PK Book 6614

managing
NOW!
Gary Dessler
Florida International University
Jean Phillips
Rutgers University
Houghton Mifflin Company Boston New York

To Samantha
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ISBN-13: 978-0-618-83347-4
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1 2 3 4 5 6 7 8 9—CRK—11 10 09 08 07
BRIEF CONTENTS
PREFACE xi
PART ONE THE ENVIRONMENT OF MANAGING NOW 1

1 MANAGING AND THE EVOLUTION OF MANAGEMENT 1
2 ETHICAL AND SOCIAL ISSUES 29
3 MANAGING IN A GLOBAL ENVIRONMENT 59
4 MANAGING ENTREPRENEURSHIP AND INNOVATION 89
PART TWO INFORMATION AND DECISION MAKING NOW 116

5 INFORMATION AND KNOWLEDGE MANAGEMENT 116
6 DECISION MAKING NOW 144
PART THREE PLANNING AND CONTROLLING NOW 175

7 PLANNING AND STRATEGIC MANAGEMENT 175
8 CONTROLLING 208
9 MANAGING OPERATIONS AND SUPPLY CHAINS 233
PART FOUR ORGANIZING NOW 263

10 ORGANIZING 263
11 DESIGNING AND CHANGING ORGANIZATIONS 303
12 HUMAN RESOURCE MANAGEMENT 331
PART FIVE LEADING NOW 372

13 LEADING 372
14 MOTIVATING EMPLOYEES 403
15 IMPROVING COMMUNICATION 435
16 BUILDING TEAMWORK, COMMUNITY, AND CULTURE 466
17 MANAGING TRUST AND COLLABORATION 496
PHOTO CREDITS 516

ENDNOTES 517
NAME INDEX 547
SUBJECT INDEX 552
iii
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CONTENTS
PREFACE xi
PART ONE THE ENVIRONMENT OF MANAGING NOW 1

I MANAGING AND THE EVOLUTION OF MANAGEMENT 1
OPENING VIGNETTE: J. Crew 1
What Managers Do 2
■ W INDOW ON M ANAGING N OW : Andrea Jung Turns Avon Around 2
The Managerial Skills 11
CHAPTER SUMMARY 26
The Evolution of Modern Management 12
DISCUSSION QUESTIONS 27 Managing Now 21
EXPERIENTIAL EXERCISES 27 ■ P RACTICE IT: J. Crew 24
■ W INDOW ON M ANAGING N OW : Virtual Integration at Dell Computer 25
CASE STUDY
NO RULES, JUST RIGHT 28 What’s to Come 26
2 ETHICAL AND SOCIAL ISSUES 29
OPENING VIGNETTE: Sarbanes-Oxley Act of 2002 29
Ethics in an Age of Information Technology 30
What Influences Ethical Behavior at Work? 34
Encouraging Ethical Behavior at Work 39
CHAPTER SUMMARY 56 ■ I MPROVING YOUR E THICS -B UILDING S KILLS 42
DISCUSSION QUESTIONS 57
■ W INDOW ON M ANAGING N OW : Complying with Sarbanes-Oxley and Other Regulations 45
EXPERIENTIAL EXERCISES 57
■ P RACTICE IT: DTE Energy’s Web-Based Ethics Training System 46
CASE STUDY
ALLSTATE’S DISAPPEARING
Social Responsibility Now 46
AGENTS 58 Managing Diversity 51
3 MANAGING IN A GLOBAL ENVIRONMENT 59
OPENING VIGNETTE: Tramco, Inc. 59
Globalization 60
How and Why Do Companies Conduct Business Abroad? 61
■ W INDOW ON M ANAGING N OW : Shanghai GM 64
The Manager’s International Environment 66
CHAPTER SUMMARY 86
Planning, Organizing, and Controlling in a Global Environment 75
■ W INDOW ON M ANAGING N OW : Global Clustering 78
■ P RACTICE IT: Tramco, Inc. 79
CASE STUDY
U.S. BOOKSELLER FINDS A STRONG Leading and Motivating in a Multicultural Environment 80
PARTNER IN GERMAN MEDIA ■ W INDOW ON M ANAGING N OW : Dräger Safety 81
GIANT 87 ■ I MPROVING YOUR C ULTURAL I NTELLIGENCE S KILLS 85
v
vi Contents
4 MANAGING ENTREPRENEURSHIP AND INNOVATION 89

OPENING VIGNETTE: Procter & Gamble 89
Introduction: Entrepreneurship and Innovation 90
Entrepreneurship Today 91
What It Takes to Be an Entrepreneur 94
Getting Started in Business 97
CHAPTER SUMMARY 114 ■ W INDOW ON M ANAGING N OW : Choosing a Web-Based Business 104
Managing Innovation and New-Product Development 105
■ W INDOW ON M ANAGING N OW : Using Computerized Business-Planning Software 106
CASE STUDY
GETTING BY WITH A LITTLE HELP Innovation Now 109
FROM HIS MOTHER’S FRIENDS 115 ■ P RACTICE IT: Collaborative Innovation at P&G 112
PART TWO INFORMATION AND DECISION MAKING NOW 116

5 INFORMATION AND KNOWLEDGE MANAGEMENT 116
OPENING VIGNETTE: Caterpillar Inc. 116
Data, Information, and Knowledge 117
Information Systems for Managing Organizations 120
■ W INDOW ON M ANAGING N OW : Computers Add Value at Bissett Nursery 124
CHAPTER SUMMARY 141 Enterprise Systems and Knowledge Management 126
Telecommunications and Computerized Networks 130
■ W INDOW ON M ANAGING N OW : Ryder System’s Knowledge Management Center 131
CASE STUDY
■ P RACTICE IT: Caterpillar 132
INFORMATION TECHNOLOGY WINS
THE DAY FOR KNITMEDIA 143 Managing Now: Managerial Applications of Information Technology 138
6 DECISION MAKING NOW 144

OPENING VIGNETTE: Fortis Bank 144
The Basics of Decision Making 145
How to Make Decisions 149
Managing Now: Technology-Supported Decision Making 154
■ W INDOW ON M ANAGING N OW : Analytics Tools 156
■ W INDOW ON M ANAGING N OW : Baylor University 158
CHAPTER SUMMARY 168
How to Make Even Better Decisions 159
■ P RACTICE IT: Fortis Bank 160
CASE STUDY
Avoiding Psychological Traps 165
WHICH ROUTES TO FLY? 170 Chapter 6 Appendix: Quantitative Decision-Making Aids 171
Contents vii
PART THREE PLANNING AND CONTROLLING NOW 175

7 PLANNING AND STRATEGIC MANAGEMENT 175
OPENING VIGNETTE: Oxford University Press 175
The Nature and Purpose of Planning 176
Forecasting 181
■ W INDOW ON Demand Forecasting at Wal-Mart 182
M ANAGING N OW :
■ P RACTICE IT: Demand Forecasting and Planning at Oxford University Press 183
CHAPTER SUMMARY 205 ■ I MPROVING YOUR F ORECASTING S KILLS : Don’t Get Blind-Sided 186
DISCUSSION QUESTIONS 205 Types of Plans 186
Strategic Planning 188
CASE STUDY ■ W INDOW ON M ANAGING N OW : Pella’s New Competitive Advantage 195
THE JETBLUE AIRWAYS
STRATEGY 206 Strategy Execution and Digital Dashboards 198
8 CONTROLLING 208
OPENING VIGNETTE: Controlling the Cappuccino Makers at Starbucks 208
The Fundamentals of Effective Control 209
■ W INDOW ON M ANAGING N OW : Using Technology to Stay in Control at UPS 212
Traditional Controls 214
Managing Now: IT-Enabled Control Systems 219
■ W INDOW ON M ANAGING N OW : Millipore Corp. Integrates
CHAPTER SUMMARY 231 Its Global Operations with ERP 221
EXPERIENTIAL EXERCISES 231 How Do People React to Control? 224
CASE STUDY Commitment-Based Control Systems 225
CONTROLLING RITZ-CARLTON 232 ■ P RACTICE IT: Controlling the Cappuccino Makers at Starbucks 230
9 MANAGING OPERATIONS AND SUPPLY CHAINS 233

OPENING VIGNETTE: Will Whirlpool Deliver? 233
The Basics of Operations Management 234
Operations and Inventory Planning and Control 240
CHAPTER SUMMARY 260 Controlling for Quality and Productivity 245
World-Class Operations Management Methods 249
CASE STUDY
Supply Chain Management 254
THE PRODUCTION PROCESS AT ■ P RACTICE IT: Whirlpool Delivers 256
WHEELED COACH 262 ■ W INDOW ON M ANAGING N OW : Zara 259
viii Contents
PART FOUR ORGANIZING NOW 263

10 ORGANIZING 263
OPENING VIGNETTE: Staying in Touch at Millipore 263
Departmentalization: Creating Departments 265
Achieving Coordination 276
■ W INDOW ON M ANAGING N OW : LG Electronics 278
Authority and the Chain of Command 280
■ W INDOW ON M ANAGING N OW : An IT-Based Independent Integrator at Thales 280
■ I MPROVING YOUR D ELEGATING S KILLS 283
CHAPTER SUMMARY 300
Organizing to Manage Change 287
EXPERIENTIAL EXERCISES 301 Modern Organizations 291
■ I MPROVING YOUR B OUNDARY-M ANAGING S KILLS 292
CASE STUDY
ORGANIZING GREENLEY ■ W INDOW ON M ANAGING N OW : Brady Corp. 297
COMMUNICATIONS 301 ■ P RACTICE IT: Millipore 299
11 DESIGNING AND CHANGING ORGANIZATIONS 303

OPENING VIGNETTE: Yellow Transportation 303
Types of Organizational Change 304
■ W INDOW ON M ANAGING N OW : Baker & McKenzie 306
Managing Now: Reorganizing, Reengineering, and Business
Process Management 308
■ W INDOW ON M ANAGING N OW : Reengineering the Loan Process 312
CHAPTER SUMMARY 329
Dealing with Resistance to Change 315
■ P RACTICE IT: Bill Zollars 318
CASE STUDY
A Process for Leading Organizational Change 318
IMMELT SPLITS GE CAPITAL 330 Organizational Development and Conflict Management 323
12 HUMAN RESOURCE MANAGEMENT 331

OPENING VIGNETTE: Sutter Health 331
Human Resource Management’s Strategic Role 332
■ W INDOW ON M ANAGING N OW : Signicast 333
Writing Job Descriptions and Recruiting Employees 335
■ W INDOW ON M ANAGING N OW : Cisco Systems Inc. 344
■ P RACTICE IT: Sutter Health 344
■ W INDOW ON M ANAGING N OW : City Garage 345
Interviewing and Selecting Employees 345
Contents ix
CHAPTER SUMMARY 369 Orienting and Training Employees 355

DISCUSSION QUESTIONS 370 ■ I MPROVING YOUR T RAINING S KILLS : On-the-Job Training 358
Appraising and Maintaining Employees 359
CASE STUDY ■ W INDOW ON M ANAGING N OW : GM and NCR 364
THE OUT-OF-CONTROL
INTERVIEW 371 Understanding HR’s Legal Framework 364
PART FIVE LEADING NOW 372

13 LEADING 372
OPENING VIGNETTE: Innovation Leadership at Whirlpool 372
What Is Leadership? 374
■ W INDOW ON M ANAGING N OW : How Can Technology Help New Leaders? 376
What Characteristics Do Leaders Have? 377
■ W INDOW ON M ANAGING N OW :How Does Technology Increase the Importance
of Leaders’ Communication Skills? 384
CHAPTER SUMMARY 400
What Do Leaders Do? 385
DISCUSSION QUESTIONS 400 What Influences a Leader’s Effectiveness? 389
EXPERIENTIAL EXERCISES 401 ■ I MPROVING YOUR L EADERSHIP S KILLS :
Least Preferred Coworker Scale 392
CASE STUDY ■ P RACTICE IT: Empowerment Through Technology at Whirlpool 396
STEVE BENNETT OF INTUIT 401 ■ W INDOW ON M ANAGING N OW : E-Leadership 399
14 MOTIVATING EMPLOYEES 403

OPENING VIGNETTE: Mercury Interactive Corporation 403
What Is Motivation and Where Does It Come from? 404
Content Approaches to Motivation 406
■ I MPROVING YOUR M OTIVATION S KILLS : A Job Enrichment Evaluation Form 414
Process Approaches to Motivation 415
■ W INDOW ON M ANAGING N OW : Motivating with Digital Dashboards 417
Learning and Reinforcement Approaches to Motivation:
CHAPTER SUMMARY 432
How Consequences Shape Behavior 422
DISCUSSION QUESTIONS 433 Rewarding Performance 425
EXPERIENTIAL EXERCISES 433 ■ W INDOW ON M ANAGING N OW : Using Internet Tools to Motivate
CASE STUDY
and Reward Employees 426
MOTIVATION AT GENERAL ■ P RACTICE IT: Online Incentives at Mercury Interactive Corporation 428
MOTORS 434 ■ W INDOW ON M ANAGING N OW : Using Technology to Retain Knowledge Workers 432
15 IMPROVING COMMUNICATION 435

OPENING VIGNETTE: Communication at Lucent 435
The Communication Process 436
x Contents
Organizational Communication 443

■ W INDOW ON M ANAGING N OW :Using Portals to Improve Performance 445
■ P RACTICE IT: Technology-Enabled Communication at Lucent 447
CHAPTER SUMMARY 463
Communication Media 447
DISCUSSION QUESTIONS 463 ■ W INDOW ON M ANAGING N OW : Building an Intranet 452
EXPERIENTIAL EXERCISES 464 Interpersonal Communication Skills 455
CASE STUDY ■ I MPROVING YOUR C OMMUNICATION S KILLS 460
ELECTRONIC MONITORING 464 ■ W INDOW ON M ANAGING N OW : E-Mail Tips 461
16 BUILDING TEAMWORK, COMMUNITY, AND CULTURE 466

OPENING VIGNETTE: Customer-Service Representatives at Medco 466
Basics of Teamwork 467
Building Teamwork 473
■ I MPROVING YOUR T EAMWORK S KILLS : Are You Emotionally Intelligent? 478
■ W INDOW ON M ANAGING N OW : Virtual Team Technology at Steelcase 483
CHAPTER SUMMARY 493
Building Community 483
■ P RACTICE IT: Using Technology to Build Community at Medco 485
■ W INDOW ON M ANAGING N OW :How Technology Enables Communities of Practice 487
CASE STUDY
IMPROVING TEAMWORK AT Building Culture 488
NOVARTIS 494 ■ W INDOW ON M ANAGING N OW : Technology-Assisted Culture at Xerox 492
17 MANAGING TRUST AND COLLABORATION 496

OPENING VIGNETTE: Saturn Corp. 496
Building Trust and Collaboration 497
Examples of Collaborative Efforts 500
Collaboration Technology 503
How to Improve Collaboration 506
CHAPTER SUMMARY 513 ■ W INDOW ON M ANAGING N OW : Solectron Corp. 509
DISCUSSION QUESTIONS 514 Building Trust 511
EXPERIENTIAL EXERCISES 515 ■ P RACTICE IT: Saturn’s Technology Aids Its Customers and Dealers 511
CASE STUDY ■ W INDOW ON M ANAGING N OW : Customer Relationship Management
AT&T 515 Collaboration at Audi 513
PHOTO CREDITS 516

ENDNOTES 517
NAME INDEX 547
SUBJECT INDEX 552
PREFACE
I nformation technology is a familiar aspect of our lives. We use computers,
e-mail, software, cell phones, iPods, fax machines, flash drives, scanners, and
BlackBerry®-type devices every day. We search for travel information on Expedia,
download airline tickets from AA.com, and register for and take college courses
online. Computerized diagnostic tools analyze our autos’ problems, point-of-sale
computers at Target process our credit-card purchases, and computerized traffic
systems manage our trips to work.
Perhaps not so obvious is the extent to which managers rely on information
and information technology to run their companies. For example, how does
Seattle-based Starbucks Coffee Company, with over 12,000 stores globally, control
what’s happening in each of those stores? Its “XPR” global information system
monitors point-of-sale measures at each store and triggers reports back to Seattle
when a store’s measures move out of control. Caterpillar Corporation needed a
better way for its employees to share their knowledge. The company installed a
new Web-based system that its employees now use to collaborate and share
knowledge via chatroom-type discussions and e-mail bulletin boards. Michael
Dell and thousands of other managers use “digital dashboards” with computerized
desktop graphs and charts to get real-time information on how their companies’
plans are progressing. Procter & Gamble no longer relies on its own engineers to
create new products. Its InnovationNet Web portal enables 18,000 outside experts
to share their ideas with P&G’s engineers, and thus bolster the firm’s innovation
efforts. The bottom line is that in any aspect of managing now, it’s impossible to be
world-class without using information technology.
Managing Now
Managing Now! is a basic management textbook for the Principles of Management
course. The book competes with the many popular principles books now on the
market and basically follows the familiar management process theme. However,
Managing Now! recognizes that the nuts and bolts of what managers do is qualita-
tively altered by the Internet and IT. In practice, we think this means that basic
management textbooks need to be more explicit at showing how the Internet and
IT change how managers carry out tasks such as planning, organizing, and man-
aging interunit relations.
Throughout history, some things in management have not and will not quickly
change. Managers still plan, organize, lead, and control. And they still get things
done through people—by communicating, leading, appraising, and coaching.
This is a book on management. We therefore focus our attention on what
managers should know about planning, organizing, leading, controlling, and
dealing with people. However, managers now manage in a fast-changing and
highly competitive global environment. To succeed here, they use information
technology devices including software systems, cell phones, and PDAs to do their
jobs. We therefore include in this book discussions about how managers use these
devices. Every chapter shows, with “Managing Now” examples, how the manager
plans, organizes, leads, and controls, in light of the Internet, IT, and ever-changing
technology.
xi
xii Preface
Syllabus Flexibility
Managing Now! also includes several new topics, including certain selected topics
in Chapters 5 (the role of information systems/IT, knowledge management, and
the Internet in managing companies), 9 (managing supply chains and opera-
tions), 16 (building community, culture, and teamwork), and 17 (encouraging
sharing and collaboration).
However, we recognize that few professors have the luxury of assigning 17 full
chapters. We’ve therefore included summary descriptions of core technology top-
ics such as supply chain, enterprise, and knowledge management systems in
Chapter 1, as well as in Chapters 5 (Information and Knowledge Management)
and 9 (Managing Operations and Supply Chains). We touch on collaboration in
several chapters, including Chapters 3 (Managing in a Global Environment),
9 (Managing Operations and Supply Chains), and 17 ( Managing Trust and Collabo-
ration). The professor can therefore assign this book without covering one or more
of Chapters 5 , 9, and 17, with no loss of continuity.
The Human Element Remains Crucial

Interestingly, the Internet and information technology haven’t diminished the
manager’s leadership role—quite the opposite. When Brady Corp. installed a new
Web-based ordering system, its managers wisely anticipated that the system
would fail unless they had employees in self-managing teams with the skills and
commitment to do the new high-tech jobs. Listening, communicating, motivat-
ing, and encouraging trust and collaboration have never been more important.
Managing Now! fully addresses, comprehensively and with the most recent re-
search findings, the human side of managing, including a new and unique chap-
ter (17), Managing Trust and Collaboration.
The Book’s Learning Features

We’ve included many exciting learning features in each chapter. Each chapter
starts with an opening vignette, which challenges students to solve an actual man-
agement problem. The chapter’s Practice IT feature then shows how the manager
used information technology to solve the problem.
Each chapter also starts with Behavioral Objectives that are broken out into
the Learn It, Practice It, and Apply It models. Students are not just given a list of
theoretical objectives. They are also urged to put these concepts into practice.
The Learn It objectives refer to the major concepts in the text. The Practice It ob-
jectives refer students to the end-of-chapter exercises and case study. And, finally,
the Apply It objectives refer students to the online simulation, Managing Now!
LIVE.
Online Study Center
The Managing Now! LIVE simulation highlights and reviews key topics
ACE the Test from each chapter and provides self-paced interactive tools for reinforcing and
Managing Now! LIVE practicing what students will learn in the book. The simulation mirrors the peda-
gogically sound Learn It, Practice It, and Apply It models.
Boxed Window on Managing Now features illustrate how actual managers
have used IT to improve their operations. Various Managing Now chapter outline
headings highlight managers’ use of technology in real situations. Boxed Improv-
ing Your Skills features provide readers with practical managerial skills.
Preface xiii
Finally, each chapter concludes with a numbered summary, discussion ques-

tions, experiential exercises, and a case study with questions. All of these features
are meant to reinforce concepts from within the chapter and make students prac-
tice what they’ve learned in the chapter.
Acknowledgments
We are very grateful to the many people who supported us in making Managing
Now! a reality. At Houghton Mifflin, we are grateful to George Hoffman and Lisé
Johnson for their advice, dedication, intelligence, insight, creativity, and courage
in bringing this book to the market. Thanks to Julia Perez and Nancy Blodget for
making the book’s editorial and production process a smooth and pleasant one.
We thank Nicole Hamm and the Houghton Mifflin marketing and sales staff for
their hard work and dedication to making adopters aware of Managing Now!.
We are grateful to Managing Now! ’s academic reviewers for their support, dili-
gence, and many helpful suggestions.
John Anstey, University of Nebraska, Omaha
Karen Barr, Penn State, Beaver Campus
Bret Becton, Winthrop University
James D. Bell, Texas State University
Keith Benson, Winthrop University
Mauritz Blonder, Hofstra University
Bruce Bloom, DeVry University, Chicago
Lon Doty, San Jose State University
Bret R. Fund, Penn State University
Melissa Gruys, Wright State University
Rebecca Guidice, University of Nevada, Las Vegas
J.W. Haddad, Seneca College of Applied Arts and Technology
James Hess, Ivy Tech State University
Nancy B. Higgins, Montgomery College
Phillip Jeck, University of Central Oklahoma
Carol Jensen, Northeast Iowa Community College
Stephen Jones, Southwest Missouri State University
Cynthia Lengnick-Hall, University of Texas, San Antonio
Susan Looney, Delaware Technical & Community College
Grace McLaughlin, University of California, Irvine
Mark Miller, Carthage College
LaVelle Mills, West Texas A&M University
Benham Nakhai, Millersville University of Pennsylvania
Muhammed Obeidat, Southern Poly State University
Leah Ritchie, Salem State College
Stephen Schuster, California State University, Northridge
Marianne Sebok, Community College of Southern Nevada
Mansour Sharifzadeh, California State Poly University, Pomona
Leslie Shore, Concordia University
Gary Springer, Texas State University, San Marcos
Charles Stubbart, Southern Illinois University
Robert Tanner, California State University, East Bay
On a personal note, we want to thank our families. Gary’s mother, Laura
Dessler, was always a source of support, and would have been very proud to see
xiv Preface
and hold this book. His wife Claudia’s managerial expertise helped make it possi-
ble for Gary to concentrate on his writing. As usual, the advice and support of his
son, Derek, the best people manager he knows, were invaluable. Jean’s husband,
Stan, and sons, Tyler and Ryan, provided the love and support that enabled Jean to
complete her work on this book.
Gary Dessler
Jean Phillips
About the Authors

Gary Dessler is a Founding Professor in the College of Business at Florida Interna-
tional University, where he teaches courses in human resource management,
management, and strategic management, and where he also served for twelve
years as associate dean and department chair. He has degrees from New York
University (B.S.), Rensselaer Polytechnic Institute (M.S.), and the Baruch School of
Business of the City University of New York (Ph.D.). Dessler’s other books include
Management: Modern Principles and Practices for Tomorrow’s Leaders, Revised
Third Edition (Houghton Mifflin 2007), Framework for Human Resource Manage-
ment (Prentice Hall), and Winning Commitment: How to Build and Keep a Com-
petitive Workforce (McGraw-Hill). Students around the world use his best-selling
Human Resource Management, Tenth Edition (Pearson/Prentice Hall 2005) in var-
ious languages, including Chinese. He has published articles on employee com-
mitment, leadership, and quality improvement in journals, including Academy of
Management Executive and SAM Advanced Management Journal. He is a visiting
professor at Renmin University of China and served for three years on the Institute
of International Education’s national selection committee for the Fulbright stu-
dent awards. Dessler consults in strategic planning, management, and human re-
source management.
Jean Phillips is a professor in the School of Management and Labor Relations at

Rutgers University. For over fifteen years, she has taught classroom and hybrid
classroom/online courses in strategic human resource management, organiza-
tional behavior, management, staffing, and teams and leadership in the United
States and in Singapore. Jean earned both her B.A. and Ph.D. in Business Adminis-
tration from Michigan State University. Her research interests focus on recruit-
ment and staffing, leadership and team effectiveness, and issues related to learn-
ing organizations. Her work has appeared in Academy of Management Journal,
Journal of Applied Psychology, Organizational Behavior and Human Decision
Processes, Personnel Psychology, Small Group Research, Business and Psychology,
and International Journal of Human Resource Management. Jean was among the
top 5% of published authors in Journal of Applied Psychology and Personnel Psy-
chology during the 1990s and received the 2004 Cummings Scholar Award from
the Organizational Behavior Division of the Academy of Management. She has
served on the Editorial Boards of Journal of Applied Psychology, Journal of Man-
agement, and Personnel Psychology. She is a member of the Academy of Manage-
ment and the Society for Industrial and Organizational Psychology. Her consulting
work includes the creation and evaluation of strategic staffing programs, coaching
on enhancing leadership and team performance, and strategic human resource
management.
MANAGING AND THE EVOLUTION 1
OF MANAGEMENT
J. Crew CHAPTER OUTLINE
Opening Vignette: J. Crew
A t first, J. Crew was a real success story. Starting as a direct-mail

retail business, its distinctive, collegiate lifestyle catalogs were a hit.
As catalog sales grew, J. Crew began opening stores with jeans, shirts,
● What Managers Do
WINDOW ON MANAGING NOW:
Andrea Jung Turns Avon Around
Organization Defined
and chinos priced a bit above stores like The Gap. Sales grew fast. But Management Defined
What Else Do Managers Do?
soon, J. Crew was struggling. Competitors were siphoning off its cus- Types of Managers
tomers. J. Crew struggled with an identity crisis, made worse by a Similarities and Differences in What
revolving door of top managers. Perhaps more unnerving, a new Managers Do
Do You Have the Traits to Be a
generation of retail managers at Zara, Benneton, and H&M was using Manager?
high-tech computerized systems to track daily store sales and to ● The Managerial Skills
produce and deliver almost overnight the fashions that were selling Technical Skills
Interpersonal Skills
best—tasks that often took
Conceptual Skills
J. Crew weeks or months to ● The Evolution of Modern
complete. With its sales, profits, Management
and prospects diminishing,Texas The Classical and Scientific
Management School
Pacific Group, a private The Behavioral School
investment company, bought The Administrative School
control of J. Crew. They tried The Management Science School
The Situational/Contingency School
for several years to revive the Modern Management Schools of
J. Crew brand. Then, a few years Thought
ago, they hired Millard Drexler, ● Managing Now
The Company of the Future Is
The Gap Inc.’s former CEO and Here Now
a famously successful retail man- Some Important Management
ager. The question was, What Information Systems
PRACTICE IT: J. Crew
steps should he take to turn J. Crew’s new CEO had to turn the company WINDOW ON MANAGING NOW:
J. Crew around? ■ around. Virtual Integration at Dell Computer
● What’s to Come
B E H AV I O R A L O B J E C T I V E S
After studying this chapter, you should be able to:
Show that you’ve learned the chapter’s essential information by

➤ Defining manager and organization.
➤ Listing and describing five things a manager can learn from the evolution of
management thought.
➤ Defining information technology and information system.
1
2 PART ONE CHAPTER 1 Managing and the Evolution of Management
Show that you can practice what you’ve learned here by

➤ Reading the opening vignette and giving three examples of what the new manager may do.
➤ Reading the exercises and answering the question,“Do I have what it takes to be a
manager?”
➤ Reading the chapter case study and listing the manager’s specific management tasks.
➤ Reading the chapter case study and explaining what environmental forces are
influencing the situation.
Online Study Center
ACE the Test
Show that you can apply what you’ve learned here by
Managing Now! LIVE ➤ Watching the simulation video and identifying the various functions the manager performs.
What Managers Do
Online Study Center
ACE the Test
Managing Now! LIVE M anagers can have the most remarkable effects on organizations. A few years
ago, Avon Products was struggling.1 Its whole back-end operation—buying
from suppliers, taking orders, and distributing products to sales reps—lacked au-
tomation. Sales reps took orders by hand. One-third of the orders went out wrong.
WINDOW ON MANAGING NOW

Andrea Jung Turns Avon Around
Within two years of becoming CEO, Andrea Jung had systems in one country couldn’t communicate with an-
turned Avon around. She did it by overhauling “everything other’s. At Avon’s headquarters,managers didn’t know what
about the way Avon does business: how it advertises, man- each country’s factories had in stock or were shipping. No
ufactures, packages, and even sells its products.”2 She one could plan the next day’s production levels.Things were
started with a turnaround plan. It included launching a slipping out of control. Avon sends out about 50,000 orders
new line of businesses, developing new products, building each day, and one-third of them went out wrong.
the sales force, and selling Avon products at retail stores. To solve this, Avon installed a single“supply chain man-
Next, she told R&D,“You’ve got two years. I need a break- agement system” in all its countries’ facilities.This system
through . . . . ”3 By the end of the year, Avon’s new Retroac- combines special software with new hardware and
tive, an anti-aging cream, sold $100 million. Jung also telecommunications devices such as handheld PDAs. Now,
reorganized Avon. She created an “office of the chairman.” every night, this new system “. . . collects supply chain in-
Now, many of the divisions that had their own managers formation from Avon’s 29 markets; information such as in-
report instead directly to her office.The effect was to flat- ventory, future sales demands, transport schedules, and
ten Avon’s chain of command (by cutting out a layer of sales history.”5 This information, along with the system’s
managers). This, Jung said, “. . . will significantly increase built-in planning software, automatically creates daily pro-
speed and flexibility in decision making . . . .” 4 duction and distribution plans for all of Avon’s facilities. It
Next, Jung appointed a new chief operating officer to also enables Avon sales reps to work collaboratively across
get Avon’s global operations under control. The company borders. For example, if a customer in Germany needs a
sells worldwide,and eachAvon facility around the world had product that is out of stock there, the rep might see that
its own unique computer system. In Poland, Germany, and it’s available in Paris and have it shipped from France.The
the United Kingdom, for instance, the shipping was manual. new high-tech system helped cut $400 million in costs.6
In other countries, it was computerized. The computer Andrea Jung’s effective management turned Avon around.
What Managers Do ■ 3
Customers no longer just wanted products like Avon’s that made them look good;
they also wanted healthier skin. Yet Avon spent a fraction of what competitors
L’Oréal and Estée Lauder spent on research and development. The company had
to take action. It appointed Andrea Jung as CEO. Within two years, she added new
products, raised Avon’s sales by tens of millions of dollars, and boosted profitabil-
ity by automating operations and cutting costs. The Window on Managing Now
feature shows how she did this.
The effect of good management is amazing. Take an underperforming—
even chaotic—situation and install a skilled manager, and he or she can soon get
the enterprise humming. In the New Orleans turmoil after Hurricane Katrina hit
several years ago, no one in government seemed to know what to do. People were
starving on rooftops, begging passing planes for help. The U.S. Army sent in
Lieutenant General Russell Honore. He swiftly established a chain of command,
decided what had to be done, prioritized those tasks, assigned officers to do
them, and created a communications structure through which he maintained
control.
● FEMA vs. Wal-Mart That storm brought out the best and the worst in several
management teams.7 Most people still remember that even days after Katrina hit
New Orleans, the U.S. government’s Federal Emergency Management Agency
(FEMA) was still trying to organize its rescue efforts. Compare that to Wal-Mart’s
response. Many people are understandably upset today with Wal-Mart manage-
ment’s labor relations actions in the past few years, for instance, with respect to
low wages. However, in the case of Katrina, Wal-Mart’s other management actions
were quite effective. Six days before Katrina hit, Wal-Mart’s emergency operations
center managers made plans to shut and guard potentially endangered stores, and
they worked out how they would reopen and restock them. Emergency merchan-
dise began moving to distribution sites close to New Orleans but outside Katrina’s
likely path. Twelve hours before the National Weather Service issued its hurricane
warning, Wal-Mart’s own meteorologists told Wal-Mart’s emergency operations
managers that Katrina would hit. Its stores hunkered down. Then, once Katrina
passed, hundreds of Wal-Mart trucks rolled out to restock stores, with desperately
needed food, water, and supplies. Wal-Mart’s labor relations policies are a serious
issue. But after Katrina, one police officer surveying the devastation said that the
city’s only lifeline was the Wal-Mart.
Manager effects like these don’t occur just in big companies. Right now, man-
agers at thousands of small businesses—diners, dry cleaners, motels—are running
their businesses well, with courteous, prompt, first-class service; high-morale
employees; and a minimum of problems like cold dinners, or pants not pressed
on time.
● The Ineffective Manager Yet the opposite can be true. Take an enterprise
that’s been managed well for years—say, a neighborhood stationery store—and
watch as a new, less-competent owner takes over. Shelves are suddenly in disarray,
products are out of stock, bills are unpaid. One study of forty manufacturing firms
concluded that effective management was more important than factors like mar-
ket share, firm size, industry average rate of return, or degree of automation.8
Another study concluded that organizations with better managers had lower
turnover rates and higher profits and sales per employees.9 About 90 percent of
the new businesses started this year will fail within five years; Dun & Bradstreet
says that the reason is usually poor management. The aim in this book is for you to
be a better manager. Let’s start with some definitions.
Organization Defined
All these enterprises—Avon, the diner, the dry cleaner, even the New Orleans res-
organization: a group of cue effort—are organizations. An organization consists of people with formally
people with formally assigned assigned roles who work together to achieve stated goals. Organizations need not
roles who work together to be just business firms. The word applies equally well to colleges, local govern-
achieve the group’s stated goals
ments, and nonprofits like the Red Cross. The U.S. government is an organization—
certainly a not-for-profit one—and its head manager, or chief executive officer, is
the president. All organizations have several things in common.
First, organizations are (or should be) goal-directed. Thirty strangers on a bus
from New York to Maine are not an organization, because they’re not working
together to accomplish some singular aim.
Organizations are also (one hopes) organized because everyone has a job to
do, and people know who does what. Even a local dry-cleaning business has an
organizational structure. Employees know who does what (pressers press, for
instance, and cleaners clean) and how the work (the incoming clothes) should
flow through the store and get cleaned and pressed.
But as we just saw, whether organizations achieve their goals or not depends
on how the organizations are managed. This is because organizations, by their na-
ture, cannot simply run themselves. Who would ensure that each employee knew
what to do? Who would ensure that all employees work together, more or less
harmoniously? Who would decide the goals? The answer is, the manager.
Management Defined
Management expert Peter Drucker said that management “. . . is the responsibility
for contribution.”10 In other words, managers are responsible for making sure that
manager: a person who plans, the company achieves its goals. Specifically, a manager is someone who is re-
organizes, leads, and controls sponsible for accomplishing an organization’s goals, and who does so by planning,
the work of others so that the organizing, leading, and controlling the efforts of the organization’s people.
organization achieves its goals
Management most often refers to the group of people—the managers—who are
management: the group of responsible for accomplishing an organization’s goals through planning, organiz-
people—the managers—who are ing, leading, and controlling the efforts of the organization’s people. However,
responsible for accomplishing management also refers to the totality of managerial actions, people, systems,
an organization’s goals through procedures, and processes in place in an organization (such as when someone
planning, organizing, leading, says, “the management of that crisis was totally inept”).
and controlling the efforts of the
organization’s people; also the
● Three Aspects of Managerial Work Our definitions of management high-
totality of managerial actions,
people, systems, procedures, light three key aspects of managerial work. First, a manager is always
and processes in place in an responsible for contribution—on his or her shoulders lies the responsibility for
organization accomplishing the organization’s goals. Therefore, while managers may apply
management theories, managing is never just theoretical. The manager is respon-
sible for getting things done. That is why former Honeywell CEO and successful
manager Lawrence Bossidy named his book Execution: The Discipline of Getting
Things Done.
Second, managers always get things done through other people. The
owner/entrepreneur running a small florist shop without the aid of employees is
not managing. Only when she starts hiring people and trying to get things done
through them can she call herself a manager. She’ll have to train and motivate her
new employees and put controls in place so that the person who closes the store
won’t borrow part of the day’s receipts.
The third aspect of managerial work refers to what managers actually do (and
why some people turn out to be better at managing than others). That third aspect
is that managers must be skilled at planning, organizing, leading, and controlling if
they are to accomplish the organization’s goals through other people. Manage-
ment writers traditionally refer to the manager’s four basic functions—planning,
management process: the organizing, leading, and controlling—as the management process. They include:
manager’s four basic functions
of planning, organizing, leading, ◗ Planning. Planning is setting goals and deciding on courses of action, develop-
and controlling ing rules and procedures, developing plans (for both the organization and those
who work in it), and forecasting (predicting or projecting what the future holds
for the firm).
◗ Organizing. Organizing is identifying jobs to be done, hiring people to do them,
establishing departments, delegating or pushing authority down to subordi-
nates, establishing a chain of command (in other words, channels of authority
and communication), and coordinating the work of subordinates.
◗ Leading. Leading is influencing other people to get the job done, maintaining
morale, molding company culture, and managing conflicts and communication.
◗ Controlling. Controlling is setting standards (such as sales quotas or quality
standards), comparing actual performance with these standards, and then
taking corrective action as required.
Some people think that managing is easy and that anyone with half a brain
can do it. But if it is so easy, why do 90 percent of new businesses fail within five
years due to poor management? Why did FEMA drop the ball when Katrina hit?
The words about management and managing in this book are easy to read. How-
ever, don’t let that lull you into thinking that managing is easy.
● Application Example: You Too Are a Manager Managing is something

we’re often called upon to do every day. In business, for instance, even a nonman-
agerial employee may have to manage once in a while. The marketing manager
might ask a marketing analyst to head a team analyzing a product’s potential.
Everyone who works should know the basics of managing.
Furthermore, life sometimes requires management skills. For example, sup-
pose that you and some friends want to spend the summer in France. They’ve
asked you to manage the trip. Where would you start? (Resist the urge to delegate
the job to a travel agent, please.) Start with planning. You will need to plan the
dates the group is leaving and returning, the cities and towns in France to visit,
the airline to take you there and back, how the group will get around in France, and
where to stay while you are there.
You might divide the work and create an organization. For example, put Rosa
in charge of checking airline schedules and prices, Ned in charge of checking
hotels, and Ruth in charge of checking the sites to see in various cities as well as the
transportation between them. However, the job won’t get done without supervi-
sion. For example, Ned can’t schedule hotels unless he knows from Ruth what sites
to see and when. You will either have to schedule weekly manager’s meetings or
coordinate the work of these people yourself.
Leadership can also be a challenge. Rosa is a genius with numbers, but she
tends to get discouraged. You’ll have to make sure she stays focused.
Finally, you will have to ensure that the whole project stays in control. At
a minimum, make sure that all those airline tickets, hotel reservations, and
itineraries are checked so there are no mistakes. Now let us consider another
real-life managing example.
● Application Example: Meg Whitman Builds eBay It took Meg Whitman

barely five years from the time eBay’s founders hired her to take eBay from almost
nothing to billions in sales. She did it by effectively applying the management
process. In terms of planning, in 2000, she said that eBay would achieve $3 billion
a year in revenue by 2005, and it did.
She organized the company. She split eBay into twenty-three main business
categories (such as sports, and jewelry and watches). Then Whitman assigned ex-
ecutives to manage each category (and many of their 35,000 subcategories). She
also organized a customer-support group that employs close to half of eBay’s
employees.
As a leader, she’s reportedly soft-spoken, participative, humble but firm. Be-
hind that quiet exterior is someone who keeps tight control. eBay reportedly meas-
ures almost everything, from how much time each user remains on the site to
eBay’s take rate (the ratio of revenues to the values of goods buyers and sellers
traded on eBay). Whitman even monitors eBay’s discussion boards to see what
users are saying.
By 2006, faced with intense competition, eBay’s growth rate was slowing.
Many of eBay’s most successful online sellers were exploring other ways to market
their products. One that sold 1,000 pairs of shoes a day on eBay was promoting its
own website and partnering with new websites that provide comparison prices.
Newer companies like Google were introducing competing services, such as
Froogle. As one analyst put it, “they’ve reached a point in their growth where
things are beginning to shift against [eBay].”11 Even a top CEO like Meg Whitman
can’t afford to relax for a moment. She knows that only the most agile and best-run
companies survive.12
Table 1.1 summarizes some differences between traditional CEOs and the
sorts of talents it takes to run today’s e-businesses such as eBay. With technology
and competition changing so fast, it takes someone who thrives on ambiguity and
change and who can make good decisions very fast.
T ABLE 1.1
CEOs of e-Businesses Need Some Special Skills
Traditional Company’s CEO eBay, Google-Type Company E-CEO
Encouraging employees Evangelizing to employees
Alert to change Obsessed with change
Cordial Brutally frank
Infotech literate Infotech superliterate
Fast decisions Superfast decisions
Can handle ambiguity Thrives on ambiguity
A paragon of good judgment Also a paragon of good judgment
Average age: fifty-seven Average age: thirty-five
Rich Really rich
Source: Adapted from Fortune, 24 May 1999, p. 107. © 1999 Time Inc. All rights reserved.
What Else Do Managers Do?

Planning, organizing, leading, and controlling are the heart of what managers do,
but there is more to the manager’s job. For example, when Apple CEO Steve Jobs
presented the new video iPod a while ago, he was acting as Apple’s spokesperson.
● Mintzberg’s Managerial Roles Professor Henry Mintzberg studied what

managers actually do. Mintzberg found that in a typical day, managers didn’t just
plan, organize, lead, and control. Instead, they also filled these various roles:
◗ The figurehead role. Every manager spends some time performing ceremonial
duties.
◗ The leader role. Every manager must function as a leader, motivating and
encouraging employees.13
◗ The liaison role. Managers spend a lot of time in contact with people outside
their own departments, essentially acting as the liaison between their depart-
ments and other people within and outside the organization.
◗ The spokesperson role. The manager is often the spokesperson for his or her
organization.
◗ The negotiator role. Managers spend a lot of time negotiating; the head of an air-
line, for instance, might try to negotiate a new contract with the pilots’ union.
● The Manager as Innovator In today’s fast-changing world, managers also

have to make sure their companies can innovate new products and react quickly
to change. Therefore, management experts Sumantra Ghoshal and Christopher
Bartlett say that successful managers must also improve their companies’ abilities
to be more innovative.14 Effective managers do this in three ways:
◗ They encourage entrepreneurship.15 In their study of successful companies,
Ghoshal and Bartlett found that successful managers got employees to think of
themselves as entrepreneurs. For example, the managers made sure employees
had the support and rewards they needed to create and run their own projects.
(We discuss entrepreneurship in Chapter 4.)
◗ They build competence. Bartlett and Ghoshal also found that successful man-
agers make sure employees had the skills and competencies to be innovative and
to run their own operations.16 They encourage them to take on more responsi-
bility, provide the education and training they need, allow them to make mis-
takes without fear of punishment, and coach them.17
◗ They promote a sense of renewal. Successful managers also foster what Bartlett and
Ghoshal call renewal.18 Effective managers take steps to guard against compla-
cency. They encourage employees to question if they might do things differently.
Effective managers want all their employees to be innovative. For example,
one South Carolina manufacturer uses a machine that now runs five times faster
than anticipated when the firm ordered it. The employees made over 200 small
improvements to boost its efficiency.19
Types of Managers
There are different types of managers. We may classify managers based on their
organization level (top, middle, first-line), their position (manager, director, or vice
president, for instance), and their functional title (such as sales manager or vice
president for finance). (Function refers in this instance to business function, such
as sales, accounting, production, and human resources.)
In Figure 1.1, the managers at the top level, of course, are the firm’s top man-
executives: the managers at agement. These are the company’s executives. Typical positions here are presi-
the top of an organization dent, senior vice president, and executive vice president. Functional titles here
include senior vice president for sales and chief financial officer (CFO).
Beneath the top management level (and reporting to it) may be one or more
levels of middle managers. The positions here usually include the words man-
ager or director in the titles. (In larger companies like IBM, managers report to
F IGURE 1.1
Types of Managers
BY LEVEL BY POSITION BY FUNCTIONAL TITLE
CEO
Chief Executive Officer
TOP
President
MANAGEMENT
Vice President for Sales
Vice Vice Vice

President President President
Advertising Director
MIDDLE Sales Director
MANAGEMENT Production Director
Director Director Manager Personnel (HR) Manager
Production Supervisor
Manager Supervisor
FIRST-LINE Sales Manager
MANAGEMENT Assistant HR
Supervisor Supervisor Manager
Non-supervisory Employees
directors, who in turn report to top managers like vice presidents.) Examples of
functional titles here include production manager, sales director, human re-
first-line managers: sources (HR) manager, and finance manager. Finally, first-line managers are at
managers at the lowest rung of the lowest rung of the management ladder. Positions here include supervisor or
the management ladder assistant manager. Functional titles include production supervisor and assistant
marketing manager.
Similarities and Differences in What Managers Do

All managers have much in common. They all plan, organize, lead, and control.
And all managers at all levels and with every functional title also spend most of
their time with people—talking, listening, influencing, motivating, and attending
meetings.20 In fact, even chief executives (whom you might expect to be somewhat
insulated from other people, up there in their executive suites) spend about three-
fourths of their time dealing directly with other people.21
However, there are two main differences among the management levels. First,
top and middle managers both have managers for subordinates. In other words,
they are in charge of other managers. First-line supervisors have workers—
nonmanagers—as subordinates. Second, top, middle, and first-line managers use
their time differently. Top managers tend to spend more time planning and setting
goals (like “double sales in the next two years”). Middle managers then translate
these goals into specific projects (like “hire two new salespeople and introduce
three new products”) for their subordinates to execute. First-line supervisors then
concentrate on directing and controlling the employees who actually do the work
on these projects day to day.
Do You Have the Traits to Be a Manager?

Research evidence can help someone decide whether management might be a
plausible occupation to pursue.22 It suggests that managers have certain traits.
● Personality and Interests Career counseling expert John Holland says that
personality (including values, motives, and needs) is an important determinant
of career choice. Specifically, he says that six basic personal orientations
determine the sorts of careers to which people are drawn. Research with his Voca-
tional Preference Test (VPT) suggests that almost all successful managers fit into at
least one of two (or both) personality types or orientations:
◗ Social orientation. Social people are attracted to careers that involve working
with others in a helpful or facilitative way. (So managers as well as others, like
clinical psychologists and social workers, would exhibit this orientation.) So-
cially oriented people usually find it easy to talk with all kinds of people; are good
at helping people who are upset or troubled; are skilled at explaining things to
others; and enjoy doing social things like helping others with their personal
problems, teaching, and meeting new people.23 It’s hard to be a manager if you’re
not comfortable dealing with people.
◗ Enterprising orientation. Enterprising people tend to like working with people in
a supervisory or persuasive way. They like influencing others. Enterprising peo-
ple often characterize themselves as being good public speakers, as having repu-
tations for being able to deal with difficult people, as successfully organizing the
work of others, and as being ambitious and assertive. They enjoy influencing
others, selling things, serving as officers of groups, and supervising the work of
others. Managers need to be comfortable influencing others.
● Comptencies Edgar Schein says that career planning is a process of discov-

ery. He says that each person slowly develops an occupational self-concept, in
terms of what his or her talents, abilities, motives, and values are.
People in different occupations have different competencies. Based on his
managerial competence: study of MIT graduates, Schein says that managers have a strong managerial
the motivation and skills required competence career anchor.24 These people show a strong motivation to become
to gain a management position, managers, “and their career experience enables them to believe that they have the
including intellectual, emotional,
skills and values necessary to rise to such general management positions.” A man-
and interpersonal skills
agement position with high responsibility is their ultimate goal. Every career deci-
sion they make pivots around the fact that they know they have this managerial
career anchor: a dominant
competence career anchor. A career anchor, says Schein, is a dominant concern or
concern or value that directs an
individual’s career choices and value that directs an individual’s career choices and that the person will not give
that the person will not give up if up if a choice must be made.
a choice must be made These managerially oriented people see themselves as competent in three
specific areas. One is analytical competence. They have the ability to identify,
analyze, and solve problems under conditions of incomplete information and
uncertainty. A second is interpersonal competence: the ability to influence, su-
pervise, lead, manipulate, and control people at all levels. Third is emotional
competence. They were stimulated, not exhausted, by emotional and interper-
sonal crises.
● Achievements Psychologists at AT&T conducted two long-term studies of

managers. The aim was to determine how their premanagement achievements
related to their subsequent success (or lack thereof) as managers at AT&T.25 Those
managers who went to college rose (on average) much faster and higher in man-
agement than did those who did not attend college. People with higher college
grades showed greater potential for promotion early in their careers, and they rose
higher in management than did those with lower grades. Those who had attended
better-quality colleges at first ranked higher as potential managers. However,
within several years, college quality had little effect on who was promoted.
Managers who majored in humanities and social
sciences moved faster up the corporate ladder.26 Busi-
ness majors ranked second. Math, science, and engi-
neering majors ranked third. Why? At least in this study,
the humanities majors scored the highest in decision
making, intellectual ability, written communication
skills, creativity in solving business problems, and
motivation for advancement. Both the humanities/
social science majors and the business majors ranked
higher in leadership ability, oral communication skills,
interpersonal skills, and flexibility than did the math,
science, and engineering majors.27
Findings like these may just be unique to this
specific group of managers—or to AT&T. However, the
findings do suggest that, whatever the major, it’s
important for managers and future managers to work
AT&T’s managers are dealing with rapid technological on improving decision making, creativity, and written
change in their industry. communication skills.
The Managerial Skills ■ 11
The Managerial Skills

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Managing Now! LIVE S uccessful managers like Andrea Jung and Lieutenant General Russell Honore
don’t just have the right personality traits and competencies. They also have
the right skills. For example, Jung’s planning skills helped her set Avon on the right
path. Honore’s organizational skills helped him turn New Orleans’s disastrous
situation around. Managers need three sets of skills: technical, interpersonal, and
conceptual.28
Technical Skills
First, managers have to be technically competent with respect to planning, organ-
izing, leading, and controlling. For example, they should know how to develop
a plan, write a job description, and design an incentive plan. Chapters 2 to 17
focus on these management skills. In today’s high-tech environment, managers
also must know when and how to use the manager’s new technological tools.
Chapters 5, 6, and 8 focus on these skills, for example, on how managers use
decision-making software. Finally, managers should be competent in their areas
of expertise. For example, accounting managers need accounting skills. Your other
business courses will help develop these latter skills.
Interpersonal Skills
Researchers at The Center for Creative Leadership in Greensboro, North Carolina,
studied why managers fail, and they came to some useful conclusions. Some man-
agers simply didn’t do their jobs. These managers thought more about being pro-
moted than about excelling on their current jobs.29 However, most of the failures
were interpersonal. These managers had abusive or insensitive styles, disagreed
with upper management about how to run the business, left a trail of bruised feel-
ings, or didn’t resolve conflicts among subordinates.
Second, managers must therefore have good interpersonal skills. Interper-
sonal skills “include knowledge about human behavior and group processes,
ability to understand the feelings, attitudes, and motives of others, and ability to
communicate clearly and persuasively.”30 These skills include tact and diplomacy,
empathy, persuasiveness, and oral communications ability. Because managing in
today’s Internet environment requires getting employees and alliance partners to
work together, encouraging collaboration and trust is also crucial. Chapters 13 to
17 will help you learn these skills.
Conceptual Skills
Third, studies also show that effective leaders tend to have more cognitive ability.
In other words, their intelligence (and subordinates’ perception of that intelli-
gence) tend to be highly rated.31 Conceptual (or cognitive) skills “include analyti-
cal ability, logical thinking, concept formation, and inductive reasoning.”32
Conceptual skills manifest themselves in good judgment, creativity, and in the
ability to see the big picture in a situation.
Intelligence is one thing; good judgment is another. Many high-IQ people
have wobbly judgment. And many people of lower IQ have great judgment.
As Lawrence Bossidy puts it, “If you have to choose between someone with a
staggering IQ and elite education who is gliding along, and someone with a lower
IQ but who is absolutely determined to succeed, you’ll always do better with the
second person.”33 Chapter 5 will help you hone conceptual skills.
The Evolution of Modern Management

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Managing Now! LIVE T o understand how to manage today, it is useful to know something about how
management evolved over time, since much of what managers do today is sur-
prisingly similar to what even ancient managers did. One ancient Egyptian father
told his child this about managerial planning: “The leader ought to have in mind
the days that are yet to come.”34 In terms of control, the pharaoh’s vizier (manager)
got this advice: “Furthermore, he shall go in to take counsel on the affairs of the
king, and there will be reported to him the affairs of the two lands in his house
every day.”35 We can learn from what worked and did not work for the managers
who came before us. For example, the word bureaucracy originally referred to an
efficient way to get things done!
The Classical and Scientific Management School

Modern management concepts and techniques had their roots in the Industrial
Revolution hundreds of years ago. Before that, businesses tended to be small.
When machines replaced human labor, business boomed. However, success cre-
ated a problem—how to manage these new, large enterprises. At this time, there
were no management principles, no management gurus, and no management
textbooks (or business schools).
Businesspeople therefore turned for management techniques to military and
religious organizations, the only big organizations they knew. These organizations
had (and still tend to have) centralized, top-down decision making, rigid chains of
command, specialized divisions of work, and autocratic leadership. Entrepre-
neurs thus organized their new businesses along the same lines.36
As their companies grew, business owners sought principles they could
apply to solve their management problems by asking questions like, “How
should we organize our departments?” and “How many employees should a
manager supervise?” Out of this environment emerged what we call today the
classical school of management.
● Frederick Winslow Taylor and Scientific Management Frederick Winslow

Taylor was among the first of the classical management writers. Writing mostly in
the early 1900s, he developed a set of principles and practices that he called scien-
tific management. Taylor’s basic theme was that managers should scientifically
study how work was done to identify the one best way to get a job done. He based
his theory of scientific management on four principles:
1. The one best way. Management, through scientific observation, must find the
one best way to perform each job.
2. Scientific selection of personnel. Management must uncover each worker’s
limitation, find his or her “possibility for development,” and give each worker
the required training.
3. Financial incentives. Taylor knew that putting the right worker on the right
job would not ensure high productivity. He proposed financial incentives,
with each worker paid in direct proportion to how much he or she produced.
The Evolution of Modern Management ■ 13
4. Functional foremanship. Taylor called for a division of work be-

tween manager and worker such that managers did all planning,
preparing, and inspecting, and the workers did the actual work. Spe-
cialized experts, or functional foremen, would be responsible for
specific aspects of a job, such as choosing the best machine speed
and inspecting the work.37
● Frank and Lillian Gilbreth and Motion Study The work of this
husband-and-wife team also illustrates the classical/scientific manage-
ment approach. Born in 1868, Frank Gilbreth began as an apprentice
bricklayer, and he soon became intrigued by the idea of improving effi-
ciency.38 In 1904, he married Lillian, who had a background in psychol-
ogy. Together, they invented motion-study principles to scientifically
analyze tasks. Two principles were “The two hands should begin and
complete their motions at the same time,” and “The two hands should
not be idle at the same time except during rest periods.”39
● Henri Fayol and the Principles of Management The work of

Henri Fayol also illustrates the classical approach. Fayol had been an ex-
The Gilbreths were scientific management ecutive with a French iron and steel firm for thirty years before writing
pioneers. General and Industrial Management. In his book, Fayol said that man-
agers performed five basic functions: planning, organizing, command-
ing, coordinating, and controlling (sound familiar?). He also outlined a list of
management principles he had found useful. Fayol’s fourteen principles include
his famous principle of unity of command: “For any action whatsoever, an
employee should receive orders from one superior only.”40
● Max Weber and the Bureaucracy Max Weber’s work was first published in
Germany in 1921. At the time, managers still had few principles they could apply
in managing organizations. Weber therefore created the concept of an ideal or
bureaucracy: to Max Weber, pure form of organization, which he called bureaucracy. Bureaucracy, for Weber,
the ideal way to organize and was the most efficient form of organization. Managers, he said, would do well to
manage an organization; organize their companies along these lines:
generally viewed today as a term
reflecting an unnecessarily rigid 1. A well-defined hierarchy of authority
and mechanical way of getting
things done 2. A clear division of work
3. A system of rules covering the rights and duties of all employees
4. A system of procedures for dealing with the work situation
5. Impersonality of interpersonal relationships
6. Selection for employment and promotion based on technical competence.41
The Behavioral School

The classical management experts’ principles gave managers at the time rules
they could use to better run their companies. However, the principles themselves,
while valuable, tended to ignore the human element at work. “Design the most
highly specialized and efficient job you can,” assumed the classicist, and “plug in
the worker, who will then do your bidding if the pay is right.” The basic (if implicit)
assumption was that pay and working conditions alone determined workers’
productivity.
By the 1920s, things were changing. People moved from farms to cities and
became more dependent on each other for goods and services. Businesses mech-
anized their factories, and jobs became more specialized, monotonous, and inter-
dependent.42 The Great Depression began. These events made people wonder: Are
hard work, individualism, and maximizing profits—the building blocks of classical
management—really as beneficial as they were thought to be? Soon, government
became more involved in economic matters. Social reformers worked both at
establishing a minimum wage and at encouraging trade unions.
● The Hawthorne Studies In 1927, what we call today the Hawthorne studies
began at the Chicago Hawthorne plant of the Western Electric Company. Re-
searchers from Harvard University conducted several studies, one of which is
known as the relay assembly test room studies. The researchers isolated a group of
workers in a separate room. Then the researchers began changing the working con-
ditions (for instance, modifying the length of the workday and the morning and af-
ternoon rest breaks). Surprisingly, these changes did not greatly affect the workers’
performance. The researchers concluded that employee performance depended on
factors other than working conditions or pay—a stunning discovery at the time.
In short, the researchers found that it was the workers’ social situations, not
just their working conditions, that influenced how they behaved at work. Most no-
tably, the researchers discovered that their study had inadvertently made the
workers feel they were special. The research observer had changed the workers’
situation by “his personal interest in the girls and their problems.”43 Scientists call
this phenomenon the Hawthorne effect. It’s what happens when the scientist, in
the course of an experiment, inadvertently influences the participants.
The Hawthorne studies were a turning point in the study of management.
They proved that employee morale and showing an interest in employees had a
big effect on employee performance. The human relations movement, inspired by
this realization, was born. It emphasized that workers had social needs that the
organization had to accommodate.
● Changing Environment Hawthorne wasn’t the only reason for this new
point of view: the environment was also changing. Having grown large and then
made their companies more efficient, many managers were turning to research
and development (R&D) to develop new products. For example, after World War II,
companies such as U.S. Rubber and B.F. Goodrich (which had concentrated on tire
manufacturing) began developing and marketing new products such as latex,
plastics, and flooring.
The new R&D and product diversification influenced management theory in
several ways. For one thing, efficiency was no longer a manager’s only concern.
With more diversified product lines to keep track of, managers had to decentralize—
that is, set up separate divisions to manage each new product. That meant relying
on these new divisions’ managers and employees to make more decisions. And
with the need to encourage employees to innovate, managers had to let even
lower-level employees make more decisions. Thus, because of the Hawthorne
findings and the other changes taking place after World War II, managers started
taking a much more people-oriented approach to managing employees.
● Douglas McGregor: Theory X and Theory Y The work of Douglas McGregor

is a good example of this new approach. According to McGregor, the classical
organization was not just a relic of ancient times. Instead, it also reflected certain
basic assumptions about human nature.44 McGregor arbitrarily classified these
assumptions as Theory X. Theory X assumptions held that most people dislike

work and responsibility and prefer to be directed; that they are motivated not by
the desire to do a good job but simply by financial incentives; and that therefore
most people must be closely supervised, controlled, and coerced into achieving
organizational objectives.
McGregor questioned this view. He felt that management needed new prac-
tices and ways of organizing to deal with diversification, decentralization, and
participative decision making. These new management practices had to reflect a
new set of assumptions about human nature, assumptions McGregor called
Theory Y. Theory Y held that people wanted to work hard, could enjoy work, and
could exercise substantial self-control. You could trust your employees if you
treated them right.
● Rensis Likert and the Employee-Centered Organization What new man-

agement practices do these Theory Y assumptions call for? Writing at this time,
the researcher Rensis Likert concluded that effective organizations differ from
ineffective ones in several ways. The classical writers’ “job-centered organiza-
tions” focus on specialized jobs, efficiency, and close supervision of workers.
Post-Hawthorne “employee-centered organizations” should “focus their primary
attention on endeavoring to build effective work groups with high performance
goals.”45 Therefore, said Likert, “widespread use of participation is one of the
more important approaches employed by the high-producing managers.”46
He said that managers should let workers participate in making important work-
related decisions.
● Chris Argyris and the Mature Individual Chris Argyris reached similar
conclusions, but he approached the situation differently.47 Argyris argued that
Chris Argyris established healthy people go through a maturation process. Gaining employees’ compliance
many of the principles that by assigning them to highly specialized jobs with no decision-making power and
led managers to take a more then closely supervising them encourages workers to be dependent, passive,
people-oriented view of how and subordinate. He said that it’s better and more natural to give workers more
to manage organizations. responsibility and broader jobs.
The Administrative School

The administrative school experts include Chester Barnard and Herbert Simon.
Chester Barnard was president of what was then New Jersey Bell Telephone Com-
pany and, at various times, president of the Rockefeller Foundation and chair of
the National Science Foundation. In terms of devising a management theory, he
focused on what managers could do to make employees willing to contribute their
individual efforts to the organization.
How do you get the employees to “contribute their individual efforts”?48
Barnard proposed what he called a person’s zone of indifference. He said that each
person has a range of orders (a “zone of indifference”) he or she will willingly ac-
cept without consciously questioning their legitimacy.49 Barnard said the manager
had to provide sufficient inducements (and not just financial ones) to make each
employee’s zone of indifference wider.
Herbert Simon also viewed getting employees to do what the organization
needed them to do as a major issue facing managers. How can managers influence
employee behavior? According to Simon, managers can ensure that employees
carry out tasks in one of two ways. They can impose control by closely monitoring
subordinates and insisting that they do their jobs as ordered (using the classicists’
approach, in other words). Or managers can foster employee self-control by

providing better training, encouraging participative leadership, and developing
commitment and loyalty (thus, take a more behavioral approach).50
The Management Science School

More recently, management theorists began to apply quantitative techniques to
solving management problems. Writers usually refer to this movement as man-
agement science (or operations research). It is “the application of scientific meth-
ods, techniques, and tools to problems involving the operations of systems so as to
provide those in control of the system with optimum solutions to the problems.”51
● The Management Science Approach Historian Daniel Wren says that op-
erations research/management science has “. . . roots in scientific management.”52
Like Taylor and the Gilbreths, today’s management scientists use research and
analysis to find optimal solutions to management problems. Modern-day manage-
ment scientists, of course, use much more sophisticated mathematical tools
and computers. And management science’s goal is not to try to find a “science
of management” but “to use scientific analysis and tools to solve management
problems.”
● The Systems Approach Management science evolved along with the sys-
tems approach. A system is an entity—a hospital, city, company, or person, for
instance—that has interdependent parts (or subsystems) and a purpose. Systems-
approach practitioners advocate viewing organizations as systems with interre-
lated subsystems. Focusing on the interrelatedness of the subsystems (and between
the subsystems and the firm’s environment) provides useful insights. For exam-
ple, it suggests that a manager can’t change one subsystem without affecting the
rest. Hiring a new production manager might have repercussions in the sales and
accounting departments.
Similarly, according to systems experts, managers can’t properly organize and
manage their companies without understanding the firms’ environments. For ex-
ample, when the tire companies diversified into new products, they abruptly faced
more diverse markets and competitors. That prompted these companies to split
themselves into separate divisions so each division could focus on its own market.
That got management experts thinking that the organization and how you
manage it must be contingent (rely) on the environment.
The Situational/Contingency School

Studies in England and the United States soon began to emphasize the need for
a situational or contingency approach to management. The essence of this
approach was that both the organization and how its managers should manage it
depended (were contingent) on the company’s environment and technology.
For example, two British researchers, Tom Burns and G. M. Stalker, studied
several industrial firms in England. They concluded that whether what they called
a mechanistic or an organic management approach was best depended on
the company’s environment. In a textile mill they studied, it was important to have
long, stable production runs. That way, management didn’t have to shut down the
huge textile machines. Management had to keep sales and demand stable. In
such a stable environment, Burns and Stalker found that within the company, a
mechanistic (or classical) management approach worked best. Managers empha-

sized efficiency, specialized jobs, and making everyone stick to the rules.
In contrast, Burns and Stalker found that the main focus in high-tech firms
was innovating new products. These companies therefore faced relatively innova-
tive, fast-changing environments (with more new products and more quickly
changing competitors, for instance). In these firms, the important thing was learn-
ing as fast as possible what competitors were doing and being able to respond
quickly by letting even lower-level employees make fast decisions. These firms
used the more flexible, people-oriented, organic management approach. They
emphasized innovation, did not confine employees to specialized jobs, and did
not stress sticking to the rules.
With business becoming increasingly high-tech, it would soon turn out that
this organic management approach would become more prevalent. With that in
mind, let us turn to managing today.
Modern Management Schools of Thought

Things change fast in business today. Just months after going public, Google faced
new competition. Yahoo! poured millions into building its search capabilities.
Microsoft was perfecting its own search engine. Amazon (fearing Google’s new
Froogle shopping site) introduced a new search engine. And, not to be outdone,
Google introduced Gmail to lure surfers from Yahoo! and Microsoft.53 After about
one year in business, Friendster.com, the social networking site, had about 1 mil-
lion unique visitors per month. Introduced a year later, myspace.com went from
nothing to 14 million visitors per month.
Rapid change like this is not limited to high-tech companies. For example, be-
tween 1997 and 2006, Coca-Cola Co. had three CEOs—extraordinary turnover for
this firm. Why? Coke faces bigger global competitors, and huge customers like
Wal-Mart are now dictating stronger terms. (For example, Wal-Mart made Coca-
Cola introduce a new Splenda-based Diet Coke.) Carbonated drinks still account
for most of Coke’s business, but consumers are increasingly purchasing noncar-
bonated drinks.54
Managing under such fast-changing conditions is a challenge. Ford Motor
Company announced its new Way Forward plan in March 2006 to return to prof-
itability; in June, they had to revise that plan because of shrinking sales. Then, in
September 2006, William Ford, Ford’s CEO, stepped down in favor of bringing in a
new CEO, a president from Boeing named Al Mulally. Mr. Mulally had experience
managing under conditions of rapid change.
Several factors explain why the manager’s environment is changing so fast.
These factors include globalization, technological change, and the changing
nature of work.
globalization: the extension ● Competition Is Global Globalization refers to extending a company’s sales,
of a firm’s sales, ownership, or ownership, and/or manufacturing to new markets abroad.55 Toyota produces the
manufacturing to new markets Camry in Kentucky, while Dell produces and sells personal computers in China.
abroad
In 2006, Google extended its reach into China by instituting its new Google China
instant messenger service. Free trade areas—agreements that reduce tariffs and
barriers among trading partners—further encourage international trade.
More globalization means more competition, and more competition means
more pressure to improve—to lower costs; to make employees more productive;
and to do things better, faster, and less expensively. When Carrefour opens stores
in Chile, the local retailers either improve or leave. Similarly, Ikea changed the
ground rules for local U.S. furniture stores when it opened in New Jersey. As one
expert says, “The bottom line is that the growing integration of the world economy
into a single, huge marketplace is increasing the intensity of competition in a wide
range of manufacturing and service industries.”56
Managers react in various ways. Some, like Levi Strauss, outsource or transfer
operations abroad to seek cheaper labor and to tap what Fortune magazine calls
“a vast new supply of skilled labor around the world.”57 Others, as we’ll see, adapt
by applying world-class management practices. Many of these practices, such as
flexible manufacturing and computerized links between a company and its sup-
pliers, rely on technology.
● Technological Advances Force Managers to Change New high-tech prod-

ucts and services are changing the face of business. Thousands of new Web-
enabled businesses exist, including (to choose just three) file-sharing sites, blog
sites, and social networking sites like myspace.com.58 Managers rely on informa-
tion technology, for instance, in the form of personal digital assistants (PDAs) to
do their jobs.
Technology is triggering turmoil. In 2006, America’s second-largest newspaper
chain, Knight-Ridder, was sold. Part of its problem was new high-tech competi-
tion. Websites such as Monster and Hot Jobs had drawn off many employment ad
users, while sites like Craigslist siphoned classified ad users. Early in 2006, SBC
Communications bought AT&T, which then bought BellSouth. The purchases re-
flect technological change. For example, demand for Voice over Internet Protocol
(VoIP) phone calls is booming, which displaces demand for land-line and even
cell-phone calls. This accelerates a revolution among land-line and cell-phone
firms, many of which have gone out of business trying to compete on this fast-
changing playing field.59
● The Nature of Work In turn, using new technology to the fullest usually re-
quires changing how people work. For example, one bank installed special software
that made it easier for customer-service representatives to handle customers’
inquiries. Seeking to capitalize on the new software, the bank upgraded the
customer-service representatives’ responsibilities. The bank gave them new train-
ing, taught them how to sell more of the bank’s services,
gave them more authority to make decisions, and
raised their wages. Here, the new computer system
improved profitability.
A second bank installed a similar system but did
not change the workers’ jobs. Here, the system did help
each service representative handle a few more calls.
But this second bank saw few of the performance gains
that the first bank did by turning its reps into moti-
vated, highly trained salespeople.60
As Microsoft Corporation chair Bill Gates put it, “In
the new organization, the worker is no longer a cog in a
machine but is an intelligent part of the overall process.
Welders at some steel jobs now have to know algebra
and geometry to figure weld angles from computer-
generated designs.”61 This means managers must
be skilled at managing knowledge work and human
Managers need a new approach when managing knowledge capital.62 Knowledge work is work that depends on
workers like the person pictured here. employees’ training, knowledge, and expertise. Human
capital refers to the sum total of all the knowledge, education, training, skills, and
expertise of a firm’s workers.63 Today, “the center of gravity in employment is mov-
ing fast from manual and clerical workers to knowledge workers, who resist the
command and control model that business took from the military 100 years
ago.”64 In other words, managers need new principles and tools for managing
knowledge workers.
● Modern Management Thought Trends like these prompted modern man-

agement writers to propose new theories of how to manage. The basic theme of
these experts is managing change and innovation. Two McKinsey & Co. consul-
tants, Thomas Peters and Robert Waterman Jr., were among the first. They studied
what they called eight excellent companies. They concluded that these firms were
excellent because managers here followed several simple principles: a bias toward
action, simple form and lean staff, continued contact with customers, productiv-
ity improvement via people, operational autonomy to encourage entrepreneur-
ship, one key business value, doing what they know best, and simultaneous loose
and tight controls (in other words, making sure that employees buy into the
company’s values so that they are able to control themselves).65
Rosabeth Moss Kantor studied companies like IBM. She concluded that more
successful companies generally had fewer management levels and a greater re-
sponsiveness to change, and they entered into more partnerships with other com-
panies.66 As mentioned earlier in this chapter, Sumantra Ghoshal and Christopher
Bartlett argue that successful managers foster innovation by encouraging
entrepreneurship.
Several modern management writers say that, with innovation so important,
the best companies are intelligent enterprises, or learning organizations. James
Brian Quinn studied what he calls intelligent enterprises. These companies (like
Google) depend on converting their employees’ intellectual resources (such as
engineering knowledge) into services and products. Companies like these, says
Quinn, must leverage—take maximum advantage of—their intellectual capital.
They do this by ensuring that ideas can flow quickly among employees, such as by
encouraging informal communications.67
Similarly, Peter Senge argues for creating learning organizations, “organiza-
tions where people continually expand their capacity to create the results they
truly desire . . . and where people are continually learning how to learn together.”68
Learning organizations’ managers do this by encouraging systems thinking,
personal mastery (empowering employees to make decisions), building a shared
vision, and team learning.69
The bottom line is that modern management theorists argue for a more agile,
responsive, lean, fast-acting approach to management. Figure 1.2 helps summa-
rize their thinking. A fast-changing global environment means more competition,
change, and unpredictability. Managers have responded by making their compa-
nies more streamlined and agile, leaner, and faster-acting. The following discus-
sion lists a few specific features of managing in today’s fast-changing environment,
according to their thinking.
● Smaller, More Entrepreneurial Organizational Units It is easier to stay

in touch with employees when the organization is not too big. Toyota therefore
keeps its plants down to several hundred employees. T. J. Rogers, president of
Cypress Semiconductor, believes that large companies stifle innovation. When
developing a new product, he creates a separate start-up company under the
Cypress umbrella.70
F IGURE 1.2
Why Companies Need to Be More Flexible and World Class
Factors including globalized competition, technology revolution, new competitors, and changing
tastes produce more uncertainty, more choices, and more complexity. The result is that
organizations must be responsive, smaller, flatter, and oriented toward motivating knowledge
workers.
CHANGES LEADS TO SO COMPANIES MUST BE

■
Explosion of technological ■
Increased competition ■
Fast, responsive, and adaptive
innovation ■
Uncertainty, turbulence, ■
Flat organizations
■
Globalization of markets and rapid change ■
Downsized
and competition ■
More consumer choices ■
Quality conscious
■
Deregulation ■
Mergers and divestitures ■
Empowered
■
Changing demographics ■
Joint ventures ■
Smaller units
■
New political systems ■
More complexity ■ Decentralized
■
Category killers ■
Short product life cycles ■ Human capital oriented
■
Service and knowledge jobs ■
Market fragmentation ■ Boundaryless
■
More uncertainty for ■ Values and vision oriented
managers ■ Team based
■
Record number of business
failures
● Team-Based Organizations Managers extend this small-is-beautiful phi-

losophy to how they organize the work itself. Most companies today organize at
least some of their operations around small, self-managing teams. GM’s Saturn
Corporation subsidiary is an example. Work is organized around work teams of ten
to twelve employees. Each team is responsible for a complete task, such as
installing door units or maintaining automated ma-
chines. The teams don’t have traditional supervisors.
Instead, highly trained workers do their own hiring,
control their own budgets, monitor the quality of their
own work, and generally manage themselves.
● Empowered Decision Making For self-managing

teams to manage themselves, they need the authority
and training to do so. Empowering employees (giving
them the training and authority) is therefore central to
what managers do today.
● Flatter Organizational Structures, Knowledge-

Based Management It can take a long time for a
request from a front-line employee to get to the top of
the typical tall, multilayered organization like GM. By
empowering their employees (and letting them make
their own decisions), companies can eliminate layers of
Worker empowerment: Rooms Control Clerk at the front management. Instead of seven or eight tall manage-
desk, the New York Marriott, Brooklyn. ment layers, there may be only three or four flat layers.71
Managing Now ■ 21
● New Bases of Management Power In today’s team-based and empowered

organizations, managers can no longer rely on their formal authority to get em-
ployees to follow them.72 Peter Drucker put it this way: “You have to learn to man-
age in situations where you don’t have command authority, where you are neither
controlled nor controlling.”73 Yesterday’s manager thought of him- or herself as a
manager or boss. The new manager is a sponsor, a team leader, or an internal
consultant.74
● An Emphasis on Vision In companies with fewer bosses, formulating a

clear vision of where the firm is heading becomes more important. Peter Drucker
says today’s companies require “clear, simple, common objectives [a vision] that
translate into particular actions.”75 The vision is like a signpost. Even without a lot
of supervisors to guide them, employees can steer themselves by the company’s
vision.76 Technology is another feature of managing now.
Managing Now
Online Study Center
ACE the Test
Managing Now! LIVE I nformation technology is now a familiar aspect of our lives. We use computers,
e-mail, software, cell phones, iPods, fax machines, flash drives, scanners, and
BlackBerries© to assist with our daily chores. We search for travel information on
Expedia, download airline tickets, and register for and take college courses online.
Computerized diagnostic tools analyze our autos’ problems, point-of-sale com-
puters at Zara process our credit-card purchases, and computerized traffic-flow
systems control our trips to work.
The Company of the Future Is Here Now

Perhaps not so obvious is the vast number of ways in which managers rely on
information technology to succeed in today’s fast-changing world. Modern man-
agement theorists’ prescriptions for streamlined, agile, lean, faster-acting compa-
information technology nies would be hard to achieve without information technology.77 Information
(IT): any processes, practices, technology (IT) refers to any processes, practices, or systems that facilitate proc-
or systems that facilitate the essing and transporting information. It includes both the hardware (such as
processing and transporting of
computers, iPods, cell phones, and servers) and the software systems used to
information
make these devices work. Like the managers and professionals on this book’s cover,
managers today simply could not do their jobs—or do them as well—without the
aid of information technology. Here are some examples of the managerial applica-
tions of information technology we’ll discuss in this book, showing how managers
use information technology.
◗ The Spanish retailer Zara doesn’t need the expensive inventories that burden
competitors like The Gap. Zara operates its own Internet-based worldwide distri-
bution network linked to the checkout registers at its stores around the world.
This lets it continuously monitor store sales. When it sees a particular garment
flying off the shelves of one of its stores, its flexible manufacturing system swings
into action. It dyes the required fabric, manufactures the item, and speeds it to
that store.78
◗ Accountants PriceWaterhouseCooper maintains electronic bulletin boards on
more than 1,000 different company projects. About 18,000 of its employees in
twenty-two countries use these bulletin boards to get updates on matters such as
how to handle specialized projects on which they are working.
◗ The team that developed the Boeing 787 made extensive use of videoconferenc-
ing for meeting with engine suppliers and airlines around the world to discuss
the new aircraft’s design.
◗ Managers make extensive use of mySpace.com-like virtual online communities.
For example, to win a $300 million navy ship deal, Lockheed-Martin established
a virtual design environment with two major shipbuilders via a private intranet.
Eventually, about 200 global suppliers also connected to the network via special,
secure Internet links. This allowed secure transfer of design, project manage-
ment, and even financial data back and forth via simple browser access.
◗ Procter & Gamble’s R&D executive, Larry Huston, knew his firm had to reach out
to get more and better new-product ideas. Procter & Gamble (P&G) now uses var-
ious information technology tools to connect itself to various sources of new-
product ideas. For example, InnovationNet is an intranet Web portal for 18,000
Procter & Gamble innovators in research and development, engineering, market
research, purchasing, and patents. One P&G senior vice president calls it a sort of
global lunchroom. It lets 18,000 P&G employees worldwide exchange ideas.
◗ With about 10,000 stores and 34 million transactions a week, Seattle-based Star-
bucks Coffee Company’s managers must make sure they stay in control of what’s
happening at each of their stores. That’s why Starbucks uses a global informa-
tion technology system to monitor transactions in each of its stores. Its system
(called XPR) remotely monitors an assortment of metrics at each store. XPR then
triggers reports when any of the metrics for a store seem to be moving in un-
usual ways. For example, the system monitors point-of-sale activities and then
triggers reports if a particular register seems to be recording too many free re-
fills. That helps Starbucks’s executives stay in control, even from thousands of
miles away.
◗ Aiming to improve its service, Safeway Supermarkets installed special point-
of-sale computerized registers. Their suppliers now get real-time information
regarding sales of their products, which they need in order to replenish Safeway’s
shelves using just-in-time inventory management. Some Safeway customers
receive handheld devices in order to communicate to Safeway, prior to leaving
home, the items they need to purchase.
◗ Wal-Mart recently had its top 100 suppliers start attaching radio frequency iden-
tification (RFID) tags to shipments. These help Wal-Mart and its supply chain
partners keep track of inventory as it moves from manufacturer to warehouse to
stores.79
◗ Information technology is critical to UPS’s success. Its drivers use handheld
computers to capture customers’ signatures along with pickup, delivery, and
time-card information and automatically transmit this information back to
headquarters via a wireless telephone network. UPS and its customers can
then monitor and control the progress of packages throughout the delivery
process.
◗ Caterpillar Corporation needed a better way for its employees to share their
knowledge. The company recently introduced its Knowledge Network, a Web-
based system that Caterpillar employees use to collaborate and share knowledge.
Managing Now ■ 23
Using the Knowledge Network, Caterpillar employees can more easily communi-
cate and participate in chatroom-type discussions, and post best ideas on
community bulletin boards.
◗ A “digital dashboard” presents the manager with computerized desktop graphs
and charts so he or she can get a picture of where the company has been and
where it’s going. For example, a top manager’s dashboard for Southwest Airlines
might display daily trends for activities such as airplane turnaround time,
attracting and keeping customers, and on-time flights. This keeps the manager
in control. For example, if ground crews are turning planes around slower today,
financial results tomorrow may decline unless the manager takes action.
Some Important Management Information Systems

● Information Systems All the examples listed above depend on information
information system: the systems. Information system refers to the interrelated components working to-
interrelated components gether to collect, process, store, and disseminate information to support decision
working together to collect, making, coordination, analysis, and visualization in an organization. Managerial
process, store, and disseminate
information systems support managerial decision making and control. Caterpillar
information to support decision
making, coordination, analysis, uses a “knowledge management information system” to capture and compile the
and visualization in an information that it needs. Safeway uses a “supply chain management information
organization system” to automate its purchases from suppliers. The following discussion lists
some important information systems that managers use (we discuss these in more
detail in Chapter 5).
decision support system ● Decision Support Systems A decision support system (DSS) is a set of
(DSS): a set of computerized computerized tools that helps managers make decisions. The DSS helps the man-
tools that helps managers make ager make decisions in two ways. It helps that person access the data he or she
decisions
needs (for instance, on which products sold best last year). And it provides user-
friendly software to analyze that data.
enterprise resource ● Enterprise Resource Planning Systems An enterprise resource plan-

planning (ERP) system: ning (ERP) system is a companywide integrated computer system. It is com-
a companywide integrated prised of compatible software modules for each of the company’s separate
computer system comprised of
departments (such as sales, accounting, finance, production, and human resources).
compatible software modules
for each of the company’s Often Internet-based, the ERP modules are designed to communicate with each
separate departments other and with the central system’s database. That way, information from all the
departments is readily shared by the ERP system and is available to employees in
all the other departments. ERP strips away the barriers that typically exist among
a company’s stand-alone departmental computer systems. The name notwith-
standing, enterprise resource planning systems are not primarily planning systems.
We’ll generally refer to them as enterprise systems in this book.
With an enterprise system, activities that formerly required human inter-
vention (such as production telling accounting that it should bill a customer
because an order just shipped) occur automatically. By integrating the separate
departmental modules, enterprise systems can do things for managers that the
separate departmental systems (sales, production, finance, and human re-
sources) could not do on their own. For example, when a customer buys a Dell
computer online, Dell’s ERP automatically records the sale, orders the necessary
parts, schedules production, orders UPS to deliver the finished product, and
has Dell’s accounting department send the customer a bill. The accompanying
PRACTICE IT
J. Crew
After hitting turbulence in the 1990s, J. Crew sold out to its departments. They started with financial systems and
Texas Pacific Group, which brought in The Gap Inc.’s for- then moved on to human resources and inventory man-
mer CEO Millard Drexler to turn the company around. agement and replenishment.
One of Drexler’s first steps was to articulate a new plan The new enterprise system made J. Crew a more
for J. Crew, which had struggled with an identity crisis for agile and efficient company. For example, by automating its
several years. Drexler took J. Crew back to its preppy purchase order system, J. Crew reduced the time required
roots and also began offering more upscale merchandise, to fill an order and get it to the store by about three
including $550 tuxedo jackets for men. weeks. More important, the new system gives J. Crew’s
However, Drexler knew that in the increasingly com- headquarters merchandise managers and buyers a real-
petitive retail industry, having the right image was not time view of what’s selling and what’s not. This changed
enough. J. Crew was now competing with huge multina- the firm’s whole planning system. Previously, it took two
tional companies like Zara, H&M, and, in some markets, to three days for J. Crew’s buyers and merchandisers to
even with Target and Wal-Mart. Companies like these had find out what was selling in each store. That made it im-
hugely efficient information technology-based systems. At possible to accurately gauge exactly what to design and
Target, for instance, every time an item moved through a produce. Now, sales and inventory data move digitally
point-of-sale register, digital signals went out to its suppli- from every store to headquarters every night. As Fusco
ers and transportation companies, automatically signaling says, “[I]t’s so important when the buyers and merchan-
them to replenish the items. Zara’s technology systems disers arrive each morning for them to have a complete
were, in a way, even more impressive. Zara does almost all view of what’s sold the previous day . . . having a better
its own designing and manufacturing in its plant in Spain. view of yesterday helps our merchants to make more
When it receives the overnight digital signals about what informed decisions.”80
customers are buying each day, management springs into Millard Drexler’s J. Crew turnaround has been a huge
action. Zara then quickly designs, produces, and delivers success. For 2005, J. Crew had profits of $3.8 million, com-
to each store similar, complementary items. Drexler knew pared with a loss of just over $100 million in the previous
J. Crew’s success depended in part on installing such man- year. And in July 2006, J. Crew’s new owners sold off some
agement information systems. of their stock in one of the largest initial public offerings in
J. Crew’s new chief intelligence officer (CIO) Paul the previous five years, raising about $350 million. In three
Fusco decided to install an enterprise system from one of years, Drexler had turned the company around, using
the largest suppliers of such systems, SAP. J. Crew began effective management skills supported by information
by installing separate SAP enterprise modules for each of technology.
Practice IT feature shows how Millard Drexler used an enterprise system to help
supply chain management
systems: systems to help a turn J. Crew around.
company manage its
relationship with its suppliers ● Supply Chain Management Systems Supply chain management systems
and retailers by providing help the company manage its relationship with its suppliers and retailers. They
information to help suppliers, provide information to help suppliers, purchasing firms, distributors, and
purchasing firms, distributors, logistics/transportation companies coordinate, schedule, and control a company’s
and logistics/transportation
procurement, production, inventory management, and delivery services. For
companies coordinate, schedule,
and control a company’s many firms today, much of their fame rests on their supply chain management
procurement, production, systems. Target keeps its costs famously low largely because its point-of-sale com-
inventory management, and puters automatically notify vendors like Levi’s and P&G when it’s time to replace
delivery services merchandise.
Managing Now ■ 25
Virtual Integration at Dell Computer
Michael Dell built Dell Computer by using supply chain more. Computerized information from Dell continually
and customer relationship technology to “blur the tradi- updates suppliers regarding the number of components
tional boundaries . . . among suppliers, manufacturers, and they should deliver every morning.The outside suppliers
the end users.”81 thus actually start to look and act more like an inside part
For most computer companies, the manufacturing of Dell. Similarly, instead of stocking its own monitors,
process is like a relay race: components come in from sup- “[w]e tell Airborne Express or UPS to come to Austin and
pliers, these components are assembled into computers, pick up 10,000 computers a day and go over to the Sony
and the computers are then handed off for distribution factory in Mexico and pick up the corresponding number
through wholesalers and retailers (such as CompUSA) to of monitors. And while we’re all sleeping, they match up
the ultimate customers. Dell’s system changes all that. For the computers and the monitors, and deliver them to the
example, Dell interacts with and sells to customers directly, customers . . . [O]f course, this requires sophisticated data
so it eliminates the activities of the wholesalers and retailers exchange.”82
in the traditional distribution chain. The result of this virtual integration is a lean, efficient,
Virtual integration—linking Dell with its suppliers and fast-moving operation. It can turn on a dime when the
and customers via the Internet—speeds things up even products demanded by customers change.
customer relationship ● Customer Relationship Management Systems Customer relationship

management systems: management systems help companies manage all the processes involved with
systems to help companies interacting with customers, such as taking orders, answering technical questions,
manage all the processes
and sending bills.83 For example, when a customer calls with a problem, Dell’s cus-
involved with interacting with
customers, such as taking tomer relationship management system shows the technician what system the
orders, answering technical customer owns. It then leads the technician through a sequence of diagnostic
questions, and sending bills questions to solve the problem.
knowledge management: ● Knowledge Management Knowledge management refers to any efforts

any efforts aimed at enabling a aimed at enabling a company’s managers and employees to better access and uti-
company’s managers and lize information available anywhere in their companies.84 When an organization
employees to better access and has information and either doesn’t know it has that information or can’t access it,
utilize information available
it suffers a breakdown in knowledge management.
anywhere in their companies
Knowledge management is enormously important today. Think of how waste-
ful it is for an engineer to spend three days writing a quote for a customer, only to
then discover that her predecessor filed a similar quote. One advisory firm esti-
mates that Fortune 500 companies lose at least $31.5 billion per year by not shar-
ing knowledge.85 In today’s competitive business environment, it’s usually the
company with the best information that is the most successful. As a result, many
managers today embrace knowledge management systems.
knowledge management Knowledge management systems organize and make available important
systems: systems to organize knowledge, wherever and whenever the manager or employee needs it. We’ll see in
and make available important Chapter 5 that some knowledge management systems focus on accessing, compil-
knowledge, wherever and
ing, and organizing and reviewing knowledge that’s already written down and
whenever a manager or
employee needs it stored away in some form in the company. For example, Merck has vast amounts of
knowledge stored away in its computers, like what combinations of drugs they’ve
tested in the past and what the results were. Others focus on helping the company
capture new knowledge. For instance, they make it easier for a repairperson to elec-
tronically record how he or she solved a customer’s computer problem.
What’s to Come
T hroughout history, some things in management have not and will not quickly
change. Managers still plan, organize, lead, and control. And they still deal
with people—communicating, leading, appraising, and coaching them.
This is a book on management; therefore, we focus on what managers should
know about planning, organizing, leading, and controlling, and dealing with peo-
ple. However, we have seen that managers now manage in a fast-changing and
highly competitive global environment. To succeed here, managers simply have
no choice but to effectively use information technology (IT) devices and systems,
including software systems, cell phones, RFIDs, and PDAs. We therefore include in
this book many examples of the Internet and IT tools that managers use today to
plan, organize, lead, and control. We place some of these examples, like the ac-
companying one on Dell Computer (on page 25), in the Practice IT and Window on
Managing Now features.
CHAPTER SUMMARY
1. An organization consists of people who have for- 6. Almost everything a manager does involves inter-
mally assigned roles and who must work together acting with and influencing people. The bottom
to achieve the organization’s goals. Organizations line is that the leading, or people, side of what
needn’t be just business firms. managers do is not just another step in the
management process; it is an integral part of the
2. Organizations are run by managers. A manager is
manager’s job.
someone who plans, organizes, leads, and controls
the people and the work of the organization so that 7. Managers and their organizations now confront
the organization achieves its goals. rapid change and intense competition. Trends
contributing to this include globalization, techno-
3. Management writers traditionally refer to the
logical advances, and an emphasis on knowledge
manager’s four basic functions of planning, organ-
work.
izing, leading, and controlling as the management
process. 8. Modern management theorists’ prescriptions for
streamlined, agile, lean, faster-acting companies
4. We can classify managers based on organizational
would be hard to achieve without information
level (top, middle, first-line), position (executives,
technology. Information technology (IT) refers to
managers or directors, supervisors), and func-
any processes, practices, or systems that facilitate
tional title (vice president of production, sales
processing and transporting information.
manager). All managers get their work done
through people and by planning, organizing, lead- 9. Information system refers to the interrelated com-
ing, and controlling. Top managers spend more ponents working together to collect, process, store,
time planning and setting goals. Lower-level man- and disseminate information to support decision
agers concentrate on implementing goals and making, coordination, analysis, and visualization
getting employees to achieve them. in an organization. Managerial information sys-
tems support managerial decision making and
5. Managers play other roles too—for instance, fig-
control.
urehead, leader, liaison, spokesperson, negotiator.
They also engage in entrepreneurial, competence-
building, and renewal processes.
Experiential Exercises ■ 27
DISCUSSION QUESTIONS
1. Is your professor responsible for managing this 7. What accounts for the fact that companies must be
class? Why or why not? agile today?
2. Is your management class an organization? Why or 8. List ten examples of information technology you
why not? would typically expect to deal with on the job.
3. Give examples of each of the four functions of 9. What information technology tools do you use?
management. List at least three ways in which managers
4. Give examples of top, middle, and first-level man- use these for planning, organizing, leading, or
agers at your college or university. controlling.
5. What are four things a manager today can learn

and apply from studying management history?
6. Briefly describe four differences between classical
and behavioral approaches to managing.
EXPERIENTIAL EXERCISES
1. Most people tend to think of organizations as the following questions: (a) In a university in which
pyramid-shaped hierarchies, with authority and students evaluate the faculty and the faculty is “the
decision making flowing from the top down. The boss” when it comes to deciding on new programs,
boss gives the orders, and the employee does the how can you determine who the “managers” and
work. As this chapter points out, today’s changing “employees” are? (b) What five specific recent envi-
environment demands new forms of organization. ronmental trends do you think have had the most
In a team of four to five students, graphically de- pronounced effect on the methods used to manage
pict some of the newer organizational designs your college or university today? (c) List several
mentioned in this chapter. First, draw the shapes ways in which you believe these trends have influ-
you think represent the organization charts of the enced the way in which the college or university’s
new team-focused organizations. Then write a managers plan, organize, lead, and control.
brief (one- to two-page) summary describing what
3. Write a short essay on this topic: the tasks I’ve per-
you have drawn and what you think the implica-
formed that I most enjoyed, was proudest of, and
tions of these designs are for planning, organizing,
was most successful at. (Perhaps, if you’re lucky,
leading, and controlling organizations today.
one task fills the bill!) Now do the same for the task
2. While most organizations do tend to be hierarchies or tasks you least enjoyed, were least proud of, and
with bosses telling employees what to do, colleges were least successful at. Now answer this question:
and universities have long been somewhat differ- based on what you know about what managers do
ent. For example, many universities traditionally and what it takes to be a manager, do you think you
have faculty senates that make decisions about have what it takes to be a manager?
what new programs to approve, and on what bases
the university will evaluate and appraise profes-
sors. Similarly, many universities have students
evaluate the faculty—still an unusual arrangement
even in progressive companies. As a team, answer
CASE STUDY
No Rules, Just Right
hris Sullivan and the founders of Outback Steak- for a minimum of five years, and a work environment
C house, Inc., developed a unique vision for a restaurant
concept and the management system that would make
serving dinner only. Outback’s unique employment
benefits aren’t just for management. Recently, the
it work. Having worked for other chain restaurants in company rolled out a benefits program for part-time
the past, Sullivan and his team wanted to do things very employees. In contrast to many other companies, the
differently. They wanted a restaurant that was a fun less you make at Outback, the less you are required to
place for employees to work. pay for health insurance.
Sullivan and his cofounders had originally planned Sullivan insists that one key for a successful restau-
to build just a few restaurants and then play a lot of rant is for the local team to have fun. Local Outback
golf. Things didn’t work out that way. The company managers have noted that one of the first questions
they created captured the imagination and appetites CEO Sullivan asks them when visiting their location is,
of the public. Within its first six years, Outback “Are you still having fun?” Management’s casual style
Steakhouse had become the fastest-growing restaurant and its fiercely entrepreneurial culture echo the corpo-
chain in the casual-dining segment of the restaurant rate motto: “No rules, just right.”
industry. Outback’s management team took the com-
pany public. It has won numerous awards for business
growth, including Entrepreneur of the Year awards DISCUSSION QUESTIONS
from both Inc. magazine and the Kauffman (Entrepre-
1. Based on this case, what management roles does
neurship) Foundation.
Sullivan fulfill?
Part of Outback’s success has come from its un-
orthodox management system. First, Sullivan and his 2. List at least ten specific management tasks Sullivan
colleagues wanted restaurateurs to be able to make a will have to attend to in a typical week.
career as store managers. In many restaurant chains,
3. Is Sullivan using a classical or a behavioral man-
the best-paying positions are in the corporate office,
agement approach, and why do you think he is
not directly serving customers. Top store managers in
doing so, given his environment and situation?
those systems leave the restaurant to move to corpo-
rate to make a good salary. 4. What environmental forces are acting to influence
To attract managers, Outback offered very strong Outback’s business and management style, for
financial packages (in many cases offering the manager good or for ill?
equity in the local restaurant), assignment to a location
ETHICAL AND SOCIAL ISSUES 2
Sarbanes-Oxley Act of 2002 CHAPTER OUTLINE
Opening Vignette: Sarbanes-
M anagers today run big legal risks if they don’t manage their compa-
nies ethically.1 For example, the federal Sarbanes-Oxley Act now
requires that publicly traded companies’ CEOs and CFOs personally
Oxley Act of 2002
● Ethics in an Age of
Information Technology
certify the accuracy of their companies’ financial statements and that Ethics and the Law
● What Influences Ethical
their firms’ internal controls are adequate.2 This means the managers
Behavior at Work?
must be able to show they’ve done their best to ensure that all their Individual Factors
employees are acting ethically. Organizational Factors
To do this, managers must ● Encouraging Ethical
Behavior at Work
provide employee ethics training Publish an Ethics Code
(among other things) and prove What Managers Do to Encourage
that employees actually got Ethical Behavior
IMPROVING YOUR ETHICS-
trained. However, offering and BUILDING SKILLS
following up on such training Managing Now: Using Information
Technology to Encourage Ethical
programs can be expensive,
Behavior
particularly when hundreds of WINDOW ON MANAGING NOW:
employees are involved. So when Complying with Sarbanes-Oxley
and Other Regulations
DTE Energy needed ethics train- PRACTICE IT: DTE Energy’s
ing for its 14,000 employees, its Web-Based Ethics Training System
managers wanted a cost-effective ● Social Responsibility Now
program.What should they do? Franklin Raines, the CEO of the Business Social Responsibility Defined
Roundtable business association, leads a To Whom Is the Company Responsible?
You should have a good answer group of managers in an ethics training Why Are Companies Socially
after reading this chapter. ■ program. Responsible?
How to Improve the Company’s Social
Responsiveness
● Managing Diversity
After studying this chapter, you should be able to: Bases for Diversity
Barriers in Dealing with Diversity
Show that you’ve learned the chapter’s essential information by How to Manage Diversity
➤ Explaining what is meant by ethical behavior. Recruiting a More Diverse Workforce
➤ Describing the organizational factors that influence ethical behavior at work.
➤ Listing five ways in which a supervisor can personally improve the ethical behavior of
his or her subordinates.
➤ Answering the question,“To whom is the company responsible?”
➤ Listing the bases for diversity.
29
30 PART ONE CHAPTER 2 Ethical and Social Issues

➤ Reading the opening vignette about the Sarbanes-Oxley Act and DTE Energy and
recommending an ethics training system for the company.
➤ Reading the end-of-chapter exercises and explain how you would handle the ethical
challenge.
➤ Reading the chapter case study and explain what you would do if you were the man-
ager, and why.

➤ Watching the simulation video, identifying the ethical situations, and determining
appropriate actions.
Online Study Center
ACE the Test ➤ Studying the video scenario and explaining how the manager could use information
Managing Now! LIVE technology (IT) to encourage ethical behavior in the company.
Ethics in an Age of Information Technology

Online Study Center
ACE the Test
Managing Now! LIVE T he U.S. Justice Department recently tried to force Google to hand over a week’s
worth of Internet searches. Google refused. Yet the day the story broke, Google’s
stock fell almost 10 percent. This drop seemed to reflect the fact that if Google ever
did have to agree to such a request, users felt it would invade their privacy.3
In fact, this case had little to do with privacy. The government said it didn’t
seek personally identifiable information. And Google said its main concern was
that supplying the information might give competitors some insight into Google’s
trade secrets. Still, just the idea that the government’s request might somehow
strip away Google users’ privacy was enough to trigger widespread concern. Users
were concerned about their privacy. And perhaps they were concerned about the
ethics of Google letting them think that all those searches they inputted were pri-
vate, when in fact they were all filed away, potentially available for all to see.
The idea that websites and even employers are tracking what people do has
focused new interest on ethics. Ethics are the principles of conduct that govern an
individual or a group.4 Someone can tell when a situation involves ethics from two
observations. First, ethical decisions always involve normative decisions. These are
decisions where the manager must decide if something is good or bad, right or
wrong. Second, ethics always involve moral decisions. These are decisions (like those
involving lying or stealing) that society views as having serious moral consequences.
● Ethical or Not? Sometimes it’s clear what the ethical thing to do is, but often
it is not. Sometimes it’s fairly clear. One guideline is that if the decision makes the
person feel ashamed or remorseful, or involves a matter of serious consequence
such as murder, then chances are it is unethical. For example, you are the pur-
chasing manager, and your biggest supplier offers you a $10,000 all-expenses-paid
trip to play golf in Scotland, but asks you not to tell your boss. Most people would
(rightly) assume that taking the trip is unethical.
On the other hand, many ethical decisions are judgment calls, and here it’s not
so clear what is ethical and what is not. Conflicts of interest often fall in this cate-
gory. Conflicts of interest arise when someone who represents Party A in dealings
with Party B has a hidden relationship with Party B. For example, a big supplier
(who you know your firm is thinking of dropping in favor of another) offers you
(the purchasing manager) some help in getting admitted to a graduate program by
Ethics in an Age of Information Technology ■ 31
calling his friend, the dean. What would you do? Similarly, some doctors accept
expensive free dinners and trips from drug companies, although they contend
(perhaps correctly) that accepting those gifts cannot affect whether and how
much they prescribe those companies’ drugs.
There are countless other ethical judgment calls. For example, at election
time, many newspapers size up the accuracy and honesty of political ads. How far
can a candidate (or company) go in embellishing the truth or stating facts out of
context in ads? It’s an ethical judgment call. As another example, most people
would say that lying is bad. But if a person who plans to cause harm asks you
where his victim is, would lying still be bad? Perhaps not.5 The fact that ethics may
be situational complicates things even more. For example, bribery in some coun-
tries is so widespread that people in those countries don’t view it as wrong.
Ethics and the Law

Why not just follow the law? It may seem odd, but the law is not a perfect guide
about what is ethical. Something may be legal but not ethical, and something may
be ethical but not legal. Charging a naïve customer an exorbitant price may be
legal but unethical. Insulting the government may be ethical by society’s broader
norms but still illegal in some countries. Patrick Gnazzo, vice president for busi-
ness practices at United Technologies Corp. (and a former trial lawyer), put it this
way: “Don’t lie, don’t cheat, don’t steal. We were all raised with essentially the same
values. Ethics means making decisions that represent what you stand for, not just
what the laws are.”6
If it’s not just legal constraints, why do people do the right thing? One ethicist
explains this by suggesting people fall along a continuum, from selfish egoists to
people of integrity. Some must be forced to be ethical, while some do so voluntar-
ily. At one end, the selfish egoist basically says, “I’ll do whatever I think I can get
away with.”7 To stop or slow them down, governments pass laws, and many man-
agers do follow these legal standards. Other managers and professionals voluntar-
ily comply with the professional standards of their professions or professional
associations. For example, the professional association of executive recruiters has
rules regarding how long a recruiter should wait before approaching a manager he
or she placed in a position about a second new position. Finally, some people do
not need laws or standards to get them to do the right thing. They are people of
integrity who do what they honestly believe is right.8
Compare your ethics answers to those of Americans in one survey by answer-
ing the quiz in Figure 2.1. You’ll find the answers on page 58.
● Managing Now: Ethics and Information Technology An Internet spam

gang recently sent misleading e-mails to businesses and consumers in the United
States. Most people saw this as unethical. Microsoft helped catch the spammers. It
used thousands of trap accounts with addresses on its e-mail service.9
For all its benefits, modern information technology does prompt new ethical
concerns. A short list of concerns includes intellectual property piracy, computer
crimes (including hacking, viruses, and cyberterrorism), security and reliability of
intellectual property and of records and forms, spamming, online marketing to
security: a company’s attempts children, and privacy.10
to prevent inappropriate access Of these, one survey found that business managers ranked IT-related security
to the company’s resources
and privacy as the two main technology-related issues they face. “Security refers
privacy: an individual’s to a company’s attempts to prevent inappropriate access to the company’s
expectation that what he or she resources. Privacy refers to an individual’s expectation that what he or she does will
does will remain secret remain secret.”11 IT issues raise serious ethical concerns.
F IGURE 2.1
The Wall Street Journal Workplace Ethics Quiz
The spread of technology into the workplace has raised a variety of new ethical questions, and
many old ones still linger.
OFFICE TECHNOLOGY GIFTS AND ENTERTAINMENT TRUTH AND LIES
1. Is it wrong to use company e-mail 7. What’s the value at which a gift from a 15. Due to on-the-job pressure, have you
for personal reasons? supplier or client becomes troubling? ever abused or lied about sick days?
Yes No $25 $50 $100 Yes No
2. Is it wrong to use office equipment 8. Is a $50 gift to a boss unacceptable? 16. Due to on-the-job pressure, have
to help your children or spouse do you ever taken credit for someone
schoolwork? Yes No
else’s work or idea?
Yes No 9. Is a $50 gift FROM the boss Yes No
unacceptable?
3. Is it wrong to play computer games on
Yes No
office equipment during the workday?
Yes No 10. Of gifts from suppliers: Is it OK to
take a $200 pair of football tickets?
4. Is it wrong to use office equipment
Yes No
to do Internet shopping?
Yes No 11. Is it OK to take a $120 pair of
theater tickets?
5. Is it unethical to blame an error you
Yes No
made on a technological glitch?
Yes No 12. Is it OK to take a $100 holiday food
basket?
6. Is it unethical to visit pornographic
Yes No
Web sites using office equipment?
Yes No 13. Is it OK to take a $25 gift certificate?
Yes No
14. Can you accept a $75 prize won at a

raffle at a supplier’s conference?
Yes No
SOURCE: Adapted from Wall Street Journal, 21 October 1999, pp. 81–84. Ethics Officer Association, Belmont, Mass.: Ethics Leadership Group,Wilmette, Ill. Surveys sampled a
cross-section of workers at large companies and nationwide.
● Privacy and IT As the Managing Now section notes, privacy is now more of a
concern than in the past because information technology facilitates collecting,
processing, and disseminating vast quantities of employee and consumer informa-
cookies: small files deposited tion.12 For example, websites use cookies to track users’ online behavior. They do
on a visitor’s hard drive to track this to see which targeted ads are most effective and to maintain passwords and
the person’s visits other personalization features at many websites.13
Most consumers don’t like cookies. For example, in a survey, 64 percent of 150
Internet users said cookies represented an invasion of their privacy. Fifty-two per-
cent disable cookies before using the Web. About 39 percent delete cookies on a
weekly basis, and 25 percent do so monthly.14 DoubleClick Inc. uses cookies to
Ethics in an Age of Information Technology ■ 33
track users’ online habits. Several years ago, it created controversy by matching
identifiable personal information with previously anonymous user profiles.15
Cookie-related ethical issues can be tricky. For example, if a consumer willingly
sends a website personal information, then collecting that information is ethical.
On the other hand, a monitoring program that secretly gathers this information to
use for identity theft is unethical. But suppose the person willingly gives informa-
tion to one site. That site then sells it to another site, which in turn uses it to pro-
mote its own Web services to the individual. In this situation, it isn’t clear that what
the websites did was ethical or not.16
Two events brought the privacy/ethics issue into focus for many people. Pas-
sage of the post-9/11 Patriot Act basically entails a tradeoff of some privacy for
added security. However, some in Congress argued that the government’s moni-
toring of some domestic phone calls without judicial consent was both illegal and
unethical. Others questioned whether librarians should have to transfer user lists
to law enforcement officials.
Similarly, passage of the Health Insurance Portability and Accountability
Act (HIPAA) affected many people. This act established national standards for
maintaining and electronically transferring patients’ health-care information. It
stemmed in part from concerns that the health-care industry was not doing
enough to protect patients’ privacy.17
● Employee Monitoring and IT Electronically monitoring employees raises

similar privacy and ethics concerns. For example, electronic performance moni-
toring (EPM) means having supervisors electronically monitor the amount of
computerized data an employee is processing per day. It’s estimated that as many
as 26 million U.S. workers have their performance monitored electronically. This
fact has already triggered congressional legislation aimed at requiring that em-
ployees receive precise notification of when they will be monitored.
Electronic performance monitoring is also becom-
ing more sophisticated. Thanks to cell phones and
wireless communication, employers like United Parcel
Service (UPS) use GPS units to monitor the where-
abouts of their deliverypeople. A federal law now re-
quires all new cell phones to have GPS capabilities; this
should expand the number and range of employees
that employers keep tabs on.18 Many more employers,
like Bronx Lebanon Hospital in New York, use biometric
scanners, for instance, to ensure that the employee
who clocks in in the morning is really who he or she
claims to be.19
Monitoring is spreading. For example, one survey
by the Society of Human Resource Management found
that about two-thirds of companies monitor e-mail ac-
tivity, three-fourths monitor employee Internet use,
and about two-fifths monitor phone calls.20 Another
survey of 192 companies concluded that 92 percent
Air-Trak employee using global positioning software to track
check their employees’ e-mail and Internet use at work.
an employee’s movements.
Twenty-two percent monitor employees’ online activi-
ties all the time.21
There are two main legal restrictions on workplace monitoring: the Electronic
Communications Privacy Act (ECPA) and common-law protections against inva-
sion of privacy. Congress intended the ECPA to restrict interception and monitoring
of oral and wire communications. Common-law protections against invasion of

privacy are not written down in laws, but reflect many years’ worth of judges’
decisions.22
Employers do have legitimate reasons for electronically monitoring employ-
ees. As one example, employees who use their company computers to swap and
download music files can ensnare their employers in illegal activities.23 Monitor-
ing can also improve productivity, as when UPS tracks the whereabouts of their
drivers.
● Security and IT Information technology also raises serious computer secu-

rity concerns. The Australian Stock Exchange recently had to review its online
practices when a security breach allowed people using its website to view the de-
tails of other users’ stock-market activity.24 Several credit-card-processing compa-
nies recently had data on millions of clients stolen. Employees understandably
worry that nonauthorized persons may gain access to their private personnel
files. Similarly, most people know that what an attorney and his or her client dis-
cuss is supposed to be confidential. Yet when an e-mail message bounces from
computer to computer through the Internet, it’s more like a postcard than a
sealed letter.25
● Piracy Information technology has created whole new industries devoted to

pirating copyrighted music, books, and movies. A walk through video stores in some
foreign countries would reveal thousands of pirated music and movie performances.
And many people routinely download and trade copyrighted files with friends or use
pirated software at work. Does morality forbid downloading? Some say no, that the
Internet should make transfers free. Others argue that it’s immoral (and thus uneth-
ical) to violate copyrights by downloading and sharing music or movies.26
● Reducing IT’s Ethical Concerns Technical and legal safeguards can reduce
piracy, privacy, and security concerns up to a point. For example, techniques for
improving security include encrypting e-mail messages, installing firewalls and
antivirus software, instituting access control techniques for preventing unautho-
rized access, making the computer itself physically secure by using passwords,
attaching a privileged notice to each e-mail, and using digital signatures on
e-mails.
However, most ethical issues come back to the ethics of people. What about the
entrepreneur who’s thinking of saving some money by illegally duplicating a pro-
gram for his or her employees to use? Or, say, the employee whose company is
monitoring his or her e-mail messages, or the consumer who’s submitting personal
information to a website? In most cases, the ethics of those involved—the entre-
preneur, the people doing the monitoring, and those managing the website—are
the only real safeguards.
What Influences Ethical Behavior at Work?

S everal years ago, MCI-WorldCom’s CFO pleaded guilty to helping hide the
company’s true financial condition. The government accused him of having
subordinates make fraudulent accounting entries and of filing false statements
What Influences Ethical Behavior at Work? ■ 35
with the Securities and Exchange Commission (SEC).Why would a star CFO do this?
Because, he said, he thought he was helping MCI: “I took these actions, knowing
they were wrong, in a misguided attempt to preserve the company to allow it to
withstand what I believed were temporary financial difficulties.”27
Managers can learn some lessons from MCI-WorldCom. Even gifted man-
agers fail if they make the wrong ethical choices. And even honest managers find it
easy to convince themselves that what they’re doing is not really wrong.
As the example from WorldCom shows, there is no simple answer to the ques-
tion, What influences ethical behavior at work? It is not just an issue of personal
honesty. Basically, to quote just one source, “[E]thical decisions are the result of
the interaction of the person and the situation.”28 Let us look more closely at what
this means.
Individual Factors
Certainly, people do bring to their jobs their own ideas of what is morally right and
wrong, and this influences what they do. Managers use a variety of devices, from
polygraph (lie detector) machines (now banned in most cases) to written honesty
tests to uncover such tendencies.
Personal ethical tendencies are important. For example, researchers surveyed
CEOs of manufacturing firms. The aim was to explain the CEOs’ intentions to
engage (or to not engage) in two questionable business practices: soliciting a
competitor’s technological secrets and making payments to foreign government
officials to secure business. The researchers concluded that the CEOs’ personal
tendencies more strongly affected their decisions than did environmental or orga-
nizational pressures.29
Several personal traits seem to predispose people to possibly making ethical
mistakes. Age is one factor. One study surveyed 421 employees to measure the
degree to which age, gender, marital status, education, dependent children,
region of the country, and years in business influenced responses to ethical
decisions. (Decisions included “doing personal business on company time” and
“calling in sick to take a day off for personal use.”) Older workers in general had
stricter interpretations of ethical standards and made more ethically sound
decisions than did younger employees. Other studies have found this ethical
generation gap.30
Researchers in another study asked graduate and undergraduate students to
complete a questionnaire containing eleven statements. Each statement de-
scribed a common but probably unethical behavior concerning intellectual prop-
erty. The good news was that the students did label as highly unethical those
behaviors that had to do with personal privacy or property theft. The bad news
was that those behaviors that had to do with theft of the company’s property or
privacy did not elicit the same negative reactions. Instead, the students tended to
be neutral about whether these behaviors were ethical or not.31
Another study focused on how different people react to protecting intellectual
property and privacy rights. Machiavellian personalities—those who took some
pleasure in manipulating others—were more likely to view ignoring the intellec-
tual property and privacy rights of others as acceptable.32
● Self-Deception Personal tendencies are also important because self-

deception has a bigger influence in ethical choice than most people realize. To
sum this up, “Corrupt individuals tend not to view themselves as corrupt.”33 They
rationalize their unethical acts as being somehow okay. As the president of the
Association of Certified Fraud Examiners puts it, people who have engaged in
corrupt acts “. . . excuse their actions to themselves, by viewing their crimes as
non-criminal, justified, or part of a situation which they do not control.”34
Table 2.135 summarizes six ways managers rationalize away the corruptness of
their corrupt acts. For example, consider the “appeal to higher loyalties” rational-
ization. Here the manager might say, “I’m doing this to protect the company.” In
one real example, three former executives pleaded guilty to federal charges in
what authorities then called the largest and longest accounting fraud in history;
the fraud had lasted for twelve years. The managers said they had done what they
did to keep their company’s stock price high.36
T ABLE 2.1
How Managers Rationalize Their Corrupt Behavior
Strategy Description Examples
Denial of responsibility The actors engaged in corrupt “What can I do? My arm is being twisted.”
behaviors perceive that they “It is none of my business what the
have no other choice than to corporation does in overseas bribery.”
participate in such activities.
Denial of injury The actors are convinced that “No one was really harmed.”
no one is harmed by their “It could have been worse.”
actions; hence, the actions
are not really corrupt.
Denial of victim The actors counter any blame for “They deserved it.”
their actions by arguing that “They chose to participate.”
the violated party deserved
whatever happened.
Social weighting The actors use two basic approaches “You have no right to criticize us.”
to reduce the perceived importance “Others are worse than we are.”
of corrupt behaviors: (1) condemn
the condemner and (2) selective
social comparison.
Appeal to higher loyalties The actors argue that their “We answered to a more important cause.”
violation of norms is due to “I would not report it because of my
their attempt to realize a loyalty to my boss.”
higher-order value.
Metaphor of the larger The actors rationalize that they “We’ve earned the right.”
are entitled to indulge in “It’s all right for me to use the Internet for
deviant behaviors because of personal reasons at work. After all, I
their accrued credits work overtime.”
(time and effort) in their jobs.
Source: Vikas Anand et al., “Business as Usual: The Acceptance and Perpetuation of Corruption in
Organizations,” Academy of Management Executive, 2004, vol. 18, no. 2, p. 41. Copyright 2004 by Academy of
Management (NY). Reproduced with permission of Academy of Management (NY) in the format Textbook via
Copyright Clearance Center.
What Influences Ethical Behavior at Work? ■ 37
Organizational Factors
In a famous study first conducted at Yale University some years ago, researcher
Stanley Milgram showed that, given the right situation, even ethical people do
unethical things.37 In this case, numerous undergraduate students were willing
to inflict what they erroneously thought was pain on fellow students in a mis-
guided effort to help the researcher conduct his study. One conclusion we can
draw is that misplaced loyalties distort peoples’ ethical choices. Most of the ap-
parently sadistic students felt they were, in effect, “just following orders.” A sec-
ond is that the organization and its leaders have a big influence on whether
people behave ethically. Pressure, the boss, and the firm’s culture are three such
factors.
● Pressure to Perform Putting employees under undue pressure fosters eth-

ical compromises. A study by the American Society of Chartered Life Underwriters
found that 56 percent of all workers felt some pressure to act unethically or ille-
gally, and that the problem seems to be getting worse.38
Table 2.2 shows the principal causes of ethical compromises as reported by six
levels of employees and managers. Dealing with scheduling pressures was the
T ABLE 2.2
Principal Causes of Ethical Compromises
Senior Middle Front-Line Professional Administrative, Hourly
Management Management Supervisor Nonmanagement Salaried Employees
Meeting schedule pressure 1 1 1 1 1 1
Meeting overly aggressive 3 2 2 2 2 2
financial or business
objectives
Helping the company 2 2 4 4 3 4
survive
Advancing the career 5 4 3 3 4 5
interests of my boss
Feeling peer pressure 7 7 5 6 5 3
Resisting competitive 4 5 6 5 6 7
threats
Saving jobs 9 6 7 7 7 6
Advancing my own career 8 9 9 8 9 8
or financial interests
Other 6 8 8 9 8 9
Note: 1 is high; 9 is low.
Source: O. C. Ferrell and John Fraedrich, Business Ethics, 3rd ed. (Boston: Houghton Mifflin, 1997), p. 28.
Adapted from Rebecca Goodell, Ethics in American Business: Policies, Programs, and Perceptions (Ethics
Resource Center, 1994), p. 54. Reprinted with permission of the Ethics Resource Center.
number 1 reported cause of ethical lapses. Meeting overly aggressive financial

or business objectives and helping the company survive were two other top
causes. Advancing my own career or financial interests ranked toward the bottom
of the list.
● The Boss’s Influence The leader’s actions may be “the single most important
factor in fostering corporate behavior of a high ethical standard.”39 In other words,
employees tend to take their ethical signals from their bosses. Yet only about
27 percent of employees in one poll strongly agreed that their organizations’ lead-
ership is ethical.40 One writer gives these examples of how supervisors knowingly
(or unknowingly) lead subordinates astray ethically:
◗ Tell staffers to do whatever is necessary to achieve results.
◗ Overload top performers to ensure that work gets done.
◗ Look the other way when wrongdoing occurs.
◗ Take credit for others’ work or shift blame.41
When managers do set the wrong tone, it often starts at the top. The National
Commission on Fraudulent Financial Reporting concluded that “more than any
other key individual, the chief executive sets the tone at the top that affects
integrity and ethics and other factors of a positive, controlled environment.”42
Some top managers react to ethical crises in admirable ways. When he found
out that a rogue group of Procter & Gamble (P&G) investigators were going through
competitor Unilever’s garbage for information, former P&G CEO John Pepper was
reportedly shocked. He ordered the campaign to stop, and he fired the managers
responsible for hiring the spies. Then, he blew the whistle on his own company. He
had P&G inform Unilever of what his firm had done. Unilever demanded, among
other things, that Procter & Gamble retain a third-party auditor to make sure it does
not take advantage of the documents its spies stole from Unilever’s trash.43
● The Organizational Culture Employees also get signals about what is ac-
organizational culture: the ceptable behavior from the culture of the organization in which they work. We may
characteristic traditions, norms, define organizational culture as the characteristic traditions, norms, and values
and values that employees share employees share. Values are basic beliefs about what you should or shouldn’t do
and about what is and is not important. Google’s
founders famously wrote “Do no evil” in the firm’s
prospectus when they took their company public on
the stock market. They wanted “Do no evil” to be a
basic value or rule employees applied when making
decisions on behalf of Google.
Managers shape organizational cultures in many
ways. They do so consciously, for example, by using
symbols (such as incentives to reward ethical
behavior), offering stories about ethical employees,
and holding ceremonies to reward employees who did
the right thing. Writing the values up as rules or codes
(as Google did) also illustrates using symbols.
Managers sometimes shape culture unconsciously.
Thus, the manager who unthinkingly accepts expensive
dinners from a supplier in violation of company rules
may send the signal to subordinates that unethical be-
Google’s organizational culture. havior really isn’t that bad.
Encouraging Ethical Behavior at Work ■ 39
Encouraging Ethical Behavior at Work

Online Study Center
ACE the Test
Managing Now! LIVE
J ust as there is no single cause of unethical behavior at work, there’s no one sil-
ver bullet to prevent it. Instead, managers must take several steps to ensure eth-
ical behavior by their employees.44
Publish an Ethics Code

ethics code: the principles, The first step is usually to adopt an ethics code. An ethics code lays out the prin-
values, and guidelines a ciples, values, and guidelines the company wants its employees to adhere to.45
company wants its employees One study found that 56 percent of large firms and about 25 percent of small firms
to adhere to
had corporate ethics codes.46 As an example, IBM’s ethics code has this to say
about tips, gifts, and entertainment:
No IBM employee, or any member of his or her immediate family, can accept
gratuities or gifts of money from a supplier, customer, or anyone in a business
relationship. Nor can they accept a gift or consideration that could be per-
ceived as having been offered because of the business relationship.
“Perceived” simply means this: if you read about it in the local newspaper,
would you wonder whether the gift just might have had something to do with
a business relationship? No IBM employee can give money or a gift of signifi-
cant value to a customer, supplier, or anyone if it could reasonably be viewed
as being done to gain a business advantage.47
The ethics code is often part of (and, in most cases, the same as) a code of con-
duct. The latter addresses not just ethics but also closely related matters such as
respecting the environment.
Basically, all publicly traded companies doing business in the United States
must have ethics codes.48 The Sarbanes-Oxley Act (passed after a series of top cor-
porate management ethical lapses a few years ago) requires companies to declare
if they have a code of conduct. Federal sentencing guidelines reduce penalties for
companies convicted of ethics violations if they have codes of conduct. Both the
New York Stock Exchange and NASDAQ require listed companies to follow their
exchanges’ corporate governance rules.
Codes of conduct are also a global phenomenon (see Figure 2.2). Nations and
groups of nations (including Japan, South Africa, the European Union, and the
F IGURE 2.2 ■
Asian Pacific Economic Cooperation Forum Business Code of Conduct
(www.cauxroundtable.org)
Codes of Conduct ■
Caux Round Table Principles for Business (www.cauxroundtable.org)
■
European Corporate Code of Conduct (European Union Parliament, www.europa.eu.int)
■
Fair Labor Association Workshop Code of Conduct (www.fairlabor.org)
■
Global Sullivan Principles (http://globalsullivanprinciples.org)
■
ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social
Policy (www.ilo.org)
■
OECD Guidelines for Multinational Enterprises—2000 (www.corporate-accountability.org)
■
OECD, Principles of Corporate Governance—2004 (www.oecd.org)
■
Rules of Conduct on Extortion and Bribery in International Business Transactions
(International Chamber of Commerce, www.iccwbo.org)
SOURCE: Adapted from Standards of
■
United Nations Universal Declaration of Human Rights (www.un.org)
Corporate Social Responsibility by Social
Venture Network, 1999, www.svn.org/.
Asian Pacific Economic Cooperation Forum) have corporate codes they expect
companies to follow. These codes generally do not carry the weight of law. How-
ever, they do set out what these countries view as acceptable corporate behavior.
As such, “. . . They are slowly defining the terms and conditions of a company’s
license to operate—around the world.”49
Businesspeople also hope that an antibribery treaty signed by thirty-four
trading nations will reduce the incidence of corruption. Some executives also ad-
vocate a global corporate ethics standard under the auspices of the International
Standards Organization (ISO). The ISO now provides international quality (ISO
9000) and environmental (ISO 14,000) standards. “We want a simple, effective way
to operate [ethically] internationally—one that meets all the criteria of doing
business overseas, whether it’s proving assurance of quality or ethical business
practices,” says one executive.50 ISO ethical standards would provide a detailed list
of criteria companies must meet to prove that they do business ethically.
Codes of conduct tend to include several common principles. After reviewing
various international codes of conduct, researchers concluded that most codes
address the eight principles listed in Figure 2.3.
F IGURE 2.3 I. Fiduciary principle: act as a fiduciary for the company and its investors.
Carry out the company’s business in a diligent and loyal manner, with the degree of
Eight Common Code of candor expected of a trustee.51
Conduct Principles
II. Property principle: respect property and the rights of those who own it.
Refrain from theft and misappropriation, avoid waste, and safeguard the property
entrusted to you.
III. Reliability principle: honor commitments. Be faithful to your word and follow through
on promises, agreements, and other voluntary undertakings, whether or not
embodied in a legally enforceable contract.
IV. Transparency principle: conduct business in a truthful and open manner. Refrain from
deceptive acts and practices, keep accurate records, and make timely disclosures of
material information while respecting the obligations of confidentiality and privacy.
V. Dignity principle: respect the dignity of all people. Protect the health, safety, privacy,
and human rights of others. Adopt practices that enhance human development of the
workplace, the marketplace, and the community.
VI. Fairness principle: engage in free and fair competition, deal with all parties fairly and
equitably, and practice nondiscrimination in employment and contracting.
VII. Citizenship principle: act as responsible citizens of the community. Respect the law,
protect public goods, cooperate with public authorities, avoid improper involvement in
politics and government, and contribute to community betterment.
VIII. Responsiveness principle: engage with parties who may have legitimate claims and
concerns relating to the company’s activities, and be responsive to public needs while
recognizing the government’s role and jurisdiction in protecting the public’s interest.
T ABLE 2.3
Six Steps to Effectively Implementing an Ethics Code
1. Distribute the code of ethics to all employees, subsidiaries, and associated
companies.
2. Assist employees in interpreting and understanding the application and intent
of the code.
3. Specify management’s role in the implementation of the code.
4. Inform employees of their responsibility to understand the code, and provide
them with the overall objectives of the code.
5. Establish grievance procedures.
6. Provide a conclusion or closing statement, such as this one from Cadbury
Schweppes: The character of the company is collectively in our hands. Pride in
what we do is important, and let us earn that pride by the way we put the
beliefs set out here into action.
Source: O. C. Ferrell and John Fraedrich, Business Ethics, 3rd ed. (Boston: Houghton Mifflin, 1997), p. 176.
Adapted from Walter W. Manley II, The Handbook of Good Business Practice (London: Routledge, 1992), p. 16.
It is customary for the firm to set forth its ethics code in the form of written
documents.52 Table 2.3 summarizes six steps for effectively implementing an
ethics code.
● Are Ethics Codes Effective? Enron was a large gas and power trading
company that basically imploded in the face of allegations of top management
misconduct. Eventually, several of its managers plead guilty. Yet Enron’s ethics
code was readily available on the company’s website. It said, among other things,
“As a partner in the communities in which we operate, Enron believes it has a re-
sponsibility to conduct itself according to certain basic principles.” Those values
include “respect, integrity, communication and excellence.”53
However, in most cases, ethics codes do have a positive impact on employees’
ethical behavior. One study consisted of interviews with 766 subjects over a
two-year period.54 The researchers drew two main conclusions. First,
Respondents who worked for companies having a code of ethics judge subor-
dinates, co-workers, themselves and especially supervisors and top managers
to be more ethical than respondents employed in organizations not having a
formal code of ethics. . . .55
Second, it seemed to be the mere presence of the code (rather than its content)
that was important.
In fact, we found that although most respondents could not recall specific fea-
tures of their company’s ethics code, employees of companies having a code
had very different perceptions of ethical climate and behavior than employees
of companies lacking a code. . . .56
What Managers Do to Encourage Ethical Behavior

Having an ethics code doesn’t guarantee employees will act ethically, as Enron
discovered. Instead, managers need to implement and enforce the code’s ethical
I M P R OV I N G Y O U R E T H I C S -B U I L D I N G S K I L L S
There is much that you, as a manager, can do to make it in the company went to do the right thing. The news is
more likely that your employees behave ethically. always a good source, as when that MCI-WorldCom exec-
utive said that he knew he was doing wrong, but he was
Walk the Talk trying to save the company.
However, clarifying expectations doesn’t mean just
First, we’ve seen in this chapter that the leader’s actions
talking about them. Strong statements may reduce the
are the biggest element in determining whether employ-
risk of legal and ethical violations. But those statements
ees’ ethical standards stay high. Supervisors therefore
are meaningless if subordinates see that you or your com-
need to walk the talk when it comes to behaving ethically
pany does not back them up with enforcement.
and enforcing ethics rules.
Unfortunately, supervisors sometimes send the
Screen Out the Problem Employees
wrong cues. For example, telling subordinates they should
do “whatever it takes” to get the job done, overloading To some extent, the easiest way to avoid ethical lapses is
subordinates, and ignoring incidents of wrongdoing help to screen out potential problem employees before you
set the stage for ethical misdeeds. hire them. Some companies use honesty tests to screen
Even for experienced supervisors, knowing where to out ethically undesirable applicants, but testing is not your
draw the ethical line sometimes isn’t easy. Questions to only option.
ask include, Is what you’re about to do legal? Is it right? To the degree possible, make sure you’ve checked
How do you think you’ll feel afterward? How would you out the person you’re thinking of hiring with careful back-
react if you saw your actions described in the newspaper? ground and reference checks. There’s generally nothing
wrong with asking all candidates some very direct ques-
Clarify Your Expectations tions. For example, Have you ever observed someone
stretching the rules at work? What did you do about it?
Make it clear what your expectations are with respect to
Have you ever had to go against company guidelines or
the ethical values you want subordinates to follow. If your
procedures to get something done? Have you ever stolen
company has a corporate ethics code, emphasize, from
anything at work?
your subordinate’s first day, that you expect him or her to
follow that code.
Support Ethics Training
Some managers use stories and examples to make
their ethical expectations come alive.The examples may be We’ve seen that, for all practical purposes, ethics training
local, as when they describe the lengths to which someone is mandatory today. Federal sentencing guidelines from
principles. Here, three main things—top management commitment, training, and

enforcement—are important.
● Top Management Commitment We saw that employees tend to take their

ethical signals from their bosses. As two researchers put it, “To achieve results,
the chief executive officer and those around the CEO need to be openly and
strongly committed to ethical conduct, and give constant leadership in tending
and renewing the values of the organization.”57 Lockheed Martin Corporation
appointed a chief ethics officer, Nancy Higgins, as executive vice president of
ethics and business conduct to emphasize top management’s commitment to
ethics.58
● Train Employees Training plays an important role in publicizing a com-

pany’s ethics principles and in encouraging employees to adhere to them. For
1991 reduced penalties for employers accused of miscon- the ethical employees (not the unethical ones) who feel
duct who had implemented codes of conduct and ethics punished.
training. An amendment to those guidelines, which be-
came effective in 2004, outlines stricter ethics training Strive to Build an Atmosphere of Fairness, Justice,
requirements. and Respect
In most firms, the manager’s responsibility here is to
Ethics always involve questions of right and wrong and of
make sure his or her employees are participating in the
society’s moral standards. Therefore, employees tend to
ethics training program and doing so seriously. Packaged
associate unfair, unjust, disreputable behavior with unethi-
ethics training programs are also widely available online.
cal companies and supervisors.They tend to associate fair,
For example, skillsoft.com and netG.com offer such
just, respectful behavior with ethical companies and
programs.
supervisors.
Some workplace unfairness is blatant. For example,
Ensure Fair and Unbiased Performance Appraisals
some supervisors are workplace bullies, yelling at or ridi-
How the supervisor handles the employees’ periodic culing subordinates, humiliating them, and even making
performance appraisals is important. Unfairness and bias threats. Behavior like this is not just unfair, but unethical
in the appraisal sends a strong signal that ethics is sec- too. Many firms therefore have antiharassment policies.
ondary in the company or to the supervisor.To send the For example,“It is the policy of this company that all em-
signal that fairness and ethics are paramount, the employees, customers, and visitors are entitled to a respect-
ployees’ standards should be clear, employees should ful and productive work environment, free from behavior
understand the basis upon which you’re appraising them, and language constituting workplace harassment.”
and you should perform the appraisals objectively and Yet in practice, it’s not gross behavior like workplace
fairly. bullying that’s the problem. Instead, it’s the many small day-
to-day opportunities where the manager should have been
Use Rewards and Discipline fair but was not. To the extent that the manager carries
out his or her hiring, training, appraisal, reward, discipline,
Because behavior tends to be a function of its conse-
and termination responsibilities with honesty, fairness, and
quences, it is the manager’s (and the company’s) responsi-
respect, he or she can foster a feeling among employees
bility to ensure that the firm rewards ethical behavior and
that they’re working in a place that values ethical behavior
penalizes unethical behavior. In fact, when the company
and where ethical behavior must be the norm.
does not deal swiftly with unethical behavior, it’s often
example, based on one survey, 89 percent of surveyed ethics officials said that their
companies use the new-hire orientation to convey ethics codes, and 45 percent
use annual refresher training sessions. Figure 2.4 on page 44 shows other findings
from this survey.
● Measure and Enforce One study of effective ethics programs found that all
these firms used surveys or audits to monitor actual compliance with ethical
standards.59 Board members and employees should then discuss the results.60
Managers should address any ethical lapses by enforcing the firm’s ethics code.
As one study of ethics concludes, “Strong statements by managers may reduce
the risk of legal and ethical violations by their work forces, but enforcement of
standards has the greatest impact.”61 The accompanying feature, Improving Your
Ethics-Building Skills, focuses on what the individual manager/supervisor can do
to encourage ethical behavior.
Company ethics officials say they convey ethics codes and programs to employees
F IGURE 2.4 using these training programs:
The Role of Training in Ethics New hire orientation
89%
Annual refresher training

45%
Annual training
32%
Occasional but not scheduled training

31%
New employee follow-up sessions

20%
No formal training
5%
Company ethics officials use these actual training tools to convey ethics training
to employees:
Copies of company policies
78%
Ethics handbooks
76%
Videotaped ethics programs

59%
Online assistance
39%
SOURCE: Susan Well,“Turn Employees
Ethics newsletters
into Saints,” adapted from HRMagazine,
30%
December 1999, p. 52.
Managing Now: Using Information Technology

to Encourage Ethical Behavior
Turner Broadcasting System Inc. noticed that employees at its CNN London busi-
ness bureau were piling up overtime claims. CNN installed new software to moni-
tor every webpage every worker used. Overtime expenses soon plunged. As the
firm’s network security specialist puts it, “If we see people were surfing the Web all
day, then they don’t have to be paid for that overtime.”62
As at CNN, information technology is a double-edged sword for employee
ethics. It enables employees to spend time at work on personal pursuits—
shopping online or sending messages to friends, for instance. (UPS caught one
employee using the company computer to run a personal business.) However, as
we saw earlier in this chapter, information technology also enables employers to
monitor their employees’ behavior as never before.
● The Wireless Revolution Internet monitoring is just one example of how

managers use technology to keep closer tabs on their employees. When cable
Complying with Sarbanes-Oxley and Other Regulations
Particularly for larger firms, complying with Sarbanes- Control System checks for embargos and then automati-
Oxley (SOX) would be prohibitively expensive without cally performs the necessary export license activities. Says
IT support. For example, SOX requires that top man- one Adaptec manager, “Many of our orders, destinations,
agers certify, through a series of sign-off procedures, that and business partners have to be screened the day of the
the company has complied with its financial statement shipments . . .We now have that data in a single, integrated
accuracy and whistle-blower requirements. Enterprise- system for a more easily accessible electronic record.”64
based financial-software packages enable managers to Similarly, IT helps international employers comply
quickly analyze each department’s compliance proce- with local employment, payroll, safety, and recording
dures, and to organize the financial data for documenta- regulations in each country in which they operate.65 For
tion and sign-off.63 example, software packages combined with special data-
Sarbanes-Oxley is just one of the many national and in- input devices help companies comply with federal money-
ternational laws and regulations with which companies must laundering regulations by automatically identifying and
comply. For example, Adaptec Corp. provides data storage classifying suspicious cash-flow activities. Others help fi-
to many companies and government agencies, many nancial companies comply with banking regulations such
abroad.Particularly for high-technology companies such as as the Home Mortgage Disclosure Act.66 The European
Adaptec, complying with global trade regulations is quite Union requires most publicly traded companies to issue
complex.The software company SAP’s “Global Trade Ser- consolidated financial statements consistent with Interna-
vices” software package helps Adaptec to comply. For ex- tional Financial Reporting Standards. Compliance here
ample, this system automatically compares Adaptec’s busi- would be impossible without using financial-software
ness partners around the world with the “restricted party” packages for planning, budgeting, financial reporting, and
lists various governments publish. The package’s Export cost and profitability management.
repairperson Johnny Cupid starts his service truck, his employer BellSouth
knows exactly where he is. Thanks to BellSouth’s new global positioning satellite
(GPS) units, BellSouth supervisors know every time Cupid stops at a stoplight
and where he is as he makes his daily rounds. “I feel like they got their eye on me
all the time,” he says. “I can’t slow down anywhere anymore.”67 A BellSouth
spokesperson says, “GPS was not installed as an employee monitoring system.
It’s an efficiency tool, just like the wireless laptops and cellphones our techni-
cians have.” However, union workers filed about fifty grievances about the system
in one recent year. Cupid says, “I love my job (but) I don’t need any more stress.”
As at BellSouth, managers generally don’t use IT just to check up on em-
ployees but to improve efficiency. The Window on Managing Now feature
shows how managers use information technology to comply with government
regulations.
Lockheed Martin relies on IT for managing its ethics compliance programs.
For example, Lockheed uses its intranet to help its 160,000 employees take ethics
and legal compliance training online. Each short course addresses topics ranging
from insider trading to sexual harassment. The system also keeps track of who is
(and is not) taking the required courses.
Lockheed’s special electronic ethics software also keeps track of how well the
company and its employees are doing in terms of maintaining high ethical stan-
dards.68 For example, the program helped top management see that in one year,
4.8 percent of the company’s ethics allegations involved conflicts of interest. It
PRACTICE IT
DTE Energy’s Web-Based Ethics Training System
Complying with Sarbanes-Oxley means that publicly traded company can monitor their progress. As one officer at In-
companies need a cost-effective way of training employees tegrity Interactive said, it would have been easy in the 1990s
and of certifying that they really were trained.So when DTE for companies to resist ethics training by saying
Energy, with 14,000 employees, needed ethics training, it
turned to a Web-based program from Integrity Interactive [W]e have 30,000 employees and 40% turnover.There’s
Corp. of Waltham, Massachusetts. Now, all the company’s no way to train all these people in our code of conduct
employees have easy access through their computers to a and ethical compliance . . . The Internet has taken that
standardized ethics training program. DTE can also easily excuse away. It is now physically possible to reach any-
track who has taken the training and who has not.The em- one, anywhere on the globe—and what’s more, to
ployees can take the training when they want to, and the prove that you’re doing it.69
shows that it takes just over thirty days to complete an ethics violation internal in-
vestigation.70 It also shows that several years ago, 302 Lockheed employees were
sanctioned for ethical violations. The accompanying Practice IT feature shows
how DTE Energy uses information technology for ethics training.
Social Responsibility Now

Online Study Center
ACE the Test
Managing Now! LIVE F or years, environmental activists linked General Electric (GE) with wasting en-
ergy and dumping toxic wastes in NewYork’s Hudson River. Today, GE is actively
pursuing socially responsible energy and environmental policies. The company is
appraising its managers based on their environment-friendly performance. Every
GE business unit must cut its greenhouse gas, or carbon dioxide, emissions. Under
GE’s Ecomagination strategy, it aims to double its revenues from renewable energy
such as hydrogen fuel cells within several years.71
General Electric isn’t doing this just because social responsibility makes for
good public relations. GE found that most of its customers believe that rising fuel
costs and environmental regulations will soon make alternative fuels and a
cleaner environment a necessity. As one of the world’s premier corporations, GE’s
new stance says much about how managers view social responsibility now. As sev-
eral writers put it:
[M]ore and more companies are accepting corporate citizenship as a new
strategic and managerial purpose requiring their attention. Once seen as a
purely philanthropic activity—a source of general goodwill, with no bottom-
line consequence—citizenship is moving from the margins of concern to the
center at leading companies.72
Figure 2.573 summarizes the new attitude and approach.
Social Responsibility Defined

Corporate social responsibility refers to the extent to which companies should and
do direct resources toward improving segments of society other than the firm’s
owners. In essence, “Theories of corporate social responsibility suggest that there
needs to be a balance between what business takes from society and what it gives
back in return.”74 Socially responsible behavior might include creating jobs for
Social Responsibility Now ■ 47
F IGURE 2.5 OLD ETHIC NEW ETHIC
Old and New Company ■

Do the minimum required by law ■
Do the right thing
Attitudes ■
Keep a low profile ■
Show you are doing the right thing
■
Downplay public concerns ■
Seek to identify and address public
■
Reply to shareholders’ inquiries when concerns
necessary ■
Be responsible to shareholders
■
Communicate on a need-to-know basis ■
Communicate openly
SOURCE: Adapted from Dunphy, D., Griffiths,
■
Make decisions on the bottom line and ■
Integrate all of the above into decision
A., & Benn, S., Organizational Change for laws alone making
Corporate Sustainability (New York:
Routledge, 2003), p. 11.
minorities, controlling pollution, improving working conditions for one’s employ-

ees abroad, or supporting educational facilities or cultural events, for example.75
To Whom Is the Company Responsible?

The topic of social responsibility continues to provoke lively debate. On one point
all or most agree: “The socially responsible corporation is a good corporation.”76 In
other words, acting in a socially responsible manner means being ethical, doing
the right thing with respect to issues such as pollution or charitable contributions.
The question is, Is a company that tries to do its best for only its owners any
less ethical than one that tries to help customers, vendors, and employees, too?
The answer depends on what you believe is the purpose of a business. Many per-
fectly ethical people believe that a company’s only social responsibility is to its
stockholders. Others disagree.
● Managerial Capitalism The classic view is that a corporation’s main pur-

pose is to maximize profits for stockholders. Today, this view is most notably asso-
ciated with economist and Nobel laureate Milton Friedman. He said:
The view has been gaining widespread acceptance that corporate officials and
labor leaders have a “social responsibility” that goes beyond the interest of
their stockholders or their members. This view shows a fundamental miscon-
ception of the character and nature of the free economy. In such an economy,
there is one and only one social responsibility of business—to use its re-
sources and engage in activities designed to increase its profits so long as it
stays within the rules of the game, which is to say, engages in open and free
competition, without deception and fraud. . . .77
Friedman said that the firm’s profits belong to the stockholders, the com-
pany’s owners, and to them alone.78 He also said that the stockholders deserve
their profits because these profits derive from a voluntary contract among the var-
ious corporate stakeholders. For example, the community receives taxes, suppliers
are paid, employees earn wages, and so on. Everyone gets his or her due, and
additional social responsibility is unnecessary.
● Stakeholder Theory An opposing view is that business has a social respon-

sibility to serve all the corporate stakeholders affected by its business decisions. A
corporate stakeholder: any corporate stakeholder is “any group which is vital to the survival and success of
group that is vital to the survival the corporation.”79
and success of the corporation As shown in Figure 2.6, experts in this area traditionally identify six stake-
holder groups: stockholders (owners), employees, customers, suppliers, managers,
F IGURE 2.6 Stockholders
A Corporation’s Major
Stakeholders
Employees Managers
One view of social responsibility is
that a firm must consider and serve THE BUSINESS
all the stakeholders that may be
affected by its business decisions.
Community Suppliers
Customers
and the local community.80 Stakeholder theory holds that the rights of these
groups must be ensured, and, further, the groups must participate, in some sense,
in decisions that substantially affect their welfare.81
● The Moral Minimum Between the extremes of Friedman’s capitalism and

moral minimum: the stakeholder theory lies an intermediate position. Moral minimum advocates
position that states that the agree that the purpose of the corporation is to maximize profits but say that in
purpose of the corporation is to doing so, it must conform with the moral minimum. This means that the firm
maximize profits without should be free to strive for profits so long as it commits no harm.82 A business
committing any harm
would certainly have a social responsibility not to produce exploding cigarette
lighters or operate chemical plants that poison the environment. However, it’s
unlikely that the firm’s social responsibilities would extend to donating to charity
or educating the poor, for instance. The bottom line is that when it comes to being
socially responsible, there are many points of view.
Why Are Companies Socially Responsible?

Employees of the DeCoro sofa plant in Shenzhen, China, recently got into a fist-
fight with the plant’s Italian managers, who had fired them the week before. The
workers were protesting their firing. Hundreds of plant
workers soon took to the streets to protest what they
said was unfair treatment by the managers.
The incident prompted management to retain
experts to administer the plants’ first social audit.
Prompted by accusations of sweatshop working condi-
tions at other plants in the 1990s, social audits aim to
verify that plants are meeting both local labor laws and
buyers’ codes regarding things like safety conditions.
Yet many buyers, including giants like Nike, reportedly
know that some plant managers falsify the information
they give the social auditers.83
In practice, the lengths to which a manager goes to
be socially responsible depends on four things. It de-
pends, first, on how ethical the person is. Ethical people
can surely adhere to Friedman’s stockholder-oriented
Russian workers protest at a Coca-Cola plant in managerial capitalism theory, but even Friedman said
St. Petersburg. that the manager must play by the rules. No ethical
Social Responsibility Now ■ 49
managerial capitalist would knowingly commit unethical acts, say, by selling med-
icines that tests have shown to be deadly.
Second, how socially responsible the company is depends on top manage-
ment’s philosophy—whether they believe in managerial capitalism, stakeholder
theory, or the moral minimum, for instance. The original Ben and Jerry (of Ben &
Jerry’s Ice Cream) were famous for buying milk from local Vermont farmers,
although their prices were higher than those of other regions.
Third, as at the sofa plant, outside monitors and pressure groups help to nudge
the process along. As another example, when shoppers in several Home Depot
stores heard, “Attention shoppers, on aisle 7 you’ll find mahogany ripped from the
heart of the Amazon,” store managers scampered to find pranksters with mega-
phones.84 There were none. Rainforest Action Network activists had cracked Home
Depot’s intercom system’s security code.
Finally, as explained above, economic realities like rising fuel costs and envi-
ronmental regulations require that managers like those at GE pursue socially
responsible aims to support their companies’ strategic needs.
Companies usually don’t go from being socially irresponsible to socially
responsible overnight. Instead, they evolve. Figure 2.785 illustrates the typical
evolution. Firms move from defensive to grudging compliance, and then on to af-
firmatively making the changes a valued part of management’s strategic plans.
F IGURE 2.7 When it comes to developing a sense of corporate responsibility, organizations

typically go through five stages.
The Five Stages in Social
Responsibility for an
Stage What Organizations Do Why They Do It
Organization
DEFENSIVE Deny practices, outcomes, To defend against attacks to their
or responsibilities reputation that in the short term could
affect sales, recruitment, productivity,
and the brand
COMPLIANCE Adopt a policy-based To mitigate the erosion of economic

compliance approach as a value in the medium term because of
cost of doing business ongoing reputation and litigation risks
MANAGERIAL Embed the societal issue To mitigate the erosion of economic

in their core management value in the medium term and to
processes achieve longer-term gains by integrating
responsible business practices into their
daily operations
STRATEGIC Integrate the societal issue To enhance economic value in the long
into their core business term and to gain first-mover advantage
strategies by aligning strategy and process
innovations with the societal issue
CIVIL Promote broad industry To enhance long-term economic value

participation in corporate by overcoming any first-mover
responsibility disadvantages and to realize gains
through collective action
How to Improve the Company’s

Social Responsiveness
Managers improve their companies’ social responsiveness by instituting policies
and practices that encourage socially responsible behavior. These include social
audits, whistle-blowing, joining responsibility advocacy groups, and staying in
touch with stakeholders.
● The Social Audit One important step is to ascertain just how socially re-
sponsible the firm really is. Some firms measure this by using a rating system
corporate social audit: a called a corporate social audit.86 This is a review and analysis of the firm’s social
review and analysis of a firm’s responsibility, usually based on a checklist that addresses issues such as “How
social responsibility many accidents have you had this year?” “What percent of your profits go to com-
munity services?” and “What portion of your managers are minority or women?”
The DeCoro plant’s social audit is typical of those used at facilities throughout
China’s Pearl River Delta, which contains many of China’s industrial cities.
Auditors come in for a few hours or days. They review payroll records, interview
employees, check fire escapes, and take similar actions.87
The Sullivan Principles for Corporate Labor and Community Relations in
South Africa is the classic audit example.88 The Reverend Leon Sullivan was an
African American minister and General Motors (GM) board of directors member.
For several years during the 1970s, he had tried to pressure the firm to withdraw
from South Africa, whose multiracial population was divided by government-
sanctioned racist policies known as apartheid.
As part of that effort, Sullivan codified a set of principles “to guide U.S. busi-
ness in its social and moral agenda in South Africa.”89 The code provided measur-
able standards by which one could audit U.S. companies operating in South
Africa. For example, there were standards for nonsegregation of the races in all eat-
ing, comfort, and work facilities.90
● Whistle-Blowing Sarbanes-Oxley strengthens the rights of whistle-blowers,

people who report their employers’ questionable activities to authorities.91 For
example, SOX gives whistle-blowers the right to sue in federal court if employers
retaliate against them.
Many firms have a reputation for actively discouraging whistle-blowing. Yet
doing that may be short-sighted. As one writer put it, whistle-blowers “represent
one of the least expensive and most efficient sources of feedback about mistakes
the firm may be making.”92 Other firms find that trying to silence whistle-blowers
backfires.93 Once the damage has been done—whether it is asbestos hurting work-
ers or a chemical plant making the community ill—the cost of making things right
can be enormous.94 When John Pepper, CEO of P&G, discovered that some rogue
P&G employees were spying on a competitor, he followed a laudable course: he
blew the whistle on his own company and told Unilever about P&G’s transgression.
● Social Responsibility Networks Other firms, such as Rhino Records, join

organizations like the Social Venture Network (www.svn.org) and Businesses for
Social Responsibility (www.bsr.org). These organizations promote socially respon-
sible business practices and help managers to establish socially responsible
CEO John Pepper took the programs.95
correct step of divulging his
company’s ethical lapse as ● Managing Now Managers use the Internet to support their social responsi-
soon as he became aware of it. bility efforts. For example, Shell Oil Company maintains an Internet-based
Managing Diversity ■ 51
stakeholder Web forum. The website makes it easy for anyone with an interest in
Shell’s operations—consumers, people living near Shell refineries, and owners of
Shell-branded gas stations, for instance—to make their opinions known. This
helps Shell be more socially responsive, by making it easier for management to en-
gage with parties who have legitimate concerns.96
Managing Diversity
Online Study Center
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Managing Now! LIVE
O f all the firm’s nonowner stakeholders, perhaps none has so obvious a claim on
receiving socially responsible treatment as do its employees. To a great extent,
the company is its employees, since they largely determine if the firm will succeed.
So the care, courtesy, integrity, and humanity the firm applies in managing its
employee diversity is a measure of how socially responsible it is.
managing diversity: Managing diversity means “planning and implementing organizational sys-
planning and implementing tems and practices to manage people so that the potential advantages of diversity
organizational systems and are maximized while its potential disadvantages are minimized.”97 Managing
practices to manage people so
diversity refers to questions like, How much effort should a manager make to
that the potential advantages of
diversity are maximized while employ minorities? How ethnically diverse should the company be? and, How
the potential disadvantages are much effort should employers make to manage the resulting diversity?
minimized Diversity management is increasingly important for several reasons. Treating
employees equitably is, first, an ethical and moral matter. There are also equal-
employment laws for those employers that require some added motivation. From
a practical point of view, the workforces of many industrialized countries, includ-
ing the United States, are increasingly diverse, and employers have little choice but
to recruit and then productively assimilate women and minorities. Furthermore,
in an increasingly diverse and globalized business environment, smart employers
capitalize on their diversity. For example, Longo Toyota in El Monte, California,
built a sixty-person salesforce that speaks more than twenty languages. This is a
powerful competitive advantage in demographically diverse Southern California.
Having a smoothly functioning diverse workforce is also advantageous for compa-
nies that routinely do business abroad. As the Wall Street Journal recently put it,
“As companies do more and more business around the world, diversity isn’t simply
a matter of doing what is fair or good public relations. It’s a business imperative.”98
Today, therefore, the aim of diversity management is not just to get diverse
employees to work together but to create “a workplace where differences can be
learned from and leveraged.”99 Leveraging—capitalizing on—diversity can pay big
dividends. For example, starting with low percentages, people of color recently
held 17 percent of PepsiCo’s mid- and top-level jobs, and women held 29 percent.
PepsiCo learned from and leveraged its newly diverse management pool. For ex-
ample, in one recent year, new diversity-driven products such as guacamole-
flavored Doritos (Hispanic) and wasabi-flavored snacks (Asian) accounted for
about one percentage point of PepsiCo’s 8 percent revenue growth.
Bases for Diversity

What is “diversity”? In one study, most respondents listed race, gender, culture, na-
tional origin, disability, age, and religion as the demographic building blocks that
represent diversity. They are what people often think of when they are asked what
diversity means.100
diverse: composed of two or A workforce is diverse when it is composed of two or more groups, each of
more groups (when referring to whose members are identifiable and distinguishable based on the following de-
a workforce), each of whose mographic or other characteristics:101
members are identifiable and
distinguishable based on ◗ Racial and ethnic groups. African Americans, Pacific Islanders, Asian Americans,
demographic or other Native Americans, and other people of color comprise about 25 percent of the
characteristics U.S. population.
◗ Women. Women represent about 48 percent of the U.S. workforce.
◗ Older workers. By 2005, the average age of the U.S.

worker was forty, up from an average of thirty-six,
and reflecting the gradual aging of the workforce.
◗ People with disabilities. The Americans with Disabil-
ities Act makes it illegal to discriminate against peo-
ple with disabilities who are qualified to do the job.
This act has highlighted the large number of people
with disabilities in the U.S. workforce.
◗ Sexual/affectional orientation. Experts estimate that
5 to 20 percent of the population is gay. This may
make gays a larger percentage of the workforce than
some racial and ethnic minorities.102
◗ Religion. Domestic and world events are underscor-
ing differences, similarities, and tensions relating to
the diversity of religions among most employees in a
Winning with diversity: the night crew at Home Depot. given firm.
Barriers in Dealing with Diversity

Demographic differences can create behavioral barriers that inhibit collegiality
and cooperation. Managers who want to manage diversity must address these
barriers if they want their employees to work together productively. The barriers
include stereotyping and prejudice, ethnocentrism, discrimination, tokenism,
and gender-role stereotypes. Managing diversity starts with understanding these
barriers.
● Stereotyping and Prejudice Stereotyping and prejudice are two sides of the
stereotyping: a process in same coin. Stereotyping is a process in which someone ascribes specific behav-
which someone ascribes specific ioral traits to individuals based on their apparent membership in a group.103
behavioral traits to individuals Prejudice is a bias that results from prejudging someone based on some trait.
based on their apparent
Most people develop lists of behavioral traits that they associate with certain
membership in a group
groups. For example, stereotypical male traits might include strong, aggressive,
prejudice: a bias that results and loud; female traits might include cooperative, softhearted, and gentle.104
from prejudging someone based When someone allows traits like these to determine how he or she reacts to mem-
on some trait bers of one of these groups, then we say the person is prejudiced.
● Ethnocentrism Ethnocentrism is prejudice on a grand scale. It is a tendency

to view members of one’s own group as the center of the universe and other social
groups less favorably. For example, in one study, managers attributed the good
performance of some minorities less to their ability and more to help they received
from others. Conversely, they attributed the performance of nonminorities to
their abilities.105
● Discrimination Discrimination is prejudice in action. Whereas prejudice

means a bias toward prejudging someone based on that person’s traits,
discrimination: taking discrimination means taking specific actions toward or against the person based
specific actions toward or on the person’s group.106
against a person based on the In many countries, including the United States, it is illegal to discriminate at
person’s group
work based on a person’s age, race, gender, disability, or country of national origin
(with some very specific exceptions, such as when hiring men to play male roles in
a movie). But in practice, discrimination is still a barrier to managing diversity. For
one thing, discrimination is often subtle. For example, many argue that an invisi-
ble “glass ceiling,” enforced by an old-boy network and friendships built in places
like exclusive clubs, effectively prevents women from reaching the top ranks of
management.
tokenism: appointing one or ● Tokenism Tokenism occurs when a company appoints one or a small group
a small group of women or of women or minority-group members to high-profile positions, rather than more
minority-group members to aggressively seeking full representation for that group. Tokenism is a diversity
high-profile positions, rather
barrier when it slows the process of hiring or promoting more members of the
than more aggressively seeking
full representation for that group minority group.
Token employees often fare poorly. Research suggests, for instance, that token
employees face obstacles to full participation, success, and acceptance in the
company. The extra attention their distinctiveness creates magnifies their good or
bad performance.107
● Gender-Role Stereotypes Discrimination against women goes beyond glass

gender-role stereotypes: ceilings. Working women also confront gender-role stereotypes, the tendency to
the tendency to associate associate women with certain (frequently nonmanagerial) jobs. In one study,
women with certain (frequently attractiveness was advantageous for female interviewees when the job was non-
nonmanagerial) jobs
managerial. When the job was managerial, there was a tendency for a woman’s
attractiveness to reduce her chances of being hired.108
How to Manage Diversity

Diversity can be a blessing or—if mismanaged—a problem. Bringing together
people with different values and views can ensure they attack problems in a richer,
more multifaceted way. On the other hand, if barriers such as stereotypes and
tokenism flourish, diversity can make it harder to create smoothly functioning
teams.109 To repeat, managing diversity means taking steps to maximize diversity’s
potential advantages while minimizing the potential barriers—such as prejudice
and bias—that can undermine the functioning of a diverse workforce. The man-
ager can take several steps.
● Legal Actions Managing diversity usually involves both legally mandated

and voluntary actions. There are, of course, many legally mandated actions. For
example, employers should avoid discriminatory employment advertising (such
as “young man wanted for sales position”) and prohibit sexual harassment.
However, legally required steps are rarely enough to blend diverse employees
into a productive team. Other voluntary steps and programs are required. As sum-
marized in Figure 2.8, these include providing strong leadership, assessing the
situation, providing diversity training and education, changing the culture and
management systems, and evaluating the diversity program.
● Provide Strong Leadership Top executives of firms with exemplary diver-

sity management reputations champion diversity. For example, they take strong
F IGURE 2.8
Activities Required to Better Manage Diversity
ACTIVITIES AT THE HEART OF A DIVERSITY MANAGEMENT PROGRAM
Changes in Culture
Assess Your
Leadership Education and Management Evaluate
Situation
Systems
■
Top management ■
Comprehensive ■
Awareness training ■
Recruitment ■
Evaluation
commitment and organizational ■
Development of ■
Orientation ■
Accountability
support assessment in-house expertise ■
Performance appraisal ■
Continuous
■
Steering and advisory ■
Baseline data ■
Orientation programs ■
Compensation and improvement
groups ■
Benchmarking ■
Advanced training benefits
■
Communications ■
Promotion
strategy ■
Training and develop-
ment
personal stands on the need for change, become role models for the behaviors
required for the change, issue a statement that defines what they mean by diver-
sity, and provide financial and other support to implement the changes.110
After settling a class-action suit by black employees, Coca-Cola took steps to im-
prove its diversity management record. For example, it established a formal men-
toring program. It also is spending $500 million to support minority suppliers.111
● Assess Your Situation For example, use surveys to measure current em-
ployee attitudes and perceptions toward different cultural groups in the company.
Conduct audits of your minority and female hiring and staffing practices.
● Provide Diversity Training and Education “The most commonly utilized

starting point for . . . managing diversity is some type of employee education pro-
gram.”112 A one- to two-day seminar involving a diverse group of employees is
typical. Topics include, What does diversity mean to you? What does it mean to
our organization?113
● Change the Culture and Management Systems Managers have to walk

the talk if they want employees to take diversity management seriously. For exam-
ple, change the performance appraisal procedure to appraise supervisors based
partly on their success in minimizing intergroup conflicts. Institute mentoring
mentoring: a relationship programs. Mentoring is “a relationship between a younger adult and an older,
between a younger adult and an more experienced adult in which the mentor provides support, guidance, and
older, more experienced adult in counseling to enhance the protégé’s success at work and in other arenas of life.”114
which the older adult provides
Mentoring can contribute to the success of diversity management. Why attract a
support, guidance, and
counseling to enhance the diverse workforce and then leave the new people to sink or swim?115
protégé’s success at work and in Sending signals about how management feels about diversity can cut both
other arenas of life ways. For example, six women filed a sexual discrimination class-action suit in
federal court against Wal-Mart.116 Among other things, they asserted that they did
not get the raises or promotions their male colleagues received. They also said they
were exposed to hostile comments and actions by male employees (including,
allegedly, offers to “get one of them pregnant”).
Wal-Mart denies any systematic discrimination and has policies forbidding sex-
ual harassment of any kind. However, some lawyers argue that it’s not whatWal-Mart
says, it’s what it does. They argue that Wal-Mart has long had a policy of vigorously
defending itself in such lawsuits. They say such actions could prompt some employ-
ees to believe that Wal-Mart may not actually take sexual harassment seriously.
● Evaluate the Diversity Program For example, do your surveys suggest

an improvement in employee attitudes toward diversity? How many employees
have entered into mentoring relationships? Do these relationships appear to be
successful?
● Managing Now The manager assessing the effectiveness of his or her com-
pany’s equal-employment and diversity efforts has numerous measures to use.
These include, for example, the number of diversity-related (sexual harassment,
age discrimination, and so forth) legal claims per year, the percentage of minority/
women promotions, and measures for analyzing the survival and loss rate among
diverse employee groups.
Even for a company with just several hundred employees, keeping track of
metrics like these is expensive. Managers therefore tend to rely on technology. For
example, the typical diversity management software package provides manage-
ment with several diversity-related software options. These provide information
relatively efficiently. The typical package calculates for the manager things like the
cost per diversity hire, a workforce profile index, the amount of voluntary turnover
among diverse employee groups, and the effectiveness of the firm’s employment
agencies’ diversity initiatives.
Recruiting a More Diverse Workforce

It is useless to talk about diversity management if the company does not effec-
tively recruit and retain a diverse team of employees. Without a diverse workforce,
there is no diversity to manage.
Managers do not just recruit diverse employees out of altruism or because it is
the socially responsible thing to do. The U.S. population is becoming more di-
verse, and thus more applicants are minorities or women. Federal, state, and local
laws also generally require equality in employment. This means hiring people
based on their abilities to do the job, not based on their ethnicity, age, gender, or
other trait such as disability. Furthermore, as we noted earlier, having a diverse
workforce is becoming a practical necessity as companies do more and more busi-
ness around the world.
● Fine-Tuning Recruitment Efforts Recruiting a diverse workforce usually

requires fine-tuning recruitment and retention efforts to the diverse employees’
needs. For example, older workers sometimes particularly value having more free
time and flexible work hours. Firms such as Wrigley Company let workers over age
sixty-five shorten their workweeks and use minishifts to let these workers work
less than full-time. Recruiting single parents similarly requires understanding that
they often need to have flexible work arrangements. They also need supervisors
who are supportive of their dual roles as employees and single parents. To the ex-
tent that some minorities or recent immigrants may need special training, many
firms institute special remedial training. For example, Aetna Life and Casualty
provides remedial training in basic arithmetic and writing.
Women workers, married or not, often carry the heavier burden of caring for
the children and obviously have childbearing responsibilities that men do not.
Many progressive firms, such as the accounting firm KPMG, therefore make it
easier for females to, say, restart their careers after returning from even lengthy
maternity leaves, or to remain employed (if they so choose) in positions that don’t
involve the time commitments of being full-time partners in the firm. In any case,
recruiting (and retaining) a diverse workforce calls for having a comprehensive
plan in place for providing the employment support these employees need.
CHAPTER SUMMARY
1. Managers face ethical choices every day. Ethics 9. Organizational culture is the characteristic tradi-
refer to the principles of conduct governing an tions, norms, and values employees share. Values
individual or a group. Ethical decisions always in- are basic beliefs about what you should or should
clude judgments of good and bad and of serious not do and what is and is not important. Managers
moral issues. need to “walk the talk” to set the right culture.
2. Being legal and being ethical are not necessarily 10. Employers’ use of information technology to
the same thing. A decision can be legal but still maintain high ethical standards goes well beyond
unethical, or ethical but still illegal. employee monitoring and employee training. For
example, it would be prohibitively expensive with-
3. Organizational factors influencing ethical behav-
out IT support for most companies to comply with
ior include pressure, the boss, and the organiza-
the standards in the Sarbanes-Oxley Act regarding
tion’s culture.
financial statement accuracy and whistle-blower
4. To improve your ethics-building skills, walk the requirements. Similarly, IT enables companies en-
talk; clarify your expectations; screen out the prob- gaged in foreign trade to automatically perform
lem employees; support ethics training; ensure fair the necessary export license activities and to com-
and unbiased performance appraisals; use rewards ply with local employment, payroll, safety, and
and discipline; and strive to build an atmosphere recording regulations in each country in which
of fairness, justice, and respect. they operate.
5. Information technology has prompted new ethical 11. People differ in answering the question, To whom
concerns, particularly related to security (control- should the corporation be responsible? Some say
ling access to company resources) and privacy. In solely to stockholders, and some say to all stake-
terms of privacy, electronic performance monitor- holders. Some take an intermediate position: they
ing and wireless-based monitoring of employee agree that the purpose of the corporation is to
location and performance allow employers to keep maximize profits, but that it is subject to the re-
close tabs on what their employees are doing. Sim- quirement that it must do so in conformity with
ilarly, the majority of companies monitor e-mail the moral minimum.
activity and employee Internet use.
12. As business becomes more global and the work-
6. Information technology also raises serious security force becomes more diverse, it becomes more im-
concerns. For example, nonauthorized employees portant to manage diversity so that its benefits
or outsiders could gain access to employees’ per- can be leveraged while minimizing potential bar-
sonal data. riers. Potential barriers to managing diversity in-
clude stereotyping, prejudice, and tokenism.
7. Technical and legal safeguards can reduce privacy
Managing diversity involves taking steps such as
and security concerns, up to a point. However, the
providing strong leadership, assessing the situa-
ethics of those managing the company may be the
tion, providing training and education, changing
only real safeguards.
the culture and systems, and evaluating the diver-
8. Ethics policies and codes send a strong signal that sity program.
top management is serious about ethics and are
signs that it wants to foster a culture that takes
ethics seriously.
1. What is ethical behavior? 7. What are important managerial methods for en-
couraging ethical behavior?
2. Explain why information technology is a double-
edged sword with respect to ethical behavior in 8. What are three ways in which managers use infor-
organizations. mation technology to improve ethical behavior in
organizations?
3. What are two technology-related ethical issues busi-
ness managers face? Give examples of each. 9. To whom is the company responsible? Include
the three main points of view addressed in the
4. What individual factors contribute to one’s ethical
chapter.
or unethical behavior?
10. Why are companies socially responsible?
5. What are the organizational factors that influence
ethical behavior at work? 11. How is the subject of managing diversity changing
today?
6. What are eight common code of conduct principles?
1. Obtain the ethics code for your college. Then de- heard that they may want to clone every employee
termine to what extent it covers the eight common so that they can use the clones to harvest body
code of conduct principles discussed in this chap- parts as the original people age or become ill. You
ter. Do you think the college’s code is effective? are not sure you endorse the cloning of humans.
Why or why not? You joined the firm for its moral and ethical repu-
tation. You feel that the image presented to you was
2. Most students (and faculty members, for that mat- one of research and development of life-saving
ter) would not want unauthorized individuals drugs and innovative medical procedures. The
gaining access to the personal information the col- thought of cloning was never on your mind, but
lege has on file for them. In teams of three or four now it must be. In teams of four or five students,
students, compile a list of the information technol- answer the following questions: What, if any, is the
ogy tools the college uses to ensure that its stu- ethical decision to be made? What would you do?
dents’ records are secure. Particularly for professors Why?
teaching online courses, employee performance
monitoring (or, more accurately in this case, stu- 4. You are taking a month’s holiday in Europe. During
dent performance monitoring) is very important. your first week there, you became very ill with a re-
After all, the professor wants to make sure that curring ailment for which you have been previ-
students log on to do the online activities. And ously treated with limited success in the United
professors want to make sure that exams are also States. It is a chronic condition that is inhibiting
properly monitored. In your teams of three or four your ability to advance your career. The doctors
students, compile a list of ways in which the online who treated you in Europe have given you some
teaching system your college uses monitors medication that is legal there but has not been ap-
student performance online. proved for use in the United States by the U.S. Food
and Drug Administration. You feel better than you
3. You work for a medical genetics research firm as a have in years. Because the European drug laws
marketing person. You love the job. The location is allow this drug to be purchased across the counter
great, the hours are good, and the work is challeng- without a prescription, you are able to buy a year’s
ing and flexible. You receive a much higher salary supply. However, you know that it is listed as an il-
than you ever anticipated. However, you’ve just legal drug in the United States and you must pass
heard via the rumor mill that the company’s elite through customs. If your decision is to smuggle the
medical team has cloned the first human, the firm’s drug in and you are successful, what will you do in
CEO. It was such a total success that you have a year?
CASE STUDY
Allstate’s Disappearing Agents
ike many companies, Allstate faces pressure to be Proponents of this type of restructuring might
L cost-competitive and to provide new services to its
customers. It also faces pressure for continuous
argue that Allstate is simply taking the steps needed to
be competitive. They might even say that if Allstate did
improvement in its financial performance from its not cut jobs to create the cash flow needed to fund new
shareholders. Assume that for Allstate to survive and competitive initiatives, it might ultimately fail as a
prosper, it needs to respond to both customers and business, putting all 54,000 of its employees at risk.
shareholders. What responsibilities does it have toward Yet Allstate’s program raises concerns. One analyst
another important group of stakeholders, its employ- noted that by encouraging customers to purchase in-
ees? Several years ago, the Allstate Corporation an- surance products directly via the Internet, Allstate
nounced a series of strategic initiatives to expand its could threaten the commissions of its more than
selling and service capabilities, buy back company 15,000 agents. The announcement of cost cutting came
shares to raise its stock price, and cut expenses by re- one day after Allstate announced it would meet its reg-
ducing the workforce. As part of its restructuring, ular quarterly dividend of $0.15 per share. The com-
Allstate would transfer its existing agents to an exclu- pany has raised its dividend annually since 1993.
sive independent contractor program, whereby Allstate
agents would become basically self-employed inde- DISCUSSION QUESTIONS
pendent contractors. This would markedly reduce the
1. Is reducing the number of employees in a com-
need for Allstate to provide agency support staff. In its
pany in and of itself unethical? Why or why not? Is
press release on this initiative, Allstate management
it socially responsible (or irresponsible)?
also announced it would eliminate 4,000 current non-
agent positions by the end of 2000, or approximately 10 2. If you decided it was generally ethical, what would
percent of the company’s nonagent workforce. the company have to do to make the employee dis-
Said Allstate’s CEO, “Now, many of our customers missals unethical?
and potential customers are telling us they want our
3. What responsibilities does a company like Allstate
products to be easier to buy, easier to service and more
have toward its employees?
competitively priced. We will combine the power of our
agency distribution system with the growth potential of 4. Is there a moral dimension to the question of mar-
direct selling and electronic commerce. . . . This unique keting Allstate insurance via the Internet? If so,
combination is without parallel in the industry and will what is it?
make Allstate the most customer-focused company in
the marketplace.”
Answers to Wall Street Journal Ethics Quiz

The quiz is on page 32. 8. 35% said a $50 gift to the boss is unacceptable.
1. 34% said personal e-mail on company computers is wrong. 9. 12% said a $50 gift from the boss is unacceptable.
2. 37% said using office equipment for schoolwork is wrong. 10. 70% said it’s unacceptable to take the $200 football tickets.
3. 49% said playing computer games at work is wrong. 11. 70% said it’s unacceptable to take the $120 theater tickets.
4. 54% said Internet shopping at work is wrong. 12. 35% said it’s unacceptable to take the $100 food basket.
5. 61% said it’s unethical to blame your error on technology. 13. 45% said it’s unacceptable to take the $25 gift certificate.
6. 87% said it’s unethical to visit pornographic sites at work.
14. 40% said it’s unacceptable to take the $75 raffle prize.
7. 33% said $25 is the amount at which a gift from a supplier
15. 11% reported they lie about sick days.
or client becomes troubling, while 33% said $50, and 33%
said $100. 16. 4% reported they take credit for the work or ideas of others.
MANAGING IN A GLOBAL 3
ENVIRONMENT
CHAPTER OUTLINE
Tramco, Inc. Opening Vignette: Tramco, Inc.
● Globalization
T ramco, Inc. is a small company with big ideas. With only about
100 employees,Wichita, Kansas–based Tramco designs and manufac-
tures the big conveyors that food-processing firms like General Mills
Globalization Defined
The Pros and Cons of Globalization
● How and Why Do Companies
Conduct Business Abroad?
use to move ingredients around their factories.1 But like almost all Exporting
small-business managers today, Licensing
Franchising
Tramco’s managers knew that Foreign Direct Investment and the
to continue to grow, they had Multinational Enterprise
Joint Ventures and Strategic Alliances
to take their company abroad. WINDOW ON MANAGING NOW:
After all, many of their huge Shanghai GM
U.S. customers already had Wholly-Owned Subsidiaries
The Language of International Business
factories abroad, and Tramco
● The Manager’s International
wanted to serve them there. Environment
And there were also thousands The Economic Environment
of local food companies abroad The Legal and Political Environment
The Sociocultural Environment
that Tramco’s managers knew The Technological Environment
would buy Tramco’s products, Distance and Global Management
Managing Now: Global Communications
if Tramco could provide local
● Planning, Organizing, and
service. The problem was that Leon Trammell (center), Chairman of Controlling in a Global
Tramco’s conveyors are so big Tramco, had to decide how he and his firm’s Environment
managers should take Tramco’s business The Global Manager
and heavy that it costs as much abroad.
Planning in a Global Environment
to pack and ship one as it does Organizing in a Global Environment
to manufacture it. So Tramco had a dilemma. It could not just hire sales- WINDOW ON MANAGING NOW:
people abroad, get orders, and then ship the huge conveyors. But with Global Clustering
PRACTICE IT: Tramco, Inc.
only about 100 employees, Tramco wasn’t big enough to build its own Controlling in a Global Environment
factories abroad. What should they do? ■ ● Leading and Motivating in a
Multicultural Environment
B E H AV I O R A L O B J E C T I V E S Dräger Safety
Values
Leadership in a Multicultural Environment
Show that you’ve learned the chapter’s essential information by Motivation in a Multicultural Environment
Interpersonal Communications in a
➤ Explaining the economic, legal/political, sociocultural, and technological issues managers Multicultural Environment
should consider when expanding abroad. IMPROVING YOUR CULTURAL
➤ Listing the special challenges a manager faces in leading and motivating employees abroad. INTELLIGENCE SKILLS
59
60 PART ONE CHAPTER 3 Managing in a Global Environment
➤ Listing the reasons why you would (or would not) be a good global manager.
➤ Giving examples of how to use information technology (IT) to improve global
communications.

➤ Reading the opening vignette about Tramco, Inc. and suggesting what IT tools they
should use, and why.
➤ Reading the end-of-chapter exercises and explaining what global strategy the company
should pursue, and why.

➤ Watching the simulation video and identifying the key implementation issues facing the
global business.
Online Study Center
ACE the Test ➤ Watching the simulation video and identifying what cultural adaptations need to be
Managing Now! LIVE made when expanding globally.
Globalization
O utside Anchorage, Alaska, just off Northern Lights Boulevard, is FedEx’s new
Anchorage hub. This enormous facility handles FedEx air shipments between
North America and China. With package delivery growing relatively slowly in North
America, China presents FedEx with enormous growth possibilities. In one recent
year, the revenue FedEx generated from its package-delivery business to and from
China increased by about 50 percent.2 Like many companies today, most of FedEx’s
growth comes from international operations. Most businesses today are therefore
involved in international business. The main purpose of this chapter is to enable
you to better understand what it’s like managing in a global environment.
Globalization Defined
Globalization (as noted in Chapter 1) is the tendency of firms to extend their sales,
ownership, and/or manufacturing to new markets abroad. As with Tramco and
FedEx, managers expand their services abroad to take advantage of new opportu-
nities. Sony, Apple, and Nike are some firms that market and manufacture all over
the world. For these firms and most others, managing is increasingly global.
Globalization is a two-way street. General Motors (GM) manufactures and
sells cars in China, and China’s Shanghai Auto is planning to manufacture and
sell cars in the United States. In South Africa, numerous small wood furniture
producers use the Internet to work with trading partners around the world. In
South Korea, a special government program subsidizes small companies that want
to use information technology to boost their share of global commerce. Raju
Mirchandani, born in Dubai, recently expanded abroad by opening a branch of
his New York–based “Bar and Books” in the Czech Republic.3
The Pros and Cons of Globalization

Globalization is thus not just for manufacturing firms.4 For example, soon after
it bought MySpace.com, News Corp. began laying plans to take the site abroad,
to Britain and Europe, and soon to Asia. Going abroad will obviously hold some
challenges for MySpace. For example, political and legal constraints against
How and Why Do Companies Conduct Business Abroad? ■ 61
unrestricted blogging may be an issue in China, and

each country must have its site in its own language.5
It’s hard to overemphasize how important global-
ization is today to just about every business and man-
ager in America (and around the world), and to every
employee and consumer. In his recent book The World
Is Flat, columnist Thomas Friedman explains how com-
munications technology now makes it easy for compa-
nies everywhere (like Tramco) to compete just about
anywhere. This has had a startling effect on businesses.
As we noted in Chapter 1, more globalization means
more competition, and more competition means more
pressures to improve—to lower costs, to make employ-
ees more productive, and to do things better and less
Many U.S. companies are outsourcing call center services to expensively. Globalization is great for firms like Tramco
centers like this one in India. and FedEx, whose managers had the foresight and skills
to capitalize on global opportunities. It’s also great for
consumers, who can now buy almost everything—from conveyors to cars to com-
puters—less expensively thanks to globalization-driven competition.
But there’s also another side to globalization.6 All that improved productivity
is coming from somewhere, and in many cases, it’s coming from reductions in
the numbers of managers and employees that companies need to compete. In
2006, Ford Motor Company instituted a plan, called Way Forward, that lays out
how Ford would return to profitability, in part by reducing its workforce by over
25,000 employees, selling assets, and boosting productivity. GM has a similar
plan. Meanwhile, Toyota’s North American sales continue to expand, putting it
on track to soon become the largest seller of cars in America. Globalization also
outsourcing: the business triggered outsourcing. Outsourcing refers to the business practice of having
practice of having workers workers abroad do jobs (such as handling customer-service questions) that em-
abroad do jobs (such as ployees in a company’s home office previously did. American companies had
handling customer-service
outsourced about 830,000 service-sector jobs as of 2005.7 No company or man-
questions) that employees in
a company’s home office ager or employee today—even one safely situated in America’s heartland, like
previously did Tramco—is not affected in a big way by globalization. Globalization shows up in
the prices of the products we buy, the companies we choose to buy from,
whether our employers stagnate or grow, and indeed how hard we work and
whether we keep our jobs. Everyone should understand the global environment
in which we live.
How and Why Do Companies Conduct Business Abroad?

Online Study Center
ACE the Test
Managing Now! LIVE C ompanies like Tramco expand abroad for several reasons: to expand sales, ob-
tain new foreign products, cut labor costs, and perhaps seek foreign partner-
ships for broader strategic reasons. Tramco expanded to follow its customers
abroad. In 2006, Google expanded its China presence by initiating its Google
China instant-messaging service. In 2005, IBM sold its personal computer (PC)
division to the Chinese firm Lenova, in part to cement firmer ties with the
booming China market.
Once they decide to expand abroad, managers like those at Tramco must
decide how to expand. (Remember that Tramco, faced with the difficulty of
shipping its products overseas, had to decide what its options were.) Options
include exporting, licensing, franchising, foreign direct investment, joint ventures/

strategic alliances, and wholly-owned subsidiaries.
Exporting
Exporting is often a manager’s first choice when expanding abroad, because it is a
exporting: selling abroad, relatively simple and easy approach. Exporting means selling abroad, either
either directly to target directly to customers or indirectly through agents and distributors. Agents,
customers or indirectly by distributors, or other intermediaries handle more than half of all exports. They are
retaining foreign sales agents
generally local people familiar with the market’s customs and customers.
and distributors
The manager can check business reputations of potential local representatives
via local agencies of the U.S. State Department. A U.S. Commerce Department trade
specialist will provide advice regarding generating overseas business. For example,
advertising in Commercial News USA, a government publication, will inform about
100,000 foreign agents, distributors, buyers, and government officials about U.S.
products. The Small Business Exporters Association (www.sbea.org) is another good
source.8
Exporting has pros and cons. It avoids the need to build factories abroad, and
it is a relatively quick and inexpensive way of going international.9 It’s also a good
way to test the waters in the host country and to learn more about its customers’
needs. Transportation and tariff costs and poorly selected representatives are
potential problems.
More and more companies rely on e-commerce to directly sell their products
abroad, but even this can produce surprises. One European country wanted the
Internet “closed” on Sundays to avoid competing unfairly with local merchants
who closed that day.10 Another country asked Lands’ End to revise its guarantee,
which it said was too good for local shops to compete with. And while getting an
online order from, say, Japan may be exciting, the Better Business Bureau says that
nondelivery is a chronic complaint, usually because the e-exporter is not familiar
with foreign shipping requirements.
Licensing
If someone with a great idea wants to let someone else use the same idea, he or she
might want to grant that person a license. Music companies grant licenses all the
time. For instance, if Universal wants to let MGM use one of its songs in a movie, it
licensing: an arrangement will grant a license for that use. Licensing is an arrangement whereby the licensor
whereby a firm (the licensor) (let’s say, Universal) grants another firm (let’s say, MGM) the right to exploit
grants a foreign firm the right to intangible (intellectual) property, such as patents, copyrights, manufacturing
use intangible property
processes, or trade names, for a specific period. The licensor usually gets royalties—
a percentage of the earnings—in return.11
Licensing is particularly useful when doing business abroad because it
enables a firm to generate income abroad from its intellectual property without
actually producing or marketing the product or service there. If a company in
Kansas has a patent on a new device, one way for it to make money on that patent
abroad is to license the patent’s foreign rights to a company abroad.
franchising: the granting of a Franchising

right by a company to another
firm to do business in a If you’ve eaten in McDonald’s by the Spanish Steps in Rome, you’ve experi-
prescribed manner enced franchising as another way to do business abroad. Franchising is the
granting of a right by a company to another firm to do business in a prescribed

manner.12
Franchising and licensing both involve granting rights to intellectual property.
Both are also quick and lower-cost ways to expand abroad. However, franchising
tends to be much more restrictive. The franchisee must generally follow strict
guidelines in running the business. McDonald’s, for instance, is very fussy about
franchisees following all its rules. The franchisee must also make substantial
investments in a physical plant (such as a fast-food restaurant). Licensing tends to
be limited to publishers and manufacturers—to letting others use a copyrighted
or patented idea. Franchising is more common among service firms, such as
restaurants, hotels, and rental services, that want to let investors (called fran-
chisees) open businesses under the franchiser’s name.
Foreign Direct Investment and

the Multinational Enterprise
At some point, managers find that capitalizing on international opportunities
foreign direct investment: requires direct investment. Foreign direct investment refers to having opera-
operations in one country tions in one country owned and controlled by entities in a different country.
owned and controlled by entities Companies make foreign direct investments in several ways. A foreign firm
in a different country
might build facilities in another country, as Toyota did when it built its Camry
plant in Georgetown, Kentucky. Or a firm might buy property or operations, as
when Wal-Mart bought control of the Wertkauf stores in Germany (it sold them
and left Germany several years later, when the investment did not pan out).
Foreign portfolio investments are investments by a company (or government) in
a foreign firm’s financial instruments (such as bonds or common stock). Strictly
speaking, foreign direct investment means owning more than 50 percent of the
operation. But in practice, a firm can gain effective control by owning less than
half.
Foreign purchases of businesses trigger large and small changes. For example,
when the Italian bank UniCredito Italiano Group purchased Boston’s Pioneer
Group, one of its first changes was installing an Italian espresso machine in
Pioneer’s offices. The Milan bank also installed videoconferencing equipment so
managers on both sides of the Atlantic can interact live. Pioneer group managers
have begun learning Italian. And the companies integrated their Italian and U.S.
investment teams, which then went on to launch several global funds.13
Joint Ventures and Strategic Alliances

Managers often form strategic alliances or joint ventures when making forays into
foreign markets (usually as a way to expand abroad without making a huge invest-
strategic alliance: a formal ment). Strategic alliances are formal cooperative agreements between potential
agreement between potential or or actual competitors, agreements that are of strategic importance to the alliance
actual competitors to achieve members.14 Airline alliances, such as American Airlines’ One World alliance with
common strategic objectives
Japan Airlines and others, are examples. The airlines don’t share investments, but
they do share seating on some flights, and they let passengers use alliance members’
airport lounges.15 Each airline gets the advantage of being able to offer its own
passengers an expanded overseas network without having to develop its own fleet
of planes and flights abroad.16 Perhaps a strategic alliance with a manufacturer
abroad is an option for Tramco, Inc.
Shanghai GM
Global joint ventures would be impractical without infor- Shanghai GM’s managers found a better way. They used
mation technology such as computers, cell phones, fax, and information technology (including new software systems
software. As we mentioned, Shanghai Auto has a joint and the Internet) to link together all the partners of the
venture with General Motors, called Shanghai GM. The joint venture’s worldwide supply chain (this includes its
company’s manufacturing process involves assembling vehi- parts suppliers, shippers, and warehouses, for instance).
cles from parts and partially assembled components it im- Shanghai GM and its vendors and carriers now use an
ports from around the world. Before Shanghai GM installed Internet portal to get continuous real-time production
its new supply chain management software system,Shanghai schedules showing what vehicles are to be produced, as
GM’s parts suppliers could not get real-time knowledge of well as updates on the availability of various parts. This
what cars Shanghai GM had scheduled to assemble. And dramatically reduced the amount of time managers had to
Shanghai GM did not know what parts its vendors already leave for ordering vehicle components and reduced how
had in stock.This meant Shanghai GM had to order parts much inventory Shanghai GM had to keep in stock.17
far in advance and then stock these parts, sometimes for This helped ensure that Shanghai GM is an efficient,
several weeks. world-class joint venture.
joint venture: the joining of With a joint venture, two or more companies jointly form a separate
two or more companies to form company in which each party contributes assets, and each shares both ownership
a separate company so that each and risk.18 Companies execute joint ventures every day. For example, the big
party contributes assets, owns
Indian media company, Zee Telefilms, formed several partnerships with Time
the entity to some degree, and
shares risk Warner. The firms call their joint venture Zee Turner. It will distribute both partners’
television programs in India and neighboring countries.19
Partners usually form joint ventures to quickly gain advantages that would
otherwise take time to acquire. Shanghai Auto and GM formed Shanghai General
Motors. GM wanted to quickly produce Buicks for sale in China. Shanghai Auto
wanted to learn how to build world-class cars.20 The Window on Managing Now
feature shows how technology helped make their venture a success.
A joint venture lets a firm gain useful experience in a foreign country by using
the expertise and resources of a locally knowledgeable firm. As already mentioned,
GM and Shanghai Auto formed a joint venture near Shanghai to build GM cars for
China. Joint ventures also help both companies share the cost of starting a new
operation. One downside is that the joint-venture partners each risk giving away
their proprietary secrets. And sharing control and decision making can lead to
conflicts, and thus requires careful planning regarding who does what.
Joint ventures can be a necessity. In China, foreign companies that want to
enter regulated industries (like telecommunications) must use joint ventures with
Chinese partners. The partnership of Britain’s Alcatel and Shanghai Bell to make
telephone-switching equipment is an example.21
● Successful Joint Ventures Experts from consultants McKinsey & Co. estimate
that companies have launched over 5,000 joint ventures worldwide in the past few
years, but that these ventures’ success rate is barely 50 percent.22 Their study shows
that in organizing a joint venture, managers need to follow several guidelines:
◗ Achieve strategic alignment. Organize the joint venture so that each corporate
partner derives from the venture the strategic benefits it desires. For example,
when Starbucks formed a coffee venture with PepsiCo, Starbucks sought to
expand its brand into carbonated coffee, and PepsiCo

wanted to expand from sodas to coffee. In assessing
results, the partners therefore had to pay careful
attention to improvements in Starbucks’ share of the
carbonated beverage market and in PepsiCo’s share
of the coffee market.
◗ Create a governance system. Give the joint venture’s
managers enough autonomy so they can make deci-
sions quickly enough to be competitive, but not so
much autonomy that they can trap either corporate
partner in large, unwelcome commitments.
◗ Manage economic interdependencies. Outline clearly
each partner’s contributions in terms of capital,
people, and material and other resources.
Shanghai Auto and GM formed Shanghai General Motors ◗ Build the organization. Decide cooperatively which
to quickly gain manufacturing and sales advantages that
managers will actually staff the joint venture and
would otherwise take time to acquire.
what roles they may continue to play in their previ-
ous joint-venture parent firms.
Wholly-Owned Subsidiaries
Sometimes, the best way to go abroad is to open or own one’s own facility. A
wholly-owned subsidiary: wholly-owned subsidiary is one owned 100 percent by the foreign firm. In the
a firm that is owned 100 percent United States, Toyota Motor Manufacturing, Inc., and its Georgetown, Kentucky,
by a foreign firm Camry facility is a wholly-owned subsidiary of Japan’s Toyota Motor Corporation.
Wholly-owned subsidiaries let the company do things exactly as it wants (subject
to local laws and regulations, of course).
international business: any
firm that engages in international The Language of International Business
trade or investment; also
business activities that involve To do business abroad, the manager should also know the vocabulary of interna-
the movement of resources, tional business. An international business is any firm that engages in international
goods, services, and skills across
trade or investment. International business also refers to those activities, such as
national boundaries
exporting goods or transferring employees, that require moving resources, goods,
international trade: the services, and skills across national boundaries.23 International trade is the export
export or import of goods or or import of goods or services to consumers in another country. International
services to consumers in another management is the performance of the management functions of planning,
country organizing, leading, and controlling across national borders. As myspace.com’s
managers expand abroad, for instance, they necessarily engage in international
international management: management.
the performance of the
management process across A multinational corporation is a special type of international business. A
national boundaries multinational corporation (MNC) is one that operates manufacturing and
marketing facilities in two or more countries. Managers of the parent firm, whose
multinational corporation owners are mostly in the firm’s home country, coordinate the MNC’s operations.
(MNC): a company that Firms like GE and GM have long been multinational corporations. However,
operates manufacturing and thousands of small firms are MNCs, too. An MNC operates in two or more
marketing facilities in two or
more countries, and whose
countries and often adapts its products and practices to each one. Often, however,
managers, located mostly in the the MNC’s behavior may still reflect its national roots. When Germany’s
firm’s home country, coordinate DeutscheBank bought a British bank, the British managers’ high-incentive pay
the MNC’s operation prompted tension between them and their new German bosses.
The Manager’s International Environment

Online Study Center
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Managing Now! LIVE T ensions like those between the British managers and their new German bosses
illustrate a fact of life when doing business abroad. Countries differ in terms of
economic, legal, and political systems and also in their cultures. Differences like
these translate into different ways of doing business. Managers at firms like Tramco
and myspace.com ignore such differences at their peril because the differences
shape the manager’s plans, organization, leadership style, and controls. We’ll
address countries’ economic, legal/political, sociocultural, and technological
environments.
The Economic Environment

First, managers should understand the economic environments of the countries
they are considering entering. This includes each country’s economic system,
economic development, exchange rates, trade barriers, and economic integration
and free trade.
● The Economic System Countries differ in the extent to which they adhere
to capitalistic economic ideals and policies like America’s. For example, America’s
is a market economy. In a pure market economy, supply and demand determine
what is produced, in what quantities, and at what prices. Managers here have
freedom of choice to compete and set prices without government intervention.
At the other extreme, North Korea is a pure command economy. Countries like
these base their yearly production and price targets on five-year plans set by the
government. Then the government establishes specific production goals and
prices for each sector of the economy (for each product or group of products), as
well as for each manufacturing plant. Managers from abroad usually need govern-
ment approval before entering these markets and forming partnerships with local
firms.
mixed economy: an In a mixed economy, some sectors have private ownership, while the
economy in which some sectors government owns and manages others.24 For example, France is a capitalist country.
are left to private ownership and However, it has a mixed economy. The government owns shares of industries like
free-market mechanisms, while
telecommunications (France Telecom) and air travel (Air France).
others are largely owned and
managed by the government Economic systems in transition can trigger social instability. Free-market
economies depend on commercial laws, banking regulations, protection of
private property, and an effective independent judiciary and law enforcement.
When Russia moved to capitalism a number of years ago, it lacked much of this
political and legal infrastructure. Early business owners there had to cope not just
with competitors but also with criminals and lax law enforcement.
● Economic Development Countries also differ in degree of economic devel-

opment. For example, some countries, such as the United States, Japan, Germany,
gross domestic product France, Italy, and Canada, have large, mature economies and extensive industrial
(GDP): the market value of all infrastructures. The latter includes telecommunications, transportation, and
goods and services that have
been bought for final use during regulatory and judicial systems. These countries’ gross domestic products range
a period of time, and, therefore, from about $700 billion for Canada to $8.5 trillion for the United States. Other
the basic measure of a nation’s countries, such as Mexico, are less developed. Economists often measure an
economic activity economy’s size by gross domestic product. Gross domestic product (GDP), a
The Manager’s International Environment ■ 67
measure of economic activity, is the market value of all goods and services bought
for final domestic use during a period.
Some countries (like China) are growing much faster than others (like the
United States). The growth rate of mature economies averages around 3 to 4 percent
per year. On the other hand, China is growing at about 9.5 percent per year
(10.5 percent in 2005–2006). Many managers at firms like General Electric (GE) are
therefore boosting their investments in high-growth, high-potential countries.25
Being relatively less-developed may suggest the potential for rapid development
and growth. However, it can also mean inadequate roadways, communications,
and regulatory and judicial infrastructures.
● Exchange Rates Like anyone traveling or doing business abroad, managers

exchange rate: the rate at engaged in international business must also juggle exchange rates. The exchange
which one country’s currency rate for one country’s currency is the rate at which someone can exchange it for
can be exchanged for another another country’s currency. As the value of the dollar dropped against Europe’s
country’s currency
euro in 2003–2006, Europeans found it easier to purchase American products
and properties. European manufacturers found it harder to compete against the
cheaper American goods. British travelers flocked to the United States to buy
clothes and even vacation homes (because the strong British pound could buy
so many weak American dollars). On the other hand, some Americans were
shocked to find it could cost $40 to buy a pasta meal in London’s Piccadilly
Circus (because it took so many American dollars to buy one British pound’s
worth of food).
● Trade Barriers The Gap store in Paris’s Passy area (across the Seine from the
Eiffel Tower) sells jeans that someone could buy for two-thirds the price in mid-
town Manhattan. Why? In part because trade barriers distort the prices companies
trade barrier: a governmental must charge for their products. Trade barriers (such as tariffs and quotas) are
influence that is usually aimed governmental influences aimed at reducing the competitiveness of imported
at reducing the competitiveness products or services. Countries often use such barriers to make their domestic
of imported products or services
products look more attractive. Tariffs, the most common trade barrier, are
tariff: a government tax on governmental taxes levied on goods shipped internationally.26 The exporting
imports country collects export tariffs. Importing countries collect import tariffs. For
instance, a China textile manufacturer might have to pay an import tax, or duty, to
the United States in order to bring its textiles into the United States. Even people
flying internationally—say, to the United States—must pay a duty to bring in many
items, such as watches. Countries through which the goods pass collect transit
quota: a legal restriction on the tariffs. Other countries impose quotas—legal restrictions on the import of specific
import of particular goods goods.27 Managers thinking of doing business abroad ignore taxes like these at
their peril.
Nontariff trade barriers exist, too. For example, cars imported to Japan must
meet a complex set of regulations and equipment modifications. Side mirrors
subsidies: direct payments a must snap off easily if they contact a pedestrian. Some countries make payments
country makes to support a called subsidies to domestic producers. These are government payments that can
domestic producer make inefficient domestic producers more competitive.
free trade: the situation in ● Economic Integration and Free Trade Economic integration and free trade
which all trade barriers among
participating countries are are two big determinants of the economic situation international managers
removed so that there is an face. Free trade means all trade barriers among participating countries are
unrestricted exchange of goods removed.28 Free trade occurs when two or more countries agree to allow the free
among these countries flow of goods and services. Trade is unimpeded by trade barriers such as tariffs.
economic integration: the Economic integration means that two or more nations obtained the advantages
result of two or more nations of free trade by minimizing trade restrictions.
minimizing trade restrictions in There are several levels or degrees of economic integration: free trade areas,
order to obtain the advantages
custom unions, and common markets. In a free trade area, member countries
of free trade
remove all barriers to trade among them so that they can freely trade goods and
free trade area: a type of services among member countries. A customs union is the next higher level of
economic integration in which economic integration. Here, members dismantle trade barriers among themselves
all barriers to trade among while establishing a common trade policy with respect to nonmembers. In a
members are removed common market, no barriers to trade exist among members, and a common
external trade policy is in force. In addition, factors of production, such as labor,
customs union: a situation in capital, and technology, move freely between member countries, as shown in
which trade barriers among
members are removed and a Figure 3.1. We’ll look at some examples next.
common trade policy exists with More regions are pursuing economic integration. Back in 1957, founding
respect to nonmembers members France, West Germany, Italy, Belgium, the Netherlands, and Luxem-
bourg established the European Economic Community (EEC), now called the
common market: a system European Union (EU). Their Treaty of Rome called for the formation of a free trade
in which no barriers to trade area, the gradual elimination of tariffs and other barriers to trade, and the forma-
exist among member countries,
tion of a customs union and (eventually) a common market. Soon, the EEC further
a common external trade policy
that governs trade with reduced its trade barriers.29 By 1995, Austria, Finland, and Sweden became the
nonmembers is in force, and thirteenth, fourteenth, and fifteenth members, respectively, of the EU. In 2002, the
factors of production, such as EU admitted ten more members, including some formerly Soviet Union countries,
labor, capital, and technology, such as Poland. On January 1, 2002, the EU’s new currency, the euro, went into
move freely among members circulation. It entirely replaced twelve EU countries’ local currencies.
Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and
Vietnam comprise the Association of Southeast Asian Nations (ASEAN).30 There is
F IGURE 3.1
Levels of Economic Member
Country
Integration
Member
Country
Member Nonmember
Country Country
Member country Goods and services move freely in free trade area, customs
union, common market.
Nonmember country Factors of production move freely in common market only.
Common trade policy toward nonmembers: customs

union, common market.
also the Asia Pacific Economic Cooperation (APEC) forum. Members include
Australia, Chile, China, Japan, Malaysia, Mexico, Singapore, and the United States.31
Africa also has several regional trading groups, including the Southern African
Development Community, the Common Market for Eastern and Southern Africa,
and the Economic Community of West African States.
Canada, the United States, and Mexico established the North American Free
Trade Agreement (NAFTA). NAFTA creates the world’s largest free trade market,
with a total output of about $11 trillion.
● The World Trade Organization (WTO) Governments work together to en-

courage free trade in other ways (not just by fostering free trade areas, in other
words).32 The General Agreement on Tariffs and Trade (GATT) was one example.
Formed in 1947 by twenty-three countries, by the mid-1990s, 117 countries were
participating. The World Trade Organization (WTO) replaced GATT in 1995, and it
now has over 130 members. One of the WTO’s important functions is granting
most favored nation (or normal trade relations) status for countries. This means
that the WTO countries’ “most favorable trade concessions must apply to all trad-
ing partners.”33
When China received most favored nation status, it got the benefits of normal
trade relations with WTO partners, but it also had to reduce its own trade barriers.
Several U.S. companies, including New York Life Insurance Company and Metro-
politan Life Insurance Co., quickly got the green light to set up 50-50 joint ventures
with Chinese partners once China joined the WTO.34 More recently, the New York
Stock Exchange got China’s permission to open a business office there.
Even for WTO members, some trade barriers fall faster than others. With
WTO membership, China will see its import duties on cars fall drastically (to
about 25 percent).35 However, within China, Shanghai still has big license fees
on cars from neighboring provinces so that Shanghai can protect its locally built
Volkswagen.
● The Impact of Economic Integration Economic integration (such as NAFTA

and the EU) has a big effect on managers. By removing trade barriers such as
tariffs, it promotes regional trade because it becomes easier for companies from
one country to do business in another. It thus boosts competition. So, in Europe,
airlines (like British Airways) and telecommunications firms (like France Telecom)
now face competition from Air France and DeutscheTelecom. Establishing free
trade zones also puts firms from nonmember countries at a disadvantage. Many
U.S. managers formed joint ventures with European partners to make it easier for
them to sell in the EU.
In general, economists believe that free trade improves the standard of living
of a country’s citizens by encouraging competition and therefore providing better
products at lower prices. The other side of the coin is that business managers now
must be much more skillful at managing their companies to compete.
The Legal and Political Environment

Global political and legal differences can blindside even the most sophisticated
managers and companies. After spending billions of dollars expanding into
Germany, for instance, Wal-Mart managers were surprised to learn that Germany’s
commercial laws discourage advertising or promotions that involve competitive
price comparisons. They soon had to leave Germany. In 2006, the European Union
was locked in a dispute with Microsoft, which the EU accused of not making it easy
enough for other firms to design compatible software products.
● Legal Systems Countries differ fundamentally in their approaches to the

law. For example, companies like MGM and Warner Music find it difficult to pro-
tect their intellectual property in some Asian countries where copyright laws
(if they exist) are not enforced with the same zeal as they are in Europe and the
United States. Similarly, a U.S. manager, if arrested in France, may be surprised to
find that French law holds him guilty until proven innocent—the opposite of the
United States.
Global managers should familiarize themselves with such differences. In
France, labor laws can make it difficult to fire and lay off employees, and employers
in France, Germany, and the Netherlands usually must consult with powerful work
councils before reorganizing or relocating employees.36 Similarly, legal terms such
as trade secrets and confidential information aren’t necessarily enforceable in
some countries around the world, even if the manager puts the words into his or
her international contracts.37
Legal considerations influence how managers expand abroad.38 In India, for
instance, a foreign investor may own only up to 40 percent of an Indian indus-
trial company, whereas in Japan, up to 100 percent of foreign ownership is al-
lowed.39 Some managers go global by appointing sales agents or representatives
in other countries. But in Algeria, agents can’t represent foreign sellers. Other
countries view agents as employees subject to those countries’ employment
laws.40
International law consists mostly of agreements embodied in treaties and
other types of agreements. International law governs things like intellectual property
rights. Intellectual property piracy (fake brands) can be a big problem where the
legal system is inadequate or inadequately enforced. For example, Procter &
Gamble (P&G) estimates that about 20 percent of all its products sold in some
countries are fake.41
● Political Systems Going abroad also means sizing up the political systems
and risks with which the manager must cope. Thus, democratic countries usually
provide a more open environment in which to run businesses than do
dictatorships. Sometimes, the company’s fate can change unexpectedly as the
political winds shift. For example, some time ago, the Coca-Cola Company was
very successful in Uzbekistan. One reason, perhaps, was that it opened the plant in
partnership with the Uzbekistan president’s son-in-law. When the president’s
daughter separated from her husband, the bottling company’s Uzbek fortunes
diminished.42
The manager also must take many practical risks into account. Examples
include the problems a firm’s employees might run into being robbed or arrested
while traveling abroad. A new website (www.assessyourinternationalrisk.org)
helps managers size up their international risks.43
The Sociocultural Environment

Global managers also quickly discover that people around the world react to
events in varied but characteristic ways. For example, one study found that
Japanese, German, and U.S. managers tended to take different approaches
when resolving workplace conflict.44 The Japanese prefer the power approach,
which meant tending to defer to the party with the most power. Germans used
a more legalistic, stick-to-the-rules approach. U.S. managers tend to try to take
into account all parties’ interests and to work out a solution that maximizes
everyone’s benefits.
Cultural differences like these should influence how managers conduct busi-
ness abroad. When it opened its new production plant in Valenciennes, France,
Toyota had to explain to the French Labor Ministry why management banned the
traditional red wine at lunchtime in the company cafeteria. The reasons given
were health and working conditions.45
On the other hand, Starbucks broke some traditions when it opened its first
Tokyo store. Starbucks (pronounced STAH-buks-zu in Japanese) redefined the
way the Japanese drink coffee. Its nonsmoking, bright, sofa-filled stores are in
marked contrast to the dimly lit, smoke-filled stores where many Japanese tradi-
tionally drink their coffee from tiny cups.46
technology transfer: the The Technological Environment

transfer, often to another country, Doing business abroad often requires technology transfer, which basically
of the knowledge required to
means transferring knowledge, such as how to design or manufacture some
manufacture a product, apply a
process, or render a service; does product, or how to apply some process or render some service.47 Let’s say that
not extend to the mere sales or Dell builds a computer factory in China staffed with local Chinese managers and
lease of goods workers. The plant’s success depends on more than the bricks and mortar and
machines. For example, Dell must also carefully train all the workers to
use Dell’s technology—such as its methods for ordering computer
parts and for reporting problems. Similarly, Tramco (from this chap-
ter’s opening vignette) must have some way to transfer its knowledge
of how to produce its conveyors if it decides to have a company abroad
manufacture them.
● Successful Technology Transfer Successful technology transfer

depends on several factors. First, one needs a desirable and suitable
technology. For instance, one Miami company transferred to another
country the machines from a plant that was a bit out-of-date in
America but still usable in the lower-cost labor country abroad. Social
and economic conditions must then favor the transfer. Pollution-
reducing technology might be economically useless in a country where
pollution reduction is low priority. Finally, technology transfer de-
pends on the willingness and ability of the receiving party to use and
adapt the technology.48 In China, for instance, many multinational
hotel chains are spending millions of dollars to train their local em-
ployees to apply the hotel chains’ philosophy, for instance, for giving
excellent service.
Sometimes technology transfers more quickly than the manager
originally planned. For example, thanks to joint ventures with Volks-
wagen (VW) and GM, Shanghai Auto now produces over 650,000
cars per year in ultramodern factories in and around Shanghai.
The company is already one of Fortune’s 500 largest companies in
“STAH-buks-zu” broke some traditions the world, with total revenues well over $12 billion. However, for
when it opened its first Tokyo store. top management at Shanghai Auto, that is only the beginning. The
company’s CEO says that Shanghai Auto will be producing 2 million vehicles
by 2010.
Technology transferred from GM and VW helped Shanghai Auto achieve this.
For example, when Shanghai Auto’s joint venture with GM (Shanghai General
Motors) started business, the joint venture received licenses to use GM’s technical
know-how. GM’s technical computer systems, blueprints, and other supporting
information helped Shanghai Auto create the manufacturing machines and
systems for its new high-tech factory.49 That helped Shanghai Auto to eventually
grow out of its dependence on joint ventures and to someday compete with its
joint-venture partners on their own turf.
Distance and Global Management

As you can see, it’s not just vast distances that global managers must deal with.
They also face economic, legal/political, sociocultural, and technological barriers.
In fact, such factors are often as or more important than geographic distance in
determining a foreign venture’s success. One researcher says that managers
should take into account four factors before expanding abroad: (1) cultural
distance (such as languages and religions), (2) administrative distance (such as ab-
sence of shared monetary or political associations), (3) geographic distance (such
as physical remoteness), and (4) economic distance (such as differences in con-
sumer incomes). All of these—not just physical distance—influence the difficulty
the company can expect to encounter (see Figure 3.2). The more distant the new
country is on each of the four measures, the more difficult it may be to expand into
it. MySpace will probably find it more challenging to expand into China than
into England.
F IGURE 3.2
Determinants of Global Distance
ATTRIBUTES CREATING DISTANCE
Cultural Distance Administrative Distance Geographic Distance Economic Distance

■
Different languages ■
Absence of shared ■
Physical remoteness ■
Differences in consumer
■
Different ethnicities; monetary or political ■
Lack of a common border incomes
lack of connective ethnic association ■
Lack of sea or river access ■
Differences in costs and
or social networks ■
Political hostility ■
Size of country quality of:
■
Different religions ■
Government policies ■
Weak transportation or • natural resources
■
Different social norms ■
Institutional weakness communication links • financial resources
■
Differences in climates • human resources
• infrastructure
• intermediate inputs
• information or
knowledge
SOURCE: Adapted from Pankaj Ghemawat,“Distance Still Matters,” Harvard Business Review, September 2001, p. 140.
Managing Now: Global Communications

Distance—be it physical distance, cultural distance, or another type of distance—
has always been a major stumbling block to doing business abroad. This is be-
cause distance complicates everything the manager does, from controlling local
operations to coaching employees.
Telecommunications tools like the telephone and e-mail reduce these prob-
lems. Instant messaging enables geographically dispersed employees to com-
municate inexpensively in real time. With Voice over Internet Protocol (VoIP)
technology, calls that would usually go over phone lines are redirected through
the Internet, which makes it easier and less expensive for companies to add or
delete phones, and to combine voice and e-mail systems. Telecommunications—
the electronic transmission of data, text, graphics, voice (audio), or image
(video) over any distance—also facilitates transferring technical information.
Ford designers at the company’s Dearborn, Michigan, headquarters use
computers to design new cars. Digitized designs then go electronically to Ford’s
Turin, Italy, design facility. There, the system automatically reproduces the designs
and creates mockups of them. As another example, PricewaterhouseCoopers
maintains electronic bulletin boards on more than 1,000 different company pro-
jects. About 18,000 of its employees in twenty-two countries use these electronic
bulletin boards to get updates on matters such as how to handle specialized
projects.50
● Face-to-Face Global Communications However, dealing with sensitive top-

ics or trying to be persuasive usually requires more personal, “rich” media, and this
is where modern IT-based systems are invaluable to global managers.51 Being able
to see the other person usually makes it easier to communicate in any situation. And
in some societies—including many in Asia—people are much more comfortable
with rich media. This means communicating with people whose expressions and
gestures they can actually see. Examples of useful IT tools here include videoconfer-
encing, group decision support systems, and virtual communities. These all support
global communications and make it possible for virtual teams—geographically dis-
persed teams who communicate primarily online and via telecommunications—
to do their jobs. We’ll look at each.
● Videoconferencing Companies use videoconferencing to facilitate commu-

nications of geographically dispersed members of work teams. For example, the
team that developed the Boeing 787 made extensive use of videoconferencing for
meetings with engine suppliers and airlines around the world to discuss the new
aircraft’s design.52 The links may be by phone or they may be satellite-based;
or they may use one of the popular PC-based video technologies.53 Videoconfer-
encing has become very sophisticated. For example, Hewlett-Packard’s new life-
size Halo Collaboration Studio makes videoconferencing so clear that it makes
people look as if they’re on the other side of the table, although they may be half a
world away.
decision support system
(DSS): an interactive, ● Workgroup Support Systems Workgroup support systems are technology-
computer-based
based systems that make it easier for workgroup members to work together.
communications system that
facilitates the solution of Team members might meet at a single site, or they may be dispersed around the
problems by a virtual decision- world. A group decision support system (DSS) is an interactive, computer-
making team based communications system that facilitates the solution of problems by a
virtual decision-making team.54 The group DSS lets team members interact via
their PCs and use several software tools to assist in decision making and project
completion. These software tools include electronic questionnaires, electronic
brainstorming tools, idea organizers (to help team members compile ideas gen-
erated during brainstorming), and tools for voting or setting priorities (so that
group scheduling system: recommended solutions can be weighted and prioritized). A group scheduling
a system that provides a shared system provides a shared scheduling database for geographically disbursed
scheduling database for group members. Each group member puts his or her daily schedule into the
geographically disbursed group
shared database, which then helps to identify and set the most suitable times for
members
meetings. A workflow automation system uses an e-mail type of system to au-
workflow automation tomate the flow of paperwork.55 For example, if a proposal requires four signa-
system: an e-mail type of tures, the workflow automation system can send it electronically from mailbox to
system to automate the flow of mailbox for the required signatures.
paperwork
● Collaborative Writing Systems Collaborative writing systems let group

members create long written documents (such as proposals) while working at a
network of interconnected computers. As team members work on different sec-
tions of the proposal, each member has automatic access to the rest of the sections
and can modify his or her section to be compatible with the rest. For example,
each member of a global team with access to Oracle Project Collaboration software
can easily keep track of such things as assigned tasks, issues, and deliverables. It
enables global team members (both within and outside the company) to work
together more efficiently and to make better and more effective project-related
decisions.56
● Virtual Communities One Friday night, about eighty young people met in a
Tokyo club to exchange business cards and to learn more about some of the other
people in their Japan-based myspace.com-like virtual online community.57 Back
online, they spend hours discussing matters of mutual interest.58
Global companies also use virtual communities. For example, as the prime
contractor in an effort to win a $300 million navy ship deal, Lockheed-Martin
“established a virtual design environment with two major shipbuilders, via a pri-
vate internet existing entirely outside the firewalls of the three individual compa-
nies.”59 Eventually, about 200 global suppliers also connected to the network via
special, secure Internet links. This Internet-based network “allows secure transfer
of design, project management, and even financial data back and forth among the
extended design team via simple browser access, with one homepage as its focal
point.” Lockheed got the contract.
● Internet-Based Communications Schlumberger, which manufactures oil-

drilling equipment and electronics, has headquarters in New York and Paris. The
company operates in eighty-five countries, and in most of them, employees are in
remote locations.60 How does the company keep communications costs low for
such a global operation? Here’s how experts describe the company’s system:
Using the Internet, Schlumberger engineers in Dubai (on the Persian Gulf )
can check e-mail and effectively stay in close contact with management at a
very low cost. In addition, the field staff is able to follow research projects as
easily as can personnel within the United States. Schlumberger has found that
since it converted to the Internet from its own network, its overall communi-
cations costs are down. . . . The main reason for the savings is the dramatic
drop in voice traffic and in overnight delivery service charges. . . .61
Planning, Organizing, and Controlling in a Global Environment ■ 75
Planning, Organizing, and Controlling

in a Global Environment
Online Study Center
ACE the Test
Managing Now! LIVE I nternational management means carrying out the four management functions
we discuss in this book—planning, organizing, leading, and controlling—
to achieve the company’s international aims. As we’ve seen, managing in a global
environment can present managers with some special challenges. We’ll look at
some of these challenges in the following discussion, starting with the global man-
ager’s traits, and then focusing on planning, organizing, and controlling in a global
environment. This should also provide you with a better feel for what planning,
organizing, leading, and controlling involve on a day-to-day basis.
The Global Manager

Not everyone is competent to manage in a global arena. Saying you appreciate
cultural differences is one thing; being able to act on it is another. Global managers
therefore tend to be, first, cosmopolitan in how they view people and the world.
Some define cosmopolitan as “belonging to the world; not limited to just one part
of the political, social, commercial or intellectual spheres; free from local, provin-
cial, or national ideas, prejudices or attachments.”62 Global managers must be
comfortable living and working anywhere in the world, and being cosmopolitan
helps them to do so.
Sir Howard Stringer, chief executive officer of Sony
Corp., is probably as “global” as a manager can be. Born
in Wales, Sir Howard manages Tokyo-based Sony Corp.
by telecommuting from his offices in New York while
still often visiting his family in Oxfordshire, England.63
Sir Howard got the Sony CEO job partly based on
his success turning around Sony USA. Under his watch,
Sony USA eliminated 9,000 jobs and $700 million in
costs. He also made other numerous changes, includ-
ing merging Sony’s music business with Bertelsmann’s
BMG label.
Now that he is CEO of Sony Corp., Sir Howard’s
strategies will probably include centralizing some
Sony activities such as research and development to
cut costs, and focusing more on high-value products
such as video games. He also wants Sony’s employees
and professionals from divisions such as engineering
Sir Howard Stringer is a global executive endeavoring to
and media to work more closely together. But as a true
manage Sony Corporation while dividing his time between
the United States, Europe, and Japan.
global manager, Sir Howard knows that in a Japanese
culture that favors harmony, he can’t push the idea of
maximizing shareholder value too hard. As a true global manager, he will adapt his
leadership style to the culture of the Japanese.
Like Sir Howard, cosmopolitan people are sensitive to what is expected of
them in any context, and they have the flexibility to deal intelligently and in an
unbiased way with people and situations from other cultures. One needn’t have
traveled extensively or be multilingual like Sir Howard to be cosmopolitan,
although such experiences help. The important thing is to be sensitive to other
people’s perspectives and to consider them in your own behavior.64
In addition to being cosmopolitan, global managers also have what some

experts call a global brain. They are flexible enough to accept that, at times, their
own ways of doing business are not the best. For example, Volkswagen formed a
partnership with Skoda, a Czech carmaker. VW trained Skoda’s managers in West-
ern management techniques. However, it followed Skoda’s suggestions about how
to conduct business in the Czech Republic.65 Being willing to apply the best solutions
from different systems is what experts mean by having a global brain.
This global point of view (or its absence) tends to reflect itself in a man-
ethnocentric: a management ager’s global philosophy. For example, an ethnocentric (home-base-oriented)
philosophy that leads to the management philosophy may manifest itself in an ethnocentric or “stay at home”
creation of home-market- home-market-oriented firm. A polycentric philosophy may translate into a com-
oriented firms
pany that is limited to several individual foreign markets. A regiocentric (or geo-
polycentric: a management centric) philosophy may lead managers to create more of a global production and
philosophy oriented toward marketing presence.
pursuing a limited number of
individual foreign markets ● Would Your Company Choose You as an International Executive?
What do companies look for in their international executives? One study focused
regiocentric: a management on 838 lower-, middle-, and senior-level managers from six international firms in
philosophy oriented toward twenty-one countries. The researchers studied the extent to which employers
larger areas, including the global
marketplace; also called
could use personal characteristics such as sensitivity to cultural differences to
geocentric distinguish between managers who had high potential as international executives
and those whose potential was not so high. Fourteen personal characteristics
successfully distinguished those identified as having high potential from those
identified as lower performing.
Table 3.1 lists the fourteen characteristics with sample items. For each, indicate
planning: the process of setting (by placing a number in the space provided) whether you strongly agree (7),
goals and courses of action, strongly disagree (1), or fall somewhere in between. The higher you score, the more
developing rules and likely you would have scored high as a potential global executive in this study.66
procedures, and forecasting
future outcomes
Planning in a Global Environment
Planning means setting goals and identifying the courses of action for achiev-
ing those goals. The company’s strategic plan lays out how the company will
move from the business it is in now to the type of business it wants to be. GM
wanted to expand into China. Its strategy was to do so by forming a joint ven-
ture with Shanghai Auto.
Going global helps to illustrate the sorts of strategic decisions managers
need to make. For example, one big global strategy question is whether to
offer standardized or localized products abroad. In deciding this, common
sense does not always suffice. Instead, the manager needs to study the matter
carefully. For years, Mattel Inc. adapted its Japan Barbie doll to what it as-
sumed were local tastes, with black hair, Asian features, and Japanese-type
clothes.67 Several years ago, Mattel’s consumer research group discovered
a surprising fact. Most kids around the world actually wanted the original
Barbie, with her blond hair and blue eyes. So recently, when Mattel intro-
duced its Rapunzel Barbie with long blond hair, it also introduced the same
doll on the same day in fifty-nine countries. The Window on Managing Now
feature (page 78) shows how managers use software and other IT components
to improve their localization decisions.
Mattel discovered that children As another planning example, expanding abroad also takes careful feasi-
everywhere wanted the same blond bility planning. French retailer Carrefour conducts feasibility studies before en-
Rapunzel Barbie. tering new markets. For example, it avoids entering developing markets—such
T ABLE 3.1
Characteristics of More Successful International Managers
Scale Your Score Sample Item
Sensitive to cultural differences. When working with people from other cultures, works
hard to understand their perspectives.
Business knowledge. Has a solid understanding of our products and
services.
Courage to take a stand. Is willing to take a stand on issues.
Brings out the best in people. Has a special talent for dealing with people.
Acts with integrity. Can be depended on to tell the truth, regardless of
circumstances.
Is insightful. Is good at identifying the most important part of a
complex problem or issue.
Is committed to success. Clearly demonstrates commitment to seeing the
organization succeed.
Takes risks. Takes personal as well as business risks.
Uses feedback. Has changed as a result of feedback.
Is culturally adventurous. Enjoys the challenge of working in countries other than
his or her own.
Seeks opportunities to learn. Takes advantage of opportunities to do new things.
Is more open to (less sensitive Appears brittle—as if criticism might cause him or her
about) criticism. to break. (Reverse scored, so 1 is “strongly agree” for
this item.)
Seeks feedback. Pursues feedback even when others are reluctant to
give it.
Is flexible. Doesn’t get so invested in things that he or she cannot
change when something doesn’t work.
TOTAL SCORE
as Russia—that don’t have reliable legal systems.68 Even in more traditional mar-
kets, Carrefour won’t proceed without at least a year’s worth of on-site research. In
China, “Carrefour takes care to chop vegetables vertically—not laterally—so as not
to bring bad luck to superstitious shoppers.”69
Organizing in a Global Environment

Organizing means identifying the jobs to be done, establishing departments,
delegating or pushing authority down to subordinates, and creating a chain of
command and mechanisms for coordinating employees’ efforts. In general, the
firm’s stage of internationalization determines how it organizes its international
Global Clustering
Managers today increasingly use “clustering” to make bet- Clustering relies on information technology.70
ter decisions about whether to offer standardized or local- Clustering requires being able to quickly access and
ized products. Clustering means identifying commonalities analyze huge amounts of sales information across the
among customers based on their local tastes, and then company’s global operations. The company needs to
combining (or clustering) common customers together. analyze who buys what and how buyers are similar to or
The clustered customers still get their locally preferred different from each other. Information technology makes
products or services. The company gets improved this possible. For example, with information on details
economies by clustering together several customers with like style and size constantly streaming back to the
similar tastes and preferences. retailer Zara’s global headquarters from point-of-sale
For example, Best Buy clusters stores in terms of computers, personal digital assistants (PDAs), and special
several typical types of customers. For example, “Jill” is a software in stores, companies like Zara have developed
busy mother who is the chief buyer for her household methods for analyzing data on local buying patterns.This
and wants quick, personalized help navigating the world enables them to group these buying patterns into
of technology. Stores aimed at appealing to “Jill” have clusters—groups of stores that get similar merchandise
uncluttered, wider aisles, warmer lighting, and more and store layouts.
technology-related toys for children.
efforts. Thus, a company at the earliest stages of internationalization (or with few
globally qualified managers) will more likely opt for managing its international
operations out of a headquarters import-export or international department.
There is a typical evolution as the company becomes more international. In a
domestic organization, each company division handles its own foreign sales. In
response to increasing orders from abroad, the firm may move to an export-
oriented structure. Here, one department (often called an import-export depart-
ment) coordinates all international activities such as licensing, contracting, and
managing foreign sales.
In an international organization, management splits the company into
domestic and international divisions. The international division focuses on
production and sales overseas, while the domestic division focuses on domestic
markets. Reynolds Metals, for instance, set up six worldwide businesses, each with
a U.S.-focused group and a separate international group. In a multinational
organization, each country where the firm does business has its own subsidiary.
Royal Dutch Shell has separate subsidiaries for Shell Switzerland and Shell U.S.A.
(as well as many other countries).71
Other things affect how the manager organizes his or her international opera-
tions. Top management’s philosophy is another consideration. For example, some
CEOs are more globally oriented, while some are more local (ethnocentric) in their
philosophical outlooks. The manager who believes that his or her country’s ways
are best is less likely to delegate much authority to remote local managers.
Geographic distance is also important. Practical experience shows that it’s harder
to keep track of things that are happening far away. The following Managing Now
section shows how Porsche uses information technology to help headquarters
managers make better local decisions.
PRACTICE IT
Tramco, Inc.
Wichita, Kansas–based Tramco wants to supply its con- wanted to do that design work in its own Wichita offices.
veyors abroad, but the conveyors are so big and heavy By installing special three-dimensional computerized
that it costs as much to pack and ship one as it does to design equipment at its own offices and at each partner
manufacture it. So they can’t economically ship them.And abroad, Tramco’s engineers in Kansas can design the
with only about 100 employees,Tramco can’t start build- conveyor and electronically transmit the design to the
ing its own factories in countries around the world. partner, which then manufactures it. It’s easy for Tramco’s
Tramco was able to use technology to solve its prob- engineers and the local manufacturer-partners’ produc-
lem. First, it entered into strategic partnership agree- tion teams to discuss and fine-tune designs electronically.
ments with manufacturers in several countries, who Thanks to its new technology, Tramco is now truly a
agreed to build the conveyors according to Tramco’s spec- global company, with customers and manufacturing part-
ifications. The engineering design work on these huge ners around the world. It’s hard to see how Tramco could
conveyors is highly specialized and proprietary, so Tramco have accomplished this without information technology.
● Managing Now: Porsche Centralizes Information technology also makes

it easier to centralize decision making in one headquarters location (as opposed
to letting managers at remote sites make these decisions). For example, Porsche’s
local warehouses used to supply parts to local dealers. If a warehouse was out of
stock, there could be a delay. Now, Porsche uses information technology to link all
its worldwide parts distribution and warehouse facilities. Therefore, its new cen-
tral global logistics-planning center always knows who has what parts where. Now,
when an order for a part comes in from a dealer, that order goes to the global lo-
gistics-planning center. This center handles the scheduling based on its informa-
tion regarding global availability of those parts.72 The Practice IT feature shows
how Tramco expanded abroad.
Controlling in a Global Environment

Coca-Cola once had a rude surprise when several European countries made it take
its beverages off store shelves. Coke has high standards for product quality and in-
tegrity, but controlling what’s happening at every plant worldwide is a challenge.
Chemicals had possibly seeped into the beverages at one of Coke’s European
plants.
Controlling means monitoring actual performance to ensure it is consistent
with the standards the manager set. This is difficult enough when the employees
are next door. Geographic distance complicates the problem, and the other
distances (cultural and legal, for instance) complicate it even more. Among other
things, the global manager should carefully address two factors: what to control
and how to control it. The following presents some examples.
● Deciding What to Control Particularly given the geographic distances in-

volved, the global manager has to choose the activities he or she will control
with great care. The manager could, of course, try to micromanage everything
abroad—from hiring and firing to product design, sales campaigns, and cash
management. However, micromanaging at long distances is not practical—even

with the Internet, keeping track of people far away is not easy.
In practice, the amount of autonomy the local manager gets is usually least for
financial and capital decisions and most for personnel decisions.73 Production and
marketing decisions tend to fall in the middle. In one study of 109 U.S., Canadian,
and European multinational corporations, “these firms exercised stricter financial
control, and allowed greater local freedom for labor, political, and business
decisions. The home offices also usually made the decisions to introduce new
products and to establish R&D facilities.”74
● Deciding How to Maintain Control The global manager also must decide
how to control his or her global operations. Most managers today use computer-
ized information systems. For many years, Kelly Services, Inc., let its offices in each
country operate with their own individual billing and accounts receivable sys-
tems. However, according to Kelly’s chief technology officer, “we are consolidating
our operations in all countries and subsidiaries under a standard [information
system]. . . . All our customers expect us to deliver consistent practices, metrics,
and measurement. Establishing global standards is an important part of meeting
and exceeding that expectation.”75
Global managers also endeavor to foster their employees’ self-control and
employee commitment. Global managers do use computerized systems, financial
and operating reports, and personal visits to help control their international
operations.76 However, methods like these are limited when thousands of miles
separate boss and subordinate. Particularly in global companies, there’s wisdom
in making sure employees want to do what is right—and that they know what’s
expected of them in terms of the company’s values and goals.
In other words, global companies have to make sure their managers and em-
ployees buy into and are really committed to “the way we do things around here.”77
Many firms, like Shell Oil and GE, therefore spend millions of dollars each year
bringing managers together for special training sessions where the firm’s core val-
ues (such as “ethics is all-important”) are stressed. The Window on Managing Now
feature illustrates how Dräger Safety uses information technology to support its
control efforts.
Leading and Motivating in a Multicultural Environment

Online Study Center
ACE the Test
Managing Now! LIVE M any people are probably less skilled at dealing with cultural differences than
they think they are. Most people might say, “of course, there are cultural differ-
ences among people from different cultures.” Yet many, once abroad, would blun-
der into simply treating the people there the same as the people at home.78 The
problem stems from what international management writers call the universality
assumption of motivation: “These [motivation] theories erroneously assume that
human needs are universal.”79 For example, an American manager in Chile might
assume that employees there are as enthusiastic about participative leadership—
having the boss ask what the workers think is best—as are those in the United
States, although they might not be.
Such assumptions are not uniquely American. Everyone everywhere tends to
assume that everyone thinks and feels more or less like they do. But, in fact, people
and cultures are different in many ways. We’ll briefly look at how cultural differences
influence how managers in international arenas motivate and lead employees.
Leading and Motivating in a Multicultural Environment ■ 81
Dräger Safety
Dräger Safety, based in Lubec, Germany, is the world’s Dräger installed a new software system that enables
largest supplier of personal-protection, gas-testing, and its managers to better control its global production. For
diving equipment, with operations in thirty-three coun- example, it installed a special enterprise software system
tries.80 Several years ago, Dräger faced a problem control- that integrated and made compatible the systems each of
ling its worldwide sales and inventory operations. Each of its facilities had been using. Now, all Dräger’s suppliers,
its facilities around the world basically had its own soft- facilities, and customers are linked together to Dräger’s
ware system. For instance, if managers at headquarters global database.
wanted to know what the company’s total inventory was, Figure 3.3 summarizes the new system. Dräger’s
headquarters employees had to collect the separate, suppliers, locations, and customers can all connect to the
incompatible reports from each of the company’s facilities common global database and thereby monitor product
and summarize them for management. and shipping status. Dräger salespeople can now give
This lack of comparable information was hurting customers accurate shipping estimates. Customers now
Dräger’s competitiveness. As Dräger’s chief financial offi- get accurate shipping information. Furthermore, Dräger
cer put it, “it got to the point where sales reps dreaded headquarters management can now access the global data-
going to customer sites . . . the customer would spend a base for producing sales forecasts, production plans, and
whole hour berating them about late deliveries and missed purchasing plans and for compiling budgets and financial re-
appointments.” For instance, warehouses found it difficult ports. At Dräger, IT—a combination of computers, special
to monitor the status of a product after it shipped, and the software, cell phones, PDAs, and fax, for instance—made
trucking company found it difficult to forecast when successful globalization possible.
Dräger would have a particular order ready to ship.
F IGURE 3.3 Budget, Controlling, Analysis, Reports

Management Applications
Common Supply Chain
An Oracle-Based Supply
Chain
Sales Demand
Production Purchasing Drop ship
Forecast Planning
Intranet / Internet
Database
Common
GLOBAL DATABASE
Common Data
Integration
SOURCE: Adapted from Business

Benefits Series,“Dräger Safety
Re-Engineers Global Supply Chain,
Builds Centralized Logistics and IT
Infrastructure Yielding Three-Year ROI
of 193%,” www.oracle.com, accessed
March 2006. Reprinted by permission of
Oracle Corporation. Dräger Supplier Dräger Locations Dräger Customer
Values
values: basic beliefs about what One way people around the world differ is in terms of their values. Values are
is important and unimportant, basic beliefs we hold about what is good or bad, important or unimportant.
and what one should and should Values (such as West Point’s famous “Duty, honor, country”) are important to
not do managers because our values shape how we behave. When Professor Geert
Hofstede studied managers around the world, he found that societies’ values
differ in several ways:
◗ Power distance.81 Power distance is the extent to which the country’s less power-
ful members accept and expect that power will be distributed unequally.82 At the
time, Hofstede concluded that acceptance of such inequality was higher in some
countries (such as Mexico) than it was in others (such as Sweden).
◗ Individualism versus collectivism. In individualistic countries like Australia and
the United States, “all members are expected to look after themselves and their
immediate families.”83 In collectivist countries like Indonesia and Pakistan, society
expects people to care for each other more.
◗ Masculinity versus femininity. According to Hofstede, societies differ also in the
extent to which they value assertiveness (which he called “masculinity”) or caring
(“femininity”). For example, Austria ranked high in masculinity; Denmark
ranked lower.
◗ Uncertainty avoidance. Uncertainty avoidance refers to whether people in the
society are uncomfortable with unstructured situations in which unknown,
surprising, novel incidents occur. People in some countries (such as Sweden,
Israel, and Great Britain) are relatively comfortable dealing with uncertainty and
surprises. People living in other countries (including Greece and Portugal) tend
to be uncertainty avoiders, said Hofstede.84
Leadership in a Multicultural Environment

Leadership means influencing someone to willingly work toward achieving the
firm’s objectives. The manager dealing with people from other cultures needs to
keep in mind that cultural differences affect how managers exercise their leadership
authority. For example, Hofstede found large differences in the “power distance” (in-
equality) people in different cultures will tolerate.85 Figure 3.4 lists countries with
large (or high) and small (or low) power-distance rankings. For example, Argentines
appear more tolerant of large power differences, Swedes less so.
Findings like these have practical managerial implications. For one thing, they
help to explain why managers from different countries seem to have different
mindsets when it comes to doing business. For example, if a manager in a “large
power distance society” attempts to reduce the distance by acting more accessible
and friendly, his or her subordinates may not react well to such friendliness from
their boss.86 In that context, it’s not surprising that leaders in some countries (for
instance, Spain, Portugal, and Greece) tend to delegate less authority than do lead-
ers in others such as Sweden, Japan, Norway, and the United States.87
Motivation in a Multicultural Environment

Similarly, the motivation techniques managers use in one country may not work
well in another. For example, in his famous “needs hierarchy theory,” American psy-
chologist Abraham Maslow said that people are motivated first to satisfy their basic
physiological needs (food and water) and only then will they be motivated to satisfy
(in ascending order) their security, social, self-esteem, and self-actualization
F IGURE 3.4 HIGH POWER DISTANCE

(Inequality more
Argentina
Brazil
Countries Ranked Based on acceptable) Belgium
How Much Power Distance Chile
People Tolerate Colombia
France
Greece
Hong Kong
India
Iran
Italy
Japan
Mexico
Pakistan
Peru
Philippines
Portugal
Singapore
Spain
Taiwan
Thailand
Turkey
Venezuela
Yugoslavia
POWER DISTANCE
Australia
Austria
Canada
Denmark
Finland
Germany
Great Britain
Ireland
Israel
Netherlands
New Zealand
Norway
LOW POWER DISTANCE Sweden
(Inequality less Switzerland
SOURCE: Adapted from G. Hofstede, Culture’s acceptable) U.S.A.
Consequences (Beverly Hills, Calif.: Sage
Publications, 1984).
(becoming the person you believe you are capable of becoming) needs. However, he
based his theory on Americans. In other societies, people’s needs don’t necessarily
revolve around the self as much as around social relationships. Thus, in China, social
needs might come first, then physiological, security, and finally self-actualization
needs. Not surprisingly, in Asia, paying an incentive to a work team for how well it
performs is very popular. In America, individual incentives are more popular.88
Interpersonal Communications in a
Multicultural Environment
Communication refers to exchanging information so that the manager creates a
common basis of understanding. Cultural differences influence communication in
obvious and subtle ways. Language barriers are one obvious problem. An American
manager negotiating a deal in England can generally make him- or herself under-
stood using English, but he or she might need an interpreter in France. Even when
the other party speaks some English, problems can arise. For example, using an
idiom (such as “you bet it is”) may be incomprehensible to the Swiss person with
whom you’re speaking. Furthermore, as General Motors once discovered, words that
sound or look the same (such as Nova, which means “won’t go” in Spanish) may have
different meanings in different countries.
The problem is not just the words. As much as 90 percent of what people “say”
is nonverbal, conveyed via facial expressions and signs and motions of one sort or
another. Here is where the novice international manager can really get into
trouble. Table 3.2 shows what some typical nonverbal behaviors mean in various
countries. Subtle differences like these can make international management an
adventure! The Improving Your Cultural Intelligence Skills feature presents other
examples of global cultural differences.
T ABLE 3.2
Implications of Various Nonverbal Behaviors in Different Cultures
Nonverbal Behavior Country Meaning
Thumbs up United States An approval gesture/okay/“Good job!”
Middle East A gesture of insult
Japan A sign indicating “male”
Germany A sign for the count of 1
A finger circulating next to the ear Argentina A telephone
United States “Crazy!”
A raised arm and waggling hand United States Goodbye
India, South America Beckoning
Much of Europe A signal for no
Showing the back of the hand England A rude sign
in a V-sign Greece, Middle East A sign for the count of 2
Showing a circle formed with United States “Very good!”
index finger and thumb Turkey Insult gesture/accusation of homosexuality
Eye contact, gazing United States A sign of attentiveness
Japan A rude behavior/an invasion of privacy
Most Asian countries Sign of disrespect to senior people
Widening eye United States An indication of surprise
Chinese An indication of anger
Hispanic Request for help
French Issuance of challenge
Nodding the head up and down Western countries A sign for agreement/yes
Greece, Bulgaria A sign for disagreement/no
Source: Adapted from Kamal Fatehi, International Management (Upper Saddle River, N.J.: Prentice Hall, 1996), Table 6.1, p. 194.
I M P R OV I N G Y O U R C U L T U R A L I N T E L L I G E N C E S K I L L S
In practice, there is more to being multicultural than just requires that the person also have what they call the right
using the right mannerisms and idioms. Two researchers say cognitive, physical, and emotional/motivational cultural
that being truly multicultural (having “cultural intelligence”) skills. Figure 3.5 presents a short cultural intelligence test.
F IGURE 3.5
Diagnosing Cultural Intelligence
These statements reflect different facets of cultural intelligence. For each set, add up your scores and divide by four to produce an
average. Work with large groups of managers shows that for purposes of your own development, it is most useful to think about
your three scores in comparison to one another. Generally, an average of less than 3 would indicate an area calling for improvement,
while an average of greater than 4.5 reflects a true “Cultural Quotient” (CQ) strength.
Rate the extent to which you agree with each statement, using the scale:
1 = strongly disagree, 2 = disagree, 3 = neutral, 4 = agree, 5 = strongly agree.
Before I interact with people from a new culture, I ask myself what I hope to achieve.
If I encounter something unexpected while working in a new culture, I use this experience to figure out new
ways to approach other cultures in the future.
I plan how I’m going to relate to people from a different culture before I meet them.
When I come into a new cultural situation, I can immediately sense whether something is going well or
+ something is wrong.
Total ÷4= COGNITIVE CQ
It’s easy for me to change my body language (for example, eye contact or posture) to suit people from a
different culture.
I can alter my expression when a cultural encounter requires it.
I modify my speech style (for example, accent or tone) to suit people from a different culture.
+ I easily change the way I act when a cross-cultural encounter seems to require it.
Total ÷4= PHYSICAL CQ
I have confidence that I can deal well with people from a different culture.
I am certain that I can befriend people whose cultural backgrounds are different from mine.
I can adapt to the lifestyle of a different culture with relative ease.
+ I am confident that I can deal with a cultural situation that’s unfamiliar.
Total ÷4= EMOTIONAL/MOTIVATIONAL CQ
SOURCE: Christopher Earley and Elaine Mosakowski,“Cultural Intelligence,” Harvard Business Review, October 2004, p. 143.
Reprinted by permission of the Harvard Business Review.
For example, the Cognitive Skills component of some- . . . Your actions and demeanor must prove that you
one’s cultural intelligence in the figure is reflected in have already to some extent entered their world.
statements like the following: “When I come into a new Whether it’s the way you shake hands or order a coffee,
cultural situation, I can immediately sense whether some- evidence of an ability to mirror the customs and gestures
thing is going well or something is wrong.” One point of the people around you will prove that you esteem them
these experts emphasize is that succeeding with people of enough to want to be like them. By adopting people’s
other cultures really takes being sensitive to who they are habits and mannerisms, you eventually come to understand
and to how they do things. As they say, in the most elemental way what it is like to be them.89
CHAPTER SUMMARY
1. Companies can pursue several approaches when it business abroad, managers should be familiar with
comes to extending operations to foreign markets: the economic systems, exchange rates, and level of
exporting, licensing, and franchising are popular economic development of the countries in which
alternatives. At some point, a firm may decide to they plan to do business. They must be aware of
invest funds in another country. Joint ventures and import restrictions, political risks, and legal differ-
wholly-owned subsidiaries are two examples of ences and restraints. Important sociocultural dif-
foreign direct investment. ferences also affect the way people in various
countries act and expect to be treated. Values,
2. An international business is any firm that engages
languages, and customs are examples of elements
in international trade or investment. Firms are
that distinguish people of one culture from those
globalizing for many reasons, the three most com-
of another. Finally, the relative ease with which the
mon being to expand sales, acquire resources, and
manager can transfer technology from one coun-
diversify sources of sales and supplies. Other rea-
try to another is an important consideration in
sons for pursuing international business include
conducting international business.
reducing costs or improving quality by seeking
products and services produced in foreign coun- 6. With respect to planning the products it sells, the
tries and smoothing out sales and profit swings. company can offer standardized products world-
3. Free trade means removing all barriers to trade wide, or products more specifically designed for
among countries participating in the trade agree- local preferences. Many companies group cus-
ment. Its potential benefits have prompted many tomers into clusters to gain some of the advantages
nations to enter into various levels of economic in- of both standardization and localization. Feasibil-
tegration, ranging from a free trade area to a com- ity planning is also important to global managers.
mon market. 7. Particularly given the geographic distances
4. Globalizing production means placing parts of a involved, the global manager has to choose the
firm’s production process in various locations activities he or she will control with great care.
around the globe. The aim is to take advantage of na- Micromanaging at long distances is not practical—
tional differences in the cost and quality of produc- even with the Internet, keeping track of people far
tion and then integrate these operations in a unified away is not easy. In practice, the amount of auton-
system of manufacturing facilities around the world. omy the local manager gets is usually least for
Companies are also tapping new supplies of skilled financial and capital decisions and most for
labor in various countries. The globalization of mar- personnel decisions.
kets, production, and labor coincides with the rise of 8. The company’s international organization reflects
a new type of global manager, someone who can the firm’s degree of globalization. In a domestic
function effectively anywhere in the world. organization, each division handles its own foreign
5. International managers must be skilled at weigh- sales. In response to increasing orders from abroad,
ing an array of environmental factors. Before doing the firm may move to an export-oriented structure.
Case Study ■ 87
In an international organization, management tendency to assume that everyone everywhere

splits the company into domestic and international thinks and feels more or less like we do. People
divisions. In a multinational organization, each around the world actually hold different values in
country where the firm does business has its own areas such as power distance, individualism versus
subsidiary. collectivism, masculinity versus femininity, and
uncertainty avoidance, and they often have differ-
9. Leading, motivating, and communicating abroad
ent needs and ways of communicating.
are susceptible to what international management
writers call the universality assumption—the
1. If you owned a small U.S. business and wanted to 3. What do we mean by economic integration?
expand sales to Europe, explain briefly how you 4. What is the European Union?
would go about doing so.
5. How do managers generally organize for interna-
2. Why does globalization affect businesses and tional business? What do their organizining deci-
employees in the United States? sions depend on?
1. You have just taken an assignment to assess the should pursue now. What global organization
feasibility of opening a branch of your company’s structure would that imply?
business in Russia. Your company manufactures
3. Spend several minutes using the tools and what
and sells farming equipment. Working in teams of
you learned so far in this book to list ten reasons
four or five, prepare a detailed outline showing the
why you would (or would not) be a good global
main topic headings you will have in your report,
manager.
including a note on the management tools you will
use to get the information you need for each topic. 4. Many rightfully believe that it is the business
school’s responsibility to familiarize business stu-
2. While Google’s strategy of exporting its e-mail and
dents with what it takes to be an effective global
other tools from the United States to various coun-
manager. In teams of four or five, compile a list,
tries seems to be working well, management is now
based on this course and any others you’ve taken,
concerned that local competitors may start eating
of what your business school is doing to cultivate a
into its business. Working in teams of four or five,
better appreciation of the challenges of doing busi-
use the discussions in this chapter to specify the
ness internationally.
global strategy (localize or not?) you believe Google
CASE STUDY
U.S. Bookseller Finds a Strong Partner in German Media Giant
hen Barnes & Noble was exploring ways to become chose to form an Internet joint venture with the
W more competitive in its battle with Amazon.com,
there were hundreds of U.S. companies to which it
German media giant Bertelsmann.
Bertelsmann was best known among college stu-
could turn. Research demonstrated that the cultural dents for its record label and music club, BMG (now
differences that characterize cross-border ventures both owned by Sony). At the time, BMG Entertainment
made them far more complicated than domestic ones. was second in the market with $1.9 billion in sales.
So Barnes & Noble surprised competitors when it Bertelsmann’s holdings include Random House, the
world’s largest English-language book publisher, and endeavor? Suggest the pros and cons of this part-
Offset Paperback, a firm that manufactures nearly nership.
40 percent of all the paperback books sold in the
2. Specify the basic global strategy you believe
United States. Bertelsmann had also actively pursued
barnesandnoble.com should pursue, and explain
e-commerce on its own.
why. How, in very general terms, would you orga-
To fund the original barnesandnoble.com, the two
nize this venture?
created a separate company and conducted an initial
public offering (IPO) to raise capital. The offering 3. With all its experience in e-commerce, why wouldn’t
raised $421 million for the new venture after commis- BMG just set up its own competitor to Amazon
sions and expenses, making it the largest e-commerce .com?
offering in history. Since launching its online business
4. List three specific planning, organizing, leading,
in May 1997, barnesandnoble.com has quickly become
and controlling issues Barnes & Noble’s managers
one of the world’s largest e-commerce retailers. The
probably faced in establishing this new joint
company has successfully capitalized on the recog-
venture.
nized brand value of the Barnes & Noble name to
become the second largest online retailer of books. 5. Write a one-page essay on the following topic:
cultural factors our Barnes & Noble managers
DISCUSSION QUESTIONS should keep in mind when dealing with our
colleagues at Bertelsmann.
1. What may have motivated Barnes & Noble to part-
ner with the German firm Bertelsmann? In general
terms, what advantages would Barnes & Noble
gain by having an international partner in such an
MANAGING ENTREPRENEURSHIP 4
AND INNOVATION
Procter & Gamble CHAPTER OUTLINE
Opening Vignette: Procter &
J ust about everyone uses products from Procter & Gamble (P&G)
every day. Some of its hundreds of famous brands include, just for a
Gamble
● Introduction:
Entrepreneurship and
start, Bounty, Crest, Clairol, Duracell, Gillette, Head & Shoulders, Ivory, Innovation
Old Spice, Pampers, and Swiffer. Like almost every company, the only ● Entrepreneurship Today
Entrepreneurs and Small-Business
way P&G can stay ahead of the Management
competition is to keep coming The Environment of Entrepreneurship
up with new and improved Why Entrepreneurship Is Important
products. Whether it’s a ● What It Takes to Be an
Entrepreneur
new multiblade razor, a Research Findings
superwhitening toothpaste, or Anecdotal Evidence
a Swiffer mop (which did not Should You Be an Entrepreneur?
● Getting Started in Business
even exist a few years ago), Coming Up with the Idea for the
innovation is the name of the Business
game at P&G. The problem is Methods for Getting into Business
Forms of Business Ownership
that companies like P&G can’t Getting Funded
rely on just their own research Writing the Business Plan
labs to come up with the WINDOW ON MANAGING NOW:
Choosing a Web-Based Business
necessary new products. Just about everyone uses a P&G product
● Managing Innovation and
“The R&D model that most every day.
New-Product Development
companies are following is broken,” says Larry Huston, the firm’s head of WINDOW ON MANAGING NOW:
Using Computerized Business-
research and development.1 Instead, P&G also wants to tap the ideas of Planning Software
its millions of consumers, distributors, and retailers, as well as any scien- The Eight-Stage New-Product
tists who might want to contribute.The question for Larry Huston is, Development Process
Fostering Innovation
How should P&G do this? ■
● Innovation Now
Innovation and Collaboration
B E H AV I O R A L O B J E C T I V E S Innovation and Learning
Managing Now: Using Information
After studying this chapter, you should be able to: Technology for Innovation
PRACTICE IT: Collaborative
Show that you’ve learned the chapter’s essential information by Innovation at P&G
➤ Explaining why you do (or do not) have the traits to be an entrepreneur. Product Life-Cycle Management
➤ Listing the pros and cons of four forms of business ownership. Managing Now: Product Life-Cycle
Management Software
➤ Listing what a person should keep in mind with respect to buying a business or
franchise.
89
90 PART ONE CHAPTER 4 Managing Entrepreneurship and Innovation
➤ Explaining managing innovation, new product development, and life-cycle management,

using examples.

➤ Reading the opening vignette and explaining how to answer Larry Huston’s question.
➤ Reading the chapter case study and listing what an entrepreneur is doing right and
doing wrong with respect to starting a business.
➤ Reading Experiential Exercise 2 and explaining why you would or would not buy that
franchise.

Online Study Center
ACE the Test ➤ Watching the simulation video and identifying how the manager recognizes, manages,
Managing Now! LIVE and creates innovation for a sustained competitive advantage.
Introduction: Entrepreneurship and Innovation

P &G is a great company, but chances are most people reading this book won’t
work for P&G, or for other giant companies like GM either. Most people work
for small, entrepreneurial firms, firms with no more than perhaps 100 or so em-
ployees. And many business school graduates also go out and start their own busi-
nesses, or buy small businesses, or start franchises. Therefore, business students
definitely should be familiar with small-business management.
Small entrepreneurial companies are important for another reason. Small
firms are engines of inventiveness and innovation, the sort of inventiveness and
innovation that produces the floods of new products that any society needs to grow
and to thrive. After all, all those Google, MySpace, and Youtube dotcoms didn’t
come out of some giant company’s lab. (Twenty-somethings Chad Hurley and
Steven Chen created Youtube in about one year.) And even most of the great and
most innovative products around today (like the Apple computer, or even Gillette
razors) originally came out of the work of a small band of people working together,
often in the proverbial garage. The bottom line is that business students and man-
agement majors should know something about managing small entrepreneurial
companies and about innovation.
In fact, innovation is a much more important topic for business success than
most people realize. Xerox Corporation revolutionized the document-duplicating
market with its first Xerox machine. It then watched feebly as Canon captured
market share with innovative new-product improvements. Kodak owned the pho-
tographic film market for almost 100 years. It then watched helplessly for years as
first Polaroid and then digital photography revolutionized the photography mar-
ket. Americans once shopped for bargains in stores owned by companies named
W. T. Grant and Woolworth’s. Then Sam Walton entered the scene with a new
approach that basically put these giants and many small mom-and-pop retail
businesses out of business.
● Creative Destruction The economist Joseph Schumpeter used the term

creative destruction to describe the process through which entrepreneurs and
companies introduce radical innovations like these that transform industries.2
Basically, to paraphrase Schumpeter, no industry and no products are immune to
being put out of business by some revolutionary new product; or new equipment;
or new methods of organization, management, or communication. For example,
think about the thousands of bookstores that Amazon put out of business with
Entrepreneurship Today ■ 91
its first Internet website. Note how Monster is killing the market for newspaper
help-wanted ads. And consider how even Microsoft, long the king of the hill of
personal computers, is fighting to stay dominant now that people increasingly
find and use the software they need online. For example, in June 2006, Google
announced a new service that lets users access (online and for free) a spreadsheet
package that rivals Microsoft’s Excel program.
Schumpeter’s creative destruction theory neatly sums up a fact of manage-
ment life, and one we’ll discuss at more length later in this chapter. The develop-
ment and life of every product, no matter how innovative it is when first intro-
duced, follows what businesspeople call a product life cycle. An inventor or
entrepreneur gets a new-product idea, develops it, introduces it to the market (to
those buying the product), and then hopefully watches sales take off. Next, he or
she turns (again, hopefully) to innovating improvements to the product as the
market matures, for instance, as competitors like Canon and Wal-Mart clamber in.
Finally, as changing tastes and even more innovative new products cause the mar-
ket for the original product to decline, our inventor/entrepreneur needs to decide
what to do. What does P&G do as things get more and more competitive in the
toothpaste market? Keep adding new innovations (whiteners, and so on)? Get out
of producing toothpaste altogether?
In this chapter, we’ll focus on two inseparable topics, entrepreneurship and
innovation. No company that fails to innovate can survive, no matter how skilled
its managers are in their other endeavors. And it is most often through the efforts
Online Study Center
ACE the Test of entrepreneurs that truly innovative new products and services arise to chal-
Managing Now! LIVE lenge the status of the former kings of the hill. We’ll begin with entrepreneurship.
Entrepreneurship Today
entrepreneurship: the
creation of a business for the
E arly in their careers, Steve Jobs, Michael Dell, and Donna Karan were all entre-
preneurs. Entrepreneurship is the creation of a business for the purpose of
gain or growth under conditions of risk and uncertainty.3 An entrepreneur is thus
purpose of gain or growth under someone who creates new businesses under risky conditions.4 Entrepreneurship
conditions of risk and uncertainty
“requires a vision and the passion and commitment to lead others in the pursuit of
entrepreneur: someone who that vision [and] a willingness to take calculated risks.”5 Figure 4.1 neatly sums up
creates new businesses for the what entrepreneurship is all about. In the pantheon of management, entrepre-
purpose of gain or growth under neurs are unique. Entrepreneurs “build something of value from practically noth-
conditions of risk and uncertainty ing.”6 Innovation, the creating of value, growth, and uniqueness, characterizes the
entrepreneur’s efforts. Many business students plan to and will start new busi-
nesses (and have to manage them) once they leave school.
Entrepreneurs and Small-Business Management

Because entrepreneurs create something out of nothing, it stands to reason that the
firms they create usually start small. Most people therefore tend to associate entre-
preneurs with small businesses, although that link is, in reality, a bit tenuous. David
Neeleman, JetBlue’s founder and CEO, is certainly an entrepreneur. However, the
business he’s running is not and never really was very small. On the other hand,
someone who buys and runs a successful dry-cleaning business probably is not
small-business an entrepreneur in the strictest sense. That person is a small-business owner/
management: planning, manager. It’s creating a business from nothing that distinguishes the entrepreneur.
organizing, leading, and Small-business management refers to planning, organizing, leading, and
controlling a small business controlling a small business. The U.S. Small Business Administration (SBA) sets
F IGURE 4.1 Process

The
Entrepreneur
Common Themes in
Definitions of
Entrepreneurship
Uniqueness Innovation
DEFINING
ENTREPRENEURSHIP
Organization
Growth
Creation
SOURCES: Adapted from Mary Coulter,
Entrepreneurship in Action (Upper Saddle
River, N.J.: Prentice Hall, 2001), p. 4; based on
W. B. Gartner,“What Are We Talking About
When We Talk About Entrepreneurship?”
Profit or Creating
Journal of Business Venturing, 5, 1990, Not-for-Profit Value
pp. 15–28.
size limits by industry when it defines which businesses are small enough to be
eligible for SBA-guaranteed loans. Generally, manufacturing or wholesaling firms
with fewer than 100 employees are small businesses. Retailing or service firms
with annual sales under $5 million are small businesses.
Successful entrepreneurs like Neeleman tend to be good small-business man-
agers because the firms they start either grow successfully or die. However, success-
ful small-business managers needn’t necessarily exhibit the flair for innovation—for
creating new businesses under risky conditions—which is the hallmark of the en-
trepreneur. Small-business owners who inherit or buy small businesses and run
them successfully need to be good managers. Entrepreneurs, on the other hand,
don’t just have to run their businesses; they must also have the flair for starting a
business from scratch.
The Environment of Entrepreneurship

Entrepreneurs like taking risks, but that doesn’t mean they are foolish. Good
entrepreneurs continuously size up their opportunities and constraints—their
environments.
Some countries are more conducive to entrepreneurship than others. The
country’s level of economic freedom is one important factor.7 Some countries make
it easier to be entrepreneurial than do others. Table 4.1 shows a portion of the
Heritage Foundation’s index of economic freedom. For instance, in Hong Kong,
Singapore, Ireland, and the United States, entrepreneurs encounter relatively few
barriers in starting and growing their businesses. At the other extreme, pity the en-
trepreneur who wants to start a business in Cuba or North Korea. Here, the com-
bination of governmental and bureaucratic impediments and high taxes are
enough to stifle almost any new business idea.
Periods of increased economic activity (boom times) tend to be associated
with increased business creation (“timing is everything” is how one entrepreneur
put this). As the U.S. economy boomed in the late 1990s, the number of businesses
created jumped (see Figure 4.2). Business creation also outpaced the number of
firms that closed down. However, the number of businesses that closed down rose,
too (perhaps because boom times also mean that struggling entrepreneurs have
other employment opportunities to pursue).
Entrepreneurship Today ■ 93
T ABLE 4.1
The Index of Economic Freedom: Selected Locales
Overall Rank Country Overall Score*
1 Hong Kong 1.35
2 Singapore 1.55
4 Ireland 1.80
4 United States 1.80
9 United Kingdom 1.85
45 France 2.70
60 Mexico 2.90
72 Saudi Arabia 3.00
153 Cuba 4.75
155 North Korea 5.00
*Low overall score means higher economic freedom.
Source: Adapted from “The Index of Economic Freedom: Selected Locales,” © 2001, The Heritage Foundation,
214 Massachusetts Ave NE, Washington, D.C., 20002–4999, at www.heritage.org.
Technological advances (whether steam engine, railroad, telephone, com-

puter, or the Web) also trigger bursts of business creation. For example, the growth
in percentage of patents issued by the U.S. Patent and Trademark Office rose from
the single digits in the early 1990s to over 32 percent in 2000 as Web businesses
took off.8 Many of these patents translated into new-business ideas.
In practice, dozens of other environmental (outside) opportunities and con-
straints influence the budding entrepreneur’s willingness and ability to create a
new business. A short list of other environmental factors includes venture capital
Business Turnover, 1990 – 2003

F IGURE 4.2
Business Turnover,
650
1990–2003
THOUSANDS
500
350
SOURCES: U. S. Small Business Administration, 1990 1992 1994 1996 1998 2000 2002 2003
Office of Advocacy, from data provided by
the U.S. Bureau of the Census and the U.S.
Department of Labor, ETA. Employer firm births Employer firm terminations
availability, a technically skilled labor force, accessibility of suppliers, accessibility

of customers, the availability of lenders, accessibility of transportation, the
attitude of the area’s population, and the availability of supporting services (such
as roads, electric power, and accounting firms).9
Why Entrepreneurship Is Important

When it comes to its impact on the U.S. economy, the phrase small business is a
little misleading.10 For example, small businesses as a group account for most of
the 600,000 or so new businesses created every year, as well as for most of the
growth of companies (small firms grow much faster than big ones). Small firms
also account for about three-quarters of the employment growth in the U.S.
economy—in other words, small businesses create most of the new jobs in the
United States.
More than half of the people working in the United States—68 million out of
118 million—work for small firms. That’s why one recent U.S. president’s report
noted, “a great strength of small businesses is [their] role in renewing the Ameri-
can economy.”11 Small businesses are “an integral part of the renewal process”
through which businesses arise to replace those that fail. In doing so, they provide
employment opportunities for tens of millions of people. Indeed, as we said, the
vast majority of students graduating today will start or work for smaller firms.
Small businesses also account for much of the product and technological
innovation in America today. For example, “new small organizations generate
24 times more innovations per research and development dollar spent than do
Fortune 500 organizations, and they account for over 95 percent of new and
‘radical product development.’”12
What It Takes to Be an Entrepreneur

S everal years ago, someone asked H. Ross Perot, who had made hundreds of
millions of dollars starting Electronic Data Systems Inc. and then Perot Sys-
tems Inc., what his advice would be for people who hoped to be entrepreneurs.
Perot said, “Never give up, never give up, never give up.” His advice highlights an
entrepreneurial dilemma. On the one hand, there’s no doubt that tenacity is a
crucial trait for entrepreneurs, because creating something out of nothing is so
difficult. On the other hand, tenacity gets the entrepreneur only so far. It is only
one entrepreneurial trait among many.
Research Findings
What does it take to be a successful entrepreneur? Psychologists have studied
this question with mixed results. Based on some studies, researchers say that the
entrepreneur’s personality characteristics include self-confidence, a high level of
motivation, a high energy level, persistence, initiative, resourcefulness, the desire
and ability to be self-directed, and a relatively high need for autonomy.13 This
certainly makes sense. Others argue that people high in the need to achieve are
more prone to be entrepreneurs because they like to set goals and achieve them.
Yet high-need-for-achievement people are no more likely to start businesses
than those with a lower need.14 One expert concludes that the trait approach
to identifying entrepreneurs is “inadequate to explain the phenomenon of
entrepreneurship.”15
What It Takes to Be an Entrepreneur ■ 95
Recent studies are more positive. Some studies focus on the proactive person-
ality. Proactive behavior reflects the extent to which people “. . . take action to
influence their environments.”16 One study of 107 small-business owners found
some support for the notion that proactive personality contributes to innovation
in some circumstances.17
Still others study what they call the dark side of the entrepreneur. They say less
positive traits drive entrepreneurs, traits like the need for control, a sense of dis-
trust, the need for applause, and a tendency to defend one’s operations.18 This
approach doesn’t paint a pretty picture of how some entrepreneurs behave. With
respect to the need for control, for instance, “a major theme in the life and person-
ality of many entrepreneurs is the need for control. Their preoccupation with con-
trol inevitably affects the way entrepreneurs deal with power relationships and the
consequences for interpersonal action. . . . An entrepreneur has a great inner
struggle with issues of authority and control.”19
Anecdotal Evidence
A few behaviors do seem to arise consistently in anecdotal and case studies of suc-
cessful entrepreneurs. As we mentioned earlier, tenacity is one. Entrepreneurs
face so many barriers when creating a business that if they’re not tenacious,
they’re bound to fail.
Intensity—the drive to pursue a goal with passion and focus—is another trait
that often pops up. For example, Sky Dayton started EarthLink in the mid-1990s,
and the firm is now one of the largest Internet service providers.20 One friend, who
watched him surfing, says Dayton “took the sport up with a vengeance. He’s as
intense and fearless in surfing as he is in business.”
Should You Be an Entrepreneur?

Is entrepreneurship for you? To gauge your potential, try taking the short proactive
personality survey in Figure 4.3. You might also answer the following questions,
compliments of the U.S. Small Business Administration:
◗ Are you a self-starter? No one will be there prompting the entrepreneur to de-
velop and follow through on projects.
◗ How well do you get along with different personalities? Business owners need to
develop good working relationships with a variety of people, including cus-
tomers, vendors, employees, bankers, and accountants. Will you be able to deal
with a demanding client, an unreliable vendor, or a cranky employee?
◗ How good are you at making decisions? Small-business owners make decisions
constantly and often quickly, under pressure, and independently.
◗ Do you have the physical and emotional stamina to run a business? Can you han-
dle twelve-hour workdays, six or seven days a week?
◗ How well do you plan and organize? Research shows that good plans could have
prevented many business failures. Furthermore, good organization—not just of
employees but also of finances, inventory, schedules, production, and all the
other details of running a business—can help prevent problems.
◗ Is your drive strong enough to maintain your motivation? Running a business
can wear you down. You’ll need strong motivation to help you survive slow-
downs, reversals, and burnout.
F IGURE 4.3 Instrument

Respond to each of the 17 statements using the following rating scale:
Is Entrepreneurship for Me?
1 = Strongly disagree
2 = Moderately disagree
3 = Slightly disagree
4 = Neither agree nor disagree
5 = Slightly agree
6 = Moderately agree
7 = Strongly agree
1. I am constantly on the lookout for new ways to improve my life. 1 2 3 4 5 6 7
2. I feel driven to make a difference in my community—
and maybe the world. 1 2 3 4 5 6 7
3. I tend to let others take the initiative to start new projects. 1 2 3 4 5 6 7
4. Wherever I have been, I have been a powerful force for
constructive change. 1 2 3 4 5 6 7
5. I enjoy facing and overcoming obstacles to my ideas. 1 2 3 4 5 6 7
6. Nothing is more exciting than seeing my ideas turn into reality. 1 2 3 4 5 6 7
7. If I see something I don’t like, I fix it. 1 2 3 4 5 6 7
8. No matter what the odds, if I believe in something, I will make
it happen. 1 2 3 4 5 6 7
9. I love being a champion for my ideas, even against others’
opposition. 1 2 3 4 5 6 7
10. I excel at identifying opportunities. 1 2 3 4 5 6 7
11. I am always looking for better ways to do things. 1 2 3 4 5 6 7
12. If I believe in an idea, no obstacle will prevent me from making
it happen. 1 2 3 4 5 6 7
13. I love to challenge the status quo. 1 2 3 4 5 6 7
14. When I have a problem, I tackle it head-on. 1 2 3 4 5 6 7
15. I am great at turning problems into opportunities. 1 2 3 4 5 6 7
16. I can spot a good opportunity long before others can. 1 2 3 4 5 6 7
17. If I see someone in trouble, I help out in any way I can. 1 2 3 4 5 6 7
Scoring Key
To calculate your proactive personality score, add up your responses to all statements,
except item 3. For item 3, reverse your score.
Analysis and Interpretation

This instrument assesses proactive personality. That is, it identifies differences among
SOURCES: Adapted from T. S. Bateman and people in the extent to which they take action to influence their environments.
J. M. Crant,“The Proactive Component of Proactive personalities identify opportunities and act on them; they show initiative,
Organizational Behavior: A Measure and take action, and persevere until they bring about change. Research finds that the
Correlates,” Journal of Organizational proactive personality is positively associated with entrepreneurial intentions. Your total
Behavior, March 1993, pp. 103–118; J. M. score will be between 17 and 119. The higher your score, the stronger your
Crant,“The Proactive Personality Scale as
proactive personality. For instance, scores above 85 indicated fairly high proactivity.
a Predictor of Entrepreneurial Intentions,”
Journal of Small Business Management, July
1996, pp. 42–49.
◗ How will the business affect your family? The first few years of a business start-
up can be hard on family life. The strain of an unsupportive spouse may be
hard to balance against the demands of starting a business. There also may
be financial difficulties until the business becomes profitable, which could
take years.21
Getting Started in Business ■ 97
Getting Started in Business

Online Study Center
ACE the Test
Managing Now! LIVE
O vercoming all the challenges that stand in the way of going from nothing to
something requires tackling at least four main tasks along the way: (1) coming
up with the idea for the business, (2) deciding how to get into that business,
(3) deciding on a form of business ownership, and (4) getting funded.
Coming Up with the Idea for the Business

Most entrepreneurs don’t come up with the ideas for their businesses by doing an
elaborate analysis of what customers want.22 Between 43 percent and 71 percent
of those responding to one survey said that they got the ideas for their businesses
through their previous employment. Ralph Lauren supposedly got his idea for the
Polo line of clothes while working at Brooks Brothers.23 After work experience,
serendipity was the source that 15 to 20 percent of respondents mentioned. They
just stumbled across the business idea. A handful of respondents got their ideas
from hobbies or from a “systematic search for business opportunities.”24
Speaking of serendipity, consider Lance Fried. He got the idea for his busi-
ness pretty much by accident. His friend dropped an iPod into a cooler of water
and ice, ruining it. Fried, who’s in the habit of watching the surfers near his home
in Del Mar, California, got his brainstorm. The prototype for a waterproof MP3
player was soon ready. His target customers were people who would use them
while surfing, swimming, or snowboarding. He invested his savings to get his
Lance Fried is a successful business started. Fried’s business plan called for starting small and for selling
entrepreneur whose insight through small specialty shops, thus building his product’s reputation. He intro-
created an all-new product,
duced his product at a big trade show, and hundreds of people came by to try it.
and whose management
He cleverly left the players at the bottom of a fish tank with the earphones hung
skills then built a successful
over the top, so anyone stopping by could listen. Dozens of shops ordered his
company around that
product. Surfer magazine put it at the top of its holiday wish list. Lance Fried’s
product.
business took off.
Methods for Getting into Business

Entrepreneurs get into business in several ways: through a family-owned business,
by starting a business from scratch, by buying a business, or by buying a franchise.
● Taking Over the Family-Owned Business Perhaps the easiest way to get
into business is to take over the family business. A family-owned business “is one
that includes two or more members of a family with financial control of the com-
pany.”25 About 90 percent of all businesses in the United States are family-owned
and -managed. They employ more than 50 million people and account for over
half of the country’s economic output.26
Balancing family and business pressures is not easy. As Dan Bishop, president
of the National Family Business Association, has said, “A family is based on emo-
tion, nurturing, and security, but a business revolves around productivity, accom-
plishment, and profit.”27 The owner may be torn between doing what’s best for the
business and a desire to help a child who may not have what it takes to succeed.
Many owners do little planning to help ease the burden for heirs. One survey
showed that only 45 percent of the owners of family firms had selected successors.28
At a minimum, the owner of the family business should make his or her succession
plans clear. “The children should know if they will take over management or if the
business will be sold to an outsider. If they spend years working in the business
only to find it sold to an outsider, they may have trouble finding positions in other
companies.”29
● Starting a New Business When most people think of entrepreneurs, it’s their
role as the starter of a new business that comes to mind. (That was the route Lance
Fried chose.) It is in starting a new business that the entrepreneur supplies the
spark that makes something out of nothing. This spark brings a new business to
life, complete with customers, suppliers, permits, accountants, and lawyers.
Because the endeavor will require so much of the entrepreneur’s money and
time, starting a small business is not something to take lightly. To prepare, the en-
trepreneur should:
1. List the reasons for wanting to go into business. Some of the most common
reasons are that you want financial independence and creative freedom, and
you want to use your skills and knowledge more fully.
2. Determine what business is right for you. Ask yourself, What do I like to do
with my time? What technical skills have I learned? What do others say I am
good at? Will I make enough to support my family?
3. Identify the niche your business will fill. Research and answer questions such
as: What business am I interested in starting? What services or products will I
sell? Is my idea practical, and will it really work? What is my competition? What
is my business’s advantage over existing firms?
4. Conduct a prebusiness review. Now answer questions like these: What insur-
ance coverage will I need? What equipment or supplies will I need? What are
my resources? What financing will I need? Where will my business be located?
Answers to these questions will help you create a business plan. The business
plan should serve as a blueprint for the business. According to the Small Business
Administration, “[The plan] should detail how the business will be operated, man-
aged and capitalized.”30 We’ll discuss business planning in a moment.
franchise: a license to use a
company’s business ideas and ● Buying an Existing Business Buying an existing business is a double-
procedures and to sell its goods edged sword. At least in theory, buying an existing business means the buyer will
or services know what the existing market is, as well as what the company’s revenues, ex-
penses, and profits (or losses) are. Buying a business can also mean getting into
franchiser: a firm that licenses business faster and with less effort than starting a business from scratch.
other firms to use its business On the other hand, as one cynical management consultant once put it,
idea and procedures and to sell
its goods or services in return for
“There’s always a reason why the business owner wants to sell, and the reason is
royalty and other types of never good.” One risk is that the figures the owner reports may be inflated. An-
payments other is that the owner may know or sense that things are about to go wrong.
franchisee: a firm that obtains ● Buying a Franchise To some extent, buying a franchise gives the entrepre-
a license to use a franchiser’s neur the best of both worlds. A franchiser is a firm that licenses other firms to use
business ideas and procedures
and that may get an exclusive
its business idea and procedures and to sell its goods or services in return for roy-
right to sell the franchiser’s alty and other types of payments. A franchisee is a firm that obtains a license to
goods or services in a specific use a franchiser’s business ideas and procedures and that may get an exclusive
territory right to sell the franchiser’s goods or services in a specific territory. Each franchisee
franchising agreement: owns his or her franchise unit. The franchising agreement is a document that
a document that lays out the lays out the relationship between the franchiser and franchisee. The agreement
relationship between the creates a franchise, a franchiser, and a franchisee.31
franchiser and franchisee
Franchising can be a good way to get into business. The franchisee usually
gets the right to start his or her business from scratch without the excess baggage
of the problems associated with an existing business. Yet the franchisee gets much
of the preparatory work done by the franchiser and (hopefully) gets a business that
is based on a proven business model. Other benefits include name recognition,
management training and assistance, economies in buying, financial assistance,
and promotional assistance. On the other hand, some franchisers don’t put the
thought and care into developing the franchise idea that familiar ones like
McDonald’s do. In such cases, the unsuspecting buyer can end up investing his or
her life savings in a dud. One expert suggests looking for the following details
when evaluating a franchise opportunity:
1. Select a franchising company with a reputation for distributing quality prod-
ucts and services to ultimate customers. Franchisers like Dunkin’ Donuts and
McDonald’s are famous for their emphasis on providing high-quality products
and services—they’re not there just to sell franchises.
2. Pick a franchiser that is dedicated to franchising. Avoid franchisers with large
numbers of company-owned stores—or that distribute the product or ser-
vices through other channels, such as supermarkets.
3. Pick a franchiser that provides products or services for which there is an es-
tablished market demand.
4. Pick a franchiser that has a well-accepted trademark.
5. Evaluate your franchiser’s business plan and marketing methods.
6. Make sure your franchiser has good relationships with its franchisees.
7. Deal with franchising companies that provide sales and earnings projections
that demonstrate an attractive return on your investment.
8. Meet with your accountant and lawyer, and carefully review the franchiser’s
Uniform Franchise Offering Circular, a document required by the U.S. Federal
Trade Commission (FTC). The FTC oversees the interstate activities of the
franchise industry. Its Uniform Franchise Offering Circular rules require fran-
chisers to disclose all essential information about the business.32
The checklist in Figure 4.4 provides additional guidance for evaluating the fran-
chise and the franchiser.
Forms of Business Ownership

In creating the business entity, the entrepreneur needs to decide what the entity’s
form of ownership will be. The four main forms of business ownership are the sole
proprietorship, the partnership, the corporation, and the limited liability company.
sole proprietorship: a ● The Sole Proprietorship The sole proprietorship is a business owned
business owned by one person by one person. About 70 percent of businesses in the United States are sole
proprietorships.
F IGURE 4.4
Checklist for Evaluating a Franchise Opportunity
The Franchise
1. Did your lawyer approve the franchise contract you are considering after he studied it paragraph by paragraph?
2. Does the franchise call on you to take any steps that are, according to your lawyer, unwise or illegal in your state, county,
or city?
3. Does the franchise give you an exclusive territory for the length of the franchise agreement or can the franchisor sell a
second or third franchise in your territory?
4. Is the franchisor connected in any way with any other franchise company handling similar merchandise or service?
5. If the answer to the last question is yes, what is your protection against this second franchisor organization?
6. Under what circumstances can you terminate the franchise contract and at what cost to you, if you decide for any reason
at all that you wish to cancel it?
7. If you sell your franchise, will you be compensated for your goodwill, or will the goodwill you have built into the business
be lost by you?
The Franchisor
8. How many years has the firm offering you a franchise been in operation?
9. Has it a reputation for honesty and fair dealing among the local firms holding its franchise?
10. Has the franchisor shown you any certified figures indicating exact net profits of one or more going firms that you
personally checked yourself with the franchisee?
11. Will the firm assist you with
a. A management training program?
b. An employee training program?
c. A public relations program?
d. Capital?
e. Credit?
f. Merchandising ideas?
12. Will the firm help you find a good location for your new business?
13. Is the franchising firm adequately financed so that it can carry out its stated plan of financial assistance and expansion?
14. Is the franchisor a one-person company or a corporation with an experienced management trained in depth (so that
there would always be an experienced person at its head)?
15. Exactly what can the franchisor do for you that you cannot do for yourself?
16. Has the franchisor investigated you carefully enough to assure itself that you can successfully operate one of its
franchises at a profit both to it and to you?
17. Does your state have a law regulating the sale of franchises, and has the franchisor complied with that law?
You—the Franchisee
18. How much equity capital will you have to have to purchase the franchise and operate it until your income equals your
expenses? Where are you going to get it?
19. Are you prepared to give up some independence of action to secure the advantages offered by the franchise?
20. Do you really believe you have the innate ability, training, and experience to work smoothly and profitably with the
franchisor, your employees, and your customers?
21. Are you ready to spend much or all of the remainder of your business life with this franchisor, offering its product or
service to your public?
Your Market
22. Have you made any study to determine whether the product or service that you propose to sell under the franchise has
a market in your territory at the prices you will have to charge?
23. Will the population in the territory given to you increase, remain static, or decrease over the next five years?
24. Will the product or service you are considering be in greater demand, about the same, or less demand five years from
now than today?
25. What competition exists in your territory already for the product or service you contemplate selling?
a. Nonfranchise firms?
b. Franchise firms?
SOURCE: Franchise Opportunities Handbook (Washington, D.C.: U.S. Government Printing Office, 1988).
The sole proprietorship is simple to start. The owner usually just has to regis-
ter the firm’s name at the county courthouse and perhaps get the necessary mu-
nicipal business license.33 As sole owner, there are no other owners with whom to
share the rewards or setbacks. Sole proprietors are their own bosses. Because the
sole proprietor is the firm, he or she pays only personal income taxes on its profits.
There is no income tax on the firm as a separate entity.
On the other hand, the sole proprietor has unlimited financial liability. Un-
limited liability means that the business owner is responsible for any claims
against the firm that go beyond what the owner has invested in the business. Sole
proprietors, therefore, risk losing everything they own if their businesses go
bust. Furthermore, there is no other owner with whom to share the management
burden.
● The Partnership Some entrepreneurs therefore opt to form a partnership.

partnership: an association of Under the Uniform Partnership Act, a partnership is “an association of two or
two or more persons to carry on more persons to carry on as co-owners of a business for profit.” People form a
as co-owners of a business for partnership by entering into a partnership agreement. A partnership agreement
profit
is an oral or written contract between the owners of a partnership. It states the
partnership agreement: an name, location, and business of the firm. It also specifies the mutual understand-
oral or written contract between ing of each owner’s duties and rights in running the business, the method for shar-
the owners of a partnership. It ing the profits or losses, and the policies for withdrawing from the business and
identifies the business, and it dissolving the partnership.
lays out the partners’ respective In a general partnership, all partners share in the ownership, management,
rights and duties. and liabilities of the firm. A limited partnership is a business in which one or
general partnership: a more, but not all, partners (the limited partners) are liable for the firm’s debts only
partnership in which all partners to the extent of their financial investment in the firm. This helps the firm’s general
share in the ownership, partners (who actually run the business) attract investment dollars from people
management, and liabilities of who do not want unlimited liability—or who do not want to get involved in man-
the firm aging the firm.
The partnership has four main advantages. There are few restrictions on start-
limited partnership: a
partnership in which one or
ing one. There are several partners, so a partnership permits the pooling of funds
more, but not all, partners (the and talents. The partnership also provides more chance to specialize. For example,
limited partners) are liable for the outside person can specialize in sales, while the inside person can specialize in
the firm’s debts only to the extent running the business. Finally, like a sole proprietorship, the owners, not the firm,
of their financial investment in are taxed only individually.
the firm Unlimited liability is a main disadvantage. In general partnerships, all part-
ners have unlimited liability for the partnership’s debts. In a limited liability part-
nership, the limited partners are personally liable only up to the amount they
invest in the business.
corporation: a legally ● The Corporation A corporation is a legally chartered organization that is a

chartered organization that is a separate legal entity, apart from its owners. A corporation comes into being when
separate legal entity, apart from the incorporators (founders) apply for and receive a charter (license) from the
its owners. A corporation
state in which the firm is to reside. The shareholders (or stockholders) own the cor-
comes into being when the
incorporators (founders) apply poration. Each owns a part interest in the entire corporation.
for and receive a charter from Limited financial liability is the corporation’s main advantage over sole pro-
the state in which the firm is to prietorships and partnerships. Usually, the most an owner/shareholder can lose is
reside. what he or she paid for the shares. This makes it much easier for the company to
raise money. Furthermore, because the corporation is a separate legal entity, it has
permanence. The death or imprisonment of a shareholder does not mean the end
of the corporation.
Taxation is a big disadvantage. In sole proprietorships and partnerships, the

owners pay the company’s income taxes individually—the government does not
also separately tax the companies themselves. Corporations are entities separate
from their owners. Therefore, the corporation generally pays federal and state taxes
on its profits. If the corporation then pays cash dividends to shareholders from its
after-tax profits, the shareholders pay personal income taxes on the dividends. Cor-
S corporation: a corporation porations can avoid double taxation by forming an S corporation. An S corporation
that has the option of being has the option of being taxed like a partnership. It pays no income taxes as a firm.
taxed like a partnership and that
pays no income taxes as a firm ● The Limited Liability Company The limited liability company (LLC) is
a cross between a partnership and a corporation. Like a corporation, the LLC
limited liability company limits the liability of its owners (called members) from personal liability for the
(LLC): a cross between a
partnership and a corporation company’s debts and liabilities. At the same time, the limited liability company’s
earnings are not subject to separate corporate taxes. The government taxes it as if
it is an individual proprietorship or partnership.34
angels: wealthy individuals
interested in the high-risk/high-
reward potentials to be derived Getting Funded
from the creation of a new
venture Generating ideas for the business and deciding on a legal form are all theoretical if
the entrepreneur can’t find the money to actually start the business. How will I
fund my business? is, therefore, a question the entre-
preneur should be thinking about. Even experienced
businesspeople make mistakes. The developers of the
Royal Palm Crowne Plaza Resort in South Florida
completed their new hotel—but two years late and
with cost overruns of $16 million. To reduce that debt,
they had to sell about 150 of the 422 hotel rooms as
condominiums.35
The two basic sources of business finance are debt
and equity. Equity finance represents an ownership in
the venture. Debt, of course, is borrowed capital.
● Equity For the typical new small business, much

of the initial capital traditionally comes from the
founder. Family and friends are usually the second
biggest source. No one knows the entrepreneur like his
One of the swimming pools at the Royal Palm Crowne Plaza
or her family and friends. One hopes that this familiar-
Resort in Miami Beach. ity translates into the faith required to help that person
start a business.
Outside equity—either from wealthy private investors (so-called angels) or
from venture capital firms—are two other possibilities. Angels are wealthy indi-
viduals interested in the high-risk/high-reward potentials to be derived from the
venture capitalists: creation of a new venture. Venture capitalists professionally manage pools of
professionals who manage pools investor money. They specialize in evaluating new venture opportunities and
of investor money, and who taking equity stakes in worthy businesses. A public offering—selling stock to the
specialize in evaluating new public—is usually an option open to relatively few new ventures. When the com-
venture opportunities and
taking equity stakes in worthy
pany first sells stock to outside owners, the firm has gone public. The process is
businesses called the initial public offering (IPO). Investment bankers are professionals
that walk the entrepreneur through the various registration requirements, thus
initial public offering enabling the company to publicly offer stock.36
(IPO): the process that occurs
the first time a company sells ● Debt Debt, or borrowed capital, is the second main source of business
stock to outside owners finance. An entrepreneur with good personal credit and a sound business plan
may be able to obtain a business loan from a commercial bank. However, banks
are not in the venture capital business. The entrepreneur usually guarantees loans
like these with his or her personal assets and promise to repay.
Many entrepreneurs dip deeply into their personal debt-paying capacity to
support the business. By one estimate, the debts of smaller businesses are divided
roughly equally among (1) business credit lines (loans from banks, or from ven-
dors who are willing to wait a while to get paid) and loans, (2) business credit-card
debt, and (3) personal credit-card debt.37 Asset-based debt is a popular type of
business loan. It is debt collateralized (guaranteed) by one or more specific assets
of the business. If the business doesn’t pay, the lender takes the asset.
● The Small Business Administration (SBA) Many entrepreneurs turn to

the Small Business Administration (SBA) for assistance in obtaining bank financ-
ing. Most of these SBA loans are in the form of so-called 7-A loans. The SBA basi-
cally guarantees up to 90 percent of the outstanding loan; the loan itself comes
from a commercial bank. However, the businessperson typically must personally
guarantee the entire loan, too.
Writing the Business Plan

Whether raising capital from friends or the SBA, the entrepreneur will have to pro-
vide a business plan. Planning means “setting goals and choosing courses of ac-
tion for achieving those goals.” The entrepreneur should have a good idea of what
financial and other business goals he or she wants to achieve and how he or she
plans to reach those goals. Those investing in the business will certainly want to
see what the entrepreneur’s plans are for the business.
Business planning usually starts with the manager asking, What business are
we in? The company needs a clear idea of what specific products it’s going to
sell and how the business will differ from the competition. The owners can’t intel-
ligently choose suppliers, employees, advertising campaigns, or business
partners if they don’t know what business they are in. They also cannot make fi-
nancial projections for sales, costs, and profits if they don’t see quite clearly what
business they are in. Compass Records illustrates why such clarity of vision is
important.
● Compass Records Alison Brown and Garry West,

both musicians, got their idea for starting Compass
Records while talking before a show they were attend-
ing in Stockholm.38 Today, Compass Records is boom-
ing. Over the last ten or so years, the company has
released more than 100 albums, ranging from “collec-
tions of centuries old ballads by the British folksinger
Kate Rusby to an album of soukous by the Congolese
singer guitarist Samba Ngo.”39
What business is Compass Records in? Compass has
built up an audience of listeners by focusing like a laser
on roots music/folk music—from whatever country.
As Alison Brown says, “Whether we’re doing Celtic or
Bluegrass or singer-songwriter, it all has that common
Alison Brown, co-owner of Compass Records. thread running through it.”40
Choosing a Web-Based Business
The Internet makes it easier to get into business. For ex- competition with bigger online bicycle retailers by focus-
ample, an entrepreneur can create a virtual bookstore or ing on hard-to-find replacement parts. He also cultivates
other business for a fraction of the time and cost that it a competitive advantage by offering free advice over the
would take to create a bricks-and-mortar version. In fact, Web.42 Ron Davis, who owns and manages a chain of ap-
eBay grew so fast in part by becoming the online market- parel stores called The Shoe Horn, also created a web-
place where entrepreneurs could sell their wares. site, but he kept it highly focused. He sells dyed wedding
In terms of deciding what one’s business should be, shoes online.43 He knows what his business is and sticks
the secret of small-business Web success seems to be to it.
choosing a niche. One expert calls this “the fragmenta- Highly focused online entrepreneurs can use giant
tion of the Web.”41 For example, Harris Cyclery is a suc- websites to help them get their businesses started. Thanks
cessful New England business. Sheldon Brown, the vet- to sites like eBay and Froogle, even tiny businesses can
eran mechanic who runs Harris Cyclery, avoids head-on offer their products to huge audiences online.
Sticking to that vision has taken Compass Records into some interesting mu-
sical niches. Its first release was an album of music played on a didgeridoo, a wood
instrument indigenous to Australia. Other titles “have included sets by the pro-
gressive jazz bassist Victor Wooten, the Czech Bluegrass band Druha Trava and the
neopop duo Swan Dive.”44 The partners know exactly what business they are in.
Their business is not “music” but “roots music/folk music.” Because they do know
what business they’re in, it is easy for them to make plans—regarding what musi-
cians to choose; how and where to record, market, and publicize their records; and
roughly speaking, what they can expect in terms of revenues, expenses, and sales
when they sign an artist. See the Window on Managing Now feature for another
example of the need for business planning.45
business plan: a plan that lays The business plan lays out in detail what the business is, where it is heading,
out what the business is, where and how it plans to get there. Figure 4.5 summarizes the contents of a typical
it is heading, and how it plans to business plan.
get there
● Creating the Business Plan Developing the business plan helps the entre-
preneur understand his or her options and anticipate problems. The entrepreneur
does not want to find out six months after opening that labor costs are twice as
high as anticipated and that the store’s economics, therefore, make it unlikely that
the business can survive. Furthermore, no banker, angel, or financier will make
cash infusions without a business plan.
Experts in writing business plans emphasize the importance of doing this
job right. You need to pay particular attention to four tasks: (1) clearly define the
business, (2) provide evidence of management capabilities, (3) provide evi-
dence of marketing capabilities, and (4) offer an attractive financial arrange-
ment.46 As one expert says, “Most entrepreneurs and small-business owners can
prepare a B or B⫹ business plan without too much trouble. That would be fine
if investors would fund B or B⫹ plans. Investors, however, fund only A or
A⫹ plans. . . .”47 The Window on Managing Now feature on page 106 shows one
way to accomplish this.
Managing Innovation and New-Product Development ■ 105
F IGURE 4.5
Contents of a Good Business Plan
Introduction
A basic description of the firm—name, address, business activity, current stage of development of the firm, and plans
for the future.
Executive Summary
An overview of the entire business plan, summarizing the content of each section and inviting the reader to continue.
Industry Analysis
A description of the industry the firm is competing in, focusing on industry trends and profit potential.
Management Section
A description of the management team and whether it is complete—and, if not, when and how it will be completed.
Manufacturing Section
A description of the complexity and logistics of the manufacturing process and of the firm’s production capacity and current
percentage of capacity use.
Product Section
A description of the good or service, including where it is in its life cycle (for example, a new product or a mature product);
of future product research and development efforts; and of the status of patent or copyright applications.
Marketing Section
A marketing plan, including a customer profile, an analysis of market needs, and a geographic analysis of markets; a description of
pricing, distribution, and promotion; and an analysis of how the firm’s marketing efforts are different from competitors’ efforts.
Financial Section
Financial statements for the current year and the three previous years, if applicable; financial projections for the next three to
five years; and assumptions for sales, cost of sales, cash flow, pro forma balance sheets, and key statistics, such as the current
ratio, the debt/equity ratio, and inventory turnovers.
Legal Section
Form of ownership (proprietorship, partnership, or corporation) and a listing of any pending lawsuits filed by or against the firm.
SOURCE: Adapted from Business Plan Pro (Palo Alto, Calif.: Palo Alto Software).
Managing Innovation and New-Product Development

Online Study Center
ACE the Test
Managing Now! LIVE E ntrepreneurs and small entrepreneurial companies don’t have monopolies on
new ideas and innovation. Innovation plays a crucial role in helping all firms,
not just small ones, to survive and expand. We’ll look at how managers manage
the innovation process in this and the following sections. We begin by defining
what innovation is and what it is not. Innovation does not just mean inventing
Using Computerized Business-Planning Software
There are several business-planning software packages to business plan step by step. The result is an integrated
assist the entrepreneur in writing A⫹ plans. For example, plan, complete with charts, tables, and professional for-
Business Plan Pro, from Palo Alto Software, contains all matting. For example, click “start a plan,” and the Planning
the information and planning aids you need to create a Wizard presents a series of questions, including, “Does
business plan. It contains, for example, thirty sample plans, your company sell products, services or both?” “Would
step-by-step instructions (with examples) for creating you like a detailed or basic business plan?” “Does your
each part of a plan (executive summary, market analysis, company sell on credit?” Then as you go to each
and so on), financial planning spreadsheets, easy-to-use subsequent part of the plan—such as the executive
tables (for instance, for making sales forecasts), and auto- summary—the Planning Wizard shows instructions with
matic programs for creating color three-dimensional examples, making it easy to create your own executive
charts for showing things like monthly sales and yearly summary (or other plan section). The Planning Wizard
profits. even helps the entrepreneur translate his or her financial
Business Plan Pro’s Planning Wizard takes the entre- and other projections (such as for numbers of items
preneur “by the hand” and helps him or her develop a sold) into easy-to-understand tables and charts.48
something new. Many new inventions end up withering on some research and de-
velopment department’s shelf. Innovation means something more. Innovation
means uncovering a valuable need, inventing a new or improved product or ser-
vice to fill that need, and then developing and introducing the new product or ser-
vice so that it succeeds in the marketplace.49
● Innovation in Practice For example, IBM’s employees produced more U.S.

patents than any other company between 1993 and 2005, at a cost of about $6 bil-
lion per year in research and development expenditures alone. Even a company as
large as IBM could not afford this unless it led to saleable products. Innovation at
IBM therefore “requires applying those technologies to critical customer problems
and then bringing them to market in a form that customers can easily use.”50 In-
novation is therefore not just a job for engineers, inventors, and entrepreneurs. It
also requires effective management, for instance, in identifying the need, develop-
ing and testing the new idea, and making sure that the structure and people are in
place to get the product to market.
The process of innovation is more complicated than it might appear at first.
For example, ideally, companies can’t just wait to react to what customers say they
want. Suppose customers don’t yet realize what they need? And waiting till the
need is obvious may give competitors the time to innovate the same (or better)
new-product ideas. The preferred approach is to anticipate the customers’ needs,
often before the customers realize that they have such needs. For example, when
Procter & Gamble engineers invented the Swiffer mop, they identified the need
and invented a whole new way to mop floors by anticipating rather than reacting
to its customers’ needs.51
As small entrepreneurial companies evolve into large multinational ones, they
must guard against losing their entrepreneurial flair. Growth can bring bureauc-
racy, for instance, in terms of stratified, compartmentalized, slow-moving deci-
sions. Many once-successful entrepreneurial companies, including Polaroid,
Kodak, and Xerox, basically became, for a time, victims of their own success.
Growth led to misplaced self-confidence and a dramatic reduction in these firms’
Managing Innovation and New-Product Development ■ 107
F IGURE 4.6
The Eight Stages in New-Product Development
Concept Marketing
Idea Idea Business Product Test Commerciali-
Development Strategy
Generation Screening Analysis Development Marketing zation
and Testing Development
creative output. Google’s small entrepreneurial teams seem, at least for now, to be
coming up with more innovative new products and services than does Microsoft’s
more plodding, hierarchical approach.
The Eight-Stage New-Product Development Process

To help ensure they have a steady stream of new and innovative products, man-
agers often establish a formal new-product development process for their compa-
nies, often under the guidance of a new-product development (R&D) officer and
department. This new-product development process typically consists of eight
main stages.52 Figure 4.6 summarizes these eight stages.
1. In the first stage, idea generation, the company uses consumer research
and creativity to produce the ideas that become the raw material of the new-
product development process.
2. It may take thousands of new-product ideas to produce just one saleable new
product. Most companies do not have the resources to put thousands of new-
product development ideas into development. The purpose of the second
stage, idea screening, is to reduce the many possible new-product ideas down
to a more manageable few. Managers here might ask questions such as, Does
this product really makes sense for our customers?
3. In the third stage, concept development and testing, the new-product develop-
ment department translates each surviving new-product idea into a more
tangible concept and then tests it. For example, Gillette researchers may have
an idea for a new razor that combines the simplicity of a manual razor with
some of the advantages of an electric one. In this concept development and
testing stage, Gillette’s development experts translate this raw idea into a more
workable product concept—say, a cross between a five-blade manual razor
and a simple battery-driven device, one that vibrates the razor’s head. Gillette
then tests this product concept. For instance, it asks consumers questions
such as, How do you like this battery-driven razor compared with the manual
razor you’re using now?
4. Having an idea—even one that seems to appeal to the markets—is only the
beginning of the process of innovating a successful new product. The best
idea will fail if the company isn’t successful in introducing it to the market.
Therefore, marketing strategy development is the fourth step in the process.
Marketing strategy development means laying out a marketing plan for the
potential new product. This plan includes the target customers (for instance,
in terms of age, income, and education) and the probable target price, sales,
and market share and profit goals.
5. In the fifth stage, business analysis, the manager examines the target market
and the potential new product’s pricing, sales, market share, and pricing goals
to determine how likely it is that this new product will succeed.
6. Assuming the answer is yes, the new-product process moves into its sixth
stage, product development. In creating the very successful RAZR cell phone,
Motorola scientists and engineers worked with production engineers and
marketing specialists to create the actual prototypes for the product. The
product development stage should answer the question, Can we turn this
product idea into a workable, saleable new product?
7. For most companies, the vast expense involved in gearing up to produce and
sell the new product means it is prudent to test-market it first. Test marketing
is the seventh new-product development stage. For example, Kraft Foods
might test-market a new cheese in one or two small U.S. cities before rolling
out full production and marketing nationwide. This gives Kraft managers an
opportunity to test and improve physical characteristics of the product. It also
lets the manager test aspects of the marketing plan for the product, such as
whether the price is too high, too low, or just right.
8. Now the manager is just about set to introduce the new product. In this eighth
stage, commercialization, the manager actually implements the marketing plan
by introducing the new product into the market. If the manager has done his or
her homework, the commercialization will be successful. The company will
have successfully innovated, from idea, to development, to commercialization.
Fostering Innovation
Managers traditionally use three methods—intrapreneurship, business incuba-
tors, and new-product development teams—to foster increased innovation. We
look at these next.
● Corporate Intrapreneurship Entrepreneurship is not just for entrepreneurs.

Large companies also work hard at being entrepreneurial. Managers of giant com-
panies understand that entrepreneurial activities drive innovation and that big-
company bureaucracy can stifle such activities. Thus, they work hard to institute
policies and practices that encourage what they call intrapreneurship within
their big firms. For example, intrapreneurial activities within Cisco Systems led
to the creation of several spinoff companies (including Cordis Corp. and Equinox)
that together produced almost $700 million for Cisco.53 Similarly, QUALCOMM
Corporation’s intrapreneurial activities led to the wireless Web company Hand-
spring. Sun Microsystems’ intrapreneurial activities helped it create and spin off
several successful companies, including Caldera Systems.
intrapreneurship: the Intrapreneurship means producing innovative ideas and products in big cor-
development, within a large porations by organizing innovation around small, usually autonomous business
corporation, of internal markets units, and by taking steps to empower employees to be more entrepreneurial and
and relatively small autonomous
innovative.54 Intel provides an example of what is involved.
or semiautonomous business
units that produce products, ● Intel’s and Sunlight’s New-Business Initiatives The idea for Intel’s new,
services, or technologies that
employ the firm’s resources in a
in-house new-business initiative “. . . came from our employees, who kept telling
unique way us they wanted to do entrepreneurial things. . . .55 Intel is in the microprocessor
business. However, its new-business intrapreneurship initiative is earmarked
Innovation Now ■ 109
specifically for encouraging nonmicroprocessor busi-

nesses. Part of Intel’s intrapreneurship effort involves pro-
viding budding Intel employee-inventors with the spare
time and some financial support to pursue their ideas. For
example, Intel engineer Paul Scagnetti came up with the
idea for a handheld computer that helps people record and
plan their fitness regimens. Intel gave him the funding to
launch his product, the Vivonic fitness planner.
Intrapreneurship applies equally well to introducing
new services as it does to introducing new products. For ex-
ample, the group benefits department of Canada’s Sunlight
Financial Insurance Company has over 3,100 employees in
eleven locations in Canada. To help innovate new services, it
also has a small, intrapreneurial sixty-person group that
works independently. Its job is to come up with and create
new insurance services, for instance, for university profes-
sors.56 As the vice president of group benefits says, this small
QUALCOMM Corporation’s intrapreneurial activities unit “. . . and the others we have like it operate with great in-
led to the wireless Web company Handspring. dependence and often act as a sort of laboratory creating, re-
fining and launching new products.”57
● Business Incubators Some entrepreneurs and managers turn to business

incubators to help develop their new-product ideas. As its name implies, employ-
ees in a business incubator center provide the advice, support, and resources that
the manager needs to nurture the new idea. Some companies establish their own
business incubators; other incubators are university-based. IBM established
dozens of business innovation centers around the world. In these centers, spe-
cially trained IBM engineering, financial, and other employees work with IBM cus-
tomers. They help the latter capitalize on IBM products and services in commer-
cializing their own companies’ new-product ideas.58
● New-Product Development Teams The usual new-product development

process resembles a relay race. Each department, such as research and devel-
opment (R&D), does its part of the job. It then hands off the project to the next
department, for instance, from R&D to marketing, to finance, and then to
production. The problem with this sequential process is that it tends to be slow
at identifying potential problems and at making the required changes. For ex-
ample, if production wants to make a change, that change needs to be backed
up to and approved by each preceding department.
More companies are therefore reorganizing their new-product development
processes around small, multifunction teams.59 Teams comprised of employees
from R&D, finance, sales, production, and engineering work together on develop-
ing and commercializing a new-product idea. Then, new-product development is
no longer a relay race. Instead, the team members work interactively and collabo-
ratively to fine-tune and finalize their new-product idea.60
Innovation Now
Online Study Center
ACE the Test
Managing Now! LIVE I nnovation today is becoming more collaborative and technology-based. We
discuss how in this final section.
Innovation and Collaboration

Traditional new-product development tends to be inward-looking. Employees in
R&D or new-product development think up and evaluate ideas for new products.
They may not check with customers and suppliers until it’s time to test-market the
product.
Managers are now moving away from that inward-looking model. Instead of
just asking their customers, suppliers, and dealers for help in test-marketing new-
product ideas, they are tapping them as sources for new-product ideas. Kraft
Foods Inc. recently launched a program to encourage unsolicited new-product-
idea submissions from customers and others.61
Kraft’s CEO calls this “open innovation.” Other experts call it “collaborative
new-product and process development” (NPPD) and “open market innovation.”
IBM speaks of creating “innovation ecosystems” comprised of solution providers,
independent software developers, consultants, venture capitalists, academics,
and industry thought leaders.62 In any case, the main aim of collaboration is to
tap the ideas of a wider community and thus to solicit more and better new-
product ideas.
● Why Collaboration? At Kraft and other firms, diminishing innovation

prompted CEOs to look outside their companies for new ideas. For example, Kraft
has its own research and development units for developing new products. How-
ever, the only big new product they’ve had in years was DiGiorno pizza. A study by
consultants Booz Allen Hamilton Inc. concluded that there was no relationship
between a company’s growth rate and the amount it spent on research and devel-
opment. Firms like Merck felt that their own R&D was becoming too insular, too
Merck-oriented. The solution: Dr. Peter Kim, Merck’s new R&D head, hired many
SOURCE: © 2006 Kraft Foods Inc. All rights reserved.

new outside scientists. He also instituted procedures that enable hundreds of

independent, outside scientists to help Merck identify and develop new potential
drugs.63
We’ll see that companies like Kraft and Merck use a variety of tools, often
Internet-based, to make it easier to tap the ideas of outsiders, be they freelance
scientists and inventors, customers, suppliers, universities, or others.64 As one
example, links on Kraft’s corporate website now make it easier for outsiders to
submit ideas online or via a toll-free telephone number.
Innovation and Learning

Tapping the ideas of people both inside and outside the firm requires that firms
such as Kraft be good at learning—for instance, at learning what customers want,
what competitors are doing, and which ideas one’s suppliers and employees
believe might work and which to discard.65 As one expert said,
[A]n organization’s innovative potential is strongly influenced by its access to
customer and competitor intelligence, by its awareness of its internal organi-
zational and technological capabilities, and by its understanding of external
demands posed by governmental policies, environmental regulations, laws,
and socioeconomic trends. . . . Progressive firms have recognized this and are
implementing new organizational structures, communication technologies,
and incentives systems in order to grow their collaborative potential in im-
portant areas.66
We will see in Chapter 10 that managers can take many steps to improve their
companies’ abilities to learn. Many reduce the number of management layers in the
chain of command. This way, the managers at the top are closer to the customers
rather than isolated in their executive suites by layers of subordinates. Most also
help their employees do a better job of gathering, analyzing, and communicating
information about new-product ideas. For example, the firm might give repair-
people laptop computers and encourage them to share ideas for learning about
and solving particular customer problems.
Managing Now: Using Information Technology

for Innovation
When a company embraces collaborative new-product development, it needs a
way to link together and tap the input of many people. It wants input from inde-
pendent experts like scientists who might be able to contribute. And it wants
input from its own supply chain members such as its dealers, customers, and
suppliers.
Companies use information technology–based systems to enable this kind of
collaboration. The basic idea is to allow ideas to flow freely among all the parties.
Companies are using a variety of information technology–based systems for
enabling this kind of collaboration. A short list would include virtual PC-based
video brainstorming sessions (among people in different locations), e-mail, re-
quest for assistance notices on bulletin boards, videoconferencing, and computer-
aided design tools. The latter enable geographically dispersed employees to work
in a virtual environment to collaboratively create and fine-tune new-product de-
signs. Many companies use even more powerful tools. The Practice IT feature
shows how Procter & Gamble uses information technology to facilitate collabora-
tive innovation.
PRACTICE IT
Collaborative Innovation at P&G
Procter & Gamble’s R&D head, Larry Huston, knew his around the world. Each posting at www.Intelincentive.com
firm had to reach out to get more and better new-product includes a promised cash incentive for coming up with the
ideas. P&G now uses several information technology tools solution.
to connect itself to various sources of new-product
ideas.67 NineSigma Inc.
This company helps its fifty or so clients (including P&G)
InnovationNet
prepare technical briefs describing projects or problems
This is an intranet Web portal for 18,000 Procter & they want solved. NineSigma then sends these briefs
Gamble innovators in research and development, engineer- (without identifying the corporate customer) to re-
ing, market research, purchasing, and patents. One P&G se- searchers around the world for possible solutions.
nior vice president calls it a sort of global lunchroom. It lets
those 18,000 P&G employees worldwide exchange ideas. YourEncore Inc.
This is a network of about 400 retired scientists and engi-
InnoCentive
neers. P&G and other YourEncore corporate sponsors
This virtual laboratory posts scientific problems from its pay them for specific, short-term job assignments aimed
thirty idea-seeking corporate members (including P&G) to at helping the YourEncore Inc. sponsors develop new
a proprietary network of about 30,000 registered solvers products.68
● Self-Organizing Intranet portals like P&G’s InnovationNet (which links its

18,000 innovators) can make it easy for subsets of these experts to self-organize.
The portal enables them to identify like-minded colleagues and to share informa-
tion about projects of mutual interest without centralized, detailed managerial
guidance.69
Product Life-Cycle Management

No new product sells forever. Instead, all products move through a product life
cycle from development to expansion, maturity, and decline.70 In stage 1, the com-
pany develops and test-markets the new product and then introduces it to the
market. Stage 2 is a period of rapid expansion as the new product, with little com-
petition, quickly expands its sales. Competition picks up in stage 3 (maturity), and
the growth rate of both sales and profitability flatten. Finally, the product enters its
fourth stage, the decline stage, as both sales and profitability start to trend down.
Managers face different challenges at each stage of a product’s life cycle. For
example, in stage 1 (development), the main challenges are creating, developing,
and testing the new-product idea, and introducing the product to the market. In
the second stage, the expansion stage, the manager, facing little competition, can
focus on marketing the new product to as many new customers as possible. In the
third stage, the maturity stage, competition becomes intense, and the manager
turns to making incremental, innovative improvements to keep the product sell-
ing. In the fourth stage, the decline stage, the total market for the product begins
to shrink, and the manager must decide whether to stay in the business or to
introduce a dramatically new stage 1 product to meet the market’s new needs.
Managing Now: Product Life-Cycle

Management Software
For companies like Sony or Dell that produce hundreds or thousands of differ-
ent products and models, each in different life-cycle stages, keeping track of
all the different components that comprise each product and model is a
daunting task.71 For example, Sony has over 3,000 main product groups and
over 54,000 identifiable products. That can translate into millions of separate
components.
The huge number of components complicates the new-product development
process for a firm like Sony or Dell.72 Ideally, companies like these don’t want
to start from scratch every time they design a new product. Instead, they want to
keep costs down by reusing, if possible, proven components from their existing
products. However, doing so presents three challenges.
◗ One challenge is keeping track of all those current products’ components.
◗ Another is enabling the companies’ designers to see how, for instance, they
might recycle a component from an existing Sony laptop to serve some purpose
in Sony’s new video game.
◗ A third is to show suppliers how the components they previously supplied for
product A are now going to be used (in a slightly modified fashion) in the com-
pany’s new product B.
Challenges like these don’t concern only companies that are trying to innovate
brand-new products. They also concern managers who are trying to update exist-
ing products. To address every product’s inevitable life-cycle maturity and decline,
every company continually fine-tunes its existing products, for instance, by
upgrading memory capacity. So Dell’s designers, for example, face the three
component-recycling challenges, not just for the new products they’re developing
but also for innovating and improving their existing products. How can managers
at Dell or Sony make sure they’re doing the best job of recycling existing products’
components?
● Product Life-Cycle Software Keeping track of all these components is a

mammoth task if done manually. The preferred alternative is to use product life-
cycle management software. Product life-cycle management software is a suite of
software applications that helps managers design, manufacture, and manage the
evolution of their products.73
Product life-cycle management (PLM) software applications support innova-
tion in many ways. For example, if Dell’s engineers want to design a new computer,
the company’s product life-cycle management software helps them keep track of
and reuse the parts of previous designs. This in turn helps Dell minimize new-
product and component development costs. It also helps Dell keep operational
surprises and problems to a minimum. By enabling designers to reuse existing
components, PLM software also reduces the amount of time it takes to get the new
product to the market and improves the efficiency of the whole new-product in-
novation process. It does this in part by enabling the company’s suppliers to track
product changes via the firm’s new-product development intranet, and thereby in-
form them automatically when a component is to be improved and/or reused in a
new product.
CHAPTER SUMMARY
1. Entrepreneurship is the creation of a business for including tenacity and intensity—the drive to pur-
the purpose of gain or growth under conditions sue a goal with passion and focus.
of risk and uncertainty, and an entrepreneur is
5. Most entrepreneurs seem to stumble upon their
someone who creates new businesses under risky
ideas for a business. Most of those responding to
conditions.
one survey said that they got their ideas for their
2. Some environments are more conducive to entre- businesses through their previous employment.
preneurship than others. The level of economic Serendipity was the next source that most respon-
freedom is one consideration. Others include dents mentioned. A relative handful got their ideas
the ability to streamline, downsize, and fire em- from hobbies or from a systematic search for busi-
ployees at will; technological advances; the level ness opportunities.
of economic activity; globalization, and other
6. In creating the business entity, the entrepreneur
environmental factors, such as venture capital
needs to decide what the ownership structure will
availability; a technically skilled labor force; the
be. The four main forms of business ownership are
accessibility of suppliers; the accessibility of cus-
the sole proprietorship, the partnership, the corpo-
tomers; the availability of lenders; the accessibility
ration, and the LLC. Taxation and limiting the
of transportation; the attitude of the area’s popu-
owner’s liability are always big considerations in
lation; and the availability of supporting services
choosing an ownership form.
(such as roads, electric power, and accounting
firms). 7. Innovation means uncovering a valuable need, in-
venting a new or improved product or service to fill
3. Small businesses as a group account for most of
that need, and then developing and introducing
the new businesses created every year as well as for
the new product or service so that it succeeds in
most of the growth of companies (small firms grow
the marketplace. Today, most big companies rely
much faster than do big ones). Small firms also ac-
more on collaborative innovation, which involves
count for about three-quarters of the employment
reaching out with IT tools to those inside and out-
growth in the U.S. economy—in other words, small
side the company for good ideas.
businesses create most of the new jobs in the
United States. 8. Product life-cycle management software is a suite
of software applications that helps managers de-
4. A few behaviors seem to arise consistently in anec-
sign, manufacture, and manage the evolution of
dotal/case descriptions of successful entrepreneurs,
their products.
1. Why is entrepreneurship important? 4. According to your state and county officials, what
is involved in incorporating where you live?
2. Do you know of anyone involved in a family busi-
ness, and if so, do they experience any of the family 5. Why do you think you would (or would not) make a
business issues we discussed in this chapter? good entrepreneur?
Which ones?
6. List ten innovative products introduced by P&G
3. If you were interested in buying a franchise, how over the past five years.
would you get started?
1. Using the information in this chapter, write a one- 2. At the library or on the Internet, review sales infor-
page paper on the topic “Why I would (or would mation on two popular franchises of your choice.
not) make a good entrepreneur.” Then, in teams of three or four people, evaluate
Case Study ■ 115
the pros and cons of these franchise businesses, outline what you would cover in such a study, and
and answer the question, Should I invest in this then explain why you believe her new program is
franchise? or is not a good idea.
3. The dean of your business school is eager to ex- 4. In teams of four or five people, choose a consumer
pand her college’s programs to new markets. She products company such as P&G and list the innov-
has decided to try to establish a new online MBA ative products they’ve introduced in the past three
program. She has asked you to conduct an infor- years. What was it about these products that you
mal, quick feasibility study. In teams of four or five, consider innovative?
CASE STUDY
Getting By with a Little Help from His Mother’s Friends
ndrew Morris had almost everything he needed to Andrew Morris has dipped into his mother’s susu a
A start his Caribbean grocery store in a New York City
suburb. He had an MBA from Columbia University, a
number of times to help his business grow. He used the
money to pay a sales tax obligation; purchase a com-
business plan, and a $50,000 loan from the European mercial oven to cook Jamaican meat patties; produce a
American Bank. However, after he negotiated the rent special Easter promotion with traditional cheese and
on a 1,600-square-foot retail space in Hempstead, New sweetbread sandwiches; and expand his inventory to in-
York, he found he did not have enough cash left for include unusual but popular items, such as Jamaican Chi-
ventory, payroll, marketing, and licenses. Thanks to his nese soy sauce. “It’s a cash-flow boon,” Morris says. After
mother and her friends, he was able to secure an addi- seven years of ongoing susu support, Morris’s store now
tional $15,000 in resources, which enabled him to stock has annual revenues of over $1 million. Morris is now
the shelves with dozens of kinds of hot sauce, curry, counting on susu support to help it expand into distrib-
and reggae music that the growing Caribbean commu- uting coffee and developing a website. “[The susu is] no
nity craves. longer just a Christmas club,” he says. “It’s a way of life.”74
Morris got the money from his mother’s susu, a kind
of club or fund developed by West Indian housewives to DISCUSSION QUESTIONS
provide rotating credit for big-ticket household pur-
chases. A susu, which means “partner,” typically has 1. Andrew Morris has approached you for help. List
about twenty members, most of them either relatives or what you believe he is doing right and doing wrong
close friends. Each week, every member contributes a with respect to starting his business. What do you
fixed sum, or hand, into the fund for a twenty-week pe- think accounts for the fact that he ran out of money
riod. Any time during those twenty weeks, each member before he opened, even though he had a business
is entitled to borrow an amount, or draw, to use interest- plan? What remedy or remedies would you suggest
free during that time. For example, if a twenty-member at this point?
susu has a set weekly contribution of $100, each member 2. Develop a one-page outline showing Andrew
pays $100 into the fund every week—or pays a total of Morris how you would suggest he conduct an in-
$2,000 over twenty weeks. Each member is then also able formal business feasibility study.
to draw $2,000 at any point during that period. Essen-
tially, the susu is a kind of planned savings program that 3. List the activity areas for which Andrew Morris
pools money to help members of the group who need should establish controls.
help with cash flow. The Caribbean susu is not really a 4. What other alternative means for obtaining financ-
unique concept in the United States. Asian Americans ing would you recommend for Andrew Morris, and
and other ethnic groups have also developed informal what are their pros and cons when compared to
lending networks for their members. continuing to use his mother’s susu?
5 INFORMATION AND KNOWLEDGE
MANAGEMENT
CHAPTER OUTLINE
Opening Vignette:
Caterpillar Inc. Caterpillar Inc.
● Data, Information, and
Knowledge
The Nature of Information
What Is Information Quality?
“
Knowledge management” at Caterpillar Inc. used to mean buying a
colleague a cup of coffee. This “would enable employees to learn
anything they needed to know.” And for many years, that was
Managing Now: Data Mining
● Information Systems for adequate.1 Caterpillar manufactures construction and mining equip-
Managing Organizations ment. Most of the company’s investment was in the sorts of machines
Management’s Requirement for
Information
and factories you would associate with a big industrial manufacturing
Transaction-Processing Systems company. Acquiring and sharing knowledge about things like best prac-
Management Information Systems tices and new ideas was not management’s major focus.
Decision Support Systems
Executive Support Systems Now things are different.
WINDOW ON MANAGING NOW: Caterpillar’s managers saw that all
Computers Add Value at Bissett competitors had access to the
Nursery
● Enterprise Systems and
same manufacturing facilities and
Knowledge Management machinery. To compete in today’s
What Are Enterprise Systems? business environment, Caterpillar
Three Special Enterprise Systems
Types of Knowledge Management Systems had to put more emphasis on its
● Telecommunications and intangible, intellectual assets—on
Computerized Networks things like patents; new, creative
Ryder System’s Knowledge
ideas; and on world-class best
Management Center practices in all areas. These best
PRACTICE IT: Caterpillar practices include finding out what
Telecommunications Basics
How Managers Use Telecommunications customers want, delivering better The giant Caterpillar Inc. needed a better
Telecommunications-Based Workgroup service, producing equipment way to manage its accumulated corporate
Support Systems more efficiently, and better man- knowledge.
Networks
The Internet aging its huge workforce. As at
● Managing Now: Managerial most firms, best practices had become the key to Caterpillar’s success.
Applications of Information In today’s business environment, best practices like these now make
Technology
Planning: Using Information Technology the difference between success and failure. For Caterpillar, the chal-
for Strategic Advantage lenge was that much of the knowledge about best practices was filed
Organizing: Networking the away in procedures manuals or hidden away in their employees’ minds.
Organization Structure
Staffing: Telecommuting How could Caterpillar retrieve and store these millions and millions of
Leading: Reengineering the Company ideas and best practices and encourage employees to share what
Controlling
they know? ■
116
Data, Information, and Knowledge ■ 117

➤ Defining and giving examples of data, information, and knowledge.
➤ Defining information technology.
➤ Giving examples of why managers at different levels require different types of information.
➤ Comparing and contrasting at least four types of information systems.

➤ Reading the chapter case study and identifying the information system the manager
needs.
➤ Showing how managers in the opening vignette rely on information technology.
Online Study Center Show that you can apply what you’ve learned here by
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Data, Information, and Knowledge

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Managing Now! LIVE
T he challenge that Caterpillar faced is a challenge that all businesses face today.
And it is a challenge that highlights how important managing information has
become to companies’ success and why information technology is so important.
Information technology is a familiar and inescapable aspect of our lives. We
use computers, e-mail, software, cell phones, iPods, fax machines, flash drives,
scanners, and BlackBerry© devices to communicate and to assist with our daily
chores. We search for travel information on Expedia, download airline tickets prior
to trips, wait patiently as voice-mail systems direct our calls, and register for and
take college courses online. Computerized diagnostic tools analyze our autos’
problems, point-of-sale computers at Target process our credit-card purchases,
and computerized traffic-flow systems control our progress to work.
What may not be quite so obvious is the vast number of ways in which man-
information technology agers rely on information and information technology. Information technology
(IT): any processes, practices, (IT) refers to any processes, practices, or systems that facilitate processing and
or systems that facilitate the transporting information. It includes both the hardware (such as computers, iPods,
processing and transporting
cell phones, and servers) as well as the software systems used to make these devices
of information
work. Information systems are more specialized. Information system refers to
information system: the “the interrelated components working together to collect, process, store, and dis-
interrelated components seminate information to support decision making, coordination, analysis, and vi-
working together to collect, sualization in an organization.”2 Managers depend on information technology and
process, store, and disseminate systems to manage the vast quantities of ideas, knowledge, and other information
information to support decision that their firms rely on for their success. Like their colleagues at Caterpillar, man-
making, coordination, analysis,
agers can’t manage today without knowing how to manage information.
and visualization in an
organization
The Nature of Information
Most information systems transform data into information and knowledge that
managers can actually use. Data comprise facts, figures, or observations. For
118 PART TWO CHAPTER 5 Information and Knowledge Management
example, daily laptop sales figures for Dell computer comprise data. But data—
these numbers—are of little use for management decisions—they’re just raw data.
Information is data in context. For example, Dell’s CEO can review a graph of
laptop sales data for a week, and from that glean useful information about
whether Dell’s sales are trending up or down. Information is data presented in a
form that is meaningful to the recipient.3 “Information,” as Peter Drucker said, “is
data endowed with relevance and purpose.”4
All information systems deal with data. Some systems transform data into in-
formation, for example, by expressing them in the form of graphs or charts. Thus,
Dell’s CEO may start each day by viewing on his laptop computerized graphs and
charts summarizing the trends for Dell activities such as laptop sales, profit mar-
gins, and unit costs.
Managers combine information like that on Dell’s sales graph with what they al-
ready know, and with other information (such as competitors’ sales for the same
knowledge: information period), to create knowledge. Knowledge is “information . . . distilled via study or
distilled via study or research research and augmented by judgment and experience.”5 Managers use knowledge to
and augmented by judgment understand what is happening and to make predictions. The sales graph (informa-
and experience tion) shows that Dell sales are trending down. Dell’s CEO knows that a newly
rejuvenated Hewlett-Packard (HP) is selling comparable laptops for 5 percent less
cost. This knowledge (Dell sales trending down plus HP selling theirs for 5 percent
less) leads Dell’s CEO to conclude, based on his previous experience, that HP’s laptop
sales are undermining Dell’s, and that a lower Dell price and more ads are in order.
Consider another example. PepsiCo wants to determine why consumers are
not buying its Pepsi Light clear drink. The company’s market researchers conduct
a survey containing thirty multiple-choice questions, each with five possible
choices. They place all these data (all the answers to the thirty questions from the
hundreds of people who took the survey) on a DVD. If printed, all these data would
appear as streams of unrelated numbers. But then, PepsiCo’s market researchers
summarize these data using graphs showing average responses by age level and
other demographic traits. The result is information. For example, they may find
that older people, by and large, don’t seem to be purchasing this product. PepsiCo’s
marketing department can then apply its knowledge to draw meaningful conclu-
sions, such as, in this case, a hypothesis about why older consumers seem less
inclined to purchase Pepsi Light than are younger ones.
What Is Information Quality?

Of course, managers don’t just want information; they want high-quality informa-
tion they can use to make good decisions. High-quality information has several
characteristics (see Figure 5.1).6 As in the PepsiCo example, good information
must be pertinent and related to the problem at hand. It must also be timely. For
example, the Pepsi Light survey information would be useless if it came rolling in
two years after the product was pulled off the shelf. Good information must also
be accurate, and finally, good information reduces uncertainty, which we can
define as the absence of information about a particular area of concern.7 In the
PepsiCo example, to meet these last two criteria, the survey information should
help the marketing manager answer the question, Why aren’t people buying Pepsi
Light the way we thought they would?
Yet managers today are, if anything, deluged by information. Having high-
quality information is therefore just a start. It’s not enough for the company’s
information systems and technology (all its computer systems, software packages,
communication devices, and so on) to generate and transfer more (even high-
quality) information. That’s often the last thing the manager needs! Those systems
Data, Information, and Knowledge ■ 119
F IGURE 5.1 Pertinent

(related to
What Makes High-Quality the problem)
Information?
Reduces uncertainty
Accurate HIGH-QUALITY (it tells us something
(the information is
INFORMATION we needed to know
correct and truthful)
but did not know)
Timely
(in time to make
a good decision)
must also contribute to the manager’s knowledge of what is happening, through

analysis, interpretation, and explanation. We’ll look at several examples in this
chapter, including the following one on data mining.
Managing Now: Data Mining

Data mining is “the set of activities used to find new, hidden, or unexpected
patterns in data.”8 Data-mining systems use tools like statistical analysis and so-
called intelligent agents to sift through computerized data looking for relation-
ships. Thanks to data mining, the manager can discover patterns that he or she
can then use to make predictions. He or she can answer questions such as, Which
of our products would this customer be most likely to buy? Which of our cus-
tomers are making too many returns? What is the likelihood that these customers
will respond to our promotional coupons?9
Department stores use data mining all the time. For example, Macy’s neces-
sarily captures huge amounts of data on its customers—what they buy, when they
buy it, how they pay for it, and what day of the week they tend to shop, for in-
stance. Left unanalyzed, all these data are of little use. However, stores like Macy’s
use data mining to make sense of it. For example, data mining reveals that some
customers often come in to redeem 20-percent-off coupons they get in the mail.
Furthermore, some customers are much more apt to buy new electronic gadgets
with coupons than are other customers. Data mining therefore gives Macy’s mar-
keting managers valuable knowledge about which customers should receive
which coupons and brochures.
The data Macy’s mines come from the firm’s data warehouse. The data ware-
house is a sort of computerized holding station for Macy’s data. The company’s
operational systems—for instance, its computerized point-of-sale registers and
billing systems—are continuously collecting data about customers’ purchases.
The data warehouse is the location in which the company stores these data.
Then Macy’s managers can use the sorts of decision support systems we discuss
next to mine these data and perform other procedures that help them make
better decisions.
Information Systems for Managing Organizations

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A s we said, an information system refers to “the interrelated components work-
ing together to collect, process, store, and disseminate information to support
decision making, coordination, analysis, and visualization in an organization.”10
An information system includes all the people, data, technology, and organiza-
tional procedures that work together to retrieve, process, store, and disseminate
information to support management. In this book, we’ll focus on managerial
information systems, which are systems that support managerial decision making
and control.
Information systems are more than computers. An information system also
usually includes the employees who input data into the system and retrieve its
output. Managers are (or should be) part of the information system, since it is de-
signed to serve their specific needs for information, like the PepsiCo managers’
need for information about customers’ buying patterns. Building an information
system usually starts with understanding what information management needs.
Management’s Requirement for Information

The information a manager needs generally depends on two basic things—the
business department the manager is attached to and the manager’s level in the
chain of command. Figure 5.2 summarizes this idea.
● Business Function Information Needs First, managers in different depart-

ments need information that is relevant to their business functions. For example,
F IGURE 5.2
Types of Information Systems Executive
KIND OF Strategic Level:
Support
Senior Managers GROUPS
INFORMATION Systems
SERVED
SYSTEM
Management
Information
Systems Management Level:
Middle Managers
Decision
Support
Systems
Operational
Transaction
Level:
Processing
Operational
Systems
Managers
SOURCE: Kenneth C. Laudon and Sales and Manufacturing Finance and Human
Jane P. Laudon, Management Information Marketing and Production Accounting Resources
Systems 9e, © 2006, Prentice Hall,
Upper Saddle River, N.J., p. 41. FUNCTIONAL AREAS
Information Systems for Managing Organizations ■ 121
PepsiCo’s marketing managers need marketing information, its production man-

agers need production information, and its human resource (HR) managers need
HR-related information on things like turnover and grievances. Therefore, busi-
nesses generally have functional information systems, such as sales systems, pro-
duction systems, finance systems, and HR systems.
● Business-Level Information Needs Similarly, managers at different lev-

els in the organization tend to require different types of information.11 For ex-
ample, first-line managers (like production supervisors) need a short-term
focus. They need to schedule front-desk personnel, supervise accounting de-
partments, and oversee production departments. At this level, the information
they need should emphasize operational activities such as production schedules
and cash-management information.
Middle managers—who supervise several front-line managers—tend to focus
more on broader, intermediate-range issues, like those events that might affect the
company in the coming year or so. Therefore, they require information for use in
budget analysis (are we meeting our budgets for the year or not?) and in overall
factory efficiency.
Top managers, including the CEO and the firm’s top vice presidents, focus
more on long-range, strategic decisions. They need information that will enable
them to make, for example, merger and acquisitions decisions and new-product
decisions.
These different information requirements translate into requirements for dif-
ferent types of information systems at each level of the organization.
● Levels of Information Systems Thus, different information systems are ap-

executive support systems: propriate to each organizational level.12 As in Figure 5.2, executive support sys-
information systems that tems provide information for strategic-level decisions on matters such as five-year
provide information for operating plans. Management information systems (MISs) provide middle man-
strategic-level decisions on
agers with reports regarding matters such as current versus historical sales levels.
matters such as five-year
operating plans Decision support systems (DSSs) are information systems that provide middle
managers with tools for analyzing and deciding on matters such as which customers
management information would be the best candidates for mailings. Transaction-processing systems pro-
systems (MISs): information vide detailed information about the most short-term activities, daily activities such
systems that provide middle as accounts payables and order status. Within each category, there are information
managers with reports regarding systems serving specific purposes. We’ll look more closely at each information sys-
matters such as current versus
tem, starting with the most day-to-day systems, transaction-processing systems.
historical sales levels
decision support systems

(DSSs): information systems Transaction-Processing Systems
that provide middle managers
with tools for analyzing and A transaction is an event that affects the business. Hiring an employee, selling
deciding on matters such as merchandise, paying an employee, and ordering supplies are transactions. In
which customers would be the essence, transaction-processing systems collect and maintain detailed records
best candidates for mailings regarding the organization’s transactions. For example, a university must know
which students have registered, which have paid fees, which members of the fac-
transaction-processing
systems: information systems ulty are teaching, and the secretaries that are employed to conduct its business.
that provide detailed The collection and maintenance of such day-to-day transactions were two
information about the most of the first procedures managers computerized. As is still the case today, early
short-term activities, daily transaction-processing systems automated the collection, maintenance, and
activities such as accounts processing of mostly repetitive transactions. These include computing withhold-
payable and order status ing taxes and net pay.
Today, transaction-processing systems perform the company’s daily opera-

tional activities, such as collecting point-of-sale data, maintaining employee
records, paying bills, processing orders, and maintaining inventories. They sup-
port business activities like tracking responses from the firm’s promotional efforts,
scheduling orders for production, and billing customers.13
Businesses generally have transaction systems for each major business func-
tion. Sales and marketing transaction-processing systems do things like enter and
process orders. Manufacturing and production systems handle activities like
maintaining inventory and scheduling production machines. Finance and ac-
counting systems handle activities such as paying bills, billing customers, and
maintaining the company’s financial records. Human resource systems help
maintain personnel or human resource (HR) records on details such as age,
address, and benefits, and track employees’ training, skills, and appraisals.
Management Information Systems

Management information systems (MISs) provide decision support for managers
by producing standardized, summarized reports on a regular basis.14 The MIS
generally produces reports for longer-term purposes than typical transaction-
processing systems.
Management information systems (MISs) aid managers by producing the
charts, graphs, and reports they need to understand their departments’ or compa-
nies’ current and past performance.15 They take data and transform them into in-
formation. For example, an MIS may take raw data and show the sales manager
the trend of sales for the past two weeks; the production manager a graph of
weekly inventory levels; and the CEO a report summarizing the company’s rev-
enues, expenses, and profits for the quarter. The MIS thereby helps managers
plan, organize, lead, and control.
Decision Support Systems

A decision support system (DSS) is a set of computerized tools that helps man-
agers analyze information and make decisions. The DSS “assist[s] management
decision making by combining data, sophisticated analytical models, and user-
friendly software into a single powerful system that can support semi-structured
or unstructured decision making.”16 (The latter are decisions such as, What are the
chances that this new product will succeed?) Decision support systems have five
main components: a data management system, a model management system, a
knowledge engine, a user interface, and the user (see Figure 5.3):17
◗ The data management component retrieves, stores, and organizes the data, for
instance, from point-of-sale cash registers.
◗ The model management system retrieves, stores, and organizes the quantitative
and statistical models that the decision support system uses to analyze the data.
F IGURE 5.3 THE DECISION SUPPORT SYSTEM
Five Components of DSS Data Model Knowledge User

User
Management Management Engine Interface
For example, Macy’s may use a formula to identify customers who make too
many returns.
◗ The knowledge engine does the actual reasoning for the system. For example, the
knowledge engine for a commercial bank might use its built-in rules to analyze a
loan applicant’s credit history, employment history, income level, and debt to ar-
rive at a decision regarding whether that person’s credit risk is high or low.
◗ The user interface consists of the tools (such as the keyboard and screen) the
manager uses to interact with the decision support system.
◗ Finally, the user is the decision maker who is actually using and controlling the
decision support system.
When it comes to helping managers make decisions, decision support sys-
tems are more powerful than are MISs because of the analytical tools and knowl-
edge engine the DSS contains. Whereas the MIS will dutifully print out prepro-
grammed sales graphs and reports, the DSS can actually analyze various
alternatives. For example, the dean of your school most likely receives weekly MIS-
produced reports on enrollments by class. Suppose, however, that your school is
facing a faculty strike. Now the dean would turn to a DSS. The dean may want to
include in her analysis her estimate of the likelihood that a number of the univer-
sity’s students would move across town to a competing university given the com-
peting university’s ability (or inability) to expand its class offerings. Among other
things, the dean’s DSS could then help the dean estimate the impact on school
revenues of having to drop various combinations of classes. Table 5.1 gives some
examples of how companies use their DSS systems. The Window on Managing
Now feature shows how one small business improved its revenues by installing
computerized transactions, MIS, and decision support information systems.
Executive Support Systems

executive support systems Executive support systems (ESSs) help top-level executives acquire, manipu-
(ESSs): information systems late, and use the information they need to maintain the overall effectiveness of the
that help managers acquire, company. Transaction-processing systems, management information systems,
manipulate, and use the
and decision support systems rely on internal data, data such as daily sales, weekly
information they need to
maintain the overall profits, and purchases per consumer that the company gathers from its customers
effectiveness of the company and operations.
T ABLE 5.1
Examples of Uses for DSS Systems
American Airlines Price and route selection—how much will we earn if
we add or drop this route?
Cornell University Program selection—should we add a new school of
business in China or not?
Donald Trump Realty Investment evaluation—should we open a new casino
in Mississippi or not?
Burger King Price and promotion selection—if we add this new
giant burger, what’s the likely impact on our revenues
and costs?
Computers Add Value at Bissett Nursery
Before it installed its new computer systems, Long Island, operations. He could now order with precision based on
New York–based Bissett Nursery could not have handled his customers’ historical needs. He could easily show
any more business. Bissett’s son Jimmy spent his days small contractors their annual needs for nonperishable
sprinting around the shop trying to serve customers, goods, enabling them to purchase in bulk and save money.
many of whom waited twenty-five minutes for a hand- Bissett Nursery’s customer base shot from 600 to 7,500.
written invoice. Bookkeeping was a month behind, and in- Bob Pospischil was just getting started.
ventory control didn’t exist.18 Marketing was costing Bissett $130,000 annually, and
Both Bissetts knew their company, a wholesaler of better than 60 percent of that budget went to producing
nursery materials and lumber, would have to change. The ads and catalogs. Pospischil had an easier time selling the
younger Bissett had ideas about expanding the business. elder Bissett on the idea that he needed a desktop pub-
He thought the best way to do so would be with the help lishing system. The price tag was $40,000, but “with the
of brother-in-law Bob Pospischil, an ex–fighter pilot first catalog, we saved enough to pay for the system,” says
knowledgeable about computer systems and the financial Pospischil.
data they could produce.“My goal was not to change the Landscapers face big barriers with homeowners be-
business,” says Pospischil,“but to use technology to meet cause they have to sell the aesthetics of their products.
the business needs.” The elder Bissett was skeptical. He’d It’s not easy to get a customer to visualize how a tree
seen competitors go the same route only to find it an ex- would look in the customer’s own front yard. That
pensive mistake, but he relented. changed when a software company sold Bissett on an
Pospischil spent sixty days getting a handle on buying, imaging system that could produce a rendering of how
sales, shipping, and accounting and then spent $135,000 the planned trees and plants would look in front of the
on the company’s first big computer. Order-entry em- customer’s house.
ployees took turns visiting the software vendor to learn The new technology gave Bissett Nursery a huge
the new system. After the first thirty minutes of opera- competitive edge. More than 95 percent of landscape con-
tions, the network crashed. A frantic Jim Bissett insisted tractors who bought from Bissett and used Bissett’s
everyone return to the old manual system. They ironed computer-generated images sold the job and came back
out the problem in fifteen minutes, and the elder Bissett to fill orders at the nursery. By 2006, Bissett Nursery had
gradually became accustomed to the new technology. grown to become the largest horticultural distribution
One big thing Jim Bissett soon gained from the new center in New York State. Its new computerized informa-
system was a better perspective on each phase of his tion systems helped make Bissett Nursery a huge success.
The information systems that fall under the executive support systems um-
brella are different. They use internal as well as external data (such as industry
sales trends). This is important. For the new CEO of Ford Motor Company, it does
little good to know just that Ford sales are up 5 percent. He also needs a compari-
son with auto industry sales to see that Ford’s market share is actually down 2 per-
cent last month. Executive support systems provide that sort of comparison.19
● How Executives Use ESSs Executives use executive support systems in many
ways. Executives such as Dell’s Michael Dell use their ESSs to monitor the pulse of
their companies. For example, Dell and his top managers have ESS-supported
“digital dashboards” on their PCs. These computerized graphs and charts help
them to monitor weekly performance, for instance, their progress relative to com-
petitors’. The Window on Managing Now feature presents another example.
Executives also use ESSs to quickly identify and understand evolving situa-
tions. A university president could use an ESS to keep tabs on and analyze the
following questions:
Is the average student taking fewer courses?
Are costs for maintenance labor substantially higher than they have been in
the past?
Is there a significant shift in the Zip Codes from which most of our students
come?
An ESS also makes it easy for executives to browse through the data. Says one:
I like to take a few minutes to review details about our customers, our manu-
facturers or our financial activities first hand. Having the details flow across
the screen gives me a feel for how things are going. I don’t look at each record,
but will glance at certain elements as they scroll by. If something looks un-
usual, it will just jump out at me and I can find out more about it. But if noth-
ing is unusual, I will know that, too.20
The CEO can also use an ESS to monitor a situation. Thus, a university presi-
dent can use an ESS to monitor the new dining facilities management firm running
the student cafeteria, by reviewing ESS information
such as student usage, student complaints, and rev-
enues. Executives also use ESSs to keep track of their
competitors. For example, a wealth of information is
available in commercial computerized databases, in-
cluding financial information on tens of thousands of
U.S. companies. Executives can use an ESS to tap into
such databases and glean competitive data (for in-
stance, regarding last year’s sales) regarding other firms
in their industry. An ESS can also support analyses. For
example, it could enable our university president to
create “what if” scenarios that show the likely effects on
university revenues of increasing faculty salaries or
adding new programs. Finally, an ESS may enable the
executive to get at data directly. Using their terminals
and personal digital assistants (PDAs), executives can
use an executive support system to tap directly into the
CEO Michael Dell, shown here with the president of the company’s data files and get specific information that
Philippines, uses a desktop balanced scorecard with may be of interest (such as, What is that manager
computerized graphs and charts to monitor his company’s spending on labor?), without waiting for his or her as-
performance. sistants to assemble it.21
● Expert Systems and Artificial Intelligence An expert system is an in-

expert system: an formation system in which computer programs store facts and rules (often called
information system in which a knowledge base) to replicate the abilities and decisions of true human experts.
computer programs store facts One early application identified an investment adviser’s criteria for recommend-
and rules (often called a
ing investments to clients who were in various demographic and risk-propensity
knowledge base) to replicate the
abilities and decisions of true categories. Those criteria were then used to develop a computer program that
human experts replicated most of the investment decisions the investment officer (the expert)
would have made. Similarly, if you go to a site such as www.vanguard.com, it will
compute an ideal investment portfolio for you (in general terms), based on factors
such as your risk preferences, current income and savings, and expected future
financial needs.
artificial intelligence (AI): The term artificial intelligence is often used in association with expert systems
a computer’s ability to because they both are related to replicating human thought processes. However,
accomplish tasks in a manner expert systems are relatively straightforward information systems made up of pro-
that is considered “intelligent”
grams that use decision rules. These decision rules, when combined with the facts
and is characterized by learning
and making decisions of the situation (like the person’s age and income level), allow the expert system to
mimic the expert’s decision-making style.
computer viruses: programs Artificial intelligence leaps beyond this sort of logical problem solving. Artifi-
that can perform destructive cial intelligence (AI) can be defined as a computer’s ability “to accomplish tasks
actions like erasing data while in a manner that is considered ‘intelligent’ and is characterized by learning and
attached to one of a computer’s making decisions.”22
existing programs
Trojan horses: items that ● Information System Security Regardless of the type of information system
seem innocent, like e-mails (executive, MIS, or other), managers need to anticipate and prepare for security
from a friend, but that once
embedded can contain
breaches. Most readers are already somewhat familiar with the sorts of problems
instructions that enable that can arise. For example, computer viruses are programs that can perform de-
outsiders to track or manipulate structive actions like erasing data while attached to one of a computer’s existing
the computer’s files programs. They’re called viruses because they’re capable of duplicating and trans-
ferring themselves to other linked computers. Trojan horses (named after the
worms: programs that act huge wooden horse of Trojan War fame) seem innocent, like e-mails from a friend,
basically like viruses but can
but once embedded, they can enable outsiders to track or manipulate the com-
operate independently, without
attaching to other programs puter’s files. Unlike viruses, Trojan horses can’t duplicate themselves. Worms ba-
sically act like viruses but can operate independently, without attaching to other
spyware: programs that hide programs. Spyware programs (as the name implies) hide themselves in a com-
themselves in a computer and puter and enable outsiders to keep track of keystrokes.
enable outsiders to keep track Computer security specialists take numerous steps to defend against security
of keystrokes breaches. Commercial information systems and those connected to broadband
firewalls: hardware/software services particularly require firewalls, hardware/software packages that stand
packages that stand between the between the company’s network and the outside network in order to inhibit unau-
company’s network and the thorized access. Systems also use authentication, for instance, via passwords, to
outside network in order to help protect systems. Various types of software, including antivirus and antispy-
inhibit unauthorized access ware programs, help identify and inhibit virus or spyware attacks. Companies
also use encryption, or coding of messages, to inhibit unauthorized people from
authentication: passwords reading messages. Companies use several protocols or coding methods to encode
and similar devices used to
verify a user’s identity data, including Secure Sockets Layer (SSL) and the newer Transport Layer Security
(TLS). Managers also take other steps to improve computer system security.
encryption: coding of Indeed, the International Standards Organization has special standards covering
messages security issues.
Enterprise Systems and Knowledge Management

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S o far, we have viewed information systems from two perspectives (refer again
to Figure 5.2). We looked at systems that cut horizontally across the company’s
functional departments, systems such as sales, production, finance, and human
resource management transaction systems. These serve managers in different
departments. We also looked at systems that serve managers depending on their
level in the company. These included transaction-processing, management infor-
mation, decision support, and executive-level systems. A third set of information
systems, called enterprise or enterprise resource planning systems, integrates
the information from all these horizontal and vertical systems. We discuss these
systems next.
Enterprise Systems and Knowledge Management ■ 127
What Are Enterprise Systems?

enterprise resource An enterprise resource planning (ERP) system is a companywide integrated
planning (ERP) system: computer system comprised of compatible software modules for each of the com-
companywide integrated pany’s separate departments (such as sales, accounting, finance, production, and
computer systems comprised
HR). Often Internet-based, the ERP modules are designed to communicate with
of compatible software modules
for each of the company’s each other and with the central system’s database. That way, information from all
separate departments (such as the departments is readily shared by the ERP system and is available to employees
sales, accounting, finance, in all the other departments. Activities that formerly required human intervention,
production, and HR) and such as production telling accounting that it should bill a customer because an
designed to communicate with order just shipped, now occur automatically. ERP strips away the barriers that typ-
each other and with the central ically exist among a company’s stand-alone departmental computer systems. The
system’s database
name notwithstanding, enterprise resource planning systems are not primarily
planning systems. We’ll generally refer to them as enterprise systems in this book.
Enterprise systems help managers coordinate and integrate all the company’s
functions and processes. By integrating the separate departmental computer
modules, enterprise systems can do things for managers that the separate depart-
mental systems (sales, production, finance, and HR) could not do on their own.
Here’s an example:
With [ERP], a customer places an order, and the sales order was recorded. The
system schedules shipping and works backwards from the shipping date to
reserve the materials, to order parts from suppliers, and to schedule manufac-
turing. The [ERP] [accounting] module checks the customer’s credit limit,
updates the sales forecast, and creates a bill of materials. The salesperson’s
commission is updated. Product costs and profitability are calculated. Finally,
accounting data is updated, including balance sheets, accounts payable,
ledgers, and other financial information.23
Software companies like SAS, SAP, and Oracle supply enterprise systems. Some-
times managers start small, by installing one functional module at a time—for
instance, first accounting. Then they install sales, production, and human re-
source management modules at later times. As we’ll see in this book, it’s hard to be
world-class (in controlling operations or costs, for instance) without the benefits
that derive from enterprise systems.
● Managing Now: Millipore Corp. For example, Millipore Corp. develops

and manufactures technologies for drug companies. Wanting to better integrate
its worldwide operations, Millipore installed a Web-based suite of enterprise soft-
ware products from Oracle Corporation. Now, for example, instead of using differ-
ent financial packages in thirty countries, the compatible financial modules can
communicate with each other and with the systems at Millipore’s headquarters.
This means top management can get fast feedback on the firm’s financial perfor-
mance around the world. Similarly, Millipore turned to Oracle Corporation to in-
stall other compatible modules, including Oracle Order Management and Oracle’s
financial, warehouse, and distribution systems. Now all these modules can com-
municate with each other. Orders are processed automatically, production sched-
ules are set, orders are processed, and bills are sent out faster, all automatically,
and management can now track orders from entry through delivery.
Three Special Enterprise Systems

In addition to the ERP systems that integrate a company’s functional department
modules, managers use three other specialized types of integrative enterprise
systems: supply chain management, customer relationship management, and

knowledge management systems.24
● Supply Chain Management Systems Supply chain management systems

help the company manage its relationship with its suppliers and retailers. They
“provide information to help suppliers, purchasing firms, distributors, and logistics
companies coordinate, schedule, and control business processes for procurement,
production, inventory management, and delivery of products and
services.”25 For example, when Dell receives an order for a new per-
sonal computer (PC), its supply chain management system auto-
matically notifies Dell’s assembly plant to schedule the work; the
vendors to send the parts; UPS to pick up the screen, printer, and
processor; and Dell’s billing department to mail an invoice. Dell’s
customers follow their orders’ progress by logging on to the same
system. For many firms today, much of their fame rests on their
supply chain management systems. French retailer (and Wal-Mart
rival) Carrefour keeps its costs down in part because its point-of-
sale computers automatically notify vendors like Levi’s and Procter
& Gamble (P&G) when it’s time to replace merchandise.
● Customer Relationship Management Systems Customer

relationship management systems help the company manage all
the processes involved with interacting with customers, such as
taking orders, answering technical questions, and sending bills.
For example, when a customer calls with a problem, Dell’s cus-
tomer relationship management system shows the technician
what system the customer owns and takes the technician through
a sequence of diagnostic questions aimed at identifying and solv-
ing the problem. Several years ago, to cut costs, Dell started having
technicians abroad take and answer customers’ calls. When cus-
Point-of-sale computers like this one enable tomers complained, Dell largely returned to its domestic system.
retailers to keep their suppliers updated in real Its newest technical service system, introduced in 2006, allows the
time about sales and inventory levels of their Dell technician (with the customer’s okay) to tap into the cus-
products. tomer’s computer, diagnose it online, and correct the problem.
● Knowledge Management Systems In today’s competitive business environ-

ment, it’s usually the company with the best information that’s the most success-
ful. As one expert put it, “It is a competitive advantage if your company is learning
faster than the competition.”26 As a result, many managers today are embracing
knowledge management: knowledge management. Knowledge management refers to any efforts aimed at
any efforts aimed at enabling a enabling the company’s managers and employees to better utilize the information
company’s managers and available anywhere in their companies.
employees to better utilize the
Knowledge management is enormously important today. Think of how waste-
information available anywhere
in their companies ful it is for an engineer to spend three days writing a quote for a customer, only to
discover that her predecessor filed a similar quote last year. One study estimates
that Fortune 500 companies lose at least $31.5 billion a year by not sharing knowl-
edge internally.27
Knowledge management systems focus on organizing and making available
important knowledge, wherever and whenever it is needed.28 Some knowledge
management systems focus on accessing, compiling, organizing, and reviewing
knowledge that’s already written down and stored away in some form in the com-
pany. For example, Merck has vast amounts of knowledge stored away in its
computers on things like what combinations of drugs they’ve tested in the past
Enterprise Systems and Knowledge Management ■ 129
and what the results were. Microsoft’s frequently asked questions (FAQ) sections at
microsoft.com contain the firm’s accumulated knowledge on how to handle vari-
ous problem issues.
But much of a company’s most important knowledge is not written down; it
resides in the minds of its employees.29 For example, think of all the knowledge
that must reside in the mind of a company’s sales manager as he or she prepares
to retire after twenty years on the job. This sales manager knows about each
customer’s preferences and needs, who to call, the names of those people’s
spouses, how often they should be contacted, and thousands of similar items of
knowledge. The company must have some way to harvest this treasure trove of
knowledge before the manager retires.
Types of Knowledge Management Systems

Experts distinguish among four basic types of knowledge management systems:
knowledge discovery systems, knowledge capture systems, knowledge sharing
systems, and knowledge application systems (see Figure 5.4).30 Knowledge discov-
ery systems help employees create or develop new knowledge. Nontechnical
knowledge discovery systems include joint decision-making meetings. Technical
F IGURE 5.4
Types of Knowledge Management Systems
Knowledge Discovery Systems

(collaborative group
decision-making tools)
Knowledge Application Systems

Knowledge Sharing Systems
FOUR KNOWLEDGE (help employees utilize
(Web-based access to
a database)
MANAGEMENT SYSTEMS knowledge; Dell
tech support)
Knowledge Capture Systems

(on-the-job training; repair-
person inputting repair
tip into wireless laptop)
systems include computerized collaborative PC-based group problem-solving

systems like those we discuss later in this chapter.
Knowledge capture systems help employees retrieve the knowledge that re-
sides in employees’ minds or in some documented form. Organizations have al-
ways used at least rudimentary knowledge capture systems, although usually not
by that name. When early humans sat telling stories of how to hunt, they were cap-
turing their experience and knowledge for the next generation. Today, on-the-job
training and face-to-face meetings are similar ways to let new employees capture
their predecessors’ knowledge. Companies also use technologies to support
knowledge capture.
● Managing Now: Knowledge Management at Xerox For example, Xerox

has about 23,000 repair technicians around the world fixing copiers at clients’
sites. In many cases, the repair solutions exist “only in the heads of experienced
technicians, who can solve complex problems faster and more efficiently than less
experienced ones.”31 The challenge for Xerox was to find a way to access all that
brain-based knowledge and translate it into a usable form. What could Xerox do to
give the company’s entire 23,000-person worldwide repair force access to this
knowledge?
Xerox’s solution was to create an intranet-based knowledge-capture communi-
cations system named Eureka that was linked to a corporate database. The company
encouraged repair technicians around the world to share repair tips by inputting
them into the database via Eureka. Xerox gave all technicians laptop computers to
facilitate this sharing of knowledge. Soon, more than 5,000 tips were in the database,
easily accessible by other service reps around the world.
Knowledge sharing systems help employees share knowledge. For example,
Web-based chat groups let people with common interests share knowledge with
the rest of the group. Knowledge sharing technologies include giving selected em-
ployees Web-based access to databases, where they can find the knowledge they
need. Thus, a manager at Dell can log on to the firm’s intranet and access the forms
he or she needs to appraise an employee. Accenture Consulting uses computer-
ized expertise locator systems. For example, a consultant in the United States with
a new client in the dairy-farming business might access information captured in
Accenture’s experience locator system from an Accenture consultant with a dairy
client in Ireland. The Window on Managing Now feature illustrates an IT-based
knowledge sharing system. The Practice IT feature (page 132) presents another.
Finally, knowledge application systems help employees utilize knowledge
without actually learning it themselves. Dell’s customer relationship management
systems have knowledge application systems built in. For example, a customer
with a problem calls Dell tech support, where a technician uses Dell’s knowledge
application system to follow a series of diagnostic questions.
Telecommunications and Computerized Networks

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T he people depicted in the photo on the cover of this book are just a few of the
tens of millions of people who rely on wireless telecommunications informa-
tion technology today. Companies use microwave transmission to get data from
one point to another. Employees use wireless transmission devices, including
BlackBerry©-type e-mail handheld devices, cellular phones, and personal digital
Telecommunications and Computerized Networks ■ 131
Ryder System’s Knowledge Management Center
Ryder Systems Inc. provides logistics and transportation news feeds on key market information; and providing col-
services worldwide. When companies in one country laborative work areas for project teams.”33
need to coordinate shipments among dozens of suppliers To meet these goals, Accenture created an online
and customers worldwide, they turn to Ryder. Because so Knowledge Management Center for Ryder.The new sys-
much of what Ryder does involves fast-changing, state-of- tem is based in part on Lotus Notes. Lotus Notes is a
the-art methods, Ryder’s managers recognized how im- suite of special collaborative software.34 For example, fea-
portant knowledge management can be. As Gene Tyndall, tures from Lotus Notes that Accenture embedded in the
Ryder’s executive vice president of global solutions and Knowledge Management Center include group calendar-
e-commerce, put it, “[P]eople, the knowledge they have ing and scheduling, instant messaging (which allows Ryder
and the new knowledge they create are the corporate as- employees to see each other online and conduct chat ses-
sets that impact Ryder’s performance more than any sions), and online instant meetings in which multiple em-
other form of capital.” ployees can meet to discuss particular issues. The new
Ryder’s managers therefore also knew that Ryder Knowledge Management Center therefore makes it easy
needed a way for all its employees to share new ideas and for Ryder employees worldwide to collaborate and to
to share what they knew about best practices. For Ryder, share knowledge.
an online knowledge management solution made the In creating its new Knowledge Management Center,
most sense, because its employees needed a simple way Ryder recognized that getting employees to use it was
to access and share knowledge worldwide.32 crucial. The implementation therefore included special
To build its knowledge management system, Ryder communications from the Knowledge Management Cen-
turned to the consulting company Accenture. Ryder ter team to all employees describing the center’s purpose
wanted its new knowledge management system to serve and tools, special training, and incentives to encourage
several purposes: “exchanging best practices, facilitating employees to use the new system.
quick access to experts within Ryder; supplying customized
assistants to access their firms’ computer systems and to communicate. Personal

area networks including Bluetooth enable managers to wirelessly link their com-
puters, printers, keyboards, and computers within their homes and offices. When
traveling, they seek out Wi-Fi hotspots at airport clubs or Starbucks so they can
wirelessly access the Internet with their laptop computers.
Wireless telecommunications and computing have revolutionized customer
relationship and supply chain management. UPS has long equipped its delivery
personnel with handheld computers to instantaneously communicate pickups
and deliveries to the company’s central computer systems. Retail firms like Zara
use wireless telecommuting to send store sales data to its supply chain manage-
ment system. Wal-Mart requires that its largest vendors embed small radio fre-
quency identification tags (RFIDs). Wal-Mart and its supply chain partners use
these small transponders to keep track of each shipment wirelessly.
Digitizing data—taking data and transforming it into computer-readable
forms—enables managers to use information technology. For example, digital
imaging makes it easier to retrieve and manage knowledge. Thus, when Select
Medical Corp. instituted its new enterprise system, the firm needed a way to
process the hard-copy invoices and expense receipts that came in from the firm’s
hundreds of rehabilitation centers. Employees now fax most of the invoices and
PRACTICE IT
Caterpillar
As a huge manufacturer of construction and mining equip- The aim of the Knowledge Network is basically to
ment, Caterpillar’s managers knew they needed a way to make it easier for Caterpillar employees to share knowl-
encourage employees to share their best ideas and to edge and record the best way to do things. Using the
capture what the company already had squirreled away Knowledge Network, Caterpillar employees can more eas-
about best practices. Caterpillar engineers began thinking ily communicate and participate in chatroom-type discus-
that they wanted to capture what they called lessons sions and post best ideas on community bulletin boards.
learned and thus avoid duplicated efforts. For example, Over the past few years, Caterpillar has expanded its
one engineer said, “[W]e found we were repeating the Knowledge Network. In August 2002, Caterpillar invited
same mistakes and doing the same research multiple its 7,000 independent dealers to start using the Knowl-
times from different business units.”35 edge Network. Now, dealers can share best practices
Therefore, about seven years ago, Caterpillar intro- with each other and with Caterpillar employees. For ex-
duced its Knowledge Network, a Web-based system that ample, over the years, dealers had lost access to a simple,
Caterpillar employees use to collaborate and share knowl- hands-on aptitude test that some dealers used to hire
edge. Caterpillar divided its Knowledge Network into quality repair technicians. Thanks to the new access to
twelve communities. Each community focused on the Caterpillar’s Knowledge Network, a dealer posted a ques-
sorts of issues and challenges that might be of special in- tion about this in the dealer service training community.
terest to particular subgroups of Caterpillar employees. Another dealer posted a response about a quick and ef-
One community focused on the best way to bolt together fective selection tool dealers could use. Caterpillar’s
joints, thus enabling the Caterpillar employees who faced Knowledge Network means employees and dealers can
this issue to share their best practices and making it easier now share ideas and do things much more productively
for them to institute these best practices—in this case, to than they did before.
bolt together and fasten joints on heavy equipment.
telecommunications: the expense receipts to a central computer server. There, the system automatically
electronic transmission of data, transforms these hard-copy receipts into digital images and launches an e-mail-
text, graphics, voice (audio), or driven invoice and expense approval process. Managers in Select’s finance depart-
image (video) over any distance ment receive these images, view them, and approve payments (or, if necessary,
telecommunications return the bills unapproved with questions requesting clarification).36 In the rest of
system: a set of compatible this final section, we’ll look more closely at telecommunications and how man-
communications devices that agers use it.
link geographically separated
information-processing devices
Telecommunications Basics
telecommunications lines: Telecommunications is the electronic transmission of data, text, graphics, voice
links that provide the medium
through which signals are (audio), or image (video) over any distance.37 A telecommunications system is a
transmitted set of compatible communications devices that link geographically separated
information-processing devices38 (such as personal computers, telephones, and
terminals: input-output video displays) for the purpose of exchanging data and information.39
devices that send or receive data As you can see in the simple system shown in Figure 5.5, several common ele-
ments exist in any telecommunications system.40 The telecommunications lines
line adapters: devices that
or links are the medium through which signals are transmitted. They might be cop-
modify the signal from the
terminal and computer so that per wires, coaxial cables, optical fibers, or microwave transmission, for instance.
it is suitable to be carried on a Terminals are input-output devices that send or receive data. Line adapters mod-
telecommunications line ify the signal from the terminal and computer so that it is suitable to be carried on
F IGURE 5.5
A Telecommunications System
A telecommunications system like this one is a set of compatible telecommunications devices
like lines, adapters, and computers that link geographically separated devices.
TRANSMITTER RECEIVER
Information Information
source user
Analog-to-digital conversion Digital-to-analog conversion

0 1 1 0 1 0 1 1 0 1
Encoding Decoding
Modulation Demodulation
Multiplexing Demultiplexing
Multiple access Multiple access
Channel
(transmission
medium)
SOURCE: Reprinted with permission from Encyclopedia Britannica, © 1999 by Encyclopedia Britannica, Inc.
modem: the most familiar a telecommunications line. The most familiar line adapter is called a modem.41
type of line adapter Finally, telecommunications software is the computer program that controls
input and output activities and other communications network functions.
telecommunications
software: the computer
program that controls input
and output activities and other
How Managers Use Telecommunications
communications network Few of a company’s information systems could function without telecommunica-
functions tions support. For example, apparel manufacturer and retailer Zara uses a sophis-
ticated telecommunications system. The system includes handheld PDAs, which
its store staff use to link Zara’s own inventory and manufacturing facilities with
point-of-sale processing devices at its retail stores. Detailed sales information is
transmitted directly to headquarters, where computerized decision-support sys-
tems analyze it for trends and buying patterns. Management can then make deci-
sions regarding inventories and production plans. Similarly, retailers such as
JCPenney use telecommunications to manage in-store inventories. Its buyers get
instant access to sales information from the stores and can modify their purchas-
ing actions accordingly.
The list of ways in which businesses rely on telecommunications to support
information transfer and management is endless: Delta Airline’s computers auto-
matically e-mail or fax your new reservation to your home or office; radiologists
rely on telecommunications to receive digital x-rays, which they can then read
from remote locations; your college uses telecommunications to allow you to
access library information from your office or home; computer-assisted manufac-
turing systems use telecommunications to transmit information from one loca-
tion in the plant to another; and banks depend on telecommunications to make
their remote automatic teller machines operational. We will look at managerial
applications of telecommunications in this final section.
Telecommunications-Based Workgroup
Support Systems
Workgroups and work teams play important roles in just about every company.
The team might be a door-assembly team at Saturn, the sales department at a Levi
Strauss subsidiary, or a project team set up in a manufacturing plant to solve a
quality-control problem. The team’s members might all be dispersed around the
city or even around the world.
Companies use a variety of telecommunications-supported devices to facilitate
group communications and decision making. These devices range from very famil-
iar tools such as e-mail to more specialized tools like collaborative writing systems.
● Videoconferencing Videoconferencing uses telecommunications devices to

transmit video and audio among locations. Businesses without their own video-
group decision support conference equipment can use a local FedEx Kinko’s, many of which rent time on
system (GDSS): an their videoconference facilities. Big-screen videoconferencing is not always re-
interactive computer-based quired. For example, Lotus Notes enables teams of users to videoconference using
system used to facilitate the their PCs, and the introduction of inexpensive PC-based video cameras quickly
solution of unstructured
brought videoconferencing within easy reach of just about everyone.
problems
Videoconferencing can significantly improve communications and coordina-
tion among group members. It thereby helps a workgroup achieve its aims more
quickly than the group could otherwise. For example, we saw that the team devel-
oping the Boeing 787 made extensive use of videocon-
ferencing for meetings with engine suppliers and key
airlines regarding the new aircraft’s design.42
● Group Decision Support Systems A group

decision support system (GDSS) is an interactive
computer-based system used to facilitate the solution
of unstructured problems (such as, Should we intro-
duce this new product?) by a team of decision makers.43
The general aim of a GDSS (see Figure 5.6) is to allow a
team of decision makers to get together (sometimes in
the same room) and facilitate making a decision or
completing a task. The GDSS allows team members to
interact via their computers and to use a number of
software tools aimed at assisting them in their decision
Videoconferencing is one IT tool that enables even making or project completion. Typical GDSS software
geographically disbursed teams to work together. tools include electronic questionnaires, electronic
F IGURE 5.6
Group Decision Support
System
The Ventana Corporation’s system
demonstrates the features of
its GroupSystems for Windows
electronic meeting software,
which helps people create, share,
record, organize, and evaluate
ideas in meetings, between offices,
or around the world.
brainstorming tools, idea organizers (to help team members synthesize ideas gen-
erated during brainstorming), and tools for voting or setting priorities (so recom-
mended solutions can be weighted and prioritized).
Using GDSS helps a workgroup avoid a lot of the group decision-making bar-
riers that often occur in face-to-face groups. For example, there’s less likelihood
that one assertive person will control the whole meeting, since the computerized
GDSS programs govern all the brainstorming and listing of ideas—and the voting.
collaborative writing ● Other Workgroup Support Systems Other workgroup support systems are
system: a computerized also available. For example, a collaborative writing system lets a workgroup’s
system that lets a workgroup’s members create long written documents (such as proposals) while working si-
members create long written multaneously at one of a number of interconnected or networked computers. As
documents (such as proposals) team members work on different sections of the proposal, each member has au-
while working simultaneously
tomatic access to the rest of the sections and can modify his or her section to be
at one of a number of
interconnected or networked compatible with the rest. A group scheduling system lets each group member
computers put his or her daily schedule into a shared database, which enables group mem-
bers to identify the most suitable times for meetings to be scheduled or to attend
group scheduling system: a currently scheduled meetings. A workflow automation system uses an e-mail-
computerized system that lets type system to automate paperwork flow.44 For example, if a proposal requires
each group member put his or four signatures, it can be sent electronically from mailbox to mailbox for the
her daily schedule into a shared
database, which enables group
required signatures.
members to identify the most Figure 5.7 summarizes how a PriceWaterhouse (now PricewaterhouseCoopers)
suitable times for meetings to be team won a consulting job by using groupware.45 The four Price Waterhouse exec-
scheduled or to attend currently utives who needed to write the proposal (which was due in three days) were in
scheduled meetings three different states. But they were able to use their Lotus Notes Groupware to
conduct a four-way dialogue on their screens and extract key proposal compo-
workflow automation nents from various Price Waterhouse databases. They could pull up résumés of the
system: a computerized
system that uses an e-mail-type key Price Waterhouse experts to include in the proposal and borrow passages from
process to automate paperwork similar proposals. The team met the deadline and won the contract.
flow
network: a group of Networks
interconnected computers, work
stations, or computer devices For many of these applications, managers rely on telecommunications networks.
(such as printers and data A network “is a group of interconnected computers, work stations, or computer
storage systems) devices (such as printers and data storage systems).”46 Local area networks (LANs)
F IGURE 5.7
Winning the Job with Groupware
Here’s how Price Waterhouse put together a proposal in four days and won a
multimillion-dollar consulting contract by using Lotus Notes software for groups.
On Thursday a Price Waterhouse executive learned that a major securities firm was out
to award a big consulting contract to help develop a complex new trading operation.
Price Waterhouse was invited to bid, but there was a hitch: The proposals were due
Monday. A Price Waterhouse competitor had been working on its own bid for weeks.
The four Price Waterhouse

executives who were needed to
write the proposal were in three
different states. But they were
able to work together using Notes,
which allowed them to conduct a
four-way dialogue on-screen. They
also extracted key components of
the proposal from various databases
on Notes. From one, they pulled
résumés of the Price Waterhouse
Server with Databases
experts from around the world

who could be assigned to the job.
From another, they borrowed
passages from similar successful
proposals. As the draft evolved,
each of the four modified it or
made comments. Notes kept
track of the changes. Other
executives looked at the proposal
via Notes over the weekend.
The proposal was ready Monday, and Price Waterhouse

won the deal. Its competitor didn’t even meet the deadline.
A year later, the client hired Price Waterhouse to audit the
new operation. That contract will probably last for years.
SOURCE: Adapted from David Kirkpatrick,“Groupware Goes Boom,” Fortune, December 27, 1993, pp. 100–101.
wide area networks (WANs), and distributed networks are three examples of man-
agerial networks.
local area network (LAN): A local area network (LAN) spans a limited distance, such as a building or
a group of interconnected several adjacent buildings, often using the company’s own telecommunications
computers, work stations, or links, rather than common-carrier links like those provided by the local phone
computer devices (such as
company’s phone lines. At home, many people use LANs such as Bluetooth to link
printers and data storage
systems) that spans a limited together their telecommunications and computer devices.
distance, such as a building or Managers generally use LANs for one or more of the following reasons:
several adjacent buildings to distribute information and messages (including e-mail); to drive computer-
controlled manufacturing equipment; to distribute documents (such as engi-
neering drawings) from one department to another; to interconnect the LAN’s
computers with those of a public network such as the Internet; and to make
equipment sharing possible (including not just printers but disk storage file
servers, for instance).
wide area networks Wide area networks (WANs) are networks that serve microcomputers over
(WANs): networks that serve larger geographic areas, from a few miles to around the globe. Early WANs utilized
microcomputers over larger common-carrier networks, such as the phone lines of phone companies. However,
geographic areas, from a few many firms today own their own wide area networks, which are essentially private,
miles to around the globe
computerized telecommunications systems. For example, Benetton retail stores
distributed processing: accumulate sales data during the day and keep them on computer disks. At night,
a method for handling another larger computer at corporate headquarters polls the individual retail
computerized information stores’ computers, accessing data that are then transmitted over telephone lines
that generally uses small local back to headquarters. Here, the information is processed and a summary of sales
computers (such as point-of- trends is forwarded to headquarters and individual store managers.47
sale systems) to collect, store,
Benetton’s system also relies on distributed processing. Distributed process-
and process information, with
summary reports and ing generally uses small local computers (such as point-of-sale systems) to collect,
information sent to store, and process information, with summary reports and information sent to
headquarters as needed headquarters as needed.48
The Internet
Of course, the most familiar telecommunications-based network for most people
is the Internet. The value of the Internet lies in its ability to connect easily and
inexpensively so many people from so many places and to instantaneously supply
information and access to business firms’ products and data.
● How Managers Use the Internet We’ll see in this book that the Internet
supports a vast array of managerial activities. Whirlpool Corporation installed a
Web-based supply chain management system. This new system can “talk” directly
to a dealer’s system for things like transmitting orders, exchanging sales data, and
submitting and paying invoices. This cuts the time and cost associated with these
transactions and greatly facilitates managing these operations. Just about every
company uses the Internet to support the transfer of the encrypted data for their
transaction-processing, MIS, decision support, and enterprise information sys-
tems, and therefore to better control their operations. Companies can, in a sense,
Managers use information get a free ride on the Internet and thus use it to reduce the cost of their communi-
technology in the form of cations. For instance, many use Voice over Internet Protocol (VoIP) in lieu of con-
computer information systems, ventional telephone communications. Using groupware, the Internet makes it
cell phones, PDAs, fax easier and less expensive for companies to coordinate and supervise the work of
machines, and networks to small teams that may, for instance, be opening new markets in isolated places. We
support their activities. will discuss more examples in the following sections.
Managing Now: Managerial Applications

of Information Technology
M anagers use information technology in the form of computer information sys-
tems, cell phones, PDAs, fax machines, and networks to support a vast array of
their activities. Indeed, just about all the manager’s planning, organizing, leading,
and controlling activities rely on information technology today. We’ll look at hun-
dreds of specific examples in the following chapters. The following subsections
provide an illustrative overview.
Planning: Using Information Technology

for Strategic Advantage
From the day that amazon.com first went online and began pushing hundreds of
bookstores out of business, managers have known that they need to make infor-
mation technology part of their strategic, long-term plans. In fact, the most suc-
cessful companies in their industries owe their success to building their strategic
plans around information technology.
UPS is the world’s largest air and ground package distribution company, de-
livering over 3 billion parcels and documents each year in the United States and
abroad. Information technology is critical to UPS’s success. Its drivers use hand-
held computers to capture customers’ signatures along with pickup, delivery, and
time-card information and automatically transmit this information back to head-
quarters via a wireless telephone network. UPS and its customers can then moni-
tor and control the progress of its packages throughout the delivery process.
Other companies use information technology as part of their strategy to lock
in customers so they won’t switch to competitors. For example, Baxter Health Care
International, Inc., which supplies almost two-thirds of all products used by U.S.
hospitals, uses a stockless inventory and ordering system to lock in its hospital
customers. Terminals tied to Baxter’s own computers are installed in hospitals,
which can then easily place an order via direct telecommunications links. The
system generates shipping, billing, and inventory information and informs cus-
tomers via their hospital terminals what their estimated delivery dates will be.49
Baxter’s clever plan makes it much easier for hospitals to use Baxter’s products
than competitors’.
Organizing: Networking the Organization Structure

Information technology also reorganizes how businesses do things. For example,
by linking together employees in different departments and at different levels,
group decision-making support tools help “network” the organization structure at
many firms. As one New York insurance manager put it, groupware networks the
corporate hierarchy “because even non-supervisory office workers plugged into
groupware networks have information and intelligence previously available only
to their bosses.” Similarly, “networks . . . can give the rank and file new access: the
ability to join in online discussions with senior executives.” 50 This reorganizes
things by changing who has authority for what.
For example, when Mary Joe Dirkes, a young insurance firm employee, posted
a well-done memo on the network about the firm’s worker’s compensation efforts,
Managing Now: Managerial Applications of Information Technology ■ 139
top managers in New York immediately noticed her good work, and her responsibil-
ities were soon broadened. Her message and the network also altered the chain of
command, helping make the whole company more responsive:
She now gets requests for help from around the firm via the network. When a
client in Ohio needed someone with experience in cutting workplace injuries
in plastics factories, Dirkes clicked into a groupware database to find an
expert that could help. “Before, people would have called or sent a memo to
my boss, and then he’d assign it to me. . . . Now I do it on my own.”51
Staffing: Telecommuting
Millions of people around the world do most of their work at home and “com-
telecommuting: using mute” to their employers electronically. Telecommuting is using telecommuni-
telecommunications and cations and computers from home, rather than actually commuting to the office,
computers from home, rather to get one’s job done.
than actually commuting to the
The typical telecommuter falls into one of three categories. Some are not em-
office, to get one’s job done
ployees at all but are independent entrepreneurs who work out of their homes—
perhaps developing new computer applications for consulting clients, for instance.
The second (and largest) group of telecommuters includes professionals and
highly skilled people who work at jobs that involve a great deal of independent
thought and action. These employees—computer programmers, regional salesper-
sons, textbook editors, or research specialists, for instance—typically work at home
most of the time, coming into the office only occasionally, perhaps for monthly
meetings.52 The third telecommuter category involves workers who carry out rela-
tively routine and easily monitored jobs such as data entry or word processing.53
When you call American Express (Amex) for travel advice, chances are your
travel counselor will not be at Amex headquarters but back home keeping one eye
on the kids.54 For a company that spends over $1 billion annually on information
technology, it is probably not surprising that many of Amex’s travel counselors
have shifted to working at home.
American Express connects its home-workers to its phone lines and data lines
for a small one-time expense of about $1,300 each, including hardware. After that,
the travel counselors easily bounce information from their homes to the nearest
reservation center and check fares and book reservations on their home PCs.
Supervisors continue to monitor agents’ calls, thus ensuring good control. Home-
worker counselors handle 26 percent more calls at home than in the office, result-
ing in about $30,000 more in annual bookings each. Working at home often means
saving three hours a day on commuting and thus translates into having more time
with the family.55
Leading: Reengineering the Company

Every business performs various processes (sets of activities) to get its work done.
Some processes are entirely embedded within some major business function such
as sales, finance, manufacturing, or human resources. For example, within manu-
facturing, one process involves checking and maintaining inventory levels.
Many other business processes are cross-functional because they include ac-
tivities in two or more departments. For example, a bank’s mortgage-approval
process typically involves activities in several departments. A loan officer writes
up the loan application, the bank’s credit department checks the prospective
borrower’s credit, the real-estate department inspects the property, and the loan-
closing department prepares the paperwork and arranges to have its attorney
meet with the customer to close the loan. This relay-race approach is not always
optimal. Much time may be lost passing the loan from department to department.
Customers may be lost to faster-moving rivals.
● Reengineering in Practice Managers therefore increasingly reengineer their

business processes.56 In practice, reengineering usually means reorganizing the
business processes around small teams of multifunctional specialists, who work
together using information technology (such as wireless laptops and MISs) to ac-
complish the end result. Thus, the bank might have a loan officer receive a mort-
gage application and type it into her laptop computer, where the bank’s new sys-
tem automatically checks the customer’s credit and sends the application to one
of several mortgage-processing teams. The team, working together or virtually
with wireless devices and group decision support systems, meets to reassess the
person’s credit, check the property’s value, and approve the loan in a fraction of the
time the process formerly took. Table 5.257 summarizes how some companies ap-
plied other reengineering principles.
Most reengineering projects stem from the installation by the company of
new information systems. This is because it’s usually wasteful to simply superim-
pose a new information system on the existing way of doing things. For example,
why use a new computer system to simplify the bank’s old wasteful relay-race ap-
proach to approving loans? Instead, the bank’s new, reengineered loan improve-
ment system means abolishing the former departments and reorganizing instead
around the new mortgage-approval teams. It also means getting these employees
to both use the new technology and work together amicably.
T ABLE 5.2
Selected Principles of Reengineering Applied
Reengineering Principle Company Example
Organize around Mutual Benefit Life A case manager performs
outcomes, not tasks. and coordinates all
underwriting tasks centrally.
Have those who use the Hewlett-Packard (HP) Department managers make
output of the process a note of their own purchases
perform the process. using a shared database of
approved vendors.
Link parallel activities Xerox Concurrent engineering—
during rather than at the let production participate in
end of the process. new-product design and
engineering.
Treat geographically Hewlett-Packard Each HP division has access
dispersed resources as to a shared purchasing
if they are centralized. database.
Capture information at Mutual Benefit Life Customer-service
the source. representatives enter
application information in a
central database.
Source: Adapted from Mary Summer, Enterprise Resource Planning, Upper Saddle River, N.J.:
Prentice Hall, © 2004, p. 24. Reprinted by permission of Pearson Education, Inc., Upper Saddle River, N.J.
Chapter Summary ■ 141
● The Behavioral Side of Reengineering Reengineering processes, as at the

bank, often succeed, but many efforts fail. Sometimes employees resist the change,
deliberately undermining the revised procedures. Often they don’t see the advan-
tage to themselves of making the change. As John Champy, a longtime reengineer-
ing proponent, has said:
[Reengineering] . . . is a matter of rearranging the quality of people’s
attachments—to their work and to each other. These are cultural matters. . . .58
What Champy means is that the manager must exercise effective leadership to
successfully implement the new technology-based reengineering process. He or
she must overcome employees’ resistance, for instance. And the manager needs
to instill in the employees the values that are consistent with working in a reengi-
neering environment. These values include:
1. To perform up to the highest measure of competence.
2. To take initiatives and risks.
3. To adapt to change.
4. To make decisions.
5. To work cooperatively as a team.
6. To be open, especially with information, knowledge, and news of forthcoming
or actual problems.59
Controlling
Information technology’s impact is particularly notable with respect to manage-
rial control. For example, Hyundai uses wireless handheld scanners to monitor
and control the 43,000 cars per year that go through one of its European import
centers. The scanners read bar codes on each car. That way, all employees, from ac-
counting to sales to the dealer, can continuously monitor each car’s whereabouts.
As another example, with offices in 36 countries, Alltech Inc. (which provides
products to the food and feed industries) needed a faster way to get information
regarding its order status and finances worldwide. Previously, auditors at each of
the company’s offices around the world manually entered data onto spreadsheets.
Then they sent the spreadsheets to Alltech’s headquarters, where accountants
compiled all this information into a master spreadsheet. Today, a Web-based soft-
ware system automatically collects financial information from standardized
financial accounting modules in each of the company’s offices around the world
and feeds this information back to headquarters. As a result, management receives
consolidated financial statements in 15 days, instead of 45.
CHAPTER SUMMARY
1. Information is data presented in a form that is 2. Information technology refers to any processes,
meaningful to the recipient. Knowledge, on the practices, and systems that facilitate the process-
other hand, is information distilled via study or re- ing and transportation of data and information.
search and augmented by judgment and experi- The increasingly rapid development of informa-
ence. Good-quality information must be pertinent, tion technology in organizations has sped the
timely, and accurate and reduce uncertainty. transformation of many businesses today into
information-based organizations. The role of in- management. Customer relationship management

formation technology at work is to contribute to systems help the company manage all the processes
the manager’s knowledge of what is happening involved with interacting with customers, such as
through analysis, interpretation, and explanation. taking orders, answering technical questions, and
sending bills.
3. Managers at different levels in the organization
require different types of information. First-line 8. Knowledge management refers to any efforts
managers tend to focus on short-term, operational aimed at enabling the company’s managers and
decisions and therefore need information that fo- employees to better utilize the information avail-
cuses on operational activities. Middle managers able anywhere in their companies. There are four
tend to concentrate on the intermediate range and basic types of knowledge management systems:
so require information for use in tasks such as knowledge discovery systems, knowledge sharing
budget analysis, short-term forecasting, and vari- systems, knowledge capture systems, and knowl-
ance analysis. Top managers make long-range edge application systems.
plans and, therefore, require information that will
9. Telecommunications is the electronic transfer of
enable them to make better strategic decisions.
data, text, graphics, voice, or images over any dis-
4. Information systems are people, data, hardware, tance. Telecommunications systems connect geo-
and procedures that work together to retrieve, graphically separated devices through the use of
process, store, and disseminate information to lines or links, terminals, computers, line adapters,
support decision making and control. The hierar- and software. They have fostered the development
chy of information systems used in management of numerous new computer systems applications,
includes executive support systems, management such as workgroup support systems.
information and decision support systems, and
10. Managers use IT in many ways. For example, many
transaction-processing systems. An expert system
firms, such as UPS, design their plans around using
uses computer programs to store facts and rules
information technology and the Internet to obtain
and to replicate the abilities and decisions of
a competitive advantage. IT and the Internet also
human experts. Artificial intelligence may allow
influence how managers organize—for instance,
computers to accomplish tasks in a manner that is
by enabling employees throughout the company
considered intelligent and is characterized by
to “network” and communicate.
learning and making decisions.
11. Implementing technologically advanced systems
5. Decision support systems have five components:
requires effective management. For example, re-
data management, knowledge management, knowl-
engineering usually involves reorganizing business
edge engine, user interface, and the user.
processes around small teams of multifunctional
6. An enterprise resource planning system is a com- specialists, who work together using information
panywide integrated computer system comprised technology to accomplish the end result. Reorga-
of compatible software modules for each of the nizations like these typically fail if, due to ineffec-
company’s separate departments. They help man- tual leadership, employees resist using the new
agers coordinate and integrate all the functions equipment or simply refuse to work together
and processes of the company. cooperatively.
7. Supply chain management systems help the com- 12. Managers at companies such as Hyundai and
pany manage its relationship with its suppliers Alltech use IT to better control their operations.
and retailers. They provide information to help For example, IT facilitates tracking product
suppliers, purchasing firms, distributors, and lo- progress and whereabouts and enables managers
gistics companies coordinate, schedule, and con- at headquarters to obtain, often in real time, infor-
trol business processes related to supply chain mation regarding the company’s finances.
1. What are the differences among data, information, 2. Is the content of this book information, or is it
and knowledge? knowledge? Why?
Case Study ■ 143
3. What are ten examples of information technology 5. What is an enterprise system, and why would a
you use every week? manager use one?
4. What knowledge management system do you use 6. What telecommunications networks do you typi-
for this course? cally use?
1. Every morning at 8:30 there is a sixty-minute daily b. How would you describe the way technology
operations review at FedEx. Fifteen to thirty repre- has shaped FedEx’s strategy and its thinking?
sentatives of key departments like Air Operations,
c. What other examples can you give for how
Computer Systems, and Meteorology attend in
FedEx uses information technology?
person or participate via conference call. The pur-
pose of the meeting is to see what happened last 2. Form teams with several other students in this
night and to figure out what needs to be done class. Your assignment is to list the knowledge
today to make sure that things run as smoothly as management techniques you would use for this
possible. This is so important because customer class, using only the knowledge management and
service is all FedEx offers and is the heart of their information technology devices you have with you
strategy. The meeting is designed to ensure that it’s in class.
reliable. Every weekday at 5 A.M., a recorded recap
3. Form teams with several students in this class.
of the night’s performance is made available by
Choose companies you have dealt with (such as
voice mail so that participants can check in before
Dell Computer), and list the instances in which you
the meeting and review any problems they will
believe you came in contact with their customer
need to discuss and solve.
relationship management systems.
a. What concepts discussed in this chapter is
FedEx using, and how do these affect the man-
agement of its operations?
CASE STUDY
Information Technology Wins the Day for KnitMedia
nitMedia is a company that owns several jazz in Tokyo, the Café @ Boat Quay in Singapore, and Ams-
K clubs, including The Knitting Factory in New York.
The company went interactive about ten years ago. The
terdam’s Paradiso. Michael Dorf, KnitMedia’s CEO,
knows this is only the start: What he needs are more
Knitting Factory presented what was billed as “the suggestions about how he and KnitMedia can use
biggest live event the Internet has ever experienced.” information technology to manage its clubs and to
This festival, called GIG (for Global Internet Gather- bring consumers the music they want to hear.
ing), presented interactive virtual live music from Lon-
1. How are music-related companies using informa-
don, Tokyo, Cologne, Paris, Toronto, San Francisco,
tion technology today? Compile a list of informa-
Amsterdam, and Hong Kong. The company used a
tion technology applications used by KnitMedia’s
website linking multiple live musical venues so that, for
competitors.
instance, Steve Lacy in Paris played and interacted
visually with a rhythm section in New York. All the Knit- 2. If you were advising Michael Dorf, how would you
Media clubs, as they go online in the future, will be- suggest he use information technology for improv-
come part of this Internet network. Outlets for these ing the performance of KnitMedia and its various
Internet broadcasts already include the Electronic Café businesses?
6 DECISION MAKING NOW
CHAPTER OUTLINE
Fortis Bank
Opening Vignette: Fortis Bank
● The Basics of Decision
Making
Why Make Decisions?
F ortis Bank is the biggest financial institution in Belgium, but that
doesn’t mean it can rest on its laurels.1 The bank’s managers know
that to stay ahead, it’s crucial to
Types of Decisions sign up new customers and get
Decision-Making Models: How Do
People Make Decisions?
current ones to add new ser-
● How to Make Decisions vices. Doing so requires a
Step 1: Define the Problem massive marketing effort. Con-
Step 2: Clarify Your Objectives sumers are deluged by offers of
Step 3: Identify Alternatives
Step 4: Analyze the Consequences credit cards and loans from
Step 5: Make a Choice banks. Spending tens of millions
● Managing Now: Technology- of euros each year reaching out
Supported Decision Making
Competing on Analytics
to customers requires a fo-
WINDOW ON MANAGING NOW: cused approach, or the money
Analytics Tools will be wasted. Some of the
Managing Now: Business Intelligence
WINDOW ON MANAGING NOW: questions the bank’s managers
Baylor University face are, for example,Which
● How to Make Even Better customers are most likely to Managers at Belgium’s Fortis Bank needed
Decisions to know more about their customers’
Increase Your Knowledge
purchase this new investment
preferences so they could make the decisions
PRACTICE IT: Fortis Bank product? How will the market to properly focus their marketing efforts.
Use Your Intuition react to a drop in interest
Don’t Overstress the Finality of
the Decision
rates? Which prospects are most likely to want this new credit card?
Make Sure the Timing Is Right And which client profile shows the highest risk of not being able to pay
Encourage Creativity back a loan?2 The challenge facing Fortis managers is how to get an-
● Avoiding Psychological
swers to these questions so they can make the decisions they must
Traps
Decision-Making Shortcuts make to properly focus their marketing efforts. ■
Anchoring
The Status Quo Trap
Delusions of Success B E H AV I O R A L O B J E C T I V E S
Psychological Set
Perception After studying this chapter, you should be able to:
Other Psychological Traps
➤ Distinguishing between programmed and nonprogrammed decisions.
➤ Listing and describing each step in the decision-making process.
➤ Explaining what is meant by competing on analytics and business intelligence.
144
The Basics of Decision Making ■ 145

➤ Reading the exercises and explaining what decision support tools you would use.
➤ Reading the chapter case and identifying what triggered the problem.
➤ Reading the chapter case and developing a consequences matrix and a decision matrix.
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Managing Now! LIVE ➤ Watching the simulation video and determining the decisions made by the manager.
The Basics of Decision Making

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E veryone constantly faces the need to choose—the route to school, the job to
accept, or the business strategy to pursue. A decision is a choice from among
the available alternatives. Decision making is the process of developing and ana-
decision: a choice made lyzing alternatives and making a choice.
between available alternatives
decision making: the process Why Make Decisions?

of developing and analyzing
alternatives and choosing from Problems prompt most decisions. A problem is a discrepancy between a desirable
among them and an actual situation. If you need $50 for a show but can only afford $10, you
problem: a discrepancy have a problem. Should you borrow money from a friend? Wait for ticket prices to
between a desirable and an fall? However, some decisions don’t involve problems. Having two job offers to
actual situation choose from is not a problem, but it still requires a decision. The problem-solving
process (the steps one goes through to solve a problem) is the same as the process
problem solving: the process for making decisions. Problem solving, like decision making, is the process of de-
of developing and analyzing veloping and analyzing alternatives and making a choice. Most people, therefore,
alternatives and making a choice use the terms decision making and problem solving interchangeably.
The quality of a decision usually depends more on judgment than on raw IQ.
Some smart people have poor judgment. Some less brilliant people have great
judgment. Judgment refers to the cognitive, or thinking, aspects of the decision-
making process.3 We’ll see in this chapter that emotions and biases often influence
one’s judgment and decisions.
Managers are always making decisions. For example, planning, organizing,
leading, and controlling are the basic management functions. However, as we
illustrate in Table 6.1, each of these functions calls for decisions—which plan to
implement, what goals to choose, which people to hire. Furthermore, managers
don’t make just planning, organizing, leading, and controlling decisions. They also
must make technical, job-related decisions. Table 6.2 illustrates this aspect of
managerial decision making. The sales manager decides which sales representa-
tives to use in each region and which advertising agency to use. The production
manager decides between alternative suppliers and whether or not to recommend
building a new plant.
Types of Decisions
Some decisions are bigger and harder to change (more strategic) than others.
Buying a house is more strategic than leasing a car. Some decisions are also more
146 PART TWO CHAPTER 6 Decision Making Now
T ABLE 6.1
Everything Managers Do Involves Making Decisions
Management Function Representative Decisions
Planning What do we want to achieve?
What are our goals?
What are the main opportunities and risks we face?
What competitive strategy should we pursue?
Organizing What are the main tasks we have to accomplish?
How should we divide the work that needs to
be done?
Should I make these decisions or let subordinates
make them?
How should we make sure the work is coordinated?
Leading What leadership style should I use in this situation?
Why is this employee doing what he or she is doing?
How should I motivate this employee?
How can I get this team to perform better?
Controlling How am I going to control this activity?
Are the goals on which these controls are based out
of date?
Does this performance deviation merit corrective
action?
T ABLE 6.2
Decisions Functional Managers Make
Manager Decisions
Accounting Manager What accounting firm should we use?
Who should process our payroll?
Should we give this customer credit?
Finance Manager What bank should we use?
Should we sell bonds or stocks?
Should we buy back some of our company’s stock?
Human Resource Manager Where should we recruit for employees?
Should we set up a testing program?
Should I advise settling the equal-employment
complaint?
Production Manager Which supplier should we use?
Should we build the new plant?
Should we buy the new machine?
Sales Manager Which sales rep should we use in this region?
Should we use this advertising agency?
Should we lower prices in response to our
competitor’s doing so?
The Basics of Decision Making ■ 147
obvious than others. If your car is out of gas, you must fill the tank. The bigger,
strategic decisions usually take more thought, as we will see.
Similarly, some decisions are more routine than others. In general, managers
try not to have to make the same decision twice. The manager of a Macy’s store
does not want clerks to check with her every time customers make returns. She
wants to focus on the big decisions—for instance, on what to buy for the fall line of
clothes. Thus, managers endeavor to premake (or program) as many decisions as
they can. Employees can make these decisions more or less automatically.
● Programmed and Nonprogrammed Decisions Many (or most) manage-

programmed decision: a ment decisions are therefore programmed. Programmed decisions (really,
decision that is repetitive and programmable decisions) are decisions the manager can set up to be made in
routine and can be made by advance. Usually, the manager creates rules or policies to help employees make
using a definite, systematic
these decisions.4 Managers want to be able to focus their attention on the big de-
procedure
cisions, like how to deal with competitors. Therefore, they write policy, procedure,
and rule manuals to help employees make the routine (programmed) decisions on
their own.
nonprogrammed decision: In contrast, managers usually cannot make nonprogrammed decisions in
a decision that is unique and advance. Nonprogrammed (really, nonprogrammable) decisions are unique and
novel novel, and they often involve issues of grave importance to the company. For
example, strategic decisions (Should we expand overseas?) usually can’t be pro-
grammed (made) in advance. When the issue arises, the manager needs to analyze
the decision carefully and weigh his or her various options and pros and cons.
Decisions like these also (given their unpredictability and broad effects) tend to be
high risk. Nonprogrammed decisions tend to require intuition, creativity, and
judgment and all the information that the manager can muster. Most of the
decision-making skills in this chapter aim to improve one’s ability to make these
nonprogrammed decisions.
Some experts estimate that 90 percent of all management decisions in compa-
nies are programmed and so get made more or less automatically.5 In many state
universities, the decision concerning which students to admit is made by mathe-
matically weighing each candidate’s test scores and grades. Most firms try to pro-
gram inventory decisions, such as “reorder ten units of item A when the number of
item A in the bin drops to two.” When you swipe your credit card at a point of pur-
chase, the computerized card-acceptance decision is a programmed one. The
cashier refers the decision to a credit manager only if there’s a problem.
Managers distinguish between programmed and nonprogrammed decisions
because the manager’s time is precious. The more decisions he or she can program
or make routine, the less time he or she must devote to them. The manager’s sub-
ordinates or systems can make these decisions routinely. The principle of excep-
tion, then, is: bring only exceptions to the (routine) way things should be to the
manager’s attention.
● Tools for Making Programmed and Nonprogrammed Decisions Table 6.3

compares programmed and nonprogrammed decisions. Making programmed
decisions usually involves applying rules, for example, “you may give that person
a refund if the jacket is not damaged.” Computers are efficient at the automated
application of rules. For example, they can compute take-home pay based on tax
deductions and other such rules.
Nonprogrammed decisions generally require a very different decision-making
methodology because it’s difficult to preplan (program) how to respond to
problems that are unexpected and unique. One writer says, “[T]hese are the kinds
of decisions managers get paid to make.”6 Deciding what career to pursue, which
T ABLE 6.3
Comparing Programmed and Nonprogrammed Decisions
Programmed Nonprogrammed
Nature of decision Recurring and predictable; Unpredictable; ambiguous
well-defined information and information; shifting decision
decision criteria criteria
Decision-making strategy Reliance on rules and computation Reliance on principles, judgment,
creative problem-solving processes
Decision-making tools Policies and rules; capital budgeting; Judgment; intuition, creativity;
computerized solutions computerized decision support
systems and modeling
job to take, whether to move across the country, and who to marry are personal
nonprogrammed decisions. Deciding whether to buy a $1 million machine or to
expand to Asia are nonprogrammed business decisions. These decisions rely
heavily on judgment and on access to information. We will spend much of this
chapter showing you how to do a better job of making nonprogrammed decisions.
Decision-Making Models: How Do People

Make Decisions?
You own a retail store and must decide which of several trucks to buy for deliver-
ies. If you are like most people, you probably assume that you would be quite ra-
tional in deciding. For example, wouldn’t you size up all your options and their
decision theory: the body pros and cons? Perhaps. Decision theory refers (most broadly) to the body of
of knowledge concerned with knowledge concerned with understanding and predicting how people make deci-
understanding and predicting sions. We’ll see later in his chapter that decision theory also refers more narrowly to
how people make decisions using quantitative methods to analyze and make decisions. We’ll focus next on two
widely known and important schools of thought (or theories of decision making)
regarding how people make decisions: the classical approach and the administra-
tive approach.
● The Classical Approach The idea that managers are totally rational when
making decisions has a long and honorable tradition in economic and manage-
ment theory. Early classical economists needed a simplified way to explain eco-
nomic phenomena, such as how demand affects prices. To come up with a work-
able theory, they accepted a number of simplifying assumptions. Specifically, they
assumed that the rational manager:
1. Had complete or “perfect” information about the situation, including the full
range of goods and services available on the market and the exact price of
each good or service.
2. Could distinguish perfectly between the problem and its symptoms.
3. Could identify all criteria and accurately weigh all the criteria according to his
or her preferences.
How to Make Decisions ■ 149
4. Could accurately calculate and choose the alternative with the highest per-
ceived value.7
5. Could, therefore, be expected to make an optimal choice without being con-
fused by irrational thought processes.
● The Administrative Approach The assumptions listed above leave some-

bounded rationality: the thing to be desired. For example, does anyone really (even with the Internet) ever
boundaries on rational decision have perfect knowledge of all the options?
making imposed by one’s values, Herbert Simon and his associates proposed a decision-making model they
abilities, and limited capacity for believe better reflects reality. They agree that decision makers try to be rational.
processing information However, they point out that such rationality is, in practice, subject to many con-
satisfice: to stop the decision- straints: “The number of alternatives [the decision maker] must explore is so
making process when a great, the information he would need to evaluate them so vast that even an ap-
satisfactory alternative is found proximation to objective rationality is hard to conceive. . . .”8
rather than reviewing solutions For example, most people probably would not check out every possible local
until the optimal alternative is store before buying a plasma t.v. Experiments support this commonsense notion.
discovered In one classic series of studies, participants were required to make decisions
based on the amount of information transmitted on a screen. Most peo-
ple quickly reached a point of information overload and began adjust-
ing in several ways. Some omitted or ignored some of the information;
others gave only approximate responses (such as “about 25” instead of
“24.6”). Based on a review of other evidence, one expert concluded,
“Even the simplest decisions, expressed in the conventional form of a
decision tree, rapidly overwhelm human cognitive capabilities.”9
Based on realities like these, Simon argues that bounded rationality
more accurately represents how managers actually make decisions.10
Bounded rationality means that a manager’s decision making is only as
rational as his or her unique values, abilities, and limited capacity for
processing information permit him or her to be.
There are two main things managers can learn from Simon’s admin-
istrative approach. One is to always remember that most people can’t
and don’t keep searching until they find the perfect solution—they don’t
optimize. Optimize means search for the perfect solution. Most people,
Simon says, satisfice; that is, they search for solutions until they find a
satisfactory one. They look for the optimal solution only in exceptional
cases.11
The second thing managers can learn from Simon is that many cog-
nitive biases and traps lie in wait for unsuspecting managers. Wise
managers thus take their own values, biases, abilities, and various other
psychological traps into account before making decisions.
How to Make Decisions

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S ome assume that good judgment is like a good singing voice—you have it or
you don’t. However, that’s not true. As with singing, it certainly helps to have
the raw material. But a conscientious effort at improving decision-making skills
can turn anyone into a better decision maker. In this section, we look at the steps
in the decision-making process: the steps that a decision maker uses to arrive at a
decision. These steps include:
◗ Define the problem.
◗ Clarify your objectives.
◗ Identify alternatives.
◗ Analyze the consequences.
◗ Make a choice.
Step 1: Define the Problem12

Identifying or defining a problem is trickier than it may appear. People commonly
emphasize the obvious and get misled by symptoms.13 Here is a classic example.
Office workers were upset because they had to wait so long for an elevator. Tenants
were threatening to move. The owners called in a consulting team and told them
the problem was that the elevators were running too slow.
If you agree with defining the problem as “slow-moving elevators,” then the
potential solutions are all expensive. You could ask the tenants to stagger their
work hours, but that request could cause more animosity. Adding more elevators
is too expensive.
The point is that the alternatives you identify and the decisions you make re-
flect how you define the problem. What the consultants did in this case was define
the problem as “The tenants are upset because they have to wait for an elevator.”
The solution they chose was to have full-length mirrors installed by each bank of
elevators so the tenants could admire themselves while waiting! The solution was
inexpensive and satisfactory: The complaints virtually disappeared. In decision
framing: the notion that how making, framing refers to the idea that how the decision maker defines (frames)
the decision maker defines the the problem determines what the solutions will be and thus the quality of the de-
problem determines what cision. Never take the statement of the problem for granted.
the solutions will be and what
the quality of the decision
will be ● How to Define the Problem The consultants’ clever solution to the eleva-
tor problem described above illustrates the first and most important step in defin-
ing problems: always ask, What triggered this problem? Luckily for the owners, the
consultants did not jump to any conclusions. They asked themselves, What trig-
gered the problem? The answer, of course, was the tenants’ complaints, complaints
triggered by frustration at having to wait. The problem then became: How do we
reduce or eliminate frustration with having to wait?
There are some useful hints to keep in mind here.14 Start by writing down your
initial assessment of the problem. Then, dissect it. Ask, What triggered this prob-
lem (as I’ve assessed it)? Why am I even thinking about solving this problem? What
is the connection between the trigger and the problem? That’s how the consultants
approached defining the problem—and how you should, too.
● Application Example Harold has had his job as marketing manager for
Universal Widgets, Inc., for about five years, and he has been happy with his job.
However, the recent widget downturn wreaked havoc with the company’s busi-
ness, and it had to cut about 10 percent of the staff. Harold’s boss gave him the bad
news: “We like the work you’ve been doing here, but we’re closing the New York
office. We want you to stay with Universal, though, so we found you a similar posi-
tion with our plant in Pittsburgh.” Harold is thrilled. He tells his parents, “I have to
move to Pittsburgh, but at least I still have a job. The problem is, where should I
live?” He immediately starts investigating housing possibilities in Pittsburgh. His
father thinks Harold may be jumping the gun. What would you do?
Harold’s father is right. Harold jumped to the conclusion that his problem
now is finding a place to live in Pittsburgh. Is that really the main decision he has
to make? Why is Harold even thinking about solving this problem? What triggered
this problem? What is the connection between the trigger and the problem? The
trigger was his boss’s comment that Universal no longer needed his services in
New York and that it was, therefore, transferring him to Pittsburgh. What’s the real
problem Harold must face here? Let us assume that the issue—and the decision
Harold really must make—is this: Should I move to Pittsburgh with Universal
Widgets? Or should I try to get the best marketing manager job I can, and if so,
where?15
Step 2: Clarify Your Objectives

Most people are looking to achieve several aims when making a decision. For ex-
ample, in choosing a location for a new plant, the manager typically wants to
achieve several objectives, such as minimize distance from the company’s cus-
tomers, get close to raw materials, and have access to a good labor supply.
● Have More Than One Objective Therefore, few managers would make a de-
cision with just a single objective in mind. (There are exceptions. The great foot-
ball coach Vince Lombardi once said, “Winning isn’t everything. It’s the only
thing.”) However, for most decisions, most people do not have the luxury of focus-
ing like a laser on one single objective. When deciding on a new laptop computer,
you may want to get the most memory, portability, and reliability you can for the
price. You’d buy the one that, on balance, best satisfied all these objectives. You’d
avoid the trap of making your decision as if minimizing price was your only aim.
● How to Clarify Objectives Your objectives should provide an explicit ex-

pression of what you really want. If you don’t have clear objectives, you will not be
able to evaluate your alternatives. For example, if Harold isn’t clear about whether
or not he wants to stay close to New York, wants at least a 10 percent raise, or wants
to stay in the widget industry, how could he possibly decide whether to stay with
Universal Widgets or leave—or which of several job offers were best? The answer
is, he could not.
How do you decide what you want the decision to accomplish for you? Here is
a useful five-step procedure:16
1. Write down all the concerns you hope to address through your decision. The
idea here is to make a comprehensive list of everything you hope to accom-
plish with your decision. Harold’s concerns include the impact of his decision
on his long-term career, enjoying what he’s doing, living close to a large urban
center, and earning more money than he earns now.
2. Convert your concerns into specific, concrete objectives. Make your objectives
measurable. Harold’s concerns translate into these objectives: getting a job
that puts him in a position to be marketing director within two years; getting a
job with a consumer products company; being within a one-hour drive of a
city with a population of at least 1 million people; and earning at least $1,200
per week.
3. Separate ends from means to establish your fundamental objectives. This step
helps you zero in on what you really want. One way to do this is to ask “why.”
Harold asks himself, “Why do I want to live within a one-hour drive of a city
with a population of at least 1 million people?” Because he wants to make sure
he can meet many other people who are his own age and because he enjoys
what he sees as big-city benefits such as museums. This helps clarify what
Harold really wants. For example, a smaller town might do if the town has the
right demographics and cultural attractions.
4. Clarify what you mean by each objective. Banish fuzzy thinking. For example,
“getting a raise” is a fuzzy objective. Harold, to his credit, wants to earn at least
$1,200 per week.
5. Test your objectives to see if they capture your interests. This is your reality
check. Harold carefully reviews his full list of final objectives to make sure they
completely capture what he wants to accomplish with his decision.
Step 3: Identify Alternatives

You must have a choice (in other words, two or more options or alternatives) if you
are going to make an effective decision. Wise managers, therefore, usually ask,
What are my options? What are my alternatives? Decision-making experts call al-
ternatives the raw material of decision making. They say that alternatives repre-
sent “the range of potential choices you’ll have for pursuing your objectives.”17
● How to Identify Alternatives There are several techniques for generating

alternatives. Be creative; start by trying to generate alternatives yourself, and then
expand your search by checking with other people, including experts. (We’ll dis-
cuss creativity below.) Also, look at each objective and ask yourself how you could
achieve each of them. For example, Harold might ask, “How could I get a position
that would lead to a marketing director’s job within two years?” One obvious alter-
native is to take a senior marketing manager’s job, a job just a notch below direc-
tor. However, remember that most managers satisfice. It’s rarely productive to
spend the time required to find the optimal solution.
● Application Example Through this process, Harold generates several feasi-

ble alternatives. He can take the Pittsburgh Universal Widget job, or he can leave
the company. If he leaves, his search for alternatives turns up four other possible
alternatives: a job with a dot-com as senior manager in New York; a marketing di-
rector’s job with Ford in Detroit; and two other marketing manager jobs, one with
a pet-food company in Newark and one with Nokia in Washington, D.C.
Step 4: Analyze the Consequences

The danger in making decisions is that you make them today, but you feel them to-
morrow. Harold decides today to stay with Universal. Then he finds out next year
that his prospects of promotion are almost nil because the company already has
two Pittsburgh marketing directors. “If only I’d thought of that,” Harold says. The
manager never wants to have to say, “If only I’d thought of that.”
Therefore, the next decision-making step is to analyze (think through) the
consequences of choosing each alternative. One expert says, “This is often the
most difficult part of the decision-making process, because this is the stage that
typically requires forecasting future events.”18 Harold needs a practical way to de-
termine what the consequences of each of his alternatives are. Only then can he
decide which option is best.
● How to Analyze the Consequences The decision maker’s job is to think

through, for each alternative, what the consequences of choosing that alternative
will be for each of the objectives. Here is a basic three-step process to use:19
1. Mentally put yourself in the future. For example, Harold imagines to himself,
here I am one year later in Pittsburgh. Can I get the director’s job? No! They al-
ready have two directors. Looking into the future is a crucial analytical skill.
2. Eliminate any clearly inferior alternatives. For example, if Harold thinks
through the consequences of each of his alternatives, it should be obvious that
his prospects for promotion to marketing director are virtually nil if he stays
with Universal Widgets. Therefore, why should he even continue considering
this alternative? He crosses it off.
3. Organize your remaining alternatives into a consequences table. A consequences
matrix (or table) lists your objectives down the left side of the page and your
alternatives along the top. In each box of the matrix, put a brief description that
shows the consequences of that alternative for that objective. This provides a
concise, bird’s-eye view of the consequences of pursuing each alternative.
consequences matrix: in
decision making, a grid showing
possible alternatives on a ● Application Example Harold started with five alternatives and four basic
vertical axis and one’s objectives objectives. Here they are in a consequences matrix, along with what he sees as
on a horizontal axis the consequences for each one:
Objective Marketing director Consumer products One-hour drive from Earn at least
Alternative in two years company major city $1,200 per week
Marketing manager, Little or no NA—eliminated this NA—eliminated this NA—eliminated this
Universal Widgets, possibility—eliminated option option option
Pittsburgh this option
Senior manager, High probability—if Consumer-oriented, Yes, excellent $1,250 plus stock
dot-com, New company survives but does not really options
York City that long sell products
Marketing manager, Moderate Yes, but not as Yes $1,100 plus great
Ford, Detroit possibility—bigger interesting as selling benefits (discount
company, longer widgets. I may on new T-bird)
climb get bored.
Marketing manager, High probability— Yes, but not quite as Yes $1,200
pet foods, Newark small, growing interesting as
company with little selling widgets
marketing expertise
now
Marketing manager, Fairly high Yes—exciting Yes—exceptional $1,200
Nokia, Washington, probability— industry cultural attractions
D.C. fast-growing and demographics
company
Step 5: Make a Choice

Your analysis is useless unless you make the right choice. Under perfect condi-
tions, making the right choice is easy. Review the consequences of each alterna-
tive, and choose the alternative that achieves your objectives. But in practice,
making a decision—even a simple one like choosing a computer—sometimes
can’t be done so rationally. Psychology and emotions can drive decisions and
make the choice more difficult.20 And not having all the facts can produce choices
that are less than optimal. In today’s unforgiving business environment, man-
agers must have the facts so they can make informed decisions.21 We turn to this
topic next.
Managing Now: Technology-Supported Decision Making

S everal years ago, Vermont-based Ben & Jerry’s Ice Cream had a problem.
Dozens of people were suddenly calling its hotline to complain that the com-
pany’s famous Cherry Garcia ice cream didn’t have enough cherries. Ben & Jerry’s
managers had to make a decision. Should they tell the plant to add more cherries?
Ignore the callers? Get more information?
As at Ben & Jerry’s, decisions are no better than the information on which
they’re based. For example, how can Ben & Jerry’s possibly identify the problem
without getting information from their factory and from other sources? How can
they identify alternatives or analyze the consequences of those alternatives with-
out information? They cannot, not without the right information.
Competing on Analytics
When Alan Mulally recently took over as Ford’s new CEO, newsapers referred to
him as “an engineer’s engineer”—meaning that he doesn’t make decisions based
just on gut feel; he wants to see the data. Some managers still take a laid-back, in-
formal approach to sizing up situations. However, many others, like Al Mulally,
compete based on analytics: their decisions are heavily fact-based. They want to
make informed decisions.
Author Michael Lewis wrote a best-selling book called Moneyball. It describes
how the Oakland A’s baseball team uses statistical data analysis to improve their
performance. Some baseball managers go by their gut in deciding questions like,
Who should we put up at bat if we have two outs and runners on first and third,
and we are facing a left-handed pitcher? Not the A’s. Whether scouting players or
deciding how much to raise stadium prices, the A’s, and some other teams, rely on
data analysis.22
Marriott International has a hotel program called Total Hotel Optimization.
The team running this program uses knowledge management and decision sup-
port software, and statistical analysis. Marriott can now send just the right offer-
ings to frequent customers, for instance, and price the rooms at each hotel at the
right level, given the dates and weather conditions.23 Like the A’s, Marriott Inter-
national competes based on analytics.24 Figure 6.1 shows some more examples
Managing Now: Technology-Supported Decision Making ■ 155
F IGURE 6.1
How Companies Use Analytics
Analytics competitors make expert use of statistics and modeling to improve a wide variety of functions.
Here are some common applications:
Function How Use Analytics Exemplars
Simulate and optimize supply chain flows;

SUPPLY CHAIN Dell, Wal-Mart, Amazon
reduce inventory and stock-outs.
Identify customers with the greatest profit

CUSTOMER SELECTION, potential; increase likelihood that they will
Harrah’s, Capital One, Barclay’s
LOYALTY, AND SERVICE want the product or service offering;
retain their loyalty.
Identify the price that will maximize

PRICING Progressive, Marriott
yield or profit.
Select the best employees for particular tasks New England Patriots, Oakland A’s,
HUMAN CAPITAL
or jobs, at particular compensation levels. Boston Red Sox
PRODUCT AND SERVICE Detect quality problems early and minimize

Honda, Intel
QUALITY them.
Better understand the drivers of financial

FINANCIAL PERFORMANCE performance and the effects of nonfinancial MCI, Verizon
factors.
RESEARCH AND Improve quality, efficacy, and, where applicable,

Novartis, Amazon, Yahoo
DEVELOPMENT safety of products and services.
Copyright © 2006 Harvard Business School Publishing Corporation. Reprinted by permission of Harvard Business Review.
of how companies use this analytical approach to make better decisions. Analy-
tical companies like Marriott have several attributes, which we discuss next.
● They Use Quantitative Modeling A quantitative model is a mathematical

representation (like Einstein’s famous E ⫽mc2) of some activity. Summarizing the
activity in mathematical terms lets the manager study the activity and perform
“what if” analyses. Capital One Bank conducts more than 30,000 analyses each
year to maximize the likelihood of signing up potential customers who are also
good credit risks. To do this, it uses decision support systems and data mining to
sift through hundreds of customer variables such as age, address, savings, net
worth, and credit history. Then they use models such as, If we send mailings to
people with these age, address, savings, net worth, and credit history traits, how
likely is it that they’ll respond to our offer for a new credit card?” Capital One Bank
does not make multimillion-dollar promotional decisions based on intuition.

They compete based on analytics.
UPS uses a similar approach. For example, its customer intelligence group
uses data mining and modeling to predict customer defections. They track vari-
ables like usage patterns and complaints.25 They know, based on their models, that
when customers’ usage patterns and complaints change in particular ways, the
customers defect to FedEx. So if UPS sees that pattern for a big customer, a UPS
salesperson contacts that customer to resolve the problem.
● They Hire and Develop Analytical People Companies like Capital One
Bank and UPS don’t hire just mathematicians and engineers, although that is part
of it. They encourage all employees to back up and defend their decisions with
facts. And they provide all their employees with the necessary technological sup-
port for obtaining the data they need and analyzing it.
● They Make Extensive Use of Technological Decision-Making Support

Analytical companies rely heavily on information technology to get the informa-
tion they need. Most have “. . . invested many millions of dollars in systems that
snatch data from every conceivable source. Enterprise resource planning, cus-
tomer relationship management, point-of-sale, and other systems ensure that no
transaction or other significant exchange occurs without leaving a mark.”26
Dell Computer spends hundreds of millions of dollars each year sending spe-
cial promotions to businesses and consumers via mail, e-mail, and other means.
How do they decide who gets what offers? They spent seven years building a data-
base that contains millions of records on the sales results by region for all the com-
pany’s print, television, and other ads. Dell then uses its computerized decision
support systems to retrieve, analyze, and draw conclusions that help it maximize
the impact of its marketing dollars.27 The Window on Managing Now feature
shows some important information technology–based analytics support tools.

Analytics Tools
SAS© offers a decision support package called SAS© Ana- ◗ Forecasting. This software takes the data and lets the
lytics, which includes several software tools, listed below. manager predict outcomes based on historical patterns.
These are the IT-based decision tools managers can use. ◗ Econometrics. This software enables the manager to
◗ Statistics. The statistics tool enables the manager to use apply statistical methods to the data and trends, thus
statistical analysis to analyze relationships and to pro- helping him or her to better understand the trends.
duce decisions based on facts. ◗ Quality improvement. This software enables the manager
◗ Data and text mining. This software enables the manager to identify, monitor, and measure quality processes and
to mine or retrieve and to sift through the data in the trends over time.
company’s data warehouse (where it holds the data it ◗ Operations research. This software enables the manager
collects from its day-to-day sales, billing, and other to apply mathematical techniques to analyze the data
transactions). This helps the manager identify trends and thus to achieve the best result.28
and to make predictions and better decisions.
Managing Now: Technology-Supported Decision Making ■ 157
Managing Now: Business Intelligence

Faced with complaints from people claiming that their Cherry Garcia ice cream
lacked enough cherries, Ben & Jerry’s managers didn’t jump to conclusions, for
instance, by adding more cherries to the recipe. Instead, they analyzed the
information.
Ben & Jerry’s decision support software mines all the data that the company
collects every day from all its operations, from production and sales to finance and
customer service. Then its decision support systems find and retrieve the data its
managers need to make their decisions, and then analyze it.29
By using their decision support software to review (on desktop computerized
charts) the information from all their operations, Ben & Jerry’s managers method-
ically eliminated possible causes. The desktop charts enabled managers to click
on particular charts (such as purchase by region) and to drill down and find the
underlying data (such as on purchases of Cherry Garcia ice cream by region). It
was not a regional problem (complaints came from all over the country). And the
factory was adding enough cherries.
What was the problem? Someone had changed the photo on the ice cream
carton so that it showed Cherry Garcia frozen yogurt by mistake. Ben & Jerry’s
Cherry Garcia frozen yogurt is pinker and has more cherries than Cherry Garcia
ice cream. So consumers thought they were being shortchanged! Management
changed the photo on the box, and complaints stopped.30 Good information—
what many experts call business intelligence—helped Ben & Jerry’s define the
problem and take corrective action.
business intelligence (BI): ● Business Intelligence Managers use the phrase business intelligence (BI) in
synonymous with decision two ways. First, they use it more or less synonymously with the phrase decision sup-
support system (DSS), namely, a port system (DSS) (discussed in Chapter 5) to refer to a set of software applications
set of software applications and
and tools that transform data into a form that managers can use to make better,
tools that transform data into a
form that managers can use to faster decisions.31 Second, they use the phrase business intelligence to refer to the
make better, faster decisions; information (intelligence) itself on which the manager makes his or her decision.
also, the information Thus, the business intelligence Ben & Jerry’s got from its analyses helped its man-
(intelligence) itself on which the agers to decide what to do. It used its business intelligence systems to produce that
manager makes his or her information.
decision Business intelligence thus helps managers make better decisions. As a conse-
quence of doing business, companies continuously collect enormous amounts of
data from their sales, finance, customer-service, and other systems. This informa-
tion is of little use if the manager cannot access, manipulate, and analyze it. As we
explained earlier in this book, a decision support system is a set of computerized
tools that helps managers access and use information to make decisions. Ben &
Jerry’s managers used the firm’s decision support system (DSS) to compile, ana-
lyze, and present all these data (from the sales and production departments, for
instance) and thus produce the business intelligence its managers needed to
make the Cherry Garcia decision.
Recall that decision support systems have five basic components:32
◗ The data management component retrieves, stores, and organizes the data.
◗ The model management system retrieves, stores, and organizes the quantitative
and statistical models that the decision support system uses to analyze the data
and make predictions.
◗ The knowledge engine does the actual reasoning for the system.
Baylor University
High school seniors shop around like never before to find

a college that best fits their needs.33 As Tom Bohannon,
Baylor’s assistant vice president of information manage-
ment and testing services, puts it, “[O]ne of Baylor’s pri-
mary challenges is managing enrollment while dealing
with factors such as the economy, over which we have no
control. . . .”34
To enable Baylor to compete in such an environment,
it uses customer relationship management, data ware-
housing, and data-mining software packages from SAS.
This enables Baylor’s administrators to retrieve and ana-
lyze student data from all the sources that touch a stu-
dent, including admissions, academic affairs, and student af-
fairs. For example, they know when each student first
makes contact, what information he or she received in the
mail, whether that student visited campus, and what his or
her major interests are. Baylor’s administrators can then
follow the students through their application and enroll-
ment process and even see when a student applies for a
job or a scholarship.
What all this gives Baylor is the ability to mine a rich
Baylor University relies on information
trove of data and to get the business intelligence Baylor technology to attract, enroll, and provide a
needs to compete for students. For example, suppose the top-notch educational experience for its
question is, How should we target our mailings to students.
prospective students? Baylor’s information systems use models (equations) that can predict, based on past experi-
about twenty variables for predicting how Baylor should ence, which prospective students are most likely to enroll.
target its initiatives. The variables include the student So “if a student received a high [likely to enroll] score, he
prospects’ test scores; extracurricular activities; the dis- or she would receive an expensive marketing brochure
tance they live from Baylor; whether their parents are about Baylor.”35 As Bohannon says, “SAS has helped us
alumni; whether they visited the school; and whether become more efficient in targeting and streamlining our
Baylor contacted them, or vice versa. Based on such infor- materials and expenses.” Even educational institutions
mation, Baylor’s decision support systems use quantitative today compete on analytics.
◗ The user interface consists of the tools (such as the keyboard and screen) that the
manager uses to interact with the system. The user interface also often includes
a computerized video dashboard. For example, Ben & Jerry’s manufacturing
management dashboard might include (among other things) a bar graph show-
ing fruit ingredients used per pound of ice cream.
◗ Finally, the user is the decision maker who is actually using and controlling the
decision support system.
At Ben & Jerry’s, the business intelligence effort drew on data from dozens of
the company’s information systems. For example, it tapped into the company’s
customer relationship management system to get more information on the actual
How to Make Even Better Decisions ■ 159
complaints (who they’re coming from, and what the consumers were saying, for
instance). It tapped the company’s enterprise systems to see if the plant was using
too few cherries. It tapped its knowledge management system to see if there had
been similar complaints before. And it tapped its supply chain system to see if the
plant was purchasing too few cherries. Its managers could access and view all this
information on their desktop dashboards and thereby analyze it and determine
what the real problem was. The Window on Managing Now feature illustrates
business intelligence in action.
How to Make Even Better Decisions

Online Study Center
ACE the Test
Managing Now! LIVE E xperts recommend various techniques to help managers improve the quality
of their decisions. We’ll discuss several of these techniques in the following
sections.
Increase Your Knowledge

“Knowledge is power,” someone once said, and that’s particularly true in making
decisions. Even the simplest decisions—like mapping the route to work each
morning—become difficult without basic information, such as the traffic report.
To increase your knowledge, ask questions, get experience, use consultants, do re-
search, and use decision support systems.
● Ask Questions Use the six main question words—Who? What? Where? When?
Why? How? In buying a used car, for instance, ask the following questions using
these question words: Who is selling the car, and who previously owned it? What
do similar cars sell for? What is wrong with this car? Where did the owner service it?
When did the owner buy it? Why does the owner want to sell? How much do you
think you could buy it for? Most people could save themselves aggravation by arm-
ing themselves with good questions.
● Get Experience For many endeavors, there’s no substitute for experience. For
example, many students find that interning in a job similar to the occupation they
plan to pursue can help in clarifying whether that occupation is right for them. Sim-
ilarly, multinational corporations with experience in a particular country generally
opt for ownership of foreign affiliates. Less-experienced companies tend to estab-
lish joint ventures in foreign markets, in part to develop the required expertise.36
● Use Consultants Managers use consultants’ experience (such as in person-

nel testing or strategic planning) to supplement their own lack of experience in
particular areas. Sometimes, just talking the problem over with other people can
help, particularly if they’ve had experience solving similar problems.
● Do Research Whatever the decision, there’s usually a wealth of information

you can tap. For example, are you thinking of moving employees from New York
City to Washington, D.C.? How do salaries in Washington compare with those in
New York? Websites like salary.com can answer that question easily.
● Use Decision Support Systems We saw that using data mining and other
decision support system tools is an invaluable way to get the business intelligence
a manager needs. The Practice IT feature shows how Fortis Bank did this.
PRACTICE IT
Fortis Bank
Fortis Bank managers had to decide how to target the address, income, and so on) were historically more likely
millions of dollars of marketing programs they offered to respond to particular offerings. That way, Fortis Bank
each year. But to do so, they needed information. The could create models—mathematical equations—that pre-
bank already had a relatively untapped customer data- dicted who would best respond to an offering.They could
base. It included an enormous amount of data that the determine, for example, that people with a certain income
bank’s transaction-processing systems collected. These level, Zip Code, savings level, spending level, credit rating,
data included facts and figures on each customer such as and so on will more likely want a gold credit card.
age, income, savings, other investments, payment pat- SAS Enterprise Miner is Web-based, so the bank’s
terns, and whether each person responded favorably to a managers can access it wherever they are. Says the bank’s
particular bank offering.37 commercial analysis manager,“SAS Enterprise Miner gave
Fortis Bank decided to install a new SAS Enterprise us a greater understanding of customer motivations. We
Miner decision-support software package. It enables can now fully exploit the data regarding our customers’
Fortis’s marketing analysts to sift through all these data, buying patterns and behavior.”38 The business intelligence
for instance by income level, age, and credit history. It also that Fortis Bank thereby derives enables the bank to
enabled them to identify which customers (based on age, make fact-based decisions, to compete on analytics.
Use Your Intuition

Several years ago, Malcolm Gladwell published a popular book named Blink: The
Power of Thinking Without Thinking. His basic point was that people tend to make
quick, snap decisions, and to do so based on intuition. Psychiatrist Sigmund
Freud made the following similar observation:
When making a decision of minor importance, I have always found it advan-
tageous to consider all the pros and cons. In vital matters, however, such as
the choice of a mate or a profession, the decision should come from the un-
conscious, from somewhere within ourselves. In the important decisions of
our personal life, we should be governed, I think, by the deep inner needs of
our nature.39
Another expert says you can usually tell when a decision fits your needs because it
brings a sense of relief. Good decisions, he says, are the best tranquilizers ever in-
vented; bad ones often increase your anxiety.40
intuition: the cognitive process These experts are talking about intuition. Intuition is the cognitive process
whereby a person instinctively whereby a person instinctively makes a decision based on his or her accumulated
makes a decision based on his or knowledge and experience. Psychologist Gary Klein tells this story to illustrate in-
her accumulated knowledge and
tuitive decision making. A fire commander and his crew encounter a fire. The
experience
commander leads his team into the building. Standing in the living room, they
blast water onto the smoke and flames, which appear to be consuming the
kitchen, yet the fire roars back. The fire’s persistence baffles the commander. His
men douse the kitchen fire again, but it flares up again. Suddenly, an uneasy feel-
ing grips the commander. His intuition tells him to order everyone to leave. Just as
the crew reaches the street, the living room floor caves in. The fire was in the base-
ment, not the kitchen. Had they been in the house, the men would have plunged
into an inferno.41
As this story shows, we often reach intuitive decisions by quickly and unthink-
ingly comparing our present situation to situations we’ve faced in the past. In his
study of firefighters, Klein found they accumulate experiences and “subcon-
sciously categorize fires according to how they should react to them.”42 The fire
commander did this: the fire, based on his experience, just didn’t make sense. The
floor muffled the sounds of the fire and retarded the transfer of heat. The com-
mander, standing with his men in the living room, felt that something was wrong:
what he originally thought was a kitchen fire seemed too quiet and too cool. His
intuition saved them.
● Intuition’s Limitations Yet in practice, intuition can also be misleading.43

For example, studies show that people tend to take higher-than-normal risks
when they want to recover a previous loss. (The trap is called escalation of com-
mitment.) Thus, in negotiating a deal after losing out on a previous deal, one might
thus foolishly “bet the ranch” with what (they think) is simply an intuitive coun-
teroffer. In fact, the person is overcompensating for losing the previous deal.44 In-
tuition without facts and analysis can be deadly.
● Intuitive People Some people seem to be more naturally inclined to take an

intuitive approach to making decisions. Research shows that systematic decision
makers (systematics) take a more logical, step-by-step approach.45 At the other ex-
treme, intuitive decision makers (intuitives) use a more trial-and-error approach.
They disregard much of the information available and bounce from one alterna-
tive to another to get a feel for which seems to work best.
One study compared systematics with intuitives. The former systematically
searched for information and thoroughly evaluated all alternatives. The latter
sought information nonsystematically, and then quickly evaluated just a few fa-
vored alternatives. The intuitive approach was usually best.46 The lesson seems to
be that plodding through all the options may be fine if time permits. However, it’s
sometimes best to follow your instincts.47 We can measure intuitiveness. The short
test in Figure 6.2 provides an approximate reading on whether you are more sys-
tematic or more intuitive in your decision making.48
Don’t Overstress the Finality

of the Decision
In making a decision, remember that few decisions are
forever. Some strategic decisions are hard to reverse.
When Ford decided in 2006 to close several plants and
to mortgage several others, it was a decision it would
have to live with for many years. However, the man-
ager can modify most decisions, even bad ones, with
time. The manager should not become frozen with an
unrealistic fear that a decision can’t be changed or
modified.49
Make Sure the Timing Is Right

“Timing is everything,” someone once said, and the
Ford decided to close several plants and mortgage several same applies to making decisions. With most people,
others. their moods or the pressure they’re under affects their
F IGURE 6.2 WHAT IS MY ORIENTATION?

Are You More Rational or You can get a rough idea of your relative preferences for the rational and intuitive ways of
More Intuitive? dealing with situations by rating yourself on four items. For each statement, rank yourself
on a six-point scale—from 1 (never), to 2 (once in a while), 3 (sometimes), 4 (quite often),
5 (frequently but not always), or 6 (always)—and place your response in the box to the
right of the item:
1. When I have a special job to do, I like to organize it carefully from the start.
2. I feel that a prescribed, step-by-step method is best for solving problems.
3. I prefer people who are imaginative to those who are not.
4. I look at a problem as a whole, approaching it from all sides.
Now add the values for the first two items for one total and for the last two items for
another total. Subtract the second total from the first. If your total has a positive value,
your preference is Rational by that amount, and if your total has a negative value, your
preference is Intuitive by that amount. Ten represents the maximum possible rational
or intuitive score from the equally preferred midpoint (0). Mark your position on the
range of possible scores:
Intuitive Rational
-10 - 9 - 8 - 7 - 6 - 5 - 4 - 3 - 2 -1 0 1 2 3 4 5 6 7 8 9 10
SOURCE: Adapted and reproduced by
permission of the publisher, Psychological
Assessment Resources, Inc., Odessa, FL These items are taken from a 30-item Personal Style Inventory (PSI) assessment of
33556, from The Personal Style Inventory by preferences for Rational and Intuitive behavior created by William Taggart.
William Taggart and Barbara Hausladen.
Copyright 1991, 1993 by PAR, Inc.
decisions. Researchers know that when people feel down, their actions tend to be
aggressive and destructive. Similarly, people tend to be lenient when they’re in
good spirits and tough when they are grouchy.
The manager therefore has to do a quick reality check prior to making a deci-
sion. Avoid regrettable decisions when moods are extreme, or when you are under
duress.
● Application Exercise: Harold’s Choice So which alternative should Harold

choose? He started by doing some research. He learns that there are two marketing
directors at the Pittsburgh plant. Because the prospects of a promotion are virtu-
ally nil, he discards that option. That leaves four options—the dot-com in New
York, Ford in Detroit, the pet food producer in Newark, and Nokia in D.C.
He reviews his consequences matrix. For three of the jobs—the dot-com, Ford,
and the pet food producer—his research and intuition suggest that they may lack
the direct interaction with consumers and consumer products that he prefers.
Promotion to senior director would probably take him more than two years at
Ford, which is suffering some reversals. He asks himself where he’ll be six months
from now if he takes the dot-com job and is dissuaded by the high failure rate of
dot-coms. Six months from now, he might be out of a job!
He puts together a decision matrix (shown in Figure 6.3) to summarize all this
information. In it, he rates each job on how well it fulfills each of his objectives.
First, he weights the importance to him of each of his objectives: 0.50, 0.20, 0.15,
F IGURE 6.3
Harold’s Decision Matrix
How Harold Rates

How Harold Rates How Harold Rates How Harold Rates
How Harold Senior Marketing
Senior Manager Marketing Manager Marketing Manager
Harold’s Rates Relative Manager PET-FOOD
DOTCOM • NY FORD • DETROIT NOKIA • WASH., D.C.
Objectives Importance of PRODUCER • NEWARK
on Satisfying on Satisfying on Satisfying
Each Objective on Satisfying This
This Objective This Objective This Objective
Objective
Marketing
Director 2 2 5 4
0.50
in Two (2 x 0.50 = 1)* (2 x 0.50 = 1) (5 x 0.50 = 2.5) (4 x 0.50 = 2)
Years
Consumer
2 3 3 5
Products 0.20
Company (2 x 0.20 = .4) (3 x 0.20 = .6) (3 x 0.20 = .6) (5 x 0.20 = 1)
One-Hour
5 5 5 5
Drive from 0.15
Major City (5 x 0.15 = .75) (5 x 0.15 = .75) (5 x 0.15 = .75) (5 x 0.15 = .75)
Earn at least
4 3 4 4
$1,200 per 0.15
Week (4 x 0.15 = .6) (3 x 0.15 = .45) (4 x 0.15 = .6) (4 x 0.15 = .6)
2.75 2.80 4.45 4.35

Sum 1.00
(1 + .4 + .75 + .6) (1 + .6 + .75 + .45) (2.5 + .6 + .75 + .6) (2 + 1 + .75 + .6)
*Shows the job’s rating (in this case 2) multiplied by the objective’s importance weight (in this case 0.50).
and 0.15—they should add up to 1.0. Then he rates (from 5—high to 1—low) the
extent to which each job fulfills each of his objectives. Looking over this matrix,
Harold sees that the pet-food and Nokia jobs look like the best bets. The pet-food
job is a possibility. In terms of senior director, it’s a good career move. However,
he’s a little less enthusiastic about the pet-food business, although it scores close
to the Nokia position. Harold has a good feeling about the Nokia job. It satisfies his
objectives, and his research suggests that living costs are comparable to New York.
He’s excited about the cell-phone business. Looking down the road, he sees this in-
dustry’s fast growth opening many new options for him. He can see himself living
in Washington, D.C. He takes the job.
Encourage Creativity
creativity: the process of To make good decisions, the manager needs to be creative—for instance, in how
developing original, novel he or she defines the problem and generates alternatives. Creativity is the process
responses to a problem of developing original, novel responses to a problem. It is an integral part of
making good decisions. We discuss techniques for being more creative in the fol-
lowing sections.
● Create a Culture of Creativity A major airline reportedly spent hundreds

of thousands of dollars training its employees to be creative, but the money was
largely wasted. After spending several days learning how to be creative, the em-
ployees returned to their cubicles, where a bureaucratic environment discouraged
them from recommending risky, innovative solutions:
This was an organization dogged by rules and regulations. What the airline had
not realized was that while you can increase the level of creativity by training,
the more important element is making sure that the corporate environment
allows people to exercise what they’ve learned.50
Management has to be proactive about creating an environment in which
creativity can flourish. Recognize (and, if appropriate, reward) innovative ideas.
Tolerate failure. If you punish employees for mistakes, they’ll tend to avoid
creative decisions because creativity involves risk.
● Encourage Brainstorming Meetings called to discuss problems often turn

out to be useless. The participants come to the meeting willing and even enthusi-
astic to define a problem and to provide solutions to it. However, if a participant’s
suggestion is immediately met with comments like, “That’s ridiculous” or “That’s
impossible,” people are unlikely to make innovative suggestions.
brainstorming: a creativity- Brainstorming is a technique aimed at banishing this problem. It means re-
stimulating technique in which quiring that all participants withhold any criticism and comments until all sug-
prior judgments and criticisms gested alternatives are on the table. One important point here is that people
are specifically forbidden from
should feel comfortable about making suggestions even if the suggestions seem
being expressed in order to
encourage the free flow of ideas strange. We saw that group decision-making software can facilitate electronic
brainstorming. It enables decision makers to meet in a virtual environment and to
type in suggestions and take positions anonymously. The system’s computerized
decision-making procedure limits premature evaluations of suggestions.
● Suspend Judgment For example, people tend to approach situations by

comparing them to similar experiences they’ve faced in the past. That can constrain
their creativity. “Unfortunately, . . . [no] two situations
are identical. Many decision makers spot the similarities
between situations very quickly but . . . ignore critical
differences.”51 Particularly if time permits, some ex-
perts suggest suspending judgment. Think through the
similarities and differences of the present and former
situations before jumping to conclusions.
● Get More Points of View When it comes to cre-

ativity, more points of view are usually better than
fewer, and diverse points of view are better than homo-
geneous ones.
● Provide Physical Support for Creativity The

AOL facility in Dulles, Virginia, has a creativity room
with leopard-print walls, oversize cartoon murals, and
giant paint cans that appear to spill over. The room’s
AOL headquarters in Dulles, Virginia. creator felt a standard conference room was not casual
Avoiding Psychological Traps ■ 165
enough. Similarly, provide plenty of bulletin boards and whiteboards to accom-

modate the decision-making and creativity process.
● Encourage Anonymous Input Even in the most supportive environment,

some employees may be too introverted to participate fully. Allowing for anony-
mous and/or written input can help encourage such people to participate more.52
Avoiding Psychological Traps

Online Study Center
ACE the Test
Managing Now! LIVE A s one researcher puts it, “[W]hen we make decisions, we’re not always in
charge. We can be too impulsive or too deliberate for our own good; one
moment we let our emotions get the better of us, and the next we’re paralyzed by
uncertainty.”53 Let’s look at some of the psychological traps that can inhibit good
decision making.
Decision-Making Shortcuts
heuristics: rules of thumb or People making decisions tend to take shortcuts. They do this by using heuristics,
approximations applied as which are decision-making shortcuts or rules of thumb. For example, mortgage
shortcuts to decision making lenders typically abide by the heuristic that “people shouldn’t spend more than
28% of their gross monthly income on mortgage payments and other house-
related expenses.”54
Based on 150 interviews with decision makers, one researcher concluded,
“Relatively few decisions are made using analytical processes such as generating a
variety of options and contrasting their strengths and weaknesses.”55 Instead,
most people tend to use cognitive shortcuts, such as rules governing what to do in
new situations that are similar to those addressed in the past. Doing so can trap
the unsuspecting decision maker when the situation is different.
Anchoring
anchoring: unconsciously Anchoring means unconsciously giving too much weight to the first information
giving disproportionate weight you hear. It can cause you to define the problem incorrectly.
to the first information you hear Assume that you’re selling your car, which you know is worth about $10,000.
Joe has responded to your classified ad; when he arrives, he offhandedly remarks
that the car is worth only about $5,000. What would you do? On the one hand, you
know that $5,000 is ridiculous. On the other hand, Joe is the only game in town
(one other person called but never showed up). So you start bargaining with Joe.
He says $5,000; you say $10,000. Before you know it, you’ve arrived at a price of
$8,000 (for your $10,000 car).
What happened? You just got anchored (to put it mildly). Without realizing it,
you gave disproportionate weight to Joe’s comment about $5,000, and your deci-
sion making (and bargaining) from then on revolved around his price, not yours.
What should you have done? One response might have been: “Five thousand dol-
lars? Are you kidding? That’s not even in the ballpark!” At least that might have
loosened that subliminal anchor so the bargaining could take place on your terms,
not his. When negotiating, “think through your position before any negotiation be-
gins in order to avoid being anchored by the other party’s initial proposal. At the
same time, look for opportunities to use anchors to your own advantage. . . .”56
The Status Quo Trap

Decision makers tend to be biased toward alternatives that perpetuate the status
quo.57 Why? Because making a decision that requires a change is fraught with risks.
As three experts put it, “[B]reaking from the status quo means taking action, and
when we take action, we take responsibility, opening ourselves to criticism and to
regret.”58 Years ago, this tendency to stick with the status quo was immortalized in
the phrase, “Nobody ever got fired for buying IBM,” which came to stand for deci-
sions whose chief rationale was safety.59
Managers can take steps to avoid the status quo trap. Don’t think of the status
quo as the only alternative; instead, force yourself to consider the other options.
Don’t exaggerate the cost of switching from the status quo. Always keep your ob-
jectives in mind, and make sure that they’re really best served by the status quo.60
Delusions of Success
A rising executive with a Fortune 100 manufacturing company led his firm into a
disastrous expansion in Asia, in the face of negative evidence. He first discussed
the opportunity with his executive staff and consultants; this rational analysis in-
dicated that it was a very risky venture. The market data looked barely favorable,
and the political and cultural factors were huge unknowns; yet the executive blun-
dered ahead. His overconfidence led him to assume that his associates really
shared his view but that they were being overcautious.61 He went ahead with his
expansion, a decision that proved disastrous.
Overoptimism misleads many decision makers. They have “delusions of suc-
cess.”62 Overoptimism is something of a built-in trait. Studies show that most peo-
ple overestimate their own talents. For example, in performance appraisals, about
half of all appraisees tend to place themselves in the top 10 percent, and almost all
the rest place themselves above the median. Another study asked students to rate
themselves on leadership ability; 70 percent said that they were above average.
Similarly, people “tend to exaggerate the degree of control we have, discounting
the role of luck.”63
psychological set: the Optimism is laudable, but managers need to guard against uninformed over-
tendency to look at things with a confidence. Successful managers compete on analytics. They use business intelli-
rigid point of view when solving gence to make fact-based decisions.
a problem
Psychological Set
Failing to think out of the box is another decision-making trap. The technical term
for this is psychological set, which means the tendency to look at things with a
rigid point of view when solving a problem.64 Doing so can severely limit a
F IGURE 6.4 manager’s ability to create alternative solutions. Figure 6.4 presents a classic ex-
Looking at the Problem in ample. Your assignment is to connect all nine dots with no more than four lines
Just One Way running through them, and to do so without lifting your pen from the paper.
Hint: Don’t take a rigid point of view.
To avoid this trap, always question your assumptions. Look again at the prob-
lem of the nine dots in Figure 6.4. Your instructions were to connect all nine dots
with no more than four lines running through them, and to do so without lifting
your pen from the paper. How would you do it? Start by checking your assumptions.
Most people view the nine dots as a square—they’re victims of psychological
set. Viewing them as a square limits your solutions. There is no way to connect all the
SOURCE: Problem originally appeared in Sam dots as long as you assume the dots represent a square. Figure 6.5 shows one solu-
Loyd’s 1914 Cyclopedia of Puzzles. tion. The key was checking your assumptions. Now solve the problem in Figure 6.6.
Avoiding Psychological Traps ■ 167
F IGURE 6.5 F IGURE 6.6

The Advantage of Not Using Creativity to Find
Looking at the Problem in a Solution
Just One Way How many squares are in the
box? Count again. Only sixteen?
Take away your preconception of
how many squares there are.
Now, how many do you find? You
should find thirty!
SOURCE: Problem originally appeared in Sam

Loyd’s 1914 Cyclopedia of Puzzles. SOURCE: Problem originally appeared in Sam
Loyd’s Cyclopedia of Puzzles.
The psychological-set trap helps explain why many decisions go bad. For ex-
ample, the owners of the building whose tenants complained about the slow ele-
vators were victims of psychological set. They could see the problem in only one
way, and they did not question their assumptions. Luckily, the consultants didn’t
fall into the same trap.
Perception
The fact that we don’t always see things as they really are is another psychological
perception: the unique way trap. Perception is the selection and interpretation of information we receive
in which each person defines through our senses, and the meaning we give to the information. Many things, in-
stimuli, depending on the cluding our individual needs, influence how we perceive stimuli. Selective per-
influence of past experiences
ception means choosing, often without thinking about it, the information we’re
and the person’s present needs
and personality going to see or focus on. Experiences involving selective perception happen every
day. You might be less happy with a B in a course after finding out that your friend,
selective perception: who had about the same test grades, got an A.65 Similarly, in organizations, prior
choosing, often without thinking experiences influence how a person perceives a problem and reacts to it.
about it, the information we’re
A classic study illustrates this point. Researchers asked twenty-three execu-
going to see or focus on
tives, all employed by a large manufacturing firm, to read a business case.66 Re-
searchers found that a manager’s position influenced how he or she defined “the
most important problem facing the company.” Of six sales executives, five thought
the most important problem was a sales problem. Four out of five production ex-
ecutives, but only one sales executive and no accounting executives, mentioned
organization problems. The managers looked at the same case, but they drew very
different conclusions. Each would probably have taken action based on his or her
singular view of the problem.
Selective perception pops up when decision makers selectively ignore critical
information. In another study, the researchers told the participants to watch a
videotape of two teams passing basketballs and to count the number of times each
team passed the ball. The participants concentrated so hard on watching the bas-
ketballs that only 21 percent of them noticed a woman walking among the team
members with an open umbrella.67 This finding may seem incredible, but it is not.
Most people, when concentrating on a particular issue, can be blind to even the
most obvious information. The solution is to work strenuously to step back and
view the bigger picture.
groupthink: the psychological Other Psychological Traps

trap in which people deeply
engaged in a problem let their
Numerous other traps lie in wait for unsuspecting decision makers. Psychologist
desire to go along and reach Irving Janis described the phenomenon of groupthink: here, people deeply en-
consensus stifle open debate gaged in a problem let their desire to go along and reach consensus stifle open de-
and full consideration of all bate and full consideration of all the issues. The classic example here is when
the issues Attorney General Robert Kennedy told one detractor (of the group decision to attack
Cuba at the Bay of Pigs), “You may be right and you may be wrong, but President
risky shift phenomenon:
the notion that groups tend to Kennedy has made his decision, so keep your opinions to yourself.”68 The risky shift
make riskier decisions than trap further complicates such a situation. Basically, the risky shift phenomenon
would their individual members refers to the fact that groups tend to make riskier decisions than would their indi-
vidual members. Escalation of commitment can then further aggravate an already
escalation of commitment: bad decision. Escalation of commitment occurs when a person or group in-
an increase in the investment
that a person or group has in a creases its investment in a decision in the face of negative feedback. In business,
decision when faced with for instance, there’s a tendency to throw more money at a losing project to make it
negative feedback profitable, although it seems obvious that the original plan was flawed.
CHAPTER SUMMARY
1. A decision is a choice from among available alter- 6. Although some managers still take an informal,
natives. Decision making is the process of develop- seat-of-the pants approach to getting the facts and
ing and analyzing alternatives and making a choice. information they need, many others now compete
based on analytics. In other words, their decisions
2. Decisions can be either programmed (repetitive
are heavily fact- and information-based. They do
and routine) or nonprogrammed (unique and
extensive analyses. They want to ensure their big
novel). Nonprogrammed decisions require more
decisions are well informed.
intuition and judgment of decision makers.
7. Business intelligence (BI) refers to a set of
3. Rational decision making assumes ideal condi-
processes (specifically, usually, a set of software ap-
tions, such as an accurate definition of the prob-
plications and technologies) that transform data
lem and complete knowledge about all relevant al-
into a form that managers can use to make better,
ternatives and their values. In contrast, decision
faster decisions.69 The phrase business intelligence
making in reality is bounded by differences in
also refers to the actual information these processes
managers’ ability to process information, man-
produce and on which the manager then bases his
agers’ reliance on heuristics or shortcuts, anchor-
or her decision.
ing, escalation, psychological set, and factors in
the organization itself. 8. Suggestions for making better decisions include
increase your knowledge, use creativity, use intu-
4. Defining the problem is crucial. Start by writing
ition, don’t overstress finality, and make sure the
down your initial assessment of the problem. Then
timing is right.
dissect it. Ask yourself, What triggered this problem
(as I’ve assessed it)? Why am I even thinking about 9. Psychological traps include decision-making short-
solving this problem? What is the connection be- cuts, anchoring, status quo traps, psychological
tween the trigger and the problem? set, perception, and ignoring information.
5. The consequences matrix compares alternatives
with objectives. The objectives matrix ranks each
alternative’s chance of achieving each objective.
1. List four programmed decisions and four nonpro- 6. Give an example of how you have used intuition to
grammed decisions you typically make. make a decision.
2. For managers, what are some of the practical im- 7. Explain what you would do to increase the creativ-
plications of Simon’s administrative theory? ity in a workgroup.
3. What are the five steps in the decision process? 8. Give an example of how you use a business-
intelligence approach when buying a computer,
4. Give one original example of why it is important to
car, or home.
define the problem correctly.
5. Explain how you would use a consequences matrix
to make a better decision.
1. Most colleges and universities have grievance pro- Kmart’s operating expenses (compared with about
cedures to address inappropriate behavior by both 2 percent at Target and 1 percent at Wal-Mart).70
students and faculty. Working as a team, obtain the He believed Kmart had to reduce that expense.
student and/or faculty grievance procedures for Conaway and his team thus decided to change
your college or university, and answer the follow- their marketing approach. They abolished the cir-
ing questions: What provision (if any) does the pro- culars, slashed prices on about 40,000 products,
cedure have for allowing the parties to define the and started advertising that “Kmart’s prices are
student’s or faculty member’s problem? Assume lower than Wal-Mart’s.” Given Wal-Mart’s size,
that a student has accused a faculty member of giv- those were gutsy decisions.
ing him or her a lower grade than deserved, based They were also disastrous. Wal-Mart’s day-to-
on the grading policies laid out in the course day operating costs were way below Kmart’s, so
syllabus. Propose at least five objectives for the Wal-Mart simply dropped its own prices even more.
committee that must decide who is right and who Conaway’s decisions left Kmart with higher prices
is wrong. and no circulars. Customers stopped showing up.
“We made a mistake by cutting too much advertis-
2. Working in teams of three to four, choose an article
ing too fast,” is how Conaway put it. In December
from a recent newspaper about some decision a
2001—typically a retailer’s busiest month—Kmart’s
company or government executive recently made.
sales fell 1 percent, while Wal-Mart’s rose 8 percent.
If the decision is working out well, why do you
One month later, Kmart sought bankruptcy protec-
think that is so, based on what we discussed about
tion. Conaway’s last big decision was to close 284
decision making in this chapter? If it turned out to
stores and fire 22,000 Kmart employees. In March
be a bad decision, what errors do you think the ex-
2002, Conaway left the firm. Investment banker
ecutive made?
Edward Lampert gained control of Kmart when it
3. In November 2004, retailers were surprised to hear emerged from bankruptcy in May 2003. In March
that Kmart was buying Sears. In fact, that was only 2004, Kmart posted its first profitable quarter in
the latest in a series of events that actually began three years. Lampert then went on to merge Sears
about three years earlier. into Kmart. The whole chain of events started, in a
It began with one decision. Charles Conaway, way, with Conaway’s circulars decision.
then Kmart’s new CEO, decided to save Kmart by Working in teams of three or four students, an-
beating Wal-Mart at its own low-cost game. For swer this question: Based on what we discussed in
years, Kmart had attracted customers with circulars this chapter, where did Conaway go wrong? What
in weekly magazines. Conaway’s research showed would you have done differently?
that the circulars accounted for over 10 percent of
CASE STUDY
Which Routes to Fly?
s an experienced airline executive, JetBlue CEO Getting the slots (the permissions to fly in and out at
A David Neeleman knows the most important deci-
sions he has to make concern the routes JetBlue will fly.
specific times) at a busy airport like JFK is not easy.
Neeleman set up a lobbying operation in Washington,
The right decision will maximize ridership and mini- D.C., to help convince New York’s congressional delega-
mize competitive retaliation by offering low-cost tion that New York cities like Buffalo, Syracuse, and
flights that competitors aren’t now providing. The Rochester needed JetBlue’s low-cost alternative flights
wrong decision will force Neeleman’s fledgling airline from New York City. In turn, New York congressional
to confront fast and sure competitive retaliation, in members will have to work on convincing the Depart-
which case, JetBlue could be out of business before it ment of Transportation that the needs of New Yorkers
really takes off. (and JetBlue) are important enough to put JetBlue’s in-
The first and biggest route decision probably re- terest ahead of those of major airlines like American and
volved around whether to choose New York’s JFK Air- USAir.
port as JetBlue’s first major gateway.71 JFK Airport was Getting the slots doesn’t mean JetBlue is home
once the headquarters for several U.S. airlines, but free. For example, it was able to obtain numerous ar-
most moved on to other cities and airports where costs rival and departure slots at California’s Long Beach air-
were lower and space was easier to come by. From port. However, those slots came with the condition that
JetBlue’s point of view, JFK had several advantages. It is they must all be utilized within several years. American
in the middle of one of the ten busiest air-passenger Airlines is already battling to take over some of those
markets in the United States. New York’s political lead- slots; it is lowering prices to Long Beach and increasing
ers badly wanted a low-cost airline for their state that incentives (such as adding more frequent-flier miles
would help reduce the cost of flying from the New York for those who fly there from JFK).
City area to upper New York State. And while JFK did In addition, Neeleman was considering taking
have heavy delays, it actually was less busy than New JetBlue abroad—for instance, to Canada and Mexico.
York’s other major airport, LaGuardia, for the time slots Assume you are a consultant to Mr. Neeleman, who is
JetBlue was looking at. depending on your management expertise to navigate
Several years ago, Neeleman and his team were con- the launch and management of JetBlue. He wants you
sidering other airport alternatives. At Boston’s Logan Air- to complete the following tasks:
port, for instance, Neeleman says, “No one would give us 1. Accurately spell out what triggered the route-
gates.” In other words, there was so much competition decision problems stated in the case.
from American Airlines and US Airways that JetBlue
couldn’t get the gates it needed, even though, according 2. List at least four ways that Neeleman can identify
to Neeleman, the gates at Logan were underutilized. where JetBlue should fly next and then choose the
In terms of what he looks for in choosing routes, best alternative.
Neeleman says that one thing his company must watch 3. Propose at least five objectives for Neeleman, who
out for is spreading itself too thin. Spreading his flights must make the decision regarding routes and
among too many destinations runs the risk of lowering gateways.
the utilization rate of each plane—there would be too
4. Propose at least four alternatives to solve the situa-
much downtime, without enough passengers on each
tion. Develop a consequences matrix for the
route. As he says, “I just want passengers on the
situation.
planes.” Thus, the basic idea is to go into a few major
gateways, like JFK, and to use the traffic and population 5. Develop a decision matrix for the situation.
base around these gateways to fly into smaller cities Note: In May 2007, apparently facing intense pressure from
that are not adequately served by low-cost airlines. For investors and his board stemming from JetBlue’s managing of
example, he wants to fly passengers from JFK to Buffalo, the February 2007 storms that grounded its planes, David
New York, and Fort Lauderdale (instead of Miami). The Neeleman relinquished the CEO position to his No. 2, Dave
question is, Where should JetBlue fly next? Barger. Neeleman remains JetBlue’s chairman, however.
Chapter 6 Appendix ■ 171
CHAPTER 6 APPENDIX
Quantitative Decision-Making Aids
M anagers use quantitative analysis to make better decisions. For example, we
saw that Fortis Bank’s managers use quantitative modeling to express, in an
equation, some situation, such as identifying the customers most likely to accept
a new gold credit card according to demographic traits like age, address, and so
forth. Managers also use quantitative analysis on a more frequent basis. This ap-
pendix describes several of the more popular quantitative decision-making aids.
Breakeven Analysis
In financial analysis, the breakeven point is that volume of sales at which revenues
breakeven analysis: a just equals expenses, and you have neither a profit nor a loss. Breakeven analysis
financial analysis decision- is a decision-making aid that enables a manager to determine whether a particu-
making aid that enables a lar volume of sales will result in losses or profits.72
manager to determine whether a
particular volume of sales will
result in losses or profits ● Breakeven Charts Breakeven analysis makes use of four basic concepts:
fixed costs, variable costs, revenues, and profits. Fixed costs (such as for the plant
and machinery) are costs that basically do not change with changes in production.
In other words, you might use the same machine to produce 10 units, 50 units, or
200 units of a product. Variable costs (such as for raw material) rise in proportion
to volume. Revenue is the total income received from sales of the product. For
example, if you sell fifty dolls at $8 each, then your revenue is $8 ⫻ 50, or $400.
Profit is the money you have left after subtracting fixed and variable costs from
revenue.
A breakeven chart, like the one shown in Figure A6.1, is a graph that shows
whether a particular volume of sales will result in profits or losses. The fixed costs
F IGURE A6.1 Total Revenues

REVENUES OR COSTS, IN DOLLARS
$5,000 Profits
Total Costs
A Breakeven Chart Breakeven Point
$4,000
The breakeven point is the
Variable Costs
number of units sold at which
total revenues just equals total $3,000
costs. Losses
$2,000
Fixed Costs
$1,000
0
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000
Number of Units Produced or Sold
line is horizontal. Variable costs, however, increase in proportion to output and are
shown as an upward sloping line. The total costs line is then equal to variable costs
plus fixed costs at each level of output. The breakeven point is the point at which
the total revenue line crosses the total costs line. Beyond this point (note the
shaded area in Figure A6.1), total revenue exceeds total costs. In this example, an
output of about 4,000 units is the breakeven point. Above this point, the company
can expect to earn a profit. If sales are fewer than 4,000 units, the company can
expect a loss.
● Breakeven Formula The breakeven chart provides a picture of the relation-

ship between sales volume and profits. However, a chart is not required for deter-
mining breakeven points. Instead, you can use the following formula:
P(X ) ⫽ F ⫹ V (X )
where
F ⫽ fixed costs
V ⫽ variable costs per unit
X ⫽ volume of output (in units)
P ⫽ price per unit
We can rearrange this formula and calculate the breakeven point with F兾(P ⫺ V). In
other words, the breakeven point is the volume of sales where total costs just
equals total revenues. If, for example, you have a product in which
F ⫽ fixed costs ⫽ $1,000.00
V ⫽ variable costs per unit ⫽ $.75
P ⫽ price per unit ⫽ $1.00 per unit
then the breakeven point is $1,000兾($1.00 ⫺ $.75) ⫽ 4,000 units.
Linear Programming
Breakeven analysis is only one of many quantitative techniques. Decision sci-
ence or decision theory techniques are another category of programmed
linear programming: a decision-making aids. These tools all rely on mathematics. For example, linear
mathematical method used programming is a mathematical method used to solve resource allocation
to solve resource allocation problems that arise “whenever there are a number of activities to be performed,
problems [with] limitations on either the amount of resources or [on] the way they can be
spent.”73
You can use linear programming to determine the best way to:
◗ Distribute merchandise from a number of warehouses to a number of

customers.
◗ Assign personnel to various jobs.
◗ Design shipping schedules.
◗ Select the product mix in a factory to make the best use of machine and labor
hours available while maximizing the firm’s profit.
◗ Route production to optimize the use of machinery.
Chapter 6 Appendix ■ 173
To apply linear programming successfully, the problem must meet certain

basic requirements. There must be a stated, quantifiable goal, such as “minimize
total shipping costs”; the resources to be utilized must be known (a firm could pro-
duce 200 of one item and 300 of another, for instance, or 400 of one or 100 of
another); all the necessary relationships must be expressed in the form of mathe-
matical equations or inequalities; and all these relationships must be linear in
nature. An example can help illustrate:
Apex Electronics has five manufacturing plants and twelve warehouses
scattered across the country. Each plant is manufacturing the same prod-
uct and operating at full capacity. Because plant capacity and location do
not permit the closest plant to fully support each warehouse, Apex would
like to identify the factory that should supply each warehouse and thus
minimize total shipping costs.
Applying linear programming techniques to Apex Electronics’ problem can
provide an optimum shipping schedule.
Waiting-Line/Queuing Techniques
waiting-line/queuing Waiting-line/queuing techniques are mathematical decision-making techniques
techniques: mathematical for solving waiting-line problems. For example, bank managers need to know how
techniques used to solve many tellers they should have. If they have too many, they are wasting money on
waiting-line problems so that
salaries; if they have too few, they may end up with many disgruntled customers.
the optimal balance of
employees available relative to Similar problems arise when selecting the optimal number of airline reservations
waiting customers is attained clerks, warehouse loading docks, highway tollbooths, supermarket checkout reg-
isters, and so forth.
Statistical Decision Theory Techniques

statistical decision theory Managers use statistical decision theory techniques to solve problems for
techniques: techniques used which information is incomplete or uncertain. Suppose a shopkeeper can stock
to solve problems for which either brand A or brand B, but not both. She knows how much it will cost to stock
information is incomplete or
her shelves with each brand, and she also knows how much money she would earn
uncertain
(or lose) if each brand turned out to be a success (or failure) with her customers.
However, she can only estimate how much of each brand she might sell, so her in-
formation is incomplete. Using statistical decision theory, the shopkeeper would
assign probabilities (estimates of the likelihood that the brand will sell or not) to
each alternative. Then she could determine which alternative—stocking brand A
or stocking brand B—would most likely result in the greatest profits.
● Three Degrees of Uncertainty Statistical decision theory assumes that a

manager may face three degrees of uncertainty in making a decision. Managers
certainty: the condition of make some decisions under conditions of certainty. Here, the manager knows in
knowing in advance the advance the outcome of the decision. From a practical point of view, for example,
outcome of a decision you know that if you buy a $50 U.S. savings bond, the interest rate you will earn to
maturity on the bond is, say, 6 percent. Managers rarely make decisions under
uncertainty: the absence of such conditions.
information about a particular At the opposite extreme, managers make some decisions under conditions of
area of concern uncertainty. Here, a manager cannot even assign probabilities to the likelihood of
F IGURE A6.2 cce

ss .70 x $800 = $560
Su
A Decision Tree
nc e of
Cha
The expected value of each 70% - 90
alternative is equal to (1) the .30 x -$300 = Expected
chance of success or failure times 30% Chance of Failure $470 value of
ndA
(2) the expected profit or loss. Bra stocking
Brand A
Bra
nd
B 60% Chance of Success
.60 x $1,000 = $600
40%
Cha
nce
of F
ailu -12
re .40 x -$30 = Expected
$588 value of
stocking
Brand B
the various outcomes. For example, a shopkeeper may have several new products
that could be stocked but not have any idea of the likelihood that one brand will be
successful or that another will fail. Conditions of complete uncertainty are also
relatively infrequent. Most management decisions are made under conditions of
risk: the chance that a risk. Under these conditions, a manager can at least assign probabilities to each
particular outcome will or outcome. In other words, the manager knows (either from past experience or by
will not occur making an educated guess) the chance that each possible outcome (such as prod-
uct A being successful or product B being successful) will occur.
decision tree: a technique for ● Decision Tree A decision tree is one technique for making a decision under
facilitating how decisions under conditions of risk. With a decision tree like the one shown in Figure A6.2, an ex-
conditions of risk are made, pected value can be calculated for each alternative. Expected value equals (1) the
whereby an expected value and
probability of the outcome multiplied by (2) the benefit or cost of that outcome.
gain or loss can be applied to
each alternative For example, in Figure A6.2, it pays our shopkeeper to stock brand B rather
than brand A. Stocking brand A allows a 70 percent chance of success for an $800
expected value: a calculated profit, so the shopkeeper has to balance this possible expected $560 profit against
value that equals the probability the possibility of the $90 loss (.30 ⫻ possible loss of $300). The expected value of
of the outcome multiplied by the stocking brand A is thus $470. By stocking brand B, though, the expected value is a
benefit or cost of that outcome
relatively high $588.
PLANNING AND STRATEGIC 7
MANAGEMENT
Oxford University Press CHAPTER OUTLINE
Opening Vignette: Oxford
T he managers at Oxford University Press (OUP) knew they had to

improve their planning systems. The company publishes over 4,500
new books each year and employs about 4,800 people worldwide.1
University Press
● The Nature and Purpose
of Planning
What Planning Accomplishes
Its education and children’s division markets textbooks, dictionaries, The Management Planning Process
children’s fiction, and picture books to schools and booksellers. The Planning Hierarchy
How to Set Objectives
Oxford is one of the top educational publishers in the United Managing Now: The Management
Kingdom. However, it competes worldwide with much larger Planning Process
educational publishers. ● Forecasting
Sales Forecasting Techniques
Publishers need accurate
forecasts. It can take from two Demand Forecasting at Wal-Mart
days to twelve weeks to reprint Marketing Research
Competitive Intelligence
a title. So if the title’s inventory PRACTICE IT: Demand Forecasting
is low and OUP gets a big and Planning at Oxford University
order, the adopting school may Press
IMPROVING YOUR FORECASTING
turn to a different book and SKILLS
publisher. On the other hand, ● Types of Plans
stocking too many books ties The Business Plan
Business Planning Packages
up cash and space.
● Strategic Planning
OUP’s education and chil- The Strategic Management Process
dren’s division relies on tradi- Types of Corporate Strategies
tional forecasting and planning Types of Competitive Strategies
Facing global competition, managers at
Functional Strategies
systems. Employees kept track Oxford University Press (OUP) knew they
Strategic Planning Tools
had to improve their planning systems.
of each book’s inventory and WINDOW ON MANAGING NOW:
sales orders manually, on electronic spreadsheets. Warehouse stock Pella’s New Competitive Advantage
● Strategy Execution and
managers can’t easily track historical sales patterns for each school or
Digital Dashboards
book. This makes it hard to forecast and anticipate future orders and Traditional Methods for Improving
to plan accordingly. “[W]e often have to order rush reprints to fulfill Strategy Execution
Managing Now: Strategy Maps
unexpected orders,” says one OUP manager. “As a result, we pay The Balanced Scorecard
higher prices.” OUP asks your team to recommend a new forecasting Digital Dashboards and Performance-
and planning system. You should have a good answer after reading this Management Systems
chapter. ■
175
176 PART THREE CHAPTER 7 Planning and Strategic Management

➤ Listing what planning accomplishes.
➤ Describing each of the steps in the management planning process.
➤ Briefly explaining what we mean by sales forecasting, marketing research, and competi-
tive intelligence.
➤ Listing and describing the steps in the strategic management process.
➤ Giving examples of the various types of strategies.

➤ Reading the opening vignette about Oxford University Press and suggesting a forecast-
ing and planning system for the company.
➤ Reading the end-of-chapter exercise and explaining how you would do an environmen-
tal scan for your college or university.
➤ Reading the chapter case study and drawing a strategic map for the company.

Online Study Center
ACE the Test ➤ Watching the simulation video and making recommendations to managers with regards
Managing Now! LIVE to their planning and strategic management processes.
The Nature and Purpose of Planning

Online Study Center
ACE the Test
Managing Now! LIVE P lanning is something we do every day, often without giving it much thought.
For example, most readers of this book are reading it as part of a management
course. This course is probably part of their program of studies. The program of
studies is a plan. It shows the goal (say, getting a business degree in two years). And
it shows how you will get that degree, by listing the courses needed to graduate, the
sequence in which to take them, and when.
plans: methods for achieving Like the program of studies, plans are methods for achieving a desired result.
a desired result Plans answer the questions, What will we do? When will we do it? Who will do it?
and (usually) How much will it cost?2 Plans always specify (or imply) goals (such as
“boost sales by 10 percent”) and courses of action (such as “hire a new salesperson
goals: specific results you want and boost advertising by 20 percent”). Goals, or objectives, are specific results
to achieve you want to achieve. Planning is the process of establishing objectives and
objectives: specific results you courses of action for achieving them.3 Planning always involves deciding now
want to achieve what to do in the future.
planning: the process of
establishing objectives and
courses of action
What Planning Accomplishes
The fact that planning “involves deciding now what to do in the future” highlights
one of the things that planning accomplishes. Planning lets you make your deci-
sions ahead of time, in the comfort of your home (or office), and with the luxury of
having the time to research and weigh your options. It also thereby helps you to
anticipate the consequences of various courses of action, and to think through the
The Nature and Purpose of Planning ■ 177
practicality and feasibility of each without actually having to commit the re-
sources to carry out each course of action. For example, developing a budget for
the year may show the business owner that the move to new, more expensive
offices would be unwise.
Planning also provides direction and a sense of purpose. For example, some-
one once said, in reference to career plans, “The world parts and makes a path for
the person who knows where he or she is going.” Many people find that this sense
of purpose—this “knowing where I am going”—pulls them like a magnet through
challenges and adversity until they reach their goals.
Planning also helps avoid piecemeal decision making—making decisions that
are not consistent with the goal or with each other. For example, R. R. Donnelley &
Sons Company prints books, magazines, and documents for customers such as
investment bankers.4 Donnelley’s planning led its managers to anticipate that, as
its customers conducted more business abroad, they would want Donnelley to
help service them globally. The company therefore invested in advanced technology
and a worldwide digital printing network. It didn’t waste money building conven-
tional printing plants in the United States. Now it prints documents simultane-
ously around the globe. It is also beginning to offer its customers a wider range
of services, such as digital content management.5 Management theorist Peter
Drucker says that planning also helps identify potential opportunities and threats
and reduce long-term risks.6 For example, R. R. Donnelley’s planning process
helped identify the opportunity for satellite-based global printing and for expan-
ding its product offerings.
Last but not least, planning facilitates control. Control means “ensuring that
activities conform to plan.” Thus, a company’s plan may specify that its profits will
double within five years. This goal becomes the standard against which to meas-
ure, compare, and control the manager’s performance. Planning and control are
the twins of the management process. You cannot control if you don’t know what
your standards are, and it’s futile to have a plan if you don’t control what you are
doing.
The Management Planning Process

The planning process involves five basic steps:
1. Set an objective. For example, managers at Ford recently decided to cut about
25 percent of its North American vehicle capacity over five years.
2. Develop forecasts and planning premises. Forecasting means making assump-
tions or premises about the future. Forecasting should help show Ford’s man-
agers which plants to cut. Forecasting should reveal, for instance, what oil
prices should be, which Ford products should be in highest demand for the
next few years, and which countries (like China) should grow the fastest. This
is valuable information for a company trying to decide which plants to close
and which products to phase out.
3. Determine what the alternatives are. Every plan consists of a goal and a course
of action for achieving that goal. There are usually several ways to achieve the
goal. Ford could cut production costs by closing selected plants or phasing out
specific products or product lines.
4. Evaluate alternatives. Remember that plans are decisions you make today for
what to do tomorrow. Therefore, apply all your decision-making skills (from
Chapter 6) to evaluating your alternatives. Think through the consequences of
each course of action.
5. Implement and then evaluate the plan. Finally, choose the course(s) of action,
decide who should do what, and implement the plan. Then periodically check
to make sure that actual progress is consistent with the plan.
It hardly matters if you’re planning your career or a trip to France, or how
you’re going to cut costs or market your firm’s new product. The basic process
always involves setting objectives, forecasting, determining alternative courses of
action, evaluating those options, and then choosing and implementing your plan.
The process is the same when managers develop plans for their companies, with
two small complications.
First, there is usually a hierarchical aspect to managerial planning. Top manage-
ment approves a long-term or strategic plan. Then each department creates its own
budgets and other plans to fit and to contribute to the company’s long-term plan.
Second, the process involves much give-and-take among departments. Top
management formulates goals and plans partly based on upward feedback from
the departments. The departments in turn draw up plans that support top man-
agement’s plan.
The Planning Hierarchy

As a result, Step 5 in the planning process (implement and then evaluate your
plan) is usually not the last step in the businesss planning process. It’s often just
the start for round 2, because top management’s plans and goals become the
targets for which lower-level departments then craft derivative plans. The vice
president produces a plan for her department. Then her own department heads
produce plans for their departments, and so on. In this way, the planning process
hierarchy of plans and produces a hierarchy of plans and goals.
goals: a set of plans and goals Figure 7.1 summarizes this idea. At the top of the hierarchy, the president and
that includes the companywide his or her staff set strategic goals (such as “a minimum of 55 percent of sales
plan and the derivative plans of
revenue will come from customized products by 2008”). Lower-level managers
subsidiary units required to help
achieve the companywide plan (in this case, starting with the vice presidents) then set goals (such as “convert
Building C to customized manufacturing operations”) that make sense in terms
of the goals at the next level up. In this way, the company creates a hierarchy of
supporting departmental goals, down to tactical and functional goals and finally
short-term operational goals for each employee.
How to Set Objectives

Goals play a central role in what managers do. Managers should always expect to be
judged on the extent to which they achieved their units’ goals. As Peter Drucker put
it, “There has to be something to point to and say, we have not worked in vain.”7
Effective goals have several characteristics, as summarized by the acronym
SMART. They are specific, and clearly state the desired results. They are measur-
able, and answer the question “How much?” They are attainable. They are relevant
and derive from a crucial organizational need. And they are timely and specify
deadlines.8
Planning expert George Morrisey advises expressing the goal so it addresses
four details:
To (1) (action/verb)
(2) the (single measurable result)
by (3) (target date/time span)
(4) at (cost in time and/or energy)
The Nature and Purpose of Planning ■ 179
F IGURE 7.1
Hierarchy of Goals
President’s Strategic Goals

■
Have a minimum of 55% of sales revenue
from customized products by 2008
■
Boost overall corporate profitability by 10%
■
Increase sales revenue by 20% in two years
VP of Marketing’s VP of Sales’ VP of Manufacturing’s VP of Human

Goals Goals Goals Resources’ Goals
Complete market Increase sales of Convert Building C Change compensation
study on sales customized products to customized structure to create
potential for to 25% in year one manufacturing incentives for
customized products operations customized sales
Purchasing Director’s Goals Engineering Director’s Goals

Purchase and install new equipment Complete feasibility study of
conversion requirements
For example, “(1) sell (2) $2 million of product X (3) next year, with (4) the same size
sales force.”
● Management by Objectives Management by objectives (MBO) is a technique

in which supervisor and subordinate jointly set goals for the latter and periodically
assess progress toward those goals. A manager may engage in a modest MBO
program by simply setting goals with his or her subordinates and periodically
providing feedback. However, the term management by objectives usually refers to
a comprehensive organizationwide program for setting goals down the chain of
command. The MBO process consists of five steps:
1. Set organization goals. Top management sets strategic goals for the company.
2. Set department goals. Department heads and their superiors jointly set sup-
porting goals for their departments.
3. Discuss department goals. Department heads present department goals and
ask all subordinates to develop their own individual goals.
4. Set individual goals. Goals are set for each subordinate, and a timetable is as-
signed for accomplishing those goals.
5. Give feedback. The supervisor and subordinate meet periodically to review the
subordinate’s performance and to monitor and analyze progress toward his or
her goals.9
Managing Now: The Management Planning Process

Without suitable technological support, planning can be unduly time-consuming.
For example, suppose the manager needs to translate revenue forecasts into pro-
duction and personnel estimates, convert the plan into financial budgets, and see
what effect different assumptions about the future might have on the manager’s
plans. Even with Excel-type spreadsheet support, such tasks take time. Many man-
agers therefore now use special planning software to facilitate these tasks. Alight
Planning software (www.alightplanning.com/Software) is one example. Alight Plan-
ning basically automates the most time-consuming management planning tasks.
For example, its Integrated Financial Statements feature quickly translates the man-
ager’s goals into financial statements such as income statements, balance sheets,
and cash-flow budgets.
Its Stage Based Planning feature lets the manager see what the results of
executing the plan will be over time, at each stage of its development. The Analysis
Tools feature lets the manager test and graph various assumptions. For example,
this feature lets the manager perform an “impact analysis,” to see how changing
various company activities (such as advertising expenses and sales-force size)
affects the company’s sales.
By automating much of the planning process and enabling the manager to
more easily test the impact of his or her assumptions, Alight Planning facilitates
managerial planning.
SOURCE: www.alightplanning.com (March 9, 2006). Copyright © 2005–2006 Alight LLC. All rights reserved.
Forecasting ■ 181
Forecasting
Online Study Center
ACE the Test
Managing Now! LIVE M anagers build their plans on assumptions or premises about the future. Audi
expanded to China because it forecast a booming market for high-quality
cars in that country. Managers traditionally use several forecasting techniques
to produce the premises on which they build their plans. These include sales
forecasting, marketing research, and competitive intelligence.
Sales Forecasting Techniques

forecast: estimate or calculate To forecast means to estimate or calculate in advance or to predict. A company’s
in advance; predict production, personnel, and finance levels usually depend on the company’s level
of sales. Therefore, business forecasting often starts with predicting the direction
and magnitude of sales.
Managers use various quantitative techniques to make sales forecasts. Time-
time series: a set of series forecasting is one approach. A time series is a set of observations taken at
observations taken at specific specific times, usually at equal intervals. Examples of time series are a department
times, usually at equal intervals store’s total monthly or yearly sales receipts, and the daily closing prices of a share
of stock.10 The manager uses time-series forecasting to plot and identify basic
trends (such as rising sales in China) over time.
Sometimes, just tracking activity over time is not enough. Instead, managers
may want to understand the causal relationship between two variables. For exam-
ple, the sales department at General Motors needs to know the causal relationship
between car sales and an indicator of economic activity, like disposable income.
Causal forecasting estimates the company factor (such as sales) based on other
factors (such as disposable income, or level of unemployment). Managers use
statistical techniques such as correlation analysis (which shows how closely the
variables are related) to identify the necessary relationships.
● Qualitative Forecasting Methods It is true that in developing useful plans,

hard data and numbers are always important. However, planning also always in-
volves human judgment. Qualitative forecasting tools emphasize human judg-
ment. They gather, in as logical, unbiased, and systematic a way as possible, all
the information and human judgment that a manager can apply to a situation.
jury of executive opinion: a The jury of executive opinion is one example. It involves asking a group of
forecasting method that involves key executives to forecast sales for, say, the next year. Generally, each executive
asking a group of key executives receives data on forecasted economic levels and anticipated corporate changes.
to forecast sales for, say, the next Each executive then makes an independent forecast. They then reconcile their dif-
year
ferences. The sales force estimation method gathers the opinions of the sales
sales force estimation force regarding what they think sales will be in the forthcoming period. Each sales-
method: the gathering of the person estimates his or her next year’s sales, usually by product and customer.
opinions of the sales force Sales managers then review each estimate, compare it with the previous year’s
regarding what they think sales data, and discuss changes with each salesperson. The sales manager then com-
will be in the forthcoming bines the separate estimates into a sales forecast for the firm.
period
Necessary though they may be, basing plans just on subjective forecasts can
be perilous. Several years ago, Nortel Networks Corp. planned to meet “explosive
customer demand” by adding 9,600 jobs.11 Nortel executives arrived at their
“explosive growth” forecast by asking their largest customers for sales estimates.
Nortel’s CEO later found that some of his largest customers told Nortel to gear up
to ship them more equipment, even as their own sales were falling off.
● Managing Now Managers today therefore often use software systems to im-
prove their sales forecasting processes. For example, MTN is South Africa’s main
cellular network. In the past, the company based its forecasts for handsets on
salespeople’s estimates. Then the company tried a more sophisticated system, but
it was still a manual one. Employees manually extracted data on details like inven-
tories of handsets in stores and warehouses and on orders and current sales. That
proved to be very time-consuming and still did not provide accurate forecasts.12
Management’s solution was to turn to several software packages from SAS.
Now, MTN’s new data warehouse continuously receives information from a
variety of sources, including daily sales and handset production lead times. With
consultants from SAS, MTN created analytical software tools so its managers
could better utilize this information.
The new system enabled management to analyze information from the com-
pany’s data warehouse. For example, it helps management validate the sales
force’s forecasts and avoid both loss of sales and overstocking. Combined with
two other SAS packages—an Internet application, and a wireless Internet gateway
data warehouse: that part of service—the sales force can now use information technology (IT) to interact
the computer system that
collects and stores information directly with the data warehouse from anywhere. That gives them a better idea of
on details like sales, inventory, which handset models sell better, where, and why.
products in transit, and product The following Window on Managing Now and Practice IT features present
returns more illustrations of IT’s use in planning.

Demand Forecasting at Wal-Mart
As most people know, Wal-Mart has many systems in items for individual stores and can also create seasonal
place whose purpose is to keep costs down. Some of profiles for each item. Armed with this information, man-
these systems—such as Wal-Mart’s policy of paying low agers can more accurately plan what items will be needed
wages and of strenuously resisting unions—have under- for each store and when.
standably elicited the concern and even the anger of many Wal-Mart took this a step further. It teamed with
critics. However, not all Wal-Mart’s cost-reducing systems suppliers like Warner-Lambert to create an Internet-
directly involve personnel issues. For example, the tech- based collaborative forecasting and replenishment system
nology the company uses to monitor and forecast cus- (Wal-Mart calls it CFAR). We saw that Wal-Mart collects
tomer preferences helps to keep costs down. data (on things like sales by product and by store, and
Wal-Mart’s forecasting is largely automated thanks to seasonal trends) for its sales of Warner-Lambert’s (and
technology. Here,Wal-Mart relies on its data warehouse. others’) products. Managers at Wal-Mart and Warner-
A data warehouse is that part of the computer system Lambert then collaborated to develop forecasts for sales
that collects and stores information on details like sales, by store for Warner-Lambert products, such as Listerine.
inventory, products in transit, and product returns, infor- Once Warner-Lambert and Wal-Mart planners decide on
mation it gathers from Wal-Mart’s computer terminals in mutually acceptable figures, a standard purchase plan is
3,000 stores. Software programs then help Wal-Mart’s finalized and sent to Warner-Lambert’s manufacturing
managers to use these data to analyze trends, understand planning system. The supplier then automatically replen-
customers, and more effectively manage inventory. As ishes items. So far, CFAR has helped cut the supply-cycle
one example, information in its data warehouse tracks the time for Listerine from twelve weeks to six. That means
sale by store of about 100,000 Wal-Mart products. Thus, less inventory, lower costs, and lower prices.13
Wal-Mart managers can examine the sales of individual
Forecasting ■ 183
Marketing Research
marketing research: the Marketing research refers to the procedures managers use to develop and analyze
procedures managers use to customer-related information that helps managers make decisions.14 Marketing
develop and analyze customer- researchers depend on two main types of information. One source is secondary
related information that helps
data, or information collected or published already. Good sources of secondary
managers make decisions
data include the Internet, libraries, trade associations, company files and sales
secondary data: information reports, and commercial data (for instance, from companies such as A. C. Nielsen,
collected or published already which tracks television-viewing habits). Primary data refer to information specif-
ically collected to solve a current problem. Primary data sources include mail and
primary data: information personal surveys, in-depth and focus-group interviews, and personal observation
specifically collected to solve (watching the reactions of customers who walk into a store).15
a current problem
Competitive Intelligence
Developing useful plans requires knowing as much as possible about what com-
petitors are doing or are planning to do. Competitive intelligence (CI) is a system-
atic way to obtain and analyze public information about competitors.
PRACTICE IT
Demand Forecasting and Planning at Oxford University Press
Faced with increasing pressure from giant competitors need, such as “how many copies of this book will likely be
like Pearson and McGraw-Hill, OUP’s managers needed a ordered next month?” E-mail or cell-phone text messag-
faster way to forecast and estimate textbook demand. Its ing triggers alerts if the system senses a wide discrepancy
education and children’s division managers wanted to in- between historical data for the book and the system’s
crease market share.To do so, they had to make sure the forecast. Stock managers then determine if there’s some
right quantities of books—not too many and not too new factor—such as a huge new adoption—affecting the
few—are in stock when customers need them.The man- forecast.
ual system involving sales force estimates and spread- The result has been a dramatic improvement in
sheets was not working.What would you suggest? Oxford University Press’s forecasts and plans. Stock man-
They installed a software package called SAP De- agers now have up-to-date information for making reprint
mand Planning.Working with the software supplier, OUP decisions. Demand Planning’s internal analytical tools do
employees input into this system details about each title, the sales-estimate computations. A graphical digital
including its international standard book number, the dashboard user interface (similar to Figure 7.2) makes it
most economical order quantities, reprint lead times, and easy for managers to see at a glance things like fore-
three years of historical sales. Each night, data (such as casted demand for a book versus historical demand. It
daily sales of each title, current inventory levels, and also enables them to analyze the most profitable titles,
numbers of books returned) from the education and identify why sales forecasts are falling short of target, and
children’s divisions’ back-office systems download auto- track the education and children’s divisions’ performance
matically into the new Demand Planning system. The against plan. The result is real-time, accurate sales fore-
Demand Planning system then automatically provides casts and plans, and the ability to make corrections
OUP’s managers with the planning information they quickly, if necessary.
F IGURE 7.2
Balanced Scorecard Digital Dashboard Example
Financial Perspective Marketing Perspective
12%
30
25
11% – 20% 20
15
10
>21% <16%
5
2002 2003 2004 2005

Budget Index
Web Hits (Thousands) Programs Adopted by Others
Steps Eliminated
Sales History Perspective Customer Perspective

5
Customer Satisfaction Survey
4
3 0 1.0 2.0 3.0 4.0 5.0

2
1 3.18
0
College Books Trade Books

Post-Sales Incentive Award Survey
0 1.0 2.0 3.0 4.0 5.0
4.1
SOURCE: Adapted from www.balancedscorecardsurvival.com/balancedscorecardsample.html (downloaded January 7, 2006).
Companies increased their use of private intelligence services over the past
few years. Today, several competitive intelligence companies including Stratfor,
Marsh and McClellan’s Marsh Kroll subsidiary, and Jane’s Information Group also
help companies assess terrorism and related risks.16
Competitive intelligence practitioners use various tools to discover what their
clients’ competitors are doing. These tools include having specialists visit their
facilities, hiring their workers, and questioning their suppliers and customers. CI
firms also do extensive Internet searches to unearth information about competi-
tors, as well as searches like reading stock analysts’ reports on the competitors’
prospects. CI consulting firms use former prosecutors, business analysts, and
FBI and Drug Enforcement Agency (DEA) employees to uncover the sorts of
Forecasting ■ 185
Today, several competitive

intelligence companies
including Stratfor help
companies assess terrorism
and related risks.
(Courtesy, Stratfor)
information you might want before entering into an alliance with another com-
pany, or before deciding to get into some business.17
Using the Internet is a gold mine for competitive intelligence investigations.
Amazon.com used this approach to analyze a competitor’s new business move.
Barnes & Noble had just listed three new-product category tabs on its homepage.
Amazon.com hired a competitive intelligence firm to analyze Barnes & Noble’s
Web activity. They found that only one of the new tabs was popular with shoppers.
Suggestions for unearthing competitors’ intelligence over the Web include:18
◗ Use a search engine to get a list of all the webpages your competitor has opened
on the Internet by typing in url://companyname.com
◗ Find all the websites linked to your competitor’s site by typing in link://www
.companyname.com
◗ Comb through your competitor’s website looking for information on things like
the firm’s business goals.
◗ If your competitor is publicly traded, carefully review its investor relations pages.
These pages contain public information like quarterly profits reports and
unusual expenses.
◗ On the website, review your competitor’s press releases; these may provide
insights into potential problems like those indicated by restructuring plans.
◗ Carefully review your competitor’s listed job openings. For example, is one of
its product lines listing many new job openings? That might signal a planned
expansion.
◗ Check out message boards and chatrooms dedicated to the company. These
often contain customer and/or employee complaints that provide insights into
the firm’s plans and or weaknesses. The Improving Your Forecasting Skills feature
presents additional recommendations.
I M P R OV I N G Y O U R F O R E C A S T I N G S K I L L S
Don’t Get Blind-Sided
Whichever forecasting methods they use, managers the manager doesn’t see coming.There are several ways
should make sure they’re not so preoccupied with their fa- to do this:
miliar competitors that they get blind-sided from an unex- ◗ Tell a department such as market research that they are
pected direction. For example, between 2001 and 2004, also in charge of watching out for unexpected events,
Mattel lost about 20 percent of its share of the fashion-doll not just the usual competitors.
Barbie-type market to smaller rivals. Mattel was so sure it
◗ Create a high-level lookout. For example, IBM has a
knew what its customers wanted that it didn’t notice a big
unit it calls Crow’s Nest. This team is responsible for
change: Barbie’s target market, girls ages three to eleven,
watching for new and unexpected opportunities and
had shrunk to girls ages three to five.19 Barbie’s customers
dangers.
were outgrowing Barbie at younger ages and turning to
◗ Start a new initiatives program. For example, Royal
dolls that looked like pop stars. Competitors picked up on
that trend much more quickly. They introduced dolls that Dutch Shell’s Game-Changer program encourages its
better appealed to girls ages five to eleven. managers to envision and test possibilities for new
The moral is that, in practice, the manager needs to opportunities beyond the company’s core products and
scan the periphery (in other words, watch what’s hap- services. The program quickly produced 400 ideas and
pening beyond your traditional competitors) when mak- led to creating thirty new technologies and three new
ing plans because the biggest threats often are the ones businesses.
Types of Plans
descriptive plans: plans that
state in words what is to be
achieved, by whom, when, and
M anagers express their plans in a variety of formats. For example, descriptive
plans, like a student’s program of studies, state in words what is to be
achieved, by whom, when, and at what cost. Budgets are plans stated in financial
at what cost terms. Graphic plans like those in Figure 7.3 show what is to be achieved, how,
budgets: plans stated in and when, in charts or in graphs.
financial terms Plans also differ in the time span they cover. Top management usually engages
in long-term (three- to five-year) business or strategic planning. Middle managers
graphic plans: plans that show focus on developing midterm tactical plans (of up to two to three years’ duration).
what is to be achieved, how, and Tactical plans (also sometimes called functional plans) pick up where strategic
when, in charts or in graphs plans leave off: these are your firm’s marketing, production, and personnel plans.
They show each department’s role in helping carry out the company’s overall
tactical plans: the
strategic plan. First-line managers focus on short-term operational plans. They
departmental plans for
supporting the business’s focus on detailed, day-to-day planning. The Gantt chart (Figure 7.3) is an opera-
companywide strategic plan; tional plan.
also known as functional plans Finally, some plans are made to be used once, and others, repeatedly. For
example, some plans are programs. Like a student’s program of studies, these
functional plans: (see tactical present in an orderly fashion all the steps in a major one-time project, used once.
plans)
operational plans: plans that ● Standing Plans In contrast, managers use standing plans repeatedly.20 Policies,
focus on detailed, day-to-day procedures, and rules are examples of standing plans. Policies are broad guide-
planning, such as how many lines. For example, it might be the policy at Saks Fifth Avenue that “we sell only
machines to use that day high-fashion apparel and top-of-the-line jewelry.” This is a plan because it shows
Types of Plans ■ 187
Day Day Day Day Day Day Day Day Day Day Day Day Day Day Day
F IGURE 7.3 PROJECT
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Gantt Scheduling Chart for A
Acme Strategic Report
Projects, January 1–15, 2007 B
The Gantt chart helps Acme’s
managers plan their consultants’ C
time and keep track of each
project’s progress. Similar Gantt
charts help managers in factories Gantt Scheduling Chart Symbols
plan machine usage for building Start of Project Scheduled Time Allowed
different products.
End of Project Actual Work Progress
programs: plans that present the firm’s apparel and jewelry buyers what general course of action they should
in an orderly fashion all the steps follow in choosing merchandise to buy for their stores. Procedures spell out what
in a major one-time project to do if a specific situation arises; for example, “Before refunding the customer’s
purchase price, the salesperson should carefully inspect the garment and then ob-
policies: broad guidelines
regarding the company’s tain approval for the refund from the floor manager.” Rules are specific guides to
approach to certain major action; for example, “Under no condition will we refund the purchase price after
decisions, such as what quality thirty days.” In standing plans, the goal or purpose is usually implied but clear.
merchandise to offer
procedures: plans that spell The Business Plan

out what to do if a specific
situation arises The company’s business plan provides a comprehensive view of the firm’s situa-
tion today and of its companywide and departmental goals and plans for the next
rules: specific guides to day- three to five years. Managers most often use the term business plan in relation to
to-day action
smaller businesses. It is the sort of plan that investors or lenders want to see before
business plan: a plan that providing money to the firm. However, small businesses don’t have monopolies on
provides a comprehensive view business plans. Even Dell or Microsoft has a version of a comprehensive plan like
of the firm’s financial, sales, and this. They often label it their long-term or perhaps strategic plan.
business situation today and of There are no rigid rules regarding what such plans must contain. However,
its companywide and they usually include, at a minimum, (1) a description of the business (including
departmental goals and plans ownership and products or services), (2) the marketing plan, (3) the production
for the next three to five years
plan, (4) the financial plan, and (5) the personnel/human resource plan.
● The Marketing Plan To be successful, a business must have customers. And

to have customers, it should have a plan for marketing its products or services to
them. Acme Business Consulting may have the best consultants. But if the poten-
tial clients don’t know those consultants exist, Acme’s prospects are limited. The
marketing plan: a plan that marketing plan specifies the nature of your product or service (for instance, its
specifies the nature of your variety, quality, design, and features). It also shows the approaches the company
product or service (for instance, plans to take with respect to pricing and promoting the product or service and
its variety, quality, design, and
getting it sold and delivered to the customers. (Marketing managers call these the
features) and the approaches the
company plans to take with four P’s—product, price, promotion, and place.)
respect to pricing and
promoting the product or ● The Production/Operations Plan Implementing the marketing plan neces-
service and getting it sold and sitates having productive assets. For example, it takes factories and machines
delivered to the customers to assemble Dell’s PCs. Therefore, Dell must plan well in advance for meeting its
projected demand for the technology to take orders for, build, and distribute its
PCs. The production or operations plan shows how the company will produce the
products it plans to sell.
● Managing Now The consulting firm Accenture helped Dell install an im-
proved Internet-based production-planning system. This system integrates Dell’s
entire sales to manufacturing to delivery supply chain. With it, Dell and its suppli-
ers automatically receive real-time updates on sales and production schedules.
Suppliers see what components Dell needs where and when. Truckers see what
components to pick up from suppliers and where to deliver them and what Dell
products to deliver and to whom.21 The system virtually automates the production-
planning process for Dell and its suppliers and truckers.
● The Personnel/Human Resource Plan Anything the company does, or plans

to do, requires managers and other personnel, and therefore a personnel plan. For
example, a consulting company’s projected number of clients helps determine
how many consultants it needs at each stage of the plan. The personnel plan
shows how many of which type of employee the company will need.
● The Financial Plan What’s the bottom line? is the first question many man-
agers and bankers ask. The question underscores a truism about business and
management. At the end of the day, most of a manager’s plans and goals and
accomplishments end up expressed in financial terms.
The financial plan is the vehicle for doing so. The financial plan translates the
manager’s sales, production, and personnel plans into financial terms. For exam-
ple, a projected (or pro forma or planned) profit and loss (P&L) statement shows
the revenue, cost, and profit (or loss) implications of a company’s marketing,
production, and personnel plans.
Business Planning Packages

Several good business planning software packages are available, such as Business
Plan Pro from Palo Alto Software. For example, Business Plan Pro contains all the
information and planning aids someone would need to create a business plan
from beginning to end. It contains thirty sample plans; detailed sample plan out-
lines; complete, step-by-step instructions (with examples) for creating each part
of a plan (executive summary, market analysis, and so on); and financial planning
spreadsheets. It also contains easy-to-use tables (for instance, for making sales
forecasts) and automatic programs for creating color, three-dimensional (3D)
charts for showing facts like monthly sales and yearly profits.
Strategic Planning
Online Study Center
ACE the Test
Managing Now! LIVE A s explained earlier, the planning process usually starts with managers formu-
lating a special type of plan, a strategic plan. A strategic plan spells out (1) the
desired business or businesses the firm wants to be in, in terms of products,
geographic sales area, and competitive advantage, and (2) the major steps it will
take to get there, given (3) the company’s opportunities and threats and internal
strengths and weaknesses. A strategy is a course of action. It shows how the
enterprise will move from the business it is in now to the business it wants to be in.
Strategic planning is the process of identifying the firm’s business today, its
Strategic Planning ■ 189
strategic plan: a plan that desired future business, and the courses of action it should pursue to get there
spells out (1) the desired given its opportunities, threats, strengths, and weaknesses.
business or businesses the firm As an example, the Ford Motor Company in 2006 was struggling to compete
wants to be in, in terms of
against stronger, more profitable competitors from abroad. In early 2006, it intro-
products, geographic sales area,
and competitive advantage, and duced a new strategic plan, which its managers dubbed Way Forward. It envi-
(2) the major steps it will take sioned moving Ford from a loss-making, relatively ponderous company to a
to get there, given (3) the leaner, more profitable one. Ford’s strategies for moving there include cutting
company’s opportunities and about 25 percent of its North American vehicle capacity and 10 percent of its
threats and internal strengths white-collar workforce and streamlining its purchasing process.22 (By mid-2006,
and weaknesses Ford, facing unexpectedly tough competition, revised its plan to strip even more
costs and to do so faster. It then replaced its CEO with a new one.)
strategy: a course of action
that shows how the enterprise
will move from the business it
is in now to the business it wants
The Strategic Management Process
to be in As you can see in Figure 7.4, strategic planning represents the first steps of the
strategic management process. The seven-step strategic management process in-
strategic planning: the cludes both strategic planning and strategy implementation and execution.
process of identifying the firm’s
business today, its desired future
business, and the courses of ● Step 1: Define the Current Business and Mission Every company must
action it should pursue to get choose the terrain on which it will compete—in particular, what products it will
there given its opportunities, sell, where it will sell them, and how its products or services will differ from its
threats, strengths, and competitors’. Rolex and Seiko are both in the watch business. But Rolex sells a
weaknesses limited product line of high-priced quality watches. Seiko sells a wide variety of
F IGURE 7.4
Strategic Management Process
Feedback
Step 1: Step 2: Step 3: Step 4: Step 5: Step 6: Step 7:

Define Perform Formulate Translate Formulate Implement Evaluate
the external new the strategies the perfor-
current and business mission to achieve strategy mance
business internal and into the
and audits mission goals strategic
mission statements goals
Strategy Strategy Strategy

Formulation Implementation Execution
SOURCE: Adapted from Fred David, Strategic Management (Upper Saddle River, N.J.: Prentice Hall, 2005), p. 77.
relatively inexpensive but innovative specialty watches with features like com-
passes and altimeters.
Sometimes, managers use the words vision and mission to help clarify the busi-
nesses in which the company should compete. The manager’s vision for the com-
pany usually provides a broad overview of where the manager wants the company
heading. For example, Rupert Murdoch, chair of News Corporation (which owns
the Fox network and many newspapers and satellite TV operations), has a vision of
an integrated, global, satellite-based news-gathering, entertainment, and Internet
and multimedia firm. WebMD CEO Jeffrey Arnold saw WebMD supplying every-
thing a consumer might want to know about medical-related issues.
The firm’s mission statement is usually more specific. Visions show in very
broad terms what the business should be tomorrow. The mission describes what
it needs to accomplish today. For example, the mission of the California Energy
Commission is to “assess, advocate and act through public/private partnerships
to improve energy systems that promote a strong economy and a healthy
environment.”23
● Step 2: Perform External and Internal Audits

Here the manager sizes up the situation. Ideally, the
new strategic plan and mission should make sense in
terms of the external opportunities and threats the firm
faces and in terms of its internal strengths and weak-
nesses. Managers base their strategic plans on careful
analyses of their external and internal situations. We’ll
discuss strategic analysis tools for doing this later in
this chapter.
● Step 3: Formulate New Business and Mission

Statements Based on the situation analysis, what
should our new business be, in terms of what products
it will sell, where it will sell them, and how its products
or services will differ from its competitors’? What is our
new mission and vision?
● Step 4: Translate the Mission into Goals Next, translate the new mission
into executable, measurable strategic goals. For example, what does the California
Energy Commission’s mission to “assess, advocate and act through public/private
partnerships to improve energy systems . . .” mean in terms of how many and what
specific types of partnerships to form, and when?
● Step 5: Formulate Strategies to Achieve the Strategic Goals The manager

formulates strategies (courses of action) to move the company from where it is
today as a business to where it wants to be tomorrow. At Ford, the strategies in-
cluded closing plants and streamlining purchasing.
● Step 6: Implement the Strategy Strategy implementation means trans-

lating the strategy into initiatives, actions, and results—by actually hiring (or fir-
ing) people, building (or closing) plants, and adding (or eliminating) products and
product lines. Therefore, success here requires applying all the management func-
tions, such as organizing, leading, and controlling.
Companies should ensure that all employees and managers understand the
strategy and their roles in executing it.24 Thus, managers usually try to make it easy
to communicate the basic principles of their strategies.25 For example, Dell’s strat-
egy boils down to “sell direct.”
F IGURE 7.5 Corporate Strategy:

Disney Corporation
Relationships Among
Strategies in Multiple-
Business Firms
Competitive Strategy: Competitive Strategy: Competitive Strategy:
Companies typically formulate Disney Films Theme Parks ABC Network
three types of strategies:
corporate-level strategies,
business-level/competitive
strategies, and functional-level
strategies. Functional Strategies
Human
Sales Manufacturing
Resources
strategic control: the process ● Step 7: Evaluate Performance Strategic control is the process of assessing
of assessing the company’s the company’s progress toward achieving its strategic goals and taking corrective
progress toward achieving its action as needed. Here, management monitors progress and asks why deviations
strategic goals and taking
exist. Management simultaneously reviews the firm’s strategic situation (competi-
corrective action as needed
tors, technical advances, customer demographics, and so on) to see if it should
make any strategic adjustments.
Strategic plans don’t always work out. When General Motors sold the last of its
Hughes Electronics assets, it was the end of a plan put in place years earlier. GM
had bought both Electronic Data Systems and Hughes Electronics to automate and
reinvigorate their automobile production and sales. Many believe that the acquisi-
tions were actually a distraction that helped push GM’s market share down.26
There are three main types of strategies, corresponding to the level in the
company for which you are planning: corporate-level, business-level/competi-
tive, and functional-level strategies. We summarize these strategies in Figure 7.5.
Types of Corporate Strategies

Every company must decide the number of businesses in which it will compete and
the relationships that will exist among those businesses. A company’s corporate-
level strategy describes the variety of products or services the company will sell,
the number of businesses in which it will compete, and the relations among those
businesses. For example, with a concentration/single-business corporate strategy,
the company offers one product or product line, usually in one market. Firms with
single-business strategies include McDonald’s, KFC, and Gerber’s. The main ad-
vantage here is that the company can specialize, which should allow it to do that
one thing better than its competitors. The disadvantage is having all one’s eggs
in one basket. That’s one reason why Harley-Davidson successfully diversified into
clothing, restaurants, and finance. There are several other standard or generic cor-
porate strategies managers use.
● Diversification Diversification is a strategy of expanding into related or un-

related products or market segments. Diversification helps the firm avoid the
problem of having all its eggs in one basket by spreading risk among several prod-
ucts or markets. However, diversification also forces the company’s managers to
split their attention and resources among several products or markets. Thus,
diversification may undermine the firm’s ability to compete successfully in its
chosen markets.
Related diversification means diversifying into other industries so that a firm’s
lines of business still possess some kind of fit. For example, Ferrari could probably
sell more high-performance cars if it wanted to, but, preferring exclusivity, it limits
production. However, Ferrari capitalizes on its exclusive image by diversifying. For
example, the company licenses Ferrari designer logo apparel and sponsors week-
end trips for Ferrari owners to Napa Valley.27 In contrast, unrelated or conglomer-
ate diversification means diversifying into products or markets not related to the
firm’s present businesses or to one another. For example, Getty Oil diversified into
pay television.
Amazon.com pursued both related and unrelated diversification. It originally
specialized in selling books. It soon diversified into music and electronics. It then
formed partnerships with companies like Toys “R” Us to manage their Internet-
based sales.28
● Vertical Integration Vertical integration means owning or controlling the in-

puts to the firm’s processes and/or the channels through which it distributes its
products or services. Thus, Shell drills and refines its own oil and also sells it
through company-controlled outlets.
Today, firms like Cisco often do not produce the electronic devices (such
as cell phones) that bear their names. Instead, vertically integrated manufacturers
like Solectron and Flextronics assemble them. These manufacturers (such as
Solectron) are continuing to integrate vertically. They are buying up design firms
and even shipping firms, because “many are trying to provide cradle to grave ser-
vices from designing to final ship to customers.”29
Diversification and integration needn’t rely on only internal growth; some-
times the firm can gain similar benefits by partnering with other companies.
Strategic alliances or joint ventures are often the strategies of choice here. They are
formal agreements between two or more companies that enable the partners to
benefit from complementary strengths.
● Joint Ventures Joint ventures are companies that involve joint ownership and
operation by two or more companies of a business. For example, a small, Florida-
based company with a patented industrial pollution–control filter formed a joint
venture with a subsidiary of Shell Oil. Here, the joint venture was a separate cor-
poration based in Europe to which each partner contributed funds and other re-
sources. The oil firm got access to a product that could revolutionize its distilling
facilities. The filter company got access to the oil firm’s vast resources and Euro-
pean marketing network.
Joint ventures are one example of strategic alliances—agreements between ac-
tual or potential competitors to achieve some strategic aim. Managers should enter
such alliances with care. Several years ago, Bertelsmann’s BMG music subsidiary
decided to partner with the original Napster, the file-sharing service. Predictably,
the other major record labels were soon suing Napster for copyright infringement,
and Napster soon suspended its file-sharing service and went bankrupt. Its board
then ousted Bertelsmann’s CEO, who had masterminded the alliance.30
The virtual corporation is a modern version of the strategic alliance. It is “a tem-
porary network of independent companies—suppliers, customers, even erstwhile
rivals—linked by information technology to share skills, costs, and access to one an-
other’s markets.”31 Successful virtual corporations rely on trust and on a sense of
codestiny: everyone in these alliances needs to recognize that the fate of each part-
ner and of the alliance as a whole depends on each partner doing its share.
Virtual corporations usually aren’t corporations at all in the traditional sense
of common ownership or a chain of command. Instead, they are networks of
companies. Each lends the virtual corporation/network its special expertise. In-
formation technology enables the virtual corporation’s far-flung constituents to
communicate and make their contributions.
● Managing Now The website eLance (www.elance.com) provides a virtual envi-

ronment that enables freelance consultants and graphic designers to sell their ser-
vices to businesses. For example, it allows them to post information about their skills
and fees.32 Denver-based graphic designer Serena Rodriguez gets about 10 percent
of her business through that site. She works on projects electronically and long dis-
tance, without seeing or being a formal part of client firms like pharmaceuticals
manufacturer Merck. Getting a big project often means recruiting other free agents
to join your virtual team. For example, says website designer Andrew Keeler, “I work
with lots of people here in San Francisco whom I’ve never even met.”33
Types of Competitive Strategies

Whether a company concentrates on a single business or diversifies into a dozen
or more, each of those businesses needs a competitive strategy. Professor Michael
competitive strategy: a plan Porter defines competitive strategy as a plan to establish a profitable and sus-
to establish a profitable and tainable competitive position against the forces that determine industry competi-
sustainable competitive position tion.34 The competitive strategy specifies the basis on which the company will
against the forces that determine
compete. For instance, Volvo competes based on safety, and Lexus competes
industry competition
based on high quality. Firms generally pursue one of three competitive strategies:
cost leadership, differentiation, or focus.
● Cost Leadership Most firms try to hold down costs. A cost leadership com-
petitive strategy goes beyond this. A business that pursues this strategy aims to be
the low-cost leader in an industry. It usually does this
by minimizing costs across the board.
● Managing Now Managers increasingly use infor-

mation technology (IT) to drive their cost leadership
strategies. Information technology helps Westdeutsche
Bank pursue its low-cost competitive strategy. The
German bank’s mortgage subsidiary’s strategic goal is to
become the lowest-cost provider of real-estate loans for
private customers through its branches in London and
Germany.35 To accomplish this goal, management knew
it had to streamline its entire loan-approval process.
Management’s solution included installing records-
management software from SAP. The new system dra-
matically reduced the need for paper-based manual
tasks, improved the bank’s ability to respond quickly to
customer inquiries, and improved efficiency. Manage-
Information technology helps Westdeutsche Bank pursue its ment estimates their records-management unit is sav-
low-cost competitive strategy. ing at least 21⁄2 hours per employee per week with the
new system. That time savings helps the bank achieve its strategic goal of being
the low-cost leader in its markets.
● Differentiation With a differentiation strategy, a firm seeks to be unique in

its industry along some dimensions that are valued by buyers.36 The manager
picks one or more attributes of the product or service (such as quality, reliabilty,
or high fashion) that buyers (hopefully) perceive as important. The firm then
positions itself to meet those needs better than its competitors, for instance, by
how it produces, advertises, or sells the product or service.
Companies differentiate in many ways. These range from the product image
offered by cosmetics firms (Revlon) to concrete differences such as product dura-
bility (Caterpillar), safety (Volvo), usability (Apple Computer), and quality (Lexus).
● Focusers Differentiators (like Volvo) and low-cost leaders (like Dell) are gen-
eralists when it comes to the market. They aim to sell to all or most potential buy-
ers. Pursuing a focus competitive strategy means the company selects a narrow
market segment and then builds its business by serving the customers in that
niche better or more cheaply than do its generalist competitors. Here, the man-
ager must ask, “By focusing on a narrow niche market, can we provide our target
customers with a product or service better or more cheaply than could our gener-
alist competitors?” If the answer is yes (and if the market is big enough), it may pay
to focus. A Pea in the Pod, a chain of maternity stores, focuses on selling stylish
clothes to pregnant working women. By focusing, the company can provide a
wider range of such clothes to its target customers than can generalist competitors
like Macy’s or JCPenney.
Managers now often make IT-based systems the centerpiece of their compet-
itive strategies. The accompanying Window on Managing Now feature illustrates
this.
Functional Strategies
Finally, functional strategies flow from and depend on the business’s competitive
functional strategy: strategy. A functional strategy lays out a department’s basic operating policies.
a strategy that lays out a For example, Dell competes as the industry’s low-cost leader. To execute this com-
department’s basic operating petitive strategy, it formulated departmental functional strategies that support
policies, such as where to build Dell’s desired (low-cost leader) position. For example, the customer-service de-
plants and what sorts of
employees to hire
partment created a new system that enables Dell advisers to link to customers’
computers (with the customers’ permission) to efficiently and quickly analyze
technical problems. We saw the production department uses special supply chain
systems to automatically coordinate production and shipping. The sales depart-
ment relies almost exclusively on direct telephone or Internet sales to eliminate
the costs of intermediaries such as retail stores.
Strategic Planning Tools

Strategic planning involves choosing strategies that will balance (1) the firm’s
strengths and weaknesses with (2) its external opportunities and threats. Ideally,
the manager wants to take advantage of opportunities (such as booming
demand in China), while capitalizing on the company’s strengths (such as a net-
work of friends and acquaintances in Asia). He or she also wants to anticipate and

Pella’s New Competitive Advantage
Pella Corporation manufactures and sells standard and their customers by offering better-designed products
custom windows and doors through a network of sales faster and with a minimum of hassle.
branches and sales associates throughout the United Working with consultants, Pella installed Oracle
States and the world. The company’s basic supply chain E-Business Suite. This enterprise software system included
starts with the customer sale.The chain of events then in- software packages such as Oracle Manufacturing and
cludes creating the actual order, designing the product, Oracle Procurement, Sales Online, Order Management,
scheduling production, acquiring the raw materials and and Marketing. The new system dramatically improved
components (such as locks and hinges), manufacturing it, Pella’s operations and competitiveness. For example, the
and delivering it to the customer. Oracle Procurement package helped reduce the number
Getting from the initial order to the final delivery is of calls between Pella’s purchasing department and suppli-
actually quite complex. Doing so involves hundreds of ers by as much as 95 percent because it processes most
not-so-obvious supporting tasks. These tasks include, for of these purchase transactions online automatically. That
example, creating invoices, computing sales commissions, saved Pella about 20 percent in unplanned overtime labor
sending delivery notices to contractors, and generating hours. Pella also now puts bar codes on all its products
accounts payable authorizations for paying suppliers. And and components, so it’s easier to track them by just scan-
because Pella produces custom products, there are liter- ning the item into Pella’s new Oracle system. This change
ally millions of possibilities when it comes to dimensions, led to about a 20 percent reduction in warehouse receiv-
window color, and composition. It’s also a very expensive ing labor costs, and means managers can keep closer tabs
process. It used to be filled with costs for manually com- on inventory.
pleting things like orders, production schedules, inventory This Oracle Web-based E-business Suite system pro-
lists, and delivery notices. vides Pella with a new competitive advantage—delivering
Strategically, Pella is a differentiator. It produces win- accurate orders more quickly and at lower cost. Cus-
dow and doors, with a strong brand image for quality and tomers can now get the products they ordered faster and
reliability, at competitive costs. The company’s managers at lower cost than they might otherwise. It thereby
believed it could strengthen its differentiation strategy by helped management strengthen Pella’s differentiation
automating and streamlining the steps in its supply chain strategy. The company can now deliver even more quality
process.They did not want just lower costs, although that and reliability to its customers by offering better-designed
was important. They wanted to deliver more value to products faster, at lower costs.37
make accommodations for threats and reduce (or avoid) strategies that might
depend on the firm’s weaknesses. Managers use SWOT analysis, environmental
scanning, portfolio analysis, and the BCG matrix as strategic analyis tools to
accomplish this balancing act.
● SWOT Analysis Managers use SWOT analysis to consolidate information

regarding their firm’s internal strengths and weaknesses and external opportuni-
ties and threats. The SWOT analysis matrix (shown in Figure 7.6) supplies illustra-
tive generic strengths, weaknesses, opportunities, and threats (SWOT) to guide
the manager’s analysis. It also provides a standardized four-quadrant format for
compiling the company’s strengths, weaknesses, opportunities, and threats.
F IGURE 7.6 Potential Strengths Potential Weaknesses

SWOT Matrix with Examples ■ Market leadership ■
Large inventories
of a Company’s Strengths, ■ Strong research and development ■
Excess capacity for market
Weaknesses, Opportunities, ■ High-quality products ■
Management turnover
and Threats
■ Cost advantages ■
Weak market image
■ Patents ■
Lack of management depth
Potential Opportunities Potential Threats

■
New overseas markets ■
Market saturation
■
Falling trade barriers ■
Threat of takeover
■
Competitors failing ■
Low-cost foreign competition
■
Diversification ■
Slower market growth
■
Economy rebounding ■
Growing government regulation
● Environmental Scanning Managers traditionally scan or monitor six key areas

of the company’s environment to identify opportunities and threats for their
SWOT analyses. Environmental scanning is the process of gathering and compil-
ing information about six environmental forces that might be relevant to the firm’s
strategic planners:
1. Economic trends. For example, the U.S. government now projects that the
country’s economic growth through 2014 will be below that of 1995–2005.
What opportunities and threats would such a trend imply for businesspeople
thinking of expanding in the United States and abroad? (GE recently reached
the point where just over half its sales come from abroad.)
2. Competition trends. These trends involve actions taken or to be taken by cur-
rent and potential competitors. For example, Google’s emergence as a search
powerhouse put Microsoft’s search technology at a disadvantage.
3. Political trends. For example, most cigarette firms have diversified into other
businesses as government regulations became more widespread.
4. Technological trends. For example, companies that own chains of movie the-
aters are irate that Disney wants to introduce new movies simulateously to the
theaters and on DVDs.38
5. Social and demographic trends. These trends reflect the way people live and
the nature of the people in a society, including what they value. In the United
States, for instance, the proportion of Hispanic people is rising. This prompted
GE’s NBC division to purchase the Spanish-language network Telemundo.
6. Geographic trends. These trends relate to climate, natural resources, and so
forth. In Florida, for instance, climate change has reduced the growing area for
oranges. Florida growers therefore formed alliances with South American
firms, who now supply much of the “Florida oranges.”
● Portfolio Analysis We saw that diversified firms end up with several busi-
nesses in their portfolios. For example, Rupert Murdoch’s News Corporation owns
F IGURE 7.7
BCG Matrix High STARS QUESTION MARKS
Market Growth Rate

After the position of each of the
company’s businessses is plotted, a
decision can be made regarding
which businesses will be cash
resources and which will be cash
users.
Low CASH COWS DOGS
High Low
SOURCE: Adapted from “The Product Relative Market Share

Portfolio,” Perspectives, no. 66, Boston
Consulting Group.
newspapers, television stations (Fox), and movie studios. How does the manager
decide which business to keep and which to sell? The BCG matrix is one tool.
● BCG Matrix The BCG matrix, developed by the Boston Consulting Group,
helps managers identify the relative attractiveness of each of a firm’s businesses.
It assumes that a particular business’s attractiveness depends on two things—the
growth rate of the business and the business’s market share. As you can see in
Figure 7.7, the manager plots each business on the matrix at the intersection of
the business’s estimated growth rate and relative competitive position (market
share).
This process identifies four types of businesses (see Figure 7.7). Stars are busi-
nesses in high-growth industries and in which the company has a high relative
market share. For example, Apple’s iPod business has a high growth rate and a very
high market share. Star businesses usually require large infusions of cash to sus-
tain growth. Their strong market positions help them generate the needed cash.
Question marks are businesses in high-growth industries, but the firm has low
market shares. The manager here faces a dilemma: the company must either di-
vert cash from its other businesses to boost the question mark’s market share or
get out of the business.
Cash cows are businesses in low-growth industries (such as cigarettes) that
enjoy high relative market shares. Being in a low-growth industry argues against
making large cash infusions into these businesses. However, their high market
share generally allows them to generate high sales and profits for years, even with-
out much new investment. Cash cows can therefore help drive a firm’s future suc-
cess. For example, Kodak’s consumer film unit is still a cash cow: the market is
shrinking fast, but Kodak has a big market share. In one recent year, Kodak was
able to generate over $1 billion in cash flow from its film business, which helped
nurture its digital photography growth business (a star business for Kodak).39
Finally, dogs are businesses with low market shares in low-growth industries.
The low market share puts the business in jeopardy relative to its larger competitors
(who can vastly outadvertise it, for instance). As a result, dogs can quickly become
cash traps, absorbing cash to support a hopeless low-growth situation. Managers

usually sell them to raise cash to build their star and question-mark businesses.
Strategy Execution and Digital Dashboards

Online Study Center
ACE the Test
Managing Now! LIVE D esigning the strategy is just the first part of the manager’s strategy manage-
ment job. The challenge isn’t just designing good strategies; it is getting em-
ployees to execute them. For example, researchers studied 1,800 large companies.
About 90 percent had detailed strategic plans with strategic goals. However, only
about one in eight achieved their strategic goals.40
Several factors help to explain why strategic goals go unmet. In one study,
consultants found that most of the 200 firms they surveyed didn’t even bother
tracking performance: “In our experience, less than 15 % of the companies make it
a regular practice to go back and compare the business’s results with the perfor-
mance forecast for each unit. . . .”41 Other reasons for not achieving the strategic
goals included allocating insufficient resources for executing the plan, poorly
communicating the strategy and goals to employees, and not clarifying what em-
ployees had to do to execute the strategy or who was in charge of what.
In other words, many managers spend a lot of time formulating strategic
plans, but then drop the ball, by not communicating their plans to employees, by
not assigning each employee clear goals and responsibilities, and by not monitor-
ing actual progress.
Traditional Methods for Improving

Strategy Execution
Therefore, if management expects employees to help execute its strategic plan, it
must ask, “Does every employee in the organization understand the business
strategy and how he or she can contribute to the success of the strategy?”42 Three
traditional ways for accomplishing this include face-to-face communicating,
management by objectives, and executive assignment tables.
● Face-to-Face Communications Managers traditionally use face-to-face com-

munications to encourage employees to help execute the managers’ plans. CEO
Lawrence Bossidy took this approach when he merged Honeywell Corp. and Al-
liedSignal. In his first two months, “I talked to probably 5,000 employees. I would
go to Los Angeles and speak to 500 people, then to Phoenix and talk to another
500. I would stand on a loading dock and speak to people and answer their ques-
tions. We talked about what was wrong and what we should do about it.”43
● Management by Objectives (MBO) As we explained earlier, many firms still

use management by objectives to communicate and set goals for employees and
to monitor their employees’ progress in meeting their goals. Department heads
meet with their own bosses, and then with their own employees, to work out and
assign objectives. The problem is that MBO is time-consuming. It requires numer-
ous meetings among employees and supervisors, and then documenting each
person’s goals. Then managers typically assess each employee’s performance no
more than once or twice a year.
● Executive Assignment Tables Many managers use an executive assignment

table similar to the one shown in Table 7.1 to clarify who is responsible for what
T ABLE 7.1
Executive Assignment Action Plan for Achieving a Long-Term Objective*
Long-term goal: have a minimum of 55% of sales revenue from customized products by 2008.
Each Manager’s Which Manager How Will We
Executive Does This, and Who By When Does the Resources Manager Monitor
Assignment/Goals Helps Him or Her? Manager Do This? Will Require . . . Progress?
Primary Supporting Start Complete Capital Operating Human Labor
1. Complete market study Vice president, Vice president, Year 1 Year 1 $10,000 500 hrs. Written
on sales potential for marketing sales progress
customized products report
2. Revise sales Vice president, Vice president, Year 1 50 hrs. Revise
forecasts for sales marketing forecasts
years 1, 2, and 3
to reflect changes
3. Convert Building Vice president, Vice president, Year 1 Year 2 $500,000 $80,000 1,100 hrs. Written
C to customized manufacturing engineering; progress
manufacturing vice president, reports
operation by 2008 administration
4. Change compensation Vice president, Vice president, Year 1 Year 1 $50,000 100 hrs. Revised
structure to create human sales structure
better incentives resources report
for customized sales
5. Train sales staff in Director of Vice president, Year 2 Year 2 $50,000 1,000 hrs. Training plan
Strategy Execution and Digital Dashboards

new technology training sales reports
6. Expand production of Vice president, Vice president, Budgeted Budgeted Production
customized products manufacturing engineering reports
—to 25% Year 1 Year 2
—to 30% Year 2
—to 40% Year 3
—to 50% to 55% Year 3
7. Increase sales Vice president, Vice president, Sales reports
of customized sales marketing
products
—to 25% Year 1 Year 2
—to 30% Year 2
—to 40% Year 3
—to 55% Year 3
8. Revise sales Vice president, Vice president, Year 3 Revised
forecasts sales marketing forecasts
■
*This executive assignment action plan shows the specific executive assignments required to achieve top management’s long-term objective:
“have a minimum of 55% of sales revenue from customized products by 2008.”
199
Source: Adapted from George Morrisey, A Guide to Long-Range Planning (San Francisco: Jossey-Bass, Inc., 1996), pp. 72–73.
aspect of the plan. As you can see, the table lists each manager’s assignment in
executing the company’s strategic plan. In this case, one long-term top-management
strategic goal is to “have a minimum of 55% of sales revenue from customized
products by 2008.” The executive assignment table then lists each department’s
goals and roles. For example, the vice president of marketing (supported by the
sales vice president) should “complete a market study of sales potential for
customized products” by the end of year 1.
In summary, managers need tools for communicating strategic goals to sub-
ordinates and for monitoring actual progress. Assigment tables provide managers
with specific, measurable objectives against which they can measure their perfor-
mance. However, tables like these are time-consuming to produce. Furthermore,
the typical annual or semiannual milestones at best permit periodic, rather than
real-time, performance assessments. MBO has much the same delay problem.
Managers today need real-time feedback on how they are doing.
Managing Now: Strategy Maps

To get this real-time feedback, managers now often use a performance-management
process to communicate goals and responsibilities and to track performance. In
this context, performance management refers to any system that focuses employ-
ees on the goals and initiatives that they must execute for the company to succeed,
and that gives managers a timely way to monitor performance and take corrective
action. The basic idea of modern performance management is to use information
technology to give management a real-time bird’s-eye view of how the company is
doing in terms of (1) carrying out the tasks required to achieve its strategic goals
and (2) actually achieving those goals. This process relies on three information
technology–based tools: strategy maps, balanced scorecards, and digital dash-
boards. Figure 7.8 summarizes this process. It starts with the strategy map.
F IGURE 7.8 PERFORMANCE MANAGEMENT PROCESS
Summary of Performance- A system that focuses employees on the goals and initiatives that they must execute for the
Management Process company to succeed, and that gives managers a timely way to monitor performance and
take corrective action.
STRATEGY BALANCED DIGITAL

MAP SCORECARD DASHBOARD
Graphical tool that A process for managing Presents the manager

summarizes the chain of employees’ performance with desktop graphs and
activities that contribute to and for aligning all employees charts, so he or she gets a
a company’s success, and so with key objectives, by picture of where the
shows employees the “big assigning financial and non- company has been and
picture” of how their financial goals, monitoring where it’s going, in terms
performance contributes to and assessing performance, of each activity in the
achieving the company’s and quickly taking corrective strategy map.
overall strategic goals. action.
Strategy Execution and Digital Dashboards ■ 201
strategy map: a graphical tool The strategy map is a graphical tool that summarizes the chain of activities
that summarizes the chain of that contributes to a company’s success. Thus, it shows the big picture of how each
activities that contributes to a department’s or team’s performance contributes to achieving the company’s over-
company’s success
all strategic goals.
Figure 7.9 presents a strategy map for Southwest Airlines. Southwest pursues
a low-cost leader competitive strategy. Therefore, it shapes all its activities to
F IGURE 7.9
Strategy Map for Southwest Airlines
Shareholder
Value
Financial Aims
Profits and Return

on
Assets
Grow Fewer
Revenues Planes
Attract
Customer Aims and Keep
Customers
On-Time Low
Flights Prices
Internal Fast Plane

Operations Turnarounds
Committed
Employee Ground and
Considerations Flight Crews
SOURCE: Adapted from Ravi Tangri,“Creating a Strategy Map,” www.teamchrysalis.com.

delivering low-cost, convenient service. The strategy map for Southwest suc-
cinctly lays out the hierarchy of big activities required for Southwest Airlines to
succeed. At the top is achieving companywide, strategic financial goals. The strat-
egy map in Figure 7.9 shows the chain of activities that helps Southwest achieve
these goals. To boost revenues and profitability, Southwest needs to fly fewer
planes (to keep costs down), attract and keep customers, maintain low prices, and
maintain on-time flights. In turn (further down the strategy map), on-time flights
and low prices require fast turnaround. And fast turnaround requires motivated,
committed ground and flight crews.
The strategy map enables Southwest’s management to see in broad terms each
of the major activities that contribute to Southwest’s success. It also helps
employees understand their assignments and roles. For example, each ground-
crew employee can see that by working hard to turn planes around fast, he or she
is contributing to a chain of activities that helps make Southwest profitable.
The Balanced Scorecard

Once the manager outlines the activities with the strategy map, he or she must
attach measurable targets to each of these activities. For example, he or she must
answer questions like “What do we mean by faster turnaround time?” and “What
do we mean by on-time flights?” The balanced scorecard is one way to do this. The
balanced scorecard: a type balanced scorecard is a type of performance-management process. In particular,
of performance-management it involves (1) assigning financial and nonfinancial goals to the activities in the
process that involves strategy map, (2) informing all employees of their goals, (3) continuously monitor-
(1) assigning financial and
ing and assessing performance, and (4) taking corrective action as required. The
nonfinancial goals to the
activities in the strategy map, word balanced in balanced scorecard refers to a balance of goals. It includes a
(2) informing all employees of balance of financial and nonfinancial goals, of short-term and long-term goals,
their goals, (3) continuously and of external goals (for instance, what the customer thinks) and internal goals
monitoring and assessing (for instance, airplane turnaround time). Southwest might want to measure turn-
performance, and (4) taking around time in the following terms: “Improve turnaround time from an average
corrective action as required of 30 minutes per plane to 26 minutes per plane this year.” It might measure
customer satisfaction with periodic surveys.
The great advantage of the balanced-scorecard approach is that it is predictive.
Financial goals such as budgets are better at telling managers how they’ve done
than how they’ll do tomorrow. On the other hand, monitoring a balanced set of
measures can signal problems ahead. Thus, doing so might prompt Southwest
Airlines’ CEO to say, “Our customer-service ratings dipped, and since customer
service leads to more customers and in turn to future revenues, we should take
corrective action now.”
As part of the balanced-scorecard process, management will probably pre-
pare performance measures, as well as management initiatives for achieving
these measures, for each of the main activities in the firm’s strategy map. For ex-
ample, “to attract and keep customers” is one strategy-map activity for Southwest.
performance The manager might therefore prepare measures and initiatives similar to those in
management: any system Figure 7.10 for this activity. Specifically, he or she would list several objectives, for
that focuses employees on the instance, in terms of customer satisfaction (as measured by customer surveys).
goals and initiatives that they For each objective, the manager might also list several initiatives aimed at sup-
must execute for the company
to succeed, and that gives
porting these customer-satisfaction objectives.
managers a timely way to The balanced-scorecard process is one specific example of performance man-
monitor performance and take agement. As noted, performance management refers to any system that focuses
corrective action employees on the goals and initiatives that they must execute for the company to
Strategy Execution and Digital Dashboards ■ 203
F IGURE 7.10
Balanced Scorecard: Performance Measures, Performance Targets,
and Management Initiatives
ONE BALANCED SCORECARD PERFORMANCE MEASURE AND TARGET*
BALANCED HOW TO MANAGEMENT INITIATIVES TO

OPERATIONAL IMPROVE PERFORMANCE
SCORECARD MEASURE
TARGET
OBJECTIVE OBJECTIVE
Project Manager Due Date
Customer Satisfaction Timeliness 95% customer Analyze why January Janis Smith, March 31,
(Based on customer Extent of customer satisfaction 2007 boardings customer 2007
surveys) satisfaction with timeliness ratings satisfaction ratings service
of airline boardings, dropped to 85% manager
takeoffs, arrivals
*Note: Customer satisfaction is one measure of how Southwest Airlines is doing. A company like Southwest might have a table like this
addressing each activity in its strategy map, along with specific measurable targets, and (as required) management initiatives for
diagnosing and rectifying poor performance. The objectives and measures in this table become the basis for Southwest’s performance
management process. Specifically, it enables management to monitor how employees are doing with respect to the balanced set of
objectives in its strategy map, and thereby makes sure employees are doing what is necessary to achieve the objectives—like customer
satisfaction—that Southwest must achieve to be successful.
SOURCE: Adapted from Steve Logan,“Balanced Scorecard 101.”
succeed, and that gives managers a timely way to monitor performance and take
corrective action. Four features characterize performance management:
1. The aim of any performance-management process is to align the employees’
efforts with the company’s strategic goals.
2. It provides each employee, from the top to the bottom of the chain of com-
mand, with an easy way to visualize and understand his or her role in achiev-
ing the company’s strategy.
3. Employees receive individual goals that make sense in terms of supporting
the company’s overall strategic goals.
4. It includes a process for continuously monitoring employees’ performance
and for taking timely corrective action, usually information technology–based.
Digital Dashboards and Performance-Management

Systems
Even a simple strategy map like that for Southwest Airlines may produce dozens of
objectives, measures, and initiatives. How is the manager to monitor, integrate,
and analyze information on performance for all employees and activities on all
these measures—and do so in real time?
Airlines like Southwest

and JetBlue use strategy
maps to identify the
chain of activities that
determine their
performance.
Managers now use special performance-management software systems to do

this. These systems integrate and store information from hundreds or thousands
of sources (for instance, feedback from customer surveys, daily airplane turn-
around statistics, employee performance measures, and on-time flights). They
employ built-in analytical tools to review and analyze all this information and to
provide managers with continuous, real-time updates regarding the company’s
performance. The performance-management systems then generally present the
summarized information the managers need in computerized digital dashboards.
● The Digital Dashboard The saying “A picture is worth a thousand words”

digital dashboard: a explains the purpose of the digital dashboard. A digital dashboard (like that in Fig-
computer dispay that presents ure 7.2 on page 184) presents the manager with desktop graphs and charts showing
the manager with desktop where the company has been and where it’s going in terms of each activity in the
graphs and charts showing
strategy map. The dashboard takes all the results of the number crunching by the
where the company has been
and where it’s going in terms of company’s performance-management software and presents it to the manager in an
each activity in the strategy map intelligible form. For example, a top manager’s dashboard for Southwest Airlines
might display daily trends for strategy-map activities such as fast turnaround, at-
tracting and keeping customers, and on-time flights. This gives the manager time to
take corrective action. For example, if ground crews are turning planes around slower
today, financial results tomorrow may decline unless the manager takes action.
Like automobile dashboards, these digital dashboards also usually present in-
formation so it grabs the manager’s attention, such as by a graph blinking red if
turnaround time is trending down. For example, SAS software’s Strategic Perfor-
mance Management package is a Web-based system that produces alerts “that call
employees to action when performance is not meeting targets.”44
Software systems like Strategic Performance Management help managers
make better decisions. For example, Oracle’s Balanced Scorecard package lets
management compare their performance (for instance, with respect to airline turn-
around time) against industry peers as well as against internal budgets and histor-
ical data. From their desktops, managers can also click on any indicator to perform
more-detailed analyses. If there are problems, the system enables employees to
collaborate online and thus analyze the causes and take corrective action.
With a digital dashboard based on the strategy map, managers can also see
how their decisions at each level affect the company’s strategy. As the managing
director of a Danish mortgage credit organization says, “When I turn on my com-
puter in the morning, our scorecard is the first thing I see. . . . If I discover any devi-
ations of the key figures I contact the person responsible for the specific area. . . .”45
Discussion Questions ■ 205
CHAPTER SUMMARY
1. Plans are methods for achieving a desired result. instance, for finding all the websites linked to the
Goals or objectives are specific results you want to competitor’s site and for carefully reviewing its
achieve. Planning is the process of establishing investor relations pages.
objectives and courses of action, prior to taking 7. The steps in the strategic-management process in-
action. clude define the business and its mission, perform
2. Planning lets you make your decisions ahead of external and internal audits, translate the mission
time, provides direction and a sense of purpose, into goals, formulate strategies to achieve the
provides a unifying framework, avoids piecemeal strategic goals, implement the strategy, and evalu-
decision making, helps managers identify potential ate performance via strategic control.
opportunities and threats, and facilitates control. 8. Examples of strategies include corporate-level
3. The management process consists of five steps: strategies (such as concentration and diversifica-
set the objective, develop forecast and planning tion), competitive strategies (such as low-cost, dif-
premises, determine what the alternatives are, ferentiator, and focuser), and functional strategies.
build alternatives, implement and then evaluate 9. A strategy map is a graphical tool that summarizes
the plan. the chain of activities that contributes to a com-
4. Goals are specific, measurable, attainable, rele- pany’s success and shows employees how their
vant, and timely (SMART). performance contributes to achieving the com-
pany’s overall strategic goals.
5. Forecasting is estimating or calculating in advance
or predicting. Basic forecasting techniques include 10. Performance management refers to any systems
time-series forecasting, causal forecasting, and that focus employees on the goals and initiatives
qualitative forecasting. Qualitative methods in- that they must execute for the company to suc-
clude jury of executive opinion and the sales force ceed, and that give managers a timely way to
estimation method. Managing now often involves monitor performance and take corrective action.
automating the forecasting process by using infor- Today, information technology supports the per-
mation technology systems to continuously moni- formance-management process, for instance, by
tor demand for the company’s product and to using the balanced-scorecard process to apply a
communicate this information to management. balanced set of financial and nonfinancial meas-
ures to the activities in the strategy map and then
6. Competitive intelligence is a systematic way to reporting actual performance in real time to man-
obtain and analyze public information about agement via desktop digital dashboards.
competitors. The Web is useful for this task, for
1. What are the advantages of planning? 5. What is competitive intelligence? Do you think that
it is an ethical process?
2. What are the basic steps in the planning process?
What are the “two small complications” that occur 6. What are the basic components of a business plan?
when managers apply that process in planning for
7. What is a strategic plan? What purpose does it
their firms?
serve?
3. In what ways are SMART goals smart?
8. What is performance management? What is its re-
4. What are some advantages and disadvantages of lationship to strategy maps, balanced scorecards,
making sales force estimates based on forecasts and digital dashboards?
collected from the sales force?
1. It is probably safe to say that a person’s career plan including details such as mission and vision state-
is one of the most important plans he or she cre- ments; strategic goals; corporate, competitive, and
ates. Unfortunately, most people never write out functional strategies; and a summary of what busi-
such a plan, or they don’t realize they need one ness your college or university is in. In preparing
until it’s too late. Using the concepts and tech- your plan, make sure to conduct an environmental
niques in this chapter, develop an outline of a scan, collect competitive intelligence, and use a
career plan for yourself, one that is sufficiently de- SWOT chart. Draw a strategy map for the college or
tailed to provide direction for your career decisions university.
over the next five years. Make sure to include
3. Meet in groups of three or four students and clas-
measurable goals and milestones.
sify local businesses as to whether they appear to
2. With three to four other students in the class, form be pursuing differentiator, low-cost, or focuser
a strategic-management group for your college or strategies. Explain why you classified the busi-
university. Your assignment is to develop the out- nesses the way you did.
line of a strategic plan for your college or university,
CASE STUDY
The JetBlue Airways Strategy
n the hugely competitive airline industry, a company emergency medical evacuation from Europe to the
I needs the right strategy, or it may as well close its
doors. In the twenty or so years since the U.S. govern-
United States, focus on serving very specific niche
markets.
ment deregulated the airline industry, dozens of air- In terms of competitive strategy, JetBlue seems to
lines, from Pan Am to Eastern, have gone out of busi- be following a hybrid approach. It seeks to combine the
ness because they had the wrong strategy or because advantages of being a low-cost leader with the kind of
strategy execution was less than effective, or both. quality service you’d expect to find only on major dif-
Therefore, when David Neeleman said he was start- ferentiator airlines such as American. JetBlue keeps
ing a new airline, there was some skepticism. However, cost down by flying new, low-maintenance planes;
JetBlue has been successful and profitable since its in- eliminating meals; training teams of employees to turn
ception, so most of that skepticism has evaporated. aircraft around quickly; and flying only one type of air-
In terms of its corporate-level strategy, JetBlue’s craft so that all pilots and crew can easily switch from
plan wasn’t that different from the plan followed by plane to plane. At the same time, JetBlue aims to pro-
other industry start-ups. Its management started small, vide top-notch service. Passengers get leather seats,
with several flights from JFK to Fort Lauderdale and each with its own TV monitor. JetBlue’s Airbus seats are
from JFK to upper New York State. Gradually, it pursued about an inch wider than those on most Boeing econ-
geographic expansion, starting with a JFK to Long omy-class seats. Managers carefully select and train
Beach route. For now, contractors at some airports, employees to provide upbeat, courteous service. Pas-
such as JFK, handle JetBlue’s servicing. sengers get reserved seats. And while it doesn’t provide
JetBlue really distinguished itself with its competi- meals, JetBlue does provide unlimited snacks.
tive strategy. Most airlines are differentiator, low-cost The competitive strategy has worked until now, but
leader, or focuser. For example, until recently, American the competition is becoming much more fierce. When
Airlines distinguished itself as a differentiator, providing JetBlue was not on the radar screens of competitors like
its passengers with perks like Internet support and a American Airlines, it had the low-cost flights from
strong frequent-flier program. Southwest Airlines is a some airports, such as Fort Lauderdale, pretty much
low-cost leader. Other airlines, like those specializing in to itself. However, its own success has increased the
Case Study ■ 207
attention it gets from competitors. Most of them, like 2. On a single sheet of paper, write the outline of a
American, are using JetBlue’s playbook, for instance, by workable strategic plan for JetBlue.
cutting out meals to lower costs. Therefore, David
3. Based on newspaper reports and an Internet
Neeleman knows he must monitor events very care-
search, identify JetBlue’s current corporate strate-
fully to make sure that his quality-service/low-cost hy-
gies, and list its strategic options.
brid competitive strategy keeps JetBlue flying high. A
breakdown in JetBlue’s systems that left hundreds of 4. List the strategic planning tools you think JetBlue
passengers stranded on JetBlue planes during a snow- should use, and why.
storm in early 2007 made it clear that costs may have
5. Draw a strategy map for JetBlue, and give its man-
already been reduced too much.
agement team a brief, two-paragraph explanation
You and your team are consultants to Neeleman,
for why you think JetBlue should institute a digital
who is depending on your management expertise to
dashboard performance-management system.
help navigate the competitive pressures ahead. Here’s
what he wants to know from you now.
Note: In May 2007, apparently facing intense pressure from
investors and his board stemming from JetBlue’s managing
DISCUSSION QUESTIONS of the February 2007 storms that grounded its planes, David
1. Develop a vision and mission statement for Neeleman relinquished the CEO position to his No. 2, Dave
JetBlue. Barger. Neeleman remains JetBlue’s chairman, however.
8 CONTROLLING
Controlling the Cappuccino Makers at Starbucks
CHAPTER OUTLINE
Opening Vignette: Controlling
the Cappuccino Makers
at Starbucks
● The Fundamentals of
W ith 10,000 company-owned stores around the world doing 34 mil-
lion customer transactions per week, Starbucks knows that control-
ling what’s happening in those stores is very important.1 The question is,
Effective Control How do you control a store
The Basic Control Process
Three Types of Control Systems
that’s 12,000 miles away?
Personal, Traditional, and Commitment- Companies such as Subway
Based Control or McDonald’s don’t have Star-
Using Technology to Stay in Control bucks’ problem. They franchise
at UPS most of their stores, so their
● Traditional Controls top managers can be reasonably
The Basic Financial Management
sure that the local franchisee
Control System
Ratio Analysis and Return on will control what’s happening in
Investment his or her store. If there’s a
Financial Responsibility Centers
problem like stealing, the local
● Managing Now: IT-Enabled
Control Systems owner should be able to catch
Enterprise Resource Planning–Based it before it gets out of hand.
Control But Starbucks decided from Starbucks’ top managers need a way to
More Timely Accounting Reports
day one not to franchise. That control what’s happening in their stores,
Activity-Based Costing (ABC)
even half a world away, as here in China.
WINDOW ON MANAGING NOW: means Starbucks needs a con-
Millipore Corp. Integrates Its Global
trol system that lets its Seattle-based managers control what’s happen-
Operations with ERP
Wireless-Assisted Control ing in each of those 10,000 stores, even if the store is far away. After
Electronic Performance Monitoring reading this chapter, you should be able to recommend a control
(EPM)
Digital Dashboards and Control
system for Starbucks. ■
● How Do People React
to Control? B E H AV I O R A L O B J E C T I V E S
Unintentional Tactics
● Commitment-Based Control
Systems
Creating Belief Systems and Values
to Encourage Self-Control ➤ Describing each step in the basic control process.
Using Commitment-Building Methods ➤ Giving examples of steering, concurrent, and feedback controls.
to Foster Self-Control ➤ Briefly explaining personal, traditional, and commitment-based controls.
PRACTICE IT: Controlling the
➤ Listing the components of the basic financial management control system.
Cappuccino Makers at Starbucks
➤ Comparing activity-based and traditional accounting systems.
➤ Listing four unintended consequences of controls.
208
The Fundamentals of Effective Control ■ 209

➤ Reading the chapter-opening vignette about Starbucks and recommending a control
system for them.
➤ Reading the end-of-chapter exercise and recommending specific feedforward, concur-
rent, and feedback controls the manager could use.
➤ Reading the chapter case study and explaining the unintended behavioral consequences
Ritz-Carlton may experience.

➤ Watching the simulation video and identifying control tools and systems being used by
Online Study Center
ACE the Test the company.
Managing Now! LIVE ➤ Watching the simulation video and explaining what the managers should do to improve
employee commitment.
The Fundamentals of Effective Control

Online Study Center
ACE the Test
Managing Now! LIVE
A s Hurricane Katrina swept through New Orleans several years ago, FEMA offi-
cials’ control systems signalled that the levees had held and that all were safe.
They were soon to find out how mistaken those controls were. Control is the task
of ensuring that activities are providing the desired results. As one expert says,
“The goal [of the control system] is to have no unpleasant surprises in the future.”2
Controlling involves setting targets, measuring performance, and taking correc-
tive action. Most controls therefore aim to influence employee behavior, which is
why controlling someone often has negative overtones. Control also requires that
targets, standards, or goals be set. That is why managers often use the word
control systems: devices planning along with the word control. Control systems collect, store, and trans-
that collect, store, and transmit mit information on profits, sales, or other measures. Starbucks needs a control
information on profits, sales, system to keep track of what’s happening in its stores. In Washington, D.C., FEMA
or other measures
needed a contol system to monitor what was happening with those levees in New
Orleans, Louisiana.
If you could be sure that every plan you made and every task you assigned
would be perfectly executed, you really wouldn’t need control. There would be no
surprises. Unfortunately, events rarely go this smoothly. People vary widely in
abilities, motivation, and ethics. Furthermore, plans themselves become out-
dated, often suddenly. (Think of the scrambling FEMA had to do when the levees
broke.)
Many people associate control with large, companywide accounting systems.
However, those systems are just part of what control is about. Control actually
refers to monitoring every task the manager delegates. Some tasks may be so
unimportant or your subordinates so capable that you needn’t bother with con-
trols. However, most managers know that abdication like this is risky. Someone
once said, “A poor manager delegates nothing, and a mediocre manager delegates
everything. An effective manager delegates all that he or she can to subordinates.
At the same time, the manager establishes sufficient checkpoints so that he or she
knows the work has been performed.”
For every task the managers delegates, he or she should ask, How will I keep
track of whether this job is done right? We’ll see how to do so in this chapter.
210 PART THREE CHAPTER 8 Controlling
The Basic Control Process

As mentioned above, controlling involves setting targets, measuring performance,
and taking corrective action. These three steps comprise the basic control process.
● Step 1: Set a Standard, Target, or Goal This step shows what the results
ought to be. Managers express standards in terms of money, time, quantity, or
quality (or a combination of these). Thus, a salesperson might have a (money)
quota of $8,000 worth of products per month. The editor may give the reporter till
June 1 (time) to submit her column. Production supervisors are usually responsi-
ble for producing a specified number of units (quantity) of product per week.
Lexus speaks glowingly of its few defects per car (quality).
● Step 2: Measure Actual Performance Against Standards The next step

is to measure and compare actual performance with the standard. Here, the man-
ager can use many tools. These range from personally monitoring how employees
are doing to using budgets or information technology–based systems.
● Step 3: Take Corrective Action When the manager compares actual with
planned performance, he or she should check for any significant deviations. If
there are any, the manager takes corrective action.
Three Types of Control Systems

It would surely do Starbucks little good to discover in June that in March, a store
manager had run off with $40,000 of a store’s receipts. By June, the money might
well be lost. Starbucks needs a more responsive control system. Some systems are
more responsive than are others. Managers therefore distinguish among three
types of control systems. All the controls we’ll discuss in this chapter fall into one
of these categories.
steering controls: controls Steering controls (also called feedforward or precontrol) are controls that let
that let the manager take the manager take corrective action before the operation or project is completed.3
corrective action before the Steering controls are always preventive in nature. For example, on a flight to Mars,
operation or project is you would not want to find out after the fact that you missed your mark. Engineers
completed; also called
feedforward or precontrol
therefore track a spacecraft’s flight path continuously so they can adjust its trajec-
tory in time to reach the target.
Managers use steering controls all the time. For example, they set intermedi-
ate milestones and thus check progress long before the project is complete. They
set up procedures to reject defective raw materials and to test and screen out job
candidates who may become problem employees. They review budgets on a com-
parative basis to better identify trends. They monitor aircraft turnaround time on
a daily basis, so they can correct any problems before profits start to suffer.
● Managing Now Information technology (IT) and the Internet have improved
managers’ abilities to make timely midcourse corrections. Boeing’s use of the
Web is a good example. Boeing has an Internet-based network used by 1,000
other companies, including aluminum supplier Alcoa, Inc.4 To gain access to this
network, external users (including most of Boeing’s suppliers and customers)
receive digital certificates from Boeing, with passwords authorizing them to
access the network.
The network allows both Boeing and its suppliers to maintain better, more
timely control by, for example, reducing the number of misunderstandings with
suppliers and customers. Access to the e-network means

suppliers can continually get real-time updates regard-
ing required delivery dates and schedule changes and
can make course corrections if these are required. Boe-
ing also linked its e-commerce system to tracking tools
supplied by delivery services such as FedEx. Customers
can therefore view the status of their parts orders at any
time over the Web, which minimizes delivery surprises.
Boeing’s Internet-based system has improved the
timeliness of the company’s control system in other
ways. For example, employees use the system to moni-
tor production lines: “We use the Web to keep track of
shortages on airplane production lines so that every-
one in the whole organization can know where the hot
spots are, not just management.”5 We’ll look more
closely at IT-based controls later in this chapter.
Concurrent (or yes/no) controls are controls
Concurrent control: A manager talks to customers at a managers apply at the moment the activity to be con-
Cheesecake Factory in California.
trolled takes place. They instantly make yes/no decisions
about whether the activity can take place. For example,
concurrent (yes/no)
controls: controls managers the movie theater clerk makes on-the-spot decisions about whether someone is old
apply at the moment the activity enough to see a particular movie. Yes/no controls often involve applying the com-
to be controlled takes place pany’s rules and procedures. Ideally, when a situation covered by the rules comes up,
the employee will be prepared to say yes or no.
feedback (or postaction) Feedback (or postaction) controls are controls the manager uses to com-
controls: controls the manager pare results to the standard and to take action after the event he or she is control-
uses to compare results to the ling has occurred. The final inspection on a car assembly line is an example. Many
standard and to take action after
other familiar controls fall into this postaction category, including semiannual
the event he or she is controlling
has occurred budgets and the end-of-term grades students receive.
The problem with postaction controls (as with grades) is that you usually can’t
do much to remedy the situation once the results are in. That’s why managers (and
professors) try to inject timeliness into their postaction controls. Instead of just a
final exam, professors give a midterm, too. Instead of just a midyear budget, the
manager prepares monthly budgets, too. The Window on Managing Now feature
shows how UPS uses IT to inject an element of timeliness into their postaction
controls.
Periodic surveys are another example of postaction controls. For example,
twice a year, Siebel Systems (which makes computer systems) has consultants
collect data from about 20 percent of its customers. This provides detailed re-
ports on how satisfied the customers are with specific Siebel departments and
individuals.6
Personal, Traditional, and Commitment-Based

Control
Assume you just took over as editor in chief of your college’s student paper. What
are some of the details you would want to control? A (very) short list would include
article length and quality, advertising revenues, operating expenses, article dead-
lines, article topics, and the format for each issue. How will you make sure all these
details stay under control? Any manager has three basic options: you can (1) mon-
itor things personally; (2) rely on traditional control tools, such as budgets; or
Using Technology to Stay in Control at UPS
UPS is the world’s largest air and ground package- called UPSnet, UPS not only tracks its packages but elec-
distribution company. It delivers close to 3 billion parcels tronically transmits documentation on each shipment di-
and documents each year in the United States and more rectly to customs officials prior to arrival. Shipments are
than 185 other countries. Critical to its success has been therefore either cleared for shipment or flagged for in-
the $1.8 billion UPS invested in information technology. spection when they arrive.
Each UPS driver uses a handheld computer called a deliv- UPS uses the Internet to help it and its customers
ery information acquisition device (pictured on page 223). monitor and control the progress of all those billions of
This device captures customers’ signatures along with packages. For example, the UPS Internet-based tracking
pickup, delivery, and time-card information. Then it auto- system lets a customer store up to twenty-five tracking
matically transmits this information to headquarters via a numbers and then monitor the progress of each package.
cellular telephone network. The system not only lets the customer (and UPS) keep
Through TotalTrack, its automated package-tracking track of each package’s progress, it also serves as a value-
system, UPS can control packages throughout the delivery added feature for the customer. It can easily keep UPS
process. And with its own global communications network customers informed about the progress of every package.
(3) rely on employees’ self-control by appealing to their sense of commitment. (Or,

of course, you can use a mixture of all three.)
● Personal (or Interactive) Control The editor in chief of a college paper

has one big control advantage over the managing editor of the New York Times.
The college paper is probably small enough so that the editor can continuously
talk face-to-face with all the staff. He or she can monitor in real time how every-
personal control:
maintaining control by thing is going.
personally monitoring how Personal control means maintaining control by personally monitoring how
everyone is doing everyone is doing. Personal control is the most basic way to stay in control. Even
large firms use this approach.7 For example, firms like Toyota limit their plants to
a few hundred employees. In this way, interactions and
control in each unit remain more instantaneous and
personal.
In fact, it would be highly unusual for any manager
not to rely to some extent on personal interactions as a
way to stay in control. Some managers formalize this
approach by adhering to the notion of “management
by walking around.” They stay in control, in part, by lit-
erally walking around their facilities to see how things
are going.
Others schedule weekly meetings where they dis-
cuss results. Senior managers at USA Today use this
approach.8 Friday morning they get three weekly re-
ports. This Friday Packet includes information ranging
from advertising sales figures to information about
One simple but effective way to control what’s happening is to particular advertisers. Weekly face-to-face meetings
have people meet and interactively discuss “how we’re doing.” among senior managers and key subordinates help
apply this information. Regular topics include advertising volume compared to

plan and new business by type of client.
traditional control: controls ● Traditional Control Traditional control uses external devices such as budg-
based on external devices such ets and computerized information systems to monitor performance and to report
as budgets and computerized on results. These methods are what usually spring to mind when most people
information systems to monitor
think of control. Thus, Jeffrey Immelt controls GE in part through a system of
performance and to report on
results (computerized) financial controls and budgets.
● Self-Control and Commitment-Based Control Personal observation and

traditional controls like budgets get the manager only so far. No control system
can anticipate every possible crisis. Employees have many ingenious ways of get-
ting around the system. And in many situations (such as building high-quality
cars), you want the employees to want to build in quality; you can’t really force
them to do so. That is why many companies, including Starbucks, work hard to cre-
ate an environment in which employees want to exercise self-control and do what’s
self-control: a set of methods best for the firm. Self-control refers to a set of methods managers use to encourage
managers use to encourage employees to control their own performance.
employees to control their own We’ve summarized the three basic control approaches—personal, traditional,
performance and commitment—in Figure 8.1. We’ll devote the rest of this chapter to discussing
the traditional and the commitment-based systems in detail.
F IGURE 8.1 Systems for

Three Basic Categories Maintaining
of Control Systems Control
Personal-
Commitment-
Traditional Interactive
Based
Control Systems
Control
Systems (monitor
Systems
face-to-face)
Diagnostic IT-Based Systems

Control (such as Belief Systems Commitment-
Systems enterprise (establish Fostering
(budgets, ROI, resource values) Systems
financial ratios) planning)
Traditional Controls
traditional controls: formal,
preplanned, methodical systems
that help managers zero in on
T raditional controls are formal, preplanned, methodical systems that help
managers zero in on discrepancies. Also called diagnostic or budgetary con-
trols, they are the controls most people think of when they think of management
discrepancies
control. Budgets and production reports are two examples. These controls reduce
the need for managers to continually and personally monitor everything for which
Online Study Center they are responsible.9 Having previously set targets or goals, the manager can (at
ACE the Test least in theory) then leave the employees to pursue the goals. Ideally, the manager
Managing Now! LIVE
can be secure in the knowledge that if the goals aren’t met, the deviations will show
up as red flags in performance reports.
This last idea forms the heart of what managers call the principle of exception.
principle of exception: The principle of exception (or management by exception) holds that to conserve
(or management by exception) managers’ time, only significant deviations or exceptions from the standard, “both
holds that to conserve the especially good and bad exceptions,” should be brought to the manager’s
managers’ time, only significant attention.10
deviations or exceptions from
the standard should be brought
to the manager’s attention The Basic Financial Management Control System
Managers—including a student paper’s editor in chief—have many nonfinancial
details to control. For our editor, these include article deadlines, article length and
quality, and the format for each issue. Yet in reality, it’s usually the financial
aspects—the bottom line—that’s first among equals when it comes to control.
Financial controls thus form the heart of a company’s basic management control
system.
Financial controls begin with the firm’s planning process. Management for-
mulates an overall strategy and mission for the firm. This provides a framework
within which the rest of the planning process can take place. Next, management
formulates subsidiary, lower-level plans and a hierarchy of goals. At the top, the
president sets strategic goals (such as “have 55% of sales revenue from customized
products by 2008”). As we discussed in Chapter 7, each functional vice president,
and in turn each of their subordinates, then receives goals.
The result is a chain or hierarchy of departmental goals and short-term oper-
ational goals and plans. At each step in this hierarchical process, management
invariably translates the goals and plans into financial targets and embodies them
in budgets. The president’s goal might translate as “$2 million in revenues from the
Custom Products Division in 2008.” Financial statements and budgets thus be-
come the heart of the firm’s basic management control system. Let’s look more
budgets: formal financial closely at these statements and budgets.
expressions of a manager’s plans
sales budget: a budget that ● Budgets Budgets are formal financial expressions of a manager’s plans.
shows the planned sales activity They show targets for things like sales, cost of materials, production levels, and
for each period (usually in units profit, expressed in dollars. These planned targets are the standards against which
per month) and the revenue the manager compares and controls the unit’s actual performance. The first step
expected from the sales in budgeting is generally to develop a sales forecast and sales budget. The sales
budget shows the planned sales activity for each period (usually in units per
operating budgets: budgets
that show the expected sales month) and the revenue expected from the sales.
and/or expenses for each of the The manager can then produce various operating budgets. Operating
company’s departments for the budgets show the expected sales and/or expenses for each of the company’s de-
planning period in question partments for the planning period in question. For example, the production and
Traditional Controls ■ 215
F IGURE 8.2 OPERATING BUDGET FOR MACHINERY DEPARTMENT, JANUARY 2007
Example of a Budget Budgeted Expenses Budget
Direct Labor $2,107
Supplies $3,826
Repairs $ 402
Overhead (electricity, etc.) $ 500
TOTAL EXPENSES $6,835
materials budget (or plan) shows what the company plans to spend for materials,
labor, administration, and so forth to fulfill the requirements of the sales budget.
● Profit Planning The next step is to combine all these departmental budgets
income statement: the profit into a profit plan for the coming year. This profit plan is the budgeted income
plan that shows expected sales, statement or pro forma income statement. It shows expected sales, expected ex-
expected expenses, and penses, and expected income or profit for the year. In practice, cash from sales
expected income or profit for
usually doesn’t flow into the firm so that it coincides precisely with cash disburse-
the year
ments. (Some customers may take thirty-five days to pay their bills, for instance,
cash budget: a plan that but employees expect paychecks every week.) The cash budget or plan shows, for
shows, for each month, the each month, the amount of cash the company can expect to receive and the
amount of cash the company amount it can expect to disperse. The manager can use it to anticipate his or her
can expect to receive and the cash needs and to arrange for short-term loans, if need be.
amount it can expect to disperse The company also has a budgeted balance sheet. The budgeted balance
sheet shows managers, owners, and creditors what the company’s projected fi-
balance sheet: a statement nancial picture should be at the end of the year. It shows assets (such as cash and
that shows managers, owners,
and creditors what the
equipment), liabilities (such as long-term debt), and net worth (the excess of as-
company’s projected financial sets over other liabilities).
picture should be at the end of Budgets are the most widely used control device. Each manager, from first-
the year, in terms of assets, line supervisor to company president, usually has an operating budget to use as
liabilities, and net worth a standard of comparison. Remember, however, that creating the budget (as in
Figure 8.2) is just the standard-setting step in the three-step control process. You
must still compare the actual and the budgeted figures. And if necessary, you’ll
need to diagnose any problems and take corrective action.
The firm’s accountants compile the financial information and feed it back to
the appropriate managers. As in Figure 8.3, the performance report shows budg-
eted or planned targets. Next to these numbers, it shows the department’s actual
variances: the differences performance numbers. Variances are the differences between budgeted and ac-
between budgeted and actual tual amounts. The report may provide a space for the manager to explain any vari-
amounts (on performance ances. After reviewing the performance report, management can take corrective
reports)
action.
F IGURE 8.3 PERFORMANCE REPORT FOR MACHINERY DEPARTMENT, JANUARY 2007
Example of a Performance Budget Actual Variance Explanation

Report
Direct Labor $2,107 $2,480 $373 over Had to put workers on
overtime.
Supplies $3,826 $4,200 $374 over Wasted two crates of

material.
Repairs $ 402 $ 150 $252 under Fewer repairs than

planned.
Overhead $ 500 $ 500 0

(electricity, etc.)
TOTAL $6,835 $7,330 $495 over
The firm’s accountants also periodically audit the firm’s financial statements.
audit: a systematic process that An audit is a systematic process that involves three steps: (1) objectively obtain
involves three steps: (1) and evaluate evidence regarding important aspects of the firm’s performance;
objectively obtain and evaluate (2) judge the accuracy and validity of the data; and (3) communicate the results to
evidence regarding important
interested users, such as the board of directors and the company’s banks.11 The
aspects of the firm’s
performance; (2) judge the purpose of the audit is to certify that the firm’s financial statements accurately re-
accuracy and validity of the flect its performance.
data; and (3) communicate the
results to interested users, such
as the board of directors and the Ratio Analysis and Return on Investment
company’s banks
Managers also use financial ratio analysis to monitor performance and maintain
financial ratios: ratios that control. Financial ratios compare one financial measure on a financial statement
compare one financial measure to another. The return on investment (ROI) is one such ratio. ROI equals net profit
on a financial statement to after taxes divided by total investment. Managers use it as a gauge of overall com-
another pany performance. Rather than measuring net profit as an absolute figure, it
shows profit in relation to the total investment in the business, which is often a
more informative figure. For example, a $1 million profit is more impressive with a
$10 million investment than it would be with a $100 million investment. Figure 8.4
lists some commonly used financial ratios.
Analyzing financial ratios helps managers analyze their firm’s performance. For
example (see Figure 8.5), suppose the firm didn’t meet its net income target. Ratio
analysis shows that low sales or high sales costs may account for this. Similarly,
earnings divided by sales (the profit margin) reflects management’s success or fail-
ure in maintaining satisfactory cost controls. As another example, too much invest-
ment may help account for a low ROI. In turn, too much investment might reflect
inadequate inventory control, too many accounts receivable, or too much cash.12
strategic ratio: a succinct
summary of the crucial
● Strategic Ratios In his book Good to Great, Jim Collins studied companies
measures that the firm must that went from good but average to great. He says that one distinguishing charac-
focus on to achieve its strategic teristic of companies that went from good to great was that they were able to
aims sum up in one simple ratio what their strategy was all about.13 A strategic ratio
Traditional Controls ■ 217
F IGURE 8.4
Widely Used Financial Ratios
INDUSTRY NORM
NAME OF RATIO FORMULA (AS ILLUSTRATION)
1. Liquidity Ratios (measure the ability of the firm Current assets

to meet its short-term obligations) 2.6
Current liabilities
Current ratio Cash and equivalent
1.0
Current liability
Acid-test ratio
Sales
12 times
Cash velocity Cash and equivalent
Inventory
Inventory to net working capital 85%
Current assets – Current liabilities
2. Leverage Ratios (measure the contributions

of financing by owners compared with financing
Total debt
provided by creditors) 56%
Net worth
Debt to equity
Net profit before fixed charges
6 times
Fixed charges
Coverage of fixed charges
Current liability
32%
Current liability to net worth Net worth
Fixed assets
Fixed assets to net worth 60%
Net worth
3. Activities Ratios (measure the effectiveness Sales

7 times
of the employment of resources) Inventory
Inventory turnover Sales
5 times
Net working capital
Net working capital turnover Sales
6 times
Fixed assets
Fixed-assets turnover
Receivables
20 days
Average collection period Average sales per day
Sales
3 times
Equity capital turnover Net worth
Sales
Total capital turnover 2 times
Total assets
4. Profitability Ratios (indicate degree of Gross operating profit

30%
success in achieving desired profit levels) Sales
Gross operating margin Net operating profit
6.5%
Sales
Net operating margin Net profit after taxes
3.2%
Sales
Sales (profit) margin
Gross income – Taxes
10%
Productivity of assets Total assets
Net profit after taxes
Return on investment 7.5%
Total investment
Net operating profit
Net profit on working capital 14.5%
Net working capital
F IGURE 8.5
Ratio Analysis: Factors Affecting Return on Investment
The firm’s overall profitability—its return on total investments—can be better understood
by analyzing its components, including earnings as a percentage of sales and turnover.
Sales
Cost of
Sales
Net Income Minus

Plus
Total Cost Selling

Earnings as of Sales Expenses
Percentage Divided by
of Sales
Plus
Administrative
and Other
Sales Expenses
Return on
Total Multiplied by
Investments Accounts
Receivable
Sales
Plus
Working
Inventories
Capital
Turnover
Divided by
Plus
Total Cash
Investment Plus
Long-Term
Investments
Total
Long-Term
Plus
Investment
Fixed,
Intangible, and
Other Assets
Managing Now: IT-Enabled Control Systems ■ 219
succinctly summarizes the crucial measures that the firm must focus on to
achieve its strategic aims. For example, Gillette bases its strategy in part on selling
multiple products repeatedly to customers. It therefore focuses on profit per cus-
tomer rather than profit per division, as other consumer companies do. Walgreen’s
wants to be “the place to shop,” and so it sells a variety of items. It therefore focuses
on profit per customer visit rather than profit per store. The grocery firm Kroger
wants to dominate in each local market. It therefore focuses on profit per local
population instead of profit per store.
Financial Responsibility Centers

financial responsibility In most firms, certain managers are responsible for achieving specific sets of fi-
centers: organizational units nancial targets. This makes it easier for top management to evaluate these man-
that are responsible for and are
measured based on a specific set
agers’ performances. It also makes it easier for each manager to see how the firm
of financial activities will evaluate his or her performance. When the manager has an operating budget
tied to specific financial performance targets, we say the manager is in charge of a
profit centers: responsibility financial responsibility center. Financial responsibility centers are units that are
centers whose managers the responsible for and are measured based on a specific set of financial activities.
company holds accountable for There are several types of financial responsibility centers. Profit centers are
profit
responsibility centers whose managers the company holds accountable for profit.
revenue centers: (Profit is a measure of the difference between the revenues generated and the cost
responsibility centers whose of generating those revenues.14) The Allfirst unit of the banking group AIB is a
managers are responsible for profit center. AIB holds the division’s head responsible for the profitability of that
generating a certain level of division. AIB controls that manager’s performance partly by monitoring whether
revenues the division “makes its numbers”—in other words, meets its profit goals.
Revenue centers are responsibility centers whose managers are accountable
cost centers: responsibility
for generating revenues. Thus, firms generally measure sales managers in terms of
centers whose managers are
responsible for managing their the sales produced by their revenue center/departments. Cost centers are respon-
operations within certain cost sibility centers whose managers are accountable for managing their operations—
constraints such as factories—within certain cost constraints.
Managing Now: IT-Enabled Control Systems

H yundai uses wireless handheld scanners to monitor and control the 43,000
cars per year that go through one of its European import centers. The hand-
held scanners read bar codes on each car. They then automatically send the infor-
mation directly back to Hyundai’s computer systems. That way, all employees
along the supply chain, from sales to the dealer, to shipping, can continuously
monitor the whereabouts of each car.15
As at Hyundai, information technology revolutionized how managers main-
tain control. We’ll look at how this change was achieved in this section, with
particular attention to using enterprise resource planning systems, more timely
accounting reports, activity-based costing, wireless systems, electronic perfor-
mance monitoring, and digital dashboards.
Enterprise Resource Planning–Based Control

As we discussed in Chapter 5, enterprise resource planning systems are not
primarily planning systems. An enterprise resource planning (ERP) system is a
companywide integrated computer system comprised of compatible software
modules for each of the company’s separate departments, such as sales, account-
ing, finance, warehousing, production, and human resources (HR). Each depart-
ment gets its own module or system. Often Internet-based, the ERP modules are
designed to communicate with each other and with the central system’s database.
That way, information from all the departments is readily shared by the ERP
system and is available to employees in all the other departments. Activities that
formerly required human intervention, such as production telling accounting that
it should bill a customer because an order just shipped, now occur automatically.
ERP strips away the barriers that typically exist among a company’s stand-alone
departmental computer systems. With an ERP installed and running, the manager
has a platform on which he or she can install IT-based accounting and other con-
trols such as those we discuss in the next sections. This produces better, faster
control systems.
More Timely Accounting Reports

Most firms computerized their accounting departments many years ago. The
main difference today is that with ERP, all the company’s global accounting (and
other) departments use compatible accounting modules and share their financial
information via a common database.16 This arrangement gives faster, more timely
accounting reports and control. We’ll look at several examples.
● Managing Now For example, updating and maintaining financial statements

was a slow process at NovaCare, a network of over 500 rehabilitation clinics and
physical therapy centers. Each clinic and center had its own accounting system.
Clinic and center administrators inputted financial data into separate systems for
each of their clinics or centers. The process took two to three employees five hours
a day.17 By installing Oracle Financials, the company put all its centers on the same
software system. This setup eliminated much of the labor that the financial state-
ment postings previously required. It also made it easy for NovaCare’s headquar-
ters staff to run off standardized financial reports for the company. This enables
the company to close its books five days faster than it could previously.
With offices in thirty-six countries, Alltech Inc. (which provides products to
the food and feed industries) needed a faster way to get information regarding its
order status and finances worldwide. Previously, auditors at each of the company’s
offices around the world manually entered data onto spreadsheets. Then they sent
the spreadsheets to Alltech’s headquarters, where accountants compiled all this
information into a master spreadsheet. The process took about forty-five days to
complete.18
Today, a Web-based software system automatically collects financial informa-
tion from standardized financial accounting modules in each of the company’s
offices around the world. It also feeds this information back to headquarters. As a
result, management receives consolidated financial statements in fifteen days, in-
stead of forty-five. This faster feedback means tighter top-management control of
global operations. The Window on Managing Now feature provides an in-depth
example.
Activity-Based Costing (ABC)

Traditional accounting systems have a problem showing what it actually costs to
produce and sell a product or service. Suppose, for example, that an insurance
company has a contract to provide insurance to a big client. The insurance firm’s
president wants to know what the contract costs the company. The traditional
Millipore Corp. Integrates Its Global Operations with ERP
Millipore Corp. develops and produces the technologies, The Web-enabled ERP suite of products helped
tools, and services pharmaceuticals companies use to Millipore to control its global operations more effectively.
produce new drugs.19 With about 4,500 employees in fa- For example, by not using separate financial packages in
cilities in thirty countries, managing and controlling global thirty countries, the standardized financial package means
operations is key to the firm’s success. Managers need to top management can get fast feedback on the firm’s
know the answers to questions such as, How many em- financial performance around the world. Similarly, as
ployees do we have in each facility? What is the status of noted above, Oracle Order Management integrates with
a particular order? and What are our sales this month in Millipore’s new Oracle financial, warehouse, and distribu-
the European Union? tion systems. Orders get processed automatically, and
Their previous systems did not let management an- management can track and control orders from entry
swer such questions in a timely manner. Most of Millipore’s through delivery.
facilities around the world each used different financial With operations around the world, Millipore also
management tools. Compiling information from facilities needed to “. . . get a handle on the number of staff we had
around the world was therefore a time-consuming at different geographies, what jobs they performed, and
process. To better manage its global operations, the com- what we were paying them.”20 Previously, headquarters
pany decided to install several integrated software prod- managers manually compiled employee spreadsheets each
ucts from Oracle Corp., including the ERP software pack- quarter based on data that facilities around the world
age components Oracle Financials, Oracle Human produced from their own systems.Today, Millipore’s facili-
Resources, Oracle Self-Service Human Resources, and ties all run the same Oracle Human Resource Manage-
Oracle Order Management. The components are inte- ment system. Thus, executives can now get an accurate
grated; for instance, inputting a new order into Order picture of how many people the firm employs around the
Management automatically informs Oracle Financials that world and an accurate idea of who reports to whom. It
the new order exists. Similarly, when an employee changes also lets managers control an array of new factors. For ex-
his or her pension plan using Self-Service Human Re- ample, they can easily analyze details like comparative
sources, the system automatically “tells” Oracle Financials staffing levels versus sales among global departments.
to deduct the new costs from the employee’s paycheck.
accounting system might show what the company pays out in claims, and perhaps
what it paid the salesperson as a commission for getting the client. It might even
show (as approximations) what share of the insurance firm’s overhead expenses,
for things like office lighting and heating, the accounting system is charging to this
particular contract.
What the insurance firm’s accounting system probably cannot show are all the
actual costs of serving this client that are scattered around the insurance com-
pany. For example, how much time do this client’s employees spend on the phone
with the insurance firm’s customer-service reps? How much time do the doctors
that serve this client’s employees spend getting approvals for medical procedures
from the insurance company’s gatekeepers?
The problem is that traditional accounting systems tend to isolate depart-
ments with separate, stand-alone accounting systems. The customer-service de-
partment knows what it’s spending overall for customer reps. The gatekeeper
department knows what it’s spending overall for gatekeepers. But the president
can’t access the insurance company’s various departments and determine what
each of them is spending on this particular client.
ERP changes that. All departments use compatible software modules. All de-
partments’ systems communicate with the central database. By linking together
the information from compatible accounting modules in different departments,
activity-based costing ERP enables managers to use activity-based costing. Activity-based costing
(ABC): a system for allocating (ABC) is a system for allocating costs to products or services that takes all the
costs to products or services that product’s or service’s costs into account (including production, marketing, distri-
takes all the product’s or
bution, and sales and follow-up activities) in calculating the actual cost of each
service’s costs into account
(including production, product or service.
marketing, distribution, and Activity-based costing is a powerful control tool. With ABC, the manager can
sales and follow-up activities) in access all departments and monitor the costs associated with any activity he or
calculating the actual cost of she wants to control. For example, the manager can calculate costs by order,
each product or service client, project, contract, or business process, rather than by just department or
cost center. ERP makes doing so possible.
● Managing Now For example, Montana Blue Cross Blue Shield installed an
activity-based management system from SAS. Previously, the company’s finance
managers controlled costs the traditional way: by computing basic budget vari-
ances for the company as a whole and for each department. The new ABC system
enabled them to also break out costs by insurance product, and even by individual
lines of business and contracts.
For instance, Blue Cross Blue Shield knew it was losing money on one contract
with a large client. However, its managers had not been able to track and evaluate
all the costs associated with this particular program. With the new SAS ABC sys-
tem, “We’ve been able to re-examine the contract and get a good grip on the costs
that we’re incurring.” Then Blue Cross Blue Shield managers took the steps neces-
sary to address the problem costs and began making the contract profitable.21
As another example, the check-printing company Deluxe Paper Payment Sys-
tems used its ABC system to “get a clearer picture of which of its customers were
profitable and which were not.”22 For example, the system helped it discover that
orders for checks from banks were much more profitable when they arrived via
electronic ordering. Deluxe then launched a campaign to increase electronic
ordering—particularly by its 18,000 bank and small-business customers. The
number of checks ordered electronically quickly jumped from 48 percent to
62 percent, which dramatically improved profits.
Wireless-Assisted Control
The UPS deliveryperson (see the Window on Managing Now feature on page 212)
picks up a package and then uses a delivery information acquisition device to
wirelessly communicate the package’s whereabouts to UPS’s home-base ERP
system. The sender of the package, using her laptop to go online wirelessly via a
Wi-Fi–enabled hot spot at an airport club before her flight, checks the UPS system.
She then uses her cell phone to tell her client that the shipment is on its way.
Control is going wireless. Wireless-assisted control often involves the com-
pany’s supply chain activities (defined in Chapters 1 and 5). For example, UPS’s
handheld acquisition devices are part of the firm’s supply chain management
system. They help UPS control, in real time, the whereabouts of packages in its
system. UPS’s TotalTrack system (see the Window on Managing Now feature) then
enables customers—senders and recipients—to communicate directly with the
system to check delivery status. The UPS system, while wireless, depends on em-
ployees to use handheld wireless devices to input the data. We’ll see next that the
trend now is to make the tracking process automatic.
● Managing Now For example, managers now use

radio-frequency identification (RFID) to wirelessly
control their materials and products.23 Basically, each
RFID is a computer chip with a tiny antenna. All along
the company’s supply chain—at the warehouse loading
dock, in the inventory stacks, and even at the checkout
counter—digital readers scan the RFIDs from a dis-
tance and transmit identifying data from the tags to
computers. Unlike bar codes that employees must read
manually, RFIDs continually transmit an item’s loca-
tion, without human intervention.
A few years ago, Wal-Mart told its 100 top suppliers
to start attaching RFID tags to their case and palate
shipments. Wal-Mart can now keep better track of in-
ventory as it moves from the warehouse into its distri-
bution centers and, finally, to its stores. For example,
UPS relies on information technology to track and control
it can replenish out-of-stock items three times faster
its package shipments.
with the RFID technology than it used to.
As another example, remote monitoring devices enable medical equipment
manufacturer Beckman Coulture to automate and better control its ordering
process. Remote sensors enable Beckman Coulture to automatically monitor the
use of blood analyzers by its medical laboratory customers. Then, when the cus-
tomer’s supplies are running low, Beckman Coulture can automatically arrange
shipments before the customer runs out. Its Oracle ERP system signals the order
department to produce an order, the manufacturing department to get ready to
produce it, and the accounting department to produce an invoice.24
Electronic Performance Monitoring (EPM)

Managers increasingly use high-tech methods to monitor and control employee
performance. As two researchers put it, “As many as 26 million workers in the
United States are subject to electronic performance monitoring (EPM)—such as
having supervisors monitor through electronic means the amount of computer-
ized data an employee is processing per day—on the job.”25 The supervisors can
then take immediate action by speaking with or contacting the errant employee if
he or she is not processing enough data. EPM basically means monitoring and
controlling employee performance automatically, using electronic means.
● Managing Now EPM is not just for monitoring subordinates. It is used for
monitoring bosses, too. For example, the Japanese company that controls 7-Eleven
is imposing an EPM system on its store managers in Japan and in the United
States. Like all 7-Eleven stores, the ones belonging to store manager Michiharu
Endo use a point-of-sale computer to let headquarters know each time he makes
a sale. With 7-Eleven’s new system, headquarters monitors how much time Endo
spends using the analytical tools built into the computerized cash register to track
product sales and how effective he is at weaning out poor sellers. Headquarters
then ranks stores by how often their operators use the computer as a measure of
their efficiency. The system has run into particular resistance in the United States.
Many 7-Eleven managers thought they escaped the bureaucratic rat race by taking
over their own stores. Some are surprised at the degree of control this new EPM
system has exposed them to.26
Digital Dashboards and Control

All things considered, it is always preferable to find out before things are out of
control that a problem exists and must be addressed. That, in essence, is the ad-
vantage of using the balanced scorecard and digital dashboard planning and con-
trol tools we discussed in Chapter 7. For example, a top manager’s dashboard for
Southwest Airlines might display daily trends for strategy-map activities such as
fast turnaround, attracting and keeping customers, and on-time flights. The man-
ager knows from experience that when these activities start to deteriorate, it’s usu-
ally not long before profits start deteriorating too. The beauty of the scorecard
process is that it gives the manager time to take corrective action. For example,
if ground crews are turning planes around more slowly today, financial results
tomorrow may decline unless the manager takes action.
Managers monitor their digital dashboards. If there are problems, the display,
with its summary graphs and charts for various measures, enables managers to
analyze the causes and take corrective action. To quote that Danish mortgage
credit managing director again, “When I turn on my computer in the morning, our
scorecard is the first thing I see. . . . If I discover any deviations of the key figures
I contact the person responsible for the specific area. . . .”27
How Do People React to Control?

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M anagers can’t rely solely on external control tools like budgets, EPM, and digi-
tal dashboards to keep employees in line. For one thing, some managers work
under an “illusion of control.” They believe they can monitor and control every-
thing when in fact they cannot.28 Even with digital dashboards, it is impossible to
have a system that’s so comprehensive it can track everything employees say or do.
behavioral displacement: There’s no practical way, for instance, to control how a front-desk clerk is greeting
a way to evade controls in which
the controls encourage guests every minute of every day.
behaviors that are inconsistent Second, employees often short-circuit the controls, sometimes with inge-
with what the company wants nious tactics. These tactics include behavioral displacement, gamesmanship, op-
to accomplish erating delays, and negative attitudes.29
● Behavioral Displacement Behavioral displace-

ment occurs when the controls encourage behaviors
that are inconsistent with what the company wants to
accomplish. A famous management truism is “you get
what you measure.” This is a double-edged sword. Set-
ting performance targets does focus employees’ efforts
on those targets. The problem is that the employees may
then focus on only what you’re measuring and disregard
the company’s more important goals.
For example, Nordstrom’s had a policy of measuring
employees in terms of sales per hour of work.30 Unfortu-
nately, monitoring just “sales per hour of work” backfired.
For example, some employees claimed their supervisors
were pressuring them to underreport hours on the job.
That way they allegedly boosted reported sales per hour
Monitoring just “sales per hour of work” backfired in one and made the supervisors look good. (Nordstrom settled
store when employees claimed their supervisors were an employee suit about this matter for $15 million.) The
pressuring them to underreport hours on the job. moral is: do not focus on just one or two targets.
Commitment-Based Control Systems ■ 225
gamesmanship: management ● Gamesmanship Gamesmanship refers to management actions that im-

actions that improve the prove the manager’s short-term performance but that may harm the firm in the
manager’s short-term longer run. For example, one manager overshipped products to distributors at
performance but that may harm
year-end. The aim was to ensure that management would meet its budgeted sales
the firm in the longer run
targets. It did, but then it had to deal with excess returns the following year.31
● Operating Delays Some control processes trigger operating delays and thus
unnecessarily slow things down. For example, General Electric’s (GE’s) former
CEO Jack Welch found that it sometimes took a year or more for division managers
to get approval to introduce new products. The problem was the long list of yes/no
approvals required by GE’s control system. Streamlining the approval process
solved this problem.
● Negative Attitudes Most people react suspiciously, at best, to efforts to con-

trol them. Therefore, it’s not surprising that controls often trigger negative em-
ployee attitudes. One classic study focused on first-line supervisors’ reactions to
budgets. It found that they saw the budgets as pressure devices. In reaction to this
perceived pressure, they formed antimanagement groups. Their own supervisors
then reacted by increasing their compliance efforts.32
Unintentional Tactics
Sometimes, the behavioral problem is unconscious rather than intentional. For
example, as we saw in Chapter 2, corrupt people often have a knack for convincing
themselves that the stealing or misreporting that they’re engaged in is really okay.
This can happen even when the facts seem to be quite clear. For example, most
people assume that accounting rules are fairly rigid and that auditors therefore
don’t have too much leeway in interpreting results. In fact, there’s actually much
ambiguity. Even apparently obvious questions like What is an expense? and What
is an investment? are open to interpretation. For example, asked by Money maga-
zine to estimate what a fictitious family owed in income taxes, the accountants’
answers ranged from about $37,000 to $68,000!33
That range means that auditors’ biases can distort the results. Most auditors
who review companies’ financial statements are honest. However, they are as sus-
ceptible to unconscious bias as other people. For example, the clients themselves
hire and fire auditors. So there can be an unconscious bias toward not overturning
the client’s financial decision, even if that decision is questionable.
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W e’ve examined several reasons why managers can’t rely exclusively on the
controls we’ve discussed in this chapter to keep their companies in line. Em-
ployees have many clever ways to evade them. And it’s an illusion to think any
control system can control everything.
Two other factors complicate employee control. First, companies are increas-
ingly global, and monitoring employees far away is more difficult than if they’re
next door. Even companies that most people think of as very “controlling” can
have problems controlling operations abroad.34 For example, Wal-Mart recently
had to close or sell its facilities in Germany and South Korea because the difficulty
of controlling and doing business abroad eroded its profits in those countries.
Second, controlling the self-managing teams that most companies now rely on
can be counterproductive if doing so undermines the employees’ sense of empow-
erment. And for some activities—such as building high-quality cars—you need the
employees to want to do an excellent job because you can’t force them to do it.
The bottom line is that managers have therefore always endeavored to sup-
plement controls like those in this chapter with efforts to encourage employees to
control themselves. Managers use three tools to accomplish this. First, motivated
employees are more likely to exercise self-control. We will discuss motivation in
Chapter 14. We devote the remainder of this chapter to discussing two other tools
for encouraging employee self-control: creating belief systems and encouraging
employee commitment.35
Creating Belief Systems and Values

to Encourage Self-Control
James Collins and Jerry Porras studied firms that had been successful over many
years. In their book, Built to Last, they explain that firms like Boeing, Disney, GE,
Merck, and Motorola are successful in part because they create powerful values for
employees to share. Values such as “the customer is always right” help show em-
ployees “[w]hat this company stands for.”36 Employees then (hopefully) control
themselves by adapting what they do to these values.
For example, at the Toyota plant in Lexington, Kentucky, quality and team-
work are key values. Managers therefore select new employees based on whether
they exhibit quality and teamwork during the one-week screening process. Then,
Toyota’s orientation, training, and appraisal and incentive programs all emphasize
quality and teamwork. When employees buy into quality and teamwork, these val-
ues guide what they do. Even when there’s no one around to supervise them, the
employees control themselves.
Johnson & Johnson (J&J) is another company famous for its shared values. It
summarizes its corporate values in its famous credo, which is shown in Figure 8.6.
The credo contains the firm’s guiding values. The first is, “We believe our first
responsibility is to the doctors, nurses, and patients . . . who use our products.”
These guidelines provide the boundaries within which Johnson & Johnson em-
ployees work. Selling a product that might be harmful would obviously be out of
bounds.
Johnson & Johnson was therefore shocked when armed federal agents briefly
closed down its LifeScan unit’s headquarters. LifeScan makes a diabetes diagnostic
device. Some J&J employees had failed to report that a software glitch made some
units show the wrong diagnosis. How could that happen in a company where all
100,000 employees are supposed to adhere to a strong code of ethics? “Mistakes
were made in the LifeScan situation. . . . They were errors in judgment. We did too
little, too late” is how the firm’s CEO put it.37 Ordinarily, the company’s efforts to es-
tablish strong values and get employees to stick to them are more successful.
Using Commitment-Building Methods

to Foster Self-Control
The U.S. National Weather Service employs highly trained scientists, many making
life-or-death forecasts about tornado warnings. Because they are highly trained
and their work is vital, one might assume that morale and commitment won’t have
much effect on the accuracy of their forecasts. However, both do. Tentative results
F IGURE 8.6
Johnson & Johnson Credo Our Credo
We believe our first responsibility is to the doctors, nurses and patients,
to mothers and fathers and all others who use our products and services.
In meeting their needs, everything we do must be of high quality.
We must constantly strive to reduce our costs
in order to maintain reasonable prices.
Customers’ orders must be serviced promptly and accurately.
Our suppliers and distributors must have an opportunity
to make a fair profit.
We are responsible to our employees,
the men and women who work with us throughout the world.
Everyone must be considered as an individual.
We must respect their dignity and recognize their merit.
They must have a sense of security in their jobs.
Compensation must be fair and adequate
and working conditions clean, orderly and safe.
We must be mindful of ways to help our employees fulfill
their family responsibilities.
Employees must feel free to make suggestions and complaints.
There must be equal opportunity for employment, development
and advancement for those qualified.
We must provide competent management,
and their actions must be just and ethical.
We are responsible to the communities in which we live and work
and to the world community as well.
We must be good citizens—support good works and charities
and bear our fair share of taxes.
We must encourage civic improvements and better health and education.
We must maintain in good order
the property we are privileged to use,
protecting the environment and natural resources.
Our final responsibility is to our stockholders.
Business must make a sound profit.
We must experiment with new ideas.
Research must be carried on, innovative programs developed
and mistakes paid for.
New equipment must be purchased, new facilities provided
and new products launched.
Reserves must be created to provide for adverse times.
When we operate according to these principles,
the stockholders should realize a fair return.
SOURCE: Courtesy of Johnson and Johnson. Johnson&Johnson

Reprinted by permission.
from one survey showed that some National Weather Service offices were much
more successful than others at predicting potentially destructive storms. Morale
and commitment factors seemed to explain much of the difference.38
Several years ago, Viacom agreed to sell its publishing operations for about
$4.6 billion. In announcing the sale, the publisher’s president thanked its employ-
ees for their “past hard work and dedication.” And he reminded them that during
the transition, “[I]t’s more important than ever to focus on our individual respon-
sibilities to ensure that our company performs at the highest levels.”39
These anecdotes illustrate the irony of employee commitment. On the one

hand, there is little doubt that employee commitment—employees’ identification
with and agreement to pursue the company’s mission as if it’s their own—contributes
to organizational success.40 On the other, the trend in many firms is to take actions
that actually undermine commitment. For example, “[T]he trend today is to buy
and sell portfolios of businesses, and to downsize and outsource in an attempt to
increase short-term profits through cost-cutting.”41
● How to Boost Employee Commitment Managers can take tangible steps

to boost employee commitment. After reviewing the research, one writer con-
cludes that the way to do this “. . . is to employ practices that communicate to
employees that the organization is supportive of their efforts, that the organiza-
tion treats its employees fairly, and that the organization is interested in building
employees’ self-worth and importance”; in other words, that the firm “puts people
first.”42 He says that specific practices include improving employment security,
selectively hiring employees whose values are consistent with the company’s, high
compensation tied to organizational performance, extensive training, reduction
of status differences among employees, sharing of information between the
company and its employees, and pushing authority for decision making down to
employees.43
In the final subsections below, we will present seven commitment-building
practices, summarized as follows: foster people-first values, guarantee organiza-
tional justice, build a sense of community, communicate your vision, use value-
based hiring, provide financial rewards, and encourage personal development
and self-actualization.
● Foster People-First Values Managers with “people-first values” character-

ize high-commitment companies. These managers trust their employees, believe in
respecting their employees as individuals and treating them fairly, and are commit-
ted to employees’ welfare. Here is how one United Auto Workers officer at Saturn’s
Spring Hill, Tennessee, plant put it: “Our philosophy is, we care about people—and
it shows. We involve people in decisions that affect them. . . . Saturn’s commitment
really comes down to how you feel about people—your attitudes—more than any-
thing, because all the other Saturn programs—the work teams, the extensive train-
ing, the way people are paid—all stem from these people attitudes.”44
Saturn fosters such people-first values. For example, Saturn employees carry a
card that lists the firm’s values, one of which is:
Trust and respect for the individual: We have nothing of greater value than our
people. We believe that demonstrating respect for the uniqueness of every in-
dividual builds a team of confident, creative members possessing a high de-
gree of initiative, self-respect, and self-discipline.45
The idea is to apply values like these to every decision. As one JCPenney officer said:
Our people’s high commitment stems from our commitment to them, and
that commitment boils down to the fundamental respect for the individual
that we all share. That respect goes back to the Penney idea—“To test every act
in this wise: Does it square with what is right and just?” As a result, the value of
respect for the individual is brought into our management process on a regu-
lar basis and is a standard against which we measure each and every decision
that we make.46
● Guarantee Organizational Justice Employee commitment depends in

part on developing trust, and this requires treating employees fairly. Managers
in firms like Starbucks, Saturn, and FedEx institute programs that guarantee man-
agers treat employees fairly. For example, they have guaranteed-fair-treatment
grievance programs for filing grievances, speak-up programs for voicing concerns,
periodic surveys for expressing opinions, and top-down programs for keeping em-
ployees informed.47
● Build a Sense of Shared Fate and Community

Part of fostering commitment entails making employ-
ees feel that “we’re all in this together.” Professor Rosa-
beth Moss Kanter found that leaders do this in several
ways.48 They minimize status differences. At Toyota’s
Camry assembly plant, all employees—from the presi-
dent on down—shared the same open office space,
wore the same uniforms, and ate in the same cafeteria.
Others foster a sense of community by encouraging
joint effort and communal work. At Saturn, all employ-
ees are on teams, and all teams work on projects
together. Others bring individual employees into regu-
lar contact with the group as a whole.49 Ben & Jerry’s
has monthly staff meetings in the receiving bay of its
Waterbury, Vermont, plant.
● Managing Now Thanks to the Internet, employ-

Saturn Corp. instituted numerous behavioral methods ees don’t have to be at the same location to feel that
aimed at fostering Saturn employees’ commitment. they’re part of a close-knit community. Internet-based
group communication systems allow companies to build virtual communities by
letting employees communicate easily and in real time, even if they are dispersed
around the globe.50 As one expert puts it, “The sales department could hold
forums and share information in an interactive community.” Said another, “When
people interact in a virtual community, there is an exchange of ideas and informa-
tion, which becomes powerful and generates excitement.”51
● Use Value-Based Hiring Kanter also found that commitment to a cause is

higher among employees who share the same basic values. High-commitment
value-based hiring: looking firms therefore practice value-based hiring. They don’t look for just job-related
for common experiences and skills in the people they hire. They also look for common experiences and values
values that may signal the that may signal the applicant’s fit with the firm. Thus, even college grads may start
applicant’s fit with the firm,
out by cleaning one airline’s planes. The idea is that if you don’t fit in, you probably
rather than hiring based solely
on job-related skills won’t become committed to the company.
● Communicate Your Vision Committed employees need missions to be

committed to, preferably missions that they feel are bigger than they are. Employ-
ees at organizations like the Salvation Army, Saturn, and Ben & Jerry’s become, in
effect, soldiers in a crusade. Through their employment, they redefine themselves
and their goals in terms of the company’s mission. The employee, says Kanter,
“finds himself anew in something larger and greater.”52 Employee commitment
thus derives in part from the power of the firm’s mission and from the manager’s
ability to crystalize that mission in a few simple values.
● Use Financial Rewards and Profit Sharing Although there is more to build-
ing commitment than financial rewards, high-commitment firms generally offer
above-average pay and incentives. FedEx, for instance, provides a half-dozen
types of incentive awards, including a Bravo-Zulu award that a manager can give
on the spot.
● Encourage Employee Development and Self-Actualization Employees

understand that staying loyal to an employer can be risky in an era of continuing
mergers and mass layoffs. Earning their commitment therefore requires reciproc-
ity. It requires proof that their employers are committed to them.
One strong signal is to show employees that the company is committed to
their personal development. Being the best at what one can be provides the best
job security, whether or not the person stays with the firm. Psychologist Abraham
Maslow emphasized that people need to self-actualize, “to become . . . everything
that one is capable of becoming. [W]hat man can be, he must be. . . .”53
Firms can help employees to self-actualize in many ways. They can train em-
ployees to expand their skills and to solve problems. They can enrich their jobs
and empower them. They can provide career-oriented interviews and help them
to continue their education and to grow. The results can be dramatic. Here’s how
one Saturn assembler put it:
I’m committed to Saturn in part for what they did for me; for the 300 hours of
training in problem solving and leadership that help me expand my personal
horizons; for the firm’s Excel program that helps me push myself to the limit;
and because I know that at Saturn I can go as far as I can go—this company
wants its people to be all that they can be.54
At FedEx, one manager similarly described his experience:
At Federal Express, the best I can be is what I can be here. I have been allowed
to grow with Federal Express. For the people at Federal Express, it’s not the
money that draws us to the firm. The biggest benefit is that Federal Express
made me a man. It gave me the confidence and self-esteem to become the
person I had the potential to become.55
The Practice IT feature shows how Starbucks applies this chapter’s control concepts.
PRACTICE IT
Controlling the Cappuccino Makers at Starbucks
With about 10,000 stores and 34 million transactions a with the information; some confessed to stealing as much
week, Seattle-based Starbucks Coffee Company’s man- as $42,000.With much smaller exceptions, the employee
agers must make sure they stay in control of what’s hap- gets a letter asking them to explain what’s happening.The
pening at each store. Starbucks’ solution combines IT behavior usually stops after that.
with fostering employee commitment. First (in addition to Starbucks does not rely on just external controls. It
standard traditional control devices such as budgets), also works hard to encourage self-control by winning the
Starbucks relies on a global information technology sys- commitment of its employees. For example, all employees
tem to monitor transactions in each of its stores. Its XPR who work at least twenty hours a week receive a full
system remotely monitors an assortment of metrics at complement of health and other benefits, and they are
each store. XPR then uses the principle of exception to eligible for the company’s stock-option plan. Employees
trigger reports when any of the metrics for a store seems also receive free drinks while on duty. And they get the
to be moving in unusual ways.56 For example, the system considerable benefit of working in an environment that
monitors point-of-sale activities and then triggers reports some liken to a collegial living room. As a result, commit-
if a particular register seems to be recording too many free ted, engaged Starbucks employees help make sure that
refills. Some employees confess after being confronted things stay under control.
CHAPTER SUMMARY
1. Control is the task of ensuring that activities are being achieved and that variances, if any, are ex-
providing the desired results. The control process plained. Commitment-based control includes using
consists of three steps: set goals, measure perfor- motivation techniques, building value systems, and
mance, and take corrective action. Managers obtaining employees’ commitment.
distinguish among steering controls, yes/no con-
4. Managers now use IT-based controls, usually
trols, and postaction controls.
based on ERP systems. These include more timely
2. Budgets and ratio analysis are among the most accounting reports, ABC, wireless-based control,
widely used diagnostic control tools. Budgets are electronic performance monitoring, and digital
formal financial expressions of a manager’s plan dashboards.
and show targets for yardsticks such as revenues,
5. A problem with relying on traditional controls is that
cost of materials, and profits, usually expressed as
they can lead to unintended, undesirable, and often
dollar amounts. Most managers also achieve con-
harmful employee reactions, such as behavioral dis-
trol by monitoring various financial ratios.
placement, gamesmanship, operating delays, nega-
3. The chapter presented three classes of control tive attitudes, and reduced empowerment.
methods. Personal, interactive control systems are
6. Steps for improving employee commitment in-
real-time, usually face-to-face methods of monitor-
clude the following: foster people-first values,
ing both a plan’s effectiveness and the underlying
guarantee fair treatment, create a shared fate, use
assumptions on which the plan was built. Tradi-
values-based hiring, communicate the vision, use
tional control systems like budgets and perfor-
rewards, and encourage self-actualization.
mance reports are intended to ensure that goals are
1. What are the basic steps in the control process? impractical without enterprise resource planning
systems.
2. Give examples of steering, concurrent, and feed-
back controls that your professor uses in this class. 6. Give examples of the unintended behavioral con-
sequences of controls that the dean of your college
3. Give examples of personal, traditional, and com- might encounter if he or she passed the rule that
mitment-based controls that family members use professors’ raises would be based on student rat-
at home. ings only.
4. How is activity-based costing different from tradi- 7. What do we mean by belief systems and values that
tional cost accounting? encourage self-control?
5. Discuss why IT-based controls such as ABC, wire- 8. Explain why having committed employees is espe-
less controls, and digital dashboards would be cially important in today’s industrial environment.
1. You are one of the founding engineers in your six- five students. Each team should answer the follow-
month-old firm, and you brought to the firm the ing question: What type of control system would
values of hard work, quality, teamwork, and excell- you develop to ensure that your values are adhered
lence. These values have united the original mem- to, based on the concepts in this chapter?
bers, but you are concerned that they might change
with the addition of fifty new people needed by 2. College students deal with professors all the time,
your fast-growing company. Form teams of four to but they may not realize how difficult it is for the
college’s administrators to control what their fac- detail. Form teams of four to five students. Each
ulty members are doing. The typical professor has team should develop a package for the dean.
a number of responsibilities, including teaching
3. There is nothing quite like eating in a restaurant
classes, writing research articles, and attending
where details—from customer service to hygiene—
curriculum-development committee meetings.
are out of control. Before coming to class, visit one
The dean also wants to make sure faculty members
or two local restaurants, and list everything you see
are conducting themselves professionally, for
that might suggest that (at least in specific areas)
instance, in terms of how they interact with their
details are a bit out of control. Then meet in teams
students. Knowing that you are a management stu-
of four to five students, compare notes, and create
dent, the dean has asked you to develop a control
a checklist for assessing the adequacy of a restau-
package for the college’s business professors. The
rant’s control mechanisms. If time permits and
package is to include, at a minimum, a list of the
if there is an on-campus cafeteria, evaluate the
details that you want to control and a correspond-
school cafeteria’s controls.
ing list showing how you plan to control each
CASE STUDY
Controlling Ritz-Carlton
any consider business hotels as offering a generic firms, Ritz-Carlton then certifies employees. It reinforces
M service—a safe, clean, comfortable room in a city
away from home. Ritz-Carlton Hotel Company viewed
its corporate values continuously by daily lineups; fre-
quent recognition for extraordinary achievement; and a
its business differently. Targeting industry executives, performance appraisal based on expectations explained
meeting and corporate travel planners, and affluent during the orientation, training, and certification
travelers, the Atlanta-based company manages twenty- processes.
five luxury hotels that pursue the goal of being the very All workers must act at the first sign of a problem,
best in each market. Ritz-Carlton succeeded with more regardless of the type of problem or customer com-
than just its guests. For example, three times it received plaint. Employees are empowered to do whatever it
the U.S. government’s Malcom Baldrige National Qual- takes to provide what Ritz-Carlton calls instant pacifi-
ity Award. Given its mission of true excellence in ser- cation. Other employees must assist if a coworker re-
vice, what types of control systems did Ritz-Carlton quests aid in responding to a guest’s complaint or wish.
need to achieve its goals? There is never an excuse for not solving a customer
In the presentation of the Baldrige award, the com- problem.
mittee commended Ritz-Carlton for a management Responsibility for ensuring high-quality guest
program that included participatory leadership, thor- services and accommodations rests largely with em-
ough information gathering, coordinated planning and ployees. The company surveys all employees annually
execution, and a trained workforce empowered “to to determine their understanding of quality stan-
move heaven and earth” to satisfy customers. Of all the dards and their personal satisfaction as a Ritz-Carlton
elements in its system, Ritz-Carlton felt the most im- employee. In one case, 96 percent of all employees
portant control mechanism was committed employees. surveyed named excellence in guest services as the
The firm trains all employees in the company’s key priority.
Gold Standards, which set out Ritz-Carlton’s service
credo and the basics of premium service. The company
has translated these basics into twenty Ritz-Carlton
Basics. Each employee is to understand and adhere to 1. What actions does Ritz-Carlton take to control the
these standards, which describe processes for solving quality of its service?
any problem guests may have.
2. What does Ritz-Carlton do to foster its employees’
The corporate motto is “ladies and gentlemen
high level of commitment?
serving ladies and gentlemen.” Like many companies,
Ritz-Carlton gives new employees an orientation 3. How does the company’s value system foster em-
followed by on-the-job training. Unlike other hotel ployee self-control?
MANAGING OPERATIONS 9
AND SUPPLY CHAINS
Will Whirlpool Deliver? CHAPTER OUTLINE
Opening Vignette: Will
S everal years ago,Whirlpool’s deliveries were so unreliable that its

managers grimly joked that customers ranked Whirlpool “fifth
among America’s four biggest appliance manufacturers.”1 Whirlpool’s
Whirlpool Deliver?
● The Basics of Operations
Management
Managing the Production System
salespeople referred to the The Facility Location Decision
company’s supply chain (the Basic Types of Production Processes
Facility and Production Layout
information system Whirlpool
● Operations and Inventory
used to link together its manu- Planning and Control
facturing plants, warehouses, Scheduling and Gantt Charts
Network Planning and Control Methods
distribution partners, and
Purchasing
retailers) as “sales disablers.”2 The Role of Inventory Management
In an industry where getting Basic Inventory Management Systems
appliances on time is the ● Controlling for Quality and
Productivity
consumer’s main concern, Total Quality Management Programs
Whirlpool often missed its Quality Control Methods
dates. Rueben Slone, Whirlpool’s Design for Manufacturability
● World-Class Operations
new head of supply chain man-
Management Methods
agement for America, knew The Basic Components of Just-in-Time
changes were in order. What Several years ago, Whirlpool needed a (JIT) Systems
more effective “supply chain” for getting Computer-Aided Design and
should he have Whirlpool do deliveries of products like these into Manufacturing
now? ■ retailers’ stores. Flexible Manufacturing Systems
Computer-Integrated Manufacturing
B E H AV I O R A L O B J E C T I V E S ● Supply Chain Management
Managing Now: Supply Chain
After studying this chapter, you should be able to: Management Software
The Three A’s of Supply Chain
Show that you’ve learned the chapter’s essential information by Management
➤ Listing and explaining the basic types of production processes. PRACTICE IT: Whirlpool Delivers
Why Supply Chain Management Is
➤ Listing what the manager has to do to minimize the seven wastes. Important
➤ Listing the reasons why a company is (and is not) world class. Basic Building Blocks of Supply Chain
➤ Listing and explaining the three A’s of supply chain management. Management Systems
WINDOW ON MANAGING NOW: Zara
Show that you can practice what you’ve learned here by Managing Now: Supply Chain City
➤ Reading the opening vignette about Whirlpool and suggesting a supply chain solution
for the company.
➤ Reading the end-of-chapter exercise and evaluating a facility’s layout.
233
234 PART THREE CHAPTER 9 Managing Operations and Supply Chains
➤ Reading the end-of-chapter exercise and creating a Gantt chart for a project.
➤ Reading the end-of-chapter exercise and computing the economic order quantity
(EOQ) for an item.

Online Study Center
ACE the Test ➤ Watching the simulation video and identifying how operations management can
Managing Now! LIVE improve organizational efficiency.
The Basics of Operations Management

Online Study Center
ACE the Test
Managing Now! LIVE T ake a brief walk through a Circuit City or Best Buy. Domestic brands from
General Electric (GE) and Whirlpool compete with Miele and Bosch from
abroad. In such an environment, only world-class competitors survive. That’s why
companies like Whirlpool must have operations management systems in place.
These systems produce high-quality products at competitive costs and get them to
customers on time.
operations management: Operations management is the process of managing the resources required
the process of managing the to produce the organization’s goods and services.3 Operations managers particu-
resources that are needed to larly focus on managing the “five P’s” of the firm’s operations: people, plants, parts,
produce an organization’s goods
processes, and planning and control systems. The people include the direct and
and services
indirect workforce, such as assembly workers, inventory clerks, and clerical staff.
Plants are the factories or service branches (like banks) where the firm creates its
product or service. Parts include the raw materials and other inputs that the firm’s
operations will transform into finished products or services. Processes represent
the technology, equipment, and steps required to accomplish production. The
planning and control systems are the procedures management uses to run the sys-
tem, such as the methods used to schedule the work and to control quality.4 Oper-
ations managers include, for instance, plant managers, manufacturing managers,
purchasing managers, and logistics (or transportation) managers.
Operations management is not important for just manufacturing firms. For
example, in the new McDonald’s kitchen, computers control production, and
sandwiches come off the line in forty-five seconds. American Airlines uses sophis-
ticated operations management planning and scheduling tools to schedule reser-
vations clerks and to adjust flight schedules in the face of rough weather. La
Quinta Motor Inns uses operations management tools to analyze variables (such
as traffic counts and local purchasing power) to identify preferred locations.
Cookie-store managers use special work-scheduling software to chart hourly and
daily sales and to tell the manager how many employees he or she will need to
staff the store that day.5
In this chapter, we’ll look at the basic aspects of managing operations, the first
of which is managing the production system itself.
Managing the Production System

The production system is the part of the operations system that actually produces
inputs: resources required for the company’s products. Any production system has three main components—
the manufacture of a product or inputs, a conversion system, and outputs (see Figure 9.1). Inputs are all the re-
service sources required to create the product or service. These include raw materials and
The Basics of Operations Management ■ 235
F IGURE 9.1
The Basic Production System
The heart of every production system is a conversion process or system, which takes various
inputs and converts them into outputs such as products or services.
INPUTS CONVERSION OUTPUTS
■
Raw Materials ■ Transportation Direct Outputs
■
Purchased Parts ■
Warehousing ■
Products
■
Personnel ■
Manufacturing System ■
Services
■
Competitive Information and Machinery
■
Demographic Information ■
Technology
■
Product Information ■
Policies and Procedures
■
Customer Needs ■
Logistics
■
Stockholder Needs ■
Wholesaling/Retailing Indirect Outputs
■
Capital System ■
Wages and Salaries
■
Machinery ■
Physical Layout ■
Environmental Impact
■
Utilities ■
Production Process ■
Community Impact
purchased parts, personnel, and capital. Other inputs include data on the compe-
tition, the product, and the customer.
Any production system takes inputs and converts them into products or ser-
conversion system: any vices (outputs). The conversion system (also called the production process or
production system that converts technology) has several components, including the production machinery and its
inputs (material and human physical layout, the transport services that bring in the inputs and deliver the final
resources) into outputs products to customers, and warehousing services for goods awaiting shipment.
(products or services);
sometimes called the
The production system’s outputs include direct outputs (the actual products or
production process or services) and indirect outputs (such as wages and salaries).
technology The same production system sequence applies to a service business (see
Table 9.1).6 For example, a college’s inputs include students, books, professors,
output: a direct outcome and buildings. Its conversion system consists of the lectures, exams, computerized
(actual product or service) or instruction, and so forth. The outputs are educated persons.
indirect outcome (taxes, wages,
Whether you are producing goods or services, designing a production system
salaries) of a production system
requires four basic decisions: Where will we locate the facility? What type of pro-
duction process will we use? What will be the layout of the overall plant or facility?
And what will be the layout of the production system itself? We’ll look at each.
The Facility Location Decision

Deciding where to locate the facility (plant or store) is crucial. Dry-cleaning
businesses try to place their stores near supermarkets to make it convenient for
customers. Britain’s Marks & Spencer had to close over thirty of its retail stores
T ABLE 9.1
Components of Typical Production Systems
Production System Main Inputs What Conversion System Does Main Outputs
1. Cereal factory Grain, water, sugar, personnel, Converts raw materials Breakfast cereals
tools, machines, paper for into finished goods
cartons, buildings, utilities
2. Law firm Legal supplies, personnel, Attracts clients, compiles and Legal advice, client
information, computers, researches legal data, advises defenses
buildings, office furniture, clients, manages billing, etc.
utilities
3. College Students, books, supplies, Teaching facts, skills, attitudes, Educated persons
personnel, buildings, values through various pedagog-
utilities ical devices, including lectures,
online learning, and exams,
and providing associated
counseling and related services
because they were in poor locations. For manufactur-

ers, key factors like transportation costs and labor
availability determine plant location.
Managers typically ponder many factors when
deciding where to locate a facility. Subjective consid-
erations can include details like the owner’s personal
preferences, say, for warm weather. More objective
criteria include, for instance, government rules and
attitudes, cultural issues, availability of labor, taxes,
utilities, environmental regulations, government in-
centives, and proximity to supplies and customers.
Managers ignore location considerations at their
peril. In the 1990s, many believed Vietnam was the
next great Asian tiger in terms of projected economic
growth.7 But for ten years, the experts were wrong.
Until recently, few visitors came. The $64 million
Location, location, location: A dry-cleaning business in a Hilton Hanoi Opera Hotel sat nearly empty for
shopping mall allows customers to drop off and pick up years.8
clothes on their way to shop for food or other items.
Basic Types of Production Processes

Deciding on a production process is a second crucial decision. We can distinguish
between two broad types of systems: intermittent production systems and contin-
intermittent production
system: a system in which uous production systems.
production is performed on a
start-and-stop basis, such as for ● Intermittent Systems In an intermittent production system, employees
the manufacture of made-to- work on the product on a start-and-stop basis.9 Automobile-repair shops, custom-
order products cabinet shops, and construction contractors are examples. Firms like these usually
offer made-to-order products. They usually deal with relatively low product volumes
and frequent schedule changes and tend to use general-purpose equipment that
can make a variety of models or products.
Mass production is a special type of intermittent production process. Here,
standardized methods and single-use machines produce long runs of standard-
ized items. Most mass production processes use assembly lines. An assembly line
is a fixed sequence of specialized (single-use) machines. In a typical assembly line,
the product moves from station to station, where one or more employees and/or
specialized machines perform tasks such as inserting bumpers or screwing on
doors.
Mass customization is a popular hybrid production process, somewhere be-
tween the intermittent and continuous production (discussed below) processes.
mass customization: Mass customization means designing, producing, and delivering products so
designing, producing, and that customers get customized products for at or near the cost and convenience of
delivering products so that mass-produced items.10 Dell’s production process exemplifies this approach. Dell
customers get customized
customers get customized PCs (they advertise today, “Dell—Purely You”) at a price
products for at or near the cost
and convenience of mass- at or below that of mass-produced, standardized machines. Mass customization
produced items depends on three factors:11
1. Modular product design. Products like Dell’s consist of separate modules
(each consisting of one or more prewired components) such as modems, DVD
drives, and processing chips. Employees can easily assemble these into differ-
ent forms of the product. Hewlett-Packard (HP) designs its printers to have a
separate power supply inserted later. Customers around the globe can get the
power supply they need.
2. Modular process design. Similarly, the firm designs its production process so
that workers can perform different steps in different places. A Dell repairper-
son may come to your office, just pull out the defective modular component,
and replace it.
3. Agile supply networks. Mass customization firms design the whole supply
chain (from vendors to production to distribution) to be adept at providing a
variety of services. For example, IBM designs its products around modules.
Vendors supply components and may do some preliminary assembly. IBM
factories then assemble these components into modules. IBM distributors
then assemble the modules into complete products based on what their cus-
tomers want.
Mass customization is unique among production processes. Managers in typ-
ical intermittent production firms must choose between high-volume mass pro-
duction and product variety. Mass customization weds high production volume
with high product variety.
continuous production ● Continuous Production A continuous production system runs uninter-

system: a production process, rupted for very long periods. Chemical plants, paper plants, and petroleum re-
such as those used by chemical fineries are examples. They may run for months or even years, producing basically
plants or refineries, that runs for
the same products (paper, or refined oil, for instance) night and day.
very long periods without the
start-and-stop behavior Mass customization is blurring the traditional dividing line between intermit-
associated with an intermittent tent and continuous production processes. For example, computer-assisted man-
production system ufacturing processes at Mead Corporation, which produces and sells paper, give
the factory the flexibility of intermittent production and the efficiency of continu-
ous production.
F IGURE 9.2
Product Layout
A car wash is an example of an assembly-line product layout. Each special-purpose machine
performs its function as the product moves from station to station.
Enter
Clean Hot water Top wash Side wash Final rinse Hot Hand wipe
out spray and brush and brush spray blower and cleanup
Exit
SOURCE: Adapted from Everett Adam, Jr. and Ronald Ebert, Production and Operations Management (Upper Saddle River, N.J.:
Prentice Hall, 1992), p. 254.
Facility and Production Layout

facility layout: the
configuration of all the Once the manager decides on a production process, he or she can decide how to
machines, employee lay out the plant or facility.
workstations, storage areas,
internal walls, and so forth that ● Facility Layout Facility layout refers to the configuration of the total facility—
constitute the facility used to not just the machines, but also the employee workstations, storage areas, internal
create a firm’s product or service walls, and so forth. Important objectives here usually include reducing materials-
product layout: a production handling costs, providing sufficient capacity, and allowing for safe equipment op-
system design in which every eration and ease of maintenance.
item to be produced follows the Facility layout is also important for service firms. Thus, food stores typically
same sequence of operations
from beginning to end, as in an
put products like meats toward the back; to get to them, customers must pass the
assembly line other aisles, hopefully prompting them to pick up and buy more products along
the way.
process layout: a production
system design in which similar ● Production System Layout Whether in a factory or a service business,
machines or functions are
there are basically four ways to lay out the production (conversion) system itself. In
grouped together
a product layout, every item produced follows the same sequence from beginning
fixed-position layout: a to end. Each item moves from one specialized tool and operation to another. An as-
production system design in
sembly line is one example. Product layouts are not restricted to manufacturing.
which the product being built or
produced stays at one location For example, automatic car washes use product layouts, as Figure 9.2 illustrates.12
and the machines, workers, and In a process layout, the designers group similar machines or processes to-
tools required to build the product gether. As Figure 9.3 illustrates,13 service businesses like hospitals are usually
are brought to that location, as organized this way. There are separate locations for departments like pediatrics and
needed, as for the building of for testing and x-ray. In a fixed-position layout, the product stays at one location.
ships or other bulky products The manufacturing machines and workers (or machines) come to that location, as
cellular manufacturing needed. Companies build heavy products like ships and planes this way.
layout: usually a combination of In a cellular manufacturing layout, the company groups machines into cells
process and product layouts in (small work areas), and each cell contains all the tools required to complete one
which machines and personnel
are grouped into cells containing
activity (see Figure 9.414). Thus, a cell may be dedicated to all the grinding and pol-
all the tools and operations ishing steps required to produce the valves for car engines. The advantage is that
required to produce a particular cellular layouts reduce the wastes normally associated with moving the items
product or family of products around the plant floor to different workstations.
F IGURE 9.3 Orthopedics Obstetrics/

Gynecology
Laboratory
Tests
Process Layout
In a process layout like this one, Restrooms X-Ray
each process has its own area. Patient
The product (in this case, the Waiting
patient) is directed to the Reception Area Ophthalmology
appropriate processes (such as Room
x-ray and pediatrics).
Pediatrics
Pharmacy
Patient Patient
Exits Enters
Clinic Clinic
SOURCE: Adapted from Everett Adam, Jr. and

Ronald Ebert, Production and Operations PROCESS LAYOUT FOR MEDICAL CLINIC
Management (Upper Saddle River, N.J.:
Prentice Hall, 1992), p. 254.
(A) (B)
F IGURE 9.4
Improving Layouts by Moving Material
to the Cellular Manufacturing
Concept
Note in both (A) and (B) that
U-shaped work cells can reduce Current layout—workers in small Current layout—straight
material and employee movement. closed areas. Cannot increase lines are hard to balance.
output without a third worker.
SOURCE: Adapted from Barry Render and

Improved layout—in a U shape,
Jay Heizer, Principles of Operations
Management, 2nd ed., © 1997. Reprinted Improved layout—workers can workers have better access. Four
by permission of Prentice Hall, Inc., Upper assist each other. May be able to workers were reduced to three.
Saddle River, N.J. add a third worker.
Operations and Inventory Planning and Control

Online Study Center
ACE the Test
Managing Now! LIVE W hether producing cars or Broadway shows, the manager needs a system for
planning and controlling production. Operations or production planning
is the process of deciding what products to produce and where, when, and how to
operations or production produce them. Operations or production control is the process of ensuring that
planning: the process of the operation is meeting its production plans and schedules. Operations depend
deciding what products to on having adequate inventory. Inventory management is the process of ensuring
produce and where, when, and
that the firm has enough inventories of all required parts and supplies within the
how to produce them
constraint of minimizing total inventory costs. We’ll look at operations and inven-
operations or production tory planning and controlling tools in this section.
control: the process of
ensuring that the specified
production plans and schedules Scheduling and Gantt Charts
are being adhered to
Scheduling charts are simple but effective production planning and control tools.
inventory management: the Managers summarize their production schedules on charts that show what oper-
process of ensuring that the firm ations will be carried out and when. The Gantt chart in Figure 9.5 is one example.
has enough inventories of all For each order, it shows the start and stop times for each activity. This type of chart
required parts and supplies lets the manager quickly monitor each order’s progress. A second type of Gantt
within the constraint of
chart lists each operation separately in the left column, one under the other, and
minimizing total inventory costs
the time along the bottom. That Gantt chart helps the manager monitor each
Gantt chart: a production operation’s progress.
scheduling chart (named after In practice, production schedulers start with the required delivery date. Then
management pioneer Henry they calculate how long each assembly operation will take, how long it will take to
Gantt) that plots time on a
obtain raw materials, and so forth. The schedulers can then decide whether the
horizontal scale and generally
shows, for each product or firm can meet its required delivery date and what bottlenecks to unclog.
project, the start-and-stop
times of each operation
network planning and Network Planning and Control Methods
control methods: ways Scheduling complex projects usually requires computerized network charting
of planning and controlling
tools. Network planning and control methods graphically represent the proj-
projects by graphically
representing the projects’ ect’s steps and the timing and linkages among those steps. A project is a series of
steps and the timing and links interrelated activities aimed at producing a major product (like a new Boeing 787)
between those steps or a service (like a wedding reception).
JANUARY
F IGURE 9.5 ORDER
Time
NUMBER
A Gantt Chart 1 5 10 15 20 25 30
This Gantt chart shows the steps Manufacture Assemble Paint Paint Second Coat
027
and timing of each step for each
order.
035 Assemble Test Paint
079 Manufacture Assemble
087 Manufacture Assemble Paint

Operations and Inventory Planning and Control ■ 241
F IGURE 9.6
PERT Chart for Building a House
In a PERT chart like this one, each event is shown in its proper relationship to the other events.
The tan circles show the critical—or most time-consuming—path.
Install 3 Paint
Fixtures days House
days
7
Put in
Put in Interior
Outside
2
s
Wiring
day
Wiring
days
days
5
8
2
day
s
2
day
s
Put Up
Lay Put Up
8 Buy 1 Level 5 15 Interior Put in 1 House
Start Founda- Outside
days Materials day Ground days tion Walls days Walls and Rugs day Complete
Doors
3 s
3
6
day
day
day
8
7
s
s
y
da
day
day
s
s
Run Put in Put in
Hire
day
9
Utilities to Outside Interior

Workers Your Lot Plumbing
s
Plumbing
days
8
Get
Building
Permits
PERT and CPM charts are the two most popular network planning and control
methods. PERT (program evaluation review technique) and CPM (critical path
method) were invented at about the same time and are similar, although several
details (for instance, CPM shows the cost of each step) set PERT apart from CPM.
Events and activities are the two major components of PERT charts. As
events: the specific Figure 9.6 shows, events, depicted by circles, represent specific accomplishments,
accomplishments in a project, such as “lay foundation.” Arrows represent activities, which are the time-consuming
represented by circles in a PERT aspects of the project (like laying the foundation). By studying the PERT chart, the
chart scheduler can determine the critical path, the sequence of critical events that, in
activities: the time-consuming total, requires the most time to complete.
aspects of a project, represented
by arrows in a PERT chart ● Managing Now In practice, managers generally use manual project planning
versions of tools like Gantt and PERT for simpler projects. They use computerized
critical path: the sequence of versions for more complex projects. Figure 9.7 illustrates a few of such software’s
events in a project that, in total, benefits. In addition to laying out the network’s events and relationships, this
requires the most time to software provides pop-up calendars, automatically produces status reports, and
complete makes it easy to link up and communicate project status via the Web. It also helps
the manager define project tasks, anticipate obstacles, and print reports.
F IGURE 9.7
Example of a Computerized
Project Planning Report
SOURCE: Copyright © Experience In

Software, Inc. 1997–2006. Reprinted with
permission.
Purchasing
Purchasing departments buy all the materials and parts the firm needs to conduct
its business, including the raw materials that go into the firm’s products as well as
machinery, tools, purchased components, and office supplies.
Purchasing is a more important function than many managers realize.
Sometimes 60 percent or more of a manufacturer’s sales dollars are paid to sup-
pliers for purchased materials.15 As a rough approximation, a manager might
have to boost sales by $3 to $4 to produce the same increase in profits that
cutting purchasing costs by $1 would produce. Furthermore, manufacturers
striving to maintain quality levels know that the quality of a finished product like
a PC can’t be any better than the quality of components such as hard drives.
Purchasing departments thus affect a firm’s cost-effectiveness as well as its rep-
utation. Many firms work closely with suppliers to create better-quality parts.
Many firms, such as Ford, send engineers to help suppliers boost their quality
management systems.
Purchasing managers traditionally engage in several activities.16 Of course,
they try to minimize the costs of materials and supplies. However, this is usually
not their only (or even their main) concern.17 For many firms, high-quality, reli-
able, on-time deliveries outweigh costs. Companies like Toyota spend years devel-
oping close relationships with favored suppliers, even helping them to improve
their own operations.
As we’ll see later in this chapter, firms are increasingly automating their pur-
chasing. Suppliers bid for and fulfill their business via the Internet.
Operations and Inventory Planning and Control ■ 243
The Role of Inventory Management

How much to purchase depends partly on the firm’s current inventories. Firms
keep inventories of five types of items: raw materials and purchased parts,
components, works in process, finished goods, and supplies.18 Firms obtain raw
materials and purchased parts from outside suppliers and hold them for the pro-
duction of finished products. Components are subassemblies that are awaiting
final assembly. Work in process refers to all materials or components on the pro-
duction floor in various stages of production. Finished goods are final products
waiting for purchase or to be sent to customers. Finally, supplies are all items the
firm needs that are not part of the finished product, such as paper clips, duplicat-
inventory management: the ing machine toner, and tools. Inventory management is the process of ensuring
process of ensuring that the firm that the firm has enough inventories of all required parts and supplies within the
has adequate inventories of all constraint of minimizing total inventory costs.
required parts and supplies
within the constraint of ● Inventory Costs In practice, inventory managers must address four types of
minimizing total inventory costs costs. First, ordering or setup costs are the costs of placing the order (or of set-
ordering or setup costs: the ting up machines for producing the parts, if the parts are being manufactured,
costs, usually fixed, of placing an not bought). For purchased items, ordering costs might include order-processing
order or setting up machines for costs (such as clerical time for filling out the order) and the cost of inspecting
a production run goods when they arrive. For items made in-house, setup costs include the labor
involved in setting up the machine and the cost of preparing the paperwork for
scheduling the production run. Ordering or setup costs are usually fixed. For ex-
ample, it costs a clerk about the same to process the paperwork for a big order as
for a small order.
acquisition costs: the total Acquisition costs (the total cost of all the units themselves bought to fill an
costs of all units bought to fill an order) vary with the size of the order. For example, ordering parts in larger quanti-
order, usually varying with the ties may reduce each unit’s cost thanks to quantity discounts. This, in turn, will
size of the order
lower the total acquisition costs of the order. Ordering smaller quantities may raise
the unit cost.
inventory-holding or Inventory managers focus on two other inventory costs. Inventory-holding
carrying costs: all the costs or carrying costs are all the costs associated with carrying parts or materials in in-
associated with carrying parts or ventory. The biggest specific cost here is usually the firm’s cost of capital, which in
materials in inventory
this case is the value of a unit of the inventory times the length of time it is held
times the interest rate at which the firm borrows money.19 Suppose an item costs
$10 and stays in inventory for a year, and the firm must pay its bank 5 percent in-
terest to borrow money. Then it costs the firm $0.50 in finance charges just to hold
stockout costs: the costs the item in inventory for a year. Stockout costs are the costs associated with run-
associated with running out of ning out of raw materials or finished-goods inventory. For example, if a company
raw materials, parts, or finished- cannot fill a customer’s order, it might lose both the current order and any profits
goods inventory
on future sales to this customer.
Inventory managers want to avoid three basic problems. Overinvestment in
inventories ties up money and space. Underinvestment leaves the firm unable to
fill production orders and discourages customers. Unbalanced inventory means
there are some understocked items and some overstocked ones.
Basic Inventory Management Systems

Many quantitative and nonquantitative tools are available for managing inven-
tory. The ABC and EOQ systems are two popular methods.
● ABC Inventory Management Most firms find that a small proportion (25 per-
cent to 30 percent) of the parts in their inventory accounts for a large proportion
(70 percent or 80 percent) of their annual dollar volume of inventory use. (Com-
pute a part’s annual dollar volume by multiplying its cost per part by the number
of parts used in a year.)
When using the ABC system, the manager divides the inventory into three
dollar-volume categories—A, B, and C. The A category parts—maybe 5 percent of the
total—are the most active. They account for perhaps 40 percent of the annual dollar
value of all parts used. The manager concentrates most of his or her surveillance on
the A parts. For example, he or she orders them most often but in smaller quantities.
In that way, their total number in inventory at any one time is minimized.
At the other extreme, the inventory manager might find that perhaps 50 per-
cent of the parts (the C category parts) in inventory account for, say, 15 percent of
all the parts used each year. Why spend as much time closely monitoring all those
parts when, in total, they account for only 15 percent of the firm’s annual dollar
volume of inventory use? They don’t tie up that much capital. The idea of ABC is to
focus most on the high-annual-dollar-volume A inventory items, to a lesser extent
on the B items, and even less on the C items.
● The Economic Order Quantity Inventory Management System The

economic order quantity point of the economic order quantity (EOQ) system is to determine the most
(EOQ): an inventory economical quantity to order—in other words, the quantity that will minimize
management system based on a total inventory and setup costs. EOQ is the best-known and probably the oldest in-
simple formula that is used to
ventory system.
determine the most economical
quantity to order so that the Figure 9.8 illustrates the EOQ system. Note that the two major costs, inventory
total of inventory and setup carrying costs and ordering/setup costs, vary inversely with each other. For exam-
costs is minimized ple, ordering in large quantities (less often) usually allows the firm to reduce aver-
age ordering or setup costs (remember, it usually costs about the same in clerical
costs to place a big order as a small one). However, it also means higher storage
costs. (Ordering less often means placing fewer, bigger orders, so the company
has, on average, more inventory in stock.)
In its simplest form the economic order quantity (the most economic quantity
to order) is:
Q⫽ 冑——
苶苶
2US
H
F IGURE 9.8 Total Costs

ANNUAL COSTS IN DOLLARS
The Economic Order Quantity H = Annual holding

costs (pilferage, finance
Model costs, cost of space, etc.).
Minimum The more you order
When order size goes up, Total each time, the more
ordering costs per order go down Costs average inventory you
but carrying costs go up because must hold, and the
longer you must hold it.
more items are left longer in
inventory. S = Restocking or ordering costs for each order
(clerical time for placing order, or cost of setting
up machine). The more you order each time, the
less you spend on annual ordering costs.
Q = Economic (optimal) order

quantity to order-total
costs minimized
Controlling for Quality and Productivity ■ 245
where Q is the economic order quantity (the most economical quantity to order), U
is the annual use of the item, S is the restocking or ordering costs, and H is the an-
nual holding cost per unit per year. Suppose a car factory uses 10,000 door handles
per year to build its cars; then U for the handles is 10,000. S may refer to either
restocking or ordering costs, depending on whether the firm makes or buys the
handles. If the car factory orders the handles from a supplier and it costs the factory
$200 per order (for forms, clerical support, and so forth) to place the order, then
S is $200. Holding (or carrying) costs per unit (H) (in this case, $1.00 per unit) in-
cludes such things as pilferage, borrowing costs associated with holding the items
in stock, and the costs of the space in which the inventory is held. EOQ would thus
be 2000 units.
This EOQ makes some simplifications. For example, it assumes that the same
number of units is taken from inventory periodically, such as ten units per day.
More sophisticated EOQ versions handle these and other complications.20
Controlling for Quality and Productivity

quality: the extent to which a
product or service can meet
customer needs and expectations
Q uality refers to the totality of features and characteristics of a product or ser-
vice that bears on its ability to satisfy given needs. Put another way, “[q]uality
measures how well a product or service meets customer needs.”21 This quote high-
ISO 9000: the quality lights several things about quality. First, the customer’s needs are the basic stan-
standards of the International dard for measuring quality. Thus, many coach flyers understandably consider
Standards Organization traveling on JetBlue’s wider leather coach seats as high quality compared with the
typical coach experience. Second, high quality does not
have to mean high price. Again, the basic consideration
should be the extent to which the product or service
meets the customer’s expectations.
Quality standards today are international. Doing
business often means the firm must show it complies
with ISO 9000, the quality standards of the Interna-
tional Standards Organization, to which the United
States is a signatory. These standards specify practices
and procedures for things like how to train employees
and how to monitor quality. Complying with ISO 9000
shows potential customers that the products you pro-
duce meet international standards. For example, Dell
wants its computers to meet international quality stan-
dards. Therefore, it must make sure that the companies
It may not be first class, but most passengers rate JetBlue’s that supply it with components like hard drives them-
wide leather coach seats as “high quality.” selves comply with those international standards.
total quality management

Total Quality Management Programs
(TQM): a specific Total quality management (TQM) programs are companywide programs that
organizationwide program that integrate all the functions and related processes of a business so that they are all
integrates all the functions and aimed at maximizing customer satisfaction through ongoing improvements. They
related processes of a business
so that they are all aimed at
aim to focus all the company’s activities, including design, planning, production,
maximizing customer distribution, and field service, on maximizing customer satisfaction. They empha-
satisfaction through ongoing size management commitment to quality, empowering employees to address
improvements quality issues, analyzing quality issues based on data and facts, and continuously
improving all aspects of one’s operations.22 Companies like GE that pursue TQM
typically train selected employees to become experts in applying TQM principles
(GE calls its employee-experts black belts). One team at GE Appliances analyzed
the inspection process on one refrigerator line and devised a better system that
did not require pulling refrigerators off the line to inspect them. By continually
making changes like these in how the company designs, manufactures, and dis-
tributes its products, total quality rises, and the savings (for instance, of not having
to throw out defective items) boosts profits.
TQM programs go by many names. Sometimes managers call them continuous
six-sigma: a total quality improvement, zero defects, six-sigma, or (in Japan) Kaizen programs.23 Six-sigma
management program, the aim programs are perhaps the best known. Statisticians use the Greek letter sigma to
of which is to reduce errors to represent standard deviation. Standard deviation is basically a measure of varia-
about 3.5 defects per million
tion. Suppose we can plot the number of defects our company gets with a normal,
items produced
or bell-shaped, curve. Then there is a very high probability we will get an average
number of defects (say, 10,000 per day), as indicated by the midpoint of the curve.
There is less probability we will get more (11,000) or fewer (9,000) defects per day.
About two-thirds of all likely defects will be between ⫾ one standard deviation
from the average (mean). In the six-sigma system, if a company achieves only one
sigma, it’s very likely they will get lots of defects. If a company achieves six-sigma, it
means it gets very few defects—about 3.5 defects per million items they produce.
Most regard W. Edwards Deming as the intellectual father of TQM. He based
his concept of total quality on a fourteen-point system, which he says must be im-
plemented at all organizational levels. To get an idea of his TQM philosophy, we
can summarize his points as follows:
1. Create consistency of purpose toward the improvement of product and service.

2. Adopt a philosophy of quality.
3. Cease depending on inspection; instead, build quality into the product from
the beginning.
4. Don’t choose suppliers based just on price; emphasize loyalty and trust.
5. Improve constantly and forever the production and service system—in other
words, aim for continuous improvement.
6. Institute extensive training on the job.
7. Shift your focus from production to quality.
8. Don’t do things that make employees fear for their jobs.
9. People in research, design, sales, and production must work as a team to fore-
see problems.
10. Don’t rely on slogans and targets that push for higher quality and productivity,
particularly where you don’t put in systems for achieving these aims.
11. Eliminate work standards (quotas) on the factory floor.
12. Abolish using tools like annual appraisals; these rob employees of the intrin-
sic desire to do a great job.
13. Institute a vigorous program of employee training and self-improvement.
14. Make sure all managers push every day for each of the preceding thirteen
points.24
Deming at first had success converting Japanese, not American, firms to his
principles, and Japanese firms still strive hard to win Japan’s Deming quality prize.
Controlling for Quality and Productivity ■ 247
16
F IGURE 9.9 15
14
Example of a Quality 13
WEIGHT IN POUNDS
Control Chart 12
11 Upper
The idea behind any control chart 10 Control
is to track quality trends to 9 Limit
ensure that they don’t go out of 8
7
control.
6
5
4 Lower
3 Control
2 Limit
1
8:00 9:00 10:00 11:00 12:00 1:00 2:00 3:00 4:00
Time
In the United States, the Department of Commerce created the Malcolm Baldrige
Award to recognize firms that adhere to Deming-type quality principles. (Baldrige
was secretary of commerce around that time.) Most U.S. firms can apply for the
award.25
Quality Control Methods

Managers use various tools to control product or service quality. For example,
most firms have formal inspection procedures. Sometimes (such as when produc-
acceptance sampling: a ing heart pacemakers), 100 percent inspection is typical. More common is accep-
method of monitoring product tance sampling. Here, the firm inspects only a portion of the items, perhaps
quality that requires the 2 percent or 5 percent.
inspection of only a small
Firms also use quality control charts like that in Figure 9.9. The manager uses
portion of the produced items
the upper and lower control limits to show the range within which some measur-
able characteristic should fall. Then employees (or machines) measure the chosen
characteristic (such as length or weight). Thus, Kellogg’s might want to make sure
each box of corn flakes contains no more than 20.2 ounces and no fewer than
19.8 ounces. If the measures begin to move toward the upper or lower control lim-
its, it’s time to see what’s causing the variation.
● Managing Now Modern information technology–based quality control sys-
tems enable manufacturers to do more than monitor obvious quality dimensions
like size and weight. Firms like Kraft also want to know if the products coming off
production lines are chewy, sweet, and/or crunchy.26 Kraft uses a sensory analysis
application from the software company SAS to ensure consistent flavor and ap-
pearance of its snack foods. The system includes special electronic sensors and a
database of information. These features enable the system to sense whether an
item is as chewy, sweet, crunchy, and/or creamy as it’s supposed to be.
Inspections and control charts are useful, but Deming pushed for getting the
employees themselves to want to produce high-quality products. Modern quality
control efforts therefore emphasize getting employee teams involved in moni-
toring quality and analyzing problems. Employee quality-assurance teams typi-
cally use several tools to monitor and analyze quality problems. Figure 9.10 sum-
marizes some of them.27 For example, a scatter diagram shows the magnitude of
one trait (such as the number of defects) versus a second trait (such as time). A
F IGURE 9.10
Commonly Used Tools for Problem Solving and Continuous Improvement
Process Flowchart Pareto Analysis Run Chart
Frequency Percentage
5 100%
?
4
3
50%
2
1
0 0%
A B C D E F G Time
A chart that describes the main steps, A plot of the frequencies of important A chart showing plotted values of
branches, and eventual outputs of error sources. 80/20 rule: 80 percent a characteristic over time.
a process. of problems are due to 20 percent of
causes (A, B, etc., are error sources).
Histogram Scatter Diagram Causes-and-Effect Diagram
Machine Human
Frequency
Environment
Effect
Method Material
Items
A distribution showing the frequency of Also known as a correlation chart. A tool that uses a graphical description
occurrences between the high and low A graph of the value of one characteristic to list and analyze potential sources of
range of data. versus another characteristic. process variation, classified by machine,
human, method, and material.
SOURCE: Adapted from Richard Chase and Nicholas Aquilero, Production and Operations Management, 6th ed.
(Homewood, Ill.: Irwin, 1992), p. 197.
cause-and-effect, or fishbone, diagram (see Figure 9.11) outlines the four main
causes of problems—machines, labor/people, methods, and materials. This kind
of diagram gives employees a useful structure they can use to systematically ana-
lyze the cause of quality problems.
Design for Manufacturability

designing for Designing for manufacturability means designing products with ease of high-
manufacturability: quality manufacturing in mind.28 Designing for manufacturability is important:
designing products with ease “By the time a product has been designed, only about 8 percent of the total
of manufacturing and quality
product budget has been spent. But by that point, the design has determined 80
in mind
percent of the [eventual] cost of the product!”29 Experts therefore say, “The
design determines the manufacturability.”30 For example, we can see evidence of
design for manufacturability in the cars we drive. A few years ago, designers
would design new cars just for aesthetics, and the company’s assemblers might
have to spend hours putting in all of a dashboard’s parts. Today, the dashboard
World-Class Operations Management Methods ■ 249
Material Machinery
F IGURE 9.11
Insufficient
Clean
Deicing Equipment
Pillows and
Not Available
Blankets Onboard
Cause-and-Effect, or
Fishbone, Diagram for
Problems with Airline Inadequate Mechanical
Customer Service Supply of Magazines Delay on Plane
Inadequate Special Broken Luggage

Meals Onboard Carousel
Dissatisfied
Airline
Customer
Overbooking Understaffed
Policies Crew
Poor Check-In Policies

Bumping Understaffed
Poorly Trained
Attendants
Policies Mistagged Bags Ticket Counters
Methods Labor/People
(and headlights, tail lights, and so on) are designed to come to the factory as
preassembled modules. This makes assembling the final, high-quality car much
concurrent engineering: simpler.
designing products in
multidisciplinary teams so that
Designing for manufacturability often means designing products using multi-
all departments involved in the disciplinary teams. Operations managers call this simultaneous design or concur-
product’s success contribute to rent engineering. It ensures that all departments involved in the product’s
its design success contribute to its design.31
World-Class Operations Management Methods

Online Study Center
ACE the Test
Managing Now! LIVE C ompetition in almost every industry is global.32 Thus, firms such as Whirlpool
face not just local competitors but foreign ones, like Meile. When competition
is global, competition is more intense. Firms everywhere are striving to improve
quality, lead time, customer service, and costs in the hope of gaining a stronger
hold on their markets. World-class companies are those that can compete based
on quality and productivity in an intensely competitive global environment. Firms
such as UPS, GE, and Toyota set the performance standards for their industries.
World-class manufacturers are world class in part because they use modern
production techniques and management systems to boost productivity, quality,
and flexibility. These techniques and systems include TQM (already described),
just-in-time manufacturing, computer-aided design and manufacturing, flexible
manufacturing systems, computer-integrated manufacturing, supply chain man-
agement, and enterprise resource planning. We discuss them next.
The Basic Components of Just-in-Time

(JIT) Systems
just-in-time (JIT): a The concept called just-in-time (JIT) has two related definitions. In the narrowest
production control method used sense, JIT refers to production control methods used to attain minimum inventory
to attain minimum inventory levels by arranging delivery of materials and assemblies just in time—in other
levels by ensuring delivery of
words, just when they are to be used. But realistically, one cannot minimize inven-
materials and assemblies just
when they are to be used; also tory without also having excellent forecasting, assembly, shipping, and employee-
refers to a philosophy of training practices in place. Otherwise, companies that keep minimal inventories
manufacturing that aims to of spare parts and get the ones they need at the last minute run out of parts when
optimize production processes they most need them! So JIT is really a philosophy of manufacturing that aims to
by continuously reducing waste optimize production-process efficiency by continuously reducing waste.
● The Seven Wastes Reducing seven main wastes is at the heart of the JIT
philosophy.33 The seven wastes (and examples of how to reduce them) are over-
production (reduce by producing only what is needed, as it is needed), waiting
(synchronize the workflow), transportation (minimize transport with better lay-
outs), processing (ask, “Why do we need this process at all?”), stock (reduce inven-
tories), motion (reduce wasted employee motions), and defective products (im-
prove quality to reduce rework).
As an example, most firms waste enormous resources waiting—to inspect in-
coming items, for storing raw materials or work in process, or for moving work in
process from one step of the process to another. JIT aims to reduce wastes like
lean or value-added these. JIT is also sometimes called lean or value-added manufacturing (reflect-
manufacturing: a ing the fact that any manufacturing activity that does not add value to the product
management philosophy that for the customer is wasteful).34
assumes that any manufacturing JIT has its weaknesses. Having minimal inventory and getting parts just in
process that does not add value
time works great when all is normal. Plants near New Orleans found themselves
to the product for the customer
is wasteful out of their parts inventory (and out of luck) when Hurricane Katrina shut down
UPS and FedEx shipments in 2005.
● JIT Characteristics In practice, JIT-based facili-

ties tend to have several characteristics. They tend to be
small (less than 100 employees) specialized plants
rather than large ones. It is easier to manage small
plants, and it is easier to design the workflow and to
staff specialized, single-function plants.35 They tend to
be organized around cells, so all the processes required
to complete a major part of the product are in one place.
One employee can then perform all the processes.
Workers tend to be more highly trained and flexible.
Each worker also tends to be personally responsible for
the quality of the item he or she produces. Thus, quality
goes in at the source, when the product is actually
made, in turn eliminating a big source of waste.
● JIT’s Human Consequences Manufacturers in-

stalling such lean production systems need to consider
their potential effects on employees.36 At firms like
JIT-based facilities: Toyota inspectors examine a finished car Toyota, eliminating waste typically goes hand in hand
coming off the assembly line in the company’s Miyazaki, with increased employee teamwork, participation, and
Japan, factory. problem solving, and so lean manufacturing seems to
boost motivation. However, one recent study shows how one company may have
done things wrong. In this study, workers who used to control the pace of their
work suddenly found themselves working on an assembly line. Basically, the work-
ers felt that the quality of their jobs had declined and that they were working
harder and with less control over what they did than they had previously. The
researcher concluded that in this case, lean production “can be damaging to
employees.”37 Such a situation is probably the opposite of what Deming had in
mind. Deming’s principles call for a quality system in which employees take own-
ership for and pride in their work. Managers instituting quality programs ignore
that to their peril.
Computer-Aided Design and Manufacturing

Technology—not just employee behavior—plays a big role in world-class manu-
computer-aided design facturing. For example, computer-aided design (CAD) is a computerized
(CAD): a computerized process for designing new products or modifying existing ones. Designers sketch
process for designing new and modify designs on a computer screen. CAD makes it easier to modify existing
products, modifying existing
designs and lets designers expose their designs to simulated stresses such as wind
ones, or simulating conditions
that may affect the designs resistance.
Computer-aided manufacturing (CAM) uses computers to plan and
computer-aided program the production process or equipment. For example, it makes possible
manufacturing (CAM): computerized control of tool movement and cutting speed. So a machine can
a computerized process for carry out several sequential operations on a part, all under the guidance of the
planning and programming computer-assisted system.
production processes and
Operations managers often use CAD and CAM together. For example, with the
equipment
design already in place within the CAD system, the computer knows a compo-
nent’s dimensions and specifications and can tell the automated CAM production
equipment how to cut and machine it.
Companies use the Internet to expand the usefulness of such computer-based
systems. Consider Motorola’s plant in Mansfield, Massachusetts. When the plant
got approval to produce new cable modems, the plant manager knew he needed a
faster and cheaper way to get the engineering documents to the assemblers on the
plant floor.38 The manager and his staff created an internal plant intranet. They
used a digital camera to take pictures of each component. They placed these pic-
tures online, along with step-by-step instructions for assembly and testing. This
setup eliminated expensive paper engineering drawings. It also helped the plant
update its drawings instantaneously.
● Managing Now Companies use software applications to create more com-

petitive manufacturing processes. For example, applications like SAP Manufactur-
ing allow production managers to monitor, detect, and resolve production and
performance deviations in real time and to improve employee productivity.39
flexible manufacturing
system (FMS): the
organization of groups of Flexible Manufacturing Systems
production machines that are
connected by automated In many firms today, flexible manufacturing systems are at the heart of their
materials-handling and transfer world-class production. Systems like these enable companies to quickly shift
machines, and integrated into a production from one product to another, even on the same production line. A flex-
computer system for the
ible manufacturing system (FMS) is “a system in which groups of production
purpose of combining the
benefits of made-to-order machines are connected by automated materials-handling and transfer machines,
flexibility and mass-production and integrated into a computer system.”40 Computers route parts and components
efficiency to the appropriate machines, select and load the proper machine tools, and then
direct the machines to perform the required operations. Computerized automated

guided vehicles (AGVs) then move the items from machine to machine. Often,
there is a computer-guided cart system. It picks up and delivers tools and parts to
and from multiple workstations. Systems like these depend on automation and ro-
automation: the automatic bots. Automation is the automatic operation of a system, process, or machine. A
operation of a system, process, robot is a programmable machine capable of manipulating items and designed to
or machine move materials, parts, or specialized devices through programmed motions.
Several things contribute to the manufacturing system’s flexibility. Comput-
erized manufacturing instructions (CAM) reduce machine setup times. Reduced
setup times cut required manufacturing lead times. Automated guided vehicles
move parts with relative speed and efficiency. And the firm can respond more
quickly to new competing products or changing consumer tastes by using CAD to
redesign products and CAM to reprogram its machines. Toshiba’s president said
the aim of flexible manufacturing “is to push Toshiba’s
two dozen factories to adapt faster to markets . . . cus-
tomers wanted choices. They wanted a washing ma-
chine or TV set that was precisely right for their needs.
We needed variety, not mass production.”41
Flexible manufacturing helps Toshiba combine the
advantages of customized, one-at-a-time production
with the efficiency of mass production. At the Toshiba
plant in Ome, Japan, workers efficiently assemble nine
word-processor models on one line and twenty laptop
computer models on another.42 Such flexibility helps
Toshiba be responsive to customer requirements. The
National Bicycle Industrial Company, a subsidiary of
electronics giant Matsushita, is another example.43
With only twenty employees, National Bicycle’s factory
can produce more than a million variations of eighteen
Plants like this one owned by Toshiba rely on flexible bicycle models, each custom-made to a customer’s
manufacturing systems. unique requirements.
Computer-Integrated Manufacturing
Many firms integrate automation, JIT, flexible manufacturing, and CAD/CAM into
computer-integrated one self-regulating production system. Computer-integrated manufacturing
manufacturing (CIM): (CIM) is defined as the total integration of all production-related business activi-
the total integration of all ties through the use of computer systems.44 It gives the firm a competitive advan-
production-related business tage based on speed, flexibility, quality, and low cost. Figure 9.12 summarizes this
activities through the use of
computer systems
integrative process.
CIM’s advantages usually exceed those of its component parts. For example,
CAD reinforces CAM by feeding design changes directly to the machinery tools.
Computer-integrated automated guided vehicles facilitate JIT systems by reduc-
ing human variability and waiting time in the system.45 We’ve also seen that many
companies are using the Web to streamline their operations. For example, Boeing’s
electronic commerce website eliminates the barriers that traditionally separated
the company from suppliers and customers. Customers can keep track of their or-
ders. Suppliers can see when Boeing needs their parts. Boeing can see where their
parts are. Manufacturing systems are increasingly integrated with customers’ and
suppliers’ systems.46
Integration is important. As one Japanese executive put it, “In the past, manu-
facturing was characterized by large [production run] quantities, with few varieties.
F IGURE 9.12
The Elements of CIM
Computer-Aided Design (CAD)

designs the product.
Computer-Aided Manufacturing
(CAM) takes the CAD design and
guides machines to automatically
fabricate product. Robots assemble and
test the products.
Computers and
Computer Systems
Automated Storage and Retrieval Systems Automated Guided Vehicles

automatically move parts and materials move the parts and products from
in and out of storage. storage to assembly and back.
SOURCE: Adapted from Barry Render and Jay Heizer, Principles of Operations Management, 2nd ed., p. 179, © 1997. Reprinted
by permission of Pearson Education, Inc., Upper Saddle River, N.J.
Today’s customers are asking for small quantities in very many varieties. CIM adds
flexibility to help make those very short production runs economical.”47
● Cook Specialty Company Cook Specialty Company is a good example of

how CIM works. Cook Specialty Company is a small manufacturer of precision
metal parts.48 As its customers trimmed the number of suppliers from whom they
purchased parts, Cook needed a way to stay competitive. Somehow, Cook had to
combine low-volume production with high variety and low cost. It needed mass-
production prices and job-shop flexibility.
Its solution was to switch to being a custom manufacturer, one that not only
made the products but helped customers design them. A new CIM system enables
Cook to do this. By linking its own computerized manufacturing system with cus-
tomers’ CAD systems, Cook and its customers can now swap drawings and send
instructions for final designs directly to Cook’s computer-automated machines for
manufacture. Cook has a highly integrated system that gives customers a value-
added benefit and gives Cook a competitive edge.
● CIM and Employees Some companies spend millions installing CIM sys-
tems but find that their plants are no more productive or flexible than before. A
study sheds some light on why. Harvard Professor David Upton found that:
The flexibility of the plants depended much more on people than on any tech-
nical factor. Although high levels of computer integration can provide criti-
cally needed advantages in quality and cost competitiveness, all the data in
my study point to one conclusion: operational flexibility is determined pri-
marily by a plant’s operators and the extent to which managers cultivate,
measure, and communicate with them. Equipment and computer integration
are secondary.49
The successful computerization of paper manufacturer Mead Corporation’s mill
in Escanaba, Michigan, is an example.50 Because some of its machines were already
computer integrated, Mead managers knew computerization itself was no panacea.
They decided to make the workers part of the plant improvement process:
◗ They replaced their existing computer systems with a new system called Quality
and Information for Decisions.51 The system (nicknamed QUID) was custom-
designed to make things easier for the operators who actually ran the machines.
◗ From the outset, the plant’s managers insisted that operators be involved in the
system’s design and development.
◗ The plant managers saw to it that the computer system was designed mostly in-
supply chain: includes all the
interactions between suppliers, house. The employees at each work function in the plant designed their own
manufacturers, distributors, and computer interface to ensure that they got the information they needed to do
customers, including specifically their jobs.
transportation, scheduling
information, cash and credit The new people-friendly program was quite successful. The plant’s responsive-
transfers, as well as ideas, ness and customer satisfaction measures rose dramatically. Escanaba became the
designs, and material transfers most productive mill in Mead’s fine-paper group. Recently, thanks in part to Esca-
naba’s success, Mead sold its entire paper operations to a company called Cerberus.
Supply Chain Management

Online Study Center
ACE the Test
Managing Now! LIVE C omputer-integrated and lean manufacturing aim to eliminate the wastes of
unnecessary activities and to help companies respond faster to customers’
needs. Supply chain management supports these aims. Indeed, world-class
firms like Dell and Toyota are so successful largely due to how they manage their
supply chains. A supply chain “includes all the interactions between suppliers,
supply chain management: manufacturers, distributors, and customers. The chain includes transportation,
the integration of the activities
that procure materials, transform
scheduling information, cash and credit transfers, as well as ideas, designs, and
them into intermediate goods material transfers.”52 Supply chain management “is the integration of the ac-
and final product, and deliver tivities that procure materials, transform them into intermediate goods and final
them to customers products, and deliver them to customers.”53 The idea is to build an integrated
Supply Chain Management ■ 255
F IGURE 9.13
The Supply Chain
The supply chain includes all interactions among suppliers, manufacturers, distributors, and
customers.The chain involves transportation, scheduling information, cash and credit transfers,
as well as ideas, designs, and material transfers.
Market Research Data

Scheduling Information Customer
Supplier
Engineering and Design Data
Order Flow and Cash Flow
Ideas and Design to Satisfy

Inventory the End Customer
Material Flow
Supplier Customer
Credit Flow
Manufacturer
Inventory Inventory
Supplier Distributor Customer
Inventory
SOURCE: Adapted from Jay Heizer and Barry Render, Operations Management (Upper Saddle River, N.J.: Prentice Hall, 2001),
p. 434.
chain of suppliers who together focus both on reducing waste and on getting the
desired products to the customers as expeditiously as possible.54 Figure 9.13
summarizes this.
Managing Now: Supply Chain Management Software

Companies usually build their supply chains’ interconnectedness around spe-
cial supply chain management software applications from companies like SAS,
SAP, and Oracle. We can get some insights into what these packages do for com-
panies by listing some typical components. For example, Oracle Supply-Chain
Management includes components such as: daily business intelligence for pur-
chasing; payables; purchasing; demand planning; e-bill payment; inventory;
order promising; manufacturing scheduling; shop floor management; trans-
portation planning; warehouse management; order management; demand con-
sensus; and advanced forecasts modeling.55
Supply chain packages like these work together with a company’s enterprise re-
source planning (ERP) software. As we saw, ERP software includes compatible soft-
ware packages for each department or business function. These business functions
include production and materials management, shipping, finance/accounting,
and human resources. Add the supply chain software, and the company can also
bring in supply chain partners such as distributors, truckers, and suppliers. Now,
information from outside the company—say, from and to suppliers and truckers—
can also flow from and to the company’s inside departments, like production and
finance.
For example, what happens when someone places an order for a new Dell PC?
Dell’s ERP software posts the order and signals manufacturing to plan to produce
the PC. It hands off information on the order to Dell’s supply chain management
system. This signals suppliers (such as the one producing the monitor you want) to
prepare to have one picked up. It also notifies UPS to pick up your PC from Dell
(and the monitor from the supplier) on a particular day and to deliver it all to you,
as ordered. At the same time, Dell’s ERP notifies the accounting department to send
you a bill, and it lists your PC’s specifications on the Dell customer-service system
in case you call or link in with a question. And, all this happens automatically.
The Three A’s of Supply Chain Management

Experts say that great supply chains exhibit three characteristics: agility, adaptabil-
ity, and alignment. Agility means that the supply chain must be able to respond
quickly to sudden changes in markets.56 For example, thanks to its supply chain sys-
tem, the retailer Zara can design, manufacture, and ship a new jacket to one of its
stores in fifteen days; so when trends change, it can respond quickly. Adaptability
means being willing to change parts of the supply chain when change is required.
For example, Lucent continued to manage its supply chain on the assumption that
it should produce its own phones, even after competitors had outsourced manu-
facturing to highly efficient electronics manufacturing firms like Flextronics. Lu-
cent’s failure to adapt helps to explain why it lost market share. Great supply chains
also align all the supply chain’s partners’ interests. For example, the incentives are
such that each Dell supply chain partner does what’s best to support Dell’s cus-
tomers’ needs. UPS will do what it needs to get that PC to the customer on time.
PRACTICE IT
Whirlpool Delivers
With Whirlpool’s sales force referring to its supply chain appliances. Sears can keep track of when its Whirlpool
as a sales disabler, new supply chain head Reuben Slone appliance order will arrive.
took action. Slone and his team began by instituting a new Whirlpool’s supply chain management team supple-
forecasting system called CPFR, which stands for “collab- mented this system with new Web-based supply chain man-
orative planning, forecasting, and replenishment.” The agement tools. For example, they installed a new Web-based
basic idea of CPFR is to let all the partners in Whirlpool’s tool that lets Whirlpool’s system communicate directly with
supply chain—retailers, truckers, and manufacturing a customer’s system for details like transmitting orders, ex-
plants, for instance—share information, like how many ap- changing sales data, and submitting and paying invoices.57
pliances Whirlpool expects to sell to each retailer (such This cuts the time and costs associated with these transac-
as Sears).This information enables each supply chain part- tions. Product availability rose from about 88 percent in
ner to develop its own forecasts and to better prepare for 2003 to more than 95 percent today. The number of days
fulfilling their roles in Whirlpool’s supply chain. UPS can the company had to hold finished goods in inventory
see when it will have to send trucks to pick up finished dropped from about thirty-three days to about twenty-six.
Why Supply Chain Management Is Important

Supply chain management is important because no business today functions
alone. The performance of every business depends on the suppliers who supply its
parts and on the companies who distribute its products to the ultimate cus-
tomers. How much the company’s products cost, the products’ quality and relia-
bility, and the speed and dependability with which the products show up at the
customer’s door all depend on the company’s supply chain partners. For example,
when the hard drive on a new Dell PC stops working, the consumer gets upset with
Dell, not with the part’s manufacturer.When the replacement doesn’t arrive on time,
he or she gets upset with Dell, not with UPS. Too many supply chain partner slip-ups
can doom a company’s business. The Practice IT feature shows that Whirlpool,
which several years ago suffered from slow deliveries, learned that lesson well.
● Managing Now: Reducing Costs with Supply Chain Management Supply

chain management helps companies reduce costs. For example, at General Elec-
tric’s power systems division, the firm’s Web-based supply chain management sys-
tem lets its customers monitor the assembly of the huge turbines they ordered as
the turbines move through the production process. These power-generating tur-
bines cost $35 million each and contain thousands of parts. Having customers
catch errors early and being able to get suppliers to change designs more expedi-
tiously means big cost savings for GE and the customer.58
As another example, Wal-Mart used to order two to four weeks’ worth of prod-
uct for each store. Now, Wal-Mart orders only five days’ worth of product. Its supply
chain partners (including its suppliers and truckers) are responsible for ensuring
that those products show up on time and for consolidating shipments from several
suppliers so the delivery trucks are full. Wal-Mart’s information technology–based
supply chain management system helps make sure the process runs smoothly. It
uses radio-frequency sensors, supply chain software, satellites, and digital trans-
mission devices from check-out stations to help suppliers keep track of Wal-Mart’s
sales and inventory and thus anticipate Wal-Mart’s needs.59
Basic Building Blocks of Supply Chain

Management Systems
In addition to the supply chain management system software and the IT system
itself, the four building blocks of supply chain management systems are sup-
plier partnering, transparency , Internet-based purchasing, and channel assembly.
supplier partnering: Supplier partnering means choosing to do business with a limited number of
choosing to do business with a suppliers, with the aim of building relationships that improve quality and relia-
limited number of suppliers, bility rather than just improve costs. Rather than getting competitive bids, the
with the aim of building customer-company often decides to work with a few supplier-partners.
relationships that improve
quality and reliability rather
Supplier partnering brings many advantages. The customer-buyer company
than just improve costs can work with the partner-supplier to ensure a cost-effective design. Firms like
Wal-Mart let suppliers literally link into the company’s point-of-purchase and in-
ventory systems to learn what products Wal-Mart needs, when. This system
reduces inventory costs, improves just-in-time performance, and reduces admin-
istrative costs. Supplier partnering reduces the customer-company’s administra-
tion costs (for instance, fewer purchasing agents are required). It can also improve
product quality (for instance, by enabling the customer-company to insist that the
supplier be ISO 9000 certified), eliminate waste from the supply chain, and still let
the firm push for cost reductions (although, perhaps, not quite so hard).
Most supply chain software applications from companies like SAP, SAS, and
transparency: giving supply Oracle facilitate transparency. Transparency basically means giving supply chain
chain partners easy access to partners easy access to information about details like demand, inventory levels,
information about details like and status of inbound and outbound shipments, usually through a Web-based
demand, inventory levels, and
portal. This information lets supply chain partners (like suppliers and truckers)
status of inbound and outbound
shipments, usually through a accurately predict the customer’s needs. Transparency requires trust and collabo-
Web-based portal ration. Thus, Dell needs to trust their suppliers to keep proprietary information
about Dell’s daily sales private. (We address trust and collaboration in Chapter 17).
As we said earlier, radio frequency identification (RFID) sensor tags support trans-
parency. Big retailers use these tags to help keep track of inventory as it moves
from manufacturer to warehouse to stores.60
● Managing Now The Safeway supermarket chain in the United Kingdom im-
plemented a supply chain management system that illustrates supplier partnering
and transparency. Aiming to improve its service, Safeway did a market research
study to find out what customers most disliked about shopping in their stores.
“Waiting on line at the checkout counter” topped the list. Safeway responded by
installing special scanners; customers can now scan and bag their own items if
they choose to. Number 2 on their customers’ list was “not being able to buy out of
stock items.” Safeway therefore reorganized its supply chain. It had been reluctant
to share information with suppliers for fear of divulging competitive information.
With new point-of-sale computerized registers, Safeway started sharing its real-
time sales with its suppliers.61 In doing so, Safeway turned their suppliers into
partners. Their suppliers now get real-time information regarding sales of their
products. That gives them the real-time information they need to replenish
Safeway’s shelves just in time.
Internet-based purchasing is a third building block of supply chain manage-
ment. For example, companies are creating what amounts to their own eBay-
type purchasing websites. They use these sites to enable potential vendors to bid
for their business. America’s big three automakers—General Motors (GM), Ford,
and DaimlerChrysler—created a Web-based purchasing exchange. Every year,
these firms make about $250 billion worth of purchases via this exchange.62
Internet-based purchasing: However, Internet-based purchasing (also called e-procurement) usually
making purchasing needs means more than just getting orders via the Web. In today’s supply chains, supplier
known via the Web, as well as partnering and transparency usually mean that favored suppliers (like Levi’s) can
getting orders via the Web and
monitor the real-time sales of customers (like Wal-Mart) and automatically create
automatically generating and
sending the necessary shipping orders to fulfill the customer’s needs. Therefore, Internet-based purchasing also
documents and bills usually means having the system automatically generate the necessary shipping
electronically; also called documents and bills.
e-procurement
● Managing Now The thousands of orders Dell fills each week translate into
millions of component requirements. Dell makes more than 90 percent of its com-
ponent purchases online.63 Here’s how the system works. Dell’s suppliers use the
company’s special supply chain Internet portal to view Dell’s estimated parts
requirements and Dell’s actual orders and to confirm that they can meet Dell’s
delivery requirements. Then, as Dell actually receives orders, the online system
sends a pull signal to each supplier. This signal triggers the shipment of the parts
Dell needs to build current orders. As the head of Dell’s supply chain management
system says, “[W]e now schedule every line in every factory around the world
every two hours, and we only bring into the factory two hours worth of materi-
als.” 64 That keeps Dell’s inventory to a minimum and helps to explain why its costs
are lower than its competitors’.
● Channel Assembly Finally, some companies also make their suppliers or

channel assembly: distributors part of their manufacturing processes. Channel assembly, a fourth
organizing the product assembly characteristic of supply chain management, means having a supplier or distrib-
process so that the company utor perform some of the company’s manufacturing steps. For example, Hewlett-
doesn’t send finished products
Packard (HP) doesn’t send finished printers to its distributors; it sends components
to its distribution channel
partners (such as warehouses, and modules. The distributors thus become an extension of HP’s production
distributors, and retailers), but process. When a retail store asks the distributor for a particular HP printer, the
instead sends the partners distributor simply plugs together the required components and ships the assem-
components and modules. The bled product.
partners thus become an Many cars are assembled this way. For example, Siemens supplies electronic
extension of the firm’s product parts for the Land Rover’s dashboard. However, Siemens does more than supply
assembly process
parts. Other Land Rover suppliers send parts to Siemens, which then assembles
all these parts into completed dashboards. Siemens then sends these assembled
dashboards to the Land Rover plant, ready for installation. Land Rover does not
have to put together these components because Siemens has already done it.
The Window on Managing Now feature shows how the retailer Zara used all of
these building blocks to create a world-class company.

Zara
Today, the Spanish retailer Zara has more than 650 stores
in fifty countries and sales of over $6.5 billion.65 But the
company’s founder, Amancio Ortega, still remembers the
day, many years ago, when his present company started. A
German wholesaler had just canceled a big order, and
Ortega thought his clothing company could go bankrupt.
He had tied up all his money in the order. How would he
get rid of all that merchandise? He opened a shop near his
factory in the northwest corner of Spain and sold the
goods himself. It was the first Zara shop.66
The cancellation of that order taught Ortega a big
lesson. As he puts it, to be successful, “You need to have
five fingers touching the factory and five touching the cus- Zara’s state-of-the-art factory in Spain helps ensure that
tomer.”67 In other words, control everything that happens popular items reach Zara’s stores in just a few days.
to your product until the customer buys it.That philoso-
phy has driven Ortega to create one of retailing’s most production staff in Spain. Zara uses information technol-
efficient supply chains. ogy to support its communications. For example, store
Zara runs a very close-knit, mostly company-owned managers use handheld personal digital assistants (PDAs)
supply chain. Because Ortega still likes to “keep five fin- to transfer data that augments regular phone conversa-
gers on the factory and five on the customer,” Zara does tions between them and Zara’s market specialists. In
about half its production in-house. Its communication sys- Spain, Zara designers work closely with product and tex-
tem quickly transfers both hard data (such as sales from tile engineers to create about 40,000 new designs per
stores’ point-of-purchase registers) and anecdotal infor- year, of which the company selects about 10,000 for pro-
mation from store managers back to designers and duction. Keeping design and manufacturing in one place
like this makes the whole process run more smoothly and the design proved quite popular, Zara designed, produced,
quickly. Once Zara’s designers choose a design, its com- and delivered new variations of that jacket and put them
puterized design system translates that design to a final on display in stores worldwide in just fifteen days. Other
product via computer-aided manufacturing. companies might take months to perfect designs and get
Zara store managers throughout most of the world them to the stores. By then, the trend may be long gone.
place their orders by 3 P.M. Tuesday and 6 P.M. Friday.The As another example, Zara’s sends new products to its
orders then generally ship from Zara’s factory within stores every week, but always in short supply. If a cus-
forty-eight hours. Zara tags the items before they reach tomer finds something that strikes his or her fancy, that
the stores and ships them hung on special racks. When customer is inclined to think, “I should buy this now be-
they arrive, they are ready for display. cause it’s the last one left.” Executing that kind of limited
Zara’s superresponsive supply chain helps to explain supply system means Zara’s supply chain must be able to
the company’s success. For example, Zara recently intro- create and quickly replenish small batches of new goods,
duced a version of a short, classic women’s jacket.When and fast.
Managing Now: Supply Chain City

Until recently, a quota system in the United States basically required that
American clothing manufacturers spread their manufacturing orders around
the globe as a way to support fledgling apparel manufacturing industries in
countries like Bangladesh. Those quotas ended a few years ago. As a result,
apparel manufacturing is quickly consolidating in low-cost, high-efficiency supply
chain cities in countries such as China. The supply chain city consolidates in one
place product design, engineering, and manufacturing. For example, the supply
chain city in Dongguam, in southern China, includes a huge factory, a hotel,
dormitory rooms for 4,000 workers, and restaurants.68
Apparel maker Liz Claiborne is consolidating all its design, textile engineering,
and manufacturing in this supply chain city because it brings together many of the
components of Liz Claiborne’s supply chain (like design, textile engineering, and
manufacturing). The company’s designers sit down here with technicians and en-
gineers from textile manufacturers and from the manufacturing facility itself to
quickly design and produce new apparel lines.
Liz Claiborne hopes that concentrating all this work in one place will simplify
and speed up its whole supply chain process. It used to have 250 suppliers in
thirty-five countries. Now, all this work will be done in the supply chain city. With
its old system, designs for new items would bounce back and forth from designers
in New York to various manufacturing facilities around the world, until the facili-
ties got the designs right. Now, all the design and manufacturing is done in one
place. Liz Claiborne hopes to get fast turnaround for new designs. In effect, it has
put much of its supply chain partners in one place—in a supply chain city.
CHAPTER SUMMARY
1. Operations management is the process of managing 2. Any production system consists of inputs, a con-
the resources required to produce an organization’s version system, and outputs. Inputs are the pri-
goods and services. The direct production resources mary resources used in the direct manufacture of
of a firm are often called the five P’s of operations the product or service. The conversion system con-
and production management: people, plants, parts, verts those inputs into useful products or services
processes, and planning and control systems. called outputs.
3. The production system is at the heart of the opera- 7. Quality reflects how well a product or service meets
tion. Four production design system decisions in- customer needs. Many firms use a process called de-
clude the facility or plant location, the type of pro- signing for manufacturability to improve quality.
duction processes that will be used, the layout of Quality control involves a total, companywide effort.
the plant or facility, and the layout of the produc- A number of quality control techniques are used to
tion system itself. monitor and control product quality, including in-
spection procedures and acceptance sampling.
4. Production planning is the process of deciding
what products to produce, and where, when, and 8. World-class companies compete based on quality,
how to produce them. Production control is the productivity, and responsiveness in an intensely
process of ensuring that the specified production competitive global environment. World-class
plans or schedules are being met. manufacturers use modern production techniques
and progressive management systems to boost
5. The production schedule is often presented on a
manufacturing productivity, quality, and flexibility.
chart that shows what operations are to be carried
These production techniques and management
out and when. Network planning and control
systems include TQM, JIT, CAD and CAM, FMS,
methods are used to plan and control complex
CIM, and mass customization.
projects. Purchasing departments buy the materials
and parts the firm needs to conduct its business. 9. Supply chain management helps the firm achieve
more efficient, integrated operations. Supplier
6. Inventory management ensures that the firm has
partnering involves choosing a limited number of
adequate inventories of all needed parts and sup-
partners with whom the firm develops closer rela-
plies within the constraint of minimizing total
tionships. Channel assembly means having part-
inventory costs. Many quantitative and nonquanti-
ners in the supply chain assemble modules to suit
tative systems are available for managing inventory;
their customers’ needs.
ABC and EOQ systems are two of the most popular.
1. Describe the production system in a dry-cleaning 5. What does world-class manufacturing mean to
store. you?
2. What are the basic types of production processes? 6. What makes a flexible manufacturing system
Which category would a college fit into? flexible?
3. What is a PERT chart? What (in outline form) would 7. What is a supply chain?
one look like for buying a car?
8. List four types of supply chain partners for your
4. How could you use ABC inventory control in your school cafeteria.
pantry?
1. The people managing your school cafeteria (or 2. You probably will not want to attempt Experiential
franchised fast-food restaurant, etc.) have discov- Exercise 1 (evaluating your school cafeteria) until
ered that you know all about laying out a facility to you’ve laid out the schedule for your project. In
make it more efficient, and they want to use your teams of four or five students, create a Gantt chart
services. In teams of four or five students, visit your for the cafeteria-evaluation project.
school cafeteria or other restaurant. What type of
3. After you have evaluated the school cafeteria in
layout does it use now? Explain how you would
Experiential Exercise 1, you’ll probably identify
change it, and why. Then briefly present your find-
problems that you want management to address.
ings to the class.
Use a fishbone/cause-and-effect diagram to ana- obtain per order. Its annual demand for paper
lyze the problems. plates is 50,000. The ordering cost is $10 per order.
The holding cost per plate per year is $0.05. Using
4. Your college cafeteria wants to reduce what it
the EOQ model, how many plates should the cafe-
spends on its inventory of paper goods by deter-
teria manager order each time?
mining the optimal number of paper plates to
CASE STUDY
The Production Process at Wheeled Coach
heeled Coach, based in Winter Park, Florida, is the Ford truck, moves to a station where the aluminum
W world’s largest manufacturer of ambulances; they
make about one of every three ambulances you see on
body is mounted. Then the vehicle is moved to paint-
ing. Following a custom paint job (usually involving
the road.69 Working four ten-hour days, 350 employees three applications), it is moved to the assembly line,
make only custom-made ambulances for hospitals, where it will spend seven days. During each of the
emergency medical teams (EMT), and fire depart- seven workdays, each workcell delivers its respective
ments. Although they make a full line of vehicles, from module to the appropriate position on the assembly
small to large, nearly every one is different—one, for in- line. During the first day, electrical wiring is installed.
stance has a special set of devices to make children On the second day, the unit moves forward to the sta-
more comfortable in it, and most need special com- tion where cabinetry is delivered and installed. From
partments in various places for the emergency medical there, the unit goes to a window and lighting station, on
team’s equipment. Continuing growth requires large to upholstery, to fit and finish, to further customizing,
capacity. The LA fire department alone orders about and finally to inspection and road testing.
150 ambulances per year. The firm has two identical
factories, one in Kansas, the other in Florida. DISCUSSION QUESTIONS
Wheeled Coach builds only ambulances and does
1. Why do you think major auto manufacturers do
much of its own fabricating in-house. For example, it
not build ambulances?
builds its own electrical assemblies and seat cushions.
Within the factory, computer-assisted machines cut the 2. What is a possible alternative production process
aluminum for the vehicle’s body, and special robotic to the assembly line that Wheeled Coach currently
welders assemble the custom-made doors and weld uses? Why?
them to the body. As a focused factory, Wheeled Coach
3. Why is it more efficient for the workcells to prepare
established workcells for every major module (body,
modules and deliver them to the assembly line
doors, and so on). These workcells feed an assembly
than it would be to produce the components (such
line, where workers assemble the bodies, electrical-
as the dashboard) as part of the line or have them
wiring harnesses, interior cabinets, windows, painting,
delivered complete by outside suppliers?
and upholstery into finished vehicles.
Every workcell feeds the assembly line on schedule, 4. What arguments would you make for why Wheeled
just in time for installation. The chassis, usually that of a Coach is a world-class manufacturer?
ORGANIZING 10
Staying in Touch at Millipore CHAPTER OUTLINE
Opening Vignette: Staying in
M assachusetts-based Millipore Corp. supplies the technologies, tools,

and services that its customers use to produce new drugs.1
Coordinating the work of all its far-flung units was increasingly challenging
Touch at Millipore
● Departmentalization:
Creating Departments
for Millipore Corp., with operations and 4,500 employees in more than Three Basic Ways to Departmentalize
Creating Departments Around Functions
thirty countries. For example, Creating Departments Around Self-
how could Millipore make sure Contained Product Units
Creating Departments Around Self-
that what the unit in France Contained Customer Units
was doing for a client made Creating Departments Around Self-
sense in terms of what its Asia Contained Marketing Channel Units
Creating Departments Around Self-
unit was doing for that same Contained Geographic Area Units
client? To coordinate their Creating Matrix Organizations
efforts, Millipore’s top managers Departmentalization in Practice
● Achieving Coordination
needed information on what
Use Mutual Adjustment
each country’s subsidiary was Use Rules and Procedures
doing. The problem was that Standardize Goals, Skills, and Values
Managing Now: Standardizing Processes
just about every subsidiary was with Enterprise and Supply Chain
using a different, incompatible Systems
information system. The only Coordinating the work of all its far-flung WINDOW ON MANAGING NOW:
units was increasingly challenging for LG Electronics
way top management could get Exercise Direct Supervision: Use the
Millipore Corp., with operations and 4,500
an overall view of things like employees in more than thirty countries. Chain of Command
sales, inventories, and finances Divisionalize
Appoint Staff Assistants
was for employees in the home office to compile and summarize the Appoint Liaisons
incoming information from each subsidiary. Doing so took weeks. Appoint Committees
Bridget Reiss, the firm’s chief information officer, knew that to Use Coordination-Supporting Software
Packages
coordinate Millipore’s worldwide efforts, it had to make a change.The Organize Independent Integrators
question was,What should they do? ■ ● Authority and the Chain
of Command
Line and Staff Authority
B E H AV I O R A L O B J E C T I V E S WINDOW ON MANAGING NOW:
An IT-Based Independent Integrator
at Thales
Show that you’ve learned the chapter’s essential information by Sources of Authority
Delegating Authority
➤ Listing and briefly describing five ways to organize departments. How to Decentralize
➤ Listing seven principles of delegating authority. IMPROVING YOUR DELEGATING SKILLS
➤ Listing and briefly describing three modern organization structures. The Span of Control
Tall Versus Flat Organizations
263
CHAPTER OUTLINE (Continued)
● Organizing to Manage
Change Show that you can practice what you’ve learned here by
Organization and Environment: ➤ Reading the chapter-opening vignette and explaining how this company can improve its
The Burns and Stalker Studies interdepartmental coordination.
Organization and Technology: The ➤ Reading the chapter case study and developing an organization chart for a company.
Woodward Studies
A Contingency Approach to Organizing Show that you can apply what you’ve learned here by
How Managers Streamline Their ➤ Watching the simulation video scenario and determining
Companies Online Study Center
ways the company organized its activities to support ACE the Test
● Modern Organizations its overall goals. Managing Now! LIVE
Building Team-Based Organizations
IMPROVING YOUR BOUNDARY-
MANAGING SKILLS
A few years ago, General Motors ran ads in Miami showing people driving Cadil-
Network-Based Organizations
The Horizontal Organization lacs through snow. GM’s marketing department in Detroit thought the ads would
WINDOW ON MANAGING NOW: help sell cars, but with temperatures around 80 degrees, the ads were just incon-
Brady Corp. gruous. Why run snow ads in Miami? Because, to paraphrase the Wall Street
Federal Organizations Journal, “GM’s cumbersome bureaucracy” was so many layers removed from the
Managing Now: Virtual Organizations buyers in Miami that it just lost touch with the market.2 GM already has many
Learning Organizations problems (including huge pension obligations). Many people thought that it was
PRACTICE IT: Millipore bizarre to add a bureaucratic organization structure to its list of ills.
The plans the manager sets need to be transformed into action. The first step
in doing so is usually to decide who is responsible for what and for organizing the
organizing: arranging the work—to arrange the activities of the enterprise so that they systematically con-
activities of the enterprise so that tribute to achieving the enterprise’s goals. Organizing may seem to be just com-
they systematically contribute to
mon sense, but even some giant companies like GM find it’s not so simple.
the enterprise’s goals
We saw in Chapter 1 that all enterprises—GM, Avon, and dry-cleaning stores,
organization: an entity that for instance—are organizations. An organization consists of people with formally
consists of people with formally assigned roles who work together to achieve stated goals. Organizations need not
assigned roles who work be just business firms. The word applies equally well to colleges, local govern-
together to achieve stated goals ments, and nonprofits like the Red Cross. In any case, they all must come up
with an organization structure such that its people work in unison to achieve the
organization’s goals.
● Organization Charts The usual way of depicting an organization’s structure

organization chart: a chart is with an organization chart. This shows the title of each manager’s position
that shows the structure of the and, by means of connecting lines, who is accountable to whom, who has author-
organization including the title ity for each area, and which people are expected to routinely communicate with
of each manager’s position and,
each other (see Figure 10.1, page 266). The organization chart also shows the chain
by means of connecting lines,
who is accountable to whom and of command (sometimes called the scalar chain or the line of authority) between
who has authority for each area the top of the organization and the lowest positions in the chart. The chain of
command represents the organization’s hierarchy of authority. It shows the path
chain of command: the path an order should take from the president to employees at the bottom of the organi-
that a directive and/or answer or
request should take through
zation chart, and the path a comment should take in traveling from employees at
each level of an organization; the bottom to the top.
also called a scalar chain or the One thing the organization chart does not show is the informal organiza-
line of authority tion. This is the informal, habitual contacts, communications, and ways of doing
things that employees develop. When the Avon salesperson, anxious to check on
informal organization:
the informal contacts, one of her pending orders, calls a friend at Avon’s shipping depot instead of asking
communications, and habitual her own district manager to check, she’s illustrating the use of a firm’s informal or-
ways of doing things that ganization. We’ll look in this chapter at the basic elements in organizing compa-
employees develop nies, starting with departmentalization.
Departmentalization: Creating Departments ■ 265
Departmentalization: Creating Departments

Online Study Center
ACE the Test
Managing Now! LIVE E very enterprise must engage in various activities such as manufacturing, sales,
or (in a hospital) radiology in order to accomplish its goals. Departmentaliza-
tion is the process through which the manager groups the enterprise’s activities
departmentalization: the together and assigns them to subordinates; it is the organizationwide division of
process through which an work. (The groupings of activities go by the names department, division, unit, sec-
organization’s activities are tion, or some other similar term.)
grouped together and
The basic question in departmentalization is, Around what activities should
assigned to managers; the
organizationwide division of we organize departments? For example, in a company, should we organize depart-
work ments for sales and manufacturing? Or should there be separate departments for
industrial and retail customers, each of which then has its own sales and manu-
facturing units? There are three basic choices.
Three Basic Ways to Departmentalize

In the movie Gladiator, each Roman legion, consisting of about 6,000 soldiers, was
managed by about sixty centurions, each of whom managed about 100 soldiers.
Armies and some other enterprises still organize by simple numbers. In general,
however, managers use this approach sparingly. Most business activities (such as
sales or human resources) require specialized efforts, so dividing people just by
numbers wouldn’t make much sense.
Managers therefore traditionally have two realistic choices when it comes to
dividing the company’s work into departments. They can organize departments
around functions, or they can organize departments around self-contained units
(often called divisions). For example, the editor in chief of a student newspaper
can appoint functional department heads (editors) for editing, production, and
sales. Working under the editor in chief, this team publishes all the paper’s issues.
Or the editor in chief can appoint editors for each of the journal’s fall, winter,
spring, and summer editions. Each edition here would be self-contained. Each
edition’s editor gets his or her own editorial, production, and sales editors. Each
edition’s editor would then control most of the activities required to publish his or
her edition.
Creating Departments Around Functions

functional Functional departmentalization is grouping activities around functions such as
departmentalization: manufacturing, sales, and finance. The manager puts subordinates in charge of
a form of organization that each of these functions. The local dry-cleaning business organizes like this. It has
groups a company’s activities separate functional departments for things like counter work, spotting, cleaning,
around functions such as
manufacturing, sales,
and pressing. Figure 10.1 shows the organizational structure for the ABC Car
or finance Company. At ABC, management organized each department around a different
business function, in this case, sales, finance, and production. Here, the produc-
tion director reports to the president and manages ABC’s production plants. Other
directors carry out the sales and finance functions.
This is a simple and obvious way to organize because regardless of how the
manager organizes (by functions or by self-contained units), someone must per-
form these functions if the firm is to survive.
266 PART FOUR CHAPTER 10 Organizing
FUNCTIONAL ORGANIZATIONS
F IGURE 10.1
Functional ABC Car Company
Departmentalization
This chart shows a functional President
organization, with departments
for basic functions like finance,
sales, and production.
Sales Finance Production
Director Director Director
Managers organize departments around three types of functions: business,

managerial, and technological. The business functions are those the enterprise
must engage in to survive. A manufacturing company’s business functions include
production, sales, and finance. A university’s business functions include academic
affairs, business affairs, and student affairs. Banks like Chase have business func-
tion departments for operations, accounting, and loans. Starbucks needs business
function managers for purchasing and sales.
Some managers organize by managerial functions, which means putting su-
pervisors in charge of managerial functions like planning, control, and adminis-
tration. Within production, technological functions may include plating, welding,
or assembling.
● Advantages Organizing by functions has several advantages:

1. It is simple, obvious, and logical. The enterprise must perform these functions
to survive.
2. It can promote efficiency for three reasons. First, functional departments are
specialized departments—they focus on doing one thing (such as sales)—and
everyone tends to get better with practice. Second, organizing by function
means that departments (like sales or production) serve all the firm’s products
or services. This can mean increased economies of scale (for instance, one
large plant and more efficient equipment for manufacturing all the company’s
products). Third, organizing by function minimizes duplication of effort. For
example, there is one production department for all the company’s products
rather than separate ones for each product.
3. It can simplify executive hiring and training. The managers running these de-
partments have specialized jobs (sales manager, for instance). It can be easier
to find good specialist managers than general managers, those with the
breadth of experience to administer several functions at once.
4. It can facilitate the top manager’s control. Functional department managers
tend to receive information on, and focus on, just the activities that concern
their own specialized activities. They usually have to rely on their boss (the
top manager) to coordinate their efforts. A functional organization can there-
fore make it easier for the top manager to control what’s happening in the
organization.
● Disadvantages Organizing by function also has disadvantages:

1. It increases the coordination workload for the executive to whom the functional
department heads report. Functional departmentalization can increase the
top manager’s control, but the other side of the coin is that responsibility for
coordinating all products and services rests on that person’s shoulders. For
example, the CEO may be the only one who can coordinate the work of the
functional departments. As size and diversity of products increase, the job of
coordinating production, sales, and finance for many different products or
markets may prove too much for one person.
2. It may reduce the firm’s sensitivity to and service to the customer. For example,
if JCPenney’s management decided to organize nationally around the func-
tions of merchandising, purchasing, and personnel, all of its U.S. stores might
tend to get the same products to sell, even if customers’ tastes in Chicago are
different from those in El Paso.
3. It produces fewer general managers. A functional organization fosters an em-

phasis on specialized managers (finance experts, production experts, and so
forth). This can make it more difficult to cultivate managers with the breadth
of experience required for jobs like CEO.
Often the functional form’s disadvantages outweigh its advantages. If so, man-
agers may opt to organize around self-contained units. The four options here are
to create departments to focus on different products, customers, marketing chan-
nels, or territories.
Creating Departments Around Self-Contained

Product Units
product With product departmentalization, the manager organizes his or her depart-
departmentalization: a form ments around the company’s products or services (or around each family of
of departmentalization in which products or services). For example, GM has product divisions for Cadillac, Buick,
the manager organizes multi- Pontiac, and Chevrolet. The editor in chief might organize her paper around sep-
functional departments around
arate fall, winter, spring, and summer issues.
the company’s products or
services (or around each family The CEO for a pharmaceuticals company (see Figure 10.2) organized the firm’s
of products or services) top-level departments so that each contains all the activities required to develop,
manufacture, and sell a particular product (skin care, vitamins, drugs). The gen-
division: a department that eral manager of each division has functional departments—for production, sales,
manages all or most of the and personnel—reporting to him or her. Each controls all or most of the resources
activities needed to develop, required to create, produce, and supply its product or products. For example, at
manufacture, and sell a
Kodak, each division focuses on a product line such as cameras.
particular product or product
line Managers often refer to these product departments as business units or
divisions, and to this type of departmentalization as a divisional organization.
divisional organization: Divisionalization means the firm’s major departments are organized so that each
a form of organization in which can manage all (or most of) the activities needed to develop, manufacture, and sell
the firm’s major departments are a particular product or product line. To the extent that each division head has
organized so that each one can control of all or most of the resources needed to create, produce, sell, and supply
manage all or most of the
activities needed to develop,
its product or products, each of these product divisions is self-contained. Axa, a
manufacture, and sell a large insurance and finance company, recently split its company into divisions
particular product or product with specific product lines such as wealth management, corporate business, and
line protection.3
F IGURE 10.2
Divisional Organization for a Pharmaceuticals Company
CEO
Chief Legal Chief Financial

Officer Officer
Skin Care Products Vitamin Products Drug Products

Division General Division General Division General
Manager Manager Manager
Prod. Sales HR Prod. Sales HR Prod. Sales HR

Dept. Dept. Dept. Dept. Dept. Dept. Dept. Dept. Dept.
Manager Manager Manager Manager Manager Manager Manager Manager Manager
● Advantages Organizing by self-contained units such as products has these

advantages:
1. The product or service gets the single-minded attention of its own general man-
ager and unit, and so its customers may get better, more responsive service. A gen-
eral manager oversees all the functions required to produce and market each
particular product or service. The effect should be that the product or service
(and its customers) get focused, more responsive attention with this type of or-
ganization than they would in a functional organization (in which, for instance,
the same sales manager must address the needs of multiple products).
2. It’s easier to judge performance. If a division is (or is not) doing well, it is clear
who is responsible because one general manager is managing the whole divi-
sion. This may better motivate the general manager.
3. It develops general managers. Divisions can be good training grounds for an
enterprise’s executives because they are miniature companies that expose
managers to a wider range of functional issues.
4. It reduces the coordination burden for the company’s CEO. In Figure 10.3, the
North American division is departmentalized by function, so that the presi-
dent has to coordinate the tasks of selling, producing, and staffing for each of
the company’s many products. He or she may thus have to deal with many
varied problems. Ideally, the effect of organizing around product divisions is
to push the job of coordinating the business units’ functional areas down to
the business unit heads. The CEO can then focus more on things like strategic
planning.
F IGURE 10.3
Divisional Organizations Facilitate Coordination
The top level shows geographic departmentalization. Unless the presidents of the International
and North America divisions reorganize by setting up separate divisions for skin care, vitamins,
and drugs, they will have to personally coordinate sales, production, and personnel for all three
sets of products.
CEO
Chief Financial
Officer
President, North President, International

America Operations
VP VP VP VP VP VP
Sales Production Personnel Sales Production Personnel
Skin Care Drugs Skin Care Drugs Skin Care Drugs Skin Care Drugs Skin Care Drugs Skin Care Drugs
Vitamins Vitamins Vitamins Vitamins Vitamins Vitamins
● Disadvantages Organizing by self-contained units such as products has

these disadvantages:
1. It creates duplication of effort. The very fact that each product-oriented unit is
self-contained implies that each unit for each product has its own production
plants, sales force, and so on.
2. It reduces opportunities for top management control. An autonomous division
might, for instance, run up excessive expenses before top management dis-
covers there’s a problem. Striking a balance between providing each division
with enough autonomy while maintaining top-management control is the
central issue in organizing in this way.
3. It requires more managers with general management abilities. Each product divi-
sion is, in a sense, a miniature company. This means these firms must work dili-
gently to identify and develop managers with general management potential.
4. It can encourage compartmentalization. The managers of the semiau-
tonomous units may be reluctant to pay much attention to the needs of the
other divisions. Thus, at toiletries maker Caswell-Massey, CEO Ann Robinson
says that her separate divisions were each oblivious to what the others were
doing: “The items featured on the catalog’s cover were not necessarily in the
store window. There was little synergy between brands.”4
F IGURE 10.4 President

and Chief
Operating
Customer Officer
Departmentalization,
Grayson Steel Company
With customer
departmentalization, separate Aerospace
Metals and Packaging Materials
departments are organized and Industrial International
Chemicals Systems Science
Products Group
around customers, such as Group Group Group
Group
aerospace as well as metals and
chemicals customers.

Customer Units
customer Customer departmentalization is similar to product departmentalization, but
departmentalization: the manager organizes departments around the company’s customers. Figure 10.4,
similar to product organization for instance, shows the organization chart for the Grayson Steel Company. The
except that generally self-
company’s main divisions are organized to serve particular customers, such as
contained departments are
organized to serve the needs of metals and chemicals customers, packaging systems customers, aerospace and
specific groups of customers industrial customers, and the international group.
● Advantages and Disadvantages With one management team and unit fo-
cused on each customer, customers can expect faster, better service than with
functional arrangements, particularly when customers’ needs are very different.
However, the company may have several production plants instead of one and
several sales managers, each serving the needs of his or her own customers, in-
stead of one.

Marketing Channel Units
Many companies, such as Caswell-Massey, sell their products through several mar-
marketing channel: the keting channels. A marketing channel is the conduit or intermediary (wholesaler,
conduit through which a drugstore) through which a manufacturer distributes its products to its ultimate
manufacturer distributes its customers. With marketing-channel departmentalization (see Figure 10.5),
products to its ultimate
management organizes the departments around each of the firm’s marketing
customers
channels (instead of products or customers).
marketing-channel Companies departmentalized into marketing-channel departments (like
departmentalization: those now used by Caswell-Massey) typically market the same product (such as
an arrangement in which soap) through two or more channels (such as drugstores and grocery stores). Man-
departments of an organization agement here typically chooses one department to manufacture the product for
focus on particular marketing all the marketing-channel departments.
channels, such as drugstores or
grocery stores
● Advantages and Disadvantages Managers use marketing-channel depart-
mentalization when it’s important to cater to each marketing channel’s unique
needs. A department store may want Revlon to supply specially trained salespeo-
ple to run concessions in its stores. A discount druggist wants quick delivery.
F IGURE 10.5 President

Marketing Channel
Departmentalization
With marketing channels, the main
departments are organized to Vice President Vice President Vice President
focus on particular marketing Drugstore Grocery Store Department Store
channels, such as drugstores and Channel Channel Channel
grocery stores. Here, the
department store channel
produces the soap, and each
channel may sell to the same Production
ultimate consumers. Sales Sales
Sales Manager
Grocery Department
Drugstores Apex
Stores Stores
Face Soap
Advertising
Advertising
Advertising Manager
Grocery
Drugstores Department
Stores
Stores
Putting a manager and department in charge of each channel helps ensure that
Revlon meets these diverse needs quickly and effectively. As in product and
customer departmentalization, the resulting duplication—in this case, of sales
forces—is the main disadvantage.

Geographic Area Units
geographic or territorial With geographic or territorial departmentalization, the manager organizes
departmentalization: separate departments for each of the territories in which the enterprise does busi-
departmentalization in which ness. Each territorial division gets its own management team. Each is often self-
the manager organizes separate contained (with its own production, sales, and personnel activities). We illustrated
multifunction departments for
territorial departmentalization in Figure 10.3 (page 269). At the top level, there are
each of the territories in which
the enterprise does business separate presidents for North American and for international operations.
● Advantages and Disadvantages As is the case with other divisional-type

organizations, the main advantage of territorial departmentalization is that there
is one self-contained department dedicated to the needs of each geographic area.
Duplication is the main disadvantage. There might be four regional offices to
maintain, for instance.
Organizing geographically grew in popularity as firms expanded across na-
tional borders. Years ago, when poor communications made it difficult to monitor
operations abroad, it made sense to let local managers run regional or country
businesses as autonomous companies.
Territorial departmentalization is somewhat less necessary today, for two
reasons. First, information technology such as Internet-based videoconferencing,
e-mail, fax, and enterprise systems makes it easier for an executive in one region to
monitor operations around the world.
Second, global competition is so intense that managers can’t risk slowing the
spread of innovations from one region to another. For example, Heinz’s CEO said
that he was ending the company’s system of managing by country or region.5 In-
stead, Heinz will organize globally by products or categories. Managers in the
United States will then work with those in Europe, Asia, and other regions to apply
the best ideas from one region to another. Similarly, Procter & Gamble’s new or-
ganization eliminates its four regional business units. Now seven new executives
each manage product groups like baby care, beauty, and fabric and home care for
all regions. The company believes the reorganization will speed decision making
and send products to market faster.6
Susan Arnold, P&G’s vice

Creating Matrix Organizations
chairman. Sometimes, managers want to leave employees in their specialized functional
departments, but they also want to have those employees focus on particular
matrix organization: an projects, products, or customers. A matrix organization, also known as matrix
organization structure in which management, is an organization structure in which employees are permanently
employees are permanently attached to one department (usually a functional department) but also simultane-
attached to one department but
ously have ongoing assignments in which they report to project, customer, prod-
also simultaneously have
ongoing assignments in which uct, or geographic unit heads.
they report to project, customer, We illustrate this in Figure 10.6. Universal Products Company organized the
product, or geographic unit firm’s automotive products division functionally, with departments for produc-
heads. Also known as matrix tion, engineering, materials procurement, personnel, and accounting. However,
management because each of Universal’s big customers had special new-product development
needs, Universal management also created three project groups. There is one for
the Ford project, the Chrysler project, and the GM project. One or more employees
from each functional department (like production and engineering) is temporar-
ily assigned to each project. This is thus a matrix organization, with employees
each simultaneously housed in functional departments while also (at least tem-
porarily) devoted to particular products. Employees report to both their functional
and new-product heads.
J. P. Morgan investment banking uses a matrix structure. Managers around the
world answer to two bosses: a J. P. Morgan investment banking manager in Mexico
City reports both to her investment banking head back in New York and to the
head of J. P. Morgan’s Mexico City office. The managing director of advertising
agency DBB’s Far East subsidiary recently organized using matrix management, to
encourage better communications across DBB’s diciplines and clients.7
● Advantages and Disadvantages Ideally, matrix management provides the

best of both worlds. It gives the employees the stability and benefits of belonging
to permanent specialized departments. And it gives the firm most of the advan-
tages of having units and employees focused on specific projects, products, areas,
or customers.
However, the matrix organization also has special drawbacks. Ambiguity is
one. Even after years with a matrix structure, GM’s chair, when asked who reports
to whom, could only reply, “[I]ncreasingly, it depends.”8 Other disadvantages in-
clude confusion(from having two bosses),9 power struggles and conflicts (because
authority tends to be more ambiguous), and excessive overhead (due to hiring
dual sets of managers, for instance).
F IGURE 10.6
Matrix Organization Departmentalization
With a matrix organization, a self-contained project structure is often superimposed over a
functional organization.
President
Universal Products
Company
General Manager General Manager General Manager General Manager

Automotive Electrical Aerospace Chemical
Products Products Products Products
Division Division Division Division
Vice President Vice President Vice President

Vice President
Engineering Materials and Accounts and
Project
and Research Procurement Control
Management
Department Department Department
Vice President Vice President

Production and Personnel and
Projects Facilities Safety
Department Department
Production Engineering Materials Personnel Accounting

Representative Representative Representative Representative Representative
Director
Ford
Project
Representative Representative Representative Representative Representative
Director
Chrysler
Project
Director Representative Representative Representative Representative Representative
GM
Project
Departmentalization in Practice
All but the smallest firms contain both functional and self-contained depart-
ments. Figure 10.7 illustrates this. Within the United States, there are separate
product departments for business systems, programming systems, and so forth.
Globally, this firm uses territorial departmentalization, with separate officers for
the United States, the Americas, Asia/Pacific, and Europe/Middle East/Africa.
F IGURE 10.7
A Hybrid Organization
Particularly in large organizations, several types of departmentalization are typically combined,
in this case, fucntional, product, and geographic.
Board of
President
Directors
Senior Vice Senior Senior Vice Vice President,

Vice President, President Vice President, Law and Vice
Corporate and President, Corporate Finance External President,
Operations Staffs General Science and and Planning Staffs Relations Personnel
■
Communications Counsel Technology Controller
■ ■
Commercial
■
Development Economics
■
and Industry
■
Manufacturing Secretary
■
Relations
■
Marketing and Strategy and
■ ■
Education
Service Research Business ■
Export
■
Organization Division Development Regulation
■
Programming Treasurer
■ ■
Governmental
■
Quality Programs
■
Information and
Telecom- Real Estate
munications and
Systems Construction Credit
Staff Corporation
Senior Vice Vice Senior

Vice President President President Vice President
and General and Group and Group and Chairperson
Manager Executive, Executive, World Trade
United States World Trade World Trade Europe/Middle
Americas Asia/Pacific East/Africa
Group Group Corporation
Latin America
■ ■
Japan ■
France
Division ■
Line Operations ■
Germany
■
Italy
■
United
Kingdom
■
Central Unit
■
Northern Unit
(Figure 10.7 continues ■
Southern Unit
on the next page.)
F IGURE 10.7 (Continued )
Report to Senior Vice President and General Manager, United States
Senior Vice President Vice President Vice President Vice President Vice President
Vice President and General and General and General and General and General
and General Manager, Manager, Manager, Manager, Manager,
Manager, Application Programming Enterprise Technology Communication
Personal Systems Business Systems Systems Systems Products Systems
■
Entry Data
■ ■
General ■
Communication
Systems Systems Technology Products
Division Division Division Division
■
Information General
■ ■
Systems
Products Products Technology
Division Division Division
System
■
Products
Division
Vice President
and Group
Executive,
U.S. Marketing
and Service
Vice President ■
National
and Distribution
General Division
Manager ■
National
Applications Service
Solutions Division
■
Application ■
North-Central
Systems Marketing
Division Division
■
Systems ■
South-West
Integration Marketing
Division Division
Management organized the headquarters staff around managerial functions (gen-

eral counsel, finance and planning, and law).
Managers mix the types of departmentalization for three reasons. One is hier-
archical considerations: if the top-level departments are based on, say, products,
then each product division will probably need subsidiary departments for func-
tions like sales and manufacturing.
The second is efficiency: product, customer, and territorial departments tend

to result in duplicate sales, manufacturing, and other functional departments.
One way to minimize this source of inefficiency is to have, say, a single production
department serving multiple customer departments. For example, after many
years of letting each GM brand (like Chevy) design its own cars, GM reorganized its
vehicle-design structure in 2005. It now designs vehicles globally rather than by
brand. Thus, Germany’s Opel leads in designing and developing GM’s midsize
cars, while other GM subsidiaries design other GM vehicles.10 GM feels it’s more
efficient to eliminate duplicate design centers.
● Hewlett-Packard’s Reorganization However, sometimes, letting business

unit heads control all the functions required to produce and sell their products
outweighs the inefficiencies of duplication. For example, when he became CEO of
Hewlett-Packard (HP), one of the first issues Mark Hurd addressed was the unsat-
isfactory performance of HP’s sales organization. Numerous HP executives and
customers described HP’s sales effort as underperforming and confused.
At that point (2005), HP consisted of product divisions that focused on busi-
nesses such as PCs, servers, and printers, as well as one centralized functional
sales department, which served all the business units. The sales force reported
through the chain of command to an executive who was separate from and not re-
sponsible to the HP product divisions. The heads of the product divisions had to
compete within the HP bureaucracy for sales assistance. As a result, customers
often had no idea who to call if they wanted to make a purchase. And the division
heads lacked the authority to direct a sales effort for their products because the
salespeople reported to their own, separate executive.
Hurd decided to abolish the central sales department and redeploy many of
the salespeople to the product divisions. This change also enabled Hurd to an-
nounce the layoffs of about 10 percent of HP’s workforce, many of whom were in
administrative or supervisory positions in the old sales division.11
● Common Sense As these examples illustrate, the third reason to mix depart-
ments is common sense. Numerous hard-to-measure factors—including what
management plans to achieve and the unique needs of the firm’s customers, terri-
tories, and products—all influence the departmentalization decision.
Rosenbluth International, a 1,000-office global travel agency, provides an ex-
ample. CEO Hal Rosenbluth organized it like a farm. “The family farm is the most
efficient type of unit I’ve ever run across, because everybody on the farm has to be
fully functional and multifaceted.” So Rosenbluth broke his company into more than
100 geographic units, each functioning like a farm. Multitalented agents serve spe-
cific regions and clients. Corporate headquarters became what Rosenbluth calls
“farm towns.” Here, central “stores” like human resources (HR) are available for all
the “farms” to use. The firm’s computerized Global Distribution Network links
each of its travel agents to the company’s PCs in Philadelphia. There, centralized
data on clients help ensure that the work of all offices is coordinated to serve the
clients’ needs. The organization seems to have worked. He recently sold Rosen-
bluth Travel to giant Amex, creating the world’s largest travel company.12
Achieving Coordination
Online Study Center
ACE the Test
Managing Now! LIVE I t is pointless for a manager to divide work among, say, production, sales, and
finance departments and then not provide the means to coordinate these de-
partments’ efforts. Coordination is the process of achieving unity of action among
Achieving Coordination ■ 277
coordination: the process of interdependent activities. It is required whenever two or more interdependent indi-
achieving unity of action among viduals, groups, or departments must work together to achieve a common goal.
interdependent activities The more interdependent are the departments, the more coordination they
require. Someone must coordinate the work of functional departments, or how
can one be sure that the products sold by sales will be produced and financed in
sufficient quantities? At the other extreme, the work of semiautonomous product
divisions such as GM’s Chevrolet, Buick, and Cadillac product divisions require
less coordination by the CEO.
Professors Jay Galbraith and Henry Mintzberg, working independently, de-
scribed the techniques managers use to achieve coordination.13 We summarize
these and other techniques next.
Use Mutual Adjustment

mutual adjustment: Mutual adjustment means achieving coordination by relying on face-to-face inter-
achieving coordination through personal interaction. For example, two people lifting a heavy log might coordinate
face-to-face interpersonal by counting “one, two, three, lift,” at which point, both people lift the log in unison.
interaction
Use Rules and Procedures

Managers use rules and procedures for coordinating routine, recurring activities.
Thus, a restaurant manager would have a rule that bussers will clear tables before
the waiter returns.
Standardize Goals, Skills, and Values

Firms also achieve coordination by standardizing their employees’ goals, skills,
values, and operating processes. For example, as long as the sales, finance, and
production managers attain their assigned goals, the president can be reasonably
sure that there will be enough financing and production capacity to meet the sales
target. Managers also standardize skills. Imagine the chaos if waiters don’t know
how to take customers’ orders and chefs can’t cook.
Many companies endeavor to standardize values among employees. For ex-
ample, every year, Unilever gives about 150 of its worldwide managers temporary
assignments at corporate headquarters.14 This gives the visiting managers a
strong sense of Unilever’s values (such as keeping an open mind and innovating
new products; see http://www.unilever.com/ourvalues/).15 This helps to ensure
that wherever they are around the world, Unilever managers’ efforts are consistent
with Unilever’s ethical values and other values.
Managing Now: Standardizing Processes

with Enterprise and Supply Chain Systems
Managers also boost coordination by standardizing processes. For example, sev-
eral years ago, the head of Nestlé Corporation’s Nordic operations (for Denmark,
Finland, Norway, and Sweden) was managing what amounted to four separate
companies. The Nestlé subsidiary in each country used its own information sys-
tem. The top executives responsible for Nestlé Nordic found it relatively difficult to
coordinate the four units’ operations due to the lack of standardized information
on matters such as sales, purchasing, inventory, and billing.
After installing an enterprise system that provided standardized information,
two things happened. First, the managers at Nestlé Nordic headquarters had the
LG Electronics
LG Electronics is one of the world’s largest consumer- the central system, ensuring all subsidiaries work to-
electronics companies, with 66,000 employees in thirty- gether to achieve company-wide business goals.”16
nine countries. LG produces products ranging from air
conditioners to laptops and mobile phones. Several years
ago, its sixty-five worldwide offices all used different soft-
ware systems. Therefore, management had to deal with
data and documents on matters such as sales, purchasing,
inventory, and finance that were in different formats.The
only way top managers could get a unified, coordinated
view of what was happening throughout the company was
to have employees in the head office merge the informa-
tion from subsidiaries, often by hand.
Moving to an enterprise system, in this case, from
Oracle Corporation, enabled LG to institute standardized
information systems across all its global offices. Now they
all use compatible software systems.As a result,“commu-
nication and cooperation between subsidiaries is ex-
pected to improve significantly, enabling different offices Moving to an enterprise system enabled LG to institute
to exchange information and resources more easily. standardized information systems across all its
Directives from [the] head office can be disseminated via global offices.
information they needed to coordinate the subsidiaries’ efforts.17 Second, stan-

dardizing the information systems each subsidiary used for each of its business
functions also had the effect of encouraging the units to move more toward stan-
dardizing the sales and other processes they used. As at Nestlé, standardizing
processes often starts with standardizing a company’s software systems. Then,
having the way things are done in each subsidiary more standardized makes it eas-
ier to coordinate the subsidiaries’ efforts.
Supply chain management software systems also help a company’s supply
chain partners coordinate their efforts. For example, all of a firm’s supply chain
partners may use a common Internet portal to share information on activities like
sales, inventory, and delivery status. This helps to ensure coordinated decision
making.18 The Window on Managing Now feature presents another example.
Exercise Direct Supervision: Use the Chain

of Command
Direct supervision achieves coordination by having one person coordinate the
work of others, issuing instructions and monitoring results.19 When problems
arise that the rules or procedures don’t cover, subordinates bring the problem to
the manager. In addition to using rules and mutual adjustment, all managers use
the chain of command in this way to achieve coordination.
Achieving Coordination ■ 279
Divisionalize
As a rule, functional departmentalization creates heavy coordination demands on
the CEO because the work of the functional departments (like sales and produc-
tion) is both specialized and interdependent. (Thus, someone must coordinate the
sales, production, and finance departments.) Organizing by product, customer, or
geographic divisions reduces interdependence and reduces the coordination bur-
den. The CEO puts each lieutenant in charge of a self-contained operation. The
lieutenants coordinate their own operations. The divisions are relatively indepen-
dent. As noted, the CEO can then coordinate less and strategize more.
Appoint Staff Assistants

The coordinating manager must monitor the activities of the subordinate depart-
ments as well as analyze and address questions from lieutenants. Some managers
hire staff assistants to help with these tasks. When subordinates bring a problem to
the manager, the assistant can compile information about the problem, research
it, and offer advice.
Appoint Liaisons
When the volume of contacts between two departments grows, some managers
use special liaisons to facilitate coordination. For example, the sales department
manager might appoint a salesperson to be his or her liaison with the production
department. This liaison stays in the sales department but travels frequently to the
factory. When a new order arrives in sales, the sales manager can quickly deter-
mine from this liaison what the production schedules are and if the company can
deliver the order as promised.
Appoint Committees
Many firms achieve coordination by appointing interdepartmental committees,
task forces, or teams composed of representatives of the interdependent depart-
ments. They meet periodically to discuss common problems and ensure interde-
partmental coordination.
Use Coordination-Supporting Software Packages

Managers use various types of software packages to improve coordination. For
example, we saw that Rosenbluth Travel’s computerized Global Distribution Net-
work links each of its travel agents to the company’s centralized client database, to
help ensure that the work of all offices is coordinated to serve that client’s needs. San
Francisco–based Citadon provides Web-based construction coordination software.
By using the Internet and a laptop, everyone involved in a project—from owners and
architects to contractors and subcontractors—receives instantaneous updates re-
garding design changes and construction status. Group decision support systems
like Lotus Notes, with tools such as group scheduling and PC-based videoconfer-
encing, make it easier for even remote employees to coordinate their efforts.20
independent integrator:
an individual or a group that
coordinates the activities of Organize Independent Integrators
several interdependent
departments but is independent An independent integrator is a separate individual or group that coordinates the
of them activities of several interdependent departments.21 Integrators are independent of
the departments they coordinate. They report to the manager who oversees both
those departments.
Professors Paul Lawrence and Jay Lorsch studied such departments.22 In the
plastics industry, for instance, developing a new product requires close coordination
among the research, engineering, sales, and production departments in a situation
where competitors are always introducing new and innovative products. Some firms
in the plastics industry thus established new-product development departments.
Their role is to coordinate (or integrate) the research, marketing analysis, sales, and
production activities needed for developing and introducing a new product. The
Window on Managing Now feature shows how managers use information technol-
ogy (IT) to create such departments.
Authority and the Chain of Command
authority: the right to take

N o one will generally take orders from someone unless they accept that person’s
authority to issue those orders. Organizations therefore run on authority.
Authority refers to a person’s legal right or power to take action, make decisions,
action, make decisions, and and direct the work of others. In a corporation, authority stems from the
direct the work of others owner/stockholders of the company. They elect a board of directors and authorize
the board to represent the owners’ interests. The board’s main functions are to
choose the top executives, approve strategies and long-term plans, and monitor
performance to make sure management is protecting the owners’ interests. The
board and its chairperson then delegate or pass down to the CEO the authority to
actually run the company—to develop plans, hire subordinate managers, and
enter into agreements. The CEO and each lower manager in turn delegates to or
authorizes his or her subordinates to do their jobs.
Line and Staff Authority

line authority: the right (or
authority) of a manager to issue
Managers need to decide which subordinates will have line authority or staff au-
orders to other managers or thority because the company’s proper functioning depends on everyone knowing
employees, creating a superior- who is in charge of what. Line versus staff authority is basically a question of rela-
subordinate relationship tionships. Line authority gives the manager the right (or authority) to issue orders

An IT-Based Independent Integrator at Thales
France-based Thales, an electronics and defense supplier, called Thales Research & Technology.24 To support this de-
has three business units: defense, aerospace, and informa- partment’s efforts, Thales and its consultants created what
tion technology. Each business unit is fairly autonomous.23 they called a knowledge management portal.Thales’s busi-
Top management wanted to make sure that the research ness unit engineers and scientists use laptops,PCs,personal
scientists, engineers, and project managers in each of these digital assistants (PDAs), and the portal to post papers, ask
three divisions were familiar with each other’s projects questions, and make suggestions. In this way, each business
and that they did not duplicate each other’s efforts.Work- unit continues to benefit from its own research and engi-
ing with consultants from Accenture, Thales created a neering teams, but they can also capitalize on each other’s
new,IT-supported independent-integrator-type department knowledge and minimize duplication of effort.
Authority and the Chain of Command ■ 281
to other managers or employees. It creates a superior-subordinate relationship.

staff authority: the right (or Staff authority gives the manager the right (authority) to advise other managers
authority) of a manager to or employees. It creates an advisory relationship. Line managers have line au-
advise other managers or thority. The production vice president is the production manager’s boss and can
employees
give that person orders. Staff managers have staff authority. They generally can-
line managers: managers who not issue orders down the chain of command (except in their own departments).
are authorized to issue orders to The HR manager can advise the production manager about who to hire but can-
subordinates down the chain of not insist or make the final decision, for instance.
command In popular usage, managers associate line managers with managing functions
like sales or production that are essential for the company to exist. Staff managers
staff managers: managers run functions that are generally advisory or supportive, such as purchasing, legal,
with authority to assist and
human resource management, and quality control. This distinction makes sense
advise line managers
as long as the staff department is in fact advisory. Strictly speaking, however, it is
not the type of department the person is in charge of or its name that determines
if the manager in charge is line or staff; it is the nature of the relationship. The line
manager can issues orders. The staff manager can advise.
There is one exception. A staff manager may also have functional authority.
functional authority: Functional authority means that the staff manager can issue orders down the
narrowly limited power to issue chain of command within the very narrow limits of his or her functional authority.
orders down the chain of For example, to protect the company from discrimination claims, the president
command in a specific
might give the HR manager functional authority over personnel testing. The latter
functional area such as
personnel testing could order the production manager to use (or not use) a particular test. However,
the HR manager would probably want to be diplomatic lest line-staff conflict
line-staff conflict: a emerge. Line-staff conflict is conflict between line and staff managers and
disagreement between a line typically arises when line managers feel staff managers are encroaching on their
manager and the staff manager prerogatives.
who is giving him or her advice Some small organizations use only line managers (they are line organiza-
tions), but most large ones have staff managers too—they are, therefore, line and
staff organizations. Typical line positions include the CEO and the managers for
sales and production. Typical staff positions include the managers for marketing
research, accounting, security, quality control, legal affairs, and human resource
management (HR).
Sources of Authority
One’s authority—and the willingness of employees to follow the manager’s
orders—derives from several sources. First, authority derives in part from a per-
son’s rank or position. We saw that in corporations, the owner-stockholders dele-
gate authority first to the board of directors, who then delegate to the CEO. The
CEO of software manufacturer Intuit has more authority based on rank than does
one of his senior vice presidents.
However, position authority is rarely enough to explain why people follow or-
ders. Some managers have authority because of personal traits, such as intelli-
gence or charisma. People follow their instructions because of the power of their
personalities. Others have authority because they are experts in an area or have
knowledge that requires others to depend on them.
Some astute management writers argue that, regardless of source, authority
always depends on subordinates’ acceptance of supervisors’ orders. Management
guru Chester Barnard was an early proponent of this view. He argued that for or-
ders to be carried out, they must lie within a subordinate’s “zone of acceptance”—
in other words, they must be viewed as acceptable. Experts often argue that getting
employees’ acceptance is increasingly important today, given the emphasis on
empowered workers and team-based organizations.
Delegating Authority
delegation: the act of passing Organizing would be impossible without delegation, which is the passing down
down authority from supervisor of authority from supervisor to subordinate. The assignment of responsibility for
to subordinate some department or job traditionally goes hand in hand with the delegation of
authority to get the job done.
A well-known management saying is, “You can delegate authority, but you
cannot delegate responsibility.” The CEO (or other manager) is ultimately respon-
sible for whatever occurs on his or her watch. Because the person doing the dele-
gating always retains the ultimate responsibility, delegation always entails the
creation of accountability. Subordinates become accountable—or answerable—to
the supervisor for the performance of the tasks assigned to them. The boss may
fire or discipline the subordinate who fails to do the job. However, the boss is still
responsible for all that goes wrong (or right).
Managers are people who get things done through others, and so knowing
how to delegate is a crucial management skill. The Improving Your Delegating
Skills feature illustrates how to do this.25
How to Decentralize
decentralized A decentralized organization is one in which (1) authority for most departmen-
organization: an organization tal decisions is delegated to the department heads, while (2) control for major
in which (1) authority for most companywide decisions is maintained at headquarters. Decentralizing should
departmental decisions is always represent a shrewd balance between delegated authority and top manage-
delegated to the department
heads, while (2) control for
ment’s centralized control of essential functions. On the one hand, division man-
major companywide decisions is agers get the autonomy and resources they need to service their customers. On the
maintained at headquarters other hand, headquarters maintains essential control by centralizing major deci-
sions regarding things like capital appropriations. Achieving this balance is an art.
Here is how two famous management writers put this a number of years ago:
[D]ecentralization cannot mean autonomy; in that it implies establishment of
policies to guide decision-making along the desired courses, and in that . . . not
being all abdication of responsibility, it must be accompanied by controls de-
signed to ensure that delegated authority is used to further goals and plans.
Although the art of authority delegation lies at the base of proper decentral-
ization . . . it is apparent that the mere act of delegation is not enough to
ensure decentralization.26
● Departmentalization and Decentralization Managers most often use

the term decentralized in conjunction with companies organized around product
divisions. Managers of product divisions often run what amount to their own
miniature companies (or business units). They have the authority to make most
decisions having anything to do with their products, with little or no communica-
tion with the firm’s CEO. However, the CEO retains authority over major decisions
such as building a new plant. Remember, you can’t have a properly decentralized
company without effective, centralized controls.
Several years ago, accounting firm Arthur Andersen confronted just this sort
of problem. Its Houston office wanted to take an aggressive approach to letting the
energy trading company Enron account for some transactions. Andersen World-
wide had a special, centralized Professional Standards Group (PSG) at its Chicago
headquarters that apparently told local Houston Andersen managers not to use
the approach. It appears that someone at Andersen Houston may have approved
I M P R OV I N G Y O U R D E L E G A T I N G S K I L L S
Suggestions for improving your delegating skills include: actions can have adverse effects outside the areas for
which the manager has made the person responsible
Clarify the Assignment (such as bankrupting the company). Second, the subordi-
Make it clear what you want the subordinate to accom- nate should know when to check with the manager. One
plish, what results are expected, and when you want those typical set of options the manager can apply is: (1) wait to
results. be told what to do; (2) ask what to do; (3) act, then report
results immediately; and (4) take action, and report
Delegate, Don’t Abdicate periodically.
Shortly after assuming the CEO position at Motorola,
Authority Should Equal Responsibility
(former) CEO Chris Galvin sat in on several meetings
with the company’s Europe mobile phone group. Galvin A basic principle of management is that authority should
knew that Europeans preferred light, inexpensive phones, equal responsibility. The person should have enough au-
so he asked if the market data supported the idea that the thority to accomplish the task.
relatively heavy phone they were working on would ap-
peal to customers. The manager said yes, and that’s re- Make the Person Accountable for Results
portedly where Galvin left it. The product subsequently
There must be predictable and acceptable measures of
failed.27 The moral is this: Giving a person a job to do and
results.
not following up is abdication, not delegation.
Know What to Delegate Beware of Backward Delegation
Larry Bossidy, the executive who turned AlliedSignal A famous Harvard Business Review article entitled “Who’s
around and helped it merge with Honeywell, says there is Got the Monkey?” explains what happens to an unsuspect-
“one job no CEO should delegate—finding and developing ing manager whose subordinate comes into his office to
great leaders.”28 In Bossidy’s case, finding and developing discuss a problem. The subordinate says,“I have a problem
great leaders was the “one job no CEO should delegate.” with the job you gave me to do.”After a few minutes of dis-
For a manager in a different company and at a different cussion, the manager, pressed for time, says,“I’ll handle it.”
level, there will be other tasks that he or she cannot (or Like a monkey, the job has jumped from the subordinate’s
should not) delegate to a subordinate. to the unsuspecting manager’s shoulders.The point is, be-
ware of backward delegation.When your subordinate says
Specify the Subordinate’s Range of Discretion the task isn’t working out as planned, suggest some solu-
The manager can use two guidelines here. First, the man- tions or insist that your subordinate take the initiative in
ager should give the subordinate enough authority to do solving the problem.
the task successfully, but not so much that the person’s
the transaction anyway, with disastrous results for Andersen Worldwide. Managers
at Andersen Worldwide had delegated most decisions to its branches, with the un-
derstanding that the branches would abide by the PSG’s centralized oversight and
control. In this case, those controls broke down. Local managers overrode the
PSG’s decision. Andersen was out of business within two years.
● Why Decentralize? In a famous study of how companies grow, historian Alfred

Chandler coined the phrase, “Structure follows strategy.” He found, for example, that
a diversification strategy at firms like General Electric (GE) led to multiple product
lines for these firms. This meant that GE’s top managers had to manage an in-
creasingly diverse range of products and an increasingly diverse range of cus-
tomers. Having to deal with so many products and customers made the firm’s
original functional structures obsolete. At Westinghouse:
All of the activities of the company were [originally] divided into production,
engineering, and sales, each of which was the responsibility of a vice presi-
dent. The domain of each vice president covered the whole diversified and far-
flung operations of the corporation. Such an organization of the corporation’s
management lacks responsiveness. There was too much delay in the recogni-
tion of problems and in the solution of problems after they were recognized.29
Chandler found that these companies therefore decentralized. After diversify-
ing, they established product divisions for different product lines like light bulbs,
engines, and power plants. The managers of these units then got the authority to
run them as self-contained, relatively autonomous units. In practice, most man-
agers decentralize because they want faster decisions.30
● What to Decentralize The knack is in knowing which decisions to centralize—

and which to decentralize. One rule is this: decentralize decisions that will affect
just that one division or area and that would take a great deal of time for you to
make. Centralize decisions that could adversely affect the entire firm and that you
can make yourself fairly quickly and easily.
Cirque du Soleil, producer of international traveling circuses, is a good exam-
ple of decentralization. Cirque du Soleil’s headquarters are in Montreal, with of-
fices in Amsterdam, Las Vegas, and Singapore. Its 2,100 employees worldwide
come from forty different countries. Two-thirds of the employees work outside
Montreal, in simultaneous, multiple tours.
Each tour is like a separate, small-town circus. Everyone works
for Cirque du Soleil, but most of the employees travel with the
local, geographic-division tours. Management delegates decisions
for matters like human resources to the separate tour managers
because employment law, for example, can vary drastically from
country to country. It would take days for headquarters managers
to make decisions like that. Management centralizes other decisions,
for instance, regarding major investments. The company main-
tains a sense of unity and coordination through its strong culture
of shared values. It posts jobs on the Internet, and employees write
the company newspaper.
● Recentralizing Because information technology in the form

of PDAs, cell phones, and enterprise and other software makes
it easier for managers to monitor remote operations, there has
recently been some movement from decentralizing back to central-
izing organizations. Saks Inc. recently centralized its cosmetics-
buying functions, which had previously been conducted in three
locations.31 Recently, Home Depot announced it would centralize
its three U.S. divisional offices into the firm’s Atlanta headquarters.
Home Depot’s vice presidents and support staff would stay in the
firm’s Southern, Northern, and Western division locations, but the
division presidents relocated to Atlanta.32 Home Depot’s centraliza-
Cirque du Soleil’s 2,100 employees worldwide tion follows a gradual consolidation over the past few years, with
come from forty different countries. Home Depot reducing geographic store division offices from nine
to three.33 China Unicom, the second largest mobile operator in China, recently
centralized the management of its international businesses.34
By the way, don’t let the Home Depot example fool you into thinking that the
only way to centralize is to bring far-flung units back to headquarters. Decentral-
ization and centralization are mainly about authority—about where decsions get
made. Lots of geographically disbursed companies, like BP and some other giant
oil firms, are actually quite centralized. Although they have geographic units
spread around the world, their big decisions are made back at headquarters.
Managers often call the centralized departments they create shared-services
departments. For example, Warner Music might establish several freestanding
music labels, but a single, centralized, shared-services legal affairs department
will do all the labels’ contracts.
● Managing Now: Recentralizing New information systems make it easier for

companies to recentralize. For example, for many years, 7-Eleven decentralized its
purchasing. Each regional area used its own software package and made its own
purchases. As one 7-Eleven manager said, “[T]here was no consistent process, so
different departments used separate access databases and had separate vendor
files for each system.”35 Upgrading all the regions to a common Oracle Procure-
ment and Sourcing software package enabled 7-Eleven to centralize its purchasing
by giving the central purchasing department real-time information on each store’s
product needs. The software package even automates the bidding process, thus
ensuring that 7-Eleven receives the best bids possible from qualified suppliers.
Delegating authority results in a chain of command. The manager needs to
decide whether that chain or hierarchy should be flat or tall. We look at this deci-
sion next.
The Span of Control

span of control: the number The span of control is the number of subordinates reporting directly to a supervi-
of subordinates reporting sor. In the country-based geographic organization shown in Figure 10.8, the span of
directly to a supervisor control of the country general manager is thirteen: there are six business managers,
five directors, one innovation manager, and one manufacturing manager.
The average number of people reporting to a manager determines how many
management levels the company will have. For example, if a company with sixty-
four workers to supervise has an average span of control of eight, then there will be
eight supervisors directing the workers and (because the eight supervisors need
their own supervisor) one manager directing the eight supervisors (a flat organi-
zation). However, if the span of control were only four, then supervising the same
number of workers would require sixteen supervisors. And because every four su-
pervisors needs their own supervisor, the sixteen supervisors would, in turn, be di-
rected by four managers. These four managers would, in turn, be directed by one
manager (a tall organization).
Tall Versus Flat Organizations

Classic management theorists said that tall organizational structures (with narrow
spans of control) improved performance by guaranteeing close supervision. The
thinking was that having six to eight subordinates was ideal. Beyond that it be-
came difficult to closely monitor and control what subordinates do. The counter-
argument is that flat is better: flat means wide spans, which means less meddling
with (and a more motivational experience for) subordinates.
F IGURE 10.8
Spans of Control in Country-Based Organization
In this chart, the span of control of the general manager is thirteen—six business managers, five
directors, one innovation manager, and one manufacturing manager.
Country
General Manager
Office of Director
Innovation Manager Quality Program
Director Director Director Director

Finance, Customer Industrial Legal and Marketing Manager
and Marketing Relations and Public Information Manufacturing
Support Operations General Services Relations and Planning
Business Business Business Business Business Business

Manager Manager Manager Manager Manager Manager
Division A Division B Division C Division D Division E Division F
There are other arguments, pro and con. A tall chain of command may also
slow decisions by forcing each decision to pass through more people at more
levels. Several weeks after the United States began bombing Afghanistan in 2001,
reporters asked then-Secretary of Defense Rumsfeld if having several layers of
officers making tactical decisions about the ground attacks was slowing the
ground forces’ responsiveness. (His answer was no.)
The consensus today seems to be that flat is better.36 For one thing, flattening
cuts out levels and managers, and to that extent, it may save the company money
and reduce the number of approvals required to make a decision. There is also the
belief that eliminating layers pushes the point at which decisions are made closer
to the customer because there’s less reason to check first with the boss. Having
wider spans also implies that the supervisor monitors his or her subordinates less,
which makes particular sense today, with the trend toward highly trained and em-
powered employees.
The classic flattening example occurred some years ago. GE’s CEO at the time,
Jack Welch, had climbed the ranks and believed GE’s chain of command was
draining the firm of creativity and responsiveness. Business heads needed ap-
proval from the headquarters staff for almost every big decision they made. In one
case, the light bulb business managers spent $30,000 producing a video to demon-
strate the need for some production equipment they wanted to buy.
First, Welch eliminated redundant organizational levels. Before he took over,
“GE’s business heads reported to a group head, who reported to a sector head, who
Organizing to Manage Change ■ 287
reported to the CEO. Each level had its own staff in finance, marketing, and plan-
ning, checking and double-checking each business.”37 Welch disbanded the group
and the sector levels, thus dramatically flattening the organizational chain of com-
mand. When Welch was done, no one stood between the business heads and the
CEO’s office. He created a leaner, more responsive organization.
Organizing to Manage Change

A recent BusinessWeek article said, “[I]f [businesses] are to thrive in this hyper-
competitive environment, they must innovate more and faster.”38 And to inno-
vate faster and faster, they need organization structures that enable managers
to make decisions faster. So, for example, Microsoft recently reorganized around
three core divisions—Platform Products & Services, Business, and Entertainment &
Devices—and eliminated several management levels. Microsoft’s stated purpose
was to “speed decision-making.”39 Also to speed decision making, Home Depot, as
we saw, consolidated its divisions, thus reducing store division offices from nine to
three, and then centralized its three remaining U.S. divisional offices in Atlanta.40 If
H&M sees a new clothing design is doing well, it can get variations of that style into
its stores in three weeks, while traditional retailers typically take ten months. H&M’s
chief executive says, “Speed is important. You need to have the systems where you
can react in a short lead time to [provide] the right products.”41
To appreciate why rapid change is causing managers to replace traditional
structures with more responsive ones, it is useful to understand the factors that in-
fluence how companies organize. Two studies help to explain this phenomenon.
We briefly look at these, and then turn to modern organizations.
Organization and Environment:

The Burns and Stalker Studies
Researchers Tom Burns and G. M. Stalker studied about twenty industrial firms in
the United Kingdom a number of years ago. Their purpose was to determine how
the nature of the firm’s environment affected the way the firm was organized and
managed.42 Their findings continue to provide insight into how managers organize.
Burns and Stalker concluded that to be successful, a rayon manufacturer they
studied had to be highly efficient. Its existence therefore depended on keeping
unexpected occurrences to a minimum and maintaining steady, high-volume
production runs. Burns and Stalker found that the rayon mill’s organizational
structure reflected this stable, unchanging environment and emphasis on effi-
ciency. The organization was a “pyramid of knowledge”: top management made
most decisions and communicated them downward. Decision making in the plant
was highly centralized. Everyone from the top of the organization to the bottom
had a very specialized job to do.43 Coordination was achieved via the chain of
command.
In contrast, Burns and Stalker found that innovation was the big challenge the
electronics firms they studied faced. Their survival depended on continually intro-
ducing innovative electronic components. They had to be alert and watch for inno-
vations by their competitors. Responsiveness, creativity, and quick learning (rather
than efficiency) were paramount here. Here, Burns and Stalker found very different
organizational structures. There was a “deliberate attempt to avoid specifying
individual tasks.”44 Each worker’s job might change daily as employees rushed to
respond to the problem of the day. Most important, all employees shared common
beliefs and goals, and these common goals (such as “let’s make sure we produce
only first-rate products”) helped ensure they all could work together with little or
no guidance. When a problem arose, employees took the initiative to solve it. This
often meant bypassing the formal chain of command.
● Mechanistic and Organic Organizations Their findings led Burns and

Stalker to distinguish between two types of organizations, which they called
mechanistic and organic. The rayon firm was typical of mechanistic, classical or-
ganizations. The electronics firms were typical of the organic, behavioral ones. In
terms of organizational structure, we can summarize the Burns and Stalker find-
ings as follows:
◗ Lines of authority. In mechanistic organizations, the lines of authority are clear,
and everyone adheres to the chain of command. In organic organizations, em-
ployees’ jobs are always changing, and the lines of authority are not so clear.
There is less emphasis on sticking to the chain of command in organic organiza-
tions. Employees simply speak directly with the person who can answer the
problem.
◗ Departmentalization. In mechanistic organizations (with their emphasis on effi-
ciency), functional departmentalization prevails. In organic organizations
(where flexibility is the rule), product/divisional departmentalization prevails.
◗ Degree of specialization. In mechanistic organizations, each employee has a
highly specialized job. In organic organizations, job enlargement is the rule.
◗ Degree of decentralization. Mechanistic organizations centralize most important
decisions. Lower-level employees in organic organizations tend to make more
important decisions; these firms are more decentralized.
◗ Span of control. The span of control is narrow in mechanistic organizations, and
there is close supervision. Spans are wider in organic organizations, and supervi-
sion is more general.
◗ Type of coordination. Managers tend to achieve coordination by sticking to the
chain of command in mechanistic organizations. In fast-changing organic organ-
izations, there is more emphasis on committees and cross-functional liaisons.
Table 10.1 summarizes the features of mechanistic and organic organizations.
Organization and Technology:

The Woodward Studies
British researcher Joan Woodward’s contribution lies in her discovery that a firm’s
production technology (the processes it uses to produce its products or services)
affects the way management should organize the firm. Woodward’s team analyzed
each company’s history, size, and policies and procedures.45 None of these factors
explained why some successful firms had classic, mechanistic structures while
others had behavioral, organic ones. Finally, Woodward’s team decided to classify
the companies according to their production technologies, as follows:
1. Unit and small-batch production companies produced one-at-a-time proto-
types and specialized custom units made to customers’ requirements (like
fine pianos). They had to be very responsive to customer needs.
Organizing to Manage Change ■ 289
T ABLE 10.1
Burns and Stalker’s Approach to Organizing
Mechanistic Type Organic Type of
Characteristic of Organization Organization
Type of environment Stable Rapid change
Comparable to . . . Classical Behavioral organization:
organization emphasis on self-control
Adherence to chain of Firm Flexible—chain of command
command often bypassed
Type of Functional Divisional
departmentalization
How specialized Specialized Jobs change daily, with
are jobs? situation
Degree of Decision making Decision making
decentralization centralized decentralized
Span of control Narrow Wide
Type of coordination Rules; chain of Committees, liaisons, and
and communication command special integrators;
networking
2. Large-batch and mass production companies produced large batches of

products on assembly lines (like cars). Here, efficiency was crucial.
3. Process production companies produced products such as paper and petro-
leum products through continuously running facilities. Here, highly trained
technicians had to be ready to respond at a moment’s notice to production
emergencies, because shutdowns were enormously costly.
Once Woodward classified the firms, it became clear that a different type of
organizational structure was appropriate for each type of technology (see Table 10.2).
Note that both unit and process production firms tended to have organic struc-
tures. Mass production firms usually had mechanistic structures.
In terms of organizational structure, we can summarize the Woodward find-
ings as follows:
◗ Lines of authority. The lines of authority and adherence to the chain of command
are rigid in mass production firms, but they are more informal and flexible in
unit and process production firms.
◗ Departmentalization. There is a functional departmentalization in mass produc-
tion firms and a product type of departmentalization in unit and process pro-
duction firms.
◗ Degree of specialization. Jobs are highly specialized in mass production firms and
less so in unit and process production firms.
◗ Delegation and decentralization. Organizations tend to be centralized in mass
production firms and decentralized in unit and process production firms.
◗ Span of control. Unit and process production firms have smaller supervisory-
level spans of control than do mass production firms.
T ABLE 10.2
Summary of Woodward’s Research Findings*
Unit and Small-Batch Large-Batch and Mass
Firms (Example: Production (Example: Process Production
Organizational Feature Custom-Built Cars) Mass-Produced Cars) (Example: Oil Refinery)
Chain of command Not clear Clear Not clear
Span of control Narrow Wide Narrow
Departmentalization Product Function Product
Overall organization Organic Mechanistic Organic
Specialization of jobs Low High Low
*Summary of findings showing how production technology and organizational structure

are related.
A Contingency Approach to Organizing

The studies discussed above demonstrate that different organizational structures
are appropriate for, or contingent on, different tasks. At one extreme are organiza-
tions where efficiency is supreme. Successful organizations here tend to be mech-
anistic. They stress adherence to rules and to the chain of command; are highly
centralized; and have a more specialized, functional departmentalization.
At the other extreme are companies where innovation is supreme. Here, man-
agement must emphasize creativity and entrepreneurial activities. To encourage
these activities, such organizations tend to be organic. Managers don’t encour-
age employees to stick to the chain of command. Decision making is pushed down
closer to the customers (it is more decentralized), and jobs and departments are
less specialized.
How Managers Streamline Their Companies

As globalized competition became more pronounced in the 1990s, CEOs began
taking steps to streamline their organizations. Their dual aims were to eliminate
waste and to boost responsiveness. The effects were twofold: streamlining reduced
costs and made the firms more efficient (for instance, by reducing the workforce).
And the streamlining made the companies more responsive (for instance, by
cutting out management layers). Downsizing was often the method they chose.
downsizing: dramatically Downsizing means dramatically reducing a company’s workforce. This method
reducing a company’s workforce probably did reduce costs. However, downsizing can and often does have negative
consequences, particularly among those employees and their families who end up
without a job.
Other techniques the CEOs used included the following.
● Reduce Layers of Management Reducing management layers is one method

managers use to streamline and prepare their companies to better respond to
change. The assumption, often correct, is that cutting out management layers puts
the decision-making employee closer to the customer, where he or she can make
a fast decision without having to “check with the boss.” The railroad company CSX
Modern Organizations ■ 291
recently reduced its layers of management from eleven to “no more than eight,” in
order to create what its CEO called a more responsive, streamlined company.46
● Establish Mini-Units Many managers split their companies into smaller

minicompanies. Intuit broke the company into separate businesses, each with its
own general manager and mission. Hal Rosenbluth broke his company into more
than 100 farmlike business units, each focused on special regions and clients. In
this way, everyone knew everyone else. Layers of management weren’t required for
approving decisions. Interactions and communications were more frequent.
● Reassign Support Staff Many firms also moved headquarters staff (such as
industrial engineers) out of headquarters and reassigned them to their business
units. For example, candy maker Mars Inc. is a $7 billion company with only a
three-person headquarters staff. Mars does have staff employees, but the staff em-
ployees are assigned directly to the individual business units. Here, they can help
their business units address customer needs rather than act as gatekeepers to
check and reject divisional managers’ plans.
● Widen Spans of Control and Empower Employees Squeezing out man-

agement layers results in wider spans of control, as we saw. If the supervisors are
not there to supervise, who makes the decisions? The answer is the employees
themselves: they are empowered. For example, when a new CEO took over at Pratt
& Whitney’s engine division, airlines were threatening to stop buying Pratt engines
unless they got faster responses to their complaints. The new CEO boosted the
number of service representatives in the field and then gave them authority to ap-
prove multimillion-dollar warranty replacements on the spot. Customers were
impressed. Pratt & Whitney quickly turned around.47
Modern Organizations
A s we saw in Chapter 1, things change fast in business today. After about one
year in business, Friendster.com, the social networking site, had about one
million unique visitors per month. Introduced a year later, myspace.com went
from nothing to fourteen million visitors per month. Amazon (fearing Google’s
new Froogle shopping site) introduced a new search engine. Then Google intro-
duced Gmail to lure surfers from Yahoo and Microsoft and bought YouTube.
Increasingly today, steps such as downsizing, widening spans of control, or
establishing mini-units are not enough. Things are changing too fast, and compa-
nies have to be too entrepreneurial. Managers are therefore organizing around
teams, networks, and horizontal and federal-type structures to better respond to
and manage change. We’ll discuss each of these four new structures in this final
section. The Improving Your Boundary-Managing Skills feature explains one skill
managers need when managing these new kinds of organizations.
Building Team-Based Organizations

Most firms today organize some or all of their activities around self-managing
team: a group of people who teams. A team is a group of people who work together and share a common objective.
work together and share a For example, at Johnsonville Sausage Company in Wisconsin, the CEO or-
common objective ganized most of the plant’s activities around self-managing, twelve-person work
I M P R OV I N G Y O U R B O U N D A R Y -M A N A G I N G S K I L L S
Finding ways to cut across traditional departmental wanting to boost efficiency, resists last-minute orders,
boundaries is at the heart of the team, network, and fed- while sales wants to accept them.
eral organizations we discuss in this section. For example, These boundaries inhibit communication and deci-
if employees are unwilling or afraid to speak their minds, sions and make modern, team-based, networked organi-
the open communication that teamwork requires is im- zations impossible. A boundaryless organization is
possible to obtain. one in which the widespread use of teams, networks, and
Traditional departmentalized organizations have four similar structures requires that the boundaries that typi-
main “boundaries.” First, vertically, the chain of command cally separate organizational functions and hierarchical
creates authority boundaries. The president supervises the levels be reduced.50
vice president, who supervises the managers, and so on. Other than being aware of the boundaries, there are
Subordinates are often reluctant to pass bad news on to no magic bullets for solving them. Reducing authority
their bosses. Second are departmental boundaries. Each boundaries requires that managers encourage and wel-
department has its own specialized responsibilities. There come honest advice and feedback from subordinates. Re-
is often minimal interdepartmental communication, as if ducing departmental and political boundaries requires
employees work in what amount to separate “silos.” 48 training and then rewarding employees for putting the
Third, each employee tends to focus on doing his or her company’s needs first. Reducing the task (“It’s not my job”)
own narrow job, which creates what some experts call a mentality requires clamping down at the first signs of such
task boundary. An employee might say, “No, that’s not my behavior and rewarding publicly those who willingly as-
job,” for instance.49 Finally, each department also typically sume additional responsibilities.
has its own political agenda. For example, manufacturing,
teams. Its organization chart would show primarily teams, rather than depart-
ments. Some of the teams are responsible for maintaining the firm’s packaging
equipment, for instance. These self-managing teams are empowered. The em-
ployees manage themselves and make fast, on-the-spot decisions. For example,
duties of a typical Johnsonville team include:
◗ Recruit, hire, evaluate, and fire (as necessary)
◗ Formulate, then track and amend, its own budget
◗ Handle quality-control inspections, subsequent

troubleshooting, and problem solving
◗ Develop and monitor quantitative standards for pro-
ductivity and quality
◗ Suggest and develop prototypes of possible new
products and packaging51
Teams like these bring a double-barreled benefit to
the company. Having one team of multitalented work-
ers do all the work required to complete a task elimi-
nates the sorts of error-laden interdepartmental hand-
offs that normally waste time and cause defects. And
empowering team members to supervise themselves
Part of a twelve-person team at the Johnsonville Sausage plant. can boost efficiency and motivation.
boundaryless organization: ● Nature of Team-Based Organizations52 Managers traditionally organized

an organization in which the their companies with departments as their basic work units. This is evident in a
widespread use of teams,
typical organization chart. Such a chart might show, for example, separate boxes
networks, and similar structures
requires that the boundaries for each functional department, down to separate tasks for individual workers at
that typically separate the bottom of the chart.
organizational functions and In team-based organizations, the team is the basic work unit. A typical Toyota
hierarchical levels be reduced plant may have 300 employees and only two or three managers. Each work team is
responsible for a body of work such as installing dashboards or maintaining ro-
bots. The teams generally supervise themselves.
● Designing Organizations to Support Teams 53 Creating a team-based or-

ganization requires first instituting the supporting mechanisms that will help the
team approach flourish. Experience suggests that these supporting mechanisms
include the right philosophy, structure, systems, skills, and policies (see Figure 10.9).
● Organizational Philosophy Team-based companies like Saturn and Toyota

emphasize values such as “people can be trusted to make important decisions
about their work activities.” They are characterized by high employee involvement
and trust.
● Organizational Structure In team-based companies, teams, not depart-

ments, are the basic work units. The teams supervise themselves, for instance,
scheduling overtime and hiring employees. The organization chart would show
primarily teams, rather than departments. These firms have relatively few supervi-
sors and delegate much decision making to the teams.
● Organizational Systems Every company depends on standard operating

systems or ways of doing things to make things go smoothly. These range from per-
formance appraisal and incentive plans to systems for hiring employees. Organizing
around teams requires making the firm’s systems and practices compatible with the
F IGURE 10.9 Effective Teams
Designing Organizations
to Manage Teams
Basis for Teamwork to Flourish
Organizational Organizational Organizational Organizational Employee

Philosophy Structure Systems Policies Skills
High involvement ■ Flat structure ■ Gainsharing ■ Employment ■ Job-related

■ All or most ■ Procedures stability ■ Interpersonal
work organized ■ Information ■ Equal treatment ■ Team-based
around teams systems ■ Managerial
SOURCE: Adapted from James H. Shonk,
■ High-involvement,
Team-Based Organizations (Homewood, Ill.: high-delegation
Irwin, 1997), p. 36. jobs
team approach. For example, managers often pay financial incentives to the team as
a whole rather than to individual employees, to encourage team solidarity.
● Organizational Policies Similarly, the company’s policies should support

the philosophy of empowerment, involvement, and trust that teamwork depends
on. For example, in plants like those run by Toyota, equal-treatment policies (such
as no reserved parking spaces and minimal status differences in offices and dress)
foster a sense of teamwork.
● Employee Skills To manage themselves, team members need various

decision-making and communications skills.
Network-Based Organizations
Many firms today superimpose organizational networks over their existing struc-
organizational network: tures. An organizational network is a system of interconnected or cooperating
a system of interconnected individuals. Networks enhance the likelihood that the work of even remote units
or cooperating individuals will be carried out promptly and in a coordinated way if quick decisions on some
matters must be made.
To put networking’s benefits into perspective, consider downloading a song.
One option is to methodically check one’s friends. Going one by one, we might find
our song after seventeen calls. Our other option is to enter one of the new legal
variants of the Napster-type online networks. Here, with everyone’s record files
shared, we instantly find our song. Putting everyone in contact with everyone else
expedites solutions.
Whether formal or informal, organizational networks share the same basic idea:
to link selected employees from various departments, levels, and geographic areas
so that they can communicate quickly and without barriers across normal organiza-
tional boundaries. We describe three types of networks: formal organizational net-
works, informal organizational networks, and electronic information networks.
● Formal Organizational Networks A formal organizational network is “a

recognized group of managers assembled by the CEO and the senior management
team. The members are drawn from across the company’s functions, business
units, and geography, and from different levels of the hierarchy.”54 Figure 10.10
illustrates the cross-functional, cross-level nature of formal networks. Note the
number of organizational levels and the departments represented by the yellow
boxes. (The yellow boxes represent the formal network’s members.)
Formal networks have several characteristics.55 First, network membership
is a permanent assignment. In fact, each manager’s continuing experience and
relationships in the network help make the network effective. Second, formal net-
works generally take the initiative in finding and solving problems. Third, having a
formal network should change how the top manager does things.56 For example,
the network handles more of the interunit coordinating that the CEO might other-
wise have to do.
At the railroad firm Conrail, nineteen middle managers from various depart-
ments and levels constitute the firm’s operating committee, which is actually a for-
mal network. They meet for several hours per week, on an as-needed basis. They
review and decide tactical issues (delivery schedules and prices, for instance).
They also work on longer-term issues such as five-year business plans.57 If a cus-
tomer needs a fast decision on, say, pricing, this team can quickly draw on its
members’ varied knowledge to arrive at a decision.
F IGURE 10.10
How Networks Reshape
Organizations
The members of a formal
network may be selected from
various departments and
organizational levels.
SOURCE: From “How Networks Reshape

Organziations—For Results,” by Ram Charan,
Harvard Business Review, September–October
1991. Copyright ©1991 by the President and
Fellows of Harvard College; all rights reserved.
Reprinted by permission of Harvard Business
School Publishing.
● Informal Organizational Networks Many companies cultivate informal or-

informal organizational ganizational networks. Informal organizational networks consist of cooperating
networks: networks that individuals who are interconnected only informally. They share information and
consist of cooperating help solve each other’s problems based on their personal knowledge of each
individuals who are
other’s expertise. The idea is that if a problem arises in one location, the manager
interconnected only informally
can informally network with colleagues at other locations to solve it.
In encouraging informal networks to form, the CEO’s main job is to create the
conditions that enable managers around the world to meet and to build mutual
trust.58 Executive development programs are one way to do this. For example,
both Philips and Shell bring managers from around the world to work together in
training centers in New York and London. Moving managers from office to office
around the world is another tactic. The transferees can build lasting relationships
around the globe. In one firm, for instance:
[International mobility] has created what one might call a “nervous system”
that facilitates both corporate strategic control and the flow of information
throughout the firm. Widespread transfers have created an informal infor-
mation network, a superior degree of communication and mutual under-
standing between headquarters and subsidiaries and between subsidiaries
themselves. . . .”59
● Managing Now: Electronic Networking Information technology, including

the Internet, e-mail, videoconferencing, PDAs, and collaborative computing soft-
ware, lets companies better utilize formal and informal networks. For example, a
new service from Airena, a Web service and mobile phone company, lets users in
small companies do group scheduling and organizing via their mobile phones.60
For larger firms, group decision support systems packages (like Lotus Notes) pro-
vide another tool.61 For example, IBM’s Lotus Sametime IM provides instant mes-
saging capabilities to remote network members.62 The OneSpace system is another
example. It allows product design teams “to collaborate over the Internet and
across firewalls in real-time by working directly on the 3D solid model. . . .”63
Hewlett-Packard’s new life-size Halo Collaboration Studio makes the people “on
the other side of the table” at a videoconference look as if they’re actually there.
F IGURE 10.11
The Horizontal Corporation
In the horizontal organization, the work is organized around the cross-functional processes,
with multifunction teams carrying out the tasks needed to service the customer. Thus, the
sales fulfillment team carries out all the tasks required for billing an order.
Chairperson Analysis Pricing Research

Sales
VP of
Support Chief Process Strategy Process Process Advertising
Services Operating Owner Owner Owner
Officer
VP of
Strategy
and Design and Shipping Production Service
Planning Engineering
New-Product Development Sales Fulfillment Customer Support

SOURCE: Adapted from John A. Byrne,“The Horizontal Corporation,” BusinessWeek, 20 December 1993, p. 80.
The Horizontal Organization

horizontal organization: The horizontal organization is an organization built around multidisciplinary
an organization built around teams, each of which performs a process such as loan approval, sales fulfillment,
multidisciplinary teams, each or customer support. Instead of being designed around departments, the
of which performs a process
processes and the teams performing each process become the basic units of work.
such as loan approval, sales
fulfillment, or customer support; Each team is comprised of several functional specialists. They work together
instead of being designed on those teams to carry out the process team’s activities (as illustrated in
around departments, the Figure 10.11).64 Once these process teams are in place and performing, the firm
processes and the teams eliminates the departments, levels, and staff that do not directly contribute to the
performing each process work of the process-oriented teams.
become the basic units of work
● Why Horizontal Organizations? Many firms found that downsizing did not
change the way their departments did their work. The firms had fewer employees.
However, the work itself was still handled like a relay race. For example, at Ryder
Corporation, doing the paperwork for leasing a truck required as many as seven-
teen handoffs, as the documents made their way from one department to another,
such as credit checking, truck valuation, and loan approval. The time and effort
wasted were enormous. Errors invariably occurred. So, instead of having the
truck-leasing process weave its way through several departments, Ryder created
a vehicle-leasing process team. This team combined in one place employees with
all the functional specialties needed to approve a lease. That way, this new
business process process-oriented team could quickly approve or reject a lease application.
reengineering: redesigning Creating horizontal organizations requires business process reengineering.
business processes, usually by Business process reengineering means redesigning business processes, usually
combining steps so that small
multifunction process teams use
by combining steps so that small multifunction process teams use information
information technology to do technology to do the jobs formerly done by a sequence of departments. We’ll
the jobs formerly done by a discuss how to do this in Chapter 11, but the Window on Managing Now feature
sequence of departments provides one example.
Brady Corp.
Brady Corp., which manufactures identification and safety them online directly to manufacturing. In manufacturing,
products, allocated about $50 million to install a new sys- Brady will have a horizontal process. One factory-floor
tem that will link Brady’s suppliers, customers, and distrib- person will oversee the entire production and shipping
utors over the Internet. However, only about one-third of process for each order. Management expects the new
that money was for the technology. Top management horizontal organization to cut about five steps out of the
spent the rest on reengineering the firm’s organization and current fifteen-step sale-manufacturing-shipping process.
processes around team-based horizontal processes. Brady’s new horizontal organization will help it capitalize
For example, Brady customer-service employees on its new online, direct customer-to-company informa-
used to get the orders and pass them on to the firm’s pro- tion technology system. Without reengineering, Brady
duction department. The physical orders would then would have had its new online ordering system, but the
move on to shipping. It was like a relay race.With Brady’s orders would still have been done the old, time-consuming
new organization, customers with simple orders will send way, from department to department.
Federal Organizations
federal organization: an In a federal organization, highly autonomous but still company-owned units de-
organization in which power is velop their own products and have the option of collaborating with sister companies
distributed between a central under the very loose direction and control of the parent firm’s central manage-
unit and a number of
ment.65 The federal approach lets the parent company tap and hopefully capital-
constituents, but the central
unit’s authority is intentionally ize on the creativity and entrepreneurial spirit of its small, self-managed units.
limited Some big record labels are run as federal organizations. The parent label, like
Sony-EMI, finances people who have successful track records in music to set up
their own music labels, and these entrepreneurs then run their firms under the
parent firm’s umbrella. The parent firm then provides services (such as HR and
legal support). The labels are free to work with other labels within Sony-EMI, while
the parent firm provides minimal oversight. Virtual organizations, as we describe
next, are one modern federal-type example.
Managing Now: Virtual Organizations

Sometimes, a company has to marshal resources to accomplish some big project
but can’t afford the time or expense of acquiring and owning those resources itself.
virtual organization: A virtual organization is “a temporary network of independent companies—
a temporary network of suppliers, customers, perhaps even rivals—linked by information technology to
independent companies— share skills, costs, and access to one another’s markets.”66
suppliers, customers, perhaps
Virtual organizations (or virtual corporations) are networks comprised of
even rivals—linked by
information technology in order partner companies. Each company or entity brings to the virtual corporation its
to share skills, costs, and access special expertise. Information technology—the Internet, cell phones, group decision-
to one another’s markets making software, and fax, for instance—makes the virtual organization possible
by linking each independent entity with the rest.
Some virtual companies are among the biggest in their industries. For exam-
ple, CorpHQ utilizes a network of professional service providers rather than em-
ployees to provide business-consulting services to industry. Its CEO says, “[O]ur
virtual organization allows us to utilize the skills and experience of a wide range of
business consultants. . . .”67
Virtual organizations enable some small businesses to undertake projects they
would not otherwise be able to. For example, Indigo Partners (www.indigohq.com),
SOURCE: http://www.indigohq.com
begun about ten years ago by Jennifer Overholt, Anne Murguia, and A. C. Ross, is an
informal support group for marketing consultants. Indigo’s projects range from mar-
ket analyses for Fortune 500 companies to revising business plans for start-ups.68
Indigo Partners is a virtual company. It has no headquarters office. The firm’s six
partners work on projects individually or in small teams. For large projects, they tap
online into a pool of specialized freelancers. Thanks to Indigo, these freelancers bid
on big jobs, knowing they can tap the sum total of all the other Indigo freelancers’
knowledge and expertise. At the same time, the virtual-organization arrangement
frees them from having to manage bricks-and-mortar assets like an office.
Learning Organizations
One reason companies downsize, network, and reengineer is so that they can be-
come better at learning what new products competitors are introducing, what
new services customers want, and what new technologies may render their own
learning organizations: services obsolete.69 Learning organizations are any organizations that have “the
organizations that have the capacity to adapt to unforeseen situations, to learn from their own experiences, to
capacity to adapt to unforeseen shift their shared mindsets, and to change more quickly, broadly, and deeply than
situations, to learn from their
ever before.”70 When Microsoft reorganized into three core divisions and elimi-
own experiences, to shift their
shared mindsets, and to change nated management levels, it did so in part to make sure it remained a learning
more quickly organization.
If you looked at their organization charts and how they did things, learning or-
ganizations generally share the characteristics that we described in the last few
pages. To speed up decision making, management starts by downsizing, reducing
management layers, and empowering employees. It then creates networks and
encourages employees to think outside the boundaries of their own jobs.
However, organizing is not enough to make a company a learning organiza-
tion. Two more things are required. First, the company provides special knowledge-
management tools. For example, Xerox gives its repair personnel laptop comput-
ers and encourages them to digitize and share knowledge and ideas for solving
repair problems.
Second, management cultivates its employees’ “personal mastery.” This
means management ensures that employees have both the capacity and willing-
ness to learn and to share ideas. Steps here include:
◗ Provide continuous learning opportunities. Learning organizations offer exten-
sive opportunities for on- and off-the-job training to increase personal mastery.
◗ Foster inquiry and dialogue. Learning organizations make sure that all of the
company’s systems and procedures, as well as all the signals that managers send,
encourage open inquiry and dialogue.
◗ Establish mechanisms to ensure that the organization is continuously aware of
and can interact with its environment. For example, learning organizations en-
courage formal and informal environmental scanning activities by employees, to
quickly identify opportunities and threats.
● Managing Now Companies rely on special software to ensure that their learn-
ing management programs stay on track. For example, Aventis Pharmaceuticals
recently installed a special learning management system from Saba Software.71
Programs like these do several things. Most important, they enable Aventis’s re-
search scientists to easily access and participate in online training and develop-
ment courses. In addition, it enables them to register for instructor-led training
and lets the company automate the course registration process, deliver tests, track
and report student participation, and generate certificates.
PRACTICE IT
Millipore
With subsidiaries in over thirty countries, all operating accounting statements. It also reduced the number of em-
with different software packages, managers at Millipore’s ployees required for this task and “gave executives better
headquarters couldn’t effectively coordinate worldwide visibility into financial performance across the globe.”72
operations. They had to wait for employees at headquar- Installing this suite of software produced several
ters to compile and consolidate the information coming organizational benefits for Millipore. It improved interde-
in from subsidiaries. The lack of timely information made partmental coordination by providing Millipore man-
it difficult for Millipore’s top managers to coordinate the agers with standardized information, which they used to
subsidiaries’ activities. compare operations and monitor results. It also elimi-
The company’s solution was to install,in phases,a suite nated numerous compilation and consolidation activities,
of separate but compatible enterprise software packages thus allowing Millipore to reduce its employee head count.
from Oracle Corporation.Each subsidiary and department Third, it enabled Millipore to centralize certain shared-
got new software such as Oracle Financials, Oracle Self services functions, such as human resource management.
Service Human Resources, and Oracle Purchasing. So, for For example, Oracle HR Self Service reduced the need
example,once all the subsidiaries were using the same ver- for local HR staff by enabling employees and supervisors
sion of Oracle Financials, coordinating the company’s to self-service, via the Web, various activities such as
financial operations became relatively simple. It cut in half updating personnel forms and completing perfor-
the time it took to finalize the company’s monthly mance appraisals.
CHAPTER SUMMARY
1. Organizing means arranging an enterprise’s activi- authority equal responsibility; making the person
ties so that they systematically contribute to the accountable for results; and avoiding backward
enterprise’s goals. An organization consists of peo- delegation.
ple whose specialized tasks are coordinated to
7. In practice, a decentralized organization is one in
contribute to the organization’s goals.
which (1) authority for most departmental deci-
2. Departmentalization is the process through which sions is delegated to the department heads, while
management groups an enterprise’s activities to- (2) control for major companywide decisions is
gether and assigns them to managers. Managers maintained at the headquarters office. Managers
generally group activities by functions, products, usually use the term decentralized in conjunction
customer groups, marketing channels, or geo- with product divisions.
graphic areas.
8. Burns and Stalker’s findings, as well as Wood-
3. Coordination is the process of achieving unity of ward’s, show that different organizational struc-
action among interdependent activities. Tech- tures are appropriate for—and contingent on—
niques for achieving coordination include mutual different tasks. At one extreme are mechanistic
adjustment; the use of rules; the standardization of organizations for dealing with predictable, routine
targets, skills, values, or processes; direct supervi- tasks. At the other extreme, organic organizations
sion; coordination software; divisionalizing; and enable companies to respond faster.
the use of a staff assistant, liaison, committee,
9. Managers can institute a number of basic struc-
and/or independent integrators.
tural changes to make their organizations operate
4. Many companies are adopting flatter structures in more responsively. Examples of simplifying or re-
an effort to eliminate duplication of effort, inspire ducing structure are reducing layers of manage-
creativity, and increase responsiveness. The span ment, creating mini-units, reassigning support
of control in a company is the number of subordi- staff, and widening spans of control.
nates reporting directly to a supervisor.
10. Many firms superimpose organizational networks
5. Authority is the right to take action, make deci- over existing structures. A network is a system of
sions, and direct the work of others. Managers usu- interconnected or cooperating individuals. It can
ally distinguish between line and staff authority. be formal or informal, or IT-based. Team-based or-
ganizations, federal organizations, virtual organi-
6. Principles of delegation include delegating author-
zations, and horizontal organizations are other
ity, not responsibility; clarifying the assignment;
modern organizations.
delegating, not abdicating; knowing what to dele-
gate; specifying the range of discretion; having
1. Why do we refer to departmentalization as the 5. What are the pros and cons of matrix management?
organizational division of work?
6. Do you think a company can flatten its hierarchy
2. What is the connection among decentralized, divi- without taking steps to prepare its employees for
sionalized, and product departmentalization? their new roles? Why or why not? What steps would
you recommend?
3. How does interdependence influence how a com-
pany coordinates its operations? 7. How would you use IT to improve coordination?
4. Why is decentralization not the same as delegation?
Case Study ■ 301
1. Colleges are interesting from an organizational colleges tend to be decentralized, they are still the
viewpoint because the employees (the faculty) most bureaucratic organizations they’ve ever
tend to make so many of a college’s decisions and dealt with. To what extent and in what way is your
run so many of its projects. It’s not unusual, for in- college decentralized? Do you consider it bureau-
stance, to have the faculty elect a faculty senate, cratic, and, if so, what explains why a decentral-
which in turn appoints committees for things like ized organization produces such bureaucracy?
faculty promotions and curricula; the committees c. How would you reorganize the college if stream-
then often have a major say in who gets promoted, lining and more efficiency were your goals?
what programs the college offers, and so on. Simi-
2. In teams of four to five students, spend some time
larly, the students elect their own student govern-
on the Internet or in the library obtaining the
ments, which in turn decide how the students’ fees
organization charts for two companies. Then to-
are spent.
gether answer these questions: What forms of de-
Some critics say that all of this is a little like
partmentalization can you identify in each chart?
“letting the inmates run the asylum.” And the pace
Which company would you say is more decentral-
of criticism has picked up in the past few years.
ized? Why do you believe each company organized
With more colleges and universities going online,
the way that it did?
students have more educational choices. As a
result, tuition fees are under pressure, and univer- 3. Because you are in college to learn, it is reasonable
sities are scrambling to cut costs and be more effi- to assume that your college (in general) and this
cient. Boards of trustees are reviewing everything management class (in particular) are learning or-
about how their colleges do things—from how ganizations. (After all, your class does have an or-
many courses faculty members teach to how pro- ganizational structure in terms of who does what,
fessors are appraised to how to decide which whether authority is centralized or dispersed, and
programs to offer or drop. Form teams of four to so on.) In teams of four to five students, answer
five students, and answer the following questions: these questions: If you were the “manager” taking
over this class, what would you say are the main
a. Draw an organization chart for your college or
goals you want this class to achieve? Based on
university. What type(s) of departmentalization
these goals, what are the main tasks the class’s or-
does it use? How would you show, on the chart,
ganization must perform? Draw the organization
the authority exercised by the faculty and fac-
chart of this class as it is now. Then list five specific
ulty committees (teams)?
things you would do to reorganize this class as a
b. Decentralized structures tend to speed decisions.
learning organization.
However, some people think that even though
CASE STUDY
Organizing Greenley Communications
ouis Greenley has to make a difficult decision. television production division. Each division had its
L Greenley Communications was a diversified com-
munications company that operated primarily in the
own bookkeeping, sales, marketing, operations, and
service divisions. Accounting and financial manage-
western United States. The firm owned and operated ment were handled at the corporate level.
newspapers and radio and television stations. For In the newspaper division, a clear distinction ex-
years, there had been an “invisible wall” between the isted between the news and the sales/financial sides
print operations and radio and television. of the business. Coming from a family of journalists,
Greenley’s existing structure was organized by in- Greenley was always concerned that the sale of advertis-
dustry: a newspaper division, a radio division, and a ing to local clients would influence the paper’s coverage
of the news—editors might ignore potential stories that DISCUSSION QUESTIONS

reflect negatively on an advertiser.
The vice president of broadcast operations in Green- 1. Draw Greenley’s current organization chart as best
ley’s television division proposed a major structural you can.
change. The proposal called for organizing Greenley 2. What factors should influence Greenley’s decision
Communications geographically. This reorganization to restructure?
would allow regional managers to have a single sales
force that could sell advertising in any form: print, 3. What risks does the proposed restructuring create?
radio, or television. The approach had some appeal. 4. What are the pros and cons of the vice president’s
There was significant overlap at Greenley—the com- new proposed structure?
pany tended to employ multiple sales forces in the
same region, for instance, with different salespeople 5. If you were Greenley, how exactly would you reor-
often calling on the same customer. Certainly, there ganize (if at all), and why?
would be savings in personnel because the company
would need a far smaller sales staff.
Greenley is not yet persuaded, however. He is try-
ing to decide what to do.
DESIGNING AND CHANGING 11
ORGANIZATIONS
Yellow Transportation CHAPTER OUTLINE
Opening Vignette: Yellow
Transportation
W hen Bill Zollars became

CEO at Yellow Transporta-
tion Inc., it had just lost about
● Types of Organizational
Change
The Challenge of Organizational Change
$30 million, laid off workers, An Example: Becoming an E-Business
Strategic Change
and had a strike. Previously se- Technological Change
nior vice president at Ryder WINDOW ON MANAGING NOW:
Corp., Zollars had built Ryder’s Baker & McKenzie
Changing the People and/or the Culture
high-tech logistics unit into a
● Managing Now: Reorganizing,
$1.5 billion business. He be- Reengineering, and
lieved that saving Yellow Trans- Business Process
Management
portation would require up-
Reorganizing
grading the firm’s technology. Business Process Reengineering
He knew he’d have to get his WINDOW ON MANAGING NOW:
Bill Zollars, Yellow’s new CEO, knew he’d have Reengineering the Loan Process
firm’s thousands of truckers, to get his firm’s thousands of employees to Business Process Management
warehouse specialists, and oth- change the way they did things and to accept ● Dealing with Resistance
ers to change the way they did the new technologies the firm required. to Change
things and to accept the new technologies.The question was, Why Do People Resist Change?
Overcoming Resistance to Change
How should he do this?1 ■ Choosing the Right Method for
Overcoming Resistance
PRACTICE IT: Bill Zollars
● A Process for Leading
After studying this chapter, you should be able to: Organizational Change
Create a Sense of Urgency
Show that you’ve learned the chapter’s essential information by Decide What to Change
➤ Listing and discussing four ways to change an organization. Create a Guiding Coalition and
Mobilize Commitment
➤ Comparing and contrasting reengineering and business process management.
Develop and Communicate a
➤ Explaining how to change an organization’s culture. Shared Vision
➤ Listing and describing at least five ways to resolve a conflict. Empower Employees to Make the Change
Implement the Change
Generate “Short-Term Wins”
Consolidate Gains and Produce
More Change
Anchor the New Ways of Doing Things
in the Company Culture
Monitor Progress and Adjust the Vision
as Required
Carlos Ghosn Leads a Change at Nissan
303
● Organizational
Development and Conflict Show that you can practice what you’ve learned here by
Management ➤ Reading the experiential exercises and explaining how you would reengineer the
Human Process Applications process.
Technostructural Applications ➤ Reading the chapter case study and deciding if the company should reorganize and, if
Human Resource Management so, what the new structure should look like.
Applications
Strategic Applications Show that you can apply what you’ve learned here by
Managing Interpersonal Conflict Online Study Center
➤ Watching the simulation video and identifying practices ACE the Test
used by the company to successfully accomplish change. Managing Now! LIVE
Types of Organizational Change

Online Study Center
ACE the Test
Managing Now! LIVE Y ou are in management class, and the dean walks in and says that you and
some others need to move to a different class because of a fire safety code.
How would you feel about that announcement? For a manager, implementing a
change almost invariably triggers worry, concern, and resistance.
Several years ago, Nissan was selling 80 percent of its cars at a loss and had lost
almost $6 billion in one year alone. The situation facing Carlos Ghosn, the person
sent to Japan to fix Nissan, was urgent. He knew the only way to save Nissan was to
take some steps that would not normally be considered within Japanese business
culture, such as cutting 21,000 jobs.2 As a French citizen coming to save a Japanese
company, how could he lead the required change without prompting vast resis-
tance by Nissan’s workers?
The Challenge of Organizational Change

Faced with the need to respond to competitive pressures, managers like Bill
Zollars, Carlos Ghosn, or Avon’s Andrea Jung invariably find themselves having to
organizational change: formulate and implement an organizational change. Organizational change
a planned, systematic alteration refers to a planned, systematic alteration of the company’s strategy, structure,
of the company’s strategy, technology, and/or people and culture. However, no change is ever made in isola-
structure, technology, and/or tion. Thus, a recent decision by Aetna Insurance to change its strategy and down-
people and culture
size also prompted changes in the firm’s organization structure and in how Aetna
trains its sales force.
Leading an organizational change can be treacherous. The change may re-
quire the cooperation of hundreds of managers and employees. Resistance may be
extensive, and the company must execute all these changes while still serving its
customers. The manager needs to know what to change and how to execute the
change. We’ll look at what the manager can change in this and the following sec-
tion, and then turn to how managers actually lead an organizational change.
An Example: Becoming an E-Business

As an example of how one change tends to trigger another, consider becoming an
e-business. General Electric (GE) now does most of its purchasing and much of
its marketing over the Web. A local jeweler can now attract orders from thousands
of miles away with its new associate relationship with Amazon.com. Fortune put
Types of Organizational Change ■ 305
it this way: “e or be eaten”: either get your business on the Web or watch your
competitors take your customers.3
The problem is that blending old business and e-business is not just about
installing new technology.4 For example, one of the things that torpedoed the
AOL-Time Warner merger a few years ago was the fact that their cultures and ways
of doing things were so different. Time Warner’s more conservative culture clashed
with AOL’s laid-back entrepreneurial way of doing things.5
The chief strategist for one e-business says, “Entering the e-commerce realm is
like managing at 90 mph. e-business affects finance, human resources, training,
supply-chain management, customer-resource management, and just about every
other corporate function.”6 For example, suppose a chain of florist shops decides
to expand its sales online. Should they organize the online operation as a separate
business unit? Or should they keep the current functional organization (sales, pur-
chasing, marketing, accounting, and human resources) and let each of those
department heads also run their parts of the new e-business? It’s a dilemma.7
Greg Rogers, head of Whirlpool Corporation’s e-commerce business, says a
new e-business’s strategy will have to change too.8 The company’s new strategy
will have to reflect the fact that e-commerce is now a big part of the company’s
plans. Becoming an e-business illustrates a change that requires altering just about
everything the company does—its strategy, technology, structure, and people and
culture.
● What’s to Come In the remainder of this first section, we’ll look briefly at
three types of organizational change (strategy, technology, and culture/people).
We’ll then look at the fourth type of change, structural change, in the next section
of this chapter. Then, in the final two sections of this chapter, we’ll turn to the
methods that managers use to make their change efforts more successful.
Strategic Change
Many managers face the need to change their companies’ strategies. For example,
faced with declining profits, Aetna Insurance pulled back from its high-growth
strategy. The firm had emphasized adding more policyholders. Its new strategy is
to emphasize fewer but more profitable ones. Management reduced policyholders
from 22 million to 14.4 million. By focusing on more profitable policyholders,
Aetna boosted profits by ten times, to $108 million in one quarter. Andrea Jung de-
cided to change Avon’s strategy so that retail stores could also sell Avon products.
strategic change: a change Managers often try to avoid making big strategic changes because strategic
in a firm’s corporate and/or changes are fraught with peril; it’s hard to predict exactly what will happen.
competitive strategies This is especially true when the firm faces “discontinuous change”: an unex-
pected change that triggers a crisis, as when digital photography began crowding
Kodak’s film off the shelves. Changes like these are usually prompted by things out-
side of the manager’s control.9 The manager will also probably have to make his or
her changes under short time constraints. Strategic changes also tend to have com-
panywide impact. As at Aetna, it’s rarely possible to change the firm’s strategy with-
out also changing in some way the firm’s structure, technology, and people.
Research findings suggest that managers facing strategic changes should
keep the following three things in mind:
1. Strategic changes are usually triggered by factors outside the company. External
threats or challenges, such as deregulation, global competition, and dramatic
technological innovations, are usually what prompt managers to embark on
companywide, strategic changes.10
306 PART FOUR CHAPTER 11 Designing and Changing Organizations
2. Strategic changes are often required for survival. Researchers found that while
making a strategic change did not guarantee success, firms that did not
change when they should have did not survive. This was especially true when
some major change required quick and effective strategic change, but the
manager failed to respond. Many neighborhood businesses close if they can’t
change to compete with a new Wal-Mart.
3. Strategic changes implemented under crisis conditions are highly risky. Strate-
gic changes made under crisis conditions and with short time constraints
were the riskiest and most prone to fail. Changes like these eventually trigger
changes companywide—changes to the firm’s structure, technologies, people,
and culture and core values. Core values (such as “don’t make any risky
moves”) are especially hard to change.
Technological Change
We’ve seen in this book that many managers increasingly have to implement tech-
technological change: nological changes. Technological change means changing the way the company
a change in the way the company creates or markets its products or services, or the way it uses technology to man-
creates and markets its products age its systems and operations. For example, the manager might want to improve
or services or in the way it uses
operations by installing a new supply chain management system or by changing
technology to manage its
systems and operations the interface through which the employees (such as UPS delivery people) commu-
nicate with their home base. (The Window on Managing Now feature presents one
such example.)
Whatever the technological change, managers like Bill Zollars know they must
get their employees to accept the change if the change is to be successful. Many of
the examples you’ve read in this book—such as Brady Company installing its new
supply chain system—illustrate this. It would make no sense for Brady to have the
customers send their orders directly online to the plant floor if the employees
there resented having to do the extra work.

Baker & McKenzie
The law firm Baker & McKenzie has seventy offices in like these can be time-consuming if done manually. Baker
thirty-eight countries. Many of its clients do business & McKenzie installed new business intake, conflicts
globally. Before accepting a new client, it must ensure management, and regulatory software systems. These
that it is not inadvertently creating a conflict, for in- technologies streamlined the firm’s former intake and
stance, by agreeing to represent a client that another of regulatory processes. They enable the firm’s lawyers to
its clients is suing. It also needs a process for ensuring avoid inadvertently accepting clients that might pose a
that the advice it gives a multinational client complies conflict, and they ensure that all relevant local laws and
with laws and regulations (like the U.S.A. Patriot Act) in regulations are being met.
all the countries in which it does business.11 Processes
Types of Organizational Change ■ 307
Changing the People and/or the Culture

As at Brady, strategic, technical, and structural changes (which we discuss next) in-
variably require changes to the behavioral, “people” side of the firm. This includes
changing the employees’ attitudes, values, or skills, or the firm’s culture.
Here, there are several options. If employees don’t have the knowledge or skills
to do the job, the manager may prescribe training. (We discuss training and devel-
opment in Chapter 12.) At other times, people problems stem from misunder-
standing or conflict. Here, conflict-resolution efforts (like those discussed at the
end of this chapter) may be in order. Sometimes, the manager just needs to over-
come resistance to the change by explaining the change’s true nature. Bill Zollars
at Yellow Transportation knew that his new technology would fail if he didn’t
explain the need for it convincingly.
Sometimes, the manager has to change the company’s culture to make his or
her broader desired changes work. Culture refers to the basic values the employees
share and the ways in which these values manifest themselves in behavior. For ex-
ample, some attribute Motorola’s lackluster performance in the early 2000s to the
company’s culture, which one writer described as “stifling bureaucracy, snail-
paced decision making, . . . and internal competition so fierce that [former CEO]
Galvin himself has referred to it as a ‘culture of warring tribes.’”12 There were few
things Galvin could do to make Motorola succeed in the face of such a culture.
● How to Create and Sustain the Right Corporate Culture Alan Mulally,
Ford’s new CEO, took over late in 2006. Many believe Ford suffered to some extent
from a culture of backbiting, bureaucratic behavior, and disdain (while Ford was
cutting 30,000 employees, the top executives suppos-
edly still used a fancy executive restaurant at Detroit
headquarters). Mulally knew he had to make many
changes at Ford to make that company succeed. He
could not do that in the face of such a culture.
What steps can a manager like Mulally take to
change the company’s culture? If, like Mr. Mulally, you
wanted to encourage Ford managers to work more like
a team, and employees to be more flexible about their
pay demands, what would you do? Perhaps close the
executive restaurant? Tell managers that from this
point on, you will appraise each one on the extent to
which he or she was a team player that year?
The essential thing to keep in mind is that it is the
manager’s behavior, not just what he or she says, that
molds what employees come to see as the firm’s real
Alan Mulally, Ford’s new CEO, had to change the company’s culture and values. Experts suggest doing the following
culture. to change organizational culture:13
1. Make it clear to your employees what you pay attention to, measure, and con-
trol. For example, at Toyota, quality and teamwork are desirable values.
Toyota’s selection and training processes therefore focus on the candidate’s
orientation toward quality and teamwork.
2. React appropriately to critical incidents and organizational crises. For exam-
ple, if you want to emphasize the value that “we’re all in this together,” don’t
react to declining profits by saying, “You’re all fired.”
3. Use signs, symbols, stories, rites, and ceremonies to signal your values. JCPenney
prides itself on loyalty and tradition. To support this, the firm inducts new
management employees into the Penney Partnership. At special conferences
they commit to Penney’s values of honor, confidence, service, and cooperation.
4. Deliberately role-model, teach, and coach the values you want to emphasize.
For example, Wal-Mart founder Sam Walton lived the values of hard work,
honesty, neighborliness, and thrift. He explained driving a pickup truck by
saying, “If I drove a Rolls-Royce, what would I do with my dog?”
5. Communicate your priorities by how you appraise employees and allocate re-
wards. For example, General Foods reoriented its strategy from cost control to
diversification and sales growth. It supported these new priorities by linking
bonuses to sales volume and new-product development, rather than to just
increased earnings.
Lawrence Weinbach, chair and CEO of Unisys, took many steps to change his
firm’s culture. His basic aim was to focus employees on performance and execu-
tion. To do this, he instituted systems that sent the right signals. As he said, “We’ve
moved to a pay-for-performance approach, to make sure that we’re properly rec-
ognizing the people who are doing things right. . . . [I]n some cases, we’ve needed
to tell people to seek opportunities elsewhere . . . we’ve invested in training and
education and created Unisys University, where employees can find courses and
programs on a range of . . . business related topics. We’ve also spent a lot of time
communicating and educating people about the importance of execution.”14
Managing Now: Reorganizing, Reengineering, and Business

Process Management
Online Study Center
ACE the Test
Managing Now! LIVE W e hear on the news that the government had to reorganize the CIA, or that
Ford Motor Company laid off 30,000 employees and changed how it organ-
ized its car divisions. Often, when we think about “organizational change,” it’s
not strategic, technical, or behavioral change that comes to mind, but reorganiz-
ing. In this section, we look at reorganizing and at the closely related topics of
reengineering and process management. These are all examples of structural
organizational change.
Reorganizing
reorganizing or structural Reorganizing or structural change means changing the company’s organiza-
change: changing one or more tional structure.
aspects of the company’s Managers reorganize all the time. GE’s CEO Jeffrey Immelt reorganized his
organizational structure
firm’s huge GE Capital division. He broke it into four divisions, with their four
managers now reporting directly to him rather than to the former GE Capital
head. DaimlerChrysler’s U.S. truck maker used to be one part of DaimlerChrysler’s
commercial vehicles division. DaimlerChrysler recently reorganized its commer-
cial vehicles division. Daimler split it into a new, separate truck group, and into
divisions for vans and buses.15 According to a Daimler spokesperson, having all
commercial vehicles in one division created “an artificial layer of administration
Managing Now: Reorganizing, Reengineering, and Business Process Management ■ 309
over trucking which will no longer be present” after the

reorganization.16 The reorganization created a “pure
truck group.” The new organization means that “. . .
management can concentrate on the relevant func-
tions [necessary to run the truck business] and further
integrate the truck divisions, and to make the truck
group comparable for benchmark purposes to other
competing truck groups.”17 The other products (vans
and buses) that used to be part of Daimler’s commer-
cial vehicle division (along with trucks) now constitute
one separate division.
Structural changes like these tend to trigger em-
ployee resistance. New structures mean new report-
ing relationships, and some will view the change as
demotions. New structures may also mean new tasks
and job descriptions (task redesign) for employees.
People often have an affinity for predictability and the
DaimlerChrysler recently reorganized its commercial
status quo.
vehicles division by splitting it into a new, separate truck
Still, reorganizing is a familiar organizational
group, and into divisions for vans and buses.
change technique. For example, after dismissing
thousands of employees, Lucent needed a new orga-
nizational structure. The former CEO had organized the company around eleven
different businesses.18 His successor argued that the eleven-division structure was
too unwieldy and downsized to five and then to two units. One unit, Integrated
Network Solutions, handles landline-based businesses, such as optical networks
and phone-call switching. Another, Mobility Solutions, focuses on Lucent’s wire-
less products. Today, a revitalized Lucent has merged with France’s Alcatel.
● Two Basic Questions When contemplating a reorganization, the manager

needs to address two basic questions: (1) how effective is our current organizational
structure? and (2) if we do restructure, how big a reorganization do we require?
● Reorganizing Question 1: How Effective Is Our Current Organizational

Structure? The manager begins by determining how effective the current or-
ganizational structure is in helping the company achieve its goals. After all, if the
current organizational structure works, why change? The manager can apply nine
tests here, as follows:19
1. The market advantage test. Does the organizational design make sense in
terms of your company’s strategy?20 For example, if the strategy involves
expanding overseas, an organizational structure that had no provision for
addressing the markets abroad should raise a red flag. The rule of thumb here
is this: If a single unit is dedicated to a single segment (to a single market,
product, geographic area), the segment is receiving sufficient attention. If no
unit has responsibility for the segment, the design is flawed and should be
revamped. The DaimlerChrysler reorganization we mentioned earlier, which
created the pure truck group, illustrates dedication.
Similarly, Volkswagen (VW) considered reorganizing its nine brand divisions
into three operational divisions—one for premium cars, one for mass-market
cars, and one for commercial vehicles.21 One intent of this reorganization is to
enable the firm to better focus on what it sees as VW’s three separate market
segments: premium brands (Audi, Bugatti, Bentley, and Lamborghini), mass
brands (Volkswagen), and commercial vehicles.
2. The parenting advantage test. Does your current structure help the corporate
parent add value to the departments and subsidiaries? For example, investors
periodically ask, Would it not be more efficient for each of GE’s separate divi-
sions to spin off and run themselves rather than to remain part of GE’s overall
structure? GE says no. For example, the current GE structure helps ensure that
modern management techniques devised in one unit quickly spread to the
others.
3. The people test. Does your design reflect the strengths, weaknesses, and moti-
vations of your people?22 For example, after PepsiCo purchased Quaker Oats
Co., PepsiCo reorganized its business units partly because of the strengths of
some executives it inherited with the Quaker purchase. Robert Morrison,
Quaker’s CEO, quickly assumed responsibility for PepsiCo’s Tropicana juice
unit, while continuing to oversee Quaker.
4. The feasibility test. The basic question here is, What could stand in the way of
successfully implementing a new organizational structure? For example, 3M
Company’s new CEO considered not changing that company’s structure. He
was afraid that 3M was so collegial that making the tough choices required by
a reorganization would trigger too much resistance.23 He decided that the
risks of staying with the old structure were too great. He anticipated the
potential constraints and dealt with them.
5. The specialist culture test. Does your design protect departments that need
distinct cultures? For example, 3M is known for the number of new products
its engineers produce (including Post-it Notes). Its organizational structure
needs to support that innovative engineering spirit.24
6. The difficult-links test. Does your structure address the hard-to-coordinate
relationships? For example, in Chapter 10, we saw that the product develop-
ment process in some high-tech firms requires coordination by special
new-product development departments. These departments coordinate the
research and development (R&D), sales, and manufacturing departments.
7. The redundant-hierarchy test. Does your organizational structure have too
many levels and units? For example, Microsoft recently eliminated several
management layers to make sure customers get quicker answers to their
inquiries.
8. The accountability test. Is it clear who is responsible for what? For example, if
a problem arose (such as a dramatic sales decline) for a particular product
line, could you quickly identify the manager who is responsible? Daimler re-
organized its truck division in part to ensure that managers were solely and
clearly responsible for truck performance.
9. The flexibility test. Does your organizational structure foster innovation and
responsiveness, or does it stifle it?25 This is one reason Intuit’s CEO breaks his
new ventures off into small, self-contained units. Such an approach ensures
that their managers can develop their businesses without being stifled waiting
for answers from the parent company.
● Reorganizing Question 2: How Big a Reorganization Do We Require?

If the current organization is not adequate, the manager may have to reorganize.
How big a reorganization is required? Sometimes, the manager can just fine-tune
F IGURE 11.1 When you identify a problem with your design, first look for ways to fix it without
substantially altering it. If that doesn’t work, you’ll have to make fundamental
Is a New Structure Really changes. Here’s a step-by-step process for resolving problems:
Required?
Steps Not Involving Major Design Change
MODIFY WITHOUT CHANGING THE UNITS.

■
Refine the allocation of responsibilities (for example, clarify powers and responsibilities).
■
Refine reporting relationships and processes.
■
Refine lateral relationships and processes (for example, define coordination mechanisms).
■
Refine accountabilities (for example, define more appropriate performance measures).
REDEFINE SKILL REQUIREMENTS AND INCENTIVES.

■Modify criteria for selecting people.
■Redefine skill development needs.
■Develop incentives.
SHAPE INFORMAL CONTEXT.

■Clarify the leadership style needed.
■Define norms of behavior, values, or social context.
Steps Involving Major Design Change
MAKE SUBSTANTIAL CHANGES IN THE UNITS.

■Make major adjustments to unit boundaries.
■Change unit roles (for example, turn functional units into business units or shared services).
■Introduce new units or merge units.
CHANGE THE STRUCTURE.

■Change reporting lines.
■Create new divisions.
NOTE : It may be possible to fix the organizational design without major changes. The first (top) section of this figure shows
how the manager can fine-tune the organization and accomplish what needs to be done without making big changes. If these
SOURCE: Adapted from Michael Goold and won’t work, the manager may have to make the sorts of major changes listed in the figure’s second (bottom) section.
Andrew Campbell,“Do You Have a Well- If the company does require a major reorganization, the guidelines in Chapter 10 apply, for example, regarding the pros and
Designed Organization?” Harvard Business cons of product versus functional structures and delegating authority. After designing a possible new structure, the manager can
Review, March 2002, p. 124. then again apply the nine tests described on pages 309–310 to test it and to ensure the new design passes muster.
the current structure. For example, it might be sufficient to just clarify employees’
responsibilities or reporting relationships rather than reorganize the whole com-
pany. On the other hand, the situation may require a more dramatic change. At
Microsoft, the CEO decided he had to reorganize the entire structure around three
core divisions. The checklist in Figure 11.1 helps the manager decide if fine-tuning
or a major change is required.
Business Process Reengineering

Today, reorganizing doesn’t mean just changing departments from functional to
divisional, or delegating more authority. Instead, it can mean reorganizing or
reengineering the company’s basic business processes. As we saw in Chapter 10,
every business uses business processes to get its work done. For example, banks
have a loan-approval process. This process consists of activities such as getting
loan applications, reviewing creditworthiness, and inspecting the property. One
department usually does its part of the task, and then hands the task to the next
department, like a relay race. We saw that business process reengineering means re-
designing business processes, usually by combining steps so that small multifunc-
tion process teams use information technology to do the jobs formerly done by a
sequence of departments. The basic approach is to:
1. Identify a business process to be redesigned (such as approving a mortgage
application).
2. Measure the performance of the existing processes.
3. Identify opportunities to improve these processes.
4. Redesign and implement a new way of doing the work, usually by assigning
ownership of formerly separate tasks to an individual or team that uses new
computerized systems to support the new arrangement.
We illustrate reengineering in the Window on Managing Now feature.

Reengineering the Loan Process
Here is how one bank reengineered its mortgage- (either in the same physical cell or space, or connected via
approval process.26 Previously, a mortgage applicant com- information technology) to complete a task that the firm
pleted a paper loan application that a bank employee then formerly did sequentially. This bank reengineered the
entered into the bank’s computer system. The application mortgage-application process by replacing the sequential
then moved through six different departments, where operation with a cell or multifunction mortgage-approval
employees such as credit analysts and underwriters per- team. Loan originators in the field now enter the mortgage
formed their tasks. This was too time-consuming for the application directly into wireless laptop computers, where
bank to be competitive. Borrowers wanted quick an- software checks it for completeness. The information then
swers. Squeezing several steps out of a loan-approval goes electronically to regional production centers. Here,
process may also save a bank $1,000 or more per loan. specialists (like credit analysts and loan underwriters)
The bank reengineered its mortgage-application process convene electronically, working as a team to review the
so that it required fewer steps and reduced processing mortgage together—at once. After they formally close
time from seventeen days to two.We illustrate the change the loan, another team of specialists takes on the task of
in Figure 11.2. servicing the loan.
As in this example, reengineering often entails having As at this bank, reengineering usually triggers many
a small team of specially trained employees work together organizational changes. For example, after creating several
loan-approval teams, the bank could eliminate the sepa- The employees also needed additional training to use the
rate credit-checking, loan-approval, and home-inspecting new system. This all could have, but did not, trigger em-
departments from its organization chart. Reengineering ployee resistance.The bank headed that resistance off by
here also required reorganizing some departments and dealing with employees’ concerns before implementing
delegating more authority to the loan-approval teams, the change.
who now did their jobs with less supervisory oversight.
F IGURE 11.2
Redesigning the Mortgage-Application Process
By reengineering the mortgage-application process, the bank will be able to handle increased
paperwork much more quickly.
BEFORE
Prior to reengineering, the paper loan
application went from department Bank President
to department like a relay race.
Field Loan Credit Property Loan-Approval Loan Billing and

Originators Analysis Inspection Communications Closing Accounting
AFTER
After reengineering, the field loan originators took the applications on their laptops, and then
electronically transmitted the loans to the loan-processing teams, which met electronically.
Multifunction
Loan-Processing
Teams
Billing and
Loan-Closing
Accounting
Credit Department
Department
Analyst
Loan-Approval Property
Communications Inspector
Companies’ experiences with reengineering illustrate the importance of over-

coming employee resistance. Reengineering failure rates run as high as 70 per-
cent.27 When reengineering does fail, it is often due to behavioral factors. For
example, it would do the bank little good to reengineer its loan process if the field
loan originators refuse to take the time to complete the online applications com-
pletely. Similarly, reengineering without considering the new loan-approval
teams’ skill requirements, training, and reporting relationships would have been
futile. John Champy, a reengineering expert, says that reengineering is not just
about changing processes, but also “. . . a matter of rearranging the quality of peo-
ple’s attachments—to their work and to each other.”28 The manager must prepare
employees for the change, to reduce resistance and also to make sure they have
the knowledge, skills, and attitudes they need to do their new jobs.
● Managing Now Reengineering also illustrates how managers use informa-

tion technology (laptops, fax, cell phones, PDAs, software, the Web, and so on) to
change management processes. In this case, information technology (IT) makes
the bank’s new loan-approval process possible. Laptops and special software en-
able the loan originators in the field to create a complete loan application. The
bank’s Web portal enables them to send it to the internal loan-processing team.
Decision support software and the Web enable even geographically dispersed
loan-processing team members to work together virtually to process the loan. And
the bank’s enterprise systems automatically provide other bank units such as
billing, accounting, and top management with the loan-related information they
need to do their jobs.
Business Process Management

business process Business process management (BPM) is the automation, coordination, and
management (BPM): the continuous improvement of the many assets and tasks that make up a company’s
automation, coordination, and existing business processes.29 The assets include, for instance, the employees who
continuous improvement of the
make the process work, as well as information technology and physical assets
many assets and tasks that make
up a company’s existing such as trucks and computer equipment.
business processes Business process reengineering and BPM both involve changing business
processes. However, business process reengineering projects tend to be one-time
efforts that aim to produce dramatic reorganizations of the handful of major
business processes that management believes are keeping the company from be-
coming world-class.30 Business process management is an ongoing process
aimed at making incremental improvements in existing processes, continuously,
over time.31
● BPM in Practice In practice, managers use special business process man-

agement software to analyze, adapt, and continuously manage and improve their
business processes.32 These software suites help the company improve the effi-
ciency and timeliness of its business processes. For example, TIBCO Company’s
TIBCO Staffware Process Suite includes several software packages that help man-
agers continuously manage and improve their business processes. The Integrated
Modeling package enables managers to create a flowchart of the business process
in question, as it is now and as it might be (see Figure 11.3). The Analysis package
enables the manager to measure and analyze the efficiency of the business
process. For example, the manager might use it to formulate key performance in-
dicators (such as “hours required to fulfill an order” and then to continuously
Dealing with Resistance to Change ■ 315
F IGURE 11.3 Activity B
Creating a Flowchart with

Project Software
Activity A Activity D
X
Activity C
SOURCE: Copyright Tibco Software Inc.All NOTE: Systems such as TIBCO’s process suite help the manager “flowchart” the business
rights reserved. Reprinted by permission. process activities and improve the overall process.
monitor the process and improve it.33 TIBCO’s business process management
suite also enables the manager to model and simulate changes to the business
process, to study what effects a change might have on efficiency.34
There is something to say about doing things incrementally. Whereas the
results of many large reengineering projects are less than satisfactory, the more
incremental BPM seems to raise productivity and lower costs more consistently.35
Perhaps this is true in part because the incremental approach tends to be less
threatening and thus incurs less employee resistance.
Dealing with Resistance to Change

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Managing Now! LIVE
A fter deciding what to change, the manager must decide how to actually im-
plement the change. The manager’s main concern is how to deal with and
minimize employee resistance. Here, the manager’s options range from unilater-
ally and authoritatively instituting the change to having the employees themselves
decide what to change and how to change it.
Overcoming resistance is often the hardest part of leading a change. Niccolò
Machiavelli, a shrewd observer of sixteenth-century Italian politics, put it this way:
“There is nothing so difficult to implement as change, since those in favor of the
change will often be small in number while those opposing the change will be nu-
merous and enthusiastic in their resistance to change.”36 The fact that a change is
advisable or even crucial for the company’s survival doesn’t mean employees will
accept it. Even the company’s key people—perhaps including some top and mid-
dle managers—may resist it.
Why Do People Resist Change?

Dealing with employee resistance is challenging because the resistance isn’t nec-
essarily based on rational factors. Professor Paul Lawrence said that it’s usually not
the technical aspects of a change employees resist, but its social consequences—
“the changes in their human relationships that generally accompany the technical
change.”37 Thus, they may see in the change diminished responsibilities for them-
selves and, therefore, lower status in the organization and less job security.
In his book Beyond the Wall of Resistance, consultant Rick Maurer says that
Level 1 resistance stems from lack of information or honest disagreement over the
facts. With Level 2 resistance, people are afraid—that the change may cost them
their jobs, or that they will lose face, for instance. He says treating all resistance as
if it were Level 1 (based on a lack of understanding) can undermine the manager’s
change efforts. For example, don’t use “slick visual presentations to explain change
with nice neat facts, charts, and time lines, when what people really want to hear
is: What does this mean to them?”38
● Individual Resistance to Change Furthermore, some people are more re-

sistant to change than are others. One study focused on six organizations—two
European companies, two Australian banks, a U.S. university, and a Korean
manufacturing firm. Three personality traits—tolerance for ambiguity, having a
positive self-concept, and being more tolerant of risk—significantly predicted
effectiveness in coping with change.39 Managers with the lowest self-image, the
least tolerance for ambiguity, and the least tolerance for risk were the most resis-
tant. Industrial psychologists use tests like the Resistance to Change Scale to meas-
ure a person’s inclination to resist change. Statements used for measurement
include, “I’d rather be bored than surprised,” “I generally consider change to be a
negative thing,” “When I am informed of a change of plans, I tense up a bit,” and “I
don’t change my mind easily.”40
It’s not just employees who may resist the change. For example, when Pirelli,
the manufacturer of automobile tires, decided to integrate its customers and deal-
ers into its enterprise systems, Pirelli had to ensure that dealer resistance did
not torpedo the change. Pirelli and its Accenture consultants therefore employed
numerous initiatives.41 For example, Pirelli’s marketing department produced
promotions explaining the new system’s benefits to dealers.
Overcoming Resistance to Change

Psychologist Kurt Lewin proposed a famous model to summarize the basic
process for implementing a change with minimal resistance. To Lewin, all behav-
ior in organizations was a product of two kinds of forces: those striving to maintain
the status quo and those pushing for change. Implementing change thus meant
either reducing the forces for the status quo or building up the forces for change.
Lewin’s process consists of three steps: unfreezing, moving, and refreezing.
unfreezing: a step in Unfreezing means reducing the forces pressing for the status quo. The usual
psychologist Kurt Lewin’s model way to accomplish this is by presenting a provocative problem or event. The goal
of change that involves reducing is to get employees to recognize the need for change and to search for new solu-
the forces for the status quo, tions. Attitude surveys, interview results, or informational meetings often provide
usually by presenting a
provocative problem or event to
such provocative events. Some managers accomplish this by creating a crisis—
get people to recognize the need such as by suggesting that bankruptcy might be imminent if things don’t change
for change and to search for new fast.
solutions Having grabbed the employees’ attention, the manager leading the change
must move them in the desired direction. Moving means developing new behav-
moving: a step in psychologist iors, values, and attitudes by applying one or more organizational change tech-
Kurt Lewin’s model of change
niques (such as having employees participate in a conflict resolution meeting). We
aimed at using techniques and
actually altering the behaviors, discuss organizational change techniques later in this chapter.
values, and attitudes of the Lewin knew that just executing the change is not enough. People tend to re-
individuals in an organization vert to their old ways of doing things unless management reinforces the new ways.
Whether it’s a new diet, a new savings plan, or a new organizational procedure,
Dealing with Resistance to Change ■ 317
Lewin knew the manager had to reinforce the change. Lewin called this reinforce-
refreezing: a step in ment refreezing, which means instituting new systems, procedures, and incen-
psychologist Kurt Lewin’s model tives to maintain the changes that were made.
of change aimed at preventing a
return to old ways of doing things
by instituting new systems and Choosing the Right Method for
procedures that reinforce the
new organizational changes Overcoming Resistance
Table 11.1 summarizes some methods that managers use to overcome resistance—
and when to use them. For example, use education and communication when
inaccurate or missing information is contributing to employee resistance.
Coercion—forcing through the change—can be a fast way of pushing through a
change, particularly when speed is essential. This can work when the manager has
the power to force the change. However, it can be risky if it leaves influential em-
ployees with the will and ability to undermine the change. The Practice IT feature
shows how Bill Zollars overcame resistance at Yellow Transportation.
T ABLE 11.1
Six Methods for Dealing with Resistance to Change
Method for Dealing
with Resistance Commonly Used When . . . Advantages Drawbacks
Education and There is a lack of information Once persuaded, Can be time-consuming.
communication or there is inaccurate people will often help with
information. implementing the change.
Participation and The managers leading the People who participate Can be time-consuming,
involvement change do not have all will be committed to and can backfire if
the information they need implementing change. recommendations not
to design the change, or when accepted.
others have power to resist.
Facilitation and People are resisting because No other approach Can be time-consuming
support of fear and anxiety. works as well when fear and expensive, yet
is the problem. still fail.
Negotiation and Someone or some group Can be a relatively easy Can be too expensive
agreement will clearly lose out in a way to avoid major if it prompts other
change, and that group has resistance. groups to negotiate,
power to resist. too.
Manipulation and Other tactics won’t work Can be relatively quick Can lead to future
co-optation or are too time-consuming. and inexpensive. problems if people
feel tricked or
manipulated.
Coercion Speed is essential, and the It is speedy and can Risky if it leaves people
change initiators possess overcome any kind angry at the initiators.
power. of resistance.
Source: Adapted and reprinted by permission of Harvard Business School Publishing. “Six Methods for Dealing
with Change,” from “Choosing Strategies for Change,” by John P. Kotter and Leonard A. Schlesinger, Harvard
Business Review, March–April 1979. Copyright © 1979 by the President and Fellows of Harvard College; all
rights reserved.
PRACTICE IT
Bill Zollars
To turn Yellow Transportation around, Bill Zollars knew he The change Zollars led was successful. For example,
had to provide the company and its workers with state- his team equipped each dockworker with a wireless mo-
of-the-art technology. He also knew this technology bile data terminal. Now, even before the truck arrives, the
would dramatically change how his employees did things, worker can see what’s on board and when the truck is
and that getting their acceptance was therefore vital.The pulling into the dock.42 Managers back at headquarters
new technology gives the employees the information can monitor progress and send additional employees if
they need to solve problems for customers quickly. But help is required.
this also meant that the employees needed additional Soon, Zollars’ changes had turned the company
decision-making authority, as well as training to use the around. In 2002 Yellow Freight System Inc. changed its
new equipment. name to Yellow Transportation Inc. to reflect the com-
With 25,000 people in hundreds of locations around pany’s transformation to a full-service global transporta-
the country, Zollars spent over a year going from termi- tion provider. In 2003 Yellow acquired Roadway Corp. to
nal to terminal, standing on loading docks and explaining become Yellow Roadway Corp. In 2006 Yellow Roadway
the changes. Linking employees with the new technology Corp. changed its name to YRC Worldwide Inc. to better
and giving them the authority to make fast, on-the-spot reflect its capabilities today as a global entity. Bill Zollars is
decisions (empowering them) helped to win their com- now Chairman of the Board, President, and CEO of YRC
mitment and dedication to getting the job done fast. Worldwide Inc.
A Process for Leading Organizational Change

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Managing Now! LIVE G iven the need to deal with resistance to change, experts have proposed many
multistep models for leading an organizational change.43 The following ten-
step list provides a useful summary change process for managers:
1. Create a sense of urgency.
2. Decide what to change.
3. Create a guiding coalition and mobilize commitment.
4. Develop and communicate a shared vision.
5. Empower employees to make the change.
6. Implement the change.
7. Generate “short-term wins.”
8. Consolidate gains and produce more change.
9. Anchor the new ways of doing things in the company culture.
10. Monitor progress and adjust the vision as required.
Each of the ten steps will be discussed in the following subsections.
Create a Sense of Urgency44

Most experienced managers instinctively know that before taking action, they
have to unfreeze the old habits. They have to create a sense of urgency.
A Process for Leading Organizational Change ■ 319
Creating a sense of urgency has a double-barreled benefit. For those who

might want to resist the change, it can convince them of the need for the
change. And it may jar those who are neutral (or who simply don’t care) out of
their complacency. Techniques that managers use to create a sense of urgency
include:45
◗ Create a crisis by highlighting a financial loss, or exposing managers to major
weaknesses relative to competitors.
◗ Eliminate examples of excess such as company-owned country club facilities,
aircraft, or executive dining rooms.
◗ Set targets for revenue, income, productivity, and customer satisfaction so high
that they can’t be reached by those conducting business as usual.
◗ Send more data about customer satisfaction and financial performance to more
employees, especially pinpointing weaknesses relative to competitors.
Decide What to Change

In practice, as we explained earlier, the manager can change the firm’s strategy;
technology; structure; and/or the culture, attitudes, and skills of its people.
Create a Guiding Coalition

and Mobilize Commitment
It is usually imprudent for the owner or top manager to try to lead a change—
particularly a major change—him- or herself. People tend to associate major cor-
porate transformations—like what Bill Zollars achieved at YRC Worldwide Inc.—
with one leader. Realistically, however, no leader can accomplish a major change
alone. Most leaders create a guiding coalition of influential people. They become
the missionaries and implementers of change. The coalition should work as a
team and should include people with enough power to influence others to buy
into the change effort.
The manager must gather political support, and so should ensure he or she
has enough key players onboard so that those left out can’t easily block
progress.46 The coalition should also have the expertise, credibility, and leader-
ship skills required to explain and implement the change. One option is to create
one or more broad, employee-based task forces to diagnose the company’s prob-
lems. Doing so can produce a shared commitment to what the company can and
must improve.
Develop and Communicate a Shared Vision

Beyond the guiding coalition, the firm’s other employees also need a vision they
can rally around, a signpost on which to focus. As we saw in Chapter 7, a vision is
“a general statement of the organization’s intended direction that evokes emo-
tional feelings in organization members.” When Barry Gibbons became CEO of a
struggling Spec’s Music retail chain, its employees, owners, and bankers—all of its
stakeholders—required a vision around which to rally. Gibbons’s vision of a leaner
Spec’s offering both concerts and retail music helped to provide the needed sense
of direction.
Having a vision is useless unless the employees

share that vision. Change expert John Kotter says, “The
real power of a vision is unleashed only when most of
those involved in an enterprise or activity have a com-
mon understanding of its goals and direction.”47 Key
steps in communicating a vision include:
◗ Keep it simple. For example, “We are going to become
faster than anyone else in our industry at satisfying
customer needs.”
◗ Use multiple forums. Try to use every channel
possible—big meetings and small, memos and news-
papers, formal and informal interaction—to publi-
cize the vision.
◗ Use repetition. Ideas sink in best after people have
When Barry Gibbons became CEO of a struggling Spec’s
Music retail chain, all of its stakeholders required a vision heard them many times.
around which to rally. ◗ Lead by example. Walk the talk so that your behaviors
and decisions are consistent with the vision you
advocate.
Empower Employees to Make the Change

In one study of organizational change, the researchers found that employees
would not even try to help implement the change unless they believed they had
the skills and authority to effect the change.48 The manager must always ask, Do
our employees have the authority and skills to carry out their roles in the change
effort? The employees must feel they’re empowered to do their new jobs.
Figure 11.4 summarizes typical barriers to such employee empowerment. For
example, employees may not have the new skills their new jobs require, and so
they couldn’t do their new jobs if they wanted to. At Allied Signal (now Honeywell),
F IGURE 11.4 Formal structures

make it
Barriers to Empowerment difficult to act.
Bosses discourage Employees understand

A lack of
actions aimed at the vision and want
needed skills
implementing the to make it a reality,
undermines action.
new vision. but they are boxed in.
SOURCE: Reprinted by permission of Harvard

Personnel and
Business School Publishing. From Leading
information systems
Change by John P. Kotter. Boston, Mass.,
make it difficult
1996, p. 102. Copyright © 1996 by the
President and Fellows of Harvard College,
to act.
all rights reserved.
A Process for Leading Organizational Change ■ 321
CEO Lawrence Bossidy had to create a leaner, more efficient company. He began
by putting all of his 80,000 people through quality training. They could then apply
this new knowledge to helping Allied improve its quality.49
Implement the Change

At about this point, the manager will implement the core features of the change. At
Bill Zollars’ YRC Worldwide, for instance, the company’s technology consultants
rolled out the actual new technology the employees were to use. At Microsoft, the
CEO implemented the new divisional structure.
Generate “Short-Term Wins”

Employees should not have to wait years before deciding if they’re going in the
right direction. They need periodic feedback: what change experts call “short-term
wins.”50 The coalition guiding the change in one company aimed to produce one
particular new product about twenty months after the start of its organizational
change effort.51 It selected the new product in part because it knew that the intro-
duction was doable. Accomplishing it sent a strong signal that the broader, longer-
term change was also doable.
Consolidate Gains and Produce More Change

Next, expand and capitalize on the short-term successes by having employees
produce more change. To do this, review and change any additional organizational
systems, structures, and policies that don’t fit well with the company’s new
direction.
Anchor the New Ways of Doing Things

in the Company Culture
The corporate culture must support the changes the manager envisions. He or she
must therefore ask, What underlying values and culture does our change imply?
For example, he or she might change the bank’s reengineered mortgage-approval
team’s incentive plan to reward the team, rather than individuals, to send the
signal that they must work together or their paychecks will suffer.
Monitor Progress and Adjust

the Vision as Required
Finally, monitor progress and results of the change effort. One firm administered
morale surveys to monitor employees’ reactions to the changes. Let’s look at what
Carlos Ghosn did at Nissan.
Carlos Ghosn Leads a Change at Nissan

The approach used by Carlos Ghosn in his dramatic turnaround of Nissan Motors
illustrates how a manager can lead an effective organizational change. When the
Renault executive agreed to lead the turnaround at Renault’s new strategic part-
ner, Nissan had lost billions of dollars, and it had billions more in debts.52
T ABLE 11.2
Some of Nissan’s Cross-Functional Teams (CFTs)
Manufacturing and Sales and Phaseout of Products and
Purchasing Team Logistics Team Marketing Team Parts Complexity Team Organization Team
CFT (cross-functional • Executive VP of • Executive VP of • Executive VP of • Executive VP of domestic • Executive VP of
team) Leaders purchasing manufacturing overseas sales sales and marketing finance (CFO)
• Executive VP of • Executive VP of and marketing • Executive VP of product • Executive VP of
engineering product planning • Executive VP of planning manufacturing
domestic sales
and marketing
Day-to-Day CFT Pilot • General manager • Deputy general • Manager of overseas • Manager of product • Manager of human
of purchasing manager of sales and marketing planning resources
manufacturing
Functions Represented • Purchasing • Manufacturing • Sales and marketing • Product planning • Product planning
on Team • Engineering • Logistics • Purchasing • Sales and marketing • Sales and marketing
• Manufacturing • Product planning • Manufacturing • Manufacturing
• Finance • Human resources • Engineering • Engineering
• Finance • Finance
• Purchasing • Purchasing
Team’s Focus • Supplier relationships • Manufacturing • Advertising structure • Manufacturing efficiency • Organizational
• Product specifications efficiency and cost- • Distribution structure and cost-effectiveness structure
and standards effectiveness • Dealer organization • Employee incentive
• Incentives and pay packages
Team’s Objectives, • Cut number of • Close three assembly • Move to a single global • Reduce number of plants • Create a worldwide
Based on Its Review suppliers in half plants in Japan advertising agency in Japan from 7 to 4 by 2002 corporate
• Reduce costs by 20% • Close two power- • Reduce SG&A costs • Reduce number of platforms headquarters
over three years train plants in Japan by 20% in Japan from 24 to 15 by 2002 • Create regional
• Improve capacity • Reduce distribution • Reduce by 50% the variation management
utilization in Japan subsidiaries by 20% in parts (due to differences committees
from 53% in 1999 to in Japan in engines or cars) • Empower program
82% in 2002 • Close 10% of retail directors
outlets in Japan • Implement
performance-
oriented
compensation
Source: Adapted from Carlos Ghosn, “Saving the Business Without Losing the Company,” Harvard Business Review, January 2002, pp. 40–41.
Organizational Development and Conflict Management ■ 323
Ghosn sized up the external and internal pres-

sures he faced, including the consensus-oriented
Japanese culture. As he says, “I knew that if I had
tried simply to impose the changes from the top, I
would have failed. Instead, I decided to use as the
centerpiece of the turnaround effort a set of cross-
functional teams.”53
Table 11.2 summarizes Ghosn’s team approach. He
organized cross-functional teams, each with responsi-
bilities for the main tasks required for Nissan to have a
successful turnaround. (Table 11.2 shows five of the
teams.) Each team had several executive leaders, a day-
to-day operational “pilot,” and specific assignments.
Each team consisted of about ten members, all middle
managers with line responsibilities (except for the
executive leaders).
Based on recent results, the changes designed by
Carlos Ghosn led a transformational change at Nissan
Motors.
and pushed through by Nissan’s teams were successful.
In 2005, Renault brought Carlos Ghosn back to Paris
and awarded him with its presidency. Within a year or two, it was evident more
work was required at Nissan. With sales diminishing, even Ghosn’s successful
turnover required more work.
Organizational Development and Conflict Management

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ACE the Test
Managing Now! LIVE O rganizational development (OD) is a special approach to organizational
change in which the employees formulate and implement the change, usually
with the aid of a trained facilitator. OD has three distinguishing characteristics:
organizational
development (OD): an 1. It is based on action research, which means collecting data about a group,
approach to organizational department, or organization, and then feeding that data back to the employ-
change in which the employees ees. Then the group members themselves analyze the data and develop
themselves formulate the hypotheses about what the problems in the unit might be.
change that’s required and
implement it, usually with the 2. It applies behavioral science knowledge to improve the organization’s
aid of a trained consultant effectiveness.
action research: the process 3. It changes the organization in a particular direction—toward improved prob-
of collecting data from
employees about a system in
lem solving, responsiveness, quality of work, and effectiveness.54
need of change, and then OD started years ago with human process interventions. These interven-
feeding that data back to the
tions aimed to help employees better understand and modify their own and
employees so that they can
analyze it, identify problems, others’ attitudes, values, and beliefs—and thereby improve the company.
develop solutions, and take Today, OD practitioners aren’t involved in just changing participants’ atti-
action themselves tudes, values, and beliefs. However, OD’s distinguishing characteristic has stayed
human process the same: to have the employees themselves analyze the situation and develop the
interventions: organizational solutions. We’ll look at the four main types of OD interventions: human process,
change techniques aimed at technostructural, human resource management, and strategic (see Table 11.3).
enabling employees to develop
a better understanding of their
own and others’ behaviors for Human Process Applications
the purpose of improving those
behaviors so that the Human process applications aim at improving employees’ human relations skills.
organization benefits The goal is to provide employees with the insight and skills they need to analyze
T ABLE 11.3
Examples of OD Interventions and the Organizational Levels They Affect
Primary Organizational Level Affected
Interventions Individual Group Organization
Human Process
T-groups ⫻ ⫻
Process consultation ⫻
Third-party intervention ⫻ ⫻
Team building ⫻
Organizational confrontation meeting ⫻ ⫻
Intergroup relations ⫻ ⫻
Technostructural
Formal structural change ⫻
Differentiation and integration ⫻
Cooperative union-management projects ⫻ ⫻ ⫻
Quality circles ⫻ ⫻
Total quality management ⫻ ⫻
Work design ⫻ ⫻
Human Resource Management
Goal setting ⫻ ⫻
Performance appraisal ⫻ ⫻
Reward systems ⫻ ⫻ ⫻
Career planning and development ⫻
Managing workforce diversity ⫻
Employee wellness ⫻
Strategic
Integrated strategic management ⫻
Culture change ⫻
Strategic change ⫻
Self-designing organizations ⫻ ⫻
their own and others’ behavior more effectively. With this new insight, they should
be able to solve interpersonal and intergroup problems more intelligently. Sensi-
tivity training, team building, and survey research are three classic techniques
used in these applications.
Sensitivity training (also known as laboratory or t-group

training) was one of the earliest OD techniques. It aims to in-
crease the participant’s insight into his or her own behavior
and the behavior of others by encouraging an open expression
of feelings in the training group. Typically, ten to fifteen people
meet, usually away from the job. The focus is on the feelings
and interactions of group members. Facilitators encourage
participants to portray themselves as they are now, in the
group, rather than in terms of past experiences.55 T-group
training is obviously very personal in nature, so it’s not surpris-
ing that it is controversial. Its use has diminished markedly.56
OD’s action research emphasis is perhaps most evident
in team building. This is a special process for improving the
effectiveness of a team. The facilitator collects data concern-
ing the team’s performance and concerns, and then feeds it
back to the members of the team. The participants examine,
explain, and analyze the data. Then they develop specific ac-
tion plans or solutions for solving the team’s problems.57
Some firms use survey research to create a sense of
urgency. Here, the facilitator/consultant has employees
complete attitude surveys. He or she then feeds back the data
to top management and to the appropriate group or groups.
Team-building exercises like this one can be effective
at building team loyalty and motivation.
The survey data may provide a lucid, comparative, graphic
illustration of the fact that the organization has problems.
sensitivity training: the basic

aim of this organizational Technostructural Applications
development technique is to
increase participants’ insight OD practitioners are increasingly involved in efforts to change the structures,
into their own and others’ methods, and job designs of firms. Technostructural interventions include
behavior by encouraging an changes such as reorganizing the company and changing the designs of specific
open expression of feelings in a jobs. For example, in a formal structure change program, employees collect
trainer-guided group; also called data on existing structures and analyze them. The purpose is to jointly redesign
laboratory or t-group training
and implement new organizational structures.
team building: the process of
improving the effectiveness of a
team through action research or Human Resource Management Applications
other techniques
OD practitioners also use action research to help employees analyze and change
survey research: the process personnel practices. Targets of change include the performance appraisal system
of collecting data from attitude and reward system. Another typical effort involves using action research to insti-
surveys filled out by employees tute workforce diversity programs. These aim to boost cooperation among a firm’s
of an organization, and then diverse employees.
feeding the data back to
workgroups to provide a basis
for problem analysis and action Strategic Applications
planning
Strategic interventions are companywide OD programs aimed at achieving a
formal structure change
program: an intervention better fit among a firm’s strategy, structure, culture, and strengths and weaknesses.
technique in which employees Integrated strategic management is one example. Using action research, it in-
collect information on existing volves four steps:
formal organizational structures
and analyze it for the purpose of 1. Analyze current strategy and organizational design. Senior managers and
redesigning and implementing other employees utilize models such as the SWOT matrix (explained in Chap-
new organizational structures ter 5) to analyze the firm’s current strategy and organizational design.
strategic intervention: an 2. Choose a desired strategy and organizational design. Based on the analysis,
organizational development senior management formulates a strategic vision, objectives, and plan, and an
application aimed at effecting a organizational structure for implementing them.
suitable fit among a firm’s
strategy, structure, culture, and 3. Design a strategic change plan. The group designs a strategic change plan: “an
external environments action plan for moving the organization from its current strategy and organi-
zational design to the desired future strategy and design.”58 It lays out how
integrated strategic management will implement the strategic change, including budgets.
management:
an organizational development
4. Implement the strategic change plan. The final step is to implement the strate-
program to create or change a
company’s strategy by analyzing gic change plan and then measure and review the results.59
the current strategy, choosing a
desired strategy, designing a ● The Global Manager OD practices such as sensitivity training that may be
strategic change plan, and acceptable in one context may be frowned upon in another. Managers thinking of
implementing the new plan
using OD interventions abroad, therefore, need to consider the cultural context. A
study of OD usage by U.S., Japanese, and European multinational corporations
and local Chinese firms in Hong Kong illustrates this.
There were distinct differences in OD usage between Western and Asian
firms. Chinese and Japanese firms generally used OD interventions less fre-
quently than did Western firms. In this study, the researchers also found that the
human process types of interventions (like sensitivity training) were least used,
even for the American firms, and that the Chinese firms were even less open to
individual and personal-level interventions than were European and U.S. firms.
The researchers concluded that the Chinese tended to be more skeptical of per-
sonal and confrontation-type interventions. On the other hand, local Chinese
firms did use HR-type interventions, for instance, to strengthen their reward
systems.60
Managing Interpersonal Conflict

Few things are potentially as deadly for a company’s performance as uncontrolled
conflict among employees or departments. Opposing parties put their own aims
above those of the organization, and the organization’s effectiveness suffers. Time
that they could have used productively evaporates when people hide information
and jockey for position. Managing conflicts like these is a major part of managers’
organizational change responsibilities.
The manager must size up the situation and decide what conflict-resolution
approach to use. For example, having the parties meet to confront the facts and
hammer out a solution is usually better than pushing problems under a rug.
Yet there are times when letting things cool down is advisable. Knowing which
conflict-resolution style or approach to use is an art.
● Interpersonal Conflict-Resolution Styles In practice, people usually don’t

rely on a single conflict-resolution style; they use several simultaneously.61 A study
illustrates this. The researchers studied how supervisors used several conflict-
resolution styles, such as confrontation. Table 11.4 summarizes (with definitions)
the possible conflict-resolution styles in this study. The researchers’ basic question
was, “Is using some combination of these styles more effective at resolving con-
flicts than others?” They analyzed videotapes of 116 police sergeants handling a
T ABLE 11.4
Conflict-Resolution Modes
Component Definition
Forcing Contending that the adversary do what you say in a
direct way
Confronting Demanding attention to the conflict issue
Process controlling Dominating the conflict-resolution process to one’s
own advantage
Problem solving Reconciling the parties’ basic interests
Compromising Settling through mutual concessions
Accommodating Giving in to the opponent
Avoiding Moving away from the conflict issue
Source: Evert Van De Vliert, Martin C. Euwema, and Sipke E. Huismans, “Managing Conflict with a Subordinate
or a Superior: Effectiveness of Conglomerated Behavior,” Journal of Applied Psychology, April 1995, pp. 271–281.
Copyright © 1995 by the American Psychological Association. Reprinted by permission.
standardized, scripted conflict with either a subordinate or a superior. The possi-

ble styles in this study (with examples) included:
◗ Confrontation. Confronting and thrashing around issues head-on, but civilly.
◗ Forcing. “If I am confronted by a roadblock, then I take the decision to some-

body higher up.”62
avoidance: moving away from
or refusing to discuss a conflict ◗ Avoidance. In general,
avoidance or smoothing over usually won’t resolve a
issue conflict. However, some problems do go away by themselves. And avoidance
may be your only option if one or both parties are highly emotional.
smoothing over: in conflict
management, diminishing or ◗ Process controlling. “We’re going to follow my agenda for this meeting and solve
avoiding a conflict issue this problem my way” is an example of process controlling. Process controlling
process controlling: means dominating the conflict-resolution process to one’s own advantage.
dominating the conflict- ◗ Compromise and collaboration. Compromise means each person gives up
resolution process to one’s own
advantage
something in return for reaching agreement. Collaboration means both people
work together to achieve agreement.
compromise: settling a
◗ Accommodating. “Calm down so we can work this out.”63 Accommodation
conflict through mutual
concessions means temporarily accommodating the other person, perhaps to calm him or
her down.
collaboration: a conflict-
management style in which both At least for these police sergeants, using three styles together—problem solving
sides work together to achieve while being moderately accommodating and still maintaining a strong hand in con-
agreement trolling the conflict-resolution process—was an especially effective combination.
accommodation: Figure 11.5 provides a self-assessment exercise for assessing one’s own
temporarily giving in to an conflict-resolution style, using a similar list of styles discussed above. Remember
opponent in an attempt to end a that most people are capable of adapting their styles to the situation and using
conflict several styles at once.
F IGURE 11.5
Your Conflict-Resolution Style
Indicate how often you do the following when you differ with someone.
When I Differ with Someone:
Usually Sometimes Seldom

1. I explore our differences, not backing down, but not imposing my view either.
2. I disagree openly, then invite more discussion about our differences.
3. I look for a mutually satisfactory solution.
4. Rather than let the other person make a decision without my input, I make sure that
I am heard and that I hear the other out.
5. I agree to a middle ground rather than look for a completely satisfying solution.
6. I admit I am half wrong rather than explore our differences.
7. I have a reputation for meeting a person halfway.
8. I expect to get out about half of what I really want to say.
9. I give in totally rather than try to change another’s opinion.
10. I put aside any controversial aspects of an issue.
11. I agree early on rather than argue about a point.
12. I give in as soon as the other party gets emotional about an issue.
13. I try to win the other person over.
14. I work to come out victorious, no matter what.
15. I never back away from a good argument.
16. I would rather win than end up compromising.
Scoring Key and Interpretation

Total your choices as follows: Give yourself 5 points for “Usually”; 3 points for “Sometimes”; and 1 point for “Seldom.” Then total
them for each set of statements, grouped as follows:
Set A: items 13–16 Set C: items 5–8

Set B: items 9–12 Set D: items 1–4
Treat each set separately.

A score of 17 or above on any set is considered high.
Scores of 8 to 16 are moderate.
Scores of 7 or less are considered low.
Sets A, B, C, and D represent conflict-resolution strategies:

A = Forcing/domination. I win, you lose.
B = Accommodation. I lose, you win.
C = Compromise. Both win some, lose some.
D = Collaboration. I win, you win.
Everyone has a basic or underlying conflict-handling style. Your scores on this exercise indicate the strategies you rely on most.
SOURCE: Adapted from Thomas J.Von de Embse, Supervision: Managerial Skills for a New Era (New York: Macmillian Publishing
Company, 1987), in Stephen Robbins and Philip Hunsaker, Training in Interpersonal Skills (Upper Saddle River, N.J.: Prentice
Hall, 1996), pp. 217–219.
CHAPTER SUMMARY
1. The manager’s change program can aim to alter 5. Methods of dealing with resistance include educa-
one of four basic things: The firm’s strategy, tech- tion and communication, facilitation and support,
nology, structure, and people/behavior/culture. In participation and involvement, negotiation and
practice, such changes are rarely compartmental- agreement, manipulation and co-optation, and
ized. Instead, the manager needs to take a systems coercion. Lewin suggests unfreezing the situation,
view of the change and its implications. perhaps by using a dramatic event to get people to
recognize the need for change.
2. Today, reorganizing a company by changing de-
partments and reporting relationships is only part 6. A ten-step process for actually leading organiza-
of the manager’s organizing responsibilities. Every tional change includes creating a sense of urgency,
business consists of various business processes. In deciding what to change, creating a guiding
a highly competitive global environment, man- coalition and mobilizing commitment to change
agers can gain a competitive advantage by using through a joint diagnosis of business problems, de-
information technology to make their processes as veloping and then communicating a shared vision,
efficient and agile as possible. removing barriers to the change and empowering
employees, implementing the change, generating
3. Business process reengineering projects tend to be
short-term wins, consolidating gains and produc-
one-time efforts that aim to produce dramatic re-
ing more change, anchoring the new ways of doing
organizations of the handful of major business
things in the company’s culture, and monitoring
processes that management believes are keeping
progress and adjusting the vision as required.
the company from becoming world-class. Busi-
ness process management is usually an ongoing 7. Organizational development (OD) is a special ap-
process aimed at making incremental improve- proach to organizational change that basically in-
ments in processes, continuously, over time. volves letting the employees themselves formulate
and implement the change that’s required, often
4. The hardest part of leading a change is overcoming
with the assistance of a trained consultant. Types
resistance. Resistance stems from several sources:
of OD applications include human process appli-
habit, resource limitations, threats to power and
cations, technostructuraI interventions, HR man-
influence, fear of the unknown, and altering em-
agement applications, and strategic applications.
ployees’ personal compacts.
1. Why do we say that no organizational change is 4. What are the ten steps in the organizational
ever compartmentalized? change process? Provide examples of each step.
2. List and give examples of the four main things a 5. What aspects of the change process did Carlos
manager can try to change in his or her organization. Ghosn apply at Nissan?
3. How exactly would you go about unfreezing a situ- 6. Briefly describe the conditions under which you
ation at work? would use education, participation, and coercion
to overcome resistance.
1. In teams of four to five students, use what you 2. Assume that you are the professor in a manage-
learned about organizational culture in this chap- ment class and you have a problem. Classes started
ter to describe the organizational culture in this last week, and the class did not get off to a good
class. List the specific things that you believe con- start. You arrived late, were snappy with the stu-
tributed to creating that culture and what specifi- dents, and gave them the impression that you’d
cally you would do to fine-tune the culture. be running a tough, dictatorial classroom. Several
students dropped the course, and most of the oth- average instead of the required 92, and you want
ers probably stayed only because the other sec- the grade changed to an A. (c) You want to go to
tions were full. You don’t want to have a miserable France on vacation this year, but your significant
semester. Form teams of four or five students, and other is concerned with the risks of flying and of
write out an outline, using the ten-step change being out of the United States. How can you get
process from page 318, that shows what exactly your significant other to change his or her mind?
you would change in your class (if you were the (d) You just applied for a job as marketing manager
professor) and how you would change it to have a for a local department store. The head of HR says
more pleasant and productive class. that you seem like a very good candidate but that
you don’t have quite enough experience. How
3. Working in teams of four to five students, explain
would you overcome his or her resistance?
specifically how you would apply each of the three
steps in Lewin’s change process to overcome resis- 4. Your college bookstore has a process for returning
tance to change in the following situations: (a) Your and getting credit for used textbooks. In teams of
brother is 100 pounds overweight. How would you four to five students, visit the bookstore; analyze
get him to go on a diet? (b) Your professor gave you that process; and explain, complete with a flow-
an A– instead of an A because you compiled a 91.9 chart, how you would reengineer the process.
CASE STUDY
Immelt Splits GE Capital
n his first major reorganization since taking over as nesses and the number of people reporting to Immelt
I CEO of General Electric (GE), Jeffrey Immelt said that
he was splitting GE’s huge GE capital finance division
are already quite large, and the new organization means
he’ll have three additional people reporting directly to
into four major parts. GE Capital produces about 40 per- him. Furthermore, there are some obvious synergies
cent of all of GE’s earnings, and the heads of its individ- among the four separate GE Capital divisions; there-
ual insurance, consumer finance, commercial finance, fore, it’s now going to be up to Immelt to ensure that he
and equipment units formerly reported to GE Capital provides the required coordination so that those syner-
chief executive Denis Nayden. He, in turn, reported to gies take place. Others point out that the sorts of im-
Jeffrey Immelt, along with the heads of GE’s various provements that Immelt says he wants—such as giving
other businesses, including NBC, appliances, and med- him a clearer idea of what each of the four divisions
ical equipment. Under the new organization, Immelt is doing—could have been accomplished without a
eliminated the position of GE Capital chief executive, major reorganization. In the past, for instance, GE’s for-
and the heads of GE Capital’s four main insurance, con- mer CEO, Jack Welch, personally reviewed major GE
sumer finance, commercial finance, and equipment Capital transactions. Another analyst pointed out that
units will now report directly to Immelt. “. . . [w]henever a high-level executive [such as Nayden]
In making the change, Immelt basically said that he departs, you have to be a little bit skeptical, and it raises
wanted more direct day-to-day control over GE Capital’s a red flag that perhaps there may be another shoe.”64
huge financial services businesses. He said, “This will
create a clearer line of sight on how our financial services
businesses operate and enhance growth.” The reorgani- DISCUSSION QUESTIONS
zation will, therefore, give him the same direct control
1. Use Figure 11.1 to answer this question: Was this
over each of the GE Capital divisions that he now has
reorganization really necessary? What other knowl-
with respect to GE’s other businesses, such as appliances
edge that you have about how to reorganize would
and jet engines. Another benefit of the change, accord-
you apply to answering this question, and what
ing to GE, is that its “external reporting will mirror this
conclusions do you draw?
organizational structure, providing greater clarity for
investors.” In other words, investors will now receive 2. Use the nine test questions (such as the market
financial reports on each of the four GE Capital busi- advantage test) in this chapter both to analyze the
nesses rather than on just GE Capital as a whole. organization that Immelt decided upon and to
While the reorganization seems to make sense, answer this question: How would you have reorga-
several observers have criticized it. The range of busi- nized GE Capital?
HUMAN RESOURCE MANAGEMENT 12
Sutter Health CHAPTER OUTLINE
Opening Vignette: Sutter
S utter Health is a nonprofit health-care network headquartered

in Sacramento, California.The company supports the work of its
California health-care affiliates. These affiliates have to fill about 10,000
Health
● Human Resource
Management’s Strategic
job openings per year. The Role
company therefore must at- Signicast
tract huge numbers of recruits, What Is Strategic Human Resource
Management?
perhaps 100,000 or more, to fill
The Challenges Facing Human Resource
those 10,000 positions.The job Management
of attracting and keeping track Managing Now: How Human Resource
Managers Use Technology
of so many recruits is enor-
● Writing Job Descriptions
mous. Sutter tried putting and Recruiting Employees
its job openings online.That Job Analysis and Personnel Planning
produced over 300,000 Employee Recruiting
Managing Now: Job Analysis and
résumés per year, overwhelm- Employee Recruitment
ing Sutter’s human resources WINDOW ON MANAGING NOW:
Cisco Systems Inc.
(HR) unit. Project manager
PRACTICE IT: Sutter Health
Keith Vencel had to devise a WINDOW ON MANAGING NOW:
Sutter Health needed a way to recruit
better recruitment solution. thousands of applicants per year for its
City Garage
What should he do?1 ■ offices around California. ● Interviewing and Selecting
Employees
Application Forms
B E H AV I O R A L O B J E C T I V E S Testing for Employee Selection
Interviews
After studying this chapter, you should be able to Guidelines for Interviewees
Other Selection Techniques
Show that you’ve learned the chapter’s essential information by Managing Now: Interviewing and
➤ Explaining, with an example, strategic human resource management. Selecting Employees
➤ Listing techniques managers use to recruit employees. ● Orienting and Training
➤ Listing at least five guidelines for disciplining employees. Employees
Orienting Employees
➤ Listing ten examples of how federal equal-employment law affects human resource Training Employees
management decisions. Training Techniques
IMPROVING YOUR TRAINING
SKILLS: On-the-Job Training
➤ Reading the chapter case study and explaining how this company could improve its Managing Now: Orientation and
interviewing process. Training
➤ Reading the chapter-opening vignette and explaining how to improve the company’s
recruitment and selection process.
➤ Reading the experiential exercises and explaining how to set up the training program.
331
● Appraising and Maintaining
Employees Show that you can apply what you’ve learned here by
Employee Appraisal ➤ Watching the video scenario and explaining how you
Compensation would set up the testing and selection process.
Discipline and Grievances ➤ Watching the simulation video and identifying human
Managing Now: Appraising and Online Study Center
resource strategies used by the company to attract ACE the Test
Maintaining Employees and maintain key employees. Managing Now! LIVE
GM and NCR
● Understanding HR’s Legal After designing the organization chart, managers turn to staffing their organiza-
Framework tions. Staffing, personnel, or (as it is known today) human resource (HR) man-
Equal-Employment Laws and agement is the management function devoted to acquiring, training, appraising,
Affirmative Action paying, and ensuring fairness and safety for the organization’s employees. We can
Occupational Safety and Health view human resource management as a series of steps, starting with identifying
Labor-Management Relations the job’s requirements, and then recruiting, selecting, training, appraising, and
Managing Now: Integrating the compensating employees while continually attending to the important issues of
Company’s Global HR Information employee fairness and safety (see Figure 12.1).
Systems Why study human resource management? Most firms have human resource
(HR) departments, so you may reasonably ask, why study human resource
management as part of a basic management course?
human resource (HR) The answer is that every manager, not just human resource managers, spend
management: the much of their day doing HR-type tasks, such as interviewing, appraising, and
management function devoted disciplining employees. Hiring the right people is a prerequisite for managerial
to acquiring, training, success. Hiring dysfunctional employees, experiencing high turnover, not attract-
appraising, paying, and ensuring ing the best candidates, and triggering discrimination charges are some of the
fairness and safety for the human resource management blunders that can torpedo any manager’s career.
organization’s employees
The main purpose of this chapter is to familiarize you with basic staffing skills. The
main topics we cover include writing job descriptions, interviewing and selecting
employees, and training and appraising the firm’s new workers.
Human Resource Management’s Strategic Role

Online Study Center
ACE the Test
Managing Now! LIVE W isconsin-based Signicast’s manufacturing process is very old, although Signi-
cast has improved it dramatically. President Terry Lutz knew that for Signicast
to vie with world-class competitors, it needed a new, automated plant. Currently,
many of its employees have little formal education. They lacked the mathematical
F IGURE 12.1 Develop

personnel
Interview
Train
employees
Appraise
Recruit and and
The Basic HR Process plans and based on
candidates select reward
job job
employees employees
descriptions requirements
Conform to EEOC
and
other HR-related laws
Human Resource Management’s Strategic Role ■ 333
Signicast
At Signicast, HR’s involvement began at the plant design a high school diploma and a good work ethic. The new
stage. The human resource management group invited plant’s employees would require the same high school de-
current employees to participate in planning and design- gree and work ethic, plus team orientation, good trainabil-
ing the new plant: “Employees would come up with sug- ity, good communication skills, and a willingness to do
gestions; we’d implement them, and bring them back to varied jobs over a twelve-hour shift. Human resources also
[employees] for confirmation.” created a cross-training program so that employees could
HR helped the company execute its new plant expan- do each other’s jobs and ensure the company’s workforce
sion strategy in other ways. For example, the new plant was as flexible as it could be. And a new compensation
would produce parts almost five times faster than the old plan paid workers to learn more about the technical as-
plant. The employees would therefore need more respon- pects of the plant (such as how to use the new comput-
sibility and self-control. Selection standards were thus ers). At Signicast, human resources played a strategic role
tighter. At the old plant, the only hiring requirements were in executing the company’s new high-tech plant strategy.
and computer skills the new plant would require.2 Mr. Lutz’s whole strategy for
growing his company hinged on finding, attracting, and then hiring and training
those new employees, in other words, on human resource management.
What Is Strategic Human Resource Management?

Terry Lutz’s experience illustrates why managers say that human resource man-
agement is “strategic” today. Computerized machines like Signicast’s are useless
without the right employees to run them. Building great hotels like Ritz-Carlton is
futile without great, service-oriented employees. And Sutter Health will see its
growth plans fail if it can’t attract enough good employees. We saw (Chapter 7) that
strategic planning is the process of identifying the firm’s business today, its desired
future business, and the courses of action it should pursue to get there given its
strategic human resource opportunities, threats, strengths, and weaknesses. Strategic human resource
management: formulating management means formulating and executing human resource management
and executing human resource policies and practices that produce the employee skills and behaviors that the
management policies and
company needs to achieve its strategic goals.
practices that produce the
employee skills and behaviors Many companies use PC-based digital dashboards to track the performance
that the company needs in order of their human resource management systems. The HR scorecard is a process for
to achieve its strategic goals identifying the employer’s essential human resource activities, and the causal
links among (1) these activities (such as employee testing), (2) the resulting em-
HR scorecard: a process for ployee behaviors (such as turnover and productivity), and (3) the resulting contri-
identifying the employer’s bution to the company (for instance, in terms of improved service and profitability).
essential human resource Thus, it might show that a new policy of testing all applicants seems to have re-
activities, and the causal links
duced turnover by 80 percent and thus led to an additional profit of $1 million per
among (1) these activities such
as employee testing, and (2) the year. The Window on Managing Now feature shows how Signicast’s human
resulting employee behaviors, resources team made its strategic contribution.
such as turnover and
productivity, and (3) the
resulting contribution to the
The Challenges Facing Human Resource Management
company, for instance, in terms As at Signicast, changes are occurring today that are requiring human resources
of improved service and managers to play an increasingly central role in managing companies. These
profitability
changes or trends include globalization, changes in the nature of work, and
technology.
334 PART FOUR CHAPTER 12 Human Resource Management
● Globalization Trends Globalization is the tendency of firms to extend their

sales, ownership, and/or manufacturing to new markets abroad. For managers,
more globalization means more competition, and more competition means more
pressure to lower costs and to make employees more productive. Both workers
and companies therefore have to work harder and smarter than they did without
globalization.
● Trends in the Nature of Work Technology has had a huge impact on how
people work and on the skills and training today’s workers need. More and more
traditional factory jobs are going high-tech. To paraphrase the U.S. government’s
Occupational Outlook Quarterly, knowledge-intensive high-tech manufacturing
in industries like aerospace and telecommunications are replacing factory jobs in
industries like steel and textiles. For managers, this means a growing emphasis
on knowledge-based work, and therefore on human capital. Human capital refers
to the knowledge, education, training, skills, and expertise of a firm’s workers.
● Labor Force Trends At the same time, workforce demographic trends are
making finding and hiring good employees more challenging. Labor force growth
is not expected to keep pace with job growth, with an estimated shortfall of about
14 million college-educated workers by 2020.3 Most notably, the labor force is get-
ting older. As the baby boomers born between 1946 and 1960 start leaving the
labor force in the next few years, employers will face a labor shortage.
Trends like the above have had two implications for the human resource man-
ager’s job. First, it has become broader and more strategic over time, as it did at
Signicast. Second, it now focuses more on productivity and performance.
● High-Performance Work Systems Often, in fact, the best-performing

companies like Toyota and GE perform so well in part because of their high-
high-performance work performance work systems.4 A high-performance work system (HPWS) is an
system (HPWS): an integrated set of human resource management policies and practices that
integrated set of human together produce superior employee performance.
resource management policies
While there’s no hard and fast rule about what policies and practices comprise
and practices that together
produce superior employee high-performance work systems, they tend to include practices such as selective
performance hiring, extensive training, and the use of self-managed teams. In terms of measur-
able outcomes, high-performance work systems produce, for instance, more qual-
ified applicants per position, more employees hired based on validated selection
tests, and more hours of training for new employees.
Managing Now: How Human Resource Managers

Use Technology
Human resource managers also use technology to make their companies world-
class. You will find specific examples throughout this chapter, but in general, tech-
nology improves HR functioning in four main ways: self-service, call centers,
operational efficiencies, and outsourcing.5 For example, Dell Corporation built a
special human resources section on its intranet. Its employees can now self-service
many of their human resources transactions, such as updating personal informa-
tion and changing benefits allocations. Technology also enabled Dell to create its
centralized HR call center. Human resources specialists here answer questions
from all Dell’s far-flung employees, reducing the need for multiple human re-
sources centers at each Dell location.
Writing Job Descriptions and Recruiting Employees ■ 335
More firms are installing Internet and computer-based systems for improv-
ing the operational efficiency of their human resources operations. International
Paper Corp.’s “Viking” human resources information system is one example. The
goal was to achieve a human resources staff to employee ratio of 1 to 150 (com-
pared with 1 to 100), and a cost per employee of $800 for delivering human
resources services.6 Among other things, Viking includes an intranet employee
portal that employees use to self-service certain human resources–related needs
(such as updating their personal information).
Finally, technology makes it easier to outsource human resources activities to
specialist service providers. It does this by enabling outside employee-benefits
providers to have real-time Internet-based access to the employer’s human re-
sources database. Outsourcing is increasingly popular. About 84 percent of the
human resources professionals responding said that their firms outsource the
administration of their companies’ 401(k) pension plans, and about 68 percent
of employers outsource background checks to specialist firms.
In creating a modern human resources system, a logical place to start is by writ-
ing job descriptions and instituting an effective recruitment function, topics to which
we now turn.
Writing Job Descriptions and Recruiting Employees

H uman resource management starts with identifying and actually filling a firm’s
open positions. As you can see in Figure 12.2, this entire process encompasses
job analysis, recruiting, selecting, and training employees.
job analysis: the procedure
through which one determines
the duties of the jobs and the Job Analysis and Personnel Planning
kinds of people (in terms of
skills and experience) to hire Designing an organization chart creates jobs the firm must fill. Job analysis is the
for them procedure through which one determines the duties of the jobs and the kinds of
F IGURE 12.2 Personnel Recruiting:

Steps in the Recruitment and planning build a Candidate Orientation
and
Selection (Staffing) Process and job pool of Candidates becomes training
analysis candidates employee
The recruitment and selection
process is a series of hurdles
aimed at selecting the best
candidate for the job.
Use Supervisors
selection and others
Applicants
tools like interview
complete
tests to final
application
screen out candidates
forms
most to make
applicants final choice
F IGURE 12.3
Sample Job Description
OLEC CORP.
Job Description
Job Title: Marketing Manager

Department: Marketing
Reports To: President
FLSA Status: Non Exempt
Prepared By: Michael George
Prepared Date: April 1, 2007
Approved By: Ian Alexander
Approved Date: April 15, 2007
SUMMARY
Plans, directs, and coordinates the marketing of the organization’s products and/or services by performing the following duties
personally or through subordinate supervisors.
ESSENTIAL DUTIES AND RESPONSIBILITIES include the following. Other duties may be assigned.
■Establishes marketing goals to ensure share of market and profitability of products and/or services.
■Develops and executes marketing plans and programs, both short and long range, to ensure the profit growth and expansion of
company products and/or services.
■Researches, analyzes, and monitors financial, technological, and demographic factors so that market opportunities may be
capitalized on and the effects of competitive activity may be minimized.
■Plans and oversees the organization’s advertising and promotion activities including print, electronic, and direct mail outlets.
■Communicates with outside advertising agencies on ongoing campaigns.
■Works with writers and artists and oversees copywriting, design, layout, pasteup, and production of promotional materials.
■Develops and recommends pricing strategy for the organization, which will result in the greatest share of the market over the
long run.
■Achieves satisfactory profit/loss ratio and share of market performance in relation to preset standards and to general and specific
trends within the industry and the economy.
■Ensures effective control of marketing results and that corrective action takes place to be certain that the achievement of
marketing objectives are within designated budgets.
■Evaluates market reactions to advertising programs, merchandising policy, and product packaging and formulation to ensure the
timely adjustment of marketing strategy and plans to meet changing market and competitive conditions.
■Recommends changes in basic structure and organization of marketing group to ensure the effective fulfillment of objectives
assigned to it and to provide the flexibility to move swiftly in relation to marketing problems and opportunities.
■Conducts marketing surveys on current and new product concepts.
■Prepares marketing activity reports.
SUPERVISORY RESPONSIBILITIES
Manages three subordinate supervisors who supervise a total of five employees in the Marketing Department. Is responsible for the
overall direction, coordination, and evaluation of this unit. Also directly supervises two non-supervisory employees. Carries out
supervisory responsibilities in accordance with the organization’s policies and applicable laws. Responsibilities include interviewing,
hiring, and training employees; planning, assigning, and directing work; appraising performance; rewarding and disciplining
employees; addressing complaints and resolving problems.
F IGURE 12.3 (Continued )
QUALIFICATIONS
To perform this job successfully, an individual must be able to perform each essential duty satisfactorily. The requirements listed
below are representative of the knowledge, skill, and/or ability required. Reasonable accommodations may be made to enable
individuals with disabilities to perform the essential functions.
EDUCATION and/or EXPERIENCE

Master’s degree (M.A.) or equivalent; or four to ten years related experience and/or training; or equivalent combination of
education and experience.
LANGUAGE SKILLS
Ability to read, analyze, and interpret common scientific and technical journals, financial reports, and legal documents. Ability to
respond to common inquiries or complaints from customers, regulatory agencies, or members of the business community. Ability
to write speeches and articles for publication that conform to prescribed style and format. Ability to effectively present information
to top management, public groups, and/or boards of directors.
MATHEMATICAL SKILLS
Ability to apply advanced mathematical concepts such as exponents, logarithms, quadratic equations, and permutations. Ability to
apply mathematical operations to such tasks as frequency distribution, determination of test reliability and validity, analysis of
variance, correlation techniques, sampling theory, and factor analysis.
REASONING ABILITY
Ability to define problems, collect data, establish facts, and draw valid conclusions. Ability to interpret an extensive variety of
technical instructions in mathematical or diagram form.
people (in terms of skills and experience) to hire for them.7 Managers then use this
job description: a list of information to develop a job description (a list of duties showing what each job
duties showing what each job entails) and a job specification (a list of the skills and aptitudes sought in people
entails hired for the job).
The job description, like the one in Figure 12.3, identifies the job, provides a
job specification: a list of the
skills and aptitudes sought in brief job summary, and then lists specific responsibilities and duties. Most descrip-
people hired for a job tions contain sections that cover job identification, job summary, responsibilities
and duties, authority of incumbent, working conditions, and job specifications
(the human requirements of the job, such as education required).
job analysis questionnaire: Managers can use a job analysis questionnaire (see Figure 12.4) to ascertain
a questionnaire used to a job’s duties and responsibilities. Employees provide detailed information on
ascertain a job’s duties and what they do. They briefly state their main duties, describe the conditions under
responsibilities
which they work, and list any permits or licenses required to their perform duties.
Supervisors and/or human resources specialists then review this information.
personnel planning: the Job analysis is part of personnel planning. Personnel planning is the process
process of determining the of determining the organization’s future personnel needs, as well as the methods
organization’s future personnel to be used to fill those needs. Here, the manager estimates the company’s future
needs, as well as the methods to personnel needs, for instance, in terms of projected revenues and installing
be used to fill those needs
new plants or facilities. Personnel planning also involves deciding ahead of time
(planning) where the requisite employees will come from (within or outside the
company’s employee pool) and how to train them.
F IGURE 12.4 Instructions: Distribute copies of this questionnaire to supervisors, managers, personnel
staff members, job analysts, and others who may be involved in writing job descriptions.
Preliminary Job Description Ask them to record their answers to these questions in writing.
Questionnaire
Use a questionnaire like this one
to interview job incumbents, or 1. What is the job title?
have them fill it out. 2. Summarize the job’s more important, regularly performed/duties in a Job Summary.
3. In what department is the job located?
4. What is the title of the supervisor or manager to whom the jobholder must report?
5. Does the jobholder supervise other employees? If so, give their job titles and a brief
description of their responsibilities.
Position Supervised Responsibilities
6. What essential function duties does the jobholder perform regularly?

List them in order of importance.
Duty Percentage of Time Devoted to This Duty

1.
2.
3.
4.
5.
6.
7. Does the jobholder perform other duties periodically? Infrequently? If so, please
list, indicating frequency.
8. What are the working conditions? List such items as noise, heat, outside work,
and exposure to bad weather.
9. How much authority does the jobholder have in such matters as training or guiding
other people?
10. How much education, experience, and skill are required for satisfactory job performance?
11. At what stage is the jobholder’s work reviewed by the supervisor?
12. What machines or equipment is the jobholder responsible for operating?
13. If the jobholder makes a serious mistake or error in performing required duties, what
SOURCE: www.HR.BLR.com © 2004
would be the cost to management?
Business and Legal Reports, Inc.
personnel replacement Many employers use personnel replacement charts (see Figure 12.5) to
charts: charts that show the keep track of inside candidates for important positions. These charts show the
present performance and the present performance and the likelihood of promotion for each potential replace-
likelihood of promotion for each
ment. Many firms maintain computerized databanks containing information on
potential replacement
hundreds of traits (like special skills, product knowledge, work experience, train-
ing courses, relocation limitations, and career interests) for each employee.
F IGURE 12.5
Management Personnel Replacement Chart
President
Vice President, Executive Vice President, Vice President,

Personnel Vice President Marketing Finance
K. Gonzalez 60 H. Chan 63 S. Goldstein 59 G. Sleight 60
C. Huser 47 D. Snow 55 M. Murray 47 C. Hood 46
S. French 45 E. Farley 56 F. Goland 45
Manager, Manager, Manager,

House Fans Industrial Fans Air Conditioners
D. Snow 55 E. Farley 56
J. James 48 R. Jarvis 47 R. Jarvis 47
R. Jarvis 47 F. Goland 42
PRESENT
Manager, Personnel Manager, Accounting Manager, Personnel Manager, Accounting PERFORMANCE
C. Huser 47 C. Hood 46 S. French 45 M. Piper 50 Outstanding
A. Kyle 36 W. Wicks 40 T. Smith 38 Satisfactory
H. Ross 33 J. Jones 35 Needs
improvement
PROMOTION
POTENTIAL
Manager, Production Manager, Sales Manager, Production Manager, Sales
Ready now
J. James 48 M. Murray 47 R. Jarvis 47 F. Goland 42
Needs further
W. Long 37 E. Renfrew 39 C. Pitts 40 S. Ramos 38 training
G. Fritz 37 B. Storey 36 C. Combs 38
Questionable
Employee Recruiting
recruiting: attracting a pool of Once the manager knows the specifics of the jobs to fill, recruiting—attracting a
viable job applicants pool of viable job applicants—becomes important. Only with a sufficient number
of applicants can the manager use techniques like interviews and tests to select
the best.
Several things affect a firm’s ability to attract candidates. Economic conditions
are one: high unemployment tends to make recruiting easier, for instance. The
employer’s compensation and other personnel policies are also important. For ex-
ample, hospitals that pay higher salaries find it easier to recruit nurses. The com-
pany’s reputation is very important. For example, some firms are known for great
training programs and for being excellent places to work, for instance, in terms
of child-care benefits. Indeed, BusinessWeek magazine ran a story on the best
places for recent graduates to work, listing firms like Disney, Lockheed Martin, and
Goldman Sachs. Some applicants also gravitate toward companies with better
growth prospects (perhaps choosing, for instance, Google over a steel company if
a choice must be made).
The manager can draw applicants either from within the firm’s current work-
force (internal recruiting) or from outside the firm (external recruiting)—for in-
stance, through help-wanted ads.
● Current Employees Many managers turn first to inside candidates. Inside

candidates are known quantities and are more likely to be committed to the com-
pany. Promoting from within may also enhance morale and performance. How-
ever, employees who unsuccessfully apply for jobs may become demoralized. And
if the company is in a rut and requires new ideas, it may be best to look outside the
company. And there may not be any worthy inside candidates.
job posting: publicizing an Promotion from within generally requires job posting.8 Job posting means
open job to employees (often by publicizing the open job to employees (often by literally posting it on bulletin
literally posting it on bulletin boards and intranets) and listing the job’s attributes, like qualifications, work
boards and intranets)
schedule, and pay. Job posting can be a good practice, insofar as it facilitates the
transfer and promotion of qualified inside candidates.9
● Advertising Advertising is a major way to attract applicants. The main issue

here is selecting the best advertising media. Choosing the right media should be a
product of research and common sense. The majority of employers today use on-
line services such as Monster.com, plus their own corporate websites to advertise
available positions. However, it makes little sense to advertise for Chicago-based
assembly-line workers in a national Monster-type campaign, or in a business
paper like the Wall Street Journal; the Chicago Tribune makes more sense. Simi-
larly, one would sensibly advertise for executives in the Wall Street Journal, or for
chemical engineers in Chemical Engineer.
However, as with all the recruiting options, managers are well advised to do
their research. Companies like General Electric carefully evaluate the number of
hireable recruits they get from each recruiting source, comparing, for instance, the
results of various media and employment agencies, and then choosing the best.
● Employment Agencies An employment agency is an intermediary whose

business is to match applicants with positions. There are four types of employ-
ment agencies: public/professional, private, temp, and executive recruiter.
Public Employment Agencies Public employment agencies, often called job-
service or unemployment-service agencies, exist in every state. They are good
sources of blue-collar and clerical workers, but firms also use them for professional
and managerial-level applicants. They also provide applicants with career coun-
seling and job-search training, and they provide employers with counseling in
matters such as writing job descriptions. Other employment agencies are associ-
ated with not-for-profit organizations. For example, most professional and techni-
cal societies have units to help members find jobs.
Private Agencies Private agencies charge a fee for each applicant they place.
Market conditions determine whether the employer or the candidate pays the fee,
but the norm today is for fee-paid jobs, a situation in which the employer pays.
These agencies are important sources of clerical, white-collar, and managerial
personnel. Even giant companies may use employment agencies because of the
specialized work they do in advertising for applicants and winnowing down
the applicant pool to an acceptable few. The harried small-business owner may
have little choice but to retain one. Points to keep in mind when dealing with em-
ployment agencies include:
◗ Give the agency an accurate and complete job description.
◗ Make sure that tests, application blanks, and interviews are part of the agency’s
selection process.
◗ Periodically review data on candidates accepted or rejected by your firm and by
the agency.
◗ Develop a long-term relationship with one or two agencies.
◗ Screen the agency: what is its reputation in the community and with the Better
Business Bureau?10
Contingent Workers and Temporary Help Agencies Employers often supple-
ment their permanent workforce by hiring contingent or temporary workers,
often through temporary help employment agencies. Also known as part-time or
just-in-time workers, they are defined as workers who don’t have permanent
jobs.11 It is estimated that 60 percent of the total U.S. temporary payroll is noncler-
ical and includes “CEOs, human resources directors, computer systems analysts,
accountants, doctors, and nurses.”12 When Foster Farms in California found itself
falling behind in solving its information technology (IT) problems, it hired an ex-
perienced interim chief information officer (CIO).13
executive recruiters: Executive Recruiters Executive recruiters (also called headhunters) are
agencies retained by employers agencies retained by employers to look for top management talent, usually in the
to look for top management $70,000 and up category. They have extensive contacts and files of potential re-
talent, usually in the $70,000 and
cruits, and they are adept at contacting qualified employed candidates who aren’t
up category; also called
headhunters looking to change jobs. The recruiter saves employers time by advertising the
position and screening what could turn out to be hundreds of applicants. Their
ability to research who might be viable and to reach out to them is something of an
art that few employers can do themselves.
● Referrals and Walk-Ins Particularly for hourly workers, walk-ins—people

who apply directly at the office, perhaps in response to Now Hiring signs—are a
major source of applicants. Other firms use employee-referral campaigns to en-
courage applicants. They may post job openings and requests for referrals in the
company’s newsletter, on its intranet, or on bulletin boards. Of the firms respond-
ing to one survey, 40 percent said that they use employee-referral campaigns and
hire about 15 percent of their employees through referrals. A cash award for refer-
ring hired candidates is the most common incentive.14
● College Recruiting College recruiting—sending employers’ representatives

to college campuses to prescreen applicants and create an applicant pool from the
graduating class—is an important source of management, professional, and tech-
nical employees. One study of 251 staffing professionals concluded that firms
filled about 38 percent of all externally filled jobs requiring a college degree with
new college graduates.15 They often use the form as presented in Figure 12.6. Traits
assessed include motivation, communication skills, education, appearance, and
attitude.16
College recruiting often involves internships. Here, students may be able to
hone business skills, check out potential employers, and learn more about their
F IGURE 12.6
Campus Applicant Interview Report
CAMPUS INTERVIEW REPORT
Name Anticipated Graduation Date

Current Address
(if different than on placement form)
Position Applied For
If Applicable (Use Comment Section if necessary)

Driver’s License Yes No
Any special considerations affecting your availability for relocation?
Are you willing to travel? If so, what % of time?
Above Below
EVALUATION Outstanding Average Average Average
Education: Courses relevant to job? Does
performance in class indicate good
potential for work?
Appearance: Was applicant neat and
dressed appropriately?
Communication Skills: Was applicant mentally
alert? Did he or she express ideas clearly?
Motivation: Does applicant have high energy
level? Are his or her interests compatible
with job?
Attitude: Did applicant appear to be pleasant,
people-oriented?
COMMENTS: (Use back of sheet if necessary)
Given Application Yes No Received Transcript Release Authorization

Recommendations Invite Reject
Interviewed by: Date:
Campus
SOURCE: Adapted and updated from Joseph J. Famularo, Handbook of Personnel Forms, Records, and Reports
(New York: McGraw-Hill, 1982), p. 70.
occupational preferences. Employers can use interns to make useful contributions

while evaluating them as possible full-time employees. Almost three-quarters of all
college students take part in an internship before they graduate, and many get
their jobs this way.17 Some interns are unpaid. On the other hand, it is not unusual
for law firms to pay top first-year law students $30,000

or more for a summer internship.
● Recruiting a More Diverse Workforce As we

discussed in Chapter 2, recruiting a diverse workforce
isn’t just socially responsible; it’s a necessity. Nation-
wide, minorities already represent over 20 percent of
the workforce in 2006 (and much higher percentages in
some states, like California).
In this case, recruiting usually involves two special
efforts. One is to create job openings that make sense
for the women or minorities one wants to attract. For
example, knowing that single parents need flexible
work hours may suggest creating a flexible work-hour
Today, recruiting a diverse workforce isn’t just socially program for the employees. The other issue is ensur-
responsible; it’s a necessity. ing that the people one hires have the job skills they
need to get up to speed in the work world. Marriott
International hired 600 welfare recipients under its Pathways to Independence
program. The program includes a six-week training program that teaches work
and life skills.
Managing Now: Job Analysis and Employee

Recruitment
Thanks to the Internet, managers now have new ways to analyze jobs and recruit
employees. For one thing, the widespread availability of online job-description
services makes it easy for any manager to quickly create job descriptions. The site
www.jobdescription.com is a good example. Search by alphabetical title, keyword,
category, or industry to find the desired job title. This leads you to a generic job de-
scription for that title, say, “Computers and EDP systems sales representative.”
Then use the wizard to add specific information such as job title, department, and
preparation date.
The U.S. Department of Labor’s occupational information network, called
O*NET, is another useful Web tool (you’ll find it at www.doleta.gov/programs/
onet). From thousands of jobs in its database, the manager can find a specific job’s
typical duties, as well as its experience, education, and knowledge requirements.
● Recruiting on the Internet As mentioned earlier, most employers use the

Internet for recruiting. Managing now goes beyond the usual Monster.com-type
listings.18 For example, Unisys Corporation posts Internet-based recruiting fairs.
Others search online databases for applicants. Thus, the human resource manager
for a hydraulic products company found that one keyword search of the HotJobs
database produced fifty-two usable résumés. Newer online recruiting sites capi-
talize on social networking. For example, users register by supplying their name,
location, and the kind of work they do on sites like monsternetworking.com and
LinkIn.com. These sites help develop personal relationships for networking, hir-
ing, and employee referrals. The accountants Deloitte & Touche Tohmatsu created
a global recruitment site, thus eliminating the need to maintain 35 separate local
recruiting websites. Arizona had IBM Global Services create a disability-friendly
website, Arizona@YourService, to help link prospective employees and others to
various agencies.
Cisco Systems Inc.
Many employers, including Cisco Systems, use information candidate calls in and links to the Cisco recruiter via the
technology like PC-based video cameras and the Internet Web. The process doesn’t eliminate face-to-face inter-
to conduct initial screening interviews. Cisco equips its views. However, using it for the initial screening interview
recruiters with PC-based video cameras. The recruiter reduces travel and recruiting expenses and make things
instructs the applicant to use his or her own PC camera easier for candidates.19
or one at a local FedEx Kinko’s. At the appointed time, the
Job hunters should know, by the way, that employers are checking candidates’
social networking sites’ postings. One employer went to Facebook.com and found
that a top candidate described his interests as smoking marijuana and shooting
people. The student may have been kidding, but he did not get the offer.20
The Window on Managing Now feature provides an illustration of how Cisco
uses information technology to recruit candidates.
In general, the Web is a relatively cost-effective way to publicize openings. For
example, Marsha Wheatley, HR director for the Washington, D.C.–based American
Crop Protection Association, no longer runs $400 ads in the Washington Post
when looking for agricultural engineers. Instead, ads on WashingtonPost.com cost
only $200. And “instead of a tiny ad that says, ‘ACPA needs an accountant,’ I get a
applicant tracking whole page to describe the job. . . .”21
services: services that compile
the employer’s online ● Managing Now: Applicant Tracking Services Managers increase the effi-
applications, screen the ciency and effectiveness of their online recruiting efforts by contracting with
incoming résumés using the
applicant tracking services. These services receive and compile the employer’s
employer’s standards, and then
assist the employer in
online applications, automatically screen the incoming résumés using the em-
automatically scheduling ployer’s standards, and then assist the employer in automatically scheduling
interviews for high-potential interviews for high-potential applicants. The Practice IT feature shows how Sutter
applicants Health uses this tool.
PRACTICE IT
Sutter Health
With over 300,000 applications per year, online job post- The applicant tracking system first rejects applicants
ings proved to be too much of a good thing for Sutter who do not meet the firm’s minimum requirements (like
Health. Project manager Keith Vencel knew he needed a willingness to submit to drug tests). Then it scores the
better solution.22 His solution was to contract with an applicants’ online tests, such as a Web-based skills test in ac-
online applications service provider (ASP) company that counting. The applicant tracking system also automatically
supplies an applicant tracking system. Sutter’s applicants keeps track of each applicant. For example, it searches for
apply for jobs on what appears to be a Sutter website, but keywords like “MBA” and brings résumés to a hiring man-
it is really one that the ASP is managing. Applicants fill out ager’s attention. It also schedules interviews and reminds
applications and answer online questions. supervisors when an applicant is due for an interview.
Interviewing and Selecting Employees ■ 345
City Garage
Establishing the right screening process can have a decisive pretty much anybody who had experience,” said training di-
effect on a firm’s success. For example, City Garage, a 200- rector Rusty Reinhold. City’s solution was to purchase the
employee chain of twenty-five auto-service and -repair Personality Profile Analysis (PPA) online test from Thomp-
shops in Dallas–Fort Worth,Texas, had expanded rapidly. son International USA. Now, after a quick application and
However, its growth was hampered by the problems it background check, candidates take the ten-minute, twenty-
was having hiring good managers and employees.23 four-question PPA. City Garage staff enter the answers into
City Garage’s original hiring process consisted of a the PPA software system, and employee suitability test re-
paper-and-pencil application and one interview, immedi- sults are available in two minutes. As Reinhold says,“[A]t a
ately followed by a hire–don’t hire decision. Local shop minimum, we feel like we’ll be able to put $500,000 on the
managers didn’t have the time to evaluate every applicant: bottom line each year, if [the PPA] does what we expect it
“If they had been shorthanded too long, we would hire to in terms of retention and right hiring.”
Interviewing and Selecting Employees

Online Study Center
ACE the Test
Managing Now! LIVE W ith a pool of applicants, managers turn to assessing the applicants’ aptitudes,
interests, and backgrounds using various screening techniques. These tech-
niques include application blanks, interviews, tests, and reference checks. From
this information, the manager can then choose the best candidate.
Employee selection is important for several reasons. A poor performer drags a
manager down, and a good one enhances the manager’s and the firms’ perfor-
mance. Hiring applicants is also expensive, so it is best to do it right. The cost of
hiring even nonexecutive employees can be $3,000 to $5,000, or more. Effective
screening is also important to avoid “negligent hiring” allegations. For example,
lawyers sued Wal-Mart, alleging that several of its employees with sexually related
convictions had assaulted young girls. Wal-Mart then instituted a program of
criminal background checks for otherwise qualified candidates. The Window on
Managing Now feature shows how employers use technology to improve their
selection processes.
Application Forms
application form: form used For most employers, the application form is the first step in the selection process.
in selection; usually includes (Some firms first require a brief prescreening interview.) As you can see in Fig-
information about areas such as ure 12.7, it usually includes information about areas such as education, prior work
education, prior work history,
history, and hobbies.
and hobbies
Testing for Employee Selection

test: a sample of a person’s A test is a sample of a person’s behavior. Employers use tests to predict success on
behavior the job. About 45 percent of 1,085 companies surveyed by the American Manage-
ment Association tested applicants for basic skills (defined as the ability to read
F IGURE 12.7
Employment Application
F IGURE 12.8 Check Yes or No Yes No

Sample Test
1. You like a lot of excitement in your life.
2. An employee who takes it easy at work is cheating

on the employer.
3. You are a cautious person.
4. In the past three years, you have found yourself in

a shouting match at school or work.
5. You like to drive fast just for fun.
Analysis: According to John Kamp, an industrial psychologist, applicants who answered no, yes,
yes, no, no to questions 1, 2, 3, 4, and 5 are statistically likely to be absent less often, to have
fewer on-the-job injuries, and, if the job involves driving, to have fewer on-the-job driving
accidents. Actual scores on the test are based on answers to 130 questions.
SOURCE: Courtesy of NYT permissions.
instructions, write reports, and do arithmetic at a level adequate to perform com-

mon workplace tasks).24 Another survey concluded that 38.6 percent of compa-
nies said that they performed psychological testing on job applicants, ranging
from tests of the applicants’ cognitive abilities to honesty testing.25 Try the short
test in Figure 12.8 to see how prone you might be to on-the-job accidents.
Tests are not for just low-level workers. For example, consultants McKinsey &
Co. flew fifty-four MIT MBA students to Miami for two days of multiple-choice
business knowledge tests, case-oriented case studies, and interviews. Barclays
Capital gives graduate and undergraduate job candidates aptitude tests instead of
first-round interviews.
● Test Reliability and Validity It is useless (and often illegal) to use a test
that lacks validity or reliability. Reliability is a test’s consistency. Thus, if someone
scores 90 on an intelligence test on Monday and 130 on Tuesday, you probably
would question the test’s reliability. Test validity answers the question, Does this
test measure what it is supposed to measure? In practical terms, this usually means,
Does performance on the test predict subsequent performance on the job? A test
that does not meet that standard is useless. If it also disproportionately screens
out minority or female candidates, it might also violate equal-employment laws.
● Types of Tests Many types of tests are available. Employers use intelligence
(IQ) tests like the Stanford-Binet or the Wechsler or Wonderlic to measure general
intellectual abilities. For some jobs, managers are also interested in testing other
abilities. For example, the Bennett Test of Mechanical Comprehension (see Fig-
ure 12.9) helps assess an applicant’s understanding of basic mechanical principles;
it would be useful for predicting success on a job such as machinist or engineer.
Other tests measure personality and interests. For example, you probably wouldn’t
hire someone for an entry-level job as an accounting clerk if he or she had no meas-
urable interest in working with numbers!26 Most of us have had some experience
dealing with service people who are obviously not psychologically suited for such
jobs. A personality test might have screened them out. Some employers need to
F IGURE 12.9 Look at Sample X on this page. It shows two men carrying a weighted object on a plank,
and it asks, Which man carries more weight? Because the object is closer to man B than to
An Example of the Bennett man A, man B is shouldering more weight; so blacken the circle under B on your answer
Test of Mechanical sheet. Now look at Sample Y and answer it yourself. Fill in the circle under the correct
Comprehension answer on your answer sheet.
Human resources managers often
use personnel tests, like this one,
to measure a candidate’s skills and X
aptitudes. Which man carries more weight?
(If equal, mark C.)
Examples
A B C
X
A B C
Y
SOURCE: Bennett Mechanical
Comprehension Test. Copyright © 1942,
1967–1970, 1980 by Harcourt Assessment,
Inc. Reproduced with permission. All Y
rights reserved.“Bennett Mechanical Municipal Busline
Which letter shows the seat where a
Comprehension Test” and “BMCT” are
passenger will get the smoothest ride?
trademarks of Harcourt Assessment, Inc.
registered in the United States of America
and/or other jurisdictions.
management assessment test candidates’ physical abilities. For example, Dell would want to make sure its
center: testing technique in assemblers have the finger dexterity to work with tiny objects.
which about a dozen candidates A management assessment center is another testing technique. In such
spend two or three days
centers, about a dozen candidates spend two or three days performing realistic
performing realistic
management tasks while expert management tasks while expert appraisers observe them. They assess each candi-
appraisers observe them date’s potential.27 The center’s activities might include individual presentations,
objective tests, interviews, and participation in manage-
ment games. Participants engage in realistic problem
solving, usually as members of two or three simulated
companies.
● Computerized and Online Testing Online tests

are increasingly replacing conventional paper-and-
pencil tests and manual testing. In one large manufac-
turing company, experts developed a computerized
testing procedure for selecting clerical personnel.28 For
example, for the “travel expense form completion” part
of this test, applicants had to access the database file,
use some of the information there to compute quar-
terly expenses, and transfer this information to the
travel expense form.
Employers such as 7-Eleven require that applicants
responding to ads first answer a series of computerized
questions by punching their telephone keypads, or tak-
Computerized selection tests like this one are increasingly ing a short test online before proceeding (for instance,
replacing conventional paper-and-pencil tests. see www.cia.gov).
Interviews
The interview is the most widely used selection device, and it would be very unusual
for a manager to hire a subordinate without at least a brief personal interview.
The problem is that while almost everyone gets a job interview, most inter-
views don’t produce very reliable information. The reasons for this predicament
are many. For one thing, research shows that interviewers rather constantly com-
mit blunders such as leaping to conclusions during the first few minutes of the
interview or asking for information (like “tell me your main weaknesses”) that
doesn’t really shed much light on what the applicant will actually do on the job.
Others are simply uncomfortable asking questions or don’t know what to ask.
The manager can boost the usefulness of selection interviews by following
procedures such as planning and structuring the interview, establishing rapport,
asking questions, delaying the decision, and closing the interview.29 We review
each of these steps next.
● Plan the Interview Begin by reviewing the candidate’s application and

résumé, and note any areas that are vague or may indicate strengths or weak-
nesses. Review the job specification. Start the interview with a clear picture of the
traits of an ideal candidate.
● Structure the Interview Most interviews are too informal.30 The inter-
viewer asks general questions like, “What are your weaknesses?” The preferred ap-
proach is to structure the interview by asking questions that relate to performance
on the job. Experts call this a behavioral interview. For example, ask the candidate
to explain how he or she would handle a hypothetical situation, such as, “If you
were a supervisor here, what would you do if one of your subordinates came in
consistently late?” If the job calls for making cold calls, ask, “Tell me about a time
when you had to make an unsolicited sales call. How did you do it? What was the
result?” Interviews based on a structured guide, like the one shown in Figure 12.10
on page 350, usually give better results. Structured interviews are more valid in
part because they are more reliable—for example, the same interviewer adminis-
ters the interview more consistently from candidate to candidate.
● Establish Rapport The point of most interviews is to have a productive in-

terchange so that the manager can better estimate how the candidate will perform
on the job. Thus, it is usually best to put the candidate
at ease and to establish some rapport.
● Ask Questions The main issue here, as men-

tioned above, is to formulate structured questions that
provide insight into how the candidate will perform on
the job. Figure 12.11 on page 351 presents a list of
generic sample questions.
As a rule, when asking questions:
◗ Avoid questions the candidate can answer with a
simple yes or no.
◗ Don’t put words in the applicant’s mouth or telegraph
the desired answer (for instance, by nodding or smil-
ing in response to the right answer).
The job interview is the most widely used selection device. ◗ Don’t be patronizing, sarcastic, or inattentive.
F IGURE 12.10
Structured Interview Form for College Applicants
CANDIDATE RECORD NAP 100 (10/77)
CANDIDATE NUMBER NAME (LAST NAME FIRST) COLLEGE NAME COLLEGE CODE
U 921
I
(1–7) (8–27) (28–30)
INTERVIEWER NUMBER
0 SOURCE (41) RACE (42) SEX (43) DEGREE (53) AVERAGE CLASS STANDING
Campus C White W Male M Bachelors B (A = 4.0) (59–59)
(33–40) Walk-in W Black B Female F Masters M Overall Top 10% 10
INTERVIEWER NAME Intern I Asian A Init. Law L (54–55) Top 25% 25
Agency A Hispanic H Cont. Majors Acctg. Top Half 50
Native Am. NA Date (56–57) Bottom Half 75
CAMPUS INTERVIEW EVALUATIONS
ATTITUDE – MOTIVATION – GOALS
POOR AVERAGE GOOD OUTSTANDING
(POSITIVE, COOPERATIVE, ENERGETIC, MOTIVATED, SUCCESSFUL, GOAL-ORIENTED)
COMMENTS:
COMMUNICATIONS SKILLS – PERSONALITY – SALES ABILITY

(ARTICULATE, LISTENS, ENTHUSIASTIC, LIKEABLE, POISED, TACTFUL, ACCEPTING, CONVINCING)
COMMENTS:
EXECUTIVE PRESENCE – DEAL WITH TOP PEOPLE

(IMPRESSIVE, STANDS OUT, A WINNER, REMEMBERED, LEVELHEADED, AT EASE, AWARE)
COMMENTS:
INTELLECTUAL ABILITIES
(INSIGHTFUL, CREATIVE, CURIOUS, IMAGINATIVE, UNDERSTANDS, REASONS, INTELLIGENT, SCHOLARLY)
COMMENTS:
JUDGMENT – DECISION MAKING ABILITY

(MATURE, SEASONED, INDEPENDENT, COMMON SENSE, CERTAIN, DETERMINED, LOGICAL)
COMMENTS:
LEADERSHIP
(SELF-CONFIDENT, TAKES CHARGE, EFFECTIVE, RESPECTED, MANAGEMENT MINDED, GRASPS AUTHORITY)
COMMENTS:
CAMPUS INTERVIEW SUMMARY

INVITE AREA OF OFFICES
(Circle) INTEREST (Circle) SEMESTER HRS. PREFERRED: SUMMARY COMMENTS:
Yes No AUDIT TAX Acctg. No. 1
DATE AVAILABLE MCS ABC Audit No. 2
OTHER Tax No. 3
F IGURE 12.11 1. How did you choose this line of work?

Suggested Supplementary 2. What did you enjoy most about your last job?
Questions for Interviewing 3. What did you like least about your last job?
Applicants 4. What has been your greatest frustration or disappointment on your present job? Why?
5. What are some of the pluses and minuses of your last job?
6. What were the circumstances surrounding your leaving your last job?
7. Did you give notice?
8. Why should we be hiring you?
9. What do you expect from this employer?
10. What are three things you will not do in your next job?
11. What would your last supervisor say your three weaknesses are?
12. What are your major strengths?
13. How can your supervisor best help you obtain your goals?
14. How did your supervisor rate your job performance?
15. In what ways would you change your last supervisor?
16. What are your career goals during the next 1–3 years? 5–10 years?
17. How will working for this company help you reach those goals?
18. What did you do the last time you received instructions with which you disagreed?
19. What are some of the things about which you and your supervisor disagreed?
What did you do?
20. Which do you prefer, working alone or working with groups?
21. What motivated you to do better at your last job?
22. Do you consider your progress on that job representative of your ability? Why?
23. Do you have any questions about the duties of the job for which you have applied?
SOURCE: www.HR.BLR.com © 2004 24. Can you perform the essential functions of the job for which you have applied?
Business and Legal Reports, Inc.
◗ Don’t monopolize the interview or let the applicant dominate the interview.
◗ Listen to the candidate and encourage him or her to express thoughts fully.
◗ Don’t ask for just general statements about accomplishments; ask for specific
examples.31
◗ If the candidate lists specific strengths or weaknesses, follow up with, “What are
specific examples that demonstrate each of your strengths?”
● Delay the Decision Research shows that interviewers often make snap
judgments based on inadequate information. Keep a record of the interview, and
then review it before deciding.32
● Close the Interview End the process courteously. Tell the applicant whether
there is an interest, and if so, what the next step will be. Rejections should be
diplomatic.
Guidelines for Interviewees

Before managers interview applicants, the managers will have to navigate job in-
terviews themselves—as interviewees. Guidelines here include:
1. Prepare. Before the interview, learn all you can about the employer, the job,
and the people doing the recruiting.
2. Make a good first impression. Bad first impressions are almost impossible to
overcome.
3. Uncover the interviewer’s real needs. Determine what the employer is looking
for and what problems he or she needs solved. Sample questions include,
Would you mind describing the job for me? and What’s the first problem you’d
want me to address?
4. Relate your answers to the interviewer’s needs. For example, say, “One of the
problem areas you’ve said is important to you is similar to a problem I once
faced.” Then state the problem, describe your solution, and reveal the results.
5. Think before answering. Pause to make sure you understand what the inter-
viewer is driving at, think about how to structure your answer, and then
speak.
6. Watch your nonverbal behavior. Maintain eye contact. Speak with enthusi-
asm, nod agreement, and remember to take a moment to frame your answer
(pause, think, speak) so that you sound articulate and fluent.33
Other Selection Techniques

Managers use several other selection techniques to screen applicants, including
realistic previews, background investigations and reference checks, honesty test-
ing, and health exams.
● Realistic Previews Sometimes a dose of realism makes the best screening

tool. Realistic previews provide candid details of what working for the company
and on that particular job actually entails. For example, Wal-Mart found that
associates who quit within the first ninety days often did so because of conflict in
their schedules or because they preferred to work in another geographic area. The
firm then began explicitly explaining and asking about work schedules and work
preferences.34
● Background Investigations and Reference Checks Employers are well

advised to verify the applicant’s background information and references. As one
firm’s security director said, “It’s not uncommon to find someone who applies and
looks good, and then you do a little digging and you start to see all sorts of crimi-
nal history.”35
The most commonly verified background areas are legal eligibility for employ-
ment (to comply with immigration laws); dates of prior employment; military
service; education; and name, date of birth, and address (see Figure 12.12).36 Most
employers verify current or previous position and salary with the current em-
ployer by telephone. Others call to discover more about the person’s motivation,
technical competence, and ability to work with others. Some employers also get
F IGURE 12.12 EMPLOYMENT REFERENCE CHECK FORM

Employee Reference Applicant: 1. Please print out this Reference Check Form.
2. Fill out the top section of the form.
Check Form 3. Send it to a former employer to complete and return to:
Human Resources Department
Winter Sports, Inc./Big Mountain Ski & Summer Resort
PO Box 1400, Whitefish, MT 59937/or Fax to: 406-862-2955
REFERENCE CHECK FORM Please Type or Print Legibly

To Be Completed by Applicant:
Applicant’s Name
Name of Reference
Business Name
I have applied for a position with Winter Sports, Inc. at Big Mountain Ski and Summer Resort.
In order to be considered for employment, they have requested information from my previous
employers. I would appreciate your cooperation in providing the answers to the following
questions. I have been advised this information will be held in confidence by the Winter Sports,
Inc. Human Resource Department.
Applicant’s Signature Date
To be Completed by Employer:
Employed From To
Position(s) Held
Reason for Separation: Quit Laid-off Discharged
Other
Comments:
As an employee, was this person:

Responsible? YES NO
Able to work well with others? YES NO
Trustworthy? YES NO
Dependable (Attendance)? YES NO
Eligible for rehire? YES NO
A positive customer service representative? (if applies) YES NO
Please comment briefly on “NO” responses:
Additional comments from supervisor, if possible
Signature of person filling out form:

Title: Date:
background reports about an applicant’s credit standing, indebtedness, reputa-

tion, character, and lifestyle. Special preemployment information services such
as intellius.com use Internet and computerized databases to access and check
information about applicants’ compensation histories, credit histories, driving
records, and conviction records.
● Honesty Testing Many employees work in jobs for which honesty is espe-
cially crucial—as bank tellers or cashiers, for instance. With few exceptions, fed-
eral law now prohibits employers from using polygraph (lie detector) machines.37
Paper-and-pencil honesty tests are legal. They ask questions (such as “Have you
ever made a personal phone call on company time?”) aimed at assessing a person’s
tendency to be honest. In practice, detecting dishonest candidates involves not
just tests but comprehensive antitheft screening procedures. These procedures
may include, for instance:
◗ Asking blunt questions.38 Managers can generally be quite blunt. For example,
“Have you recently held jobs other than those listed on your application?” “Have
you ever been fired or asked to leave the job?”
◗ Doing a credit check. Have applicants sign an application form declaration saying
that the employer is authorized to conduct background checks and credit
checks.
◗ Carefully checking all employment and personal references.
◗ Using paper-and-pencil honesty tests and psychological tests.
◗ Testing for drugs. Devise a drug-testing program, and give each applicant a copy
of the policy.
◗ Establishing a search-and-seizure policy. The policy should state that all desks and
similar property remain the property of the company and may be inspected.39
● Health Exams Employers use the medical exam to confirm that the appli-
cant qualifies for the physical requirements of the position and to discover any
medical limitations they should take into account.
With drug screenings, it is common to test candidates just before they’re hired.
Many also test current employees when there is reason to believe the person has
been using drugs—after a work accident, or in the presence of obvious behavioral
symptoms, chronic lateness, or high absenteeism. Some firms routinely adminis-
ter drug tests on a random or periodic basis.40
Managing Now: Interviewing

and Selecting Employees
Employers are increasingly using computerized means, often Web-assisted, to
conduct interviews. The advantage of using the Web is that it enables employers to
integrate the automated Web-based employment interview and test results with
applicant tracking capabilities.
A computerized selection interview is one in which a job candidate’s oral and/
or computerized replies are obtained in response to computerized oral, visual, or
written questions and/or situations. Most computerized interviews present the
Orienting and Training Employees ■ 355
applicant with a series of questions regarding his or her background, experience,

education, skills, knowledge, and work attitudes that relate to the job. Some
(video-based) computerized interviews also confront candidates with realistic
scenarios (such as irate customers) to which they must respond. Typical comput-
erized interviews present questions in a multiple-choice format, one at a time; the
applicant is expected to respond to the questions on the screen by pressing a key.
Pic’n Pay stores, a chain of self-service shoe stores, gives job applicants an 800
number to dial for a computerized interview. The interview contains 100 ques-
tions and lasts about ten minutes. Applicants press 1 for yes and 0 for no. Every
applicant then gets a follow-up live telephone interview, from one of the firm’s six
dedicated interviewers.
Orienting and Training Employees

Online Study Center
ACE the Test
Managing Now! LIVE Q nce employees are hired, they must be prepared to do their jobs; this is the
purpose of orientation and training. Designing and implementing training
programs are essential managerial activities. It is futile to carefully select new
employees and then put them on the job with inadequate training.
Orienting Employees
orientation: providing new Employee orientation means providing new employees with basic information
employees with basic like work rules and vacation policies. In many companies, employees receive a
information like work rules and hard-copy or Internet-based handbook containing this information. Orientation
vacation policies
aims to familiarize the new employee with the company and his or her coworkers;
provide information about working conditions (coffee breaks, overtime policy,
and so on); explain how to get on the payroll, how to obtain identification cards,
and what the working hours are; and generally reduce the jitters often associated
with starting a new job.
Orientation also begins the process of socializing employees into the em-
ployer’s values and ways of doing things. Here, socializing means achieving a fit
between the employee’s values and way of doing things and those of the firm.
For example, the Mayo Clinic recently revised its orientation program. Its new
“Heritage and Culture” program now covers matters such as Mayo core principles,
history, work atmosphere, teamwork, personal responsibility, innovation, in-
tegrity, diversity, customer service, and mutual respect.41
Figure 12.13 outlines a typical orientation program.
Training Employees
Orientation usually precedes training, which is a set of activities aimed at giv-
ing the employee the knowledge and skills to perform the job. Training is one
thing that distinguishes superior firms and managers.42 For example, why does
the coffee always taste good at Starbucks? Because “Brewing the Perfect Cup” is
one of five classes that all Starbucks employees take during their first six weeks
on the job.43 They learn that they must steam milk at temperatures of at least
157°F, and that coffee should never sit on the hot plate for more than twenty
minutes.
F IGURE 12.13
New Employee Departmental Orientation Checklist
SOURCE: UCSDHealthcare. Used with permission.
NEW EMPLOYEE DEPARTMENTAL ORIENTATION CHECKLIST

(Return to Human Resources within 10 days of Hire)
NAME: HIRE DATE: SSN: JOB TITLE:
DEPARTMENT: NEO DATE: DEPARTMENTAL ORIENTATION COMPLETED BY:
TOPIC: DATE REVIEWED N/A
1. HUMAN RESOURCES INFORMATION

a. Departmental Attendance Procedures and UCSD Healthcare Work
Time & Attendance Policy a. ❐
b. Job Description Review b. ❐
c. Annual Performance Evaluation and Peer Feedback Process c. ❐
d. Probationary Period Information d. ❐
e. Appearance/Dress Code Requirements e. ❐
f. Annual TB Screening f. ❐
g. License and/or certification Renewals g. ❐
2. DEPARTMENT INFORMATION
a. Organizational Structure-Department Core Values Orientation a ❐
b. Department/Unit Area Specific Policies & Procedures b. ❐
c. Customer Service Practices c. ❐
d. CQI Effort and Projects d. ❐
e. Tour and Floor Plan e. ❐
f. Equipment/Supplies f. ❐
• Keys issued ❐
• Radio Pager issued ❐
• Other _____________________ ❐
g. Mail and Recharge Codes g. ❐
3. SAFETY INFORMATION
a. Departmental Safety Plan a. ❐
b. Employee Safety/Injury Reporting Procedures b. ❐
c. Hazard Communication c. ❐
d. Infection Control/Sharps Disposal d. ❐
e. Attendance at annual Safety Fair (mandatory) e. ❐
4. FACILITIES INFORMATION
a. Emergency Power a. ❐
b. Mechanical Systems b. ❐
c. Water c. ❐
d. Medical Gases d. ❐
e. Patient Room e. ❐
• Bed ❐
• Headwall ❐
• Bathroom ❐
• Nurse Call System ❐
5. SECURITY INFORMATION
a. Code Triage Assignment a. ❐
b. Code Blue Assignment b. ❐
c. Code Red—Evacuation Procedure c. ❐
d. Code 10—Bomb Threat Procedure d. ❐
e. Departmental Security Measures e. ❐
f. UCSD Emergency Number 6111 or 911 f. ❐
*This generic checklist may not constitute a complete departmental orientation or assessment. Please attach any additional unit-specific orientation material for placement
in the employee’s HR file*
I have been oriented on the items listed above ————————————————————
Orienting and Training Employees ■ 357
training programs: program Training programs consist of five steps:

aimed at providing employees
with the skills they need to do ◗ The first, or needs-analysis, step identifies the specific job performance skills
their jobs needed; analyzes the skills and needs of the prospective trainees; and develops
specific, measurable knowledge and performance objectives.
◗ In the second step, instructional design, you decide on, compile, and produce
the training program content, including workbooks, exercises, and activities.
◗ There may be a third step, validation, in which the firm works the bugs out of the
training program by presenting it to a small representative audience.
◗ The fourth step is to implement the program by actually training the targeted
employee group.
◗ Fifth is an evaluation and follow-up step to assess the program’s effectiveness.
Most managers do not need to create their own training materials because
many materials are available on- and offline. For example, the professional devel-
opment site Click2learn.com offers a wide range of Web-based courses that
employees can take online. And many firms, including American Media Inc. of
West Des Moines, Iowa, provide packaged training programs on various topics.
The programs include a training leader’s guide; a self-study book; and a video for
improving skills in areas such as customer service, documenting discipline, and
appraising performance.
Training Techniques
on-the-job training (OJT): Training techniques range from simple to complex. On-the-job training (OJT)
having a person learn a job by means having a person learn a job by actually performing it. Just about every em-
actually performing it, usually ployee gets some OJT. It usually involves assigning new employees to experienced
under guidance of an
workers or supervisors, who then do the actual training.44 Some employers, like
experienced coworker
The Men’s Wearhouse, do almost all their training via a formal on-the-job training
program. This includes providing line managers with detailed manuals explaining
how to train employees on the job. At a minimum, employees should get job
descriptions and short training manuals that explain their jobs. The Improving
Your Training Skills feature shows the kinds of information a supervisor should
know about using OJT techniques.
Of course, most situations call for using other training techniques as well.
For example, instead of sending new rental agents to weeklong, classroom-based
training courses, Value Rent-a-Car provides them with interactive, multimedia-
based training programs using DVDs. Airlines use simulated learning to train
pilots to fly new planes and to react to various emergencies (both situations
would be dangerous for training on the job). When steelmaker Dofasco discov-
ered that many of its employees would be retiring in the next few years, it revived
its apprenticeship training program. New recruits spend about thirty two months
in a training program learning various jobs under the tutelage of experienced
employees.45
With jobs becoming more technically demanding, literacy training is often
required. This often involves bringing in local educators to teach basic literacy
skills such as reading, writing, and math.
I M P R OV I N G Y O U R T R A I N I N G S K I L L S
On-the-Job Training
Step 1: Prepare the Learner Step 3: Do a Tryout
1. Put the learner at ease—relieve tension. 1. Have the learner go through the job several times,
2. Explain why he or she is being taught. slowly, explaining each step to you.
3. Create interest, encourage questions, find out what the 2. Run the job at the normal pace.
learner already knows. 3. Have the learner do the job, gradually building up skill
4. Explain the whole job and relate it to some job the and speed.
worker already knows. 4. As soon as the learner demonstrates ability to do the
5. Place the learner as close to the normal working job, let the worker begin, but don’t abandon him or her.
position as possible.
Step 4: Follow-Up
6. Familiarize the worker with equipment, materials, tools,
and trade terms. 1. Designate to whom the learner should go for help.
2. Gradually decrease supervision, checking work from
Step 2: Present the Operations
time to time.
1. Explain quantity and quality requirements. 3. Correct faulty work patterns before they become a
2. Go through the job at the normal workplace. habit.
3. Go through the job at a slow pace several times, 4. Compliment good work; encourage the worker until
explaining each step. he or she is able to meet the quality and quantity
standards.46
4. Again go through the job at a slow pace several times;
explain the key points.
5. Have the learner explain the steps as you go through
the job at a slow pace.
Managing Now: Orientation and Training

Employers use technology in orientation and training. For example, some firms pro-
vide incoming managers with preloaded personal digital assistants. These contain
information the new managers need to better adjust to their new jobs, such as key
contact information, main tasks to undertake, and even digital images of employ-
ees the new manager needs to know.47
Similarly, just as Web-based courses have changed how college students learn,
more employers are moving all or most of their training functions to the Web.
In most cases, the preferred approach is to create Internet-based learning
portals for employees, either on the employers’ own intranets or on the websites
of special online training-content providers. These content providers then offer
their training content to the firms’ employees via the portal. For example, the U.S.
Post Office contracted with Thinq.com to use the latter’s online learning manage-
ment system. Thinq.’s learning management system gives employees access to
up-to-date training courses and lets the postal service’s managers monitor their
employees’ training progress.
Appraising and Maintaining Employees ■ 359
Increasingly, employers are also integrating their e-learning systems with

their overall, enterprise management information systems. Doing so produces
several benefits. For example, the employer can more easily combine its online
training with its online discussion forums and synchronous meeting tools, thus
improving the interactivity of the learning.48
Appraising and Maintaining Employees

Online Study Center
ACE the Test
Managing Now! LIVE O nce employees are recruited, hired, oriented, and trained, the manager turns
to appraising their performance and to providing for their compensation and
working conditions.
Employee Appraisal
performance appraisal: Performance appraisal means evaluating an employee’s performance relative
evaluating an employee’s to his or her performance standards. There are several methods for evaluating em-
performance relative to his or ployees. Probably the most familiar performance appraisal method involves using
her performance standards
a graphic rating scale. This scale lists several job characteristics (like quality of
graphic rating scale: work) and provides a rating scale (from outstanding to unsatisfactory), along with
appraisal scale that lists several short definitions of each rating. Some use the more subjective critical incidents
job characteristics (like quality method instead. Here, the manager compiles brief examples of the employee’s
of work) and provides a rating good or bad performance, and then uses these examples to support the person’s
scale (from outstanding to
appraisal and his or her development needs. Some supplement graphic ratings
unsatisfactory), along with short
definitions of each rating with critical incidents. Ranking means positioning employees at different levels,
from low to high, based on their performance. Behaviorally anchored rating
critical incidents: brief scales (BARS) aim to combine the benefits of critical incidents and quantified
examples of an employee’s good ratings by anchoring each rating in the rating scale (from high to low) with illustra-
or bad performance, used to tive performance examples. The forced distribution method, a form of ranking,
support the person’s appraisal
and his or her development
is similar to grading on a curve. The rater places predetermined percentages of ra-
needs tees into performance categories, for example, top 10 percent, middle 80 percent,
and bottom 10 percent.
ranking: positioning Sun Microsystems uses the forced distribution method. Managers appraise
employees at different levels, employees in groups of about thirty, and the bottom 10 percent of each group gets
from low to high, based on their
ninety days to improve. If they’re still at the bottom 10 percent in ninety days, they
performance
get a chance to resign and take severance pay. Some decide to stay, but if it doesn’t
behaviorally anchored work out, the firm fires them without severance.49 GE still uses forced distribution
rating scales (BARS): scales rankings. Its former CEO, Jack Welch, insisted that managers routinely dismiss
that combine the benefits of their lowest 10 percent–performing employees each year. The current CEO, Jeffrey
critical incidents and quantified
Immelt, has softened the process by giving bottom 10-percenters more time to
ratings by anchoring each rating
from high to low, with improve. About a fourth of Fortune 500 companies, including Microsoft, Conoco,
illustrative performance and Intel, use versions of forced distribution.50
examples With 360-degree feedback, performance information is collected via surveys
from supervisors, subordinates, peers, and internal or external customers.51 Based
forced distribution on one study, 29 percent of the responding employers use 360-degree feedback.52
method: a form of ranking,
similar to grading on a curve; the
For managers, surveys might include items such as “returns phone calls promptly”
rater places predetermined and “my manager keeps me informed.”53 Computerized systems compile the feed-
percentages of ratees into back into individualized reports for the ratee.54 The feedback is generally used for
performance categories training purposes, not raises.55
● Performance Management Experts like W. E. Deming argue that forced

ranking and even other conventional approaches like rating scales foster fear and
are unfair. Their basic argument is that performance is more a product of the qual-
ity of management and of the training the person received. Thus, employees
shouldn’t shoulder all the blame for poor performance. Indeed, in many top
companies, including Toyota, you’d be hard-pressed to find any conventional
appraisals. Instead, teams and supervisors meet often to review performance
issues, analyze them, and figure out how to improve things. Deming recommends,
among other things, performance contracts that lay out the steps the worker and
company will take to get the employee’s performance up to par.
Performance management, which we discussed earlier in this book, plays a
role in performance appraisal. As we explained, performance management refers
to any system that focuses employees on the goals and initiatives that they must
execute for the company to succeed, and that gives managers a timely way to
monitor performance and take corrective action. The basic idea of performance
management is to give each employee several goals in the context of a strategy
map approach—in other words, link the employee’s goals and outputs (like good
service) directly to what the company needs to do to succeed (like have more
guests return more often). The company then uses information technology and
digital dashboards to provide employees and managers with a real-time bird’s-eye
view of how each employee is doing and impacting the company.
Doing this, particularly for larger companies, requires Web-based perfor-
mance management systems. For example, Seagate Technology uses Enterprise
Suite for managing the performance of its 39,000 employees.
● The Appraisal Interview An appraisal typically culminates in an appraisal

interview. One suggested approach for conducting an appraisal interview
includes:
◗ Prepare for the interview. Assemble the data, study the person’s job description
and performance, and give the person notice to review his or her work.
◗ Be direct and specific. Talk in terms of objective work data, such as absences and
quality.
◗ Do not get personal. Try to compare the person’s performance to a standard.
◗ Encourage the person to talk. Use expressions such as “go on” or “tell me more.”
◗ Provide a plan with concrete examples. Make sure the person leaves with an
agreement of remedial steps to take.
● Dealing with Common Appraisal Problems Few of the manager’s jobs

are fraught with more peril than appraising subordinates’ performance. Employ-
ees in general tend to be overly optimistic about what their ratings should be.
They also know that their raises, career progress, and peace of mind may hinge on
how you rate them. This alone makes it difficult to rate performance. In addition,
managers tend to make one or more common appraisal mistakes when rating
subordinates.
The unclear standards appraisal problem means that an appraisal scale is too
open to interpretation. For example, without clear definitions, each individual
supervisor will probably define “good” performance in his or her own way. Rectify
this by including descriptive phrases that define each trait and degree of merit.
The halo effect problem means that the rating of a subordinate on one trait
(such as “gets along with others”) influences the way you rate the person on other
traits (such as “quantity of work”). Thus, an unfriendly employee might be rated
unsatisfactory for all traits rather than just for “gets along with others.” Being
aware of this problem is a major step toward avoiding it.
Central tendency is the tendency to rate all employees about average. For
example, if the rating scale ranges from 1 to 7, a supervisor may tend to rate most
of his or her employees from 3 to 5. Ranking employees eliminates this problem.
Leniency or strictness means that some supervisors tend to rate all their subor-
dinates consistently high or low. Again, solutions here include ranking subordinates.
Bias refers to the tendency to let individual differences like age, race, and sex
affect the appraisal ratings employees receive. In one study, researchers sought to
determine if pregnancy is a source of bias in performance appraisals. Despite hav-
ing been exposed to otherwise identical behavior by the same female employee,
the student raters of this study assigned lower performance ratings to pregnant
women than to nonpregnant women months later. Raters must be forewarned of
such problems and trained to use objectivity in rating subordinates.
Compensation
employee compensation: After being appraised, employees expect to be paid. Employee compensation refers
all work-related pay or rewards to all work-related pay or rewards that go to employees. It includes direct financial
that go to employees payments in the form of wages, salaries, incentives, commissions, and bonuses, and
indirect payments in the form of financial fringe benefits like employer-paid insur-
ance and vacations. Today, the emphasis is generally on basing the employee’s pay
at least in part on his or her performance and on his or her skills and competen-
cies. Competency- or skills-based pay basically means paying the employees for
the range and types of skills they’ve accumulated.
● Salary However, a fixed salary or an hourly wage is still the centerpiece of

most employees’ pay. Some employees—managerial, professional, and often
secretarial—are salaried. They are paid by the week, month, or year. Other em-
ployees typically receive an hourly wage. Under the federal Fair Labor Standards
Act, employers must pay certain categories of workers overtime pay if they work
more than forty hours per week. Those employees earning under $455 per week
are generally nonexempt from the act’s overtime provisions and must get overtime
pay (at the rate of one and one half times their hourly salary) for each overtime
hour worked. Those earning over $100,000 per year are generally exempt.
Companies’ boards are clamping down on executive pay.56 One reason is that
investors believe that companies should tie pay more to performance.
financial incentive: any ● Pay for Performance A financial incentive is any financial reward that is
financial reward that is contingent on performance (some call this pay for performance). Salespeople get
contingent upon performance financial incentives called commissions, generally in proportion to the items or
(some call this pay for
services they sell. Production workers may receive a financial incentive called
performance)
piecework, which is a standard sum for each item the worker produces.
Today, increasingly, it is common to pay almost all employees, including engi-
neers, secretaries, managers, and college professors, in part based on the extent to
which they and/or their companies achieve their goals. For example, in a profit-
sharing program, most employees usually receive some small share of the com-
pany’s profits. Many employees periodically receive merit pay or a merit raise,
which is a salary increase awarded to an employee based on individual perfor-

mance. Merit pay differs from a bonus, which is a one-time financial payment.
employee benefits: pay ● Benefits Employee benefits are pay supplements. Many benefits are legally
supplements, such as insurance mandated. For example, under federal and state law, unemployment insurance is
and vacations available to most employees and is paid by state agencies to workers who lose their
jobs through no fault of their own. Worker’s compensation, another legally man-
unemployment insurance:
a payment made by state dated benefit, is a payment aimed at providing sure, prompt income and medical
agencies to workers who lose benefits to victims of work-related accidents or their dependents, regardless of
their jobs through no fault of fault. Social Security is another federally mandated benefit paid for by a tax on an
their own, and paid for by a tax employee’s salary or wages. Vacations and holiday days are benefits but are not
on the employer’s payroll legally mandated.
In an effort to attract and hold superior employees, employers can differenti-
worker’s compensation:
a payment aimed at providing ate themselves on the basis of the benefits that they offer. For many employees,
sure, prompt income and health and hospitalization benefits are a major determinant of which job to
medical benefits to victims of accept. Many other companies such as SAS Institute distinguish themselves with
work-related accidents or their outstanding family-friendly benefits such as child-care facilities, gyms, and flexi-
dependents, regardless of fault ble work schedules. With the number of employees age sixty and over skyrocket-
ing, many firms are offering early retirement benefits, for instance, allowing those
employees to phase into retirement by working half-time until they formally retire.
Discipline and Grievances

Supervisors sometimes discipline subordinates, usually when the latter violate a
rule. Prerequisites to discipline include having clear rules (such as “no smoking
allowed when dealing with customers”), as well as progressive penalties.
In assessing the need for discipline, some supervisors follow the so-called
FRACT model: get the facts, obtain the reason for the infraction, audit the records,
pinpoint the consequences of the infraction, and identify the type of infraction
discipline without before taking remedial steps. Some use the discipline without punishment
punishment: disciplinary approach, where an employee first gets an oral reminder if he or she breaks a rule;
approach that begins with an then a written reminder if it occurs again; then a paid, one-day decision-making
oral reminder, then paid time
leave if another incident occurs. If he or she breaks the rule again, a dismissal may
off, and then more punitive
measures only if the rules be in order. Some companies now establish independent ombuds, neutral coun-
infraction continues selors outside the normal chain of command to whom employees who believe
they were treated unfairly can turn for confidential advice.57 Discipline guidelines
include:
◗ Make sure the evidence supports the charge.
◗ Protect the employee’s due process rights.
◗ Warn the employee of the disciplinary consequences.
◗ The rule allegedly violated should be reasonably related to the effective opera-
tion of the work environment.
◗ Investigate the matter.
◗ Apply rules and penalties evenhandedly.
◗ Make sure the penalty is reasonably related to the misconduct and to the
employee’s past work history.
◗ Don’t rob your subordinate of his or her dignity.
◗ Remember that the burden of proof is on you.
◗ Don’t base your decision on hearsay or a general impression.
◗ Don’t act while angry.
grievance: a complaint an A grievance is a complaint an employee lodges against an employer, usually

employee lodges against an regarding wages, hours, or some condition of employment, like supervisory be-
employer, usually regarding havior. For example, a terminated employee might file a grievance stating that the
wages, hours, or some condition
supervisor didn’t warn her about her impending termination, per the union agree-
of employment
ment. Grievance steps typically include discussing the problem with a supervisor,
and then referring the matter to the department head, the personnel department,
and finally the head of the facility.
Managing Now: Appraising

and Maintaining Employees
Appraisal tends to involve extensive documentation. Each employee needs pre-
appraisal period goals. And, the appraisal forms may go on for two or three pages,
or more.
The Internet is therefore well suited to improving the employee appraisal
process. For example, PerformanceReview.com, from KnowledgePoint of Petaluma,
California, lets managers evaluate employees online based on their competencies,
goals, and development plans. Managers can choose from standard competencies
such as communications, or create their own. PerformancePro.net from the
Exxceed Company of Chicago, Illinois, is another Internet-based performance
review system. It helps the manager and his or her subordinates develop perfor-
mance objectives for the employee and conduct the annual review.
● Benefits Administration The Internet has also revolutionized compensa-

tion and benefits administration. For example, benefits administration is a labor-
intensive and time-consuming activity for an HR department. Without automation,
it can require the employer to devote hundreds or thousands of human resource
professionals’ hours to transactions such as answering employees’ questions
about comparative benefits.
When the organization that assists Pennsylvania school districts with their
insurance decided to automate their benefits administration, they chose a
company called BeneLogic.58 Its Employee Benefit Electronic Service Tool “lets
users manage all aspects of benefits administration, including enrollment, plan
descriptions, eligibility, and premium reconciliation, via Microsoft Internet
Explorer. . . .”59 BeneLogic’s system provides the school districts with numerous
advantages. BeneLogic hosts and maintains the Web support application on its
own servers, and it creates customized Web-based applications for each school
district. The system facilitates Web-based employee benefits enrollment, provides
centralized call center support for benefits-related questions, and even handles
benefits-related payroll functions. Each school board’s employees access the
BeneLogic site via a link on the school board’s website and uses it to manage their
own accounts.
The Window on Managing Now feature shows how employers use employee
portals.
GM and NCR
Employers now use online employee portals for commu- career growth, and NCR values and policies. NCR also
nicating with employees and for enabling employees to has a forms center on the site’s title bar.The portal gives
self-service their HR-related tasks.60 General Motors NCR employees a shortcut to all the information and
calls its employee portal mySocrates. It enables employees forms they need to manage their own tasks, such as
to keep track of and/or modify details such as their merit updating their personal information. It also helps NCR su-
awards, pay records, and retirement formulas.61 pervisors carry out day-to-day supervisory tasks such as
NCR Corporation organized its HR portal into three completing performance appraisal forms.
information areas: benefits and compensation, training and
Understanding HR’s Legal Framework

Online Study Center
ACE the Test
Managing Now! LIVE T housands of federal, state, and local laws prescribe what companies can and
can’t do when it comes to employee recruitment and selection, compensation
and benefits, and safety on the job.
Equal-Employment Laws and Affirmative Action

A federal court recently ruled that Dial Corp. discriminated against female job
applicants at a meatpacking plant by requiring applicants to take a pre-employment
strength test.62 The test screened out disproportionately more women than men,
and there appeared to be no compelling need for strength on the job. Equal-
employment opportunity laws aim to ensure that managers conduct the firm’s per-
sonnel activities in a nondiscriminatory manner. For example, employers should
verify that their selection tests are valid and do not screen out a disproportionate
number of women or minorities; interviews should avoid delving into applicants’
ethnic, racial, or marital status; and employers usually can’t advertise “help
wanted—male” or “help wanted—female.” The basic idea is that all applicants and
employees should be on a level playing field. The manager should not discrimi-
nate against an applicant or employee based on that person’s age, race, sex, reli-
gion, national origin, color, or disability.
Title VII of the 1964 Civil Rights Act bars discrimination because of race, color,
religion, sex, or national origin (see Table 12.1). It also created the Equal Employ-
ment Opportunity Commission (EEOC), a five-member commission supported by
a large staff to enforce these laws. The EEOC receives, investigates, and may file
charges regarding job discrimination complaints on behalf of aggrieved individu-
sexual harassment: als. We list other important antidiscrimination laws in Table 12.1.
unwelcome sexual advances,
requests for sexual favors, or ● Sexual Harassment Sexual harassment is a special type of discriminatory
other verbal or physical conduct behavior. It is:
of a sexual nature that occurs
under various workplace . . . unwelcome sexual advances, requests for sexual favors, and other verbal or
conditions physical conduct of a sexual nature that occurs under conditions including
Understanding HR’s Legal Framework ■ 365
T ABLE 12.1
Summary of Important Equal Employment Opportunity Legislation and Decisions
Action What It Does
Title VII of 1964 Civil Rights Act, Bars discrimination because of race, color, religion, sex, or national origin;
as amended instituted EEOC
Executive orders Prohibit employment discrimination by employers with federal contracts of
more than $10,000 (and their subcontractors); establish office of federal
compliance; require affirmative action programs
Federal agency guidelines Used by federal agencies for enforcement of laws barring discrimination
based on sex, national origin, and religion, as well as employee selection
procedures; for example, they require validation of tests
Supreme Court decisions: Ruled that job requirements must be related to job success; that
Griggs v. Duke Power Co., discrimination need not be overt to be proved; that the burden of proof is
Albemarie v. Moody on the employer to prove that the qualification is valid
Equal Pay Act of 1967 Requires equal pay for men and women for performing similar work
Age Discrimination in Prohibits discriminating against a person 40 years or over in any area of
Employment Act of 1967 employment because of age
State and local laws Often cover organizations too small to be covered by federal laws
Vocational Rehabilitation Requires affirmative action to employ and promote qualified disabled
Act of 1973 persons and prohibits discrimination against disabled persons
Pregnancy Discrimination Prohibits discrimination in employment against pregnant women or
Act of 1978 workers with related conditions
Vietnam Era Veteran’s Readjustment Requires affirmative action in employment for veterans of the Vietnam
Assistance Act of 1974 War era
Wards Cove v. Atonio; Patterson v. These Supreme Court decisions made it more difficult to prove a case of
McLean Credit Union unlawful discrimination against an employer
Morton v. Wilks This case allowed consent decrees to be attacked and could have had a
chilling effect on certain affirmative action programs
Americans with Disabilities Strengthens the need for most employers to make reasonable
Act of 1990 accommodations for disabled employees at work; prohibits discrimination
Civil Rights Act of 1991 Reverses Wards Cove, Patterson, and Morton decisions; places burden of
proof back on employer and permits compensatory and punitive money
damages for discrimination
Source: Gray Dessler, Human Resource Management, 10th ed. (Upper Saddle River, N.J.: Prentice Hall, 2005), p. 45.
the following: when such conduct is made, either explicitly or implicitly, a

term or condition of an individual’s employment; when submission to or re-
jection of such conduct by an individual is used as the basis for employment
decisions affecting the individual; or when such conduct has the purpose or
effect of unreasonably interfering with an individual’s performance or creat-
ing an intimidating, hostile, or offensive work environment.
In addition to being unfair and detestable, sexual harassment is also illegal. To

comply with the law, managers and employers should:
1. Take all complaints seriously. When confronted with sexual harassment com-
plaints or when sexual conduct is observed in the workplace, “the best reac-
tion is to address the complaint or stop the conduct.”63
2. Issue a strong policy statement condemning such behavior.
3. Inform all employees about the policy prohibiting sexual harassment and of
their rights under the policy.
4. Establish a complaint procedure so that employees understand the chain of
command in filing and appealing sexual harassment complaints.
5. Establish a management response system that includes an immediate reac-
tion and investigation by senior management when charges of sexual harass-
ment are made.
6. Hold training sessions with supervisors and increase their awareness of the
issues.
7. Discipline managers and employees involved in sexual harassment.
● Affirmative Action Whereas equal-employment opportunity aims to en-

affirmative action: requires sure equal treatment at work, affirmative action requires employers to make an
employers to make an extra extra effort to hire and promote those in a protected group (such as women or mi-
effort to hire and promote those norities). An example would be setting a goal of promoting more minorities to
in a protected group (such as
middle-management jobs.
women or minorities)
Occupational Safety and Health

In one recent year, 5,559 U.S. workers died in workplace incidents. There were also
over 4.4 million occupational injuries and illnesses resulting from accidents at
work. The Occupational Safety and Health Act was passed by Congress “to assure
so far as possible every working man and woman in the nation safe and healthful
working conditions and to preserve our human resources.” It sets safety and
health standards that apply to almost all workers in the United States. The Occu-
pational Safety and Health Administration (OSHA), a U.S. government agency,
administers these laws. In one recent year, OSHA conducted about 39,000 safety
inspections.
Companies take a variety of steps to improve safety and health. One is to
reduce unsafe conditions, such as slippery floors. For example, the organization
Prevent Blindness America estimates that each year, more than 700,000 Americans
injure their eyes at work, and that employers could avoid 90 percent of these in-
juries with safety eyewear.64 The occupational safety laws address unsafe condi-
tions. A brief checklist like that in Figure 12.14 can be useful for identifying such
conditions. Reducing unsafe acts is another matter, because careless employees
have accidents even where unsafe conditions are minimal. Screening out poten-
tially careless employees, training employees to work carefully, and rewarding
those who act properly are some methods employers use to reduce unsafe acts.
● Managing Now Employers increasingly turn to the Web to support their

safety training programs. For example, www.puresafety.com enables firms to create
Understanding HR’s Legal Framework ■ 367
F IGURE 12.14
Checklist of Mechanical or Physical Accident-Causing Conditions
I. GENERAL HOUSEKEEPING
Adequate and wide aisles—no materials protruding Material piled in safe manner—not too high or
into aisles too close to sprinkler heads
Parts and tools stored safely after use—not left in All work areas clean and dry
hazardous positions that could cause them to fall All exit doors and aisles clear of obstructions
Even and solid flooring—no defective floors or ramps Aisles kept clear and properly marked; no air
that could cause falling or tripping accidents lines or electric cords across aisles
Waste and trash cans—safely located and not overfilled
II. MATERIAL HANDLING EQUIPMENT AND CONVEYANCES

On all conveyances, electric or hand, check to see that the following items are all in sound working conditions:
Brakes—properly adjusted No loose parts
Not too much play in steering wheel Cables, hooks, or chains—not worn or otherwise defective
Warning device—in place and working Suspended chains or hooks conspicuous
Wheels—securely in place; properly inflated Safely loaded
Fuel and oil—enough and right kind Properly stored
III. LADDERS, SCAFFOLD, BENCHES, STAIRWAYS, ETC.

The following items of major interest to be checked:
Safety feet on straight ladders Properly stored
Guardrails or handrails Extension ladder ropes in good condition
Treads, not slippery Toeboards
None splintered, cracked, or rickety
IV. POWER TOOLS (STATIONARY)

Point of operation guarded Tool or material rests properly adjusted
Guards in proper adjustment Adequate work space around machines
Gears, belts, shafting, counterweights guarded Control switch easily accessible
Foot pedals guarded Safety glasses worn
Brushes provided for cleaning machines Gloves worn by persons handling rough or sharp materials
Adequate lighting No gloves or loose clothing worn by persons operating
Properly grounded machines
V. HAND TOOLS AND MISCELLANEOUS

In good condition—not cracked, worn, or Goggles, respirators, and other personal protective
otherwise defective equipment worn where necessary
Properly stored
Correct for job
VI. ELECTRICITY
No frayed, cracked, or deteriorated cords No dangling wires
All portable, as well as fixed, machinery grounded Ground-fault circuit interrupters used in humid conditions
by three-wire connectors
VII. SPRAY PAINTING

Explosion-proof electrical equipment Fire extinguishers adequate and suitable; readily accessible
Proper storage of paints and thinners in approved Minimum storage in work area
metal cabinets
VIII. FIRE EXTINGUISHERS

Properly serviced and tagged Adequate and suitable for operations involved
Readily accessible
SOURCE: Courtesy of the American Insurance Association. From “A Safety Committee Man’s Guide,” pp.1–64.
SOURCE: www.osha.gov.
their own training websites, complete with a “message from the safety director.”
The employer contracts with www.puresafety.com. Puresafety is an applications
service provider that creates a website for the employer and populates the site
with safety training courses from www.puresafety.com.65
Labor-Management Relations
Under the laws of the United States and many other countries, employees may
organize into unions. In the United States, the Norris-LaGuardia Act guarantees
each employee the right to bargain with employers for union benefits. The
Wagner Act outlaws unfair labor practices such as employers interfering with,
restraining, or coercing employees who are exercising their legally sanctioned
rights of organizing themselves into a union. The Taft-Hartley Act prohibits unfair
labor practices by unions against employers (like refusing to bargain with an em-
ployer). The Landrum-Griffin Act protects union members from unfair practices
perpetrated against them by their unions.
The manager needs to be familiar with a variety of special terms with respect
to labor relations. For example, suppose that a union wins, through a special elec-
tion, the right to represent the company’s workers. Good faith bargaining means
that both the union and management must make reasonable progress toward
working out an agreement, by making proposals and counterproposals. If progress
is unsatisfactory, the union or management may bring in a third party, such as an
arbitrator or mediator, to help the two sides reach an agreement. The former may
have the power to impose an agreement. The latter usually just meets with the par-
ties and tries to get them to agree.
● Managing Now Unions’ websites are becoming integral parts of many union-
ization campaigns. Alliance@IBM provides one example. Managed by the Commu-
nications Workers of America, Alliance@IBM seeks to encourage IBM employees to
join the union. It does so by providing information on a range of issues, such as why
IBM employees need a union, questions and concerns about unions, and how
employees can join the union and get involved.
Managing Now: Integrating the Company’s Global

HR Information Systems
As a company grows, relying on separate human resources systems (for appraisal,
applicant tracking, and so on) becomes unwieldy. Increasingly, the manager wants
and needs human resources systems that “talk to each other”—that are integrated.
For example, the employer needs a system in which personal data (such as next of
kin’s name and address) from the applicant tracking system is automatically fed
into the benefits system, and completed training courses automatically become
part of the employee’s appraisal records. More firms are therefore integrating their
human resources HR systems into human resources information systems (HRISs). We can define
information systems an HRIS as interrelated components working together to collect, process, store,
(HRISs): interrelated and disseminate information to support decision making, coordination, control,
components working together
analysis, and visualization of an organization’s human resource management
to collect, process, store, and
disseminate information to activities.
support decision making, For example, when Buildnet, Inc., decided to integrate its separate human
coordination, control, analysis, resources systems, it chose a Web-based software package called MyHRIS, from
and visualization of an NuView, Inc. (www.nuviewinc.com). This Internet-based system includes human
organization’s human resource resources and benefits administration, applicant tracking and résumé scanning,
management activities training administration, and succession planning and development. With
MyHRIS, managers at any of the firm’s locations around the world can access and
update more than 200 built-in reports such as “termination summary,” or “open
positions.”66 And the firm’s home-office managers can monitor global HR activi-
ties on a real-time basis.
Oracle Corp.’s Human Capital Management is another example. A summary
of this HRIS system’s components helps illustrate what it does for employers. Its
components include, for instance, daily business intelligence for human re-
sources, incentive compensation, learning management, self-service human
resources, absence management, benefits administration, candidate gateway,
pension administration, workforce planning, workforce rewards, and help desk
for human resources.67
CHAPTER SUMMARY
1. Human resource management is the management including the use of internal sources, advertising,
function devoted to acquiring, training, apprais- the Internet, employment agencies, recruiters,
ing, and compensating employees. As workers referrals, college recruiting, and recruiting a more
become more fully empowered, the HR function diverse workforce—is then used to create a pool of
has grown in importance. applicants.
2. Staffing—filling a firm’s open positions—starts with 3. With a pool of applicants, the employer can turn
job analysis and personnel planning. Recruiting— to screening and selecting and use one or more
techniques—including application blanks, inter- fringe benefits like employer-paid insurance and
views, tests, and reference checks—to assess and vacations.
investigate an applicant’s aptitudes, interests, and
7. In disciplining employees, managers should be
background.
sure they have all the facts and that the discipline is
4. Once employees have been recruited, screened, and defensible and fair.
selected, they must be prepared to do their jobs; this
8. The HR function is subject to the constraints of
is the purpose of employee orientation and training.
numerous federal, state, and local laws. The equal-
Orientation means providing new employees with
employment laws prohibiting employment dis-
basic information about the employer; training
crimination are among the most important of
ensures that the new employee has the basic knowl-
these personnel laws and include Title VII of the
edge required to perform the job satisfactorily.
Civil Rights Act, various executive orders, the Equal
5. Once they’ve been on the job for some time, Pay Act of 1963, and the Americans with Disabili-
employees are appraised. ties Act of 1990. The Occupational Safety and
Health Act sets safety and health standards that
6. Employee compensation refers to all work-related
apply to most U.S. workers. Other laws govern
pay or rewards that go to employees. It includes
union-management relations and include the
direct financial payments in the form of wages,
Wagner Act.
salaries, incentives, commissions, and bonuses, as
well as indirect payments in the form of financial
1. Why do we say that HR today is strategic? 5. Why is effective employee selection important to
the manager?
2. What are the main elements in a job description?
6. Explain how you would conduct an interview, in-
3. What information would you collect for a job
cluding the types of questions you would ask.
analysis?
7. What do the equal-employment laws say managers
4. How would you use JobDescription.com to create
can and cannot do? Explain briefly.
a job description?
1. Working in teams of four to five students, conduct plan for the job of teaching this course, as well as a
a job analysis and develop a job description for the list of interview questions your team can use to
instructor of this course. Make sure to include a job screen applicants for the job of instructor. Then
summary, as well as a list of job duties and a job develop an on-the-job training program for the job
specification listing the human requirements of or instructor.
the job.
3. Working in teams of four to five students, refer to
2. Using the job description that you wrote in Experi- Figure 12.14 and spend thirty minutes assessing the
ential Exercise 1 as a guide, develop a recruiting safety of the college building your class meets in.
Case Study ■ 371
CASE STUDY
The Out-of-Control Interview
aria Fernandez is a bright, popular, and well- the management team. She was left wondering whether
M informed mechanical engineer who graduated with
an engineering degree from State University in May
the panel interview had been intentionally tense to see
how she’d stand up under pressure and, if so, why the
2007. During the spring preceding her graduation, she panel members would do such a thing.
went out on many job interviews, most of which she
thought were courteous. Therefore, she looked forward
with great anticipation to an interview with the one DISCUSSION QUESTIONS
firm for which she most wanted to work, Apex Environ-
mental. She had always had a strong interest in clean- 1. How would you explain the nature of the interview
ing up the environment. The interview, however, was a Maria Fernandez had to endure? Specifically, do
disaster. When Maria walked into the room, five men, you think it reflected a well-thought-out interview-
including the president of the company, two vice presi- ing strategy on the part of the firm or carelessness
dents, the marketing director, and another engineer, on the part of the firm’s management? If it was
began throwing questions at her. The questions ranged carelessness, what would you do to improve the
from unnecessarily discourteous (“Why would you take interview process at Apex Environmental?
a job as a waitress in college if you’re such an intelligent
2. Would you take the job if you were Maria? If you’re
person?”) to irrelevant and sexist (“Are you planning on
not sure, is there any additional information that
settling down and starting a family anytime soon?”).
would help you make your decision, and, if so,
After the interview, she met with two of the men indi-
what is it?
vidually (including the president), and the discussions
focused almost exclusively on her technical expertise. 3. The job of applications engineer for which Maria
She thought that these later discussions went fairly well. was applying requires (1) excellent technical skills
Given the apparent mean-spiritedness of the panel with respect to mechanical engineering, (2) a com-
interview, however, she was astonished when several mitment to working in the area of pollution con-
days later she got a job offer from the firm. The offer trol, (3) the ability to deal well and confidently with
forced her to consider several matters. From her point customers who have engineering problems, (4) a
of view, the job itself was perfect—she liked what she willingness to travel worldwide, and (5) a very
would be doing, the industry, and the firm’s location. intelligent and well-balanced personality. What
And, in fact, the president had been quite courteous in questions would you ask when interviewing appli-
subsequent discussions, as had the other members of cants for the job?
13 LEADING
CHAPTER OUTLINE
Innovation Leadership at Whirlpool
Opening Vignette: Innovation
Leadership at Whirlpool
● What Is Leadership?
W ith stagnating washer and dryer sales,Whirlpool Corporation’s
former CEO Dave Whitman knew the company needed bold new
products. His plan for achieving this was risky and required strong
Are Leadership and Management
the Same? leadership—he would transform Whirpool into a company in which
Studying Leadership every employee felt driven to
How Can Technology Help New come up with new ideas.
Leaders? Whitman knew that this
● What Characteristics Do would require a major leader-
Leaders Have?
Types of Power
ship effort. Employees had to
When Is Each Type of Power get the information they
Appropriate? needed and have the freedom
Abuse of Power
Influence to develop their ideas.They
What Traits and Skills Are Associated would need training, and their
with Leadership? supervisors would have to
Emotional Intelligence
Does Gender Matter? learn how to supervise by con-
WINDOW ON MANAGING NOW: sensus rather than by com-
How Does Technology Increase
mand.Whitman’s plan meant
the Importance of Leaders’
Communication Skills? changing the very nature of Whirlpool CEO Dave Whitman drove
● What Do Leaders Do? what his managers did and innovation through his effective leadership.
The Ohio State Studies how they led. And it meant
The University of Michigan Studies
Blake and Mouton’s Managerial Grid finding new ways to use information technology (IT) to help employ-
University of Iowa Leadership Styles ees share information and collaborate.Whirlpool asks your team for
Transformational and Transactional advice on two issues: (1) what new leadership styles would you rec-
Leadership
ommend for our managers, and (2) how can we use IT to further our
● What Influences a Leader’s
Effectiveness? aims?1 ■
Hersey-Blanchard Situational Leadership
Model
Fiedler’s Leader-Match Model
IMPROVING YOUR LEADERSHIP
SKILLS: Least Preferred Coworker
Scale Show that you’ve learned the chapter’s essential information by
Continuum of Leader Behavior
Path-Goal Theory
➤ Describing the difference between leadership and management.
PRACTICE IT: Empowerment Through ➤ Explaining how leaders can best use different types of power and influence.
Technology at Whirlpool ➤ Briefly explaining what traits, skills, and behaviors have been associated with
leadership.
372
CHAPTER 13 Leading ■ 373

Leader-Member Exchange Theory ➤ Listing five or more different leadership styles and describing when each is most
Substitutes for Leadership appropriate.
Leadership Effectiveness in Different ➤ Giving examples of factors that influence leaders’ effectiveness.
Cultures
E-Leadership
➤ Reading the Whirlpool chapter-opening vignette and identifying the leadership implica-
tions for the organization’s change to an innovation democracy.
➤ Completing the least preferred coworker self-assessment and interpreting your
leadership style.
➤ Reading the chapter case study and identifying what makes Steve Bennett an effective
leader.
➤ Completing the end-of-chapter exercises and analyzing and improving a leader’s
effectiveness.

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➤ Watching the video scenario and identifying leadership traits being displayed.
Managing Now! LIVE ➤ Watching the video scenario and identifying why the leader is not effective.
Good managers know that information technology, organizational plans, decision-

making systems, and supply chains do not make an organization successful by
themselves. Even if the right organizational systems and employees are in place,
nothing will happen without leadership. A leader sets the goals and direction and
then influences the employees to work toward achieving those goals. An organiza-
tion without leadership is like a boat without a captain. Effective leadership taps
an organization’s potential and converts it into stellar performance. Weak or inef-
fective leadership drains an organization of its potential and erodes its competi-
tive edge. The administrative debacle in the wake of Hurricane Katrina’s impact on
the Gulf Coast illustrates what happens without leadership. Mayor Giuliani’s lead-
ership in New York City in the wake of the 9/11 attacks illustrates great leadership
in a time of crisis.
Leadership involves influencing others, which may require different styles
and behaviors in different situations. In this part, Part 5, “Leading Now,” we
turn our attention to the things managers must do in their leadership roles to
enable the company to execute its strategy and meet its goals. Although tech-
nology can make some of these behaviors easier, no amount of technology can
replace them. Leaders can and must do many things—including motivate,
communicate, and build culture, community, and trust. The next five chapters
will help you to become a more effective leader and manager. Here’s what each
covers:
◗ Chapter 13, “Leading”: what leaders do; the traits and skills of leadership; situa-
tional, process, and contemporary theories of leadership; leadership through
technology; and how managers can become better leaders.
◗ Chapter 14, “Motivating Employees”: differences among people that help to
explain why people behave as they do, and theories that describe how leaders
can better motivate employees.
374 PART FIVE CHAPTER 13 Leading
◗ Chapter 15, “Improving Communications”: what is communication, what can

enhance and impede effective communication, and what a manager should
know about communication to lead effectively.
◗ Chapter 16, “Building Community, Culture, and Teamwork”: how managers can
create an environment in which employees feel committed to the company and
its goals, what are important team processes and dynamics, and how leaders can
build effective teams.
◗ Chapter 17, “Encouraging Sharing, Trust, and Collaboration”: how managers can
engage employees in the sharing and collaborative behaviors necessary to estab-
lish trust and high performance.
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What Is Leadership? ACE the Test
Managing Now! LIVE
leadership: setting the

direction and inspiring and
influencing others to work
L eadership means setting the direction and inspiring and influencing others
to work willingly toward achieving a firm’s objectives. Leadership can have
both positive and negative effects in organizations. At its best, leadership inspires
willingly toward achieving a
and motivates employees to work hard toward organizational objectives and helps
firm’s objectives
the organization succeed. At its worst, leadership can reduce the performance of
individual employees as well as the entire organization, and even result in unethi-
cal behavior and an organization’s demise.
Are Leadership and Management the Same?

Leadership and management are not the same. Leadership experts Warren Bennis
and Burt Nanus put it this way: “Management controls, arranges, does things
right; leadership unleashes energy, sets the vision so we do the right thing.”2 Ideally,
all managers should be leaders, too (after all, managers plan, organize, lead, and
control). Realistically, however, not all managers are leaders. You can probably
think of someone, perhaps a former boss, whom you would not describe as being
a leader despite his or her managerial authority. Conversely, you can probably also
think of someone you would consider a leader, although he or she didn’t have
formal authority.
Managers establish and implement procedures, processes, and practices that
help the firm function smoothly and are responsible for goal attainment.3
Because of their position in the organization, managers have formal authority to
reward and punish while ensuring that what employees do is consistent with the
organization’s rules and regulations. Leaders can influence the behaviors of others
without using rewards or punishment. Leaders help clarify their subordinates’
goals and the paths or methods through which they can pursue and achieve those
goals, and help them understand their role in implementing those goals. Table 13.1
summarizes the differences between managers and leaders.
Because leadership can help all managers to be more effective, all managers
should ideally have excellent leadership skills. The reality is that everyone in an
organization, from the CEO to the entry-level employee, can and should exhibit
leadership. The leadership displayed by a store employee who inspires her
What Is Leadership? ■ 375
T ABLE 13.1
Management Versus Leadership
Management Leadership
A function A relationship
Planning Selecting and developing talent
Budgeting Motivating
Evaluating Coaching
Facilitating Building trust
Source: Michael Macoby, “Understanding the Difference Between Management and Leadership,” Research &
Technology Management, January–February 2000, pp. 57–59. Reprinted by permission of Research & Technology
Management.
coworkers to provide better customer service and the leadership shown by a ware-
house supervisor who inspires subordinates to work more safely both have posi-
tive consequences for the firm. And leadership does matter—a Hewitt Associates
study found that companies with more rigorous leadership development pro-
grams tend to outperform their competitors.4 Successful organizations and lead-
ers develop leadership skills in all of their employees, encouraging employees to
set a positive example for their coworkers and continually work toward the ac-
complishment of the firm’s goals.
The next five chapters provide a wealth of information about leadership and
behavioral concepts and skills related to effective leadership. After studying
them, you should have a variety of tools at your disposal for becoming a better
leader.
Studying Leadership
Throughout the ages, Chinese emperors, Egyptian pharaohs, and Indian chiefs
must have wondered, “Why are some people more effective leaders than others?”5
Yet only in the last seventy years or so have behavioral scientists addressed this
question. In brief, experts’ current thinking is that effective leadership reflects
a balance of (1) a leader’s traits and skills and (2) a leader’s styles or behaviors,
(3) combined in a way that best fits the followers and is most appropriate for the
situation at hand.6 Essentially, effective leadership depends on who a person is in
terms of their traits and skills, how the person behaves, and the appropriateness of
the two given the situation the leader is facing. Followers’ perceptions of the leader
and their willingness to let the leader influence them further influence leadership
effectiveness. No one can be a leader without followers, and only the followers de-
termine whether someone will lead them.
First, we will discuss leadership traits, what leaders do, and what influences a
leader’s effectiveness. At the end of the chapter, we will review several contempo-
rary approaches to leadership. Let’s first look at the Window on Managing Now
feature, which illustrates how technology can help new leaders become effective
more quickly.
How Can Technology Help New Leaders?
New leaders often have a lot to learn before they can get Online Leadership Development
down to the business of leading. They have to learn what
Web-based coaches and tools can support leadership de-
their new goals and responsibilities are and who it is that
velopment. For example, Boeing’s Web-based leadership
they are responsible for leading. New and existing leaders
development tool, called Waypoint, helps leaders develop
also often benefit from training in coaching and leadership
their leadership and management competence.Waypoint
skills. Technology can help new leaders get up to speed in
allows leaders to engage in self-directed learning using
a variety of ways.7
an interactive website where they can take assessment
CD-ROMs tests, devise personal development plans, and identify
training and developmental assignments. Reading materi-
Many companies, like Dell Computer, are putting new-hire
als and other learning resources facilitate their contin-
and new-leader orientation information on CD-ROMs, in-
ued development.8
cluding hyperlinks to important company intranet pages;
videos featuring corporate leaders and corporate spaces,
manufacturing facilities, and product lines; and information Mixed Modes of Training and Development
about the company’s history, mission, and culture. Unlike Some companies use learning programs that incorporate
classroom training programs that require leaders to be in technology to help leaders learn quickly and develop new
a particular place at a particular time to learn the infor- skills. For example, Xerox partnered with the Center for
mation, the leader can watch a CD-ROM when he or she Creative Leadership to institute the Emerging Leaders
has the time to devote to it or when the leader needs the Program, a five-month program that combines Web-based
information. conferencing with face-to-face sessions, along with Web-
based learning modules, personal executive coaching, and
Personal Digital Assistants (PDAs)
internal mentoring.9
Some companies provide incoming leaders with personal
digital assistants (PDAs) preloaded with important contact
information in the organization, key tasks to complete, and
even pictures of staff and others whom the new leader
needs to know. Important meeting dates can also be pre-
loaded to help the new leader schedule his or her time.
Web-Based Toolkits
Some companies also create Web-based toolkits or in-
tranet sites that contain information leaders regularly
refer to, including information about company ethics, per-
formance management, and other company processes and
procedures.
Communities of Practice
Employers encourage leaders and others to visit online
chatrooms and bulletin boards to form communities of
practice where members ask questions and share an-
swers.These communities can be particularly helpful for a
new leader who wants advice on how to handle certain Many organizations use technology to enhance their
situations or challenges. training and development programs.
What Characteristics Do Leaders Have? ■ 377
What Characteristics Do Leaders Have?

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Managing Now! LIVE
W e’ll see in this chapter that a leader’s traits, style, and appropriateness for the
situation determine his or her leadership effectiveness. But a leader’s ability
to exercise leadership also depends on that person having the authority or power
to influence his or her subordinates. Let’s therefore look at this idea first.
Managers typically have formal authority because of their position, which
gives them a legitimate right to ask employees to complete tasks that are part of
their job descriptions. However, being in a position of authority does not guaran-
tee that employees will fully comply with a manager’s requests. For example, em-
ployees of an unpopular supervisor may do the minimum amount possible to
meet the requirements of their jobs. A manager’s ability to influence others to give
power: the capability to their all depends on the power or capability she or he has to influence other peo-
influence other people’s ple’s behavior or attitudes. Power refers to someone’s ability to directly or indi-
behavior or attitudes and rectly control the outcomes of another person in a relationship.10 Because leader-
directly or indirectly control the
ship always involves some sort of power, it is important to understand its use and
outcomes of another person
its consequences.
Types of Power
Managers’ power stems from both organizational authority and personal sources.
position power: power based Organizational authority gives a manager position power. For example, the dean
on one’s position in the of a school has certain authority that comes with this position. However,
organization organizational authority cannot grant a leader all forms of power—some types
originate with the person. Personal power is based on the characteristics of that
personal power: power based
on the person’s individual individual and stays with him or her regardless of where that person works.
characteristics; stays with a French and Raven11 identified five sources of power: legitimate, reward, coer-
person regardless of his or her cive, expert, and referent. Another type of power is informational power. Table 13.2
job or organization summarizes these six types of power. We will discuss each of these types of power
in more detail next, along with their use and abuse.
legitimate power: a position
power based on a person’s
holding of the managerial
● Legitimate Power Legitimate power is based on a person’s holding of the
position rather than anything managerial position rather than anything the manager is or does as a person.
the manager is or does as Legitimate power is the formal authority the firm gives managers to hire new
a person employees, make work assignments, monitor employees’ work, and enforce
T ABLE 13.2
Summary of the Six Types of Power
Legitimate: control because of the position of authority held.
Reward: control over rewards.
Coercive: control over punishments.
Expert: control due to knowledge, skills, and/or expertise.
Referent: control because subordinates respect, admire, and identify with the
leader.
Informational: control over information.
organizational rules. Subordinates comply because they believe that holding a

managerial position gives the manager the right to make certain requests of them.
For example, nurses will show up for their shifts as assigned by a supervisor, even
if those shifts are not those preferred by the nurses. Because the scheduling man-
ager has the legitimate power to assign shifts, employees accept the final work
schedule.
reward power: a position ● Reward Power Reward power is power that involves the use of both tangi-
power that involves the use of ble (e.g., pay raises or preferred work assignments) and intangible (e.g., praise) re-
rewards to influence and wards to influence and motivate followers. Subordinates comply because they
motivate followers
want to receive the rewards. As we discuss further in Chapter 14, rewards are one of
the strongest tools used by managers to inspire high performance.
Because rewards are such strong motivators, it is important to monitor the
positive and negative impacts they have on employee behavior. For example, the
manager of a hair salon wanted to motivate his stylists to sell more hair care prod-
ucts. The manager began offering a monthly prize to the stylist who sold the most.
Because one stylist’s customers always tended to buy more products than did the
other stylists’ customers, the other stylists felt that there was no way they could
win the prize. Rather than trying harder to sell products, they stopped trying at all
and overall product sales and revenues fell. Clearly, if rewards are improperly
used, they can decrease the motivation of employees who do not expect to receive
them.
● Coercive Power If a manager has the ability to punish subordinates, she or

he can coerce subordinates into complying because people want to avoid punish-
coercive power: a position ment. This type of power is coercive power. Punishment could be any undesired
power based on the ability to or negative consequence, including a reduction in work hours, the assignment of
punish undesirable shifts, or a written or verbal reprimand.
Threatening punishment can have negative side effects on employees, in-
cluding stress, resentment, decreased morale, and retaliation,12 and can even cost
the manager his or her job. Although it can produce behavior change, most man-
agers probably learn early on that it’s best to use coercion only when absolutely
necessary—for example, if an employee is behaving dangerously.
expert power: a personal ● Expert Power Expert power is based on an individual’s expertise in some
power based on an individual’s area. People respond to expert power because of their belief in the person’s knowl-
knowledge and/or expertise edge, skills, and/or expertise. For example, some sales managers may have spe-
cialized knowledge of certain market segments or customers, giving them expert
power among other managers and employees.
Because an individual’s knowledge is the foundation of expert power, it can
exist at any level in an organization. When Jack Welch was the CEO of General Elec-
tric (GE), he realized that the Web was going to transform business. He recognized
that GE’s younger employees had better Internet skills and e-business knowledge
than did GE’s older and higher-ranking executives. He decided to pair an Internet-
savvy employee with each of GE’s 600 worldwide executives to share his or her ex-
pertise about the new technology. In addition to building the e-business capabili-
ties of his managers, this unique mentoring program made managers at all levels
more receptive to influence from people at lower levels of the company who have
referent power: a personal relevant expertise.13
power based on a manager’s
charisma and/or attractiveness ● Referent Power Referent power is based on a manager’s charisma and/or
to others attractiveness to others. Subordinates refer to the manager as a role model and
comply out of respect, admiration, and liking. They behave as the manager does
and wants because they seek his or her approval.
Referent power is not limited to high-visibility leaders. All managers can use
referent power effectively by displaying respect for subordinates, modeling behav-
iors consistent with the organization’s culture, and being effective role models. By
consistently walking the walk and talking the talk, managers can use their referent
power to promote the attitudes and behaviors they desire in employees. For ex-
ample, when Wal-Mart founder Sam Walton was worth more than $25 billion, he
still drove an old pickup truck to work and shared budget-hotel rooms with col-
leagues on business trips. His modeling of frugality permeated the company and
promoted the practice of frugality that made Wal-Mart consistently profitable.14
informational power: power ● Informational Power Control over information is informational power.
derived from control over In addition to experts with specialized knowledge, some people in an organization
information have or are able to control access to important information. These gatekeepers are
able to exert power over others by providing or withholding information that
others need. For example, managers with extensive personal networks may have
access to information few others have. Once the information is shared, however,
the informational power that the information provided is lost. Managers who de-
pend on informational power must therefore continually replenish their supply of
hard-to-get information.
When Is Each Type of Power Appropriate?

Managers should adjust their use of power to the situation and person they are try-
ing to influence. Because the effects of referent and expert power rely on the em-
ployee’s internal motivation and voluntary compliance, they are always appropri-
ate. However, these types of power are also the weakest—if they do not motivate
employee behavior, then either legitimate or reward organizational power might
be appropriate.
Legitimate, reward, and coercive power rely on external motivation and
obligatory obedience. Managers often rely on legitimate and reward power, but
coercive power is rarely appropriate and should be reserved for only the most ex-
treme situations. Effective leaders tend to rely on expert and referent power more
than legitimate, reward, or coercive power.15
Abuse of Power
Power in itself is neither good nor bad—what matters is how people use their
power or position. Gary Jackson, president of private military contractor and se-
curity firm Blackwater USA, preserves his military training company’s high-energy
culture through his own example of energy and commitment.16 An important
point to make about power is the potential for its abuse. In any firm, the abuse of
power is (1) using any type of power to demean, exploit, or take advantage of an-
other or (2) influencing someone to do something they later regret. It is easy to
think of news stories where people have abused their power. In addition to finan-
cial ruin, the results of the abuse of power may include sexual or racial harass-
ment, abusive behavior, and embarrassed employees.
Unchecked authority can result in the abuse of power. Managers should not
have free reign to do whatever they want—a manager’s power should match his
or her responsibilities. For example, a manager responsible for subordinates’

performance should receive some sort of reward power such as performance
appraisals or allocating merit-pay awards. Regularly reviewing managers’
behaviors and performance and holding them accountable for their actions are
important. Even CEOs report to a board of directors, and legislation like the
Sarbanes-Oxley Act of 2002 limits the unchecked authority of CEOs.
● Empowerment The degree to which power is shared and an employee has

empowerment: sharing the authority to make and implement at least some decisions is empowerment.17
power with employees and Empowerment may be organizationwide and embedded in an organization’s cul-
giving them the authority to ture, or it may be something done by individual managers. Empowering employ-
make and implement at least
ees to improve quality, cut costs, and make their work more efficient is becoming
some decisions
more common in organizations because technologies such as digital dashboards
increasingly make it possible for subordinates to lead themselves. If trained
employees have important, accurate, and timely information, they can often han-
dle situations and spot opportunities without a manager’s intervention. This can
increase the flexibility and responsiveness of organizations.
Empowerment is more than mere involvement. Involvement gives subordi-
nates influence in the decision being made; empowerment gives subordinates
the ability and authority to make the decision themselves. In today’s challeng-
ing business environment, empowerment helps free up leaders’ time. Leaders
can now spend more time running the business rather than micromanaging
employees.
Essentially, empowerment requires that managers (1) allow those beneath
them to have more power and control over their work and (2) provide training,
resources, and coaching to give employees the skills and confidence to act em-
powered. Just telling an employee that he or she is empowered is not enough. Em-
ployees have to have the skills to do what they are empowered to do and believe
that they can successfully do it. In one manufacturing facility, newly empowered
employee teams had the authority to spend up to $500 to improve their teams’
processes without having to consult with a manager. At first, none of the teams
was willing to spend anything, fearing that they would make a bad choice. Not
until the teams went through a hands-on training program teaching decision-
making, communication, and problem-solving skills did they have the confidence
to act empowered.
● Managing Now Technology can help empower employees to solve problems

themselves. For example, knowing that to receive her quarterly bonus she must
consistently meet call-volume targets, Pat uses the digital dashboard to check her
performance. The color-coded display shows that she is below target. She knows
that she’s been getting to work on time and that she’s productive. So why is her
performance below her target?
Pat sees that her call volume has been consistently low for the last month.
Further analysis indicates that a dip in her performance occurs at the same time
each day—just after lunch. This is the root cause of the problem: her afternoon
shift starts at exactly the time her lunch break ends. Although she hurries through
lunch, she’s getting back from lunch ten minutes after her scheduled start each
afternoon. Pat requests a minor schedule change that gives her ten more minutes
to get from the cafeteria to her workstation.18 The digital dashboard helped to em-
power Pat to solve her performance problem without needing the help of a super-
visor, other than approval of the minor schedule change.
Influence
Power does not necessarily translate into influence. Whether a leader’s use of
power to influence someone will be successful depends on whether the other per-
son allows him- or herself to be influenced. How much formal power or authority a
manager has is not as important as the amount of influence the manager has over
subordinates. A manager who lacks the respect of subordinates because of unethi-
cal behavior or perceptions that the manager is unqualified will not effectively mo-
tivate subordinates to work their hardest toward the firm’s goals.
In addition to possessing power, leaders can engage in various influence tac-
tics to increase the likelihood that others will respond favorably to their requests.
Table 13.3 summarizes some of the influence tactics, along with the possible re-
sponses to them. Responses to influence attempts are not always positive.
T ABLE 13.3
Influence Tactics and Responses to Them
Effective Influence Tactics
Coalition tactics: engaging the help of others to persuade someone to do something; referring to the support of others
to convince someone to agree to a proposal or to change his or her attitude toward something.
Consultation: requesting someone’s advice to solve a problem or mutually setting goals to increase a follower’s
commitment to the leader’s decision; being willing to modify the goals or solution based on the person’s concerns
and suggestions to sustain commitment.
Exchange: offering to exchange something of value now or in the future for someone’s cooperation.
Ingratiation: flattering or praising people to put them in a good mood or to make them more likely to want to help
(for example, complimenting your manager’s outfit before asking for additional project funding).
Inspirational appeals: appealing to someone’s aspirations, values, and ideals to gain his or her commitment;
increasing the person’s confidence that he or she can do something to increase motivation.
Legitimating tactics: enhancing one’s formal authority to make a certain request by referring to rules, precedents, or
official documents.
Personal appeals: asking someone to do something because of friendship or asking for a personal favor.
Pressure: using coercion or persistent follow-up or reminders to gain influence.
Rational persuasion: using logic and facts to persuade someone.
Responses to Influence Attempts

Commitment: endorsing and becoming an actively involved participant as a result of the influence attempt.
Compliance: just going along with what the influencer wants without being personally committed.
Passive resistance: rejecting the influence attempt but not getting in the way of what the influencer is trying to do.
Active resistance: rejecting the influence attempt and actively trying to stop the influencer from doing what she or
he is trying to do or trying to change the influencer’s attitudes in return.
Source: Gary Yukl, Leadership in Organizations, 4th ed. (Englewood Cliffs, N.J.: Prentice Hall, 1998).
Reprinted by permission of Pearson Education, Inc., Upper Saddle River, N.J.
What Traits and Skills Are Associated

with Leadership?
When asked to name people they consider leaders, most people can easily come
up with names such as Martin Luther King Jr., Margaret Thatcher, Mahatma
Gandhi, and Oprah Winfrey. But why are these people considered leaders? When
asked, many people explain that these leaders have charisma, intelligence, a
strong vision, and a determination to achieve their goals. But do personality traits
or skills really predict who will become a leader?
Because people differ in so many ways, it is natural to think that some people
have certain unchanging characteristics or special gifts that enhance their abilities
traits: a person’s unchanging to lead. Describing the personal traits of leaders is also the way leadership re-
characteristics that predispose searchers first thought about leaders. The first systematic research studies on
him or her to act in a certain way leadership investigated individual traits that included intelligence, birth order, so-
cioeconomic status, and child-raising practices.19 These early attempts to isolate
specific leadership traits were generally unsuccessful and led to the conclusion
that no single characteristic distinguishes leadership.
Later research on leadership traits and skills had better success in identifying
some traits and skills relevant to successful leadership. Leaders seem to have higher
energy levels, higher internal control orientation, emotional maturity,20 intelli-
gence, self-confidence, determination, integrity, and social and interpersonal
skills.21 Table 13.4 describes some important leadership traits and skills.
T ABLE 13.4
Some of the Traits and Skills of Leaders
Determination: leaders overcome obstacles and achieve their goals through initiative, drive, dominance, and a
motivation to achieve.
Emotional maturity: effective leaders control their emotions rather than letting their emotions control them.
Energy levels: leaders have the energy to work hard toward their goals and can create excitement and enthusiasm
in others.
Integrity: leaders who behave honestly and earn the trust of followers are more effective at motivating them.
Intelligence: leaders must scan, interpret, and integrate large amounts of information; identify patterns; and devise
courses of action based on the information.
Internal control orientation: leaders tend to believe that they are able to control their environment rather than
merely reacting to events around them.
Job-relevant knowledge: leaders make decisions and set appropriate goals and strategies based on their
understanding of how their unit and firm works.
Self-confidence: leaders who demonstrate self-confidence and a belief that their chosen course of action is correct
develop followers who are more committed.
Social and interpersonal skills: leaders who are good at relating to other people are able to build trusting
relationships with followers.
Source: Based on Stephen J. Zaccaro, Cary Kemp, and Paige Bader, “Leader Traits and Attributes,” in John
Antonakis, Anna T. Cianciolo, and Robert J. Sternberg (eds.), The Nature of Leadership, pp. 101–125 (London:
Sage, 2004); Peter G. Northouse, Leadership: Theory and Practice, 2nd ed. (London: Sage, 2000); and Gary Yukl,
Leadership in Organizations, 5th ed. (Upper Saddle River, N.J.: Prentice Hall, 2002).
Emotional Intelligence
Emotional intelligence is a person’s ability to recognize and manage emotions and
relationships. This characteristic gained popularity in the 1990s when psycholo-
gists, sociologists, and management consultants claimed that one’s emotional
quotient (EQ) was twice as important as their intelligence quotient (IQ) or even
technical skills when it comes to job performance.22 One research study found
that emotional intelligence accounted for 85 percent of what distinguishes stars
from low performers in top leadership positions.23 Organizations, including
American Express, use emotional intelligence programs to improve team and
organizational effectiveness.24 Some of the biggest supporters of emotional intel-
ligence have called the awareness of others’ feelings and ability to recognize and
control one’s own emotions an indispensable ingredient of leadership.25 Emo-
tional intelligence is composed of five dimensions:
◗ Self-awareness: being aware of what you are feeling.
◗ Self-motivation: persisting in the face of obstacles, setbacks, and failures.
◗ Self-management: managing your own emotions and impulses.
◗ Empathy: sensing how others are feeling.
◗ Social skills: effectively handling the emotions of others.
Part innate and part trainable, emotional intelligence has been receiving
increasing attention in leadership development programs. Emotionally intelligent
leaders know their own limitations and strengths and have the ability to commu-
nicate clearly and convincingly, manage conflicts, build strong personal bonds,
and motivate employees and customers.26 Because leadership involves such a
high degree of social interaction, emotional intelligence is likely to enhance lead-
ership effectiveness. In a negotiation setting, Franz Humer, the chairman and CEO
of the pharmaceutical firm Roche, tries to switch his entire body, mind, and emo-
tions into “receiving” mode to understand how the other side is reacting and be-
having. This increases his sensitivity to how the negotiations are going and how
best to negotiate with the other party.27
Does Gender Matter?

Despite making up more than 45 percent of the U.S. workforce, women lead less
than 2 percent of Fortune 1000 companies.28 Excuses that have been offered as to
why so few women reach the top in organizations include women not being in
managerial positions long enough, lacking managerial experience, being less
suited to demanding jobs, and being insufficiently qualified. Research has not
supported these excuses.29 So why are most women managers having trouble
breaking into the top ranks?
One constraint facing women in management may stem from institutional
biases, or patterns of preferences inherent in organizations that create barriers.
For example, managers often prefer hiring and promoting people who are similar to
themselves. Because most managers are male, they tend to prefer that other man-
agers also be male. Whether conscious or unconscious, this type of bias contributes
to the glass-ceiling effect by restricting women’s access to managerial jobs.
Women leaders often emphasize inaccurate gender stereotypes as a key
barrier to their advancement.30 Stereotypes are generalizations people make to
differentiate groups of people, such as believing that men are better leaders than
women. However, men and women are much more similar in personality,
communication, ability, and leadership than commonly believed.31 Several
reviews of studies of gender differences in leadership have found many more
similarities than differences between males and females,32 although research
does suggest that males tend to punish subordinates more harshly than
women do.33 It is important to note that while males and females may differ
with respect to participative management and punishment tendencies, re-
search has found males and females to be equally effective as leaders.
Another problem may be that people frequently compare women to an
ideal leadership style that favors autocratic men. It is common for both men
and women to view competitive (stereotypically masculine) characteristics as
managerial and cooperative and communicative (stereotypically feminine)
characteristics as nonmanagerial.34 Because men are more likely to exhibit the
Carly Fiorina ran into considerable
masculine characteristics thought to reflect better managerial and leadership
headwinds as HP’s CEO, and
eventually stepped down.
skills, they are more likely than women to be viewed as appropriate leaders.
Research does suggest that many women use a more participative style
and can have better interpersonal skills than men.35 It is interesting to note, how-
ever, that a more participative style may actually be more appropriate for today’s
challenges of managing diversity and leading empowered teams. As Rosabeth
Moss Kanter put it, “[W]omen get high ratings on exactly those skills needed to
succeed in the global Information Age, where teamwork and partnering are so im-
portant.”36 Rather than changing how women lead, it may be more appropriate to
change perceptions about what it means to be an effective leader and what char-
acteristics and styles are required to become one.
Communication skills are critical to all managers, regardless of their gender.
The Window on Managing Now feature gives you some tips on deciding when
technology is an appropriate communication medium.

How Does Technology Increase the Importance of Leaders’
Communication Skills?
Technology gives managers the opportunity to communi- ◗ Be careful when writing e-mail messages. Like written
cate with employees in a variety of ways. Sometimes tech- performance reviews and other documents, e-mails can
nology can enhance a leader’s effectiveness, but some- be subject to discovery and subpoena. Also, e-mail is
times it can get in the way. Here are some netiquette tips not always secure, and it sometimes results in unin-
for deciding when technology is an appropriate medium tended readers receiving confidential information.
of communication and for creating appropriate employee ◗ Do not rely on e-mail to the exclusion of personal con-
expectations about the use of IT:37 tact. Even in the age of IT, relationship skills are at the
◗ Never use e-mail to fire employees or deliver bad heart of long-term business success. Supplement your
news. Because it contains no body language, facial e-mails with periodic face-to-face staff, customer, and
expression, and intonation, e-mail is the worst way to supplier meetings, even if they must occur through
deliver bad news to employees. A one-on-one meeting videoconferencing.
is better. ◗ Do not use e-mail when there is any chance of the
◗ Do not use e-mail to discuss an employee’s perfor- message being misunderstood. Use a telephone call or
mance with other managers. Hold these discussions a face-to-face meeting if a message is complex, techni-
privately. cal, or in any danger of being misinterpreted.
What Do Leaders Do? ■ 385
What Do Leaders Do?

Online Study Center
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Managing Now! LIVE
I f leaders can’t always be identified just by their traits, perhaps we can identify
leaders by what they do. After the early leadership researchers ran out of steam
in their search for traits, attention turned to what leaders did and how they be-
haved, especially toward followers. This research led to the identification of vari-
ous leadership behaviors and styles. We now turn our attention to understanding
leadership styles and behaviors.
The Ohio State Studies

In the 1950s, Ralph Stogdill and his Ohio State University colleagues identified
initiating structure: concern two dimensions of leadership style: initiating structure (concern for organiza-
for task accomplishment tional task accomplishment) and consideration (concern for individuals and
interpersonal relations). These two dimensions are the Ohio State dimensions of
consideration: concern for leadership.38
individuals and interpersonal
relations ◗ Initiating structure emphasizes the achievement of concrete goals. Leaders look
for ways to organize people and activities that will best accomplish these con-
crete goals. Initiating structure includes planning, organizing, and defining the
required tasks, for example, setting goals and clearly communicating them to the
group. When Steve Ballmer took the reins at Microsoft, he initiated structure by
implementing an online performance appraisal system (previously there had
been no formal performance appraisal process).39
◗ Consideration emphasizes the social and emotional needs of individuals, includ-
ing trust, respect, work satisfaction, and self-esteem, by being respectful and
friendly.
The Ohio State team developed the Leader Behavior Description Questionnaire
(LBDQ), later refined by others, to measure these two dimensions. One of the major
research findings was that effective leaders address both the task and the human as-
pects of their organizations. Although people tend to be more satisfied when work-
ing with considerate leaders,40 their task performance is not necessarily better.41
And although leaders high in initiating structure tend to have higher-performing
groups, this is not always true. In particular, subordinates of leaders who are very
task-oriented can have lower morale unless the leader is also considerate.42
The University of Michigan Studies

While the Ohio State studies on leadership styles were being conducted, Rensis
Likert and the team at the University of Michigan’s Survey Research Center identi-
fied two leadership styles43 that were similar to those resulting from the Ohio State
studies:
◗ Employee-oriented leaders emphasize building good interpersonal relation-
ships with employees and focus on meeting employees’ needs.
◗ Production-oriented leaders focus on the job’s technical aspects and on getting
the job done.
Consistent with the conclusions of the Ohio State researchers, Likert suggested
that leaders must take a balanced approach. He found that the best-performing
supervisors focus on the human aspects of their subordinates’ problems and on

building effective workgroups with high performance goals. Higher-performing
managers were also more facilitative than directive, and they used a participa-
tive style in making decisions that took recommendations from the team into
account.44
Blake and Mouton’s Managerial Grid

Robert Blake and Jane Mouton45 developed a two-dimensional managerial grid
that has become a classic way to illustrate the behavioral, leadership-style ap-
proach to leadership. The grid diagrams leadership styles based on “concern for
people” and “concern for task (results).” These two dimensions reflect the Ohio
State dimensions of initiating structure and consideration and the University of
Michigan dimensions of production orientation and employee orientation.
As Figure 13.1 shows, “concern for people” is on the vertical axis of the grid
and “concern for production” (concern for results) is on the horizontal axis. Both
have a range of 0 to 9. Each cell of the grid contains a numerical rating reflecting
the manager’s concern for results and for people, which Blake and Mouton say
High
F IGURE 13.1
Blake and Mouton’s
Managerial Grid 9 1, 9 Team Management 9, 9
Work accomplishment is
Country Club Management
8 from committed people;
Thoughtful attention to the
interdependence through a
needs of people for satisfying
“common stake” in organization
7 relationships leads to a comfortable,
purpose leads to relationships
friendly organization atmosphere
of trust and respect.
and work tempo.
6
Concern for People
Middle of the Road

Management 5, 5
5 Adequate organization performance
is possible through balancing the necessity
to get out work with maintaining morale
4 of people at a satisfactory level.
3 Authority-Compliance
Efficiency in operations
Impoverished Management results from arranging
2 Exertion of minimum effort conditions of work in
to get required work done such a way that human
1 1, 1 is appropriate to sustain elements interfere to 9, 1
organization membership. a minimum degree.
SOURCE: Adapted from Robert R. Blake 0

and Jane S. Mouton, The Managerial Grid III:
The Key to Leadership Excellence, 3rd ed. 1 2 3 4 5 6 7 8 9
(Houston: Gulf Publishing Co., 1985); The Low
Leadership Grid, Grid International, Inc.
Online at http://www.gridinternational.com/ Low Concern for Production High
gridtheory.html. Reprinted with permission
from gridinternational.com.
What Do Leaders Do? ■ 387
are independent of each other. Although Blake and Mouton considered the ideal
to be a 9,9 manager who integrates a high concern for both task and people, there
is little evidence to support this style as the most effective in all situations.46
Effective leadership requires more than the use of a particular style regardless of
the context. We’ll see that the nature of the followers and the situation are impor-
tant as well.
University of Iowa Leadership Styles

Kurt Lewin and his colleagues at the University of Iowa47 explored three types of
leadership styles: autocratic, democratic, and laissez-faire. A leader who central-
izes authority, makes decisions alone, and expects followers or subordinates sim-
ply to follow instructions uses an autocratic leadership style. A leader who shares
decision making with others and encourages subordinates to be involved in
setting goals uses a democratic leadership style. A democratic leader may be con-
sultative, seeking input from others but making the final decision alone, or partic-
ipative, giving employees a say in the decision. A laissez-faire leadership style is an
extremely hands-off approach. Employees are given discretion to make decisions
and perform their work any way they want. A laissez-faire leader exercises little or
no control over the group and may not even participate in discussions.
So which of these leadership styles is best? The laissez-faire style of leadership
consistently underperforms the democratic and autocratic styles. Although em-
ployees’ satisfaction is generally higher when working with a democratic leader
than an autocratic one,48 research comparing the two has been inconclusive.
Because more employee-centered styles tend to produce higher levels of motiva-
tion, decision quality, morale, and teamwork, managers should use them when-
ever possible.49
Many of the early writers on leadership styles argued that greater participa-
tion made followers more satisfied. But this idea didn’t hold up in practice.50 There
were many inconsistencies from one study to the next, and it was hard to say that
any particular style of leadership always enabled groups to work better. Perhaps
the biggest problem, though, was one shared with those studies that looked for
traits: ignoring the context or setting in which the style was used. We’ll see that the
same leadership style is not likely to work equally well in a corporate boardroom,
on a construction site, and in a hospital emergency room.
Transformational and Transactional Leadership

Another way to consider leadership behavior is to consider what the leader is try-
ing to accomplish. Some leaders focus on making incremental improvements to
the status quo. Other leaders focus on making large-scale revolutionary changes to
transformational an organization. Transformational leadership51 changes the values and priori-
leadership: leadership that ties of followers, motivating them to achieve more by doing things in new ways.
inspires followers to adopt the Transformational leaders inspire followers through a clear mission, optimism, en-
values and goals of the leader
thusiasm, and emotional appeals. They provide personal support and encourage-
and put aside their self-interests
for the good of the organization ment, set a personal example, and behave ethically. Followers then connect deeply
to the mission and seek ways to improve their performance. John F. Kennedy and
Ghandi are good examples of transformational leaders.
Studies show that transformational leadership affects a wide range of em-
ployee outcomes (including motivation, satisfaction, and commitment) and orga-
nizational outcomes (including business unit performance).52 Transformational
leaders can influence followers to change their priorities, set new goals, and de-
velop confidence in their abilities by giving subordinates developmental work ex-
periences, inspiring them to do their best, and demonstrating positive behaviors
that followers want to emulate.53
Transformational leaders are:54
◗ Inspirational, and they communicate a future vision of the organization that can
be shared with followers. “The leader uses visionary explanations to depict what
the employee work group can accomplish.”55
◗ Considerate, and they treat each employee as an individual rather than simply as
a member of the group. A transformational leader tries to bring out the strengths
of each employee.
◗ Intellectually stimulating, and they encourage employees to solve problems cre-
atively by approaching old and familiar problems in new ways.56
◗ Charismatic,57 or idealized by followers who develop strong emotional attach-
ments to them. Charismatic leadership during the early stages of a group’s life
can influence the group’s belief that it will be successful, enhancing the likeli-
hood that it will perform well.58 Although substantial research has found that
charismatic leadership spurs high performance and follower satisfaction,59 it
isn’t always needed. Charisma appears to be most influential when the environ-
ment has a high degree of uncertainty, with accompanying stress, or when the
followers’ task is ideological in some way.60
transactional leadership: Transactional leadership focuses on a transaction or exchange of something
leadership based on a reciprocal of value that the leader possesses or controls and that the follower wants in return
exchange of something of value for his or her services. By offering promotions in exchange for work done, or
bonuses in exchange for extra effort or good performance, leaders are able to in-
fluence and motivate others. With transactional leadership, employees comply be-
cause of contingent reinforcement, but with transformational leadership, employ-
ees comply because they are personally committed to the leader’s goals.
Transformational leadership and transactional leadership complement each
other,61 and the choice of which to use depends on the situation. The best leaders
are both transformational and transactional.62 The transactional style can work
well for short-term goals when both leader and led understand and are in agree-
ment about which tasks are important. Because transformational leadership re-
sults in employees adopting the leader’s mission, vision, and goals as their own, it
is more effective for long-term goals and organizational change. Transformational
leaders, if unsuccessful in gaining compliance by appealing to the values of the
followers or peers, may resort to the transactional style to get things done.63
level 5 leadership: a Level 5 leadership requires a leader to use a combination of transforma-
combination of transactional tional and transactional leadership styles and channel his or her ambition into the
and transformational leadership goal of building a great company.64 Level 5 leaders are humble and willing to take
styles focused on long-term
the blame for failure while simultaneously setting high standards and demon-
company performance
strating an unwavering resolve to do whatever it takes to produce the best long-
term results.
David Maxwell retired after turning financial-services company Fannie Mae
around and leading it for nine years. His retirement package, which had grown to
be worth $20 million because of Fannie Mae’s strong performance, drew the atten-
tion of Congress (Fannie Mae operates under a government charter). Maxwell
responded by writing a letter to his successor expressing concern that the future
of the company could be jeopardized and asked that the remaining $5.5 million
What Influences a Leader’s Effectiveness? ■ 389
balance instead be contributed to the Fannie Mae foundation for low-income

housing.65 Such Level 5 leadership has gained popularity among executives, and
some consider it to be the ultimate leadership style.
What Influences a Leader’s Effectiveness?

Online Study Center
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Managing Now! LIVE A s we have seen, an effective leader does not rely on a single preferred style.
Leadership is more complex—good leaders adapt to the situation, take into
account the motivation and capability of followers, evaluate the challenges of the
task, and consider the organizational environment. A good manager uses many
different leadership styles over the course of a day, depending on the nature of the
problem and the people being led. Once researchers realized that leaders can’t be
differentiated based solely on their personal traits or styles, they began to pursue
the idea that leadership needs to change from situation to situation. Researchers
began to believe that different contexts required particular types of leadership.
This meant that leaders had to develop an ability to work in different ways and to
change their style to adapt to the situation and the followers. We will next discuss
contingency theories of various contingency theories of leadership.
leadership: leadership
theories that acknowledge that
the appropriateness of any Hersey-Blanchard Situational Leadership Model
leadership style depends on the
nature of the followers and the Paul Hersey and Kenneth Blanchard66 believed that a single best leadership style
situation did not exist, and they developed the situational leadership model to help leaders
decide how to adapt their style to a given task or situation. They proposed that
leader effectiveness requires successfully diagnosing
where subordinates are on a readiness continuum. Be-
cause subordinates move back and forth along this
continuum, leaders have to adapt. The four leadership
styles featured by Hersey and Blanchard are:
◗ Delegating: letting group members decide what to do.
◗ Participating: asking group members for input but

making the final decision alone.
◗ Selling: making the decision alone but explaining to
the group the reasons for the decision, then helping
followers to complete the task by persuading them
and providing opportunities to learn more about the
task.
◗ Telling: making the decision and telling the group
what to do.
Figure 13.2 summarizes what to look for when choosing which style to use.
◗ Delegating: letting followers make and implement decisions is appropriate when
followers are able, willing, and confident. Delegating leaders delegate activities
and enhance group effectiveness by providing support and resources and by en-
couraging autonomy.
◗ Participating: sharing decision-making responsibilities with followers, handling
followers’ apprehensions and concerns when necessary, and focusing on results
F IGURE 13.2 LEADER BEHAVIOR
Using the Situational High

S3 S2
Leadership Model Share ideas Explain
and facilitate in decisions
Relationship Behavior (Supportive Behavior)

decision making and provide
ting
Sell
opportunity
cipa
ing
for clarification
Parti
High Rel High Task
Low Task High Rel
Low Rel High Task

Low Task Low Rel
ng
S4 S1
Tel
ati
li n
Turn over Provide specific
eg
l
g
De responsibility instructions and
for decisions closely supervise
and implementation performance
Low
Low Task Behavior (Directive Behavior) High
FOLLOWER READINESS
(when to use each style)
High Moderate Low
S4 S3 S2 S1
Employees Employees Employees Employees

able and able but unable but unable and
SOURCE: Adapted from Paul Hersey, willing or unwilling or willing or unwilling or
Situational Selling (Escondito, Calif.:
confident insecure confident insecure
Center for Leadership Studies, 1985), p. 19.
Reprinted with permission.
works best when followers are somewhat less ready to be led. Participating lead-
ers work well when followers are able but are unwilling or insecure.
◗ Selling: explaining and clarifying decisions is appropriate when followers are
even less ready to be led because they are unable but are willing or confident.
Here, a leader must persuade followers to buy into the decisions, then the leader
must check their understanding of the task, explain why certain actions are
taken, encourage questions, and demonstrate how to do the task.
◗ Telling: providing clear directions and closely supervising performance works

best when followers are relatively unprepared for the task. The leader provides
specific instructions and close supervision and positively reinforces small im-
provements. Telling leaders work well when followers are unable and are unwill-
ing or insecure.
Fiedler’s Leader-Match Model

Fred E. Fiedler67 argued that leader effectiveness depends on two interacting fac-
tors: leadership style and the degree to which the situation gives the leader control
and influence. The leader-match model proposes that leadership style is part of
who a person is and can’t be changed. Fiedler did not believe that leaders can
adopt different styles in different situations. Instead, he proposed two ways to
make leaders more effective: match them to the situation they are best suited to, or
change the context to suit the leader’s style. Three factors are important in under-
standing the context:
◗ Leader-follower relations. Fiedler felt that this was the key: “A leader who is liked,
accepted, and trusted by his [or her] members will find it easy to make his [or her]
influence felt.”68
◗ Task structure. If the goals, methods and performance standards of a task are
clear, then it is more likely that leaders will be able to exert influence.
◗ Position power. If an organization or group confers powers on the leader to get
the job done, then this may well increase the influence of the leader.
According to Fiedler’s model, effective leadership is contingent on matching
the leader’s style to the setting, and certain styles are effective in certain situa-
tions. Task-oriented leaders do well when the situation is extremely favorable or
extremely unfavorable for the leader (where leader-member relations, task struc-
ture, and leader position power are all very high or very low), and relationship-
oriented leaders do well in more moderate situations. In favorable situations, the
leader can get away with focusing solely on the task, and in unfavorable situa-
tions, the leader has no choice but to focus on the task. A more people-oriented
leader is appropriate in the middle range where these three contextual factors are
mixed.
Fiedler thought of leadership style as a continuum, with task motivation at one
end and relationship motivation at the other. He developed the least preferred
coworker (LPC) scale to assess a leader’s style. Leaders describe their least pre-
ferred coworker using a list of adjectives. Leaders who describe their least preferred
coworker favorably (pleasant, friendly, enthusiastic) are considered high LPC and
are more people-oriented. Leaders who describe their least preferred coworker
unfavorably (inefficient, gloomy, uncooperative) are considered low LPC and are
more task-oriented. The Improving Your Leadership Skills feature provides an op-
portunity for you to assess your leadership style according to Fiedler’s LPC scale.
Figure 13.3 on page 393 will help you apply your score to understand where you
might be most effective as a leader, according to Fiedler’s model.
Researchers have criticized Fiedler’s leader-match model because it does not
explain why some people are more effective in different situations. It is also not
entirely clear what the LPC scale actually measures. For example, some people
may have had very different experiences with their LPC than others, and these dif-
ferences can influence responses to the measure. A fair amount of research has
I M P R OV I N G Y O U R L E A D E R S H I P S K I L L S
Least Preferred Coworker Scale
Think of the person you work with least well. This may answers. Work quickly; your first answer is usually the
be a person you currently work with or someone you most accurate. Please do not omit any items, and mark
knew in the past.This person is not necessarily the per- only one answer for each item. When you are finished,
son you like least, but he or she should be the person add up the numbers appearing under each line that you
with whom you had the most difficulty in getting a job marked with an X. Scoring instructions are at the bottom
done. of the table.
The following questionnaire asks you to describe this Scores above 78 are considered high LPC and are
person as she or he appears to you. Look at the words at more people-oriented; scores below 29 are considered
both ends of the line before you mark one box with an X. low LPC and are more task-oriented.
Please remember that there are no right or wrong
Pleasant Unpleasant
8 7 6 5 4 3 2 1
Friendly Unfriendly
8 7 6 5 4 3 2 1
Rejecting Accepting
1 2 3 4 5 6 7 8
Helpful Frustrating
8 7 6 5 4 3 2 1
Unenthusiastic Enthusiastic
1 2 3 4 5 6 7 8
Tense Relaxed
1 2 3 4 5 6 7 8
Distant Close
1 2 3 4 5 6 7 8
Cold Warm
1 2 3 4 5 6 7 8
Cooperative Uncooperative
8 7 6 5 4 3 2 1
Supportive Hostile
8 7 6 5 4 3 2 1
Boring Interesting
1 2 3 4 5 6 7 8
Quarrelsome Harmonious
1 2 3 4 5 6 7 8
Self-assured Hesitant
8 7 6 5 4 3 2 1
Efficient Inefficient
8 7 6 5 4 3 2 1
Gloomy Cheerful
1 2 3 4 5 6 7 8
Open Guarded
8 7 6 5 4 3 2 1
Source: Adapted from Fred E. Fiedler, A Theory of Leadership Effectiveness (New York: McGraw-Hill, 1967), p. 41.
F IGURE 13.3 High LPC

Relationship-
Applying Fiedler’s Motivated
Leader-Match Model Leaders
Perform Better
Low LPC
Task-Motivated
Leaders Perform
Better
SOURCE: Adapted and reprinted by Leader-Member

permission of the Harvard Business Review, Good Good Good Good Poor Poor Poor Poor
Relations
“How the Style of Effective Leadership
Varies with the Situation” from “Engineer Task Structure Structured Unstructured Unstructured
Structured
the Job to Fit the Manager” by Fred E.
Fiedler, September–October 1965.
Leader Position
Copyright © 1965 by the President and Strong Weak Strong Weak Strong Weak Strong Weak
Fellows of Harvard College; all rights
Power
reserved. Reprinted by permission of
Harvard Business School Publishing. I II III IV V VI VII VIII
produced mixed results. Although popular in management-training programs,

the usefulness of the leader-match model, including its more recent variants, is
uncertain.69
Continuum of Leader Behavior

Tannenbaum and Schmidt70 presented a simple way to view participation in a
group. They identified three forces that influenced the appropriateness of subor-
dinate participation in decision making:71
◗ Manager factors: personal values, tolerance for ambiguity, confidence in subor-
dinates, and the leadership behaviors with which the manager is comfortable
engaging in.
◗ Subordinate factors: need for independence, willingness to take responsibility,
tolerance for ambiguity, problem-solving interest, comprehension of goals and
commitment to them, relevant knowledge and experience, expectations about
participating.
◗ Situation factors: time constraints, ability of the group to work together, organi-
zational type, nature of problem.
Based on an assessment of these factors, leaders choose a decision-making
style along a continuum ranging from autocratic, when the leader makes a deci-
sion alone and announces it to the group, to delegative, where the manager
permits employees to function autonomously within defined limits. Figure 13.4
illustrates the continuum.
F IGURE 13.4
Tannenbaum and Schmidt’s Continuum of Leader Behavior
Subordinate-Centered
Manager-Centered Leadership
Leadership
Use of Authority
by the Manager
Area of Freedom
for Subordinates
Manager Manager Manager Manager Manager Manager Manager

makes “sells” presents presents presents defines permits
decision decision ideas and tentative problem, limits; subordinates
and invites decision gets asks group to function
announces questions subject to suggestions, to make within limits
it change makes decision defined by
decision superior
SOURCE: Adapted from an exhibit, “How to Choose a Leadership Pattern,” by Robert Tannenbaum and Warren H. Schmidt,
May–June 1973. Copyright © 1973 by the President and Fellows of Harvard College; all rights reserved. Reprinted by
permission of Harvard Business School Publishing.
Tannenbaum and Schmidt stressed to leaders the importance of being honest

with subordinates and making clear what kind of leadership behavior is being
used. If the manager intends to make a certain decision alone, but group members
expect or have the impression that this authority should be delegated to them,
considerable confusion and resentment will likely result. They also warned against
using a democratic façade to conceal the fact that the leader has already made a
decision that she or he hopes the group will accept as its own.72
Path-Goal Theory
Respected leadership researcher Robert J. House’s73 path-goal theory emphasizes
that the leader’s job is to help followers attain their goals and to provide appropri-
ate direction and support to ensure that followers’ goals are consistent with those
of the group and organization. Path-goal theory is based on the expectancy theory
of motivation (see Chapter 14), which proposes that motivation to exert effort
is based on a person’s belief that (1) he or she has the ability to accomplish a goal,
(2) goal accomplishment will lead to rewards, and (3) these rewards are attractive
or valued. Path-goal theory reflects the belief that effective leaders increase the
personal rewards that subordinates receive for attaining goals, and they clarify the
path to these goals by reducing roadblocks. The core assumption is that subordi-
nates will be motivated if they think they can do their work and get a favorable
reward or outcome for doing so.
Path-goal theory originally focused on the leadership dimensions of leader
consideration and initiating structure.74 It now focuses on four leadership styles:75
◗ Directive leadership: letting subordinates know what the leader expects of them,
giving specific guidance about what to do and how to do it, and scheduling the
work to be done.
◗ Supportive leadership: being friendly and approachable and showing concern
for the status and well-being of subordinates.
◗ Participative leadership: soliciting subordinates’ suggestions and input.
◗ Achievement-oriented leadership: setting challenging goals, expecting subordi-

nates to perform at their highest level, continuously seeking improvements in per-
formance, and showing confidence that subordinates will assume responsibility.76
The leader’s job is to help subordinates reach their goals by providing the guid-
ance, coaching, support, and rewards lacking in the environment that are neces-
sary for effective and satisfying performance.77 The theory suggests which style is
most appropriate for leaders.
Essentially, to be effective, a leader has to structure ambiguous tasks, be sup-
portive and considerate when employees lack confidence or are demoralized, and
always clarify how job effort will lead to rewards. The idea is that if employees
don’t know what to do, think they can’t do it, or don’t see how effort leads to re-
wards, they will not be motivated to do the job. Table 13.5 illustrates how to apply
the theory.
T ABLE 13.5
Fitting the Leadership Style to the Situation: Applying Path-Goal Theory
Leader Behavior Best for Situations With . . . Motivational Effects
Directive Ambiguous, unstructured tasks Reduces role ambiguity; increases follower
beliefs that effort will lead to good
performance and that performance will
result in an attractive reward
Supportive Frustrating, routine, stressful, or Increases self-confidence; increases
dissatisfying tasks; employees may lack the personal value of job-related effort
self-confidence
Participative Ambiguous, varied, challenging tasks Reduces ambiguity, clarifies expectations,
increases consistency of subordinate and
organizational goals, increases involvement
with and commitment to organizational
goals
Achievement-oriented Ambiguous, varied, challenging tasks Increases subordinate confidence and the
personal value of goal-directed effort
Source: Adapted from Jon Howell and Dan Costley, Understanding Behavior for Effective Leadership
(Upper Saddle River, N.J.: Prentice Hall, 2001), p. 43.
PRACTICE IT
Empowerment Through Technology at Whirlpool78
Facing pressure to become more innovative and to build tools and resources, including innovation templates and
customer loyalty, Whirlpool wanted to empower every- I-Mentors.This allows innovators to seek employees with
one in the organization to participate in the innovation expertise to influence innovations early in the process.
process. The hardest part was changing the way leaders On the back end is the I-Pipe, a digital dashboard view of
saw their roles.“Only leaders can change an environment the innovation pipeline adapted from Strategos. By track-
and allow an innovator the freedom to pursue things,” ing ideas from concept to scale-up, it can provide project
says Nancy Snyder, vice president of leadership and com- details and a view of the big picture. This gives lower-level
petency creation.“Leaders are no longer controlling, man- employees the power to make decisions and changes
aging. Now they’re removing barriers, setting up seed without having to depend heavily on top management.
funds, interacting.” By removing obstacles and genuinely The innovation democracy at Whirlpool seems to
empowering employees, which is consistent with path- be working. For example, when a team from marketing
goal theory, leaders are helping employees meet their played with the idea of appliances for men, it refined the
goals. concept into a modular system of garage appliances and
Technology was critical to empowering employees to storage units. It was so successful that Whirlpool eventu-
innovate.To help with the creative end,Whirlpool built an ally spun off Gladiator Garage Works as a separate brand.
informal intranet social system called the Innovation Whirlpool now has hundreds of ideas in its innovation
E-Space. The homepage links prospective innovators to pipeline under new CEO Jeff Fettig.
Path-goal theory makes a lot of intuitive sense, but research on the theory has
yielded mixed results. Supportive leadership tends to have a positive relationship
regardless of the task, and the results for directive leadership generally haven’t
supported the theory. Research is insufficient to draw conclusions about the
situational factors influencing the effectiveness of participative and achievement-
oriented leadership.79
The Practice IT feature shows how Whirlpool used technology to apply some
of these leadership concepts.
Leader-Member Exchange Theory

Managers behave quite differently toward different subordinates, depending on
the quality of their interpersonal relationships. Leader-member exchange theory
(LMX) describes how leaders develop different relationships with different subor-
dinates over time.80 Formerly called vertical dyad linkage theory (when it focused
on two-person subordinate-supervisor dyads rather than on the leader-group re-
lationship), LMX theory proposes that leaders usually develop a special relation-
ship with a subset of subordinates (the in-group). Members of the in-group serve
as trusted advisers and assistants and have greater influence, autonomy, and tan-
gible benefits in exchange. Members of the out-group have less or no input into
group decisions and are primarily influenced with position power.
Although the theory does not specify what pattern of leader-member ex-
change relationships is optimal for effective leadership, research has found that
in-group members have greater loyalty and higher performance levels than out-
group members.81 Members of a clear out-group are likely to feel resentment and
withdraw effort and participation.82 The quality of leader-member relations also

influences the degree to which managers are willing to empower workers.83 All or-
ganizations have in- and out-groups, and it is not necessary for leaders to treat all
subordinates the same; effective leaders relate differently to different people and
give them a different amount of influence. But each team member should feel im-
portant and respected rather than like a “second-class citizen.”84
leadership substitutes: Substitutes for Leadership

factors that make leadership Leadership substitutes theory85 proposes that the importance of formal leaders is
unnecessary
reduced by aspects of the situation called substitutes and neutralizers. Leader-
leadership neutralizers: ship substitutes are factors that make leadership unnecessary, such as empow-
factors that make leadership ered employees or highly competent employees. For example, a high-performing
impossible call-center team whose members have been together for years may not need a
leader to provide instruction or set goals for the team. Leadership
neutralizers are factors that make leadership impossible, such as
a union contract that prohibits a supervisor from giving workers
incentives for higher performance. Substitutes for leadership can
come from subordinates (i.e., their abilities and need for indepen-
dence), the task (i.e., if it is routine or intrinsically satisfying), and
the organization (i.e., cohesive workgroups or a high degree of
formalization or inflexibility). Research has supported the idea.
For example, intrinsically satisfying work and task-provided per-
formance feedback diminish a leader’s supportive behaviors from
making a difference in task performance.86
A good example of leadership substitutes occurred in the
Coast Guard after Hurricane Katrina in 2005. While Coast Guard
employees usually specialize in certain types of operations, they
are cross-trained so that they can do other jobs. Cross-training al-
lows teams to form quickly in emergencies, with everyone knowing
what each job entails and how it fits into overall operations. After
Hurricane Katrina, Coast Guard crews rescued over 33,000 people
in Louisiana, Mississippi, and Alabama despite a nearly complete
loss of connectivity for extended periods between Air Station New
Orleans and the chain of command. The complex operation suc-
cessfully continued because of the employees’ clear objectives,
Cross-training of Coast Guard crews allowed united effort, and flexibility. These factors served as leadership
them to function after Hurricane Katrina even substitutes and reduced the need for centralized leadership.87
though their communication was disrupted.
Leadership Effectiveness in Different Cultures

Much of the leadership literature has a North American bias. However, cultural
factors influence the effectiveness of different leadership styles. For example,
some cultures are more individualistic and others focus more on preserving
group harmony. Different cultures have different norms and expectations about
what is appropriate leader behavior and about the use of power and influence. It
is important to understand the impact of culture on leadership effectiveness not
only because companies are increasingly operating in multiple countries but
also because increasing diversity in the workplace means that most Western
businesses (even those based in one location) employ people from many cultural
backgrounds.88
Consider China as an example of how culture influences the exercise of lead-
ership. In China, Guanxi, which literally means social relationships or social con-
nections, defines in-group and out-group people. Like LMX, Guanxi determines
how individuals treat others—in-group people are benefited and protected,
while out-group people may be rejected.89 Followers expect Chinese leaders to
have personal contact with subordinates and show their awareness of their sub-
ordinates’ personal problems and sentiments to gain their loyalty and support.90
A manager is not only responsible for business success but is also supposed to
act as a father figure and take care of employees’ personal lives.91 The effective
model for leadership in the Chinese system is thus the wise and loving father,
which results in a paternalistic managerial style,92 in which the leader will take
care of subordinates in exchange for responsible behavior and performance. This
clearly calls for a different leadership style than would be found in most Western
cultures.
A recent large-scale, eleven-year study (the GLOBE study) of global leader-
ship effectiveness investigated the leadership beliefs of people in sixty-two differ-
ent cultures.93 One of the goals of the research was to identify the ways in which
middle managers worldwide distinguish between effective and ineffective lead-
ership. The GLOBE team identified many leader attributes universally seen as
being at least somewhat responsible for a leader’s effectiveness or ineffectiveness.
They also identified a large number of culturally contingent attributes, whose ef-
fects on leadership effectiveness differed from one culture to the next. A sum-
mary of the effect of culture on perceptions of leaders’ attributes is presented in
Table 13.6.
Effective leaders must learn to leverage technology in engaging followers. The
next Window on Managing Now feature discusses how to manage the interactions
with followers that occur through technology, or e-leadership.
T ABLE 13.6
The Effect of Culture on Perceptions of Leaders’ Attributes
Some Examples of Some Examples of Some Examples of
Universal Positive Universal Negative Culturally Contingent
Leader Attributes Leader Attributes Leader Attributes
Trustworthy Irritable Cunning
Dependable Dictatorial Sensitive
Excellence-oriented Uncooperative Evasive
Honest Ruthless Risk taker
Motivating Egocentric Ruler
Source: Based on Robert J. House, Paul J. Hanges, Mansour Javidan, Peter W. Dorfman, and
Vipin Gupta, Culture, Leadership, and Organizations: The GLOBE Study of 62 Societies (London:
Sage Publications, 2004).

E-Leadership
Technology is rapidly altering how leaders engage follow- inspire others. Although the vast majority of leaders use
ers. Leaders must manage work through telecommuting e-mail to communicate at least once a day, more sophisti-
relationships, communicate with employees through e-mail cated technologies (such as videoconferencing,Web con-
and Web-based portals, and support virtual teams that ferencing, instant messaging, chatrooms, blogs, or wikis)
may have members around the world. E-leadership ad- are used less frequently. Blogs are Web logs, or online di-
dresses the human interactions that now occur through aries, that can provide information to a particular sub-
IT. E-leaders use technology to enhance, improve, and re- scriber audience. Wikis are websites that allow users to
fine relationships in an organization’s structure and envi- add and edit content easily and collaboratively. They are
ronment. For example, a participative leader may set up especially well suited for collective writing and collabora-
chatrooms to solicit input on an important decision. tive problem solving.
Anonymous commenting during meetings can encourage Fourth, e-leaders must be able to communicate with
honest input, and electronic polls can take the pulse of the ’Net generation—people born after 1977 who have
current opinions.94 grown up with the Internet and technology embedded in
Like traditional leadership, e-leadership can be inspir- the world around them and are very comfortable with
ing and transformative, even if it takes place through web- new technologies. Attracting, retaining, and motivating
site postings, e-mail, or large-scale Web conferencing. So people from the ’Net generation requires a departure
how is e-leadership different from traditional leadership? from traditional hierarchical and autocratic styles of lead-
Emerging trends in leadership and concerns expressed by ership and an appreciation for how one might use tech-
current mid- and high-level executives provide some nology to motivate and generate commitment to the
clues.95 organization.96
First, e-leaders must use more participative styles to
address both global and local demands of decision making.
E-leaders must use technology to gather and distribute in-
formation around the globe so that others with specific
knowledge or expertise can provide insights about
emerging issues.
Second, e-leaders must become more comfortable
with developing, managing, and maintaining relationships
without having direct personal control and oversight. A
manager of telecommuting call-center employees must
use technology to keep abreast of employee attitudes,
maintain effective working relationships, and evaluate cur-
rent levels of productivity.This requires a different set of
skills than those of a leader who has an office inside a call
center filled with employees. Managers must use different techniques when leading face-
Third, e-leaders must become increasingly comfort- to-face than when interacting with subordinates through
able using technology to manage, influence, motivate, and technology.
CHAPTER SUMMARY
1. The difference between leadership and manage- authoritative/autocratic leaders present workers
ment is that management is a function involving with clear goals and offer little participation, affilia-
planning, budgeting, evaluating, and facilitating, tive leaders focus on human relationships and
while leadership is a relationship-based process emotional bonds, democratic leaders encourage
focused on developing talent, motivating, coach- employee involvement by being consultative and
ing, and building trust. participative, laissez-faire leaders are extremely
hands-off, pace-setting leaders expect high perfor-
2. Leaders can update their knowledge quickly by
mance from others without telling them what is
using technology-based solutions such as CD-
expected, and coaching leaders develop employ-
ROMs, PDAs, Web-based toolkits, communities of
ees. Transformational leadership is most effective
practice, online leadership development, and
when large-scale change is required. Transactional
mixed modes of training and development.
leadership works well for short-term goals when
3. Managers have both position power and personal both leader and led understand and are in agree-
power. Through position power, managers have ment about which tasks are important and about
legitimate, reward, and coercive power by virtue when change is smaller in scale.
of organizational authority. Effective managers
8. Initiating structure behaviors and production-
should focus on using personal power that includes
oriented leaders focus on task accomplishment,
expert, referent, and informational power.
i.e., getting the job done. Consideration and
4. Leaders can use coalition tactics (consultation, ex- employee-oriented leaders focus on employees,
change, ingratiation, and inspirational appeals) their needs, and interpersonal relationships.
and legitimating tactics (personal appeals, pres-
9. Path-goal theory emphasizes that the leader’s job is
sure, and rational persuasion) to influence others.
to help followers attain their goals. Leaders must
Some of these influence approaches are more
provide appropriate direction and support to
effective than others.
ensure that followers’ goals are consistent with
5. Traits and skills that tend to identify leaders include those of the group and organization.
determination, emotional maturity, high energy
10. Leader-member exchange theory proposes that
levels, integrity, intelligence, internal control orien-
leaders develop a special relationship with a subset
tation, job-relevant knowledge, self-confidence, so-
of subordinates (the in-group). Members of the
ciability, and interpersonal skills.
in-group serve as trusted advisers, while members
6. Netiquette is important for effective management of the out-group are given little opportunity to pro-
in today’s world. vide input to group decisions.
7. There are a variety of leadership styles. Coercive
leaders make demands and expect results,
1. Do all managers need to be leaders? Why or 5. Are men and women equally effective as leaders?
why not? Why or why not?
2. Can a leader be effective without power? Why or 6. When would transactional leadership be preferred
why not? to transformational leadership?
3. What influence tactics do you believe are most 7. Which leadership style do you feel is best for man-
effective? Why? agers to use most often? Why?
4. How can emotional intelligence help leaders be 8. Is it always good to empower workers? Why or why
more effective? not?
Case Study ■ 401
9. How do situational factors influence whether or 11. What advice would you give a leader on managing
not leaders will be successful? people from the ’Net generation?
10. Do you feel that it is possible for leadership substi-
tutes to be effective? Why or why not?
1. Think of an ineffective leader with whom you are 3. In groups of three or four students, form an execu-
familiar. It could be a manager you’ve worked with tive board and brainstorm the leader characteris-
or a public figure. Drawing from the material tics and styles you would look for when hiring a
presented in this chapter, describe what has made new CEO for a company with which you are all
this leader ineffective. Then identify three factors familiar (e.g., Microsoft, Google, McDonald’s, GE).
that would have made the leader more effective. From this list, identify the three most important
competencies or characteristics for the new CEO
2. Habitat for Humanity is a volunteer association
and describe why you prioritized them the way
whose goal is to eliminate poverty housing and
you did. Would these competencies and charac-
homelessness from the world and to make decent
teristics work equally well in all organizations?
shelter a matter of conscience and action. Habitat
Why or why not?
invites people of all backgrounds, races, and reli-
gions to build houses together in partnership with 4. Internet Exercise. In groups of three or four stu-
families in need. Imagine for a moment that you dents, brainstorm three leaders with whom every
have been asked to lead a Habitat for Humanity group member is familiar. As a group, choose one of
team in building a house. Now incorporate infor- these leaders to research using the Internet. Write a
mation from leader-member exchange theory to two-page paper describing the nature of the follow-
describe how you would be effective in this con- ers and the situation that the leader faced, the lead-
text. Then identify the power and influence tactics ership style(s) the leader used, and why the leader-
you would use to motivate your team. ship style(s) were or were not appropriate.
CASE STUDY
Steve Bennett of Intuit
hen Steve Bennett became president and CEO of When he gave his first overview of the company at
W Intuit Corporation, the software firm known for
Quicken and TurboTax, he became the leader of an
an analysts’ meeting, he did something unthinkable at
the time: with the company’s founders in the audience,
organization obsessively devoted to its people but lack- he stood up and said that Intuit was underperforming
ing operational rigor. It had focused so intently on its compared with the opportunity it faced. That message
core customers—businesses with fewer than twenty was directed as much to Intuit’s employees as it was to
people—that it had not kept up with customers who the financial markets. He then distributed a document
had outgrown its software. titled “Steve’s Dream for Intuit” that mapped his plan
Bennett had run a variety of business units over the for turning the company into a high-performance
course of two decades and had refined a plan for taking machine; among his goals: put leaders of business
on new challenges. He realized Intuit was an organiza- units totally in charge of the end-to-end customer ex-
tion with a democratic, employee-centric culture. “We perience, institute zero-based budgeting, standardize
were focused too much on making sure that everybody equipment as a way of managing costs, and eliminate
felt good and not enough on high performance,” says businesses such as insurance where Intuit couldn’t
Bennett. He adds, “I wanted them to know that a com- control the critical success factors.
pany can be focused on high performance and still be a Bennett restructured the organization so that he
good place to work.” had eighteen direct reports instead of eight. “I took out
some layers so that I could connect directly with more DISCUSSION QUESTIONS
people in order to drive change faster,” he says. “If you
have that many direct reports, you don’t have time to 1. Which traits and characteristics does Steve Bennett
meddle in their business. My job is to conduct the possess that make him an effective leader?
orchestra, not to play all the instruments.” 2. How would you describe Steve Bennett’s leader-
Raymond Stern, Intuit’s senior vice president of ship style in terms of task and relationship orienta-
corporate development and strategy, appreciates the tion? Is his style appropriate for Intuit? Describe
discipline Bennett has introduced. “One of the things why or why not.
that Steve is amazingly good at is getting a crisp under-
standing of priorities. All of the top-level leaders in this 3. Which of the leadership theories covered in this
company have a one-page list of priorities. They chapter do you think apply to Steve Bennett’s lead-
learned that from him.” ership at Intuit?
Despite all of the new initiatives, including a focus 4. If you were the CEO of Intuit, what leadership style
on operational rigor, time management, and the quality- and influence tactics would you use to guide Intuit
improvement process, Intuit has not lost its small- into the future? There is more than one way to
company feel or its dedication to being a great place to be an effective leader; be honest regarding your
work. Bennett himself now has more time to seek personal leadership style and beliefs rather than
employees’ input, and he is often seen in the company trying to be like Steve Bennett.
cafeteria or around the office talking to employees. He
even sends praiseworthy employees handwritten
notes.97
MOTIVATING EMPLOYEES 14
Mercury Interactive Corporation CHAPTER OUTLINE
Opening Vignette: Mercury
S unnyvale, California, software company Mercury Interactive

Corporation1 had a problem. The members of their field staff, who
maintain and troubleshoot computer systems, were not communicating
Interactive Corporation
● What Is Motivation and
Where Does It Come from?
to managers the sales opportu- Characteristics of the Individual
Characteristics of the Job
nities they saw while visiting Characteristics of the Work Environment
clients. The company realized ● Content Approaches to
that if the field staff members Motivation
Maslow’s Hierarchy of Needs
could identify weaknesses in
Alderfer’s Existence-Relatedness-Growth
existing client systems, they (ERG) Theory
could create sales opportuni- Herzberg’s Two-Factor Theory
McClelland’s Needs for Achievement,
ties.“We asked them to Affiliation, and Power
voluntarily jot notes about Empowerment
opportunities they saw when Hackman and Oldham’s Job
Characteristics Model
on assignment, but the program IMPROVING YOUR MOTIVATION
was so-so. I thought that if we SKILLS: A Job Enrichment
could create an incentive pro- Evaluation Form
● Process Approaches
gram we’d generate more
to Motivation
interest,” says Amit Ronen, vice Mercury Interactive needed to motivate its Goal Setting and Feedback
president of field technical oper- computer repair field staff to create new sales
opportunities.
Motivating with Digital Dashboards
ations.2 But the program can’t Self-Efficacy
cost a lot, and the company wants it to be online. Mercury Interactive Vroom’s Valence, Instrumentality, and
asks your team’s advice on how to motivate its field staff members to Expectancy (VIE) Theory
What Does It Mean to Be Fair?
identify and communicate sales leads. ■ Equity Theory
● Learning and
B E H AV I O R A L O B J E C T I V E S Reinforcement Approaches
to Motivation: How Conse-
After studying this chapter, you should be able to: quences Shape Behavior
Reinforcing Performance
Show that you’ve learned the chapter’s essential information by Behavior Modification
➤ Describing the motivation process. ● Rewarding Performance
➤ Listing various ways work can be motivating. WINDOW ON MANAGING NOW:
➤ Briefly explaining the difference between content and process theories of motivation. Using Internet Tools to Motivate
and Reward Employees
➤ Explaining how valence, instrumentality, and expectancy can influence motivation.
Pay for Performance
➤ Listing and describing three ways of being fair.
➤ Giving examples of when you would use different motivational techniques.
403
PRACTICE IT: Online Incentives at
Mercury Interactive Corporation Show that you can practice what you’ve learned here by
Alternative Rewards ➤ Reading the chapter-opening vignette and identifying ways the company can motivate
Putting It All Together its field staff to identify and report sales opportunities.
WINDOW ON MANAGING NOW: ➤ Reading the end-of-chapter exercises and identifying which motivation theories apply
Using Technology to Retain to the situation.
Knowledge Workers
➤ Reading the end-of-chapter exercises and identifying a job’s enrichment potential.
➤ Reading the chapter case study and describing why GM employees’ motivation
increased.

Online Study Center
ACE the Test ➤ Studying the video scenario and recommending what you would do to improve employee
Managing Now! LIVE motivation in the company.
What Is Motivation and Where Does It Come from?

G reat managers know that strategizing, planning, and organizing can only lay
the foundation for high performance. Managing the motivation of employees
is the key to translating strategies, plans, and organizational efforts into action.
motivation: the intensity of Motivation is the intensity of a person’s desire to begin or continue engaging in
a person’s desire to begin or the pursuit of a goal. Factors from a variety of sources in the individual, job, and
continue engaging in the pursuit work environment arouse, maintain, and channel a person’s efforts toward a goal
of a goal
and affect motivation, as shown in Figure 14.1.
Because people’s personal goals are often different from the organization’s
goals, managers must motivate employees to work toward shared organizational
goals.3 The purpose of this chapter is to show you how to apply different theories
of motivation, reinforcement, and rewards to motivate employees and become a
more effective leader and manager.
An easy mistake to make when trying to motivate others is to assume that the
same things that motivate you also motivate them. Different things motivate dif-
ferent people. It is easy to make incorrect assumptions about the reasons for
someone else’s behavior if you don’t understand what motivates them. People
have different abilities, needs, personalities, values, and self-concepts—which
law of individual psychologists know as the law of individual differences. Just as effective leaders
differences: people have change their leadership style to match the followers and the situation, good man-
different abilities, needs, agers also vary their motivational methods based on what works for a particular
personalities, values, and self-
employee and situation.4 We’ll see in a moment that three sets of characteristics—
concepts
in the individual, job, and work environment—influence a manager’s ability to
motivate his or her subordinates.
F IGURE 14.1 Unmet

need or want
Drive toward
goal to satisfy
Attainment of
goal satisfies
want or need want or need
The Basic Motivation Process
What Is Motivation and Where Does It Come from? ■ 405
Some employees might want money or career advancement from their job, but
these things may have relatively little appeal to others. For example, it is clear from
the following conversation that what motivates these two workers is quite different.
Tyler: You’re crazy for quitting your old job. The work may have been
boring, but it pays better than any other job in the area.
Ryan: You’re right about the pay, but the job drove me crazy. Even though
I make less money in my new job, I really like it. I do something different
every day.
How can work be motivating? Work can be motivating because it:
◗ Is interesting and satisfying.
◗ Allows employees to learn new skills.
◗ Provides needed income.
◗ Provides needed benefits such as health care.
◗ Gives status and prestige.
◗ Gives employees something to do.
◗ Provides social contact.
◗ Is a way to give back to society and help others.
Why is motivation important? One reason is that motivated workers are more
productive.5 High performance requires both ability and motivation. Someone
who is able to do a task well will do so only if she or he is motivated to do it well.
Higher employee motivation can also lead to faster and better-quality work.6 More
motivated employees work more safely,7 provide suggestions for improvements,
and are less likely to quit.8 Clearly, managers can realize several benefits if they can
increase the motivation of their employees.
Characteristics of the Individual

Why does one employee come to work early, stay late, and take on additional work
while another does the minimum amount to get by? The answer is because people
are not all the same. Personality, values, needs, abilities, and interests are individ-
ual characteristics that people bring to their jobs. These individual characteristics
motivate people to work harder at some things than at others. Table 14.1 provides
examples of individual characteristics that influence people’s motivation to do
certain things.
People also differ in their perceptions about the nature of other people. After
watching how managers interacted with employees, Douglas McGregor proposed
Theory X: the belief that most that people hold either a generally negative view, called Theory X, or a generally
people dislike work and will try positive view, called Theory Y, about others.9 Theory X managers assume that
to avoid it whenever possible most workers display little ambition and believe that employees dislike work and
attempt to avoid it whenever possible. As a result, Theory X managers use coercion
Theory Y: the belief that
people can enjoy responsibility
and threats to motivate employees to achieve the organization’s goals. Theory Y
and work and can make good managers, on the other hand, assume that most people enjoy responsibility and
decisions and exercise self- can make good decisions. Theory Y managers motivate employees by providing
direction opportunities to develop their skills and abilities.
406 PART FIVE CHAPTER 14 Motivating Employees
T ABLE 14.1
Some Individual Characteristics That Influence Motivation
Goals Needs Attitudes
To attain a certain quality level For affiliation About oneself
To reach a certain performance level For power About the job
To complete a task For the approval About the
of others supervisor
To advance one’s career For achievement About coworkers
Although McGregor personally subscribed to Theory Y and felt that participa-

tory decision making, challenging and responsible jobs, and good workgroup
relations would maximize work motivation, effective managers have held both
Theory X and Theory Y views. It is helpful to remember that while some personal
characteristics influence our own motivation to accomplish specific goals, our
being more aligned with Theory X or Theory Y can also influence how we choose to
motivate others.
Characteristics of the Job

Job characteristics refer to the nature of the work. Job characteristics that influ-
ence work motivation include the types and variety of tasks done and the amount
of feedback a worker gets from the task itself (rather than from a supervisor or
someone else). The characteristics of a job that motivate someone to do some-
thing are external pull factors because they pull someone to want to exert effort to-
ward a goal. We will discuss a formal theory of job characteristics in more detail
later in the chapter.
Characteristics of the Work Environment

content theories of The work environment is made up of the rules, management practices and poli-
motivation: theories of cies, and rewards system of an organization. Things like supportive supervision
motivation that assume that
all individuals possess inner
and a fun work environment can motivate employees. Some organizations create
needs and are motivated by the such a positive work environment that employees become passionate about work-
desire to satisfy those needs, and ing there. Zingerman’s Delicatessen in Ann Arbor, Michigan, is a good example.
that focus on whether the Zingerman’s strong sense of community, deep belief in people, and passion for
characteristics of the work great food and great service is very motivating to its employees. As one employee
environment satisfy the inner put it, “Working here has never felt like a job to me. I’m constantly learning about
needs of the worker managing, about food, and about myself.”10
Content Approaches to Motivation

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M otivation theories can be divided into two categories, content and process
theories. Content theories assume that all individuals possess inner needs
and are motivated to satisfy these needs. Content theories therefore address
Content Approaches to Motivation ■ 407
the characteristics jobs should have to satisfy the needs of the worker. Next, we
will discuss the four main content theories of motivation.
Maslow’s Hierarchy of Needs

Abraham Maslow’s hierarchy of needs11 is one of the most famous content theo-
ries of motivation. Maslow suggested that a hierarchy of needs motivate people.
Basic physiological needs for food, water, and comfort must be met first, then
safety and security needs motivate behavior. We pursue social needs for friendship
and belonging next, followed by self-esteem needs for self-respect and respect
from others. Eventually, once all the lower-level needs are satisfied, we pursue self-
actualization needs, which are desires for self-fulfillment and the realization of our
full potential. As one need in the hierarchy is satisfied, it ceases to motivate be-
havior, and the need at the next level up the hierarchy motivates our behavior. For
example, when the basic need for food and clothing is satisfied, we aim for secu-
rity needs, and so on.
Maslow intended the hierarchy to be a general theory of motivation, but many
managerial theorists have enthusiastically adopted it. When jobs are secure, em-
ployees will seek ways of satisfying social needs and, if successful, will seek the
means to the ultimate end of self-actualization. Although it appeals to managers
because it is simple and intuitive, academic research has not supported Maslow’s
theory.12 But by identifying the importance of esteem and self-actualization,
Maslow helped to increase managers’ awareness of the motivating potential of
giving employees greater responsibility, challenge, and continuous development,
which is consistent with Theory Y. Figure 14.2 illustrates Maslow’s needs hierarchy
and shows how managers can address each level.
F IGURE 14.2
How Managers Can Address Self-
Maslow’s Hierarchy of Needs Actualization:
Manager assigns
challenging tasks
and empowers workers
Self-Esteem:
Manager shows workers
appreciation, recognition, and respect
Social Needs:
Manager shows interest in and concern for employees
Safety and Security Needs:

Firm and manager provide health benefits and safe work conditions
Physiological Needs (Food, Water, Clothing, Shelter):

Firm and manager provide adequate pay
Alderfer’s Existence-Relatedness-Growth
(ERG) Theory
Clay Alderfer13 suggested that there are three groups of individual needs:
◗ Existence needs reflect desires for physical and material well-being, including nu-
tritional and material requirements (e.g., pay, benefits, and working conditions).
◗ Relatedness needs reflect desires for respect from and relationships with others.
◗ Growth needs reflect a desire to make useful and productive contributions and
to have opportunities for personal development.
Alderfer’s existence needs parallel Maslow’s physiological and security needs.
Similarly, Alderfer’s relatedness needs parallel Maslow’s social and esteem needs,
and his growth needs parallel Maslow’s self-actualization needs. Despite these
similarities, Alderfer’s theory differs from Maslow’s in a number of important re-
spects. First, Alderfer argued that it is better to think in terms of a continuum
rather than a hierarchy, and he argued that people could move along the contin-
uum in either direction. Maslow proposed that a satisfied need becomes less
important, but Alderfer argued that relatedness or growth needs become more
important when satisfied. This suggests, for instance, that work enriched by orga-
nizing employees into teams can continue to motivate employees.
Both Maslow’s and Alderfer’s theories were developed in the United States,
and it is likely that the needs do not fall into the same order in all cultures and
countries.14 It is also likely that the order of the needs differs in one country at dif-
ferent times; during periods of war, for example, security needs may take prece-
dence over physiological needs. Different people are also likely to have different
hierarchies when it comes to their own needs, as well as different thresholds for
meeting one level’s needs. For example, one person may not feel financially secure
until he or she has saved $10 million, but another person may feel quite secure
with $1 million. These ambiguities make it difficult for managers to base specific
actions on either theory.
Nonetheless, it can be helpful for managers to remember that people have dif-
ferent types of needs. Managers can enhance employees’ motivation by looking
for opportunities to address employees’ existence, relatedness, and growth needs
in creative ways. For example, some companies sponsor volunteer activities in the
community or create mentoring programs with local schools, which can fulfill
relatedness and growth needs.
● Managing Now Technology and the Internet have helped organizations meet
employees’ growth needs by enabling the delivery of training and development
programs. Using an Internet/intranet training platform, employees at HIP Health
Plan of New York can choose from over 2,000 professional business and technical
training classes, which are available from home or at work via the Internet.15
Herzberg’s Two-Factor Theory

Economic rewards alone are insufficient to motivate employees to perform at their
best. Frederick Herzberg16 theorized in his Two-Factor Theory17 that while factors
extrinsic to the job (such as pay) can cause dissatisfaction if inadequate, only
factors intrinsic to the job (such as opportunities to achieve) could motivate
T ABLE 14.2
Herzberg’s Motivators and Hygiene Factors
Motivators (Satisfiers) Hygiene Factors (Maintenance Needs)
Achievement Pay
Advancement Supervision
Recognition Company policies and administration
Growth Status
Responsibility Interpersonal relations with colleagues
The work itself Working conditions
hygiene factors: factors such behavior. Extrinsic hygiene factors, such as pay, status, and working conditions
as pay, status, and working produce an acceptable working environment. Although their presence does not
conditions that produce an increase satisfaction, their absence causes dissatisfaction. In other words, high
acceptable work environment
pay and good working conditions are generally not enough to make people feel
and whose absence leads to
dissatisfaction satisfied with their jobs. But if pay or working conditions are poor, then people feel
dissatisfied. Hygiene factors correspond to Maslow’s lower-level physiological,
safety, and social needs and Alderfer’s existence and relatedness needs.
motivators: factors intrinsic Herzberg identified a second set of factors, called satisfiers or motivators,
to the job that can drive an that are intrinsic to the job and can drive an employee to pursue excellence.
employee to pursue excellence Motivators include recognition, responsibility, and growth.18 Motivators corre-
and whose presence increases spond to Maslow’s higher-level needs of esteem and self-actualization and Alder-
satisfaction
fer’s growth need. Table 14.2 lists some examples of motivators and hygiene
factors.
As you can see in Figure 14.3, motivator factors can increase satisfaction but
do not lead to dissatisfaction, and hygiene factors can reduce dissatisfaction but
do not lead to satisfaction or positive motivation. In other words, the opposite of
both satisfaction and dissatisfaction is no satisfaction. This differs from the tradi-
tional view of motivation that satisfaction is the opposite of dissatisfaction, as
summarized in Figure 14.3.
Traditional View of Motivation

F IGURE 14.3
The Traditional View and Dissatisfied Satisfied
Herzberg’s View of
Motivation
Herzberg’s View of Motivation
Hygiene Factors Motivators
Neither Satisfied
Dissatisfied nor Dissatisfied Satisfied
(No Satisfaction)
The most important contribution of the two-factor theory is the idea that
motivation comes from the intrinsic value and satisfaction the worker gets from the
job itself, not from the conditions surrounding the job. Even if pay and benefits are
high, a job must also be challenging and interesting, and have opportunities for
feelings of achievement, if it is to be motivating. Herzberg’s two-factor theory thus
draws attention to job design and the role of managers in attending to the motiva-
tor factors present in a job.
Although its intuitiveness and simplicity appeals to many managers, many
scholars have criticized the two-factor theory.19 One important issue is the fact
that Herzberg talks about satisfiers and dissatisfiers, but satisfaction and motiva-
tion aren’t necessarily the same. For example, Mary might be satisfied with her pay,
but pay may not motivate her to work harder. Despite the criticisms and lack of
consistent research support, Herzberg’s theory continues to influence manage-
ment practitioners.20
McClelland’s Needs for Achievement,

Affiliation, and Power
David McClelland21 divides motivation into three needs that influence both em-
ployee and leader performance:22
◗ Need for affiliation: The desire to establish and maintain friendly
and warm relations with others. People high in need for affilia-
tion tend to be friendly and like to socialize with others, and their
interpersonal skills help them to resolve conflicts and facilitate
cooperation within and between groups.
◗ Need for achievement: The desire to do something better or more
efficiently, to solve problems, or to master complex tasks. People
high in need for achievement prefer tasks of moderate difficulty,
enjoy pursuing attainable goals, and like to be recognized.
◗ Need for power: The desire to control and influence others, or to
be responsible for others. People can express a need for power
in ways that improve organizations and societies (a socialized
power orientation) or by manipulating and exploiting others (a
personalized power orientation). A socialized power orientation
motivates by inspiring others.
The implication for managers is that they must identify what
motivates a subordinate and then create appropriate motivators.
Managers can give achievement-motivated workers goals and clear
roles and responsibilities, assign affiliation-oriented workers to
work with others they know and trust, and give power-motivated
What’s happening here? Psychologists use people greater responsibility and authority. Understanding what
ambiguous pictures like this to help identify a motivates employees enables a manager to choose motivators that
test taker’s level of various needs. will appeal to them and positively influence their behavior.
Empowerment
One theme shared by the four needs or content theories we just discussed is the
idea that a sense of achievement and responsibility is motivating. This idea corre-
sponds with Maslow’s self-actualization need, Alderfer’s growth need, Herzberg’s
motivators, and McClelland’s need for achievement. Empowerment fosters ex-

actly such a sense of achievement. As discussed in Chapter 13, empowerment is
the degree to which an employee has the authority to make and implement deci-
sions. Empowerment enables employees to use more of their potential. Work-
groups can have empowerment that enhances their performance.23
Although some employees are likely to feel more motivated when empowered,
increased responsibility will not motivate everyone. Nonetheless, empowerment
can be an important management tool to increase the motivation of many em-
ployees. Practical ways to empower others include:24
◗ Articulating a clear vision and goals.
◗ Fostering personal mastery experiences to enhance self-efficacy and build skills.
◗ Modeling successful behaviors.
◗ Sending positive messages and arousing positive emotions.
◗ Connecting employees with the outcomes of their work and giving them
feedback.
◗ Building confidence by showing competence, honesty, and fairness.
● Managing Now Technology has helped organizations empower workers by

making better and timelier information available to everyone.25 By empowering
workers, technology helps eliminate layers of management and create a flatter
organization. Bill Gilmer, owner of Wordsprint Inc. in Wytheville, Virginia, uses
technology—such as frequent updates via PDAs—to give his employees the infor-
mation they need to make decisions without a supervisor. Technology helps
monitor employees’ productivity and empowers employees to make their own de-
cisions. Gilmer also motivates employees to take responsibility for decisions by
basing a substantial portion of their pay on individual, departmental, and com-
pany productivity. Cisco uses technology in a different way to help empower work-
ers. When a manager is on vacation or out of the office, he or she electronically
delegates various responsibilities by using Cisco’s Universal Proxy tool.26
Managers who have a clear appreciation for different types of employee needs
can design jobs to provide different opportunities to fulfill those needs. Employees
can be more empowered or they may have opportunities to engage in auton-
omous decision making. Always remember, however, that not all employees will
be motivated by these and other job characteristics. How can we design more
motivating jobs? J. Richard Hackman and Greg R. Oldham developed the job char-
acteristics model to answer this question.
Hackman and Oldham’s Job Characteristics Model

job characteristics model: Hackman and Oldham’s job characteristic model suggests that objective charac-
objective characteristics of the teristics of the job lead to motivation.27 In particular, Hackman and Oldham28
job itself, including skill variety, identified five characteristics on which jobs differ:
task identity, task significance,
autonomy, and task feedback, ◗ Skill variety: The degree to which the job requires a variety of activities, thus en-
that lead to job satisfaction for abling the worker to use different skills
people with a high growth need
strength ◗ Task identity: The degree to which the job requires the worker to complete a
whole and identifiable piece of work
◗ Task significance: The degree to which job performance is important and affects
the lives or work of others
◗ Autonomy: The degree to which the job gives the worker freedom, discretion,
and independence in scheduling the work and determining how to do the work
◗ Task feedback: The degree to which carrying out the job’s activities results in di-
rect and clear information about the effectiveness of the worker’s performance
These five characteristics together determine the motivating potential of a
job.29 But a high motivating potential score alone does not mean that the job is
more motivating for everyone. Not everyone wants more variety, responsibility,
and so on—some people just want to do their jobs without having to think much
about it. For them, jobs that are stable, less complex, and less demanding (i.e., jobs
with a lower motivating potential score) would be more motivating. We look at a
person’s motivational preferences, such as desire for advancement, to identify the
factors that motivate that particular worker. We then compare a job’s motivating
potential to the person’s motivational preferences to identify the job-person
match. Ideally, the motivating potential of a job matches the growth needs (such
as your achievement) of the individual.
Hackman and Oldham suggest that if there is a good match between the needs
of the person and the characteristics of the job, three critical psychological states
can occur in employees:
◗ Experienced meaningfulness of work
◗ Experienced responsibility for work outcomes
◗ Knowledge of results of work activities
According to Hackman and Oldham, these psychological states increase work

motivation and job satisfaction. Figure 14.4 illustrates the model.
Although research generally supports the existence of a positive relationship
between the five job characteristics and job satisfaction and the role of growth need
strength,30 conceptual and methodological difficulties31 prevent firm conclusions
from being drawn.32 Nonetheless, the job characteristics model highlights the need
for managers to be aware of the role of job redesign in addressing worker motivation
problems. For example, when a U.S. printing company in the Midwest organized
workers into semiautonomous teams to increase worker autonomy, employees put
in greater effort, used more skills, and did a better job solving problems.33
● Managing Now Technology has increased the amount of feedback provided

by many jobs. Digital dashboards and other electronic feedback mechanisms help
employees continually monitor their performance. According to job characteris-
tics theory, this feedback increases employees’ knowledge of work results and
increases their motivation, performance, and satisfaction.
● Job Enrichment, Job Enlargement, and Job Rotation Related to the no-
tion of motivating potential, enriched and enlarged jobs can increase employee
motivation. For many people, enriched, more interesting work tends to be more
motivating than simple, repetitive work. Task variety, task significance, and au-
job enrichment: an approach tonomy (characteristics of motivating work proposed by the job characteristics
to job design that increases a
job’s complexity to give workers
model) are much more likely to exist when a task is complex than when it is
greater responsibility and simplified.34
opportunities to feel a sense of Job enrichment is an approach to job design that increases a job’s complex-
achievement ity to give workers a greater sense of responsibility and achievement. Enriched
F IGURE 14.4
The Job Characteristics Model
Job Characteristics Psychological States Outcomes
■
Skill Variety
■
Task Identity Experienced Meaningfulness of Work
■
Task Significance
■
High Motivation
Autonomy Experienced Responsibility of Work Outcomes ■
High Performance
■
High Satisfaction
Feedback Knowledge of Work Results
Employee Growth
Need Strength
SOURCE: Adapted from J. Richard Hackman and Greg R. Oldham,“Development of the Job Diagnostic Survey,” Journal of Applied Psychology, 1975, vol. 60, no. 2, pp. 159–170.
Reprinted by permission of The American Psychological Association.
jobs are typically expanded vertically—responsibilities previously performed by

the supervisor are added to the enriched job. To enrich a job, a supervisor can in-
troduce new or harder tasks, organize work in teams, provide direct feedback from
customers, or grant additional authority to employees. Job enrichment gives em-
ployees more autonomy and feelings of control, and it can reduce the negative
motivational effects of tasks that are repetitive or require little autonomy. Hackman
and Oldham’s skill variety, task identity, task significance, autonomy, and task
feedback are five aspects of the task that determine how enriched it is.
For example, expanding a secretary’s job responsibilities to include keeping
inventory and ordering office supplies, previously the supervisor’s responsibili-
ties, enriches the job. Merely adding more tasks at the same level of responsibility
and skill related to an employee’s current position (horizontal job expansion) is
job enlargement: adding considered job enlargement. When a secretary’s job responsibilities of receiving
more tasks at the same level of visitors and answering phones expand to include typing correspondence and sort-
responsibility and skill related to ing mail, the job is enlarged. Job enlargement is not the same as job enrichment,
an employee’s current position
although it can help reduce boredom.
Performing a variety of tasks can be motivating, but be careful not to put too
much into any one job. When UPS tried to understand the high turnover rate
among its drivers, it found that the high turnover was due to requiring drivers to
load their own vehicles prior to delivery. UPS responded by redesigning the job:
hiring separate workers to handle vehicle loading and allowing drivers to focus on
making deliveries.35
I M P R OV I N G Y O U R M O T I V A T I O N S K I L L S
A Job Enrichment Evaluation Form
The Job Itself

1. Quality is important and attributable to 1-2-3-4-5 Quality is not too important and/or is not
the worker. controlled by the worker.
2. Flexibility is a major contributor to job efficiency. 1-2-3-4-5 Flexibility is not a major consideration.
3. The job requires the coordination of tasks or 1-2-3-4-5 The job is performed by one worker acting
activities among several workers. independently.
4. The benefits of job enrichment will compensate 1-2-3-4-5 Job enrichment will eliminate substantial
for the efficiencies of task specialization. efficiencies realized from specialization.
5. The conversion and one-time setup costs 1-2-3-4-5 Training and other costs associated with job
involved in job enrichment can be recovered in enrichment are estimated to be much greater
a reasonable period of time. than expected results.
6. The wage payment plan is not based solely 1-2-3-4-5 Workers are under a straight piecework wage
on output. plan.
7. Because of the worker’s ability to affect output, an 1-2-3-4-5 Because of the dominance of technology, an
increase in job satisfaction can be expected to increase in job satisfaction is unlikely to
increase productivity. significantly affect productivity.
Technology
8. Changes in job content would not necessitate a 1-2-3-4-5 The huge investment in equipment and
large investment in equipment and technology. technology overrides all other considerations.
9. Employees are accustomed to change and respond 1-2-3-4-5 Employees are set in their ways and prefer the
favorably to it. status quo.
10. Employees feel secure in their jobs; employment 1-2-3-4-5 Layoffs are frequent; many employees are
has been stable. concerned about the permanency of
employment.
11. Employees are dissatisfied with their jobs and 1-2-3-4-5 Employees are satisfied with their present jobs
would welcome changes in job content and and general work situation.
work relationships.
job rotation: moving workers Job rotation occurs when workers are moved through a variety of jobs to in-
through a variety of jobs to crease their interest and motivation. For example, a workgroup of three secretaries
increase their interest and may take turns answering the phones, greeting visitors in the reception area, and
motivation typing and filing correspondence. Cross-training is usually required to give em-
ployees the skills they need to do the different jobs. Because it involves a horizon-
tal rather than vertical expansion of job responsibilities, job rotation is a type of
job enlargement rather than job enrichment.
Because some workers actually prefer work with low responsibility, autonomy,
and variety to seemingly more stimulating jobs,36 well-intentioned managers
need to be careful when enriching or enlarging the jobs of people who like their
jobs just the way they are. Successful job enrichment efforts to improve employee
motivation require an understanding of employee and management readiness for
proposed changes and an analysis of the job’s suitability for enrichment. We can
never be certain that job enrichment will work as intended, but the form for eval-
uating the appropriateness of job enrichment in the Improving Your Motivation
Skills feature provides a guide. According to the form’s creators, “A lower rating
(1.0–1.9) indicates that a job is a prime candidate for enrichment; and if properly
Process Approaches to Motivation ■ 415
12. Employees are highly skilled blue- and 1-2-3-4-5 Employees are semi- and unskilled blue- and
white-collar workers, professionals, and white-collar workers.
supervisors.
13. Employees are well educated, with most having 1-2-3-4-5 The average employee has less than a high
college degrees. school education.
14. Employees are from a small town and rural 1-2-3-4-5 The company is located in a large, highly
environment. industrialized metropolitan area.
15. The history of union-management (if no union, 1-2-3-4-5 Union-management (worker-management)
worker-management) relations has been one relations are strained, and the two parties are
of cooperation and mutual support. antagonistic to one another.
Management
16. Managers are committed to job enrichment and 1-2-3-4-5 Managers show little interest in job enrichment
are anxious to implement it. and even less interest in implementing it in
their departments.
17. Managers have attended seminars, workshops, 1-2-3-4-5 Managers lack the training and experience
and so forth; are quite knowledgeable of the necessary to develop and implement job
concept; and have had experience in enrichment projects.
implementing it.
18. Management realizes that substantial payoffs 1-2-3-4-5 Management expects immediate results (within
from job enrichment usually take one to three six months) from job enrichment projects.
years to materialize.
Total Score _____________ ⫼ 18 ⫽ Job Enrichment Rating
Source: Theodore T. Herbert, Organizational Behavior: Readings and Cases, New York: Macmillan Publishing Co., Inc., 1976, pp. 344–345.
implemented, it has a high expected return on investment. A job enrichment rat-

ing of 2.0–3.9 identifies jobs that can be enriched that may have a marginal return
on investment in terms of productivity measures. A high rating (4.0–5.0) identifies
jobs that for all practical purposes cannot be enriched at the present time.”37
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process theories: theories

that address how and why
different external factors
P rocess theories of motivation address how and why people choose certain
actions to meet their personal goals. In other words, whereas content theories
focus on which factors (needs) internal to a person influence motivation, process
influence motivation
theories address the process through which different factors external to a person
influence motivation. These external influences, such as goals and reinforcement,
are often easy for managers to manipulate, making process theories useful in
worker motivation.
Goal Setting and Feedback

Edwin Locke and his colleagues38 developed the goal-setting theory of motivation,
which has become perhaps the most consistently supported work motivation the-
ory. Here is a summary of what we know about goal setting:39
◗ Participation in setting goals increases one’s sense of control and fairness in the
process.
◗ Performance is enhanced when goals are both difficult (challenging but attain-
able) and specific (a number rather than a range), for example, selling $1,000
worth of clothing in a shift or assembling fifteen parts per hour.
◗ A goal is most likely to be attained when people are strongly committed to it and
are given feedback showing their progress toward the goal.
◗ People are most likely to set high goals and be committed to them when they
have high self-efficacy (task-specific self-confidence) and believe they can reach
the goal.
◗ Goals affect what people pay attention to, how hard they work, and how long
they work, and they motivate people to find and use appropriate task strategies.
◗ Goals work best on simple tasks that are already learned rather than on complex
and novel ones.
Individual goals can sometimes conflict with team or organizational goals. For
individual goals to be effective, they must be integrated with team and organiza-
tional goals and strategies. Home Depot ensures that all senior store staff work to-
ward the same goals by broadcasting a live twenty-five-minute show called The
Same Page in stores every Monday. The show emphasizes the week’s top priorities
so that everyone shares the core goals of the business.40
Managers must continually challenge and motivate employees by setting
high goals and tight schedules. But in doing this, managers must avoid setting
unrealistic targets that may stimulate unethical behavior. People whose perfor-
mance is falling just short of a goal are the ones most likely to act unethically to
collect a reward.41 In the early 1990s, Sears, Roebuck, and Company set very
difficult goals for its automotive service advisers. After a number of complaints,
California state regulators found that most of the repairs made were unnecessary.
Sears’ chairperson, Edward Brennan, later admitted that Sears’ “goal setting
process for service advisors created an environment where mistakes did occur.”42
To guard against this, managers must create an ethical climate so that employees
feel comfortable bringing up conflicts. The pressure to reach high goals is often
necessary to ensure that the company succeeds. Enhancing trust and teamwork
reduces the pressure for unethical behavior and better equips employees to man-
age the pressure.
Feeling that goals are important also enhances commitment to them and in-
creases the motivation to do a job well. For example, S. Kenneth Kannappan, CEO
of Plantronics, a $560 million maker of headsets and products for the hearing
impaired, says, “The way I believe you motivate people is to make it clear not only
what goals the company is trying to achieve but also why the goals are important to
society. Our products, for example, help people drive safely while talking on mobile
phones. That’s a societal benefit we want our people to understand.”43 Explaining
goal importance also enhances feelings of task significance, which can increase
motivation, according to the job characteristics model.
For goal setting to work, people must have feedback

about how well they are doing in relation to their goals. It
is impossible to know if you need to do anything differ-
ently to reach your goal if you don’t know you are doing
poorly. Some companies have been able to use technol-
ogy to provide employees with real-time feedback about
their performance. For example, employees at fast-food
restaurant Chick-fil-A strive to complete orders within
ninety seconds in the drive-through window and sixty
seconds at the counter. Technology behind the counter
gives them constant feedback to help them reach this
goal—a timer on the computer monitor flashes yellow if
an order is cutting it close, red if it runs over.44
● Managing Now Information technology (IT)

Chick-fil-A employees strive to complete orders within sixty helps to provide timely and accurate feedback to em-
seconds at the counter. ployees. Firms can collect performance information
electronically from multiple sources and store it in a
centralized data warehouse. Rather than having to check multiple sources to
learn how they are doing, employees go to one place, usually the company in-
tranet. For example, Cisco uses IT systems to track individual performance.
Cisco employees also have easy access to a variety of performance information,
such as sales and customer satisfaction, to get a sense of whether they’re ac-
complishing the goals on which they’re measured.45 In the Window on Manag-
ing Now feature below, you will learn more about motivating employees with
digital dashboards.

Motivating with Digital Dashboards
As first discussed in Chapter 7, a digital dashboard pre- that reflect their own performance regularly reminds
sents a manager with desktop graphs and charts that paint employees of their goals and gives them feedback on their
a picture of performance in terms of various key perfor- performance. Digital dashboards provide personalized
mance indicators. For example, Johnson & Johnson uses information tailored to each user based on his or her
digital dashboards to provide timely and accurate key organizational role.48
business indicators to executives.46 Verizon executives Digital dashboards can also stimulate people to help
can choose from 300 metrics that reflect company objec- others to reach their goals. For example, Oracle CEO
tives in constructing their dashboards, metrics that in- Larry Ellison closely tracks his customers near the end of
clude information from broadband sales to wireless each financial quarter. “I want to know what our five
subscriber defections.47 Dashboards can be created that biggest deals are three days before the quarter closes,” he
show organization-level performance, workgroup-level says. “I look at the [dashboard] several times a day. So
performance, or individual performance. Dashboards can much of our sales activity gets compressed into a few
provide important feedback to employees about how well days.” He will then call the companies himself or figure
they are meeting their individual goals. out another way to seal the deal.49 By reviewing the digi-
Organizations are increasingly using digital dashboards tal dashboard, Ellison can identify where to best invest his
to motivate employees as well as to monitor and control time in closing deals that will help Oracle meet its quar-
them. Giving employees access to digital dashboards terly goals.
Self-Efficacy
If salespeople did not think that they could sell enough products to meet their
quotas, would they be very motivated to try? Because people are motivated in part
by what they expect to be able to do, these salespeople would probably not be very
self-efficacy: a person’s motivated. Self-efficacy is a person’s beliefs in his or her capabilities to do what is
confidence in his or her ability required to accomplish a task.50 Self-efficacy influences an individual’s effort and
to organize and execute the persistence in the face of challenges, potentially aversive situations, and events
courses of action necessary to
with high probabilities of failure. Self-efficacy beliefs have three dimensions:
accomplish a specific task
◗ Magnitude: How difficult is the task to be accom-
plished?
◗ Strength: How confident is the person that he or she
can accomplish the task?
◗ Generality: What is the degree to which he or she can
accomplish similar tasks?
Self-efficacy perceptions are changeable. Good
managers enhance subordinates’ perceptions of their
abilities. Managers can raise self-efficacy through
coaching and encouragement. If an employee fails at a
task he or she should be able to do, the manager can ex-
press confidence in the employee and guide him or her
through successful experiences. When an employee is
successful, the manager can discuss how the success
was due to the employee’s skills and effort (rather than
to luck) to enhance his or her self-efficacy.
Vroom’s Valence, Instrumentality,

and Expectancy (VIE) Theory
Valence, instrumentality, and expectancy (VIE) theory resulted from Victor
Vroom’s51 research. VIE theory holds that motivation is the product of three key
factors: valence, instrumentality, and expectancy. Valence is the perceived value
of a given reward or outcome to the person. Instrumentality is a person’s belief
that performance will result (be instrumental) in obtaining a particular reward.
Expectancy is the belief or expectation that effort will lead to performance. Vroom
proposed that the perception of a link between effort and reward was crucial
to work motivation. A worker must believe that effort will lead to performance
(expectancy), that performance will lead to rewards (instrumentality), and that the
rewards will be desirable (valence). If the worker perceives valence, instrumental-
ity, or expectancy to be low, then his or her motivation will also be low.
◗ Expectancy: If I work hard and put in a good effort, will I perform well?
◗ Instrumentality: If my performance is good, will I receive any rewards?
◗ Valence: Will the rewards I receive be things that I want?
VIE theory has been criticized.52 It focuses on only a few variables that are
likely to influence motivation. The concept of instrumentality is also ambiguous
and difficult to measure.53 Although support for the theory is mixed, empirical
research has shown that the strength of these three factors can influence a
worker’s effort and performance level.54 VIE theory is useful to managers because
it highlights the role of employee perceptions in the motivation process. Because

employees’ perceptions determine valences, instrumentalities, and expectancies,
managers can influence each of them in the following ways:
◗ Link rewards to performance (instrumentality) by creating easy-to-understand
incentive plans and communicating employees’ success stories in earning the
rewards.
◗ Administer rewards that are highly valued (valence) by matching the reward to
the worker, or give workers their choice of reward when they meet performance
targets.
◗ Enhance workers’ perceptions that they can perform well (expectancy) by ensur-
ing that employees know what they are expected to do; that they know how to do
it; and that they believe they can do it through training, coaching, and confi-
dence building.
● Managing Now Online incentive programs have made it easier for firms
to identify rewards that are highly valued by employees. For example,
salesdriver.com offers 1,500 different rewards, including gift certificates, travel,
technology, and even motorcycles. This broad selection allows employees to iden-
tify rewards that have high valence for them, which increases their motivation.
Online incentive programs typically award employees points for engaging in
desired behaviors or for reaching goals. Because employees know exactly how
many points they need to earn to receive their chosen reward, instrumentality is
also high.
What Does It Mean to Be Fair?

How fairly people feel they are being treated influences their motivation.55 Fair-
ness perceptions affect job performance, satisfaction, organizational commit-
ment, withdrawal behaviors, and counterproductive behaviors such as stealing.56
Managers have some options for increasing fairness perceptions and reducing
negative reactions when people do feel that a situation is unfair. We will discuss
the three main ways people perceive situations or results to be fair or unfair next.
● Distributive Fairness Distributive fairness is the perception of the fairness

of the outcome received. The reality of managerial decision making is that not
everyone can get what they want. But how do people react to not getting what they
want? Most people feel that positive outcomes are fair and that undesirable out-
comes are not fair. But how they react to undesirable outcomes depends on their
perceptions of two other types of fairness: procedural fairness and interactional
fairness.
● Procedural Fairness Procedural fairness is the fairness of the policies and

procedures used to determine the outcomes. Does the employee who did not
receive the performance bonus feel that the requirements for earning the bonus
are fair? Were the methods that determined the bonus awards reasonable? If not,
negative outcomes such as lower job performance and withdrawal behaviors like
coming to work late or putting in less effort are likely to result. But if procedural
fairness is high, negative reactions are much less likely. Consistent with VIE theory,
procedural fairness increases instrumentality by helping to reinforce employees’
beliefs that if they engage in certain behaviors and perform at a certain level, they
will receive rewards.
● Interactional Fairness Interactional fairness refers to whether the amount

of information about the decision and the process was adequate and whether
employees feel that they were treated respectfully during the process. Continuing
our example, does the employee who did not receive the performance bonus feel
that the supervisor did not adequately explain why she or he did not receive it?
When we assess undesirable outcomes, how we are treated can be just as impor-
tant as the outcomes we receive. If someone treats us rudely, it is hard to feel
motivated to do our best for him or her.
Although providing adequate information and treating people respectfully may
not sound like powerful tools in work motivation, interactional fairness can reduce
negative reactions to undesirable work outcomes.57 In one case,58 two plants in the
same company announced 15 percent pay cuts for their workers. The CEO gave em-
ployees at one plant extensive explanations about why the pay cut was necessary
and regretfully and explicitly explained that they would allow the company to avoid
layoffs. The second plant heard a short explanation that a pay cut was going to take
place to avoid layoffs, but employees received no apology. Interactional fairness was
therefore high in the first plant and low in the second plant. After the announce-
ment, theft increased in both plants, but its incidence was significantly higher in the
plant that received an inadequate explanation for the pay cuts. Voluntary turnover
was also higher in the plant that perceived low interactional fairness.
● Managing Fairness A great benefit to understanding how people perceive

fairness is that it helps managers identify factors that are not expensive but that
can effectively increase employee motivation. Managers can improve fairness per-
ceptions in two ways: (1) change the fairness of the situation or (2) change how
employees perceive the fairness of the situation. To change the fairness of the sit-
uation, managers can improve distributive fairness by appropriately rewarding
employees’ contributions. Ensuring that the policies and procedures used in de-
termining employee outcomes are objective and fair improves procedural fair-
ness. Treating employees with respect and giving adequate explanations for why
decisions are made can improve interactional fairness.
To change how employees perceive fairness, managers can focus on explain-
ing the procedures and decision-making processes to employees so that they are
clear and transparent. Employees should not wonder why some people get
bonuses or promotions and others do not—the requirements, procedures, and
decision-making processes should be transparent and decisions explained. In
addition, managers should always treat employees with sincerity and respect.
Equity Theory
equity theory: the theory that J. Stacey Adams59 developed equity theory to describe how people arrive at deci-
people observe the rewards sions regarding whether a decision was fair. Equity theory proposes that people
others are getting and the effort observe the rewards others are getting and the effort they are putting into their
they are putting into their work,
work. They then compare the efforts and rewards of others with their own effort
and then compare these
observations with their own and rewards. If people perceive inequity, especially in comparison to relevant oth-
effort and rewards ers, they will be dissatisfied and will try to restore equity. Employees’ concern for
fairness and equity drives this social comparison process. Research has supported
this theory, and it has become one of the most useful frameworks for understand-
ing work motivation.
A fair or equitable situation is one in which people with similar inputs experi-
ence similar outcomes. Employees will compare their inputs and rewards with the
rewards received by others for their inputs. Inputs include effort, ability, experience,
and other factors that enable someone to perform the job well. If employees per-
ceive that an inequity exists, they are likely to withhold some of their contribu-
tions, either consciously or unconsciously, to bring a situation into better balance.
This balance can be expressed as follows:
own inputs others’ inputs
⫽
own outcomes others’ outcomes
For example, imagine you have a job at which you feel that you work hard for
forty hours a week and earn a salary of $50,000. A colleague with the same job and
same hours earns a $60,000 salary. Is this fair? In assessing the equity of the situa-
tion, you realize that your colleague has advanced training, has worked ten years
longer than you have, and is more productive. You decide that, given your col-
league’s greater job inputs, his or her greater outcome (salary) is fair. You might
know of another colleague, however, who has the same effort level, work experi-
ence, productivity, and education that you do but who makes $55,000. You may
feel that this situation is unfair.
Equality and equity are not the same: equality means that everyone’s out-
comes are the same; equity means that everyone’s outcomes are fair given the na-
ture of their inputs. Equity theory does not propose that pay levels (outcomes)
need to be equal across employees. Employees generally won’t think it’s unfair if a
comparison employee is receiving more from the organization (such as getting
paid more) if he or she also contributes more to the organization (by being a bet-
ter performer, working more hours, etc.).
If an inequity is perceived, the employee may experience an emotional reac-
tion (such as anger) and try to restore equity. Adams proposed several ways that an
individual can try to resolve the inequity. For example, imagine a situation where
someone feels that they are underpaid compared to a coworker. To restore feelings
of equity, the worker could react by:
◗ Decreasing inputs (working more slowly or sloppily).
◗ Increasing outputs from the company (asking for a raise or bonus, or stealing).
◗ Trying to get the comparison person to work harder (to increase his or her inputs).
◗ Trying to get the comparison person’s outputs from the company reduced.
◗ Choosing a different comparison person.
◗ Cognitively distorting the comparison and trying to convince him- or herself that
the situation is equitable.
◗ Quitting.
Employees are more likely to notice being underpaid than being overpaid.60
When employees perceive that they have been overpaid, they may temporarily
increase their productivity to make the situation more equitable, but this effect
gradually wears off.61 It is likely that people reevaluate their inputs to justify the
overpayment and convince themselves that they deserve it.
Although equity theory was originally concerned with differences in pay, it is
also applicable to other forms of tangible and intangible rewards in the work-
place.62 That is, if any employee input is not balanced with some fair outcome,
motivation will be difficult. Managers must manage the perception of fairness in
the mind of each employee. If a subordinate thinks that you are treating him or her
unfairly, it will be difficult to motivate that employee, even if you disagree with his
or her assessment.
Learning and Reinforcement Approaches to Motivation:

How Consequences Shape Behavior
Online Study Center
ACE the Test
Managing Now! LIVE L earning can be thought of as a relatively permanent change in behavior that
occurs as a result of experience.63 Throughout our lives, we learn cause-and-
effect relationships both consciously and unconsciously. Children learn appropri-
learning: a relatively ate ways to behave as a result of parents’ and teachers’ smiles and reprimands in
permanent change in behavior response to their actions. Adults learn what their bosses expect through the feed-
that occurs because of back and rewards received because of their performance. This type of learning
experience tends to happen naturally and instinctively rather than because of deliberate
thought. Although several theories exist about how people learn, we will focus our
attention on those involving reinforcement. Reinforcement theories address the
role of consequences in shaping behavior.
Reinforcing Performance
Reinforcement theory is based on the work of noted psychologist Edward
Thorndike and B. F. Skinner.64 Thorndike discovered three laws:
◗ The law of effect: People tend not to engage in behavior that does not result in a
reward.
◗ The law of recency: The most recent consequence of a behavior is likely to govern
the recurrence of that behavior.
◗ The law of exercise: Repetition strengthens the association between cause and
effect.
The core of reinforcement theory is that behavior that is followed by positive
consequences is likely to be repeated. B. F. Skinner expanded on Thorndike’s work
and found that many behaviors can be controlled using different types of rein-
reinforcer: anything that forcers.65 A reinforcer is anything that makes a behavior more likely to happen
makes a behavior more likely again. Reinforcers work best when they are immediate, sincere, and specific to an
to happen again activity. There are four types of reinforcers, which are shown in Figure 14.5 and
explained more fully below:
◗ Positive reinforcement: Use of rewards to increase the likelihood that a behavior
will be repeated.
◗ Negative reinforcement: Removal of current or future unpleasant consequences
to increase the likelihood that someone will repeat a behavior. In other words,
avoidance or removal of something undesirable is motivating.
◗ Punishment: Application of negative outcomes to decrease the likelihood of a
behavior.
◗ Extinction: Removal of any reinforcement (positive or negative) following the
occurrence of the behavior to be extinguished to decrease the likelihood of that
behavior.
For reinforcement to work, the employee must know exactly why he or she is
receiving a reward. To best reinforce a behavior, the reward should come as quickly
as possible after the behavior. One of the biggest benefits of online incentive
Learning and Reinforcement Approaches to Motivation: How Consequences Shape Behavior ■ 423
F IGURE 14.5 TYPE OF STIMULUS
The Four Types of Reinforcers Positive Negative
Present the Positive Reinforcement Punishment

Stimulus (Increases the Behavior) (Decreases the Behavior)
ACTION
Remove the Extinction Negative Reinforcement
Stimulus (Decreases the Behavior) (Increases the Behavior)
programs is that they immediately reward desired behavior. A reward can be

almost anything and does not need to cost a lot of money, but it must be some-
thing desired by the employee. Some of the most powerful rewards are symbolic,
things like plaques or certificates that cost very little but mean a lot to the people
who get them.
The Safety, Environment, Energy and Security Committee (SEES) group at
Walt Disney World Resorts created a fun competition using positive and negative
reinforcement to motivate Contemporary Hotel employees.66 SEES hands out a
monthly award to the best-performing department as positive reinforcement and
a nonaward to the worst-performing department as negative reinforcement in the
categories of safety and security, the environment, and energy. If the nonaward-
winning department improves within five days, the nonaward is taken away. The
general manager ensures that the department managers display the awards in
their offices until the following month.
For the category of energy, the award is a nine-inch statue of Sorcerer Mickey.
The nonaward is a statue of a burnt-out light bulb. For safety and security, the
award is a statue of Donald Duck’s uncle, Ludwig Von Drake, and the nonaward
depicts a miniature broken crutch. For the environment, the award is a Jiminy
Cricket statue, and the nonaward is a clear plastic case containing a noose with a
dead rubber chicken. The rubber chicken has been an effective negative reinforce-
ment; because no one wants to have the rubber chicken nonaward in his or her
office, environmental performance is often good enough that no department
receives it.
Behavior Modification
Behavior modification, based on the work of B. F. Skinner, gives managers a way
to apply reinforcement theory to motivate workers. There are two basic issues in
using behavior modification: the type of reinforcement (reward or punishment)
and the schedule of reinforcement.
● Types of Reinforcement Managers must choose from among the four types
of reinforcement listed above: positive reinforcement, negative reinforcement,
punishment, and extinction. Each is best suited to a different type of situation:
◗ Positive reinforcement: Positive reinforcement motivates more of the desired be-
havior. For example, when a manufacturing employee wears hearing protection,
the manager can praise the employee to increase the likelihood that the em-
ployee will wear the hearing protection in the future.
◗ Negative reinforcement: Negative reinforcement is appropriate when an em-

ployee perceives something undesirable and the manager wants to increase the
frequency of certain types of behaviors. Removing whatever is undesirable
motivates the employee to engage in the behavior. For example, when a good
employee dislikes her long commute, the manager can allow her to telecom-
mute two days a week as long as her performance exceeds a certain level. Be-
cause she wants to avoid the unpleasant commute, the employee is motivated
to perform well.
◗ Punishment: Punishment focuses on decreasing the likelihood of undesirable
behaviors. It requires giving an employee an unpleasant consequence, such as a
suspension, assigning an unpleasant task, or a reprimand. Company policies
and procedures usually govern the use of punishment,67 and it is generally less
effective than the other methods of behavior modification.
◗ Extinction: Extinction is appropriate when a manager realizes he or she has
been rewarding the wrong action(s) and the manager wants to stop the behavior.
For example, a manager used to laugh at an employee’s inappropriate comments
at meetings but now wants the comments to stop. If the manager begins ignoring
the comments, over time, the lack of a positive reaction from the manager
reduces the employee’s motivation and extinguishes the behavior.
● Schedule of Reinforcement Behavior modification also requires attention

to the schedule used to apply reinforcement. Research suggests that the fastest
way to get someone to learn is to use continuous reinforcement and so reinforce
the desired behavior every time it occurs. The downside to this approach is that as
soon as the reward is stopped, the desired behavior decreases in frequency.
The most effective schedule for sustaining a behavior is variable reinforce-
ment. This type of schedule requires reinforcing the desired behavior every few
times it occurs, around some average number of times, rather than every time it
occurs. Because performing the behavior can result in a reward at any time, this
approach is a strong motivator of behavior. Slot machines motivate players
through variable reinforcement—players know that their machine will eventually
pay out but don’t know when, so they are motivated to continue playing for a long
time, even when they are losing and not being reinforced.
● Using Behavior Modification as a Manager To a behavior modification

expert, any behavior can be understood as being a result of its consequences. In
other words, as a manager, you get whatever behaviors you are reinforcing. For
example, if an employee continually comes to work late, it is because you are not
providing the right consequences for coming to work on time, the consequences
for coming in late are inappropriate, or both. To motivate the right behavior, an
expert in behavior modification would identify the desired behaviors and then
carefully reinforce them. This process involves five steps:68
1. Define the problem—what could be improved?
2. Identify and define the specific behavior(s) you wish to change.
3. Count and record the occurrence of the target behavior.
4. Analyze the current consequences of the behavior and arrange for more
appropriate consequences to follow the behavior in the future.
5. Evaluate whether the behavior improved, and by how much.
Rewarding Performance ■ 425
1. General Statement of Problem: The accounting department was making many payroll errors,
F IGURE 14.6 frustrating employees, and increasing costs by taking up managers’ time and accounting time.
Performance Improvement 2. Pinpointed Behaviors: The accounting department counted and recorded the number of payroll
Project Worksheet errors reported to it by department managers.
3. Count and Record:

25
NUMBER OF PAYROLL ERRORS

Before Program Program
20
15
10
0
0 5 10 15 20
Weeks
4. Consequences for Behavior Changes: Each bookkeeper in the accounting department started
graphing the number of errors for which he or she was responsible. The accounting manager
assigned responsibility for each error after discussing it with the bookkeepers. The manager verbally
reinforced those bookkeepers who displayed low rates of error to begin with or who showed
SOURCE: Lawrence Miller, Behavior improvement on their graphs.
Management: The New Science of Managing
People at Work (New York: John Wiley, 5. Evaluate Changes: The number of errors dropped from an average of 11.6 per week to 1.17
1978), p. 18. per week.
Figure 14.6 illustrates an application of the behavior modification approach.

In this case, the general problem was the number of payroll errors the accounting
department was making. The specific behaviors were the number of payroll errors
reported by department managers, which were counted and recorded. The cur-
rent and desired consequences for payroll accuracy were identified and aligned—
in this case, payroll errors reported by the managers were attributed to the appro-
priate bookkeeper and graphed. The manager verbally reinforced bookkeepers
with low error rates and bookkeepers who reduced their error rates, and the num-
ber of errors fell.
As you will see in the Window on Managing Now feature on page 426, Internet
tools can also be used to motivate employees.
Rewarding Performance
Online Study Center
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Managing Now! LIVE
R
ewards are one of the most powerful motivational tools managers have at their
disposal. The rewards offered by a job determine not only whether someone is
willing to accept a job offer but also how much effort he or she is willing to put
Using Internet Tools to Motivate and Reward Employees
Incentive programs can have a positive impact on em- Many Internet incentive sites exist, including
ployee motivation and performance by providing positive incentivecity.com, emaritz.com, premierchoiceaward.com,
reinforcement.69 Many companies are using technology to salesdriver.com, hinda.com, and loyaltyworks.com. In
enhance their positive reinforcement programs. For exam- some cases, employees can specify the rewards they want.
ple, Sta-Dri, a forty-year-old plastics manufacturer based in Managers can adapt the rewards to be those most moti-
Mankato, Minnesota, established an online scoreboard vating to each employee, such as an extra day off for one
where sales representatives could check their incentive and a flat-screen TV for another. Many incentive sites are
points. “Having access, literally, twenty-four hours a day to point-based and work like airline frequent-flyer programs.
see how they’re progressing is important,” says Paula Employees earn points for reaching certain goals or for
Godar, director of marketing communications for Maritz doing certain things over a set period of time and can cash
Incentives in St. Louis, because “They can say, ‘I’m doing in the points for a variety of trips and prizes.
great’ or ‘I need to step it up because I’m really behind.’ ”70
forth. In organizations, workers exchange their time and effort for some set of
rewards, including pay, benefits, training opportunities, and so forth.
The clearing of the island of Penang illustrates the motivational power of
rewards. Before 1786, Penang was covered with jungle and infested with malaria.
When English captain Francis Light of the East India Company chose Penang as a
new harbor for ships on their way to China to get fresh food and water, he needed
his soldiers to clear the thick jungle. The soldiers were understandably not very
excited about the job. To motivate them, Light loaded the ship’s guns with silver
dollars and fired them into the jungle. The work was rapidly finished.
Pay for Performance

Although money motivates people differently, it can be a powerful motivator be-
cause it determines the degree to which people will be able to satisfy many of their
needs and wants. Employees can be rewarded for their individual performance as
well as the performance of their workgroup or even the entire organization.
● Merit Pay Merit pay is a salary increase, usually permanent, given because
of an individual’s past performance. Consistent with VIE theory, employee motiva-
tion is enhanced because good performance is expected to result in higher pay. A
clear link among effort, job performance, and the reward enhances motivation.
● Spot Awards Spot awards are most consistent with reinforcement theory.
Spot awards are given on the spot, as soon as a desired behavior is observed.71
Effective spot reward programs depend on discretion, timely acknowledgments,
and clear links between employee actions and recognition. Systems engineering
consulting firm Scitor in Sunnyvale, California, has a Be Our Guest program in
which employees award bonuses, usually ranging from $100 to $300, to cowork-
ers who go beyond the call of duty at work. If someone feels a coworker has done
something worthy, the giver fills out a card indicating the amount of the bonus,
and the recipient can spend it as he or she likes through his or her expense
account.72
● Pay for Performance Pay-for-performance programs pay employees based

on some specific measure of their performance. The amount employees produce or
sell determines their pay—the higher their performance, the more money they
make. The clear performance-reward link is consistent with VIE theory.
Several different pay-for-performance programs are popular. Variable pay
plans are pay-for-performance plans that put a small amount of base pay at risk,
in exchange for the opportunity to earn additional pay. For example, all employ-
ees of Chicago-based Ameritech Corp. are compensated using a variable-pay
approach. Every Ameritech employee has a set of target incentives ranging from
5 to 35 percent of pay. A portion of the incentive amount (about 60 percent) is
based on the performance of the employee’s business
unit, with the remainder (about 40 percent) based on
individual performance.73 An average of two-thirds of
a Nucor steelworker’s pay is based on a production
bonus, and profit sharing can add even more.74
● Stock Options Stock options are an incentive

most often given to executives. Stock options motivate
managers to increase the company’s profitability and
therefore its stock price. Stock options allow the pur-
chase of a specific amount of the company’s stock at a
certain price during a specific period. If the stock price
rises above this price, the resulting stock can be sold at
a profit. If the stock price decreases below this price,
the options are worthless (although organizations
have the option of repricing the options to restore their
Many companies use stock options to motivate managers.
value and motivating potential).
Criticisms of stock options include the facts that they are linked too loosely to
individual performance and that they motivate executives to manage the
company for the short term rather than the long term. Stock options also motivate
executives to inflate earnings to maximize the value of their stock options.
Nonetheless, they can be good motivators of performance if they are properly
managed.
● Gain Sharing Gain sharing is sharing the value of productivity gains with
the workforce. For example, if workers come up with ways to increase productivity
10 percent by lowering costs or increasing productivity, they receive some of the
value of the 10 percent productivity gain. This clear link between performance and
rewards is consistent with VIE theory and can motivate employees to improve pro-
ductivity because doing so will lead to financial rewards for them. Gain sharing
can also increase employees’ commitment to organizational goals by focusing
their attention on cost and productivity.
● Skill-Based Pay Rather than paying employees for the jobs they currently
hold, skill-based pay compensates employees for the range and depth of their
knowledge and skills.75 Broader skills make workers more flexible and enable them
to contribute to the organization in more ways. When work is organized in teams,
skill-based pay can encourage all team members to develop the skills needed to
help the team be flexible and perform at its best.
A General Mills plant implemented a skill-based pay plan that paid employees
in several types of jobs based on their attained skill levels for their job.76 Workers
could attain three levels of skill in their job: limited ability (ability to perform simple
tasks without direction), partial proficiency (ability to apply more advanced

principles on the job), and full competence (ability to analyze and solve problems
associated with that job). The company periodically tested workers to see if they
had attained the next higher skill level on their job. If they had, they received
higher pay even though they kept the same job. The program increased employ-
ees’ overall skill levels and increased managers’ ability to move employees from
job to job as needed.
Skill-based pay plans are used predominantly in blue-collar environments be-
cause of the relative ease of understanding what skills are important to job perfor-
mance. Competency-based pay is used to evaluate the skills and knowledge of
other workers. Using salespeople as an example, the employer first learns what its
best salespeople do well. It might be building relationships, tailoring the sales
pitch to the client, or possessing technical knowledge about the product. Once the
elements that predict sales success are identified, all sales employees would be
compensated based on how well they show those competencies.77
● Managing Now Organizations use IT, the Internet, and their intranets to
improve the effectiveness of their incentive and reward programs. When T-Mobile
needed to improve the performance of its call-center customer-service profes-
sionals, it reinforced its Do More Get More program through in-center TV moni-
tors, e-mail flashes, and an intranet site.78 A point system awards employees
PRACTICE IT
Online Incentives at Mercury Interactive Corporation
Mercury Interactive Corporation needed an affordable, company priorities. For example, sales of slow-moving
online employee incentive program to encourage its field products can be stimulated by offering bonus points for
staff members to identify and report the sales opportuni- sales of these items. Because the data in online systems is
ties they saw while on client assignments. The company centralized, firms can continually evaluate the effectiveness
implemented an online program in which field staff mem- of the awards program and ensure that it is making a dif-
bers receive points for sales leads and even more points ference, and they can identify underperformers as well.80
for leads that generate new business.“The administration An important requirement for online incentive pro-
of this would have been way too much if the program grams is that employees must have Internet access. This
wasn’t online,” a company representative says. “A $7,000 requirement is challenging for companies with employees
investment has generated more than $600,000 in new who work on factory floors and at cash registers and thus
business.”79 Setting clear expectations for employees to do not have access to company computers. Many online
identify and report sales opportunities and then reward- vendors provide supplemental paper materials for these
ing these behaviors with points redeemable for valued re- employees, but other companies find ways to give all em-
wards are consistent with reinforcement theory. Letting ployees computer access. By putting its incentive program
employees choose their rewards increases employees’ va- online, 3M saved enough money that it was able to install
lence, and knowing how many points are required to earn computer kiosks so that all employees had access, and it
a reward enhances instrumentality, which is consistent scheduled time on the computer as part of the workday.81
with VIE theory. Incentive programs should also be well promoted and
Online programs also give managers easy access to made an integral part of the job.82
real-time data and the flexibility to adjust to changing
points based on the achievement of specific goals and performance results.

Employees then redeem the points online for rewards ranging from retailer gift
certificates to entertainment and travel options. The incentive program has led to
improvements in quality, accuracy, and productivity. Employees are more moti-
vated and more satisfied—absenteeism decreased and employee attrition rates
fell by 50 percent.83
By leveraging technology, online incentive and recognition programs can ef-
fectively motivate employees. Program information can be quickly communicated
through intranet sites or e-mail, and the speed at which rewards are received
strongly reinforces desired behaviors. By running rewards programs online, com-
panies can greatly reduce costs and acquire real-time insight into the program’s
impact. The Practice IT feature presents another example.
Alternative Rewards
Besides money, employees also value recognition, appreciation, and help in
balancing their work and family lives. Recognition and nonmonetary rewards are
typically inexpensive, but they can be effective motivators. One study found that
financial incentives initially had a greater effect on profit and customer service,
but over time, financial and nonfinancial incentives had an equally significant
impact.84 Employee recognition methods include a personal thank-you note, a
preferred parking space, public praise, a unique award, company picnics, and
management dressing in a crazy outfit if employees meet sales targets.
At Nucor Corporation, the largest steelmaker in the United States, motivation
is about focusing on the people on the front line. Managers talk to them, listen to
them, and act on their ideas. In exchange for being treated with respect, having
real power, and being generously rewarded, Nucor employees put in extraordi-
nary effort.85
Sometimes simple gestures can get great results. A Westinghouse sales man-
ager agreed to pay for and cook lunch for all sixteen of the employees who
reported directly to him if they met their sales quotas. They subsequently ex-
ceeded their goals in eighteen out of nineteen months. Corporate higher-ups vol-
unteered to foot the bill, but the manager refused, saying that the incentive
worked because he personally went to the supermarket to buy the steaks with his
own money and because employees got a kick out of seeing the boss become a
cook and a waiter.86
Employees have lives outside work, and facilitating work-life balance can
reward and motivate employees. Offering a compressed workweek allows em-
ployees to work forty hours in less than five days. Job sharing, which allows two or
more people to split a single job, is another option. One person might perform
the job on Mondays and Tuesdays, the other person on Thursdays and Fridays,
and both on Wednesdays. Or one employee could work in the mornings and the
other in the afternoons. This option requires finding compatible pairs of employ-
ees who can share the responsibilities of one job successfully, and it can help
motivate and retain skilled workers—particularly students, retirees, and parents
of young children.
● Flextime Flextime is another scheduling option that lets employees decide

when to go to work, within certain parameters. Companies typically establish a
core set of work hours, say, 9:00 A.M. to 3:00 P.M., during which time all employees
need to be at work. Employees have the flexibility of scheduling their other two
hours of work either before or after this core period. Flextime can increase the
motivation of workers by helping them better match their work schedule to their
personal needs and preferences.
● Telecommuting Telecommuting is another way employers can facilitate

employees’ work-life balance. Telecommuting allows employees to work from
home and link to the company’s offices via computer. This option eliminates
commuting time for employees, increases their ability to meet family demands,
and can save the company money by reducing the company’s need for office
space.87
● Lifelong Learning Allowing opportunities for lifelong learning is another

way companies can reward employees and help the organization stay competitive
at the same time. Lifelong learning is a formal commitment to ensuring that em-
ployees have and develop the skills they need to be effective in their jobs today and
in the future. Lifelong learning programs include in-house training in basic skills
such as English and math, courses on decision making and problem solving, and
even tuition reimbursement for relevant college-level coursework. Because it in-
creases employees’ self-efficacy and expectancy, and provides an opportunity for
employees to feel a sense of achievement and self-actualize, lifelong learning is in-
herently motivational.
It might not seem like lifelong learning can be an effective tool for motivating
employees, but in fact, its motivational impact can be considerable. For many
employees, particularly for people working two jobs or with family responsibili-
ties, pursuing educational opportunities outside work can be difficult. Anything
learned in these programs—for example, learning to read or improving computer
skills—can also enrich employees’ personal lives. One study found that “produc-
tivity improvements, greater workforce flexibility, reduced material and capital
costs, a better motivated workforce, and improved quality of the final product or
service are all identified as advantages [of lifelong learning].”88
● Managing Now IT makes it easier for organizations to implement lifelong

learning programs. For example, Rutgers University instituted a self-paced,
computer-based continuous learning program for its facilities and maintenance
operations staff by creating a computer room with sixteen terminals. It then de-
veloped courses enhancing employees’ math, computer literacy, and supervisory
skills. The targeted, self-paced approach to training not only improved worker
morale, it also raised the skill levels of over 300 workers.89
Putting It All Together

This chapter has presented different methods that managers can use to enhance
employee motivation. Each motivation method that a manager can use is based
on one of the motivation theories we have discussed. Understanding why and how
a motivational technique works helps managers match motivational techniques
with motivation opportunities and thus enhances the likelihood of success. For
example, goal-setting theory and equity theory help to explain why goal setting
enhances motivation. Table 14.3 shows the theoretical foundations of ten popular
methods of motivating employees. The Window on Managing Now feature on
page 432 illustrates how to use technology to retain knowledge workers.
T ABLE 14.3
The Motivational Underpinnings of Ten Motivation Methods
Foundations of Behavior Goal Pay for Merit Spot Skill-Based Recognition Job Empower Positive Lifelong
and Motivation Setting Performance Raises Rewards Pay Awards Redesign Employees Reinforcement Learning
Self-Concept: People seek to fulfill
their potential. ⴛ ⴛ ⴛ ⴛ ⴛ
Self-Efficacy: People differ in their

estimate of how they’ll perform on a
task: self-efficacy influences setting of
goals and effort. ⴛ ⴛ ⴛ ⴛ ⴛ
Maslow’s Needs Hierarchy: High-level

needs are never totally satisfied and
aren’t aroused until lower-level needs
are fulfilled. ⴛ ⴛ ⴛ ⴛ ⴛ ⴛ
Alderfer: All needs may be active, to

some degree, at the same time. ⴛ ⴛ ⴛ ⴛ ⴛ ⴛ
McClelland’s Needs (Achievement,

Power, Affiliation): Needs for achievement,
power, and affiliation are especiallly
important in the work setting. ⴛ ⴛ ⴛ ⴛ ⴛ
Herzberg’s Two Factors: Extrinsic factors

prevent dissatisfactions; intrinsic factors
motivate workers. ⴛ ⴛ ⴛ
Vroom’s VIE Theory: Motivation is a

function of expectancy that effort leads
to performance, performance leads to
reward, and reward is valued. ⴛ ⴛ ⴛ ⴛ
Locke’s Goal Setting: People are motivated

to achieve the goals they consciously set. ⴛ ⴛ
Adam’s Equity Theory: People are

motivated to maintain balance between
their perceived inputs and outputs. ⴛ ⴛ ⴛ ⴛ ⴛ
Reinforcement: People will continue

behavior that is rewarded and cease
behavior that is punished. ⴛ ⴛ ⴛ ⴛ ⴛ
Source: Adapted from Gary Dessler, Ph.D., 1997.

Using Technology to Retain Knowledge Workers90
The challenge in retaining employees often is finding ways To create an employee retention model, Banca
to match individuals’ passions with the organization’s Carige used SAS to create an employee data warehouse
needs. Knowledge workers, who develop or use knowl- that contains information about each employee’s age, gen-
edge in doing their jobs rather than doing production der, salary, job role, education, and professional informa-
work, are often motivated by doing their work well, build- tion. The retention model analyzes the factors associated
ing their professional reputations, working on challenging with voluntary turnover, builds a model to predict the
projects that broaden their skills and marketability, and likelihood of an employee voluntarily leaving, scores all
achieving a greater balance between work and their per- employees based on the model, and delivers reports
sonal lives. Examples of knowledge workers include based on the model’s results. The retention model allows
lawyers, doctors, professors, managers, and bankers. Tech- the company to answer questions like the following:
nology has helped companies better understand the
◗ Which employees are at the highest risk of voluntarily
turnover patterns of their knowledge workers so that
leaving the organization?
they can better retain them.
Banca Carige, one of the oldest banks in Italy, uses ◗ What reasons do employees have for wanting to leave?
technology to engage in what it calls employee relation- ◗ Which reasons are the strongest predictors of employ-
ship management. Its first goal was to predict if its best ees actually leaving?
employees were about to leave. Improving employee re- ◗ What are the profiles of those employees most likely
tention would not only save money (it is cheaper to retain to leave?
employees than to hire and train new people), it would
While low current turnover is important, it is just as
also help the bank keep its best performers. It wanted a
important to keep turnover from increasing, and the re-
retention model that would help forecast and analyze in-
tention model from SAS helps with both issues.
formation and trends, plan proactively for the future, and
reduce turnover costs.
CHAPTER SUMMARY
1. Motivation is the intensity of a person’s desire to about reaching the goal. Feedback is necessary to
begin or continue engaging in the pursuit of a goal. monitor progress toward the goal and to learn if
Motivation is affected by factors that arouse, main- task strategies need to be changed.
tain, and channel a person’s efforts toward a goal to
5. Digital dashboards help keep employees focused
fulfill unmet wants or needs.
on important goals and provide timely feedback to
2. Motivation is affected by characteristics of the in- employees regarding how well they are meeting
dividual, job, and work environments. their goals.
3. Whereas content theories focus on which factors 6. According to VIE theory, employees must perceive
(needs) internal to a person influence motivation, valence, instrumentality, and expectancy if they
process theories address how and why different are to be motivated. Managers can proactively in-
factors external to a person influence motivation. fluence employees’ perceptions of all three factors.
4. Goal setting is one of the most effective ways of 7. Employees’ fairness perceptions affect their job
motivating workers. Goal setting is particularly ef- performance, satisfaction, organizational commit-
fective if employees participate in setting the goals, ment, withdrawal behaviors, and counterproductive
are committed to them, and have self-efficacy behaviors such as stealing. Fairness perceptions
are determined by the nature of the outcomes observations with their own effort and rewards. If
received (distributive fairness), the policies and inequity is perceived, people are motivated to try
procedures used to determine the outcomes (pro- to reduce the inequity.
cedural fairness), and the nature of the informa-
9. Positive reinforcement, negative reinforcement,
tion given and interpersonal treatment received
punishment, and extinction can all be used to en-
during the process.
courage or discourage certain behaviors from oc-
8. Equity theory proposes that people observe the recurring again, and they are at the core of behavior
wards others are getting and the effort they are modification programs.
putting into their work, and then compare these
1. What motivates you at work? What motivates motivation do you think least applies to the work-
you at school? Are your answers the same? Why or place? Why?
why not?
5. How can management style and organizational
2. Think about a time when you had a hard time policies affect the motivation levels of employees?
getting motivated to complete a task (a task at work, Consider both content and process theories in
studying for an exam, etc.). Why did you have a your answer.
hard time? What could have increased your motiva-
6. What suggestions would you give an organization
tion? How can you use this information to improve
that has little money to spend but wants to moti-
your performance in these tasks in the future?
vate its employees to work harder? What would you
3. Think of a time you felt unfairly treated at work or caution it not to do?
at school. Now describe why you felt that you were
7. What can managers do to reward employees for
treated unfairly. How do your answers relate to
behaving ethically? What are some things that
fairness theory? What could have been done differ-
managers should not do if they want employees to
ently to make your reactions less negative?
behave ethically?
4. Which theory of motivation do you think best
applies to the workplace? Why? Which theory of
1. Read the following about motivation and intelli- consequences of poorer decisions made by less in-
gence: telligent police officers can clearly be great, includ-
ing the loss of life. This controversy highlights the
It can be hard to stay motivated when you do the
importance of understanding the impact of task
same thing day after day. Because of this, one
characteristics on task motivation, as well as the
town’s police department decided that applicants
importance of managing jobs to reduce the poten-
who score too high on a cognitive ability test will
tial for negative outcomes.
not be hired on the premise that they are more
likely to feel bored on the job and thus be harder to Now form groups of three or four students, answer
retain.91 The test’s manual even warns about the the following questions, and share your answers
cost of replacing high-scoring workers who quit with the class:
because they become dissatisfied with repetitive
a. Do you agree that candidates high in cognitive
work.92 This premise has proved controversial,
ability should not be police officers because
however, because the hiring of less intelligent
they might become bored with the work? Why or
police officers may also reduce their overall perfor-
why not?
mance. And when a gunfight does occur, the
b. What motivation theories best apply to the job each person. What are the similarities? What are
of police officer? the differences? Now imagine that you are their
manager. Given what you have learned, what rec-
c. If you were a police chief, what would you do to
ommendations would you make about how best to
increase the motivation of your officers and pre-
motivate each of them?
vent them from feeling bored?
4. Use the Internet to identify a situation where a
2. In groups of three or four students, identify a job
company leader was effective in motivating em-
with which you are all familiar or a job currently
ployees in some way (i.e., to perform better, to
held by one of your group members. Use Fig-
work more safely, etc.). Write a two-page paper de-
ure 14.5 to analyze the job’s enrichment potential.
scribing what made the leader effective, applying
To what degree is the job enriched now? Why? What
material you learned in this chapter.
would your group recommend to enrich it further?
3. Interview two people about a job they currently
hold and try to identify the factors that motivate
CASE STUDY
Motivation at General Motors93
he 3,500 employees in General Motors’ (GM) assem- in the spring and for a picnic in the summer. “When
T bly plant in Wilmington, Delaware, were told by GM
executives that the plant would be shut down in five
your family is engaged, it makes you feel good about
what you do,” says Harvey G. Thomas, the plant’s cur-
years to reduce costs. They were told that the decision rent manager.
was final. After the executives left, plant manager Ralph Within two years, the workers made the factory the
Harding spoke passionately to the stunned workers. lowest-cost producer for GM, with the lowest warranty
“There may be nothing we can do to affect this deci- costs as well. The employees succeeded in making the
sion, but there is something we can do: We can make corporation’s decision look foolish—and GM reversed
them feel really stupid! Because they are going to be itself and kept the plant open.
closing the best plant in General Motors!”
Motivated by his challenge, employees and man-
agers began working in problem-solving teams to
lower costs and tackle quality-control problems. Ener- 1. What motivation theories describe why the work-
gized to embarrass GM’s top brass, “Be the Best!” be- ers became so motivated to do their best?
came a rallying cry and was printed on posters and
2. What might GM have done, rather than announce
sewn onto jackets given to employees. Union leaders
the plant’s closing, to motivate the plant workers to
and managers worked together more closely than ever
do their best? Would your suggestions have been as
to come up with ideas to improve quality and lower
effective? Why or why not?
costs. Harding kept everyone informed of the plant’s
weekly progress on quality and costs. And the families 3. Why would involving the workers’ families en-
of employees were invited to the plant for a luncheon hance workers’ motivation?
IMPROVING COMMUNICATION 15
Communication at Lucent1 CHAPTER OUTLINE
L ucent Technologies, headquartered in Murray Hill, New Jersey, de- Opening Vignette:
Communication at Lucent
signs the systems, services, and software that drive next-generation
● The Communication
communication networks.With over 30,000 employees located around Process
the globe, communicating with One-Way and Two-Way Communication
Communication Barriers
employees is difficult. But in this
● Organizational
fast-paced industry, communica- Communication
tion is critical to keep employ- Downward Communication
ees abreast of company chal- Upward Communication
Horizontal Communication
lenges and needs. As a global WINDOW ON MANAGING NOW:
company, employees live and Using Portals to Improve
work in different time zones: Performance
Diagonal Communication
work is done somewhere in the Formal and Informal Communication
world twenty-four hours a day, PRACTICE IT: Technology-Enabled
Communication at Lucent
seven days a week. How can
● Communication Media
Lucent keep employees abreast The Internet
of company challenges and Collaboration Software
needs and use technology to Intranets
Lucent employees must be able to WINDOW ON MANAGING NOW:
communicate effectively with communicate effectively around the world Building an Intranet
them? ■ twenty-four hours a day, seven days a week. Oral Communication
Media Richness
● Interpersonal
Communication Skills
After studying this chapter, you should be able to: Listening Skills
Persuading Skills
Show that you’ve learned the chapter’s essential information by Negotiating Skills
Conflict-Resolution Skills
➤ Describing the communication process.
Nonverbal Communication Skills
➤ Explaining the difference between formal and informal communication in Writing Skills
organizations. IMPROVING YOUR COMMUNICATION
➤ Giving examples of different technologies that have influenced organizational SKILLS
communication. WINDOW ON MANAGING NOW:
➤ Discussing how media richness affects the appropriateness of a medium for different E-Mail Tips
types of messages. Speech and Presentation Skills
Meeting Skills
➤ Describing active listening and explaining what makes a good listener.
➤ Describing how to make an effective presentation.
435
436 PART FIVE CHAPTER 15 Improving Communication

➤ Reading the chapter-opening vignette and identifying how Lucent can use technology to
enhance its internal communication.
➤ Completing the end-of-chapter exercises and practicing the use of appropriate negotia-
tion tactics and nonverbal cues in negotiating a job offer.
➤ Reading the chapter case study and describing issues related to electronic monitoring
at work.

Online Study Center
➤ Watching the video scenario and determining effective ways of communicating in
ACE the Test varying situations.
Managing Now! LIVE
➤ Studying the video scenario and identifying the appropriate types of technology that
can enhance the communication effectiveness.
Nothing can happen in an organization without communication. Managers

can’t manage, employees can’t work, and decisions can’t be made. Communica-
tion is the glue that holds organizations together—an organization would cease
to exist if communication channels that allow information to flow do not link its
employees.
Communication is the means through which firms achieve their strategies,
goals, and outcomes. Organizational planning and strategy development require
communication among organizational decision makers. Decisions require the
communication of information. Managers then communicate these decisions to
employees, who communicate among themselves to execute the decision or strat-
egy. Managers also communicate with customers and suppliers, and communica-
tion is how people in the firm acquire information about the marketplace and
competitors.
To be effective leaders, managers must have good communication skills. In
this chapter, we will discuss the communication process, some of the basic issues
in interpersonal communication, methods of communication, and how informa-
tion technology (IT) influences organizational communication. We will also dis-
cuss some specific communication skills, present some barriers to effective com-
munication, and consider ways to overcome those barriers. This chapter should
give you an understanding of the communication process and help you to become
a more effective communicator as a manager.
The Communication Process Online Study Center

ACE the Test
Managing Now! LIVE
communication: the
transmission of information
from one person to another to
C ommunication is the transmission of information from one person to another
to create a shared understanding and feeling. The word communication actu-
ally comes from the Latin word communicare, which means to share or make
create a shared understanding common.2 Figure 15.1 illustrates the communication process. The six parts of the
and feeling
model of the communication process, other than the message sender and mes-
encoding: converting a sage receiver, are defined as follows:
thought, idea, or fact into a
message composed of symbols, 1. Encoding is when the message sender converts or encodes a thought, idea, or
pictures, or words fact into a message composed of symbols, pictures, or words.
The Communication Process ■ 437
F IGURE 15.1 Noise

The Communication Process
When Anita asks David with
anticipation,“Is the contract ready
Feedback
yet?” Anita is the sender who
encodes a message using both
words and body language channels
of communication to inquire about
the status of a contract. David is Message Channel or Medium Message
the receiver who decodes her Sender Receiver
Encoding Decoding
message.Through the noise of
ringing phones and the distraction
of an urgent e-mail that just came
in, his translation of her message is Noise Noise Noise
that she is not angry but curious
about whether the contract is
finished. David sends Anita verbal
feedback that he understands her
message by replying,“Yes, I put it in
your mailbox.”
message: the encoded 2. The message is the encoded information that the sender sends. For example,
information a manager wants to communicate to her new employee Kim that Kim is doing
well. The manager encodes that thought into words expressing that Kim’s per-
formance has been steadily increasing and that she is performing at 80 per-
cent of her target level. These words are the message. The manager could also
create a graph showing Kim’s performance pattern and a line representing her
target performance level. This graph would then be the message.
channel: the medium used to 3. The channel is the medium used to send the message to the receiver, includ-
send the message ing voice, writing, videos, television, and body language.
4. When the message receiver sees, reads, or hears the message, it gets decoded.
decoding: the interpretation Decoding is the interpretation and translation of the message back into
and translation of a message something that can be understood by the receiver. The information resulting
back into something that can be from the decoding should be the same as the information the sender intended
understood by the receiver
to communicate.
feedback: a check on the 5. Feedback is a check on the success of the communication. The message re-
success of the communication ceiver becomes the sender of a new message back to the original sender, and the
original sender can assess if the receiver understood the original message as he
or she intended. Repeating or paraphrasing the original message, asking for
clarification, and asking if your conclusion is correct are examples of feedback.
noise: anything that blocks, 6. Noise is anything that blocks, distorts, or changes in any way the information
distorts, or changes in any way the sender intended to communicate. For example, noise can be something
the information the sender physical in the environment, like machine noise or other people talking, or it
intended to communicate
can occur because the sender or receiver is distracted by other things and is
unable to concentrate on the message being sent or received.
Essentially, in the communication process, the sender translates (encodes)
information into words, symbols, or pictures and passes the encoded information
to the receiver through some medium (channel). The sender then receives the
message and retranslates (decodes) it into a message that is, with luck, the same as
what the sender intended. Noise can enter anywhere in the process, making the
message received different from the one that the sender intended. Feedback
should represent two-way communication that helps to check on the success of
the communication and ensure that the received message is accurate.
Throughout the communication process, barriers can make the message that
the recipient ultimately receives different from the one sent. These barriers, a form
of noise, can come from the sender, the receiver, the organization, or from other
forms of noise. We will discuss some of these barriers below.
One-Way and Two-Way Communication

In one-way communication, information flows in only one direction. The sender
communicates a message without expecting or getting any feedback from the
receiver. For example, if a manager tells an employee to get back to work and the
employee does so without saying a word, or if a manager tells an employee that
she or he is doing a good job and then leaves before hearing a response, one-way
communication has occurred.
When a receiver provides feedback to a sender, the sender and receiver have
engaged in two-way communication. If a manager asks an employee to join a
client meeting and the employee says, “I’ll be right there,” two-way communica-
tion occurred. Feedback enhances the effectiveness of the communication
process by helping to ensure that the intended message is the one received. Have
you ever sent an important e-mail and then waited and wondered if the receiver
received and understood it? If so, you appreciate the value of two-way communi-
cation and feedback.
Communication media can enable synchronous (immediate, like talking to
someone face-to-face) or asynchronous (delayed, like leaving a message for some-
one that she or he receives later) communication. As technology changes, the
nature of media can change. For example, telephones originally produced only
two-way synchronous communication, but now voice mail allows telephones to
provide one-way or asynchronous communication as well. Similarly, e-mail origi-
nally generated one- or two-way asynchronous communication, but instant mes-
saging has made it possible to engage in two-way synchronous communication.
● Managing Now Information technology (IT) and the Internet have given
senders more media channels to choose from than ever before. Managers now
regularly use cell phones, voice mail, and instant messaging to communicate. The
managers on the cover of this book are using IT devices like wireless laptops,
BlackBerries, and cell phones to make two-way communication possible where it
has never been possible before.
Communication Barriers
Several potential barriers can prevent effective communication. Table 15.1 sum-
marizes some of the most common barriers that can interfere with the accurate
communication of a message.
● Nonverbal Communication Our nonverbal behavior and tone is often more

nonverbal communication: important to the meaning of a message than the words we say. Nonverbal com-
communication that is not munication is not spoken or written but has meaning to others. Some of the
spoken or written but that has strongest and most meaningful communication is nonverbal, for example, a smile,
meaning to others or a look of anger on someone’s face.
T ABLE 15.1
Communications Barriers
Barrier Description
Body language Gestures or expressions that carry meaning in themselves, for example, shrugging your
shoulders or rolling your eyes.
Verbal intonation How words are said can affect how they are interpreted.
Selective perception We select what we are willing to see or hear based on our expectations and beliefs.
Misperception Messages are not received in the way that they were intended.
Filtering Information is intentionally withheld, ignored, or distorted to influence the message
that is ultimately received.
Information overload Having so much information that it is impossible to process all of it.
Organizational barriers The hierarchical structure and culture of an organization can influence who is allowed
to communicate what to whom and can limit how messages are sent.
Cultural barriers Different cultures have different ways of expressing things. For example, a thumbs-up
sign does not mean the same thing everywhere in the world.
Noise Anything that blocks, distorts, or changes the message that the sender intended to
communicate. Distractions, the sender’s credibility, jargon, and ambiguity are some
common sources of noise.
The most common nonverbal interpersonal communication involves body

body language: a body language and intonation. Body language is a body movement such as a gesture or
movement such as a gesture or expression. For example, during a performance appraisal interview, an employee
expression drumming his or her fingers on the table and fidgeting in the chair is communi-
cating anxiety or impatience without saying a word.
The ability to read body

language, such as this woman
expressing boredom at a
meeting, is an important
managerial skill.
verbal intonation: the Verbal intonation is the emphasis given to spoken words and phrases. For ex-
emphasis given to spoken words ample, the simple words, “May I speak with you?” can be interpreted very differently
and phrases if said in a cheery, upbeat tone versus a strong or angry tone. Managers should re-
member the saying, “It’s not what you say that matters but how you say it,” every
time they communicate. When body language is inconsistent with the spoken mes-
sage, receivers are more likely to interpret the body language as the “true meaning.”3
According to noted nonverbal communication researcher Albert Mehrabian,
in any face-to-face communication:4
◗ Seven percent of the total message is conveyed by the words.
◗ Thirty-eight percent of the total message is conveyed by vocal intonation.
◗ Fifty-five percent of the total message is conveyed by facial and body expressions.
For communication to be effective and meaningful, all three parts of the mes-
sage need to be similar. If any of the three parts are different, the receiver is receiv-
ing conflicting messages.5
Consciously controlling our body language is as important a managerial skill
as knowing how to interpret others’ body language. Managers must control their
body signals and tone to ensure that they reinforce their intended message. For ex-
ample, shifting your eyes and looking away while speaking makes people not trust
your message. If you want people to see you as a leader, stand up straight, make
eye contact, and smile—those signals project confidence and energy. Walking with
slumped shoulders, speaking in a flat tone, and fidgeting will often lead to your
being seen as indecisive, negative, or inexperienced.6 Managers must also be sen-
sitive to how the interpretation of body language varies in different cultures. In
some areas of the world, averting your eyes by looking downward is a sign of re-
spect for senior managers, while in others, it is interpreted as a lack of confidence.
● Misperception People tend not to hear things that they do not want to hear
selective perception: the and to hear things that are consistent with what they already believe. Selective
tendency to see and hear things perception is our tendency to see and hear things according to our beliefs and ex-
according to our beliefs and pectations rather than how they really are. Sometimes people ignore conflicting
expectations rather than how
information and focus on only the information that confirms what they already
they really are
believe. Selective perception makes a receiver perceive only part of a message be-
cause of his or her expectations, needs, motivations, interests, and other personal
characteristics.
Managers’ functional expertise can influence how they perceive and solve
complex problems.7 Two managers given the same information about a problem
may see the problem differently. A manager with a finance background may be
more likely to see the problem as financial, while a manager with a production
background may be more likely to see it as production-based. Each manager se-
lectively perceives information that is consistent with his or her expertise and ex-
pectations and does not pay as much attention to other types of information.
misperception: when a Misperception is when a message is not decoded by the receiver in the way
message is not decoded by the the sender intended. A misperception can occur because the sender’s body lan-
receiver in the way the sender guage is inconsistent with the sender’s words, and the receiver incorrectly inter-
intended
prets the body language to be the true message. It can also occur if body language
or tone is interpreted incorrectly; if the receiver selectively focuses on favorable
parts of the sender’s message, thus distorting the message’s meaning; or if the
filtering: less than the full
amount of information is
receiver has poor listening skills.
received due to withholding,
ignoring, or distorting ● Filtering Filtering occurs when people receive less than the full amount of
information information due to the withholding, ignoring, or distorting of information. Filtering
can happen when a sender manipulates information so that the receiver is more
likely to perceive it in a favorable way. For example, a manager might tell his or her
boss about the things that are going well in the manager’s unit and not mention
any problems to try to look good during a performance evaluation.
● Information Overload Filtering can also occur when a receiver has too
information overload: the much information. Information overload results when the amount of informa-
amount of information available tion available exceeds a person’s ability to process it. People faced with too much
exceeds a person’s ability to information have to use some sort of filtering strategy to reduce it to a manageable
process it
amount. For example, an executive who starts the day with 500 e-mails in the in-
box will apply some sort of filter, such as who sent each e-mail or the urgency con-
veyed by the sender, to decide which to read and which to delete or save to read
later. Filtering is essential to managers because it helps to reduce noise in the com-
munication process. Using technology such as spam filters for e-mail amplifies
relevant and accurate information and minimizes the rest.
● Managing Now Some companies have used technology to reduce the filter-
ing of messages. For example, Medco Health Solutions wanted to better manage
its internal communication and encourage the free flow of information to serve its
clients better. Medco built an internal broadcast facility that allows the company
to broadcast video with sound to all employee desktop computers in the country.
The facility posts taped presentations to the company intranet and hosts real-time
interviews and panel discussions with company leaders. Employees can e-mail
questions to the people in the studio, who can answer them in real time. This pre-
vents lower-level employees from having to go through the company’s hierarchy to
get information about company issues. Medco uses polling tools on its intranet
and in the broadcast studio to quickly survey employees on important issues.
The broadcast facility has allowed Medco managers to go right to the source to
get information that hasn’t been filtered as it gets passed around and up the hier-
archy. In addition, lower levels of the organization get faster resolution to many of
their issues because they can eliminate all of the inefficient filtering and managing
that used to take place when the company relied on traditional linear communi-
cation channels. An additional benefit of adopting the technology has been
greater mutual visibility between the lower and higher levels of the organization,
which helps to ensure that everyone shares the same goals and priorities.8
● Organizational Barriers Organizational barri-

ers to communication come from the hierarchical
structure and culture of the organization. The hierar-
chical levels and department specializations within
a firm can make communication across levels and de-
partments difficult. Different hierarchical levels typi-
cally focus on different types of information, which can
interfere with communication. Higher-level execu-
tives, for example, typically focus on information
related to bigger-picture issues and business strategy,
while lower-level employees focus on production is-
sues and deadlines.
Some organizational cultures encourage open
communication, while other cultures promote a lim-
ited sharing of information. Company spaces can rein-
Open floor plans facilitate coordination and communication force an organization’s communication culture. For
among coworkers. example, when music company Muzak moved from
Seattle to Fort Mill, South Carolina, company leaders wanted to take advantage of
the move to create more open communication paths. To do this, they designed the
new workspace to be completely open, with no cubicle walls. The open environ-
ment makes it easy for people to ask questions and offer ideas. This setup facili-
tates communication and allows the CEO to get ideas from people he previously
never would have asked for input.9
● Cultural Barriers Words and gestures can mean different things in different
cultures. For example, in much of the world, the thumbs-up sign means “okay.”
But in Nigeria, Afghanistan, Iran, and parts of Italy and Greece, it is an obscene
insult and carries the same stigmatism as the middle finger does in the United
States.
One informal survey of managers from fifteen countries identified lack of cul-
tural understanding as the biggest challenge in communicating with people
around the world. Other challenges (in order) were: “being thorough and very care-
ful with interpretations,” “careful audience research,” “keeping communication
simple,” “respecting everyone,” “using technology as an asset,” and “knowing sim-
ilarities as well as differences.”10
● Noise As we discussed earlier, noise is anything that blocks, distorts, or

changes in any way the information that the sender intended to communicate. It
can enter anywhere in the communication process and interfere with the success-
ful transmission and reception of a message. We will next discuss some of the most
common sources of noise.
Physical barriers that create noise include interruptions, sounds, dim com-
puter screens, or a receiver’s headache. Loss of transmission occurs when an
Internet connection goes down, phone lines are full of static, or a videoconference
link is dropped. Competition from other communication sources, such as em-
ployees checking their BlackBerries or whispering to each other during a meeting
rather than listening to the speaker, can also create noise.
Ambiguity is another source of noise in communication. Ambiguity of mean-
ing means the receiver isn’t sure what the sender meant. (Does “we need to make
this happen” mean now or next year?) Ambiguity of intent means the receiver is
uncertain about the message’s consequences. (What am I supposed to be doing to
“make this happen”?) The clearer a message, the less chance ambiguity will cloud
its meaning.
Perceptual noise can result from the receiver making unwarranted assump-
tions and paying more or less attention to what an individual says based on those
assumptions. For example, if Rosa assumes that Huan wants to pursue a contract
with a vendor, she may erroneously decode his “maybe” as meaning yes and tune
out when he describes his concerns.
The sender’s credibility can create noise by making the receiver question the
accuracy of the message. Jargon, or technical language, can also create ambiguity
when the receiver does not understand it. Consider the CEO whose use of jargon
prevented audiences from understanding exactly what his company did. He
described his company as “a premier developer of intelligent semiconductor
intellectual property solutions that dramatically accelerate complex SOC designs
while minimizing risk.” After some coaching, he more clearly communicated the
same information in the statement, “Our technology makes cell phones that are
smaller, more powerful, and last longer on a single charge.”11 Effective managers
use clear, concrete, and concise language to keep their message simple and
understandable.
Organizational Communication ■ 443
Semantics are another barrier that introduces noise into communication.

Words mean different things to different people. Soon might mean “immediately”
to one person and “in a few days” or “in a few weeks” to another. Asking for feed-
back helps the sender ensure that his or her intended meaning is the same as the
one ultimately received.
● Managing Now Some companies rely on technology to minimize the effect

of barriers to effective communication. For example, DreamWorks Animation has
three major locations that often need to communicate with one another.12 How-
ever, traditional communication media are ineffective for communicating about
animation, and they add noise that distorts messages. CEO Jeffrey Katzenberg
says, “We convey stories and ideas and emotions through pictures and words. . . .
It’s a science and an art, and a lot of it is nonverbal.” So DreamWorks created a
videoconferencing system to improve productivity and the quality of the com-
pany’s internal communication.
DreamWorks’ custom videoconferencing room resembles a typical corporate
boardroom. Meeting participants who are physically present sit on one side of the
table, opposite their remote colleagues shown on three giant flat-screen monitors.
A fourth screen allows participants to share documents, drawings, and animated
sequences. The audio system lets people talk over one another, just as they would
in a traditional meeting, rather than waiting for a speaker to finish.
Organizational Communication Online Study Center

ACE the Test
Managing Now! LIVE
organizational
communication: the
exchange of information that
O rganizational communication is an exchange of information that creates a
common basis of understanding and feeling among two or more individuals or
groups in an organization. Organizational communication can move in a variety of
creates a common basis of
directions and can be formal or informal in nature. Figure 15.2 illustrates upward,
understanding and feeling
among two or more individuals diagonal, downward, and horizontal communication paths in an organization.
or groups in an organization
Downward Communication
Downward communication occurs when higher-level employees communicate to
those at lower levels in the organization, for example, from a manager to a subor-
dinate. Downward communication typically consists of messages about how to do
a job, performance goals, the firm’s policies, and how the company is performing.
Management by wandering around is a face-to-face management technique
in which managers get out of their offices and spend time talking informally to em-
ployees throughout the organization.13 Being actively engaged in the day-to-day
operations of the business gives managers a feel for what is really going on in the
company. For example, in the first six months after Gary Kusin became CEO of
Kinko’s Inc., before it became FedEx Kinko’s, he went into each of Kinko’s twenty-
four markets in the United States, visited over 200 stores, and met with over 2,500
team members to learn what the company needed to do to continue evolving.14
● Managing Now IT and the Internet have given managers more choices in
how to communicate downward, including e-mail, instant messaging, intranets,
portals, wikis, blogs, and webcasts, in addition to traditional verbal and written
communication. Managers need to fit the medium to the message, use appropri-
ate body language and nonverbal cues, and ensure that subordinates understand
F IGURE 15.2
Communication Paths in an Upward Downward
Organization Communication Communication
Diagonal
Communication
Horizontal
Communication
the meaning of the messages sent. As Lucent discovered (see the Practice IT fea-
ture on page 447), it is also a good idea to understand how employees like to be
communicated with and to seek their feedback about how different communica-
tion channels are working.
Upward Communication
Upward communication occurs when lower-level employees communicate with
those at higher levels, for example, when a subordinate tells a manager about a
problem she or he is having with a customer’s request. Encouraging upward com-
munication can help managers check that subordinates understand their goals
and instructions, keep managers informed of employee challenges and com-
plaints, and cultivate acceptance and commitment by giving employees the
opportunity to express ideas and suggestions.15
Despite its potential benefits, getting subordinates to give upward feedback
can be challenging. Subordinates often filter bad news, fearing that their bosses do
not really want to hear it. A manager who is approachable and accessible and who
creates a culture of trust and openness can help subordinates feel more comfort-
able giving upward feedback. Not overreacting, being defensive, or blameful and
respecting confidentiality when a subordinate shares potentially controversial or
negative information can help. Attitude surveys, an open-door policy, and regular
face-to-face meetings with subordinates can also foster upward communication.
One of the best ways to build trust and make subordinates feel comfortable
sharing negative information may be sympathetically listening during your daily
informal contacts with them in and outside the workplace.16
● Managing Now Technology tools such as wikis can enhance upward com-
munication in organizations and make all employees part of the brainstorming
and problem-solving process. For example, when a manager at an investment
bank wanted an analysis of how to double profits on a particular trade, he put the
Organizational Communication ■ 445
problem on a wiki page where other employees could comment, brainstorm, and
edit in real time. In two days, the manager had analytics that would have otherwise
taken two weeks.17
Technology helps keep managers connected to subordinates in other ways.
Old Navy staffers are all connected to the back room via headsets that provide two-
way communication so that they can get real-time announcements about out-of-
stock items and substitutions as well as real-time responses to customer questions
they can’t answer.18 By facilitating both upward and downward communication,
this technology helps to improve customer service and boost sales.
Horizontal Communication
Horizontal communication occurs when someone in an organization communi-
cates with others at the same organizational level. Managers often depend on each
other to help get the job done, and communication is necessary for them to coordi-
nate resources and workflow. Although horizontal communication occurs between
peers, as in all organizational communication, it is important to stay professional
and avoid belligerent words and negative body language. Managers can facilitate
horizontal or interdepartmental communication by appointing liaison personnel
or creating interdepartmental committees or task forces to facilitate communica-
tion and coordination and solve common problems.
The Window on Managing Now feature describes how Sperry Marine uses por-
tals to improve horizontal communication and improve project team performance.

Using Portals to Improve Performance
Portals are pages on a company’s intranet that contain Now everyone gets general information from the portal’s
links to other sites on the company’s intranet. Organiza- home pages, reviews an up-to-date notice board, checks
tions adopt project management portals to give their documents in and out, accesses process and risk informa-
executives easy access to the latest project information. tion, and views live schedule and milestone reports.”19
Portals also make it easier for their project teams to share Goodrich Aviation Technical Services uses a project
information, stay informed of changes, and collaborate. management portal, along with a project-scheduling sys-
Sperry Marine, a business unit of the global aerospace and tem, to manage the maintenance and repair of Boeing 737
defense giant Northrop Grumman, implemented a project aircraft. With these integrated tools, the company de-
management portal to create virtual rooms for collaborat- creased turnaround time from thirty-seven to about
ing on requests for proposals and resulting projects. The twenty-seven days. Goodrich maintenance teams receive
portal also provides a centralized, visible location for co- real-time work orders and assignments live through the
ordinated document storage, information, and schedule portal. Teams can quickly adjust when a part is missing be-
tracking. cause that information is communicated instantly on the
The portal has improved horizontal communication portal. Mechanics enter progress updates on the shop
dramatically. “Before using the portal, people had to e-mail floor, giving managers the most up-to-the-minute infor-
back and forth or call to stay informed,” says Thea Yancey, mation that allows them to adjust quickly. Decision mak-
proposal manager with Sperry Marine. “The wrong version ers are also able to detect problems earlier because the
of a document could be passed to somebody and team portal makes schedule status immediately visible and
members might miss information if they missed meetings. keeps senior managers continually up to date.20
Diagonal Communication
When employees communicate across departments and levels, they are engaging
in diagonal communication. For example, if Lorenzo’s subordinate, Amy, contacts
Lorenzo’s peer in a different department, diagonal communication has occurred.
Diagonal communication is common in cross-functional project teams com-
posed of people from different levels drawn from different departments.
Diagonal communication allows employees in different parts of an organi-
zation to contribute to creating a new product or solving a problem. Diagonal
communication also helps to link groups and spread information around the
firm. Almost all successful managers use these informal communication net-
works to monitor employee communication and to communicate quickly with
employees.21
IT and the Internet can facilitate horizontal and diagonal communication
through the company’s intranet, portals, and wikis. By creating a central loca-
tion where employees can post questions and help solve problems other em-
ployees are dealing with, communication can occur among employees who
would be unable to communicate without the use of technology. For organiza-
tions with multiple locations, IT and the Internet can create employee networks
that allow employees located around the world to work together and share
knowledge. The Practice IT feature presents another example.
Formal and Informal Communication

Formal communication is official, organization-sanctioned communication. It
can be upward, downward, horizontal, or diagonal. Formal communication chan-
nels typically involve some sort of written communication that provides a perma-
nent record of the exchange.
Informal communication is communication that is not official. Informal com-
munication includes gossip and answering another employee’s question about
how to do something. Rumors and the grapevine are also examples of informal
communication. The grapevine refers to social networks in organizations that
allow employees to exchange information. These informal networks can be help-
ful because they give employees access to people elsewhere in the company who
can help solve problems and get work done. It is often recommended that new
employees try to tap into existing social networks to learn how to do their work
successfully.22
But the grapevine can also promote the spread of gossip or rumors, which can
be destructive and interfere with the functioning of the company, particularly if
they are untrue.23 You should not avoid the grapevine, but be sure to evaluate the
credibility of the source before you believe what you hear.24 If the rumor doesn’t
make sense or is inconsistent with other things you know or have heard, seek more
information before reacting.
As a manager, being aware of current office gossip can help to keep you
informed of what is on employees’ minds and prevent rumors from growing
out of control. It is best to prevent rumors from starting by establishing clear
communication channels, building trust with your employees, and providing
employees adequate facts and information. If a rumor does start to spread,
neutralize it by communicating consistently and honestly with employees
about the issue. Not making a comment is usually seen by employees as confir-
mation of a rumor.25
Communication Media ■ 447
PRACTICE IT
Technology-Enabled Communication at Lucent26
Lucent relies heavily on IT to facilitate communication the MyLucent page, making it easier for us to get impor-
with and among employees around the world. Lucent tant information to employees in a timely fashion.” Lucent
continually uses employee feedback submitted through its also distributes a subscriber-based e-mail publication with
intranet to assess which communication methods em- additional company information.
ployees prefer and what is and is not working. Through To ensure that employees share the same organiza-
this feedback, Lucent has learned how best to focus its tional goals, once a quarter the CEO and the executive
communication to reach a variety of different audiences. leadership team webcast what the company has done in
Communication through satellite broadcasts, e-mail mes- the prior quarter and what needs to be done in the future.
sages, and Internet publications helps to share informa- These webcasts are then archived on Lucent’s website,
tion with employees. Mary Lou Ambrus, Lucent’s vice making it possible for employees around the world to view
president of group communications, says,“Global commu- the messages at a time that is most convenient for them.
nication becomes almost instantaneous when posted to Clips of Lucent leaders reflecting on pivotal moments or
the web site. We can send out an internal press release discussing important topics, such as innovation and taking
and ensure that employees are getting accurate informa- a risk, are also posted weekly on the MyLucent site. Price
tion as quickly as possible.” When big news hits, audio says,“Employees want more candor in communications—
files are quickly posted to the website so that employees they want to hear the real voice of what is going on in
can listen to the leader’s message. the business. While we try to reflect this in our written
Lucent relies on the Internet to make its internal com- communications, employees often interpret this as ‘the
munication entirely Web-based.Bill Price,Lucent’s director company line.’ When it’s the executive’s own voice, the
of corporate communications, and his team researched message is given much more credibility.” The webcast
how to make the site user-friendly and interactive. “Our medium has been so well received by employees that
main Internet homepage,MyLucent,has two weekly feature Lucent leaders have begun doing their own webcasts with
articles that reinforce the strategic vision and positioning their teams and archiving them for employees to view
of the company. This prompts weekly employee visits to when it fits their schedules.
Communication Media
Online Study Center
ACE the Test
Managing Now! LIVE I nformation technology has changed the way communication occurs in organ-
izations.27 Managers now have a variety of communication media available
for use. We will discuss some of the most commonly used media next.
The Internet
The Internet has fundamentally changed how many managers communicate.
Managers are no longer the filtration system for all information coming into an
organization. Now they are responsible for aligning information with business
goals, and they act as facilitators by bringing the right people together to solve
business problems as a collaborative community. Individuals using the Internet
can select only the information they want using information pull.28 This contrasts
with the old broadcast technique of information push, where people receive infor-
mation just in case they need it.
● Managing Now: Alpine Access Sometimes, face-to-face communication

simply is not possible. That’s true at Alpine Access, a provider of outsourced call-
center services based in Golden, Colorado. Nearly all of the company’s 7,500 em-
ployees work from home and are located around the country—senior executives
at the company rarely see them. Hiring, training, day-to-day management, and
strategic planning are done electronically or over the phone. “There’s no opportu-
nity to look into someone’s eyes to make sure they understand what’s being said,”
says cofounder Jim Ball. So the company has developed a number of practices to
compensate, and these practices can boost the effectiveness of e-mail at any
company.
First, clarity is a priority. Important messages, such as the idea that everyone
needs to work harder to meet a monthly target, are checked for everything from
grammar to nuance. Second, employees must acknowledge receipt of every e-mail
and can immediately ask questions. Managers seek feedback by regularly check-
ing that employees are on track and not missing any critical information. Third,
telephone calls are made for truly difficult conversations, such as performance re-
views. “You can be just as empathetic over the phone as you would be in person,”
a company leader insists. “It’s more difficult, but it can be done.”29
Although technology should never replace all human interaction between
leaders and subordinates, it can help the communication process by giving lead-
ers more ways to communicate with their employees. For example, e-mail is now
an accepted way to communicate with employees and customers. It enables man-
agers to prioritize incoming communications and to catch up while away from
work. Key company employees are accessible via e-mail twenty-four hours a day,
seven days a week. Work is completed faster because people can e-mail docu-
ments to each other and quickly receive feedback. In many organizations, e-mail
is a primary and formal means of business correspondence.
Instant messaging enables users to chat with other employees in real time
rather than e-mailing and waiting for a response. This method allows employees
to get in touch with each other immediately to get input or ask questions. Voice
mail is similar to e-mail, but instead of writing, a spoken message is digitized and
sent to someone to be retrieved and listened to later. Like e-mails, voice mails can
be saved or sent to others.
● Managing Now: Medco Health Solutions IT and the Internet have changed
some of the skills managers need to be effective communicators. For example,
Medco Health Solutions, Inc., is a virtual, real-time, fully networked pharmacy
benefit management community. Instant messaging is available companywide
and is used constantly to provide high-quality cus-
tomer service. Most corporate managers are rarely
without their wireless laptops. Because meeting
customer needs is Medco’s priority, managers are even
expected to respond to customer-oriented instant mes-
sages during meetings. Although this can create some
distractions, managers have become good at multitask-
ing and have learned to handle the multiple communi-
cation channels open to them at any one time.30
Managers are increasingly using cell phone–personal
digital assistant hybrids, wireless messaging devices,
smart phones, and wireless devices using Internet-
based calling systems to communicate with employees.
Videoconferencing enhances the quality of communication For example, technology distributor Avnet introduced a
with people in other locations. program that allows executives to make international
calls from their laptops using an Internet-based calling system, which yields a sav-
ings of more than $1 million annually.31
Managers can also use various software tools to meet with staff without being
face-to-face. Videoconferencing can enable leaders to communicate effectively
with employees and customers. By allowing the parties to see as well as hear each
other, videoconferencing can be a very effective form of communication. At the
Global Outsourcing Group at Unisys Corporation, leaders regularly use videocon-
ferencing to stay in touch with telecommuting staff. Any employee can schedule a
telephone meeting over Unisys’s phone system.32
● Managing Now: Telework Bear Stearns’s associate director of corporate

marketing, Chris DiFiglia, says, “Bear Stearns first deployed video conferencing . . .
because the company was expanding rapidly and needed to stay connected with
our branch offices all over the world. Today, video conferencing is an ingrained
part of the Bear Stearns culture. It helps us save money on travel, and, even more im-
portant, it helps our employees work more effectively and increases productivity.”33
Bear Stearns holds 150 to 200 videoconferences each month, with most calls
including three to four different sites. Bear Stearns also uses videoconferencing
frequently for hiring, thus saving travel costs on plane tickets and accommoda-
tions by interviewing candidates remotely. “While you can’t always replace an
initial handshake with a video call, many a deal has been closed over video at Bear
Stearns,” says DiFiglia.34
Telework is work conducted in a location other than a central office or pro-
duction facility, with communication between coworkers and supervisors occur-
ring via electronic communication systems.35 Immunex, Nortel, and Washington
Mutual all use telework. There are four major types of telework:36
1. Home-based telecommuting includes people who work at home for some pe-
riod on a regular basis, but not necessarily every day. Security, the challenge of
motivating employees from a distance, and loneliness can be drawbacks to
home-based telecommuting.
2. Satellite offices are offices situated to be more convenient for employees
and/or customers. These offices are located away from what would normally
be the main office location.
3. Neighborhood work centers provide office space for the employees of more
than one company to save commuting time to central locations.
4. Mobile work refers to work completed by traveling employees who use tech-
nology to communicate with the office as necessary from places such as client
offices, airports, cars, hotels, and so forth.
Telecommuting allows organizations to reduce the amount of office space they
own or rent, and it decreases employees’ need to commute to work. If telecommut-
ing employees sometimes need to work at the company’s location, the company
can set up a hoteling space for them. This space gives visiting telecommuting em-
ployees who don’t have dedicated office space at the company’s location a cubicle
or office in which to set up their laptop computer, log in, and be immediately con-
nected to the company’s intranet. They can then work effectively at the company’s
location when they need to. Deloitte Consulting and Boeing both use hoteling.
Collaboration Software
Computer software such as Microsoft’s SharePoint allows members of workgroups
and teams to share information to improve their communication, efficiency,
and performance. Collaborative software, also called groupware, enhances the

collaborative abilities of group or team members by providing an electronic meet-
ing site. It essentially integrates work being done on a single project simultane-
ously by several employees at different computers located anywhere in the
world.37 General Foods and Seagate Software38 both use groupware.
Collaborative writing systems allow group members to work simultaneously
on written documents through a network of interconnected computers. As team
members work on different sections of the document, each member has access to
the entire document and can modify his or her section to be compatible with the
rest of it. Siemens and IBM use collaborative writing systems.
A group scheduling system lets group members input their daily schedules
into a common scheduling database. This system makes it faster and easier to
identify the best times for meetings and to schedule them quickly. Both World
Family Financial and Bear Stearns use group scheduling systems.
Workflow automation systems use technology to facilitate and speed up work
processes. The system sends documents, information, or tasks to the right people
or places based on the established procedure. For example, after one person signs
a document, the system automatically sends it to the next person for a signature.
Group decision support systems are interactive,
computer-based systems that help decision-making
teams find solutions to unstructured problems that
require judgment, evaluation, and insights.39 Team
members can meet in the same room or be located in
separate places and interact via their computers. Soft-
ware tools, including electronic questionnaires, brain-
storming tools, idea organizers, and voting tools to
weigh and prioritize recommended solutions, help the
group make decisions. A group decision support sys-
tem can reduce the likelihood that one member will
dominate the discussion and helps groups avoid many
of the barriers that face-to-face groups encounter. The
Canadian National Railway System, Pfizer, and Bayer
use group decision support systems to improve their
Software tools can help groups make more effective decisions. decision-making processes.
Intranets
An intranet is a type of centralized information clearinghouse. At its simplest, an
intranet is a website stored on a computer that is connected to other company
computers by an internal network. Employees reach the intranet site with stan-
dard Web-browser software such as Netscape or Microsoft’s Internet Explorer. An
intranet can be connected to the Internet so that suppliers and customers can visit
using company-issued passwords. In such cases, firewall software can be installed
to act as a barrier between the internal systems and unauthorized outsiders.
Because they centralize data and provide easy access, intranets are a good idea
when a company’s employees use several different types of computers and all of
the users need to reach the same company information. Intranets give employees
controlled access to the information stored on a company’s network, which can
reduce the need for paper versions of documents such as manuals and company
forms. Intranets are not useful if many employees do not use or have access to
computers or if no one has the expertise to set up and manage the intranet. Many
companies now use intranets, including Intel, Nike, and Safeco Insurance.
● Portals Portals are similar to intranets but tend to be more project-focused

rather than providing a wide variety of information like an intranet does. Portals
strongly resemble Internet sites like Yahoo.com and AOL.com. Users interact with
them with a standard computer browser like Internet Explorer or Netscape, but in-
stead of containing links to news and weather, the links lead employees to sites on
the company’s private intranet.
Portals can make project status continually visible to managers through real-
time reports and visual cues such as red-yellow-green status signals or digital
dashboards. Portals allow managers to use their browsers to get high-level sum-
maries of project status at any time. Some portals also provide visual comparisons
and metrics between projects within a program.40
Project managers use portals to manage schedules and any issues that arise. By
centralizing a variety of project information, portals allow managers to track
progress and identify any problems early. Managers can also use portals to quickly
disseminate information (documents, processes, notices, etc.) to all of their team
members, wherever they are located, and solicit input and feedback in a controlled
manner.41
Portals allow team members to easily share news and ideas, enhancing col-
laboration and project implementation efficiency. Project managers can delegate
responsibilities to individual team members yet still retain control of the project.42
Portals are often customizable, allowing employees to subscribe to only the infor-
mation they need.
Portals can be integrated with other applications. For example, one button on a
portal might call up yesterday’s production charts, another lets employees check
their 401(k) balance, and a third lets employees tell colleagues about how they
solved important customer problems. Portals also let everyone in a company share
databases, documents, calendars, and contact lists. They make it possible to collab-
orate easily with coworkers in remote locations and even conduct instant employee-
opinion polls. By consolidating information and connecting employees with each
other, they help companies function as a single unit rather than as individual
entities.43 Companies using portals include EDS, Ford Motor, and Merrill Lynch.
Until recently, portals were strictly for big business. Because they require an
intranet, the cost was prohibitive. Their complexity also required a team of com-
puter specialists to set up and administer. But intranets have become more com-
mon as software vendors like IBM, Microsoft and Oracle, Plumtree and SAP have
developed packaged portal solutions to suit almost every size business and meet
almost every business need.44
When team members see the big picture of the whole project through a portal,
they have a greater appreciation of the impact of their part on the rest of the proj-
ect. They often feel more involved in the project and want to add to its successful
completion. Team members know that progress on their own tasks is visible, too,
which also helps motivate productivity.45 This is consistent with the idea of task
identity leading to greater motivation, as we discussed in Chapter 14.
● Managing Now In addition to portals for their employees and customers to

use in interacting with the company and employee portals to facilitate work, com-
panies are using specialized portals to meet specific goals. For example, to help
control health-care premiums, insurance brokerage firm Keenan & Associates of
Torrance, California, created a Web-based portal to encourage employees to eat
right and exercise more. The service, KeenanFit, offers customized fitness, nutri-
tion, and self-improvement plans for employees and their families. The portal also
allows employees to complete self-assessments to monitor specific health risks.46
Building an Intranet
Companies like ExxonMobil recognize that their globally consistency, only one person, or one group, should be
dispersed and increasingly mobile workforce make knowl- responsible for approving the content and setting
edge management, collaboration, and wireless communi- standards.
cation technologies more important to their success than 3. Keep pages simple. All intranet pages should be con-
ever.47 Firms including Boeing, Ford Motor Company, and sistent in format and work in a similar way. Using
Sandia National Laboratories are turning to their in- templates can help ensure simplicity and consistency.
tranets to address their coordination and communication
4. Keep the information updated, trustworthy, and reliable.
needs. But how do you start building a company intranet?
Here are some recommendations:48 5. Avoid information overload. Don’t try to cram too
much information onto a single page.
1. Use the intranet as a productivity and communication
tool. First establish what the intranet should contain. 6. The intranet homepage should include company news,
What types of information or services would make easy-to-understand navigation, and a search option. If it is
employees more productive? Needs vary from com- difficult to use, it won’t be used.
pany to company, but some popular elements include 7. Test the usability of your intranet. Intranet features can’t
human resources information (the employee hand- be too complicated, and the links must be clearly la-
book, vacation and sick-leave policies, change-of- beled, or the intranet won’t be used. Before launching
address forms, etc.), business forms, the ability to an intranet, ask a few employees to use it to solve a
book a conference room online, and company news. problem or locate a form and watch how they do it
2. Make a single person or group responsible for the intranet. and how much time it takes. Ask for their feedback
Depending on your company’s size, an employee can about whether the intranet is easy to use and intuitive.
manage an intranet in addition to his or her regular 8. Evaluate the intranet and modify it over time. An organi-
role, or one person might manage an entire depart- zation’s intranet needs change over time, as the com-
ment responsible for the intranet. Content for the in- pany’s priorities change and as the ways the intranet
tranet can come from many sources, but to maintain can add value change.
Although company intranets can facilitate communication, they require some

time and thought to set up. The Window on Managing Now feature gives you some
recommendations for setting up a company intranet.
webcasts: live or prerecorded Webcasts are live or prerecorded video segments that are broadcast over a
video segments that are company’s intranet and archived for employees to view later. They can help higher
broadcast over a company’s levels of management communicate with more employees and communicate
intranet and archived for
messages more effectively because the executives can use voice and even video
employees to view later
to express the message through intonation and body language. And as Lucent’s
director of corporate communications said in the Practice IT example, “When it’s
the executive’s own voice, the message is given much more credibility.”
wikis: searchable, archiveable Wikis are searchable, archiveable websites that allow people to comment on
websites that allow people to and edit one another’s work in real time. The name wiki is based on the Hawaiian
comment on and edit one term wiki, meaning “fast.”49 Wikis are well suited for collaborative writing because
another’s work in real time.
they allow users to quickly and easily add and edit content. Wikis are essentially a
simplified system of creating webpages combined with a system that records and
catalogs all revisions. This allows entries to be changed to a previous state at any
time. A wiki system may also include tools to provide users with an easy way to
monitor the constantly changing state of the wiki and a place to discuss and
resolve any issues or disagreements over wiki content.50
Wikis are easy to use and inexpensive. Because real-time project information
is located in one easy-to-access place, project completion times can be greatly re-
duced. Unlike a portal or intranet, wikis have no inherent structure. Some emerg-
ing wiki conventions are an automatically generated list of pages recently changed
and an index of all of the wiki’s pages.51 Access can be restricted to a limited group
of people and even require passwords. Disney, Kodak, Cingular, and Motorola
have all found ways to use wikis successfully.52
● Managing Now IT and the Internet have made it easier for organizations to
communicate with people outside the organization. When Intuit wanted to con-
nect with more tax professionals, it created a free wiki called TaxAlmanac.org,
where thousands of professors, authors, and tax attorneys contributed thousands
of articles as a tax law resource.53
Blogs are individuals’ personal accounts of thoughts and interests. Some blogs
function as online diaries. A typical blog combines text, images, and links to other
blogs, webpages, and other media related to its topic.54 Companies such as
McDonald’s, General Motors, Walt Disney, Boeing, Nokia, and Kodak have estab-
lished blogs to enhance internal communication. In some cases, a CEO will create
a blog to communicate more directly with employees and stakeholders. Compa-
nies like Sun Microsystems, Google, and Maytag have set up both customer blogs
and internal ones, too.55 A wiki listing the Fortune 500 companies that have a blog
is on the Internet at http://www.fortune500blogs.com/.
● Managing Now When the investment bank Dresdner Kleinwort Wasserstein

wanted to make it easier for its employees to collaborate, it used blogs and wikis.
Now that its 1,500 employees create, comment, and revise projects in real time,
meeting times have been cut in half, and productivity has increased.56 Boeing
even set up blog kiosks at its annual strategy meeting for the company’s top 1,000
defense executives. While the CEO and his team discussed hot topics, executives
responded via the kiosks. Executives also discussed some of the comments from
the blog later in the meeting.57
Oral Communication
Despite the speed and convenience of IT message channels, some, like email, tend
to promote one-way communication and decrease feedback opportunities. If used
improperly, these message channels can increase the chances of miscommunica-
tion because the receiver has less opportunity to ask questions or get clarification.
They can also decrease the quality of decisions if it is harder for employees to make
suggestions or share concerns.
IT and the Internet have changed the ways many managers communicate, but
there will always be a need for managers to communicate face-to-face. One expert
advises people to use electronic communication only to transmit and confirm
simple information and to have actual conversations for anything that could pos-
sibly be sensitive.58 Some companies, like Veritas Software, designate one day a
week to be e-mail-free to promote greater in-person communication.
Communicating in person is also important to building credibility and trust.
One DreamWorks representative says that despite technological advances, face-
to-face conversations are still critical—especially in the early stages of a project.
“When you meet someone, there’s that instinctive, involuntary chemical reaction,
where you decide what you think and whether you trust them.”59
Media Richness
Communication media can be classified in terms of their richness, or the media’s
ability to carry nonverbal cues, provide rapid feedback, convey personality traits,
and support the use of natural language.60 The richness of a medium depends on
four factors:
1. Interactivity or the availability of feedback. Immediate feedback allows senders
to adjust their messages—richer media provide faster feedback.
2. The ability to transmit multiple cues. Multiple cues include physical presence,
voice inflection, nonverbal cues, and pictures. Richer media allow the com-
munication of multiple cues.
3. Language variety for conveying a broad set of concepts and ideas. For example,
ideas about a new advertising campaign cannot be expressed in as many ways
in a letter as they can in a face-to-face conversation. Richer media allow for
greater language variety.
4. The personal focus of the medium. Personal focus is the degree to which the
medium allows the expression of emotions and other social cues.
The more a medium displays these four attributes, the richer it is. Otherwise,
it is leaner. Face-to-face interaction is the richest medium because it has the ca-
pacity for immediate feedback, carries multiple cues, and uses natural language.
When communicating, managers must choose the medium that best matches
the information richness that the task or communication requires.61 The more am-
biguous and uncertain a task is, the richer the medium should be that supports it.
For example, text-based computer messaging is a good fit for generating ideas but
not for negotiating conflicts. Videoconferencing is a good fit for decision-making
tasks, but is often not rich enough for negotiating. Table 15.2 describes how differ-
ent media compare in terms of their richness.
T ABLE 15.2
The Media Richness of Various Managerial Communications
Feedback Number Language Personal
Media Richness Availability of Cues Variety Focus
Face-to-face
interaction High High High High High
Videoconferencing High High High High High
Telephone Moderate Moderate Moderate Moderate High
62
Instant messaging Moderate High Low Low Moderate
E-mail Moderate Moderate Low Low Moderate
Personal written
correspondence Low Low Low Low Low
Formal written
correspondence Low Low Low Low Low
Interpersonal Communication Skills ■ 455
Interpersonal Communication Skills

C ommunicating effectively is an important leadership and managerial skill.
Many barriers exist to good communication, but improving your communica-
tion skills can help to overcome these barriers.
Listening Skills
Listening is not the same as hearing. Hearing is passive, whereas listening is an
active listening: becoming active search for meaning. Active listening plays an important role in communi-
actively involved in the process cation and is especially important for effective leadership. It requires becoming
of listening to what others are actively involved in the process of listening to what others are saying and focusing
saying and focusing on the
on the meaning of messages. Both parties should engage in active listening until
meaning of messages
it’s clear that each understands the final message.
Being an active listener requires asking (at least to yourself), “What is the
sender really saying?” When someone speaks, try to identify any ambiguous words
and any discrepancies between the speaker’s words and nonverbal cues. Then re-
flect the message back to the sender, paraphrasing and repeating the message in
your own words. The person with whom you are speaking should either confirm
your understanding or restate his or her message if there is a misunderstanding.
This allows both parties to continue to work toward mutual understanding until
you both are sure you understand each other.
Active listening requires the receiver to tune out noise and concentrate on the
message. It is harder than it sounds—it can be as difficult to refrain from inter-
rupting a speaker as it can be to keep your mind from wandering while listening
to someone else. Ways to be an active listener include asking open-ended ques-
tions and sending the other person feedback to check that you understand the
message—for example, by saying, “You’re really overloaded with work today, I
guess.” Making eye contact, nodding occasionally, and showing appropriate non-
verbal behaviors also show the sender that you are listening. Here is one expert’s
list of good listening skills:63
◗ Pay close attention to individual inferences, facts, and judgments and make use-
ful and logical connections between what you have heard on multiple occasions.
◗ Give speakers clear, nonverbal evidence that you are listening attentively, includ-
ing leaning toward the speaker, maintaining eye contact, and not fidgeting.
◗ Give speakers clear verbal evidence that you are listening attentively, including
giving constructive feedback, paraphrasing, and questioning for clarification
and refinement.
◗ Show the speaker respect by not interrupting and by using an inclusive, friendly,
and sharing tone rather than an exclusionary, hostile, and condescending tone.
◗ Follow up on unusual or inconsistent communication cues from the speaker,
such as changes in tone, vocabulary, and body language, to determine the real
message that the speaker is trying to send.
◗ Use what the speaker says or infers to determine his or her motives, self-interest,
and expectation(s) of listeners.
◗ Offer speakers honest, clear, timely, respectful, and relevant acknowledgment of
what they have said.
Persuading Skills
Managing often requires persuading others. The manager who wants more
resources, the supervisor who wants to keep a key employee from leaving, and
the company president who wants to sell her idea to the board of directors all
need to be persuasive. Because most people are resistant to altering their habits,
managers need to use persuasion skills whenever they need to create change.64 As
we discussed in Chapter 13, persuasion is a more effective way to lead when it
gets people to do things differently because they want to, not because they have
been ordered to.
Persuasion requires several things: thorough and careful preparation; the
compelling framing of arguments; the presentation of vivid supporting evidence;
and finding the correct emotional match with the audience. It is much more
than a sales skill. As one expert says, “Many businesspeople misunderstand per-
suasion, and more still underutilize it.”65 Here are some recommendations for
being more persuasive:
◗ Build credibility. Using good posture, an appropriate tone of
voice, and showing a sense of confidence increases the
chances that others will quickly see you as credible.66
◗ Do not begin with a hard sell. This gives potential opponents
something to resist and fight against.67
◗ Search for shared ground. Every audience is different, and it
is important not to come across as if you have already made
up your mind. Communicate in words easily understood and
related to by the audience, incorporate values and beliefs
they share, and be willing to compromise.68
◗ Develop compelling positions based on only a few convinc-
ing arguments rather than overwhelming people with facts
and information.
◗ Connect with people emotionally rather than relying solely
on logical arguments. Appealing to people’s needs can better
persuade them.
◗ Create a continuous feedback loop between the audience
and yourself. Incorporate the audience’s perspective into
your own arguments.69
◗ Be patient—people are rarely persuaded on the first try.70
Negotiating Skills
negotiation: a process in Negotiation is a process in which two or more parties make offers, counteroffers,
which two or more parties make and concessions to reach an agreement. Most managers do a lot of negotiating as
offers, counteroffers, and part of their jobs. Job offers and contracts with customers and suppliers have to be
concessions to reach an
negotiated, resources need to be secured and shared with other departments, and
agreement
deals have to be cut with bosses and subordinates.
There are two types of negotiation: distributive and integrative. Distributive
negotiation (also called competitive negotiation) occurs under zero-sum condi-
tions, where any gain to one party is offset by an equivalent loss to the other
party.71 Distributive negotiation essentially distributes resources among the
parties involved. Because distributive negotiation structures the conflict in a win-

lose way, it tends to be competitive and adversarial as the parties negotiate who is
going to get how much. For example, every dollar one manager gets from the com-
pany’s total budget is a dollar another manager does not get. Distributive negotia-
tion is a good choice when the relationship with the other person is not important
but winning is.
Integrative (or principled) negotiation is a win-win negotiation in which the
agreement allows both parties to walk away feeling that they’ve won.72 In general,
integrative negotiation is better than distributive negotiation because neither party
feels that it has lost when it is over. Integrative negotiation helps to build good long-
term relationships and minimizes grudges between the parties. This is particularly
beneficial when the parties have to work together on an ongoing basis once the
negotiations are finished.
The classic example of integrative negotiation involves a dispute over an
orange. Two people say that they want the whole orange. In a simple distributive
negotiation decision, the mediator might simply give each person half of the orange.
However, if the parties’ interests were considered, there could have been a different,
win-win outcome. One person wanted to eat the meat of the orange, but the other
wanted just the peel to use in a recipe. If the mediator had understood their inter-
ests, they both could have gotten all of what they wanted rather than just half.73
The four fundamental principles of integrative negotiation are:74
◗ Separate the people from the problem. Separate relationship issues (or “people
problems” such as emotions, misperceptions, or communication issues) from
substantive issues, and deal with them independently.
◗ Focus on interests, not positions. Negotiate about issues that people really want
and need, not what they say they want or need.
◗ Invent options for mutual gain. Look for new solutions to the problem that will
allow both sides to win rather than fight over the original positions that assume
one side must lose for one to win.
◗ Insist on objective criteria. Outside, objective fairness criteria (like the terms of
another company’s union-management contract) for the negotiated agreement
are ideal, if they exist.
When negotiating, it is helpful to research and understand the individual with
whom you will be negotiating. Try to begin with a positive exchange, create an
open and trusting environment, and emphasize win-win situations. Be sure to
prepare well, listen actively, and think through your alternatives. The more options
you feel you have, the better your negotiating position.75 Here are one expert’s sug-
gestions for being an effective negotiator:76
◗ Do not look at a deal as an either/or proposition. Negotiating is about compromise.
◗ Identify what you can and cannot part with. Identify the details most important to
you and those details that are less important. Act like everything is important and
grudgingly concede ground on the details that matter less to you. The other party
will count these concessions as victories and might yield on issues you value more.
◗ Try to identify and use sources of leverage. Leverage consists of anything that can
help or hinder a party in a bargaining situation. For example, a seller who must
sell is at a disadvantage, and if the other party needs to move quickly, you might
be able to make a tougher offer. Competing offers can also increase the leverage
one party has over another.
◗ Show the other side that you understand her or his position. Help the other person
to see you as an ally by mirroring their emotions. If the other person appears
frustrated, let him or her know that you recognize he or she is frustrated. They
may respond with, “You’re right I’m frustrated!” and now you’re agreeing on
something. By empathizing with the other party, you stand a better chance of
preserving a cordial and productive atmosphere.
◗ Suppress your emotions. Negotiations can become tense and stir emotions. Con-
stantly reminding yourself of your goal can help you keep an appropriate level of
detachment and continue to see the deal clearly. Stay rationally focused on the
issue being negotiated, and take a break if emotions start to flare up. Also, be
careful not to show too much desire for something, or your bargaining power will
be reduced.
◗ Know your BATNA. BATNA is an acronym for “best alternative to a negotiated
agreement.” It is what you could have done had no negotiation taken place, or
what you will do if you can’t reach an agreement with the other party. The pur-
pose of negotiations is to see if you can meet your needs better by negotiating an
agreement with the other party, compared to this best alternative. If the BATNA
is not compared to the agreement being negotiated, negotiators can make agree-
ments that are worse than not making an agreement at all.77 If negotiations stall,
letting the other side know that you’re prepared to proceed with your backup
plan can also help to get the process started again.
Conflict-Resolution Skills
We all regularly deal with conflict at home, at work, and with friends. Whenever
two or more parties want different things, the potential for conflict exists. Eventu-
ally, all managers have to deal with conflicts between coworkers and/or between
themselves and employees. Good managers take action to resolve a conflict before
it interferes with productivity or performance.
In managing conflict between others, sometimes conflict resolution can be as
easy as directing the disputing parties to leave their disagreements at the door.
More frequently, however, managers have to get more directly involved by order-
ing the disputants to behave in a certain way (arbitrarily settling the argument for
them) or by mediating the conflict (helping the parties find their own settlement
or solution). Arbitrarily imposing a solution seldom works, however, and often
backfires. Mediating the conflict usually has the most positive and lasting effects,
but it requires skills that don’t come naturally to many managers.
● Conflict Management Skills The good news is that almost everyone can
learn to develop effective conflict-management skills. Professionals in conflict-
resolution training suggest four areas of skill development: listening, questioning,
communicating nonverbally, and mediating.78 Listening skills include making eye
contact, rephrasing, and summarizing what each side tells you to show them that
you understand their positions. Also reflect back the feelings you observe them
expressing (anger, frustration, disappointment, etc.).
Ask open rather than loaded or leading questions, and use nonverbal cues to
show both parties that you are listening respectfully and are sincerely trying to
help. Read both parties’ nonverbal cues to learn additional information. Media-
tion skills include being open-minded, staying nonjudgmental and calm, demon-
strating empathy and sensitivity, remaining neutral, respecting confidentiality,
and showing flexibility and resiliency.79
T ABLE 15.3
Best and Worst Conflict-Resolution Behaviors for Career Advancement
Best Conflict-Resolution Behaviors
◗ Perspective taking: trying to put yourself in the other person’s position and trying to understand her or his point
of view.
◗ Creating solutions: brainstorming with the other person, asking questions, and trying to create solutions to the
problem.
◗ Expressing emotions: talking honestly with the other person and expressing one’s thoughts and feelings.
◗ Reaching out: reaching out to the other person, making the first move and trying to make amends.
Worst Conflict-Resolution Behaviors

◗ Avoidance: avoiding or ignoring the other person and acting distant and aloof.
◗ Winning at all costs: arguing vigorously for your own opinion, refusing to consider changing your position, and
trying to win regardless of the interpersonal costs.
◗ Displaying anger: expressing anger; raising your voice and using harsh, angry words.
◗ Demeaning others: laughing at the other person, ridiculing the other’s ideas and using sarcasm.
◗ Retaliating: obstructing the other person, retaliating against the other person and trying to get revenge.
Source: Martin Delahoussaye, “Don’t Get Mad, Get Promoted,” Training, June 2002, vol. 39, no. 6, p. 20.
Reprinted by permission of Training magazine.
One study found a strong link between a person’s ability to resolve conflict
and his or her perceived effectiveness as a leader.80 Managers with poor conflict-
management skills encountered a promotional ceiling much earlier in their ca-
reers. The study revealed strong relationships between certain conflict-resolution
behaviors and perceived suitability for promotion. These conflict-resolution
behaviors are summarized in Table 15.3.
Nonverbal Communication Skills

As we discussed earlier, your body language and other nonverbal cues can com-
municate a greater part of your message than the words you say. Sending appro-
priate nonverbal cues can make us better communicators. The information in the
Improving Your Communication Skills box on page 460 will help you to use the
right body language in two important managerial situations: negotiating and con-
ducting job interviews.
Writing Skills
From memos and business letters to e-mails, managers frequently need to com-
municate in writing. Effective business writing isn’t about just grammar and punc-
tuation; the style and tone also have to be appropriate for the audience.81 The style
of business writing also needs to be professional and direct, and it often needs to
be persuasive. Here are some guidelines for effective business writing:82
1. Make sense. Express ideas in an organized and logical way. Provide transitions
between ideas.
2. Back up your assertions. Support your points with statistics, examples, citation
of authorities, and anecdotes.
I M P R OV I N G Y O U R C O M M U N I C A T I O N S K I L L S 83
When Negotiating
Do:
◗ Prepare well ◗ Build rapport
◗ Control the environment ◗ Maintain good eye contact
◗ Offer a warm greeting ◗ Ask high-quality, open questions
◗ Understand your position ◗ Speak in a clear, measured manner
◗ Have an upright, confident posture ◗ Show empathy
◗ Use open body language (relaxed, not stiff) ◗ Display controlled energy
Do not:
◗ Constantly make eye contact ◗ Display closed body language (arms folded, head down,
◗ Ignore members of the group avoiding eye contact)
◗ Inject coldness or harshness in your voice
When Conducting Interviews

Do:
◗ Use open body language ◗ Offer a firm handshake
◗ Present a straight, relaxed, confident posture ◗ Show sincerity in voice tone
◗ Maintain good eye contact so that you look pleasant ◗ Speak at a suitable pace
and engaged ◗ Explain expectations
◗ Take charge ◗ Ask framed, contextualized questions
◗ Express interest in the other person and his or ◗ Listen attentively and nod occasionally
her experience
Do not:
◗ Give a flimsy or a bone-crushing handshake ◗ Invade personal space
◗ Sit across a table ◗ Say,“Tell me about yourself”
◗ Stand too close on arrival
Online Study Center

3. Write for your audience. Ensure that your language, length, and evidence suit
ACE the Test your audience.
Managing Now! LIVE
4. Edit and revise. Correct grammar and spelling errors, and stay focused.
5. Format for readability. Make documents attractive and easy to read.
6. Write to express, not to impress. Get to the point.
7. Use common language rather than jargon or difficult verbiage. For example,
Mark Twain vowed never to write metropolis when paid the same for writing
city.84
8. Acknowledge your sources. Cite any ideas, phrases, sentences, and terms that
are not your own.
E-Mail Tips
Composing effective electronic communication can be financial report.” This saves time and prevents
challenging. Because e-mail is not an interactive conversa- confusion.
tion, the rules for phone conversations aren’t appropriate. 8. Send group mail only when the message is useful to
Neither are the rules for written correspondence, which all recipients. Use “reply all” and “cc” sparingly.
is more formal and not instantaneous. Because e-mail falls
9. When traveling, unsubscribe from e-mail distribution
in between a phone call and a letter, e-mail etiquette can
lists (e.g., listservs), use the out-of-office feature to
be difficult. Here are some suggestions for using e-mail at
let people know that you may not be able to respond
work effectively:85
quickly.
1. Deliver important personal information in person or
10. Because they are slow to download, avoid sending
by telephone rather than via e-mail.
large attachments and graphics to people who are
2. Read your e-mails before sending them to check for traveling unless it is necessary. Post large attachments
clarity and readability. on a wiki or portal instead.
3. Have clear company policies about what is acceptable 11. Be specific and helpful in letting the recipient know
and what is not acceptable to send in e-mails; for what is important. If you send a twenty-five-page
example, salary and layoff information may not be attachment, highlight critical information.
appropriate.
12. Consolidate your messages in one organized e-mail
4. Write concise and informative subject lines; for ex- rather than sending one message per thought.
ample,“We’re meeting Tuesday morning at 10” sends
13. Respond to e-mails quickly, preferably by the end of
a message without employees even needing to open
the same day.
the e-mail.
Training in using all forms of electronic communica-
5. Don’t criticize employees via e-mail. Their inability to
tion,including e-mail,instant messaging,blogs,and wikis,can
respond can make them feel that you have not shown
help managers and employees reduce misunderstandings
them respect.
and enhance communication efficiency. For example, the
6. Don’t use your in-box as a catchall folder. After read- New Jersey HospitalAssociation (NJHA) in Princeton,New
ing an incoming item, answer immediately, delete it, or Jersey, gives all new hires e-mail etiquette training, which
move it to a project-specific folder. covers the basics including how to communicate quickly
7. Agree on company acronyms for subject lines, such but with courtesy, what not to put in writing, and the im-
as AR for “action required” or MFR for “monthly portance of proofreading e-mails before sending them.
9. Use graphic aids and pictures where appropriate to highlight and express ideas.
10. Write with energy and conviction.
Knowing when and how to use e-mail to communicate is another important
managerial skill. The Window on Managing Now feature gives you some tips for
effectively using e-mail at work.
Speech and Presentation Skills

Do you ever get the jitters when you are about to make a presentation? It is
perfectly normal to feel nervous before speaking in front of a group, even if you
have a lot of experience. Fortunately, the jitters tend to improve with practice, and
it is even possible to take courses on public speaking. Managers need effective
presentation skills to present proposals to supervisors and to communicate with

other managers and groups of subordinates.
When giving a speech, be sure to organize your talk so that you first present an
overview of the material you will cover, then the body of your material, then a
summary at the end. It is best to restrict yourself to only three to five key points to
prevent information overload, and to monitor the audience’s body language for
feedback that they understand your message.
Here are some suggestions for making effective presentations:86
1. Speak up and speak clearly.
2. Quickly achieve rapport. In the first few moments, show audience members
that you feel comfortable with them.
3. Look at your audience.
4. Use gestures to express your ideas.
5. Move freely and naturally without pacing.
6. Try not to fidget or use vocalized pauses. Channel your energy into your talk
and nervous behaviors. Try to avoid saying “um” or “uh” or “you know” or
other similar vocalized pauses.
7. Minimize notes and use them unobtrusively. Notes work best as thought triggers.
8. Highlight key ideas. Use voice volume, graphic aids, pauses, and headlining
(telling the audience that a point is particularly important).
9. Channel nervous energy into an enthusiastic delivery.
10. Don’t focus on any errors or problems in your delivery. Keep going, even if
something throws you off.
11. Watch the audience for signs of comprehension or misunderstanding. Tilted
heads and furrowed brows can signal a need for clarification and review.
12. End with a bang. Your concluding words should be memorable.
Meeting Skills
Because they lead groups and teams, another way that managers often have to
communicate is through meetings. In addition to wasting time and money, poorly
led meetings are often a source of frustration. One international survey found that
employee well-being in meetings was related to whether meeting time was well
spent, not to the amount of meeting time or number of meetings attended. Meet-
ing effectiveness may be improved when people come to meetings prepared, an
agenda is used, meetings are punctual (start and end on time), purposes are clear,
and there is widespread participation.87
Leading meetings requires skills in organizing, eliciting input from meeting
participants, and conflict management. Here are some suggestions for running
effective meetings:88
◗ Have a good reason to meet in the first place, or do not meet.
◗ Distribute an agenda in advance that clearly states the purpose of the meeting
and the key steps to satisfying that purpose by the end of the meeting. Require
that participants know what you expect of them and to come prepared for the
meeting.
◗ State a time frame at the beginning of the meeting and stick to it.
◗ Keep participants focused on the agenda items and quickly manage any inter-
personal issues so that the meeting stays productive. Record additional issues
that arise so that they can be attended to later.
◗ Before adjourning, decide what needs to be done next and assign tasks, respon-
sibilities, and time lines accordingly.
CHAPTER SUMMARY
1. In the communication process, the sender en- 5. E-mail, instant messaging, teleconferencing, tele-
codes information into words, symbols, or pictures commuting, wikis, blogs, portals, and collabora-
and passes it to the receiver through a channel. The tion software are all ways IT and the Internet have
sender then receives the message and decodes it changed organizational communication.
into a message that is, with luck, the same as what
6. The richness of a medium, or its ability to carry
the sender intended.
nonverbal cues, provide rapid feedback, convey
2. The message carried by nonverbal communica- personality traits, and support the use of natural
tions, such as body language and verbal intonation, language, affects its appropriateness for different
can carry more meaning than a spoken message. types of messages.
3. There are numerous barriers to effective commu- 7. Active listening requires becoming actively in-
nication, including body language, verbal intona- volved in the process of listening to what others are
tion, selective perception, misperception, filtering, saying and clarifying the meaning of messages. It
overload, noise, organizational barriers, and cul- requires the sender to tune out noise and focus on
tural barriers. Noise can enter anywhere in the the message being sent.
communication process, making the message
8. Distributive negotiation means that one side’s gain
received different from the one that the sender
is the other side’s loss. Integrative negotiation is
intended.
win-win negotiation that focuses on meeting each
4. Formal communication is official and organization- party’s needs.
sanctioned. Informal communication is anything
9. Making a good presentation requires speaking
that is not official. Informal communication occurs
loudly and clearly, achieving a good rapport with
via informal networks, gossip, or the grapevine.
the audience, minimizing notes, looking at the au-
Employees rely on both formal and informal com-
dience, highlighting key ideas, and taking cues from
munication to communicate effectively.
the audience to assess any misunderstandings.
1. How is communication important in helping man- 4. How have IT and the Internet changed organiza-
agers be effective leaders? tional communication? Do you think each of these
changes is for the better, or have any of them made
2. Think about a time when someone’s nonverbal
organizational communication more difficult? Why?
cues overrode their spoken words in communicat-
ing a message. What about their behavior made 5. What are some of the negative consequences if
you question what they were saying? media richness is not matched to the message
being sent?
3. When do you think formal communication is best
in an organization? When is informal communica- 6. What do you think are the most important com-
tion best? munication skills for managers?
7. Think about a time when you listened to a speaker 8. Think about a time you were at a poorly run meet-
you thought was very effective. What did she or he ing. What could have been done to make the meet-
do that made them so good? ing more effective?
1. Pair up with another student. One student should 2. Form groups of four to five students and appoint
be the job candidate, and the other should be the one member as the group’s spokesperson. As a
company representative negotiating a job offer for group, brainstorm ways that IT and the Internet
an entry-level management position. Assume that can make managers more effective in their roles as
the company typically pays similar new hires in the leaders. From this list, identify what your group
range of $30,000 to $40,000, with the dollar amount thinks are the best three ways managers can lever-
depending on the new hire’s background and rele- age IT and the Internet to lead better.
vant work experience. Health and dental benefits Now brainstorm ways that IT and the Internet
are included, as are a $2,500 relocation package, can make managers less effective in their roles as
two weeks paid vacation that increases to three leaders. From this list, identify the three most im-
weeks after one year of service, and the opportunity portant of which managers should be aware. Share
to earn up to 15 percent of base salary as an annual your answers with the class.
bonus depending on individual and organizational
3. It is midterm week. You have four exams scheduled
performance. The recruit’s start date is flexible.
in two days and are concerned that you won’t be
Using the material presented in this chapter,
able to do your best on the exam in this class. In
negotiate a compensation package. The company
groups of four to five students, use what you
representative should assume that the company
learned in this chapter to persuade the instructor
would really like to hire this person, but it is impor-
to reschedule the midterm for this class to the fol-
tant not to offer a package that is out of line with
lowing week. A spokesperson for the group should
what current employees are receiving. You should
briefly present the message to the class, and the in-
be creative in meeting the recruit’s needs and try to
structor will identify the most persuasive one.
keep the candidate enthusiastic about joining your
company, even if you can’t give him or her every- 4. Working alone or in small groups, use the Internet
thing requested. to research different ways two different compa-
The job candidate should try to negotiate the nies are using webcasts to communicate. Write a
best compensation package possible. You would two-page paper comparing and contrasting how
really like to take this job, but you want the best the two different companies are using the technol-
starting salary and compensation package you can ogy, and provide recommendations for how each
get. Both parties should give each other feedback company could use webcasts as a communication
on their negotiation tactics and use of nonverbal tool. The material you learned in this chapter
cues. When you have finished, switch roles and should inform your evaluation and suggestions for
negotiate again. improvement.
CASE STUDY
Electronic Monitoring
lthough employers are increasingly using technology Employees think that their bosses monitor them to
A to monitor employees at work,89 a workplace privacy
survey found a huge discrepancy between how organi-
check their productivity levels and job performance,
and because management does not trust them. Human
zations and employees view electronic monitoring. resources (HR) professionals, on the other hand, say
Case Study ■ 465
that the reasons organizations monitor employee be- e-mail or computer-use monitoring unless employees
havior are to prevent computer viruses, keep hackers have been informed of the monitoring.93
and others from interfering with business operations,
and protect the organization’s proprietary informa- DISCUSSION QUESTIONS
tion.90 Employees have become more cautious about
1. What forms of electronic monitoring would you be
Internet usage while at work because they believe that
in favor of at work? What forms of electronic moni-
their behavior may be monitored by their organiza-
toring would you be opposed to? What could your
tions. More companies are starting to block instant
manager do to make you feel more comfortable
messaging and employee access to personal e-mail ac-
with being electronically monitored?
counts to protect proprietary information.91
The survey found that HR professionals were more 2. Do you think that organizations have the right
likely than employees to agree that organizations have to monitor employees electronically? Are there
the right to monitor the use of cell phones in the work- any situations in which you think organizations
place (76 percent compared with 52 percent, respec- should not be allowed to monitor employees
tively), and that organizations have the right to search electronically?
employee desks and offices (49 percent compared with
3. How do you think electronic monitoring affects
23 percent), although overall, both groups tended to
employees’ morale?
oppose these searches. HR professionals and employ-
ees agreed that organizations should not read employee 4. What can managers do to effectively communicate
postal mail, listen to employee telephone conversa- to employees why they are being electronically
tions, and search employee desks and offices without monitored and make them more comfortable with
cause.92 Many states have enacted laws prohibiting the monitoring?
16 BUILDING TEAMWORK, COMMUNITY,
AND CULTURE
CHAPTER OUTLINE Customer-Service Representatives at Medco
Opening Vignette: Customer-
Service Representatives
at Medco
● Basics of Teamwork
M edco Health Solutions, Inc., a Fortune 50 company headquartered
in Franklin Lakes, New Jersey, is a leader in managing prescription-
drug benefit programs in the United States. Meeting client needs safely
Groups Versus Teams
Types of Teams and effectively is a priority at Medco, and it is important that its
How Groups Become Teams customer-service representa-
● Building Teamwork
tives provide high-quality ser-
Enhancing Team Effectiveness
Creating Effective Teams vice. A large part of their work
IMPROVING YOUR TEAMWORK involves answering benefits
SKILLS: Are You Emotionally
Intelligent?
questions and addressing client
Managing Now: Leading Virtual Teams needs over the telephone.
WINDOW ON MANAGING NOW: Because the work is largely
Virtual Team Technology at
Steelcase telephone-based, Medco felt
● Building Community that it could improve efficiency
Establishing Shared Goals, Values, and increase employee satisfac-
and Rules
tion by allowing some of its
PRACTICE IT: Using Technology to customer-service representa-
Build Community at Medco tives to work from home.
How Technology Enables
Challenges remained. How can Working at home can make employees more
Communities of Practice these work-at-home employees efficient and satisfied.
● Building Culture be integrated into Medco’s cul-
Does Culture Matter? ture and feel part of the Medco community? What would your team
How Leaders Create Culture
Using Intranets to Build and suggest to Medco to prevent the representatives from feeling
Maintain Culture disconnected from the rest of the company?1 ■
Technology-Assisted Culture at Xerox

➤ Explaining the difference between groups and teams.
➤ Describing the stages of team development and explaining what happens to teams
during each stage.
➤ Explaining why shared goals, values, and rules help to create organizational
community.
466
Basics of Teamwork ■ 467
➤ Explaining why organizational culture is important.

➤ Discussing how intranets can be used to reinforce organizational culture.

➤ Reading the chapter-opening vignette and identifying how the company can help
its work-from-home employees stay connected with the company’s community
and culture.
➤ Reading the end-of-chapter exercises and identifying ways to enhance feelings of
community and commitment among members of a geographically distributed team.
➤ Completing the chapter case study and identifying ways to reinforce Barclay’s
teamwork culture.

➤ Watching the video scenario and identifying characteristics of effective teams being
Online Study Center
ACE the Test exhibited by team members.
Managing Now! LIVE ➤ Watching the video scenario and identifying how the organization’s culture influenced
the employee’s behaviors and ability to work together as a team.
Some of the most important things managers do in their leadership roles are build-
ing a sense of community, creating a strong and positive culture, and organizing
effective teams. As a manager, you will definitely be working in and will probably
also need to lead teams. In the first part of this chapter, you will learn how to make
your teams more effective. Later, you will learn how to build a strong culture and
sense of community among employees.
Basics of Teamwork
Online Study Center
ACE the Test
Managing Now! LIVE O f the many trends in business, perhaps the best documented has been the
increased use of teams in organizations.2 One reason why organizations have
increasingly relied on teams is the belief that they can be more creative, respon-
sive, productive, and efficient than individuals working alone. Although few man-
agers seem to question the potential benefits of work teams,3 the fact remains that
teams often fail.4 Good teams are not the result of luck—they are a product of care-
ful planning, effective leadership, and support from the broader organization.
Companies like Hewlett-Packard use information technology (IT) to promote
effective teamwork by making it easy to express information visually and to share
files and data freely, and by promoting communication.5
Groups Versus Teams

teams: interdependent
collections of at least two
What are teams? The definition that we will use is that teams are interdependent
individuals who share a collections of at least two individuals who share a common goal and responsi-
common goal and responsibility bility for specific outcomes.6 A key part of this definition is that team members are
for specific outcomes interdependent with respect to information, resources, and skills. As tasks become
468 PART FIVE CHAPTER 16 Building Teamwork, Community, and Culture
more complex, they require greater coordination among team members. Team
members’ roles become interdependent, increasing the need for teamwork, recip-
rocal communication, and feedback. Communication and collaboration demands
group: two or more people also increase dramatically.7 A group, on the other hand, is simply two or more
interacting so that each people interacting so that each influences the other.
influences the other Companies have long used groups at work—workgroups—to help get work
done. GM uses groups of employees to install dashboard parts in new cars or to
unload trucks at the loading dock. However, such groups differ from today’s
work teams in several ways (as Table 16.1 summarizes). In general, workgroups
tend to be simply clusters of people who find themselves working together,
whereas teams tend to be more premeditated, pre-designed, self-directing, and
self-contained. In particular, group members tend to continue to focus on their
own individual goals, while team members subordinate their goals to those of
the team. Team members’ efforts tend to be highly interdependent, while group
members can do their jobs more independently. Group members tend to be
more individually accountable for their results, while team members are jointly
responsible for the team’s performance. Group members need only their individ-
ual technical skills, while team members also need team-supporting social skills
(such as in interpersonal communications and problem solving) to make the
team function effectively. Group decisions tend to be made by an appointed
leader, while team decisions tend to be self-directed and shared. Today’s teams
thus “bring to the table” a set of advantages that most employers work hard to
capitalize on.
Types of Teams
There are many different types of teams.
functional teams: teams ● Functional Teams The members of functional teams come from the same
whose members come from the department or functional area. A team of marketing employees and a team of
same department or functional finance employees are examples of functional teams.
area
cross-functional teams: ● Cross-Functional Teams Cross-functional teams have members from

teams whose members come different departments or functional areas. This is one of the most common types
from different departments or
functional areas
T ABLE 16.1
Differences Between Workgroups and Work Teams
Workgroups Characteristic Work Teams
Low Interdependence High
Individual Goals Shared
Individual Accountability Individual and group
Task Competencies Task and social
Individual/leader Decision making Shared
Fixed Leadership Shared or rotated
of work teams. An example of a cross-functional

team is a top management team with members
representing different functions or units of the
organization. Some organizations are struc-
tured so that work is done in cross-functional
teams.
For example, IDEO, a product innovation
and design company, believes that interdiscipli-
nary teamwork boosts innovation and creativity.8
Teams share and improve ideas, building on their
members’ skills and providing more opportu-
nities for problem solving. Steelcase; IDEO;
Hammel, Green, and Abrahamson, Inc.; and the
Team members at Rodel, Inc., a Delaware manufacturing firm, Mayo Clinic formed a cross-functional team that
after completing a rigorous leadership-training program aimed worked together to integrate technology to im-
at building trust, teamwork, and leadership.
prove patient care at the Mayo Clinic.9
quality circles: teams created ● Quality Circles Quality circles, or work councils, are teams established to
to solve problems and make solve problems and make improvements at work. Because employees are the ones
improvements actually doing the work, they usually know the job best. Putting employees on
teams responsible for solving problems puts this expertise to work. Quality circles
at the Paul Revere Insurance Group use computers to log, track, and share ideas
with each other.10
Suggestion teams are teams that meet to address a specific work issue such as
productivity or safety improvements. For example, Colgate-Palmolive and JM
Huber, a raw materials supplier, assembled a multidisciplinary team to identify
ways to reduce costs. The team ultimately realized savings of hundreds of thou-
sands of dollars.11 Unlike quality circles that can exist for long periods, suggestion
teams are short-lived and assembled to address specific issues.
self-directed teams: teams ● Self-Directed Teams Self-directed teams set their own goals and pursue
that set their own goals and them in ways defined by the team. Team members are responsible for tasks typi-
pursue them in ways defined by cally reserved for team leaders or managers, including scheduling work and vaca-
the team tions, ordering supplies, and evaluating their performance. At 3M, self-directed
work teams have made improvements in products, services, and processes while
increasing customer responsiveness, lowering operating costs, increasing produc-
tivity, and decreasing cycle times. Warner-Lambert, FedEx, and Silicon Graphics
also use self-directed teams.12
The General Electric (GE) plant in Durham, North Carolina, that assembles
engines for the Boeing 777 is a good example of self-directed teams.13 The plant
has one manager and 170 employees. The only company mandate for each of the
nine teams is the day their next engine must be finished. Teams make the sched-
ule, assign tasks, and deal with underperforming teammates. Teams also send
members to a work council that deals with supplier problems, computer systems,
and other issues. The manager’s job is listening, informing, focusing the teams on
costs, and representing the factory within GE and to customers.14
venture teams: teams that

operate semiautonomously to
● Venture Teams Venture teams are teams that operate semiautonomously
create and develop new to create and develop new products (product development teams), processes
products, processes, or (process design teams), or businesses (venture teams).15 Separating a team from
businesses the formal structure of the rest of the organization can enhance its innovativeness
and speed up cycle time. The classic example is the IBM team created to develop
IBM’s first personal computer (PC).16 The team had its own budgets and leader
and the freedom to make decisions without the constraints of many of the typical
IBM rules and policies.
IBM’s experience illustrates the pros and cons of venture teams. The team
successfully developed the new PC and brought it to market in less than two
years—much faster than it would have taken with IBM’s usual hierarchical,
check-with-me-first, product development approach. However, the team’s
autonomy also let it avoid IBM’s traditional requirement of using only IBM parts.
The team instead used Microsoft for the computer’s disk operation system and
Intel for its processor. This allowed Microsoft and Intel to sell these same parts to
any PC manufacturer, leading to increased competition from low-priced IBM
clones.17 Team autonomy can clearly have advantages, but appropriate controls
should hold it in check.
virtual teams: teams whose ● Virtual Teams Virtual teams are teams of geographically and/or organiza-
members are linked by tionally dispersed coworkers who communicate using telecommunications and
technology information technologies.18 Some virtual team members may never see each
other face-to-face. Many organizations use virtual teams to accomplish a variety
of goals. For example, PricewaterhouseCoopers, one of the world’s largest ac-
counting firms with over 130,000 employees in 148 countries, uses virtual teams to
bring employees from around the globe “together” for a week or two to prepare
work for a particular client. Whirlpool Corporation used a virtual team composed
of experts from the United States, Brazil, and Italy during a two-year project to
develop a chlorofluorocarbon-free refrigerator.19 You will learn more about lead-
ing virtual teams later in this chapter.
● Managing Now Virtual teams rely on IT to communicate. Bausch & Lomb

uses Documentum’s eRoom collaboration tool to bring together globally dis-
persed teams to develop new products. Each team member has immediate access
to every type of document and information in a common virtual workspace, and
project leaders and team members communicate during e-meetings via audio-
conference calls. The service provides capabilities for group edits, whiteboard ses-
sions, real-time discussions, and one-to-many presentations. In addition, users
can share their desktops and let other meeting participants access applications on
them remotely. A team’s guests can even attend meetings via a secure URL.20
global teams: face-to-face or ● Global Teams Global teams consist of members from different countries.
virtual teams whose members Global teams can be virtual or they can meet face-to-face. Procter & Gamble (P&G),
are from different countries a multinational manufacturer of family, personal, and household care products,
uses global teams to allow employees at its Cincinnati headquarters to collaborate
with employees and suppliers all over the world. Bosch und Siemens Hausgeräte
GmbH (BSH) is a global company that operates thirty-one production sites and
forty-three factories in fifteen countries in Europe, Asia, the United States, and
Latin America. The company sells household appliances under brand names
including Bosch and Siemens and uses global teams of employees from Spain,
China, and Latin America to develop technologies and concepts for new products.
How Groups Become Teams

All groups progress through a series of developmental stages before performing
effectively as a team. Many models of team development exist, but most are a
T ABLE 16.2
How Groups Become Teams
Forming : team members learn about each other and the team’s purpose, goals,
and lifespan and begin to identify each member’s strengths and potential
contribution to the team.
Storming : team members begin establishing goals, work processes, and
individual roles, and they test how the team will respond to differences among
team members and to conflict.
Norming : the team becomes more cohesive and clarifies members’ roles and
responsibilities and team goals; team processes and members’ expectations of
each other are established.
Performing : the team is cohesive and productive and makes progress toward its
goals; cohesiveness and goal commitment are high.
Adjourning : the team disbands.
variation of the basic five-stage model developed by Bruce W. Tuckman in the

1960s and refined in the 1970s.21 Teams vary in how they proceed through the
stages, but Tuckman’s stages, summarized in Table 16.2, are useful guideposts for
leaders and team members.
forming: first stage of team During the first stage, forming, team members get to know each other; learn
development in which members the team’s purpose, goals, and lifespan and begin to identify each member’s
learn about each other and the strengths and potential contribution to the team. Members typically ask the leader
team’s goals, purpose, and questions about the team’s purpose and goals, try to establish their identity in the
lifespan
team, and test what types of behaviors are acceptable. The purpose of the forming
stage of team development is to create a team with a clear structure, goals, and
roles so that members begin to trust each other and feel like a team. Managers can
facilitate this process by providing a good orientation to the team, clarifying the
team’s mission and goals, and establishing expectations about the team’s process
and outcomes.
storming: stage of team The storming stage is characterized by conflict as team members begin
development in which team establishing goals, work processes, and individual roles and test how the team will
members begin establishing respond to differences among team members and to conflict. Cognitive conflict
goals, work processes, and
focuses on work goals and processes, and affective conflict focuses on personali-
individual roles
ties and conflicts between individual group members. Cognitive conflict is a posi-
tive type of conflict, and, by addressing it, the team identifies the goals and
processes that will best work for it. Affective conflict fosters distrust and cynicism
and can undermine team effectiveness. The team leader needs to keep team mem-
bers focused on their goals, roles, and tasks to avoid members’ becoming dis-
tracted by the frustrations and conflicts developing among the team members. At
the end of the storming stage, team goals and leadership are clear.
norming: stage of team During the norming stage, the team clarifies roles and responsibilities and
development in which the team reaches agreement about team goals and processes. The team develops cohesive-
becomes more cohesive and ness as members accept their teammates’ differences and recognize that the diver-
clarifies members’ roles and
sity of member opinions and perspectives strengthens the team. Goal commitment
responsibilities, team goals,
and team processes is strong. At the end of the norming stage, team processes and members’ expecta-
tions of each other are established.
performing: stage of team During the fourth stage of team development, performing, the team has a
development in which the team shared understanding of why it is doing what it is doing; it is cohesive and produc-
is cohesive, productive, and tive, and makes progress toward its goals. Disagreements in the team are resolved
makes progress toward its goals
positively, and the focus is on goal achievement. Team members are also able to
attend to relationship and process issues that arise. As team members master their
roles, team roles may become more flexible, with members taking on various roles
and responsibilities as needed. Cohesiveness and goal commitment are high, and
the team makes significant progress toward its goals.
The performing stage is where teams hopefully become high-performing.
Even when a team has reached this stage, however, it is not the end of the team’s
development. The team needs to be able to adapt to any changes in its environ-
ment or goals. The team also needs to address membership changes—each new
member requires the team to cycle back to an earlier stage to incorporate the new
member and find ways to fill the roles left by the departing member. A team that
does not take the time to socialize a new member and modify the team’s roles and
processes does not allow the newcomer to contribute maximally to the team. If
membership and environmental changes are recognized and addressed, teams
can remain in this stage indefinitely.
● Managing Now Technology can facilitate and speed up the integration of

new team members. By keeping everything a new team member needs to know on
a website, Deloitte Consulting says that it can bring a new team member up to
speed on a project in a day or two, compared to three weeks without it.22
adjourning: fifth stage of team The fifth stage of team development is adjourning, or the breakup of the
development, when the team team. This stage is less relevant to managing and developing a team, but it is
disbands important to members who have formed an attachment to the team. Ideally, the
team is ending because it has accomplished goals and everyone feels good about
what the team has achieved. If members of the team have become friends and
enjoyed the team experience, it can be beneficial to recognize their sense of loss
and give them a sense of closure. It is also a good idea to address members’ anxi-
ety over the uncertainty of their next assignment in the organization. This is also
the time to evaluate what the team did well and what it did poorly to learn how to
make future teams more effective.
Holding a closing celebration that acknowledges
the contributions of each team member and the
accomplishments of the team as a whole formally ends
the team’s existence. It is also a good time to evaluate
the team’s processes and outcomes to identify lessons
learned that can be passed on to other team leaders.
It is important to note that the amount of time
teams spend in each stage can differ considerably.
Some teams never get out of the storming stage, while
others are able to advance rapidly to the performing
stage. Some teams may also be able to perform effec-
tively at the storming and norming stages, depending
on the nature of the task and the team members.
Although research has supported the idea that
teams tend to develop in this five-stage sequence, not
all teams do. Teams develop in different ways and at
their own speeds. It is best to consider Tuckman’s
Closing celebrations are important to members who have sequence as a general framework and not hold teams
formed an attachment to the team. rigidly to each stage.
Building Teamwork ■ 473
Building Teamwork
Enhancing Team Effectiveness
We can define “team effectiveness” in terms of three outcomes: (1) a team product
acceptable to clients, (2) growth in team capability (the team enhances its ability
to work together effectively in the future), and (3) a team experience that is mean-
ingful and satisfying for its members.23 Teams that deliver on all three of these
components are the most effective.
It is the leader’s job to create the conditions needed for a team to be successful.
Noted team expert J. Richard Hackman believes that teams perform best when lead-
ers create five conditions that allow teams to manage themselves effectively. The
five conditions he has identified as necessary for effective teams are as follows:24
1. The team must be a real team, rather than a team in name only. The team
needs to have a real team task requiring interdependence, rather than
being merely a group of individual workers. The team task must be neither too
large nor too small for the team to accomplish and find energizing. Teams
need to have the authority to manage their own work processes, and mem-
bership needs to be stable over a reasonable period. If team members are fre-
quently reassigned or quit, the team’s effectiveness is compromised.
2. The team has compelling direction. Setting direction for the team means that
the team’s leadership is insistent about the team’s goals but does not specify
how the team should go about achieving those goals. Creativity and innova-
tion are enhanced when team goals are clear, but appropriately trained team
members are allowed to decide the means.
3. It has an enabling structure that facilitates teamwork. Consistent with the job
characteristics model of motivation that you learned about in Chapter 14, a
team’s work should provide meaningfulness, responsibility, and knowledge of
results to maximize team members’ motivation. In addition, the team needs
to develop appropriate norms. Teams should also be an appropriate size and
have an appropriate mix of skills, and team members should possess the
interpersonal skills required for effective teamwork. Hackman refers to these
characteristics of the team structure as “the shell of the team . . . the shaping
structure within which (the team) comes to life.”25 He states, “[T]hose who
create teams have two quite different but equally important responsibilities:
to make sure that a team has the best structure that can be provided, and to
help members move into that structure and competently launch themselves
onto a course of their own.”26
4. It operates within a supportive organizational context. The rest of the organ-
ization’s policies and practices need to be designed to support teamwork.
For example, a reward system that recognizes and rewards individual perfor-
mance rather than team excellence is not supportive of work teams.
Information systems must provide teams with the necessary information, at
the appropriate time and in the appropriate format. Leaders must also ensure
that team members receive the training and technical assistance to acquire
needed technical and interpersonal skills. The extent to which these systems
are supportive of team efforts reflects the extent to which an organization’s
culture truly supports a team-based approach to effective operations. With-
out cultural support for teams, team efforts are not likely to be successful.
5. It has effective teamwork coaching. Acquiring teamwork skills often takes

some coaching. Leaders can promote team effectiveness by helping team
members develop the skills required to work interdependently with others.
Coaching with well-timed suggestions can influence team members’ motiva-
tion and effort, the levels of knowledge and skills that team members can
apply to team tasks, and teams’ performance strategies. Coaching efforts
should reflect the team’s stage of activity, with special opportunities for coach-
ing activities available at the beginning, midpoint, and end of task cycles.
Creating Effective Teams

In creating an effective work team, employers need to strive to do several things,
starting with creating synergy.
● Create Synergy Overall, the goal is to create synergy, which means to make
sure that the sum of the team members’ individual outputs is greater than what
any one individual’s effect would be. Process gain refers to the performance
improvements that occur because people work together rather than indepen-
dently. Process gain is the goal of teamwork—people working together doing more
and doing it better than would be possible by working alone. IT helps teams ac-
complish synergy despite the increased communication and coordination require-
ments of team-based work. Bausch & Lomb found that a Web-based collaboration
tool increased synergy by decreasing the number of meetings, giving people more
free work time to get things done.27
Unfortunately, many teams do not realize process gain and instead experience
process loss. Process loss occurs when a team of people working together performs
worse than the individual members would have if they had worked alone. Process
loss can be reduced by clarifying role and task requirements and not tolerating free
riders. Free riders don’t contribute because they rely on the work of others. Making
team roles and expectations clear helps to reduce process loss.
● Develop Cohesiveness Cohesiveness refers to the degree to which mem-

bers are attracted to and how loyal they are to the team and to each other. Mem-
bers of a highly cohesive team are motivated to stay in the team, contribute as
much as they can, and conform to team norms. Because members of teams that
lack cohesiveness are not strongly committed to the team or its goals and do not
contribute up to their full potential, team performance is compromised.28 Even
high cohesiveness can interfere with team effectiveness if it encourages the wrong
norms and goals. For example, a highly cohesive team that pursues its own goals
for having fun and socializing rather than accomplishing the organization’s goals
can actually backfire on the employer. Factors that promote cohesiveness include
a smaller team size, the experience of team success, and the effective management
of conflict. Friendly competition with other teams can also build cohesiveness.
● Create Trust Trust is someone’s confidence that another person will honor
her or his commitments, especially when it is difficult to monitor or observe the
other person’s behavior.29 Teams build trust through repeated positive experi-
ences, commitment to shared goals, and an understanding of team members’
needs, motives, and ideas. Because the lack of trust in a team can undermine any
team activity, building trust is one of managers’ most important tasks.
Mutual trust is the foundation of the entire team strategy of Team EcoInternet,
an adventure racing team. The team can progress only as fast as its current weakest
member, and because the grueling race lasts several days, every team member will
be the weakest link at one point. Team founder Robert Nagle says, “If one of us
stumbles for the second time in 10 minutes, there’s no question about what needs
to be done: Somebody reaches into that person’s pack and takes out some weight,
and then we all just move on.”30 Team members don’t feel heroic for helping each
other, nor do they feel like they’re letting the team down if they need help. Team
members trust their teammates and know that in a while, the person whose stuff
they are carrying is likely to be carrying theirs.
● Prevent Social Loafing Social loafing occurs when people put less effort
into a task when working with a team than they do when working alone.31
Research has supported the existence of social loafing,32 particularly for trivial to
moderately important tasks. Social loafing is less common with very important
tasks33 and with smaller teams.34 Social loafing occurs because team members
feel that their individual contributions will not be evaluated or because team
members expect others in the team to do tasks, so they choose not to. An opposite
behavior occurs when people actually work harder and are more motivated when
others are present than when they are working alone. This social facilitation effect
happens when people are motivated to look good to others and want to maintain
a positive self-image.
Keeping team size small, clarifying what the team expects each member to
do, and clarifying individual contributions to the team can help reduce social
loafing.35 Letting team members choose which tasks they will be responsible for
can also increase their motivation for getting them done.
roles: the behaviors and tasks ● Establish Clear Roles Roles define the behaviors and tasks each team
team members are expected to member is expected to perform because of the position he or she holds. One of the
perform because of their primary outcomes of the forming, storming, norming, and performing process of
positions
team development is the establishment of clear roles in the team. Understanding
what teammates expect you to do and what you can expect your teammates to do
reduces conflict and enables smooth team performance.
Two types of roles must be performed in any team.36 The task specialist role
keeps the team moving toward goal accomplishment and is played by people with
more advanced job-related skills and abilities. The team maintenance role creates
and maintains team harmony. Team maintenance specialists boost morale, show
concern for members’ well-being, and provide support and humor. You may no-
tice that these roles parallel the concern for people and concern for production
leadership behaviors that you learned about in Chapter 13. Any member of the
team can perform these roles, and over time, different team members are likely to
play both roles.
● Prevent Groupthink Irving L. Janis coined the term groupthink to explain

groupthink: the situation that a type of faulty decision making that he observed in groups. Groupthink occurs
occurs when decision-making when decision-making groups do not consider all alternatives, and value una-
groups do not consider all nimity rather than quality decisions.37 Janis said that groupthink can be found
alternatives and value
whenever institutions make difficult decisions, and that it reflects the triumph
unanimity rather than
quality decisions of agreement over good sense and authority over expertise. The escalation of the
Vietnam War, the debacle at the Bay of Pigs,38 and the space shuttle Columbia
disaster39 have all been used as examples of groupthink. The three conditions
Janis identified as antecedents of groupthink are (1) high group cohesiveness,
(2) leader preference for a particular decision, and (3) group insulation from
outside opinions.40
Symptoms of groupthink include the group believing it is invulnerable,

group members pressuring other group members to conform, rationalizing poor
decisions, and maintaining an illusion of unanimity.41 Self-appointed“mindguards”
who protect the group and its leader from negative information are an additional
symptom of groupthink. The Abilene paradox is a classic example of groupthink
in action:42
In a small town near Abilene, Texas, a couple and the wife’s parents are sitting
on a porch in 104-degree heat. They are engaging in as little motion as possi-
ble, drinking lemonade, and occasionally playing dominoes. At some point,
the wife’s father suggests they drive to Abilene to eat. The son-in-law thinks
this is a crazy idea but doesn’t see any need to upset the apple cart, so he goes
along with it, as do the two women. They get in their non-air-conditioned
Buick and drive 53 miles through a dust storm to Abilene. They eat a mediocre
lunch at a cafeteria and return exhausted, hot, and generally unhappy with
the experience. It is not until they return home that they learn that none of
them really wanted to go to Abilene—they were just going along because they
thought the others were eager to go.
Social pressures often create pressure to conform to group opinions rather
than expressing a different opinion and risking conflict. Using outside experts,
having a group member play devil’s advocate to question the group’s assumptions
and ideas, making it clear that all opinions are welcome, and not punishing any-
one for speaking up can help to discourage groupthink.
norms: shared rules, standards, ● Establish Positive Norms Norms are shared rules, standards, or guide-
or guidelines for team member lines for team member behavior and performance. By helping team members
behavior and performance know what to expect from each other, norms help to ensure high performance. An
example of a positive team norm is arriving to meetings prepared and on time and
participating fully. Team members comply with team norms (1) to avoid punish-
ments and receive rewards, (2) to imitate team members who they like and
admire, and (3) because they have internalized the norm and believe it is the
appropriate way to behave.43
Team norms can also be negative, such as not producing more than is required
to meet the team’s quota, not thoroughly checking product quality to save time, or
not wearing safety equipment. As team leaders, managers are influential in setting
and reinforcing team norms. Managers can help to establish positive team norms
by leading discussions about how the team can best function to achieve both the
team’s and the team members’ objectives. Clear and mutually agreed-upon norms,
work processes, and rules are important for effective teams. When a problem arises,
effective teams have an open discussion and find a solution.44
● Create Shared Team Goals High-performing teams have clear and chal-
lenging goals that all team members are committed to, and they create subgoals
and milestones against which they measure themselves. If performance is lagging,
the team quickly adjusts its behavior and processes to reach its goals.45
● Provide Appropriate Rewards Team rewards motivate effective teamwork

behaviors. Tying team rewards to team performance motivates team members to
pursue team goals rather than individual goals.46 Teams require firms to shift the
emphasis of their compensation and rewards programs from individual to team
rewards. Any remaining individual rewards should acknowledge people who are
effective team players—people who freely share their expertise and their help
when needed, and challenge their teams to improve. A system that rewards only
individual performance undermines team effectiveness. Some individual rewards
may be appropriate for rewarding particularly critical individual contributions to
the team, but the bulk of the rewards need to be made at the team level.
Southwest Airlines is an example of a company that relies heavily on cross-
functional teams and uses collective rewards such as profit sharing and stock own-
ership to promote teamwork.47 At Men’s Wearhouse, CEO George Zimmer rewards
team selling because shoppers want to have a positive total store experience. To
encourage collaboration, Men’s Wearhouse tracks the sales performance of each
so-called wardrobe consultant. Having substantially more sales than one’s
coworkers is taken as a sign that the person is hogging rather than sharing cus-
tomers. Team selling is taken so seriously that the company even terminated one
of its most successful salespeople because he refused to conform to the firm’s cul-
tural values. After the salesperson was fired, no one matched his individual sales
figures but the store’s total sales volume still increased significantly.48
● Use an Appropriate Team Size Jeff Bezos of Amazon.com feels that if you
can’t feed a team with two pizzas, it’s too big and will be hindered by bureauc-
racy.49 The insight that teams can get bogged down if they are too big is a good
one. Although larger teams technically have more resources available, members of
smaller teams are better able to interact and share information, tend to be more
motivated and satisfied, and can more clearly identify their contributions to the
team. Imagine working on a project or exercise for this class on a team of twenty-
five people versus a team of five people. It would be difficult for everyone to par-
ticipate fully and communicate effectively with each other on such a large team. A
team should be only large enough to contain the expertise it needs to get its work
done without compromising individual and team productivity. Teams should have
fifteen or fewer members, and the ideal number is about seven.
● Integrate New Team Members Over time, some team members may leave
the team or be reassigned, and the team may need additional team members to
work effectively and meet its goals. As replacement team members are introduced,
they need to be integrated and socialized.50 Leaders are critical to this newcomer
integration and socialization process. New team member integration involves
promoting shared goal commitment, creating positive feelings toward the team,
and shaping team processes. Team socialization creates effective bonds that con-
nect members to the team and its mission and helps build trust and a sense of
community. If new members are not incorporated into the fabric of the team, the
team will be less cohesive, and new members will not be able to contribute to their
full potential and will likely be less committed to the team.
● Acquire Emotional Intelligence Another characteristic that is important

emotional intelligence: for team members and team leaders to have is emotional intelligence, or the
the ability to understand and ability to understand and manage one’s own emotions and moods and those of
manage one’s own emotions and other people.51 The team leader establishes norms and maximizes collaboration to
moods and those of other ensure that the team benefits from the best talents of each member. He or she does
people this by setting a positive emotional tone; modeling appropriate behavior; and
using positive images, optimistic interpretations, and culture-building norms and
leadership styles.52 Setting the right ground rules for a team requires an emotion-
ally intelligent leader. The best leaders pay attention and act on their sense of
what’s going on in the team. This helps teams naturally develop positive norms and
I M P R OV I N G Y O U R T E A M W O R K S K I L L S
Are You Emotionally Intelligent?53
Being an effective team leader or team member requires 10. I always tell myself I am a competent person.
emotional intelligence. The following sixteen questions 11. I am a self-motivating person.
will help you to assess yourself on four aspects of emo-
12. I would always encourage myself to try my best.
tional intelligence. Answer each question honestly using
the following scale. Write the number from 1 to 7 that 13. I am able to control my temper so that I can
corresponds to your answer in the space to the left of handle difficulties rationally.
each item number. 14. I am quite capable of controlling my own emotions.
1 2 3 4 5 6 7 15. I can always calm down quickly when I am very
angry.
Strongly Disagree Slightly Neither Slightly Agree Strongly
Disagree Disagree Agree nor Agree Agree 16. I have good control of my own emotions.
Disagree
1. I have a good sense of why I have certain feelings Scoring: Add up your scores for statements 1 to 4. A
most of the time. score above 23 reflects high self-emotion appraisal and
means that you have a good understanding of your own
2. I have a good understanding of my own emotions.
emotions. Add up your scores for statements 5 to 8. A
3. I really understand what I feel.
score above 22 reflects high others’ emotion appraisal
4. I always know whether or not I am happy. and means that you are sensitive to what others are feel-
5. I always know my friends’ emotions from their ing. Add up your scores for statements 9 to 12. A score
behavior. above 22 reflects high use of emotion and means that you
6. I am a good observer of others’ emotions. are able to use your emotions to drive positive behav-
ior. Add up your scores for statements 13 to 16. A score
7. I am sensitive to the feelings and emotions of
above 23 reflects high regulation of emotion and means
others.
that you control your emotions effectively.
8. I have a good understanding of the emotions of
people around me. Source: Reprinted by permission of The Leadership Quarterly, a publication of
9. I always set goals for myself and then try my best Elsevier Science.
to achieve them.
expectations about how to work with each other.54 The U.S. Air Force and L’Oréal
use emotional intelligence to improve team performance. The Improving Your
Teamwork Skills feature will help you to evaluate and understand your emotional
intelligence. Table 16.3 contains diagnostic questions that you can use to see if you
are doing what is necessary to address some of the critical factors for team success.
Managing Now: Leading Virtual Teams

Managing virtual teams is one of the most difficult leadership challenges. It’s hard
enough to lead teams who see each other and whose members share a common
language and culture. The challenges multiply when teams go virtual and com-
municate via technology and when team members have different cultures and
life experiences.55
Virtual teams allow organizations to access the most qualified individuals for a
particular job regardless of their location, respond faster to increased competition,
and provide greater flexibility to individuals working from home or on the road. In
some cases, some members of the team may be free agents or alliance partners
rather than employees of the organization. In some teams, members may never
T ABLE 16.3
Diagnosing a Team56
1. Clear Direction Can team members articulate a clear direction, shared by all members, of the basic
purpose that the team has been organized to achieve?
2. A Real Team Task Is the team assigned collective responsibility for all of the team’s customers and
major outputs?
Is the team required to make collective decisions about work strategies (rather than
leaving it to individuals)?
Are members cross-trained and able to help each other?
Does the team get team-level data and feedback about its performance?
Is the team required to meet frequently, and does it do so?
3. Team Rewards Counting all reward dollars available, are more than 80 percent of those dollars
available to teams only and not to individuals?
4. Basic Material Resources Does the team have its own meeting space?
Can the team get basic materials needed for the work easily?
5. Authority to Manage Do the team members have the authority to decide the following (without first
the Work receiving special authorization)?
◗ How to meet client demands
◗ Which actions to take, and when
◗ Whether to change their work strategies when they deem necessary
6. Team Goals Can the team members articulate specific goals?

Do these goals stretch their performance?
Do they specify a time by which they intend to accomplish these goals?
7. Strategy Norms Do team members encourage each other to detect problems without the leader’s
intervention?
Do team members openly discuss differences in what members have to contribute
to the team?
Do team members encourage experimentation with new ways of operating?
Does the team actively seek to learn from other teams?
Source: Ruth Wageman, Organizational Dynamics. Copyright © 1997 by Elsevier Science & Technology Journals.
Reproduced with permission of Elsevier Science & Technology Journals in the format Textbook via Copyright
Clearance Center.
even meet face-to-face. Many virtual teams operate within a particular organiza-
tion, but increasingly they cross organizational boundaries as well.57 Hewlett-
Packard, Motorola, and Bank of Boston rely on virtual teams to execute their
strategies.58
● Virtual Team Leadership Skills The effective management and leadership

of teams whose members are linked by technology and whose members often
don’t see each other require unique skills and behaviors compared to managing
and leading teams located in the same place.59 Working from different locations
introduces challenges with communication, collaboration, and integration of the
team members with the rest of the team and the broader organization. When team
members rarely see each other or other employees, it can be difficult for them to
feel like part of the team and organizational community. One expert identified five
categories of important leadership skills in virtual project team or distance man-

agement situations:60
1. Communicating effectively and matching technology to the situation. Col-
laborative online tools help virtual teams manage files, meetings, and task
assignments.
2. Building community among team members based on mutual trust, respect,
affiliation, and fairness. Effective leaders solicit and value the contributions
of all team members and consistently treat all team members with respect
and fairness.
3. Establishing a clear and motivating shared vision, team purpose, goals, and
expectations. Subtle messages, such as quietly reminding someone not to
attack ideas during a brainstorming session, are powerful tools in shaping
virtual team norms.
4. Leading by example and focusing on measurable results. Effective virtual lead-
ers set clear goals and make clear task assignments. The leaders then hold
team members accountable for them.
5. Coordinating and collaborating across organizational boundaries. Virtual
team leaders need to work effectively with people in multiple organizations
and with free agents and alliance partners who are not employees of the
leader’s organization.
● Leader Behaviors The lack of face-to-face contact with virtual team mem-
bers makes it difficult for leaders to monitor team member performance and
to implement solutions to work problems. It is also difficult for virtual team lead-
ers to perform typical mentoring, coaching, and developmental functions. The
challenges for virtual team leaders are that these tasks must be accomplished
without being physically present and finding ways to empower the team to per-
form these functions itself.61
For example, members of virtual teams are usually chosen for their expertise
and competence and for their prior virtual team experience. They are expected to
have the technical knowledge, skills, abilities, and other attributes to be able to
contribute to team effectiveness and to operate effectively in a virtual environ-
ment. Thus, the need for virtual team leaders to monitor or develop team mem-
bers may not be as crucial. In addition, it is important for virtual team leaders to
distribute aspects of these functions to the team itself, in effect, making it more of
a self-managing team.62
Virtual team leaders need to provide a clear, engaging direction for the team,63
along with specific individual goals. Clear direction and goals allow team mem-
bers to monitor and evaluate their own performance.64 Although this kind of
clarity is relevant in all teams, virtual team leaders need to be more proactive
about structuring direction and goals. Virtual team leaders need to develop team
processes that become the way the team naturally behaves.
One way virtual team leaders can provide this structure is by developing
appropriate routines and procedures early in the team’s life cycle.65 Routines
create consistent patterns of behavior that occur even in the leader’s absence.
Leaders can establish routines by defining desired standard operating procedures,
training members in them, and providing motivational incentives sufficient to
ensure compliance with them. Leaders can also establish rules and guidelines that
specify appropriate team member behavior. For example, computer-mediated

communication tends to lead to more uninhibited individual behavior, such as
strong and inflammatory expressions.66 Therefore, virtual team leaders may need to
develop standard operating procedures that specify appropriate and inappropriate
computer-mediated communication. Because virtual team members are more de-
tached from the overall team environment, it is important for leaders to monitor the
environment and inform team members of any important changes.67
● Groupware and Group Decision Support Systems Synchronous and

asynchronous information technologies support members of virtual teams.68 Syn-
chronous technologies such as videoconferencing, instant messaging, and even
conference calls allow real-time communication and interaction. Asynchronous
technologies such as e-mail, wikis, and some electronic meetings delay the com-
munication of the message. Many virtual teams rely on both types of information
technology and use the one best suited to the message being communicated and
the task being performed.
Many team meetings are poorly run, take too long, and accomplish too little.
Meeting-management software can facilitate meetings by creating a record of ideas
presented, comments made, votes taken, and action items identified. It allows peo-
ple to meet while sitting at their own desks, wherever they are in the world, thus
eliminating travel expense and wasted time. Meeting-management software allows
people to contribute ideas, view other people’s ideas anonymously, and comment
and vote on them. Everybody can see everything, but because contributions can be
anonymous, it can promote greater participation and idea sharing.
Effective communication is critical for virtual teams to function well. Because
communication occurs largely through technology, team members have to diag-
nose both the verbal and nonverbal elements of team communications. Technol-
ogy can facilitate communication among virtual team members, and it can sup-
port team decision making as well. Electronic whiteboards and collaborative
document editors allow members located anywhere in the world to see where oth-
ers are pointing in a document. Revisions and comments appear on all users’
screens at the same time, and changes are tracked and saved automatically.
Document-management systems provide indexing and search-engine capabilities
to prevent companies from being overwhelmed by the proliferation of messages
created by groupware.
Instant poll capabilities allow teams to assess member opinions quickly.69
Instant messaging allows for fast, personal communication. The company in-
tranet can also contain discussion threads and a place to store shared documents.
Videoconferencing gives team members a richer medium through which to com-
municate when necessary. Technology-based meeting aids include a silent-voting
function to assess consensus among meeting participants and a raise-hands func-
tion for asking questions during a virtual presentation.
● Managing Now Using group support systems can take some getting used
to. In one hospital, teams developing plans to improve customer service tried
using group support systems instead of their usual face-to-face meetings. When
they found the technology-based meeting process uncomfortable, they reverted
to their traditional, verbal, discussion-based process. They then found the tra-
ditional processes also to be uncomfortable after their experience with the
technology and went back to using more electronic communication-based
processes.70
SOURCE: Reprinted by permission of Microsoft Corporation, Inc.
Videoconferencing is also an important component of groupware. Group

video can link meeting rooms in multiple locations, and participants can see who
is in each room, who is talking, and who has entered or left the meeting. Thus,
group video provides a virtual meeting space.
For collaboration to work well, it has to be between people, not just machines.
Management experts say that digital workspaces can’t completely replace more
traditional interactions, especially in the creative process. In-person communica-
tion can be important for training and building relationships. For example, Land
O’ Lakes builds trust and helps virtual teams resolve their problems by requiring
face-to-face meetings every quarter.71
● Managing Now The goal of the World Health Organization’s (WHO) Health
InterNetwork is to improve global public health by providing health professionals,
researchers, and policy makers in developing countries access to high-quality, rel-
evant, and timely health information using the Internet.72 WHO’s challenge is to
keep its worldwide project teams both productive and on track, while minimizing
the expense and time associated with coordinating such a global effort.
To coordinate and support its widely dispersed project teams, WHO uses
Project.net to facilitate the teams’ global collaboration. WHO invites relevant ex-
perts and consultants worldwide to participate in the project, and they then work
together in a Web-based virtual forum. Team members can participate at times
and places convenient to them; the software helps manage processes and docu-
mentation and provides tools to track and archive completed work. Using
Project.net, WHO now works with health experts in more than twenty countries on
this important health initiative for the world’s underserved populations. The
Window on Managing Now feature describes virtual team technology at Steelcase.
Building Community ■ 483
Virtual Team Technology at Steelcase
The right technology is critical to making virtual teams marking up documents and showing PowerPoint presen-
work. Office furniture maker Steelcase relies on its cross- tations within secure workspaces synchronized across all
functional, cross-office, and even cross-company virtual team members’ personal computers (PCs). Team mem-
teams to do business every day.73 To reduce travel costs bers communicate via instant messaging, chatrooms, or
and to increase team productivity and efficiency, the com- voice over Internet protocol using the virtual meeting
pany uses Groove Virtual Office software to support its tool. A meeting wizard facilitates the process of creating
virtual teams and enable them to work together as if they a meeting and inviting team members. Once a meeting is
were in the same location.74 created, any participant can easily add agenda topics, cre-
The collaboration software connects virtual teams ate action items, attach files, and record minutes.The ease
with members in locations around the world and helps of using the e-meeting software system and its many fea-
structure the meeting process. Teams can share files, tures helped to promote user acceptance.75
manage projects, and coordinate business processes by
Building Community
Online Study Center
ACE the Test
Managing Now! LIVE O ne of the most challenging aspects of managing now is maintaining a balance
between integrating technology into jobs for maximum efficiency and keeping
employees engaged and connected to the organizational community. A sense
organizational community: of organizational community develops when employees have a strong sense of
employees’ shared sense of personal connection to the mission of the organization and to their business unit.
personal connection to the How can community be enhanced in an organization in which employees are
mission of the organization and linked by technology and spend less time talking face-to-face?
to their business unit
Establishing Shared Goals, Values, and Rules

Some jobs require people to spend much if not all of
their workday interacting with technology. For exam-
ple, customer-service representatives may take orders
and answer customer questions over the Internet or
over the phone and may have face-to-face conversa-
tions with other employees only during breaks from
work. Decreasing human contact during the workday
can create feelings of detachment from work and from
the organization, leading to lower commitment and
even burnout.
What can managers do to keep employees engaged
and help them feel like part of the company’s commu-
nity? Maintaining continuous communication and
holding occasional face-to-face meetings to share infor-
mation and reinforce the employee’s personal connec-
Despite working near each other, these customer-service tion to the firm can help. In the case of telecommuters,
call-center employees spend most of their day interacting the benefits of having a shorter commute and being
with customers through technology. better able to take care of family or other needs might
offset the loss of human contact at work. Holding community events like company
picnics and parties serves a ritualistic as well as a practical purpose. At such
events, people can physically experience being part of the community and be re-
minded of the company’s culture and values. Recognition and awards given during
these events also reinforce the behaviors the company expects from its employees
and help keep them connected to the company and to their coworkers.
One of the best ways to create and maintain a sense of community is for lead-
ers to establish core sets of values that link employees to the broader organization
and work rules that ensure that all employees feel valued and respected. Firms can
help employees feel connected to the broader organization by clearly identifying,
stating, and discussing the organization’s values. Holding employees accountable
for behaving consistently with those values is also important. For example, Johnson
& Johnson is a widely distributed organization with over thirty-five global affiliates
and over 200 different operating units. Each operating unit is highly autonomous
and accountable for its individual performance. Employees’ shared values and
consistent adherence to the company’s credo help to unify these separate units
and connect them with the broader organization.76
What should managers do to build community? One expert suggests the
following:77
◗ Modeling the behaviors you want from all members by consistently demonstrating
openness, respect, and trust.
◗ Maintaining members’ self-esteem and self-confidence by demonstrating
respect for all employees and their opinions and encouraging everyone to
participate fully.
◗ Confronting issues directly and taking the initiative for improvement.
◗ Maintaining constructive relationships by respecting what is told in confidence,

keeping commitments, and admitting mistakes.
◗ Using technology such as bulletin boards, the company intranet, blogs, and wikis
to build a sense of community among dispersed employees.
communities of practice: Communities of practice are groups of people whose shared expertise and
groups of people whose shared interest in a joint enterprise informally binds them together. Examples include
expertise and interest in a joint consultants who specialize in designing training systems, or environmental engi-
enterprise informally binds neers willing to share their knowledge and insights with other environmental
them together
engineers. A community of practice may or may not meet regularly or even in per-
son. The people involved in a community of practice share their knowledge and
experiences in open, creative ways that can create new solutions and approaches
to problems.78 The company intranet can cultivate a sense of community and
employee loyalty.
For example, The St. Paul Companies is a global organization providing insurance
products and services. It understands that its success depends on the expertise of its
people. Because it is a global company, it needs extensive knowledge-sharing activ-
ities to ensure that employee expertise is consistent around the world. Through their
intranet site, called the Knowledge Exchange, employees use a variety of tools and
processes for online virtual communities. These communities allow The St. Paul
Companies’ employees to network with each other and to share their expertise to
solve work problems.79 The Practice IT feature presents another example.
PRACTICE IT
Using Technology to Build Community at Medco80
Medco Health Solutions needs to ensure that its work- through a video camera on top of each computer, and
at-home customer-service representatives (CSRs) do not they can monitor what CSRs type on their keyboards and
feel disconnected from the Medco community and cul- discuss with customers. Managers then use this informa-
ture. The CSRs are given a preconfigured workstation to tion to give CSRs performance feedback. Managers also
use in their home offices. Medco uses various tools and take great care to stay in touch with their staff by includ-
technology to ensure that its CSRs can do their jobs ing them in communications and celebrations. Team meet-
effectively and still feel part of Medco’s community. For ings are also held that require the work-at-home CSRs to
instance, CSRs have e-mail and instant-messaging capabil- come onsite, see each other face-to-face, and learn what
ity and can also talk with their supervisor via phone or is happening in the business.
webcam. Also, some of Medco’s CSRs can participate in Rather than feeling disconnected from the rest of the
virtual meetings using Internet and webcam technology. company, technology has helped the work-at-home CSRs
Karin Princivalle, Medco’s senior vice president of human actually feel more committed to the company. Kenny
resources, says, “We’re always conscious of the fact that Klepper, Medco’s president and chief operating officer,
they’re working alone, and we want to make sure they feel says,“Never before have I done something that delivered
part of Medco and our culture.” such employee satisfaction and business results. The
Medco places an especially high priority on keeping work-at-home CSRs are more productive than our on-
work-at-home CSRs connected to their supervisors and site CSRs and have a lower attrition rate.” Medco’s sur-
the corporate resources needed to perform their jobs. veys of its CSRs have found no sense of disconnection
For example, if a CSR needs assistance, he or she can with the rest of the company. In fact, in focus-group dis-
quickly instant message or videoconference with a super- cussions, employees report feeling less stressed, healthier,
visor or technical support staff member and receive an and even more committed to the company. The work-at-
answer while the client is still on the phone.Time is also home program has been so successful that soon more
scheduled for CSRs to watch videotaped presentations than half of Medco’s over 2,500 customer-service repre-
about company issues via the company intranet. sentatives will work from home.
CSRs may work from home, but they are far from
isolated. Managers can see the work-at-home CSRs
Successful managers cultivate communities of practice by identifying and

bringing the right people together, building trust among community members,
and providing an infrastructure that meets the group’s needs.81 The heart of a com-
munity of practice is the web of relationships among community members, and
much of the communication occurs in one-on-one exchanges. Every phone call,
wiki posting, and e-mail exchange strengthens members’ relationships and builds
the community.
As a manager, how would you create the conditions that enable communities
of practice to flourish? Here are some experts’ tips:82
1. Start with a clear area of business need. Think about how communities of prac-
tice can help the company. Build communities that help the company work
more effectively. For example, Hewlett-Packard’s Work Innovation Networks
are a means of focusing effort on developing a creative approach to a current
problem.83
2. Start small. Test ideas and try several formats to see what employees like and
what works best. For example, any Hewlett-Packard business can create a
network. A business announces itself as the host for a series of presentations,
conferences, and seminars on a topic it is currently striving to understand.
An invitation is broadcast to the rest of the company, and if employees
respond, then the subject area takes on a life of its own in a community of
practice.84
3. Recruit management involvement. If lower-level employees see their bosses
actively participating in the community, they are more likely to participate
as well.
4. Use technology that supports the community’s needs and that community
members are comfortable using. Manufacturing employees who do not have
computer access will be unable to participate in a technologically mediated
community of practice, even if they would like to. Providing computer kiosks,
installing computer workstations in break rooms or lunchrooms, and sched-
uling computer time for employees allow them to participate. Some training
in using wikis, portals, or other technologies may also be necessary. Some
companies, including Ford Motor Company and Delta Airlines, have even
provided home computers and Internet connections for employees for a very
low price.
5. Respect and build on informal employee initiatives already under way.
Employees may have already created a type of community of practice to help
them do their jobs better. Understand what is already in place and working,
and build on it. Employees will already be somewhat familiar with the
processes and practices of the community and thus will be more willing to
use it.
6. Celebrate contributions and build on small successes. Building a community of
practice takes time and requires employees to behave in new ways. Highlight
on the company intranet or in the company newsletter ways that the commu-
nity has solved business problems, and recognize employees who have mean-
ingfully contributed.
● Managing Now Communities of practice can be located in a single com-

pany or span companies. Technology is critical in facilitating communities of
practice that involve people who work for multiple firms. Community home-
pages on the Internet can link to forums and electronic communities where
employees can share ideas, news, and documents with like-minded colleagues.
These pages can then link to other discussion forums, technical libraries, and
other resources.
One example of a non-company-specific community of practice is IEE Net-
works for Engineers (http://www.iee.org/oncomms/sector/index.cfm), which
describes itself as “[a] community for the growth and exchange of knowledge in
engineering and technology.” Their website contains various communities in elec-
tronics and electrical engineering, discussion forums, an online library, and article
archives.
A key driver for investing in communities of practice is their ability to transfer
knowledge among people—organizations such as IBM, HP, and Unisys even prefer
to call them knowledge networks. In the knowledge economy, organizations need
their employees to become knowledge workers who constantly draw on their
SOURCE: © 1998–2007 Knowledge Networks, Inc. All rights reserved.
expertise to respond to a rapidly changing market. Employees need to be able to

participate in a flow of knowledge that consists of not only written and online
information sources but also the active exchange of ideas with others who have re-
lated experience and skills.85 The Window on Managing Now feature describes
communities of interest:
groups that bring together
how technology enables communities of practice.
stakeholders from different Communities of interest bring together stakeholders from different com-
communities of practice to solve munities of practice to solve a common problem. They can be thought of as com-
a common problem munities of communities or a community of representatives of communities.86

How Technology Enables Communities of Practice
IT helps companies improve the flow of information to questions and help with problems by using their
through communities of practice. For example, Ericsson InTouch system. Peter Day, InTouch program manager,
Canada pools the talent of its geographically dispersed em- credits the program with “$200 million in cost savings and
ployees by using a Web system. Employees can ask ques- revenue in 2001, along with a 95 percent reduction in the
tions and quickly get answers over the company’s intranet. time required to solve difficult operational problems and
The company is experimenting with six communities of a 75 percent decrease in the time necessary to update
practice—four in face-to-face meetings and two online.87 engineering modifications.”88 Technology helps communi-
Schlumberger oilfield services engineers can quickly ties of practice become valuable resources for real-time
reach out to other Schlumberger employees for answers help and information.
T ABLE 16.4
Communities of Practice, Formal Workgroups, Project Teams, and Informal Networks89
What’s the What Holds How Long Does
Purpose? Who Belongs? It Together? It Last?
Community of To develop members’ Members who join Passion, commitment, As long as there
Practice capabilities; to build the community by and identification with is interest in
and exchange their own decision the group’s expertise maintaining the
knowledge group
Formal To deliver a product Everyone who Job requirements Until the next
Workgroup or service reports to the and common goals reorganization
group’s manager
Project Team To accomplish a Employees assigned The project’s Until the project
specified task by senior milestones and has been
management goals completed
Informal To collect and pass Friends and business Mutual needs As long as
Network on business acquaintances people have a
information reason to connect
Source: Reprinted by permission of The Harvard Business Review.
An example of a community of interest is a group of citizens and experts in envi-

ronmental health who are interested in cleaning a polluted river. Communities of
interest are characterized by their shared interest in the framing and resolution of
a specific problem, and as a result, they are more temporary than are communities
of practice. Once the project they came together to do is finished, the community
of interest dissolves. For example, the Linux community set up a new kind of work
model in which a temporary, self-managed group of diverse individuals created a
new computer operating system.
By bringing together people from across an organization and even outside it
who are able to contribute to a problem or project, organizations can both per-
form better and enhance the feeling of community among employees. Members
of a community of practice or a community of interest expand their network of
relationships in the organization by participating in the community. Those rela-
tionships continue even after a project has ended and a community of interest has
disbanded. Table 16.4 summarizes the characteristics of communities of practice,
formal workgroups, project teams, and informal networks.
Building Culture Online Study Center

ACE the Test
Managing Now! LIVE
organizational culture:
a system of shared values and
norms that guide members’
O rganizational culture is a system of shared values and norms that guide
members’ attitudes and behaviors.90 Common organizational culture themes
or emphases include innovation, stability, being casual or formal, having a people
attitudes and behaviors orientation, having an orientation toward outcomes or results, valuing attention
to detail, and having a collaborative or team orientation.91 An organization’s
culture is reflected in how it gets work done and how employees interact with
each other. In many ways, culture is like the organization’s personality because it
Building Culture ■ 489
influences the way employees behave. If a company’s culture is inconsistent with

its business strategy, the culture will win no matter how great the strategy is.92
Does Culture Matter?

Noted culture researcher Edgar Schein states, “Organizational culture is the key
to organizational excellence . . . and the function of leadership is the creation and
management of culture.”93 Research has shown that by actively managing
culture, an organization and its employees will be more likely to deliver on the
organization’s strategic objectives over the long run. In particular, culture boosts
organizational performance when it (1) is strategically relevant, (2) is strong, and
(3) emphasizes innovation and change.94
A company’s culture should reinforce its business strategy. A good example is
seen in the way Acadian Ambulance Service in New Orleans responded after
Hurricane Katrina hit in the fall of 2005. Employees from medics to mechanics,
some of whom had lost their homes, quickly began delivering supplies, cooking,
and keeping generators working. By the weekend, over 5,000 patients and about
11,000 hospital staff and family members were evacuated. Ross Judice, M.D.,
Acadian Ambulance Service’s medical director said, “Acadian’s culture has always
been to ‘Get the job done’ . . . Things happen because you have good people want-
ing to do good things who have the leadership and the motivation to do it. We saw
a need and stepped up. That happened over and over again.”95
Organizational cultures can be strong and highly determinant of employees’
performance, or weak. Strong cultures can enhance organizational performance in
two ways. First, they improve performance by energizing employees—appealing
to their higher ideals and values and rallying them around a set of meaningful,
unified goals. Because they are engaging, these cultures stimulate employee com-
mitment and effort.96
At Quicken Loans, CEO Bill Emerson believes that “[g]reat companies create
a culture where everyone believes we’re all in this together and together we
can accomplish anything.” He and chair and founder Dan Gilbert spend an en-
tire day of new employees’ orientation discussing the company’s culture and
philosophies.97
Second, strong cultures improve performance by coordinating employees’
behavior. Shared values and norms focus employees’ attention on company prior-
ities and goals that then guide their behavior and decision making without
impinging, as formal control systems do, on employee autonomy. This makes
strong cultures particularly helpful for dealing with changing environments.98
Cultures can reinforce both positive and negative norms. When a culture is
strong, it pushes employees to engage in behaviors that reinforce the firm’s values
and culture, whether good or bad. What ruined Enron? Accounting shenanigans is
the easy answer. But underlying many of its problems was a culture that pushed
for visible results and individual performance above all. An emphasis on consis-
tent earnings growth and individual initiative, combined with the absence of the
usual corporate checks and balances, tipped the culture to one that reinforced
unethical corner cutting.99
Most managers’ training prepares them well to set the business strategy and
ensure that the organization’s capabilities are in line. Changing an organization’s
culture is harder to learn in school and takes personal involvement. The leader has
to define the culture to support the strategy, consistently behave in ways that
demonstrate the culture, explain the culture to employees so they understand why
it is critical, and then hold him- or herself and others accountable for maintaining
T ABLE 16.5
Evaluating an Organization’s Culture100
1. Observe the physical surroundings. Pay attention to how employees are
dressed, how open the offices are, what type of furniture is used, and what is
displayed on the walls. Signs warning of prohibited activities can also provide
information.
2. Sit in on a team meeting. Observe how employees treat each other and how
open the conversation is. Are there obvious differences in how different
employees are treated?
3. Listen to the language. Do you hear a lot of talk about customer service and
ethics? Or do you hear more emphasis on meeting targets and making the
numbers?
4. Note to whom you are introduced and how they act. Is the person formal or
casual, serious or laid back? Do you feel you’re being introduced to everyone
in the unit or only to a few select employees?
5. Get the views of outsiders, including vendors, customers, and former employees.
Do these sources of information describe the organization as bureaucratic and
frustrating to deal with or open and flexible and a positive and engaging place
to work?
it. It can be very time-consuming to create and maintain a strong organizational

culture. Nevertheless, organizations like GE, Nordstrom, Southwest Airlines, and
Google didn’t earn their success by letting their cultures happen accidentally.
How Leaders Create Culture

Changes in strategy, technology, and organizational structure all trigger a need for
changes in employees’ attitudes, behaviors, values, and skills. These changes can
require changes in the organization’s culture to reinforce these new employee
behaviors and values. The first step in changing a firm’s culture is to understand its
current culture. Table 16.5 can help you assess an organization’s culture.
Managers can shape culture. Steelmaker Nucor Corporation uses symbolic
gestures to build and reinforce their strong culture. For example, every single
employee’s name is listed on the front cover of the company’s annual report.101
How can leaders create, maintain, and/or change an organization’s culture?
Here are some tactics several experts recommend:102
◗ Develop a clear sense of mission and values about what the company should be,
and communicate it to employees through what you pay attention to, measure,
and control.
◗ Select employees who can share, express, and reinforce the desired values and
thus help build the desired culture. Steelmaker Nucor Corporation protects its
culture by making cultural compatibility a key issue in acquiring other compa-
nies. In visiting companies it is interested in acquiring, Nucor pays careful atten-
tion to how plant managers and employees interact.103
◗ Use daily routines and concrete actions and behaviors to demonstrate and
exemplify appropriate values and beliefs. For example, Wal-Mart employees are
Building Culture ■ 491
constantly reminded of the company’s cost-control culture. A Wal-Mart vice

president responsible for billions of dollars’ worth of business even has his
visitors sit in mismatched, cast-off lawn chairs likely left behind as free samples
during a sales call.104
◗ Consistently role-model behaviors that reinforce the culture. For example, Wal-
Mart CEO Lee Scott and chief financial officer Tom Schoewe each earn millions
of dollars a year. But on business trips, the two regularly share a modest hotel
room. “Sharing rooms is a very symbolic part of what we do,” Scott says. “It’s also
an equalizer. If I’m asking the district managers to share a room, but I won’t share
a room with Schoewe, then what am I saying? There are two different standards
here? The customer is the most important thing for all of you, but for me I think
I’ll run a different standard.”105 Leaders set the culture, and employees learn
what behaviors and attitudes are appropriate from their leaders’ behaviors.
◗ Make your human resource management procedures and criteria consistent
with the desired values and culture. Communicate your priorities in the way you
reward employees. Linking raises and promotions to specific behaviors commu-
nicates leaders’ priorities. When Lou Gerstner became chair and CEO of IBM, he
reinforced his performance focus with new performance appraisal and compen-
sation systems. Toyota, a company whose culture values teamwork and high
quality, has selection and training processes that emphasize employee teamwork
and quality orientations.
◗ Nurture traditions and rituals that express, define, and reinforce the culture.
Awards and recognition ceremonies, having the CEO address new employees
during their orientations, and reciting stories of past company successes can all
define and reinforce a firm’s culture.
● Managing Now Business research firm Dun & Bradstreet’s formal telework
program requires employees to put in at least three to six months in an office
before embarking on a remote work program. Time in the office for the Murray
Hill, New Jersey–based company lets managers assess employees’ strengths,
weaknesses, and work habits in person. Employees also experience the company’s
unique corporate culture and work ethic firsthand. Working in the same place also
allows team members to get to know one another before embarking on an e-mail
and phone-based relationship.106
Using Intranets to Build and Maintain Culture

Being virtual challenges an organization’s identity and culture, particularly when
the company relies on free agents or alliances with other firms that have their own
cultures. It is hard for virtual employees to become familiar with an organization’s
culture. It is also harder for the organization to reinforce its cultural values. This
situation has important implications for employee identification with the organi-
zation and for the ability of managers to manage organizational identities.107
By building and fostering a sense of community among employees, intranets
can help reinforce an organization’s culture. An organization’s culture can vary
across divisions and even across managers. Ask people who work in different parts
of a large company to describe its culture and you may well get different answers.
Intranet-based web pages can help to foster more consistency. Because work-
groups develop their own subcultures, intranets help to build a common cultural
foundation that can help unify employees in different units and locations around
common company values. This keeps people connected to the broader organization
and also promotes consistency in how employees behave and make decisions.
The key issue for organizations is not about using the latest information tech-
nologies but about leveraging the right technologies for creating and maintaining
a culture of trust, openness, relationship building, and information sharing. An or-
ganization’s intranet strongly reflects its culture. Intranets can reflect and influ-
ence a firm’s culture through:
1. Their scope. Intranets with a narrow scope can reinforce a culture of secrecy
and information hoarding. Intranets that contain information on a variety of
topics and links to other useful sites such as human resources, company news,
industry news, blogs, wikis, bulletin boards, interviews with company leaders,
and performance indicators reflect a culture of openness and teamwork.
2. Their openness to employee feedback and contributions. Intranets that contain
feedback tools, ways of easily communicating feedback on the intranet that
will actually be considered, and features that allow employees to contribute
reflect a participative culture that values employee contributions. A more cen-
tralized, heavily edited and filtered site reflects a culture in which information
flows less freely and employee contributions are less valued.
3. The frequency with which they are updated. Intranets that are rarely updated
are not likely to influence the company’s culture and can reflect a culture that
does not value employee contributions, does not value individual contribu-
tions, and has poor attention to detail. Lucent updates its intranet multiple
times a day, if appropriate. It also posts two weekly feature articles that rein-
force the strategic vision and positioning of the company to entice employees
to visit multiple times each week.
4. The number of intranets. Does the company have one intranet or several, each
serving different groups of employees? For example, some organizations have
one intranet for its sales force and another, completely different one for its
research and development (R&D) group.
5. The use of symbols, stories, and ceremonies. Because symbols, stories, and cer-
emonies express a company’s culture, intranets can convey news of events
affecting the organization, messages from CEOs, and announcements of
employees’ awards programs.

Technology-Assisted Culture at Xerox
Creating a culture that supports sharing and helping other “the 50,000 solution tips that have been entered into the
employees can have big business results. Technology can knowledge base, all on a purely voluntary basis, in ex-
make that type of culture possible. For example, Xerox change for contributors’ being recognized. What we have
gave 25,000 field-service engineers access to a knowledge- learned is the importance of creating a work environment
sharing system that engineers can consult during sales with a culture and incentives that are conducive to shar-
calls. The system led to a nearly 10 percent savings on ing, and to support that environment with improved work
parts and labor, worth $15 to $20 million per year. Dan processes and strong technology.”108
Holtshouse, director of knowledge initiatives, talks about
Each intranet design reflects a different type of organizational culture, and in

turn reinforces the firm’s culture by controlling the flow of information and estab-
lishing norms of behavior. The Window on Managing Now describes how Xerox
uses technology to reinforce its knowledge-sharing culture.
CHAPTER SUMMARY
1. Groups and teams differ in terms of members’ 6. It is the leader’s job to create the five conditions
competencies, interdependence, and accountabil- needed for a team to be successful.
ity; the degree to which goals and decision-making
7. Leading virtual teams requires different skills and
responsibilities are shared; and whether leader-
behaviors than does leading face-to-face teams.
ship is fixed or shared.
8. Shared goals, values, and rules help to create organ-
2. Organizations use different types of teams to ac-
izational community.
complish different goals. Some teams meet face-
to-face, some are virtual, and some are comprised 9. Communities of practice can help organizations
of members from around the world. build a sense of community among employees and
help the organization leverage the knowledge of all
3. The five stages of team development are storming,
of its employees.
forming, norming, performing, and adjourning.
10. Strong, positive organizational cultures can en-
4. Team effectiveness is influenced by team mem-
hance organizational performance by energizing
bers’ trust, cohesiveness, shared goals, and team
employees and helping to coordinate their
rewards.
behavior.
5. Synergy can be realized when the team as a whole
11. Leaders play an important role in creating and
performs better than its individual members
maintaining organizational culture. Intranets can
would have performed working separately. Syn-
also be used to reinforce an organizational culture.
ergy is reduced by process loss, social loafing, and
avoiding conflict resolution.
1. Think about a time you were on a high-performing 6. What might you do differently as a leader of a vir-
team. What made the team function so well? Link tual versus a face-to-face team?
your answers to the material you learned in this
7. How do you think that working on a virtual product
chapter.
development team would be different from work-
2. Think about a time you were on a team that per- ing on a face-to-face team? Do you think that the
formed poorly. What could have been different characteristics you identified would help or hurt
that would have allowed the team to perform bet- the team’s performance? Why?
ter? Link your answers to the material you learned
8. Do you think that it is important for employees to
in this chapter.
feel a sense of community at work? Why or why
3. What do you think are the three biggest threats to not?
team performance? Why?
9. Why is organizational culture important to organi-
4. What do you think are the most important skills for zations? What would happen if a company let its
leading a team? Why? culture develop on its own and did not try to proac-
tively shape or influence it?
5. Think about a time when you interacted with a
team leader who you thought was very effective. 10. Do you think that the increasing use of IT and the
What did she or he do that made the team so effec- Internet strengthens or weakens organizational
tive? Link your answers to the material you learned culture? Why?
in this chapter.
1. Working alone or in a group of three to five stu- c. How has IDEO created both an organizational
dents, read the following description of work culture and a sense of community among mem-
teams at IDEO, the Palo Alto, California, industrial bers of smaller workgroups?
design company that helped create the Swiffer 2. Assume that members of your group of three to five
Quick Flick, Apple mouse, and Palm V handheld students are each business strategy consultants
computer. Then answer the following questions. who know each other from college. You have de-
Be prepared to share your answers with the class. cided to form an alliance to better serve each of
your clients and increase business. You each work
Teamwork is the name of the game at IDEO,
in different towns in the same state but are at least
with over 350 employees located around the
an hour’s drive from each other. How will your
world. The company has built its success on
group create a sense of community among each of
getting employees to work in teams, to share
your members so that you each feel like committed
ideas, and to build on them. Employees at each
members of your team? How might technology
location are broken down into “studios” with
help you create a sense of community and en-
their own names and themes. IDEO promotes
hance your ability to work as a team?
the establishment of group identity by holding
outside retreats, and uses a bonus system based 3. Imagine that you are about to start working on a
on company performance, the studio, and the semester-long class project in a team of five stu-
individual to reinforce teamwork. Studios dents. What can your team do to ensure that it per-
adopt their own names and themes, including a forms well? What should your team watch out for
“Lost Horizon” theme that has the studio nes- as signs that the team might be underperforming?
tled under a DC-3 wing and another made to Think about what you learned from reading this
look like a supper club complete with velvet chapter and your past experiences working in
curtains. A project often starts with a brain- teams as you develop your answers.
storming session to encourage the free flow of 4. This exercise should be completed out of class in
ideas. Project team members then develop ex- groups of three to five students. Your assignment is
tensive prototypes to test and refine their use the Internet to research the values and culture
ideas.109 of an organization chosen by your group. Then
write a two-page report describing two aspects of
a. If you were a manager in charge of facilitating
the organization’s culture that you feel are positive
teamwork at IDEO, what would you do to help
and two aspects that are negative. Then identify
the teams work even more effectively?
what you would do to improve the culture if you
b. What types of managerial skills do you think are were the company’s top management team. Be
most important for IDEO teams? prepared to share your answers with the class.
CASE STUDY
Improving Teamwork at Novartis
ovartis is a global pharmaceutical and consumer for Novartis’s Clinical Development & Medical Affairs
N health company headquartered in Basel, Switzerland,
employing over 75,000 employees in over 140 coun-
division, states, “In an organization the size of Novartis,
everything relies on communication.”111 Members of
tries.110 Feedback from associates to management at the clinical teams responsible for testing new products
Novartis showed that performance was being compro- are located around the world, and cultural and lan-
mised by poor communication and a lack of coopera- guage barriers are only part of the teamwork challenge.
tion within teams. Annette Schirmer, global account Because insufficient information was flowing through
manager within Pharmaceutical Development Training the teams, the teams were having trouble identifying
Case Study ■ 495
priorities, planning, and making timely decisions. This improved communication and work processes in the
resulted in critical issues not being addressed. The lack teams have led to faster problem solving, smoother
of face-to-face contact in some of the global teams decision making, and faster product development
required skills that team members lacked. times.113
Novartis knew that team synergy was critical to its
short- and long-term success and wanted to take ac-
tion. One of the first things Novartis did was create a DISCUSSION QUESTIONS
team-building training program. The training topics
included remote and virtual team building, cultural di- 1. What were the main issues compromising team
versity, matrix organizations, global talent, and global effectiveness at Novartis?
structure in large organizations. A variety of team- 2. Besides training, what should Novartis do to
building exercises required good leadership and team- improve teamwork in these teams?
work and simulated real pressure.112
The program was a success. Teamwork was en- 3. If you were the leader of a team at Novartis, what
hanced, communication was improved, and team would you do to maximize the effectiveness of your
member interactions were friendly and more common, own team? Be sure to take into account your own
even for team members located around the world. The leadership and teamwork styles and preferences.
17 MANAGING TRUST AND
COLLABORATION
CHAPTER OUTLINE Saturn Corp.
Opening Vignette: Saturn
Corp.
● Building Trust and
Collaboration
S aturn has always built its repu-
tation on giving car buyers an
outstanding service experience.
Information Technology, Collaboration,
and Trust Part of that experience means
What Is Collaboration? making sure that when customers
Why Collaborate?
bring their cars in for service, the
● Examples of Collaborative
Efforts dealer has the required parts in
Supply Chain Management stock.The problem is that most
Alliances
Virtual Teams
retailers aren’t great at inventory
● Collaboration Technology
planning.1 But if the parts aren’t
Types of Collaboration Technology there, it’s Saturn, not just the
Why Use Collaboration Technology? dealer, who the customers blame.
Challenges in Implementing
Collaboration Technology The question is,What can Saturn
and its dealers do to make sure Saturn and its dealers needed some way to
● How to Improve
make sure the parts their customers required
Collaboration the parts are definitely on hand were definitely on hand when customers
Factors in Promoting Collaboration
Guidelines for Collaborating
when customers need them? ■ needed them.
Successfully
WINDOW ON MANAGING NOW: B E H AV I O R A L O B J E C T I V E S
Solectron Corp.
● Building Trust
Trusting Behaviors Show that you’ve learned the chapter’s essential information by
PRACTICE IT: Saturn’s Technology
Aids Its Customers and Dealers
➤ Explaining, with examples, why using information technology often depends on trust.
The Trust-Building Process ➤ Using examples to define collaboration and collaboration technology.
WINDOW ON MANAGING NOW: ➤ Explaining why supply chains rely on collaboration and trust.
Customer Relationship Management ➤ Listing and giving examples of the seven C’s of collaboration.
Collaboration at Audi ➤ Listing at least five trusting behaviors.

➤ Reading the end-of-chapter exercises and explaining how to promote collaboration.
➤ Reading the chapter case study and explaining why the employees need to collaborate
and how you would go about developing trust in that situation.

➤ Watching the video scenario and making recommendations on ways to improve trust and
collaboration in the company.
Online Study Center
ACE the Test ➤ Watching the video scenario and identifying appropriate types of collaborative technology
Managing Now! LIVE to maximize the opportunities for collaboration.
496
Building Trust and Collaboration ■ 497
Building Trust and Collaboration

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Managing Now! LIVE A new website service, Yodlee, recently went online. Yodlee lets users store all
their financial information online, on its website. This gives users a sort of
one-stop shop for keeping track of and accessing everything financial—all their
credit-card balances, frequent-flyer miles, checking accounts, and stock invest-
ments, for instance. Want to check that Visa bill from last June? Just open the
Yodlee website, access your account, and all the details are there. The site is easy to
navigate and use, and, perhaps best of all, it’s free.2
What’s the catch? Nothing, except that to make this site work, you need to give
it all your financial information, including checking and savings account num-
bers, credit-card numbers, mutual fund accounts, and frequent-flyer accounts—
as well as all the passwords for each. That way, Yodlee automatically and continu-
ally accesses all those accounts to compile the information you can then use on
the Yodlee website.
Information Technology, Collaboration, and Trust

As with much of the information technology–based world today, using Yodlee
depends on trust. When we type our credit-card information into Amazon’s website
to make a purchase, we trust that Amazon’s system will keep this information
secure. When we buy a car with a GPS navigation system like General Motors’s
OnStar, we trust that someone in the company is not tracking our every move.
When we make phone calls using our digital phones, we trust AT&T and the others
not to share the details of our conversations with the government. And when
we type search terms into Google, we trust Google not to tell the government what
we were searching for. E-commerce, as we know it, as well as just about every in-
formation technology (IT) device we use depends on trust.
SOURCE: © 2006 Yodlee, Inc. All rights reserved.

498 PART FIVE CHAPTER 17 Managing Trust and Collaboration
Similarly, when retailers such as Target enter into collaborative supply chain
relationships with Levi’s and Procter & Gamble (P&G), each partner needs to trust
the other, for instance, with the confidential details of their stores’ demand for
various products. When Xerox Corp. asks its repair personnel to input their repair
experience into its new knowledge database, the repair personnel need to trust
that Xerox won’t use this information to phase out these same employees. When
Boeing formed an alliance with suppliers and others to collaborate online in
designing its 787, it trusted those alliance partners to keep the plane’s details confi-
dential. Trust and collaboration underpin almost everything companies do today.
Nonprofit organizations and governments also rely on collaboration. For ex-
ample, Microsoft Corp. recently donated $41 million in technology and cash to
several humanitarian agencies to foster collaboration and communication.3 The
aim is to help these agencies use technological solutions to collaborate more
effectively in responding to tragedies. Thus, the online Guatemalan Humanitarian
Center now provides a central clearinghouse for the agencies involved in the relief
efforts after mudslides in that country.
The American Management Association polled 461 of its members and cus-
tomers about the executives’ main concerns. Sixty percent of the executives cited
lack of collaboration as their main leadership challenge. Balancing priorities
(56 percent) and motivating workers (40 percent) ranked second and third,
respectively.4 In this chapter, we’ll focus on how managers improve collaboration
and trust.
What Is Collaboration?
collaboration: working Collaboration means working together cooperatively to achieve some aim in an
together cooperatively to atmosphere of teamwork, group effort, trust, and goodwill. Collaboration is not an
achieve some aim in an either/or situation; instead, collaboration can range from informal, loose, ad hoc
atmosphere of teamwork,
relationships to formal arrangements. Figure 17.1 illustrates this. The informal
group effort, trust, and goodwill
networks we discussed in Chapter 10 cut across the company’s hierarchical and
horizontal boundaries and achieve, through collaboration, what the company
might not achieve as well in another way. Three small contracting, design, and
architecture firms might informally agree to collaborate and to submit a proposal
for a new building. When the client accepts their design, the three formalize their
F IGURE 17.1
Collaboration Can Range from Informal to Formal
INFORMAL FORMAL
Creation of
federal structure
in which Merger of
Loose network Limited Agreement Agreement
participating participating
Form of of informal, agreement to undertake to constitute
bodies agree bodies into
Collaboration ad hoc to share activities formal
to devolve single
relationships information jointly governing body
upward some organization
of their
autonomy
SOURCE: Adapted from Helen Sullivan and Chris Skelcher, Working Across Boundaries (New York: Pelgrave, 2002), p. 43. Reprinted by permission.
Building Trust and Collaboration ■ 499
collaborative arrangement with a partnership agreement and perhaps choose

one or two people from each of their firms to lead the effort.5
However, collaboration in business today often blurs the distinctions among
things like contractual, networked, and partnership approaches to collaborating.
For example, Toyota creates its supply chain using a relatively few trusted suppli-
ers. Price is not the sole or even the main concern. Other factors, including the
partners’ abilities to deliver quality products on time under continuous improve-
ment requirements, are more important. Supply chains like these rely on several
types of collaboration. For example, legal agreements lay out certain require-
ments. Networked employees throughout the supply chain informally interact to
keep the supply chain humming. And gluing all this effort together is a sense of co-
operatively working together to achieve some aim in an environment of team-
work, group effort, trust, and goodwill.6
Why Collaborate?
Individuals or companies collaborate when they see that they can’t achieve their
objectives with their own resources. Collaboration “aims to secure the delivery of
benefits or added value which could not have been provided by any single [entity]
acting alone or through the employment of others.”7
Companies collaborate more today because of the complexity of doing busi-
ness in a world that depends on systems like supply chains. As one expert on col-
laborative efforts summarizes, “We are living at a time when organizations cannot
succeed on their own.”8 Collaboration is a recognition of the fact that the chal-
lenges facing companies, communities, and even countries today are so “complex
in scope and scale as to require the involvement of a range of actors with comple-
mentary perspectives, expertise and resources.”9
Sometimes, even competitors need to collaborate.
Ford, General Motors, and DaimlerChrysler created a
joint purchasing website where suppliers come to
match their products to America’s big three auto com-
panies’ needs.
New United Motor Manufacturing Incorporated
(NUMMI) is a classic example of competitive collabora-
tion. A number of years ago, General Motors and Toyota
collaborated in managing an automobile factory in
California. The factory, in Fremont, California, was
formerly one of GM’s worst in terms of grievances and
productivity. GM wanted to find out more about the
Toyota way of manufacturing. Toyota wanted to learn
more about marketing cars in the United States.
NUMMI automobile factory in Fremont, California. NUMMI helped these competitors work together to
achieve what neither could do as well alone.
Sometimes companies collaborate to share risk, for example, in undertaking a
project that may be too large for either partner to handle. Efficiency is another rea-
son. Companies like Dell use their supply chains to squeeze more efficiency from
their suppliers and transportation systems. They do this by making the transac-
tions among the participants digital and seamless: “. . . in the current digital econ-
omy, organizations gain competitive advantage through collaborative commerce
(C-Commerce) and by sharing information and synchronizing transactions in the
collaborative network of value chain partners.”10 And in such situations, sharing
information and knowledge, and therefore trust, between trading partners is a
necessity.11
Examples of Collaborative Efforts

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Managing Now! LIVE
I n this section, we’ll review a sampling of the modern techniques we discussed
earlier in this book that rely on collaboration and trust. These techniques
include supply chains, strategic alliances, and virtual teams.
Supply Chain Management

Supply chains grind to a halt without collaboration and trust, since they rely on the
partners’ willingness to share information, knowledge, and decision making. For
example, companies like Dell must be comfortable exchanging information such
as demand forecasts and sales data with its supply chain partners. This enables
those partners to make their plans and to ensure that they’ll have the components
Dell needs, when it needs them. Supply chain partners also exchange knowledge.
For example, Toyota routinely shares its knowledge about improving manufactur-
ing processes with its supply chain partners, on the assumption that all the part-
ners gain when any of them improves. Supply chain partners must also be willing
to exchange the right to make decisions. For example, Levi’s tracks jeans sales in
each Target store through supply chain systems tied to
each store’s point-of-sale computer. Levi’s then makes
the restock decision for each store itself, a process sup-
ply chain managers call vendor-managed inventory.12
Creating successful supply chains therefore re-
quires building deep supplier relationships. The basic
requirement for doing so is to learn as much as possible
about suppliers and to share best-practice knowledge
with them. The following quote provides an example:
“Unlike most companies we know, Toyota and Honda
take the trouble to learn all they can about their suppli-
ers. They believe they can create the foundations for
partnerships only if they know as much about their
vendors as the vendors know about themselves.”13
Figure 17.2 summarizes six rules for building such
Supply chain partners must also be willing to exchange the relationships. These rules include engaging in joint
right to make decisions. For example, Levi’s tracks jeans improvement activities, sharing information, and
sales in each Target store through systems tied to each store’s exchanging best practices with suppliers. The rules as-
point-of-sale computer. sume an atmosphere of collaboration and trust.
Alliances
alliance: a relationship An alliance “is a relationship between separate companies that involves joint con-
between separate companies tributions and shared ownership and control.”14 (We discussed strategic alliances
that involves joint contributions in Chapters 3 and 7.) Companies enter into alliances when they believe that doing
and shared ownership and
so beats the other two basic options. One option is simply to enter into a legally
control
binding agreement. The problem here is that legal agreements usually don’t, by
themselves, provide enough incentives for the sort of collaborative innovation
that a fast-changing situation may require.15 The other option is a merger or
acquisition to obtain the required resources. However, the permanence here may
be too expensive or too risky.
Strategic alliances have three characteristics.16 First, “All alliances are agree-
ments between two or more separate firms that involve ongoing resource
Examples of Collaborative Efforts ■ 501
F IGURE 17.2 THE SUPPLIER-PARTNERING HIERARCHY
Rules for Supplier Partnering Conduct Joint Improvement Activities

■
Exchange best practices with suppliers.
■
Initiate kaizen projects at suppliers’ facilities.
■
Set up supplier study groups.
Share Information Intensively but Selectively

■
Set specific times, places, and agendas for meetings.
■
Use rigid formats for sharing information.
■
Insist on accurate data collection.
■
Share information in a structured fashion.
Develop Suppliers’ Technical Capabilities

■
Build suppliers’ problem-solving skills.
■
Develop a common lexicon.
■
Hone core suppliers’ innovation capabilities.
Supervise Your Suppliers

■
Send monthly report cards to core suppliers.
■
Provide immediate and constant feedback.
■
Get senior managers involved in solving problems.
Turn Supplier Rivalry into Opportunity

■ Source each component from two or three vendors.
■ Create compatible production philosophies and systems.
■ Set up joint ventures with existing suppliers to transfer
knowledge and maintain control.
Understand How Your Suppliers Work

■
Learn about suppliers’ businesses.
SOURCE: Jeffrey Liker and Thomas Choi, ■
Go see how suppliers work.
“Building Deep Supplier Relationships,” ■
Respect suppliers’ capabilities.
Harvard Business Review, December 2004, ■
Commit to coprosperity.
p. 108. Reprinted by permission of The
Harvard Business Review.
contributions from each to create joint value.”17 Contributions include, for

instance, technology, staff, capital, and customers. Second, the nature of most
alliances is that the parties cannot completely specify and agree to all the details of
their relationship in advance. As a result, all alliances have a third characteristic,
namely, “joint decision-making to manage the business and share the value.”
● Ten Suggestions for Creating Alliances Based on one study of strategic

alliances, two researchers make the following suggestions for creating successful
alliances:18
1. Don’t do it unless you have to. Working with other organizations is inherently
difficult and resource consuming. Unless you can see the potential for real
collaborative advantage (that is, you can achieve something really worthwhile
that you couldn’t otherwise achieve), it’s more efficient to do it on your own.
2. Budget a great deal more time for the collaborative activities than you would
normally need.
3. Don’t set up an alliance and then delegate the task of making it work to junior
staff. Alliances need to be continually nurtured by you or your most able and
committed staff.
4. Remember that the other organizations involved are unlikely to want to
achieve exactly the same goal(s) as you. Be prepared to compromise.
5. Try to begin by setting yourselves some small, achievable tasks. Build up
mutual trust gradually through achieving mutual small wins.
6. Pay attention to communication. Beware of your own company jargon and
professional jargon and try to find clear ways to express yourself to others who
do not share your daily world. If partners speak in ways that do not make
sense, don’t be afraid to seek clarification.
7. Don’t expect other organizations to do things the same way you do. Tasks that
may be easy to do in your organization may require major political maneuver-
ing in another.
8. Ensure that those who have to manage the alliance are sufficiently briefed
so that they can act with a high degree of autonomy. They need to be able to
react quickly and contingently without having to check back with the parent
organizations.
9. Recognize that power plays are often a part of the negotiation process. Under-
standing your own source of power and ensuring that your partners do not
feel vulnerable is a valuable part of building trust.
10. In summary: always be sensitive to the needs of, and constraints on, your
partner(s). Then, with commitment, determination, and stamina, you can
achieve the advantages that derive from collaboration.19
Virtual Teams
As we explained in Chapter 3, virtual teams are groups of people who work
together interdependently, using information technology to communicate and
collaborate over long distances. Developing trust in virtual teams is no easy mat-
ter. In teams that meet face-to-face, members can build trust by spending time
with each other and by “sharing meals, discussing personal matters, and socializ-
ing outside work.”20 Given the distances involved and the limited opportunities for
face-to-face interaction, building trust in virtual teams presents some special
challenges. The problems can be especially challenging when people from differ-
ent cultures comprise, for instance, a global virtual team. For example, many peo-
ple in Asia are more comfortable with rich, face-to-face communications where
they can see the context of what is being said, while many Americans are comfort-
able simply zipping orders and suggestions around the world by e-mail. Based on
the virtual teams used by one successful online company, we can draw the follow-
ing conclusions about establishing trust in virtual teams:
1. Establish trust based on performance consistency (doing what you are
supposed to do, when you are supposed to do it) rather than on social bonds.
2. Remember that rapid responses to virtual teammates foster trust.
3. Establishing norms for acceptable communication patterns is key. For
instance, each party should know how to contact each other, when to expect
the response, and so on.
4. Team leaders need to play important roles in reinforcing timeliness and con-
sistency of team interaction.21
Collaboration Technology ■ 503
Collaboration Technology
E veryone collaborates today thanks to information technology. We use instant
messaging via cell phones to plan and organize meetings, file-sharing web-
sites to share and download music, and e-bulletin boards to work on team projects
for school. At work, management makes extensive use of collaboration technology
to help their companies compete more effectively. Companies use videoconfer-
encing to facilitate communications of geographically dispersed members of work
teams. For example, we saw that the team that developed the Boeing 787 made ex-
tensive use of videoconferencing for meetings with engine suppliers and airlines
around the world to discuss the new aircraft’s design. Hewlett-Packard’s new life-
size Halo Collaboration Studio makes videoconferencing so clear that talking to
meeting participants via this technology makes it look as if they’re actually there.
Collaborative writing systems let group members create long written documents
(such as proposals) interactively, while working sepa-
rately at interconnected computers.
The Internet powers much of the new collaborative
technology. For example, a typical $100 million build-
ing project produces about 150,000 technical drawings,
legal contracts, and other such documents. These doc-
uments can run up millions of dollars in reproduction,
storage, and shipping costs.22 By using online collabo-
rative software from Citadon Corp., everyone involved
Hewlett-Packard’s new life-size Halo Collaboration Studio in a project, including owners, contractors, and archi-
makes videoconferencing so clear that talking to meeting tects, can receive instantaneous updates on design
participants makes it look as if they’re in the room with you. changes and construction status.
Types of Collaboration Technology

collaboration technology: Collaboration technology is “all types of information and communication tech-
any technology, such as instant nologies that enable collaboration at various levels, from two persons co-authoring
messaging and e-bulletin a document to inter-organizational collaboration, where several companies are
boards, that supports
engaged in common tasks.”23 Examples include desktop conferencing, knowledge-
collaboration by facilitating
several types of collaborative management databases, online meeting scheduling systems, and the devices that
tasks support virtual teamwork. Business information technology experts refer to these
technologies collectively as collaborative commerce or c-commerce.
Figure 17.3 on page 504 shows one way to classify types of collaboration tech-
nology. For example, employees meeting at the same place and at the same time
can use electronic meeting systems to improve group problem solving. Those
meeting at the same place (say, within the same building) but interacting at differ-
ent times can use e-mail and electronic bulletin boards. Virtual teams working
from different locations but at the same time can use videoconferencing. Those
same people working at different times can use e-mail, calendar and scheduling
systems, and electronic bulletin boards.
Why Use Collaboration Technology?

Collaboration technology supports collaboration by facilitating several types of
collaborative tasks. Collaboration requires communication, and these devices
enable interpersonal communication through audio, video, or textual means.
Collaboration requires information sharing, and technologies such as e-bulletin
Same Time Different Time

F IGURE 17.3
Classifying Collaboration ■
E-mail
Same Place
Technology ■
Document management systems
■
Electronic meeting systems ■
Calendar and scheduling systems
■
Workflow management systems
■
Electronic bulletin boards
■ E-mail
Different Place
■ Audioconferencing ■ Document management systems

■ Videoconferencing ■ Web-based team/project rooms
■ Data conferencing ■ Calendar and scheduling systems
■ Instant messaging ■ Workflow management systems
SOURCE: Bjorn Munkvold, Implementing ■ Desktop conferencing ■ Electronic bulletin boards
Collaboration Technologies in Industry
(London, England: Springer, 2002), p. 9.
Reprinted by permission of Springer-Verlag.
boards make it easier to create and manipulate shared information. Collaboration

also requires coordination (for instance, arranging to have everyone online at the
same time for a virtual meeting), and these technologies facilitate coordination
(via online calendaring, for example).24
Figure 17.4 summarizes collaboration technology tools by purpose. Most of
these tools are self-descriptive. “Shared information space technologies” (like
document-management systems and electronic bulletin boards) support collabo-
rative work by making it easier to produce and manipulate information such as
documents and drawings.25 Workflow-management systems help automate work
processes by routing information among project employees according to a prede-
termined sequence; the idea is to make sure each person has the right information
at the right time. For example, when Banc One reengineered its mortgage ap-
proval loan process, the new teams used a workflow-management system to move
F IGURE 17.4 Main Categories Examples of Technologies
Categories of Collaboration Communication technologies E-mail

Technology, by Purpose Instant messaging
Audio- and videoconferencing
Shared information space Document management systems

technologies Web-based team/project rooms
Data conferencing/application sharing
Electronic bulletin boards
Meeting support technologies Electronic meeting systems
Coordination technologies Workflow management systems

Calendar and scheduling systems
SOURCE: Bjorn Munkvold, Implementing Integrated products Collaboration product suites, integrated team
Collaboration Technologies in Industry (London, support technologies, e-learning technologies
England: Springer, 2002), p. 10. Reprinted by
permission of Springer-Verlag.
Collaboration Technology ■ 505
applications from loan approval to loan processing to credit approval. Integrated

collaborative technology products like Lotus Notes provide several collaboration
supporting services (such as communication, shared information, and virtual
meeting support) simultaneously.
Challenges in Implementing
Collaboration Technology
Installing collaboration technology and getting employees to use it are two differ-
ent things. Gaining employees’ acceptance of the new systems is crucial. However,
managers face several challenges in doing so, challenges that would not normally
arise when installing noncollaborative, single-user systems such as e-mail. (In
fact, failure to gain employees’ acceptance to the new technology is one reason
why about half of all business process reengineering projects fail to produce the
expected results.) It’s not necessarily that installing systems like Lotus Notes didn’t
produce some gains; it did, but often there was no corresponding improvement in
interpersonal or organizational collaboration.26
Figure 17.5 summarizes the challenges in implementing collaborative sys-
tems. For example, groupware applications (like Lotus Notes) can require extra
effort. Employees may have to invest extra time in reporting and maintaining in-
formation for use by other team members. Collaborative systems can also disrupt
existing social processes. For example, they cut across department lines and so
can suffer from interdepartmental infighting.27
Managers can take steps to avoid the problems and thereby improve the
chances for successful implementation. The following are indicative of the condi-
tions under which these technologies are most likely to fail:28
◗ There is no clear need for improved collaboration.
◗ The implementers do not define a clear need for collaboration before imple-
menting the system.
F IGURE 17.5 1. Disparity between work and benefit: Groupware applications often require additional
work from individuals, who do not perceive a direct benefit from the use of the application.
Challenges in Designing and
Implementing Collaboration 2. The critical-mass problem: If the groupware doesn’t attract the critical mass (number)
Technology and Groupware of users required to be useful, the system won’t achieve its aims.
Systems
3. Disruption of social processes: Groupware can lead to activity that violates social taboos
and threatens existing political structures or in some other way motivates users who are
critical of or threatened by its success.
4. Exception handling: The groupware may not accommodate the wide range of exceptions
and improvisations that a particular group’s activity requires.
5. Difficulty of evaluation: It is difficult to meaningfully evaluate the improvements in

collaboration that the new system produces, which in turn could detract from its
acceptability.
SOURCE: Adapted from Bjorn Munkvold, 6. The adoption process: Groupware can require more careful implementation and/or
Implementing Collaboration Technologies in introduction in the workplace than other types of computer-based systems, given the
Industry (London, England: Springer, 2002), additional challenges of getting teams of people to use it to work together collaboratively.
p. 32. Reprinted by permission of
Springer-Verlag.
F IGURE 17.6 1. Clearly identify communication problems.
Suggestions for 2. Effectively match computer system solutions to existing problems.

Implementing Colloboration
Technology 3. Provide education that demonstrates a positive impact on the employees’ workday.
4. Provide step-by-step training on unfamiliar features.
5. Encourage top management to use the new system.
6. Provide follow-up support to encourage system use.

SOURCE: Bjorn Munkvold, Implementing
Collaboration Technologies in Industry 7. Troubleshoot system problems quickly to avoid premature rejection.
(London, England: Springer, 2002), p. 38.
Reprinted by permission of Springer-Verlag.
◗ Users do not understand the new technology.
◗ Sufficient training in the underlying collaborative technology is not provided.
◗ The organizational culture does not support collaboration.
◗ Limited information is available to the users prior to the implementation, result-

ing in confusion and uncertainty about how to use the technology.
◗ Taking a top-down approach to implementing the new system, rather than getting
the participants involved, alienates the employees who are supposed to use it.
Figure 17.6 lists suggestions for implementing collaboration technology.
These suggestions include clearly identifying the communication problems ahead
of time, providing education and training that demonstrate a positive impact on
the workday, and troubleshooting the systems’ problems quickly to avoid prema-
ture rejection by the users.
How to Improve Collaboration

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Managing Now! LIVE M anagers can take several steps to build and maintain collaboration. We will
discuss these steps next.
Factors in Promoting Collaboration

Research shows that building and maintaining collaboration depends on several
factors. Collaboration usually does not emerge spontaneously. Therefore, it
requires, first, having people who are adept at seeing the linkages that need to be
made and at bringing people together, for instance, by acting as catalysts to build
relationships and to convene meetings.29 Trust is an essential ingredient. A basic
level of trust between the parties is “essential both to begin a collaborative venture
and to sustain and deepen the collaboration over time.”30 Collaboration also re-
quires leadership: “the ability to develop and communicate a persuasive vision of
the future and a strategy for achieving that [collaborative] vision.”31
Building collaborative relationships also means overcoming some very real im-
pediments to collaboration. For example, in agreeing to collaborate, the participants
How to Improve Collaboration ■ 507
necessarily lose some of their independence; they must

also invest the time and effort in building the collabora-
tion, with no guarantee that the investment will pay off.32
Overcoming these obstacles requires, as one expert says,
creating a “normative environment for collaboration.”
In other words, don’t try to adopt collaborative tools or
kick off a project that requires collaboration unless the
people who’ll have to collaborate share cultural values
like trust, openness, and communication.33
Collaboration also depends on having the right
attitudes and inclinations toward dealing with people
and conflicts. Figure 17.7 summarizes these factors. For
example, when the employees involved in the collabo-
ration have open minds, respect for the other’s position,
and commitment to carrying out the solution, conflict
is less likely to arise. Conversely, hidden agendas, emo-
tions, and a “me only” mentality will trigger conflict, not
collaboration.
Guidelines for Collaborating Successfully

One series of collaboration studies focused on strategic alliances between non-
profit organizations and corporations. The researcher concluded that building
and maintaining effective collaboration depends on what he calls the seven C’s
of collaboration, shown in the following checklist:34
◗ Connect purpose and people
— To what extent are the individuals personally and emotionally connected

to the purpose of the collaboration?
— What level and what quality of interaction exist among senior leaders?
— To what extent do personal connections and interactions occur at other
levels across the organizations?
— How strong are interpersonal bonds?
F IGURE 17.7 Open Closed
Attitudes and Behaviors ■

Open minds ■
Hidden agendas
During Conflict ■
Respect for the other’s position ■
Emotions
■
Defining the problem up front ■
“Me only” attitude
■
Cooperation ■
Assumptions
■
Commitment to a solution ■
Fixed conclusions
■
Willingness to meet others’ needs ■
Positionalism
■
Compromise ■
Personal attacks
■
Win-win possibility ■
Lack of communication
■
Commitment to excellence ■
Lack of information
■
Objective ■
Lack of listening
■
Better rapport ■
Misstating facts
■
No personalization ■
Personality conflicts
SOURCE: John Glaser, Leading Through
■
Lots of listening and communication, plenty ■
Defensiveness
Collaboration (Thousand Oaks, Calif.: of information ■
Old history comes into play
Corwin Press, 2005), p. 24. Reprinted by
permission of Corwin Press.
◗ Clarity of purpose
— What is the purpose of the collaboration?

— Do both partners have written collaboration purpose statements?
◗ Congruency of mission, strategy, and values
— How well does each partner understand the other’s business?

— What are the missions, strategies, and values of each partner?
— What are the areas of current and potential overlap?
— How can each partner help the other accomplish its mission?
— To what extent is the collaboration a strategic tool for each partner?
— Have the partners engaged in shared visioning about future fit?
◗ Creation of value
— What resources of each partner are of value to the other?

— What specific benefits will accrue to each partner from the collaboration?
— Do benefits outweigh costs and risks?
— What new resources, capabilities, and benefits can be created by the
collaboration?
— Are benefits equitably balanced between the partners?
— Is it time to end the collaboration?
◗ Communication between partners
— What level of respect and trust exists between the partners?

— Is communication open and frank, and is critical communication
constructive?
— How is communication between the partners managed?
— Does each partner have a partner relationship manager?
— What channels and vehicles are used to communicate internally?
— Are there potential dissenters, and can they be converted?
— How does the alliance communicate externally?
— Do the partners have a coordinated external communication strategy and
program?
◗ Continual learning
— What has each partner learned from the collaboration about how to work
with another organization more effectively and how to create greater
partner and social value?
— How has this learning been incorporated into the collaboration?
— Is there a process for routinely assessing learning from the collaboration?
— Is complacency stifling innovation?
◗ Commitment to the partnership
— What is the level of organizational commitment to the partnership, and

how is this commitment demonstrated?
How to Improve Collaboration ■ 509
— What is the trend in investments (personal, financial, institutional) in the

partnership?
— Are the partners’ expectations of each other high?
— Are partner expectations and commitments commensurate with execu-
tion capabilities?
The Window on Managing Now feature shows how one alliance applied these
ideas.

Solectron Corp.
Solectron Corp. is a leading example of supply chain often heavily based on satisfying measurable performance
integration.35 The company started out as a contract criteria.These rules include:
manufacturer, handling the manufacturing overflow from ◗ Base relationships on a foundation of performance metrics,
companies such as Hewlett-Packard and Sony. During the information, and formal contracts. Otherwise, collabora-
1990s, as companies began outsourcing more of the activ- tors’ styles, approaches, and relationships will tend to
ities in which they did not have a core, strategic compe- vary widely, and performance will be unpredictable.38
tence, Solectron was well placed to take on more of this
◗ Use a supplier scorecard. Every quarter, Solectron eval-
work. It was already providing world-class manufacturing
uates 100 of its most important, preferred suppliers on
and had twice won the Malcolm Baldrige award for qual-
a number of metrics, including price, terms and condi-
ity in manufacturing.
tions, quality, and on-time delivery.39 Solectron sends a
Solectron gradually took on more and more of their
copy of this review to the supplier and then holds
customers’ design, manufacturing, and distribution respon-
meetings with the suppliers to identify and discuss any
sibilities. Soon, it became what some referred to as a
issues they need to address.
global supply chain facilitator, “that is, a company that can
◗ Formalize relationships. While supply chain relationships
manage the entire supply chain.”36 As such, Solectron now
rely on trust and collaboration, Solectron does not do
handles “all the actions, processes, and relationships nec-
business based solely on handshakes. Solectron reduces
essary to turn a great idea into a product—and to keep it
informal agreements to formal contracts, even though
in great working condition for the end-user . . . [f]rom the
“every day things get negotiated outside a contract. Life
time a product is conceived all the way through repair and
is compromise and negotiation.”40
end-of-life.”37 Today, when you get a new Motorola or
other cell phone, chances are Solectron (or one of its ◗ Offer suppliers several ways to provide feedback, so that
competitors, such as Flextronics) made it. the review process is not one way. For example, Solec-
To make their systems work, supply chain facilitators tron has a supplier council, whose purpose is to enable
like Solectron must collaborate closely with their suppli- suppliers to provide their perspective on emerging
ers. Furthermore, they must do this in an increasingly trends and best practices to Solectron and to other
competitive industrial environment, with changing busi- suppliers.
ness conditions across countries and cultures. Solectron ◗ Encourage the use of standardized processes and prac-
follows several rules in building the sorts of strong, col- tices. This “helps make suppliers’ jobs easier and im-
laborative supply chain relationships it requires. Its rules proves the effectiveness of Solectron’s procurement
underscore the fact that in collaborative efforts, trust is processes . . . .”41
F IGURE 17.8 Phase Action Step
Building Trust and PHASE I: ■

Promote a strategic vision of supply chain collaboration
Collaboration at Selectron Setting the Stage through written and spoken words and actions.
Corporation ■
Develop an organizationwide infrastructure that supports
collaboration through:
■
Information systems and metrics
■
Contracts
■
Standardized practices
PHASE II: ■
Find partners with compatible performance-based cultures.
Getting Started with ■
Management actively and visibly supports projects by:
Specific Projects ■
Developing trust and taking visible risks
■
Providing autonomy to participants
■
Put the right people in the right place:
■
Create liaison roles
■
Link the liaisons in collaborative pairs
■
Fill liaison roles with people who have good lateral skills
(that is, people who can communicate across geographical
and functional cultures, provide customer service and
more, demonstrate integrity, and inspire trust)
PHASE III: ■
Adapt preexisting governance and management practices to
Creating the Infrastructure specific projects (for example, by creating an account
management team and providing lots of autonomy to
on-site participants).
■
Develop and use performance metrics for strategic and
political purposes (for example, as early indicators of
success to build support).
PHASE IV: ■
Establish norms for communicating across cultures and
Doing the Work organizations by using liaisons to establish and teach norms
and by sharing information.
SOURCE: Don Mankin and Susan Cohen,
■
Build relationships through travel and face-to-face interaction.
Business Without Boundaries (San Francisco, ■
Learn from doing.
Calif.: John Wiley and Sons, 2004), ■
Go for early wins.
pp. 136–137. Copyright © 2004. Reprinted
by permission of John Wiley & Sons.
Figure 17.8 summarizes what the Solectron way of doing things tells managers
about how to build collaboration across the supply chain and in other, similar sit-
uations. For example, Solectron set the stage for effective collaboration by invest-
ing the time in promoting a strategic vision and culture that support collaboration
across the boundaries between Solectron and its suppliers and customers. Solec-
tron not only made it clear what its strategic vision as a supply chain facilitator was;
it also created a culture that helped make collaboration possible (including values
such as consistency, metrics, and systems) and developed an infrastructure that
supports collaboration, for instance, in terms of its supply chain systems and per-
formance metrics.
Building Trust ■ 511
Building Trust
Online Study Center
ACE the Test
Managing Now! LIVE S everal years ago, the Harvard Business Review brought together a panel of
supply chain management experts. Most agreed that while information sys-
tems and technology are important for supply chain management, supply chain
effectiveness actually depends on more subjective considerations. One partici-
pant said:
[T]rust is the basis of agility, of flexibility. Yet it’s an incredible challenge to
establish trust, and maybe even harder to maintain it . . . But it’s important. As
the world gets more complicated, when I sell a product, I may be selling a solu-
tion that requires input from 45 companies. How do they get along with each
other? If suppliers don’t trust each other, the customer will be whipsawed. Also,
trust enables you to make fast decisions, which lets you be more innovative
and get rid of unproductive work. Trust is a competitive advantage.42
trust: a person’s belief and Trust is a person’s belief and confidence in the goodwill of others, and the
confidence in the goodwill of conviction that their actions will be consistent with the group’s goals.43 As one re-
others, and the conviction that searcher says, trust “is the essential intangible aspect of the effect of alliances, the
their actions will be consistent
interpersonal webbing that ties organizations together and facilitates considered
with the group’s goals
action.”44 The Practice IT feature illustrates this concept at Saturn Corp.
Trusting Behaviors
Research sheds light on the specific behaviors people need to exhibit to build
trust. These behaviors include:
◗ Integrity—honesty and truthfulness.45
◗ Competence—technical and interpersonal knowledge and skills.
PRACTICE IT
Saturn’s Technology Aids Its Customers and Dealers
Having the right part in stock was a big factor in a car collaborative inventory system in two ways. First, it
buyer’s customer experience. Knowing that, Saturn and showed them over time how effective it could be. For
its dealers came up with an innovative, collaborative solu- example, the average Saturn dealer now turns over or uti-
tion. Saturn, with its dealers’ agreement, took over the lizes its inventory about 7.5 times per year, versus the
entire dealership inventory planning and forecasting job. industry average of 2.5 times. That means a lot more
Saturn installed its own supply chain system to track the profit from each dollar invested in inventory for Saturn
inventory at every dealer. dealers. Second, Saturn won its dealers’ trust by assuming
Letting Saturn implement that solution took consid- part of the risk. If a customer wants a part and it’s not
erable trust on the dealer’s part. Inventory is a very ex- available, Saturn gets the part from another dealer and has
pensive and profitable category for all dealers: stock too it delivered overnight. At Saturn Corp., trust and collabo-
much and profits go down; don’t stock enough and you ration meant superior customer service and better prof-
upset customers. Saturn won its dealers’ trust for its itability for both the dealers and for Saturn.46
◗ Consistency—reliability, predictability, and good judgment in handling situations.
◗ Loyalty—willingness to protect and save face for a person.
◗ Openness—willingness to share ideas and information freely.47
◗ Community—willingly offer materials and resources to help the team move

ahead.
◗ Respect—recognize the strengths and abilities of others.48
◗ Cooperation—behave cooperatively, and put oneself in the other person’s position.
◗ Dependability—partners “promise cautiously, and then keep their promises.”
The Trust-Building Process

Although collaboration requires trust, the parties’ initial position may well be one
of suspicion rather than trust.49 Trust building therefore generally involves starting
small and following a process, such as the process shown in Figure 17.9. First, the
parties need to have enough trust to be willing to take the first, initial steps in col-
laborating. They start working together, aiming for realistic but initially modest
outcomes. Their success then reinforces mutual trust. These new attitudes then
encourage the participants to pursue more ambitious, collaborative projects. The
Window on Managing Now feature helps to illustrate this concept.
F IGURE 17.9
The Trust-Building Loop
Reinforce Gain underpinnings

trusting for more ambitious
attitudes. collaboration.
Aim for realistic

(initially modest)
but successful
outcomes.
Form expectations
Have enough trust;
about the future of
SOURCE: Chris Huxham and Siv Vangan, be willing to be
the collaboration
Managing to Collaborate: The Theory and vulnerable and
based on reputation
Practice of Collaborative Advantage (London take a risk to
or past behavior
and New York: Routledge Taylor and Francis initiate the
or contracts and
Group, 2005), p. 68. Copyright 2005. collaboration.
agreements.
Reproduced by permission of Taylor &
Francis, Inc., http://www.routledge-ny.com.
Customer Relationship Management Collaboration at Audi50
We saw in Chapter 5 that customer relationship manage- Audi is working effectively with its dealers to over-
ment (CRM) systems help the company manage all the come this. For one thing, it is building trust among the
processes involved with interacting with customers, such dealers in its network by showing them the long-term
as taking orders, answering technical questions, and send- benefits of sharing customer data with Audi. As the
ing bills. For example, when a customer calls with a prob- head of Audi’s customer and dealer systems put it, “[I]n
lem, Dell’s customer relationship management system using CRM, our goal is to help facilitate more relevant
shows the technician what system the customer owns. interactions between dealer and customer, to help deal-
Audi is using its customer relationship management ers sell more cars.” For example, Audi showed its deal-
systems and effective management practices to collabo- ers how they could create more complete customer
rate with its dealers and thereby improve the Audi cus- profiles and thereby generate more effective marketing.
tomer’s experience. The National Auto Dealer Associa- Audi is also building trust by emphasizing customer data
tion estimates that 50 to 70 percent of the approximately privacy and security. With the new system, “consumers
22,000 car dealerships in the United States engage in specify to the dealer at the point-of-sale whether or
some form of customer relationship management. How- not they want their information used, and whether the
ever, the potential collaboration between manufacturer dealer, Audi, or both can have access.” Audi also out-
and dealer still faces several challenges. For example, even lines its formal data privacy policies in its contracts with
with CRM, manufacturers like Audi often don’t have full consumers and dealers, and Audi does not sell its
access to their dealers’ customers’ data. So even though consumer list.
firms like Audi have sophisticated decision support sys- The bottom line is that by building trust based on
tems that could use this data for predicting things like integrity and competence, Audi AG built a collaborative
local marketing program effectiveness, the manufacturers relationship with its dealers, one that enables both sets of
and dealers can’t fully get at or utilize the data. partners to compete more effectively.
CHAPTER SUMMARY
1. Using most types of information technology own resources. Collaboration “aims to secure the
devices requires trust. Similarly, collaborative sup- delivery of benefits or added value which could not
ply chains require that each partner trust each have been provided by any single entity acting
other, for instance, with the details of their stores’ alone or through the employment of others.”
demand for various products.
5. Many of the modern techniques we discussed in
2. Collaboration means working together coopera- this book rely on collaboration and trust. Supply
tively to achieve some aim in an atmosphere of chains rely on collaboration and trust because the
teamwork, group effort, trust, and goodwill. Col- partners must feel comfortable to exchange infor-
laboration is not an either/or situation, but instead mation, knowledge, and their right to make deci-
can range from informal, ad hoc relationships to sions, as in vendor-managed inventory situations.
formal arrangements.
6. An alliance is a relationship between separate com-
3. Modern collaborative supply chain relationships panies that involves joint contributions and shared
blur the distinctions between types and levels of ownership and control. Companies enter into al-
collaboration because they depend on a range of liances when they believe simple legal agreements
collaborative behaviors, from informal, ad hoc don’t provide enough incentive for the required col-
day-to-day interactions to formal, contractual laborative innovation and when they believe a
agreements. merger or acquisition is too expensive or risky.
4. Individuals or companies collaborate when they 7. Ten suggestions for creating alliances include:
see they can’t achieve their objectives with their don’t do it unless you have to; budget sufficient
time; don’t delegate work to junior staff; be pre- clear need for improved collaboration, users do
pared to compromise; begin with small tasks; pay not understand the new technology, or the organi-
attention to communication; don’t expect others to zational culture does not support collaboration.
do things the same way you do; ensure that those 12. Building and maintaining collaboration depends
managing the alliance have the required knowl- on several factors. These factors include having
edge and autonomy; recognize that power plays people who are adept at seeing the linkages that
may be a part of the negotiation process; and, in need to be made and then bringing people
summary, always be sensitive to the needs of, and together, plus trust and leadership. Furthermore,
constraints on, your partner. participants may lose some of their independence,
8. Virtual teams are groups of people who work and they must invest time and effort in building
together interdependently using information tech- collaboration with no guarantee of success. Thus, a
nology to communicate and collaborate over long normative environment for collaboration should
distances. Developing trust and virtual teams is already exist, which means that the people in-
not easy because, by their nature, they lack the volved share cultural values like trust, openness,
opportunities for day-to-day social interactions and communication. The seven C’s of collabora-
that traditional teams have. Virtual teams build tion include connect purpose and people; clarity of
trust by relying on performance consistency, purpose; congruency of mission, strategy, and val-
quickly responding to virtual teammates, establish- ues; creation of value; communication between
ing norms for acceptable communication patterns, partners; continual learning; and commitment to
and having the right team leaders. partnership.
9. Collaboration technology includes all types of in- 13. Successful supply chains require collaboration.
formation and communication technologies that Solectron’s rules for supply chain success include
enable collaboration at various levels, from col- basing relationships on a foundation of perfor-
laboration between two persons to organizational mance metrics, using a supplier scorecard, formal-
collaboration, where several companies are en- izing relationships, offering suppliers several ways
gaged in common tasks. Examples of collabora- to provide feedback, and encouraging the use of
tion technology include desktop videoconferencing, standardized processes and practices. Trust de-
knowledge-management databases, online meeting pends on cultural and behavioral issues but also on
scheduling systems, and the devices that support proving one is trustworthy by meeting agreed-to
virtual teamwork. performance standards.
14. Supply chains (and all other collaborative efforts)
10. Collaborative technology supports collaboration
also depend heavily on trust. Trust is a person’s be-
by facilitating several types of collaborative tasks,
lief and confidence in the goodwill of others and
including communication, information sharing,
the conviction that their actions will be consistent
and coordination.
with the group’s goals. Trusting behaviors include
11. There are many challenges to implementing col- integrity, competence, consistency, loyalty, open-
laborative systems, including the fact that employ- ness, community, respect, cooperation, and de-
ees may have to invest extra time in maintaining pendability. The trust-building process generally
information for use by other team members. Con- involves starting small and gradually building
ditions under which these technologies are most trust by successfully collaborating and achieving
likely to fail include instances when there is no successes.
1. List five reasons supply chains can’t function with- 4. What virtual teams do you participate in, and what
out trust. types of technology does your virtual team rely on?
2. What are the main types of collaborative technolo- 5. What role do measurable performance goals play
gies, and what situations are they most suitable for? in building collaboration and trust?
3. What does building and maintaining collaboration
depend on?
Case Study ■ 515
1. We’ve all probably met, at one time or another, 2. Just about everyone uses information technology
people we did not trust. In groups of three or four systems and devices today, and many of these sys-
students, pick (without mentioning names) one or tems and devices support collaborative activities.
two people who each student did not trust. Make a In teams of three or four students, list at least ten
list of what those people did—in terms of their information technology systems and/or devices
actual behaviors—that made them untrustworthy. that you typically use, and next to each one, itemize
How does your list compare with the trusting be- the ways in which you either do or could use these
haviors discussed in this chapter? If time permits, systems and devices to improve collaboration.
write the untrustworthy behaviors on the board
and compare them in class.
CASE STUDY
AT&T
rior to its recent merger with SBC, AT&T provided personnel). AT&T doesn’t view itself as having two sep-
P data and voice-service communications to busi-
nesses and consumers worldwide. The company
arate sets of employees: office workers and telecom-
muters. Instead, the company understandably expects
employed about 100,000 employees, half of whom all its employees to collaborate and network together.
telecommute, either full- or part-time. AT&T had long AT&T has installed several tools to connect its
promoted telework, which means encouraging its telecommuters—which it now refers to as its remote
employees to work at home or in other nontraditional knowledge workers—to each other. For example, its
locations during regular business hours.51 InfoCenter portal supplies basic information like organ-
AT&T began seriously promoting telework when ization charts and personnel details, so even employ-
management decided that, henceforth, all its informa- ees outside the office should not have a problem find-
tion systems salespeople would work out in the field ing out who to go to if they have a question.
100 percent of the time. AT&T took away their offices Even so, encouraging collaboration remains a
and cubicles, and AT&T’s new era of telework was born. challenge. AT&T needs to decide what additional infor-
Of the 50,000 or so employees who telecommute, about mation systems and collaborative technology it can
15,000 are managerial personnel. AT&T gives the typi- supply to its employees to encourage collaboration.
cal teleworker a laptop, external keyboard and monitor, And it must try to anticipate the problems that it may
router, and an allowance of about $100 to purchase a encounter by trying to get its employees to use these
telephone (AT&T is also rolling out Voice over Internet new technologies.
Protocol phones).
One chronic drawback to telework (or telecom- DISCUSSION QUESTIONS
muting) in many firms is that the remote workers
1. Specifically, what types of collaborative technology
sometimes take on a second-class status. After all, they
would you recommend that AT&T provide to its
frequently don’t have offices, and they usually aren’t
telecommuters and office staff now to maximize
around to socialize with the other office employees for
the opportunities for collaboration? Why did you
lunch or after work. Even AT&T’s own studies show that
suggest these types of technology?
these factors can be a problem. For example, about
68 percent of its teleworkers cited reduced visibility in 2. Assume that AT&T’s managers have accepted your
the office, and 68 percent cited a need to interact with recommendations. Now, provide ATA&T with a
people live. Another drawback to telecommuting in- short report itemizing the problems it can antici-
volves the larger issue of encouraging and facilitating pate in getting employees to use these collabora-
collaboration among employees (both among the tive devices and how you suggest it can overcome
telecommuters and between telecommuters and office those problems.
PHOTO CREDITS
CHAPTER 1 p. 250: Michael S. Yamashita/Corbis; p. 252: © TWPhoto/

p. 1: AP Photo/Marco Jose Sanchez; p. 10: Jack Plunkett/ Corbis; p. 259: Miguel Vidal/Reuters/Landov
Bloomberg News/Landov; p. 13: Underwood & Underwood/
Corbis; p. 15: Debra DeBoise; p. 18: PicturePress/Getty CHAPTER 10
Images; p. 20: AP Photo/Suzanne Plunkett p. 263: Courtesy, Millipore Corporation; p. 272: CHIP
EAST/Reuters/Landov; p. 278: Reuters/You Sung-ho;
CHAPTER 2 p. 284: Christinne Muschi/Reuters/Landov;
p. 29: Chris Kleponis/Bloomberg News/Landov; p. 292: Johnsonville
p. 33: Courtesy of Air-Trak; p. 38: AP Photo/
John Cogill; p. 48: AP Photo/Dmitry Lovetsky; CHAPTER 11
p. 50: Hugh Siegenthaler/Bloomberg News/Landov; p. 303: YRC Worldwide Inc.; p. 307: AP Photo/Carlos
p. 52: Alan Levenson Osorio; p. 309: AP Photo/Koji Sasahara; p. 320: Jeff
Greenberg/PhotoEdit; p. 323: Joern Wolter/vario images
CHAPTER 3 Gmb & Co. KG/Alamy; p. 325: Jason Smalley/
p. 59: Courtesy, Congressman Todd Tiahrt’s Office; Wildscape/Alamy
p. 61: Money Sharma/epa/Corbis; p. 65: Kevin Lee/
Bloomberg News/Landov; p. 71: Andrew T. Malana/ CHAPTER 12
Bloomberg News/Landov; p. 75: Christopher p. 331: Elena Rooraid/PhotoEdit; p. 343: Purestock/
Farina/Corbis; p. 76: AP Photo/Richard Drew Getty Royalty Free; p. 348: Susan Van Etten/PhotoEdit;
p. 349: Creatas/Jupiter Images
CHAPTER 4
p. 89: Tannen Maury/Bloomberg News/Landov; CHAPTER 13
p. 97: Courtesy, Freestyle Audio; p. 102: AP Photo/ p. 372: Kevin Horan/Time&Life Pictures/Getty Images;
Wilfredo Lee; p. 103: © David Redferns/Redferns; p. 376: Fisher/Thatcher/Stone/Getty Images; p. 384: Doug
p. 109: AP Photo/Denis Poroy Kanter/AFP/Getty Images; p. 389 (cartoon): Randy
Glasbergen; p. 397: Robert Galbraith/Reuters;
p. 399: © Fredrik Renander/Alamy
CHAPTER 5
p. 116: AP Photo/Toby Talbot; p. 125: Joel Nito/AFP/Getty
Images; p. 128: Bill Aron/PhotoEdit; p. 134: Comstock/
CHAPTER 14
p. 403: Michael Newman/PhotoEdit; p. 410: Prentice Hall;
Corbis; p. 135: Courtesy FacilitatePro.; p. 137: Image100/
p. 417: Robin Nelson/PhotoEdit; p. 418 (cartoon): Randy
Jupiter Images
Glasbergen; p. 427: AP Photo
CHAPTER 6 CHAPTER 15
p. 144: Thierry Roge/Reuters/Landov; p. 149 (cartoon):
p. 435: AP Photo/Jeff Zelevansky; p. 439: Image100/
Morris/Cartoonstock.com; p. 158: AP Photo/Roy Aydelotte;
Jupiter Images; p. 441: Mark Richards/PhotoEdit;
p. 161: AP Photo/The Plain Dealer/Joshua Gunter;
p. 448: Thinkstock/Jupiter Images; p. 450: Purestock/Getty
p. 164: Steve Barrett/Bloomberg News/Landov
Royalty Free; p. 456 (cartoon): © LaughingStock Licensing
Inc. All rights reserved.
CHAPTER 7
p. 175: Shangara Singh/Alamy; p. 190 (cartoon): Randy CHAPTER 16
Glasbergen; p. 193: AP Photo/Edgard R.; p. 204: David p. 466: Tony Freeman/PhotoEdit; p. 469: James Wasserman
Butow/Corbis/SABA Photography; p. 472: Digital Vision/Getty Royalty Free;
p. 483: Image Source/Jupiter Royalty Free
CHAPTER 8
p. 208: © Reuters/Corbis; p. 211: Spencer Grant/PhotoEdit; CHAPTER 17
p. 212: Banana Stock/Jupiter Images; p. 223: David R. p. 496: AP Photo/General Motors/Joe Polimeni;
Frazier Photography, Inc./Alamy; p. 224: Photodisc Red/ p. 499: © NOAH Berger/Bloomberg News/Landov;
Getty Royalty Free; p. 229: AP Photo/Mark Humphrey p. 500: AP Photo/Ann Heisenfelt; p. 503: Courtesy, Hewlett
Packard; p. 507 (cartoon): © The New Yorker Collection
CHAPTER 9 1988 Bernard Schoenbaum from cartoonbank.com. All
p. 233: © David Young Wolff/PhotoEdit; p. 236: Jim rights reserved.
Whitmer Photography; p. 245: Courtesy, JetBlue;
516
ENDNOTES
CHAPTER 1 24. Edgar Schein, Career Dynamics: Matching Individual and

1. Katrina Brooker, “It Took a Lady to Save Avon,” Fortune, Organizational Needs (Reading, Mass.: Addison-Wesley, 1978),
October 15, 2001, pp. 203–208; Emily Nelson, “Avon Calls on pp. 128–129.
Good-Looking Research,” Wall Street Journal, May 23, 2002, 25. A. Howard and D. W. Bray, Managerial Lives in Transition:
p. B6. “Avon Sees China Operation as a Sole Business Unit,” Advancing Age and Changing Times (New York: Guilford, 1988);
SinoCast China Business Daily News, December 13, 2005, p. 1; discussed in Dwayne Schultz and Sydney Ellen Schultz,
and “Avon, The Net, and Glass Ceilings,” BusinessWeek, New Psychology and Work Today (New York: Macmillan Publishing
York, February 6, 2005, p. 104. Co., 1994), pp. 103–104.
2. Brooker, op. cit., p. 203. 26. Ibid., Schultz and Schultz, p. 104.
3. Ibid., p. 204. 27. Ibid.
4. Molly Prior, “Slimming Down at Avon: Company Restructures 28. Unless otherwise noted, the following discussion is based on
to Become More Nimble,” WWD, December 8. Gary Yukl, Leadership in Organizations (Upper Saddle River, N.J.:
5. http://www.supplychainplanet.com/e_article00030547.cfm Prentice Hall, 1998), pp. 251–255.
6. Ibid., p. 208. 29. Joan Lloyd, “Derailing Your Career,” Baltimore Business Journal,
7. Devin Leonard, “The Only Lifeline Was the Wal-Mart,” Fortune, October 19, 2000, pp. 21, 33.
October 3, 2005, pp. 74–80. 30. Yukl, op. cit., p. 252.
8. In G. Hanson, “Determinants of Firm Performance: An 31. Shelley Kirkpatrick and Edwin Locke, “Leadership: Do Traits
Integration of Economic and Organizational Factors,” Matter?” Academy of Management Executive, May 1991, p. 49.
unpublished doctoral dissertation, University of Michigan 32. Yukl, op. cit., p. 253.
Business School, 1986. 33. Quoted in William Holstein, “Why Big Ideas Often Fall Flat,”
9. M. A. Huselid, “The Impact of Human Resource Management New York Times, May 26, 2002, p. B5. See also Judith Chapman,
Practices on Turnover, Productivity, and Corporate Financial “The Work of Managers in New Organizational Context,” Journal
Performance,” Academy of Management Journal, 1995, p. 647; of Management Development, January 2001, vol. 20, no. 1, p. 55.
J. Pfeffer and J. Vega, “Putting People First for Organizational 34. Claude George, The History of Management Thought (Upper
Success,” Academy of Management Executive, 1999, pp. 37–48. Saddle River, N.J.: Prentice Hall, 1968), p. 6.
10. Peter Drucker, An Introductory View of Management (New York: 35. Ibid., p. 7.
Harper’s College Press, 1977), p. 15. 36. Alfred Chandler, Strategy and Structure (Cambridge, Mass.: MIT
11. Adam Lshimsky, “Meg and a Machine,” Fortune, September 1, Press, 1962). See also Daniel Wren, The Evolution of Management
2003, pp. 68–76. Thought (New York: John Wiley, 1979).
12. Katie Hafner, “For eBay, Departures Underscore a Risky Time,” 37. D. S. Pugh, Organization Theory (Baltimore: Penguin, 1971),
New York Times, July 10, 2006, p. C1. pp. 126–127.
13. These are based on Henry Mintzberg, “The Manager’s Job: 38. Claude George Jr., The History of Management Thought (Upper
Folklore and Fact,” Harvard Business Review, July–August 1975, Saddle River, N.J.: Prentice Hall, 1972), pp. 99–101.
pp. 489–561. 39. Richard Hopeman, Production (Columbus, Ohio: Charles
14. Sumantra Ghoshal and Christopher Bartlett, “Changing the Merrill, 1965), pp. 478–485.
Role of Top Management: Beyond Structure to Processes,” 40. Henri Fayol, General and Industrial Management, transl.
Harvard Business Review, January–February 1995, pp. 86–96. Constance Storrs (London: Sir Isaac Pitman, 1949), pp. 42–43.
15. Ibid., p. 89. 41. Based on Richard Hall, “Intra-Organizational Structural
16. Ibid., p. 91. Variation: Application of the Bureaucratic Model,”
17. Ibid., p. 96. Administrative Science Quarterly, December 1962, pp. 295–308.
18. Ibid., p. 94. 42. William Scott, Organization Theory (Homewood, Ill.: Richard D.
19. Liz Simpson, “Fostering Creativity,” Training, December 2001, Irwin, 1967).
vol. 38, no. 12, pp. 54–57. 43. F. L. Roethlisberger and William Dickson, Management and the
20. Mintzberg, op. cit., pp. 489–561. Worker (Boston, Mass.: Harvard University Graduate School of
21. See, for example, ibid.; and George Copeman, The Chief Business, 1947), p. 21.
Executive (London: Leviathan House, 1971), p. 271. See also 44. Douglas McGregor, “The Human Side of Enterprise,” eds.
George Weathersby, “Facing Today’s Sea Changes,” Management Edward Deci, B. Von Haller Gilmer, and Harry Kairn, Readings
Review, June 1999, p. 5; David Kirkpatrick, “The Second in Industrial and Organizational Psychology (New York: McGraw-
Coming of Apple,” Fortune, November 9, 1998, pp. 86–104; and Hill, 1972), p. 123.
Jenny McCune, “The Changemakers,” Management Review, May 45. R. Likert, New Patterns of Management (New York: McGraw-Hill,
1999, pp. 16–22. 1961), p. 6.
22. For information on employment prospects for managers, see 46. Ibid., p. 100.
“The 2004–14 Job Outlook in Brief,” Occupational Outlook 47. Chris Argyris, Integrating the Individual and the Organization
Quarterly, Spring 2006, pp. 7–11. (New York: John Wiley, 1964).
23. John Holland, Making Vocational Choices: A Theory of Careers 48. Chester Barnard, The Functions of the Executive (Cambridge,
(Upper Saddle River, N.J.: Prentice Hall, 1973). See also John Mass.: Harvard University Press, 1968), p. 84.
Holland, Assessment Booklet: A Guide to Educational and Career 49. Ibid., p. 167.
Planning (Odessa, Fla.: Psychological Assessment Resources, 50. Herbert A. Simon, Administrative Behavior (New York: Free Press,
Inc., 1990). 1976), p. 11.
517
518 Endnotes
51. C. West Churchman, Russell Ackoff, and E. Leonard Arnoff, 76. Stratford Sherman, “A Master Class in Radical Change,”
Introduction to Operations Research (New York: John Wiley. Fortune, December 13, 1993, p. 82. See also McCune,
1957), p. 18. pp. 16–22.
52. Daniel Wren, The Evolution of Management Thought (New York: 77. Some argue that with IT so widely available and used, it doesn’t
John Wiley, 1979), p. 512. matter—unless you don’t use it. See Nicholas Carr, “IT Doesn’t
53. Fred Vogelstein, “No Love Lost for Google,” Fortune, August 23, Matter,” Harvard Business Review, May 2003, pp. 41–49.
2004, pp. 19–20. 78. Kasra Ferdows et al., “Rapid Fire Fulfillment,” Harvard Business
54. “10 on the Spot: These CEOs Are Facing Herculean Review, November 2004, pp. 104–110.
Challenges,” Fortune, February 20, 2006, vol. 153, no. 3, p. 81. 79. Ibid., p. 167.
55. The World Almanac and Book of Facts, 1998 (Mahwah, N.J.: K-III 80. “J. Crew Enhances Business Agility with ERP Solution,” www
Reference Corporation, 1998), p. 207. .stores.org, downloaded July 8, 2006; “J. Crew Starts Fast in
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Workplace Visions, Society for Human Resource Management, downloaded July 8, 2006; www.Forbes.com, downloaded July 8,
2000, no. 5, pp. 1–8. 2006.
57. Bryan O’Reilly, “Your New Global Workforce,” Fortune, 81. Joan Magretta, “The Power of a Virtual Integration: An
December 14, 1992, pp. 52–66. Interview with Dell Computer’s Michael Dell,” Harvard Business
58. Robert Hof, “The Power of Us,” BusinessWeek, June 20, 2005, Review, March–April 1998, p. 73.
pp. 75–81. 82. Ibid., p. 76.
59. Kevin Werbach, “Using VOIP to Compete,” Harvard Business 83. See, for example, Darrel Rigby and Dianne Ledingham,
Review, September 2005, pp. 140–147. “CRM Done Right,” Harvard Business Review, November 2004,
60. www.knowledge.wharton.upe.edu, “Human Resources pp. 118–127.
Wharton,” downloaded January 8, 2006. See also Richard 84. Pamela Babcock, “Shedding Light on Knowledge Management,”
Crawford, In the Era of Human Capital (New York: Harper HR Magazine, May 2004, pp. 47–50.
Business, 1991), p. 10. 85. Ibid.
61. This discussion is based on Gary Dessler, Management
Fundamentals (Reston, Va.: Reston, 1977), p. 2. See also William CHAPTER 2
Berliner and William McClarney, Management Practice and 1. Janet Adams et al., “Code of Ethics as Signals for Ethical
Training (Burr Ridge, Ill.: McGraw-Hill, 1974), p. 11. Behavior,” Journal of Business Ethics, February 2001, vol. 29, no. 3,
62. Rachel Moskowitz and Drew Warwick, “The 1994–2005 Job pp. 199–211. See also Michael Burr, “Corporate Governance:
Outlook in Brief,” Occupational Outlook Quarterly, Spring 1996, Embracing Sarbanes-Oxley,” Public Utilities Fortnightly, October
vol. 40, no. 1, pp. 2–41. See also Mahlon Apgar IV, “The 15, 2003, vol. 141, no. 19, pp. 20–22.
Alternative Workplace: Changing Where and How People 2. Ibid. See also Max Rexroad and Joyce Ostrosky, “Sarbanes-
Work,” Harvard Business Review, May–June 1998, pp. 121–136. Oxley: What It Means to the Marketplace,” Journal of
63. Crawford, op. cit., p. 26. Accountancy, February 2004, vol. 197, no. 2, pp. 43–48.
64. Peter Drucker, “The Coming of the New Organization,” Harvard 3. Adam Liptak, “Privacy Not the Issue in Google Case,”
Business Review, January–February 1988, p. 45. For a good International Herald Tribune, January 27, 2006, p. 22.
discussion, see also Thomas Davenport, Thinking for a Living: 4. Manuel Velasquez, Business Ethics: Concepts and Cases (Upper
How to Get Better Performance and Results from Knowledge Workers Saddle River, N.J.: Prentice-Hall, 1992), p. 9; Kate Walter,
(Boston, Mass.: Harvard Business School Press, 2006). “Ethics Hot Lines Tap into More Than Wrongdoing,” HR
65. Thomas Peters and Robert Waterman Jr., “In Search of Magazine, September 1995, pp. 79–85. See also Skip
Excellence,” eds. Jon Pierce and John Nestrom, The Manager’s Kaltenheuser, “Bribery Is Being Outlawed Virtually Worldwide,”
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66. Rosabeth Moss Kanter, When Giants Learn to Dance (New York: 5. S. Morris Engel, The Study of Philosophy, San Diego, Calif.:
Touchstone, 1989). Collegiate Press, 1987, p. 52.
67. James Brian Quinn, Intelligent Enterprises (New York: The Free 6. Richard Osborne, “A Matter of Ethics,” Industry Week,
Press, 1992). September 4, 2000, vol. 49, no. 14, pp. 41–42.
68. Peter Senge, The Fifth Discipline (New York: Currency 7. Michael Boylon, Business Ethics (Upper Saddle River, N.J.:
Doubleday, 1994), p. 3. Prentice-Hall, 2001), pp. 37–38.
69. Tom Peters, Liberation Management (New York: Alfred Knopf, 8. Ibid., p. 119.
1992), p. 9. 9. Rachel Zimmerman, “Sites Ordered Shut-In Spam Case,” Wall
70. Bryan Dumaine, “What the Leaders of Tomorrow See,” Fortune, Street Journal, May 12, 2005, p. A35.
July 3, 1989, p. 58. See also Weathersby, op. cit., p. 5; and Gary 10. See, for example, Bonnie A. Osif, “Computer and Internet
Hamel and Jeff Sampler, “The eCorp.: Building a New Ethics, Part 2,” Library Administration and Management, Summer
Industrial,” Fortune, December 7, 1998, pp. 80–112. 2005, vol. 19, no. 3, pp. 149–153.
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July 3, 1989, p. 51. Technology,” Internet Wire, October 4, 2005.
72. Rosabeth Moss Kanter, “The New Managerial Work,” Harvard 12. Lee Freeman and A. Graham Peace, “Information Ethics:
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73. Drucker, “The Coming of the New Organization,” p. 45. Spring 2005, vol. 18, no. 1/2, pp. 17, 31.
74. Bryan Dumaine, “The New Non-Managers,” Fortune, February 13. Brian Morrisey, “Cookies Are Seen as Privacy Threat,” Adweek
22, 1993, p. 81. See also David Kirkpatrick, “IBM: From Big Blue Online, December 5, 2005.
Dinosaur to e-Business Animal,” Fortune, April 26, 1999, 14. Ibid.
pp. 116–127. See also McCune, pp. 16–22; and Brent Schlender, 15. Darren Charters, “Electronic Monitoring and Privacy Issues in
“Larry Ellison: Oracle at Web Speed,” Fortune, May 24, 1999, Business Marketing: The Ethics of the Double-Click Experience,”
pp. 128–137. Journal of Business Ethics, February 15, 2002, vol. 35, no. 4,
75. Peter Drucker, “The Coming of the New Organization,” p. 43. pp. 243–255.
Endnotes 519
16. Janice Sipior et al., “Ethics of Collecting and Using Consumer January–February 1977, pp. 57–71; Robert Jackyll, “Moral
Internet Data,” Information Systems Management, Winter 2004, Mazes: Bureaucracy and Managerial Work,” Harvard Business
vol. 21, no. 1, pp. 58–67. Review, September–October 1983, pp. 118–130. See also Ishmael
17. See, for example, Abbie Maliniak and Lynsey Mitchel, “Overview P. Akaah, “The Influence of Organization Rank and Role of
of the Current State of HIPAA Enforcement: Three Useful Tips for Marketing Professionals’ Ethical Judgments,” Journal of Business
Avoiding Civil Penalties,” Journal of Health Care Compliance, Ethics, June 1996, pp. 605–614.
November–December 2006, vol. 8, no. 6, pp. 23–26. 40. Jennifer Schramm, “Perceptions on Ethics,” HR Magazine,
18. “Do You Know Where Your Workers Are? GPS Units Aid November 2004, p. 176.
Efficiency, Raise Privacy Issues,” BNA Bulletin to Management, 41. From Guy Bromback, “Managing Above the Bottom Line of
July 22, 2004, p. 233. Ethics,” Supervisory Management, December 1993, p. 12.
19. “Time Clocks Go High Touch, High-Tech to Keep Workers from 42. Tom Horton, “Tone at the Top,” Directors and Boards, Summer
Gaining the System,” BNA Bulletin to Management, March 25, 2002, vol. 26, no. 4, pp. 8–9. See also Terry Thomas et al.,
2004, p. 97. “Strategic Leadership of Ethical Behavior in Business,” Academy
20. D. Leonard and Angela France, “Workplace Monitoring: of Management Executive, 2004, vol. 17, no. 2, pp. 56–66.
Balancing Business Interests with Employee Privacy Rights,” 43. Julian Barnes, “Unilever Once P&G Placed Under Monitor and
Society for Human Resource Management Legal Report, May–June Spikes,” New York Times, September 1, 2001, p. B1.
2003, pp. 3–6. 44. Marcia Miceli and Janet Near, “Ethical Issues in the
21. “You’ve Got Mail and the Boss Knows: Survey by Bentley’s Management of Human Resources,” Human Resource
Center for Business Ethics Reveals Nine out of Ten Companies Management Review, vol. 11, no. 1, pp. 1–10.
Monitor Their Employee’s E-mail, Internet Use at Work,” 45. Deon Nel, Leyland Pitt, and Richard Watson, “Business Ethics:
Europe Intelligence Wire, October 7, 2003. Defining the Twilight Zone,” Journal of Business Ethics, 1989,
22. See also Ravi Sarathy and Christopher Robertson, “Strategic and vol. 8, p. 781; Brenner and Molander, “Is the Ethics of Business
Ethical Considerations in Managing Digital Privacy,” Journal of Changing?” See also Daniel Glasner, “Past Mistakes Make
Business Ethics, August 15, 2003, vol. 46, no. 2, pp. 111–127. Present Future Challenges,” Workforce, May 1998, p. 117.
23. “Workers Sharing Music, Movies at Work Violate Copyrights, 46. Rochelle Kelin, “Ethnic Versus Organizational Cultures: The
Trigger Employer Fines,” BNA Bulletin to Management, June 19, Bureaucratic Alternatives,” International Journal of Public
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Pulse News, July 22, 2004. Business (Upper Saddle River, N.J.: Prentice Hall, 2001), p. 109.
25. Thomas Watkins, “Malpractice Issues in the Technology 48. Lynne Paine et al., “Up to Code: Does Your Company’s
Sector,” The Computer and Internet Lawyer, August 2004, vol. 21, Conduct Meet World-Class Standards?” Harvard Business Review,
no. 8, pp. 14–22. December 2005, pp. 122–133.
26. Norman E. Bowie, “Digital Rights and Wrongs: Intellectual 49. Ibid., p. 123.
Property in the Information Age,” Business and Society Review, 50. Amy Zuckerman, “Managing Business Ethics in a World of Pay
Spring 2005, vol. 110, no. 1, pp. 77–96. All,” World Trade, December 2001, vol. 14, no. 12, pp. 38–39.
27. “Former CEO Joins WorldCom’s Indicted,” Miami Herald, 51. These eight items are quoted from Lynne Paine, op. cit., p. 123.
March 3, 2004, p. 4C. 52. Marcia Miceli and Janet Near, “Ethical Issues in the
28. Janet Adams et al., “Code of Ethics as Signals for Ethical Management of Human Resources,” Human Resource
Behavior,” Journal of Business Ethics, February 2001, vol. 29, Management Review, vol. 11, no. 1, pp. 1–10.
no. 3, pp. 199–211. 53. James Kunen, “Enron Division (and Values) Thing,” New York
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Personal Influences on the Ethical Intentions of CEOs,” 54. Adams et al., op. cit.
Business and Society, August 1995, pp. 119–147. 55. Ibid.
30. Justin Longnecker, Joseph McKinney, and Carlos Moore, “The 56. Ibid.
Generation Gap in Business Ethics,” Business Horizons, 57. For a discussion, see, for example, Alan Rowe et al., Strategic
September–October 1989, pp. 9–14. Management: A Methodological Approach (Reading, Mass.:
31. Vincent Calluzzo and Charles Cante, “Ethics in Informational Addison-Wesley Publishing Co., 1994), p. 101.
Technology and Software Use,” Journal of Business Ethics, May 58. Dale Buss, “Corporate Compasses,” HR Magazine, June 2004,
15, 2004, vol. 15, no. 3, pp. 301–313. pp. 127–132.
32. Susan Winter et al., “Individual Differences in the Acceptability 59. Miceli and Near, op. cit., p. 9.
of Unethical Information Technology Practices: The Case of 60. Sandra Gray, “Audit Your Ethics,” Association Management,
Machiavellianism and Ethical Ideology,” Journal of Business September 1996, p. 188.
Ethics, October 15, 2004, vol. 54, no. 3, pp. 303–326. 61. Richard Beatty et al., “HR’s Role in Corporate Governance:
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Perpetuation of Corruption in Organizations,” Academy of 2003, vol. 42, no. 3, p. 268.
Management Executive, 2004, vol. 18, no. 2, pp. 40–41. 62. Michael McCarthy, “Now the Boss Knows Where You’re
34. Ibid., p. 40. Clicking,” Wall Street Journal, October 21, 1999, p. B1.
35. Ibid., p. 41. 63. www.sap.com/solutions, January 9, 2005.
36. Floyd Norris and Diana Henriques, “Three Admit Guilty and 64. www.sap.com, January 13, 2006.
Falsifying CUC’s Books,” New York Times, June 15, 2000, p. C1. 65. www.sap.com, January 13, 2006.
37. Stanley Milgram, “Behavioral Study of Obedience,” Journal of 66. www.sas.com, January 10, 2006.
Abnormal and Social Psychology, 1963, vol. 67, pp. 371–378. 67. Tammy Joyner, “Big Boss Is Watching,” Atlanta Constitution,
38. Discussed in Samuel Greengard, “Cheating and Stealing,” July 25, 2001, p. D1.
Workforce, October 1997, pp. 45–53. 68. Michael J. McCarthy, “How One Firm Attracts Ethics
39. For a discussion, see Steen Brener and Earl Molander, “Is the Electronically,” Wall Street Journal, October 21, 1999, p. B1.
Ethics of Business Changing?” Harvard Business Review, 69. Adams et al., op. cit.
520 Endnotes
70. Ibid. Companies Operating in South Africa Under the Sullivan

71. “A Lean, Clean Electric Machine,” Economist, December 10, Principles,” Business and the Contemporary World, 1996, vol. 8,
2005, pp. 77–79. no. 1, pp. 129–150. Standards similar to the international
72. S. A. Moorehead et al., “Corporate Citizenship in the New quality standards that have been used for some time have
Century: Accountability, Transparency, and Global been put in place for social accountability areas such as child
Stakeholder Engagement,” New York: The Conference Board labor and health and safety. See Ruth Thaler-Carter, “Social
Inc., 2002, quoted in Nancy Lockwood, “Corporate Social Accountability 8000: A Social Guide for Companies or
Responsibility: HR’s Leading Role,” The Society for Human Another Layer of Bureaucracy?” HR Magazine, June 1999,
Resource Management, 2004, p. 2. pp. 106–108. In the 1990s, Sullivan proposed a new code
73. Lockwood, op. cit., p. 3. for companies returning to South Africa after apartheid had
74. Dennis Patton, “Give or Take on the Internet: An ended, stressing the protection of equal rights and the
Examination of the Disclosure Practices of Insurance Firm promotion of education and job training.
Web Innovators,” Journal of Business Ethics, March 15, 2002, 91. Philip Berkowitz, “Sarbanes-Oxley Whistleblower Claims: The
vol. 36, no. 3, pp. 247–260. Meaning of Fraud Against Shareholders,” Society for Human
75. See also Deborah Doan, “Beyond Corporate Social Resource Management Legal Report, July–August 2005.
Responsibility: Minnows, Myths and Markets,” Futures, 92. Janet Near, “Whistle-Blowing: Encourage It!” Business
March–April 2005, vol. 37, no. 2–3, pp. 215–230. Horizons, January–February, 1989, p. 5. See also Robert J.
76. Beauchamp and Bowie, op. cit., p. 45. Paul and James B. Townsend, “Don’t Kill the Messenger!
77. Milton Friedman, Capitalism and Freedom (Chicago: University Whistle-Blowing in America: A Review with
of Chicago Press, 1962), p. 133. See also Charles Handy, “A Recommendations,” Employee Responsibilities and Rights,
Better Capitalism,” Across the Board, April 1998, pp. 16–22. See June 1996, pp. 149–161. Nick Perry, “Indecent Exposures:
also Robert Reich, “The New Meaning of Corporate Social Theorizing Whistle Blowing,” Organization Studies, 1998,
Responsibility,” California Management Review, Winter 1998, vol. 19, no. 2, pp. 235–257.
pp. 8–17. Reich also believes that because of pressure from 93. Near, op. cit., p. 5. See also Fraser Younson, “Spilling the
investors, nonowner stakeholders are being neglected and Beans,” People Management, June 11, 1998, pp. 25–26.
that the government should step in to protect them. 94. Near, op. cit., p. 6. See also David Lewis, “Whistleblowing at
78. Beauchamp and Bowie, op. cit., pp. 49–52. See also Marjorie Work: Ingredients for an Effective Procedure,” Human Resource
Kelly, “Do Stockholders ‘Own’ Corporations?” Business Ethics, Management Journal, 1997, vol. 7, no. 4, pp. 5–11.
June 1999, pp. 4–5. 95. “The Importance of Business Ethics,” HR Focus, July 2001,
79. Beauchamp and Bowie, op. cit., p. 79. vol. 78, no. 7, pp. 1, 13.
80. Ibid., p. 60. 96. Jeffery Unerman and Mark Bennett, “Increased Stakeholder
81. Ibid., p. 54. Dialog and the Internet: Towards Greater Corporate
82. John Simon, Charles Powers, and John Gunnerman, “The Accountability or Reinforcing Capitalist Enemy Economy in
Responsibilities of Corporations and Their Owners,” The the Company Accounting,” Organizations and Society, October
Ethical Investor: Universities and Corporate Responsibilities (New 2004, vol. 29, no. 7, pp. 685–718.
Haven, Conn.: Yale University Press, 1972); reprinted in 97. Cox, op. cit., p. 11.
Beauchamp and Bowie, pp. 60–65. See also Roger Kaufman 98. Carol Heimowitz, “The New Diversity,” Wall Street Journal,
et al., “The Changing Corporate Mind: Organizations, Vision, November 14, 2005, p. R1.
Missions, Purposes, and Indicators on the Move Toward 99. Ibid., p. R3.
Societal Payoffs,” Performance Improvement Quarterly, 1998, 100. Patricia Digh, “Creating a New Balance Sheet: The Need for
vol. 11, no. 3, pp. 32–44. Better Diversity Metrics,” Mosaics, Society for Human
83. Alexander Harney, “Falsified Records Highlight Flaw in the Resource Management, September–October 1999, p. 1.
Social Audit Culture Standards,” Financial Times, November 101. Michael Carrell, Daniel Jennings, and Christina Heavrin,
28, 2005, p. 4. Fundamentals of Organizational Behavior (Upper Saddle River,
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Right,” Across the Board, July/August 2001, vol. 38, no. 4, 102. George Kronenberger, “Out of the Closet,” Personnel Journal,
pp. 61–64. June 1991, pp. 40–44.
85. Simon Zadek, “The Path to Corporate Responsibility,” Harvard 103. Cox, op. cit., p. 88.
Business Review, December 2004, p. 127. 104. Ibid., p. 89.
86. Jo-Ann Johnston, “Social Auditors: The New Breed of Expert,” 105. J. H. Greenhaus and S. Parasuraman, “Job Performance
Business Ethics, March 1996, p. 27. Attributions and Career Advancement Prospects: An
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88. Karen Paul and Steven Ludenberg, “Applications of Corporate Behavior and Human Decision Processes, July 1993, vol. 55,
Social Monitoring Systems: Types, Dimensions and Goals,” pp. 273–298.
Journal of Business Ethics, 1992, vol. 11, pp. 1–10. 106. Adapted from Cox, op. cit., p. 64.
89. Karen Paul, “Corporate Social Monitoring in South Africa: A 107. Ibid., pp. 179–180.
Decade of Achievement, An Uncertain Future,” Journal of 108. Madeleine Heilmann and Lewis Saruwatari, “When Beauty Is
Business Ethics, 1989, vol. 8, p. 464. See also Bernadette Ruf Beastly: The Effects of Appearance and Sex on Evaluation of
et al., “The Development of a Systematic, Aggregate Measure Job Applicants for Managerial and Nonmanagerial Jobs,”
of Corporate Social Performance,” Journal of Management, Organizational Behavior and Human Performance, June 1979,
1998, vol. 24, no. 1, pp. 119–133. pp. 360–372; see also Tracy McDonald and Milton Hakel,
90. Ibid. See also John S. North, “Living Under a Social Code of “Effects of Applicant Race, Sex, Suitability, and Answers on
Ethics: Eli Lilly in South Africa Operating Under the Sullivan Interviewer’s Questioning Strategy and Ratings,” Personnel
Principles,” Business and the Contemporary World, 1996, vol. 8, Psychology, Summer 1985, pp. 321–334.
no. 1, pp. 168–180; and S. Prakash Sethi, “Working with 109. Francis Milliken and Luis Martins, “Searching for Common
International Codes of Conduct: Experience of U.S. Threads: Understanding the Multiple Effects of Diversity in
Endnotes 521
Organizational Groups,” Academy of Management Review, 17. “Shanghai General Motors Co.,” www.sap.com, downloaded
1996, vol. 21, no. 2, p. 415; see also Patricia Nemetz and March 2006.
Sandra Christensen, “The Challenge of Cultural Diversity: 18. Czinkota et al., op. cit., p. 320.
Harnessing a Diversity of Views to Understand 19. Saritha Rai, “India Company Reaches Deal with AOL for
Multiculturalism,” Academy of Management Review, July 21, Programming,” New York Times, December 14, 2001, p. W1.
1996, pp. 434–462. 20. Gregory White, “In Asia, GM Pins Hope on a Delicate Web of
110. Patricia Digh, “Coming to Terms with Diversity,” HR Alliances,” Wall Street Journal, October 23, 2001, p. A23; Alex
Magazine, November 1998, p. 119. Taylor III, “Shanghai Auto Wants to Be the World’s Next Great
111. Jeremy Kahn, “Diversity Trumps the Downturn,” Fortune, Car Company,” Fortune, October 4, 2004, pp. 103–110.
July 9, 2001, vol. 144, no. 1, pp. 114–116. 21. Wilfred Vanhonacker, “Entering China: An Unconventional
112. Cox, op. cit., p. 236. Approach,” Harvard Business Review, March–April 1997,
113. Digh, op. cit., p. 119. pp. 130–40.
114. K. Kram, Mentoring at Work (Glenview, Ill.: Scott Foresman, 22. James Bamford et al., “Launching a World-Class Joint Venture,”
1985); Cox, op. cit., p. 198. See also Ian Cunningham and Harvard Business Review, February 2004, pp. 91–100.
Linda Honold, “Everyone Can Be a Coach,” HR Magazine, 23. For a discussion, see, for example, Arvind Phatak, International
June 1998, pp. 63–66. Dimensions of Management (Boston, Mass.: PWS-Kent, 1989),
115. See, for example, G. F. Dreher and R. A. Ash, “A Comparative p. 2.
Study of Mentoring Among Men and Women in Managerial, 24. Note that there are few, if any, pure market economies or
Professional, and Technical Positions,” Journal of Applied command economies anymore. For example, some of the
Psychology, 1990, vol. 75, no. 5, pp. 1–8. French banking system is still under government control.
116. Michelle Conlon and Wendy Zellner, “Is Wal-Mart Hostile to 25. David Kemme, “The World Economic Outlook for 1999,”
Women?” BusinessWeek, July 16, 2001, pp. 58–59. Business Perspectives, January 1999, pp. 6–9.
26. Daniels and Radebaugh, op. cit., p. 138.
27. Czinkota et al., op. cit., p. 640.
CHAPTER 3 28. For a discussion, see, for example, ibid., Chapter 2; and James
1. Andrew Schneider, “Small Business Going Global to Tap Flanigan, “Asian Crisis Could Bring New Threat:
Markets,” Kiplinger Business Forecasts, June 8, 2005, vol. 1, Protectionism,” Los Angeles Times, February 3, 1999, p. N1.
no. 2, p. 2. 29. Czinkota et al., op. cit., p. 116.
2. Matthew Boyle, “Why FedEx Is Flying High,” Fortune, 30. Daniels and Radebaugh, op. cit., 1994, p. 409.
November 1, 2003, pp. 145–152. 31. Molly O’Meara, “Riding the Dragon,” World Watch, March/April
3. Moon Ihlwan, “Mom and Pop Outfits Are Embracing a 1997, pp. 8–18.
Government Sponsored Effort to Get Them Online—Fast,” 32. This is based on John Daniels and Lee Radebaugh,
BusinessWeek Online, August 27, 2003; Sagren Moodley, International Business (Upper Saddle River, N.J.: Prentice Hall,
“E-Commerce and Export Markets,” Journal of Small Business 2001), pp. 217–219.
Management, July 2003, vol. 41, no. 3, pp. 31–39; Susannah 33. Ibid., p. 218.
Cahalan, “Small Businesses Find Success Melding the Local and 34. Karby Leggett, “Beijing Allows New York Life, Met Life,
the Global,” International Herald Tribune, August 25, 2006, p. 10. Nippon to sell in China,” Wall Street Journal, December 12,
4. Schneider, op. cit. 2001, p. A8.
5. Steven Zeitchik, “Global Face for MySpace,” Daily Variety, 35. Andrew Tanzer, “Chinese Walls,” Forbes, November 12, 2001,
June 21, 2006, vol. 291, no. 157, pp. 1–2. vol. 168, pp. 74–75.
6. Michael Tobin, “Debunking the Five Myths of Global 36. Mitch Betts, “Navigating Global IT,” Computer World, July 18,
Expansion,” Financial Executive, March 2006, vol. 22, no. 2, 2005, vol. 40, no. 8, p. 23.
pp. 57–60. 37. Mary Pratt, “Global Gotchas: How to Avoid Hidden Tracks in
7. “Forrester’s Study Pumps Up Estimated Increase in Offshoring International Laws,” Computer World, vol. 40, February 20,
Over Next Two Years,” BNA Bulletin to Management, May 27, 2006, pp. 32–34.
2004, p. 171. 38. Laura Pincus and James Belohlav, “Legal Issues in
8. Lara Sowinski, “The Global Market,” World Trade, August Multinational Business Strategy: To Play the Game, You Have
2005, vol. 18, no. 8, pp. 28–32. to Know the Rules,” Academy of Management Executive,
9. Charles Hill, International Business (Boston, Mass.: Irwin- November 1996, pp. 52–61.
McGraw Hill, 2001), p. 484. 39. Ibid., pp. 53–54.
10. Margaret Allen, “Technology Spawned Changes in Exporting,” 40. Ibid., p. 53.
Dallas Business Journal, September 7, 2001, p. 22; Jan Quintrall, 41. Richard Behar, “China’s Phony War on Fakes,” Fortune,
“It Pays to Know the Nuts and Bolts of E-Exporting,” Wenatchee October 30, 2000, p. 206. See also Derek Dessler, “China’s
Business Journal, October 2005, p. C7. Intellectual Property Protection: Prospects for Achieving
11. See, for example, John Daniels and Lee Radebaugh, International International Standards,” Fordham International Law Journal,
Business (Reading, Mass.: Addison-Wesley, 1994), p. 544. 1995, 181.
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69. Ibid. 10. “Small Business Economic Indicators 2000,” Office of
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14. C. R. Brockhaus, “The Psychology of the Entrepreneur,” eds. C. Asked Questions,” downloaded May 12, 2002, www.sba.gov/
Kent, D. Sexton, and K. Verspers, Encyclopedia of Entrepreneurship addl/stats/spfaq.txt.
(Upper Saddle River, N.J.: Prentice Hall, 1982), pp. 39–71; 38. Bill Friskics-Warren, “Tapping an Audience with an Ear to the
discussed in Dollinger, op. cit., p. 38. See also Robert Baum and Ground,” New York Times, March 17, 2002, pp. 2, 33.
Edwin Locke, “The Relationship of Entrepreneurial Traits, Skill, 39. Ibid.
and Motivation to Subsequent Venture Growth,” Journal of 40. Ibid.
Applied Psychology, August 2004, vol. 89, no. 4, pp. 587–599. 41. Ibid.
15. Richard Becherer and John Maurer, “The Proactive Personality 42. Ibid.
Disposition and Entrepreneurial Behavior Among Small 43. Ibid.
Company Presidents,” Journal of Small Business Management, 44. Ibid.
January 1999, vol. 37, no. 1, pp. 28–37. 45. Ross Kerber, “dotcoms May Be Dead, But Small Businesses Are
16. Ibid. Still Using the Internet,” Boston Globe, April 15, 2002, p. C1.
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Leadership and Organization Development Journal, November Strategic Management Concepts (Upper Saddle River, N.J.:
1996, vol. 17, no. 6, pp. 41–46. See also Richard Hendrickson, Prentice Hall, 1996), pp. 224–225.
“Ingredients of Success,” Inside Business, August 2002, vol. 4, 49. See, for example, Paul Horn, “The Changing Nature of
no. 8, pp. 3–7. Innovation: R&D Management Needs to Enhance
19. Ibid. Collaboration and Integrate with Its Ecosystem of Suppliers,”
20. Arlene Weintraub, “Can Boingo Wireless, from the Founder of Research-Technology Management, November–December 2005,
EarthLink, Turn Hot Spots into Money?” BusinessWeek, April 29, vol. 48, no. 6, pp. 28–34.
2002, no. 3780, p. 106. 50. Horn, op. cit.
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Start-Up Kit,” downloaded May 12, 2002, www.sba.gov/ 2006, p. 44.
starting/ask.html. 52. This is based on Philip Kotler and Gary Armstrong, Principles
22. A. Bhide, “How Entrepreneurs Craft Strategies That Work,” of Marketing (Upper Saddle River, N.J.: Prentice Hall, 2001),
Harvard Business Review, March–April 1994, pp. 150–161; John pp. 336–352.
Case, “The Origins of Entrepreneurship,” Inc., June 1989, 53. Dollinger, op. cit., p. 335.
pp. 51–62. 54. Adapted from R. Nielsen, M. Peters, and R. Hisrich,
23. Peggy Lambing and Charles Kuehl, Entrepreneurship (Upper “Intrapreneurship Strategy for Internal Markets: Corporate,
Saddle River, N.J.: Prentice Hall, 2000), p. 90. Nonprofit Anti-Government Institution Cases,” Strategic
24. Ibid., p. 91. See also Lora Kolodny, “The Problem: Lance Fried Management Journal, April–June 1985, no. 6, pp. 181–89, quoted
Planned to Sell His Waterproof MP3 Players in Surf Shops. But in Dollinger, op. cit., p. 333.
Could He Really Say No to the Big-Box Retailers?” Inc, April 2005. 55. This is based on Dean Takahashi, “Reinventing the
25. Norman Scarborough and Thomas Zimmerer, Effective Small Intrapreneur,” Red Herring, September 2000, pp. 189–196.
Business Management (Upper Saddle River, N.J.: Prentice Hall, 56. “Big Lessons from Little Divisions: Intrapreneurship 101,” The
2002), p. 21. Americas Intelligence Wire, March 23, 2006.
26. Lambing and Kuehl, op. cit., p. 35. 57. Ibid.
27. Quoted in ibid. 58. See, for example, Rosa Grimaldi and Alessandro Grandi,
28. Barbara Marsh, “When Owners of Family Businesses Die, “Business Incubators and New-Venture Creation: An
Survivors Often Feel Unsuited to Fill the Void,” Wall Street Assessment of Incubating Models,” Technovation, February
Journal, May 7, 1990, pp. B1–B2; discussed in William Schoell, 2005, vol. 25, no. 2, pp. 111–122.
Gary Dessler, and John Reinecke, Introduction to Business 59. For a discussion of this, see Bahman Edrahimi et al., “The
(Boston, Mass.: Allyn & Bacon, 1993), p. 173. Success Factors in New-Product Development,” International
29. Lambing and Kuehl, op. cit., p. 38. Journal of Management and Decision-Making, March 6, 2006,
30. Steps 1 to 4 from Small Business Administration, “First Steps: vol. 7, no. 2/3, p. 313.
How to Start a Small Business,” downloaded May 12, 2002, www 60. See also “Three New Features of Innovation Brought About by
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of a Startup,” Entrepreneur, March 2006, vol. 34, no. 3, p. 94. Information Technology and Management, July 7, 2004, vol. 3,
31. Schoell, Dessler, and Reinecke, op. cit., pp. 178–179. See also no. 1, p. 3.
“All You Need to Know About Franchising,” Entrepreneur, 61. “Kraft Looks Outside the Box for Inspiration,” Wall Street
January 2006, vol. 34, no. 18, p. 8. Journal, June 2, 2006, p. 815.
32. Laverne Urlacher, Small Business Entrepreneurship: An Ethics and 62. “IBM Turns Inside Out to Usher in the Innovation Age,” Asia
Human Relations Perspective (Upper Saddle River, N.J.: Prentice Pulse News, March 14, 2006.
Hall, 1999), pp. 114–119. 63. Mary Brandel, “Jumpstart Innovation,” Computer World, March 6,
33. This section is based on Schoell, Dessler, and Reinecke, op. cit., 2006, p. 48.
pp. 132–42. 64. John Carreyou and Barbara Martinez, “Research Chief Stirs Up
34. John Vinturella, The Entrepreneur’s Field Book (Upper Saddle Merck by Seeking Help of Others,” Wall Street Journal, June 7,
River, N.J.: Prentice Hall, 1999), pp. 109–110. 2006, pp. A1, A12.
524 Endnotes
65. Anthes, op. cit. 18. Donna Fenn, “Picture the Image,” Inc., February 1994, pp. 66–71;
66. See, for example, Hock-Hai Teo et al., “Organizational Learning http://www.bissettnursery.com/ (accessed September 10, 2006).
Capacity and Attitude Toward Complex Technological 19. Larry Long and Nancy Long, Computers (Upper Saddle River,
Innovations: An Empirical Study,” Journal of the American N.J.: Prentice-Hall, 1996), p. 18.
Society for Information Science and Technology, January 15, 2006, 20. Senn, op. cit., p. 576.
vol. 57, no. 2, pp. 265–279. 21. This discussion is based on Senn, op. cit., pp. 576–577.
67. Morgan Swink, “Building Collaborative Innovation Capability: 22. Senn, op. cit., p. A11.
The Central Challenge of New-Product Development Is to 23. Mary Sumner, Enterprise Resource Planning (Upper Saddle River,
Integrate and Address Dependencies That Span Customer N.J.: Pearson Education, 2005), p. 63.
Needs/Values, Product Specs and Supply-Chain Capabilities,” 24. Laudon and Laudon, Management Information Systems,
Research-Technology Management, March–April 2006, vol. 49, pp. 54–62. See also Sumner, op. cit., pp. 63–65, and Irma
no. 2, pp. 37–48. Becerra-Fernandez et al., Knowledge Management (Upper Saddle
68. Anthes, op. cit. River, N.J.: Pearson Education, 2004), pp. 2–3.
69. See also George Farris et al., “Web-Enabled Innovation in New- 25. Laudon and Laudon, ibid., pp. 57–59. See also “Dell: Build-To-
Product Development,” Research-Technology Management, Order Manufacturing,” www.accenture.com (accessed January 9,
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70. Robert Rycroft and Don Kash, “Self Organizing Innovation 26. Michael Hickins, “Xerox Shares Its Knowledge,” Management
Networks: Implications for Globalization,” Technovation, March Review, September 1999, p. 42; http://www.darwinmagazine
2004, vol. 24, no. 3, pp. 187–198; see also Emmanuel Amadides .com/read/020101/share.html (accessed September 10, 2006).
and Nikos Karacapildes, “Information Technology Support for 27. Pamela Babcock, “Shedding Light on Knowledge Management,”
Knowledge and Social Processes of Innovation Management,” HR Magazine, May 2004, pp. 47–50.
Technovation, January 2006, vol. 26, no. 1, pp. 50–60. 28. Irma Becerra-Fernandez et al., op. cit., p. 3.
71. See, for example, Andi Gray, “Exploring Product Lifecycle,” 29. Ibid.
Fairfield County Business Journal, June 20, 2005, vol. 44, no. 25, 30. Ibid., pp. 37–39.
p. 9. 31. Michael Hickins, op. cit., p. 42.
72. “Better by Design,” Economist, September 17, 2005, vol. 376, 32. “Ryder Systems,” Accenture.com, 2003. Accessed March 2, 2006.
no. 1444, p. 28. 33. Ibid.
73. Ibid. 34. http://www-306.ibm.com/software/lotus/ (accessed September
74. This case is quoted from Dollinger, op. cit., p. 37, and it is 13, 2006).
adapted from Meera Louis, “Pooled Savings Help Jamaicans 35. Vicki Powers, op. cit., p. 42.
Build Business,” Wall Street Journal, October 17, 2000, 36. “Select Medical Corp Implements Oracle E-Business Week for
pp. B1–B2. 79 Long-Term Acute-Care Hospitals and 790 Outpatient
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CHAPTER 5 37. For the definition of telecommunications, see G. Michael
1. Vicki Powers, “Virtual Communities at Caterpillar Foster Ashmore, “Telecommunications Opens New Strategic Business,”
Knowledge Sharing,” Training and Development, June 2004, Journal of Business Strategy, March–April 1990, p. 58.
p. 41. 38. Laudon and Laudon, Management Information Systems,
2. Kenneth C. Laudon and Jane P. Laudon, Management pp. 262–268.
Information Systems, 9th ed. (Upper Saddle River, N.J.: Pearson 39. Frenzel, op. cit., pp. 159–160.
Education, 2006), p. G7. 40. Ibid., p. 160.
3. James Senn, Information Systems in Management (Belmont, 41. The term modem is derived from the functions of modulation
Calif.: Wadsworth Publishing, 1990), p. 58. and demodulation. A modem’s function is to modulate or
4. Peter F. Drucker, “The Coming of the New Organization,” superimpose on the telephone line’s analog signal the digital
Harvard Business Review, January–February 1988, p. 45. information form the computer input device. See, for example,
5. Carroll Frenzel, Management of Information Technology (Boston, Frenzel, op. cit., p. 162.
Mass.: Boyd & Fraser, 1992), p. 10. 42. Marakas, op. cit., p. 29.
6. See, for example, David Kroenke and Richard Hatch, 43. Laudon and Laudon, Essentials, p. 413.
Management Information Systems (New York: McGraw-Hill, 44. Kroenke and Hatch, op. cit., p. 359.
1994), p. 20. 45. David Kirkpatrick, “Groupware Goes Boom,” Fortune,
7. Senn, op cit., p. 58. December 27, 1993, pp. 100–101. For a discussion of group
8. George Marakas, Decision Support Systems (Upper Saddle River, decision support systems, see also Marakas, op. cit., pp. 153–154.
N.J.: Prentice-Hall, 2003), p. 326. 46. Senn, op. cit., p. 415.
9. Ibid. 47. See, for example, Senn, op. cit., p. 418.
10. Laudon and Laudon, op. cit., p. G7. 48. Ibid., p. 427.
11. Frenzel, op. cit., p. 11. 49. Laudon and Laudon, Management Information Systems, p. 54.
12. Laudon and Laudon, op. cit., Chapter 2. 50. John Wilke, “Computer Links Erode Hierarchical Nature of
13. Laudon and Laudon, op. cit., pp. 43–44. See also Maracas, op. Workplace Culture,” Wall Street Journal, December 9, 1993, p. A7.
cit., p. 176, and, for an example, see “Mitek’s QuickStrokes 51. Ibid.
Recognition Tool,” Bank Systems & Technology, January 2005, 52. See, for example, Laudon and Laudon, Essentials, pp. 413–416,
p. 42. and Tom Williams, “Virgin Holidays to Set Up 600
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15. Laudon and Laudon, op. cit., pp. 44–45. 2006, p. 3.
16. Kenneth Laudon and Jane Laudon, Essentials of Management 53. See Sandra Atchison, “The Care and Feeding of Loan Eagles,”
Information Systems (Upper Saddle River, N.J.: Prentice Hall, BusinessWeek, November 15, 1993, p. 58; William Van Winkle,
1997), p. 405. See also Marakas, op. cit., pp. 3–5. “Your Away-from-Home Office,” Home Office Computing,
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Endnotes 525
54. Atchison, op. cit., pp. 24–25. 26. Ibid., p. 106.

55. Ibid., p. 28. 27. Ibid.
56. Mary Sumner, op. cit., p. 8. 28. “Analytics,” sas.com (downloaded March 4, 2006).
57. Ibid., p. 24. 29. Julie Schlosser, “Looking for Intelligence in Ice Cream,” Fortune,
58. John Champy, Reengineering Management: The Mandate for New March 17, 2003, p. 120.
Leadership (New York: Harper Business, 1995), pp. 78–79. 30. Ibid.
59. Ibid., p. 79. 31. See, for example, www.oracle.com/applications/cpm/
intelligence.html (downloaded September 15, 2006).
CHAPTER 6 32. George Marakas, Decision Support Systems (Upper Saddle River,
1. “Fortis Bank Marketing Campaigns Gain in Efficiency,” N.J.: Pearson, 2003), pp. 8–22.
www.sas.com (downloaded March 4, 2006). 33. “Baylor Relies on SAS for Cost-Saving Strategic Enrollment
2. Ibid. Management,” sas.com/Baylor (downloaded January 10, 2006).
3. Max Bazerman, Judgment in Managerial Decision Making (New 34. Ibid.
York: Wiley, 1994), p. 3. 35. Ibid.
4. See, for example, Herbert Simon, The New Science of 36. Prased Padmanabhan, “Decision Specific Experience in Foreign
Management Decision (Upper Saddle River, N.J.: Prentice Hall, Ownership and Establishment Strategies: Evidence from Japanese
1971), pp. 45–47. Firms,” Journal of International Studies, Spring 1999, pp. 25–27.
5. Larry Long and Nancy Long, Computers (Upper Saddle River, For further discussion of the usefulness of experience, see, for
N.J.: Prentice Hall, 1996), p. M7. example, Michael McDonald and James Westphal, “Getting by
6. Mairead Browne, Organizational Decision Making and Information with the Advice of Their Friends: CEOs’ Advice Networks and
(Norwood, N.J.: Ablex Publishing Corporation, 1993), p. 6. Firms’ Strategic Responses to Poor Performance,” Administrative
7. Bazerman, op. cit., p. 5. Science Quarterly, March 2003, vol. 48, no. 1, pp. 1–32.
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Research,” Journal of Consumer Research, December 2001, 39. Quoted in Robert L. Heilbroner, “How to Make an Intelligent
vol. 38, no. 4, pp. 499–505. See also Leigh Buchanan and Decision,” Think, December 1990, pp. 2–4.
Andrew O’Connell, “A Brief History of Decision Making,” 40. Ibid. See also Theodore Rubin, Overcoming Indecisiveness: The
Harvard Business Review, January 2006, vol. 84, no. 1, pp. 32–42. Eight Stages of Effective Decision Making (New York: Avon Books,
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addresses the question of how decision makers faced with “Decision Management: How to Assure Better Decisions in Your
severe uncertainty should deal with the problem; one study Company,” Global Cosmetic Industry, February 2006, vol. 174,
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more information than is usable. See, for example, Yakov Ben- 41. This anecdote is quoted and paraphrased from Bill Breen, “What’s
Haim, Information Gap Decision Theory: Decisions Under Severe Your Intuition?” Fast Company, September 2000, pp. 294–295.
Uncertainty (New York: Academic Press, 2001). 42. Ibid., p. 296.
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Wiley, 1958), pp. 140–141. Review, February 2001, p. 64. See also David A. Garvin, “All the
12. For a discussion, see, for example, Bazerman, op. cit., pp. 4–5. Wrong Moves,” Harvard Business Review, January 2006, vol. 84,
13. Ibid., p. 4. no. 1, pp. 18–27.
14. John Hammond, Ralph Keeney, and Howard Raiffa, Smart 44. J. Wesley Hutchinson and Joseph Alba, “When Business Is a
Choices (Boston, Mass.: Harvard Business School Press, 1999), Confidence Game,” Harvard Business Review, June 2001,
pp. 19–30. pp. 20–21. For an additional perspective, see, for example,
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marketing. Digital Age,” USA Today, September 2001, vol. 130, no. 2676,
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section are based on Hammond et al., op cit., pp. 35–41. Decision-Making,” Credit Union Journal, September 3, 2001,
17. Ibid., p. 47. See also Paul Nutt, “Expanding the Search for vol. 5, no. 35, p. 7.
Alternatives During Strategic Decision-Making,” Academy of 45. Kenneth Laudon and Jane Price Laudon, Management
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Decision Process,” Human Resource Management Review, 2004, Company’s Whole Brain to Work,” Harvard Business Review,
vol. 14, pp. 179–199; and Jeffrey Pfeffer and Robert Sutton, July–August 1997, pp. 111–121.
“Evidence Based Management,” Harvard Business Review, 48. See, for example, William Taggart and Enzo Valenzi, “Assessing
January 2006, pp. 66–74. Rational and Intuitive Styles: A Human Information Processing
22. Thomas Davenport, “Competing on Analytics,” Harvard Metaphor,” Journal of Management Studies, March 1990,
Business Review, January 2006, pp. 99–107. pp. 1501–1571; and Christopher W. Allinson and John Hayes,
23. Ibid., p. 100. “The Cognitive Style Index: A Measure of Intuition—Anaylsis
24. Ibid., p. 105. for Organizational Research,” Journal of Management Studies,
25. Ibid., p. 102. January 1996, pp. 119–135.
526 Endnotes
49. This and the following guidelines are from Heilbroner, op. cit. Relationship of Culture and Information Flows,” Journal of
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Thinking,” IIE Solutions, October 2001, vol. 33, no. 10, p. 22; 67. Max Bazerman and Dolly Chugh, “Decisions Without
Curtis Sittenfeld, “The Most Creative Man in Silicon Valley,” Blinders,” Harvard Business Review, January 2006, pp. 88–97.
Fast Company, June 2000, pp. 275–290; Joy Caldwell, “Beyond 68. Irving Janis, Groupthink: Psychological Studies of Policy Decisions
Brainstorming: How Managers Can Cultivate Creativity and and Fiascos, 2d ed. (Boston, Mass.: Houghton Mifflin, 1982). See
Creative Problem Solving Skills in Employees,” Supervision, also James Esser, “Alive and Well After 25 Years: A Review of
August 2001, pp. 6–9; “Creativity Rooms Help Brainstormers Group Think Research,” Organizational Behavior and Human
Become Rainmakers at America Online,” BNA Bulletin to Performance, February–March 1998, pp. 116–142.
Management, June 24, 1999, p. 193; and Max Messner, 69. See, for example, www.oracle.com/applications/cpm/
“Encouraging Employee Creativity,” Strategic Finance, December intelligennce.html (downloaded September 15, 2006).
2001, vol. 83, no. 6, pp. 16–18. 70. Amy Merrick, “Expensive Circulars Help Precipitate Kmart
51. As discussed in Michael Roberto, “Making Difficult Decisions in President’s Departure,” Wall Street Journal, January 18, 2002,
Turbulent Times,” Ivey Business Journal, January/February 2002, p. B1; “Kmart to Acquire Sears in $11 Billion Deal,” http://
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“How to Foster Creativity at Work,” Training & Development, York,” Air Transport World, June 2001, vol. 38, no. 6, p. 78.
February 2001, pp. 61–67; A. Muoio, “Where Do Great Ideas 72. The breakeven point is also sometimes defined more
Come From?” Fast Company, January–February 2000, technically as the quantity of output or sales that will result in
pp. 149–164; Charles Fishman, “Creative Tension,” Fast a zero level of earnings before interest or taxes. See, for
Company, November 2000, pp. 359–368; Andrew Hargadon example, J. William Petty et al., Basic Financial Management
and Robert Sutton, “Building an Innovation Factory,” Harvard (Upper Saddle River, N.J.: Prentice Hall, 1993), p. 932.
Business Review, May–June 2000, pp. 157–166; Michael 73. Jay Heizer and Barry Render, Production and Operations
Michalko, “Jumpstart Your Company’s Creativity,” Supervision, Management (Upper Saddle River, N.J.: Prentice Hall, 1996),
January 2001, vol. 62, no. 1, p. 14; and Liz Sampson, “Fostering pp. 240–250. For a good treatment of statistical decision
Creativity: Companies Enhance the Bottom Line by Building theory, see, for example, Simon French and David Rios,
Corporate Cultures That Encourage Employee Innovation,” Statistical Decision Theory (New York: Oxford University
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53. Gardiner Morse, “Decisions and Desire,” Harvard Business
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56. John Hammond et. al., “The Hidden Traps in Decision- 2. George L. Morrisey, A Guide to Tactical Planning (San Francisco:
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58. Ibid. 3. Fred David, ibid.
59. Leigh Buchanan and Andrew O’Connell, “A Brief History of 4. R. R. Donnelley and Sons Company website, www.rrdonnelley
Decision-Making,” Harvard Business Review, January 2006, p. 40. .com.
60. Hammond et al., op. cit. 5. Ronald Henkoff, “How to Plan for 1995,” Fortune, December
61. Robert Cross and Susan Brodt, “How Assumptions of 31, 1990, p. 74; and “RR Donnelley Paying $1.3 Billion for
Consensus Undermined Decision-Making,” MIT Sloan Banta,” UPI NewsTrack, November 1, 2006, p. NA.
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Harvard Business Review, July 2003, pp. 56–64. Drucker,” Journal of Business Strategy, May–June 1999, pp. 1–9.
63. Ibid., p. 59. 7. Peter F. Drucker, The Effective Executive (New York: Harper &
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Mass.: Allyn & Bacon, 1992), pp. 248–249. See also Daphne Setting to Organizational Results (Westport, Conn.: Quorum
Main and Joyce Lambert, “Improving Your Decision Making,” Books, 1994), p. 101.
Business and Economic Review, April 1998, pp. 9–12; and John 8. “Setting Departmental Goals You Can Actually Achieve,” Info-
Hammond, Ralph L. Keeney, and Howard Raiffa, “The Hidden Tech Advisor Newsletter, January 22, 2002.
Traps in Decision Making, Harvard Business Review, January 9. Steven Carroll and Henry Tosi, Management by Objectives (New
2006, vol. 84, no. 1, pp. 118–126. York: Macmillan, 1973); see also Conny Antoni, “Management
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of Managers Revisited,” Academy of Management Journal, June Journal of Human Resource Management, February 2005, vol. 16,
1997, pp. 716–737. no. 2, pp. 174–185.
66. Dewitt Dearborn and Herbert A. Simon, “Selective Perception: 10. Other examples of time series include daily average
A Note on the Departmental Identification of Executives,” temperatures in Chicago, daily average aircraft turnaround time
Sociometry, 1958, vol. 21, pp. 140–144. For a recent study of this for Southwest Airlines, and monthly customer service
phenomenon, see Mary Waller, George Huber, and William satisfaction ratings.
Glick, “Functional Background as a Determinant of Executives’ 11. Dennis Berman, “Lousy Sales Forecasts Helped Fuel the
Selective Perception,” Academy of Management Journal, August Telecom Mess,” Wall Street Journal, July 9, 2001, p. B1.
1995, pp. 943–994. While not completely supporting the 12. “First Too Few, Then Too Many . . . and Finally a Spot On!”
Dearborn findings, these researchers did also conclude that sas.com (accessed January 10, 2006).
managers’ functional backgrounds affected how they perceived 13. Kenneth Laudon and Jane Laudon, Management Information
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Gibson, “Executive Values and Decision Making: The “Wal-Mart to Triple Size of a Warehouse,” TechWeb,
Endnotes 527
http://192.215.17.45/newsflash/nf617/0210—st6.htm (accessed 37. “Pella Corp. Streamlines Business Processes to Cut Costs and
February 10, 1999). Boost Productivity with Oracle E-Business Suite,” Oracle.com
14. Philip Kotler, Marketing Management (Upper Saddle River, N.J.: (January 9, 2006).
Prentice Hall, 1997), p. 113. 38. Laura Holson and John Markoff, “With One Click of the
15. Phillip Kotler and Gary Armstrong, Principles of Marketing, Mouse,” New York Times, January 23, 2006, p. C1.
(Upper Saddle River, N.J.: Pearson, 2001), pp. G7–8. 39. Adrienne Carter, “Kodak’s Promising Development,” Money,
16. “Companies Turn to Private Spies,” Fortune, August 23, 2004, Feburary 2002, vol. 31, no. 2, p. 39.
p. 24. 40. Robert Kaplan and David Norton, “The Office of Strategy
17. For a tool that helps managers more clearly understand Management,” Harvard Business Review, October 2005,
environmental trends, see Sarsha Drafi and Paul Kampas, “How pp. 72–80.
to Identify Your Enemies Before They Destroy You,” Harvard 41. Michael Mankin and Richard Steele, “Turning Great Strategy
Business Review, November 2002, pp. 115–120. into Great Performance,” Harvard Business Review, July/August
18. Susan Warren, “I-Spy: Getting the Lowdown on Your 2005, pp. 65–72.
Competition Is Just a Few Clicks Away,” Wall Street Journal, 42. Laura Ponticello, “Scorecard: Linking Strategy to Performance
January 14, 2002, p. 14. Objectives,” www.ISIXSIGMA.com (accessed January 21, 2006).
19. George Day and Paul Shoemaker, “Scanning the Periphery,” 43. Noel Tichy and the RAM Charan, “The CEO as Coach: An
Harvard Business Review, November 2005, pp. 135–148. Interview with Allied Signal’s Lawrence Bossidy,” Harvard
20. Harvey Kahalas, “A Look at Planning and Its Components,” Business Reivew, March–April 1995, pp. 69–78.
Managerial Planning, January–February 1982, pp. 13–16; 44. www.sas.com (accessed January 9, 2006).
reprinted in Phillip DuBose, Readings in Management (Upper 45. www.sas.com/success (accessed January 10, 2006).
Saddle River, N.J.: Prentice Hall, 1988), pp. 49–50. For a
discussion of a modern technique for evaluating management CHAPTER 8
policies and procedures, see Salwa Ammar and Ronald Wright, 1. Ron Ruggles, “Transaction Monitoring Boosts Safety, Perks Up
“Characteristics and Features of a Performance Evaluation Coffee Chain Profits,” Nation’s Restaurant News, November 28,
Model Using a Multilevel Fuzzy Rule-Based System,” 2005, vol. 39, no. 58, p. 35.
International Journal of Technology, Policy and Management, 2. Kenneth Merchant, “The Control Function of Management,”
May 10, 2004, vol. 3, no. 2, p. 301. Sloan Management Review, Summer 1982, p. 44.
21. “Annual Report, 2001. Feature Stories, Dell,” Accenture.com 3. This section is based on William Newman, Constructive Control
(accessed January 9, 2006). (Upper Saddle River, N.J.: Prentice Hall, 1995), pp. 6–9.
22. Jeffrey McCracken, “‘Way Forward’ Requires Culture Shift at 4. Kristina Sullivant, “Boeing Achieves Internet Liftoff,” PC Week,
Ford,” Wall Street Journal, January 23, 2006, p. B1. May 10, 1999, p. 67.
23. Fred David, Strategic Management (Upper Saddle River, N.J.: 5. Ibid.
Prentice Hall, 2001), p. 54. 6. Melanie Warner, “Confessions of a Control Freak,” Fortune,
24. David Pringle, “Nokia’s CEO, Marking a Decade, Faces September 4, 2000, pp. 130–140.
Struggling, Quickly Changing Industry,” Wall Street Journal, 7. These characteristics are based on Robert Simons, Levers of
January 23, 2002, p. B70. Control, How Managers Use Innovative Control Systems to Drive
25. Orit Gadiesh and James Gilbert, “Transforming Corner Office Strategic Renewal (Boston, Mass.: Harvard Business School Press,
Strategy into Front-Line Action,” Harvard Business Review, May 1995), p. 87.
2000, p. 74. 8. This discussion is based on Simons, op. cit., pp. 87–88.
26. Danny Hakim, “With Huge Sale, GM Buries a Discarded 9. For an example, see Simons, op. cit., p. 82.
Strategy,” New York Times, October 30, 2001, p. C8. 10. Daniel Wren, The Evolution of Management Thought (New York:
27. Joseph Weitz, “How Ferarri Toils in the Nirvana of Carmakers,” John Wiley & Sons, 1994), p. 115.
Wall Street Journal, January 24, 2006, p. B2. 11. Based on Kenneth Merchant, Modern Management Control
28. Mylene Mangalindian, “How Amazon’s Dream Alliance with Systems (Upper Saddle River, N.J.: Prentice Hall, 1998), p. 642.
Toys ‘R’ Us Went So Sour,” Wall Street Journal, January 23, 2006, 12. For a discussion, see ibid., pp. 542–545.
p. A1. 13. Biff Motely, “Picking the Right Ratio to Measure Performance,”
29. Jim Carbone, “Contract Manufacture Is Moved to Vertical Bank Marketing, January/February 2002, vol. 34, no. 1, p. 44.
Integration,” Purchasing, October 18, 2001, vol. 130, no. 20, 14. Merchant, Modern Management Control Systems, p. 304.
pp. 33–35. 15. Arif Mohammed, “Hyundai Boosts Network Access and
30. “Killer App,” Fortune, September 1, 2003, pp. 111–116. Control,” Computer Weekly, February 22, 2005, p. 44.
31. John Byrne et al., “The Virtual Corporation,” BusinessWeek, 16. Mary Sumner, Enterprise Resource Planning (Upper Saddle River,
Feburary 8, 1993, p. 99; see also Keith Hammonds, “This Virtual N.J.: Pearson Education, 2005).
Agency Has Big Ideas,” Fast Company, November 1999, pp. 70–74. 17. “Select Medical Corp Implements Oracle E-Business Suite for 79
32. Gary Latham and J. James Baldes, “The Practical Significance of Long-Term Acute-Care Hospitals and 790 Outpatient Clinics,”
Locke’s Theory of Goal Setting,” Journal of Applied Psychology, www.oracle.com (accessed January 10, 2006).
February 1975, pp. 605–612. See also Gary Latham, “The Effects 18. “Midsize Company Turns to Process-Driven ERP System;
of Proximal and Distal Goals on Performance of a Moderately Biotech Firm Rolls Out ERP System from Exact Software in 18
Complex Task,” Journal of Organizational Behavior, July 1999, Months to 48 Offices Worldwide,” InformationWeek, December
pp. 421–430. 23, 2004, no. 9750-6874.
33. Katherin Mieszkowski, “The E Lance Economy,” Fast Company, 19. “Millipore Goes Global with Oracle,” www.oracle.com (accessed
November 1999, pp. 66–68. See also www.elance.com/ January 9, 2006).
(accessed January 5, 2007). 20. Ibid.
34. Michael Porter, Competitive Advantage (New York: Free Press, 21. “Healthcare Insurer Fit for Success,” www.sas.com (accessed
1980). January 10, 2006).
35. “Westdeutsche Bank,” www.sap.com (accessed January 9, 2006). 22. Matt Hicks, “Tuning to the Big Picture for a Better Business,”
36. Michael Porter, op. cit. PC Week, July 15, 1999, p. 69.
528 Endnotes
23. “RFID: Technology Tracks Goods, Now People,” Knight-Ridder During Restructuring in China,” Asia Pacific Journal of
Tribune Business News (accessed January 20, 2006). Management, 2004, vol. 21, pp. 515–533.
24. Jennifer Maselli and Beth Batcheldor, “Remote-Control 48. Rosabeth Moss Kanter, Commitment and Community
Businesses: Integrating Real-Time Remote Diagnostic Data with (Cambridge, Mass.: Harvard University Press, 1972), pp. 24–25.
CRM and ERP Systems to Boost Sales and Improve Service,” 49. See Dessler, op. cit., p. 64.
InformationWeek, September 3, 2001, vol. 18, p. NA. 50. JoAnn Davy, “Online at the Office: Virtual Communities Go to
25. Jeffrey Stanton and Janet Barnes-Farrell, “Effects of Electronic Work,” Managing Office Technology, July–August 1998, pp. 9–11.
Performance Monitoring on Personal Control, Task 51. Ibid.
Satisfaction, and Task Performance,” Journal of Applied 52. Dessler, op. cit., p. 69.
Psychology, December 1996, p. 738; and Paul Greenlaw, “The 53. Abraham Maslow, Motivation and Personality (New York: Harper
Impact of Federal Legislation to Limit Electronic Monitoring,” & Row, 1954), p. 336.
Public Personnel Management, Summer 1997, pp. 227–245. 54. Interview with assembler Dan Dise, March 1992.
26. Norihiko Shirouzu and Jon Bigness, “7-Elevens’ Operators 55. Personal interview, March 1992.
Resist System to Monitor Managers,” Wall Street Journal, June 56. Ron Ruggles, op. cit., p. 35.
16, 1997, pp. B1–B6.
27. www.sas.com/success (accessed January 10, 2006). CHAPTER 9
28. Joseph Rosanas and Manuel Nevilla, “The Ethics of 1. Reuben Slone, “Leading a Supply-Chain Turnaround,” Harvard
Management Control Systems: Developing Technical and Business Review, October 2004, pp. 114–121.
Moral Values,” Journal of Business Ethics, March 2005, vol. 57, 2. Ibid., p. 114.
no. 1, pp. 83–97. 3. Richard Chase and Nicholas Aquilero, Production and Operations
29. The following, except as noted, is based on Kenneth Merchant, Management, 6th ed. (Homewood, Ill.: Irwin, 1992), p. 5.
Control in Business Organizations (Boston, Mass.: Pitman, 1985), 4. Ibid., p. 5.
pp. 71–120. See also Robert Kaplan, “New Systems for 5. Based on Jay Heizer and Barry Render, Operations Management,
Measurement and Control,” The Engineering Economist, Spring 6th ed. (Upper Saddle River, N.J.: Prentice Hall, 2001), p. 181.
1991, pp. 201–218. 6. Norman Gaither, Production and Operations Management, 5th ed.
30. This is based on Simons, op. cit., pp. 81–82. (Fort Worth, Tex.: The Dryden Press, 1992), p. 22.
31. “Did Warner-Lambert Make a $468 Million Mistake?” 7. “Goodnight, Vietnam,” Economist, January 8, 2000, p. 65.
BusinessWeek, November 21, 1983, p. 123; quoted in Merchant, 8. Ibid., p. 65.
Control in Business Organizations, pp. 98–99. 9. Gaither, op. cit., pp. 132–133.
32. Chris Argyris, “Human Problems with Budgets,” Harvard 10. See, for example, James Gilmore and Joseph Pine II, “The Four
Business Review, January–February 1953, pp. 97–110. Faces of Mass Customization,” Harvard Business Review,
33. “Why Good Accountants Do Bad Audits,” Harvard Business January–February 1997, pp. 91–101; and Mark Willoughby,
Review, November 2002, pp. 97–102. “SOA: Enabler of Mass Customization,” Computerworld,
34. “Wal-Mart Takes Reigns at Seiyu,” MMR, December 12, 2005, November 20, 2006, p. 30.
vol. 22, no. 20, p. 103. 11. For a discussion of how other companies apply these concepts,
35. See also Eric Krell, “Greener Pastures,” Training, November see, for example, Edward Feitzinger and Jan Lee, “Mass
2001, vol. 38, no. 11, pp. 54–59. Customization and Hewlett-Packard: The Power of
36. Tom Burns and G. M. Stalker, The Management of Innovation Postponement,” Harvard Business Review, January–February
(London: Tavistock, 1961), p. 119. 1997, pp. 116–121; and Frank Piller and Ashok Kumar, “For
37. Jeffrey Seglin, “A Company Credo, as Applied or Not,” New York Each, Their Own: The Strategic Imperative of Mass
Times, July 15, 2001, pp. 3–4. Customization,” Industrial Engineer, September 2006, pp. 40–46.
38. David Pollitt, “Satisfied Employees Keep Better Track of 12. Everett Adam Jr. and Ronald Ebert, Production and Operations
Tornadoes at the US National Weather Service,” Human Management (Upper Saddle River, N.J.: Prentice Hall, 1992),
Resource Management International Digest, 2005, vol. 13, no. 1, p. 254.
pp. 15–18. 13. Ibid.
39. J. Newcomb, 1998 letter to employees, May 17, 1999. 14. Gaither, op. cit., p. 135. See also Nancy Hyer, “The Discipline of
40. J. Pfeffer and J. Veiga, “Putting People First for Organizational Real Cells,” Journal of Operations Management, August 1999,
Success,” Academy of Management Executive, 1999, vol. 13, pp. 557–559; and Tom Dassenbach, “Cellular Manufacturing
pp. 37–48. Part 1—What’s in It for You?” Wood & Wood Products,
41. See also John Myer, “Employee Commitment and Motivation: November 2005, pp. 29–33.
A Conceptual Analysis and Integrative Model,” Journal of 15. Barry Render and Jay Heizer, Principles of Operations Management
Applied Psychology, December 2004, vol. 89, no. 6, pp. 191–206. (Upper Saddle River, N.J.: Prentice Hall, 1997), p. 551.
42. James McElroy, “Managing Workplace Commitment by Putting 16. Ibid., pp. 551–553.
People First,” Human Resource Management Review, 2001, vol. 11, 17. Jack Robertson, “Sony Centralizes Procurement,” EBN, January
pp. 329–334. 28, 2002, p. 1.
43. See also Rene Schalk and Wim Van Dijk, “Quality Management 18. James Evans et al., Applied Production and Operations Management
and Employee Commitment Illustrated with Examples from (St. Paul, Minn.: West Publishing Co., 1984), pp. 500–501.
Dutch Healthcare,” International Journal of Healthcare Quality 19. Ibid., p. 511.
Assurance, 2005, vol. 18, nos. 2–3, pp. 170–178. 20. See, for example, T. C. E. Cheng, “An EOQ Model with
44. Personal interview. See Gary Dessler, Winning Commitment: How Learning Effect on Set-Ups,” Production and Inventory
to Build and Keep a Competitive Work Force (New York: McGraw- Management Journal, First Quarter 1991, pp. 83–84.
Hill, 1993), pp. 27–28. 21. Evans et al., op. cit., p. 39.
45. Ibid., p. 28. 22. Joel E. Ross, Total Quality Management: Text, Cases and Readings
46. Ibid., p. 30. (Delray Beach, Fla.: St. Lucie Press, 1993), p. 1. See also James
47. See, for example, Gerald Fryxell et al., “The Role of Gaskin, “Bonner Bets on Total Quality Management,” Internet
Trustworthiness in Maintaining Employee Commitment Week, September 6, 1999, p. 43.
Endnotes 529
23. Render and Heizer, op. cit., p. 96. See also, Chip Caldwell, Implementing a Pull System by Putting the Cart Before the
“Lean-Six Sigma: Tools for Rapid Cost Reduction: Have You Ever Horse?” Production & Inventory Management Journal, Spring 1999,
Conducted a “Manager Quality Waste Walk”? If Not, Read On.” pp. 67–72.
Healthcare Financial Management, October 2006, pp. 96–99. 42. Ibid., p. 64.
24. Discussed in Ross, op. cit., pp. 2–3, 35–36. 43. Susan Moffat, “Japan’s New Personalized Production,” Fortune,
25. In Richard Hodgetts, Blueprints for Continuous Improvement: October 22, 1990, pp. 132–135. See also Richard Truett,
Lessons from the Baldrige Winners (New York: American “Chrysler Robots Are Boon to Plant Flexibility,” Automotive
Management Association, 1993), p. 19. See also www.quality News, August 2005, vol. 79, no. 6160, p. 16.
.nist.gov/Business_Criteria.htm (accessed November 8, 2006). 44. Mark Vonderem and Gregory White, Operations Management
26. “How Creamy? How Crunchy? Kraft Foods Discovers the True (St. Paul, Minn.: West Publishing, 1988), pp. 44–45. For more
Measure of SAS,” www.sas.com (accessed January 10, 2006). information on computer-integrated manufacturing, see
27. Chase and Aquilero, op. cit., p. 197. Michael Baudin, Manufacturing Systems Analysis (Upper Saddle
28. These traits are quoted from David Anderson, Design for River, N.J.: Prentice Hall, 1990), pp. 2–5. See also Bob
Manufacturability (Lafayette, Calif.: CI Press, 1990), p. 9. Trebilcock, “Synching up Production Lines,” Modern Materials
29. Ibid., p. 16. Handling, May 2005, vol. 60, no. 5, p. 31.
30. Ibid., p. 15. See also F. Robert Jacobs and Vincent Mabert, 45. For additional information, see, for example, Alan Luber,
Production Planning, Scheduling, and Inventory Control (Norcross, “Living in the Real World of Computer Interfaced
Ga.: Industrial Engineering and Management Press, 1986), Manufacturing,” Production & Inventory Management, September
pp. 96–100; and Otis Port, Zachary Shiller, Gregory Miles, and 1991, pp. 10–11; and Jeremy Main, “Computers of the World,
Amy Schulman, “Smart Factories, America’s Turn,” BusinessWeek, Unite!” Fortune, September 24, 1990, pp. 115–122. See also
May 8, 1989, pp. 142–148. John Teresko, “Japan’s New Idea,” Industry Week, September 3,
31. See, for example, Joseph Martinich, Production and Operations 1990, pp. 62–66; and David Bak, “Shared Intelligence Guides
Management (New York: Wiley, 1997), pp. 215–216. Control System,” Design News, October 18, 1999, p. 97.
32. Valerie Reitman, “Global Money Trends Rattle Shop Windows 46. Kristina Sullivan, “Boeing Achieves Liftoff,” PC Week, May 10,
in Heartland America,” Wall Street Journal, November 26, 1993, 1999, p. 67.
p. A1. See also Derek Korn, “Surviving Global Competition 47. John Teresko, “Manufacturing in Japan,” Industry Week,
Through Aggressive Business Practices,” Modern Machine Shop, September 4, 1989, p. 35–48. See also Richard Jensen, “How to
August 2005, vol. 78, no. 3, pp. 72–74. Be Nimble, How to Be Quick,” CMA Management, October 1999,
33. These elements are based on Kenneth Wantuck, The Japanese pp. 34–38.
Approach to Productivity (Southfield, Mich.: Bendix Corporation, 48. Brian McWilliams, “Re-Engineering of the Small Factory,” Inc.
1983). See also Chase and Aquilero, op. cit., pp. 261–272; Adam Technology, March 19, 1996, pp. 44–47, reprinted in Roberta
and Ebert, op. cit., p. 568; Carla Kalogeridis, Gary Witzenburg, Russell and Bernard Taylor, Operations Management (Upper
and John Peter, “A Decade of Tech,” Automotive Industries, Saddle River, N.J.: Prentice Hall), p. 260.
January 2005, vol. 185, no. 1, pp. 34–36; and John 49. David Upton, “What Really Makes Factories Flexible?” Harvard
McClenahen, “JIT Tops Management Practices,” Industry Week, Business Review, July–August 1995, p. 75.
December 2006, p. 13. 50. Ibid., pp. 80–81.
34. See, for example, Mike Kaye, “Continuous Improvement: Ten 51. Ibid., p. 80; Lisa Gewirtz, “Cerberus Buying Mead Paper Unit,”
Essential Criteria,” International Journal of Quality & Reliability TheDeal.com, January 18, 2005, p. 1.
Management, April–May 1999, pp. 485–487; and David 52. Heizer and Render, op. cit., p. 434.
Blanchard, “What’s Working for U.S. Manufacturers: The Latest 53. Ibid.
Census of Manufacturers Reveals That Lean Is Still the Most 54. Ibid.
Popular Improvement Method,” Industry Week, October 2006, 55. “Oracle Supply-Chain Management,” www.oracle.com
pp. 49–52. (downloaded January 15, 2006).
35. Chase and Aquilero, op. cit., p. 261. See also “Flexibility Critical 56. Hau Lee, “The Triple-A Supply Chain,” Harvard Business Review,
for Auto Sector to Succeed,” M P & P, Metal-Working Production October 2004, pp. 102–110.
& Purchasing, June 2005, vol. 32, no. 4, p. 17. 57. Reuben Slone, “Leading a Supply-Chain Turnaround,” Harvard
36. Sharon Parker, “Longitudinal Effects of Lean Production Business Review, October 2004, p. 120.
on Employee Outcomes and the Mediating Role of Work 58. “In the Room,” BusinessWeek, February 14, 2000, p. 116.
Characteristics,” Journal of Applied Psychology, 2004, vol. 88, 59. William Cassidy, “At Wal-Mart, Less Is More,” Journal of
no. 4, pp. 620–634. Commerce, November 7, 2005, vol. 6, no. 45, pp. 29–31.
37. Ibid., p. 631. 60. “RFID: Technology Tracks Goods, Now People,” Knight-Ridder
38. Mary Cronin, “Intranets Reach the Factory Floor,” Fortune, Tribune Business News, January 20, 2006 (accessed February 20,
August 18, 1997, p. 208. 2006).
39. “SAP Manufacturing: Drive Manufacturing at the Speed 61. Janet Perna, “Reinventing How We Do Business,” Vital Speeches
of Business,” www.sap.com (downloaded January 12, of the Day, July 15, 2001, vol. 67, no. 19, pp. 587–591.
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40. Adapted from Gaither, op. cit., pp. 6–8. See also Mike Exchange,” Wall Street Journal, February 28, 2000, p. A3.
Brezonick, “New Vickers Plant Focuses on Flexibility,” Diesel 63. “Dell: Build-To-Order Manufacturing,” www.accenture.com
Progress, North American Edition, January 1999, pp. 32–35; (downloaded January 9, 2006).
Millan Yeung, “The Future Looks Like Flexible Automation,” 64. Ibid.
DPN: Design Product News, May 2005, vol. 33, no. 3, p. 4; and 65. Kasra Ferdows et al., “Rapid-Fire Fulfillment,” Harvard Business
“Chrysler Shifting to Japanese Method of ‘Flexible Review, November 2004, pp. 104–110.
Manufacturing,’ ” Machine Design, September 2005, vol. 77, 66. Ibid., p. 104.
no. 17, p. 49. 67. Ibid., p. 106.
41. Thomas Stewart, “Brace for Japan’s Hot New Strategy,” Fortune, 68. Gabriel Kahn, “Making Labels for Less,” Wall Street Journal,
September 21, 1992, p. 64. See also Bobby Ray Inman, “Are You August 13, 2004, p. B1.
530 Endnotes
69. Heizer and Render, op. cit., p. 277; “Wheeled Coach 17. “My SAP CRM Unites Nestle Nordic,” mysap.com (downloaded
Ambulances Dominate The Market,” Fire Apparatus, October January 9, 2006).
2004, vol. 9, no. 10, pp. 1–6; www.wheeledcoach.com/ 18. “Visibility with mySAP Supply-Chain Management,” mysap.com
(accessed December 10, 2006). (downloaded January 4, 2006).
19. Mintzberg, op. cit., p. 4.
CHAPTER 10 20. Delia Craven, “Click and Mortar,” Red Herring, November 1999,
1. “Millipore Goes Global with Oracle,” www.oracle.com (accessed p. 208; Steven Thompson et al., “Improving Disastor Response
January 12, 2006). Efforts with Decision Support Systems,” International Journal of
2. Lee Hawkins Jr., “Lost in Transmission: Behind GM’s Slide: Emergency Management, November 14, 2006, p. 250; and
Bosses Misjudged New Urban Tastes,” Wall Street Journal, March www.citadon.com/ (accessed December 18, 2006).
8, 2006, p. A1. 21. Paul Lawrence and Jay Lorsch, Organization and Environment
3. “Reshuffle Sees Axa Split into Product Divisions,” Money (Cambridge, Mass.: Harvard University Press, 1967). See also
Management, December 7, 2006, p. 12. Frank Mueller and Romano Dyerson, “Expert Humans or
4. Mark Dale Franco, “Synergies 250 Years in the Making,” Catalog Expert Organizations?” Organization Studies, 1999, vol. 20,
Age, March 15, 2001, vol. 18, no. 4, pp. 47–38. See also no. 2, pp. 225–256. Some companies today practice concurrent
“Caswell-Massey Forges Ahead with Aggressive Growth Plan,” engineering to improve production coordination, which
Cosmetics International, September 9, 2005, p. 2. basically means having all the departments—design,
5. Rekha Back, “Heinz’s Johnson to Divest Operations, Scrap production, and marketing, for instance—work together to
Management of Firm by Region,” Wall Street Journal, December develop the product so that its production and marketing are
8, 1997, pp. B10, B12. See also “HJ Heinz: Restructuring Plan more easily coordinated once the item goes into production.
Announced by HJ Heinz,” The Economist, February 20, See Hassan Abdalla, “Concurrent Engineering for Global
1999, p. 7. Manufacturing,” International Journal of Production Economics,
6. Jana Parker-Pope and Joann Lublin, “P&G Will Make Jager CEO April 20, 1999, p. 251.
Ahead of Schedule,” Wall Street Journal, September 10, 1998, 22. Paul Lawrence and Jay Lorsch, Organization and Environment
pp. B1, B8. (Boston, Mass.: Division of Research, Graduate School of
7. John Barham, “The Morgan Matrix,” Latin Finance, April 2001, Business Administration, Harvard University, 1967), p. 1.
no. 126, p. 18; and “Thailand: Ad Agency Far East DDB Applies 23. This is based on “Thales: Knowledge Management and Worker
Matrix Management,” Thai Press Reports, September 20, 2006, Transformation,” www.accenture.com (downloaded January 9,
p. NA. 2006).
8. Lee Hawkins Jr., op. cit., p. A1. 24. Ibid.
9. John Hunt, “Is Matrix Management a Recipe for Chaos?” 25. These principles are based on Stephen Robbins and Philip
Financial Times, January 1998, p. 14. Hunsaker, Training in Interpersonal Skills (Upper Saddle River,
10. “Germany: Opel Takes Over Key Role in Development of Saturn N.J.: Prentice Hall, 1996), pp. 91–95; and David Whetter and
Cars,” just-auto.com, February 21, 2005 (downloaded March 20, Kim Cameron, Developing Management Skills (Upper Saddle
2006). River, N.J.: Prentice Hall, 2002), p. 435.
11. Pui Tam, “Hurd’s Big Challenge at HP: Overhauling Corporate 26. Harold Koontz and Cyril O’Donnell, The Principles of
Sales,” Wall Street Journal, April 3, 2006, pp. A1, A13. Management (New York: McGraw-Hill, 1964), p. 335.
12. Rob Walker, “Down on the Farm,” Fast Company, 27. Roger Crockett, “Can Chris Galvin Save His Family’s Legacy?”
February–March 1997, pp. 112–122; and “Amex acquires BusinessWeek, July 16, 2001, pp. 72–78.
Rosenbluth,” Travel Trade Gazette UK & Ireland, July 21, 28. Larry Bossidy, “The Job No CEO Should Delegate,” Harvard
2003, p. 3. Business Review, March 2001, pp. 47–49.
13. Jay Galbraith, “Organizational Design: An Information 29. The foundation study for this conclusion is Alfred Chandler,
Processing View,” Interfaces, 1974, vol. 4, no. 3, pp. 28–36; and Strategy and Structure (Cambridge, Mass.: MIT Press, 1962).
Jay Galbraith, Organizational Design (Reading, Mass.: Addison- 30. James Murdock, “Management Matters: To Centralize or
Wesley, 1977). See also Ranjay Gulati, “The Architecture of Decentralize?” Commercial Property News, April 16, 2005,
Cooperation: Managing Coordination Costs and Appropriation vol. 19, no. A, p. 20.
Concerns in Strategic Alliances,” Administrative Science Quarterly, 31. “Saks, Inc. Will Centralize,” Chain Store Age, September 2004,
December 1998, pp. 781–784; Henry Mintzberg, Structures in vol. 80, no. 9, p. 26.
Fives: Designing Effective Organizations (Upper Saddle River, N.J.: 32. “Home Depot to Centralize in Atlanta,” Display and Design
Prentice Hall, 1983), pp. 4–9; and Cliff McGoon, “Cutting-Edge Ideas, May 2005, vol. 17, no. 5, p. 6.
Companies Use Integrated Marketing Communication,” 33. “Home Depot to Centralize Store Teams,” Do-It-Yourself
Communication World, December 1998, pp. 15–20. Retailing, May 2005, vol. 188, no. 5, p. 14.
14. Christopher A. Bartlett and Sumantra Ghoshal, “Matrix 34. “China Unicom to Set Up International Department to
Management: Not a Structure, a Frame of Mind,” Harvard Centralize Business Management,” China Business News,
Business Review, July–August 1990, pp. 138–145. See also February 6, 2006.
K. Simon-Elorz, “Information Technology for Organizational 35. “7-Eleven Maximizes Savings with Complete Sourcing,
Systems: Some Evidence with Case Studies,” International Procurement, and Financial Solution,” www.oracle.com
Journal of Information Management, February 1999, p. 75; and (downloaded January 9, 2006).
Alexander Gerybadz, “Globalization of R&D: Recent Changes 36. For a discussion of the contingencies affecting span of control
in the Management of Innovation in Transnational (task uncertainty, professionalism, and interdependence), see,
Corporations,” Research Policy, March 1999, pp. 251–253. for example, Daniel Robey, Designing Organizations, 3rd ed.
15. Bartlett and Ghoshal, ibid., pp. 143–144. (Homewood, Ill.: Irwin, 1991), pp. 258–259.
16. “LG Electronics Maximizes Efficiency of Global Business with 37. Judith H. Dobrzynski, “Jack Welch: How Good a Manager?”
Centralized Oracle Platform,” www.oracle.com (accessed BusinessWeek, December 14, 1987, p. 94. See also Thomas
January 12, 2006). Stewart, “Brain Power,” Fortune, March 17, 1997, pp. 105–110.
Endnotes 531
38. Steve Hamm, “Speed Demons,” BusinessWeek, March 27, 2006, 66. John Byrne, Richard Brandt, and Otis Port, “The Virtual
pp. 69–70. Corporation,” BusinessWeek, February 8, 1992, p. 99.
39. Robert Guth, “Microsoft to Restructure Business,” Wall Street 67. “The Americas’ Intelligence Wire,” September 21, 2005
Journal, September 21, 2005, p. A3. (downloaded March 20, 2006).
40. “Home Depot to Centralize in Atlanta,” Display and Design 68. Julie Bick, “The New Fact of Self-Employment,” Inc. Magazine,
Ideas, May 2005, vol. 17, no. 5, p. 6; “Home Depot to November 2001, vol. 23, no. 5, pp. 87–89.
Centralize Divisional Store Teams,” Do-It-Yourself Retailing 69. Peter Senge, The Fifth Discipline: The Art and Practice of the
Telling, May 2005, vol. 188, no. 5, p. 14. Learning Organizations (New York: Currency Doubleday, 1994),
41. Steve Hamm, “Speed Demons,” op. cit., pp. 69–70. p. 3. See also Hershey Friedman et al., “Transforming a
42. Tom Burns and G. M. Stalker, The Management of Innovation University from a Teaching Organization to a Learning
(London: Tavistock, 1961), p. 1. Organization,” Review of Business, Fall 2005, vol. 26, no. 3,
43. Ibid., p. 80. pp. 31–36.
44. Ibid., p. 92. 70. Robert Rowden, “The Learning Organization and Strategic
45. Joan Woodward, Industrial Organization: Theory and Practice Change,” SAM Advanced Management Journal, Summer 2001,
(London: Tavistock Publications, 1965). vol. 66, no. 1, p. 11. See also “Pull Virtual Teams Together,”
46. “CSX Cutting Three Layers of Management,” Railway Age, Investors Business Daily, January 30, 2006, p. 88.
December 2003, p. 15. 71. K. Martin et al., “Implementing a Learning Management
47. Peters, Liberation Management, p. 238. System Globally: An Innovative Change Management
48. Marianne Devanna and Noel Tichy, “Creating the Competitive Approach,” IBM Systems Journal, March 2005, vol. 44, no. 1,
Organization of the 21st Century: The Boundaryless pp. 125–144.
Corporation,” Human Resource Management, Winter 1990, 72. “Millipore Goes Global with Oracle,” www.oracle.com
vol. 29, no. 4, pp. 455–471; and Ron Ashkenas et al., The (downloaded January 9, 2006).
Boundaryless Organization (San Fransisco: Jossey-Bass, 2002).
49. Except as noted, the remainder of this section is based on Larry CHAPTER 11
Hirschhorn and Thomas Gilmore, “The New Boundaries of the 1. Chuck Salter, “On the Road Again,” Fast Company, January
Boundaryless Company,” Harvard Business Review, May–June 2002, pp. 51–58; “Trucking Getting Global,” Traffic World,
1992, pp. 107–108. For a contrary view of “boundarylessness,” December 19, 2005, vol. 269, no. 51, p. 34.
see Victoria Sharpe, “The Myth of the Boundaryless 2. Roger Schreffler, “Revivalist Art,” Ward’s Auto World, November
Organization,” Technical Communication, May 2002, p. 262. 2001, vol. 37, no. 11, pp. 38–39; and Bruce Crumley, “Speeding
50. This is based on Hirschhorn and Gilmore, op. cit., pp. 104–108. Up Renault: Carlos Ghosn, Nissan’s Savior, Is Pushing the
51. Peters, Liberation Management, p. 238. French Automaker to Get into Gear,” Time, March 27, 2006,
52. This section is based on James Shonk, Team-Based Organizations vol. 167, no. 13, p. A15.
(Chicago, Ill.: Irwin, 1997). 3. Erin Brown, “Big Business Meets the E World,” Fortune,
53. Ibid., pp. 35–38. See also Susanne Scott and Walter Einstein, November 8, 1999, p. 88.
“Strategic Performance Appraisal in Team-Based Organizations: 4. Ibid., p. 91.
One Size Does Not Fit All,” The Academy of Management 5. Ibid.
Executive, May 2001, pp. 107–117. 6. David Baum, “Running the Rapids,” Profit Magazine, November
54. Ram Charan, “How Networks Reshape Organizations—For 1999, p. 54.
Results,” Harvard Business Review, September–October 1991, 7. Ibid.
pp. 14–15. 8. Stewart Alsop, “E or Be Eaten,” Fortune, November 8, 1999,
55. Ibid., pp. 16–17. pp. 94–95.
56. Ibid., p. 106. 9. Based on David Nadler and Michael Tushman, “Beyond the
57. Ibid., p. 108. Charismatic Leader: Leadership and Organizational Change,”
58. Christopher Bartlett and Sumantra Ghoshal, “What Is a Global California Management Review, Winter 1990, p. 80; and Alfred
Manager?” Harvard Business Review, September–October 1992, Marcus, “Responses to Externally Induced Innovation: Their
pp. 62–74. Effects on Organizational Performance,” Strategic Management
59. Paul Evan, Yves Doz, and Andre Laurent, Human Resource Journal, 1988, vol. 9, pp. 194–202. See also Steve Crom, “Change
Management in International Firms (London: Macmillan, 1989), Leadership: The Virtues of Obedience,” Leadership & Organization
p. 123. See also Carla Mahieu, “Management Development in Development Journal, March–June 1999, pp. 162–168; and Omar
Royal Dutch/Shell,” Journal of Management Development, S. Khan, “The Case for Real Change,” Strategy & Leadership,
February 2001, p. NA. January–February 2006, vol. 34, no. 1, pp. 32–36.
60. “Groupware Service Turns Mobile Phones into Smartphones,” 10. Nadler and Tushman, op. cit., p. 80. See also “The Art and
Product News Network, December 21, 2005, p. NA. Process of Strategy Development and Deployment,” Journal for
61. “Enterprise E-Mail and IM, the Linux Way,” eWeek, August 14, Quality and Participation, Winter 2005, vol. 28, no. 4, pp. 10–18;
2006, p. NA. and Marc H. Meyer, Mark Anzani, and George Walsh,
62. Ibid. “Organizational Change for Enterprise Growth: IBM Had to
63. Douglas Johnson, “Discuss Changing Models in Real Time,” Change Its Organization and Development Processes to Survive
Design News, May 3, 1999, p. 96; and www.onespace.com/ the 1990s,” Research-Technology Management, November–
(accessed December 15, 2006). December 2005, vol. 48, no. 6, pp. 48–57.
64. Except as noted, this section is based on John Byrn, “The 11. “Baker and McKenzie Selects Hummingbird LegalKEY®,” CNW
Horizontal Corporation,” BusinessWeek, December 20, 1993, Group, January 31, 2006 (downloaded April 28, 2006).
vol. 20, pp. 76–81. See also Frank Ostroff, The Horizontal 12. John Kador, “Shall We Dance?” Electronic Business, February
Organization (London: Oxford University Press, 1999). 2002, vol. 28, no. 2, p. 56.
65. As in a federal government–type arrangement, the parent firm 13. Edgar Schein, Organizational Culture and Leadership (San
need not necessarily “own” the autonomous units. The Francisco: Jossey-Bass, 1985), pp. 224–237; Peter Wright, Mark
important thing is that they agree to abide by its rules. Kroll, and John Parnell, Strategic Management Concepts
532 Endnotes
(Upper Saddle River, N.J.: Prentice Hall, 1996), pp. 233–236; and Resistance,” Training & Development Journal, October 1995,
Benjamin Schneider et al., “Creating a Climate and Culture for pp. 15–18; Eric Dent, “Challenging Resistance to Change,”
Sustainable Organizational Change,” Organizational Dynamics, Journal of Applied Behavioral Science, March 1999, p. 25; and
1996, vol. 24, no. 4, pp. 7–19. See also John S. Oakland and “The Key to Innovation: Overcoming Resistance,” CIO, October
Steve J. Tanner, “Quality Management in the 21st Century: 15, 2005, vol. 19, no. 2, pp. 34–38. See also Tina Kiefer,
Implementing Successful Change,” International Journal of “Feeling Bad: Antecedents and Consequences of Negative
Productivity and Quality Management, December 12, 2005, Emotions in Ongoing Change,” Journal of Organizational
vol. 1, no. 1/2, p. 69. Behavior, December 2005, vol. 26, no. 8, pp. 875–898.
14. Peter N. Haapaniemi, “How Companies Transformed 38. John Mariotti, “The Challenge of Change,” Industry Week, April
Themselves,” Chief Executive, November 2001, pp. 2–5. See also 6, 1998, p. 140. See also Jim Folaron, “The Human Side of
“Unisys to Get New CEO,” Client Server News, November 1, Change Leadership,” Quality Progress, April 2005, vol. 38, no. 4,
2004, p. NA. pp. 39–44; and Tina Kiefer, op. cit.
15. Daniel Guido, “Daimler to Reorganize Commercial Vehicle 39. Timothy Judge et al., “Managerial Coping with Organizational
Unit,” Transport Topics, January 30, 2005, issue 3675, pp. 3–5. Change: A Dispositional Perspective,” Journal of Applied
16. Ibid. Psychology, 1999, vol. 84, no. 1, pp. 107–122.
17. Ibid. 40. Shaul Oreg, “Resistance to Change: Developing an Individual
18. Dennis Berman, “Lucent’s Latest Revamp to Split Five Businesses Differences Measure,” Journal of Applied Psychology, 2003,
into Two Units,” Wall Street Journal, July 11, 2001, p. B7. vol. 88, no. 4, p. 682.
19. Michael Goold and Andrew Campbell, “Do You Have a Well- 41. “Pirelli: Enterprise Integration,” www.accenture.com
Designed Organization?” Harvard Business Review, March 2002, (downloaded January 9, 2006).
pp. 117–124. 42. Salter, op. cit., p. 56.
20. Ibid., p. 118. 43. Wendell French and Cecil Bell Jr., Organization Development,
21. Scott Miller, “Volkswagen Is Considering a Reorganization into 6th ed. (Upper Saddle River, N.J.: Prentice Hall, 1999),
Three Divisions,” Wall Street Journal, June 26, 2001, p. 18. pp. 74–82.
22. Goold and Campbell, op. cit., p. 120. 44. John R. Kotter, Leading Change (Boston, Mass.: Harvard Business
23. Carol Hymowitz, “How a Leader at 3M Got His Employees to School Press, 1996), pp. 40–41. See also Gary Hamel, “Waking
Back Big Changes,” Wall Street Journal, April 23, 2002, p. B1. up IBM,” Harvard Business Review, July–August 2000, pp. 137–146.
24. Ibid., p. B1. See also “Mapping an Effective Change Programme,” Marketing
25. Goold and Campbell, op. cit., p. 123. Strategy, October 2005, p. NA.
26. Gary Dessler, Winning Commitment: How to Build and Keep a 45. Kotter, op. cit., p. 44.
Competitive Work Force (New York: McGraw-Hill, 1993), p. 85. 46. Ibid., p. 57.
27. Ibid. See also Varun Grover, “From Business Reengineering to 47. Ibid., pp. 90–91.
Business Process Change Management: A Longitudinal Study of 48. Richard Pascale et al., “Changing the Way We Change,”
Trends and Practices,” IEEE Transactions on Engineering Harvard Business Review, November–December 1997, p. 129.
Management, February 1999, p. 36. 49. Noel Tichy and Ram Charan, “The CEO as Coach: An Interview
28. Daniel Denison, Corporate Culture and Organizational with Allied Signal’s Lawrence A. Bossidy,” Harvard Business
Effectiveness (Hoboken, N.J.: John Wiley & Sons, 1990), p. 12. Review, March–April 1995, p. 77.
See also Daniel Denison, “What Is the Difference Between 50. This is based on Kotter, op. cit., pp. 61–66.
Organizational Culture and Organizational Climate? A Native’s 51. Ibid., p. 65.
Point of View on a Decade of Paradigm Wars,” Academy of 52. This subsection is based on Carlos Ghosn, “Saving the Business
Management Review, July 1996, pp. 619–654. Without Losing the Company,” Harvard Business Review,
29. “Business Process Management,” www.TIBCO.com January 2002, pp. 37–45; and Bruce Crumley, op. cit.
(downloaded April 28, 2006). 53. Ghosn, op. cit., p. 41.
30. Bruce Silver, “The ABCs of BPM,” InfoWorld, February 20, 2006, 54. Thomas Cummings and Christopher Worley, Organization
vol. 28, no. A, p. 8. Development and Change (Minneapolis, Minn.: West Publishing
31. See also “Evolve Business Processes, Don’t Reengineer Them,” Company, 1993), p. 3.
Internet Week, November 11, 2004. 55. Based on J. T. Campbell and M. D. Dunnette, “Effectiveness of
32. “Independent Research Company Ranks TIBCO Leader Among T-Group Experiences in Managerial Training and Development,”
Business Process Management Suites’ Vendors,” PR Newswire Psychological Bulletin, 1968, vol. 7, pp. 73–104, reprinted in W. E.
(April 13, 2006). Scott and L. L. Cummings, Readings in Organizational Behavior
33. “TIBCO Staffware Process Suites,” www.TIBCO.com (accessed and Human Performance (Homewood, Ill.: Irwin, 1973), p. 571.
April 28, 2006). 56. Robert J. House, Management Development (Ann Arbor,
34. www.TIBCO.com (April 28, 2006). Mich.: Bureau of Industrial Relations, University of
35. Based on one independent survey of twenty-two companies Michigan, 1967), p. 71; Louis White and Kevin Wooten,
reported by TIBCO. “TIBCO Staffware Process Suites,” “Ethical Dilemmas in Various Stages of Organizational
www.TIBCO.com (downloaded April 28, 2006). Development,” Academy of Management Review, 1983, vol. 8,
36. Niccolò Machiavelli, The Prince, trans. W. K. Marriott (London: no. 4, pp. 690–697.
J. M. Dent & Sons, Ltd., 1958). 57. Wendell French and Cecil Bell Jr., Organization Development
37. Paul Lawrence, “How to Deal with Resistance to Change,” (Upper Saddle River, N.J.: Prentice Hall, 1995), pp. 171–193.
Harvard Business Review, May–June, 1954. See also Andrew W. 58. Cummings and Worley, op. cit., p. 501.
Schwartz, “Eight Guidelines for Managing Change,” Supervisory 59. For a description of how to make OD a part of organizational
Management, July 1994, pp. 3–5; Thomas J. Werner and Robert strategy, see Aubrey Mendelow and S. Jay Liebowitz,
F. Lynch, “Challenges of a Change Agent,” Journal for Quality “Difficulties in Making OD a Part of Organizational Strategy,”
and Participation, June 1994, pp. 50–54; Larry Reynolds, Human Resource Planning, 1995, vol. 12, no. 4, pp. 317–329.
“Understand Employees’ Resistance to Change,” HR Focus, June 60. Chung-Ming Lau and Hang-Yue Ngo, “Organizational
1994, pp. 17–18; Kenneth E. Hultman, “Scaling the Wall of Development and Firm Performance: A Comparison of
Endnotes 533
Multinational and Local Firms,” Journal of International Business 18. For a discussion of these and others, see Eric Krell, “Recruiting
Studies, Spring 2001, vol. 32, no. 1, p. 95. Outlook: Creative HR for 2003,” Workforce, December 2002;
61. This section is based on Evert Van De Vliert, Martin C. Jennifer Berkshire, “Social Network Recruiting”, HR Magazine,
Euwema, and Sipke E. Huismans, “Managing Conflict with a April 2005, pp. 95–98; Joe Mullich, “Hiring Without Limits,”
Subordinate or a Superior: Effectiveness of Conglomerated Workforce Management, June 2004, pp. 52–58; and Jessica
Behavior,” Journal of Applied Psychology, April 1995, pp. 271–281. Marquez, “A Global Recruiting Site Helps Far-Flung Managers
See also Claire Murphy, “Change Management: Motivation vs. at the Professional Services Company Acquire the Talent They
Manipulation,” Marketing, October 19, 2005, p. 36. Need—and Saves One Half-Million Dollars a Year,” Workforce
62. Paul Lawrence and Jay Lorsch, Organization and Environment Management, March 13, 2006, p. 22.
(Boston, Mass.: Harvard University, Graduate School of Business 19. Gary Dessler, Human Resource Management, 10th ed. (Upper
Administration, Division of Research, 1967), pp. 74–75. Saddle River, N.J.: Prentice-Hall, 2005), p. 245.
63. Kenneth Thomas, “Conflict and Conflict Management,” in 20. Alan Finder, “When a Risque Online Persona Undermines a
Marvin Dunnette, Handbook of Industrial and Organizational Chance for a Job,” New York Times, June 11, 2006, p. 1.
Psychology (Chicago, Ill.: Rand McNally, 1976), pp. 900–902; 21. Sarah Gale, “Internet Recruiting: Better, Cheaper, Faster,”
and Michael Carrell, Daniel Jennings, and Christina Heavrin, Workforce, December 2001, p. 75.
Fundamentals of Organizational Behavior (Upper Saddle River, 22. Gilbert Nicholson, “Automated Assessments for Better Hires,”
N.J.: Prentice Hall, 1997), pp. 505–509. Workforce, December 2000, pp. 102–104.
64. “One into Four,” The Economist, August 1, 2002, www 23. Ibid.
.economist.com. See also Philip Klein, “GE Capital to Split 24. “Workforce Testing and Monitoring,” Management Review,
into Four,” July 26, 2002, biz.yahoo.com. October 1998, pp. 31–42.
25. Ibid.
CHAPTER 12 26. Mel Kleiman, “Employee Testing Essential to Hiring
1. Gilbert Nicholson, “Automated Assessments for Better Hires,” Effectively in the ’90s,” Houston Business Journal, February 8,
Workforce, December 2000, pp. 102–104. 1993, p. 31; and Gerald L. Borofsky, “Pre-Employment
2. Ben Nagler, “Recasting Employees into Teams,” Workforce, Psychological Screening,” Risk Management, January 1993,
January 1998, pp. 101–106. p. 47. See also Christina Ronquist, “Pre-Employment Testing:
3. Tony Carneval, “The Coming Labor and Skills Shortage,” Making It Work for You,” Occupational Hazards, December
Training & Development, January 2005, p. 39. 1997, pp. 38–40.
4. Brian Becker, Mark Huselid, and David Ulrich, The HR Scorecard: 27. Louis Olivas, “Using Assessment Centers for Individual and
Linking People, Strategy, and Performance (Boston, Mass.: Harvard Organizational Development,” Personnel, May–June 1980,
Business School Press, 2001). pp. 63–67; Tim Payne, Neil Anderson, and Tom Smith,
5. “The Future of HR,” Workplace Visions, Society for Human “Assessment Centers, Selection Systems and Cost-Effectiveness:
Resource Management, 2001, no. 6, pp. 3–4. An Evaluative Study,” Personnel Review, Fall 1992, p. 48; Roger
6. Bill Robert, “Process First, Technology Second,” HR Magazine, Mottram, “Assessment Centers Are Not Only for Selection:
June 2002, pp. 40–46. The Assessment Center as a Development Workshop,” Journal
7. See also James Clifford, “Manage Work Better to Better Manage of Managerial Psychology, January 1992, p. A1; and Charles
Human Resources: A Comparative Study of Two Approaches Woodruffe, “Going Back a Generation,” People Management,
to Job Analysis,” Public Personnel Management, Spring 1996, February 20, 1997, pp. 32–35.
pp. 89–103. 28. Neal Schmitt et al., “Computer-Based Testing Applied to
8. Arthur R. Pell, Recruiting and Selecting Personnel (New York: Selection of Secretarial Candidates,” Personnel Psychology,
Regents, 1969), pp. 10–12. See also Katherine Tyler, “Employees November 1991, vol. 46, no. 19, pp. 149–165.
Can Help Recruit New Talent,” HR Magazine, September 1996, 29. For a full discussion of interviewing, see, for example, Gary
pp. 57–61; and Martha Frase-Blunt, “Make a Good First Dessler, Human Resource Management, 10th ed. (Upper Saddle
Impression,” HR Magazine, April 2004, pp. 81–86. River, N.J.: Prentice-Hall, 2005), Chapter 7.
9. Arthur R. Pell, ibid., p. 11. 30. The research on interviewing is extensive. See, for example,
10. Gary Dessler, Human Resource Management, 10th ed. (Upper R. E. Carlson, “Selective Interview Decisions: The Effects of
Saddle River, N.J.: Prentice-Hall, 2005), pp. 114–129. Interviewer Experience, Relative Quota Situation, and
11. Allison Thompson, “The Contingent Workforce,” Occupational Applicant Sample on Interview Decisions,” Personnel Psychology,
Outlook Quarterly, Spring 2005, pp. 28–34. 1967, vol. 20, pp. 259–280; Linda Thornburgh, “Computer-
12. Brenda Palk Sunoo, “From Santa to CEO—Can Display All Assisted Interviewing Shortens Hiring Cycle,” HR Magazine,
Roles,” Personnel Journal, April 1996, pp. 4034–4044. February 1998, pp. 73–76; Chad Higgins and Timothy Judge,
13. Gretchen Weber, “Tempts at the Top,” Workforce Management, “The Effect of Applicant Influence Tactics on Recruiter
August 2004, pp. 35–38. Perceptions of Fit and Hiring Recommendations: A Field
14. “High-Stakes Recruiting in High-Tech,” BNA Bulletin to Study,” Journal of Applied Psychology, 2004, vol. 89, no. 4,
Management, February 12, 1998, p. 48. pp. 622–632; Frank Schmidt and Ryan Zimmerman, “A
15. Sara Rynes, Marc Orlitzky, and Robert Bretz Jr., “Experienced Counterintuitive Hypothesis About Employment Interview
Hiring Versus College Recruiting: Practices and Emerging Validity and Some Supporting Evidence,” Journal of Applied
Trends,” Personnel Psychology, 1997, vol. 50, pp. 309–339. Psychology, 2004, vol. 89, no. 3, pp. 553–561.
16. See, for example, Richard Becker, “Ten Common Mistakes in 31. Pamela Paul, “Interviewing Is Your Business,” Association
College Recruiting—How to Try Without Really Succeeding,” Management, November 1992, p. 29.
Personnel, March–April 1975, pp. 19–28. See also Sara Ryne and 32. William Tullar, Terry Mullins, and Sharon Caldwell, “Effects
John Bordreau, “College Recruiting in Large Organizations: of Interview Length and Applicant Quality on Interview
Practice, Evaluation, and Research Implications,” Personnel Decision Time,” Journal of Applied Psychology, December 1979,
Psychology, Winter 1986, pp. 729–757. pp. 669–674. See also Jennifer Burnett et al., “Interview
17. “Internships Provide Workplace Snapshot,” BNA Bulletin to Notes and Validity,” Personnel Psychology, Summer 1998,
Management, May 22, 1997, p. 168. pp. 375–396.
534 Endnotes
33. Gary Dessler, Human Resource Management, 10th ed. (Upper 57. “Employers Turn to Corporate Ombuds to Defuse Internal
Saddle River, N.J.: Prentice-Hall, 2005), pp. 264–265. Ticking Time Bombs,” BNA Bulletin to Management, August 9,
34. Coleman Peterson, “Employee Retention: The Secrets Behind 2005, p. 249.
Wal-Mart’s Successful Hiring Policies,” Human Resource 58. “Benefits Cost Control Solutions to Consider Now,” HR Focus,
Management, Spring 2005, vol. 44, no. 1, pp. 85–88. November 2003, vol. 80, no. 11, p. 1; and Johanna Rodgers,
35. Edward Robinson, “Beware—Job Seekers Have No Secrets,” “Web-Based Apps Simplify Employee Benefits,” Insurance and
Fortune, December 29, 1997, p. 6. Technology, November 2003, vol. 28, no. 11, p. 21.
36. Mary Mayer, “Background Checks in Focus,” HR Magazine, 59. Johanna Rodgers, op. cit.
January 2002, pp. 59–62. 60. Douglas Shuit, “A Few Years Behind Schedule, Employee Portals
37. John Jones and William Terris, “Post-Polygraph Selection Gain Ground,” Workforce Management, 2005, p. 58.
Techniques,” Recruitment Today, May–June 1989, pp. 25–31. See 61. Chris Pickering, “A Look Through the Portal,” Software
also Richard White Jr., “Ask Me No Questions, Tell Me No Lies,” Magazine, February 2001, vol. 21, no. 1, pp. 18–19; and Jill
Public Personnel Management, Winter 2001, vol. 30, no. 4, Elswick, “How NCR Corp. Undertook an Internet Makeover to
pp. 483–493. Improve Access to HR Information,” Employee Benefit News,
38. These are based on Commerce Clearing House, Ideas and Trends, January 1, 2001, item 01008001. Ibid., p. 58.
December 29, 1998, pp. 222–223. 62. “Hiring Based on Strength Test Discriminates Against Women,”
39. Dessler, Human Resource Management, 9th ed., pp. 150–151. BNA Bulletin to Management, February 22, 2005, p. 62.
40. Scott MacDonald et al., “The Limitations of Drug Screening in 63. This section is based on Dessler, Human Resource Management,
the Workplace,” International Labor Review, 1993, vol. 132, 8th ed., pp. 43–44; see also Commerce Clearing House, Sexual
no. 1, p. 98. Harassment Manual, p. 8.
41. Sheila Hicks et al., “Orientation Redesign,” Training and 64. James Nash, “Beware the Hidden Hazards,” Occupational
Development, July 2006, pp. 43–46. Hazards, February 2005, pp. 48–51.
42. “Industry Report 1999,” Training, October 1999, pp. 37–60. 65. Michael Blotzer, “PDA Software Offers Auditing Advances,”
43. Jennifer Reese, “Starbucks,” Fortune, December 9, 1996, Occupational Hazards, December 2001, vol. 63, no. 12, pp. 11–13.
pp. 190–200. 66. Jim Meade, “Web Based HRIS Meets Multiple Needs,” HR
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Human Resources in Organizations (Glenview, Ill.: Scott, 67. “Oracle Human Capital Management,” www.oracle.com
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45. Cindy Waxer, “Steelmaker Revives Apprentice Program to
Address Graying Workforce, Forge Next Leaders,” Workforce CHAPTER 13
Management, January 30, 2006, p. 40. 1. See http://www.whirlpoolcorp.com/about/innovation/
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and Training (Burr Ridge, Ill.: McGraw-Hill, 1974), pp. 442–443. Innovation,” BusinessWeek Online, March 6, 2006, available
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Long-Term Gains of OJT,” Personnel Journal, April 1987, vol. 66, mar2006/id20060306_287425.htm (accessed November 1,
no. 4, pp. 48–51. 2006); and Kathleen Melymuka, “Innovation Democracy,”
47. Unless otherwise noted, this section is based on Darin Hartley, Computerworld, February 18, 2004, vol. 38, no. 7, pp. 31–32.
“Technology Kicks Up Leadership Development,” Training and 2. Warren Bennis and Burt Nanus, Leaders: The Strategies for Taking
Development, March 2004, pp. 22–24. “The U.S. Postal Service Charge (New York: Harper & Row, 1985), p. 21.
Turns to Thinq’s LMS to Streamline Operations,” Training and 3. W. D. Spangler, R. J. House, and R. Palrecha, “Personality and
Development, December 2003, pp. 72–73. Leadership,” in B. Schneider and D. B. Smith, eds., Personality
48. Helen Beckett, “Blended Skills for a Better Class of E-Learning,” and Organizations (Mahway, N.J.: Lawrence Erlbaum, 2004),
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the Improvement of Workforce Potential: A Baseline 5. See David Waldman, Gabriel Ramirez, Robert J. House, and
Simulation,” Personnel Psychology, 2005, vol. 58, p. 1. Phanish Puranam, “Does Leadership Matter? CEO Leadership
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Training and Development, January 1993, p. 69. For a description Incremental Uncertainty,” Academy of Management Journal,
of some of the problems involved in implementing 360-degree 2001, vol. 44, no. 1, pp. 134–143.
feedback, see Matthew Budman, “The Rating Game,” Across the 6. See Gary Yukl, Leadership in Organizations, 5th ed. (Upper
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Efforts,” Training and Development Journal, April 1999, 7. This section is based in part on Darin E. Hartley, “Technology
pp. 48–53; and “Building a Better Workforce,” HR Magazine, Kicks Up Leadership Development: Bam! Some Basic
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Withdrawal, Satisfaction with the Leader, and Willingness to CHAPTER 14

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Wendy Zellner, “At Enron, the Environment Was Ripe for pp. 82–83.
Abuse,” BusinessWeek Online, February 28, 2002, available 11. Ibid.
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100. This table is based on Phillip Hunsaker, Training in 13. Jeffrey Liker and Thomas Choi, “Building Deep Supplier
Management Skills (Upper Saddle River, N.J.: Prentice Hall, Relationships,” Harvard Business Review, December 2004, p. 108.
2001), p. 323. 14. James Bamford et al., Mastering Strategy (San Francisco, Calif.:
101. Nanette Byrnes, “The Art of Motivation,” BusinessWeek, May Jossey-Bass, 2003), p. 20.
1, 2006, pp. 56–62. 15. Ibid., p. 13.
102. Arthur P. Brief, Benjamin Schneider, and Richard A. Guzzo, 16. Ibid., pp. 12–13.
“Creating a Climate and Culture for Sustainable 17. Ibid.
Organizational Change,” Organizational Dynamics, 1996, 18. Quoted from Jens Genefke and Frank McDonald, Effective
vol. 24, no. 4, pp. 7–19; Edgar Schein, Organizational Culture Collaboration (New York: Pelgrave, 2001), pp. 12–13.
and Leadership (San Francisco, Calif.: Jossey-Bass, 1985), 19. See also Salvatore Parise and Amy Casher, “Alliance Portfolios
pp. 224–237; and Terrence E. Deal and Kent D. Peterson, and Managing Your Network of Business Partner
Shaping School Culture: The Heart of Leadership (San Francisco, Relationships,” Academy of Management Executive, 2003, vol. 17,
Calif.: Jossey-Bass, 1998). no. 4, pp. 25–52.
103. Byrnes, “The Art of Motivation,” op. cit. 20. Bradley Kirkman et al., “Five Challenges to Virtual Team
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Company, January 2006, vol. 202, p. 66. Executive, 2002, vol. 16, no. 3, p. 71.
105. David Faber, “With a Small-Town Culture, Wal-Mart 21. Ibid., p. 70.
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106. Tracy Mayor, “Remote Control,” CIO Magazine, 2001, 24. Ibid.
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107. Denise M. Rousseau, “Why Workers Still Identify with Management Information Systems, Winter 1996–1997, vol. 13,
Organizations,” Journal of Organizational Behavior, 1998, no. 3, pp. 65–81.
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Foreman, “Classifying Managerial Responses to Multiple 28. Ibid., pp. 38–56.
Organizational Identities,” Academy of Management Review, 29. Sullivan and Skelcher, op. cit., pp. 118–136.
2000, vol. 25, pp. 18–42. 30. Ibid., p. 50.
108. Ambrozek and Ambrozek, “Building Business Value Through 31. Ibid.
‘Communities of Practice,’” op. cit. 32. Ibid., p. 41.
109. Peter Sinton, “Teamwork the Name of the Game for Ideo,” 33. Ibid., p. 52.
San Francisco Chronicle, February 23, 2000, available online at: 34. Adapted from James Austin, The Collaboration Challenge
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/ (San Francisco, Calif.: Jossey-Bass, 2000).
archive/2000/02/23/BU39355.DTL (accessed April 4, 2006). 35. Don Mankin and Susan Cohen, Business Without Boundaries
110. http://www.novartis.com/about_novartis/en/index.shtml (San Francisco, Calif.: John Wiley & Sons, 2004).
(accessed April 28, 2006). 36. Ibid., p. 102.
111. Global Integration, “Case Study: Novartis,” GlobalIntegration 37. Unless otherwise noted, this is based on Mankin and Cohen,
.com, available online at: http://www.global-integration.com/ op. cit., pp. 106–148.
about/novartis_case_study.html (accessed April 28, 2006).
546 Endnotes
38. Ibid. 46. Ibid.

39. Ibid. 47. Quoted from ibid., p. 294.
40. Ibid., p. 111. 48. The following is adapted from Eileen Aranda et al., Teams:
41. “Supply Chain Challenges: Building Relationships,” Harvard Structure, Process, Culture, and Politics (Upper Saddle River, N.J.:
Business Review, July 2003, p. 69. Prentice-Hall, 1998), pp. 116–117.
42. Jerald Greenberg and Robert Barron, Behavior in Organizations 49. Chris Huxham and Siv Vangen, Managing to Collaborate
(Upper Saddle River, N.J.: Prentice-Hall, 2000), p. 378. (London: Routledge, 2005), p. 66.
43. Austin, op. cit., p. 127. 50. “CRM ROI Review: Optimizing Returns on Customer-Centric
44. “Supply Chain Challenges: Building Relationships,” Harvard Strategies,” SAP, March 2004, vol. 3, no. 2, p. 11.
Business Review, July 2003, p. 69. 51. This case is quoted from and based on www.thecollaborationloop
45. Steven Robbins, Organizational Behavior (Upper Saddle River, .com, “Collaboration Case Study: AT&T” (downloaded June 29,
N.J.: Prentice-Hall, 1998). 2006).
NAME INDEX
A Audi, 309, 513 Bossidy, Lawrence, 4, 11, 198, 283, 321

A.C. Nielsen, 183 Australian Stock Exchange, 34 Boston Consulting Group, 197
Acadian Ambulance Service, 489 Aventis Pharmaceuticals, 299 Boston Red Sox, 155
Accenture Consulting, 130, 131, 188, Avon Products, 2–3, 11, 264, 304, 305 Bounty, 89
280, 316 BP, 285
ACME Business Consulting, 187 B Brady Corp., 297, 306
Adam, Everett, Jr., 238, 239 Bader, Paige, 382 Brennan, Edward, 416
Adams, J. Stacey, 420–421 Baker & McKenzie, 306 British Airways, 69
Adaptec Corp., 45 Ball, Jim, 448 Bronx Lebanon Hospital, 33
Aetna Life and Casualty, 55, 304, 305 Ballmer, Steve, 385 Brooks Brothers, 97
AIB, 219 Banca Carige, 432 Brown, Alison, 103
Airborne Express, 25 Banc One, 504 Brown, Sheldon, 104
Airena, 295 Bank of Boston, 479 Bugatti, 309
Air France, 66, 69 Barbie, 186 Buildnet, Inc., 369
Air-Trak, 33 Barclays Capital, 155, 347 Burger King, 123
Alcatel, 65, 309 Barnard, Chester, 15, 281 Burns, Tom, 16–17, 287–289, 300
Alcoa, Inc., 210 Barnes & Noble, 87, 88, 185 Businesses for Social Responsibility, 50
Alderfer, Clay, 408–410 Bartlett, Christopher, 7, 19 Business Roundtable, 29
Alight Planning, 180 Bateman, T. S., 96 BusinessWeek, 287, 339–340
Allfirst, 219 Bausch & Lomb, 470, 474 Byrne, John A., 296
Alliance@IBM, 369 Baxter Health Care International,
AlliedSignal, 198, 283 Inc., 138 C
Allstate Corporation, 58 Bayer, 450 Cadbury Schweppes, 41
Alltech Inc., 141, 142, 220 Baylor University, 158 Café @ Boat Quay, 143
Alpine Access, 448 Bear Stearns, 449, 450 Caldera Systems, 108
Amazon.com, 17, 87, 88, 90, 155, 185, Beckman Coulture, 223 California Energy Commission, 190
192, 291, 304, 477, 497 BellSouth, 18, 45 Campbell, Andrew, 311
Ambrus, Mary Lou, 447 Ben & Jerry’s Ice Cream, 49, 154, Canadian National Railway
American Airlines, 63, 123, 170, 157–159, 229 Sytstem, 450
206, 234 BeneLogic, 363 Canon, 90, 91
American Crop Protection Benetton, 1, 137 Capital One Bank, 155–156
Association, 344 Benn, S., 47 Carrefour, 17, 76–77, 128
American Express (Amex), 139, 383 Bennett, Steve, 401–402 Caswell-Massey, 269, 270
American Insurance Association, 367 Bentley, 309 Caterpillar Corporation, 22–23,
American Management Association, Bertelsmann, 75, 87, 88, 192 116–117, 132, 194
345–347, 498 Best Buy, 78, 234 Center for Creative Leadership, 11
American Media Inc., 357 Better Business Bureau, 62 Cerberus, 254
American Society of Chartered Life Bezos, Jeff, 477 Champy, John, 141, 314
Underwriters, 37 B.F. Goodrich, 14 Chandler, Alfred, 283
Ameritech Corp., 427 Bishop, Dan, 97 Charan, Ram, 295
Amex, 276 Bissett, Jim, 124 Chase, Richard, 248
Anand, Vikas, 36 Bissett, Jimmy, 124 Chase bank, 266
Andersen Worldwide, 282–283 Bissett Nursery, 124 Cheesecake Factory, 211
Antonakis, John, 382 BlackBerry, 21, 117, 130, 438, 442 Chemical Engineer, 340
AOL, 164–165, 305, 451 Blackwater USA, 379 Chen, Steven, 90
Apex Electronics, 173 Blake, Robert, 386–387 Cherry Garcia ice cream, 154, 157
Apex Environmental, 370–371 Blanchard, Kenneth, 389–390 Chicago Tribune, 340
Apple Computer, 7, 60, 90, 194, 494 Bluetooth, 131, 137 Chick-fil-A, 417
Aquilero, Nicholas, 248 BMG Entertainment, 87, 192 China Unicom, 285
Argyris, Chris, 15 Boeing, 22, 134, 206, 210–211, 226, Choi, Thomas, 501
Arizona@YourService, 343 252, 376, 445, 449, 452, 453, 469, Chrysler, 272
Arnold, Jeffrey, 190 498, 503 Cianciolo, Anna T., 382
Arnold, Susan, 272 Bohannon, Tom, 158 Cingular, 453
Arthur Andersen, 282 Booz Allen Hamilton Inc., 110 Circuit City, 234
Association of Certified Fraud Bosch, 234 Cirque du Soleil, 284
Examiners, 36 Bosch und Siemens Hausgeräte Cisco Systems, 108, 192, 344, 411, 417
AT&T, 10, 18, 497, 515 GmbH (BSH), 470 Citadon Corp., 279, 503
547
548 Name Index
City Garage, 345 Dorf, Michael, 143 Ferrell, O. C., 37, 41

Clairol, 89 Dorfman, Peter W., 398 Fettig, Jeff, 396
Click2learn.com, 357 Doritos, 51 Fiedler, Fred E., 391–393
CNN, 44 DoubleClick Inc., 32–33 Fiorina, Carly, 384
Coast Guard, 397 Dräger Safety, 80, 81 Flextronics, 192, 256, 509
Coca-Cola Co., 17, 48, 54, 70, 78 DreamWorks Animation, 443, 453 Ford, William, 17
Cohen, Susan, 510 Dresdner Kleinwort Wasserstein, 453 Ford Motor Company, 17, 61, 73, 124,
Colgate-Palmolive, 469 Drexler, Millard, 1, 24 154, 161, 177, 189, 190, 258, 272,
Collins, James, 216, 226 Drucker, Peter, 4, 21, 118, 177, 178 307, 308, 451, 452, 486, 499
Commercial News USA, 62 Drug Enforcement Agency (DEA), Fortis Bank, 144, 159–160, 171
Communications Workers 184–185 Fortune, 6, 25, 71, 128, 166, 298, 359,
of America, 369 Druha Trava, 104 383, 453
Compass Records, 103–104 DTE Energy, 29, 46 Foster Farms, 341
CompUSA, 25 Dun & Bradstreet, 491 Fox network, 190, 197
Conaway, Charles, 169 Dunkin’ Donuts, 99 Fraedrich, John, 37, 41
Conoco, 359 Dunphy, D., 47 France Telecom, 66, 69
Conrail, 294 Duracell, 89 French, 377
Contemporary Hotel, 423 Fried, Lance, 97, 98
Cook Specialty Company, 253–254 E Friedman, Milton, 47–48
Cordis Corp., 108 Earley, Christopher, 85 Friedman, Thomas, 61
Cornell University, 123 EarthLink, 95 Friendster.com, 17, 291
CorpHQ, 297 Eastern Airlines, 206 Froogle, 6, 17, 104, 291
Costley, Dan, 395 East India Company, 426 Fusco, Paul, 24
Coulter, Mary, 92 eBay, 6, 104, 258
Craigslist, 18 Ebert, Ronald, 238, 239 G
Crant, J. M., 96 EDS, 451 Galbraith, Jay, 277
Crest, 89 eLance, 193 Galvin, Chris, 283, 307
CSX, 290–291 Electronic Café, 143 Gandhi, Mahatma, 382, 387
Cupid, Johnny, 45 Electronic Data Systems Inc., 94, 191 The Gap, 1, 21, 24, 67
Cypress Semiconductor, 19 Ellison, Larry, 417 Gartner, W. B., 92
Embse, Thomas J. Von de, 328 Gates, Bill, 18
D Emerson, Bill, 489 General Electric (GE), 46, 67, 80, 196,
DaimlerChrysler, 258, 308–310, 499 Encyclopedia Britannica, 133 213, 225, 226, 234, 246, 249, 257,
David, Fred, 189 Endo, Michiharu, 223 283–284, 286, 304, 308, 310, 330,
Davis, Ron, 104 Enron, 41, 282, 489 334, 340, 359, 378, 401, 469, 490
Day, Peter, 487 Equal Employment Opportunity General Foods, 308, 450
Dayton, Sky, 95 Commission (EEOC), 364 General Mills, 59, 427–428
DBB, 272 Equinox, 108 General Motors (GM), 50, 60, 61, 65,
DeCoro, 48, 50 Ericsson Canada, 487 71, 72, 76, 84, 90, 181, 191, 258,
Delahoussaye, Martin, 459 Estée Lauder, 3 264, 267, 272, 276, 277, 364, 434,
Dell, Michael, 25, 91, 124, 125 Eureka, 130 453, 468, 497, 499
Dell Computer, 17, 23, 25, 26, 71, European American Bank, 115 Gerber’s, 191
113, 118, 128, 130, 143, 155, 156, Euwema, Martin C., 327 Gerstner, Lou, 491
187–188, 190, 194, 237, 254, 256– Expedia, 21, 117 Getty Oil, 192
258, 334, 348, 376, 499, 500, 513 Exxceed Company, 363 Ghemawat, Pankaj, 72
Deloitte Consulting, 449, 472 ExxonMobil, 452 Ghoshal, Sumantra, 7, 19
Deloitte & Touche Tohmatsu, 343 Ghosn, Carlos, 304, 321
Delta Airlines, 134, 486 F Gibbons, Barry, 319–320
Deluxe Paper Payment Systems, 222 Facebook.com, 344 Gilbert, Dan, 489
Deming, W. Edwards, 246–247, 251, 360 Famularo, Joseph J., 342 Gilbreth, Frank, 13, 16
Dessler, Gary, 365, 431 Fannie Mae, 388–389 Gilbreth, Lillian, 13, 16
DeutschBank, 65 Fatehi, Kamal, 84 Gillette, 89, 90, 107, 219
DeutscheTelecom, 69 Fayol, Henri, 13 Gilmer, Bill, 411
Dial Corp., 364 Federal Bureau of Investigation (FBI), Giuliani, Rudolph, 373
Diet Coke, 17 183–184, 346 Gladiator Garage Works, 396
DiFiglia, Chris, 449 Federal Emergency Management Gladwell, Malcolm, 160
DiGiorno, 110 Agency (FEMA), 3, 5, 209 Glaser, John, 507
Dirkes, Mary Jo, 138–139 FedEx, 60, 61, 143, 156, 211, 229, 230, Gmail, 17, 291
Disney, 196, 226, 340, 453 250, 469 Gnazzo, Patrick, 31
Documentum, 470 FedEx Kinko’s, 134, 344, 443 Godar, Paula, 426
Dofasco, 357 Fernandez, Maria, 370–371 Goldman Sachs, 340
Donald Trump Realty, 123 Ferrari, 192 Goodell, Rebecca, 37
Name Index 549
Goodrich Aviation Technical I King, Martin Luther, Jr., 382

Services, 445 IBM, 19, 39, 106, 109, 186, 237, 295, Kinko’s Inc., 443
Google, 6, 17, 30, 38, 87, 90, 91, 107, 450, 451, 470, 486, 491 Kirkpatrick, David, 136
196, 291, 340, 401, 453, 490, 497 IBM Global Services, 343 Klein, Gary, 160–161
Google China, 17, 61 IDEO, 469, 494 Klepper, Kenny, 485
Goold, Michael, 311 IEE Networks for Engineers, 486 Kmart, 169
Grayson Steel Company, 270 Ikea, 17–18 Knight-Ridder, 18
Greenley, Louis, 301–302 Immelt, Jeffrey, 308, 330, 359 KnitMedia, 143
Greenley Communications, 301–302 Immunex, 449 The Knitting Factory, 143
Griffiths, A., 47 Inc., 28 Knowledge Networks, 22–23, 487
Groove Virtual Office, 483 Indigo Partners, 297–298 KnowledgePoint, 363
GroupSystems for Windows, 135 InnovationNet, 22 Kodak, 90, 106, 197, 267, 305, 453
Guatemalan Humanitarian Integrated Network Solutions, 309 Kotter, John P., 317, 320
Center, 498 Integrity Interactive Corp., 46 KPMG, 56
Gupta, Vipin, 398 Intel, 108–109, 155, 359, 450, 470 Kraft Foods, 108, 110, 111, 247
International Paper Corp., 335 Kroger, 219
H International Standards Organization Kusin, Gary, 443
Habitat for Humanity, 401 (ISO), 40, 126, 245
Hackman, J. Richard, 411–413, 473 Internet Explorer, 450 L
Hammel, Green, and Abrahamson, Intuit Corporation, 281, 310, 401–402 Lacy, Steve, 143
Inc., 469 iPod, 7, 21, 117, 197 Lamborghini, 309
H&M, 1, 24 Ivory, 89 Lampert, Edward, 169
Handspring, 108 Land O’Lakes, 482
Hanges, Paul J., 398 J Land Rover, 259
Harding, Ralph, 434 Jackson, Gary, 379 Lands’ End, 62
Harley-Davidson, 191 Jane’s Information Group, 184 La Quinta Motor Inns, 234
Harrahs, 155 Janis, Irving L., 475 Laudon, Jane P., 120
Harris Cyclery, 104 Japan Airlines, 63 Laudon, Kenneth C., 120
Harvard Business Review, 283, 488, 511 Japan Barbie, 76 Lauren, Ralph, 97
Hausladen, Barbara, 162 Javidan, Mansour, 398 Lawrence, Paul, 280, 315
Head & Shoulders, 89 JCPenney, 133–134, 194, 228, 267, 308 Lenova, 61
Heinz, 272 J.Crew, 1, 24 Levi Strauss, 18, 24, 128, 134, 258,
Heizer, Jay, 239, 253, 255 JetBlue, 91, 170, 204, 206–207, 245 498, 500
Herbert, Theodore T., 414–415 JM Huber, 469 Lewin, Kurt, 316–317, 387
Hersey, Paul, 389–390 JobDescription.com, 370 Lewis, Michael, 154
Herzberg, Frederick, 408–410 Jobs, Steve, 7, 91 Lexus, 193, 194
Hewitt Associates, 375 Johnson & Johnson (J&J), 226, 227, LG Electronics, 278
Hewlett-Packard (HP), 73, 118, 140, 417, 484 LifeScan, 226
237, 259, 276, 295, 467, 479, Johnsonville Sausage Company, Light, Francis, 426
485–486, 503, 509 291–292 Liker, Jeffrey, 501
Higgins, Nancy, 42 J.P. Morgan, 272 Likert, Rensis, 15, 385
Hilton Hanoi Opera Hotel, 236 Judice, Ross, 489 LinkIn.com, 343
HIP Health Plan of New York, 408 Jung, Andrea, 2–3, 11, 304, 305 Linux, 488
Hofstede, Geert, 82, 83 Listerine, 182
Holland, John, 9 K Liz Claiborne, 260
Holtshouse, Dan, 492 Kamp, John, 347 Locke, Edwin, 416
Home Depot, 49, 52, 284–285, 287, 416 Kannappan, S. Kenneth, 416 Lockheed-Martin Corporation, 22, 42,
Honda, 155, 500 Kantor, Rosabeth Moss, 19, 229, 384 45–46, 74, 340
Honeywell Corp., 198 Karan, Donna, 91 Logan, Steve, 203
Honore, Russell, 3, 11 Katzenberg, Jeffrey, 443 Longo Toyota, 51
HotJobs, 18, 343 Kauffman (Entrepreneurship) L’Oréal, 3, 478
House, Robert J., 394–395, 398 Foundation, 28 Lorsch, Jay, 280
Howell, Jon, 395 Keeler, Andrew, 193 Lotus Notes, 131, 134–136, 279,
Hughes Electronics, 191 Keenan & Associates, 451 295, 505
Huismans, Sipke E., 327 KeenanFit, 451 Loyd, Sam, 167
Humer, Franz, 383 Kellogg’s, 247 Lucent Technologies, 256, 309, 435,
Hunsaker, Philip, 328 Kelly Services, Inc., 80 444, 447, 492
Hurd, Mark, 276 Kemp, Gary, 382 Lutz, Terry, 332–333
Hurley, Chad, 90 Kennedy, John F., 387
Huston, Larry, 22, 89, 112 Kennedy, Robert, 168 M
Huxham, Chris, 512 KFC, 191 Machiavelli, Niccolò, 315
Hyundai, 141, 142, 219 Kim, Dr. Peter, 110–111 Macoby, Michael, 375
550 Name Index
Macy’s, 119, 123, 147, 194 MyHRIS, 369 Outback Steakhouse, Inc., 28
Mankin, Don, 510 mySpace.com, 17, 22, 60, 65, 66, 72, Overholt, Jennifer, 298
Manley, Walter W., II, 41 90, 291 Oxford University Press (OUP), 175
Maritz Incentives, 426
Marks & Spencer, 235–236 N P
Marriott, 20, 155 Nagle, Robert, 475 Palm V, 494
Marriott International, 154, 343 Napster, 192, 294 Palo Alto Software, 106, 188
Marsh and McClellan’s Marsh NASDAQ, 39 Pampers, 89
Kroll, 184 National Auto Dealer Association, 513 Pan American Airlines, 206
Mars Inc., 291 National Bicycle Industrial Paradiso, 143
Maslow, Abraham, 82, 230, 407–410 Company, 252 Paul Revere Insurance Group, 469
Matsushita, 252 National Commission on Fraudulent A Pea in the Pod, 194
Mattel Inc., 76, 186 Financial Reporting, 38 Pearson, 183
Maurer, Rick, 316 National Family Business Association, Pella Corporation, 195
Maxwell, David, 388 97–98 Pepper, John, 38, 50
Mayo Clinic, 355, 469 National Science Foundation, 15 PepsiCo, 51, 64–65, 118, 120–121, 310
Maytag, 453 Nayden, Denis, 330 Pepsi Light, 118
McClelland, David, 410–411 NBC, 196 PerformancePro.net, 363
McDonald’s, 62–63, 99, 191, 208, 234, NCR Corporation, 364 PerformanceReview.com, 363
401, 453 Neeleman, David, 91, 92, 170, 206–207 Perot, H. Ross, 94
McGraw-Hill, 183 Nestlé Corporation, 277–278 Perot Systems Inc., 94
McGregor, Douglas, 14–15, 405–406 netG.com, 43 Peters, Thomas, 19
MCI-WorldCom, 34–35, 42, 155 Netscape, 450 Pfizer, 450
McKinsey & Co., 19, 64, 347 New England Patriots, 155 Philips, 295
Mead Corporation, 237, 254 New Jersey Bell Telephone Piccadilly Circus, 67
Medco Health Solutions, Inc., 441, Company, 15 Pic’n Pay, 355
448, 466, 485 New Jersey Hospital Association Pioneer Group, 63
Men’s Wearhouse, 357, 477 (NJHA), 461 Pirelli, 316
Merck, 5, 110, 111, 128–129, 193, 226 News Corporation, 60, 190, 196–197 Plantronics, 416
Mercury Interactive Corporation, New United Motor Manufacturing Plumtree, 451
403, 428 Incorporated (NUMMI), 499 Polaroid, 106
Merrill Lynch, 451 New York Life Insurance Company, 69 Polo, 97
Metropolitan Life Insurance Co., 69 New York Stock Exchange, 39, 69 Porras, Jerry, 226
MGM, 62, 70 New York Times, 212 Porsche, 79
Microsoft, 17, 31, 70, 91, 107, 129, 187, Ngo, Samba, 103 Porter, Michael, 193
196, 291, 298, 310, 311, 321, 359, Nike, 48, 60, 450 Pospischil, Bob, 124
363, 385, 401, 451, 470, 482, 498 NineSigma, 112 Post-it Notes, 310
Miele, 234 Nissan, 304, 321–323 Pratt & Whitney, 291
Milgram, Stanley, 37 Nokia, 453 Prevent Blindness America, 366
Miller, Lawrence, 425 Nordstrom, 224, 490 Price, Bill, 447
Millipore Corp., 127, 221, 263, 299 Nortel Networks Corp., 181, 449 PriceWaterhouseCooper, 21–22, 73,
Mintzberg, Henry, 7, 277 Northouse, Peter G., 382 135, 136, 470
Mirchandani, Raju, 60 Northrop Grumman, 445 Princivalle, Karin, 485
Mobility Solutions, 309 NovaCare, 220 Procter & Gamble (P&G), 22, 24, 38,
Money, 225 Novartis, 155, 494–495 50, 70, 89, 91, 106, 111, 112, 128,
Monster.com, 18, 91, 340, 343 Nucor Corporation, 427, 429, 490 272, 470, 498
Montana Blue Cross Blue Shield, 222 NuView, Inc., 369 Progressive, 155
Morris, Andrew, 115 Project.net, 482
Morrisey, George, 178–179, 199 O Puresafety, 368
Morrison, Robert, 310 Oakland A’s, 155
Mosakowski, Elaine, 85 Occupational Safety and Health Q
Motorola, 108, 226, 251, 283, 307, Administration (OSHA), 366, 368 Quaker Oats Co., 310
453, 479, 509 Offset Paperback, 88 QUALCOMM Corporation, 108, 109
Mouton, Jane, 386–387 Ohio State University, 385 Quicken, 401
MP3, 97 Oldham, Greg R., 411–413 Quicken Loans, 489
MTN, 182 Old Navy, 445 Quinn, James Brian, 19
Mulally, Alan, 17, 154, 307 Old Spice, 89
Munkvold, Bjorn, 504–506 Opel, 276 R
Murdoch, Rupert, 190, 196 Oracle Corporation, 74, 127, 195, 204, Raines, Franklin, 29
Murguia, Anne, 298 220, 221, 223, 255, 258, 278, 285, Rainforest Action Network, 49
Mutual Benefit Life, 140 299, 369, 417, 451 Random House, 87–88
Muzak, 441–442 Ortega, Amancio, 259 Rapunzel Barbie, 76
Name Index 551
Raven, 377 Sears, Roebuck, and Company, 416 Swan Dive, 104
RAZR cell phone, 108 Securities and Exchange Commission Swiffer, 89, 106, 494
Red Cross, 4, 264 (SEC), 35
Reinhold, Rusty, 345 Seiko, 189 T
Reiss, Bridget, 263 Select Medical Corp., 131, 132 Taggart, William, 162
Renault, 321, 323 Senge, Peter, 19 Tangri, Ravi, 201
Render, Barry, 239, 253, 255 7-Eleven, 223, 285 Tannenbaum, Robert, 393–394
Revlon, 194, 270 Shanghai Auto, 60, 64, 65, 71–72, 76 Target, 24, 117, 169, 498, 500
Reynolds Metals, 78 Shanghai Bell, 65 TaxAlmanac.org, 453
Rhino Records, 50 Shanghai General Motors, 65, 72 Taylor, Frederick Winslow, 12–13, 16
Ritz-Carlton Hotel Company, 232, 333 SharePoint, 449 Team EcoInternet, 474–475
Robbins, Stephen, 328 Shell Oil Company, 50–51, 80, 192, 295 Telemundo, 196
Robinson, Ann, 269 Shell Switzerland, 78 Texas Pacific Group, 1, 24
Roche, 383 Shell U.S.A., 78 Thales, 280
Rockefeller Foundation, 15 The Shoe Horn, 104 Thatcher, Margaret, 382
Rodel, Inc., 469 Shonk, James H., 293 Thinq.com, 358
Rodriguez, Serena, 193 Siebel Systems, 211 Thomas, Harvey G., 434
Rogers, Greg, 305 Siemens, 259, 450 Thompson International USA, 345
Rogers, T. J., 19 Signicast, 332–333 Thorndike, Edward, 422
Rolex, 189 Silicon Graphics, 469 3M Company, 310
Rolls-Royce, 308 Simon, Herbert, 15–16, 149 TIBCO Company, 314–315
Ronen, Amit, 403 Skelcher, Chris, 498 Time Warner, 65, 305
Rosenbluth, Hal, 276, 291 skillsoft.com, 43 T-Mobile, 428
Rosenbluth International, 276, 279 Skinner, B. F., 422–423 Toshiba, 252
Ross, A. C., 298 Skoda, 76 Toyota, 17, 19, 61, 63, 65, 71, 212,
Royal Dutch Shell, 78, 186 Slone, Reuben, 233, 256 226, 229, 242, 249–250, 254, 293,
Royal Palm Crowne Plaza Resort, 102 Small Business Exporters Association, 62 294, 307, 334, 360, 491, 499, 500
R.R. Donnelley & Sons Company, 177 Snyder, Nancy, 396 Toys “R” Us, 192
Rumsfeld, Donald, 286 Social Venture Network, 39, 50 Tramco, Inc., 59–61, 63, 66, 71, 79
Rusby, Kate, 103 Society of Human Resource Tropicana, 310
Rutgers University, 430 Management, 33 Tuckman, Bruce W., 471
Ryder Corp., 303 Solectron Corp., 192, 509–510 TurboTax, 401
Ryder Systems Inc., 131, 296 Sony Corp., 25, 60, 75, 87, 113, 509 Turner Broadcasting System Inc., 44
Sony-EMI, 297 Tyndall, Gene, 131
S Southwest Airlines, 23, 201–204, 206,
Saba Software, 299 477, 490 U
Safeco Insurance, 450 Spec’s Music, 319–320 UCSD Healthcare, 356
Safeway Supermarkets, 22, 23, 258 Sperry Marine, 445 UniCredito Italiano Group, 63
The St. Paul Companies, 484 Sta-Dri, 426 Unilever, 38, 50, 277
Saks Fifth Avenue, 186–187 Stalker, G. M., 16–17, 287–289, 300 Unisys Corporation, 308, 343, 449, 486
Saks Inc., 284 Starbucks Coffee Company, 22, 64–65, United Auto Workers, 228
Salvation Army, 229 71, 131, 208–210, 213, 229, 230, United Technologies Corp., 31
Sandia National Laboratories, 452 266, 355 Universal Products Company, 62, 272
SAP, 24, 45, 127, 183, 255, 258, 451 Steelcase, 469, 483 University of Iowa, 387
SAS Analytics, 127, 156, 158, 160, Stern, Raymond, 402 University of Michigan, 385, 386
182, 222, 255, 258, 432 Sternberg, Robert J., 382 UPS (United Parcel Service), 23, 25,
SAS Institute, 362 Stogdill, Ralph, 385 33, 44, 128, 131, 138, 142, 156,
Saturn Corporation, 20, 134, 228–230, Strategic Performance 212, 222, 223, 249, 250, 256, 257,
293, 496, 511 Management, 204 306, 413
SBC Communications, 18, 515 Strategos, 396 Upton, David, 254
Scagnetti, Paul, 109 Stratfor, 184, 185 U.S. Air Force, 478
Schein, Edgar, 10, 489 Stringer, Howard, 75 U.S. Bureau of the Census, 93
Schirmer, Annette, 494 Subway, 208 U.S. Department of Commerce, 62, 247
Schlesinger, Leonard A., 317 Sullivan, Chris, 28 U.S. Department of Labor, 93, 343
Schlumberger, 74, 487 Sullivan, Helen, 498 U.S. Federal Trade Commission
Schmidt, Warren H., 393–394 Sullivan, Rev. Leon, 50 (FTC), 99
Schoewe, Tom, 491 Summer, Mary, 140 U.S. Justice Department, 30
Schumpeter, Joseph, 90 Sunlight Financial Insurance U.S. National Weather Service,
Scitor, 426 Company, 109 226–227
Scott, Lee, 491 Sun Microsystems, 108, 359, 453 U.S. Patent and Trademark Office, 93
Seagate Technology, 360, 450 Surfer, 97 U.S. Post Office, 358
Sears, 169, 256 Sutter Health, 331, 333, 344 U.S. Rubber, 14
552 Subject Index
U.S. Small Business Administration Warner-Lambert, 182, 469 Wren, Daniel, 16

(SBA), 91–93, 95, 98, 103 Warner Music, 70, 285 Wrigley Company, 55
U.S. State Department, 62 Washington Mutual, 449 W.T. Grant, 90
US Airways, 170 Washington Post, 344
USA Today, 212–213 Washington Post.com, 344 X
Waterman, Robert, Jr., 19 Xerox Corporation, 90, 106, 130, 140,
V Waypoint, 376 299, 376, 492, 493, 498
Value Rent-a-Car, 357 Weber, Max, 13
Vangan, Siv, 512 WebMD, 190
Y
Vencel, Keith, 331, 344 Yahoo!, 17, 155, 291, 451
Weinbach, Lawrence, 308
Ventana Corporation, 135 Yancey, Thea, 445
Welch, Jack, 225, 286–287, 330, 359, 378
Veritas Software, 453 Yellow Freight System Inc., 318
Well, Susan, 44
Verizon, 155, 417 Yellow Roadway Corp., 318
Wertkauf, 63
Viacom, 227 Yellow Transportation Inc., 303, 307,
West, Garry, 103
Vivonic, 109 317–318
Westdeutsche Bank, 193
Vliert, Evert Van De, 327 Yodlee, Inc., 497
Western Electric Company, 14
Vocational Preference Test (VPT), 9 YourEncore, 112
Westinghouse, 284, 429
Volkswagen, 69, 71, 72, 76, 309 YouTube.com, 90, 191
Wheatley, Marsha, 344
Volvo, 193, 194 YRC Worldwide Inc., 318, 319, 321
Wheeled Coach, 262
Vroom, Victor, 418–419 Yukl, Gary, 381, 382
Whirlpool Corporation, 137, 233, 234,
249, 256, 257, 305, 372, 396, 470 Z
W Whitman, Dave, 372
Wageman, Ruth, 479 Zaccaro, Stephen J., 382
Whitman, Meg, 6 Zara, 1, 21, 24, 78, 131, 133, 256,
Walgreen’s, 219
Winfrey, Oprah, 382 259–260
Wall Street Journal, 32, 51, 264, 340
Woodward, Joan, 288–290, 300 Zee Telefilms, 65
Wal-Mart, 3, 17, 22, 24, 54–55, 63, 69,
Woolworth’s, 90 Zee Turner, 65
91, 128, 131, 155, 169, 182, 223,
Wordsprint Inc., 411 Zimmer, George, 477
225, 257, 258, 306, 308, 345, 352,
World Family Financial, 450 Zingerman’s Delicatessen, 406
490–491
World Health Organization (WHO), 482 Zollars, Bill, 303, 304, 306, 307,
Walt Disney World Resorts, 423
World Trade Organization (WTO), 69 317–319
Walton, Sam, 90, 308, 379
SUBJECT INDEX
A Alliances line, 280–281

ABC inventory management, 243–244 creation of, 501–502 sources of, 281
Acceptance sampling, 247 explanation of, 500 staff, 281
Accommodation, 327 strategic, 500–501 unchecked, 379–380
Accounting reports, 220 Ambiguity, 442 Autocratic leaders, 387
Accounting scandals, 34 Analytical competence, 10 Automation, 252
Achievement, need for, 410 Analytics, decision-making, 154–156 Avoidance, 327
Achievement-oriented leadership, 395 Anchoring, 165
Acquisitions costs, 243 Angels, 102 B
Action research, 323 Applicant tracking services, 344 Background investigations, 352, 354
Activities, 241 Appraisal interviews, 360 Balanced scorecard, 200, 202–203
Activities ratios, 217 Arbitrators, 368 BATNA (best alternative to negotiated
Activity-based costing (ABC), 220–222 Artificial intelligence, 126 agreement), 458
Adjourning, team, 472 Asia Pacific Economic Cooperation BCG matrix, 197–198
Administrative approach to decision (APEC) forum, 69 Behavioral displacement, 224
making, 149 Association of Southeast Asian Behaviorally anchored rating scales
Administrative distance, 72 Nations (ASEAN), 68 (BARS), 359
Administrative school, 15–16 Audits, 190, 216 Behavioral school, 13–15
Advertisements, recruitment, 340 Authentication, 126 Behavior modification
Affiliation need, 410 Authority explanation of, 423–424
Affirmative action, 366 decentralization of, 282–285 use of, 424–425
Alderfer’s existence-relatedness-growth delegation of, 282 Bennett Test of Mechanical
(ERG) theory, 408 functional, 281 Comprehension, 347, 348
Subject Index 553
Bias, 361 Chief executive officers (CEOs) misperception of, 440

Biometric scanners, 33 authority of, 281, 282 noise and, 442–443
Blogs, 399, 453 for e-businesses, 6 nonverbal, 84, 438–440, 459, 460
Body language, 439 ethical behavior and, 35, 42 one-way, 438
Boundaryless organization, 292 China, leadership effectiveness in, 398 organizational barriers in, 441–442
Bounded rationality, 149 Civil Rights Act of 1964, Title VII, process of, 436–438
Brainstorming, 164 364, 365 technological advances in, 384, 438,
Breakeven analysis, 171–172 Classical approach to decision 441, 443–453
Breakeven charts, 171–172 making, 148–149 two-way, 438
Breakeven formula, 172 Clustering, 78 upward, 444–445
Bureaucracy, 13 Coaching, team, 474 Communication media. See also
Burns and Stalker organization Coercive power, 378 Technological advances
studies, 287–289 Cohesiveness, team, 474 collaboration software as, 449–450
Business analysis, 108 Collaboration (See also Software)
Businesses in alliances, 500–502 function of, 438
coming up with ideas for, 97 benefits of, 499 Internet as, 447–449, 461 (See also
family-owned, 97–98 explanation of, 327, 498–499 Internet)
methods for getting into, 97–99 factors in promoting, 506–507 intranets as, 450–453 (See also
planning for, 103 function of, 110–111 Intranets)
raising money to start, 102–103 guidelines for, 507–510 oral, 453
types of ownership of, 99, 101–102 information technology and, 498 richness of, 454
Business incubators, 109 in supply chain management, 500 Communication skills
Business intelligence (BI), 157–158. in virtual teams, 502 conflict resolution as, 458–459
See also Decision support Collaboration technology listening as, 455
systems (DSSs) challenges in implementing, for meetings, 462–463
Business ownership 505–506 negotiation as, 456–458, 460
corporation, 65, 101–102, explanation of, 503 persuasion as, 456
192–193 use of, 503–505 speech and presentation as, 461–462
limited liability company, 102 Collaborative commerce writing as, 459–461
partnerships, 101, 102 (c-commerce), 499 Communities
sole proprietorship, 99, 101, 102 Collaborative software. See Groupware establishing sense of, 483–484
Business Plan Pro (Alto Software), Collaborative writing systems, of interest, 487–488
106, 188 74, 135 organizational, 483–484
Business plans Collectivism, 82 of practice, 484–488
contents of, 105 College recruiting, 341–343 Communities of practice, 376
explanation of, 104, 187–188 Command economy, 66 Compensation. See Employee
software packages for, 106, 188 Commercialization, 108 compensation
Business process management (BPM), Commitment-based control Competencies, 7, 10
314–315 belief systems and values to Competitive intelligence (CI), 183–185
Business process reengineering encourage, 226 Competitive strategies, 193–194
example of, 312–313 building methods for, 226–230 Compromise, 327
explanation of, 296, 312 explanation of, 213, 225–226 Computer-aided design (CAD), 251
Committees, for direct supervision, 279 Computer-aided manufacturing
C Common market, 68 (CAM), 251, 252
Campus interview report, 342 Common Market for Eastern and Computer-integrated
Capitalism, managerial, 47 Southern Africa, 69 manufacturing (CIM)
Career anchor, 10 Communication. See also employees and, 254
Carrying costs, 243 Technological advances; example of, 253–254
Cause-and-effect diagrams, 248, 249 Telecommunications explanation of, 252–253
CD-ROMs, 376 barriers to, 438–443 Computerized testing, 348
Cellular manufacturing layout, cultural barriers in, 442 Computer viruses, 126
238, 239 diagonal, 446 Concept development and
Central tendency, 361 downward, 443–444 testing, 107
Certainty, 173 for emergency situations, 3 Conceptual skills, 11–12
Chain of command explanation of, 426 Concurrent controls, 211
authority and, 280–285 face-to-face, 73, 198, 438, 453 Concurrent engineering, 249
boundaries and, 292 filtering of, 440–441 Conflict
direct supervision and, 278 formal, 446 line-staff, 281
explanation of, 264 global, 73–74 managing interpersonal, 326–328
tall vs. flat, 285–287 horizontal, 445 Conflict resolution
Change. See Organizational change informal, 446 skills in, 458–459
Channel assembly, 259 Internet-based, 74 styles of, 326–328
Channels, communication, 437 interpersonal, 83–84 Conflicts of interest, 30
554 Subject Index
Consequences, 152–153 Cultural intelligence test, 85–86 Decision theory, 148–149

Consequences matrix, 153 Culture. See Multicultural Decision trees, 174
Consideration, 385 environments; Organizational Decoding, 437
Content theories, 406–407. See also culture Delegation
Motivation theories Customer departmentalization, 270 decentralization and, 289
Contingent workers, 341 Customer relationship management explanation of, 282
Continuous production system, 237 (CRM) systems skills for, 283
Continuum of leader behavior, 393–394 example of, 513 Demand Planning (SAP), 183
Control explanation of, 25, 128 Democratic leaders, 387
decisions related to, 146 Customs union, 68 Departmentalization. See also
example of, 6 Organizing
in global environment, 79–80 D application of, 273–276
information technology use for, 141 Data boundaries and, 292
as management task, 5–6 digitizing, 131 customer, 270
personal, 212–213 primary, 183 decentralization and, 282–283
planning to facilitate, 177 secondary, 183 explanation of, 265
process for, 210 Data mining, 119 functional, 265–267, 279, 289
reactions to, 224–225 Debt, 102–103 geographic or territorial, 271–272
self-control and commitment- Decentralized organization marketing-channel, 270–271
based, 213 departmentalization and, matrix organization, 272–273
span of, 285, 286, 288, 289, 291 282–283, 288 in mechanistic and organic
strategic, 191 explanation of, 282 organizations, 288
traditional, 213–219 reasons for, 283–284 methods of, 265
Control systems timing for, 284 product, 267–269, 289
commitment-based, 225–230 Decision making Descriptive plans, 186
explanation of, 209 analytical approach to, 154–155 Designing for manufacturability,
IT-enabled, 219–224 creativity in, 163–165 248–249
traditional, 214–219 explanation of, 145 Diagonal communication, 446
types of, 210–211 increasing your knowledge for, 159 Differentiation strategies, 194
Conversion system, 235 as managerial function, 145, 146 Digital dashboards
Cookies, 32–33 psychological traps in, 165–168 explanation of, 200, 204
Coordination shortcuts to, 165 motivation with, 417
explanation of, 276–277 timing of, 161–162 use of, 224, 380, 412
methods for, 277–280, 288 using your intuition for, 160–161 Directive leadership, 395
software packages for, 279 Decision-making process Discipline
Corporate intrapreneurship, 108 analyzing consequences as step in, guidelines for, 362–363
Corporate social audits, 48, 50 152–153 for unethical behavior, 43
Corporate social responsibility, 46–47. clarifying objectives as step in, Discrimination, 53
See also Social responsibility 151–152 Distance, global management and, 72
Corporate stakeholders, 47–48 defining problem as step in, 150–151 Distributed processing, 137
Corporations identifying alternatives as step in, 152 Distributive fairness, 419
explanation of, 101–102 making choice as step in, 154 Distributive negotiation, 456–457
multinational, 65 Decision-making techniques Diversification, 191–192
virtual, 192–193 breakeven analysis as, 171–172 Diversity. See also Multicultural
Cost centers, 219 linear programming as, 172–173 environments
Cost leadership, 193 statistical decision theory, 173–174 barriers in dealing with, 52–53
CPM charts, 241 technology-supported, 154–159 bases for, 51–52
Creative destruction, 90–91 waiting-line/queuing, 173 communication and, 439, 442
Creativity Decisions leadership effectiveness and,
culture of, 164 change or modification of, 161 397–398
explanation of, 163–164 explanation of, 145 recruitment for, 55–56, 343
to find solutions, 167 moral, 30 workforce, 52, 55, 397–398
techniques to support, 164–165 nonprogrammed, 147–148 Diversity management
Critical incidents, 359 normative, 30 explanation of, 51, 53
Critical path, 241 programmed, 147–148 methods for, 53–55
Cross-functional teams, 322, 323, timing of, 161–163 Diversity training, 54
468–469 types of, 145, 147–148 Division, 267
Cues, 454 Decision support systems (DSSs). See Divisional organization
Cultural differences. See Diversity; also Business intelligence (BI) examples of, 268, 269
Multicultural environments components of, 122–123, 157–158 explanation of, 267
Cultural distance, 72 explanation of, 23, 73–74, 121 Downsizing, 290
Cultural intelligence, 84 use of, 123, 159 Downward communication, 443–444
Subject Index 555
E Employee selection tools Ethical behavior

E-business background investigations and accounting issues and, 34
skills for, 6 reference checks as, 352–354 individual factors related to, 35
transition to, 304–305 health exams as, 354 methods to encourage, 39–43
Economic Community of West honesty testing as, 354 methods to monitor and enforce, 43
African States, 69 interviews as, 349–352 organizational factors related to,
Economic development realistic previews as, 352 37–38
entrepreneurship and, 92 tests as, 345–348 social responsibility and, 48–49
explanation of, 66–67 Employee training Ethical issues
Economic distance, 72 ethics, 42–44, 46 employee monitoring as, 33–34
Economic freedom, 92, 93 leadership, 376 overview of, 30–31
Economic integration safety, 366, 368 privacy as, 30–34
explanation of, 67–68 steps in, 357 Ethics
impact of, 69 techniques for, 357, 358 explanation of, 30
levels of, 68 Employment agencies, 340–341 legislation related to, 29, 31–34,
Economic order quantity (EOQ) Employment applications, 346 39, 45–46
system, 244–245 Empowerment new attitudes regarding, 47
Economic systems, 66 barriers to, 320 organizational culture and, 37–38
E-leadership, 399 to counteract resistance to change, Ethics code
E-learning systems, 359 320–321 effectiveness of, 41
Electronic Communications Privacy employee, 20, 291 explanation of, 39–40
Act (ECPA), 33–34 explanation of, 380 implementation of, 41
Electronic monitoring, 464–465 motivation and, 410–411 Ethics training
Electronic performance monitoring technology use for, 380, 396, 411 explanation of, 42
(EPM) Encoding, 436 Internet-based, 46
explanation of, 33–34, 223 Encryption, 126 support for, 42–43
use of, 223 Enterprise resource planning (ERP) tools used for, 44
E-mail activity-based costing and, 222 types of, 44
globalization and, 74 customer relationship Ethnic groups, 52
guidelines for using, 461 management, 128 Ethnocentric philosophy, 76
monitoring employee, 33 explanation of, 23–24, 127, 219–220 Ethnocentrism, 52
Emotional competence, 10 knowledge management, 128–129 European Economic Community
Emotional intelligence standardizing processes with, (EEC), 68. See also European
assessment of, 478 277–278 Union (EU)
explanation of, 383, 477–478 supply chain management software European Union (EU), 45, 68
Emotional quotient (EQ), 383 and, 128, 255, 256 Events, 241
Empathy, 383 wireless-assisted control using, 222 Exchange rates, 67
Employee appraisals Entrepreneurs Executive assignment tables,
explanation of, 359 business ideas of, 97 198–200
methods for, 360 characteristics of, 94–95 Executive recruiters, 341
problems related to, 360–361 qualities for, 95–96 Executives, 8
technology use for, 363 tasks for, 97–105 Executive support systems (ESSs)
Employee benefits, 362, 363 Entrepreneurship explanation of, 121, 123–124
Employee compensation, 361–362 creative destruction and, 90–91 function of, 124–125
Employee monitoring, 33–34, 44–45, encouragement of, 7 Existence-relatedness-growth (ERG)
464–465 environment of, 92–94 theory (Alderfer), 408
Employee-oriented leaders, 385 explanation of, 91 Expected value, 174
Employee recruitment importance of, 94 Expert power, 378
for diversity, 55–56, 343 small-business management and, Expert systems, 125, 126
explanation of, 339–340 91–92 Exporting, 62
on Internet, 343–344 Environment Export-oriented structure, 78
methods for, 340–343 motivation and, 406 Extinction, 424
steps in, 335 organization and, 287–288
of women, 55–56 Environmental scanning, 196 F
Employees E-procurement, 258 Face-to-face communication
building competencies of, 7 Equal Employment Opportunity global, 73
clarifying expectations of, 42 Commission (EEOC), 364 to improve strategy execution, 198
development of, 230 Equal-employment opportunity technology and, 438, 453
electronically monitoring, 33–34 legislation, 364, 365 Facilities
empowerment of, 20, 291, 320–321, Equity, 102 layout of, 238
410–411 Equity theory, 420–421 location of, 235–236
orientation for, 355, 356, 358 Escalation of commitment, 168 Fair Labor Standards Act, 361
556 Subject Index
Fairness General Agreement of Tariffs and H

distributive, 419 Trade (GATT), 69 Halo effect, 361
improving perception of, 420 General partnerships, 101 Hawthorne studies, 14
interactional, 420 Geographic departmentalization, Headhunters, 341
procedural, 419 271–272 Health exams, 354
Family life, 96 Geographic distance, 72 Health Insurance Portability and
Family-owned businesses, 97–98 Global environment Accountability Act (HIPAA), 33
Federal organization, 297 communication technology in, 73–74 Hersey-Blanchard situational
Feedback controlling in, 79–80 leadership model, 389–391
communication, 437 distance and, 72 Herzberg’s two-factor theory, 408–410
to employees, 180 economic environment and, 66–69 Heuristics, 165
on goals, 417 interpersonal communications in, Hierarchy of needs (Maslow), 407
Femininity, 82 83–84 High-performance work systems
Fiedler’s leader-match model, 391, 393 leadership in, 82 (HPWSs), 334
Figurehead role, 7 legal systems and, 69–70 Hiring, value-based, 229
Filtering, as communication barrier, managers in, 75–76 Histograms, 248
439–441 motivation in, 82–83 Honesty testing, 354
Financial incentive, 361–362 organizing in, 77–78 Horizontal communication, 445
Financial plans, 188 planning in, 76–77 Horizontal organization, 296
Financial ratios, 216, 217 political system and, 70 HR scorecord, 333
Financial responsibility centers, 219 sociocultural environment and, Human capital, 334
Firewalls, 126 70–71 Human process interventions, 323–325
First-line managers, 9 technology transfers and, 71–72 Human relations movement, 14
Fixed-position layout, 238 values and, 82 Human resource management
Flexible manufacturing systems (FMS), Globalization benefits administration and, 363
251–252 explanation of, 17–18, 60 challenges facing, 333–334
Flextime, 429–430 human resource management compensation and, 361–362
Forced distribution method, 359 and, 334 discipline and grievances and,
Forecasting information technology and, 45, 61 362–363
explanation of, 181, 182 pros and cons of, 60–61 employee appraisals and, 359–361
techniques for, 183–185 Global teams, 470 equal employment opportunity
Foreign direct investment, 63 GLOBE leadership study, 398 legislation and, 364–366
Formal communication, 446 Goal-directed organizations, 4 globalization and, 334
Formal structural change program, 325 Goals interviewing and selecting
Forming, team, 471 coordination through, 277 employees and, 345–355
Framing, 150 hierarchy of, 178 job analysis and personnel planning
Franchisees, 98–99 strategic, 190 and, 335–339
Franchisers, 98 team, 476 labor-management relations and,
Franchises types of, 179 368–369
benefits of, 99 Goal-setting theory of motivation, occupational safety and health and,
evaluation of, 99, 100 416–417 366–368
explanation of, 62–63, 98 Good faith bargaining, 368 organizational development and, 325
Franchising agreements, 99 GPS, 33 orienting employees and, 355, 356
Free trade, 67 Grapevine, 446 recruitment and, 339–344
Functional authority, 281 Graphic plans, 186 strategic, 333
Functional departmentalization Graphic rating scale, 359 technology use by, 334–335
advantages of, 266 Grievances, 363 training employees and, 355,
disadvantages of, 267, 279 Gross domestic product (GDP), 66–67 357–359
explanation of, 265–266 Group decision support systems (GDSS) Human resources information systems
in unit and process production explanation of, 134–135 (HRISs), 369
firms, 289 for virtual teams, 481 Hurricane Katrina, 3, 5, 250, 373, 397
Functional plans, 186 Groups Hygiene factors, 409
Functional strategies, 194 teams vs., 467
Functional teams, 468 transition to teams, 470–472 I
Fundraising, for businesses, 102–103 Group scheduling systems, 74, 135 Idea generation, 107
Groupthink Idea screening, 107
G explanation of, 168, 475 Independent integrators, 279–280
Gain sharing, 427 symptoms of, 476 Individualism, 82
Gamesmanship, 225 Groupware Individuals with disabilities, 52
Gantt charts, 240, 242 benefits of, 137, 449–450 Influence, 381
Gays/lesbians, in workforce, 52 function of, 135, 136 Informal communication, 446
Gender, leadership and, 383–384 for virtual teams, 481 Informal organization, 264
Subject Index 557
Information new-product development process explanation of, 450

management’s requirement for, and, 107–108 features for, 452–453
120–121 role of, 105–106 guidelines for building, 452
nature of, 117–118 using information technology for, incentive and rewards
quality of, 118–119 111–112 programs on, 428
Informational power, 379 Innovators, managers as, 7 organizational culture and, 491–493
Information overload, as Inputs, 234 portals and, 451
communication barrier, 439, 441 Instant messaging, 73 Intrapreneurship, corporate, 108
Information systems. See also Integrated strategic management, Intuition, 160–161
Management information 325–326 Inventory-holding costs, 243
systems (MISs) Integration, vertical, 192 Inventory management
decision support, 122–123 Integrative negotiation, 457 explanation of, 240
enterprise, 126–130 Intelligence quotient (IQ), 383 function of, 243
executive support, 123–126 Intelligent enterprises, 19 systems for, 243–245
explanation of, 23, 117 Interactional fairness, 420 ISO 9000, 245, 257
function of, 120 Interactive control, 212–213
levels of, 121 Intermittent production systems, J
security issues for, 126 236–237 Jargon, 442
transaction-processing, 121–122 International business, 65 Job analysis, 335, 337
types of, 23–25, 120 International law, 70 Job analysis questionnaire, 337
Information technology (IT). See also International management, 65 Job characteristics
Internet; Intranets; Software; International organizations, 78 motivation and, 406
Telecommunications International trade, 65 types of, 411–412
for collaboration, 498 Internet. See also Information Job characteristics model, 411–415
communication and, 384, 438, 441, technology (IT); Technological Job description questionnaire, 337
443–447 advances Job descriptions, 336–337
for control functions, 141, 210–211, benefits administration using, 363 Job enlargement, 413
219–224 business use of, 137 Job enrichment, 412–413
for cost leadership strategies, communication and, 438, 447–449 Job enrichment evaluation form,
193–194 employee appraisals using, 363 414–415
for decision support, 156–159 employee learning portals on, 358 Job postings, 340
for employee monitoring, 33–34, ethics training using, 46 Job rotation, 414
44–45 incentive and rewards Job specifications, 337
ethical issues related to, 30–34 programs on, 428 Joint ventures
ethics software and, 45–46 incentive programs on, 419 explanation of, 64
explanation of, 21, 117 monitoring employee use of, 33–34, guidelines for successful, 64–65
feedback using, 417 44–45, 464–465 as strategic alliances, 192–193
for forecasting, 183 performance management using, 360 Judgment, 145, 164
globalization and, 45, 61, 73–74 privacy issues and, 30, 32–33 Jury of executive opinion, 181
for incentive and rewards recruiting on, 343–344 Just-in-time (JIT) systems, 250–251
programs, 428 safety training using, 366, 368 K
for innovation, 111–112 security issues related to, 126 Kaizen programs, 246
for leading, 139–141, 384 social responsibility support using, Knowledge
network use using, 295 50–51 to aid in decision making, 159
for organizing, 138–139 starting business on, 104 explanation of, 118
piracy and, 34 wireless access to, 131 transfer of, 486
for planning, 138 Internet-based purchasing, 258 Knowledge capture systems, 130
privacy issues and, 32–33 Internships, 340–342 Knowledge discovery systems, 129–130
for quality control, 247–248 Interpersonal communications, 83–84 Knowledge management
for reengineering, 314 Interpersonal competence, 10 example of, 130, 131
reliance on, 18 Interpersonal conflict, 326–328 explanation of, 25, 128
security issues and, 34 Interpersonal skills, 11 Knowledge management systems
for teams, 467, 470, 478–483, 491 Interviewees, 352 explanation of, 25, 128–129
for telecommuting, 139 Interview forms, 350 types of, 129–130
trust and, 497 Interviews Knowledge workers, 432
Initial public offering (IPO), 102 appraisal, 360
Initiating structure, 385 computerized, 354–355 L
Innovation employee selection, 349–352 Labor-management relations, 368–369
application of, 104–105 skills for conducting, 460 Labor unions, 368, 369
collaboration and, 110–111 Intonation, 439, 440 Laissez-faire leaders, 387
learning and, 111 Intranets. See also Information technol- Landrum-Griffin Act, 368
method for fostering, 108–109 ogy (IT); Technological advances Law of individual differences, 404
558 Subject Index
Leader Behavior Description Legal systems, 69–70 Manufacturability, designing for,

Questionnaire (LBDQ), 385 Legitimate power, 377–378 248–249
Leader-match model (Fiedler), 391, 393 Leniency, 361 Manufacturing
Leader-member exchange theory, Level 5 leadership, 388–389 computer-aided, 251, 252
396–397 Leverage ratios, 217 computer-integrated, 253–254
Leader role, 7 Liability, 101 lean, 250
Leaders Liaisons, 7, 279 value-added, 250
autocratic, 387 Licensing, 62 Market economy, 66
democratic, 387 Lifelong learning, 430 Marketing-channel
emotional intelligence of, 383 Limited liability companies (LLCs), 102 departmentalization, 270–271
employee-oriented, 385 Limited partnerships, 101 Marketing channels, 270
function of, 373 Line adapters, 132–133 Marketing plans, 187
influence of, 381 Linear programming, 172–173 Marketing research, 183
laissez-faire, 387 Line authority, 280–281 Marketing strategy development,
organizational culture created by, Line managers, 281 107–108
490–491 Line-staff conflict, 281 Masculinity, 82
power of, 377–380 Liquidity ratios, 217 Mass customization, 237
production-oriented, 385 Listening, active, 455 Matrix organization, 272–273
traits and skills of, 382 Listening skills, 455 McClelland’s need for achievement,
virtual team, 480–481 Local area networks (LANs), 137 affiliation, and power theory, 410
Leadership Mechanistic organizations, 288
central role of, 373 M Mediators, 368
collaboration and, 506 Malcolm Baldrige Award, 247 Meetings, skills for conducting,
cultural factors affecting, 397–398 Management 462–463
decisions related to, 146 business process, 314–315 Mentoring, 54
in diversity management, 53–54 diversity, 51, 53–55 Merit pay, 426
example of, 6 during emergencies, 3 Messages, 437
explanation of, 5, 373, 374 explanation of, 4 Mini-units, 291
gender and, 383–384 leadership vs., 374–375 Misperception, 439, 440
management vs., 374–375 matrix, 272–273 Mission, 190
in multicultural environments, 82 performance, 360 Mixed economy, 66
technological advances and, 376, reducing layers of, 290–291 Moral decisions, 30
384, 399 by wandering around, 443 Moral minimum, 48
Leadership neutralizers, 397 Management assessment center, 348 Motion study, 13
Leadership styles Management by objectives (MBO), 198 Motivation
achievement-oriented, 395 Management information emotional intelligence and, 383
directive, 395 systems (MISs) explanation of, 404–405
level 5, 388–389 decision support systems vs., 123 individual characteristics and,
managerial grid and, 386–387 explanation of, 121, 122 405–406
Ohio State studies of, 385 Management process, 5 job characteristics and, 406
participative, 395 Management science, 16 in multicultural environments, 82–83
supportive, 395 Management theory work environment and, 406
transactional, 388–389 administrative school of, 15–16 Motivational methods
transformational, 387–388 behavioral school of, 13–15 flextime as, 429–430
University of Iowa studies of, 387 classical and scientific, 12–13 lifelong learning as, 430
University of Michigan studies of, management science school of, 16 pay-for-performance as, 426–429
385–386 modern, 17–21 rewards as, 425–426
Leadership substitutes theory, 397 situational/contingency telecommuting as, 430
Leadership theories school of, 16–17 theoretical foundations of, 430
continuum of leader behavior, Managerial competencies, 10 Motivation theories
393–394 Managerial grid, 386–387 Alderfer’s existence-relatedness-
Fiedler’s leader-match model, Managers growth, 408
391, 393 ethical standards set by, 38, 41–43 behavior modification, 423–425
Hersey-Blanchard situational explanation of, 4 content, 406–407
leadership model, 389–391 first-line, 9 empowerment, 410–411
leader-member exchange, 396–397 global, 75–76 equity, 420–421
leadership substitutes, 397 as innovators, 7 explanation of, 406–407
path-goal, 394–396 line, 281 fairness, 419–420
Lean manufacturing, 250 responsibilities of, 4–5 goal setting and feedback, 416–417
Learning, 111 roles of, 7 Hackman and Oldham’s job
Learning organizations, 19, 298–299 staff, 281 characteristics model, 411–415
Least preferred coworker scale, 392 traits for, 9–10 Herzberg’s two-factor, 408–410
Legal issues, 53 types of, 7–9 Maslow’s hierarchy of needs, 407
Subject Index 559
McClelland’s need for achievement, problem-causing conditions Organizational communities, 483–484

affiliation, and power, 410 affecting, 367 Organizational culture
process, 415 training programs for, 366, 368 communication and, 441–442
reinforcing performance, 422–423 Occupational Safety and Health ethics and, 36, 38
self-efficacy, 418 Administration (OSHA), 366 evaluation of, 490
Vroom’s valence, instrumentality, Ohio State leadership studies, 385 explanation of, 38, 488–489
and expectancy, 418–419 Older individuals, 52 function of, 489–490
Motivators, 409 One-way communication, 438. See intranets and, 491–493
Moving, 316 also Communication leadership and, 490–491
Multicultural environments. See also Online testing, 348 method for changing, 307–308
Diversity On-the-job training (OJT), 357, 358 Organizational development (OD)
explanation of, 82 Operating delays, 225 explanation of, 323
interpersonal communications in, Operational plans, 186 human process applications
83–84 Operations control, 240 to, 323–325
leadership in, 82 Operations management human resource management
motivation in, 82–83 design for manufacturability and, applications to, 325
values in, 82 248–249 interpersonal conflict resolution
Multinational corporations (MNCs), 65 explanation of, 234 and, 326–328
Multinational organizations, 78 facility layout and, 238 strategic applications to, 325–326
Mutual adjustment, 277 facility location and, 235–236 technostructural applications
operations and inventory planning to, 325
N and control and, 240–245 Organizational networks, 294, 295
Negative attitudes, 225 production processes and, Organizational structure
Negative reinforcement, 424 236–238 boundaryless, 292
Negotiation production system and, 234–235 decentralized, 282–285
explanation of, 456–457 production system layout and, explanation of, 4
principles of integrative, 457–458 238, 239 horizontal, 296
skills for, 460 quality control and, 245–248 reorganization of, 308–311
Negotiator role, 7 Operations management methods Organization charts, 264
Network-based organizations, 294–295 computer-aided design and Organizations
Network planning and control manufacturing and, 251 communication barriers in, 439,
methods, 240–241 computer-integrated manufacturing 441–442
Networks and, 252–254 employee-centered, 15
electronic, 295 flexible manufacturing systems and, explanation of, 4, 264
explanation of, 135, 137 251–252 federal, 297
formal organizational, 294 just-in-time systems and, 250–251 international, 78
informal organizational, 295 overview of, 249 learning, 298–299
New-product development, 107–108 Operations planning matrix, 272–273
New-product development teams, 109 control methods and, 240–241 mechanistic, 288
Noise explanation of, 240 multinational, 78
as communication barrier, 439, purchasing and, 242 network-based, 294–295
442–443 scheduling and, 240 organic, 288
explanation of, 437 Optimism, 166 social responsibility stages for, 49
Nonprogrammed decisions, 147–148 Ordering costs, 243 tall vs. flat, 285–287
Nonverbal communication. See also Organic organizations, 288 team-based, 20, 21, 291–294
Communication Organizational change virtual, 192–193, 297–298
cultural differences in, 84, 442 culture and, 307–308 Organizing. See also
explanation of, 438–439 example of, 304–305 Departmentalization
skills in, 459, 460 explanation of, 304 authority and, 280–287
Normative decisions, 30 management of, 287–291 contingency approach to, 290
Norming, team, 471 organizational development as coordination as aspect of, 276–280
Norms, 476, 489 approach to, 323–328 decisions regarding, 146
Norris-LaGuardia Act, 368 resistance to, 315–323 example of, 6
North American Free Trade Agreement strategic, 305–306 explanation of, 264
(NAFTA), 69 structural, 308–314 in global environment, 77–78
technological, 306 information technology use for,
O Organizational communication. 138–139
Objectives See also Communication to manage change, 287–291
management by, 179–180 diagonal, 446 as management task, 5
methods to set, 178–179 downward, 443–444 Orientation
steps to clarify, 151–152 formal and informal, 446 employee, 355, 356, 358
Occupational safety and health horizontal, 445 enterprising, 9–10
explanation of, 366 upward, 444–445 social, 9
560 Subject Index
Outputs, 235 explanation of, 377 Q

Outsourcing, 61, 335 informational, 379 Qualitative forecasting methods, 181
legitimate, 377–378 Quality, 245
P need for, 410 Quality circles, 469
Pareto analysis, 248 personal, 377 Quality control
Participative leadership, 395 referent, 378–379 design for manufacturability and,
Partnership agreements, 101 reward, 378 248–249
Partnerships, 101, 102 Power distance, 82, 83 methods for, 247–248
Path-goal theory, 394–396 Prejudice, 52 overview of, 245
Pay-for-performance programs, 427 Presentation skills, 461–462 total quality management programs
Perception, 167–168 Primary data, 183 and, 245–247
Performance, pay for, 426–429 Privacy Quantitative model, 156
Performance appraisals explanation of, 31 Questions, for interviews, 349, 351
explanation of, 359 information technology and, 32–33 Quotas, 67
fair and unbiased, 43 Internet and, 30
methods for, 360 Problems R
problems related to, 360–361 explanation of, 145 Radio-frequency identification (RFID),
technology use for, 363 steps to define, 150–151 223, 258
Performance management Problem solving. See also Decision Ranking, 359
explanation of, 200, 202–203 making Ratio analysis, 216–219
function of, 360 explanation of, 145 Rationalization, 36
software for, 204 tools for, 247, 248 Realistic previews, 352
Web-based, 360 Procedural fairness, 419 Recentralizing, 284–285
Performing, team, 472 Procedures, 187 Recruitment. See Employee
Personal control, 212–213 Process controlling, 327 recruitment
Personal digital assistants (PDAs), Process design, 237 Reengineering
18, 376, 411 Process flowcharts, 248 behavioral side of, 141
Personality, of managers, 9–10 Process layout, 238, 239 business process, 296, 312–313
Personal power, 377 Process theories of motivation, principles of, 140
Personnel/human resource plans, 188 415–416. See also Motivation resistance to, 314
Personnel planning, 337 theories Reference checks, 352–354
Personnel replacement charts, Product departmentalization Referent power, 378–379
338, 339 advantages of, 268 Refreezing, 317
Persuasion, guidelines for, 456 disadvantages of, 269 Regiocentric philosophy, 76
PERT charts, 241 explanation of, 267–269 Reinforcement, 423–424
Planning in unit and process production Reinforcement theory, 422–423
decisions regarding, 146 firms, 289 Reinforcers, 422
example of, 6 Product design, 237 Religious beliefs, 52
explanation of, 5 Product development, 108 Renewal, promotion of sense of, 7
function of, 176–177 Product development teams, 109 Reorganizing
in global environment, 76–77 Production control, 240 explanation of, 308–309
hierarchy of, 178 Production/operations plan, 187–188 guidelines for, 309–311
objectives for, 178–180 Production-oriented leaders, 385 Research and development (R&D),
strategic, 188–189 Production system layout, 238 14, 109
Planning process Production systems Revenue centers, 219
explanation of, 177–178 components of, 236 Reward power, 378
management, 180 continuous, 237 Rewards
Plans facility layout and, 238, 239 alternative, 429–430
business, 104–106, 187–188 intermittent, 236–237 for ethical behavior, 43
marketing, 187 management of, 234–235 financial, 229
standing, 186–187 Production technologies, 288–290 function of, 425–426
strategic, 188, 189 Product layout, 238 pay-for-performance, 426–429
types of, 186–187 Product life cycle, 91 team, 476–477
Policies, 186 Product life-cycle management, Risk, 174
Political systems, 70 112, 113 Risky shift phenomenon, 168
Polycentric philosophy, 76 Profitability ratios, 217 Roles, team, 475
Portals, 358, 445, 451 Profit centers, 219 Rules, 187
Portfolio analysis, 196–197 Profit sharing, 229 Rumors, 446
Positive reinforcement, 423 Programmed decisions, 147–148 Run charts, 248
Power Programs, 187
abuse of, 379–380 Psychological set, 166–167 S
coercive, 378 Punishment, 424 Salaries, 361
expert, 378 Purchasing, 242, 258 Sales force estimation method, 181
Subject Index 561
Sarbanes-Oxley Act of 2002 collaborative, 449–450 Strategic planning tools

compliance with, 45, 46 coordination-supporting, 279 BCG matrix as, 197–198
function of, 29, 39 decision-support, 156–159 environmental scanning as, 196
whistle-blowing and, 50 financial statement, 220 explanation of, 194–195
SAS Analytics, 156 forecasting, 182 portfolio analysis as, 196–197
Satisfice, 149 learning management, 299 SWOT analysis as, 195, 196
Scatter diagrams, 248 operations management, 251 Strategic plans, 188, 189
Scientific management, 12–13 performance-management, 204 Strategic ratios, 216, 219
S corporations, 102 product life-cycle, 113 Strategies
Secondary data, 183 supply chain, 255–256 competitive, 193–194
Secure Sockets Layer (SSL), 126 telecommunications, 133 explanation of, 188
Security, 30 Sole proprietorships, 99, 101, 102 functional, 194
Selection. See Employee selection Southern African Development implementation of, 190
Selective perception Community, 69 types of corporate, 191–193
as communication barrier, 439, 440 Span of control Strategy maps, 200–202
explanation of, 167–168 in country-based organization, 286 Strictness, 361
Self-actualization, 230 explanation of, 285 Structural change. See Reorganizing
Self-awareness, 383 method for widening, 291 Sullivan Principles for Corporate
Self-control variations in, 288, 289 Labor and Community Relations
belief systems and values to Speaking skills, 461–462 (South Africa), 50
encourage, 226 Spokesperson role, 7 Supervisors, 38, 42
commitment-building methods to Spot awards, 426 Supplier partnering, 257, 258
foster, 226–227 Spyware, 126 Supplier-partnering hierarchy, 500, 501
explanation of, 213 Staff authority, 281 Supply chain, 254, 255
Self-deception, 35–36 Staffing, 139 Supply chain management
Self-directed teams, 469 Staff managers, 281 advantages of, 256, 257
Self-efficacy, 418 Stakeholders building blocks of, 257–259
Self-management, 383 corporate, 47–48 collaboration in, 500
Self-motivation, 383 social responsibility and, 51 examples of, 259–260
Semantics, 443 Stakeholder theory, corporate, 47–48 explanation of, 24, 128, 254–255
Sensitivity training, 325 Standing plans, 186–187 software for, 255–256
Setup costs, 243 Statistical decision theory techniques, standardizing processes with, 278
Sexual harassment, 364–366 173–174 Web-based, 137
Shared information space Status quo trap, 166 Supply networks, 237
technologies, 504 Steering controls, 210 Supportive leadership, 395
Shareholders, 101 Stereotypes Support staff, 291
Situational/contingency school, 16–17 explanation of, 52 Survey research, 325
Situational leadership model (Hersey- gender-role, 53, 383–384 SWOT analysis
Blanchard), 389–391 Stock options, 426 explanation of, 195, 196
Six-sigma, 246 Stockout costs, 243 use of, 325
Skill-based pay, 427–428 Storming, team, 471 Synergy, 474
Small business, 94 Strategic alliances Systems approach, 16
Small-business management, 91–92 explanation of, 63, 500–501
Smoothing over, 327 joint ventures as, 192–193 T
Social audits, 48, 50 Strategic change, 305–306 Tactical plans, 186
Social leafing, 475 Strategic control, 191 Taft-Hartley Act, 368
Social orientation, 9 Strategic human resource Tariffs, 67
Social responsibility management, 333 Taxation, 102
explanation of, 46–47 Strategic interventions, 325–326 Team-based organizations
managerial capitalism and, 47 Strategic management explanation of, 20, 21
managerial view of, 46 balanced scorecard for, 202–203 methods for building, 291–293
methods to improve, 50–51 digital dashboard for, 204 nature of, 293–294
moral minimum and, 48 integrated, 325–326 Teams
reasons for corporate, 48–49 process of, 189–191 cross-functional, 322, 323, 468–469
stakeholder theory and, 47–48 strategy maps for, 200–202 diagnostic questions for, 478, 479
Social skills, 383 traditional execution methods effective, 473–478
Sociocultural environment, 70–71 for, 198–200 explanation of, 291–292, 467
Software. See also Information Strategic planning. See also Planning functional, 468
technology (IT); Technological competitive strategies and, global, 470
advances 193–194 groups vs., 467
business plan, 106, 188 corporate strategies and, 191–193 new members on, 477
business process management, explanation of, 188–189 process for building, 325
314–315 functional strategies and, 194 quality circle, 469
562 Subject Index
Teams (continued) Theory X, 14–15, 405, 406 Vertical integration, 192

rewards for, 476–477 Theory Y, 14–15, 405, 406 Videoconferencing
self-directed, 469 360-degree feedback, 359 explanation of, 73, 134
self-managed, 292 Time series, 181 use of, 449, 454, 503
size of, 477 Tokenism, 53 for virtual teams, 482
transition from groups to, 470–472 Total quality management (TQM) Virtual communities, 74
venture, 469–470 programs, 245–247 Virtual organizations, 192–193,
virtual, 470, 478–483 Trade barriers, 67 297–298
Technical skills, 11 Traditional controls Virtual teams
Technological advances. See also budgets for, 214–215 collaboration in, 502
Information technology (IT); explanation of, 213, 214 explanation of, 470, 478–479
Internet; Intranets; Software; profit planning for, 215–216 leader behavior for, 480–481
Telecommunications Training leadership of, 479–480
for collaboration, 503–506 diversity, 54 technology for, 481–483
for communication, 384, 438, 441, ethics, 42–44, 46 Vision
443–453 Traits, 382 commitment to, 229
for communities of practice, Transactional leadership, 388–389 communication of shared, 319–320
486–488 Transaction-processing systems, explanation of, 190
for competitive edge, 124 121–122 importance of, 21
for decision making, 154–159 Transformational leadership, 387–388 Voice over IP (VoIP) technology, 73, 137
effects of, 18 Transparency, 258
for employee monitoring, 464–465 Transport Layer Security (TLS), 126 W
for employee orientation and Treaty of Rome, 68 Wagner Act, 368
training, 358–359 Trojan horses, 126 Waiting-line/queuing techniques, 173
empowerment and, 380, 396, 411 Trust Web-based toolkits, 376
entrepreneurship and, 93, 94 behaviors that build, 511–512 Webcasts, 452
global environment and, 71–72 explanation of, 511 Web logs, 399
for human resource management, information technology and, 497 Websites. See Internet
334–335 process to build, 512 Whistle-blowing, 50
leadership and, 376, 384, 399 in teams, 474–475 Wholly-owned subsidiaries, 65
to retain knowledge workers, 432 Two-factor theory (Herzberg), 408–410 Wide area networks (WANs), 137
for teams, 467, 470, 478–483, 491 Two-way communication, 438. See Wikis, 399, 444–445, 452–453
work skills and, 334 also Communication Wireless-assisted control, 222–223
Technological change, 306 Wireless telecommunications, 130–131
Technology transfer, 71–72 U Women
Technostructural applications, 325 Uncertainty, 173–174 as leaders, 383–384
Telecommunications. See also Uncertainty avoidance, 82 recruitment of, 55–56
Information technology (IT); Unemployment insurance, 362 in workforce, 52
Technological advances Unfreezing, 316 Woodward studies on production
explanation of, 73, 132–133 University of Iowa leadership technologies, 288–290
types of devices used for, 134–135 studies, 387 Work, changing nature of, 18–19
use of, 133–134 University of Michigan leadership Worker’s compensation, 362
wireless, 130–131 studies, 385–386 Workflow automation systems,
Telecommunications lines, 132 Unlimited liability, 101 74, 135, 450
Telecommunications networks, Upward communication, 444–445 Workforce
135, 137 Urgency, as tactic for resistance to diversity in, 52, 55, 397–398
Telecommunications software, 133 change, 318–319 individuals with disabilities in, 52
Telecommunications systems, 132, 133 USA Patriot Act, 33 women in, 52
Telecommuting Workforce-management systems, 504
benefits of, 449 V Workgroup support systems, 135
explanation of, 139, 430 Valence, instrumentality, and Work support systems, 73–74
Temporary help employment expectancy (VIE) theory, 418–419 World Wide Web. See Internet
agencies, 341 Value-added manufacturing, 250 Worms, 126
Terminals, 132 Value-based hiring, 229 Writing, skills for, 459–461
Territorial departmentalization, Values
271–272 coordination through, 277
Test marketing, 108 in multicultural environments, 82 Y
Tests of organizational communities, 484 Yes/no controls, 211
computerized and online, 348 people-first, 228
explanation of, 345, 347 Venture capitalists, 102 Z
reliability and validity of, 347 Venture teams, 470 Zone of acceptance, 281
types of, 347–348 Verbal intonation, 439, 440 Zone of indifference, 15

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managing

Houghton Mifﬂin Company Boston New York

Vice President, Executive Publisher: George Hoffman

Cover photo credits

Additional photo credits are listed on page 516.

Copyright © 2008 by Houghton Mifﬂin Company. All rights reserved.

Printed in the U.S.A.

Library of Congress Control Number: 2007924351

Instructor’s exam copy :

For orders, use student text ISBNs:

PART ONE THE ENVIRONMENT OF MANAGING NOW 1

PART TWO INFORMATION AND DECISION MAKING NOW 116

PART THREE PLANNING AND CONTROLLING NOW 175

PART FOUR ORGANIZING NOW 263

PART FIVE LEADING NOW 372

PHOTO CREDITS 516

PART ONE THE ENVIRONMENT OF MANAGING NOW 1

4 MANAGING ENTREPRENEURSHIP AND INNOVATION 89

PART TWO INFORMATION AND DECISION MAKING NOW 116

6 DECISION MAKING NOW 144

PART THREE PLANNING AND CONTROLLING NOW 175

9 MANAGING OPERATIONS AND SUPPLY CHAINS 233

PART FOUR ORGANIZING NOW 263

11 DESIGNING AND CHANGING ORGANIZATIONS 303

12 HUMAN RESOURCE MANAGEMENT 331

CHAPTER SUMMARY 369 Orienting and Training Employees 355

PART FIVE LEADING NOW 372

14 MOTIVATING EMPLOYEES 403

15 IMPROVING COMMUNICATION 435

Organizational Communication 443

16 BUILDING TEAMWORK, COMMUNITY, AND CULTURE 466

17 MANAGING TRUST AND COLLABORATION 496

PHOTO CREDITS 516

The Human Element Remains Crucial

The Book’s Learning Features

Finally, each chapter concludes with a numbered summary, discussion ques-

About the Authors

Jean Phillips is a professor in the School of Management and Labor Relations at

A t ﬁrst, J. Crew was a real success story. Starting as a direct-mail

After studying this chapter, you should be able to:

Show that you’ve learned the chapter’s essential information by

Show that you can practice what you’ve learned here by

WINDOW ON MANAGING NOW

● Application Example: You Too Are a Manager Managing is something

● Application Example: Meg Whitman Builds eBay It took Meg Whitman

What Else Do Managers Do?

● Mintzberg’s Managerial Roles Professor Henry Mintzberg studied what

● The Manager as Innovator In today’s fast-changing world, managers also

BY LEVEL BY POSITION BY FUNCTIONAL TITLE

Vice Vice Vice

Similarities and Differences in What Managers Do

Do You Have the Traits to Be a Manager?

● Comptencies Edgar Schein says that career planning is a process of discov-

● Achievements Psychologists at AT&T conducted two long-term studies of

The Managerial Skills

The Evolution of Modern Management

The Classical and Scientific Management School

● Frederick Winslow Taylor and Scientiﬁc Management Frederick Winslow

4. Functional foremanship. Taylor called for a division of work be-