Individual Management Planning Presentation Imagine you are an executive for BP, and you are preparing a presentation for the board of directors about the organization’s direction. Create a 10- to 15-slide Microsoft® PowerPoint® presentation, with spe

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Management Planning Presentation

Imagine you are an executive for BP, and you are preparing a presentation for the board of directors about the organization’s direction.

Create a 10- to 15-slide Microsoft® PowerPoint® presentation, with speaker notes, in which you address the following:

·  Evaluate the planning function of management as it relates to the organization’s goals and strategies. Use steps in the planning process outlined in the text.

·  Analyze the influence that legal issues, ethics, and corporate social responsibility have had on management planning at BP. Provide at least one example for each.

·  Analyze at least three factors that influence the company’s strategic, tactical, operational, and contingency planning.

Format your paper consistent with APA guidelines.

APPENDIX B
APPENDIX B

Managing in Our Natural
Environment
BUSINESS AND THE ENVIRONMENT:
CONFLICTING VIEWS
Some people believe everyone wins when business tackles envi-
ronmental issues. 1 Others disagree.

The Win-Win Mentality Business used to look at environ-
mental issues as a no-win situation: You either help the envi-
ronment and hurt your business, or help your business only at
a cost to the environment. Fortunately, things have changed.
“When Americans first demanded a cleanup of the environment
during the early 1970s, corporations threw a tantrum. Their
response ran the psychological gamut from denial to hostility,
defiance, obstinacy, and fear. But today, when it comes to green
issues, many U.S. companies have turned from rebellious under-
achievers to active problem solvers.” 2 Table B.1 gives just a few
examples of things U.S. corporations are doing to help solve
environmental problems.

The Earth Summit in Rio in 1992 helped increase aware-
ness of environmental issues. This led to the Kyoto Protocol, an
international effort to control global warming that included an
unsuccessful meeting in the Hague in November 2000. 3 “There
has been an evolution of most groups—whether industry, gov-
ernments, or nongovernmental organizations—toward a recog-
nition that everyone plays a part in reaching a solution.” 4

Being “green” is potentially a catalyst for innovation, new
market opportunities, and wealth creation. Advocates believe
that this is truly a win-win situation; actions can be taken that
benefit both business and the environment. For example, Procter
& Gamble in a span of five years reduced disposable wastes by
over 50 percent while increasing sales by 25 percent. 5 Win-win
companies will come out ahead of those companies that have
an us-versus-them, we-can’t-afford-to-protect-the-environment
mentality.

Is the easy part over? 6 Companies have found a lot of easy-
to-harvest, “low-hanging fruit”—that is, overly costly practices
that were made environmentally friendlier and that saved money
at the same time. Many big companies have made these easy
changes, and reaped benefits from them. Many small companies
still have such low-hanging fruit to harvest, 7 and plenty remains
to be done.

The Dissenting View The critics of environmentalism in
business are vocal. Some economists maintain that not a single
empirical analysis supports the “free lunch view” that spending
money on environmental problems provides full payback to the
firm. 8 Skepticism should continue, they say; the belief that every-
one will come out a winner is naive.

What really upsets many businesspeople is the financial cost
of complying with environmental regulations. 9 Consider a few
examples:

• GM spent $1.3 billion to comply with California requirements
that 10 percent of the cars sold there be emission-free.
European automakers spent $7 billion to install pollution-
control equipment in all new cars during a five-year period.

• At Bayer, 20 percent of manufacturing costs were for the
environment. This is approximately the same amount spent
for labor.

• The Clean Air Act alone was expected to cost U.S. petro-
leum refiners $37 billion, more than the book value of the
entire industry.

• California’s tough laws are a major reason why manufactur-
ers moved to Arkansas or Nevada.

In industries like chemicals and petroleum, environmental reg-
ulations were once considered a threat to their very survival. 10

Balance A more balanced view is that business must weigh
the environmental benefits of an action against value destruc-
tion. The advice here is: Don’t obstruct progress, but pick your
environmental initiatives carefully. Compliance and remediation
efforts will protect, but not increase, shareholder value. 11 And
it is shareholder value, rather than compliance, emissions, or
costs, that should be the focus of objective cost-benefit analyses.
Such an approach is environmentally sound but also hard-headed
in a business sense, and is the one approach that is truly sustain-
able over the long term.

Johan Piet maintains, “Only win-win companies will survive,
but that does not mean that all win-win ideas will be successful.” 12
In other words, rigorous analysis is essential. Thus, some compa-
nies maintain continuous improvement in environmental perfor-
mance, but fund only projects that meet financial objectives.

Most people understand that business has the resources and
the competence to bring about constructive change, and that
this creates great opportunity—if well managed—for both busi-
ness and the environment.

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190 Part Two Planning: Delivering Strategic Value

TABLE B.1
What Companies Are Doing to Enhance the Environment

Toyota established an “ecotechnologies” division both
for regulatory compliance and to shape corporate
direction, including the development of hybrid
electric-combustion automobiles.

Interface Corporation’s new Shanghai carpet factory
circulates liquid through a standard pumping loop like
those used in most industries. But simply by using
fatter pipes and short, straight pipes instead of long
and crooked pipes, it cut the power requirements by
92 percent.

Xerox used “zero-waste-to-landfill” engineering to
develop a new remanufacturable copier. AT&T cut
paper costs by 15 percent by setting defaults on
copiers and printers to double-sided mode.

Electrolux uses more environmentally friendly water-
based and powder paints instead of solvent-based
paints, and introduced the first refrigerators and
freezers free of chlorofluorocarbons.

Many chemical and pharmaceutical companies,
including Novo Nordisk and Empresas La Moderna,
are exploring “green chemistry” and seeking biological
substitutes for synthetic materials.

Anheuser-Busch saved 21 million pounds of metal a
year by reducing its beer-can rims by 1/8 of an inch
(without reducing its contents).

Nissan enlisted a group of ecologists, energy experts,
and science writers to brainstorm about how an
environmentally responsible car company might
behave. Among the ideas: to produce automobiles
that snap together into electrically powered trains for
long trips and then detach for the dispersion to final
destinations.

SOURCES: P. M. Senge and G. Carstedt, “Innovating Our Way to the Next
Industrial Revolution,” Sloan Management Review, Winter 2001, pp. 24–38;
M. P. Polonsky and P. J. Rosenberger III, “Reevaluating Green Marketing:
A Strategic Approach,” Business Horizons, September–October, 2001, pp. 21–30;
C. Garfield, Second to None: How Our Smartest Companies Put People First (Burr
Ridge, IL; Business One-Irwin, 1992); H. Bradbury and J. A. Clair, “Promoting
Sustainable Organizations with Sweden’s Natural Step,” Academy of Management
Executive, November 1999, pp. 63–74; A. Loving, L. Hunter Lovins, and
P. Hawken, “A Road Map for Natural Capitalism,” Harvard Business Review,
May–June 1999, pp. 145–58; P. Hawken, A. Lovings, and L. Hunter Lovins, Natural
Capitalism (Boston: Little Brown, 1999); and S. L. Hart and M. B. Milstein, “Global
Sustainability and the Creative Destruction of Industries,” Sloan Management
Review, Fall 1999, pp. 23–32.

TABLE B.2
Some U.S Environmental Laws

Superfund [Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA)]:
Establishes potential liability for any person or
organization responsible for creating an environmental
health hazard. Individuals may be prosecuted, fined,
or taxed to fund cleanup.

Clean Water Act [Federal Water Pollution Control
Act]: Regulates all discharges into surface waters,
and affects the construction and performance of
sewer systems. The Safe Drinking Water Act similarly
protects groundwaters.

Clean Air Act: Regulates the emission into the air of
any substance that affects air quality, including nitrous
oxides, sulfur dioxide, and carbon dioxide.

Community Response and Right-to-Know Act:
Mandates that all facilities producing, transporting,
storing, using, or releasing hazardous substances
provide full information to local and state authorities
and maintain emergency-action plans.

Federal Hazardous Substances Act: Regulates
hazards to health and safety associated with
consumer products. The Consumer Product Safety
Commission has the right to recall hazardous
products.

Hazardous Materials Transportation Act: Regulates
the packaging, marketing, and labeling of shipments
of flammable, toxic, and radioactive materials.

Resource Conservation and Recovery Act: Extends
to small-quantity generators the laws regulating
generation, treatment, and disposal of solid and
hazardous wastes.

Surface Mining Control and Reclamation Act:
Establishes environmental standards for all
surface-mining operations.

Toxic Substances Control Act: Addresses the
manufacture, processing, distribution, use, and
disposal of dangerous chemical substances and
mixtures.

SOURCE: Dennis C. Kinlaw, Competitive and Green: Sustainable Performance in the
Environmental Age (Amsterdam: Pfeiffer & Co., 1993). Reprinted by permission of
the author.

WHY MANAGE WITH THE ENVIRONMENT IN MIND?
Business is turning its full attention to environmental issues for
many reasons, including legal compliance, cost effectiveness,
competitive advantage, public opinion, and long-term thinking.

Legal Compliance Table B.2 shows just some of the most
important U.S. environmental laws. Government regulations
and liability for damages provide strong economic incentives to
comply with environmental guidelines. Most industries already
have made environmental protection regulation and liability an

integral part of their business planning. 13 The U.S. Justice Depart-
ment has handed out tough prison sentences to executives
whose companies violate hazardous-waste requirements.

Some businesspeople consider the regulations to be too rigid,
inflexible, and unfair. In response to this concern, regulatory
reform may become more creative. The Aspen Institute Series
on the Environment in the Twenty-First Century is trying to
increase the cost-effectiveness of compliance measures through
more flexibility in meeting standards and relying on market-
based incentives. Such mechanisms, including tradable permits,
pollution charges, and deposit refund systems, provide positive
financial incentives for good environmental performance. 14

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Ethics and Corporate Responsibility Chapter 5 191

and low key, but much pressure is exerted by environmental
organizations, aroused citizen groups, societies and associations,
international codes of conduct, and environmentally conscious
investors. 20

Another important reason for paying attention to environ-
mental impact is TRI, the Toxic Release Inventory. 21 Starting in
1986, the EPA required all the plants of approximately 10,000
U.S. manufacturers to report annual releases of 317 toxic chemi-
cals into the air, ground, and water. The substances include freon,
PCBs, asbestos, and lead compounds. Hundreds of others have
been added to the list. The releases are not necessarily illegal,
but they provide the public with an annual environmental bench-
mark. TRI provides a powerful incentive to reduce emissions.

Finally, it is useful to remember that companies recover very
slowly in public opinion from the impact of an environmental
disaster. Adverse public opinion may affect sales as well as the
firm’s ability to attract and retain talented people. You can see
why companies like P&G consider concern for the environment
a consumer need, making it a basic and critical business issue.

Long-Term Thinking Long-term thinking about resources
helps business leaders understand the nature of their responsi-
bilities with regard to environmental concerns. For example, you
read about sustainable growth in the chapter. 22 Economic argu-
ments and the tragedy of the commons also highlight the need
for long-term thinking.

Economic arguments In Chapter 3, we discussed long-term
versus short-term decision making. We stated that it is common
for managers to succumb to short-term pressure for profits and
to avoid spending now when the potential payoff is years down
the road. In addition, some economists maintain that it is the
responsibility of management to maximize returns for share-
holders, implying the preeminence of the short-term profit goal.

But other economists argue that such a strategy caters to
immediate profit maximization for stock speculators and neglects
serious investors who are with the company for the long haul.
Attention to environmental issues enhances the organization’s
long-term viability because the goal is the long-term creation of
wealth for the patient, serious investors in the company 23 —not
to mention the future state of our planet and the new genera-
tions who will inhabit it.

The tragedy of the commons In a classic article in Science,
Garrett Hardin described a situation that applies to all business
decisions and social concerns regarding scarce resources like
clean water, air, and land. 24 Throughout human history, a com-
mons was a tract of land shared by communities of people on
which they grazed their animals. A commons has limited car-
rying capacity, or the ability to sustain a population, because
it is a finite resource. For individual herders, short-term inter-
est lies in adding as many animals to the commons as they can.
But problems develop as more herders add more animals to
graze the commons. This leads to tragedy: As each herder acts
in his short-term interest, the long-run impact is the destruction
of the commons. The solution is to make choices according to
long-run rather than short-run consequences.

In many ways, we are witnessing this tragedy of the com-
mons. Carrying capacities are shrinking as precious resources,

Cost Effectiveness Environmentally conscious strategies can
be cost-effective. 15 In the short run, company after company
is realizing cost savings from repackaging, recycling, and other
approaches. Union Carbide faced costs of $30 a ton for dis-
posal of solid wastes and $2,000 a ton for disposal of hazardous
wastes. By recycling, reclaiming, or selling its waste, it avoided
$8.5 million in costs and generated $3.5 million in income during
a six-month period. Dow Chemical launched a 10-year program
to improve its environmental, health, and safety performance
worldwide. Dow projected savings of $1.8 billion over the
10-year period. 16

Environmentally conscious strategies offer long-run cost
advantages as well. Companies that are functioning barely within
legal limits today may incur big costs—being forced to pay dam-
ages or upgrade technologies and practices—when laws change
down the road.

A few of the other cost savings include fines, cleanups, and
litigation; lower raw materials costs; reduced energy use; less
expensive waste handling and disposal; lower insurance rates;
and possibly higher interest rates.

Competitive Advantage Corporations gain a competitive
advan tage by channeling their environmental concerns into entre-
preneurial opportunities and by producing higher-quality prod-
ucts that meet consumer demand. Business opportunities abound
in pollution protection equipment and processes, waste cleanup,
low-water-use plumbing, new lightbulb technology, and market-
ing of environmentally safe products like biodegradable plastics.
With new pools of venture capital, government funding, and spe-
cialized investment funds available, environmental technology has
become a major sector of the venture-capital industry. 17

In addition, companies that fail to innovate in this area will be
at a competitive disadvantage. Environmental protection is not
only a universal need; it is also a major export industry. U.S.
trade suffered as other countries—notably Germany—took
the lead in patenting and exporting anti–air pollution and other
environmental technologies. If the United States does not pro-
duce innovative, competitive new technologies, it will forsake a
growth industry and see most of its domestic spending for envi-
ronmental protection go to imports. 18

In short, competitive advantage can be gained by maintaining
market share with old customers, and by creating new products
for new market opportunities. And if you are an environmental
leader, you may set the standards for future regulations—regu-
lations that you are prepared to meet, while your competitors
are not.

Public Opinion The majority of the U.S. population believes
business must clean up; few people think it is doing its job well.
Gallup surveys show that more than 80 percent of U.S. con-
sumers consider environmentalism in making purchases. An
international survey of 22 countries found that majorities in
20 countries gave priority to environmental protection even at
the risk of slowing economic growth. Consumers seem to have
reached the point of routinely expecting companies to come up
with environmentally friendly alternatives to current products
and practices. 19

Companies also receive pressure from local communities and
from their own employees. Sometimes the pressure is informal

bat37241_ch05_160-197.indd 191 12/3/09 2:49:19 PM

192 Part Two Planning: Delivering Strategic Value

is conservation. The conservation movement is anthropocen-
tric (human centered), technologically optimistic, and concerned
chiefly with the efficient use of resources. The movement seeks
to avoid waste, promote the rational and efficient use of natural
resources, and maximize long-term yields, especially of renew-
able resources.

The environmental movement, in contrast, historically
has posed dilemmas for business management. Following the
lead of early thinkers like George Perkins Marsh (1801–1882),
it has shown that the unintended negative effects of human eco-
nomic activities on the environment often are greater than the
benefits. For example, there are links between forest cutting and
soil erosion and between the draining of marshes and lakes and
the decline of animal life.

Other early environmentalists, such as John Muir (1838–1914)
and Aldo Leopold (1886–1948), argued that humans are not
above nature but a part of it. Nature is not for humans to subdue
but is sacred and should be preserved not simply for economic
use but for its own sake—and for what people can learn from it.

Science and the Environment Rachel Carson’s 1962 best-
selling book, The Silent Spring, helped ignite the modern environ-
mental movement by alerting the public to the dangers of unre-
stricted pesticide use. 27 Carson brought together the findings
of toxicology, ecology, and epidemiology in a form accessible
to the public. Blending scientific, moral, and political arguments,
she connected environmental politics and values with scientific
knowledge.

Barry Commoner’s Science and Survival (1963) continued in
this vein. Commoner expanded the scope of ecology to include
everything in the physical, chemical, biological, social, politi-
cal, economic, and philosophical worlds. 28 He argued that all
of these elements fit together, and have to be understood as
a whole. According to Commoner, the symptoms of environ-
mental problems are in the biological world, but their source
lies in economic and political organizations.

Economics and the Environment Economists promote
growth for many reasons: to restore the balance of payments,
to make nations more competitive, to create jobs, to reduce
the deficit, to provide for the elderly and the sick, and to reduce
poverty. Environmentalists criticize economics for its notions of
efficiency and its emphasis on economic growth. 29 For example,
environmentalists argue that economists do not adequately con-
sider the unintended side effects of efficiency. Environmentalists
hold that economists need to supplement estimates of the eco-
nomic costs and benefits of growth with estimates of other fac-
tors that historically were not measured in economic terms. 30

Economists and public policy analysts argue that the benefits
of eliminating risk to the environment and to people must be bal-
anced against the costs. Reducing risk involves determining how
effective the proposed methods of reduction are likely to be
and how much they will cost. There are many ways to consider
cost factors. Analysts can perform cost-effectiveness analyses,
in which they attempt to figure out how to achieve a given goal
with limited resources, or they can conduct more formal risk-
benefit and cost-benefit analyses, in which they quantify both the
benefits and the costs of risk reduction. 31

water chief among them, become scarcer. Inevitably, conflict
arises—and solutions are urgently needed.

The Environmental Movement The 1990s were labeled the
“earth decade” when a “new environmentalism” with new fea-
tures emerged. 25 For example, proponents of the new envi-
ronmentalism asked companies to reduce their wastes, use
resources prudently, market safe products, and take responsi-
bility for past damages. These requests were formalized in the
CERES principles (see Table B.3 ).

The new environmentalism combined many diverse view-
points, but initially it did not blend easily with traditional business
values. Some of the key aspects of this philosophy are noted in
the following discussion of the history of the movement. 26

Conservation and Environmentalism A strand of environ-
mental philosophy that is not at odds with business management

TABLE B.3
The CERES Principles

Scie
sell
men
stri
of t
to t
she
kno

this
eve
cal,
of t
a w
men
lies

Eco
gro
to
the
pov
effic
env
side
hold
nom
tors

of e
anc
effe
and
cos
in w
with
ben
b

Protection of the biosphere: Minimize the release of
pollutants that may cause environmental damage.

Sustainable use of natural resources: Conserve
nonrenewable resources through efficient use and
careful planning.

Reduction and disposal of waste: Minimize the
creation of waste, especially hazardous waste, and
dispose of such materials in a safe, responsible
manner.

Wise use of energy: Make every effort to use
environmentally safe and sustainable energy sources
to meet operating requirements.

Risk reduction: Diminish environmental, health, and
safety risks to employees.

Marketing of safe products and services: Sell
products that minimize adverse environmental impact
and are safe for consumers.

Damage compensation: Accept responsibility for any
harm the company causes the environment; conduct
bioremediation; and compensate affected parties.

Disclosure of environmental incidents: Public
dissemination of accidents relating to operations that
harm the environment or pose health or safety risks.

Environmental directors: Appoint at least one board
member who is qualified to represent environmental
interests; create a position of vice president for
environmental affairs.

Assessment and annual audit: Produce and
publicize each year a self-evaluation of progress
toward implementing the principles and meeting
all applicable laws and regulations worldwide.
Environmental audits will also be produced annually
and distributed to the public.

SOURCES: Chemical Week, September 20, 1989, copyright permission granted by
Chemical Week magazine. CERES Coalition Handbook.

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Ethics and Corporate Responsibility Chapter 5 193

tally conscious. Italy, Ireland, Spain, Portugal, and Greece are in
the early stages of developing environmental policies. Poland,
Hungary, the Czech Republic, and former East Germany are the
most polluted of the world’s industrialized nations. 35

U.S. companies need to realize that there is a large growth
market in western Europe for environmentally “friendly” prod-
ucts. U.S. managers also need to be fully aware of the envi-
ronmental movement in western Europe. Environmentalists in
Europe have been successful in halting many projects. 36 China
has been paying a high ecological price for its rapid economic
growth. But the government has begun recognizing the problem
and is creating some antipollution laws. 37

Industries that pollute or make polluting products will have
to adjust to the new reality, and companies selling products
in certain parts of the world must take into account a grow-
ing consumer consciousness about environmental protection.
Manufacturers may even be legally required to take products
and packaging back from customers after use, to recycle or dis-
pose of. In order to meet these requirements in Germany, and
be prepared for similar demands in other countries, Hewlett-
Packard redesigned its office-machine packaging worldwide.

WHAT MANAGERS CAN DO
To be truly “green”—that is, a cutting-edge company with respect
to environmental concerns—legal compliance is not enough. Pro-
gressive companies stay abreast and ahead of the laws by going
beyond marginal compliance and anticipating future requirements
and needs. 38 But companies can go further still by experiment-
ing continually with innovations that protect the environment.
McDonald’s, for example, conducted tests and pilot projects in
composting food scraps and in offering refillable coffee mugs and
starch-based (biodegradable) cutlery. 39

Systems Thinking The first thing managers can do to better
understand environmental issues in their companies is to engage
in systems thinking. Environmental considerations relate to the
organization’s inputs, processes, and outputs. 40 Inputs include
raw materials and energy. Environmental pressures are causing
prices of some raw materials, such as metals, to rise. This greatly
increases the costs of production. Higher energy costs are caus-
ing firms to switch to more fuel-efficient sources.

Firms are considering new processes or methods of produc-
tion that will reduce water pollution, air pollution, noise and
vibration, and waste. They are incorporating technologies that
sample and monitor (control) these by-products of business
processes. Some chemical plants have a computerized system
that flashes warnings when a maximum allowable pollution level
is soon to be reached. Many companies keep only minimal stocks
of hazardous materials, making serious accidents less likely.

Outputs have environmental impact, whether the products
themselves or the waste or by-products of processes. To reduce
the impact of its outputs, Herman Miller recycles or reuses nearly
all waste from the manufacturing process. It sells fabric scraps to
the auto industry, leather trim to luggage makers, and vinyl to
stereo and auto manufacturers. It buys back its old furniture,
refurbishes it, and resells it. Its corporatewide goal is to send
zero waste to landfills. Environmental manager Paul Murray says,
“There is never an acceptable level of waste at Miller. There are
always new things we can learn.” 41

Qualitative Judgments in Cost-Benefit Analysis Formal,
quantitative approaches to balancing costs and benefits do not
eliminate the need for qualitative judgments. For example, how
does one assess the value of a magnificent vista obscured by
air pollution? What is the loss to society if a particular genetic
strain of grass or animal species becomes extinct? How does
one assess the lost opportunity costs of spending vast amounts
of money on air pollution that could have been spent on produc-
tivity enhancement and global competitiveness?

Fairness cannot be ignored when doing cost-benefit analysis. 32
For example, the costs of air pollution reduction may have to be
borne disproportionately by the poor in the form of higher gaso-
line and automobile prices. Intergenerational fairness also plays a
role. 33 Future generations have no representatives in the current
market and political processes. To what extent should the cur-
rent generation hold back on its own consumption for the sake
of posterity? This question is particularly poignant because few
people in the world today are well off. To ask the poor to reduce
their life’s chances for the sake of a generation yet to come is
asking for a great sacrifice.

International Perspectives Environmental problems present
a different face in various countries and regions of the world.
The United States and Great Britain lag behind Germany and
Japan in mandated emissions standards. 34 In Europe, the Dutch,
the Germans, and the Danes are among the most environmen-

The environmental movement is a worldwide phenomenon. The
“Greens,” pictured here demonstrating in LePuy, France, are an
important growing European political party.

bat37241_ch05_160-197.indd 193 12/3/09 2:49:20 PM

194 Part Two Planning: Delivering Strategic Value

environmental audits. 44 The Community Environmental
Responsibility Program includes strategy and planning, and
the development of products and processes with neutral
environmental impact.

3. Engage in “green” process and product design. The German
furniture maker Wilkhahn uses an integrated strategic
approach that minimizes the use of virgin resources and uses
recycled materials in an environmentally designed plant. 45

4. Establish environmentally focused stakeholder relationships.
Many firms work closely with the EPA and receive technical
assistance to help convert to more energy-efficient facilities.
And to defray costs as well as develop new ideas, small
companies like WHYCO Chromium Company establish
environmental management partnerships with firms like IBM
and GM. 46

5. Provide internal and external education. Engage employees
in environmental actions. Dow’s WRAP program has
cut millions of pounds of hazardous and solid waste and
emissions, and achieved annual cost savings of over
$10 million, all through employee suggestions. 47 At the
same time, inform the public of your firm’s environmental
initiatives. For example, ecolabeling can urge consumers to
recycle and communicate the environmental friendliness of
your product. And BPAmoco redesigned its logo (BP’s logo
has always been green) as a sun-based emblem, reflecting its
strategic vision of a hydrogen/solar-based energy future. 48

Implementation How can companies implement “greening”
strategies? One tactic you read about in the chapter is life-cycle
analysis. 49 That and other approaches begin with a commitment
by top management. Specific actions could include commission-
ing an environmental audit in which an outside company checks
for environmental hazards, drafting (or reviewing) the organi-
zation’s environmental policy, communicating the policy and
making it highly visible throughout the organization, having envi-
ronmental professionals within the company report directly to
the president or CEO, allocating sufficient resources to support
the environmental effort, and building bridges between the orga-
nization and other companies, governments, environmentalists,
and local communities.

Ultimately, it is essential to make employees accountable for
any of their actions that have environmental impact. 50 Texaco,
Du Pont, and other companies evaluate managers on their ideas
for minimizing pollution and for new, environment-friendly prod-
ucts. Kodak ties some managers’ compensation to the preven-
tion of chemical spills; the company attributes to this policy a
dramatic reduction in accidents. 51

Companies can employ all areas of the organization to meet
the challenges posed by pollution and environmental challenges.
A variety of companies have responded creatively to these chal-
lenges 52 and may serve as models for other organizations. The
following sections describe specific actions companies can take
to address environmental issues.

Strategy Actions companies can take in the area of strategy
include the following:

1. Cut back on environmentally unsafe businesses. Du Pont, the
leading producer of CFCs, voluntarily pulled out of this
$750 million business. 53

Strategic Integration Systems thinking reveals that environmen-
tal issues permeate the firm, and therefore should be addressed
in a comprehensive, integrative fashion. Perhaps the first step is
to create the proper mindset. Does your firm see environmen-
tal concerns merely in terms of a business versus environment
trade-off, or does it see in it a potential source of competitive
advantage and an important part of a strategy for long-term sur-
vival and effectiveness? The latter attitude, of course, is more
likely to set the stage for the following strategic actions.

These ideas help to strategically integrate environmental con-
siderations into the firm’s ongoing activities: 42

1. Develop a mission statement and strong values supporting
environmental advocacy. Table B.4 shows Procter & Gamble’s
environmental quality policy.

2. Establish a framework for managing environmental initiatives.
Some industries have created voluntary codes of
environmental practice, for example, the chemical industry’s
Responsible Care Initiative. Not all standard practices are
adopted by all companies, however. 43 At J&J, Environmental
Regulatory Affairs uses external audit teams to conduct

TABLE B.4
Procter & Gamble’s Environmental Quality Policy

Im
str
ana
by
ing
for
zat
ma
ron
the
the
niz
and

any
Du
for
uct
tio
dra

the
A v
len
fol
to

Str
inc

1.

Procter & Gamble is committed to providing
products of superior quality and value that best fill
the needs of the world’s consumers. As part of this,
Procter & Gamble continually strives to improve the
environmental quality of its products, packaging,
and operations around the world. To carry out this
commitment, it is Procter & Gamble’s policy to:

Ensure our products, packaging, and operations
are safe for our employees, consumers, and the
environment.

Reduce or prevent the environmental impact
of our products and packaging in their design,
manufacture, distribution, use, and disposal
whenever possible.

Meet or exceed the requirements of all environmental
laws and regulations.

Continually assess our environmental technology
and programs, and monitor programs toward
environmental goals.

Provide our consumers, customers, employees,
communities, public interest groups, and others
with relevant and appropriate factual information
about the environmental quality of P&G products,
packaging, and operations.

Ensure every employee understands and is
responsible and accountable for incorporating
environmental quality considerations in daily
business activities.

Have operating policies, programs, and resources in
place to implement our environmental quality policy.

SOURCE: K. Dechant and B. Altman, “Environmental Leadership: From
Compliance to Competitive Advantage,” The Academy of Management Executive,
August 1994, p. 10. Reprinted by permission.

bat37241_ch05_160-197.indd 194 12/3/09 2:49:24 PM

Ethics and Corporate Responsibility Chapter 5 195

2. Comply early. Because compliance costs only increase over
time, the first companies to act will have lower costs.
This will enable them to increase their market share and
profits and win competitive advantage. 3M’s goal was to
meet government requirements to replace or improve
underground storage tanks five years ahead of the legally
mandated year.

3. Take advantage of innovative compliance programs. The EU
started a carbon-cutting and trading system in 2005. 66
Instead of source-by-source reduction, the EPA’s bubble
policy allows factories to reduce pollution at different
sources by different amounts, provided the overall result
is equivalent. Therefore, 3M installed equipment on only
certain production lines at its tape-manufacturing facility
in Pennsylvania, thereby lowering its compliance costs. 67
Today, there is greater use of economic instruments like
tradable pollution permits, charges, and taxes to encourage
improvements. 68 Joint implementation involves companies
in industrialized nations working with businesses in
developing countries to help them reduce greenhouse gas
emissions. The company lending a hand then receives credit
toward fulfilling its environmental obligations at home.
The developing country receives investment, technology,
and jobs; the company giving a lending hand receives
environmental credits; and the world gets cleaner air. 69

4. Don’t deal with fly-by-night subcontractors for waste disposal.
They are more likely to cut corners, break laws, and do
a poor job. Moreover, the result for you could be bad
publicity and legal problems. 70

Operations The actions companies can take in the area of
operations include the following:

1. Promote new manufacturing technologies. Louisville Gas and
Electric took the lead in installing smokestack scrubbers,
Consolidated Natural Gas pioneered the use of clean-
burning technologies, and Nucor developed state-of-the-art
steel mills.

2. Practice reverse logistics. Firms move packaging and other
used goods from the consumer back up the distribution
channel to the firm. Make them not just costs, but a source
of revenue— inputs to production. Fuji Australia believes
that remanufacturing has generated returns in the tens of
millions of dollars. 71

3. Encourage technological advances that reduce pollution from
products and manufacturing processes. Cinergy and AEP are
working on technologies that capture carbon as coal is
burned and pump it deep into the ground to be stored
for thousands of years. 72 3M’s “Pollution Prevention Pays”
program is based on the premise that it is too costly for
companies to employ add-on technology; instead, they
should attempt to eliminate pollution at the source. 73
Pollution prevention, more than pollution control, is related
to both better environmental performance and better
manufacturing performance, including cost and speed. 74

4. Develop new product formulations. The Chicago Transit
Authority and Union Pacific Corporation are replacing
traditional wood railroad ties with plastic ties. Other
companies are experimenting with making recycled cross-
ties of old tires, grocery bags, milk jugs, and Styrofoam

2. Carry out R&D on environmentally safe activities. GM is
spending millions to develop hydrogen-powered cars that
don’t emit carbon dioxide. GE is doing research on earth-
friendly hydrogen and lower-emission locomotives and jet
engines. 54

3. Develop and expand environmental cleanup services. Building on
the expertise gained in cleaning up its own plants, Du Pont
formed a safety and environmental resources division to help
industrial customers clean up their toxic wastes. 55 Global
Research Technologies LLC is trying to use solvents to grab
carbon dioxide out of the air to isolate it for disposal. 56

4. Compensate for environmentally risky projects. AES has a long-
standing policy of planting trees to offset its power plants’
carbon emission. 57

5. Make your company accountable to others. Royal Dutch
Shell and Bristol-Myers Squibb are trendsetters in green
reporting. 58 Danish health care and enzymes company
Novo Nordisk purposely asked for feedback from
environmentalists, regulators, and other interested bodies
from around Europe. Its reputation has been enhanced, its
people have learned a lot, and new market opportunities
have been identified. 59

6. Make every new product environmentally better than the last.
Intel is developing ultra-energy-efficient chips. 60 IBM aims
to use recyclable materials, reduce hazardous materials,
reduce emissions, and use natural energy and resources in
packaging. 61

7. Invest in green businesses. American Electric Power Co. is
investing in renewable energy in Chile, as well as retrofitting
Bulgarian schools for greater efficiency. 62

Public affairs In the area of public affairs, companies can take
a variety of actions:

1. Attempt to gain environmental legitimacy and credibility. The
cospon sors of Earth Day included Apple Computer,
Hewlett-Packard, and the Chemical Manufacturers
Association. McDonald’s has tried to become a corporate
environmental “educator.” Ethel M. Chocolates, in public
tours of its Las Vegas factory, showcases effective handling
of its industrial wastes. 63

2. Try to avoid losses caused by insensitivity to environmental
issues. As a result of Exxon’s apparent lack of concern after
the Valdez oil spill, 41 percent of Americans polled said
they would consider boycotting the company. 64 MacMillan
Bloedel lost a big chunk of sales almost overnight when it
was targeted publicly as a clear-cutter and chlorine user. 65

3. Collaborate with environmentalists. Executives at Pacific Gas
& Electric seek discussions and joint projects with any
willing environmental group, and ARCO has prominent
environmentalists on its board of directors.

The legal area Actions companies can take in the legal area
include the following:

1. Try to avoid confrontation with state or federal pollution control
agencies. W. R. Grace faced expensive and time-consuming
lawsuits as a result of its toxic dumps. Browning-Ferris,
Waste Management Inc., and Louisiana-Pacific were charged
with pollution control violations, damaging their reputations.

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196 Part Two Planning: Delivering Strategic Value

3. Differentiate your product via environmental services. ICI takes
back and disposes of customers’ waste as a customer service.
Disposal is costly, but the service differentiates the firm’s
products. Teach customers how to use and dispose of
products; for instance, farmers inadvertently abuse pesticides.
Make education a part of a firm’s after-sales service.

4. Take advantage of the Net. The EcoMall ( www.ecomall.com/
biz/ ) promotes a number of environmentally oriented firms
in 68 product categories. Firms using the Net target green
consumers globally, effectively, and efficiently. 85

Accounting Actions companies can take in the accounting area
include the following:

1. Collect useful data. The best current reporters of environ-
mental information include Dow Europe, Danish Steel
Works, BSO/Origin, 3M, and Monsanto. BSO/Origin has
begun to explore a system for corporate environmental
accounting. 86

2. Make polluters pay. CIBA-GEIGY has a “polluter pays
principle” throughout the firm, so managers have the
incentive to combat pollution at the sources they can
influence. 87

3. Demonstrate that antipollution programs pay off. 3M’s Pollution
Prevention Pays program is based on the premise that only
if the program pays will there be the motivation to carry
it out. Every company needs to be cost-effective in its
pollution reduction efforts.

4. Use an advanced waste accounting system. Do this in addition
to standard management accounting, which can hinder
investment in new technologies. Waste accounting makes
sure all costs are identified and better decisions can be made.

5. Adopt full-cost accounting. This approach, called for by Frank
Popoff, Dow’s chairman, ensures that the price of a product
reflects its full environmental cost. 88

cups. 75 Weyerhaeuser, recognizing the
decreasing supply of timber and growing
demand, is working to produce high-
quality wood on fewer, continuously
regenerated acres. 76 Electrolux has
developed a sun-powered lawn mower
and a chainsaw that runs on vegetable
oil. 77 Many companies are developing
green pesticides.

5. Eliminate manufacturing wastes. 3M
replaced volatile solvents with water-
based ones, thereby eliminating the
need for costly air pollution control
equipment. BPAmoco implemented a
similar program.

6. Find alternative uses for wastes. When
DuPont halted ocean dumping of acid
iron salts, it discovered that the salts
could be sold to water treatment plants
at a profit. A Queensland sugarcane
facility powers production via sugarcane
waste. 78

7. Insist that your suppliers have strong environmental performance.
Chiquita Banana had a spotty environmental record, but
now its plantations are certified by the Rainforest Alliance,
and Wal-Mart has named Chiquita its most environmentally
conscious supplier. 79 Scott Paper discovered that many of
its environmental problems were “imported” through the
supply chain. Initially focusing on pulp suppliers, the company
sent questionnaires asking for figures on air, water, and land
releases, energy consumption, and energy sources. Scott
was astonished at the variance. For example, carbon dioxide
emissions varied by a factor of 17 among different suppliers.
Scott dropped the worst performers and announced that
the best performers would in the future receive preference
in its purchasing decisions. 80

8. Assemble products with the environment in mind. Make them
easy to snap apart, sort, and recycle, and avoid glues and
screws.

Marketing Companies can also take action in the marketing
area:

1. Cast products in an environment-friendly light. Most Americans
believe a company’s environmental reputation influences
what they buy. 81 Wal-Mart has made efforts to provide
customers with recycled or recyclable products. A
Chinese entrepreneur is making underwear out of soybean
by-products. 82 Spiegel plans to offer soybean-fiber halter-top
dresses in pink and mocha. 83 Other eco-friendly fibers are
made from hemp and bamboo, which require little pesticide.

2. Avoid attacks by environmentalists for unsubstantiated or
inappropriate claims. When Hefty marketed “biodegradable”
garbage bags, that claim was technically true, but it turned
out that landfill conditions didn’t allow decomposition to
occur. 84 The extensive public backlash affected not only
Hefty bags but also other Hefty products. Hefty didn’t
lie, but it did exaggerate. Its tactics overshadowed well-
intentioned greening actions.

Companies like Toyota use advertising to convey to consumers their
efforts to become more environmentally friendly.

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Ethics and Corporate Responsibility Chapter 5 197

environmental movement An environmental philosophy
postulating that the unintended negative effects of human eco-
nomic activities on the environment are often greater than the
benefits, and that nature should be preserved. p. 192

tragedy of the commons The environmental destruction
that results as individuals and businesses consume finite resourc-
es (the “commons”) to serve their short-term interests without
regard for the long-term consequences. p. 191

DISCUSSION QUESTIONS
1. To what extent can and should we rely on government to

solve environmental problems? What are some of govern-
ment’s limitations? Take a stand on the role and usefulness
of government regulations on business activities.

2. To what extent should managers today be responsible for
cleaning up mistakes from years past that have hurt the
environment?

3. How would you characterize the environmental movement in
western Europe? How does it differ from the U.S. movement?
What difference will this make to a multinational company
that wants to produce and market goods in many countries?

4. What business opportunities can you see in meeting envi-
ronmental challenges? Be specific.

5. You are appointed environmental manager of XYZ Com-
pany. Describe some actions you will take to address envi-
ronmental challenges. Discuss obstacles you are likely to
encounter in the company and how you will manage them.

6. Interview a businessperson about environmental regula-
tions and report your findings to the class. How would you
characterize his or her attitude? How constructive is his or
her attitude?

7. Interview a businessperson about actions he or she has taken
that have helped the environment. Report your findings to
the class and discuss.

8. Identify and discuss some examples of the tragedy of the
commons. How can the tragedies be avoided?

9. Discuss the status of recycling efforts in your community
or school, your perspectives on it as a consumer, and what
business opportunities could be available.

10. What companies currently come to mind as having the best
and worst reputations with respect to the environment?
Why do they have these reputations?

11. Choose one product and discuss its environmental impact
through its entire life cycle.

12. What are you, your college or university, and your commu-
nity doing about the environment? What would you recom-
mend doing?

6. Show the overall impact of the pollution reduction program.
Companies have an obligation to account for the costs and
benefits of their pollution reduction programs. 3M claims half
a billion dollars in savings from pollution prevention efforts. 89

Finance In the area of finance, companies can do the following:

1. Gain the respect of the socially responsible investment community.
Many investment funds in the United States and Europe take
environmental criteria into account. A study by ICF Kaiser
concluded that environmental improvements could lead to
significant reduction in the perceived risk of a firm, with
a possible 5 percent increase in the stock price. 90 Socially
responsible rating services and investment funds try to help
people invest with a “clean conscience.” 91

2. Recognize true liability. Investment houses often employ
environmental analysts who search for companies’
true environmental liability in evaluating their potential
performance. Bankers look at environmental risks and
environmental market opportunities when evaluating a
company’s credit rating. 92 The Securities and Exchange
Commission in New York requires some companies to
report certain environmental costs. The Swiss Bank Corp.
has specialized Environmental Performance Rating Units
to include environmental criteria in order to improve the
quality of financial analysis. 93

3. Fund and then assist green companies. Ann Winblad of
Hummer Winblad Venture Partners was one of the first
venture capitalists to coach green entrepreneurs to increase
their business skills and chances of success. 94

4. Recognize financial opportunities. Worldwide, one of these
great opportunities is water. Water must be purified and
delivered reliably to everyone worldwide. Billions of people
lack sanitary sewage facilities and have poor access to
drinking water. Infrastructures in big cities, including those
in the United States, are seriously deteriorating. Supplying
clean water to people and companies is a $400 billion-a-year
industry—one-third larger than the global pharmaceutical
industry. Companies are aggressively pursuing this market.
They are betting that water in the 21st century will be like
oil in the 20th century. A Bear Stearns analyst called water
the best sector for the next century. 95

KEY TERMS
carrying capacity The ability of a finite resource to sustain a
population. p. 191

conservation An environmental philosophy that seeks to
avoid waste, promote the rational and efficient use of natural
resources, and maximize long-term yields, especially of renew-
able resources. p. 192

bat37241_ch05_160-197.indd 197 12/3/09 2:49:27 PM

“ ”
The business executive is by profession a decision maker. Uncertainty is his opponent. Overcoming it is

his mission.

— John McDonald

Managerial Decision Making

chapter

3

LEARNING OBJECTIVES

After studying Chapter 3, you will be

able to:

1 Describe the kinds of decisions you
will face as a manager. p. 86

2 Summarize the steps in making
“rational” decisions. p. 89

3 Recognize the pitfalls you should
avoid when making decisions. p. 95

4 Evaluate the pros and cons of using
a group to make decisions. p. 98

5 Identify procedures to use in leading
a decision-making group. p. 100

6 Explain how to encourage creative
decisions. p. 102

7 Discuss the processes by which
decisions are made in organizations.
p. 104

8 Describe how to make decisions in a
crisis. p. 105

LO

LO
LO
LO
LO
LO
LO
LO

CHAPTER OUTLINE

Characteristics of Managerial Decisions

Lack of Structure
Uncertainty and Risk
Conflict

The Stages of Decision Making

Identifying and Diagnosing the Problem
Generating Alternative Solutions
Evaluating Alternatives
Making the Choice
Implementing the Decision
Evaluating the Decision

The Best Decision

Barriers to Effective Decision Making

Psychological Biases
Time Pressures
Social Realities

Decision Making in Groups

Potential Advantages of Using a Group
Potential Problems of Using a Group

Managing Group Decision Making

Leadership Style
Constructive Conflict
Encouraging Creativity
Brainstorming

Organizational Decision Making

Constraints on Decision Makers
Models of Organizational Decision Processes
Decision Making in a Crisis

bat37241_ch03_084-123.indd 84 12/4/09 3:04:17 PM

Management Close-Up
HOW DID ANNE MULCAHY’S DECISIONS PULL XEROX BACK FROM THE BRINK?

While Xerox had stayed the course with an outdated
business plan, nimbler and more innovative competi-
tors like Ricoh and Canon were snatching away mar-
ket share. To add to the company’s woes, shortly after
Mulcahy became CEO, the Securities and Exchange

Commission announced that it
would investigate Xerox on
suspected billing and account-
ing irregularities.

At that point, Mulcahy could
have simply caved to angry
share holders, killed the famed
Xerox culture, shut down
research and development,
filed for bankruptcy, or turned

out the lights—all advice she received from many peo-
ple. But Mulcahy was a Xerox believer. Besides her time
in the sales force, she had headed the human resource
department and the company’s $6 billion desktop print-
ing division. Anne Mulcahy had just begun to fight. 1

Anne Mulcahy is not your typical English major. After
college graduation she joined Xerox Corporation’s sales
force and rose through the ranks. Twenty-five years
later, she became chairman and CEO of the world’s lead-
ing document management and services enterprise. But
her promotion brought a host
of problems. King of the hill in
the 1970s and 1980s, Xerox
had faltered badly with its com-
puter division during the 1990s
as competitors undercut it on
price. By 2000, once-mighty
Xerox Corporation was in the
red and sinking fast.

Stepping into the corner
office in August 2001, Mulcahy found a company in
total disarray. Her predecessor, former IBMer Richard
Thoman, had lasted only 13 months in the job. Xerox
was nearly $18 billion in debt. It had exhausted a $7 bil-
lion line of credit, and its credit ratings were tanking.

When Mulcahy took the reins at Xerox,
the company was in a mess, seemingly
with no way out except bankruptcy.
As you read this chapter, consider
the decisions managers face—and how
Mulcahy approached the decision-
making process.

{ }

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86 Part One Foundations of Managemen

t

The best managers make decisions constantly. Some are big and difficult, like those
Anne Mulcahy faced when she became head of a global empire on the brink of bank-
ruptcy. But managers also make countless smaller decisions that affect day-to-day
operations and procedures. Karen Lancaster, chief information officer at Western
Marine Insurance, makes many decisions about her firm’s computer systems. For
example, she had to decide on a plan to back up and store the company’s data to pro-
tect the company. If Western Marine’s computers ever lost power or failed, the com-
pany needed to store data off-site. So Lancaster compared offers from three vendors
and chose Courtesy Computers, which uses an Internet connection to back up the
company’s data automatically at the end of each day.

Backing up data is hardly glamorous, but a crisis can bring home the importance
of these decisions, as Lancaster well knows. One day the phone company was digging
outside Western Marine’s building in Stockton, California, and cut a line, causing
the company’s Internet firewall to go down, which in turn allowed a hacker access to
the company’s server, clogging it with spam so that it crashed. Another time a power
surge caused a loss of data in the computers. In both situations, the online backup
solved the problem. Lancaster says, “When you’re creating your disaster plan, you
need to think about every scenario.” 2

Decisions. If you can’t make them, you won’t be an effective manager. This chapter
discusses what kinds of decisions managers face, how they are made, and how they
should be made.

Characteristics of Managerial Decisions
Managers face problems and opportunities constantly. Some situations that require a
decision are relatively simple; others seem overwhelming. Some demand immediate
action, while others take months or even years to unfold.

Actually, managers often ignore problems. 3 M. For several reasons, they avoid tak-
ing action. 4 First, managers can’t be sure how much time, energy, or trouble lies ahead
once they start working on a problem. Second, getting involved is risky; tackling a
problem but failing to solve it successfully can hurt a manager’s track record. Third,
because problems can be so perplexing, it is easier to procrastinate or to get busy with
less demanding activities. For these reasons, managers may lack the insight, courage,
or will to decide.

It is important to understand why decision making can be so challenging. Figure 3.1
illustrates several characteristics of managerial decisions that contribute to their diffi-
culty and pressure. Most managerial decisions lack structure and entail risk, uncer-
tainty, and conflict.

LO 1

You’ll be making
decisions

constantly.
It may seem

obvious, but it’s
worth stating: If
you know how

to make good decisions, you’ll
deliver good results.

Risk

Lack of
structur

e

Uncertainty

Conflict
FIGURE 3.1
Characteristics of
Managerial Decision

s

bat37241_ch03_084-123.indd 86 12/4/09 3:04:18 PM

Managerial Decision Making Chapter 3 87

Lack of Structure
Lack of structure is the usual state
of affairs in managerial decision
making. 5 Although some decisions are routine and clear-cut, for most there is no auto-
matic procedure to follow. Problems are novel and unstructured, leaving the decision
maker uncertain about how to proceed.

An important distinction illustrating this point is between programmed and non-
programmed decisions. Programmed decisions have been encountered and made
before. They have objectively correct answers and can be solved by using simple rules,
policies, or numerical computations. If you face a programmed decision, a clear pro-
cedure or structure exists for arriving at the right decision. For example, if you are a
small-business owner and must decide the amounts for your employees’ paychecks,
you can use a formula—and if the amounts are wrong, your employees will prove it to
you. Table 3.1 gives some other examples.

If most important decisions were programmed, managerial life would be much
easier. But managers typically face nonprogrammed decisions: new, novel, complex
decisions having no certain outcomes. They have a variety of possible solutions, all
of which have merits and drawbacks. The decision maker must create or impose a
method for making the decision; there is no predetermined structure on which to rely.
As Table 3.1 suggests, important, difficult decisions tend to be nonprogrammed, and
they demand creative approaches.

Uncertainty and Risk
If you have all the information you need, and can predict precisely the consequences
of your actions, you are operating under a condition of certainty. 6 Managers are
expressing their preference for certainty when they are not satisfied hearing about
what might have happened or may happen, and insist on hearing what did or will hap-
pen. 7 But perfect certainty is rare. For important, nonprogrammed managerial deci-
sions, uncertainty is the rule.

Uncertainty means the manager has insufficient information to know the conse-
quences of different actions. Decision makers may have strong opinions—they may
feel sure of themselves—but they are still operating under conditions of uncertainty if

programmed decisions

Decisions encountered
and made before, having
objectively correct answers,
and solvable by using simple
rules, policies, or numerical
computations.

nonprogrammed
decisions

New, novel, complex
decisions having no proven
answers.

certainty

The state that exists when
decision makers have
accurate and comprehensive
information.

uncertainty

The state that exists when
decision makers have
insufficient information.

A moderate ego demonstrates wisdom.
Lao-tzu

Programmed Decisions Nonprogrammed Decisions

Problem Frequent, repetitive, routine.
Much certainty regarding
cause-and-effect relationships.

Novel, unstructured. Much
uncertainty regarding cause-
and-effect relationships.

Procedure Dependence on policies, rules,
and definite procedures.

Necessity for creativity,
intuition, tolerance for
ambiguity, creative problem
solving.

Examples

Business firm Periodic reorders of inventory. Diversification into new
products and markets.

University Necessary grade-point average
for good academic standing.

Construction of new
classroom facilities.

Health care Procedure for admitting
patients.

Purchase of experimental
equipment.

Government Merit system for promotion of
state employees.

Reorganization of state
government agencies.

TABLE 3.1
Comparison of Types of
Decisions

SOURCE: J. Gibson, J. Ivancevich, and J. Donnelly Jr., Organizations: Behavior, Structure, Processes, 10th ed. Copyright © 2000
by The McGraw-Hill Companies. Reprinted with permission of The McGraw-Hill Companies.

bat37241_ch03_084-123.indd 87 12/4/09 3:04:19 PM

88 Part One Foundations of Management

they lack pertinent information and cannot estimate accurately the likelihood of dif-
ferent results of their actions.

When you can estimate the likelihood of various consequences but still do not
know with certainty what will happen, you are facing risk. Risk exists when the prob-
ability of an action being successful is less than 100 percent and losses may occur. If
the decision is the wrong one, you may lose money, time, reputation, or other impor-
tant assets.

Risk, like uncertainty, is a fact of life in managerial decision making. But this is
not the same as taking a risk. Although it sometimes seems as though risk takers are
admired and that entrepreneurs and investors thrive on taking risks, the reality is that
good decision makers prefer to manage risk. They accept the fact that decisions have
consequences entailing risk, but they do everything they can to anticipate the risk,
minimize it, and control it.

Consider the choices involved in preparing a restaurant menu. The Center for
Science in the Public Interest recently criticized restaurant chains for selling entrées,
appetizers, and desserts containing 1,400 calories or more (a typical American might
eat 2,000 calories in an entire day). Making no changes could give those restaurants
a reputation for contributing to obesity, but if a restaurant offers more healthful
alternatives, will diners bite? The riskiest approach would be to change the entire
menu. Instead, restaurateurs including T.G.I. Friday’s are more likely to lower uncer-
tainty by retaining popular choices and adding some new selections. Some entrées
are smaller versions of items already being offered, and others are new but similar to
popular dishes. 8

A T-shirt company called Threadless reduces uncertainty and manages risk by
basing its whole marketing model on collaboration with customers. Professional and
amateur graphic designers submit their ideas for T-shirt designs at the Threadless
Web site, where customers vote on the designs they like. From hundreds of submis-
sions, the company selects four to six of the top vote getters each week and pays their
designers $1,000. But it makes and sells them only after a minimum number of cus-
tomers have already ordered the shirt design. 9

Conflict
Important decisions are even more difficult because of the conflict managers face.
Conflict, which exists when a manager must consider opposing pressures from differ-
ent sources, occurs at two levels.

First, individual decision makers
expe rience psychological conflict when
several options are attractive, or when
none of the options is attractive. For
instance, a manager may have to decide
whom to lay off, when she doesn’t want
to lay off anyone. Or she may have
three promising job applicants for one
position—but choosing one means she
has to reject the other two.

Second, conflict arises between peo-
ple. A chief financial officer argues in
favor of increasing long-term debt to
finance an acquisition. The chief exec-
utive officer, however, prefers to mini-
mize such debt and find the funds
else where. A marketing department
wants more product lines to sell, and
the engineers want higher-quality

risk

The state that exists when
the probability of success is
less than 100 percent and
losses may occur.

conflict

Opposing pressures from
different sources, occurring
on the level of psychological
conflict or of conflict
between individuals or
groups.

T-shirt designers have a chance to
get their designs printed through
the Threadless Web site, but only
after customers have given them
high ratings and ordered a shirt.

bat37241_ch03_084-123.indd 88 12/4/09 3:04:20 PM

Managerial Decision Making Chapter 3 89

products. But the production people want to lower costs by having longer production
runs of fewer products with no changes. Few decisions are without conflict.

The Stages of Decision Making
Faced with these challenges, how can you make good decisions? The ideal decision-
making process includes six stages. As Figure 3.2 illustrates, decision makers should
(1) identify and diagnose the problem, (2) generate alternative solutions, (3) evalu-
ate alternatives, (4) make the choice, (5) implement the decision, and (6) evaluate the
decision.

Identifying and Diagnosing the Problem
The first stage in the decision-making process is to recognize that a problem exists
and must be solved. Typically, a manager realizes some discrepancy between the cur-
rent state (the way things are) and a desired state (the way things ought to be). Such
discrepancies—say, in organizational or unit performance—may be detected by com-
paring current performance against (1) past performance, (2) the current performance
of other organizations or units, or (3) future expected performance as determined
by plans and forecasts. 10 Larry Cohen, who founded Accurate Perforating with his
father, knew his company was having difficulty making a profit, because costs at the
metal company were rising while the prices customers were willing to pay remained
unchanged. However, when the company’s bank demanded immediate payment of
its $1.5 million loan, Cohen realized the problem had to be solved, or the company
would have to sell off all its assets and close. 11 We will refer to this example through-
out this section.

The “problem” may actually be an opportunity that
needs to be exploited: a gap between what the orga-
nization is doing now and what it can do to create a
more positive future. In that case, decisions involve
choosing how to seize the opportunity. To recognize
important opportunities as a manager, you will need
to understand your company’s macro- and competitive
environments (described in Chapter 2), including the
opportunities offered by technological developments.
Cisco Systems CEO John Chambers advises managers
to stay current by talking to people who challenge you
and are willing to teach you. Says Chambers, “When
somebody travels with me, they have to teach me a
topic. When I review engineers, at the end they have
to teach me two topics. I listen.” 12

Recognizing that a problem or opportunity exists is
only the beginning of this stage. The decision maker
must dig in deeper and attempt to diagnose the situ-
ation. For example, a sales manager knows that sales
have dropped drastically. If he is leaving the company
soon or believes the decreased sales volume is due to the
economy (which he can’t do anything about), he won’t
take action. But if he does try to solve the problem,
he should not automatically reprimand his sales staff,
add new people, or increase the advertising budget.
He must analyze why sales are down and then develop
a solution appropriate to his analysis. Asking why, of
yourself and others, is essential to understanding the

LO 2

Identifying and
diagnosing
the problem

Generating
alternative
solutions

Evaluating
alternatives

Making the
choice

Implementing
the decisio

n

Evaluating
the decision

FIGURE 3.2
The Stages of Decision
Making

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90 Part One Foundations of Management

real problem. Unfortunately, in the case of Accurate Perforating, described earlier,
Larry Cohen did not ask why profits were declining; he simply assumed that the com-
pany’s costs were too high. 13

The following questions are useful to ask and answer in this stage: 14

Is there a difference between what is actually happening and what should be
happening?

How can you describe the deviation, as specifically as possible?
What is/are the cause(s) of the deviation?
What specific goals should be met?
Which of these goals are absolutely critical to the success of the decision?

Bookseller Borders faced a problem: declining sales. The book industry in general had
become sluggish, as consumers filled leisure time with other activities. And consumers
who did choose to buy books were often doing so online. But Borders didn’t recognize
that not having its own Web site was a problem, choosing instead to create an alliance
with Amazon.com to sell its books online. At the time, CEO Greg Josefowicz defended
the decision, saying it would “help us to focus on what we do best,” which meant building
more stores. But the customers didn’t come. As the overall book market declined, online
sales soared.

Borders’s new CEO, George Jones, admits that the firm’s previous strategy was wrong,
saying that an online presence will be “a necessary component of our business” going for-
ward. In addition, says Jones, Borders will invest in more superstores, reduce the number
of CDs they carry, and strengthen the firm’s publishing business—all in an effort to boost
those flagging sales.15

Generating Alternative Solutions
The second stage of decision making links problem diagnosis to the development of
alternative courses of action aimed at solving the problem. Managers generate at least
some alternative solutions based on past experiences. 16

Solutions range from ready made to custom made. 17 Decision makers who search
for ready-made solutions use ideas they have tried before or follow the advice of oth-
ers who have faced similar problems. Custom-made solutions, by contrast, must be
designed for specific problems. This technique often combines ideas into new, creative
solutions. For example, Yamaha Corporation drew on ideas from its customer com-
munity, which said that hobby guitarists were interested in an instrument they could
play without a lot of practice. Designers at Yamaha created an idea for a guitar that
could read electronically entered songs and display lights on the fingerboard showing
users where to put their fingers. Customers provided ideas for modifications, and the
back and forth eventually generated more than the minimum number of orders for
the company to produce the innovative product. 18 Potentially, custom-made solutions
can be devised for any challenge. Later in the chapter, we will discuss how to generate
creative ideas.

Often, many more alternatives are available than managers may realize. For exam-
ple, what would you do if one of your competitors reduced prices? Cutting prices in
response to a competitor’s price cuts is not your only option, although sometimes
it is assumed to be. Alternatives include emphasizing consumer risks to low-priced
products, building awareness of your products’ features and overall quality, and com-
municating your cost advantage to your competitors so they realize that they can’t win
a price war. If you do decide to cut your price as a last resort, do it fast—if you do it
slowly, your competitors will gain sales in the meantime, which may embolden them
to employ the same tactic again in the future. 19

ready-made solutions

Ideas that have been seen or
tried before.

custom-made
solutions

New, creative solutions
designed specifically for the
problem.

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Managerial Decision Making Chapter 3 91

The case of Accurate Perforating shows the importance of looking for every alter-
native. The company had become successful by purchasing metal from steel mills,
punching many holes in it to make screenlike sheets, and selling this material in bulk
to distributors, who sold it to metal workshops, which used it to make custom prod-
ucts. Cohen admits, “We stayed away from sophisticated products, and as a result we
wound up in a very competitive situation where the only thing we were selling was
price.” Management responded by cutting costs wherever possible, avoiding invest-
ment in new machinery or processes. The result was an out-of-date factory managed
by people who had grown accustomed to resisting change. Only after the bank called
in its loan did Cohen begin to see alternatives. The bank offered one painful idea: liq-
uidate the company. It also suggested a management consultant, who advised another
alternative: renegotiating payment schedules with the company’s suppliers. Cohen
also received advice from managers of a company Accurate had purchased a year
before. That company, Semrow Perforated & Expanded Metals, sold more sophis-
ticated products directly to manufacturers, and Semrow’s managers urged Cohen to
invest more in finished metal products such as theirs. 20

Evaluating Alternatives
The third stage of decision making involves determining the value or adequacy of the
alternatives that were generated. In other words, which solution will be the best?

Too often, alternatives are evaluated with insufficient thought or logic. At Accurate
Perforating, Cohen made changes to cut costs but dismissed the idea to invest in mar-
keting finished metal products, even though these product lines were more profitable.
Accurate’s general manager, Aaron Kamins, counseled that money spent on finished
metal products would be a distraction from Accurate’s core business. That reasoning
persuaded Cohen, even though it meant focusing on unprofitable product lines. 21

Obviously, alternatives should be evaluated more carefully. Fundamental to this
process is to predict the consequences that will occur if the various options are put
into effect. Managers should consider several types of consequences, including quanti-
tative measures of success, such as lower costs, higher sales, lower employee turnover,
and higher profits.

Environmental changes require companies to think through new alternatives and
their consequences. When the recent downturn in the U.S. economy required cut-
backs, organizations as diverse
as the State of California, Gulf-
stream Aerospace, and Gannett
evaluated the alternatives of lay-
offs (permanent job cuts) versus
furloughs (requiring employees
to take some unpaid time off until
demand picks up again). While
layoffs save more money per
employee, because the company
doesn’t have to continue paying
for benefits, furloughs attempt to
maintain relationships with tal-
ented employees, who are more
likely than laid-off workers to return when the company needs them again. Furloughs
may seem kinder to employees, who can hope to return to work eventually, but workers
may not be eligible for unemployment compensation during the furlough period. 22

To evaluate alternatives, refer to your original goals, defined in the first stage.
Which goals does each alternative meet, and fail to meet? Which alternatives are most
acceptable to you and to other important stakeholders? If several alternatives may
solve the problem, which can be implemented at the lowest cost or greatest profit? If

When managers make decisions, they often draw on other people’s insights to help
them evaluate alternatives. In a survey of Canadian executives, more than two-thirds
said the opinion of their assistant was important in deciding which job candidate to
hire—a useful point to remember the next time you are job hunting.2

3

37%

32%

11%

6%
3%

11%

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92 Part One Foundations of Management

no alternative achieves all your goals, perhaps you can combine two or more of the
best ones. Several additional questions help: 24

Is our information about alternatives complete and current? If not, can we get
more and better information?

Does the alternative meet our primary objectives?
What problems could we have if we implement the alternative?

Of course, results cannot be forecast with perfect accuracy. But sometimes decision
makers can build in safeguards against an uncertain future by considering the poten-
tial consequences of several different scenarios. Then they generate contingency
plans —alternative courses of action that can be implemented depending on how the
future unfolds.

For example, scenario planners making decisions about the future might consider
four alternative views of the future state of the U.S. economy: 25 (1) an economic boom

with 5 to 6 percent
annual growth and the
United States much
stronger than its global
competitors; (2) a mod-
erately strong economy
with 2 to 3 percent
growth; (3) a pessimistic
outlook with no growth,

rising unemployment, and recession; or (4) a worse scenario with global depression,
massive unemployment, and widespread social unrest.

Some scenarios will seem more likely than others, and some may seem highly
improbable. Ultimately, one of the scenarios will prove to be more accurate than the
others. The process of considering multiple scenarios raises important “what if?” ques-
tions for decision makers and highlights the need for preparedness and contingency
plans. As you read this, what economic scenario is unfolding? What are the important
current events and trends? What scenarios could evolve six or eight years from now?
How will you prepare?

Making the Choice
Once you have considered the possible consequences of your options, it is time to make
your decision. Some managers are more comfortable with the analysis stage. Especially
with all the advanced technology that is available, quantitatively inclined people can eas-
ily tweak the assumptions behind every scenario in countless ways. But the temptation

can lead to “paralysis by analysis”—
that is, indecisiveness caused by too
much analysis rather than the asser-
tive decision making that is essential
if an organization is ever to seize new
opportunities or thwart challenges. In
contrast, as described in the “Manage-
ment Close-Up: Taking Action” fea-
ture, Xerox’s Anne Mulcahy behaved
decisively.

As you make your decision, impor-
tant concepts include maximizing, sat-
isficing, and optimizing. 27

Maximizing is achieving the best
possible outcome. The maximizing
decision realizes the greatest positive

contingency plans

Alternative courses of action
that can be implemented
based on how the future
unfolds.

A scenario may use numbers that sound reasonable, but you should look at the
data in different ways to check your assumptions. As Dean Kamen’s company
developed the Segway scooter, Kamen decided that each year Segway could capture
0.1 percent of the world’s population. That percentage might sound conservative,
but consider that 0.1 percent of 6 billion people is 6 million Segways a year! Kamen
decided to build a factory that could produce 40,000 units a month; five years later,
sales had reached fewer than 25,000.26

British entrepreneur Richard
Branson shows a model of his
proposed Spaceship Two, a vehicle
he hopes will be developed by
his company in the next few
years, which would take private
passengers on commercial space
fights. To what degree do you
think Branson’s decision to move
ahead with this idea was based on
the maximizing strategy?

maximizing

A decision realizing the best
possible outcome.

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Managerial Decision Making Chapter 3 93

consequences and the fewest negative consequences. In other words, maximizing
results in the greatest benefit at the lowest cost, with the largest expected total return.
Maximizing requires searching thoroughly for a complete range of alternatives, care-
fully assessing each alternative, comparing one to another, and then choosing or cre-
ating the very best.

Satisficing is choosing the first option that is minimally acceptable or adequate.
When you satisfice, you compare your choice against your goal, not against other
options. Satisficing means that a search for alternatives stops at the first one that is
okay. Commonly, people do not expend the time or energy to gather more information.
Instead, they make the expedient decision based on readily available information.

Let’s say you are purchasing new equipment, and your goal is to avoid spending too
much money. You would be maximizing if you checked out all your options and their
prices, and then bought the cheapest one that met your performance requirements.
But you would be satisficing if you bought the first adequate option that was within
your budget and failed to look for less expensive options.

Satisficing is sometimes a result of laziness; other times, there is no other known
option because time is short, information is unavailable, or other constraints make max-
imizing impossible. When the consequences are not huge, satisficing can even be the
ideal approach. But in other situations, when managers satisfice, they fail to consider
important options. Returning to the earlier example of Accurate Perforating, when

satisficing

Choosing an option that is
acceptable, although not
necessarily the best or
perfect.

Management Close-Up
As Xerox CEO, Anne Mulcahy stumbled into an environment of uncertainty, but once
she learned the full extent of her company’s problems, she moved quickly. Mulcahy knew
she couldn’t fix Xerox by herself; she needed support from the whole team. To gain their
cooperation, she would need to inform each person about the new reality for Xerox. So,
Mulcahy visited each of Xerox’s top 100 executives and, mincing no words about the grim
situation, asked whether they were “in.” To her credit, all but two stood with her. Today,
most of those managers remain at Xerox.

Mulcahy spoke directly and honestly with shareholders, too. While some CEOs avoid
giving unpleasant news to shareholders and try to pacify them at all times, that is not
Mulcahy’s style. What mattered most, she reasoned, were relationships with Xerox’s
employees and customers. Speaking to the shareholders, she characterized Xerox’s
old business model as “unsustainable” and warned that unless Xerox cut expenses and
increased the profit margin, it would never return to profitability. By the next day, the
stock price had tumbled 26 percent.

Yet Mulcahy stuck to her guns. She discontinued paying a dividend to shareholders,
then began the difficult task of slashing expenses and eliminating unnecessary jobs. At the
same time, she told the sales force she’d go anywhere to meet with Xerox customers and
assure them that Xerox was getting back on track.

Where Mulcahy didn’t have expertise, she became a quick study. Lacking financial
expertise and with Xerox under SEC scrutiny, she asked her finance people for a “crash
course” that would enable her to hold her own in meetings with the SEC.2

8

• Unlike many CEOs who put shareholders above everything, Anne Mulcahy decided to
put employees and customers first. Why do you think she picked that alternative when
it could generate conflict with the shareholders?

• Mulcahy could have declared bankruptcy for Xerox. Instead, she chose a hard program
of cutting expenses and reassuring customers that the company would turn around.
Why do you think she chose the alternative she did?

TAKING ACTION

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94 Part One Foundations of Management

the company’s management initially addressed declining profits, they were satisficing;
they assumed they should focus on cutting costs and failed to identify alternatives that
would boost profits by investing in new markets where they could charge more.

Optimizing means that you achieve the best possible balance among several goals.
Perhaps, in purchasing equipment, you are interested in quality and durability as well
as price. So, instead of buying the cheapest piece of equipment that works, you buy the
one with the best combination of attributes, even though there may be options that
are better on the price criterion and others that are better on the quality and durabil-
ity criteria. The same idea applies to achieving business goals: one marketing strategy
could maximize sales, while a different strategy might maximize profit. An optimizing
strategy is the one that achieves the best balance among multiple goals.

Implementing the Decision
The decision-making process does not end once a choice is made. The chosen alter-
native must be implemented. Sometimes the people involved in making the choice
must put it into effect. At other times, they delegate the responsibility for implemen-
tation to others, such as when a top management team changes a policy or operating
procedure and has operational managers carry out the change.

Unfortunately, sometimes people make decisions but don’t take action. Imple-
menting may fail to occur when talking a lot is mistaken for doing a lot; if people just
assume that a decision will “happen”; when people forget that merely making a deci-
sion changes nothing; when meetings, plans, and reports are seen as “actions,” even if
they have no effect on what people actually do; and if managers don’t check to ensure
that what was decided was actually done. 29

Managers should plan implementation carefully. Adequate planning requires sev-
eral steps: 30

1. Determine how things will look when the decision is fully operational.
2. Chronologically order, perhaps with a flow diagram, the steps necessary to

achieve a fully operational decision.
3. List the resources and activities required to implement each step.
4. Estimate the time needed for each step.
5. Assign responsibility for each step to specific individuals.

Decision makers should presume that things will not go smoothly during imple-
mentation. It is very useful to take a little extra time to identify potential problems and
identify potential opportunities associated with implementation. Then you can take
actions to prevent problems and also be ready to seize on unexpected opportunities.
The following questions are useful:

What problems could this action cause?
What can we do to prevent the problems?
What unintended benefits or opportunities could arise?
How can we make sure they happen?
How can we be ready to act when the opportunities come?

Many of the chapters in this book are concerned with implementation issues: how
to implement strategy, allocate resources, organize for results, lead and motivate peo-
ple, manage change, and so on. View the chapters from that perspective, and learn as
much as you can about how to implement properly.

Evaluating the Decision
The final stage in the decision-making process is evaluating the decision. It involves
collecting information on how well the decision is working. Quantifiable goals—a
20 percent increase in sales, a 95 percent reduction in accidents, 100 percent on-time

optimizing

Achieving the best possible
balance among several goals.

It’s easy to
become so
focused on

maximizing on
one goal that

you lose sight of
other important

goals. You’re optimizing if you
make sure that no important

result suffers too much,
unnecessarily.

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Managerial Decision Making Chapter 3 95

deliveries—can be set before the solution to the problem is implemented. Then objec-
tive data can be gathered to accurately determine the success or failure of the decision.

Decision evaluation is useful whether the conclusion is positive or negative. Feed-
back that suggests the decision is working implies that the decision should be con-
tinued and perhaps applied elsewhere in the organization. Negative feedback means
that either (1) implementation will require more time, resources, effort, or thought
or (2) the decision was a bad one.

If the decision appears inappropriate, it’s back to the drawing board. Then the process
cycles back to the first stage: (re)definition of the problem. The decision-making pro-
cess begins anew, preferably with more information, new suggestions, and an approach
that attempts to eliminate the mistakes made the first time around. This is the stage
where Accurate Perforating finally began to see hope. When cost-cutting efforts could
not keep the company ahead of the competition or in favor with the company’s bank,
general manager Aaron Kamins hired a consultant to guide him in identifying more
alternatives and making more professional decisions about investment and marketing.
This stage of the implementation showed Kamins that the company needed better-
educated management, and he began taking executive education courses. Kamins real-
ized that the advice he had received from the managers at the Semrow subsidiary—to
invest in producing finished metal products—was wiser than he had realized. He
arranged new financing to purchase modern equipment, hired salespeople, developed a
Web site, and finally began to see profits from his improved decision making. 31

The Best Decision
How can managers tell whether they have made the best decision? While nothing can
guarantee a “best” decision, managers should at least be confident that they followed
proper procedures that will yield the best possible decision under the circumstances.
This means that the decision makers were appropriately vigilant in making the deci-
sion. Vigilance occurs when the decision makers carefully and conscientiously execute
all six stages of decision making, including making provisions for implementation and
evaluation. 32

Author and CEO Luda Kopeikina says managers can learn to make better decisions
by improving the processes they use. First, she says your decisions will get better if
you learn to manage stress, get enough rest, and put distractions aside when you need
to make important decisions. Next, you should define the consequences you are trying
to achieve and make sure the data you gather match the goals for your decision. Along
with this comes the vision of how your decision can play out when you implement it.
Finally, you need to develop the strength of character to take responsibility for the
consequences of your decision. Encourage debate so that you can see all the alterna-
tives, but if you are the decision maker, you must eventually end the debate, exercise
courage, and act on your responsibility as decision maker. 33

LO 3

vigilance

A process in which a decision
maker carefully executes all
stages of decision making.

Strong leadership and a vision of the future gave Greg Waldorf confidence to decide on
a change in the face of great uncertainty. Waldorf, chief executive of the dating Web site
eHarmony, believed the company needed to modify its advertising campaign. The prob-
lem, as Waldorf defined it, was that the company’s ads, in which several people talked
about their experience with the site, were meeting a previous need to explain what the
site does. But by now most people had become familiar with what eHarmony does; to
persuade new people to sign up, Waldorf believed, the company needed to connect with
them on a more emotional level.

Waldorf determined that the best way to generate an emotional response would be
with more in-depth examples. But as strongly as he felt, Waldorf also appreciated the risk

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96 Part One Foundations of Management

Even if managers reflect on their decision-making activities and conclude that they
executed each step conscientiously, they still will not know whether the decision will
work; after all, nothing guarantees a good outcome. But they will know that they did
their best to make the best possible decision.

of abandoning an ad campaign that had worked well in favor of new advertisements that
had no track record. Waldorf addressed the risk by first testing the new ads, in which one
couple per ad talked about their dating relationship, and then airing the campaign first in
Canada before moving into the larger U.S. market.

The initial response in Canada was so favorable that Waldorf considered bringing
the new ad campaign to the United States ahead of schedule. He ran the idea past his
chief operating officer, Greg Steiner, whose business judgment Waldorf values. Steiner
agreed with the decision to move ahead, a reaction that helped Waldorf make the call to
proceed.34

Melinda Miller opens her computer to show the eHarmony Web site at Stetson University in
Celebration, Florida. Miller vouches for eHarmony where the 32- year-old middle school teacher
completed her personality profile. Jack Stevison, an investment officer for a securities firm,
submitted his profile the very next day. They met in person and were engaged within four months.

Barriers to Effective Decision Making
Vigilance and full execution of the six-stage decision-making process are the exception
rather than the rule. But when managers use such rational processes, better decisions
result. 35 Managers who make sure they engage in these processes are more effective.

Why don’t people automatically invoke such rational processes? It is easy to neglect
or improperly execute these processes. The problem may be improperly defined, or
goals misidentified. Not enough solutions may be generated, or they may be evaluated
incompletely. A satisficing rather than maximizing choice may be made. Implementa-
tion may be poorly planned or executed, or monitoring may be inadequate or nonex-
istent. And decisions are influenced by subjective psychological biases, time pressures,
and social realities.

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Managerial Decision Making Chapter 3 97

Psychological Biases
Decision makers are far from objective in the way they gather, evaluate, and apply
information in making their choices. People have biases that interfere with objective
rationality. The examples that follow represent only a few of the many documented
subjective biases. 36

The illusion of control is a belief that one can influence events even when one has
no control over what will happen. Gambling is one example: Some people believe they
have the skill to beat the odds, even though most of the time they cannot. In business,
such overconfidence can lead to failure because decision makers ignore risks and fail
to objectively evaluate the odds of success. In addition, they may believe they can do
no wrong, or hold a general optimism about the future that can lead them to believe
they are immune to risk and failure. 37 In addition, managers may overrate the value
of their experience. They may believe that a previous project met its goals because
of their decisions, so they can succeed by doing everything the same way on the next
project. Rohit Girdhar admits that he held this type of bias until he tried a computer
simulation that he assumed would confirm his skills as an experienced manager of
software programmers. In the simulation, the workload increased and he hired more
workers, as he had in his prior jobs. But the added workers weren’t as productive as
his experience told him they would be, and his project fell behind. Girdhar learned to
question his assumptions before making decisions. 38

Framing effects refer to how problems or decision alternatives are phrased or pre-
sented and how these subjective influences can override objective facts. In one exam-
ple, managers indicated a desire to invest more money in a course of action that was
reported to have a 70 percent chance of profit than in one said to have a 30 percent
chance of loss. 39 The choices were equivalent in their chances of success; it was the
way the options were framed that determined the managers’ choices.

Managers may be quick to frame a problem as being similar to problems they have
already handled, so they don’t search for new alternatives. For example, when CEO
Richard Fuld tackled financial problems at Lehman Brothers as the mortgage market
tumbled, he assumed that the situation was much the same as when he had handled
a previous financial crisis in the late 1990s. Unfortunately for Lehman Brothers, the
recent crisis was far worse. In late 2008 the firm declared bankruptcy—the largest in
U.S. history—helping to send global financial markets into a tailspin. Similarly, when
the head of the operations center of the Department of Homeland Security prepared for
Hurricane Katrina as it headed for New Orleans, he assumed the storm would be like
Florida hurricanes he had prepared for in the past. As information came in, he focused on
the data that fit his expectations, but Katrina turned out to be far more devastating. 40

Often decision makers discount the future. That is, in their evaluation of alterna-
tives, they weigh short-term costs and benefits more heavily than longer-term costs and
benefits. Consider your own decision about whether to go for a dental checkup. The
choice to go poses short-term financial costs, anxiety, and perhaps physical pain. The
choice not to go will inflict even greater costs and more severe pain if dental problems
worsen. How do you choose? Many people decide to avoid the short-term costs by not
going for regular checkups, but end up facing much greater pain in the long run.

The same bias applies to students who don’t study, weight watchers who sneak
dessert or skip an exercise routine, and people who take the afternoon off to play
golf when they really need to work. It can also affect managers who hesitate to invest
funds in research and development programs that may not pay off until far into the
future. In all these cases, the avoidance of short-term costs or the seeking of short-
term rewards results in negative long-term consequences.

In contrast, when U.S. companies sacrifice present value to invest for the future—
such as when Weyerhaeuser incurs enormous costs for its reforestation efforts that
won’t lead to harvest until 60 years in the future—it seems the exception rather than
the rule. Discounting the future partly explains governmental budget deficits, envi-
ronmental destruction, and decaying urban infrastructure.41

illusion of control

People’s belief that they can
influence events, even when
they have no control over
what will happen.

framing effects

A decision bias influenced by
the way in which a problem
or decision alternative is
phrased or presented.

discounting the
future

A bias weighting short-term
costs and benefits more
heavily than longer-term
costs and benefits.

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98 Part One Foundations of Management

Time Pressures
In today’s rapidly changing business environment, the premium is on acting quickly
and keeping pace. The most conscientiously made business decisions can become
irrelevant and even disastrous if managers take too long to make them.

How can managers make decisions quickly? Some natural tendencies, at least for
North Americans, might be to skimp on analysis (not be too vigilant), suppress conflict,
and make decisions on one’s own without consulting other managers. 42 These strate-
gies may speed up decision making, but they reduce decision quality. Carl Camden,
CEO of Kelly Services, believed that rapid-fire decisions were the sign of a dynamic
executive until he saw how this approach could hurt decision quality. In light of some
early mistakes, Camden now believes the habit of fast decisions is related to the “trap
of being all-knowing.” 43

In fact, the “speed trap” can be as dangerous as moving too slowly. 44 In an Internet
start-up that went bankrupt, fast decisions initially helped the firm achieve its growth
objectives. Early on, the founders did everything they could to create a sense of
urgency: they planned a meeting to “light a fire under the company,” calling it a “state-
of-emergency address” with the purpose of creating “the idea of panic with an emerg-
ing deadline.” Speed became more important than content. They failed to consider
multiple alternatives, used little information, didn’t fully acknowledge competing
views, and didn’t consult outside advisers. They never considered slowing down to be
an option. This speed trap syndrome is a potential pathology for organizations under
pressure to make fast decisions.

Can managers under time pressure make decisions that are timely and of high qual-
ity? A recent study of effective decision-making processes in microcomputer firms—a
high-tech, fast-paced industry—revealed the tactics that such companies use. 45 First,
instead of relying on old data, long-range planning, and futuristic forecasts, they focus
on real-time information: current information obtained with little or no time delay.
For example, they constantly monitor daily operating measures like work in process
rather than checking periodically the traditional accounting-based indicators such as
profitability.

Second, they involve people more effectively and efficiently in the decision-making pro-
cess. They rely heavily on trusted experts, and this yields both good advice and the
confidence to act quickly despite uncertainty. They also take a realistic view of conflict:
They value differing opinions, but they know that if disagreements are not resolved,
the top executive must make the final choice in the end. Slow-moving firms, in con-
trast, are stymied by conflict. Like the fast-moving firms they seek consensus, but
when disagreements persist, they fail to come to a decision.

Social Realities
Many decisions are made by a group rather than by an individual manager. In slow-
moving firms, interpersonal factors decrease decision-making effectiveness. Even the
manager acting alone is accountable to the boss and to others and must consider the
preferences and reactions of many people. Important managerial decisions are marked
by conflict among interested parties. Therefore, many decisions are the result of
intensive social interactions, bargaining, and politicking.

The remainder of this chapter focuses on the social context of decisions, including
decision making in groups and the realities of decision making in organizations.

You’ll feel pressure to
make quick decisions,

but then it becomes
easier to make mistakes.

Fortunately, you can be vigilant
while moving quickly, and you

can avoid the “speed trap.”

Decision Making in Groups
Sometimes a manager finds it necessary to convene a group of people for the pur-
pose of making an important decision. Some advise that in today’s complex business
environment, significant problems should always be tackled by groups. 46 As a result,

LO 4

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Managerial Decision Making Chapter 3 99

managers must understand how groups operate and how to use them to improve deci-
sion making. You will learn much more about how groups work later in the book.

The basic philosophy behind using a group to make decisions is captured by the
adage “two heads are better than one.” But is this statement really valid? Yes, it
is—potentially.

If enough time is available, groups usually make higher-quality decisions than most
individuals acting alone. However, groups often are inferior to the best individual. 47

How well the group performs depends on how effectively it capitalizes on the
potential advantages and minimizes the potential problems of using a group. Table 3.2
summarizes these issues.

Potential Advantages of Using a Group
If other people have something to contribute, using groups to make a decision offers
at least five potential advantages: 48

1. More information is available when several people are making the decision.
If one member doesn’t have all the facts or the pertinent expertise, another
member might.

2. A greater number of perspectives on the issues, or different approaches to solving
the problem, are available. The problem may be new to one group member
but familiar to another. Or the group may need to consider other viewpoints—
financial, legal, marketing, human resources, and so on—to achieve an optimal
solution.

3. Group discussion provides an opportunity for intellectual stimulation. It can get
people thinking and unleash their creativity to a far greater extent than would
be possible with individual decision making.

These three potential advantages of using a group improve the odds that a more fully
informed, higher-quality decision will result. Thus, managers should involve people
with different backgrounds, perspectives, and access to information. They should not
involve only their cronies who think the same way they do.

4. People who participate in a group discussion are more likely to understand why
the decision was made. They will have heard the relevant arguments both for
the chosen alternative and against the rejected alternatives.

5. Group discussion typically leads to a higher level of commitment to the decision.
Buying into the proposed solution translates into high motivation to ensure
that it is executed well.

The last two advantages improve the chances that the decision will be implemented
successfully. Therefore, managers should involve the people who will be responsible
for implementing the decision as early in the deliberations as possible.

Potential Problems of Using a Group
Things can go wrong when groups make decisions. Most of the potential problems
concern the process through which group members interact with one another: 49

1. Sometimes one group member dominates the discussion. When this occurs—
such as when a strong leader makes his or her preferences clear—the result is

Using a group may seem
to slow down decision
making. If one person

dominates the discussion,
it may feel like you’re

speeding up the decision
making. But one dominant

person reduces decision
quality, and most of you will

have wasted your time.

TABLE 3.2
Pros and Cons of Using a
Group to Make Decisions

TAB
Pros
Grou

Potential Advantages Potential Disadvantages

1. Larger pool of information. 1. One person dominates.

2. More perspectives and approaches. 2. Satisficing.

3. Intellectual stimulation. 3. Groupthink.

4. People understand the decision. 4. Goal displacement.

5. People are committed to the decision.

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100 Part One Foundations of Management

the same as it would be if the dominant individual made the
decision alone. Individual dominance has two disadvantages. First,
the dominant person does not necessarily have the most valid
opinions—and may even have the most unsound ideas. Second,
even if that person’s preference leads to a good decision, convening
as a group will have been a waste of everyone else’s time.

2. Satisficing is more likely with groups. Most people don’t like
meetings and will do what they can to end them. This may include
criticizing members who want to continue exploring new and better
alternatives. The result is a satisficing rather than an optimizing or
maximizing decision.

3. Pressure to avoid disagreement can lead to a phenomenon called
groupthink. Groupthink occurs when people choose not to
disagree or raise objections because they don’t want to break
up a positive team spirit. Some groups want to think as one,
tolerate no dissension, and strive to remain cordial. Such groups
are overconfident, complacent, and perhaps too willing to take
risks. Pressure to go along with the group’s preferred solution
stifles creativity and the other behaviors characteristic of vigilant
decision making.

4. Goal displacement often occurs in groups. The goal of group members should
be to come up with the best possible solution to the problem. But when goal
displacement occurs, new goals emerge to replace the original ones. It is
common for two or more group members to have different opinions and
present their conflicting cases. Attempts at rational persuasion become heated
disagreement. Winning the argument becomes the new goal. Saving face and
defeating the other person’s idea become more important than solving the
problem.

Effective managers pay close attention to the group process; they manage it care-
fully. You have just read about the pros and cons of using a group to make deci-
sions, and you are about to read how to manage the group’s decision-making process.
Chapter 12, on leadership, helps you decide when to use groups to make decisions.

groupthink

A phenomenon that occurs
in decision making when
group members avoid
disagreement as they strive
for consensus.

Keeping focus on the goal is critical
for team members, even when
there are conflicting viewpoints.

goal displacement

A condition that occurs
when a decision-making
group loses sight of its
original goal and a new, less
important goal emerges.

Managing Group Decision Making
As Figure 3.3 illustrates, effectively managing group decision making has three
requirements: (1) an appropriate leadership style, (2) the constructive use of disagree-
ment and conflict, and (3) the enhancement of creativity.

Leadership Style
The leader of a decision-making body must attempt to minimize process-related
problems. The leader should avoid dominating the discussion or allowing another
individual to dominate. Less vocal group members should be encouraged to air their
opinions and suggestions, and all members should be asked for dissenting viewpoints.

At the same time, the leader should not allow the group to pressure people into
conforming. The leader should be alert to the dangers of groupthink and satisficing.
Also, she should be attuned to indications that group members are losing sight of the
primary objective: to come up with the best possible solution to the problem.

These suggestions have two implications. First, don’t lose sight of the problem.
Second, make a decision! Slow-moving organizations whose group members can’t
come to an agreement will be standing still while their competitors move ahead.

LO 5

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Managerial Decision Making Chapter 3 101

Constructive Conflict
Total and consistent agreement among group members can be destructive. It can
lead to groupthink, uncreative solutions, and a waste of the knowledge and diverse
viewpoints that individuals bring to the group. Therefore, a certain amount of con-
structive conflict should exist. 50 Some companies, including United Parcel Service,
take steps to ensure that conflict and debate are generated within their management
teams. 51

The most constructive type of conflict is cognitive conflict, or differences in per-
spectives or judgments about issues. In contrast, affective conflict is emotional and
directed at other people. Affective conflict is likely to be destructive to the group
because it can lead to anger, bitterness, goal displacement, and lower-quality decisions.
Cognitive conflict, in contrast, can air legitimate differences of opinion and develop
better ideas and problem solutions. Conflict, then, should be task related rather than
personal. 52 But even task-related conflict can hurt performance; 53 disagreement is
good only when managed properly.

Conflict can be generated formally through structured processes. 54 Two techniques
that purposely program cognitive conflict into the decision-making process are devil’s
advocacy and the dialectic method.

A devil’s advocate has the job of criticizing ideas. The group leader can formally
assign people to play this role. Requiring people to point out problems can lessen
inhibitions about disagreeing and make the conflict less personal and emotional.

An alternative to devil’s advocacy is the dialectic. The dialectic goes a step beyond
devil’s advocacy by requiring a structured debate between two conflicting courses of
action. 55 The philosophy of the dialectic stems from Plato and Aristotle, who advo-
cated synthesizing the conflicting views of a thesis and an antithesis. Structured debates
between plans and counterplans can be useful prior to making a strategic decision. For
example, one team might present the case for acquiring a firm while another team
advocates not making the acquisition.

Constructive conflict does not need to be generated on such a formal basis and
is not solely the leader’s responsibility. Any team member can introduce cognitive

cognitive conflict

Issue-based differences in
perspectives or judgments.

affective conflict

Emotional disagreement
directed toward other
people.

devil’s advocate

A person who has the job
of criticizing ideas to ensure
that their downsides are fully
explored.

dialectic

A structured debate
comparing two conflicting
courses of action.

Effective group
decision making

Creativity
1. Brainstorm.
2. Avoid criticizing.
3. Exhaust ideas.
4. Combine ideas.

Leadership
1. Avoid domination.
2. Encourage input.
3. Avoid groupthink
and satisficing.
4. Remember goals.

Constructive conflict
1. Air legitimate differences.
2. Stay task-related.
3. Be impersonal.
4. Play devil’s advocate.

FIGURE 3.3
Managing Group Decision
Making

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102 Part One Foundations of Management

conflict by being honest with opinions, by being unafraid to disagree with others, by
pushing the group to action if it is taking too long or making the group slow down
if necessary, and by advocating long-term considerations if the group is too focused
on short-term results. Introducing constructive conflict is a legitimate and necessary
responsibility of all group members interested in improving the group’s decision-
making effectiveness.

Encouraging Creativity
As you’ve already learned, ready-made solutions to a problem can be inadequate or
unavailable. In such cases, custom-made solutions are necessary, so the group must be
creative in generating ideas.

Some have said we are in the midst of the next great business revolution: the
“creative revolution.” 56 Said to transcend the agricultural, industrial, and informa-
tion revolutions, the most fundamental unit of value in the creativity revolution
is ideas. Creativity is more than just an option; it is essential to survival. Allowing
people to be creative may be one of the manager’s most important and challenging
responsibilities.

You might be saying to yourself, “I’m not creative.” But even if you are not an artist
or a musician, you do have potential to be creative in countless other ways. You are
being creative if you (1) bring a new thing into being ( creation ); (2) join two previ-
ously unrelated things ( synthesis ); or (3) improve something or give it a new applica-
tion ( modification ). You don’t need to be a genius in school either—Thomas Edison
and Albert Einstein were not particularly good students. Nor does something need to
change the world to be creative; the “little things” can always be done in new, creative
ways that add value to the product and the customer.

How do you “get” creative? 57 Recognize the almost infinite “little” opportunities
to be creative. Assume you can be creative if you give it a try. Escape from work once

in a while. Read widely, and try
new experiences. Take a course
or find a good book about cre-
ative thought processes; plenty
are available. And be aware that
creativity is social; your creativity

will be affected by your social relationships at work, including your connections with
other people outside your immediate close network. 58 Talk to people, often, about the
issues and ideas with which you are wrestling.

How do you “get” creativity out of other people? 59 Give creative efforts the credit
they are due, and don’t punish creative failures. Avoid extreme time pressure, if pos-
sible. 60 Stimulate and challenge people intellectually. Listen to employees’ ideas, and
allow enough time to explore different ideas. Put together groups of people with
different styles of thinking and behaving. Get your people in touch with customers,
and let them bounce ideas around. Protect your people from managers who demand
immediate payoffs, who don’t understand the importance of creative contributions, or
who try to take credit for others’ successes. And strive to be creative yourself—you’ll
set a good example.

People are likely to be more creative if they believe they are capable, if they know
that their coworkers expect creativity, and if they believe that their employer values
creativity. 61 As a manager, you can do much to help employees develop these beliefs by
how you listen, what you allow, and what you reward and punish. At a large consumer
products company, management signals that it values creativity by inviting managers
to post stories on the company’s intranet about ideas their employees have suggested
and the results of implementation. The company also awards “innovation bonuses”
linked to how these innovations have benefited the organization. 62

LO 6

The bottom line
Innovation

Most creative ideas come, not
from the lone genius in the

basement laboratory, but from
people talking and working

together.

“I invented nothing new. I simply assembled into a car the discoveries of other men
behind whom were centuries of work.”

Henry Ford

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Managerial Decision Making Chapter 3 103

Brainstorming
A common technique used to elicit
creative ideas is brainstorming. In
brain storming, group members gen-
erate as many ideas about a problem
as they can. As the ideas are pre-
sented, they are posted so that every-
one can read them, and people can
use the ideas as building blocks. The
group is encouraged to say anything
that comes to mind, with one excep-
tion: No criticism of other people or
their ideas is allowed.

In the proper brainstorming
environment—free of criticism—
people are less inhibited and more
likely to voice their unusual, creative,
or even wild ideas. By the time people
have exhausted their ideas, a long list
of alternatives has been generated.
Only then does the group turn to the
evaluation stage. At that point, many different ideas can be considered, modified, or
combined into a creative, custom-made solution to the problem.

Brainstorming isn’t necessarily as effective as some people think. Sometimes in
a brainstorming session people are inhibited and anxious, they conform to others’
ideas, they set low standards, and they engage in noncreative behaviors including
cocktail party–type conversations—complimenting one another, repeating ideas, tell-
ing stories—that are nice but don’t promote creativity. Fortunately, there are tech-
niques that help, including brainwriting (taking time to silently write down ideas),
using trained facilitators, setting high performance goals, brainstorming electroni-
cally so that people aren’t competing for air time, and even building a playground
with fun elements that can foster creativity. 64

Brainstorming is a technique
used to generate as many ideas
as possible to solve a problem.
You have probably engaged in
brainstorming sessions for various
class or work projects.

At Miron Construction Company, Theresa Lehman fosters creative thinking about
sustainability—the effort to minimize the use of resources, especially those that are pol-
luting and nonrenewable. Besides helping clients plan more sustainable buildings, Lehman,
the director of sustainability at the Neenah, Wisconsin, building contractor, helps Miron
itself operate more sustainably.

Lehman defines the problem—or opportunity—of running a sustainable construction
company as one that extends beyond a building’s features. Rather, all efforts to reduce
waste contribute to sustainability. Says Lehman, “Everyone needs to focus on doing things
more effectively and efficiently by reducing resources and eliminating waste.” She seeks
ideas from all employees and ensures that every idea receives careful consideration. For
example, an employee suggested switching from paper paychecks to direct deposit for all
employees. Besides saving paper, that change cuts printing and postage expenses. By tak-
ing ideas seriously and then communicating the practical benefits, Lehman reinforces the
value of sustainability.

Lehman is ready with plenty of examples about the financial soundness of sustain-
ability. For example, as Miron adds to and renovates its own headquarters, it is installing
geothermal heating and cooling, which will pay for itself in five years, and it is replacing
interior lights with LED bulbs that are expected to save about $12,000 in energy costs
over the life of the bulbs. With benefits like these, it’s no wonder that Lehman has been
able to make sustainability a widely shared value at Miron.63

brainstorming

A process in which group
members generate as many
ideas about a problem as they
can; criticism is withheld until
all ideas have been proposed.

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104 Part One Foundations of Management

Organizational Decision Making
Individuals and groups make decisions constantly, throughout every organization. To
understand decision making in organizations, a manager must consider (1) the con-
straints decision makers face, (2) organizational decision processes, and (3) decision
making during a crisis.

Constraints on Decision Makers
Organizations—or, more accurately, the people who make important decisions—
cannot do whatever they wish. They face various constraints—financial, legal, market,
human, and organizational—that inhibit certain actions. Capital or product markets
may make an expensive new venture impossible. Legal restrictions may constrain the
kinds of international business activities in which a firm can participate. Labor unions
may defeat a contract proposed by management, and managers and investors may
block a takeover attempt. Even brilliant ideas must take into account the practical
matters of implementation. 65

Suppose you have a great idea that will provide a revolutionary service for your
bank’s customers. You won’t be able to put your idea into action immediately. You
will have to sell it to the people who can give you the go-ahead and also to those
whose help you will need to carry out the project. You might start by convincing your
boss of your idea’s merit. Next, the two of you may have to hash it out with a vice
president. Then maybe the president has to be sold. At each stage, you must listen
to these individuals’ opinions and suggestions and often incorporate them into your
original concept. Ultimately, you will have to derive a proposal acceptable to others.

In addition, ethical and legal considerations must be thought out carefully. Deci-
sion makers must consider ethics and the preferences of many constituent groups—
the realities of life in organizations. You will have plenty of opportunity to think about
ethical issues in Chapter 5.

Models of Organizational Decision Processes
Just as with individuals and groups, organizational decision making historically was
described with rational models like the one depicted earlier in Figure 3.2 . But Nobel
laureate Herbert Simon challenged the rational model and proposed an important
alternative called bounded rationality. According to Simon’s bounded rationality,
decision makers cannot be truly rational because (1) they have imperfect, incomplete
information about alternatives and consequences; (2) the problems they face are so
complex; (3) human beings simply cannot process all the information to which they
are exposed; (4) there is not enough time to process all relevant information fully; and
(5) people, including managers within the same firm, have conflicting goals.

When these conditions hold—and they do for most consequential managerial
decisions—perfect rationality will give way to more biased, subjective, messier deci-
sion processes. For example, the incremental model of decision making occurs when
decision makers make small decisions, take little steps, move cautiously, and move in
piecemeal fashion toward a bigger solution. The classic example is the budget process,
which traditionally begins with the budget from the previous period and makes incre-
mental decisions from that starting point.

The coalitional model of decision making arises when people disagree on goals or
compete with one another for resources. The decision process becomes political, as
groups of individuals band together and try collectively to influence the decision. Two
or more coalitions form, each representing a different preference, and each tries to use
power and negotiations to sway the decision.

Organizational politics, in which people try to influence organizational decisions so
that their own interests will be served, can reduce decision-making effectiveness. 66 One
of the best ways to reduce such politics, and to make sure that constructive cognitive
conflict does not degenerate into affective conflict, is to create common goals for members

LO 7

The bottom line
Innovation

You may be an innovator if
you come up with a creative

idea. But you’re not yet, until
you implement it.

bounded rationality

A less-than-perfect form of
rationality in which decision
makers cannot be perfectly
rational because decisions
are complex and complete
information is unavailable or
cannot be fully processed.

incremental model

Model of organizational
decision making in which
major solutions arise through
a series of smaller decisions.

coalitional model

Model of organizational
decision making in which
groups with differing
preferences use power and
negotiation to influence
decisions.

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F R O M T H E P A G E S O F

Managerial Decision Making Chapter 3 105

of the team—that is, make the decision-making process a collaborative, rather than a
competitive, exercise by establishing a goal around which the group can rally. In one
study, top management teams with stated goals like “build the biggest financial war
chest” for an upcoming competitive battle, or “create the computer firm of the decade,”
or “build the best damn machine on the market” were less likely to have dysfunctional
conflict and politics between members. 67 On a personal level, if you find yourself in
a conflict, you and your adversary may be focused on the wrong goals. Work to find
common ground in the form of an important goal that you both want to achieve.

The garbage can model of decision making occurs when people aren’t sure of
their goals, or disagree about the goals, and likewise are unsure of or in disagreement
about what to do. This situation occurs because some problems are so complex that
they are not well understood and also because decision makers move in and out of the
decision process because they have so many other things to attend to as well. This
model implies that some decisions are chaotic and almost random. You can see that
this is a dramatic departure from rationality in decision making.

Decision Making in a Crisis
In crises, managers must make decisions under a great deal of pressure. 68 You may
know some of the most famous recent crises: the explosion of BP’s oil refinery in
Texas, the devastation of hurricanes along the Gulf Coast, the sickening of people by
tainted peanuts, and the recent economic crisis discussed in the “From the Pages of
BusinessWeek ” feature.

garbage can model

Model of organizational
decision making depicting
a chaotic process and
seemingly random decisions.

LO 8

Managing Through a Crisis: The New Rules
In times of turmoil, opportunities abound. All managers must do is keep their companies afloat,
their eyes peeled for openings, and their bearings—as the old rules wash away. What do Car-
negie Steel and Hewlett-Packard (HPQ) have in common? Both were born at a time when
people thought the world was falling apart. Andrew Carnegie launched his first steel mill
during the Panic of 1873, the start of a long depression. He took advantage of low costs
to build an industrial giant that made him the world’s richest man. Bill Hewlett and Dave
Packard showed similar courage when they launched HP from a Palo Alto (Calif.) garage
toward the end of the Great Depression.

History has shown that crisis breeds opportunity. Business leaders may have to cut costs
to survive 2009, but the smart ones are also out there looking for prospects. They are will-
ing to take the type of bold move that IBM (IBM) made during the recessionary days of 1981
when CEO John R. Opel aggressively rolled out the company’s landmark personal computer
just as PC demand soared. Even in the current downturn, there are companies like AT&T
(T), which recently announced plans to buy two companies for a total of $1.2 billion. “A
recession creates winners and losers just like a boom,” observes Mauro F. Guillen, a profes-
sor of international management at the University of Pennsylvania’s Wharton School.

Managers are now dealing with everything from shattered consumer confidence to
tighter credit, not to mention the likelihood of a tougher regulatory environment. Deci-
sions that made sense two years ago may prove disastrous in this climate—from giving
outsize rewards to those who take big risks to borrowing heavily just because inter-
est rates are low. Years of excessive borrowing have taken a toll: An unprecedented
two-thirds of nonfinancial American companies covered by Standard & Poor’s have
speculative-grade, or junk-rated, debt. (S&P, like BusinessWeek, is a unit of The McGraw-
Hill Companies (MHP).) On the whole, U.S. businesses face a $238 billion wave of debt
maturities that will come due by the end of 2009.

http://www.businessweek.com/magazine/content/09_03/b4116030884620.htm

SOURCE: E. Thornton, “Managing through a Crisis: The New Rules,” BusinessWeek, January 19, 2009, p. 30.

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106 Part One Foundations of Management

In two famous cases from the past, Union Carbide’s gas leak in Bhopal, India, killed
thousands of people, and several people were killed in the cyanide poisonings using
Johnson & Johnson’s Tylenol. As outlined in Table 3.3 , Union Carbide and J&J han-
dled their crises in very different ways. Today, J&J is still known for its effective han-
dling of the crisis, as outlined in the table.

Information technology is a new arena for a crisis. Businesses, homes, government
agencies, hospitals, and other organizations send critical information through the
Internet and private networks around the clock, and any technical failure—sometimes
accidental, sometimes maliciously intentional— could be magnified by the speed and
widespread use of information technology. One vulnerable area is the electrical grid,
which links utilities and carries power to each user. Information technology systems
allow utility employees to control the grid remotely. Recently, information came
to light that hackers have gained access to the U.S. electrical grid, leaving behind
computer programs that theoretically would permit them to interfere with the grid’s
operations. 69 Such programs can be purged, but the biggest challenge is preventing or
catching each attempt to gain unauthorized access to the system.

The response to IT-related crises must involve senior-level executives in online
communication, both to protect the firm’s reputation and to communicate with out-
side experts, news sources, and key external and internal stakeholders. Managers can
use IT to monitor and respond immediately to problems including scandals, boycotts,
rumors, cyber attacks, and other crises. 70

Although many companies don’t concern themselves with crisis management, it is
imperative that it be on management’s agenda. An effective plan for crisis manage-
ment (CM) should include the following elements. 71

TABLE 3.3
Two Disasters

Union Carbide Johnson & Johnson

Failed to identify as a crisis the public
perception that the company was a
negligent, uncaring killer.

Identified the crisis of public perception
that Tylenol was unsafe and J&J was not
in control.

No planning before reacting:

CEO immediately went to India to
inspect damage.

All executives involved.

Planned before reacting:

CEO picked one executive to head
crisis team.

Rest of company involved only on a
need-to-know basis.

Set no goals. Set goals to:

Stop the killings.

Find reasons for the killings.

Provide assistance to the victims.

Restore Tylenol’s credibility.

Action: Damage control/stonewalling.

Distanced itself.

Misrepresented safety conditions.

Did not inform spokespeople.

Adopted bunker mentality.

Action: Gave complete information.

Worked with authorities.

Pulled Tylenol from shelves (first-year
cost: $150 million).

Used strong marketing program.

Reissued Tylenol with tamper-proof
packaging.

Chronic problems continued:

Public confidence low.

Costly litigation.

No formal crisis plan resulted.

Crisis resolved:

Public confidence high.

Sales high again.

Well-documented crisis management
plan.

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Managerial Decision Making Chapter 3 107

1. Strategic actions such as integrating CM into strategic planning and official policies.
2. Technical and structural actions such as creating a CM team and dedicating a

budget to CM.
3. Evaluation and diagnostic actions such as conducting audits of threats and

liabilities, and establishing tracking systems for early warning signals.
4. Communication actions such as providing training for dealing with the media,

local communities, and police and government officials.
5. Psychological and cultural actions such as showing a strong top management

commitment to CM and providing training and psychological support services
regarding the human and emotional impacts of crises.

Ultimately, management should be able to answer the following questions: 72

What kinds of crises could your company face?
Can your company detect a crisis in its early stages?
How will it manage a crisis if one occurs?
How can it benefit from a crisis after it has passed?

The last question makes an important point: A crisis, managed effectively, can have
benefits. For example, Hurricanes Katrina and Rita devastated businesses along the Gulf
Coast, but some managers were able to respond effectively. Michael de la Houssaye,
who with his father runs the C&D Agency, which serves the electricity distribution
industry, set up a new office and as soon as possible began communicating with clients
via e-mail. As you can imagine, demand
for generators and other equipment
was enormous in the months follow-
ing the storm. De la Houssaye took
advantage of the demand to shift the
focus to selling generators, rather than
meeting with clients to discuss new
products. More important, perhaps,
the agency switched from paper docu-
ments to electronic order processing
and communications, which yielded
greater efficiency. “We’re operating
here better than I think we were
before the hurricane,” de la Houssaye
concluded. 73

Thus, with effective crisis manage-
ment, old as well as new problems can
be resolved, new strategies and com-
petitive advantages may appear, and positive change can emerge. And if someone steps
in and manages the crisis well, a hero is born. The view that Xerox was floundering,
perhaps even near bankruptcy, is one reason that observers are so impressed with
Anne Mulcahy’s decisions, which turned the company around, as described in the
“Management Close-Up: Assessing Outcomes and Seizing Opportunities” feature.

As a leader during a crisis, don’t pretend that nothing happened (as did managers
at one firm after a visitor died in the hallway despite employees’ efforts to save him). 74
Communicate and reinforce the organization’s values. Try to find ways for people to
support one another, and remember that people will take cues from your behavior.
You should be optimistic but brutally honest. Show emotion, but not fear. “You have
to be cooler than cool,” says Gene Krantz of Apollo 13 ground control fame. But
don’t ignore the problems or downplay them and reassure too much; don’t create false
hopes. Give people the bad news straight—you’ll gain credibility, and when the good
news comes, it will really mean something.

An aerial infrared image of a
wildfire area is displayed in
the background as California
Governor Arnold Schwarzenegger,
state fire officials, and NASA
employees team up to address
the wildfire crisis. This crisis
management team met to discuss
the important role of NASA’s
remotely piloted aircraft, named
Ikhana. The unmanned aircraft
carrying a NASA infrared scanning
sensor flew over much of the
state gathering information that
was delivered to fire commanders
in the field, helping them to
understand the terrain and
behavior of the state’s most
dangerous fires.

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108 Part One Foundations of Management

Management Close-Up
ASSESSING OUTCOMES AND SEIZING
OPPORTUNITIES
As CEO of a floundering company, Anne Mulcahy had to make
hard choices. She closed divisions, eliminated 34,000 jobs, and
trimmed billions in expenses. Mulcahy believes companies in cri-
sis need leaders to make speedy decisions, and she claims that
“speed trumps perfection.” Inaction, when action is needed, she
says, is often worse than doing the wrong thing.

With her team, Mulcahy restored Xerox to profitability. The
company paid its debts. Revenues are rising, and the company
recently hit $1 billion in net profit. In addition, the stock divi-
dend has been restored.

Mulcahy’s turnaround strategy emphasized communication
and teamwork, and the belief that Xerox would survive only if
it made a long-term commitment to innovation. Under Mulcahy,
Xerox has stepped up research and development funding,
investing nearly $1 billion a year and filling the pipeline with new
technologies. Since 2005, the company has introduced 100 new
products. Reflecting the spirit of a revived Xerox, the company
redesigned its decades-old logo with a lively new one. The logo
is a physical symbol of the company’s rebirth.

Today, Xerox is moving to an all-color world, where users
can print customized work on demand. It is also making strides in
digital technologies, helping customers put their records on digi-
tal files. Xerox also wants customers to print less. Erasable paper,
invented by Xerox, allows users to program what’s printed on
the sheet to disappear within 24 hours, enabling repeated reuse
and eliminating waste.

Anne Mulcahy’s brand of tough love seems to have worked.
Recently ranked number 10 on Forbes’ s list of the 100 most pow-
erful women and named CEO of the Year by CEO Magazine, she
masterminded the plan that pulled Xerox back from the brink. 75

• Instead of declaring bankruptcy, Mulcahy met with key leaders,
employees, and customers to enlist their help in turning the
company around. What are the potential advantages and
disadvantages to making such group decisions?

• Mulcahy could have focused solely on cost cutting and
increasing profits for existing products. How does her decision
to invest in research and development demonstrate leadership
and creativity in decision making?

Affective conflict, p. 101

Bounded rationality, p. 104

Brainstorming, p. 103

Certainty, p. 87

Coalitional model, p. 104

Cognitive conflict, p. 101

Conflict, p. 88

Contingency plans, p. 92

Custom-made solutions, p. 90

Devil’s advocate, p. 101

Dialectic, p. 101

Discounting the future, p. 97

Framing effects, p. 97

Garbage can model, p. 105

Goal displacement, p. 100

Groupthink, p. 100

Illusion of control, p. 97

Incremental model, p. 104

Maximizing, p. 92

Nonprogrammed decisions, p. 87

Optimizing, p. 94

Programmed decisions, p. 87

Ready-made solutions, p. 90

Risk, p. 88

Satisficing, p. 93

Uncertainty, p. 87

Vigilance, p. 95

KEY TERMS

Now that you have studied Chapter 3, you should be able to:

LO 1 Describe the kinds of decisions you will face as
a manager.

Most important managerial decisions are ill structured and charac-
terized by uncertainty, risk, and conflict. Yet managers are expected
to make rational decisions in the face of these challenges.

LO 2 Summarize the steps in making “rational”
decisions.

The ideal decision-making process involves six stages. The first,
identifying and diagnosing the problem (or opportunity), requires
recognizing a discrepancy between the current state and a desired
state and then delving below surface symptoms to uncover the
underlying causes of the problem. The second stage, generating

SUMMARY OF LEARNING OBJECTIVES

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Managerial Decision Making Chapter 3 109

and satisficing; and stay focused on the group’s goals. They
encourage constructive conflict via devil’s advocacy and the
dialectic, posing opposite sides of an issue or solutions to a
problem. They also encourage creativity through a variety of
techniques.

LO 6 Explain how to encourage creative decisions.
When creative ideas are needed, leaders should set a good
example by being creative themselves. They should recognize
the almost infinite “little” opportunities for creativity and have
confidence in their own creative abilities. They can inspire
creativity in others by pushing for creative freedom, reward-
ing creativity, and not punishing creative failures. They should
encourage interaction with customers, stimulate discussion, and
protect people from managers who might squelch the creative
process. Brainstorming is one of the most popular techniques
for generating creative ideas.

LO 7 Discuss the processes by which decisions are
made in organizations.

Decision making in organizations is often a highly complex pro-
cess. Individuals and groups are constrained by a variety of factors
and constituencies. In practice, decision makers are boundedly
rational rather than purely rational. Some decisions are made
on an incremental basis. Coalitions form to represent different
preferences. The process is often chaotic, as depicted in the gar-
bage can model. Politics can also enter the process, decisions are
negotiated, and crises come and go.

LO 8 Describe how to make decisions in a crisis.
Crisis conditions make sound, effective decision making more
difficult. However, it is possible for crises to be managed well.
A strategy for crisis management can be developed beforehand,
and the mechanisms readied, so that if crises do arise, decision
makers are prepared.

alternative solutions, requires adopting ready-made or designing
custom-made solutions. The third, evaluating alternatives, means
predicting the consequences of different alternatives, sometimes
through building scenarios of the future. Fourth, a solution is
chosen; the solution might maximize, satisfice, or optimize. Fifth,
people implement the decision; this stage requires more careful
planning than it often receives. Finally, managers should evaluate
how well the decision is working. This means gathering objective,
valid information about the impact the decision is having. If the
evidence suggests the problem is not getting solved, either a bet-
ter decision or a better implementation plan must be developed.

LO 3 Recognize the pitfalls you should avoid when
making decisions.

Situational and human limitations lead most decision makers to
satisfice rather than maximize. Psychological biases, time pres-
sures, and the social realities of organizational life may prevent
rational execution of the six decision-making stages. But vigi-
lance and an understanding of how to manage decision-making
groups and organizational constraints will improve the process
and result in better decisions.

LO 4 Evaluate the pros and cons of using a group to
make decisions.

Advantages of using groups include more information, per-
spectives, and approaches brought to bear on problem solv-
ing; intellectual stimulation; greater understanding by all of the
final decision; and higher commitment to the decision once it is
made. Potential dangers or disadvantages of using groups include
individual domination of discussions, satisficing, groupthink, and
goal displacement.

LO 5 Identify procedures to use in leading a decision-
making group.

Effective leaders in decision-making teams avoid dominating
the discussion; encourage people’s input; avoid groupthink

1. Discuss Xerox Corporation in terms of risk, uncertainty,
and how its managers handled the company’s problems.
What is the current news on this company?

2. Identify some risky decisions you have made. Why did you
take the risks? How did they work out? Looking back, what
did you learn?

3. Identify a decision you made that had important unexpected
consequences. Were the consequences good, bad, or both?
Should you, and could you, have done anything differently in
making the decision?

4. What effects does time pressure have on your decision mak-
ing? In what ways do you handle it well and not so well?

5. Recall a recent decision that you had difficulty making.
Describe it in terms of the characteristics of managerial
decisions.

6. What do you think are some advantages and disadvantages
to using computer technology in decision making?

7. Do you think that when managers make decisions they fol-
low the decision-making steps as presented in this chapter?
Which steps are apt to be overlooked or given inadequate
attention? What can people do to make sure they do a
more thorough job?

8. Discuss the potential advantages and disadvantages of
using a group to make decisions. Give examples from your
experience.

9. Suppose you are the CEO of a major corporation and one
of your company’s oil tanks has ruptured, spilling thousands
of gallons of oil into a river that empties into the ocean.
What do you need to do to handle the crisis?

10. Identify some problems you want to solve. Brainstorm with
others a variety of creative solutions.

DISCUSSION QUESTIONS

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110 Part One Foundations of Management

CONCLUDING CASE

The Wallingford Bowling Center
A group of 12 lifelong friends put together $1,200,000 of their
own funds and built a $6,000,000, 48-lane bowling alley, near
Norfolk, Virginia. Two of the investors became employees of the
corporation. Ned Flanders works full-time as General Manager,
and James Ahmad, a licensed CPA, serves as Controller on a
part-time basis.

The beautiful, modern-day facility features a multilevel spa-
cious interior with three rows of 16 lanes on two separate levels
of the building, a full-service bar, a small restaurant, a game room
(pool, videogames, pinball), and two locker rooms. The facility
sits on a spacious lot with plenty of parking and room to grow.

The bowling center is located in the small blue-collar town
of Wallingford. There is no direct competition within the town.
The surrounding communities include a wide-ranging mix of eth-
nic groups, professionals, middle- to upper-middle-class private
homes, and apartment and condominium complexes ranging from
singles to young married couples to senior citizen retirement
units. Nearly 200,000 people live within 15 miles of Wallingford.

The bowling center is open 24 hours per day and has a staff
of 27 part- and full-time employees. After four years of opera-
tion, the partners find themselves frustrated with the low profit
performance of the business. While sales are covering expenses,
the partners are not happy with the end-of-year profit-sharing
pool. The most recent income statement follows:

Sales $1,844,000

CGS 315,000

GM 1,529,000

Operating expenses 1,466,000

Mortgage 460,000

Depreciation 95,000

Utilities 188,000

Maintenance 70,000

Payroll 490,000

Supplies 27,000

Insurance 136,000

Taxable income 63,000

Taxes 19,000

Net income $ 44,000

The bowling center operates at 100 percent capacity on
Sunday through Thursday nights from 6:00 p.m. until midnight.
Two sets of men’s leagues come and go on each of those nights,
occupying each lane with mostly five-person teams. Bowlers
from each league consistently spend money at both the bar and
restaurant. In fact, the men’s leagues combine to generate about
60 percent of total current sales.

The bowling center operates at about 50 percent capacity on
Friday and Saturday nights and on Saturday morning. The Friday
and Saturday “open bowling” nights include mostly teenagers,
young couples, and league members who come to practice in
groups of two or three. The Saturday morning group is a kids’
league, ages 10 through 14.

There are four ladies leagues that bowl on Monday and
Wednesday afternoons.

Business is extremely slow at the bowling center on Monday
through Friday and Sunday mornings, and on the afternoons of
Tuesday, Thursday, Friday, Saturday, and Sunday. It is not uncom-
mon to have just three or four lanes in operation during those
time periods.

The owners have taken a close look at the cost side of their
business as a way to improve profitability. They concluded that
while the total operating expense of $1,466,000 might appear to
be high, there was in fact little room for expense cutting.

At a recent meeting of the partners, James Ahmad reported
on the results of his three-month-long investigation into the
operating cost side of other bowling alleys and discovered that
the Wallingford Bowling Center was very much in keeping with
their industry. James went on to report that bowling alleys were
considered to be “heavy fixed cost operations” and that the key
to success and profitability lies in maximizing capacity and sales
dollars.

QUESTIONS

1. Apply the decision-making process described in the chapter
to this case. What is the major problem facing Wallingford?
List five specific alternative solutions that could be imple-
mented to solve that major problem.

2. As general manager of this company, how could you utilize
and manage the group decision-making process and tech-
nique to improve company profits? Which employees would
you include in the group?

OBJECTIVE

To explore the effects of competition on decision making.

INSTRUCTIONS

Step 1: 5 Minutes. The instructor will play the role of auction-
eer. In this auction, the instructor will auction off $1 bills (the

EXPERIENTIAL EXERCISES

3.1 Competitive Escalation: The Dollar Auction

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Managerial Decision Making Chapter 3 111

DISCUSSION QUESTIONS

1. Who made the most money in this exercise—one of the bid-
ders or the auctioneer? Why?

2. As the auction proceeded, did bidders become more com-
petitive or more cooperative? Why?

3. Did two bidders ever pay more for the money being auc-
tioned than the value of the money itself? Explain how and
why this happened.

4. Did you become involved in the bidding? Why?

a. If you became involved, what were your motivations? Did
you accomplish your objectives?

b. If not, why didn’t you become involved? What did you
think were the goals and objectives of those who did
become involved?

5. Did people say things to one another during the bidding
to influence their actions? What was said, and how was it
influential?

instructor will inform you whether this money is real or imagi-
nary). All members of the class may participate in the auction at
the same time.

The rules for this auction are slightly different from those of
a normal auction. In this version, both the highest bidder and the
next highest bidder will play their last bids even though the dollar
is awarded only to the highest bidder. For example, if Bidder A
bids 15 cents for the dollar and Bidder B bids 10 cents, and there
is no further bidding, then A pays 15 cents for the dollar and
receives the dollar, while B pays 10 cents and receives nothing.
The auctioneer will lose 75 cents on the dollar just sold.

Bids must be made in multiples of 5 cents. The dollar will be
sold when there is no further bidding. If two individuals bid the
same amount at the same time, ties are resolved in favor of the
bidder located physically closest to the auctioneer. During each
round, there is to be no talking except for making bids.

Step 2: 15 Minutes. The instructor (auctioneer) will auction off
five individual dollars to the class. Any student may bid in an
effort to win the dollar. A record sheet of the bidding and win-
ners can be kept in the worksheet that follows.

Dollar Auction Worksheet

Amount paid
by winning bidde

r

Amount paid
by second bidder

Total paid for
this dollar

First dollar

Second dollar

Third dollar

Fourth dollar

Fifth dollar

SOURCE: Excerpted from R. Lewicki, Experiences in Management and Organizational Behavior, 3rd ed. Copyright © 1991 John Wiley &
Sons, Inc. Reprinted with permission of John Wiley and Sons, Inc.

3.2 Group Problem-Solving Meeting
at the Community Agency

6. When everyone is ready, John Cabot enters his office, joins
the others at the table, and the scene begins. Allow 20 min-
utes to complete the meeting. The meeting is carried to the
point of completion unless an argument develops and no
progress is evident after 10 or 15 minutes of conflict.

DISCUSSION QUESTIONS

1. Describe the group’s behavior. What did each member
say? Do?

2. Evaluate the effectiveness of the group’s decision making.

3. Did any problems exist in leadership, power, motivation,
communication, or perception?

4. How could the group’s effectiveness be increased?

OBJECTIVE

To understand the interactions in group decision making through
role playing a meeting between a chairman and his subordinates.

INSTRUCTIONS

1. Gather role sheets for each character and instructions for
observers.

2. Set up a table in front of the room with five chairs around it
arranged in such a way that participants can talk comfortably
and have their faces visible to observers.

3. Read the introduction and cast of characters.

4. Five members from the class are selected to role play the
five characters. All other members act as observers. The par-
ticipants study the roles. All should play their roles without
referring to the role sheets.

5. The observers read the instructions for observers.

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112 Part One Foundations of Management

Joan Sweet, Head of Client Services, reports to Smith. She has
been with the agency 12 years, having worked before that for
the government as a contracting officer.

Tom Lynch, Head Community Liaison, reports to Joan Sweet.
He came to the Community Agency at Sweet’s request, having
worked with Sweet previously.

Jane Cox, Head Case Worker, also works for Joan Sweet. Cox
was promoted to this position two years ago. Prior to that time,
Jane had gone through a year’s training program after receiving
an MSW from a large urban university.

TODAY’S MEETING

John Cabot has called the meeting with these four managers to
solve some problems that have developed in meeting service
schedules and contract requirements. Cabot must catch a plane
to Washington in half an hour; he has an appointment to negoti-
ate a key contract that means a great deal to the future of the
Community Agency. He has only 20 minutes to meet with his
managers and still catch the plane. Cabot feels that getting the
Washington contract is absolutely crucial to the future of the
agency.

SOURCE: Judith R. Gordon, A Diagnostic Approach to Organizational
Behavior. Copyright © 1983 Pearson Education, Inc. Reprinted by permis-
sion of Pearson Education, Inc., Upper Saddle River, NJ.

INTRODUCTION

The Community Agency is a role-play exercise of a meeting
between the chairman of the board of a social service agency
and four of his subordinates. Each character’s role is designed to
recreate the reality of a business meeting. Each character comes
to the meeting with a unique perspective on a major problem
facing the agency as well as some personal impressions of the
other characters developed over several years of business and
social associations.

CAST OF CHARACTERS

John Cabot, the Chairman, was the principal force behind the for-
mation of the Community Agency, a multiservice agency. The
agency employs 50 people, and during its 19 years of operations
has enjoyed better client relations, a better service record, and a
better reputation than other local agencies because of a reputa-
tion for high-quality service at a moderate cost to funding agen-
cies. Recently, however, competitors have begun to overtake
the Community Agency, resulting in declining contracts. John
Cabot is expending every possible effort to keep his agency
comfortably at the top.

Ron Smith, Director of the agency, reports directly to Cabot.
He has held this position since he helped Cabot establish the
agency 19 years ago.

PART 1 SUPPORTING CASE

SSS Software In-Basket Exercise
One way to assess your own strengths and weaknesses in man-
agement skills is to engage in an actual managerial work expe-
rience. The following exercise gives you a realistic glimpse of
the tasks faced regularly by practicing managers. Complete the
exercise, and then compare your own decisions and actions with
those of classmates.

SSS Software designs and develops customized software for
businesses. It also integrates this software with the customer’s
existing systems and provides system maintenance. SSS Software
has customers in the following industries: airlines, automotive,
finance/banking, health/hospital, consumer products, electron-
ics, and government. The company has also begun to generate
important international clients. These include the European Air-
bus consortium and a consortium of banks and financial firms
based in Kenya.

SSS Software has grown rapidly since its inception just over a
decade ago. Its revenue, net income, and earnings per share have
all been above the industry average for the past several years.
However, competition in this technologically sophisticated field
has grown very rapidly. Recently, it has become more difficult
to compete for major contracts. Moreover, although SSS Soft-
ware’s revenue and net income continue to grow, the rate of
growth declined during the last fiscal year.

SSS Software’s 250 employees are divided into several oper-
ating divisions with employees at four levels: nonmanagement,
technical/professional, managerial, and executive. Nonmanage-
ment employees take care of the clerical and facilities support

functions. The technical/professional staff perform the core
technical work for the firm. Most managerial employees are
group managers who supervise a team of technical/professional
employees working on a project for a particular customer. Staff
who work in specialized areas such as finance, accounting, human
resources, nursing, and law are also considered managerial
employees. The executive level includes the 12 highest-ranking
employees at SSS Software. There is an organization chart in Fig-
ure A that illustrates SSS Software’s structure. There is also an
Employee Classification Report that lists the number of employ-
ees at each level of the organization.

In this exercise, you will play the role of Chris Perillo, Vice
President of Operations for Health and Financial Services. You
learned last Wednesday, October 13, that your predecessor,
Michael Grant, has resigned and gone to Universal Business Solu-
tions, Inc. You were offered his former job, and you accepted
it. Previously, you were the Group Manager for a team of 15
software developers assigned to work on the Airbus consortium
project in the Airline Services Division. You spent all of Thurs-
day and Friday and most of the weekend finishing up parts of the
project, briefing your successor, and preparing for an interim
report you will deliver in Paris on October 21.

It is now 7 a.m. Monday, and you are in your new office. You
have arrived at work early so you can spend the next two hours
reviewing material in your in-basket (including some memos
and messages to Michael Grant), as well as your voice mail and
e-mail. Your daily planning book indicates that you have no

bat37241_ch03_084-123.indd 112 12/4/09 3:05:09 PM

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FIGURE A
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and Financial Services
Division

bat37241_ch03_084-123.indd 113 12/4/09 3:05:09 PM

114 Part One Foundations of Management

jot down a few notes). For example, you might draft a memo or
write out a message that you will deliver via phone/voice mail.
You may also decide to meet with an individual (or individu-
als) during the limited time available on your calendar today or
tomorrow. If so, prepare an agenda for a personal meeting and
list your goals for the meeting. As you read through the items,
you may occasionally observe some information that you think
is relevant and want to remember (or attend to in the future)
but that you decide not to include in any of your responses to
employees. Write down such information on a sheet of paper
titled “note to self.”

Source: D. Whetten and K. Cameron, Developing Management
Skills, 3rd ed. (New York: Harper Collins, 1995).

appointments today or tomorrow but will have to catch a plane
for Paris early Wednesday morning. You have a full schedule for
the remainder of the week and all of next week.

ASSIGNMENT
During the next two hours, review all the material in your in-
basket, as well as your voice mail and e-mail. Take only two
hours. Using the following response form as a model, indicate
how you want to respond to each item (that is, via letter/memo,
e-mail, phone/voice mail, or personal meeting). If you decide not
to respond to an item, check “no response” on the response
form. All of your responses must be written on the response
forms. Write your precise, detailed response (do not merely

SAMPLE RESPONSE FORM
Relates To:

Memo # _____________ E-mail # _____________ Voice mail # _____________

Response form:

_____________ Letter/Memo _____________ Meet with person (when, where)

_____________ E-mail _____________ Note to self

_____________ Phone call/Voice mail _____________ No response

ITEM 1 MEMO

TO: All Employees

FROM: Roger Steiner, Chief Executive Officer

DATE: October 15

I am pleased to announce that Chris Perillo has been appointed as Vice President of Opera-
tions for Health and Financial Services. Chris will immediately assume responsibility for all
operations previously managed by Michael Grant. Chris will have end-to-end responsibility for
the design, development, integration, and maintenance of custom software for the health and
finance/banking industries. This responsibility includes all technical, financial, and staffing issues.
Chris will also manage our program of software support and integration for the recently
announced merger of three large health maintenance organizations (HMOs). Chris will be
responsible for our recently announced project with a consortium of banks and financial firms
operating in Kenya. This project represents an exciting opportunity for us, and Chris’s back-
ground seems ideally suited to the task.

Chris comes to this position with an undergraduate degree in Computer Science from the
California Institute of Technology and an M.B.A. from the University of Virginia. Chris began
as a member of our technical/professional staff six years ago and has most recently served for
three years as a Group Manager supporting domestic and international projects for our air-
lines industry group, including our recent work for the European Airbus consortium.

I am sure you all join me in offering congratulations to Chris for this promotion.

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Managerial Decision Making Chapter 3 115

ITEM 2 MEMO

TO: All Managers

FROM: Hal Harris, Vice President, Community and Public Relations

DATE: October 15

For your information, the following article appeared on the front page of the business section
of Thursday’s Los Angeles Times.

In a move that may create problems for SSS Software, Michael Grant and Janice Ramos
have left SSS Software and moved to Universal Business Solutions Inc. Industry analysts see the
move as another victory for Universal Business Solutions Inc. in their battle with SSS Software
for share of the growing software development and integration business. Both Grant and
Ramos had been with SSS Software for over 7 years. Grant was most recently Vice President
of Operations for all SSS Software’s work in two industries: health and hospitals, and finance
and banking. Ramos brings to Universal Business Solutions Inc. her special expertise in the
growing area of international software development and integration.

Hillary Collins, an industry analyst with Merrill Lynch, said “the loss of key staff to a com-
petitor can often create serious problems for a firm such as SSS Software. Grant and Ramos
have an insider’s understanding of SSS Software’s strategic and technical limitations. It will be
interesting to see if they can exploit this knowledge to the advantage of Universal Business
Solutions Inc.”

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116 Part One Foundations of Management

ITEM 3 MEMO

TO: Chris Perillo

FROM: Paula Sprague, Executive Assistance to Roger Steiner

DATE: October 15

Chris, I know that in your former position as a Group Manager in the Airline Services Division,
you probably have met most of the group managers in the Health and Financial Services Divi-
sion, but I thought you might like some more personal information about them. These people
will be your direct reports on the management team.

Group #1: Bob Miller, 55-year-old white male, married (Anne) with two children and three
grandchildren. Active in local Republican politics. Well regarded as a “hands-off” manager
heading a high-performing team. Plays golf regularly with Mark McIntyre, John Small, and a
couple of V.P.s from other divisions.

Group #2: Wanda Manners, 38-year-old white female, single with one school-age child. A
fitness “nut,” has run in several marathons. Some experience in Germany and Japan. Consid-
ered a hard-driving manager with a constant focus on the task at hand. Will be the first person
to show up every morning.

Group #3: William Chen, 31-year-old male of Chinese descent, married (Harriet), two
young children from his first marriage. Enjoys tennis and is quite good at it. A rising star in the
company, he is highly respected by his peers as a “man of action” and a good friend.

Group #4: Leo Jones, 36-year-old white male, married (Janet), with an infant daughter.
Recently returned from paternity leave. Has traveled extensively on projects, since he speaks
three languages. Has liked hockey ever since the time he spent in Montreal. Considered a
strong manager who gets the most out of his people.

Group #5: Mark McIntyre, 45-year-old white male, married (Mary Theresa) to an executive
in the banking industry. No children. A lot of experience in Germany and Eastern Europe. Has
been writing a mystery novel. Has always been a good “team player,” but several members of
his technical staff are not well respected and he hasn’t addressed the problem.

Group #6: John Small, 38-year-old white male, recently divorced. Three children living with
his wife. A gregarious individual who likes sports. He spent a lot of time in Mexico and Central
America before he came to SSS Software. Recently has been doing mostly contract work with
the federal government. An average manager, has had some trouble keeping his people on
schedule.

Group #7: This position vacant since Janice Ramos left. Roger thinks we ought to fill this
position quickly. Get in touch with me if you want information on any in-house candidates for
any position.

Group #8: Marcus Harper, 42-year-old black male, married (Tamara) with two teenage
children. Recently won an award in a local photography contest. Considered a strong manager
who gets along with peers and works long hours.

Customer Services: Armand Marke, 38-year-old Armenian male, divorced. A basketball fan.
Originally from Armenia. Previously a Group Manager. Worked hard to establish the Techni-
cal Services Phone Line, but now has pretty much left it alone.

Office Administrator: Michelle Harrison, 41-year-old white female, single. Grew up on a
ranch and still rides horses whenever she can. A strict administrator.

There are a number of good folks here, but they don’t function well as a management
team. I think Michael played favorites, especially with Janice and Leo. There are a few cliques
in this group and I’m not sure how effectively Michael dealt with them. I expect you will find it
a challenge to build a cohesive team.

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Managerial Decision Making Chapter 3 117

ITEM 4 MEMO

TO: Chris Perillo

FROM: Wanda Manners, Group 2 Manager

DATE: October 15

CONFIDENTIAL AND RESTRICTED

Although I know you are new to your job, I feel it is important that I let you know about some
information I just obtained concerning the development work we recently completed for First
National Investment. Our project involved the development of asset management software
for managing their international funds. This was a very complex project due to the volatile
exchange rates and the forecasting tools we needed to develop.

As part of this project, we had to integrate the software and reports with all their existing
systems and reporting mechanisms. To do this we were given access to all of their existing
software (much of which was developed by Universal Business Solutions Inc.). Of course, we
signed an agreement acknowledging that the software to which we were given access was
proprietary and that our access was solely for the purpose of our system integration work
associated with the project.

Unfortunately, I have learned that some parts of the software we developed actually “bor-
row” heavily from complex application programs developed for First National Investment by
Universal Business Solutions Inc. It seems obvious to me that one or more of the software
developers from Group 5 (that is, Mark McIntyre’s group) inappropriately “borrowed” algo-
rithms developed by Universal Business Solutions Inc. I am sure that doing so saved us sig-
nificant development time on some aspects of the project. It seems very unlikely that First
National Investment or Universal Business Solutions Inc. will ever become aware of this issue.

Finally, First National Investment is successfully using the software we developed and is
thrilled with the work we did. We brought the project in on time and under budget. You
probably know that they have invited us to bid on several other substantial projects.

I’m sorry to bring this delicate matter to your attention, but I thought you should know
about it.

ITEM 5A MEMO

TO: Chris Perillo

FROM: Paula Sprague, Executive Assistant to Roger Steiner

DATE: October 15

RE: Letter from C.A.R.E. Services (copies attached)

Roger asked me to work on this C.A.R.E. project and obviously wants some fast action. A lot
of the staff are already booked solid for the next couple of weeks. I knew that Elise Soto and
Chu Hung Woo have the expertise to do this system, and when I checked with them, they
were relatively free. I had them pencil in the next two weeks and wanted to let you know.
Hopefully, it will take a “hot potato” out of your hands.

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118 Part One Foundations of Management

ITEM 5B COPY OF FAX

C.A.R.E.
Child and Adolescent Rehabilitative and Educational Services
A United Way Member Agency
200 Main Street
Los Angeles, California 9023

0

DATE: October 11

Mr. Roger Steiner, CEO
SSS Software
13 Miller Way
Los Angeles, California 90224

Dear Roger,

This letter is a follow-up to our conversation after last night’s board meeting. I appreciated
your comments during the board meeting about the need for sophisticated computer systems
in nonprofit organizations and I especially appreciate your generous offer of assistance to have
SSS Software provide assistance to deal with the immediate problem with our accounting sys-
tem. Since the board voted to fire the computer consultant, I am very worried about getting
our reports done in time to meet the state funding cycle.

Thanks again for your offer of help during this crisis.

Sincerely yours,

Janice Polocizwic
Janice Polocizwic
Executive Director

ITEM 5C COPY OF LETTER

SSS SOFTWARE
13 Miller Way

Los Angeles, CA 90224
213-635-2000

DATE: October

12

Janice Polocizwic
Executive Director, C.A.R.E. Services
200 Main Street
Los Angeles, California 90230

Dear Janice,

I received your fax of October 11. I have asked Paula Sprague, my executive assistant, to line
up people to work on your accounting system as soon as possible. You can expect to hear
from her shortly.

Sincerely,
Roger Steiner
Roger Steiner

cc: Paula Sprague, Executive Assistant

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Managerial Decision Making Chapter 3 119

ITEM 6 MEMO

TO: Michael Grant

FROM: Harry Withers, Group 6 Technical Staff

DATE: October 12

PERSONAL AND CONFIDENTIAL

Our team is having difficulty meeting the submission deadline of November 5 for the Halstrom
project. Kim, Fred, Peter, Kyoto, Susan, Mala, and I have been working on the project for
several weeks, but are experiencing some problems and may need additional time. I hesitate to
write this letter, but the main problem is that our group manager, John Small, is involved in a
relationship with Mala. Mala gets John’s support for her ideas and brings them to the team as
required components of the project. Needless to say, this has posed some problems for the
group. Mala’s background is especially valuable for this project, but Kim and Fred, who have
both worked very hard on the project, do not want to work with her. In addition, one mem-
ber of the team has been unavailable recently because of child-care needs. Commitment to
the project and team morale have plummeted. However, we’ll do our best to get the project
finished as soon as possible. Mala will be on vacation the next two weeks, so I’m expecting that
some of us can complete it in her absence.

ITEM 7 VOICE MAIL
Hello, Michael. This is Jim Bishop of United Hospitals. I wanted to talk with you about the quality
assurance project that you are working on for us. When José Martinez first started talking with us, I
was impressed with his friendliness and expertise. But recently, he doesn’t seem to be getting much
accomplished and has seemed distant and on-edge in conversations. Today, I asked him about the
schedule and he seemed very defensive and not entirely in control of his emotions. I am quite con-
cerned about our project. Please give me a call at 213-951-1234.

ITEM 8 VOICE MAIL
Hi, Michael. This is Armand. I wanted to talk with you about some issues with the Technical Services
Phone Line. I’ve recently received some complaint letters from Phone Line customers whose complaints
have included: long delays while waiting for a technician to answer the phone; technicians who are not
knowledgeable enough to solve problems; and, on occasion, rude service. Needless to say, I’m quite
concerned about these complaints.

I believe that the overall quality of the phone line staff is very good, but we continue to be under-
staffed, even with the recent hires. The new technicians look strong, but are working on the help line
before being fully trained. Antolina, our best tech, often brings her child to work, which is adding to the
craziness around here.

I think you should know that we’re feeling a lot of stress here. I’ll talk to you soon.

ITEM 9 VOICE MAIL
Hi Chris, it’s Pat. Congratulations on your promotion. They definitely picked the right person. It’s great
news—for me, too. You’ve been a terrific mentor so far, so I’m expecting to learn a lot from you in
your new position. How about lunch next week?

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120 Part One Foundations of Management

ITEM 10 VOICE MAIL
Chris, this is Bob Miller. Just thought you’d like to know that John’s joke during our planning meeting
has disturbed a few of the women in my group. Frankly, I think the thing’s being blown out of propor-
tion, especially since we all know this is a good place for both men and women to work. Give me a call
if you want to chat about this.

ITEM 11 VOICE MAIL
Hello. This is Lorraine Adams from Westside Hospital. I read in today’s Los Angeles Times that you
will be taking over from Michael Grant. We haven’t met yet, but your division has recently finished
two large million-dollar projects for Westside. Michael Grant and I had some discussion about a small
conversion of a piece of existing software to be compatible with the new systems. The original vendor
had said that they would do the work but has been stalling, and I need to move quickly. Can you see if
Harris Wilson, Chu Hung Woo, and Elise Soto are available to do this work as soon as possible? They
were on the original project and work well with our people. You can call me at 213-555-3456.

Um . . . (long pause) I guess I should tell you that I got a call from Michael offering to do this work.
But I think I should stick with SSS Software. Give me a call.

ITEM 12 VOICE MAIL
Hi, Chris. This is Roosevelt Moore calling. I’m a member of your technical/professional staff. I used
to report to Janice Ramos, but since she left the firm, I thought I’d bring my concerns directly to you.
I’d like to arrange some time to talk with you about my experience since returning from six weeks of
paternity leave. Some of my major responsibilities have been turned over to others. I seem to be out
of the loop and wonder if my career is at risk. Also, I am afraid that I won’t be supported or seriously
considered for the opening created by Janice’s departure. Frankly, I feel I’m being screwed for taking
my leave. I’d like to talk with you this week.

ITEM 13 E-MAIL

TO: Michael Grant

FROM: José Martinez, Group 1 Technical Staff

DATE: October 12

I would like to set up a meeting with you as soon as possible. I suspect that you will get a call
from Jim Bishop of United Hospitals and want to be sure that you hear my side of the story
first. I have been working on a customized system design for quality assurance for them using
a variation of the J-3 product we developed several years ago. They had a number of special
requirements and some quirks in their accounting systems, so I have had to put in especially
long hours. I’ve worked hard to meet their demands, but they keep changing the ground
rules. I keep thinking, this is just another J-3 I’m working on, but they have been interfering
with an elegant design I have developed. It seems I’m not getting anywhere on this project.
Then Mr. Bishop asked me if the system was running yet. I was worn out from dealing with
the Controller, and I made a sarcastic comment to Mr. Bishop. He gave me a funny look and
just walked out of the room.

I would like to talk with you about this situation at your earliest convenience.

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Managerial Decision Making Chapter 3 121

ITEM 14 E-MAIL

TO: Chris Perillo

FROM: John Small, Group 6 Manager

DATE: October 15

Welcome aboard, Chris. I look forward to meeting with you. I just wanted to put a bug in your
ear about finding a replacement for Janice Ramos. One of my technical staff, Mala Abendano,
has the ability and drive to make an excellent group manager. I have encouraged her to apply
for the position. I’d be happy to talk with you further about this, at your convenience.

ITEM 15 E-MAIL

TO: Chris Perillo
FROM: Paula Sprague, Executive Assistant to Roger Steiner
DATE: October 15

Roger asked me to let you know about the large contract we have gotten in Kenya. It means
that a team of four managers will be making a short trip to determine current needs. They
will assign their technical staff the task of developing a system and software here over the next
six months, and then the managers and possibly some team members will be spending about
10 months on site in Kenya to handle the implementation. Roger would appreciate an email
of your thoughts about the issues to be discussed at this meeting, additional considerations
about sending people to Kenya, and about how you will put together an effective team to work
on this project. The October 15 memo I sent to you will provide you with some information
you’ll need to start making these decisions.

ITEM 16 E-MAIL

TO: Chris Perillo

FROM: Sharon Shapiro, V. P. of Human Resources

DATE: October 15

RE: Upcoming meeting

I want to update you on the rippling effect of John Small’s sexual joke at last week’s planning
meeting. Quite a few women have been very upset and have met informally to talk about it.
They have decided to call a meeting of all the people concerned about this kind of behavior
throughout the firm. I plan to attend, so I’ll keep you posted.

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122 Part One Foundations of Management

ITEM 17 E-MAIL

TO: All SSS-Software Managers

FROM: Sharon Shapiro, Vice President, Human Resources

DATE: October 14

RE: Promotions and External Hires

Year-to-date (January through September) promotions and external hires

Race Sex

Level White Black Asian Hispanic
Native

American M F Total

Hires into
Executive Level

Promotions to
Executive Level

0
(0%)

0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
(0%)
0
0

Hires into
Management Level

Promotions to
Management Level

2
(67%)

7
(88%)

1
(33%)

0
(0%)
0
(0%)

1
(12%)

0
(0%)
0
(0%)
0
(0%)
0
(0%)
2
(67%)
7
(88%)
1
(33%)
1
(12%)
3
8

Hires into Technical/
Professional Level

Promotions
to Technical/
Professional Level

10
(36%)

0
(0%)

6
(21%)

0
(0%)
10
(36%)
0
(0%)

2
(7%)

0
(0%)
0
(0%)
0
(0%)

14
(50%)

0
(0%)
14
(50%)
0
(0%)

28

0

Hires into
Non-Management
Level

Promotions to
Non-Management
Level

4
(20%)

NA

10
(50%)

NA

2
(10%)

NA
4
(20%)
NA
0
(0%)
NA

6
(30%)

NA

14
(70%)

NA

20

NA

SSS Software employee (EEO) classification report as of June 30

Race Sex
Level White Black Asian Hispanic
Native
American M F Total

Executive Level

11
(92%)

0
(0%)

1
(8%)

0
(0%)
0
(0%)
11
(92%)
1
(8%)
12

Management Level 43 2 2 1 0 38 10 48
(90%) (4%) (4%) (2%) (0%) (79%) (21%)

Technical/ 58 20 37 14 1 80 50 130
Professional Level (45%) (15%) (28%) (11%) (1%) (62%) (38%)

Non-Management 29 22 4 4 1 12 48 60
Level (48%) (37%) (7%) (7%) (2%) (20%) (80%)

Total 141 44 44 19 2 141 109 250
(56%) (18%) (18%) (8%) (1%) (56%) (44%)

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Managerial Decision Making Chapter 3 123

CRITICAL INCIDENTS

Employee Raiding
Litson Cotton Yarn Manufacturing Company, located in Mur-
ray, New Jersey, decided as a result of increasing labor costs
to relocate its plant in Fairlee, a southern community of 4,200.
Plant construction was started, and a human resources office was
opened in the state employment office, located in Fairlee.

Because of ineffective HR practices in the other three textile
mills located within a 50-mile radius of Fairlee, Litson was receiv-
ing applications from some of the most highly skilled and trained
textile operators in the state. After receiving applications from
approximately 500 people, employment was offered to 260 male
and female applicants. These employees would be placed immedi-
ately on the payroll with instructions to await final installation of
machinery, which was expected within the following six weeks.

The managers of the three other textile companies, faced with
resignations from their most efficient and best-trained employ-
ees, approached the Litson managers with the complaint that
their labor force was being “raided.” They registered a strong
protest to cease such practices and demanded an immediate can-
cellation of the employment of the 260 people hired by Litson.

Litson managers discussed the ethical and moral consider-
ations involved in offering employment to the 260 people. Litson

clearly faced a tight labor market in Fairlee, and management
thought that if the 260 employees were discharged, the company
would face cancellation of its plans and large construction losses.
Litson management also felt obligated to the 260 employees who
had resigned from their previous employment in favor of Litson.

The dilemma was compounded when the manager of one
community plant reminded Litson that his plant was part of a
nationwide chain supplied with cotton yarn from Litson. He
implied that Litson’s attempts to continue operations in Fairlee
could result in cancellation of orders and the possible loss of
approximately 18 percent market share. It was also suggested
to Litson managers that actions taken by the nationwide textile
chain could result in cancellation of orders from other textile
companies. Litson’s president held an urgent meeting of his top
subordinates to (1) decide what to do about the situation in
Fairlee, (2) formulate a written policy statement indicating Lit-
son’s position regarding employee raiding, and (3) develop a plan
for implementing the policy.

How would you prepare for the meeting, and what would
you say at the meeting?

Source: J. Champion and J. James, Critical Incidents in Management: Decision
and Policy Issues, 6th ed. (Burr Ridge, IL: Richard D. Irwin, 1989). © 1989
The McGraw-Hill Companies.

Effective Management
Dr. Sam Perkins, a graduate of the Harvard University College of
Medicine, had a private practice in internal medicine for 12 years.
Fourteen months ago, he was persuaded by the Massachusetts
governor to give up private practice to be director of the State
Division of Human Services.

After one year as director, Perkins recognized he had made
little progress in reducing the considerable inefficiency in the
division. Employee morale and effectiveness seemed even lower
than when he had assumed the position. He realized his past
training and experiences were of a clinical nature with little
exposure to effective management techniques. Perkins decided
to research literature on the subject of management available to
him at a local university.

Perkins soon realized that management scholars are divided
on the question of what constitutes effective management. Some
believe people are born with certain identifiable personality traits
that make them effective managers. Others believe a manager can
learn to be effective by treating subordinates with a personal and
considerate approach and by giving particular attention to their
need for favorable working conditions. Still others emphasize
the importance of developing a management style characterized
by either authoritarian, democratic, or laissez-faire approaches.
Perkins was further confused when he learned that a growing
number of scholars advocate that effective management is con-
tingent on the situation.

Because a state university was located nearby, Perkins con-
tacted the dean of its college of business administration. The
dean referred him to the director of the college’s management
center, Professor Joel McCann. Discussions between Perkins
and McCann resulted in a tentative agreement that the manage-
ment center would organize a series of management training
sessions for the State Division of Human Services. Before agree-
ing on the price tag for the management conference, Perkins
asked McCann to prepare a proposal reflecting his thoughts on
the following questions:

1. How will the question of what constitutes effective manage-
ment be answered during the conference?

2. What will be the specific subject content of the conference?

3. Who will the instructors be?

4. What will be the conference’s duration?

5. How can the conference’s effectiveness be evaluated?

6. What policies should the State Division of Human Services
adopt regarding who the conference participants should be
and how they should be selected? How can these policies be
best implemented?

Source: J. Champion and J. James, Critical Incidents in Management: Decision
and Policy Issues, 6th ed. (Burr Ridge, IL: Richard D. Irwin, 1989). © 1989
The McGraw-Hill Companies.

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Managing Chapter 1 1

Foundations of Manageme

nt

• Managing
• The External Environment

and Organizational Cultur

e

• Managerial Decision

Making

Planning:
Delivering Strategic Value

• Planning and Strategic
Management

• Ethics and Corporate
Responsibilit

y

• International Management
• Entrepreneurship

Strategy Implementation

Organizing: Building
a Dynamic

Organization

• Organization Structure
• Organizational Agility
• Human Resources

Management
• Managing the Diverse

Workforce

Leading:
Mobilizing People

• Leadership
• Motivating for Performance
• Teamwork
• Communicating

Controlling:
Learning and Changing

• Managerial Control
• Managing Technology and

Innovation
• Creating and Managing

Change

bat37241_ch01_001-045.indd 1 12/3/09 2:39:40 PM

“ ”
Management means, in the last analysis, the substitution of thought for brawn and muscle, of knowledge
for folklore and tradition, and of cooperation for force.

— Peter Drucker

Managing
chapter

1
P A R T O N E FOUNDATIONS OF MANAGEMENT

LEARNING OBJECTIVES

After studying Chapter 1, you will be

able to:

1 Summarize the major challenges of
managing in the new competitive
landscape. p. 4

2 Describe the sources of competitive
advantage for a company. p. 9

3 Explain how the functions of
management are evolving in today’s
business environment. p. 14

4 Compare how the nature of
management varies at different
organizational levels. p. 18

5 Define the skills you need to be an
effective manager. p. 20

6 Understand the principles that will
help you manage your career. p. 22

LO

LO
LO
LO
LO
LO

CHAPTER OUTLINE

Managing in the New Competitive
Landscape

Globalization
Technological Change
Knowledge Management
Collaboration across “Boundaries”

Managing for Competitive Advantage

Innovation
Quality
Service
Speed
Cost Competitiveness
Delivering All Five

The Functions of Management

Planning: Delivering Strategic Value
Organizing: Building a Dynamic Organization
Leading: Mobilizing People
Controlling: Learning and Changing
Performing All Four Management Functions

Management Levels and Skills

Top-Level Managers
Middle-Level Managers
Frontline Managers
Working Leaders with Broad Responsibilities
Management Skills

You and Your Career

Be Both a Specialist and a Generalist
Be Self-Reliant
Be Connected
Actively Manage Your Relationship with Your
Organization
Survive and Thrive

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Management Close-Up
CAN ELON MUSK KEEP TESLA MOTORS RUNNING?

future for electric cars. But the two often disagreed
about how to move the company forward. Costs and
conflicts escalated until 2007, when the board of direc-
tors ousted Eberhard.

With Tesla at a turning
point, Musk helped the com-
pany regroup, introducing its
first model, the all-electric
Roadster, in 2008. The two-
seat sports car goes from 0 to
60 miles per hour in four sec-
onds and hits a top speed of
135 mph. Powered solely by a
lithium-ion battery, the Road-
ster operates without engine
noise and can travel nearly
250 miles on a single charge. It

also doesn’t emit any gases to the environment.
Despite its substantial $109,000 price tag, the Tesla

Roadster sold out almost immediately. Today, Tesla
ships 10 of the cars each week and has a year-long wait-
ing list. 1

A small player in the struggling global auto market,
California-based start-up Tesla Motors is trying to
revolutionize its industry. Headed by chief executive
Elon Musk, Tesla has an ambitious vision: to mass pro-
duce electric cars that end
Americans’ dependence on
fossil fuels and cut greenhouse
gas emissions. The South
African–born Musk, who holds
degrees in both physics and
finance, predicts that by 2030,
the majority of cars made in the
United States will be electric.

A bold prediction? Maybe.
But Elon Musk is a skilled man-
ager. By his thirties he had led
two successful Internet compa-
nies: Zip2 (later sold to Compaq) and X.com (which
morphed into what is now known as PayPal). In 2004
Musk became chairman of Tesla Motors, a start-up
founded the year before by CEO Martin Eberhard. Self-
professed car geeks, Musk and Eberhard saw a bright

To be effective, a manager is often
compelled to create change. But
bringing about change is hard, especially
in a difficult business environment.
As you read this chapter, think about
the challenges Elon Musk faces as his
company attempts to fundamentally
change the way Americans think about
their cars.

{ }

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4 Part One Foundations of Management

Tesla Motors’ Elon Musk is arguably one of the most interesting leaders in business
today. He combines strong creative skills with a keen ability to see the big picture—
and he’s been remarkably successful at building organizations. Of course, not every
manager or organization succeeds. A recent story of failure that shocked many Ameri-
cans involved the care provided to wounded soldiers at the Walter Reed Army Medi-
cal Center in Washington, D.C. Reporters investigating outpatient facilities of Walter
Reed—which ranks among the nation’s top military hospitals—discovered that in
some facilities, outpatients were coping with mold, roaches, rodents, and damaged
walls and doors. Many outpatients, some with serious injuries and mental impair-
ments, complained of paperwork problems that kept them from receiving services.
Testifying before Congress, General Richard A. Cody, the Army’s vice chief of staff,
admitted fundamental management problems:

Our counselors and case managers are overworked, and they do not receive enough training.
We do not adequately communicate necessary information. Our administrative processes are
needlessly cumbersome and . . . take too long. Our medical holding units are not manned to

the proper level, and we do not assign leaders who can ensure a proper accountability, proper
discipline and well-being, . . . and our facilities are not maintained to the standards that we

know is [sic] right. 2

Major General George W. Weightman, who lost his job as Walter Reed’s commander
as a result of the scandal, acknowledged that the organization had experienced a “fail-
ure of leadership.” 3

Companies, like individuals, succeed or fail for a variety of reasons. Some of these
reasons are circumstantial. Most are personal and human and include the decisions
managers make and the actions they take.

In business, there is no replacement for effective management. Companies may fly
high for a while, but they cannot do well for very long without good management. It’s
the same for individuals: BusinessWeek ’s Managers of the Year succeed by focusing on
fundamentals, knowing what’s important, and managing well. The aim of this book is
to help you succeed in those pursuits.

Managing in the New Competitive Landscape
When the economy is soaring, business seems easy. Starting an Internet company
looked easy in the 1990s, and ventures related to the real estate boom looked like a
sure thing during much of the past decade. But investors grew wary of dot-com start-
ups, and the demand for new homes dropped off the table when the economy crashed
in late 2008. At such times, it becomes evident that management is a challenge requir-
ing constant adaptation to new circumstances.

What defines the competitive landscape of today’s business? You will be reading
about many relevant issues in the coming chapters, but we begin here by highlighting
four key elements that make the current business landscape different from the past:
globalization, technological change, the importance of knowledge and ideas, and col-
laboration across organizational “boundaries.”

Globalization
Far more than in the past, today’s enterprises are global, with offices and production
facilities in countries all over the world. Corporations operate worldwide, transcend-
ing national borders. Companies that want to grow often need to tap international
markets, where incomes are rising and demand is increasing. GE, which became a
massive and profitable corporation by selling appliances, light bulbs, and machinery
to U.S. customers, recently announced that it expected its foreign sales to equal its
sales within the United States. GE’s biggest foreign customers are in Europe, but sales
volume in China and India is rising fast. 4

LO 1

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Managing Chapter 1 5

Globalization also means that a
company’s talent can come from any-
where. As with its sales, half of GE’s
employees work outside the United
States. 5 Cisco, a leader in equipment
for computer networking, considers
maintaining operations in India to be
an essential tactic for staying com-
petitive. Cisco serves the fast-growing
Indian Internet market at a crucial
time: the growth in demand is attract-
ing low-cost competition from Chi-
nese businesses. 6

Another force that is making glo-
balization both more possible and more
inevitable is the Internet. Now that
more than a billion users have come online, more and more of the new users are in
developing nations such as China, India, Russia, and Brazil. 7 As people in developing
nations increasingly turn to the power of the Web, they become a force to develop
content in their own languages and suited to their own means of access, such as inex-
pensive laptops.

Globalization has changed the face
of the workforce. Management in
this new competitive landscape
will need to attract and effectively
manage a talent pool from all over
the globe.

The global reach of the Internet pushed Mitch Free to expand his business, MFG.com, into
China. MFG.com runs a Web site where manufacturers that need parts post their speci-
fications online, and suppliers bid to provide those parts. Free, who grew up in a small
town in Georgia and had barely traveled outside the United States, had never planned
to be an international manager, but Chinese suppliers soon began submitting requests to
participate. At the same time, manufacturers were pressing MFG.com to include Asian
suppliers, which often could offer the best prices.

So Free traveled to Shanghai, China. He learned about the business culture, such as
the importance of cultivating business relationships and networks. After a difficult search,
he made a key hiring decision: general manager James Jin, who speaks fluent English, stud-
ied global management, and has experience in manufacturing both in the United States
and China. The effort was well rewarded. Jin has helped Free navigate the fast-growing,
ambitious business landscape of his native China. Sales in China accounted for more than
10 percent of MFG.com’s total annual sales and are growing faster than overall sales.8

Companies can get their message to users on every continent and often are expected
to provide service anytime, anywhere. This can affect how and when people work.
Laura Asiala, a manager for Dow Corning, based in Midland, Michigan, supervises
employees in Tokyo, Seoul, Hong Kong, Shanghai, and Brussels. To keep in touch
with them, she may start working at 5:00 a.m. some days and end as late as midnight.
She takes a break from 3:30 to 9:30 each day, and technology makes it possible to do
some of her communicating from home. 9

Successful CEOs know that the change from a local to a global marketplace is gain-
ing momentum and is irreversible. 10 For example, PepsiCo’s chief executive, Indra
Nooyi, brings a much-needed global viewpoint to a company whose international
business has been growing three times faster than sales in the United States. Nooyi,
who was raised in India and educated there and in the United States, has steered the
company toward more “better for you” and “good for you” snacks with acquisitions
including a nut packager in Bulgaria and a hummus producer in Israel. 11

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6 Part One Foundations of Management

Thus globalization affects small companies as well as large. Many small companies
export their goods. Many domestic firms assemble their products in other countries.
And companies are under pressure to improve their products in the face of intense
competition from foreign manufacturers. Firms today must ask themselves, “How can
we be the best in the world?”

For students, it’s not too early to think about the personal ramifications. In the
words of CEO Jim Goodnight of SAS, the largest privately held software company
in the world, “The best thing business schools can do to prepare their students is to
encourage them to look beyond their own backyards. Globalization has opened the
world for many opportunities, and schools should encourage their students to take
advantage of them.” 12

Technological Change
The Internet’s impact on globalization is only one of the ways that technology is
vitally important in the business world. Technology both complicates things and cre-
ates new opportunities. The challenges come from the rapid rate at which commu-
nication, transportation, information, and other technologies change. 13 For example,
after just a couple of decades of widespread desktop use, customers switched to laptop
models, which require different accessories. 14 Any company that serves desktop users
has to rethink its customers’ wants and needs, not to mention the possibility that these
customers are now working at the airport or a local Starbucks outlet, rather than in
an office.

Later chapters will discuss
technology further, but here we
highlight the rise of the Internet
and its effects. Why is the Inter-

net so important to business? 15 It is a marketplace, a means for manufacturing goods
and services, a distribution channel, an information service, and more. It drives down
costs and speeds up globalization. It improves efficiency of decision making. It facili-
tates design of new products, from pharmaceuticals to financial services. Managers
can watch and learn what other companies are doing—on the other side of the world.
While these advantages create business opportunities, they also create threats as com-
petitors sometimes capitalize on new developments more than you do.

It may be hard to imagine that just a few years ago, going online to order plane
tickets, read the news, or share photos was a novelty. Some online success stories, such
as Amazon, Monster, and Google, are purely Internet businesses. Other companies,
including Barnes & Noble, Best Buy, and Office Depot, have incorporated online
channels into an established business strategy.

The Internet’s impact is felt not only at the level of businesses as a whole but also by
individual employees and managers. Just as globalization has stretched out the work-
days of some people, high-tech gadgets have made it possible to stay connected to
work anytime, anywhere. This ability is both a convenience and a potential source of
stress. The stress comes when employees or their supervisors don’t set limits on being
connected. Facilities manager Cherri Chiodo loves the convenience of her BlackBerry
but finds that it sometimes replaces face-to-face communication with family members.
Real estate broker Ted Helgans calls his BlackBerry a “traveling office” and a valu-
able tool for getting and sharing information. Helgans emphasizes that users can and
should decide when to turn the devices off. 17 Jean Chatzkey, an editor for Money mag-
azine, found that she constantly interrupted whatever she was doing to check e-mail
on her Palm Treo. Realizing that the device had become more of a distraction than a

help, Chatzkey began reminding
herself that the messages were not
emergencies; in fact, many came
from subscriptions that Chatzkey

Google search sites span the Internet in more than 100 languages.

Among people who work long hours in high-stress jobs, 59% said technology
lengthens rather than shortens their workday.16

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Managing Chapter 1 7

decided she could happily live with-
out. 18 Thus, using technology effec-
tively is more than a matter of learning
new skills; it also involves making judg-
ments about when and where to apply
the technology for maximum benefit.

Knowledge Management
Companies and managers face a grow-
ing need for good, new ideas. Because
companies in advanced economies have
become so efficient at producing physi-
cal goods, most workers have been
freed up to provide services or “abstract
goods” such as software, entertainment,
data, and advertising. Efficient factories
with fewer workers produce the cereals
and cell phones the market demands;
meanwhile, more and more workers create software and invent new goods and services.
These workers, whose primary contributions are ideas and problem-solving expertise,
are often referred to as knowledge workers. Managing these workers poses some particu-
lar challenges, which we will examine throughout this book. For example, determining
whether they are doing a good job can be difficult, because the manager cannot simply
count or measure a knowledge worker’s output. Also, these workers often are most
motivated to do their best when the work is interesting, not because of a carrot or stick
dangled by the manager. 19

Because the success of modern businesses so often depends on the knowledge used
for innovation and the delivery of services, organizations need to manage that knowl-
edge. Knowledge management is the set of practices aimed at discovering and har-
nessing an organization’s intellectual resources—fully utilizing the intellects of the
organization’s people. Knowledge management is about finding, unlocking, sharing,
and altogether capitalizing on the most precious resources of an organization: people’s
expertise, skills, wisdom, and relationships. Knowledge managers find these human
assets, help people collaborate and learn, help people generate new ideas, and harness
those ideas into successful innovations.

In hospitals, important knowledge includes patients’ histories, doctors’ orders,
billing information, dietary requirements, prescriptions administered, and much
more. With lives at stake, many hospitals have embraced knowledge management.
For example, at Virginia Commonwealth University (VCU) Health System, a single
information system lets doctors write prescriptions, look up patient information and
lab results, and consult with one another. Billing also is automated as part of VCU’s
knowledge management system, making the process more efficient and connect-
ing with patient data so that it can remind the physician of all the conditions being
treated—and billed for. 20 Hospitals may also give patients access to the knowledge
management system so that they can schedule appointments, request prescription
refills, and send questions to their doctors.

Collaboration across “Boundaries”
One of the most important processes of knowledge management is to ensure that peo-
ple in different parts of the organization collaborate effectively with one another. This
requires productive communications among different departments, divisions, or other
subunits of the organization. For example, British Petroleum wants “T-shaped” man-
agers who break out of the traditional corporate hierarchy to share knowledge freely

knowledge
management

Practices aimed at
discovering and harnessing
an organization’s intellectual
resources.

Will Wright, creator of “The
Sims” video games, poses with a
computer image of the game. His
newest creation, “Spore,” will
undoubtedly build on the success
of “The Sims.”

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8 Part One Foundations of Management

across the organization (the horizontal part of the T) while remaining fiercely com-
mitted to the bottom-line performance of their individual business units (the vertical
part). This emphasis on dual responsibilities for performance and knowledge sharing
also occurs at pharmaceutical giant GlaxoSmithKline, large German industrial com-
pany Siemens, and London-based steelmaker Ispat International. 21

For example, Toyota keeps its product development process efficient by bring-
ing together design engineers and manufacturing employees from the very beginning.
Often, manufacturing employees can see ways to simplify a design so that it is easier to
make without defects or unnecessary costs. Toyota expects its employees to listen to
input from all areas of the organization, so this type of collaboration is a natural part
of the organization’s culture. Employees use the software to share their knowledge—
best practices they have developed for design and manufacturing. 22 Thus, at Toyota,
knowledge management supports collaboration, and vice versa.

Collaboration across “boundaries” occurs even beyond the boundaries of the orga-
nization itself. Companies today must motivate and capitalize on the ideas of people
outside the organization. How can a company best use the services of its consultants,
ad agencies, and suppliers? To obtain the product development software that supports
collaboration between manufacturing and design, Toyota collaborated with a software
developer, PTC. Toyota and PTC together identified how software could support
the company’s strategy of “lean product development,” and they kept meeting regu-
larly to continue improving the software. This collaboration not only helped Toyota
obtain a superior product but also helped PTC improve the value of the software it
offers to its other customers. 23

Collaboration with investors helped a pair of entrepreneurs launch their com-
pany in the seriously risky business of making games. When Richard Tait and Whit
Alexander developed their unusual board game Cranium, they confidently ordered
20,000 units from a Chinese manufacturer before winning any orders from retailers.
But retailers generally are reluctant to take a chance on new products. The solution
was to collaborate with a different kind of distributor. Howard Schultz, chairman of
the Starbucks coffee chain, thought the game was great, so he let Tait and Alexander
place samples of Cranium in Starbucks outlets, where customers could try playing it.
Customers loved it. Thanks to its track record at Starbucks, Cranium became not only
the first game sold at Starbucks but also the first board game sold on Amazon.com,

which had earlier turned it down. That
success enabled Cranium the company
to launch a dozen more games, now
sold in 30 countries. 24

Customers, too, can be collabo-
rators. Companies must realize that
the need to serve the customer drives
everything else. Best serving the cus-
tomer can start with involving the cus-
tomer more in company decisions. For
example, companies like Procter &
Gamble are getting customers to think
creatively and talk with one another
online to come up with new product
and service ideas. 25 Tapping into the
popularity of social networking Web
sites like Facebook and MySpace,
P&G has set up Web sites aimed at
bringing its customers together. One
site is a discussion group for women,
where they can discuss health and
other concerns. Although such sites

Innovation and collaboration are
the key factors in the phenomenal
success of Cranium. This board
game was the fastest selling
game in history when it was
released in 1998, with 100,000
units sold within seven months.
Creators Richard Tait, left, and
Whit Alexander are shown
here demonstrating their highly
successful board game.

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Managing Chapter 1 9

The rise of the Internet turned careers (and lives) upside down. Students dropped out
of school to join Internet start-ups or start their own. Managers in big corporations
quit their jobs to do the same. Investors salivated, and invested heavily. The risks were
often ignored, or downplayed—sometimes tragically, as the boom went bust. Or con-
sider an earlier industry with similar transforming power: automobiles. There have
been at least 2,000 car makers, but now only three U.S. car companies are left in the
United States. In recent years, even these three have struggled to stay afloat as sales
declined. Despite plant closings, layoffs, and other belt-tightening, the financial sta-
tus of General Motors and Chrysler remained so shaky that, with talk of bankruptcy,
President Obama tried to assure the country that the U.S.-based auto industry would
not “vanish.” 27

What is the lesson to be learned from the failures in these important transforma-
tional industries? A key to understanding the success of a company—whether tradi-
tional, Internet-based, or a combination of both—is not how much the industry in
which it operates will affect society or how much it will grow. The key is the competi-
tive advantage held by a particular company and how well it can sustain that advan-
tage. Good managers know that they are in a competitive struggle to survive and win.

To survive and win, you have to gain advantage over your competitors and earn a
profit. You gain competitive advantage by being better than your competitors at doing
valuable things for your customers. But what does this mean, specifically? To succeed,
what must managers deliver? The fundamental success drivers are innovation, quality,
service, speed, and cost competitiveness.

Innovation
Google’s search engine quickly became a hit, and investors bid up the stock price of
the company when it went public. But now that the free search service is used around
the world, what can the company do next? Competitors are working hard to take away
some of Google’s share of the market. Google management knows that they need to
come up with the next big idea, so they require their engineers to devote one-fifth of
their time to special projects of their own. 28

Innovation is the introduction of new goods and services. Your firm must adapt
to changes in consumer demands and to new competitors. Products don’t sell forever;
in fact, they don’t sell for nearly as long as they used to, because so many competitors
are introducing so many new products all the time. Your
firm must innovate, or it will die. Likewise, you have to
be ready with new ways to communicate with customers
and deliver the products to them. When the Net allowed
merchants to bypass traditional distribution channels and
reach buyers directly, traditional marketers had to learn
how to innovate to remain competitive.

Sometimes the most important innovation isn’t the
product itself but the way it is delivered. Borrowing an idea
that has proved popular in Europe, Opaque–Dining in the
Dark has collaborated with the Braille Institute of America
to present dining events at the Hyatt West Hollywood in
total darkness. Diners select gourmet meals from a menu
in a lighted lounge and then are led into a dark banquet
room by blind or visually impaired waiters. The attraction

LO 2

The bottom line
Innovation

Because it’s easy for managers
to get so caught up in being

busy, get distracted, and
lose sight of what really

drives performance, you
will periodically see icons

as “bottom-line” reminders
of the need for innovation,
quality, service, speed, and

cost competitiveness.

innovation

The introduction of new
goods and services.

offer advertising opportunities, P&G uses them primarily as a way to learn more
about consumers’ attitudes. 26

Managing for Competitive Advantage

People entering the Dans le Noir
(In the Black) restaurant in Paris
where they will enjoy a dining
experience in complete darkness
as if they were blind. Blind waiters
serve as guides. The concept is an
innovative approach to fine dining,
and restaurants such as this are
spreading around the globe.

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10 Part One Foundations of Management

is that diners experience the meal in a completely new way because they are forced to
concentrate on their senses of taste, smell, and touch. 29

The need for innovation is driven in part by globalization. One obvious reason is
that when facilities in other countries can manufacturer appliances or write software
code at a lower cost than facilities in the United States, U.S. facilities are operating at
a disadvantage. They have to deliver something that their foreign competitors don’t
offer—and often that means something new. Philips, which started out making light
bulbs in the Netherlands in the 1890s, later expanded into X-ray machines, record
albums, and then semiconductors (microchips), which have since become a highly
competitive, cost-driven business. Now Philips is moving into higher-end products
such as medical equipment and LED-based lighting systems. The company has set up
research as well as manufacturing operations of its own in China, because that country
is becoming a key source of technical know-how, not just cheap labor. 30 The demand
for innovation will only intensify.

Innovation is today’s holy grail. 31 Like the other sources of competitive advantage,
innovation comes from people, it must be a strategic goal, and it must be managed
properly. Later chapters will show you how great companies innovate.

Quality
When Spectrum Health, a hospital chain based in Grand Rapids, Michigan, asked
patients how well they were served, patients rated staff low on helpfulness and their
attitude toward visitors and said they didn’t get good information about procedures
or how to take care of themselves after being released to go home. Spectrum set up
an advisory council of patients and family members, making visiting hours more flex-
ible, getting patient input into who was allowed to hear medical information and make
decisions about treatment, and calling discharged patients at home to make sure they
understood the directions they had received. Satisfaction scores of Spectrum patients
improved dramatically. 32

Spectrum Health’s efforts reflect a commitment to quality. In general, quality is the
excellence of your product. The importance of quality and the standards for accept-
able quality have increased dramatically in recent years. Customers now demand high-
quality goods and services, and often they will accept nothing less. In the hospital
industry, the government is contributing to that trend. To receive full reimbursement
from Medicare, hospitals must participate in a national program of patient satisfaction
surveys. Results of these surveys are posted on the Department of Health and Human
Service’s Medicare information Web site, hospitalcompare.hhs.gov, so that patients
can compare the rankings of hospitals in their area when choosing services. 33

Historically, quality pertained primarily to the physical goods that customers
bought, and it referred to attractiveness, lack of defects, reliability, and long-term
dependability. The traditional approach to quality was to check work after it was com-
pleted and then eliminate defects, using inspection and statistical data to determine
whether products were up to standards. But then W. Edwards Deming, J. M. Juran,
and other quality gurus convinced managers to take a more complete approach to
achieving total quality. This includes preventing defects before they occur, achieving
zero defects in manufacturing, and designing products for quality. The goal is to solve
and eradicate from the beginning all quality-related problems and to live a philosophy
of continuous improvement in the way the company operates. 34

Quality is further provided when companies customize goods and services to the
wishes of the individual consumer. Choices at Starbucks give consumers thousands
of variations on the drinks they can order, whether it’s half-caff or all caffeine, skim
milk or soy milk, or shots of espresso and any of a variety of flavored syrups. Car
buyers can go online to “build their own” Mini Cooper, down to the color of the
light for the speedometer. And for a premium price, candy lovers can select M&M’s

quality

The excellence of your
product (goods or services).

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Managing Chapter 1 11

candies bearing the message of their own creation. 35 Similarly, Jones
Soda Company lets visitors to its Web site order a 12-pack of soda with
their photo on the bottles. They upload the photo to the myJones Web
site ( www.myjones.com ), choose a soda flavor, and pay by credit card. 36

Providing world-class quality requires a thorough understanding of
what quality really is. 37 Quality can be measured in terms of product
performance, customer service, reliability (avoidance of failure or break-
downs), conformance to standards, durability, and aesthetics. At the
beginning of this section, we mentioned how hospitals are using patient
surveys to measure quality and meet Medicare requirements. However,
a recent study conducted by the University of Pennsylvania School of
Medicine determined that a patient’s risk of dying was not significantly
less at hospitals that scored well on Medicare’s quality measures. 38 But
certainly, quality care is more than staying alive! Only when you move
beyond broad, generic concepts such as “quality” and identify specific
quality requirements can you identify problems, target needs, set perfor-
mance standards more precisely, and deliver world-class value.

Service
As noted, important quality measures often pertain to the level of service
received by customers. This dimension of quality is particularly impor-
tant because the service sector has come to dominate the U.S. economy.
According to the federal government, the value of services produced in
the United States is much more than one and a half times the value of tangible goods
produced. 39 The Bureau of Labor Statistics projects that the fastest-growing job cat-
egories will be almost entirely services and retailing jobs, and the jobs expected to
see the greatest declines are almost all in manufacturing. 40 Services include intangible
products such as insurance, hotel accommodations, medical care, and haircuts.

In a competitive context, service means giving customers what they want or need,
when they want it. So service is focused on continually meeting the needs of custom-
ers to establish mutually beneficial long-term relationships. Software companies, in
addition to providing the actual programs, may help their customers identify require-
ments, set up computer systems, and perform maintenance. Best Buy adjusted its store
environment so that it would be more inviting to female shoppers. The chain’s loud
music and emphasis on high-tech features had been aimed at young men, but the
store found that women today influence 9 out of 10 consumer electronics purchases.
So Best Buy lowered the volume and the lighting, and it trained staff to discuss what
customers want the technology to do for them, rather than merely pointing out each
item’s bells and whistles. The chain is also trying to hire more female salespeople. 41

An important dimension of service quality is making it easy and enjoyable for cus-
tomers to experience a service or to buy and use products. The Detroit Institute of
Arts recently hired Sven Gierlinger, a manager from the Ritz-Carlton hotel chain,
noted for its exceptional level of service, to be its vice president of museum opera-
tions. As the art museum prepared for a grand reopening following a major renova-
tion, Gierlinger analyzed the types of customer interactions that occur in a museum,
identifying ways to make the experience more pleasant. He also worked with his staff
to identify ways to customize services, such as offering tours tailored to the interests
of particular groups. 42

Speed
Google constantly improves its search product at a rapid rate. In fact, its entire culture
is based on rapid innovation. Sheryl Sandberg, a Google vice president, once made a
mistake because she was moving too fast to plan carefully. Although the mistake cost

service

The speed and dependability
with which an organization
delivers what customers
want.

Every time you get a haircut at a
salon, you are contributing to the
employment of someone in one of
the fastest growing job categories,
the service sector.

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12 Part One Foundations of Management

the company a few million dollars, Google cofounder Larry Page responded to her
explanation and apology by saying he was actually glad she had made the mistake. It
showed that she appreciated the company’s values. Page told Sandberg, “I want to run
a company where we are moving too quickly and doing too much, not being too cau-
tious and doing too little. If we don’t have any of these mistakes, we’re just not taking
enough risks.” 43

While it’s unlikely that Google actually favors mistakes over money-making ideas,
Page’s statement expressed an appreciation that in the modern business environ-
ment, speed —rapid execution, response, and delivery of results—often separates the
winners from the losers. How fast can you develop and get a new product to market?
How quickly can you respond to customer requests? You are far better off if you are
faster than the competition—and if you can respond quickly to your competitors’
actions.

Speed isn’t everything—you can’t get sloppy in your quest to be first. But other
things being equal, faster companies are more likely to be the winners, slow ones
the losers. Even pre-Internet, companies were getting products to market and in the
hands of customers faster than ever. Now the speed requirement has increased expo-
nentially. Everything, it seems, is on fast-forward.

Speed is no longer just a goal of some companies; it is a strategic imperative. In the
auto industry, getting faster is essential just for keeping up with the competition. A
recent study found that the top assembly plant in the United States was Ford’s Atlanta
facility, where employees needed just 15.4 hours to assemble a vehicle. Compare that
with the 1980s, when GM employees needed 40 hours to assemble a vehicle. 44 Another
important measure of speed in the auto industry is the time the company takes to
go from product concept to availability of the vehicle in the showroom. During the
1980s, that time was about 30 or 40 months. Today Toyota has cut the process to an
average of 24 months; it needed just 22 months to launch its Tundra pickup. 45

Cost Competitiveness
Wal-Mart keeps driving hard to find new ways to cut billions of dollars from its
already very low distribution costs. It leads the industry in efficient distribution, but
competitors are copying Wal-Mart’s methods, so the efficiency no longer gives it as
much of an advantage. 46 Wal-Mart has sought to keep costs down by scheduling store
employees more efficiently. It recently introduced a computerized system that sched-
ules employees based on each store’s sales, transactions, units sold, and customer traf-
fic. The system is intended to schedule just enough workers, with full staffing only
at the busiest times of day and days of the week, so it requires more flexibility from
Wal-Mart’s employees. 47

Wal-Mart’s efforts are aimed at cost competitiveness, which means keeping costs
low enough so that the company can realize profits and price its products (goods or
services) at levels that are attractive to consumers. Needless to say, if you can offer a
desirable product at a lower price, it is more likely to sell.

Start-up firms typically practice cost competitiveness out of necessity. Paul Gra-
ham’s company, Y Combinator, provides seed funding to start-ups, and he observes
how new companies keep their expenses down because they simply don’t have much
to spend. A start-up’s total information technology could be just a few laptops con-
nected to the Internet and running free Web-based software. Graham says lean times
can remind managers to think about whether all their expenses are necessary: “You
may as well use [a slowdown] as an excuse to clean out all the expensive crap you have
lying around.” 48

Managing your costs and keeping them down requires being efficient: accomplish-
ing your goals by using your resources wisely and minimizing waste. Many top execu-
tives fly on private jets, which of course is more expensive than buying a ticket on

speed

Fast and timely execution,
response, and delivery of
results.

cost competitiveness

Keeping costs low to achieve
profits and be able to offer
prices that are attractive to
consumers.

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Managing Chapter 1 13

One reason every company must worry about cost is that consumers can easily
compare prices on the Internet from thousands of competitors. Consumers looking to
buy popular items, such as cameras, printers, and plane fares, can go online to research
the best models and the best deals. If you can’t cut costs and offer attractive prices, you
can’t compete.

Delivering All Five
Don’t assume that you can settle for delivering just one of the five competitive advan-
tages: low cost alone, or quality alone, for example. The best managers and companies
deliver them all.

Virginia Mason Medical Center, like many hospitals, felt challenged in deliver-
ing low costs along with high quality and superior services. Virginia Mason has a
reputation for high-quality care, but it was losing money treating certain patients.
So Virginia Mason collaborated with Aetna, an insurer that pays for 10 percent
of the medical center’s business, and found ways to treat some of the most expen-
sive conditions so that they became more economical to insure but were paid for at
higher rates that would be profitable for Virginia Mason. The medical center has
also improved quality through measures that enhance speed—in this case, cutting
waiting times for patients, such as a reduction in the 4-hour wait for chemotherapy
to 90 minutes. 51

Trade-offs may occur among the five sources of competitive advantage, but
this doesn’t need to be a zero-sum game where one has to suffer at the expense of
another. Avon focused on cost savings when it contracted with IBM Global Services
to handle human resources tasks such as payroll and benefits management. Turn-
ing over those responsibilities to a company that specializes in performing them
efficiently also frees Avon to concentrate on innovating in areas it knows best: direct
selling cosmetics to new customers. Avon’s CEO, Andrea Jung, launched an effort
to sell cosmetics to Chinese consumers through hundreds of thousands of represen-
tatives who are licensed with the government. 52 Avon also has tapped into the trend
toward customization by introducing the Hook Up Connector, a packaging product
that allows consumers to snap together items of their choice, such as a lipstick and
mascara. 53

These sources of competitive advantage were behind BusinessWeek ’s choices of best
and worst managers. By and large, “best” and “worst” are determined by results, as
indicated by the examples in the “From the pages of BusinessWeek ” feature.

One manager with a reputation for meeting this challenge skillfully is Mark Hurd, chief
executive of Hewlett-Packard. For Hurd, operating efficiently is the main goal of a nec-
essary and ongoing effort to look hard at all the company’s numbers and identify areas
where the company can get the job done with less. For example, HP improved the effi-
ciency of its information technology (IT) group by reducing the number of data centers
from 85 to 6. Critics question whether HP under Hurd is investing enough in innova-
tion for the future, but at least in the short term, the drive for efficiency has positioned
Hewlett-Packard to handle difficult times. In the recent recession, HP forecasted a sales
decline but expected its profits would actually rise. That’s not so strange when you con-
sider that even as HP reduced staffing in support departments like IT, it was increasing its
sales force and helping sales people target HP’s most profitable goods and services.50

Don’t forget:

Don’t focus on one aspect
of performance and neglect

the others. You
might be better

at or more
interested in one
than the others,
but you should

strive for all five.

a commercial airline. If the company can arrange to participate in a service such as
NetJets, where the company buys only shares in a jet with the rights to use it, this can
trim the price and make the arrangement more worthwhile. 49

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F R O M T H E P A G E S O F

14 Part One Foundations of Management

Management is the process of working with people and resources to accomplish
organizational goals. Good managers do those things both effectively and efficiently.
To be effective is to achieve organizational goals. To be efficient is to achieve goals
with minimal waste of resources, that is, to make the best possible use of money, time,
materials, and people. Some managers fail on both criteria, or focus on one at the
expense of another. The best managers maintain a clear focus on both effectiveness
and efficiency. These definitions have been around for a long time. But as you know,
business is changing radically. The real issue is how to do these things. 54

management

The process of working
with people and resources
to accomplish organizational
goals.

LO 3

The Best and Worst Managers of 2008
The best leaders have not only ridden out the crisis so far but also gleaned valuable,
often profitable, lessons from it. The worst? Well, some helped set the economic crisis
in motion; others became paragons of bad judgment in a time of trouble. Here are the
leaders of 2008 with all their successes and failures.

It’s not easy to measure excellence in a year like 2008. While some managers can be
judged by the bottom line, others merely had the good fortune to be running a food com-
pany instead of a financial firm. Then again, with volatile commodity prices, succeeding in
the food business wasn’t such an easy task.

BusinessWeek has singled out 12 executives who did a remarkable job of navigating
stormy waters. Some have posted stellar results. Others are struggling. But there are les-
sons to be learned from each of them.

David Axelrod, 53
Chief strategist, Obama campaign

The Chicago consultant may have described himself as the “keeper of the message,” but
he was more an architect. Credited with shaping Obama’s mission of hopeful change, he
drew campaign themes from the candidate’s life story, recruited potent supporters, and
made sure any attack on rivals was firm, but seldom angry or demeaning. The tightly run
campaign had few leaks and little infighting. And like any good right-hand man, Axelrod
stayed focused on the boss. “I see myself simply as helping disseminate the message of
Barack Obama,” he recently told NBC’s Meet the Press.

Frank Blake, 59
CEO, Home Depot, Atlanta

He simplified the company and boosted morale. Too bad Blake took over as the housing
market went bust.

His valued counselor? “Every year, I do a pilgrimage to go talk to Jack Welch. The first
time I sat down with him, he just talked to me about the people [at Home Depot]. Not a
number. Not ‘How are you going to get your gross margin rates up?’ ”

Great book: The War Within, on the Bush Administration, by Bob Woodward. “That’s
a good cautionary story. One of the first questions you have to ask as a leader is, to what
extent do people feel comfortable saying what’s on their minds?”

Jamie Dimon, 52
CEO, JPMorgan, New York

Dimon largely shunned the subprime bets and exotic financial instruments that brought
down rivals. As a result, JPMorgan was able to pick up the pieces of Bear Stearns when it
imploded in March and later absorb collapsed mortgage lender Washington Mutual.

http://images.businessweek.com/ss/09/01/0108_best_worst/1.htm

SOURCES: Excerpted from “The Best Managers,” BusinessWeek, January 19, 2009, p. 40; and “The Worst Manag-
ers,” BusinessWeek, January 19, 2009, p. 42.

The Functions of Management

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Managing Chapter 1 15

Although the context of business and the specifics of doing business are changing,
there are still plenty of timeless principles that make great managers, and great com-
panies, great. While fresh thinking and new approaches are required now more than
ever, much of what has already been learned about successful management practices
remains relevant, useful, and adaptable, with fresh thinking, to the 21st-century busi-
ness environment.

In the business world today, the great executives not only adapt to changing con-
ditions but also apply—fanatically, rigorously, consistently, and with discipline—the
fundamental management principles. These fundamentals include the four traditional
functions of management: planning, organizing, leading, and controlling. They remain as
relevant as ever, and they still provide the fundamentals that are needed in start-ups as
much as in established corporations. But their form has evolved.

Planning: Delivering Strategic Value
Planning is specifying the goals to be achieved and deciding in advance the appropri-
ate actions needed to achieve those goals. Planning activities include analyzing current
situations, anticipating the future, determining objectives, deciding in what types of
activities the company will engage, choosing corporate and business strategies, and
determining the resources needed to achieve the organization’s goals. Plans set the
stage for action and for major achievements.

The planning function for the new business environment, discussed in Part 2 of
this book, is more dynamically described as delivering strategic value. Value is a com-
plex concept. 55 Fundamentally, it describes the monetary amount associated with how
well a job, task, good, or service meets users’ needs. Those users might be business
owners, customers, employees, society, and even nations. The better you meet those
needs (in terms of quality, speed, efficiency, and so on), the more value you deliver.
That value is “strategic” when it contributes to meeting the organization’s goals. On
a personal level, you will do well when you periodically ask yourself and your boss,
“How can I add value?” Answering that question will enhance your contributions,
your job performance, and your career.

Historically, planning described a top-down approach in which top executives
establish business plans and tell others to implement them. Now and in the future,
delivering strategic value is a continual process in which people throughout the orga-
nization use their brains and the brains of customers, suppliers, and other stakeholders
to identify opportunities to create, seize, strengthen, and sustain competitive advan-
tage. This dynamic process swirls around the objective of creating more and more
value for the customer. Effectively creating value requires fully considering a new
and changing set of stakeholders and issues, including the government, the natural
environment, globalization, and the dynamic economy in which ideas are king and
entrepreneurs are both formidable competitors and potential collaborators. You will
learn about these and related topics in Chapter 4 (planning and strategic manage-
ment), Chapter 5 (ethics and corporate social responsibility), Chapter 6 (international
management), and Chapter 7 (entrepreneurship).

Organizing: Building a Dynamic Organization
Organizing is assembling and coordinating the human, financial, physical, infor-
mational, and other resources needed to achieve goals. Organizing activities include
attracting people to the organization, specifying job responsibilities, grouping jobs
into work units, marshaling and allocating resources, and creating conditions so that
people and things work together to achieve maximum success.

Part 3 of the book describes the organizing function as building a dynamic organi-
zation. Historically, organizing involved creating an organization chart by identify-
ing business functions, establishing reporting relationships, and having a personnel
department that administered plans, programs, and paperwork. Now and in the future,

planning

The management function
of systematically making
decisions about the goals and
activities that an individual,
a group, a work unit, or
the overall organization will
pursue.

value

The monetary amount
associated with how well a
job, task, good, or service
meets users’ needs.

organizing

The management function of
assembling and coordinating
human, financial, physical,
informational, and other
resources needed to achieve
goals.

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16 Part One Foundations of Management

effective managers will be using new
forms of organizing and viewing their
people as perhaps their most valuable
resources. They will build organiza-
tions that are flexible and adaptive,
particularly in response to competitive
threats and customer needs. Progres-
sive human resource practices that
attract and retain the very best of
a highly diverse population will be
essential aspects of the successful com-
pany. You will learn about these topics
in Chapter 8 (organization structure),
Chapter 9 (organizational agility),
Chapter 10 (human resources manage-
ment), and Chapter 11 (managing the
diverse workforce).

Leading: Mobilizing People
Leading is stimulating people to be high performers. It includes motivating and com-
municating with employees, individually and in groups. Leading involves close day-
to-day contact with people, helping to guide and inspire them toward achieving team
and organizational goals. Leading takes place in teams, departments, and divisions, as
well as at the tops of large organizations.

In earlier textbooks, the leading function described how managers motivate workers
to come to work and execute top management’s plans by doing their jobs. Today and
in the future, managers must be good at mobilizing people to contribute their ideas—to
use their brains in ways never needed or dreamed of in the past.

As described in Part 4, managers must rely on a very different kind of leadership
(Chapter 12) that empowers and motivates people (Chapter 13). Far more than in the
past, great work must be done via great teamwork (Chapter 14), both within work
groups and across group boundaries. Ideally, underlying these processes will be effec-
tive interpersonal and organizational communication (Chapter 15).

Controlling: Learning
and Changing
Planning, organizing, and lead-
ing do not guarantee success.
The fourth function, controlling,
monitors performance and imple-
ments necessary changes. By con-
trolling, managers make sure the
organization’s resources are being
used as planned and that the orga-
nization is meeting its goals for
quality and safety.

Monitoring is an essential
aspect of control. If you have
any doubts that this function is
important, consider some control
breakdowns that caused serious
problems. After an explosion at
BP’s Texas oil refinery caused the

leading

The management function
that involves the manager’s
efforts to stimulate high
performance by employees.

Shona Brown of Google makes
decisions about organizing. She
says, “The company’s goal is to
determine precisely the amount of
management it needs—and then
use a little bit less.”

In a recent nationwide survey, employees had mixed reviews of their manager’s
leadership skills.56 As a result, a manager who excels in leadership is especially
valuable.

Percentage of employees who say . . .

They positively relate to
their boss

Their boss is competent

Their boss rewards them f

or

accomplishments

Their boss is a good role
model and mentor

They feel motivated by
their boss

o
s

nt

oror
s

e
or

e
or

y
e

y
s
y

77%

50%

30%

29%

22%

20% 40% 60% 80% 100%

controlling

The management function of
monitoring performance and
making needed changes.

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Managing Chapter 1 17

deaths of 15 people, investigations suggested that widespread failure to implement
safety measures was behind the tragedy. In spite of a year of record profits, BP’s chief
executive announced plans to retire early, and his bonus was cut almost in half. 57 Other
lapses in controlling can hurt customers. A recent outbreak of salmonella infections—
which can cause fever, diarrhea, dehydration, and even death—was traced to Peter Pan
and Great Value peanut butter made by ConAgra Foods in its Sylvester, Georgia, fac-
tory. Processing the peanuts generally kills salmonella and other germs, so the likely
culprit was contamination of jars or equipment. ConAgra quickly announced a recall,
but more than 400 people in 44 states reported being infected, and 71 of them had to
be hospitalized. The recall alone was expected to cost ConAgra at least $50 million;
lawsuits, cleanup of the facility, and damage to the brands’ reputation are adding to
those costs. 58 As you can see, control failures can take many forms.

When managers implement their plans, they often find that things are not work-
ing out as planned. The controlling function makes sure that goals are met. It asks
and answers the question, “Are our actual outcomes consistent with our goals?” It
then makes adjustments as needed. To learn how Elon Musk applied this function to
make needed adjustments at Tesla Motors, see the “Management Close-Up: Taking
Action” feature.

Successful organizations, large and small, pay close attention to the controlling
function. But Part 5 of the book makes it clear that today and for the future, the key
managerial challenges are far more dynamic than in the past; they involve continually
learning and changing. Controls must still be in place, as described in Chapter 16. But
new technologies and other innovations (Chapter 17) make it possible to achieve con-
trols in more effective ways and to help all the people throughout the company, and
across company boundaries (including customers and suppliers), to use their brains,
learn, make a variety of new contributions, and help the organization change in ways
that forge a successful future (Chapter 18).

The four management functions apply to you personally, as well. You must find
ways to create value, organize for your own personal effectiveness, mobilize your own

Management Close-Up
Like many start-ups, Tesla Motors has hit a few potholes along the way. Fundamental dif-
ferences between Elon Musk and Tesla founder Martin Eberhard led to complications that
nearly halted the company’s progress. Technical problems during development pushed
back the launch of the company’s first car, the Roadster, by more than a year. In turn,
the production delays caused cash flow problems. Yet, to date Tesla has raised nearly
$150 million from investors; $55 million of that has come from Elon Musk.

The company burned through three CEOs before Musk took the reins in 2008. By
that time, the world economy had taken a serious downturn, and the United States found
itself in a deepening credit crisis. Musk ordered a layoff of nearly 25 percent of the work-
force, closed one office in a Detroit suburb, and opened a smaller one nearby. Tesla is
also looking to its Roadster, now in full production, to enhance the revenue stream by
trimming manufacturing costs.

While Musk is confident Tesla will weather the storm and characterizes the moves as
needed belt-tightening, the recession couldn’t have come at a worse time for the firm.
Tesla was already in development mode on its next model, a four-door luxury sedan
called the Model S. Now, Musk has slowed the Model S program, pushing back produc-
tion until mid-2011, and shelved plans to build an assembly plant.59

• What attributes does Elon Musk exhibit that make him an effective manager?
• How can Musk maintain Tesla’s momentum in spite of setbacks?

TAKING ACTION

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18 Part One Foundations of Management

talents and skills as well as those of others, monitor performance, and constantly learn,
develop, and change for the future. As you proceed through this book and this course,
we encourage you to not merely do your “textbook learning” of an impersonal course
subject but to think about these issues from a personal perspective as well, using the
ideas for your own personal development.

Performing All Four Management Functions
As a manager, your typical day will not be neatly divided into the four functions. You
will be doing many things more or less simultaneously. 60 Your days will be busy and
fractionated, spent dealing with interruptions, meetings, and firefighting. There will
be plenty to do that you wish you could be doing but can’t seem to get to. These
activities will include all four management functions.

Some managers are particularly interested in, devoted to, or skilled in one or two of
the four functions but not in the others. But you should devote adequate attention and
resources to all four functions. You can be a skilled planner and controller, but if you
organize your people improperly or fail to inspire them to perform at high levels, you
will not be realizing your potential as a manager. Likewise, it does no good to be the
kind of manager who loves to organize and lead, but who doesn’t really understand
where to go or how to determine whether you are on the right track. Good managers
don’t neglect any of the four management functions. Knowing what they are, you can
periodically ask yourself if you are devoting adequate attention to all of them.

Management Levels and Skills
Organizations—particularly large organizations—have many levels. In this section,
you will learn about the types of managers found at three different organizational
levels: top level, middle level, and frontline.

Top-Level Managers
Top-level managers are the senior executives of an organization and are responsible
for its overall management. Top-level managers, often referred to as strategic manag-
ers, are supposed to focus on long-term issues and emphasize the survival, growth, and
overall effectiveness of the organization.

Top managers are concerned not only with the organization as a whole but also
with the interaction between the organization and its external environment. This
interaction often requires managers to work extensively with outside individuals and
organizations.

The chief executive officer (CEO) is one type of top-level manager found in large
corporations. This individual is the primary strategic manager of the firm and has
authority over everyone else. Others include the chief operating officer (COO), com-
pany presidents, vice presidents, and members of the top management team. As compa-
nies are appreciating the potential of modern technology and knowledge management
to help them achieve and maintain a competitive advantage, more are creating the
position of chief information officer (CIO). At defense contractor Northrop Grum-
man, CIO Tom Shelman used to focus on managing the company’s computer systems.
But in the last few years, he has become directly involved with strategy; Shelman’s job
includes meeting with customers to help identify ways the company can use its tech-

nology to serve them better and
help the company grow. 61

Traditionally, the role of top-
level managers has been to set
overall direction by formulating

LO 4

top-level managers

Senior executives responsible
for the overall management
and effectiveness of the
organization.

In a recent poll of chief information officers, half said their responsibilities extend
beyond information technology to include top-level concerns such as developing the
company’s strategy.62

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Managing Chapter 1 19

strategy and controlling resources. But now, top managers are more commonly called
on to be not only strategic architects but also true organizational leaders. As leaders,
they must create and articulate a broader corporate purpose with which people can
identify—and one to which people will enthusiastically commit.

Middle-Level Managers
As the name implies, middle-level managers are located in the organization’s hierar-
chy below top-level management and above the frontline managers. Sometimes called
tactical managers, they are responsible for translating the general goals and plans devel-
oped by strategic managers into more specific objectives and activities.

Traditionally, the role of the middle manager is to be an administrative controller
who bridges the gap between higher and lower levels. Middle-level managers take cor-
porate objectives and break them down into business unit targets; put together sepa-
rate business unit plans from the units below them for higher-level corporate review;
and serve as linchpins of internal communication, interpreting and broadcasting top
management’s priorities downward and channeling and translating information from
the front lines upward.

As a stereotype, the term middle manager connotes mediocrity: unimaginative peo-
ple behaving like bureaucrats and defending the status quo. But middle managers are
closer than top managers to day-to-day operations, customers, and frontline managers
and employees—so they know the problems. They also have many creative ideas—
often better than their bosses’. Good middle managers provide the operating skills
and practical problem solving that keep the company working. 63

Frontline Managers
Frontline managers, or operational managers, are lower-level managers who supervise
the operations of the organization. These managers often have titles such as supervisor
or sales manager. They are directly involved with nonmanagement employees, imple-
menting the specific plans developed with middle managers. This role is critical in
the organization because operational managers are the link between management and
nonmanagement personnel. Your first management position probably will fit into this
category.

Traditionally, frontline managers have been directed and controlled from above,
to make sure that they successfully implement operations in support of company
strategy. But in leading companies, the role has expanded. Whereas the operational
execution aspect of the role remains vital, in leading companies frontline managers are
increasingly called on to be innovative and entrepreneurial, managing for growth and
new business development.

Managers on the front line—which usually means newer, younger managers—are
crucial to creating and sustaining quality, innovation, and other drivers of financial
performance. 64 In outstanding organizations, talented frontline managers are not only
allowed to initiate new activities but are expected to by their top- and middle-level man-
agers. And they are given freedom, incentives, and support to find ways to do so. 65

Table 1.1 elaborates on the changing aspects of different management levels. You
will learn about each of these aspects of management throughout this course.

Working Leaders with Broad Responsibilities
In small firms—and in those large companies that have adapted to the times—managers
have strategic, tactical, and operational responsibilities. They are complete business-
people; they have knowledge of all business functions, are accountable for results, and
focus on serving customers both inside and outside their firms. All of this requires the
ability to think strategically, translate strategies into specific objectives, coordinate
resources, and do real work with lower-level people.

middle-level
managers

Managers located in
the middle layers of the
organizational hierarchy,
reporting to top-level
executives.

frontline managers

Lower-level managers who
supervise the operational
activities of the organization.

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20 Part One Foundations of Management

In short, today’s best managers can do it all; they are “working leaders.” 66 They
focus on relationships with other people and on achieving results. They don’t just
make decisions, give orders, wait for others to produce, and then evaluate results.
They get dirty, do hard work themselves, solve problems, and produce value.

What does all of this mean in practice? How do managers spend their time—what
do they actually do? A classic study of top executives found that they spend their time
engaging in 10 key activities or roles, falling into three categories: interpersonal,
informational, and decisional. 67 Table 1.2 summarizes these roles. Even though the
study was done decades ago, it remains highly relevant as a description of what execu-
tives do. And even though the study focused on top executives, managers at all levels
engage in all these activities. As you study the table, you might ask yourself, “Which of
these activities do I enjoy most (and least)? Where do I excel (and not excel)? Which
would I like to improve?” Whatever your answers, you will be learning more about
these activities throughout this course.

Management Skills
Performing management functions and roles, and achieving competitive advantage,
are the cornerstones of a manager’s job. However, understanding this fact does not
ensure success. Managers need a variety of skills to do these things well. Skills are
specific abilities that result from knowledge, information, practice, and aptitude.
Although managers need many individual skills, which you will learn about through-
out this textbook, there are three essential categories: technical skills, interpersonal
and communication skills, and conceptual and decision skills. 68

First-timers can underestimate the challenges of the many technical, human, and
conceptual competencies required. 69 But when the key management functions are
performed by managers who have these critical management skills, the result is high
performance.

LO 5

TABLE 1.1
Transformation of
Management Roles and
Activities

Frontline
Managers

Middle-Level
Managers

Top-Level
Managers

Changing
Roles

• From operational
implementers
to aggressive
entrepreneurs

• From
administrative
controllers to
supportive
coaches

• From resource
allocators to
institutional
leaders

Key Activities • Creating and
pursuing
new growth
opportunities for
the business

• Developing
individuals and
supporting their
activities

• Establishing high
performance
standards

• Attracting and
developing
resources

• Linking dispersed
knowledge and
skills across units

• Institutionalizing a
set of norms and
values to support
cooperation and
trust

• Managing
continuous
improvement
within the unit

• Managing the
tension between
short-term
purpose and long-
term ambition

• Creating an
overarching
corporate purpose
and ambition

SOURCE: Adapted from C. Bartlett and S. Goshal, “The Myth of the Generic Manager: New Personal Competencies for New
Management Roles,” California Management Review 40, no. 1, Fall 1977, pp. 92–116.

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Managing Chapter 1 21

A technical skill is the ability to perform a specialized task that involves a cer-
tain method or process. Most people develop a set of technical skills to complete the
activities that are part of their daily work lives. The technical skills you learn in school
will provide you with the opportunity to get an entry-level position; they will also
help you as a manager. For example, your accounting and finance courses will develop
the technical skills you need to understand and manage the financial resources of an
organization.

Conceptual and decision skills involve the ability to identify and resolve problems
for the benefit of the organization and everyone concerned. Managers use these skills
when they consider the overall objectives and strategy of the firm, the interactions
among different parts of the organization, and the role of the business in its external
environment. As you acquire greater responsibility, you must exercise your conceptual
and decision skills with increasing frequency. You will confront issues that involve all
aspects of the organization and must consider a larger and more interrelated set of
decision factors. Much of this book is devoted to enhancing your conceptual and deci-
sion skills, but experience also plays an important part in their development.

Interpersonal and communication skills influence the manager’s ability to work
well with people. These skills are often called people skills. Managers spend the great
majority of their time interacting with people, 70 and they must develop their abilities
to lead, motivate, and communicate effectively with those around them. Your people
skills often make the difference in how high you go. Management professor Michael
Morris explains, “At a certain level in business, you’re living and dying on your social
abilities. . . . [Knowledge of a particular field] gets you in the door, but social intel-
ligence gets you to the top.” 71 Supporting this view, a survey of senior executives and
managers found that more than 6 out of 10 say they base hiring and promotion deci-
sions on a candidate’s “likability.” Almost as many (62 versus 63 percent) said they
base these decisions on skills, presumably referring to technical skills. 72

technical skill

The ability to perform a
specialized task involving
a particular method or
process.

conceptual and
decision skills

Skills pertaining to the ability
to identify and resolve
problems for the benefit
of the organization and its
members.

interpersonal and
communication skills

People skills; the ability
to lead, motivate, and
communicate effectively with
others.

TABLE 1.2
Managerial Roles: What
Managers Do

TA
Man
Man

Interpersonal
Roles

Leader: Staffing, training, and motivating people

Liaison: Maintaining a network of outside contacts who provide
information and favors

Figurehead: Performing symbolic duties (ceremonies and serving
other social and legal demands)

Informational
Roles

Monitor: Seeking and receiving information to develop a thorough
understanding of the organization and its environment; serving as
the “nerve center” of communication

Disseminator: Transmitting information from source to source,
sometimes interpreting and integrating diverse perspectives

Spokesperson: Speaking on behalf of the organization about
plans, policies, actions, and results

Decisional
Roles

Entrepreneur: Searching for new business opportunities and
initiating new projects to create change

Disturbance handler: Taking corrective action during crises or
other conflicts

Resource allocator: Providing funding and other resources to
units or people; includes making or approving significant
organizational decisions

Negotiator: Engaging in negotiations with parties outside the
organization as well as inside (e.g., resource exchanges)

SOURCE: Adapted from H. Mintzberg, The Nature of Managerial Work (New York: Harper & Row, 1973), pp. 92–93.

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22 Part One Foundations of Management

Professor Morris, quoted in the previous paragraph, has helped to teach people skills
to MBA candidates at Columbia Business School. He emphasizes that it is vital for
future managers to realize the importance of these skills in getting a job, keeping it, and
performing well in it, especially in the 21st century, where managers tend to be super-
visors of independent-minded knowledge workers. He explains, “You have to get high
performance out of people in your organization who you don’t have any authority over.
You need to read other people, know their motivators, know how you affect them.” 73

The importance of these skills varies by managerial level. Technical skills are most
important early in your career. Conceptual and decision skills become more impor-
tant than technical skills as you rise higher in the company. But interpersonal skills are
important throughout your career, at every level of management. Several biomedical
companies in California’s Orange County collaborated to provide training because they
observed that managers originally hired for their technical expertise needed to develop
their people skills so that they could handle higher-level assignments successfully. 74

You and Your Career
At the beginning of your career, your contribution to your employer depends on your
own performance; that’s all you’re responsible for. But on becoming a manager, you
are responsible for a whole group. To use an orchestra analogy, instead of playing an
instrument, you’re a conductor, coordinating others’ efforts. 75 The challenge is much
greater than most first-time managers expect it to be.

Throughout your career you’ll need to lead teams effectively, as well as influence
people over whom you have no authority; thus, the human skills are especially impor-
tant. Businesspeople often talk about emotional intelligence, 76 or “EQ”—the skills
of understanding yourself (including strengths and limitations), managing yourself
(dealing with emotions, making good decisions, seeking and using feedback, exer-
cising self-control), and dealing effectively with others (listening, showing empathy,
motivating, leading, and so on).

An example of a manager with these skills is Rita Burns, vice president of com-
munications and marketing at Memorial Health System in Colorado Springs. Self-
knowledge led Burns to pursue a career that brings together her talent at listening
and her love of health care. Burns says she finds it easy to appreciate other points of
view: “No matter where I am or what the situation is, I can find something to have a
conversation about.” Her boss, senior vice president Ron Burnside, describes her as a
talented communicator, and a colleague at the American Heart Association says Burns
possesses a “collaborative spirit,” which helps her see how Memorial Health System
can cooperate with the association on joint projects. 77

A common complaint about leaders, especially newly promoted ones who had been
outstanding individual performers, is that they lack what is perhaps the most funda-
mental of EQ skills: empathy. The issue is not lack of ability to change (you can),
but the lack of motivation to change. 78 William George, former chair and CEO of
Medtronic, says some people can go a long way in their careers based on sheer deter-
mination and aggressiveness, but personal development—including EQ—ultimately
becomes essential. 79 Executives who score low on EQ are less likely to be rated as
excellent on their performance reviews, and their divisions tend not to perform as
well. 80 A vice president at an aerospace company underwent a program to improve
her EQ after colleagues kept complaining that she was overly demanding and inclined
to put people down. An assessment found that she lacked social awareness. The vice
president eventually learned to respond after calming herself, as well as to explore
colleagues’ ideas rather than demeaning them. Before long, her colleagues began to
appreciate the change, and her career took a more successful path. 81

What should you do to forge a successful, gratifying career? You are well advised
to be both a specialist and a generalist, to be self-reliant and connected, to actively

LO 6

emotional
intelligence

The skills of understanding
yourself, managing yourself,
and dealing effectively with
others.

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Managing Chapter 1 23

manage your relationship with your organization, and to know what is required not
only to survive but also to thrive in today’s world.

Be Both a Specialist and a Generalist
If you think your career will be as a specialist, think again. Chances are, you will
not want to stay forever in strictly technical jobs with no managerial responsibilities.
Accountants are promoted to accounting department heads and team leaders, sales
representatives become sales managers, writers become editors, and nurses become
nursing directors. As your responsibilities increase, you must deal with more people,
understand more about other aspects of the organization, and make bigger and more
complex decisions. Beginning to learn now about these managerial challenges may
yield benefits sooner than you think.

So, it will help if you can become both a specialist and a generalist. 82 Seek to become
a specialist: you should be an expert in something. This will give you specific skills that
help you provide concrete, identifiable value to your firm and to customers. And over
time, you should learn to be a generalist, knowing enough about a variety of business
disciplines so that you can think strategically and work with different perspectives.

Patricia Calkins broadened her focus gradu-
ally and ambitiously from specialties in the
sciences, expanding first to engineering and
then to management. She started her career
with AT&T’s Western Electric subsidiary
as a chemist; when she was considering a
master’s degree in chemistry, she heeded
advice to develop her career opportuni-
ties by studying engineering. Once Calkins
had her master’s in civil and environmental
engineering, the company saw her manage-
ment talent and wanted to promote her, so
she returned to school for another master’s
degree, this time in business administra-
tion. She developed her generalist skills by
consulting, and from that work moved to
her current—and favorite—position as vice
pres ident of environment, health, and safety
at Xerox.83

There’s another advantage to being both
a specialist and a generalist: it can give you
the opportunity to indulge in the causes or
activities about which you are most passion-
ate. For example, Josh Ruxin, a professor
and founder of Access Project, a program
that applies American management systems
to hospitals in Rwanda, got started on his
career path when he traveled to Ethiopia
as a teenager. “That changed the rest of my life,” Ruxin recalls. “I couldn’t believe that
people so desperately poor were living on the same planet as we were.” So Ruxin earned
a doctorate in medical history and joined a management consulting firm, where he honed
his management skills. When he got the opportunity to follow a spin-off venture focusing
on economic development in underdeveloped regions, he took it.

In Africa, “I realized health care there had to get fixed before these economies had a
chance,” says Ruxin. So he formed Access Project. Now he uses both his general and his
specialized skills to help improve the health care system in Rwanda.84

Patricia Calkins, VP of Environment, Health, and
Safety at Xerox, became successful by being both
a specialist and a generalist. She developed her
specialty skills in the sciences and in business
administration, and then acquired her generalist skills
as a business consultant. What steps do you need to
take to become a specialist and a generalist?

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24 Part One Foundations of Management

Be Self-Reliant
To be self-reliant means to take full responsibility for yourself, your actions, and your
career, as Patricia Calkins did when she furthered her education and tackled con-
sulting assignments that applied her technical knowledge to the business world. You
cannot count on your boss or your company to take care of you. A useful metaphor is
to think of yourself as a business, with you as president and sole employee. Table 1.3
gives some specific advice about what this means in practice.

Jordan Edelstein took ownership of his career; for him, that meant taking a leap
into an industry he loved. General Mills hired him as an assistant marketing manager.
He was successful, but during a business trip, as he read about Electronic Arts and
its game Sims Online, Edelstein realized that this was an industry he felt passionate
about. Edelstein began researching jobs in the industry. When an opening came at
Electronic Arts, Edelstein prepared for extensive interviews in which he had to per-
suade dozens of people that his marketing expertise made up for his lack of experience
with high-tech products. Evidently, Edelstein has real marketing talent: he landed
what he identified as his dream job. 85

To be self-reliant, find new ways to make your overall performance better. Take
responsibility for change; be an innovator. 86 Don’t just do your work and wait for
orders; look for opportunities to contribute in new ways, to develop new products
and processes, and to generate constructive change that strengthens the company and
benefits customers and colleagues. As in Jordan Edelstein’s career, success requires
more than talent; you also have to be willing to work hard. The elite, world-class
performers in many fields reach the top tier only after ten years or more of hard
work. 87 The key is to engage in consistent practice, looking at the results and identify-
ing where to improve.

It’s easy to see how this works for violinists or basketball players, but what about
business managers? The answer is to focus on getting better results each time you try
any business task, whether it’s writing a report, chairing a meeting, or interpreting a
financial statement. To know whether you’re getting better, make a point of asking
for feedback from customers, colleagues, and bosses.

To develop your full potential, assess yourself, including your interests, aptitudes,
and personal character strengths. Think about it, ask others who know you well,
conduct a formal exercise in which you learn what others consider to be your “best
self,” 88 and use the resources of recent advances in psychology to identify your signa-
ture strengths. 89 Consider the professional image and reputation you would like to
develop, 90 and continue building your capabilities. Consider the suggestions found
throughout this book, and your courses, as you pursue these objectives.

TABLE 1.3
Keys to Career
Management

Vicky Farrow of Sun Microsystems gave the following advice to help people assume
responsibility for their own careers:

1. Think of yourself as a business.

2. Define your product: What is your area of expertise?

3. Know your target market: To whom are you going to sell this?

4. Be clear on why your customer buys from you. What is your “value proposition”—
what are you offering that causes him to use you?

5. As in any business, strive for quality and customer satisfaction, even if your
customer is just someone else in your organization—like your boss.

6. Know your profession or field and what’s going on there.

7. Invest in your own growth and development, the way a company invests in
research and development. What new products will you be able to provide?

8. Be willing to consider changing your career.

SOURCE: W. Kiechel III, “Eight Keys to Career Self-Reliance,” Fortune, April 4, 1994, pp. 68–72. Copyright © 1994 Times, Inc.
All rights reserved. Reprinted by permission.

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Managing Chapter 1 25

Be Connected
Being connected means having many good working relationships and interpersonal
contacts and being a team player with strong interpersonal skills. For example, those
who want to become partners in professional service organizations like accounting,
advertising, and consulting firms strive constantly to build a network of contacts.
Their “connectedness” goal is to work not only with lots of clients but also with a half
dozen or more senior partners, including several from outside their home offices and
some from outside their country. A study of new auditors showed that social relation-
ships improved newcomers’ knowledge of the organization and their jobs, their social
integration into the firm, and their commitment to the organization. 91

Social capital is the goodwill stemming from your social relationships, and it can
be mobilized on your behalf. It aids career success, compensation, employment, team
effectiveness, successful entrepreneurship, and relationships with suppliers and other
outsiders. 92 Today much of that social capital can be tapped online, at social network-
ing Web sites. Besides the purely social sites like MySpace and Facebook, some of
these sites are aimed at helping people tap business networks. For example, LinkedIn
has more than 8 million registered users, with member-
ship growing rapidly. Even busy executives are willing to
give LinkedIn a try because it allows sharing only among
people who agree to be connected; acquaintances can
introduce others only with permission. 93

Look at this another way: All business is a function of
human relationships. 94 Building competitive advantage
depends not only on you but on other people. Manage-
ment is personal. Commercial dealings are personal. Pur-
chase decisions, repurchase decisions, and contracts all
hinge on relationships. Even the biggest business deals—
takeovers—are intensely personal and emotional. With-
out good work relationships, you are an outsider, not an
effective manager and leader.

Actively Manage Your Relationship with
Your Organization
Many of the previous comments suggest the importance
of taking responsibility for your own actions and your
own career. Unless you are self-employed and your own
boss, one way to do this is to think about the nature of the
relationship between you and your employer. Figure 1.1
shows two possible relationships—and you have some
control over which relationship you will be in.

Relationship #1 is one in which you view yourself as
an employee and passively expect your employer to tell
you what to do and give you pay and benefits. Your
employer is in charge, and you are a passive recipient of its
actions. Your contributions are likely to be adequate but
minimal—you won’t make the added contributions that
strengthen your organization, and if all organizational
members take this perspective, the organization is not likely to be strong for the long
run. Personally, you may lose your job, or keep your job in a declining organization,
or receive few positive benefits from working there and either quit or become cynical
and unhappy in your work.

In contrast, relationship #2 is a two-way relationship in which you and your organi-
zation both benefit from one another. The mind-set is different: Instead of doing what
you are told, you think about how you can contribute—and you act accordingly. To
the extent that your organization values your contributions, you are likely to benefit

social capital

Goodwill stemming from
your social relationships.

This young professional is
“connecting” with her former
co-workers through Facebook, a
popular social networking tool.
Social networking is an important
way to stay “connected” and
build social relationships within
and outside of the workplace.
Increasingly, social networking
takes place through the use of
technology and the Internet.

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26 Part One Foundations of Management

in return by receiving full and fair rewards, support for further personal development,
and a more gratifying work environment. If you think in broad terms about how you
can help your company, and if others think like this as well, there is likely to be con-
tinuous improvement in the company’s ability to innovate, cut costs, and deliver qual-
ity products quickly to an expanding customer base. As the company’s bottom line
strengthens, benefits accrue to shareholders as well as to you and other employees.

What contributions can you make? You can do your basic work. But you can, and
should, go further. You can also figure out new ways to add value—by thinking of and
implementing new ideas that improve processes and results. You can do this by using
your technical knowledge and skills, as in developing a better information system,
accounting technique, or sales technique.

You also can contribute with your conceptual and human skills and your manage-
rial actions (see Figure 1.2 ). You can execute the essential management functions and
deliver competitive advantage. You can deliver strategic value (Part 2 of this book).
You can take actions that help build a more dynamic organization (Part 3). You can
mobilize people to contribute to their fullest potential (Part 4). And you can learn
and change—and help your colleagues and company learn and change—to adapt to
changing realities and forge a successful future (Part 5).

Survive and Thrive
Now—far more than ever—you will be accountable for your actions and for results.
In the past, people at many companies could show up, do an OK job, get a decent

Employer

You

#1
You as a passive

employee

#2
You as an active contributor
in a productive relationship

You
Your

OrganizationFIGURE 1.1
Two Relationships: Which
Will You Choose?

You

Your
Organization

Managerial Actions

1. Delivering Strategic Value
2. Building a Dynamic
Organization
3. Mobilizing People
4. Learning and Changing

FIGURE 1.2
Managerial Action Is Your
Opportunity to Contribute

bat37241_ch01_001-045.indd 26 12/3/09 2:40:21 PM

Managing Chapter 1 27

evaluation, and get a raise equal to the cost of living and maybe higher. Today, man-
agers must do more, better. Eminent management scholar Peter Drucker, in consid-
ering what makes managers effective, notes that some are charismatic while some are
not, and some are visionary while others are more numbers-oriented. 95 But successful
executives do share some common practices:

• They ask “What needs to be done?” rather than “What do I want to do?”
• They write an action plan. They don’t just think, they do, based on a sound,

ethical plan.
• They take responsibility for decisions. This requires checking up, revisiting,

and changing if necessary.
• They focus on opportunities rather than problems. Problems have to be solved,

and problem solving prevents more damage. But exploiting opportunities is
what creates great results.

This creative approach can make each employee a standout in some unique way.
Career adviser Rachelle Canter advises identifying where you deliver superior results
and thinking of that as your “brand.” For instance, an executive might develop a track
record of consistently improving productivity in various organizations, and an entry-
level customer service worker might become the company’s go-to employee for han-
dling the toughest customers. 96

Career success is most likely if you are flexible, creative, and ambitious. You will
need to learn how to think strategically, discern and convey your business vision, make
decisions, and work in teams. You will need to deliver competitive advantage and thrive
on change, just as Elon Musk does at Tesla Motors, as discussed in the “Management
Close-Up: Assessing Outcomes and Seizing Opportunities” feature. These and other
topics, essential to your successful career, provide the focus for the following chapters.

Management Close-Up
ASSESSING OUTCOMES AND SEIZING
OPPORTUNITIES
With Elon Musk’s cost-cutting initiatives, Tesla Motors was able
to withstand its financial crunch. Musk drew on relationships he
formed in the computer industry—with investors ranging from
eBay’s cofounder to Google’s founders to Silicon Valley venture
capitalists—to help fund Tesla. Meanwhile, the company focused
on filling its backlog of orders for its Roadster sports car to gen-
erate needed cash. Musk says, “The reason we started off with
a sports car is because initially any new technology’s expensive.”
Sports cars, even with their hefty price tags, do not suffer sales
slumps the way an average mom-and-pop car would—buyers
still want the latest technology. But their smaller market limits
the growth that Tesla can expect. To realize his vision of bring-
ing electric cars to the masses, Musk needs to produce a more
mainstream, less expensive model.

So Musk is now working to get his sedan project rolling. In
2009 Tesla previewed its luxury Model S sedan. Designed to
travel up to 300 miles on a single charge, the Model S can seat
seven passengers. Cars will be assembled in the United States,
with full production of up to 20,000 units a year. Though priced
at $57,400, the Model S qualifies buyers for a $7,500 federal
tax credit through the government’s economic stimulus package.
That price puts the car in the range of more mainstream buyers.

If it is successful, the Model S could catapult Tesla into industry
leadership and allow the company to expand into its planned
company-owned dealerships.

Musk has applied for a $350 million loan from the U.S. Depart-
ment of Energy to help produce the Model S. He also hopes to
receive some funding from the government’s $25 billion auto-
industry bailout package, 10 percent of which is set aside for
small business. In addition, Musk has expressed interest in taking
Tesla Motors public in the next few years. Of his efforts to bring
electric cars to the masses, Musk said, “In all frankness, I don’t
really need the stress of building a car company. . . . If I didn’t
think it was extremely important, I wouldn’t have done it . . . We
need to change the world. There’s no choice.” 97

• Consider Elon Musk’s background in the computer industry
and the difficulty of starting a revolutionary car company. Do
you think California is a good place from which to base Tesla
Motors? What are some advantages and disadvantages to this
strategy?

• Musk has drawn on his background in both physics and
finance to get Tesla off the ground. But he has also used his
managerial skills to keep the company moving ahead. Which
skills has he used? Do you think Musk is more of a specialist
or a generalist? Why?

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28 Part One Foundations of Management

Conceptual and decision skills, p. 21

Controlling, p. 16

Cost competitiveness, p. 12

Emotional intelligence, p. 22

Frontline managers, p. 19

Innovation, p. 9

Interpersonal and communication
skills, p. 21

Knowledge management, p. 7

Leading, p. 16

Management, p. 14

Middle-level managers, p. 19

Organizing, p. 15

Planning, p. 15

Quality, p. 10

Service, p. 11

Social capital, p. 25

Speed, p. 12

Technical skill, p. 21

Top-level managers, p. 18

Value, p. 15

KEY TERMS

Now that you have studied Chapter 1, you should be able to:

LO 1 Summarize the major challenges of managing
in the new competitive landscape.

Managers today must deal with dynamic forces that create
greater change than ever before. Among many forces that are
creating a need for managers to rethink their approaches, there
have recently been four major waves of change: globalization,
technological change including the development and applica-
tions of the Internet, knowledge management, and collaboration
across organizational boundaries.

LO 2 Describe the sources of competitive advantage
for a company.

Because business is a competitive arena, you need to deliver
value to customers in ways that are superior to what your com-
petitors do. Competitive advantages result from innovation,
quality, service, speed, and cost.

LO 3 Explain how the functions of management are
evolving in today’s business environment.

Despite massive change, management retains certain foundations
that will not disappear. The primary functions of management
are planning, organizing, leading, and controlling. Planning is ana-
lyzing a situation, determining the goals that will be pursued, and
deciding in advance the actions needed to pursue these goals.
Organizing is assembling the resources needed to complete the
job and coordinating employees and tasks for maximum success.
Leading is motivating people and stimulating high performance.
Controlling is monitoring the progress of the organization or
the work unit toward goals and then taking corrective action,
as necessary. In today’s business environment, these functions
more broadly require creating strategic value, building a dynamic
organization, mobilizing people, and learning and changing.

LO 4 Compare how the nature of management
varies at different organizational levels.

Top-level, strategic managers are the senior executives respon-
sible for the organization’s overall management. Middle-level, tac-
tical managers translate general goals and plans into more specific
objectives and activities. Frontline, operational managers are
lower-level managers who supervise operations. Today, managers
at all levels must perform a variety of interpersonal, informational,
and decisional roles. Even at the operational level, the best manag-
ers think strategically and operate like complete businesspeople.

LO 5 Define the skills you need to be an effective
manager.

To execute management functions successfully, managers need
technical skills, conceptual and decision skills, and interpersonal
and communication skills. A technical skill is the ability to per-
form a specialized task involving certain methods or processes.
Conceptual and decision skills help the manager recognize com-
plex and dynamic issues, analyze the factors that influence those
issues or problems, and make appropriate decisions. Interper-
sonal and communication skills enable the manager to interact
and work well with people. As you rise to higher organizational
levels, technical skills tend to become less important and con-
ceptual skills become more important, while human skills remain
extremely important at every level.

LO 6 Understand the principles that will help you
manage your career.

You are more likely to succeed in your career if you become
both a specialist and a generalist. You should be self-reliant but
also connected. You should actively manage your relationship
with your organization and continuously improve your skills
so that you can perform in the ways demanded in the changing
work environment.

SUMMARY OF LEARNING OBJECTIVES

1. Identify and describe a great manager. What makes him or
her stand out from the crowd?

2. Have you ever seen or worked for an ineffective man-
ager? Describe the causes and the consequences of the
ineffectiveness.

3. Describe in as much detail as possible how the Internet and
globalization affect your daily life.

4. Identify some examples of how different organizations col-
laborate “across boundaries.”

DISCUSSION QUESTIONS

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Managing Chapter 1 29

5. Name a great organization. How do you think management
contributes to making it great?

6. Name an ineffective organization. What can management
do to improve it?

7. Give examples you have seen of firms that are outstanding
and weak on each of the five pillars of competitive advan-
tage. Why do you choose the firms you do?

8. Describe your use of the four management functions in the
management of your daily life.

9. Discuss the importance of technical, conceptual, and inter-
personal skills at school and in jobs you have held.

10. What are your strengths and weaknesses as you contem-
plate your career? How do they correlate with the skills
and behaviors identified in the chapter?

11. Devise a plan for developing yourself and making yourself
attractive to potential employers. How would you go about
improving your managerial skills?

12. Consider the managers and companies discussed in the
chapter. Have they been in the news lately, and what is the
latest? If their image, performance, or fortunes have gone up
or down, what has changed to affect how they have fared?

13. Who are BusinessWeek ’s most recent “best and worst man-
agers,” and why were they selected?

CONCLUDING CASE

Your Job and Your Passion—You Can Pursue Both!
The 21st century offers many challenges to every one of us. As
more firms go global, as more economies interconnect, and as
the Web blasts away boundaries to communication, we become
more informed citizens. This interconnectedness means that
the organizations you work for will require you to develop both
general and specialized knowledge—such as speaking multiple
languages, using various software applications, or understanding
details of financial transactions. You will have to develop gen-
eral management skills to foster your ability to be self-reliant
and thrive in a changing marketplace. And here’s the exciting
part: As you build both types of knowledge, you may be able to
integrate your growing expertise with the causes or activities
you care most about. Or, your career adventure may lead you
to a new passion.

Former presidents George H. W. Bush and Bill Clinton are
well known for combining their management skills—running
a country—with their passion for helping people around the
world. Together they have raised funds to assist disaster vic-
tims, those with HIV/AIDS, and others in need. Jake Burton
turned his love of snow sports into an entire industry when he
founded Burton Snowboards. Annie Withey poured her busi-
ness and marketing knowledge into her two famous business
ventures: Smartfood and Annie’s Homegrown. Both products
were the result of her passion for healthful foods made from
organic ingredients.

As you enter the workforce, you may have no idea where
your career path will lead. You may be asking yourself, “How will
I fit in?” “Where will I live?” “How much will I earn?” “Where
will my business and personal careers evolve as the world con-
tinues to change at such a fast pace?” If you are feeling nervous
because you don’t know the answers to these questions yet,
relax. A career is a journey, not a single destination. You may
have one type of career or several. It is likely you will work for
several organizations, or you may run one or more businesses
of your own.

As you ask yourself what you want to do and where you
want to be, take a few minutes to review the chapter and its

main topics. Think about your personality, what you like and
dislike, what you know and what you want to learn, what you
fear and what you dream. Then try the following exercise.

QUESTIONS

1. Create a three-column chart in which the first column lists
nonmanagement skills you have. Are you good at travel? Do
you know how to build furniture? Are you a whiz at sports
statistics? Are you an innovative cook? Do you play video
games for hours? In the second column, list the causes or
activities about which you are passionate. These may dovetail
with the first list, but they might not.

2. Once you have your two columns complete, draw lines
between entries that seem compatible. If you are good at
building furniture, you might have also listed a concern about
families who are homeless. Remember that not all entries will
find a match—the idea is to begin finding some connections.

3. In the third column, generate a list of firms or organizations
you know about that reflect your interests. If you are good
at building furniture, you might be interested working for the
Habitat for Humanity organization, or you might find your-
self gravitating toward a furniture retailer like Ikea or Ethan
Allen. You can do further research on organizations via the
Internet or business publications.

With this chart, you have begun to create a career plan for
yourself. In the next exercise, you will be assessing your manage-
ment skills. Each of these activities begins to zero in on your own
particular combination of general and specialized knowledge—
both of which will grow and change throughout your career.
Creating a plan is like talking the talk. Making the plan happen
requires walking the walk. By the time you finish this course, you
will be ready to take those first career steps. You may change
direction once or many times, but always your path will lead
forward. Good luck!

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30 Part One Foundations of Management

To get an overall profile of your level of skill competence,
respond to the following statements using the following rating
scale. Please rate your behavior as it is, not as you would like
it to be. If you have not engaged in a specific activity, answer
according to how you think you would behave based on your
experience in similar activities. Be honest; this instrument
is designed to help you tailor your learning to your specific
needs.

RATING SCALE

1 Strongly disagree

2 Disagree

3 Slightly disagree

4 Slightly agree

5 Agree

6 Strongly agree

In regard to my level of self-knowledge:
_____ 1. I seek information about my strengths and weak-

nesses from others as a basis for self-improvement.

_____ 2. To improve, I am willing to be self-disclosing to oth-
ers (i.e., to share my beliefs and feelings).

_____ 3. I am aware of my preferred style in gathering infor-
mation and making decisions.

_____ 4. I understand how I cope with situations that are
ambig uous and uncertain.

_____ 5. I have a well-developed set of personal standards and
principles that guide my behavior.

When faced with stressful or time-pressured
situations:
_____ 6. I use effective time-management methods such as

keeping track of my time, making to-do lists, and
prioritizing tasks.

_____ 7. I reaffirm my priorities so that less important things
don’t drive out more important things.

_____ 8. I maintain a program of regular exercise for fitness.

_____ 9. I maintain an open, trusting relationship with some-
one with whom I can share my frustrations.

_____ 10. I know and practice several temporary relaxation
techniques such as deep breathing and muscle
relaxation.

_____ 11. I maintain balance in my life by pursuing a variety of
interests outside work.

When I approach a typical, routine problem:
_____ 12. I state clearly and explicitly what the problem is. I

avoid trying to solve it until I have defined it.

_____ 13. I generate more than one alternative solution to
the problem, instead of identifying only one obvious
solution.

_____ 14. I keep steps in the problem-solving process distinct;
that is, I define the problem before proposing alter-
native solutions, and I generate alternatives before
selecting a single solution.

When faced with a complex or difficult problem
that does not have an easy solution:
_____ 15. I define a problem in multiple ways. I don’t limit myself

to just one problem definition.

_____ 16. I unfreeze my thinking by asking lots of questions
about the nature of the problem before considering
ways to solve it.

_____ 17. I think about the problem from both the left (logical)
side of my brain and the right (intuitive) side of my
brain.

_____ 18. I avoid selecting a solution until I have developed
many possible alternatives.

_____ 19. I have specific techniques that I use to help develop
creative and innovative solutions to problems.

When trying to foster more creativity and innova-
tion among those with whom I work:
_____ 20. I make sure there are divergent points of view rep-

resented or expressed in every complex problem-
solving situation.

_____ 21. I try to acquire information from individuals outside
the problem-solving group who will be affected by
the decision, mainly to determine their preferences
and expectations.

_____ 22. I provide recognition not only for those who come
up with creative ideas (the idea champions) but
also for those who support others’ ideas (support-
ers) and who provide resources to implement them
(orchestrators).

_____ 23. I encourage informed rule-breaking in pursuit of cre-
ative solutions.

In situations where I have to provide negative
feedback or offer corrective advice:
_____ 24. I help others recognize and define their own prob-

lems when I counsel them.

_____ 25. I am clear about when I should coach someone and
when I should provide counseling instead.

_____ 26. When I give feedback to others, I avoid referring to
personal characteristics and focus on problems or
solutions instead.

_____ 27. When I try to correct someone’s behavior, our rela-
tionship is strengthened.

EXPERIENTIAL EXERCISES

1.1 Personal Assessment of Management Skills (PAMS)

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Managing Chapter 1 31

When I see someone doing something that needs
correcting:
_____ 50. I avoid making personal accusations and attributing

self-serving motives to the other person.

_____ 51. I encourage two-way interaction by inviting the
respon dent to express his or her perspective and to
ask questions.

_____ 52. I make a specific request, detailing a more acceptable
option.

When someone complains about something I’ve
done:
_____ 53. I show genuine concern and interest, even when I

disagree.

_____ 54. I seek additional information by asking questions that
provide specific and descriptive information.

_____ 55. I ask the other person to suggest more acceptable
behaviors.

When two people are in conflict and I am the
mediator:
_____ 56. I do not take sides but remain neutral.

_____ 57. I help the parties generate multiple alternatives.

_____ 58. I help the parties find areas on which they agree.

In situations where I have an opportunity to
empower others:
_____ 59. I help people feel competent in their work by recog-

nizing and celebrating their small successes.

_____ 60. I provide regular feedback and needed support.

_____ 61. I provide all the information that people need to
accomplish their tasks.

_____ 62. I highlight the important impact that a person’s work
will have.

When delegating work to others:
_____ 63. I specify clearly the results I desire.

_____ 64. I specify clearly the level of initiative I want others to
take (e.g., wait for directions, do part of the task and
then report, do the whole task and then report, etc.).

_____ 65. I allow participation by those accepting assignments
regarding when and how work will be done.

_____ 66. I avoid upward delegation by asking people to recom-
mend solutions, rather than merely asking for advice
or answers, when a problem is encountered.

_____ 67. I follow up and maintain accountability for delegated
tasks on a regular basis.

When I am in the role of leader in a team:
_____ 68. I know how to establish credibility and influence

among team members.

_____ 69. I am clear and consistent about what I want to
achieve.

_____ 70. I build a common base of agreement in the team
before moving forward with task accomplishment.

_____ 28. I am descriptive in giving negative feedback to oth-
ers. That is, I objectively describe events, their conse-
quences, and my feelings about them.

_____ 29. I take responsibility for my statements and point of
view, for example, “I have decided” instead of “They
have decided.”

_____ 30. I identify some area of agreement in a discussion with
someone who has a different point of view.

_____ 31. I don’t talk down to those who have less power or
less information than I.

_____ 32. When discussing someone’s problem, I respond with a
reply that indicates understanding rather than advice.

In a situation where it is important to obtain more
power:
_____ 33. I put forth more effort and take more initiative than

expected in my work.

_____ 34. I am continually upgrading my skills and knowledge.

_____ 35. I support organizational ceremonial events and
activities.

_____ 36. I form a broad network of relationships with people
throughout the organization at all levels.

_____ 37. In my work I strive to generate new ideas, initiate
new activities, and minimize routine tasks.

_____ 38. I send personal notes to others when they accom-
plish something significant or when I pass along
important information to them.

_____ 39. I refuse to bargain with individuals who use high-
pressure negotiation tactics.

_____ 40. I avoid using threats or demands to impose my will
on others.

When another person needs to be motivated:
_____ 41. I determine if the person has the necessary resources

and support to succeed in a task.

_____ 42. I use a variety of rewards to reinforce exceptional
performances.

_____ 43. I design task assignments to make them interesting
and challenging.

_____ 44. I make sure the person gets timely feedback from
those affected by task performance.

_____ 45. I help the person establish performance goals that
are challenging, specific, and time bound.

_____ 46. Only as a last resort do I attempt to reassign or
release a poorly performing individual.

_____ 47. I discipline when effort is below expectations and
capabilities.

_____ 48. I make sure that people feel fairly and equitably
treated.

_____ 49. I provide immediate compliments and other forms of
recognition for meaningful accomplishments.

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32 Part One Foundations of Management

When I am leading change:
_____ 78. I usually emphasize a higher purpose or meaning asso-

ciated with the work I do.

_____ 79. I keep track of things that go right, not just things that
go wrong.

_____ 80. I frequently give other people positive feedback.

_____ 81. I work to close performance gaps—the difference
between good performance and great performance.

_____ 82. I express gratitude frequently and conspicuously, even
for small acts.

_____ 83. I know how to get people to commit to my vision of
positive change.

_____ 84. I know how to unlock the positive energy in other
people.

_____ 85. I express compassion toward people who are facing
pain or difficulty.

SOURCE: David A. Whetten and Kim S. Cameron, Developing Management
Skills, 6th ed. (Upper Saddle River, NJ: Pearson/Prentice Hall, 2005), pp. 23–27.
Adapted by permission of Pearson Education, Inc., Upper Saddle River, NJ.

_____ 71. I articulate a clear, motivating vision of what the team
can achieve along with specific short-term goals.

When I am in the role of team member:
_____ 72. I know a variety of ways to facilitate task accomplish-

ment in the team.

_____ 73. I know a variety of ways to help build strong relation-
ships and cohesion among team members.

When I desire to make my team perform well,
regardless of whether I am a leader or member:
_____ 74. I am knowledgeable about the different stages of

team development experienced by most teams.

_____ 75. I help the team avoid groupthink by making sure that
sufficient diversity of opinions is expressed in the
team.

_____ 76. I diagnose and capitalize on my team’s core compe-
tencies, or unique strengths.

_____ 77. I encourage exceptionally high standards of perfor-
mance and outcomes that far exceed expectations.

1. See the figure on page 33. Working on your own, write down
all of your primary contacts—individuals you know person-
ally who can support you in attaining your professional goals.
Then begin to explore their secondary connections. Make
assumptions about possible secondary connections that can
be made for you by contacting your primary connections.
For example, through one of your teachers (primary), you
might be able to obtain some names of potential employers
(secondary). (10–15 min.)

2. Then meet with your partner or small group to exchange
information about your primary and secondary networks and
to exchange advice and information on how to best use these
connections, as well as how you could be helpful to them.
(about 5 min. per person; 10–30 min. total, depending on
group size)

3. Add names or types of names to your list based on ideas you
get by talking with others in your group. (2–5 min.)

4. Discuss with large group or class, using the following discus-
sion questions. (10 min.)

1.2 Your Personal Network
QUESTIONS

1. What were some of the best primary sources identified by
your group?

2. What were some of the best sources for secondary contacts
identified by your group?

3. What are some suggestions for approaching primary contacts?

4. What are some suggestions for approaching secondary con-
tacts, and how is contacting secondary sources different from
contacting primary contacts?

5. What did you learn about yourself and others from this
exercise?

SOURCE: Suzanne C. de Janasz, Karen O. Dowd, and Beth Z. Schneider,
Interpersonal Skills in Organizations (New York: McGraw-Hill, 2002),
p. 211. © 2002 The McGraw-Hill Companies.

1.3 Effective Managers

OBJECTIVES

1. To better understand what behaviors contribute to effective
management.

2. To conceive a ranking of critical behaviors that you person-
ally believe reflects their importance to your success as a
manager.

INSTRUCTIONS

1. Following is a partial list of behaviors in which managers may
engage. Rank these items in terms of their importance for

effective performance as a manager. Put a 1 next to the item
that you think is most important, 2 for the next most impor-
tant, down to 10 for the least important.

2. Bring your rankings to class. Be prepared to justify your
results and rationale. If you can add any behaviors to this list
that might lead to success or greater management effective-
ness, write them in.

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Managing Chapter 1 33

Secondary
connections

Primary
connections

Self

Primary and Secondary
Connections

Effective Managers Worksheet
_____ Participates in community activities as opportunities

arise.
_____ Is neat in appearance.

_____ Is honest in all matters pertaining to company property
or funds.

SOURCE: Excerpted from Lawrence R. Jauch, Arthur G. Bedeian,
Sally A. Coltrin, and William F. Glueck, The Managerial Experience:
Cases, Exercises, and Readings, 5th ed. Copyright © 1989. Reprinted
with permission of South-Western, a division of Thomson Learning,
www.thomson-rights.com . Fax 800 730-2215.

_____ Communicates and interprets policy so that it is
understood by the members of the organization.

_____ Makes prompt and clear decisions.

_____ Assigns subordinates to the jobs for which they are
best suited.

_____ Encourages associates to submit ideas and plans.

_____ Stimulates subordinates by means of competition
among employees.

_____ Seeks means of improving management capabilities and
competence.

_____ Fully supports and carries out company policies.

1.4 Career Planning
OBJECTIVES

1. To explore your career thinking.

2. To visualize your ideal job in terms as concrete as possible.

3. To summarize the state of your career planning, and to
become conscious of the main questions you have about it
at this point.

INSTRUCTIONS

Read the instructions for each activity, reflect on them, and then
write your response. Be as brief or extensive as you like.

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34 Part One Foundations of Management

1.

2.

3.

4.

5.

6.

7.

8.

1.
2.
3.
4.
5.
6.
7.
8.

Career Planning Worksheet

1. Describe your ideal occupation in terms of responsibilities, skills, and how you would know if you were successful.

2. Identify 10 statements you can make today about your current career planning. Identify 10 questions you need answered for
career planning.

10 statements 10 questions

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Managing Chapter 1 35

9.

10.

9.
10.

SOURCE: Judith R. Gordon, Diagnostic Approach to Organizational Behavior. Copyright © 1983 Pearson Education, Inc. Reprinted by permission of Pear-
son Education, Inc. Upper Saddle River, NJ.

bat37241_ch01_001-045.indd 35 12/3/09 2:40:23 PM

36

APPENDIX A
APPENDIX A

The Evolution of Management
For thousands of years, managers have wrestled with the same
issues and problems confronting executives today. Around
1100 B.C., the Chinese practiced the four management functions—
planning, organizing, leading, and controlling—discussed in
Chapter 1. Between 400 B.C. and 350 B.C., the Greeks recog-
nized management as a separate art and advocated a scientific
approach to work. The Romans decentralized the management
of their vast empire before the birth of Christ. During medieval
times, the Venetians standardized production through the use
of an assembly line, building warehouses and using an inventory
system to monitor the contents. 1

But throughout history most managers operated strictly on
a trial-and-error basis. The challenges of the industrial revolu-
tion changed that. Management emerged as a formal discipline
at the turn of the century. The first university programs to offer
management and business education, the Wharton School at the
University of Pennsylvania and the Amos Tuck School at Dart-
mouth, were founded in the late 19th century. By 1914, 25 busi-
ness schools existed. 2

Thus, the management profession as we know it today is
relatively new. This appendix explores the roots of modern
management theory. Understanding the origins of management
thought will help you grasp the underlying contexts of the ideas
and concepts presented in the chapters ahead.

Although this appendix is titled “The Evolution of Manage-
ment,” it might be more appropriately called “The Revolu-
tions of Management,” because it documents the wide swings
in management approaches over the last 100 years. Out of the
great variety of ideas about how to improve management, parts
of each approach have survived and been incorporated into
modern perspectives on management. Thus, the legacy of past
efforts, triumphs, and failures has become our guide to future
management practice.

EARLY MANAGEMENT CONCEPTS
AND INFLUENCES
Communication and transportation constraints hindered the
growth of earlier businesses. Therefore, improvements in man-
agement techniques did not substantially improve performance.
However, the industrial revolution changed that. As companies
grew and became more complex, minor improvements in man-
agement tactics produced impressive increases in production
quantity and quality. 3

The emergence of economies of scale —reductions in the
average cost of a unit of production as the total volume pro-
duced increases—drove managers to strive for further growth.
The opportunities for mass production created by the industrial
revolution spawned intense and systematic thought about man-
agement problems and issues—particularly efficiency, produc-
tion processes, and cost savings. 4

Figure A.1 provides a timeline depicting the evolution of
management thought through the decades. This historical per-
spective is divided into two major sections: classical approaches
and contemporary approaches. Many of these approaches over-
lapped as they developed, and they often had a significant impact
on one another. Some approaches were a direct reaction to the
perceived deficiencies of previous approaches. Others developed
as the needs and issues confronting managers changed over the
years. All the approaches attempted to explain the real issues
facing managers and provide them with tools to solve future
problems.

Figure A.1 will reinforce your understanding of the key rela-
tionships among the approaches and place each perspective in its
historical context.

The oldest company on the Fortune 500 list is the Bank
of New York, founded in 1784 by Alexander Hamilton.
The oldest industrial company is DuPont, begun in 1802
after E. I. du Pont fled persecution during the French
Revolution.5

CLASSICAL APPROACHES
The classical period extended from the mid-19th century through
the early 1950s. The major approaches that emerged during this
period were systematic management, scientific management,
administrative management, human relations, and bureaucracy.

Systematic Management During the 19th century, growth in
U.S. business centered on manufacturing. 6 Early writers such as
Adam Smith believed the management of these firms was cha-
otic, and their ideas helped to systematize it. Most organizational
tasks were subdivided and performed by specialized labor. How-
ever, poor coordination caused frequent problems and break-
downs of the manufacturing process.

The systematic management approach attempted to build
specific procedures and processes into operations to ensure coor-
dination of effort. Systematic management emphasized economical

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Managing Chapter 1 37

not constrain business practices significantly. Finally, labor was
poorly organized. As a result, many managers were oriented
more toward things than toward people.

Systematic management did not address all the issues 19th-
century managers faced, but it tried to raise managers’ aware-
ness about the most pressing concerns of their job.

operations, adequate staffing, maintenance of inventories to meet
consumer demand, and organizational control. These goals were
achieved through:

• Careful definition of duties and responsibilities.
• Standardized techniques for performing these duties.
• Specific means of gathering, handling, transmitting, and ana-

lyzing information.
• Cost accounting, wage, and production control systems to

facilitate internal coordination and communications.

Systematic management emphasized internal operations
because managers were concerned primarily with meeting the
explosive growth in demand brought about by the industrial
revolution. In addition, managers were free to focus on inter-
nal issues of efficiency, in part because the government did

Systematic
management

Contingency
theory

Current and
future revolutions

Classical Approaches Contemporary Approaches

1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Scientific
management

Bureaucracy

Administrative
management

Human
relations

Quantitative
management

Organizational
behavior

Systems
theory

FIGURE A.1
The Evolution of Management Thought

Production costs dropped as mass manufacturing lowered unit costs.
Thus economies of scale was born, a concept that persists in the
modern manufacturing era.

SOURCE: W. Sullivan, “The Industrial Revolution and the Factory Operative
in Pennsylvania,” The Pennsylvania Magazine of History and Biography 78 (1954),
pp. 478–79.

SOURCE: W. Sullivan, “The Industrial Revolution and the Factory Operative
in Pennsylvania,” The Pennsylvania Magazine of History and Biography 78 (1954),y
pp 478 79

The following rules, taken from the records of Cocheco
Company, were typical of labor contract provisions in the
1850s.

1. The hours of work shall be from sunrise to sunset, from
the 21st of March to the 20th of September inclusively;
and from sunrise until eight o’clock, P.M., during the
remainder of the year. One hour shall be allowed for
dinner, and half an hour for breakfast during the first
mentioned six months; and one hour for dinner during
the other half of the year; on Saturdays, the mill shall
be stopped one hour before sunset, for the purpose of
cleaning the machinery.

2. Every hand coming to work a quarter of an hour after the
mill has been started shall be docked a quarter of a day;
and every hand absenting him or herself, without absolute
necessity, shall be docked in a sum double the amount of
the wages such hand shall have earned during the time of
such absence. No more than one hand is allowed to leave
any one of the rooms at the same time—a quarter of a
day shall be deducted for every breach of this rule.

3. No smoking or spiritous liquors shall be allowed in
the factory under any pretense whatsoever. It is also
forbidden to carry into the factory, nuts, fruits, etc.,
books, or papers during the hours of work.

An Early Labor Contract

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38 Part One Foundations of Management

exceeded a standard level of output for each job. Taylor con-
cluded that both workers and management would benefit from
such an approach.

Scientific management principles were widely embraced.
Other proponents, including Henry Gantt and Frank and Lillian
Gilbreth, introduced many refinements and techniques for apply-
ing scientific management on the factory floor. One of the most
famous examples of the application of scientific management is
the factory Henry Ford built to produce the Model-T. 9

Scientific Management Systematic management failed to lead
to widespread production efficiency. This shortcoming became
apparent to a young engineer named Frederick Taylor, who
was hired by Midvale Steel Company in 1878. Taylor discov-
ered that production and pay were poor, inefficiency and waste
were prevalent, and most companies had tremendous unused
potential. He concluded that management decisions were unsys-
tematic and that no research to determine the best means of
production existed.

In response, Taylor introduced a second approach to man-
agement, known as scientific management. 7 This approach
advocated the application of scientific methods to analyze work
and to determine how to complete production tasks efficiently.
For example, U.S. Steel’s contract with the United Steel Work-
ers of America specified that sand shovelers should move 12.5
shovelfuls per minute; shovelfuls should average 15 pounds of
river sand composed of 5.5 percent moisture. 8

Taylor identified four principles of scientific management:

1. Management should develop a precise, scientific approach for
each element of one’s work to replace general guidelines.

2. Management should scientifically select, train, teach, and
develop each worker so that the right person has the right
job.

3. Management should cooperate with workers to ensure that
jobs match plans and principles.

4. Management should ensure an appropriate division of work
and responsibility between managers and workers.

To implement this approach, Taylor used techniques such as
time-and-motion studies. With this technique, a task was divided
into its basic movements, and different motions were timed to
determine the most efficient way to complete the task.

After the “one best way” to perform the job was identified,
Taylor stressed the importance of hiring and training the proper
worker to do that job. Taylor advocated the standardization of
tools, the use of instruction cards to help workers, and breaks
to eliminate fatigue.

Another key element of Taylor’s approach was the use of
the differential piecerate system. Taylor assumed workers were
motivated by receiving money. Therefore, he implemented a pay
system in which workers were paid additional wages when they

Frederick Taylor (left) and
Dr. Lillian Gilbreth (right) were
early experts in management
efficiency.

Scientific Management and the Model-T

At the turn of the century, automobiles were a luxury that
only the wealthy could afford. They were assembled by
craftspeople who put an entire car together at one spot on
the factory floor. These workers were not specialized, and
Henry Ford believed they wasted time and energy bringing
the needed parts to the car. Ford took a revolutionary
approach to automobile manufacturing by using scientific
management principles.

After much study, machines and workers in Ford’s new
factory were placed in sequence so that an automobile
could be assembled without interruption along a moving
production line. Mechanical energy and a conveyor belt
were used to take the work to the workers.

The manufacture of parts likewise was revolutionized. For
example, formerly it had taken one worker 20 minutes to
assemble a flywheel magneto. By splitting the job into 29
different operations, putting the product on a mechanical
conveyor, and changing the height of the conveyor, Ford cut
production time to 5 minutes.

By 1914 chassis assembly time had been trimmed from
almost 13 hours to 1½ hours. The new methods of
production required complete standardization, new machines,
and an adaptable labor force. Costs dropped significantly, the
Model-T became the first car accessible to the majority of
Americans, and Ford dominated the industry for many years.

SOURCE: H. Kroos and C. Gilbert, The Principles of Scientific Management (New
York: Harper & Row, 1911).

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Managing Chapter 1 39

managers desire flexibility and the differences between motivat-

ing groups and individuals—laid the groundwork for the modern
contingency approach discussed later in the chapter.

All the writings in the administrative management area empha-
size management as a profession along with fields such as law and
medicine. In addition, these authors offered many recommenda-
tions based on their personal experiences, which often included
managing large corporations. Although these perspectives and
recommendations were considered sound, critics noted that
they might not work in all settings. Different types of personnel,
industry conditions, and technologies may affect the appropriate-
ness of these principles.

The legacy of Taylor’s scientific management approach is
broad and pervasive. Most important, productivity and efficiency
in manufacturing improved dramatically. The concepts of scien-
tific methods and research were introduced to manufacturing.
The piecerate system gained wide acceptance because it more
closely aligned effort and reward. Taylor also emphasized the
need for cooperation between management and workers. And
the concept of a management specialist gained prominence.

The first female executive to head a company on
the Fortune 500 list was Katharine Graham of The
Washington Post (first listed in 1972).10

Despite these gains, not everyone was convinced that scien-
tific management was the best solution to all business problems.
First, critics claimed that Taylor ignored many job-related social
and psychological factors by emphasizing only money as a worker
incentive. Second, production tasks were reduced to a set of
routine, machinelike procedures that led to boredom, apathy,
and quality control problems. Third, unions strongly opposed
scientific management techniques because they believed man-
agement might abuse their power to set the standards and the
piecerates, thus exploiting workers and diminishing their impor-
tance. Finally, although scientific management resulted in intense
scrutiny of the internal efficiency of organizations, it did not help
managers deal with broader external issues such as competitors
and government regulations, especially at the senior manage-
ment level.

Administrative Management The administrative manage-
ment approach emphasized the perspective of senior managers
within the organization, and argued that management was a pro-
fession and could be taught.

An explicit and broad framework for administrative man-
agement emerged in 1916, when Henri Fayol, a French mining
engineer and executive, published a book summarizing his man-
agement experiences. Fayol identified five functions and 14 prin-
ciples of management. The five functions, which are very similar
to the four functions discussed in Chapter 1, are planning, orga-
nizing, commanding, coordinating, and controlling. Table A.1 lists
and defines the 14 principles. Although some critics claim Fayol
treated the principles as universal truths for management, he
actually wanted them applied flexibly. 11

A host of other executives contributed to the administra-
tive management literature. These writers discussed a broad
spectrum of management topics, including the social responsibili-
ties of management, the philosophy of management, clarification
of business terms and concepts, and organizational principles.
Chester Barnard’s and Mary Parker Follet’s contributions have
become classic works in this area. 12

Barnard, former president of New Jersey Bell Telephone
Company, published his landmark book The Functions of the Exec-
utive in 1938. He outlined the role of the senior executive: for-
mulating the purpose of the organization, hiring key individuals,
and maintaining organizational communications. 13 Mary Parker
Follet’s 1942 book Dynamic Organization extended Barnard’s
work by emphasizing the continually changing situations that
managers face. 14 Two of her key contributions—the notion that

TABLE A.1
Fayol’s 14 Principles of Management

managers desire flexibility and the differences between motivat-

1. Division of work—divide work into specialized
tasks and assign responsibilities to specific
individuals.

2. Authority—delegate authority along with
responsibility.

3. Discipline—make expectations clear and punish
violations.

4. Unity of command—each employee should be
assigned to only one supervisor.

5. Unity of direction—employees’ efforts should be
focused on achieving organizational objectives.

6. Subordination of individual interest to the general
interest—the general interest must predominate.

7. Remuneration—systematically reward efforts that
support the organization’s direction.

8. Centralization—determine the relative importance
of superior and subordinate roles.

9. Scalar chain—keep communications within the
chain of command.

10. Order—order jobs and material so they support
the organization’s direction.

11. Equity—fair discipline and order enhance
employee commitment.

12. Stability and tenure of personnel—promote
employee loyalty and longevity.

13. Initiative—encourage employees to act on their
own in support of the organization’s direction.

14. Esprit de corps—promote a unity of interests
between employees and management.

1955 Ray Kroc’s first McDonald’s opens. Bill Gates and
Steve Jobs are born.15

Human Relations A fourth approach to management, human
relations, developed during the 1930s. This approach aimed at
understanding how psychological and social processes interact

bat37241_ch01_001-045.indd 39 12/3/09 2:40:27 PM

40 Part One Foundations of Management

relations was a significant step in the development of manage-
ment thought, because it prompted managers and researchers
to consider the psychological and social factors that influence
performance.

Bureaucracy Max Weber, a German sociologist, lawyer, and
social historian, showed how management itself could be more
efficient and consistent in his book The Theory of Social and Eco-
nomic Organizations. 19 The ideal model for management, accord-
ing to Weber, is the bureaucracy approach.

Weber believed bureaucratic structures can eliminate the
variability that results when managers in the same organization
have different skills, experiences, and goals. Weber advocated
that the jobs themselves be standardized so that personnel

with the work situation to influence performance. Human rela-
tions was the first major approach to emphasize informal work
relationships and worker satisfaction.

This approach owes much to other major schools of thought.
For example, many of the ideas of the Gilbreths (scientific man-
agement) and Barnard and Follet (administrative management)
influenced the development of human relations from 1930 to
1955. In fact, human relations emerged from a research project
that began as a scientific management study.

Western Electric Company, a manufacturer of communica-
tions equipment, hired a team of Harvard researchers led by
Elton Mayo and Fritz Roethlisberger. They were to investigate
the influence of physical working conditions on workers’ pro-
ductivity and efficiency in one of the company’s factories outside
Chicago. This research project, known as the Hawthorne Studies,
provided some of the most interesting and controversial results
in the history of management. 16

The Hawthorne Studies were a series of experiments con-
ducted from 1924 to 1932. During the first stage of the project
(the Illumination Experiments), various working conditions, par-
ticularly the lighting in the factory, were altered to determine the
effects of those changes on productivity. The researchers found
no systematic relationship between the factory lighting and pro-
duction levels. In some cases, productivity continued to increase
even when the illumination was reduced to the level of moon-
light. The researchers concluded that the workers performed
and reacted differently because the researchers were observing
them. This reaction is known as the Hawthorne Effect.

This conclusion led the researchers to believe productivity
may be affected more by psychological and social factors than
by physical or objective influences. With this thought in mind,
they initiated the other four stages of the project. During these
stages, the researchers performed various work group experi-
ments and had extensive interviews with employees. Mayo and
his team eventually concluded that productivity and employee
behavior were influenced by the informal work group.

Human relations proponents argued that managers should
stress primarily employee welfare, motivation, and communica-
tion. They believed social needs had precedence over economic
needs. Therefore, management must gain the cooperation of the
group and promote job satisfaction and group norms consistent
with the goals of the organization.

Another noted contributor to the field of human relations
was Abraham Maslow. 17 In 1943, Maslow suggested that humans
have five levels of needs. The most basic needs are the physical
needs for food, water, and shelter; the most advanced need is
for self-actualization, or personal fulfillment. Maslow argued that
people try to satisfy their lower-level needs and then progress
upward to the higher-level needs. Managers can facilitate this
process and achieve organizational goals by removing obstacles
and encouraging behaviors that satisfy people’s needs and orga-
nizational goals simultaneously.

Although the human relations approach generated research
into leadership, job attitudes, and group dynamics, it drew heavy
criticism. 18 Critics believed that one result of human relations—a
belief that a happy worker was a productive worker—was too
simplistic. While scientific management overemphasized the
economic and formal aspects of the workplace, human relations
ignored the more rational side of the worker and the impor-
tant characteristics of the formal organization. However, human

In 1837, William Procter, a ruined English retailer, and James
Gamble, son of a Methodist minister, formed a partnership
in Cincinnati to make soap and candles. Both were known
for their integrity, and soon their business was thriving.

By 1883, the business had grown substantially. When
William Cooper Procter, grandson of the founder, left
Princeton University to work for the firm, he wanted to
learn the business from the ground up. He started working
on the factory floor. “He did every menial job from
shoveling rosin and soap to pouring fatty mixtures into
crutchers. He brought his lunch in a paper bag . . . and sat
on the floor [with the other workers] and ate with them,
learning their feelings about work.”

By 1884, Cooper Procter believed, from his own experience,
that increasing workers’ psychological commitment to the
company would lead to higher productivity. His passion
to increase employee commitment to the firm led him to
propose a scandalous plan: share profits with workers to
increase their sense of responsibility and job satisfaction.
The surprise was audible on the first “Dividend Day,” when
workers held checks equivalent to seven weeks’ pay.

Still, the plan was not complete. Workers saw the profit
sharing as extra pay rather than as an incentive to improve.
In addition, Cooper Procter recognized that a fundamental
issue for the workers, some of whom continued to be
his good friends, was the insecurity of old age. Public
incorporation in 1890 gave Procter a new idea. After trying
several versions, by 1903 he had discovered a way to meet
all his goals for labor: a stock purchase plan. For every
dollar a worker invested in P&G stock, the company would
contribute four dollars’ worth of stock.

Finally, Cooper Procter had resolved some key issues for
labor that paid off in worker loyalty, improved productivity,
and an increasing corporate reputation for caring and
integrity. He went on to become CEO of the firm, and P&G
today remains one of the most admired corporations in the
United States.

A Human Relations Pioneer

SOURCES: O. Schisgall, Eyes on Tomorrow (Chicago: J. G. Ferguson, 1981):
T. Welsh, “Best and Worst Corporate Reputations,” Fortune, February 7, 1994,
pp. 58–66.

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Managing Chapter 1 41

Computers facilitated the development of specific quantitative
methods. These include such techniques as statistical decision
theory, linear programming, queuing theory, simulation, forecast-
ing, inventory modeling, network modeling, and break-even analy-
sis. Organizations apply these techniques in many areas, including
production, quality control, marketing, human resources, finance,
distribution, planning, and research and development.

Despite the promise quantitative management holds, manag-
ers do not rely on these methods as the primary approach to
decision making. Typically they use these techniques as a supple-
ment or tool in the decision process. Many managers will use
results that are consistent with their experience, intuition, and
judgment, but they often reject results that contradict their
beliefs. Also, managers may use the process to compare alterna-
tives and eliminate weaker options.

Several explanations account for the limited use of quantita-
tive management. Many managers have not been trained in using
these techniques. Also, many aspects of a management decision
cannot be expressed through mathematical symbols and formu-
las. Finally, many of the decisions managers face are nonroutine
and unpredictable.

changes would not disrupt the organization. He emphasized a
structured, formal network of relationships among specialized
positions in an organization. Rules and regulations standardize
behavior, and authority resides in positions rather than in indi-
viduals. As a result, the organization need not rely on a particu-
lar individual, but will realize efficiency and success by following
the rules in a routine and unbiased manner.

1962 The first Wal-Mart store opens in Rogers,
Arkansas.
1964 Blue Ribbon Sports ships its first shoes. It’s now
called Nike.
1969 Don and Doris Fisher open the first Gap store in
San Francisco.

1971 Intel introduces the first microprocessor and IBM
introduces the floppy disk.
1976 Steve Jobs and Steve Wozniak start Apple
Computer in their garage.

According to Weber, bureaucracies are especially important
because they allow large organizations to perform the many
routine activities necessary for their survival. Also, bureaucratic
positions foster specialized skills, eliminating many subjective
judgments by managers. In addition, if the rules and controls are
established properly, bureaucracies should be unbiased in their
treatment of people, both customers and employees.

Many organizations today are bureaucratic. Bureaucracy
can be efficient and productive. However, bureaucracy is not
the appropriate model for every organization. Organizations
or departments that need rapid decision making and flexibility
may suffer under a bureaucratic approach. Some people may
not perform their best with excessive bureaucratic rules and
procedures.

Other shortcomings stem from a faulty execution of bureau-
cratic principles rather than from the approach itself. Too much
authority may be vested in too few people; the procedures may
become the ends rather than the means; or managers may ignore
appropriate rules and regulations. Finally, one advantage of a
bureaucracy—its permanence—can also be a problem. Once a
bureaucracy is established, dismantling it is very difficult.

CONTEMPORARY APPROACHES
The contemporary approaches to management include quantita-
tive management, organizational behavior, systems theory, and
the contingency perspective. The contemporary approaches
have developed at various times since World War II, and they
continue to represent the cornerstones of modern management
thought.

Quantitative Management Although Taylor introduced the
use of science as a management tool early in the 20th century,
most organizations did not adopt the use of quantitative tech-
niques for management problems until the 1940s and 1950s. 20
During World War II, military planners began to apply math-
ematical techniques to defense and logistic problems. After the
war, private corporations began assembling teams of quantita-
tive experts to tackle many of the complex issues confronting
large organizations. This approach, referred to as quantitative
management, emphasizes the application of quantitative analy-
sis to management decisions and problems.

Quantitative management helps a manager make a decision
by developing formal mathematical models of the problem.

Organizational Behavior During the 1950s, a transition took
place in the human relations approach. Scholars began to rec-
ognize that worker productivity and organizational success are
based on more than the satisfaction of economic or social needs.
The revised perspective, known as organizational behav-
ior, studies and identifies management activities that promote
employee effectiveness through an understanding of the com-
plex nature of individual, group, and organizational processes.
Organizational behavior draws from a variety of disciplines,
including psychology and sociology, to explain the behavior of
people on the job.

During the 1960s, organizational behaviorists heavily influ-
enced the field of management. Douglas McGregor’s Theory
X and Theory Y marked the transition from human relations. 21
According to McGregor, Theory X managers assume workers
are lazy and irresponsible and require constant supervision and
external motivation to achieve organizational goals. Theory Y
managers assume employees want to work and can direct and
control themselves. McGregor advocated a Theory Y perspec-
tive, suggesting that managers who encourage participation and
allow opportunities for individual challenge and initiative would
achieve superior performance.

Other major organizational behaviorists include Chris Argyris,
who recommended greater autonomy and better jobs for
workers, 22 and Rensis Likert, who stressed the value of partici-
pative management. 23 Through the years, organizational behavior
has consistently emphasized development of the organization’s
human resources to achieve individual and organizational goals.
Like other approaches, it has been criticized for its limited per-
spective, although more recent contributions have a broader and
more situational viewpoint. In the past few years, many of the

bat37241_ch01_001-045.indd 41 12/3/09 2:40:29 PM

42 Part One Foundations of Management

recommendations for the major contingencies throughout this
text. The contingencies include

1. Circumstances in the organization’s external environment.
2. The internal strengths and weaknesses of the organization.
3. The values, goals, skills, and attitudes of managers and

workers in the organization.
4. The types of tasks, resources, and technologies the

organization uses.

With an eye to these contingencies, a manager may cat-
egorize the situation and then choose the proper competitive
strategy, organization structure, or management process for the
circumstances.

Researchers continue to identify key contingency variables and
their effects on management issues. As you read the topics cov-
ered in each chapter, you will notice similarities and differences
among management situations and the appropriate responses.
This perspective should represent a cornerstone of your own
approach to management. Many of the things you will learn about
throughout this course apply a contingency perspective.

primary issues addressed by organizational behavior have expe-
rienced a rebirth with a greater interest in leadership, employee
involvement, and self-management.

1980 Microsoft licenses its operating system to IBM.
1981 MTV launches on cable.
1995 Netscape goes public and kicks off the dot-com
boom.

2000 AOL becomes the first pure Internet company to
make the Fortune 500 list and merges with Time Warner
the same year.
2001 Enron files for bankruptcy.
2002 United Airlines files for bankruptcy.
2003 AOL Time Warner posts a record $98.7 billion
loss.26

Systems Theory The classical approaches as a whole were
criticized because they (1) ignored the relationship between
the organization and its external environment, and (2) usually
stressed one aspect of the organization or its employees at the
expense of other considerations. In response to these criti-
cisms, management scholars during the 1950s stepped back from
the details of the organization to attempt to understand it as
a whole system. These efforts were based on a general scien-
tific approach called systems theory. 24 Organizations are open
systems, dependent on inputs from the outside world, such as
raw materials, human resources, and capital. They transform
these inputs into outputs that (ideally) meet the market’s needs
for goods and services. The environment reacts to the outputs
through a feedback loop; this feedback provides input for the
next cycle of the system. The process repeats itself for the life of
the system, and is illustrated in Figure A.2 .

Systems theory also emphasizes that an organization is one
system in a series of subsystems. For instance, Southwest Air-
lines is a subsystem of the airline industry and the flight crews
are a subsystem of Southwest. Systems theory points out that
each subsystem is a component of the whole and is interdepen-
dent with other subsystems.

Contingency Perspective Building on systems theory ideas,
the contingency perspective refutes universal principles of
management by stating that a variety of factors, both internal and
external to the firm, may affect the organization’s performance. 25
Therefore, there is no “one best way” to manage and organize,
because circumstances vary.

Situational characteristics are called contingencies. Under-
standing contingencies helps a manager know which sets of cir-
cumstances dictate which management actions. You will learn

EXTERNAL ENVIRONMENT

Raw materials
Human resources
Energy
Financial resources
Information
Equipment

Organization

Transformation
process

Goods
Services

Inputs Outputs

FIGURE A.2
Open-System Perspective of an Organization

AN EYE ON THE FUTURE
All of these historical perspectives have left legacies that affect
contemporary management thought and practice. Their under-
currents continue to flow, even as the context and the specifics
change.

Times do pass, and things do change. This may sound obvi-
ous, but it isn’t to those managers who sit by idly while their
firms fail to adapt to changing times. Business becomes global.
New technologies change how we work, produce goods, and
deliver services. Change continually creates both new oppor-
tunities and new demands for lowering costs and for achieving
greater innovation, quality, and speed. Management knowledge
and practices evolve accordingly.

bat37241_ch01_001-045.indd 42 12/3/09 2:40:29 PM

Managing Chapter 1 43

quantitative management A contemporary management
approach that emphasizes the application of quantitative analysis
to managerial decisions and problems, p. 41.

scientific management A classical management approach
that applied scientific methods to analyze and determine the
“one best way” to complete production tasks, p. 38.

systematic management A classical management approach
that attempted to build into operations the specific procedures
and processes that would ensure coordination of effort to
achieve established goals and plans, p. 36.

systems theory A theory stating that an organization is a
managed system that changes inputs into outputs, p. 42.

DISCUSSION QUESTIONS
1. How does today’s business world compare with the one of

40 years ago? What is different about today, and what is not
so different?

2. What is scientific management? How might today’s organiza-
tions use it?

3. Table A.1 lists Fayol’s 14 principles of management, first pub-
lished in 1916. Are they as useful today as they were then?
Why or why not? When are they most, and least, useful?

4. What are the advantages and disadvantages of a bureaucratic
organization?

5. In what situations are quantitative management concepts
and tools applicable?

6. Choose any organization and describe its system of inputs
and outputs.

7. Why did the contingency perspective become such an
important approach to management? Generate a list of con-
tingencies that might affect the decisions you make in your
life or as a manager.

8. For each of the management approaches discussed in the
chapter, give examples you have seen. How effective or inef-
fective were they?

9. The appendix highlighted a few landmark events in recent
business history. What additional landmarks during those
decades would you include?

10. The final landmark was from 2003—what are the most
important landmarks since then, and why?

The essential facts about change are these: First, change is
happening more rapidly and dramatically than at any other time
in history. Second, if you don’t anticipate change and adapt to
it, you and your firm will not thrive in a competitive business
world. The theme of change—what is happening now, what lies
ahead, how it affects management, and how you can deal with
it—permeates this entire book.

What are the implications of these changes for you and your
career? How can you best be ready to meet the challenges? You
must ask questions about the future, anticipate changes, know
your responsibilities, and be prepared to meet them head-on. We
hope you study the remaining chapters with these goals in mind.

KEY TERMS
administrative management A classical management ap-
proach that attempted to identify major principles and functions
that managers could use to achieve superior organizational per-
formance, p. 39.

bureaucracy A classical management approach emphasizing
a structured, formal network of relationships among specialized
positions in the organization, p. 40.

contingencies Factors that determine the appropriateness of
managerial actions, p. 42.

contingency perspective An approach to the study of man-
agement proposing that the managerial strategies, structures,
and processes that result in high performance depend on the
characteristics, or important contingencies, or the situation in
which they are applied, p. 42.

economies of scale Reductions in the average cost of a unit
of production as the total volume produces increases, p. 36.

Hawthorne Effect People’s reactions to being observed or
studied resulting in superficial rather than meaningful changes in
behavior, p. 40.

human relations A classical management approach that at-
tempted to understand and explain how human psychological
and social processes interact with the formal aspects of the
work situation to influence performance, p. 39.

organizational behavior A contemporary management ap-
proach that studies and identifies management activities that
promote employee effectiveness by examining the complex and
dynamic nature of individual, group, and organizational process-
es, p. 41.

Experiential Exercises
A.1 Approaches to Management

OBJECTIVES

1. To help you conceive a wide variety of management
approaches.

2. To clarify the appropriateness of different management
approaches in different situations.

INSTRUCTIONS

Your instructor will divide your class randomly into groups of
four to six people each. Acting as a team, with everyone offering

ideas and one person serving as official recorder, each group will
be responsible for writing a one-page memo to your present
class. Subject matter of your group’s memo will be “My advice for
managing people today is . . .” The fun part of this exercise (and
its creative element) involves writing the memo from the view-
point of the person assigned to your group by your instructor.

Among the memo viewpoints your instructor may assign are:

• An ancient Egyptian slave master (building the great pyramids)
• Henri Fayol
• Frederick Taylor

bat37241_ch01_001-045.indd 43 12/3/09 2:40:30 PM

44 Part One Foundations of Management

Make sure you manage your 20-minute time limit carefully.
A recommended approach is to spend 2 to 3 minutes putting
the exercise into proper perspective. Next, take about 10 to
12 minutes brainstorming ideas for your memo, with your
recorder jotting down key ideas and phrases. Have your recorder
use the remaining time to write your group’s one-page memo,
with constructive comments and help from the others. Pick a
spokesperson to read your group’s memo to the class.

SOURCE: R. Krietner and A. Kinicki, Organization Behavior, 3rd ed. (New
York: Richard D. Irwin, 1994), pp. 30–31.

• Mary Parker Follet
• Douglas McGregor
• A contingency management theorist
• A Japanese auto company executive
• The chief executive officer of IBM in the year 2030
• Commander of the Starship Enterprise II in the year 3001
• Others, as assigned by your instructor

Use your imagination, make sure everyone participates, and
try to be true to any historical facts you’ve encountered. Attempt
to be as specific and realistic as possible. Remember, the idea is
to provide advice about managing people from another point in
time (or from a particular point of view at the present time).

A.2 The University Grading System Analysis

OBJECTIVES

1. To learn to identify the components of a complex system.
2. To better understand organizations as systems.
3. To visualize how a change in policy affects the functioning of

an organization system.

INSTRUCTIONS

1. Assume that your university has decided to institute a pass–
fail system of grading instead of the letter-grade system it
presently has. Apply the systems perspective learned from
this chapter to understanding this decision.

2. Answer the questions on the Grading System Analysis
Worksheet individually, or in small groups, as directed by
your instructor.

DISCUSSION QUESTIONS

Share your own or your group’s responses with the entire class.
Then answer the following questions.

1. Did you diagram the system in the same way?
2. Did you identify the same system components?
3. Which subsystems will be affected by the change?
4. How do you explain differences in your responses?

Grading System Analysis Worksheet

DESCRIPTION
1. What subsystems compose the system (the university)? Diagram the system.

2. Identify in this system: inputs, outputs, transformations.

DIAGNOSIS

3. Which of the subsystems will be affected by the change; that is, what changes are likely to occur throughout the system as a result
of the policy change?

SOURCE: J. Gordon, A Diagnostic Approach to Organizational Behavior (Englewood Cliffs, NJ: Prentice Hall, 1983), p. 38. Reprinted with permission of
Prentice Hall, Inc., Englewood Cliffs, NJ.

bat37241_ch01_001-045.indd 44 12/3/09 2:40:30 PM

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