung, 144, 382, 559, 612 SESA (Samsung Electronica staffi ng and, 323, 323–
293, 293 Samsung Electronica Espa- Espanola SA), 382 327
reward power, 242, 442– 443 nola SA (SESA), 382 Sewell, Carl, 119 sociocultural forces, 142
reward system, effective, sanctions, 254–255 Sewell Automotive Com- soft manufacturing systems
421– 422 Sanko, Bill, 475– 476 pany, 99 (SMS), 585
RFID (radiofrequency iden- Santa Fe Institute (SFI), 36 sexual harassment, 74, 321, Solomon, Robert C., 64– 65,
tification technology), Sarbanes-Oxley Act of 2002 322–323 70, 77
541, 542 (SOX), 74 sexual orientation, 321 Sonnenberg, Frank, 316
702 Index
Sonoco Products Company, as management function, elements of, 173–174 responsibilities to, 83,
116 19 formulation by level, 179– 146
Sony, 612 orientation, 338–339 183 supplies and materials, 138
sources and uses of funds performance appraisal, formulation vs. implemen- supply-chain management,
statement, 549, 549–550 342–346 tation, 174 591
South Africa, 142 process of, 317–318 international, 612– 613 support, providing, 419
Southwest Airlines recruitment, 332–333 operations strategy, 578 supportive behavior, 452
culture, 280, 281, 284, 289 responsibility for, 317 organizational design and, surveys, customer response,
customer satisfaction, 25 selection, 334, 334–338 268, 269 116, 117
layoffs avoided by, 349 sociocultural environment process of, 175–179, 176 surveys of employees, 541,
mission statement, 154 of, 323–327 responsibility for, 174 564
motivation, 392 stability of tenure, 42 strategic management vs., sustainable communities, 85
planning, 155, 160 training and development, 172–173 Sweet Ridge Organic Dairy,
strategy and tactics, 153– 339–342 strategies 92
154, 157, 159, 175, 182 unions and, 327–328 adaptive, 181–182 SWOT (situation analysis),
SOX (Sarbanes-Oxley Act of See also entries at human changing, 291 177–178
2002), 74 resource for confl ict management, symbols and culture, 285
span of control Stahl, Stephanie, 76 487– 489 symptoms, 198
centralization and, 249– stakeholders, 78, 81– 83, defi ned, 157 synchronized commerce, 225
250 145–146 effective, 156 synergy, 49, 173–174, 482
communication and, 378 Stake in the Outcome, A grand, 179–180 Syngenta, 472
defi ned, 236 (Stack and Burlingham), levels of, 174–175, 175, systems
proper choice of, 247 112 179–183 defi ned, 47– 48
wide vs. narrow, 244–246, Stallone, Tony, 124, 125 for organizational develop- organizations as open sys-
246 standard cost centers, 554 ment, 304, 305 tems, 130–132, 131
SPC (statistical process con- standards, 528, 530–533, 614 portfolio, 180–181 quality and, 119
trol), 56, 115 standing plans, 161 for recruiting, 332–333 systems school, 48– 49
specialization of labor, 231– Staples, 248 strategy formulation, 174 systems theory, 47–50, 48.
233, 232 Starbucks Coffee Company, strategy implementation, 174 See also information sys-
Spectrum Associates, 490 209, 264, 433– 434, 441 Strauss, George, 368 tems (IS)
Spencer, Herbert, 36 Stark Statue, The, 91 stress, 654– 657, 655
spokesperson role, 22 “stars,” 180 stretch goals, 156
sponsors, 650, 659 statistical analysis, 562–563. structure. See organizing and
T
Spragins, Ellen, 372 See also fi nancial ratios organizational structure Taco Bell, 473
Springfield ReManufacturing statistical process control Study of Retention Practices tactical objectives, 159
Corporation, 112 (SPC), 56, 115 (SHRM), 349 tactical plans, 158–159
SQC (statistical quality con- statistical quality control style, managerial, 208–210, tactics, 157
trol), 56, 115 (SQC), 56, 115 444– 450 Target, 182
SRM (supplier relationship status and communication, subcultures, 135, 288 tariffs, 609
management), 589 379 subordinates task forces, 468
stability strategy, 180 Stead, Jere, 414– 415, 419 decision making and, 205– task orientation vs. people
Stack, Jack, 112 Stephens, Deborah C., 44 207 orientation, 447– 450,
staff authority, 239, 239 stereotypes, 370 personal characteristics 452
staff departments, 240–241 stockage, 561–562 of, 453 task structure, 450, 451
staffi ng, 314–357 stockholders. See owners and in Theory X and Theory Taylor, Frederick W., 38–39
overview, 316 stockholders Y, 415 Taylor, Jeff, 315
case studies, 315–316, stockholders’ equity, 547 See also employees TCO (Total Cost of Owner-
355–357 stockless system. See just- Substance Abuse and Mental ship) Life-cycle model,
compensation, 349–352, in-time (JIT) inventory Health Services Adminis- 519, 520
622– 623, 623 systems tration (SAMHSA), 326 TCP/IP, 512
controlling and, 530 Stone, Florence, 651 subsystem controls, 544–546 teams, 464– 495
decision making and, 194 stories and culture, 284 Sullivan, Scott D., 197, 554 overview and defi nition of,
employment decision imple- storming stage, 479, 479 Supercuts, 183 466– 467
mentation, 346–349 strategic business units superiors and decision mak- case studies, 465– 466,
human resources planning, (SBUs), 180, 274–275, ing, 205 494– 495
328–331 275 superordinate objectives, 488 characteristics of effective
international management, strategic management, 172– supplier relationship manage- teams, 467
607, 621– 623 173 ment (SRM), 589 communication in, 366–
Japan’s lifetime employ- strategic planning suppliers 368
ment system, 348 case studies, 153–154, close connections with, 118 compensation issues, 484
legal environment of, 318– 188–189 as directly interactive confl ict in, 484– 490
323 defi ned, 157–158 forces, 139–140 design control and, 588
Index 703
effectiveness, measuring, telecommuting, 648– 649 top management trust, 298, 377–378, 534
482– 484 telemarketing, 9 centralization and, 247– tunnel vision, 209
establishing organization Telephone Marketing Pro- 248 Turk, Cynthia, 283
of, 474– 478, 475 grams (TMP), 315 change and, 293 turnover, 562
independence of, 472– 474 telework, 649, 649– 650 defi ned, 14 twinning, 425
internal processes, 478– Tenet Healthcare Corpora- ethical behavior and,
482 tion, 91 68– 69
leadership and, 441 Tesoro Corp., 80 executive compensation,
U
meetingware and, 515 test-marketing, 559–560 352 U-571 (fi lm), 463
for quality improvement, tests in selection process, 336 functions of, 20, 20–21 Umanoff & Parsons, 419
113–114, 115 Texas Instruments, 217, 483 in hierarchy, 14, 16 understanding, in communi-
types of, 467– 469, 468 Textron, 367, 479– 480 information needs, 503 cation, 361
uses of, 469, 469– 472 theories of management, quality and productivity, unified hierarchy of goals,
See also group decision 34– 61 commitment to, 109–113 162–164, 164
making overview, 36 social responsibility and, Union Carbide, 141–142
team structure, 278, 279 behavioral school, 43– 45 85– 87 union environment, 327–328
team-training costs, 483 case studies, 35, 59– 61 Toshiba, 570–571 union negotiations, 359
technical skills, 23–25, 66 classical, 37– 43 Total Cost of Ownership Union of Japanese Scientists
technological environment, complexity theory, 35– 36 (TCO) Life-cycle model, and Engineers, 56
international, 608, 612 contingency school, 50–51 519, 520 United Airlines, 48– 49
technological forces, 142–143 defi nition of theory, 37 total quality control (TQC). United Nations Millennium
technology history of, 37 See total quality manage- Development Goals, 87
CAD, CAE, and CAM, quality school, 51–57 ment (TQM) United Parcel Service (UPS),
508, 577, 584 quantitative school, 45– 47 total quality management 100–101, 225–226, 227,
collaboration and, 294, systems school, 47–50 (TQM), 101, 102, 103, 581
294 time line of, 38 110 United Technologies, 233,
communication and, 365, “Theory of Human Motiva- Toyoda, Kiichiro, 95 234
366, 366 tion, A” (Maslow), 44 Toyota unit production technology,
computer monitoring of Theory of Social and Eco- efficiency of, 105 272, 272–273
employee performance, nomic Organizations empowerment and guiding unity of command, 42, 241
344 (Weber), 41– 42 principles, 112, 114 unity of direction, 42, 229
controls and, 543 Theory X and Theory Y, 44, infrastructure resources, University of Michigan lead-
culture and, 283 415, 416 137 ership studies, 448
customer relationship man- “they” approach, 447 QFD and, 99–100 University of Southern Cali-
agement (CRM), 8 Thomas, David, 369 Toyota Production System fornia (USC), 466
database applications, 170 Thompson, Robert M., 398– (TPS), 95, 114 Unocal, 80
defi ned, 24, 272 399, 404, 414, 415 “The Toyota Way,” 95–96, UPS (United Parcel Service),
disaster recovery, 457, 457 Thompson-McCully Com- 100 100–101, 225–226, 227,
electronic noise, 379 pany, 398–399, 404, TQM (total quality manage- 581
e-mail, 322–323 415 ment), 101, 102, 103, upward communication chan-
enterprise resource plan- Thomson, S. A., 628 110 nels, 372, 373–374
ning (ERS) systems, 52, threats, 177–178 trade barriers, 609 Urich, Joe, 189
54, 54 three-step approach, 302 trademark protection, 614 Ursprung, Cecil, 421
formal communication net- Tighe, Jim, 213 training U.S. Fair Labor Standards
works, 374 Timbuk2, 188–189, 221–222 overview, 339–342 Act (1938), 350
intranets, 417 time, cross-cultural perspec- “Harassment Prevention
knowledge management tives on, 627 Program,” 324
(KM), 134, 134 TIME Magazine, 84 in IS, 517
V
literacy in, 104 timing of communications, standards and, 563 value-added networks
organizational structure 377, 381 teams and, 475– 476, 483 (VANs), 508
and, 272, 272–273 timing of decisions, 209 Training for the Next Econ- values
outsourcing and, 228 Tindell, Kip, 428 omy (ASTD), 339 confl ict and, 486
production processes and, Title I, Civil Rights Act transactional processing, 511 core, 109–110, 133, 287
583–586 (1968), 319 transfers, 347 Enron and, 155
RFID, 541, 541 Title VI, Civil Rights Act transformational leaders, 439 generational, 658
video interviews, 335, 335 (1964), 319 Treacy, Michael, 101 managers and, 5– 6
virtual teams, 470 Title VII, Civil Rights Act Tregoe, Benjamin, 198 personal vs. organizational,
See also information sys- (1964), 319, 321, 322 Tremmel, Klaus, 610 657– 658
tems (IS); Internet and TMP (Telephone Marketing Trent, Harry, 362 See also organizational
electronic commerce Programs), 315 Troedsson, Hans, 565 culture
Technology Leadership 9000 Tony Lama Company, 423 Tronnes, David, 571 Van Flett, David, 421
(TL9000), 382 top-down budgeting, 556 Trotman, Alexander, 489 van Gelder, Marc, 125, 572
704 Index
Vanguard Info Solutions, 231 waiting line models, 216–217 web logs (blogs), 471 work teams, 472
VANs (value-added net- Walden, John, 14 Welch, Jack, 136, 208, 292– workweek, compressed, 425
works), 508 Walker Loyalty Report for 293, 295, 348 WorldCom, 197, 553–554
Varga, George, 621– 622 Loyalty in the Work- Weldon, William C., 63– 64, World Health Organization
variable costs, 558 place, 67 67, 238, 247 (WHO), 565
variable inspections, 597 Wal-Mart West, Cornel, 11 World Trade Center, 457
variance, 533 communication, 360 Western Electric, 44 World Wide Web. See
Varian Medical Systems, Inc., core competencies, 133 WFD Consulting, 540 Internet
118 culture, 284, 288–289 Wheeler, Maureen, 150, 310 written communication, 362–
Veda International, 174 decision making, 194, 216 Wheeler, Tony, 150, 310 363, 363
Vegso, Kathryn A., 622 environment, responses to, Whirlpool, 610
verbal communication, 362– 129–130 whistle-blowers, 84, 657– 658
363 inventory control, 561–562 Whitaker, Tracy, 419 X
vertical integration, 179 management information White, Miles, 82 XEL, 475– 476, 483
vertical job loading, 423 systems and, 47 WHO (World Health Organi- Xerox Corporation
vertical structure, 236, 267 motivation, 400 zation), 565 DfD at, 581
vertical teams, 467, 468 operational excellence and, wide area networks (WANs), diversity and, 419
vestibule training, 341 101 512 knowledge management,
VF Corporation, 523 strategy, 182, 183 Wiersema, Fred, 101 503, 504, 504
videoconferenences, satellite- subcontractors, 442, 443 Williams, Ocelia, 407 problem solving, 201
transmitted, 365 Walt Disney Company Wilson, Steve, 412– 413 strategy, 179–180
video interviews, 335, 335 culture, 285, 287–288 Wipro Ltd., 7 videoconferencing, 374
Vietnam, 565 Disney World as bench- women
Vietnam Era Veterans Read- mark, 99 Accenture and, 160
justment Act (1974), 319 mission statement, 132– Deloitte & Touche and, Y
virtual teams, 470 133 211, 283 Yahoo!, 195
visibility, organizational, sociocultural forces and, glass ceilings and glass Yetton, Phillip, 206
648– 650 142 walls, 209, 324–325 youth stage, 271, 271
vision, 109, 133 Walton, Sam, 129, 284, 287, in labor force, 141 Yukl, Gary, 435, 436, 437
Vogel, Bic, 15 360, 400, 417, 561–562 mentoring and, 651– 652
VoIP, 365 Wang, An, 379 mommy tracks, 347
Volkswagen AG, 53, 585 Wang, Fred, 379 Wood, Bob, 472 Z
voluntary separations, 347– Wang Laboratories, 379 Woodward, Joan, 272, 273 Zander, Edward J., 263, 268
348 WANs (wide area networks), WordPerfect, 373 Zeitz, Jochen, 201, 203
volunteering, 650 512 work environment and lead- Zeneca Agricultural Prod-
Volvo, 283, 423 Warner, Tom, 405– 406 ership, 453 ucts, 472
Vroom, Victor, 206 Warner Corporation, 406 workers. See employees Zenith, 55
Vroom and Yetton decision Waterman, Robert, 281 work force, 141, 323–324, zero-based budgeting, 557
tree, 206–207, 207 Watkins, Sherron, 84 537. See also diversity zero-inventory system. See
“we” approach, 446 Working Values Group, 70 just-in-time (JIT) inven-
web-based commerce. See work-in-process inventory, tory systems
W Internet and electronic 591 Zhang Ruimin, 603
W. L. Gore & Associates, 477 commerce “Workplace Romance Sur- Zingarelli, David, 311
wages and salaries, 350–351 web conferencing, 516 vey,” 333 Zingerman’s Deli, 372–373
Wagoner, Rick, 461 Weber, Max, 41– 43 work planning, 345 Zuboff, Shoshana, 373
Management Global Managing Valuing
Chapter in Action Applications Technology Diversity
1 Best Buy Wipro Ltd. (India) Customer Relationship MTV Networks

Management (CRM) (Chief Diversity
Officer)
2 Procter & Gamble Industry/Government Enterprise Resource Organizational

(P&G) (Japan) Planning (ERP) Diversity
3 Johnson & Johnson Bill and Melinda Gates Electronic Commerce Abbott
(J&J) Foundation (U.S.) Ethics (social
responsibility)
4 Toyota The Toyota Way (Japan) Technologically Literate Empowerment

Managers at Toyota
5 Wal-Mart The Metric System Knowledge Frito-Lay

(Great Britain) Management (KM) Cultural Festival
6 Southwest Airlines Mercedes-Benz (U.S.) Database Accenture

(women)
7 Microsoft Puma (Germany) Breakthrough Business Pathlore Inc.

Models (managing older
workers)
8 UPS Vanguard Info Solutions Outsourcing Hoffman

(India) Agency
9 Motorola Nokia (Finland) Collaboration Deloitte &

Touche
10 Monster Lifetime Employment Video Interviews Harassment

(Japan) Prevention
11 American Airlines Samsung (South Korea) Real-Time Customer Racial Diversity

Support
12 SAS Institute Semco (Brazil) Personalization GNL

(diversity audit)
13 Starbucks Wal-Mart Disaster Recovery Male and Female

Subcontractors (U.S.) Leadership
14 Google Siemens AG (Germany) Web Log or Blog GB Tech Inc.

(retired team
members)
15 Boeing BP (Great Britain) Knowledge Electronic

Management at Xerox Meetings
16 Harrah’s Bird Flu (Vietnam) RFID Age

Entertainment Discrimination
Appendix A French Rags NA NA NA
Appendix B Haier NA NA NA
Appendix C Intel NA NA NA
Ethical Application On the Job Biz Flix
Management Case Video Case Video Case
Do Not Call List Circuit City Original Penguin 8 Mile
MEECO Ford Original Penguin Back to the Future,

(Lean manufacturing) Part II
BuildingBlocks International Tenet Organic Valley Emperor’s Club

(1000 Challenge)
Raytheon Russian Auto Quality Peapod Apollo 13

(quality and ethics)
Cola Wars Barnes & Noble Lonely Planet Blue Crush

(exclusive contracts)
Employee Privacy IBM Timbuk2 The Bourne Identity
WorldCom Apple Inc. Timbuk2 Dr. Seuss’

(securities fraud) How the Grinch
Stole Christmas
Enron, Merrill Lynch Merlin Metalworks P.F. Chang’s Babe

(payoffs and kickbacks)
Hewlett-Packard DaimlerChrysler Lonely Planet Backdraft

(profits/layoffs)
Workplace Conyers-Riverside PepsiCo Bowfinger

Romances Ford
Ralcorp Holdings (imitation) Alcoa NEADS Patch Adams
Oracle (pink slips) The Container Store P.F. Chang’s For Love of the Game
Risk International Oldsmobile P.F. Chang’s U-571

(peer reviews)
Metamor Enterprise Solutions Motorola NEADS Apollo 13

(team compensation)
Database Marketing VF Corp. Peapod Lorenzo’s Oil
Enron (trust) Toshiba Peapod Casino
NA NA NA NA
NA NA NA NA
NA NA NA NA

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MANAGEMENT

Meeting and Exceeding Customer Expectations

VP/Editorial Director: Marketing Manager: Photo Manager:

Part 2: Planning and Decision Making 127

Part 3: Organizing 223

Part 4: Staffing 313

Part 5: Leading 431

Part 6: Controlling 497

Chapter 2: Management Thought: Past and Present 34

Chapter 3: Management Ethics and Social Responsibility 62

Ethical Management: BuildingBlocks International, 1000 Challenge 87

Chapter 4: Management’s Commitments

PART 2: PLANNING AND DECISION MAKING 127

Chapter 6: Planning and Strategy 152

Chapter 7: Making Decisions 190

Seven-Step Decision-Making Process 197

PART 3: ORGANIZING 223

Ethical Management: Payoffs and Kickbacks—Who Pays? 245

Chapter 9: Organizational Design, Culture, and Change 262

Implementation of Change 299

PART 4: STAFFING 313

Chapter 11: Communication: Interpersonal

Chapter 12: Human Motivation 390

Valuing Diversity: GNL Gets A Wake-up Call 420

PART 5: LEADING 431

Chapter 14: Team Management and Conflict 464

Valuing Diversity: Experience Counts 478

PART 6: CONTROLLING 497

Chapter 16: Control: Purpose, Process, and Techniques 526

Types of Controls and Control Systems 535

Management of Operations 586

Appendix B: International Management 602

Appendix C: Succeeding in Your Organization 632

Organizational Dilemmas 657

• A Global Applications feature demonstrating the successful application of

GLOBAL APPLICATIONS Part 3 Organizing

Chapter 2 Management Thought: Past and Present

How the Pursuit of Quality

Can Alienate Customers

• A Valuing Diversity feature depicting unique ways in which organizations

Chapter 9 Organizational Design, Culture, and Change

VALUING DIVERSITY 283

Deloitte & Touche Changes

• A Managing Technology feature highlighting techniques that can make the

MANAGING TECHNOLOGY Part 3 Organizing

• A Chapter Summary providing a narrative explanation for each of the chap-

• Internet Exercises designed to help in applying one or more of the chapter’s

Organization of the Content

Part 2: Planning and Decision Making

the most relevant theories. It gives special consideration to

Chapter 13 looks at leadership and details its importance and associations

Reel to Real Video Package (0-324-56841-X)

BIZ FLIX VIDEO CASE

Instructor’s Manual (0-324-53685-2)—prepared by Harold Babson, Colum-

Test Bank (0-324-53686-0)—prepared by Ross Mecham, Virginia Polytechnic

PowerPoint (0-324-53687-9)—prepared by Charlie Cook, The University of

Web Site (http://www.thomsonedu.com/management/plunkett)

Management Interactive Self-Assessments (0-324-20187-7)

InfoTrac College Edition