Phase 2 due in 36 hours - Paper Answers

Phase 2 due in 36 hours.. continuation of phase 1.. PowerPoint resources attached.. refer to phase 1 for final project instructions

Please read the detailed instructions that have been provided regarding your “Final Project” located in both the Announcements and Discussions sections This paper should be written in APA format with proper sentence and paragraph structure.

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Week 4: Phase 2

During Week 3 you introduced your company. Before you submit your Week 5 assignment please review the feedback provided from previous weeks and make the necessary changes.

This week you will address the following questions:

In what ways did Planning, Organizing, Leading & Controlling contribute to the company’s success (or failure)?

What was the most important thing leading to that success (or failure)?

36 hours

Chapter 6

Innovation and Change

What Would You Do?
3M (Minneapolis, Minnesota)
Should 3M continue to focus on using Six Sigma procedures to reduce costs and increase efficiencies, or should it strive again to encourage its scientists and managers to focus on innovation? Which will make 3M more competitive in the long run?
Over time, how much should companies like 3M rely on acquisitions for innovation? Should 3M acquire half, one-third, 10 percent, or 5 percent of its new products through acquisitions? What makes the most sense and why?

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3M Headquarters, Minneapolis, Minnesota
With 40,000 global patents and patent applications, 3M, maker of Post-it Notes, reflective materials (Scotchlite), and 55,000 products in numerous industries (displays and graphics, electronics and communications, health care, safety and security, transportation, manufacturing, office products, and home and leisure), has long been one of the most innovative companies in the world. 3M codified its focus on innovation into a specific goal, “30/5,” which meant that 30 percent of its sales each year must come from products no more than five years old. The logic was simple but powerful. Each year, five-year-old products become six years old and would not be counted toward the 30 percent of sales. Thus, the 30/5 goal encouraged everyone at 3M to be on the lookout for and open to new ideas and products. Furthermore, 3M allowed its engineers and scientists to spend 5 percent of their time, roughly two hours per week, doing whatever they wanted as long as it was related to innovation and new product development.
And it worked, for a while. A decade ago, the Boston Consulting Group, one of the premier consulting companies in the world, ranked 3M as the most innovative company in the world. In subsequent years, it dropped to second, third, and then seventh. Today, 3M doesn’t even crack the top 50. Dev Patnaik, of Jump Associates, an innovation consulting firm, says, “People have kind of forgotten about those guys [3M]. When was the last time you saw something innovative or experimental coming out of there?” So, what happened?
When your predecessor became CEO ten years ago, he found a struggling, inefficient, oversized company in need of change. He cut costs by laying off 8,000 people. Marketing, and research and development funds, which had been allocated to divisions independent of performance (all divisions got the same increase each year), were now distributed based on past performance and growth potential. Perform poorly, and your funds would shrink the next year. Likewise, with U.S. sales stagnating and Asia sales rising, management decreased headcount, hiring, and capital expenditures in the United States, while significantly increasing all three in fast-growing Asian markets. Six Sigma processes, popularized at Motorola and GE, were introduced to analyze how things got done, to remove unnecessary steps, and to change procedures that caused defects. Thousands of 3M managers and employees became trained as Six Sigma “black belts” and returned to their divisions and departments to root out inefficiencies, reduce production times, and decrease waste and product errors. And it worked incredibly well, in part. Costs and capital spending dropped, while profits surged 35 percent to record levels. But, product innovation, as compared to the 30/5 goal sank dramatically, as only 21 percent of profits were generated by products that were no more than five years old.
So, what should 3M do? From inception, 3M has been an innovator, bringing a stream of new products and services to market, creating value for customers, sustainable advantage over competitors, and sizable returns for investors. Thanks to your predecessor, 3M has lower costs, is highly efficient, and much more profitable. But it no longer ranks among the most innovative firms in the world. In fact, the use of Six Sigma procedures appears to be inversely related to product innovation. If that’s the case, should 3M continue to focus on using Six Sigma procedures to reduce costs and increase efficiencies, or should it strive again to encourage its scientists and managers to focus on innovation? Which will make 3M more competitive in the long run?
When people think of innovation, they tend to think of game-changing advances that render current products obsolete, for example, comparing the iPhone to text-based “smartphones.” Innovation, however, also occurs with lots of incremental changes over time. What are the advantages and disadvantages for 3M of each approach, and when and where would each be more likely to work? Finally, some companies innovate from within by successfully implementing creative ideas in their products or services. Sometimes, though, innovation is acquired by purchasing other companies that have made innovative advances. For example, although Google is generally rated as one of the most innovative companies in the world, most people have forgotten that Google bought YouTube to combine its search expertise with YouTube’s online video capabilities. Over time, how much should companies like 3M rely on acquisitions for innovation? Should 3M acquire half, one-third, 10 percent, or 5 percent of its new products through acquisitions? What makes the most sense and why?
If you were in charge at 3M, what would you do?

Technology Cycles
Birth of a new technology
© 2016 Cengage Learning
Technology reaches limits

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Exhibit 6.1
S-Curves and Technological Innovation
© 2016 Cengage Learning
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Early in a technology cycle, there is still much to learn, so progress is slow, as depicted by point A on the S-curve. The flat slope indicates that increased effort (in terms of money or research and development) brings only small improvements in technological performance. Fortunately, as the new technology matures, researchers figure out how to get better performance from it. This is represented by point B of the S-curve in Exhibit 6.1. The steeper slope indicates that small amounts of effort will result in significant increases in performance. At point C in Exhibit 6.1, the flat slope again indicates that further efforts to develop this particular technology will result in only small increases in performance. More important, however, point C indicates that the performance limits of that particular technology are being reached. In other words, additional significant improvements in performance are highly unlikely. After a technology has reached its limits at the top of the S-curve, significant improvements in performance usually come from radical new designs or new performance-enhancing materials. In Exhibit 6.1, that new technology is represented by the second S-curve. The changeover or discontinuity between the old and new technologies is represented by the dotted line. At first, the old and new technologies will likely coexist. Eventually, however, the new technology will replace the old technology. When that happens, the old technology cycle will be complete, and a new one will have started.

“High-Tech?”
Technology cycles involve advances or changes in any kind of knowledge, tools, and techniques…not just “high technology.”
© 2016 Cengage Learning
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Innovation Streams
Patterns of innovation over time that can create sustainable competitive advantage.
© 2016 Cengage Learning
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Companies that want to sustain a competitive advantage must understand and protect themselves from the strategic threats of innovation. Over the long run, the best way for a company to do that is to create a stream of its own innovative ideas and products year after year.

Exhibit 6.2
Innovation Streams: Technology Cycles over Time
© 2016 Cengage Learning
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Exhibit 6.2 shows a typical innovation consisting of a series of technology cycles. Recall that a technology cycle begins with a new technology and ends when it is replaced by a newer, substantially
better technology. The innovation stream in Exhibit 6.2 shows three such technology cycles. An innovation stream begins with a technological discontinuity, in which a scientific advance or a unique combination of existing technologies creates a significant breakthrough in performance or function. Technological discontinuities are followed by a discontinuous change, which is characterized by technological substitution and design competition. Technological substitution occurs when customers purchase new technologies to replace older technologies. Discontinuous change is also characterized by design competition, in which the old technology and several different new technologies compete to establish a new technological standard. Because of large investments in old technology, and because the new and old technologies are often incompatible with each other, companies and consumers are reluctant to switch to a different technology during a design competition. In addition, during design competition, the older technology usually improves significantly in response to the competitive threat from new technologies; this response also slows the changeover from older to newer technologies. Discontinuous change is followed by the emergence of a dominant design, which becomes the new accepted market standard for technology.

Dominant Designs
Discontinuous change is followed by the emergence of a dominant design. Dominant designs emerge in several ways:
Critical mass
Solves a practical problem
Independent standards bodies
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© 2016 Cengage Learning

Emergence of Dominant Design
Emergence:
indicates there are winners and losers.
may lead to technological lockout (when a new dominant design makes it difficult for a company to sell its products).
signals a shift from design experimentation and competition to incremental change.
© 2016 Cengage Learning
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Managing Sources of Innovation
Innovation begins with creativity, the production of novel and useful ideas.
Two factors can significantly affect innovation:
Creative work environment
Flow
© 2016 Cengage Learning
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When we say that innovation begins with great ideas, we’re really saying that innovation begins with creativity. Creativity is the production of novel and useful ideas. While companies can’t command creativity from employees (“You will be more creative!”), they can jump-start innovation by building creative work environments, in which workers perceive that creative thoughts and ideas are welcomed and valued.
Work is challenging when it requires hard work, demands attention and focus, and is seen as important to others in the organization. Researcher Mihaly Csikszentmihalyi said that challenging work promotes creativity because it creates a rewarding psychological experience known as “flow.” Flow is a psychological state of effortlessness, in which you become completely absorbed in what you’re doing and time seems to fly. (You begin work, become absorbed in it, and then suddenly realize that several hours have passed.) When flow occurs, who you are and what you’re doing become one. Csikszentmihalyi first encountered flow when studying artists. He said, “What struck me by looking at artists at work was their tremendous focus on the work, this enormous involvement, this forgetting of time and body. It wasn’t justified by expectation of rewards, like, ‘Aha, I’m going to sell this painting.’”

Exhibit 6.3
Components of Creative Work Environments
© 2016 Cengage Learning
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A creative work environment requires three kinds of encouragement: organizational, supervisory, and work group encouragement. Organizational encouragement of creativity occurs when management encourages risk taking and new ideas, supports and fairly evaluates new ideas, rewards and recognizes creativity, and encourages the sharing of new ideas throughout different parts of the company. Supervisory encouragement of creativity occurs when supervisors provide clear goals, encourage open interaction with subordinates, and actively support development teams’ work and ideas. Work group encouragement occurs when group members have diverse experience, education, and backgrounds and the group fosters mutual openness to ideas; positive, constructive challenge to ideas; and shared commitment to ideas. Freedom means having autonomy over one’s day-to-day work and a sense of ownership and control over one’s ideas. Numerous studies have indicated that creative ideas thrive under conditions of freedom. To foster creativity, companies may also have to remove impediments to creativity from their work environments. Internal conflict and power struggles, rigid management structures, and a conservative bias toward the status quo can all discourage creativity. They create the perception that others in the organization will decide which ideas are acceptable and deserve support.

Experiential Approach to Innovation
Assumes that innovation occurs within a highly uncertain environment and that the key to fast product innovation is to use intuition, flexible options, and hands-on experience to reduce uncertainty and accelerate learning and understanding.
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© 2016 Cengage Learning

Experiential Approach to Innovation
The experiential approach has five aspects:
Design iteration
Product prototype
Testing
Milestones
Multifunctional teams
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© 2016 Cengage Learning

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Companies that want to create a new dominant design following a technological discontinuity quickly build, test, improve, and retest a series of different product prototypes. By trying a number of very different designs or making successive improvements and changes in the same design, frequent design iterations reduce uncertainty and improve understanding. Simply put, the more prototypes you build, the more likely you are to learn what works and what doesn’t. Also, when designers and engineers build a number of prototypes, they are less likely to fall in love with a particular prototype. Instead, they’ll be more concerned with improving the product or technology as much as they can. Testing speeds up and improves the innovation process, too. When two very different design prototypes are tested against each other, or the new design iteration is tested against the previous iteration, product design strengths and weaknesses quickly become apparent. Likewise, testing uncovers errors early in the design process when they are easiest to correct. Finally, testing accelerates learning and understanding by forcing engineers and product designers to examine hard data about product performance. When there’s hard evidence that prototypes are testing well, the confidence of the design team grows. Also, personal conflict between design team members is less likely when testing focuses on hard measurements and facts rather than personal hunches and preferences.
A design iteration is a cycle of repetition in which a company tests a prototype of a new product or service, improves on the design, and then builds and tests the improved product or service prototype. A product prototype is a full-scale working model that is tested for design, function, and reliability. Testing is a systematic comparison of different product designs or design iterations. Milestones are formal project review points used to assess progress and performance. By making people regularly assess what they’re doing, how well they’re performing, and whether they need to take corrective action, milestones provide structure to the general chaos that follows technological discontinuities. Milestones also shorten the innovation process by creating a sense of urgency that keeps everyone on task. Multifunctional teams are work teams composed of people from different departments. Multifunctional teams accelerate learning and understanding by mixing and integrating technical, marketing, and manufacturing activities. By involving all key departments in development from the start, multifunctional teams speed innovation through early identification of problems that would typically not have been identified until much later.

Powerful Leaders
Powerful leaders provide the vision, discipline, and motivation to keep the innovation process focused, on time, and on target.
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© 2016 Cengage Learning

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Powerful leaders provide the vision, discipline, and motivation to keep innovation process focused, on time, and on target. Powerful leaders are able to get resources when they are needed, are typically more experienced, have high status in the company, and are held directly responsible for product success or failure.

Compression Approach to Innovation
Assumes that innovation is a predictable process, that incremental innovation can be planned using a series of steps, and that compressing the time it takes to complete those steps can speed up innovation.
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© 2016 Cengage Learning

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While the experiential approach is used to manage innovation during periods of discontinuous change, a compression approach can be used during periods of incremental change, in which the focus is on systematically improving the performance and lowering the cost of the dominant technological design. A compression approach to innovation assumes that innovation is a predictable process, that incremental innovation can be planned using a series of steps, and that compressing the time it takes to complete those steps can speed up innovation.

Planning for Incremental Innovation
Generational change
When incremental improvements are made to a dominant technological design such that the improved version of the technology is fully backward compatible with the older version.
© 2016 Cengage Learning
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When planning for incremental innovation, the goal is to squeeze or compress development time as much as possible, and the general strategy is to create a series of planned steps to accomplish that goal. Planning for incremental innovation helps avoid unnecessary steps and enables developers to sequence steps in the right order to avoid wasted time and delays between steps. Planning also reduces misunderstandings and improves coordination. Most planning for incremental innovation is based on the idea of generational change.

Shortening Development Time
Ways to shorten development time:
Adjust supplier involvement
Shorten the time of individual steps
Develop overlapping steps
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© 2016 Cengage Learning

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Delegating some of the preplanned steps in the innovation process to outside suppliers reduces the amount of work that internal development teams must do. Plus, suppliers provide an alternative source of ideas and expertise that can lead to better designs. Another way to shorten development time is simply to shorten the time of individual steps in the innovation process. In a sequential design process, each step must be completed before the next step begins. But sometimes multiple development steps can be performed at the same time. Overlapping steps shorten the development process by reducing delays or waiting time between steps.

Managing Change
Change forces lead to differences in the form, quality, or condition of an organization over time.
Resistance forces support the status quo.
Causes of resistance to change include self-interest, misunderstanding, distrust, and general intolerance for change.
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© 2016 Cengage Learning

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Resistance to change is caused by self-interest, misunderstanding, distrust, and a general intolerance for change. People resist change out of self-interest because they fear that change will cost or deprive them of something they value. For example, resistance might stem from a fear that the changes will result in a loss of pay, power, responsibility, or even perhaps one’s job. People also resist change because of misunderstanding and distrust, that is, they don’t understand the change or the reasons for it, or they distrust the people, typically management, behind the change. Ironically, when this occurs, some of the strongest resisters may support the changes in public, nodding and smiling their agreement, but then ignore the changes in private and just do their jobs as they always have. Management consultant Michael Hammer calls this deadly form of resistance the “Kiss of Yes.”
Resistance may also come from a generally low tolerance for change. Some people are simply less capable of handling change than others. People with a low tolerance for change are threatened by the uncertainty associated with change and worry that they won’t be able to learn the new skills and behaviors needed to successfully negotiate change in their companies.

Managing Resistance to Change
© 2016 Cengage Learning

Unfreezing
Change intervention
Refreezing
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According to Kurt Lewin, managing organizational change is a basic process of unfreezing, change intervention, and refreezing. Unfreezing is getting the people affected by change to believe that change is needed. During the change intervention itself, workers and managers change their behavior and work practices. Refreezing is supporting and reinforcing the new changes so that they stick.

Managing Resistance to Change
Educate employees.
Communicate change-related information.
Have employees participate in planning and implementing change.
Discuss and agree on who will do what.
Give significant managerial support.
Use coercion.
© 2016 Cengage Learning
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Resistance to change is an example of frozen behavior. Given the choice between changing and not changing, most people would rather not change. Because resistance to change is natural and inevitable, managers need to unfreeze resistance to change to create successful change programs. The following methods can be used to manage resistance to change: education, communication, participation, negotiation, top-management support, and coercion. When resistance to change is based on insufficient, incorrect, or misleading information, managers should educate employees about the need for change and communicate change-related information to them. Managers must also supply the information and funding or other support employees need to make changes. For example, resistance to change can be particularly strong when one company buys another company. Another way to reduce resistance to change is to have those affected by the change participate in planning and implementing the change process. Employees who participate have a better understanding of the change and the need for it. Furthermore, employee concerns about change can be addressed as they occur if employees participate in the planning and implementation process. Employees are also less likely to resist change if they are allowed to discuss and agree on who will do what after change occurs. Resistance to change also decreases when change efforts receive significant managerial support. Managers must do more than talk about the importance of change, though. They must provide the training, resources, and autonomy needed to make change happen. Finally, resistance to change can be managed through coercion, or the use of formal power and authority to force others to change. Because of the intense negative reactions it can create (e.g., fear, stress, resentment, sabotage of company products), coercion should be used only when a crisis exists or when all other attempts to reduce resistance to change have failed.

Exhibit 6.4
What to Do When Employees Resist Change

Exhibit 6.4 summarizes some additional suggestions for what managers can do when employees resist change.
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Exhibit 6.5
Errors Managers Make When Leading Change
© 2016 Cengage Learning
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Exhibit 6.5 shows the most common errors that managers make when they lead change. The first two errors occur during the unfreezing phase, when managers try to get the people affected by change to believe that change is really needed. The first and potentially most serious error is not establishing a great enough sense of urgency. Indeed, Kotter estimates that more than half of all change efforts fail because the people affected are not convinced that change is necessary. People will feel a greater sense of urgency if a leader in the company makes a public, candid assessment of the company’s problems and weaknesses. The second mistake that occurs in the unfreezing process is not creating a powerful enough coalition. Change often starts with one or two people, but it has to be supported by a critical and growing group of people if an entire department, division, or company is to be affected. Besides top management, Kotter recommends that key employees, managers, board members, customers, and even union leaders be members of a core change coalition that guides and supports organizational change.
The next four errors that managers make occur during the change phase, when a change intervention is used to try to get workers and managers to change their behavior and work practices. Lacking a vision for change is a significant error at this point. A vision (defined as a purpose statement in Chapter 4) is a statement of a company’s purpose or reason for existence. A vision for change makes clear where a company or department is headed and why the change is occurring. Change efforts that lack vision tend to be confused, chaotic, and contradictory. By contrast, change efforts guided by visions are clear and easy to understand and can be explained in 5 minutes or less. Undercommunicating the vision by a factor of 10 is another mistake in the change phase. According to Kotter, companies mistakenly hold just one meeting to announce the vision. Or, if the new vision receives heavy emphasis in executive speeches or company newsletters, senior management undercuts the vision by behaving in ways contrary to it. Successful communication of the vision requires that top managers link everything the company does to the new vision and that they “walk the talk” by behaving in ways consistent with the vision. Furthermore, even companies that begin change with a clear vision sometimes make the mistake of not removing obstacles to the new vision. They leave formidable barriers to change in place by failing to redesign jobs, pay plans, and technology to support the new way of doing things. Another error in the change phase is not systematically planning for and creating short-term wins. Most people don’t have the discipline and patience to wait 2 years to see if the new change effort works. Change is threatening and uncomfortable, so people need to see an immediate payoff if they are to continue to support it. Kotter recommends that managers create short-term wins by actively picking people and projects that are likely to work extremely well early in the change process.
The last two errors that managers make occur during the refreezing phase, when attempts are made to support and reinforce changes so that they stick. Declaring victory too soon is a tempting mistake in the refreezing phase. Managers typically declare victory right after the first large-scale success in the change process. Declaring success too early has the same effect as draining the gasoline out of a car: It stops change efforts dead in their tracks. With success declared, supporters of the change process stop pushing to make change happen. After all, why push when success has been achieved? Rather than declaring victory, managers should use the momentum from short-term wins to push for even bigger or faster changes. This maintains urgency and prevents change supporters from slacking off before the changes are frozen into the company’s culture. The last mistake that managers make is not anchoring changes in the organization’s culture. An organization’s culture is the set of key values, beliefs, and attitudes shared by organizational members that determines the accepted way of doing things in a company.

Anchoring Changes
Show people directly that changes have actually improved performance.
Make sure that people who get promoted fit the new culture.
© 2016 Cengage Learning
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Change Tools and Techniques
Results-driven change supplants the emphasis on activity with a focus on quickly measuring and improving results.
An advantage of results-driven change is that quick, visible improvements motivate employees to continue to make additional changes to improve measured performance.
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© 2016 Cengage Learning

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One of the reasons that organizational change efforts fail is that they are activity-oriented rather than results-oriented. In other words, they focus primarily on changing company procedures, management philosophy, or employee behavior. Typically, there is much buildup and preparation as consultants are brought in, presentations are made, books are read, and employees and managers are trained. There’s a tremendous emphasis on doing things the new way. But, with all the focus on “doing,” almost no attention is paid to results, to seeing if all this activity has actually made a difference. By contrast, results-driven change supplants the emphasis on activity with a laserlike focus on quickly measuring and improving results. An advantage of results-driven change is that quick, visible improvements motivate employees to continue to make additional changes to improve measured performance.

Exhibit 6.6
Results-Driven Change Programs
© 2016 Cengage Learning
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Exhibit 6.6 describes the basic steps of results-driven change.
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GE Workout
First morning
The boss discusses the agenda.
First and second days
Groups discuss and debate solutions.
Third day
A town meeting is held.
Only three options are available– “yes,” “no,” or a request for more information.
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© 2016 Cengage Learning

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The General Electric workout is a special kind of results-driven change. The “workout” involves a three-day meeting that brings together managers and employees from different levels of an organization to generate quickly and act on solutions to specific business problems. On the first morning, the boss discusses the agenda and targets specific business problems that the group will solve. Then, the boss leaves and an outside facilitator breaks the group (typically 30 to 40 people) into five or six teams and helps them spend the next day and a half discussing and debating solutions.
On day three, in what GE calls a “town meeting,” the teams present solutions to their boss, who has been gone since day one. As each team’s spokesperson makes specific suggestions, the boss has only three options: agree on the spot, say no, or ask for more information so that a decision can be made by an agreed-on date.

Transition Management Team
A transition management team is a group of 8 to 12 people assigned to manage and coordinate a company’s change process.
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© 2016 Cengage Learning

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While the GE workout clearly speeds up change, it may also fragment change if different managers approve conflicting suggestions in separate town meetings across a company. By contrast, a transition management team provides a way to coordinate change throughout an organization. A transition management team (TMT) is a group of 8 to 12 people whose full-time job is to manage and coordinate a company’s change process. One member of the TMT is assigned to anticipate and manage the emotions and behaviors related to resistance to change. Despite their importance, many companies overlook the impact that negative emotions and resistant behaviors can have on the change process. TMT members report to the CEO every day, decide which change projects to approve and fund, select and evaluate the people in charge of different change projects, and make sure that different change projects complement one another.
It is also important to say what a TMT is not. A TMT is not an extra layer of management further separating upper management from lower managers and employees. A TMT is not a steering committee that creates plans for others to carry out. Instead, the members of the TMT are fully involved with making change happen on a daily basis. Furthermore, it’s not the TMT’s job to determine how and why the company will change. That responsibility belongs to the CEO and upper management. Finally, a TMT is not permanent. Once the company has successfully changed, the TMT is disbanded.

Exhibit 6.7
Primary Responsibilities of Transition Management Teams
© 2016 Cengage Learning
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Exhibit 6.7 lists the primary responsibilities of TMTs.

Organizational Development
A philosophy and collection of planned change interventions designed to improve an organization’s long-term health and performance.
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Organizational development is a philosophy and collection of planned change interventions designed to improve an organization’s long-term health and performance. Organizational development takes a long-range approach to change, assumes that top management support is necessary for change to succeed, creates change by educating workers and managers to change ideas, beliefs, and behaviors so problems can be solved in new ways, and emphasizes employee participation in diagnosing, solving, and evaluating problems.

Exhibit 6.8
General Steps for Organizational Development Interventions
© 2016 Cengage Learning
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As shown in Exhibit 6.8, organizational development interventions begin with the recognition of a problem. Then, the company designates a change agent to be formally in charge of guiding the change effort. This person can be someone from the company or a professional consultant. The change agent clarifies the problem, gathers information, works with decision makers to create and implement an action plan, helps to evaluate the plan’s effectiveness, implements the plan throughout the company, and then leaves (if from outside the company) after making sure the change intervention will continue to work.

what really works
Change the Work Setting or Change the People? Do Both!

Changing Individual Behavior and Organizational Performance

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Changing the Work Setting
An organizational work setting has four parts: organizing arrangements (control and reward systems, organizational structure), social factors (people, culture, patterns of interaction), technology (how inputs are transformed into outputs), and the physical setting (the actual physical space in which people work). Overall, there is a 55 percent chance that organizational change efforts will successfully bring changes to a company’s work setting. Although the odds are 55–45 in your favor, this is a much lower probability of success than you’ve seen with the management techniques discussed in other chapters. This simply reflects how strong resistance to change is in most companies.
Changing the People
Changing people means changing individual work behavior. The idea is powerful. Change the decisions people make. Change the activities they perform. Change the information they share with others. And change the initiatives they take on their own. Change these individual behaviors and collectively you change the entire company. Overall, there is a 57 percent chance that organizational change efforts will successfully change people’s individual work behavior. If you’re wondering why the odds aren’t higher, consider how difficult it is to change personal behavior. It’s incredibly difficult to quit smoking, change your diet, or maintain a daily exercise program. Not surprisingly, changing personal behavior at work is also difficult. Viewed in this context, a 57 percent chance of success is quite high.

Identify the type of change that Holden’s leaders are managing on a daily basis.
What resistance has Holden encountered while introducing innovative garment designs? How was it able to overcome that resistance?
Management Workplace – Holden Outerwear

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Holden Outerwear: Managing Change and Innovation
Founded in 2002 by professional snowboarder Mikey LeBlanc, Holden Outerwear has given traditional baggy outerwear a complete style make-over. Unlike ski-apparel brands that focus on utility at the expense of looking good, Holden pants and jackets possess features that are inspired by runway brands like Marc Jacobs and G-Star, as Holden is always looking to bring new elements of style to the slopes. Holden has the attention of everyone in its industry. Retailers wait anxiously to see LeBlanc’s newest collections, and competitors from Burton and Salomon to Bonfire and Walmart borrow heavily from Holden’s collections. LeBlanc doesn’t worry too much about the rampant plagiarism that goes on in his industry. As he sees it, imitation is the highest form of flattery. Plus, Holden’s business is based on finding the next big thing. When it comes to style, Holden is the leader, never the follower.

Chapter 5

Organizational Strategy

What Would You Do?
Walt Disney Company (Burbank, California)
Should Disney grow, stabilize, or retrench? If Disney should grow, where? If stabile, how do you improve quality to keep doing what Disney has been doing, but even better? Finally, retrenchment would mean shrinking Disney’s size and scope. If you were to do this, what divisions would you shrink or sell?
Is Disney a content business, creating characters and stories? Or is it a technology/distribution business that simply needs to find ways to buy content wherever it can?
From a strategic perspective, how should Disney’s different entertainment areas be managed? Should there be one grand strategy (i.e., growth, stability, retrenchment) that every division follows, or should each division have a focused strategy for its own market and customers?

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Walt Disney Company Headquarters, Burbank, California
Over two decades, your predecessor and boss at the Walt Disney Company, CEO Michael Eisner, accomplished much, starting the Disney Channel, the Disney Stores, and Disneyland Paris, and acquiring ABC television, Starwave Web services (from Microsoft cofounder Paul Allan), and Infoseek (an early Web search engine). But his strong personality and critical management style created conflict with shareholders, creative partners, and board members, including Roy Disney, nephew of founder Walt Disney.
One of your first moves as Disney’s new CEO was repairing relationships with Pixar Studios and its then CEO Steve Jobs. Pixar produced computer-animated movies for Disney to distribute and market. Disney also had the right to produce sequels to Pixar Films, such as Toy Story, without Pixar’s involvement. Jobs argued, however, that Pixar should have total financial and creative control over its films. When Disney CEO Michael Eisner disagreed, relations broke down, with Pixar seeking other partners. On becoming CEO, you approached Jobs about Disney buying Pixar for $7 billion. More important than the price, however, was promising Jobs and Pixar’s leadership, President Ed Catmull and creative guru John Lasseter, total creative control of Pixar’s films and Disney’s storied but struggling animation unit. Said Jobs, “I wasn’t sure I could get Ed and John to come to Disney unless they had that control.”
Although Pixar and Disney animation thrived under the new arrangement, Disney still had a number of critical strategic problems to address. Disney was “too old” and suffering from brand fatigue as its classic but aging characters, Mickey Mouse (created in 1928) and Winnie-the-Pooh (licensed by Disney in 1961), accounted for 80 percent of consumer sales. On the other hand, Disney was also “too young” and suffering from “age compression,” meaning it appealed only to young children and not preteens, who gravitated to Nickelodeon, and certainly not to teens at all. Finally, despite its legendary animated films, over time Disney products had developed a reputation for low-quality production, poor acting, and weak scripts. Movies “High School Musical 3: Senior Year,” “Beverly Hills Chihuahua,” “Bolt,” “Confessions of a Shopaholic,” “Race to Witch Mountain,” and “Bedtime Stories” disappointed audiences and failed to meet financial goals. As you told your board of directors, “It’s not the marketplace, it’s our slate [of TV shows and movies].”
With many of Disney’s brands and products clearly suffering, you face a basic decision: Should Disney grow, stabilize, or retrench? Disney is an entertainment conglomerate with Walt Disney Studios (films), parks and resorts (including Disney Cruise lines and vacations), consumer products (i.e., toys, clothing, books, magazines, and merchandise), and media networks such as TV (ABC, ESPN, Disney Channels, ABC Family), radio, and the Disney Interactive Media Group (online, mobile, and video games and products). If Disney should grow, where? Like Pixar, is another strategic acquisition necessary? If so, what company should it acquire? If stability, how do you improve quality to keep doing what Disney has been doing, but even better? Finally, retrenchment would mean shrinking Disney’s size and scope. If you were to do this, what divisions would you shrink or sell?
Next, given the number of different entertainment areas that Disney has, what business is it really in? Is Disney a content business, creating characters and stories? Or is it a technology/distribution business that simply needs to find ways to buy content wherever it can, for example, by buying Pixar and then delivering that content in ways that customers want (i.e., DVDs, cable channels, iTunes, Netflix, social media, Internet TV, etc.)?
Finally, from a strategic perspective, how should Disney’s different entertainment areas be managed? Should there be one grand strategy (i.e., growth, stability, retrenchment) that every division follows, or should each division have a focused strategy for its own market and customers? Likewise, how much discretion should division managers have to set and execute their strategies, or should that be controlled and approved centrally by the strategic planning department at Disney headquarters?
If you were CEO at Disney, what would you do?

Sustainable Competitive Advantage
Competitive advantage
Providing greater value for customers than competitors can.
Sustainable competitive advantage
A competitive advantage that other companies have tried unsuccessfully to duplicate and have, for the moment, stopped trying to duplicate.
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An organization’s resources are the assets, capabilities, processes, employee time, information, and knowledge that the organization controls. Firms use their resources to improve organizational effectiveness and efficiency. Resources are critical to organizational strategy, because they can help companies create and sustain an advantage over competitors.
Organizations can achieve a competitive advantage by using their resources to provide greater value for customers than competitors can. A competitive advantage becomes a sustainable competitive advantage when other companies cannot duplicate the value a firm is providing to customers. Importantly, sustainable competitive advantage is not the same as a long-lasting competitive advantage, though companies obviously want a competitive advantage to last a long time. Instead, a competitive advantage is sustained if that advantage still exists after competitors have tried unsuccessfully to duplicate the advantage and have, for the moment, stopped trying to duplicate it.

Exhibit 5.1
Four Requirements for Sustainable Competitive Advantage
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Four conditions must be met if a firm’s resources are to be used to achieve a sustainable competitive advantage. The resources must be valuable, rare, imperfectly imitable, and nonsubstitutable.
Valuable resources allow companies to improve their efficiency and effectiveness. Unfortunately, changes in customer demand and preferences, competitors’ actions, and technology can make once-valuable resources much less valuable. For sustained competitive advantage, valuable resources must also be rare resources. Think about it. How can a company sustain a competitive advantage if all of its competitors have similar resources and capabilities? Consequently, rare resources, resources that are not controlled or possessed by many competing firms, are necessary to sustain a competitive advantage. However, for sustained competitive advantage, other firms must be unable to imitate or find substitutes for those valuable, rare resources. Imperfectly imitable resources are impossible or extremely costly or difficult to duplicate. Valuable, rare, imperfectly imitable resources can produce sustainable competitive advantage only if they are also nonsubstitutable resources, meaning that no other resources can replace them and produce similar value or competitive advantage.

Exhibit 5.2
Three Steps of the Strategy-Making Process
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Exhibit 5.2 displays the three steps of the strategy-making process.
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Assessing Need for Change
Top-level managers are often slow to recognize need for change because of competitive inertia.
Managers should look for strategic dissonance to improve speed and accuracy of determining need for changes.
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It might seem that determining the need for strategic change would be easy to do, but in reality, it’s not. There’s a great deal of uncertainty in strategic business environments. Furthermore, top-level managers are often slow to recognize the need for strategic change, especially at successful companies that have created and sustained competitive advantages. Because they are acutely aware of the strategies that made their companies successful, they continue to rely on them, even as the competition changes. In other words, success often leads to competitive inertia—a reluctance to change strategies or competitive practices that have been successful in the past.
So, besides being aware of the dangers of competitive inertia, what can managers do to improve the speed and accuracy with which they determine the need for strategic change? One method is to actively look for signs of strategic dissonance. Strategic dissonance is a discrepancy between upper management’s intended strategy and the strategy actually implemented by the lower levels of management. Upper management sets overall company strategy, but middle and lower-level managers must carry out the strategy. Middle and lower-level managers are held directly responsible for meeting customers’ needs and responding to competitors’ actions. While strategic dissonance can indicate that these managers are not doing what they should to carry out company strategy, it can also mean that the intended strategy is out of date and needs to be changed.

SWOT Analysis
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A situational analysis can also help managers determine the need for strategic change. A situational analysis, also called a SWOT analysis for strengths, weaknesses, opportunities, and threats, is an assessment of the strengths and weaknesses in an organization’s internal environment and the opportunities and threats in its external environment.

Internal Environment
A company’s strengths and weaknesses begin with an assessment of distinctive competencies and core capabilities.
A distinctive competence is something a company can do better than its competitors.
Core capabilities are less visible factors that determine how efficiently inputs can be turned into outputs.
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Consequently, an analysis of an organization’s internal environment, that is, a company’s strengths and weaknesses, begins with an assessment of distinctive competencies and core capabilities. A distinctive competence is something that a company can make, do, or perform better than its competitors. While distinctive competencies are tangible—for example, a product or service is faster, cheaper, or better—the core capabilities that produce distinctive competencies are not. Core capabilities are the less visible, internal decision-making routines, problem-solving processes, and organization cultures that determine how efficiently inputs can be turned into outputs.

External Environment
Managers must identify specific opportunities and threats that affect a company’s ability to sustain competitive advantage.
Strategic group
A group of companies within an industry against which top managers compare, evaluate, and benchmark their company’s strategic threats and opportunities.
Core firms
The central companies in a strategic group.
Secondary firms
Firms that use strategies related to but somewhat different from those of core firms.
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When scanning the environment for strategic threats and opportunities, managers tend to categorize the different companies in their industries into several kinds of strategic groups: core, secondary, and transient firms.
The first kind of strategic group consists of core firms, that is, central companies in a strategic group. Secondary firms are firms that use related but somewhat different strategies than core firms. Managers are aware of the potential threats and opportunities posed by secondary firms. However, they spend more time assessing the threats and opportunities associated with core firms.

what really works

Strategy Making for Firms, Big and Small
© 2016 Cengage Learning
Measure Probability of Success
Strategic Planning & Profits for Big Companies 72%
Strategic Planning & Growth for Big Companies 75%
Strategic Planning & Growth for Small Companies 61%
Strategic Planning & Return on Investment for Small Companies 62%
Strategic Planning & External Growth through Acquisitions 45%

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There is a 72 percent chance that big companies that engage in the strategy-making process will be more profitable than big companies that don’t. Not only does strategy making improve profits but it also helps companies grow. Specifically, there is a 75 percent chance that big companies that engage in the strategymaking process will have greater sales and earnings growth than big companies that don’t. Thus, in practical terms, the strategy-making process can make a significant difference in a big company’s profits and growth.

Choosing Strategic Alternatives
Risk-avoiding
Aims to protect an existing competitive advantage.
Risk-taking
Aims to extend or create a sustainable competitive advantage.
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According to Strategic Reference Point Theory, managers choose between two basic alternative strategies. They can choose a conservative, risk-avoiding strategy that aims to protect an existing competitive advantage. Or, they can choose an aggressive, risk-seeking strategy that aims to extend or create a sustainable competitive advantage. The choice to be risk-seeking or risk-avoiding typically depends on whether top management views the company as falling above or below strategic reference points.

Exhibit 5.3
Strategic Reference Points
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Strategic reference points are the targets that managers use to measure whether their firm has developed the core competencies that it needs to achieve a sustainable competitive advantage. However, Strategic Reference Point Theory is not deterministic. Managers are not predestined to choose risk-averse or risk-seeking strategies for their companies. Indeed, one of the most important points in Strategic Reference Point Theory is that managers can influence the strategies chosen at their companies by actively changing and adjusting the strategic reference points they use to judge strategic performance. To illustrate, if a company has become complacent after consistently surpassing its strategic reference points, then top management can change the company’s strategic risk orientation from risk-averse to risk-taking by raising the standards of performance (i.e., strategic reference points).
As shown in Exhibit 5.3, when a company is performing above or better than its strategic reference points, top management will typically be satisfied with the company’s strategy. This satisfaction tends to make top management conservative and risk-averse. But, when a company is performing below or worse than its strategic reference points, top management will typically be dissatisfied with the strategy. In this instance, managers are more likely to choose a risk-taking strategy.

Corporate-Level Strategies
“What business or businesses are
we in or should we be in?”
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Companies must answer three basic questions:
What business are we in or should we be in?
How should we compete in this industry?
Who are our competitors and how should we respond to them?
© 2016 Cengage Learning

Exhibit 5.4
Corporate-Level Strategies
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Corporate-level strategy is the overall organizational strategy that addresses the question “What business or businesses are we in or should we be in?”
One of the standard strategies for stock market investors is diversification: buy stocks in a variety of companies in different industries. The purpose of this strategy is to reduce risk in the overall stock portfolio (i.e. the entire collection of stocks). The basic idea is simple: If you invest in 10 companies in 10 different industries, you won’t lose your entire investment if one company performs poorly. Furthermore, because they’re in different industries, one company’s losses are likely to be offset by another company’s gains. Portfolio strategy is based on these same ideas.
Portfolio strategy is a strategy that minimizes risk by diversifying investment among various businesses or product lines. Managers who use portfolio strategy are often on the lookout for acquisitions—other companies to buy.
Portfolio strategy can reduce risk even more through unrelated diversification—creating or acquiring companies in unrelated businesses. The BCG Matrix is the best-known portfolio strategy that managers use to categorize their corporation’s businesses.
Grand strategies include growth, stability, and retrenchment/recovery.

Portfolio Strategy
A corporate-level strategy that minimizes risk by diversifying investments among various businesses or product lines.
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Standard strategies:
Diversification
Acquisition
Unrelated diversification
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Portfolio Strategy

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One of the standard strategies for stock market investors is diversification, or owning stocks in a variety of companies in different industries.
An acquisition is the purchase of a company by another company.
Unrelated diversification is creating or acquiring companies in completely unrelated businesses

BCG Matrix
A portfolio strategy that managers use to categorize their corporation’s businesses by growth rate and relative market share, helping them decide how to invest corporate funds
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The BCG matrix is a portfolio strategy that managers use to categorize their corporation’s businesses by growth rate and relative market share, helping them decide how to invest corporate funds. The matrix, shown in Exhibit 5.5, separates businesses into four categories, based on how fast the market is growing (high-growth or low-growth) and the size of the business’s share of that market (high or low).
Stars are companies that have a large share of a fast-growing market. To take advantage of a star’s fast-growing market and its strength in that market (large share), the corporation must invest substantially in it. However, the investment is usually worthwhile, because many stars produce sizable future profits. Question marks are companies that have a small share of a fast-growing market. If the corporation invests in these companies, they may eventually become stars, but their relative weakness in the market (small share) makes investing in question marks more risky than investing in stars. Cash cows are companies that have a large share of a slow-growing market. Companies in this situation are often highly profitable, hence the name “cash cow.” Finally, dogs are companies that have a small share of a slow-growing market. As the name “dogs” suggests, having a small share of a slow-growth market is often not profitable.

Exhibit 5.5
Boston Consulting Group Matrix
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Exhibit 5.5
Arrow 1: While the substantial cash flows from cash cows last, they should be reinvested in stars.
Arrow 2: Over time, as their market growth slows, some stars may turn into cash cows.
Arrow 3: Cash flows should also be directed to some question marks because of greater potential in a fast-growing market.
Arrow 4: Some question marks will become stars over time, as their small markets become larger ones.
Arrow 5: Because dogs lose money, they should “find a new owner” or be “taken to the pound” (sold or closed down and liquidated for their assets).

Related Diversification
Different business units share similar products, manufacturing, marketing, technology, or cultures.
The key to related diversification is to acquire or create new companies with core capabilities that complement the core capabilities of businesses already in the corporate portfolio.
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Exhibit 5.6
U-Shaped Relationship between Diversification and Risk
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Source: M. Lubatkin & P.J. Lane, “Psst…The Merger Mavens Still Have It Wrong!” Academy of Management Executive 10 (1996): 21-39.
While the BCG matrix and other forms of portfolio strategy are relatively popular among managers, portfolio strategy has some drawbacks. The most significant is that the evidence does not support the usefulness of acquiring unrelated businesses. As shown in Exhibit 5.6, there is a U-shaped relationship between diversification and risk. The left side of the curve shows that single businesses with no diversification are extremely risky (if the single business fails, the entire business fails). So, in part, the portfolio strategy of diversifying is correct—competing in a variety of different businesses can lower risk. However, portfolio strategy is partly wrong, too–the right side of the curve shows that conglomerates composed of completely unrelated businesses are even riskier than single, undiversified businesses.

Grand Strategies
There are three kinds of grand strategies:
Growth
Stability
Retrenchment
Recovery
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A grand strategy is a broad strategic plan used to help an organization achieve its strategic goals. Grand strategies guide the strategic alternatives that managers of individual businesses or subunits may use. There are three kinds of grand strategies: growth, stability, and retrenchment/recovery.
The purpose of a growth strategy is to increase profits, revenues, market share, or the number of places (store, offices, locations) in which the company does business. Companies can grow in several ways. They can grow externally by merging with or acquiring other companies. The purpose of a stability strategy is to continue doing what the company has been doing, but just do it better. Consequently, companies following a stability strategy try to improve the way in which they sell the same products or services to the same customers.
The purpose of a retrenchment strategy is to turn around very poor company performance by shrinking the size or scope of the business. The first step of a typical retrenchment strategy might include significant cost reductions, layoffs of employees, closing of poorly performing stores, offices, or manufacturing plants, or closing or selling entire lines of products or services. After cutting costs and reducing a business’s size or scope, the second step in a retrenchment strategy is recovery. Recovery consists of the strategic actions that a company takes to return to a growth strategy. This two-step process of cutting and recovery is analogous to pruning roses.

Industry-level Strategies
Industry-level strategies address the question:
“How should we compete in this industry?”
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Exhibit 5.7
Five Industry Forces
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According to Harvard professor Michael Porter, five industry forces determine an industry’s overall attractiveness and potential for long-term profitability. These include the character of the rivalry, the threat of new entrants, the threat of substitute products or services, the bargaining power of suppliers, and the bargaining power of buyers. The stronger these forces, the less attractive the industry becomes to corporate investors because it is more difficult for companies to be profitable.
Character of the rivalry is a measure of the intensity of competitive behavior among companies in an industry. Is the competition among firms aggressive and cutthroat, or
do competitors focus more on serving customers than on attacking each other? Both industry attractiveness and profitability decrease when rivalry is cutthroat. The threat of new entrants is a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry. If new companies can easily enter the industry, then competition will increase and prices and profits will fall. On the other hand, if there are sufficient barriers to entry, such as large capital requirements to buy expensive equipment or plant facilities or the need for specialized knowledge, then competition will be weaker and prices and profits will generally be higher. The threat of substitute products or services is a measure of the ease with which customers can find substitutes for an industry’s products or services. If customers can easily find substitute products or services, the competition will be greater and profits will be lower. If there are few or no substitutes, competition will be weaker and profits will be higher. Generic medicines are some of the best-known examples of substitute products. Bargaining power of suppliers is a measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs. When companies can buy parts, materials, and services from numerous suppliers, the companies will be able to bargain with the suppliers to keep prices low. On the other hand, if there are few suppliers, or if a company is dependent on a supplier with specialized skills and knowledge, then the suppliers will have the bargaining power to dictate price levels. Bargaining power of buyers is a measure of the influence that customers have on a firm’s prices. If a company sells a popular product or service to multiple buyers, then the company has more power to set prices. By contrast, if a company is dependent on just a few high-volume buyers, those buyers will typically have enough bargaining power to dictate prices.

Positioning Strategies
After analyzing industry forces, the next step in industry-level strategy is to protect your company from the negative effects of industry-wide competition and to create a sustainable competitive advantage.
Cost leadership
Differentiation
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Cost leadership is producing a product or service of acceptable quality at consistently lower production costs than competitors so that the firm can offer the product or service at the lowest price in the industry.
Differentiation is making your product or service sufficiently different from competitors’ offerings so that customers are willing to pay a premium price for the extra value or performance that it provides.

Focus Strategy
A company uses either cost leadership or differentiation to produce a specialized product or service for a limited, specifically targeted group in a particular region or market.
© 2016 Cengage Learning
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Adaptive Strategies
Adaptive strategies are another set of industry-level strategies.
Defenders
Prospectors
Analyzers
Reactors
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Adaptive strategies are another set of industry-level strategies. Whereas the aim of positioning strategies is to minimize the effects of industry competition and build a sustainable competitive advantage, the purpose of adaptive strategies is to choose an industry-level strategy that is best suited to changes in the organization’s external environment. There are four kinds of adaptive strategies: defenders, prospectors, analyzers, and reactors. Defenders seek moderate, steady growth by offering a limited range of products and services to a well-defined set of customers. In other words, defenders aggressively “defend” their current strategic position by doing the best job they can to hold on to customers in a particular market segment. Prospectors seek fast growth by searching for new market opportunities, encouraging risk taking, and being the first to bring innovative new products to market. Adaptive strategies are another set of industry-level strategies. Whereas the aim of positioning strategies is to minimize the effects of industry competition and build a sustainable competitive advantage, the purpose of adaptive strategies is to choose an industry-level strategy that is best suited to changes in the organization’s external environment. There are four kinds of adaptive strategies: defenders, prospectors, analyzers, and reactors. Analyzers are a blend of the defender and prospector strategies. Analyzers seek moderate, steady growth and limited opportunities for fast growth. Analyzers are rarely first to market with new products or services. Instead, they try to simultaneously minimize risk and maximize profits by following or imitating the proven successes of prospectors. Finally, unlike defenders, prospectors, or analyzers, reactors do not follow a consistent strategy. Furthermore, rather than anticipating and preparing for external opportunities and threats, reactors tend to “react” to changes in their external environment after they occur. Not surprisingly, reactors tend to be poorer performers than defenders, prospectors, or analyzers.

Firm-level Strategy
“How should we compete
against a particular firm?”
© 2016 Cengage Learning
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Firm-level strategies
address the question:
“How should we compete against a particular firm?”

Direct Competition
The rivalry between two companies offering similar products and services that acknowledge each other as rivals and take offensive and defensive actions as they act and react to each other’s strategic actions.
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© 2016 Cengage Learning

Direct competition is the rivalry between two companies offering similar products and services that acknowledge each other as rivals and take offensive and defensive positions as they act and react to each other’s strategic actions. Two factors determine the extent to which firms will be in direct competition with each other: market commonality and resource similarity.
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Direct Competition
Two factors determine the extent to which firms will be in direct competition with each other:
Market commonality
Resource similarity
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Direct competition is the rivalry between two companies offering similar products and services that acknowledge each other as rivals and take offensive and defensive positions as they act and react to each other’s strategic actions. Two factors determine the extent to which firms will be in direct competition with each other: market commonality and resource similarity. Market commonality is the degree to which two companies have overlapping products, services, or customers in multiple markets. The more markets in which there is product, service, or customer overlap, the more intense the direct competition between the two companies. Resource similarity is the extent to which a competitor has similar amounts and kinds of resources, that is, similar assets, capabilities, processes, information, and knowledge used to create and sustain an advantage over competitors. From a competitive standpoint, resource similarity means that the strategic actions that your company takes can probably be matched by your direct competitors.

Exhibit 5.8
A Framework of Direct Competition
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Exhibit 5.8 shows how market commonality and resource similarity interact to determine when and where companies are in direct competition. The overlapping
area in each quadrant (between the triangle and the rectangle, or between the differently colored rectangles) depicts market commonality; the larger the overlap, the greater the market commonality. Shapes depict resource similarity, with rectangles representing one set of competitive resources and triangles representing another. Quadrant I shows two companies in direct competition because they have similar resources at their disposal and a high degree of market commonality. These companies try to sell similar products and services to similar customers. McDonald’s and Burger King would clearly fit here as direct competitors. In Quadrant II, the overlapping parts of the triangle and rectangle show two companies going after similar customers with some similar products or services but with different competitive resources. McDonald’s and Wendy’s restaurants would fit here. Wendy’s is after the same lunchtime and dinner crowds that McDonald’s is. Nevertheless, with its more expensive hamburgers, fries,
shakes, and salads, Wendy’s is less of a direct competitor to McDonald’s than is Burger King. Wendy’s Garden Sensation salads (using fancy lettuce varieties, grape tomatoes, and mandarin oranges) bring in customers who would have eaten at more expensive casual dining restaurants like Applebee’s. In Quadrant III, the very small overlap shows two companies with different competitive resources and little market commonality. McDonald’s and Luby’s cafeterias fit here. Although both are in the fast-food business, there’s almost no overlap in terms of products and customers. Luby’s sells baked chicken, turkey, roasts, meat loaf, and vegetables, none of which are available at McDonald’s. Furthermore, Luby’s customers aren’t likely to eat at McDonald’s. In fact, Luby’s is not really competing with other fast-food restaurants at all, but with eating at home. Finally, in Quadrant IV, the small overlap between the two rectangles shows that McDonald’s and Subway compete with similar resources but with little market commonality. In terms of resources, sales at McDonald’s are much larger, but Subway has grown substantially in the last decade and now has 33,048 stores worldwide, compared to 32,000 worldwide at McDonald’s (just 13,000 in the United States). Though Subway and McDonald’s compete, they aren’t direct competitors in terms of market commonality in the way that McDonald’s and Burger King are because Subway, unlike McDonald’s, sells itself as a provider of healthy fast food.

Strategic Moves of
Direct Competition
Firms in direct competition can make two basic strategic moves:
Attack
Response
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While corporate-level strategies help managers decide what business to be in and business-level strategies help them determine how to compete within an industry, firm-level strategies help managers determine when, where, and what strategic actions should be taken against a direct competitor. Firms in direct competition can make two basic strategic moves: attacks and responses.
An attack is a competitive move designed to reduce a rival’s market share or profits.
A response is a countermove, prompted by a rival’s attack, designed to defend or improve a company’s market share or profit.
Attacks and responses can include smaller, more tactical moves, like price cuts, specially advertised sales or promotions, or improvements in service. However, they can also include resource-intensive strategic moves, such as expanding service and production facilities, introducing new products or services within the firm’s existing business, or entering a completely new line of business for the first time. Of these, market entries and exits are probably the most important kinds of attacks and responses. Entering a new market is a clear offensive signal to an attacking or responding firm that your company is committed to gaining or defending market share and profits at their expense. By contrast, exiting a market is an equally clear defensive signal that your company is retreating.

Strategic Moves of
Direct Competition
When market commonality is strong, there is less motivation to attack and more motivation to respond to an attack.
When resource similarity is strong, the responding firm will generally be able to match the strategic moves of the attacking firm.
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When resource similarity is low, a competitive attack is more likely to produce sustained competitive advantage.
In general, the more moves a company initiates against direct competitors, and the greater a company’s tendency to respond when attacked, the better its performance.
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Strategic Moves of
Direct Competition

Evaluate Theo’s new strategy in light of the company’s strengths, weaknesses, opportunities, and threats.
Using the BCG matrix, explain Theo’s decision to offer a classic line of chocolate bars after having limited success with Fantasy Flavor chocolates.
3. Which of the three competitive strategies—differentiation, cost leadership, or focus—do you think is right for Theo Chocolate? Explain.
Management Workplace – Theo Chocolate

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Theo Chocolate: Strategy Formulation and Execution
When Theo Chocolate first started its production, the company offered an exotic line of dark chocolate and milk chocolate bars and truffles. These early treats had unusual names such as the 3400 Phinney Bar, and they were wrapped in artistic watercolor packaging with whimsical cover designs. Though the chocolate was well received by critics and organic food enthusiasts, it was not popular with mainstream consumers. Founder Joe Whinney began working on a new strategy, creating classic milk chocolate bars as a gateway product that would attract consumers more easily. The end result is that Theo now offers two distinct product lines for two different market segments – a Classic line of milk chocolate bars for mainstream customers, and Fantasy Flavors for more adventurous eaters.

Chapter 4
Planning and Decision Making
© 2016 Cengage Learning

What Would You Do?
DuPont (Wilmington, Delaware)
How can you restore DuPont’s prestige, performance, and competitiveness?
Given sustained weak performance over the last quarter century, do you need to step back and consider DuPont’s purpose, that is, the reason that you’re in business?
Is it time, again, to reconsider what DuPont is all about? Or, instead of an intense focus on DuPont’s purpose, would it make more sense to keep options open by making small, simultaneous investments in many alternative plans?
What kind of goals should you set for the company? Should you focus on finances, product development, or people? And should you have an overriding goal, or should you have separate goals for different parts of the company?

Planning
Choosing a goal and developing a method or strategy to achieve that goal.
© 2016 Cengage Learning

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Planning is choosing a goal and developing a method or strategy to achieve that goal.
Are you one of those naturally organized people who always makes a daily to-do list, writes everything down so you won’t forget, and never misses a deadline because you keep track of everything with a scheduling app? Or are you one of those flexible, creative, go-with-the-flow people who dislike planning and organizing because it restricts your freedom, energy, and performance? Some people are natural planners. They love it and can only see the benefits of planning. However, others dislike planning, and can only see its disadvantages. It turns out that both views are correct. Planning has advantages and disadvantages.

Benefits of Planning
Benefits include:
Intensified effort
Persistence
Direction
Creation of task strategies
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Planning offers the benefits, as shown on this slide.
First, managers and employees put forth greater effort when following a plan. Take two workers. Instruct one to “do his or her best” to increase production, and instruct the other to achieve a 2 percent increase in production each month. Research shows that the one with the specific plan will work harder.
Second, planning leads to persistence, that is, working hard for long periods. In fact, planning encourages persistence even when there may be little chance of short-term success.
The third benefit of planning is direction. Plans encourage managers and employees to direct their persistent efforts toward activities that help accomplish their goals and away from activities that don’t.
The fourth benefit of planning is that it encourages the development of task strategies. After selecting a goal, it’s natural to ask, “How can it be achieved?”
Finally, perhaps the most compelling benefit of planning is that it has been proven to work for both companies and individuals. On average, companies with plans have larger profits and grow much faster than companies that don’t. The same holds true for individual managers and employees. There is no better way to improve the performance of the people who work in a company than to have them set goals and develop strategies for achieving those goals.

Pitfalls of Planning
Pitfalls include:
Impeded change and slow adaptation
A false sense of certainty
Detachment of planners
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© 2016 Cengage Learning

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Despite the significant benefits associated with planning, planning is not a cure-all. Plans won’t fix all organizational problems. In fact, many management authors and consultants believe that planning can harm companies in several ways.
The first pitfall of planning is that it can impede change and prevent or slow needed adaptation. Sometimes companies become so committed to achieving the goals set forth in their plans, or they can become so intent on following the strategies and tactics spelled out in them, that they fail to see that their plans aren’t working or that their goals need to change.
The second pitfall of planning is that it can create a false sense of certainty. Planners sometimes feel that they know exactly what the future holds for their competitors, their suppliers, and their companies. However, all plans are based on assumptions.
The third pitfall of planning is the detachment of planners. In theory, strategic planners and top-level managers are supposed to focus on the big picture and not concern themselves with the details of implementation, that is, carrying out the plan. According to management professor Henry Mintzberg, detachment leads planners to plan for things they don’t understand. Plans are not meant to be abstract theories. They are meant to be guidelines for action.

Exhibit 4.1
How to Make a Plan That Works
© 2016 Cengage Learning
4-2

As depicted in Exhibit 4.1, planning consists of five important steps.
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Setting Goals
Effective goals are SMART:
S – Specific
M – Measurable
A – Attainable
R – Realistic
T – Timely

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Step 1: Set Goals
The first step in planning is to set goals. Goals need to be specific and challenging, to provide a target for which to aim and a standard against which to measure to success.
One way of writing effective goals is to use the SMART guidelines.

Goal Commitment
The determination to achieve a goal.
To bring about goal commitment:
Set goals participatively
Make the goal public
Obtain top management’s support
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© 2016 Cengage Learning

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Step 2:
Goal commitment is the determination to achieve a goal. Commitment to achieve a goal is not automatic. Managers and workers must choose to commit themselves to a goal.
So how can managers bring about goal commitment? The most popular approach is to set goals participatively. Rather than assigning goals to workers (“Johnson, you’ve got ‘til Tuesday of next week to redesign the flux capacitor so it gives us 10 percent more output”), managers and employees choose goals together. The goals are more likely to be realistic and attainable if employees participate in setting them.
Another technique for gaining commitment to a goal is to make the goal public.
Another way to increase goal commitment is to obtain top management’s support. Top management can show support for a plan or program by providing funds, speaking publicly about the plan, or participating in the plan itself.

Developing Effective Action Plans
An action plan lists the specific steps, people, resources, and time period for accomplishing a goal. It answers:
How?
Who?
What?
When?
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© 2016 Cengage Learning

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An effective action plan lists the how, who, what, and when for accomplishing a goal.

Tracking Progress
There are two accepted methods of tracking progress:
Set proximal goals and distal goals.
Gather and provide performance feedback.
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© 2016 Cengage Learning

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The fourth step in planning is to track progress toward goal achievement. There are two accepted methods of tracking progress. The first is to set proximal goals and distal goals. Proximal goals are short-term goals or subgoals, whereas distal goals are long-term or primary goals. The idea behind setting proximal goals is that they may be more motivating and rewarding than waiting to achieve far-off distal goals.
The second method of tracking progress is to gather and provide performance feedback. Regular, frequent performance feedback allows workers and managers to track their progress toward goal achievement and make adjustments in effort, direction, and strategies.

Exhibit 4.2
Effects of Goal Setting, Training, and Feedback on Safe Behavior in a Bread Factory
© 2016 Cengage Learning
4-2

Exhibit 4.2 shows the impact of feedback on safety behavior at a large bakery company with a worker safety record that was two and a half times worse than industry average.
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Maintaining Flexibility
The last step in developing an effective plan is to maintain flexibility.
Options-based planning
Slack resources entail a cushion of resources that can be used to address and adapt to unexpected changes.
Learning-based planning
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© 2016 Cengage Learning

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Because action plans are sometimes poorly conceived and goals sometimes turn out to not be achievable, the last step in developing an effective plan is to maintain flexibility.
One method of maintaining flexibility while planning is to adopt an options-based approach. The goal of options-based planning is to keep options open by making small, simultaneous investments in many options or plans. Then when one or a few of these plans emerge as likely winners, you investment even more in these plans while discontinuing or reducing investment in the others. In part, options-based planning is the opposite of traditional planning. For example, the purpose of an action plan is to commit people and resources to a particular course of action. However, the purpose of options-based planning is to leave those commitments open. Holding options open gives you choices and choices give you flexibility.
Another method of maintaining flexibility while planning is to take a learning-based approach. In contrast to traditional planning, which assumes that initial action plans are correct and will lead to success, learning-based planning assumes that action plans need to be continually tested, changed, and improved as companies learn better ways of achieving goals. Because the purpose is constant improvement, learning-based planning not only encourages flexibility in action plans, but it also encourages frequent reassessment and revision of organizational goals.

Exhibit 4.3
Planning from Top to Bottom
© 2016 Cengage Learning
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Planning works best when the goals and action plans at the bottom and middle of the organization support the goals and action plans at the top of the organization. Exhibit 4.3 illustrates this planning continuity.

Exhibit 4.4
Time Lines for Strategic, Tactical, and Operational Plans
© 2016 Cengage Learning
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As shown in Exhibit 4.4, top management is responsible for developing long-term strategic plans that make clear how the company will serve customers and position itself against competitors in the next two to five years.
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Top Management
Responsible for:
Strategic plans
Purpose statement
Strategic objective

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Top management is responsible for developing long-term strategic plans that make clear how the company will serve customers and position itself against competitors in the next two to five years. A purpose statement, which is often referred to as an organizational mission or vision, is a statement of a company’s purpose or reason for existing. The strategic objective, which flows from the purpose, is a more specific goal that unifies company-wide efforts, stretches and challenges the organization, and possesses a finish line and a time frame.

Middle Management
Responsible for:
Tactical plans
Management by objectives (MBO)
4-3
© 2016 Cengage Learning

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Middle management is responsible for developing and carrying out tactical plans to accomplish the organization’s mission. Tactical plans specify how a company will use resources, budgets, and people to accomplish specific goals within its mission. Whereas strategic plans and objectives are used to focus company efforts over the next two to five years, tactical plans and objectives are used to direct behavior, efforts, and attention over the next six months to two years.
Management by objectives (see the feature what really works: Management by Objectives) is a management technique often used to develop and carry out tactical plans. Management by objectives, or MBO, is a four-step process in which managers and their employees (1) discuss possible goals, (2) participatively select goals that are challenging, attainable, and consistent with the company’s overall goals, (3) jointly develop tactical plans that lead to accomplishment of tactical goals and objectives, and (4) meet regularly to review progress toward accomplishment of those goals.

Lower-Level Managers
Responsible for:
Operational plans
Single-use plans
Standing plans
4-3
© 2016 Cengage Learning

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Lower-level managers are responsible for developing and carrying out operational plans, which are the day-to-day plans for producing or delivering the organization’s products and services. Single-use plans deal with unique, one-time-only events. Unlike single-use plans that are created, carried out, and then never used again, standing plans save managers time because once the plans are created, they can be used repeatedly to handle frequently recurring events.

Standing Plans
Policies
the general course of action that company managers should take in response to a particular event or situation
Procedures
series of steps that should be taken in response to a particular event
Rules and regulations
specify what must happen or not happen

4-3
© 2016 Cengage Learning

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Standing plans save managers time because once the plans are created, they can be used repeatedly to handle frequently recurring events. If you encounter a problem that you’ve seen before, someone in your company has probably written a standing plan that explains how to address it. Using this plan, rather than reinventing the wheel, will save you time. There are three kinds of standing plans: policies, procedures, and rules and regulations.

Exhibit 4.5
2013 U.S. Federal Government Budget Outlays
© 2016 Cengage Learning
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Exhibit 4.5 shows the operating budget outlays for the U.S. federal government.
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what really works
Management by Objectives

On average, companies that effectively use MBO outproduce those that don’t by an incredible 44.6 percent.

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On average, companies that effectively use MBO outproduce those that don’t by an incredible 44.6 percent. And in companies where top management is committed to MBO, that is, where objective setting begins at the top, the average increase in performance is an even more astounding 56.5 percent. By contrast, when top management does not participate in or support MBO, the average increase in productivity is only 6.1 percent. In all, there is a 97 percent chance that companies that use MBO will outperform those that don’t! Thus, MBO can make a very big difference to the companies that use it.

Decisions…
decision making
the process of choosing a solution from available alternatives
rational decision making
a systematic process in which managers define problems, evaluate alternatives, and choose optimal solutions that provide maximum benefits to their organizations
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© 2016 Cengage Learning

Exhibit 4.6
Steps of the Rational Decision-Making Process
© 2016 Cengage Learning
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The first step in decision making is identifying and defining the problem. A problem exists when there is a gap between a desired state (what managers want) and an existing state (the situation that managers are facing).
Decision criteria are the standards used to guide judgments and decisions. Typically, the more criteria that a potential solution meets, the better that solution should be.
After identifying decision criteria, the next step is deciding which criteria are more or less important.
After identifying and weighting the criteria that will guide the decision-making process, the next step is to identify possible courses of action that could solve the problem. In general, at this step the idea is to generate as many alternatives as possible.
The next step is to systematically evaluate each alternative against each criterion. Because of the amount of information that must be collected, this step can take much longer and be much more expensive than other steps in the decision-making process.
The final step in the decision-making process is to compute the optimal decision by determining each alternative’s optimal value. This is done by multiplying the rating for each criterion (step 5) by the weight for that criterion (step 3), and then summing those scores for each alternative course of action that you generated (step 4).

Define the Problem
© 2016 Cengage Learning
Existing state
Problem
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Desired state

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The first step in decision making is identifying and defining the problem. A problem exists when there is a gap between a desired state–what managers want–and an existing state–the situation that the managers are facing.
The existence of a gap between an existing state and a desired state is no guarantee that managers will make decisions to solve problems. Three things must occur for this to happen. First, managers have to be aware of the gap. They have to know there is a problem before they can begin solving it.
Second, being aware of the gap between a desired state and an existing state isn’t enough to begin the decision-making process. You also have to be motivated to reduce the gap.
Finally, it’s not enough to be aware of a problem and be motivated to solve it. You must also have the knowledge, skills, abilities, and resources to fix the problem.

The Decision to Solve Problems
Managers have to be aware of the gap.
Managers have to be motivated to reduced the gap.
Managers must have knowledge, skills, and resources to fix the problem.
© 2016 Cengage Learning
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Identify Decision Criteria
Decision criteria are the standards used to guide judgments and decisions.
Typically, the more criteria a potential solution meets, the better the solution will be.
4-4
© 2016 Cengage Learning

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After identifying decision criteria, the next step is deciding which criteria are more or less important.

Weight the Criteria
Absolute comparisons
Each criterion is compared with a standard or ranked on its own merits.
Relative comparison
Each criterion is compared directly with every other criterion.
© 2016 Cengage Learning
4-4

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Although there are numerous math models for weighting decision criteria, all require the decision maker to provide an initial ranking of the decision criteria. Two methods are absolute and relative comparisons.

Exhibit 4.7
Absolute Weighting of Decision Criteria for a Car Purchase
© 2016 Cengage Learning
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Exhibit 4.7 shows the absolute weights that someone buying a car might use.
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Exhibit 4.8
Relative Comparison of Home Characteristics
© 2016 Cengage Learning
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Exhibit 4.8 show six criteria that someone might use when buying a house.
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Generate Alternative
Courses of Action
The idea of this step is to generate as many alternatives as possible.

Evaluate Each Alternative
The goal of this step is to use information systematically to evaluate each alternative against each criterion.
© 2016 Cengage Learning
4-4

Exhibit 4.9
Criteria Ratings Used to Determine the Best Location for a New Office
© 2016 Cengage Learning
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Exhibit 4.9 shows how each of 10 proposed office locations faired on each of the 12 criteria developed.
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Compute the Optimal Decision
The final step in the decision-making process is to compute the optimal decision by determining the optimal value of each alternative:
rating for each criterion
X
weight for that criterion
Then, add scores for each alternative.
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© 2016 Cengage Learning

Limits to Rational Decision Making
The rational decision-making model describes the way decisions should be made.
But, it’s highly doubtful that rational decision making can always lead to optimal solutions with maximum benefits.
Very few managers make decisions the way they should because of time and resource constraints.
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© 2016 Cengage Learning

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In general, managers who diligently complete all six steps of the rational decision-making model will make better decisions than those who don’t. So, when they can, managers should try to follow the steps in the rational decision-making model, especially for big decisions with long-range consequences.
However, it’s highly doubtful that rational decision making can help managers “choose optimal solutions that provide maximum benefits to their organizations.” The terms “optimal” and “maximum” suggest that rational decision making leads to perfect or near-perfect decisions. Of course, for managers to make perfect decisions, they have to operate in perfect worlds with no real-world constraints.
It never works like that in the real world. Managers face time and money constraints. They often don’t have time to make extensive lists of decision criteria. And, they often don’t have the resources to test all possible solutions against all possible criteria.

Bounded Rationality
© 2016 Cengage Learning
Managers try to take a rational approach to decision making but are restricted by real-world constraints, incomplete and imperfect information, and their own limited decision-making capabilities.
Satisficing is choosing a “good enough” alternative.
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Using Groups to Improve
Decision Making
© 2016 Cengage Learning
Groups bring certain advantages and pitfalls to the decision-making process. Managers can overcome such pitfalls by using various techniques:
Structured conflict
The nominal group technique
The Delphi technique
The stepladder technique
Electronic brainstorming
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Advantages of Group
Decision Making
Groups are able to view problems from multiple perspectives.
Groups can find and access more information.
Groups can generate more alternative solutions.
Group members will be committed to making the solution to work.
4-5
© 2016 Cengage Learning

Pitfalls of Group Decision Making
Groupthink occurs when group members feel intense pressure to agree with each other.

The group is insulated from others with different perspectives.
The group leader begins by expressing a strong preference for a particular decision.
The group has no established procedure for systematically defining problems and exploring alternatives.
Group members have similar backgrounds and experiences.

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Although groups can do a better job of defining problems and generating alternative solutions, group decision making is subject to pitfalls. One possible pitfall is groupthink, which occurs in highly cohesive groups when group members feel intense pressure to agree with each other.
Although groups can do a better job of defining problems and generating alternative solutions, group decision making is subject to some pitfalls that can quickly erase these gains. One possible pitfall is groupthink. Groupthink occurs in highly cohesive groups when group members feel intense pressure not to disagree with each other, so that the group can approve a proposed solution. Because groupthink leads to consideration of a limited number of solutions, and because it restricts discussion of any considered solutions, it usually results in poor decisions. Groupthink is most likely to occur under the following conditions:
The group is insulated from others with different perspectives
The group leader begins by expressing strong preference for a particular decision
There is no established procedure for systematically defining problems and exploring alternatives
Group members have similar backgrounds and experiences

Pitfalls of Group Decision Making
Group decision making takes considerable time.
One or two people can dominate the discussion and limit the group’s consideration.
Group members may not feel accountable for decisions.
© 2016 Cengage Learning
4-5

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A second potential problem with group decision making is that it takes considerable time. It takes time to reconcile schedules (so that group members can meet). Furthermore, it’s the rare group that consistently holds productive task-oriented meetings to effectively work through the decision process. Some of the most common complaints about meetings (and thus group decision making) are that the meeting’s purpose is unclear, meeting participants are unprepared, critical people are absent or late, conversation doesn’t stay focused on the problem, and no one follows up on the decisions that were made.
A third possible pitfall is that sometimes just one or two people dominate group discussion, restricting consideration of different problem definitions and alternative solutions. Another possible problem is that, unlike their own decisions and actions, group members often don’t feel accountable for the decisions made and actions taken by the group.
While these pitfalls can lead to poor decision making, this doesn’t mean that managers should avoid using groups to make decisions. When done properly, group decision making can lead to much better decisions. The pitfalls of group decision making are not inevitable. Most of them can be overcome through good management. Let’s see how structured conflict, the nominal group technique, the Delphi technique, the stepladder technique, and electronic brainstorming help managers improve group decision making.

Structured Conflict
Most people view conflict negatively. However, the right kind of conflict can lead to much better group decision making.
C-Type (cognitive) conflict focuses on problem- and issue-related differences of opinion.
A-Type (affective) conflict focuses on emotional reactions.
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© 2016 Cengage Learning

Introducing C-Type Conflict
Devil’s Advocacy

1. Generate a potential solution.
2. Assign a devil’s advocate to criticize and question the solution.
3. Present the critique of the potential solution to key decision makers.
4. Gather additional relevant information.
5. Decide whether to use, change, or not use the originally proposed solution.

4-5
© 2016 Cengage Learning

Dialectical Inquiry
1. Generate a potential solution.
2. Identify the assumptions underlying the potential solution.
3. Generate a conflicting counterproposal based on the opposite assumptions.
4. Have advocates of each position present their arguments and engage in a debate in front of key decision makers.
5. Decide whether to use, change, or not use the originally proposed solution.
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© 2016 Cengage Learning
Introducing C-Type Conflict

Nominal Group Technique
The process begins with a quiet time. Group members independently write down as many ideas as possible.
Then, all ideas are shared.
Then, members rank all ideas.
The alternative with the highest average rank is selected.

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“Nominal” means “in name only.” Accordingly, the nominal group technique received its name because it begins with “quiet time,” in which group members independently write down as many problem definitions and alternative solutions as possible. In other words, the nominal group technique begins by having group members act as individuals. After the “quiet time,” the group leader asks each group member to share one idea at a time with the group. As they are read aloud, ideas are posted on flip charts or wall boards for all to see. This step continues until all ideas have been shared. The next step involves a discussion of the advantages and disadvantages of these ideas. The nominal group technique closes with a second “quiet time,” in which group members independently rank the ideas presented. Group members then read their rankings aloud, and the idea with the highest average rank is selected.
The nominal group technique improves group decision making by decreasing a-type conflict. However, in doing so, it also restricts c-type conflict. Consequently, the nominal group technique typically produces poorer-quality decisions than do the devil’s advocacy or dialectical inquiry approaches. Nonetheless, more than 80 studies have found that nominal groups produce better-quality ideas than traditional group decisions.

Delphi Technique
Members of a panel of experts respond to questions and to each other until reaching agreement.
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© 2016 Cengage Learning

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The Delphi technique is a decision-making method in which a panel of experts respond to questions and to each other until reaching agreement on an issue. The first step is to assemble a panel of experts. However, unlike other approaches to group decision making, it isn’t necessary to bring the panel together in one place. Since the Delphi technique does not require the experts to leave their offices or disrupt their schedules, they are more likely to participate in the process. The anonymity also helps deter the negative effects of groups on this process.
The second step is to create a questionnaire consisting of a series of open-ended questions for the experts.
In the third step, panel members’ written responses are analyzed, summarized, and fed back to the panel for reactions until panel members reach agreement. Then, their written responses are summarized and typed into a brief report (no more than two pages).
The summary is then sent to the panel members, who are asked to explain why they agreed or disagreed with the conclusions from the first round of questions. Asking why they agreed or disagreed is important, because it helps uncover panel members’ unstated assumptions and beliefs. Again, this process of summarizing panel feedback and obtaining reactions to that feedback continues until panel members reach agreement.
The Delphi technique is not an approach that managers should use for common decisions. Because it is a time-consuming, labor-intensive, and expensive process, the Delphi technique is best reserved for important long-term issues and problems. Nonetheless, the judgments and conclusions obtained from it are typically better than those you would get from one expert.

Devil’s Advocacy, Dialectical Inquiry, and Considering Negative Consequences

Measure Probability of Success
Devil’s Advocacy 58%
Dialectical Inquiry 55%
Considering Negative Consequences 86%

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There is a 58 percent chance that decision makers who use the devil’s advocacy approach to criticize and question their solutions will produce decisions that are better than decisions based on the advice of experts. There is a 55 percent chance that decision makers who use the dialectical inquiry approach to criticize and question their solutions will produce decisions that are better than decisions based on the advice of experts.
Considering negative consequences, such as with a devil’s advocate or via critical inquiry, means pointing out the potential disadvantages of proposed solutions. There is an 86 percent chance that groups that consider negative consequences will produce better decisions than those that don’t.

Stepladder Technique
This technique begins with a discussion between two people…
…other members are added one at a time to review old ideas and suggest new ones…
…and the process continues until all members have contributed.
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© 2016 Cengage Learning

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The stepladder technique begins with discussion between two group members, each of whom presents to the other their thoughts, ideas, and recommendations before jointly making a tentative decision. At each step, as other group members are added to the discussion one at a time (i.e., like a stepladder), the existing group members take the time to listen to each new member’s thoughts, ideas, and recommendations. The group then shares the ideas and suggestions that it had already considered, discusses the new and old ideas, and then makes a tentative decision about what to do. This process (new member’s ideas are heard, group shares previous ideas and suggestion, discussion is held, tentative group decision is made) continues until each group member’s ideas have been discussed.
For the stepladder technique to work, group members must have enough time to consider the problem or decision on their own, to present their ideas to the group, and to thoroughly discuss all ideas and alternatives with the group at each step. Rushing through each step destroys the advantages of this technique. Also, groups must make sure that subsequent group members are completely unaware of previous discussions and suggestions. This will ensure that each member who joins the group brings truly independent thoughts and suggestions, thus, greatly increasing the chances of making better decisions.

Exhibit 4.10
Stepladder Technique for Group Decision Making
© 2016 Cengage Learning
4-5

As shown in Exhibit 4.10, the stepladder technique begins with discussion between two group members who share their thoughts, ideas, and recommendations before jointly making a tentative decision.
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Brainstorming
Brainstorming is a technique for generating a large number of ideas and alternative solutions.
The more ideas, the better.
All ideas are acceptable, no matter how wild or crazy they might seem.
Other group members’ ideas should be used to come up with even more ideas.
Criticism or evaluation of ideas is not allowed.
4-5
© 2016 Cengage Learning

Electronic Brainstorming
Electronic brainstorming helps avoid:
Production blocking
Evaluation apprehension
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© 2016 Cengage Learning

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The first disadvantage that electronic brainstorming overcomes is production blocking, which occurs when you have an idea, but you have to wait to share it because someone else is already describing an idea to the group. This short delay may make you forget your idea or decide that it really wasn’t worth sharing. But with electronic brainstorming, production blocking doesn’t happen. With all group members seated at computers, everyone can type in their ideas whenever they occur. There’s no waiting your turn to be heard by the group.
The second disadvantage that electronic brainstorming overcomes is evaluation apprehension, that is, being afraid of what others will think of your ideas. However, with electronic brainstorming, all ideas are anonymous. When you type in an idea and hit the Enter key to share it with the group, group members see only the idea. Furthermore, many brainstorming software programs also protect anonymity by displaying ideas in random order. So, if you laugh maniacally when you type, “Cut top management’s pay by 50 percent!” and then hit the Enter key, it won’t show up immediately on everyone’s screen. This makes it doubly difficult to determine whose comments belong to whom.
Studies show that electronic brainstorming is much more productive than face-to-face brainstorming. Compared to regular four-person brainstorming groups, the same-sized electronic brainstorming groups produce 25 to 50 percent more ideas. Compared to regular 12-person brainstorming groups, the same-sized electronic brainstorming groups produce 200 percent more ideas!

Exhibit 4.11
What You See on the Computer during Electronic Brainstorming
© 2016 Cengage Learning
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Exhibit 4.11 shows what the typical electronic brainstorming group member will see on his or her computer screen.
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Did Plant Fantasies owner Teresa Carleo follow the rational decision making process to launch Plant Fantasies? Explain.
List an example of a programmed decision at Plant Fantasies. Identify a nonprogrammed decision at Plant Fantasies.
Plant Fantasies
© 2016 Cengage Learning

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Teresa Carleo, owner of Plant Fantasies, is the gardener for such well-known New York City properties as the Trump Organization, John Jay College, and Jack Resnick & Sons. In landscaping, success often boils down to big decisions over little details. Although some decisions involve plant colors and types, others involve complex negotiation with people, such as when Plant Fantasies builds designs created by outside landscape architects. Despite Carleo’s confidence in her own decision making, the Plant Fantasies owner understands the benefits of empowering others. But regardless of who makes decisions, Carleo expects all her employees to share her high standards for quality.

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DuPont Headquarters, Wilmington, Delaware
The DuPont company got its start when Eleuthère Irénée du Pont de Nemours fled France’s revolution to come to America, where, in 1802, he built a mill on the Brandywine River in Wilmington, Delaware, to produce blasting powder used in guns and artillery. In 1902, E.I. du Pont’s great-grandson, Pierre S. du Pont, along with two cousins, bought out other family members and began transforming DuPont into the world’s leading chemical company. In its second century, DuPont Corporation would go on to develop Freon for refrigerators and air conditioners; nylon, which is used in everything from women’s hose to car tires; Lucite, a ubiquitous clear plastic used in baths, furniture, car lights, and phone screens; Teflon, famous for its nonstick properties in cookware and coatings; Dacron, a wash-and-wear, wrinkle-free polyester; Lycra, the stretchy, clingy fabric used in activewear and swimwear; Nome, a fire-resistant fiber used by firefighters, race car drivers, and to reduce heat in motors and electrical equipment; Corona, a high-end countertop used in homes and offices; and Kevlar, the “bulletproof” material used in body armor worn by police and soldiers, in helmets, and for vehicle protection.
You became DuPont’s CEO right as “the world fell apart” at the height of the world financial crisis. Fortunately, you had early warning from sharply declining sales in DuPont’s titanium dioxide division, which makes white pigment used in paints, sunscreen, and food coloring. Sales trends there can be counted on to indicate what will happen next in the general economy, so you and your leadership team began working with the heads of all of DuPont’s divisions to make contingency plans in case sales dropped by 5 percent, 10 percent, 20 percent, or more. Many DuPont managers thought you were crazy, until the downturn hit. It was difficult, but with plans to cut 6,500 employees at the ready, you were prepared when sales dropped by 20 percent at the end of the year. But when that wasn’t enough, salaried and professional employees were asked to voluntarily take unpaid time off and an additional 2,000 jobs were eliminated. In all, these moves reduced expenses by a billion dollars a year. But one place you refused to cut was DuPont’s research budget, which remained at $1.4 billion per year.
One of the ways in which the Board of Directors measures company performance is by comparing DuPont’s total stock returns to 19 peer companies. Over the last quarter century, DuPont has regularly ended up in the bottom third of the list. This makes clear that you have one overriding goal: to restore DuPont’s prestige, performance, and competitiveness. The question, of course, is how?
Before deciding how to restore DuPont’s edge, there are some big questions to consider. First, given sustained weak performance over the last quarter century, do you need to step back and consider DuPont’s purpose, that is, the reason that you’re in business? After transitioning from blasting powder to chemicals, DuPont’s slogan became, “Better things for better living . . . through chemistry.” Is it time, again, to reconsider what DuPont is all about? Or, instead of an intense focus on DuPont’s purpose, would it make more sense to make lots of plans and lots of bets so that “a thousand flowers can bloom”? In other words, would it be better to keep options open by making small, simultaneous investments in many alternative plans? Then, when one or a few of these plans emerge as likely winners, you invest even more in these plans while discontinuing or reducing investment in the others. Finally, planning is a double-edged sword. If done right, it brings about tremendous increases in individual and organizational performance. But if done wrong, it can have just the opposite effect and harm individual and organizational performance. With that in mind, what kind of goals should you set for the company? Should you focus on finances, product development, or people? And should you have an overriding goal, or should you have separate goals for different parts of the company?
If you were the CEO at DuPont, what would you do?
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Planning is choosing a goal and developing a method or strategy to achieve that goal.
Are you one of those naturally organized people who always makes a daily to-do list, writes everything down so you won’t forget, and never misses a deadline because you keep track of everything with a scheduling app? Or are you one of those flexible, creative, go-with-the-flow people who dislike planning and organizing because it restricts your freedom, energy, and performance? Some people are natural planners. They love it and can only see the benefits of planning. However, others dislike planning, and can only see its disadvantages. It turns out that both views are correct. Planning has advantages and disadvantages.
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Planning offers the benefits, as shown on this slide.
First, managers and employees put forth greater effort when following a plan. Take two workers. Instruct one to “do his or her best” to increase production, and instruct the other to achieve a 2 percent increase in production each month. Research shows that the one with the specific plan will work harder.
Second, planning leads to persistence, that is, working hard for long periods. In fact, planning encourages persistence even when there may be little chance of short-term success.
The third benefit of planning is direction. Plans encourage managers and employees to direct their persistent efforts toward activities that help accomplish their goals and away from activities that don’t.
The fourth benefit of planning is that it encourages the development of task strategies. After selecting a goal, it’s natural to ask, “How can it be achieved?”
Finally, perhaps the most compelling benefit of planning is that it has been proven to work for both companies and individuals. On average, companies with plans have larger profits and grow much faster than companies that don’t. The same holds true for individual managers and employees. There is no better way to improve the performance of the people who work in a company than to have them set goals and develop strategies for achieving those goals.
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Despite the significant benefits associated with planning, planning is not a cure-all. Plans won’t fix all organizational problems. In fact, many management authors and consultants believe that planning can harm companies in several ways.
The first pitfall of planning is that it can impede change and prevent or slow needed adaptation. Sometimes companies become so committed to achieving the goals set forth in their plans, or they can become so intent on following the strategies and tactics spelled out in them, that they fail to see that their plans aren’t working or that their goals need to change.
The second pitfall of planning is that it can create a false sense of certainty. Planners sometimes feel that they know exactly what the future holds for their competitors, their suppliers, and their companies. However, all plans are based on assumptions.
The third pitfall of planning is the detachment of planners. In theory, strategic planners and top-level managers are supposed to focus on the big picture and not concern themselves with the details of implementation, that is, carrying out the plan. According to management professor Henry Mintzberg, detachment leads planners to plan for things they don’t understand. Plans are not meant to be abstract theories. They are meant to be guidelines for action.
As depicted in Exhibit 4.1, planning consists of five important steps.
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Step 1: Set Goals
The first step in planning is to set goals. Goals need to be specific and challenging, to provide a target for which to aim and a standard against which to measure to success.
One way of writing effective goals is to use the SMART guidelines.
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Step 2:
Goal commitment is the determination to achieve a goal. Commitment to achieve a goal is not automatic. Managers and workers must choose to commit themselves to a goal.
So how can managers bring about goal commitment? The most popular approach is to set goals participatively. Rather than assigning goals to workers (“Johnson, you’ve got ‘til Tuesday of next week to redesign the flux capacitor so it gives us 10 percent more output”), managers and employees choose goals together. The goals are more likely to be realistic and attainable if employees participate in setting them.
Another technique for gaining commitment to a goal is to make the goal public.
Another way to increase goal commitment is to obtain top management’s support. Top management can show support for a plan or program by providing funds, speaking publicly about the plan, or participating in the plan itself.
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An effective action plan lists the how, who, what, and when for accomplishing a goal.
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The fourth step in planning is to track progress toward goal achievement. There are two accepted methods of tracking progress. The first is to set proximal goals and distal goals. Proximal goals are short-term goals or subgoals, whereas distal goals are long-term or primary goals. The idea behind setting proximal goals is that they may be more motivating and rewarding than waiting to achieve far-off distal goals.
The second method of tracking progress is to gather and provide performance feedback. Regular, frequent performance feedback allows workers and managers to track their progress toward goal achievement and make adjustments in effort, direction, and strategies.
Exhibit 4.2 shows the impact of feedback on safety behavior at a large bakery company with a worker safety record that was two and a half times worse than industry average.
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Because action plans are sometimes poorly conceived and goals sometimes turn out to not be achievable, the last step in developing an effective plan is to maintain flexibility.
One method of maintaining flexibility while planning is to adopt an options-based approach. The goal of options-based planning is to keep options open by making small, simultaneous investments in many options or plans. Then when one or a few of these plans emerge as likely winners, you investment even more in these plans while discontinuing or reducing investment in the others. In part, options-based planning is the opposite of traditional planning. For example, the purpose of an action plan is to commit people and resources to a particular course of action. However, the purpose of options-based planning is to leave those commitments open. Holding options open gives you choices and choices give you flexibility.
Another method of maintaining flexibility while planning is to take a learning-based approach. In contrast to traditional planning, which assumes that initial action plans are correct and will lead to success, learning-based planning assumes that action plans need to be continually tested, changed, and improved as companies learn better ways of achieving goals. Because the purpose is constant improvement, learning-based planning not only encourages flexibility in action plans, but it also encourages frequent reassessment and revision of organizational goals.
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Planning works best when the goals and action plans at the bottom and middle of the organization support the goals and action plans at the top of the organization. Exhibit 4.3 illustrates this planning continuity.
As shown in Exhibit 4.4, top management is responsible for developing long-term strategic plans that make clear how the company will serve customers and position itself against competitors in the next two to five years.
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Top management is responsible for developing long-term strategic plans that make clear how the company will serve customers and position itself against competitors in the next two to five years. A purpose statement, which is often referred to as an organizational mission or vision, is a statement of a company’s purpose or reason for existing. The strategic objective, which flows from the purpose, is a more specific goal that unifies company-wide efforts, stretches and challenges the organization, and possesses a finish line and a time frame.
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Middle management is responsible for developing and carrying out tactical plans to accomplish the organization’s mission. Tactical plans specify how a company will use resources, budgets, and people to accomplish specific goals within its mission. Whereas strategic plans and objectives are used to focus company efforts over the next two to five years, tactical plans and objectives are used to direct behavior, efforts, and attention over the next six months to two years.
Management by objectives (see the feature what really works: Management by Objectives) is a management technique often used to develop and carry out tactical plans. Management by objectives, or MBO, is a four-step process in which managers and their employees (1) discuss possible goals, (2) participatively select goals that are challenging, attainable, and consistent with the company’s overall goals, (3) jointly develop tactical plans that lead to accomplishment of tactical goals and objectives, and (4) meet regularly to review progress toward accomplishment of those goals.
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Lower-level managers are responsible for developing and carrying out operational plans, which are the day-to-day plans for producing or delivering the organization’s products and services. Single-use plans deal with unique, one-time-only events. Unlike single-use plans that are created, carried out, and then never used again, standing plans save managers time because once the plans are created, they can be used repeatedly to handle frequently recurring events.
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Standing plans save managers time because once the plans are created, they can be used repeatedly to handle frequently recurring events. If you encounter a problem that you’ve seen before, someone in your company has probably written a standing plan that explains how to address it. Using this plan, rather than reinventing the wheel, will save you time. There are three kinds of standing plans: policies, procedures, and rules and regulations.
Exhibit 4.5 shows the operating budget outlays for the U.S. federal government.
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On average, companies that effectively use MBO outproduce those that don’t by an incredible 44.6 percent. And in companies where top management is committed to MBO, that is, where objective setting begins at the top, the average increase in performance is an even more astounding 56.5 percent. By contrast, when top management does not participate in or support MBO, the average increase in productivity is only 6.1 percent. In all, there is a 97 percent chance that companies that use MBO will outperform those that don’t! Thus, MBO can make a very big difference to the companies that use it.
The first step in decision making is identifying and defining the problem. A problem exists when there is a gap between a desired state (what managers want) and an existing state (the situation that managers are facing).
Decision criteria are the standards used to guide judgments and decisions. Typically, the more criteria that a potential solution meets, the better that solution should be.
After identifying decision criteria, the next step is deciding which criteria are more or less important.
After identifying and weighting the criteria that will guide the decision-making process, the next step is to identify possible courses of action that could solve the problem. In general, at this step the idea is to generate as many alternatives as possible.
The next step is to systematically evaluate each alternative against each criterion. Because of the amount of information that must be collected, this step can take much longer and be much more expensive than other steps in the decision-making process.
The final step in the decision-making process is to compute the optimal decision by determining each alternative’s optimal value. This is done by multiplying the rating for each criterion (step 5) by the weight for that criterion (step 3), and then summing those scores for each alternative course of action that you generated (step 4).

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The first step in decision making is identifying and defining the problem. A problem exists when there is a gap between a desired state–what managers want–and an existing state–the situation that the managers are facing.
The existence of a gap between an existing state and a desired state is no guarantee that managers will make decisions to solve problems. Three things must occur for this to happen. First, managers have to be aware of the gap. They have to know there is a problem before they can begin solving it.
Second, being aware of the gap between a desired state and an existing state isn’t enough to begin the decision-making process. You also have to be motivated to reduce the gap.
Finally, it’s not enough to be aware of a problem and be motivated to solve it. You must also have the knowledge, skills, abilities, and resources to fix the problem.
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After identifying decision criteria, the next step is deciding which criteria are more or less important.
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Although there are numerous math models for weighting decision criteria, all require the decision maker to provide an initial ranking of the decision criteria. Two methods are absolute and relative comparisons.
Exhibit 4.7 shows the absolute weights that someone buying a car might use.
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Exhibit 4.8 show six criteria that someone might use when buying a house.
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Exhibit 4.9 shows how each of 10 proposed office locations faired on each of the 12 criteria developed.
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In general, managers who diligently complete all six steps of the rational decision-making model will make better decisions than those who don’t. So, when they can, managers should try to follow the steps in the rational decision-making model, especially for big decisions with long-range consequences.
However, it’s highly doubtful that rational decision making can help managers “choose optimal solutions that provide maximum benefits to their organizations.” The terms “optimal” and “maximum” suggest that rational decision making leads to perfect or near-perfect decisions. Of course, for managers to make perfect decisions, they have to operate in perfect worlds with no real-world constraints.
It never works like that in the real world. Managers face time and money constraints. They often don’t have time to make extensive lists of decision criteria. And, they often don’t have the resources to test all possible solutions against all possible criteria.

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According to a study reported in Fortune magazine, 91 percent of U.S. companies use teams and groups to solve specific problems (i.e., make decisions).
When done properly, group decision making can lead to much better decisions than individual decision making. In fact, numerous studies show that groups consistently outperform individuals on complex tasks. Let’s explore the advantages and pitfalls of group decision making, and see how the following group decision making methods–structured conflict, the nominal group technique, the Delphi technique, the stepladder technique, and electronic brainstorming–can be used to improve decision making.
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Although groups can do a better job of defining problems and generating alternative solutions, group decision making is subject to pitfalls. One possible pitfall is groupthink, which occurs in highly cohesive groups when group members feel intense pressure to agree with each other.
Although groups can do a better job of defining problems and generating alternative solutions, group decision making is subject to some pitfalls that can quickly erase these gains. One possible pitfall is groupthink. Groupthink occurs in highly cohesive groups when group members feel intense pressure not to disagree with each other, so that the group can approve a proposed solution. Because groupthink leads to consideration of a limited number of solutions, and because it restricts discussion of any considered solutions, it usually results in poor decisions. Groupthink is most likely to occur under the following conditions:
The group is insulated from others with different perspectives
The group leader begins by expressing strong preference for a particular decision
There is no established procedure for systematically defining problems and exploring alternatives
Group members have similar backgrounds and experiences

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Most people view conflict negatively. However, the right kind of conflict can lead to much better group decision making. C-type conflict, or cognitive conflict, focuses on problem- and issue-related differences of opinion. In c-type conflict, group members disagree because their different experiences and expertise lead them to different views of the problem and its potential solutions. C-type conflict is also characterized by a willingness to examine, compare, and reconcile those differences to produce the best possible solution.
By contrast, a-type conflict, meaning affective conflict, refers to the emotional reactions that can occur when disagreements become personal rather than professional. A-type conflict often results in hostility, anger, resentment, distrust, cynicism, and apathy. So, unlike c-type conflict, a-type conflict undermines team effectiveness by preventing teams from engaging in the kinds of activities, such as c-type conflict, that are critical to team effectiveness. Examples of a-type conflict statements would be, “your idea,” “our idea,” “my department,” “you don’t know what you are talking about,” or “you don’t understand our situation.” Rather than focusing on issues and ideas, these statements focus on individuals.
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“Nominal” means “in name only.” Accordingly, the nominal group technique received its name because it begins with “quiet time,” in which group members independently write down as many problem definitions and alternative solutions as possible. In other words, the nominal group technique begins by having group members act as individuals. After the “quiet time,” the group leader asks each group member to share one idea at a time with the group. As they are read aloud, ideas are posted on flip charts or wall boards for all to see. This step continues until all ideas have been shared. The next step involves a discussion of the advantages and disadvantages of these ideas. The nominal group technique closes with a second “quiet time,” in which group members independently rank the ideas presented. Group members then read their rankings aloud, and the idea with the highest average rank is selected.
The nominal group technique improves group decision making by decreasing a-type conflict. However, in doing so, it also restricts c-type conflict. Consequently, the nominal group technique typically produces poorer-quality decisions than do the devil’s advocacy or dialectical inquiry approaches. Nonetheless, more than 80 studies have found that nominal groups produce better-quality ideas than traditional group decisions.
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The Delphi technique is a decision-making method in which a panel of experts respond to questions and to each other until reaching agreement on an issue. The first step is to assemble a panel of experts. However, unlike other approaches to group decision making, it isn’t necessary to bring the panel together in one place. Since the Delphi technique does not require the experts to leave their offices or disrupt their schedules, they are more likely to participate in the process. The anonymity also helps deter the negative effects of groups on this process.
The second step is to create a questionnaire consisting of a series of open-ended questions for the experts.
In the third step, panel members’ written responses are analyzed, summarized, and fed back to the panel for reactions until panel members reach agreement. Then, their written responses are summarized and typed into a brief report (no more than two pages).
The summary is then sent to the panel members, who are asked to explain why they agreed or disagreed with the conclusions from the first round of questions. Asking why they agreed or disagreed is important, because it helps uncover panel members’ unstated assumptions and beliefs. Again, this process of summarizing panel feedback and obtaining reactions to that feedback continues until panel members reach agreement.
The Delphi technique is not an approach that managers should use for common decisions. Because it is a time-consuming, labor-intensive, and expensive process, the Delphi technique is best reserved for important long-term issues and problems. Nonetheless, the judgments and conclusions obtained from it are typically better than those you would get from one expert.
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There is a 58 percent chance that decision makers who use the devil’s advocacy approach to criticize and question their solutions will produce decisions that are better than decisions based on the advice of experts. There is a 55 percent chance that decision makers who use the dialectical inquiry approach to criticize and question their solutions will produce decisions that are better than decisions based on the advice of experts.
Considering negative consequences, such as with a devil’s advocate or via critical inquiry, means pointing out the potential disadvantages of proposed solutions. There is an 86 percent chance that groups that consider negative consequences will produce better decisions than those that don’t.
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The stepladder technique begins with discussion between two group members, each of whom presents to the other their thoughts, ideas, and recommendations before jointly making a tentative decision. At each step, as other group members are added to the discussion one at a time (i.e., like a stepladder), the existing group members take the time to listen to each new member’s thoughts, ideas, and recommendations. The group then shares the ideas and suggestions that it had already considered, discusses the new and old ideas, and then makes a tentative decision about what to do. This process (new member’s ideas are heard, group shares previous ideas and suggestion, discussion is held, tentative group decision is made) continues until each group member’s ideas have been discussed.
For the stepladder technique to work, group members must have enough time to consider the problem or decision on their own, to present their ideas to the group, and to thoroughly discuss all ideas and alternatives with the group at each step. Rushing through each step destroys the advantages of this technique. Also, groups must make sure that subsequent group members are completely unaware of previous discussions and suggestions. This will ensure that each member who joins the group brings truly independent thoughts and suggestions, thus, greatly increasing the chances of making better decisions.

As shown in Exhibit 4.10, the stepladder technique begins with discussion between two group members who share their thoughts, ideas, and recommendations before jointly making a tentative decision.
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The first disadvantage that electronic brainstorming overcomes is production blocking, which occurs when you have an idea, but you have to wait to share it because someone else is already describing an idea to the group. This short delay may make you forget your idea or decide that it really wasn’t worth sharing. But with electronic brainstorming, production blocking doesn’t happen. With all group members seated at computers, everyone can type in their ideas whenever they occur. There’s no waiting your turn to be heard by the group.
The second disadvantage that electronic brainstorming overcomes is evaluation apprehension, that is, being afraid of what others will think of your ideas. However, with electronic brainstorming, all ideas are anonymous. When you type in an idea and hit the Enter key to share it with the group, group members see only the idea. Furthermore, many brainstorming software programs also protect anonymity by displaying ideas in random order. So, if you laugh maniacally when you type, “Cut top management’s pay by 50 percent!” and then hit the Enter key, it won’t show up immediately on everyone’s screen. This makes it doubly difficult to determine whose comments belong to whom.
Studies show that electronic brainstorming is much more productive than face-to-face brainstorming. Compared to regular four-person brainstorming groups, the same-sized electronic brainstorming groups produce 25 to 50 percent more ideas. Compared to regular 12-person brainstorming groups, the same-sized electronic brainstorming groups produce 200 percent more ideas!
Exhibit 4.11 shows what the typical electronic brainstorming group member will see on his or her computer screen.
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Teresa Carleo, owner of Plant Fantasies, is the gardener for such well-known New York City properties as the Trump Organization, John Jay College, and Jack Resnick & Sons. In landscaping, success often boils down to big decisions over little details. Although some decisions involve plant colors and types, others involve complex negotiation with people, such as when Plant Fantasies builds designs created by outside landscape architects. Despite Carleo’s confidence in her own decision making, the Plant Fantasies owner understands the benefits of empowering others. But regardless of who makes decisions, Carleo expects all her employees to share her high standards for quality.

Chapter 2
Organizational Environments and Culture
© 2016 Cengage Learning

What Would You Do?
Waste Management (Houston, Texas)
What steps could the company take to take advantage of the growing trend of zero waste?
What can the company do to meet increased customer expectations on one hand, while still finding a way to earn a profit on high-cost recycled materials?
Should Waste Management take on the company’s critics and fight back, or should they focus on business and let the results speak for themselves? Should they view environmental advocates as a threat or an opportunity for the company?

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Waste Management Headquarters, Houston, Texas
Americans generate a quarter billion tons of trash a year, or 4.5 pounds of trash per person per day. Thanks to nearly 9,000 curbside recycling programs, a third of that is recycled. But, that still leaves 3 pounds of trash per person per day to be disposed of. With 20 million customers, 273 municipal landfills, 91 recycling facilities, and 17 waste-to-energy facilities, Waste Management, Inc., is the largest waste-handling company in the world. It generates 75 percent of its profits from 273 landfills, which can hold 4.8 billion tons of trash. And because it collects only 110 million tons a year, it has plenty of landfill capacity for years to come.
You joined the company a decade ago and, after three and a half short years as deputy general counsel and then chief financial officer, became chief executive officer (CEO). Corporations, cities, and households are greatly reducing the amount of waste they generate, and thus the amount of trash that they pay Waste Management to haul away to its landfills. Subaru of America, for instance, has a zero-landfill plant in West Lafayette, Indiana, that hasn’t sent any waste to a landfill since 2004. None! And Subaru isn’t exceptional in seeking to be a zero-landfill company. Walmart, the largest retailer in the world, has also embraced this goal, stating, “Our vision is to reach a day where there are no dumpsters behind our stores and clubs, and no landfills containing our throwaways.” Like those at Subaru and Walmart, corporate leaders worldwide are committed to reducing the waste produced by their companies. Because that represents a direct threat to Waste Management’s landfill business, what steps could it take to take advantage of the trend toward zero waste, which might allow it to continue growing company revenues?
Another significant change for Waste Management is that not only are its customers reducing the waste they send to its landfills, they’re also wanting what is sent to landfills to be sorted for recycling and reuse. For instance, food waste, yard clippings, and wood—all organic materials—account for roughly one-third of the material sent to landfills. Likewise, there’s growing demand for waste companies to manage and recycle discarded TVs, computer monitors, and other electronic waste that leaks lead, mercury, and hazardous materials when improperly disposed of. However, the high cost of collecting and sorting recyclable materials means that Waste Management loses money when it recycles them. What can the company do to meet increased customer expectations on one hand, while still finding a way to earn a profit on high-cost recycled materials?
Finally, advocacy groups, such as the Sierra Club, regularly protest Waste Management’s landfill practices, deeming them irresponsible and harmful to the environment. Everywhere that Waste Management’s top managers look, they see changes and forces outside the company that directly affect how they do business. Should they take on the company’s critics and fight back, or should they focus on business and let the results speak for themselves? Should they view environmental advocates as a threat or an opportunity for the company?
If you were in charge of Waste Management, what would you do?

Changing Environments
Environmental Change
Environmental Complexity
Resource Scarcity
Uncertainty
© 2016 Cengage Learning
2-1

Environmental Change
The rate at which a company’s environments change.
Stable environments: slow rate of change.
Dynamic environments: fast rate of change.
© 2016 Cengage Learning
2-1

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The rate of environmental change affects many organizational aspects, particularly decision making.
In stable environments, the rate of environmental change is slow – decision makers can be more deliberate.
In dynamic environments, the rate of environmental change is fast – decision makers must be nimble and quick.
While it would seem that companies would either be in stable external environments or dynamic external environments, recent research suggests that companies often experience both stable and dynamic external environments. Punctuated equilibrium theory says that companies go through long periods of stability (equilibrium), followed by short, complex periods of dynamic, fundamental change (revolutionary periods), finishing with a return to stability (new equilibrium).

Punctuated Equilibrium Theory
Companies cycle through stable and dynamic environments
© 2016 Cengage Learning
Stable Environment
Dynamic Environment

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Exhibit 2.1
Punctuated Equilibrium: U.S. Airline Industry
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© 2016 Cengage Learning

Environmental Complexity
The number and the intensity of external factors in the environment that affect organizations.
2-1
© 2016 Cengage Learning

Resource Scarcity
The abundance or shortage of critical organizational resources in an organization’s external environment.
2-1
© 2016 Cengage Learning

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The third characteristic of external environments is resource scarcity: the degree to which an organization’s external environment has an abundance or scarcity of critical organizational resources.

Uncertainty
The extent to which managers can understand or predict which environmental changes and trends will affect their businesses.
2-1
© 2016 Cengage Learning

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Uncertainty is the extent to which managers can understand or predict which environmental changes and trends will affect their businesses.

Exhibit 2.2
Environmental Change, Environmental Complexity, and Resource Scarcity
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© 2016 Cengage Learning

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Environmental change, environmental complexity, and resource scarcity affect environmental uncertainty, as shown in Exhibit 2.2.
At the left side of the figure, environmental uncertainty is lowest when environmental change and complexity are at low levels and resources are plentiful. By contrast, the right side indicates that environmental uncertainty is highest when environmental change and complexity are extensive and resources are scarce.
In these environments, managers may not be at all confident that they can understand and predict the external forces affecting their businesses.

Exhibit 2.3
General and Specific Environments
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© 2016 Cengage Learning

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Exhibit 2.3 shows the two kinds of external environments that influence organizations: the general environment and the specific environment.
The general environment consists of the economy and the technological, sociocultural, and political/legal trends that indirectly affect all organizations. Changes in any sector of the general environment eventually affect most organizations. For example, most businesses benefit when the Federal Reserve lowers its prime lending rate, because banks and credit card companies will then lower the interest rates they charge for loans. Consumers, who can then borrow money more cheaply, will borrow more money to buy homes, cars, and flat-screen TVs.
By contrast, each organization has a specific environment that is unique to that firm’s industry and directly affects the way it conducts day-to-day business. The specific environment includes customers, competitors, suppliers, industry regulation, and advocacy groups.

General Environment
Economy
Technological Trends
Sociocultural Trends
Political/Legal Trends
2-2
© 2016 Cengage Learning

Economy
A growing economy is a more favorable environment for businesses.
Managers scan the environment to predict future economic activity.
Business confidence indices show how confident managers are about growth.
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© 2016 Cengage Learning

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The current state of a country’s economy affects most organizations operating in it. In a growing economy, more people are working and have more money to spend. A growing economy provides an environment favorable to business growth. In contrast, in a shrinking economy, consumers have less money to spend, and relatively fewer products are bought and sold, making growth for individual businesses more difficult.
Because economic statistics can be such poor predictors, some managers try to predict future economic activity by keeping track of business confidence. Business confidence indices show how confident actual managers are about future business growth. For example, the Fortune Business Confidence Index is a monthly survey of chief financial offices at large Fortune 1000 firms.
Another widely cited measure is the U.S. Chamber of Commerce Business Confidence Index, which asks 7,000 small business owners to express their optimism (or pessimism) about future business sales and prospects. Managers often prefer business confidence indices to economic statistics, because they know that the level of confidence reported by real managers affects their business decisions. In other words, it’s reasonable to expect managers to make decisions today that are in line with their expectations concerning the economy’s future.

Technological Component
Technology is the knowledge, tools, and techniques used to transform inputs into outputs.

Inputs
raw material
information

Outputs
products
services
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Sociocultural Component
© 2016 Cengage Learning
affect how companies staff their business.
affect demand for products and services.
Changes in demographics…
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The sociocultural component of the general environment refers to the demographic characteristics and general behavior, attitudes, and beliefs of people in a particular society.
First, changing demographic characteristics, such as the number of people with particular skills, or the growth or decline in particular population segments (marital status, age, gender, ethnicity) affect how companies run their businesses.
Today, with traffic congestion creating longer commutes and with both parents working longer hours, employees are much more likely to value products and services that allow them to recapture free time with their families. Priscilla La Barbera, a marketing professor at New York University, believes that there’s been a “societal shift” in the way people view their free time. She said, “…people are beginning to realize that their time has real value.” Companies, such as CDW in Vernon, Illinois, provide a service that picks up dry cleaning at their employees’ desks. At First Command Financial Planning, Fort Worth, Texas, employees can borrow movies and receive free shoe shining and car washing.
Sociocultural changes in behavior, attitudes, and beliefs also affect the demand for a business’s products and services. Today’s harried worker/parent can find services that have all the supplies you need for children’s birthday parties. These services are a direct result of the need for more efficient time management, which is a result of the sociocultural changes associated with a much higher percentage of women in the work place.

Political/Legal Component
This component includes…
Legislation
Regulations
Court Decisions

1991 Civil Rights Act
Family and Medical Leave Act
© 2016 Cengage Learning
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The political/legal component includes the legislation, regulations, and court decisions that govern and regulate business behavior. In recent years, new laws and regulations have imposed additional responsibilities on companies. Unfortunately, many managers are unaware of these new responsibilities.
Another area in which companies face potential legal risks these days is from customer-initiated lawsuits. For example, under product liability law, manufacturers can be liable for products made decades ago. Also, the law, as it is now written, does not consider whether manufactured products have been properly maintained and used.
From a managerial perspective, the best medicine against legal risk is prevention. As a manager, it is your responsibility to educate yourself about the laws, regulations, and potential lawsuits that could affect your business. Failure to do so may put you and your company at risk of sizable penalties, fines, or legal charges.

Specific Environment
Customer
Competitor
Supplier
Industry Regulation
Advocacy Group

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In contrast to the general environment that indirectly influences organizations, changes in an organization’s specific environment directly affect the way a company conducts its business. If customers decide to use another product, a competitor cuts prices 10 percent, a supplier can’t deliver raw materials, federal regulators specify that industry pollutants must be reduced, or environmental groups accuse your company of selling unsafe products, the impact on your business is immediate.

Customer Component
This component includes…
Reactive Customer Monitoring
Proactive Customer Monitoring
© 2016 Cengage Learning
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Customers purchase products and services, and companies cannot exist without customer support. Therefore, monitoring customers’ changing wants and needs is critical to business success.
There are two basic strategies for monitoring customers: reactive and proactive. Reactive customer monitoring is identifying and addressing customer trends and problems after they occur. One reactive strategy is to identify customer concerns by listening closely to customer complaints. Not only does listening to complaints help identify problems, but the way in which companies respond to complaints indicates how closely they are attending to customer concerns. For example, companies that respond quickly to customer letters of complaint are viewed much more favorably than companies that are slow to respond or never respond. In particular, studies have shown that when a company’s follow-up letter thanks customers for writing, offers a sincere, specific response to the customer’s complaint, and contains a small gift, coupons, or a refund to make up for the problem, customers will be much more likely to purchase products or services again from that company.
Proactive monitoring of customers means trying to sense events, trends, and problems before they occur (or before customers complain).

Competitor Component
Competitive analysis entails…
deciding who your competitors are.
anticipating competitors’ moves.
determining competitors’ strengths.
determining competitors’ weaknesses.
2-3
© 2016 Cengage Learning

*
Often, the difference between business success and failure comes down to whether your company is doing a better job of satisfying customer wants and needs than the competition. Consequently, companies need to keep close track of what their competitors are doing. This is called competitive analysis.

Competitor Component
Mistakes managers make:
Focusing only on two or three well-known competitors.
Underestimating a potential competitor’s capabilities.

Supplier Component
This component involves:
Supplier dependence
Buyer dependence
2-3
© 2016 Cengage Learning

*
Suppliers are companies that provide material, human, financial, and informational resources to other companies.
A key factor influencing the relationship between companies and their suppliers is how dependent they are on each other.
Supplier dependence is the degree to which a company relies on a supplier because of the importance of the supplier’s product to the company and the difficulty of finding other sources of that product.
Buyer dependence is the degree to which a supplier relies on a buyer because of the importance of that buyer to the supplier and the difficulty of selling its products to other buyers.
A high degree of buyer or seller dependence can lead to opportunistic behavior, in which one party benefits at the expense of the other. Opportunistic behavior between buyers and suppliers will never be completely eliminated. However, many companies believe that both buyers and suppliers can benefit by improving the buyer-supplier relationship.
Relationship behavior focuses on establishing a mutually beneficial, long-term relationship between buyers and suppliers.

Supplier Component
This component also involves:
Opportunistic behavior
Relationship behavior
2-3
© 2016 Cengage Learning

*
Opportunistic behavior is when one party benefits at the expense of the other. Although opportunistic behavior between buyers and suppliers will never be completely eliminated, many companies believe that both buyers and suppliers can benefit by improving the buyer-supplier relationship. In contrast to opportunistic behavior, relationship behavior focuses on establishing a mutually beneficial, long-term relationship between buyers and suppliers.

Industry Regulation Component
This component involves the regulations and rules that govern the business practices and procedures of specific industries, businesses, and professions.
© 2016 Cengage Learning
2-3

*
The industry regulation component consists of regulations and rules that govern the practices and procedures of specific industries, businesses, and professions.
Regulatory agencies affect businesses by creating and enforcing rules and regulations to protect consumers, workers, or society as a whole.
Overall, the number and cost of federal regulations have nearly tripled in the last 25 years. However, businesses are not just subject to federal regulations. For every $1 the federal government spends creating regulations, businesses spend $45 to comply with them. They must also meet state, county, and city regulations. Surveys indicate that managers rank government regulation as one of the most demanding and frustrating parts of their jobs.

Advocacy Groups
This component involves groups of concerned citizens who band together to try to influence the business practices of specific industries, businesses, and professions.
© 2016 Cengage Learning
2-3

*
Advocacy groups are groups of concerned citizens who band together to try to influence the business practices of specific industries.
Unlike the industry regulation component of the specific environment, advocacy groups cannot force organizations to change their practices. However, they can use a number of techniques to try to influence companies, including public communications, media advocacy, Web pages, blogs, and product boycotts.

Advocacy Techniques
Advocacy techniques include…
Public communications
Media advocacy
Product boycotts
© 2016 Cengage Learning
2-3

*
The public communications approach relies on voluntary participation by the news media and the advertising industry to get an advocacy group’s message out, such as the public service announcements for World No Tobacco Day.
A media advocacy approach typically involves framing issues as public issues (i.e., affecting everyone); exposing questionable, exploitative, or unethical practices; and obtaining media coverage by buying media time or creating controversy that is likely to receive extensive news coverage. PETA’s actions are a good example of this approach.
A product boycott is a tactic in which an advocacy group actively tries to convince consumers to not purchase a company’s product or service. Such groups are now using the Web to get “the word out” on boycotts, as evidenced by Ecopledge.com.

Making Sense of Changing Environments
The three-step process:
Environmental Scanning
Interpreting Environmental Factors
Acting on Threats and Opportunities
© 2016 Cengage Learning
2-4

*
In Chapter 1, you learned that managers are responsible for making sense of their business environments. However, our discussions of the general and specific environments indicate that making sense of business environments is not an easy task.
Because external environments can be dynamic, confusing, and complex, managers use a three-step process to make sense of the changes in their external environments: environmental scanning, interpreting environmental factors, and acting on threats and opportunities.

Environmental Scanning
Environmental scanning is searching the environment for events or issues that might affect an organization.

Managers must stay up-to-date on important factors in their industry and pay close attention to trends and events related to their company’s ability to compete.

Scanning contributes to organizational performance and helps managers detect environmental changes and problems before they become organizational crises.
© 2016 Cengage Learning
2-4

*
Environmental scanning is searching the environment for important events or issues that might affect an organization.
Managers scan the environment to stay up-to-date on important factors in their industry and reduce uncertainty.
Organization strategies also affect environmental scanning. Managers pay close attention to trends and events that are directly related to the company’s ability to compete.
Environmental scanning contributes to organizational performance, and helps managers detect environmental changes and problems before they become organizational crises. Furthermore, companies whose CEOs do more environmental scanning have higher profits. CEOs in better-performing firms scan their firm’s environments more frequently and scan more key factors in their environments in more depth and detail than do CEOs in poorer-performing firms.

Interpreting Environmental Factors
After scanning, managers must determine:
threats, and take steps to protect the company from further harm.
opportunities, and consider strategic alternatives for taking advantage of those events.

Organizational Cultures
Creation and Maintenance of Organizational Cultures
Successful Organizational Cultures
Changing Organizational Cultures
© 2016 Cengage Learning
2-5

Internal Environment
The trends and events within an organization that affect the management, employees, and organizational culture.
© 2016 Cengage Learning
2-5

*
External environments are external trends and events that have the potential to affect companies. The internal environment consists of the trends and events within an organization that affect the management, employees, and organizational culture.

Organizational Culture
The key values, beliefs, and attitudes shared by members of the organization.
© 2016 Cengage Learning
2-5

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Organizational culture is the set of key values, beliefs, and attitudes shared by organizational members.

Creation and Maintenance of Organizational Cultures

Company Founder
© 2016 Cengage Learning
2-5
Organizational Stories
Organizational Heroes

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A primary source of organizational culture is the company founder. For example, Thomas J. Watson (IBM), Sam Walton (Walmart), and Bill Gates (Microsoft) created organizations in their images that they imprinted with their beliefs, attitudes, and values.
When the founders are gone, the organizational culture is sustained through stories and heroes.
Organizational stories make sense of organizational events and changes and emphasize culturally consistent assumptions, decisions, and actions. For example, at Walmart, stories abound about the thriftiness of Sam Walton.
Second, organizational culture is sustained by recognizing and celebrating heroes, admired for their qualities and achievements.

Exhibit 2.4
Successful Organizational Cultures
2-5
© 2016 Cengage Learning

*
Preliminary research shows that organizational culture is related to organizational success. As shown in Exhibit 2.4, cultures based on adaptability, involvement, a clear vision, and consistency can help companies achieve higher sales growth, return on assets, profits, quality, and employee satisfaction.
Adaptability is the ability to notice and respond to changes in the organization’s environment.
In cultures that promote higher levels of employee involvement in decision making, employees feel a greater sense of ownership and responsibility.
A company mission is a company’s purpose or reason for existing. In organizational cultures in which there is a clear organizational vision, the organization’s strategic purpose and direction are apparent to everyone in the company. And, when managers are uncertain about their business environments, the vision helps guide the discussions, decisions, and behavior of the people in the company.
Finally, in consistent organizational cultures, the company actively defines and teaches organizational values, beliefs, and attitudes. Consistent organizational cultures are also called strong cultures, because the core beliefs are widely shared and strongly held.

Exhibit 2.5
Three Levels of Organizational Culture
2-5
© 2016 Cengage Learning

*
As shown in Exhibit 2.5, organizational cultures exist on three levels.

Changing Organizational Culture
Behavioral addition
Behavioral substitution
Change visible artifacts
© 2016 Cengage Learning
2-5

*
One way of changing a corporate culture is to use behavioral addition or behavioral substitution to establish new patterns of behavior among managers and employees.
Behavioral addition is the process of having managers and employees perform a new behavior, while behavioral substitution is having managers and employees perform a new behavior in place of another behavior. The key in both instances is to choose behaviors that are central to and symbolic of the old culture you’re changing and the new culture that you want to create.

Changing Organizational Culture
© 2016 Cengage Learning
Selection: the process of gathering information about job applicants to decide who should be offered a job.
Managers must:
define and describe organizational culture.
use selection tests, instruments, and exercises to measure values and beliefs in job applicants.
2-5

What aspects of Camp Bow Wow’s corporate culture reflect the surface level of the organizational culture? What aspects reflect the values and beliefs? What aspects reflect the unconsciously held assumptions and beliefs.
Why did Camp Bow Wow have to change its culture when it became a national franchise?
What impact does Heidi Ganahl’s personal story have on employees at Camp Bow Wow?
Camp Bow Wow
© 2016 Cengage Learning

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Camp Bow Wow: The Environment and Corporate Culture
In ten years, Camp Bow Wow has grown from a single kennel in Denver, Colorado to a $40 million dollar business, with more than 150 locations. The transition from a small family business to a national chain, however, required a shift from a family-based culture to a business- and performance-based culture. A key element of of Camp Bow Wow’s culture is the staff’s deep emotional connection with animals. The connection is immediately apparent at corporate headquarters, where offices are bustling with employees and pets alike. According to founder Heidi Ganahal, “What we do is focus on what’s important to us, and that’s the animals.”

*
As shown in Exhibit 2.1, one example of punctuated equilibrium is the U.S. airline industry. Three times in the last 30 years, the U.S. airline industry has experienced revolutionary periods. The first, from mid-1979 to mid-1982, occurred immediately after airline deregulation in 1978. Prior to deregulation, the federal government controlled where airlines could fly, when they could fly, and the number of flights they could have on a particular route. After deregulation, these choices were left up to the airlines. The large financial losses during this period clearly indicate that the airlines had trouble adjusting to the intense competition that occurred after deregulation. However, by mid-1982, profits returned to the industry and held steady until mid-1989.
Then, after experiencing record growth and profits, U.S. airlines lost billions of dollars between 1989 and 1993 as the industry went through dramatic changes. Key expenses, like jet fuel and employee salaries, which had held steady for years, suddenly increased. Furthermore, revenues, which had grown steadily year after year, suddenly dropped because of dramatic changes in the airlines’ customer base. Business travelers, who typically pay full-priced fares, comprised more than half of all passengers during the 1980s. But now, the largest group is leisure travelers who, in contrast to business travelers, want the cheapest flights they can get. With expenses suddenly up and revenues suddenly down, the airlines responded to these changes in their business environment by laying off 5 to 10 percent of all workers, canceling orders for new planes, and getting rid of routes that were not profitable. Starting in 1993 and lasting until 1998, these changes helped profits return even stronger. The industry began to stabilize, if not flourish, just as punctuated equilibrium theory predicts.
The third revolutionary period began with the September 11, 2001, terrorist attacks. The immediate effect was a 20 percent drop in scheduled flights, and a 40 percent drop in passengers. Losses were so large that the U.S. government approved a $15 billion bailout. By 2005, several major airlines had laid off an average of 25 percent of their workers.
Source: “Annual Revenue and Earnings: U.S. Scheduled Airlines—All Services,” Air Transport Association, [Online] Available http://airlines.org/econ/d.aspx?nid=1034, 15 January 2005.
*
The third characteristic of external environments is resource scarcity: the degree to which an organization’s external environment has an abundance or scarcity of critical organizational resources.
*
Uncertainty is the extent to which managers can understand or predict which environmental changes and trends will affect their businesses.
*
Environmental change, environmental complexity, and resource scarcity affect environmental uncertainty, as shown in Exhibit 2.2.
At the left side of the figure, environmental uncertainty is lowest when environmental change and complexity are at low levels and resources are plentiful. By contrast, the right side indicates that environmental uncertainty is highest when environmental change and complexity are extensive and resources are scarce.
In these environments, managers may not be at all confident that they can understand and predict the external forces affecting their businesses.
*
Exhibit 2.3 shows the two kinds of external environments that influence organizations: the general environment and the specific environment.
The general environment consists of the economy and the technological, sociocultural, and political/legal trends that indirectly affect all organizations. Changes in any sector of the general environment eventually affect most organizations. For example, most businesses benefit when the Federal Reserve lowers its prime lending rate, because banks and credit card companies will then lower the interest rates they charge for loans. Consumers, who can then borrow money more cheaply, will borrow more money to buy homes, cars, and flat-screen TVs.
By contrast, each organization has a specific environment that is unique to that firm’s industry and directly affects the way it conducts day-to-day business. The specific environment includes customers, competitors, suppliers, industry regulation, and advocacy groups.
*
The current state of a country’s economy affects most organizations operating in it. In a growing economy, more people are working and have more money to spend. A growing economy provides an environment favorable to business growth. In contrast, in a shrinking economy, consumers have less money to spend, and relatively fewer products are bought and sold, making growth for individual businesses more difficult.
Because economic statistics can be such poor predictors, some managers try to predict future economic activity by keeping track of business confidence. Business confidence indices show how confident actual managers are about future business growth. For example, the Fortune Business Confidence Index is a monthly survey of chief financial offices at large Fortune 1000 firms.
Another widely cited measure is the U.S. Chamber of Commerce Business Confidence Index, which asks 7,000 small business owners to express their optimism (or pessimism) about future business sales and prospects. Managers often prefer business confidence indices to economic statistics, because they know that the level of confidence reported by real managers affects their business decisions. In other words, it’s reasonable to expect managers to make decisions today that are in line with their expectations concerning the economy’s future.
*
The sociocultural component of the general environment refers to the demographic characteristics and general behavior, attitudes, and beliefs of people in a particular society.
First, changing demographic characteristics, such as the number of people with particular skills, or the growth or decline in particular population segments (marital status, age, gender, ethnicity) affect how companies run their businesses.
Today, with traffic congestion creating longer commutes and with both parents working longer hours, employees are much more likely to value products and services that allow them to recapture free time with their families. Priscilla La Barbera, a marketing professor at New York University, believes that there’s been a “societal shift” in the way people view their free time. She said, “…people are beginning to realize that their time has real value.” Companies, such as CDW in Vernon, Illinois, provide a service that picks up dry cleaning at their employees’ desks. At First Command Financial Planning, Fort Worth, Texas, employees can borrow movies and receive free shoe shining and car washing.
Sociocultural changes in behavior, attitudes, and beliefs also affect the demand for a business’s products and services. Today’s harried worker/parent can find services that have all the supplies you need for children’s birthday parties. These services are a direct result of the need for more efficient time management, which is a result of the sociocultural changes associated with a much higher percentage of women in the work place.
*
The political/legal component includes the legislation, regulations, and court decisions that govern and regulate business behavior. In recent years, new laws and regulations have imposed additional responsibilities on companies. Unfortunately, many managers are unaware of these new responsibilities.
Another area in which companies face potential legal risks these days is from customer-initiated lawsuits. For example, under product liability law, manufacturers can be liable for products made decades ago. Also, the law, as it is now written, does not consider whether manufactured products have been properly maintained and used.
From a managerial perspective, the best medicine against legal risk is prevention. As a manager, it is your responsibility to educate yourself about the laws, regulations, and potential lawsuits that could affect your business. Failure to do so may put you and your company at risk of sizable penalties, fines, or legal charges.
*
In contrast to the general environment that indirectly influences organizations, changes in an organization’s specific environment directly affect the way a company conducts its business. If customers decide to use another product, a competitor cuts prices 10 percent, a supplier can’t deliver raw materials, federal regulators specify that industry pollutants must be reduced, or environmental groups accuse your company of selling unsafe products, the impact on your business is immediate.

Managers tend to make two mistakes when they do competitive analysis:
They tend to focus on only two or three well-known competitors with similar goals and resources.
They underestimate potential competitors’ capabilities. When this happens, managers don’t take the steps they should to continue to improve their products or services. The result can be significant decreases in both market share and profits.
*
*
Suppliers are companies that provide material, human, financial, and informational resources to other companies.
A key factor influencing the relationship between companies and their suppliers is how dependent they are on each other.
Supplier dependence is the degree to which a company relies on a supplier because of the importance of the supplier’s product to the company and the difficulty of finding other sources of that product.
Buyer dependence is the degree to which a supplier relies on a buyer because of the importance of that buyer to the supplier and the difficulty of selling its products to other buyers.
A high degree of buyer or seller dependence can lead to opportunistic behavior, in which one party benefits at the expense of the other. Opportunistic behavior between buyers and suppliers will never be completely eliminated. However, many companies believe that both buyers and suppliers can benefit by improving the buyer-supplier relationship.
Relationship behavior focuses on establishing a mutually beneficial, long-term relationship between buyers and suppliers.
*
Opportunistic behavior is when one party benefits at the expense of the other. Although opportunistic behavior between buyers and suppliers will never be completely eliminated, many companies believe that both buyers and suppliers can benefit by improving the buyer-supplier relationship. In contrast to opportunistic behavior, relationship behavior focuses on establishing a mutually beneficial, long-term relationship between buyers and suppliers.
*
The industry regulation component consists of regulations and rules that govern the practices and procedures of specific industries, businesses, and professions.
Regulatory agencies affect businesses by creating and enforcing rules and regulations to protect consumers, workers, or society as a whole.
Overall, the number and cost of federal regulations have nearly tripled in the last 25 years. However, businesses are not just subject to federal regulations. For every $1 the federal government spends creating regulations, businesses spend $45 to comply with them. They must also meet state, county, and city regulations. Surveys indicate that managers rank government regulation as one of the most demanding and frustrating parts of their jobs.
*
Advocacy groups are groups of concerned citizens who band together to try to influence the business practices of specific industries.
Unlike the industry regulation component of the specific environment, advocacy groups cannot force organizations to change their practices. However, they can use a number of techniques to try to influence companies, including public communications, media advocacy, Web pages, blogs, and product boycotts.
*
The public communications approach relies on voluntary participation by the news media and the advertising industry to get an advocacy group’s message out, such as the public service announcements for World No Tobacco Day.
A media advocacy approach typically involves framing issues as public issues (i.e., affecting everyone); exposing questionable, exploitative, or unethical practices; and obtaining media coverage by buying media time or creating controversy that is likely to receive extensive news coverage. PETA’s actions are a good example of this approach.
A product boycott is a tactic in which an advocacy group actively tries to convince consumers to not purchase a company’s product or service. Such groups are now using the Web to get “the word out” on boycotts, as evidenced by Ecopledge.com.
*
In Chapter 1, you learned that managers are responsible for making sense of their business environments. However, our discussions of the general and specific environments indicate that making sense of business environments is not an easy task.
Because external environments can be dynamic, confusing, and complex, managers use a three-step process to make sense of the changes in their external environments: environmental scanning, interpreting environmental factors, and acting on threats and opportunities.
*
Environmental scanning is searching the environment for important events or issues that might affect an organization.
Managers scan the environment to stay up-to-date on important factors in their industry and reduce uncertainty.
Organization strategies also affect environmental scanning. Managers pay close attention to trends and events that are directly related to the company’s ability to compete.
Environmental scanning contributes to organizational performance, and helps managers detect environmental changes and problems before they become organizational crises. Furthermore, companies whose CEOs do more environmental scanning have higher profits. CEOs in better-performing firms scan their firm’s environments more frequently and scan more key factors in their environments in more depth and detail than do CEOs in poorer-performing firms.

*
After scanning the environment for information, managers must make sense of the data they have gathered.
Threats mean potential harm to an organization and managers take steps to protect the company from further damage.
By contrast, when managers interpret environmental events as opportunities, they will consider strategic alternatives for taking advantage of the event to improve company performance.
After scanning for information on environmental events and issues and interpreting them as threats or opportunities, managers have to decide how to respond to these environmental factors. However, deciding what to do under conditions of uncertainty is difficult. Managers are never completely confident that they have all the information they need, or that they correctly understand the information they have.
*
External environments are external trends and events that have the potential to affect companies. The internal environment consists of the trends and events within an organization that affect the management, employees, and organizational culture.
*
Organizational culture is the set of key values, beliefs, and attitudes shared by organizational members.
*
A primary source of organizational culture is the company founder. For example, Thomas J. Watson (IBM), Sam Walton (Walmart), and Bill Gates (Microsoft) created organizations in their images that they imprinted with their beliefs, attitudes, and values.
When the founders are gone, the organizational culture is sustained through stories and heroes.
Organizational stories make sense of organizational events and changes and emphasize culturally consistent assumptions, decisions, and actions. For example, at Walmart, stories abound about the thriftiness of Sam Walton.
Second, organizational culture is sustained by recognizing and celebrating heroes, admired for their qualities and achievements.
*
Preliminary research shows that organizational culture is related to organizational success. As shown in Exhibit 2.4, cultures based on adaptability, involvement, a clear vision, and consistency can help companies achieve higher sales growth, return on assets, profits, quality, and employee satisfaction.
Adaptability is the ability to notice and respond to changes in the organization’s environment.
In cultures that promote higher levels of employee involvement in decision making, employees feel a greater sense of ownership and responsibility.
A company mission is a company’s purpose or reason for existing. In organizational cultures in which there is a clear organizational vision, the organization’s strategic purpose and direction are apparent to everyone in the company. And, when managers are uncertain about their business environments, the vision helps guide the discussions, decisions, and behavior of the people in the company.
Finally, in consistent organizational cultures, the company actively defines and teaches organizational values, beliefs, and attitudes. Consistent organizational cultures are also called strong cultures, because the core beliefs are widely shared and strongly held.
*
As shown in Exhibit 2.5, organizational cultures exist on three levels.
*
One way of changing a corporate culture is to use behavioral addition or behavioral substitution to establish new patterns of behavior among managers and employees.
Behavioral addition is the process of having managers and employees perform a new behavior, while behavioral substitution is having managers and employees perform a new behavior in place of another behavior. The key in both instances is to choose behaviors that are central to and symbolic of the old culture you’re changing and the new culture that you want to create.

The second way in which managers can begin to change corporate culture is to change visible artifacts of their old culture, such as the office design and layout, company dress code, and who benefits (or doesn’t) from company benefits and perks like stock options, personal parking spaces, or the private company dining room.
Corporate cultures are very difficult to change. Consequently, there is no guarantee that behavioral substitution, behavioral addition, or changing visible cultural artifacts will change a company’s organizational culture. However, these methods are some of the best tools that managers have for changing culture, because they send the clear message to managers and employees that “the accepted way of doing things” has changed.
*
*
Camp Bow Wow: The Environment and Corporate Culture
In ten years, Camp Bow Wow has grown from a single kennel in Denver, Colorado to a $40 million dollar business, with more than 150 locations. The transition from a small family business to a national chain, however, required a shift from a family-based culture to a business- and performance-based culture. A key element of of Camp Bow Wow’s culture is the staff’s deep emotional connection with animals. The connection is immediately apparent at corporate headquarters, where offices are bustling with employees and pets alike. According to founder Heidi Ganahal, “What we do is focus on what’s important to us, and that’s the animals.”

What Would You Do?
American Express (New York, New York)
On what basis should the company decide whether to hire smokers? Should the decision be based on what’s in the best interest of the firm, what the law allows, or what affirms and respects individual rights?
Is this an issue of ethics or social responsibility? Is refusing to hire smokers a form of discrimination?

Ethics
The set of moral principles or values that defines right and wrong for a person or group.
© 2016 Cengage Learning
3-1

Ethics and Management
Ethical behavior follows accepted principles of right and wrong.
Managers must be careful of…
authority and power.
handling information.
influencing the behavior of others.
the goals they set.
© 2016 Cengage Learning
3-1

*
Areas of unethical behavior are: authority and power, handling information, influencing the behavior of others, and setting goals.
Unethical management behavior occurs when managers personally violate accepted principles of right and wrong. The authority and power inherent in some management positions can tempt managers to engage in unethical practices. Since managers often control company resources, there is a risk that some managers will cross the line from legitimate use of company resources to personal use of those resources. For example, some managers have used corporate funds to pay for extravagant personal parties, lavish home decorating, jewelry, or expensive pieces of art.
Handling information is another area in which managers must be careful to behave ethically. Information is a key part of management work. Managers collect it, analyze it, act on it, and disseminate it. However, they are also expected to deal in truthful information and, when necessary, to keep confidential information confidential. Leaking company secrets to competitors, “doctoring” the numbers, wrongfully withholding information, or lying are some possible misuses of the information entrusted to managers.
A third area in which managers must be careful to engage in ethical behavior is the way in which they influence the behavior of others, especially those they supervise. Managerial work gives managers significant power to influence others. If managers tell employees to perform unethical acts (or face punishment), such as “faking the numbers” to get results, then they are abusing their managerial power. This is sometimes called the “move it or lose it” syndrome. “Move it or lose it” managers tell employees, “Do it. You’re paid to do it. If you can’t do it, we’ll find somebody who can.”
Setting goals is another way that managers influence the behavior of their employees. If managers set unrealistic goals, the pressure to perform and to achieve these goals can influence employees to engage in unethical business behaviors.

U.S. Sentencing Commission Guidelines for Organizations
It is important to know:
to whom the guidelines apply and what they cover.
how an organization can be punished for the unethical behavior of managers and employees.
3-2
© 2016 Cengage Learning

U.S. Sentencing Commission
Guidelines for Organizations
Companies can be prosecuted and punished even if management didn’t know about the unethical behavior.
3-2
© 2016 Cengage Learning

Who, What, and Why?
Nearly all business are covered by the U.S. Sentencing Commission’s guidelines.
The purpose of the guidelines is to punish companies after they break the law and discourage crime before it happens.
3-2
© 2016 Cengage Learning

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Nearly all businesses, nonprofits, partnerships, labor unions, unincorporated organizations and associations, incorporated organizations, and even pension funds, trusts, and joint stock companies are covered by the guidelines. If your organization can be characterized as a business (remember, nonprofits count, too), then it is subject to the guidelines.
The guidelines cover offenses such as invasion of privacy, price fixing, fraud, customs violations, antitrust violations, civil rights violations, theft, money laundering, conflicts of interest, embezzlement, dealing in stolen goods, copyright infringements, extortion, and more. However, it’s not enough to stay “within the law.” The purpose of the guidelines is not just to punish companies after they or their employees break the law. The purpose is to encourage companies to take proactive steps that will discourage or prevent white-collar crime before it happens. The guidelines also give companies an incentive to cooperate with and disclose illegal activities to federal authorities.

Determining the Punishment
Stick: the threat of heavy fines.

The guidelines impose smaller fines on companies that take proactive steps to encourage ethical behavior or voluntarily disclose illegal activities to federal authorities. Essentially, the law uses a “carrot-and-stick” approach. The stick is the threat of heavy fines that can total millions of dollars. The carrot is greatly reduced fines, but only if the company has started an effective compliance program to encourage ethical behavior before the illegal activity occurs.
*

Determining the Punishment
The process takes several steps:
Compute the base fine by determining level of offense
Compute culpability score
Total fine = base fine x culpability score.
3-2
© 2016 Cengage Learning

The first step is computing the base fine by determining what level of offense has occurred. The level of the offense (i.e., the seriousness of the problem) is figured by examining the kind of crime, the loss incurred by the victims, and how much planning went into the crime.
After assessing a base fine, the judge computes a culpability score, which is a way of assigning blame to the company. Higher culpability scores suggest greater corporate responsibility in conducting, encouraging, or sanctioning illegal or unethical activity. The culpability score is a number ranging from a minimum of 0.05 to a maximum of 4.0.
The culpability score is critical, because the total fine is computed by multiplying the base fine by the culpability score. Going back to our level 24 fraud offense, a company with a compliance program that turns itself in will only be fined $105,000 ($2,100,000 x 0.05). However, a company that secretly plans, approves, and participates in illegal activity will be fined $8.4 million ($2,100,000 x 4.0)!
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Exhibit 3.1
Offense Levels, Base Fines, Culpability Scores, and Possible Total Fines under the U.S. Sentencing Commission Guidelines
3-2
© 2016 Cengage Learning

The method used to determine a company’s punishment illustrates the importance of establishing a compliance program, as illustrated in Exhibit 3.1.
*

Exhibit 3.2
Compliance Program Steps for the U.S. Sentencing Commission Guidelines for Organizations
3-2
© 2016 Cengage Learning

*
Source: D.R. Dalton, M.B. Metzger, & J.W. Hill, “The ‘New’ U.S. Sentencing Commission Guidelines: A Wake-up Call for Corporate America,” Academy of Management Executive 8 (1994): 7-16.
Fortunately, for those who want to avoid paying these stiff fines, the 1991 U.S. Sentencing Guidelines are clear on the seven necessary components of an effective compliance program. These guidelines are listed in Exhibit 3.2.

Influences on Ethical
Decision Making
Influences include:
The ethical intensity of the decision
The moral development of the manager
3-3
© 2016 Cengage Learning

Factors of Ethical Intensity
Factors include:
Magnitude of consequences
Social consensus
Probability of effect
Temporal immediacy
Proximity of effect
Concentration of effect
3-3
© 2016 Cengage Learning

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Managers don’t treat all ethical decisions the same. The manager who has to decide whether to deny or extend full benefits to Joan Addessi and her family is going to treat that decision much more seriously than the manager who has to deal with an assistant who has been taking paper home for personal use. The difference between these decisions is one of ethical intensity, which is how concerned people are about an ethical issue.
Magnitude of consequences is the total harm or benefit derived from an ethical decision.
Social consensus is agreement on whether behavior is bad or good.
Probability of effect is the chance that something will happen and then result in harm to others.
Temporal immediacy is the time between an act and the consequences the act produces.
Proximity of effect is the social, psychological, cultural, or physical distance of a decision maker to those affected by his or her decisions.
Finally, whereas the magnitude of consequences is the total effect across all people, concentration of effect is how much an act affects the average person.

*
In part, according to Lawrence Kohlberg, ethical decisions are based on a person’s level of moral development. Kohlberg identified three phases of moral development, with two stages in each phase.
At the preconventional level of moral development, people decide based on selfish reasons. For example, if you were in Stage 1, the punishment and obedience stage, your primary concern would be not to get in trouble. Yet, in Stage 2, the instrumental exchange stage, you make decisions that advance your wants and needs.
People at the conventional level of moral development make decisions that conform to societal expectations. In Stage 3, the good boy–nice girl stage, you normally do what the other “good boys” and “nice girls” are doing. In the law and order stage, Stage 4, you do whatever the law permits.
People at the postconventional level of moral maturity always use internalized ethical principles to solve ethical dilemmas. In Stage 5, the social contract stage, you would consider the effects of your decision on others. In Stage 6, the universal principle stage, you make ethical decisions based on your principles of right and wrong.

Practical Steps to Ethical
Decision Making
Managers can encourage ethical decision making by…
selecting and hiring ethical employees.
establishing a specific code of ethics.
training employees to make ethical decisions.
creating an ethical climate.
© 2016 Cengage Learning
3-4

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Managers can encourage more ethical decision making in their organizations by carefully selecting and hiring ethical employees, establishing a specific code of ethics, training employees how to make ethical decisions, and creating an ethical climate.

Selecting and Hiring
Ethics can be gauged through:
Overt integrity tests
Personality-based integrity tests
3-4
© 2016 Cengage Learning

*
Overt integrity tests estimate honesty by directly asking job applicants what they think or feel about theft or about punishment of unethical behaviors. For example, an employer might ask an applicant, “Would you would ever consider buying something from somebody if you knew the person had stolen the item?” or, “Don’t most people steal from their companies?” Surprisingly, because they believe that the world is basically dishonest and that dishonest behavior is normal, unethical people will usually answer yes to such questions.
Personality-based integrity tests indirectly estimate employee honesty by measuring psychological traits such as dependability and conscientiousness. For example, prison inmates serving time for white-collar crimes (counterfeiting, embezzlement, and fraud) scored much lower than a comparison group of middle-level managers on scales measuring reliability, dependability, honesty, and being conscientious and rule-abiding. These results show that companies can selectively hire and promote people who will be more ethical.

Codes of Ethics
A company must communicate its code both inside and outside the company.
Management must develop practical ethical standards and procedures specific to the company’s business.
© 2016 Cengage Learning
3-4

*
Today, almost all large corporations have an ethics code in place. However, two things must happen if those codes are to encourage ethical decision making and behavior. First, companies must communicate the codes to others both within and outside the company.
An excellent example of a well-communicated code of ethics can be found at Nortel Networks Internet site, at http://www.nortel-us.com. With the click of a computer mouse, anyone inside or outside the company can obtain detailed information about the company’s core values, specific ethical business practices, and much more.
Second, in addition to general guidelines and ethics codes like “do unto others as you would have others do unto you,” management must also develop practical ethical standards and procedures specific to the company’s line of business. Visitors to Nortel’s Internet site can instantly access references to specific ethics codes, ranging from bribes and kickbacks to expense vouchers and illegal copying of software.
Specific codes of ethics such as these make it much easier for employees to decide what they should do when they want to do the “right thing.”

Ethics Training
Ethics training allows a manager to…
develop employees’ awareness of ethics.
achieve credibility with employees.
reinforce behavior by teaching initial ethics classes.
teach employees a practical model of ethical decision making.
© 2016 Cengage Learning
3-4

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The first objective of ethics training is to develop employee awareness about ethics. This means helping employees recognize what issues are ethical issues, and then avoid the rationalization of unethical behavior: “This isn’t really illegal or immoral.” “No one will ever find out.”
The second objective for ethics training programs is to achieve credibility with employees. Not surprisingly, employees can be highly suspicious of management’s reasons for offering ethics training.
The third objective of ethics training is to teach employees a practical model of ethical decision making. A basic model should help them think about the consequences their choices will have on others and consider how they will choose between different solutions. This model is shown on the next slide.

Exhibit 3.4 presents a basic model of ethical decision making.
*

Creating an Ethical Climate
Managers should act ethically.
Management should be active in and committed to company ethics program.
Managers must put in a place a reporting system that encourages whistleblowers.
3-4
© 2016 Cengage Learning

*
The first step in establishing an ethical climate is for managers—especially top managers—to act ethically themselves. Managers who decline to accept lavish gifts from company suppliers; who only use the company phone, fax, and copier for business and not personal use; or who keep their promises to employees, suppliers, and customers encourage others to believe that ethical behavior is normal and acceptable.
A second step in establishing an ethical climate is for top management to be active in the company ethics program.
A third step is to put in place a reporting system that encourages managers and employees to report potential ethics violations. Whistleblowing, which is reporting others’ ethics violations, is a difficult step for most people to take. Potential whistleblowers often fear that they will be punished rather than the ethics violators.
The final step in developing an ethical climate is for management to fairly and consistently punish those who violate the company’s code of ethics.

what really works
Integrity Tests

Measure Probability of Success
Overt Integrity Tests & Workplace Deviances 82%
Personality-Based Integrity Tests & Workplace Deviance 68%
Overt Integrity Tests & Job Performance 69%
Personality-Based Integrity Tests & Job Performance 70%
Over Integrity Tests & Theft 57%

*
Compared with job applicants who score low, there is an 82 percent chance that job applicants who score high on overt integrity tests will participate in
less illegal activity, unethical behavior, drug abuse, or workplace violence. Personality-based integrity tests also do a good job of predicting who will engage in workplace deviance. Compared with job applicants who score low, there is a 68 percent chance that job applicants who score high on personality-based integrity tests will participate in less illegal activity, unethical behavior, excessive absences, drug abuse, or workplace violence.
In addition to reducing unethical behavior and workplace deviance, integrity tests can help companies hire better performers. Compared with employees who score low, there is a 69 percent chance that employees who score high on overt integrity tests will be better performers.

Social Responsibility
A business’s obligation to pursue policies, make decisions, and take actions that benefit society.
© 2016 Cengage Learning
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There are two perspectives regarding to whom organizations are socially responsible: the shareholder model and the stakeholder model. According to Nobel prize-winning economist Milton Friedman, the only social responsibility that organizations have is to satisfy their owners, that is, company shareholders. This view–called the shareholder model–holds that the only social responsibility that businesses have is to maximize profits. By maximizing profit, the firm maximizes shareholder wealth and satisfaction. More specifically, as profits rise, the company stock owned by company shareholders generally increases in value.
By contrast, under the stakeholder model, management’s most important responsibility is long-term survival (not just maximizing profits), which is achieved by satisfying the interests of multiple corporate stakeholders (not just shareholders). Stakeholders are people or groups with a legitimate interest in a company. Since stakeholders are interested in and affected by the organization’s actions, they have a “stake” in what those actions are. Consequently, stakeholder groups may try to influence the firm to act in their own interests.

To Whom Are Organizations
Socially Responsible?
There are two major perspectives:
Shareholder model
Stakeholder model
Primary stakeholders
Secondary stakeholders
3-5
© 2016 Cengage Learning

Exhibit 3.5 shows the various stakeholder groups that the organization must satisfy to assure its long-term survival.
*

*
A century ago, society expected businesses to meet their economic and legal responsibilities and little else. Today, however, when society judges whether businesses are socially responsible, ethical and discretionary responsibilities are considerably more important than they used to be.
Historically, economic responsibility, or making a profit by producing a product or service valued by society, has been a business’s most basic social responsibility. Organizations that don’t meet their financial and economic expectations come under tremendous pressure.
Legal responsibility is the expectation that companies will obey a society’s laws and regulations as they try to meet their economic responsibilities.
Ethical responsibility is society’s expectation that organizations will not violate accepted principles of right and wrong when conducting their business. Because different stakeholders may disagree about what is or is not ethical, meeting ethical responsibilities is more difficult than meeting economic or legal responsibilities.
Discretionary responsibilities pertain to the social roles that businesses play in society beyond their economic, legal, and ethical responsibilities.

For What Are Organizations
Socially Responsible?
Economic responsibility
Legal responsibility
Ethical responsibility
Discretional responsibility
3-6
© 2016 Cengage Learning

*
Historically, economic responsibility, or making a profit by producing a product or service valued by society, has been a business’s most basic social responsibility. Legal responsibility is a company’s social responsibility to obey society’s laws and regulations as it tries to meet its economic responsibilities. Ethical responsibility is a company’s social responsibility not to violate accepted principles of right and wrong when conducting its business. Discretionary responsibilities pertain to the social roles that businesses play in society beyond their economic, legal, and ethical responsibilities.

Responses to Demands for
Social Responsibility
Social responsiveness is a company’s strategy to respond to stakeholders’ economic, legal, ethical, or discretionary expectations concerning social responsibility.

*
The model of social responsiveness, shown in Exhibit 3.7, identifies four strategies for responding to social responsibility problems: reactive, defensive, accommodative, and proactive. These strategies differ in the extent to which the company is wiling to act to meet or exceed society’s expectations.

*
A company using a reactive strategy will do less than society expects. It may deny responsibility for a problem or fight any suggestions that the company should solve a problem. By contrast, a company using a defensive strategy would admit responsibility for a problem but would do the least required to meet societal expectations. A company using an accommodative strategy will accept responsibility for a problem and take a progressive approach by doing all that could be expected to solve the problem. Finally, a company using a proactive strategy will anticipate responsibility for a problem before it occurs, do more than expected to address the problem, and lead the industry in its approach.

Social Responsibility and
Economic Performance
There is no trade-off between social responsibility and economic performance.
It usually does pay to be socially responsible.
There is no guarantee that social responsibility will lead to profits.
© 2016 Cengage Learning
3-8

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One question that managers often ask is, “Does it pay to be socially responsible?” While this is an understandable question, asking whether social responsibility pays is a bit like asking if giving to your favorite charity will help you get a better-paying job. The obvious answer is no. There is not an inherent relationship between social responsibility and economic performance. However, this doesn’t stop supporters of corporate social responsibility from claiming a positive relationship.
In the end, if company management chooses a proactive or accommodative strategy toward social responsibility (rather than a defensive or reactive strategy), it should do so because it wants to benefit society and its corporate stakeholders, not because it expects a better financial return.

1. Which of the four strategies for responding to social responsibility best reflects Theo Chocolate?
2. How does Theo Chocolate’s business practices reflect the stakeholder model of social responsibility?
3. What would happen if fair trade goals conflicted with a company’s primary responsibility to be profitable?
Management Workplace – Theo Chocolate
© 2016 Cengage Learning

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Theo Chocolate: Managing Ethics and Social Responsibility
Joe Whinney exudes a sense of mission in everything he does. After a trip to cacao farms in Central America, Whinney decided to build the first organic fair trade chocoloate factory in the U.S. By building the first sustainable chocolate maker in the nation, Whinney hoped to help solve social and environmental issues by operating a profitable and ethical business. While Theo Chocolate is finding good success in the organic foods industry, perhaps the most exciting thing for “Theonistas” is that the company is being hailed as a voice for change. Employees say they have gained a loyal following for their efforts in the developing world, and business success has opened up new opportunities for sharing their vision of a better world.

*
American Express Headquarters, New York, New York
With medical costs rising 10 to 15 percent per year, one of the members of your Board of Directors at American Express mentioned that some companies are now refusing to hire smokers and that the board should discuss this option at the next month’s meeting. Nationwide, about 6,000 companies refuse to hire smokers. Weyco, an employee benefits company in Okemos, Michigan, requires all applicants to take a nicotine test. Weyco’s CFO says, “We’re not saying people can’t smoke. We’re just saying they can’t smoke and work here. As an employee-benefits company, we need to take a leadership role in helping people understand the cost impact of smoking.” The Cleveland Clinic, one of the top hospitals in the United States, doesn’t hire smokers. Paul Terpeluk, the director of corporate and employee health, says that all applicants are tested for nicotine and that 250 people have lost job opportunities because they smoke. The Massachusetts Hospital Association also refuses to hire smokers. The company’s CEO says, “Smoking is a personal choice, and as an employer I have a personal choice within the law about who we hire and who we don’t.”
As indicated by your board member, costs are driving the trend not to hire smokers. According to the U.S. Centers for Disease Control, a smoker costs about $4,000 more a year to employ because of increased health-care costs and lost productivity. Breaking that down, a smoker will have 50 percent higher absenteeism, and, when present, will work 39 fewer minutes per day because of smoke breaks, which leads to 162.5 lost hours of annual productivity. A smoker will have higher accident rates, cause $1,000 a year in property damage (from cigarette burns and smoke damage), and will cost up to $5,000 more a year for annual insurance premiums.
Although few would disagree about the costs, others argue it is wrong not to hire smokers. Jay Whitehead, publisher of a magazine for human resources managers, says, “There is discrimination at many companies—and maybe even most companies—against people who smoke.” Even if applicants aren’t asked whether they smoke, it “doesn’t mean that hiring managers turn off their sense of smell.” Paul Sherer, a smoker who was fired less than a week after taking a new job, says, “Not hiring smokers affects millions of people and puts them in the same category as women able to bear children, that is, people who contribute to higher health-care costs. It’s unfair.” Law professor Don Garner believes that not hiring smokers is “an overreaction on the part of employers whose interest is cutting costs. If someone has the ability to do the job, he should get it. What you do in your home is your own business. . . . Not hiring smokers is ‘respiratory apartheid.’”
Well, with the meeting just a month away, you’ve got to prepare for questions from the Board of Directors. For example, on what basis should the company decide whether to hire smokers? Should the decision be based on what’s in the best interest of the firm, what the law allows, or what affirms and respects individual rights? The Board is interested in making good decisions for the company, but “doing the right thing” is also one of its core values. Is this an issue of ethics or social responsibility? Is refusing to hire smokers is a form of discrimination?
The dilemma facing American Express is an example of the tough decisions involving ethics and social responsibility that managers face. Unfortunately, no matter what you decide to do, someone or some group will be unhappy with the outcome. Managers don’t have the luxury of choosing theoretically optimal, win–win solutions that are obviously desirable to everyone involved. In practice, solutions to ethics and social responsibility problems aren’t optimal. Often, managers must be satisfied with a solution that just makes do or does the least harm. Rights and wrongs are rarely crystal clear to managers charged with doing the right thing. The business world is much messier than that.
If you were in charge at American Express, what would you do?
*
Areas of unethical behavior are: authority and power, handling information, influencing the behavior of others, and setting goals.
Unethical management behavior occurs when managers personally violate accepted principles of right and wrong. The authority and power inherent in some management positions can tempt managers to engage in unethical practices. Since managers often control company resources, there is a risk that some managers will cross the line from legitimate use of company resources to personal use of those resources. For example, some managers have used corporate funds to pay for extravagant personal parties, lavish home decorating, jewelry, or expensive pieces of art.
Handling information is another area in which managers must be careful to behave ethically. Information is a key part of management work. Managers collect it, analyze it, act on it, and disseminate it. However, they are also expected to deal in truthful information and, when necessary, to keep confidential information confidential. Leaking company secrets to competitors, “doctoring” the numbers, wrongfully withholding information, or lying are some possible misuses of the information entrusted to managers.
A third area in which managers must be careful to engage in ethical behavior is the way in which they influence the behavior of others, especially those they supervise. Managerial work gives managers significant power to influence others. If managers tell employees to perform unethical acts (or face punishment), such as “faking the numbers” to get results, then they are abusing their managerial power. This is sometimes called the “move it or lose it” syndrome. “Move it or lose it” managers tell employees, “Do it. You’re paid to do it. If you can’t do it, we’ll find somebody who can.”
Setting goals is another way that managers influence the behavior of their employees. If managers set unrealistic goals, the pressure to perform and to achieve these goals can influence employees to engage in unethical business behaviors.

*
Historically, if management was unaware of such activities, the company could not be held responsible for an employee’s unethical acts. However, under the 1991 U.S. Sentencing Commission Guidelines, companies can be prosecuted and punished even if management didn’t know about the unethical behavior. Moreover, penalties can be substantial, with maximum fines approaching $300 million dollars!
*
Nearly all businesses, nonprofits, partnerships, labor unions, unincorporated organizations and associations, incorporated organizations, and even pension funds, trusts, and joint stock companies are covered by the guidelines. If your organization can be characterized as a business (remember, nonprofits count, too), then it is subject to the guidelines.
The guidelines cover offenses such as invasion of privacy, price fixing, fraud, customs violations, antitrust violations, civil rights violations, theft, money laundering, conflicts of interest, embezzlement, dealing in stolen goods, copyright infringements, extortion, and more. However, it’s not enough to stay “within the law.” The purpose of the guidelines is not just to punish companies after they or their employees break the law. The purpose is to encourage companies to take proactive steps that will discourage or prevent white-collar crime before it happens. The guidelines also give companies an incentive to cooperate with and disclose illegal activities to federal authorities.
The guidelines impose smaller fines on companies that take proactive steps to encourage ethical behavior or voluntarily disclose illegal activities to federal authorities. Essentially, the law uses a “carrot-and-stick” approach. The stick is the threat of heavy fines that can total millions of dollars. The carrot is greatly reduced fines, but only if the company has started an effective compliance program to encourage ethical behavior before the illegal activity occurs.
*
The first step is computing the base fine by determining what level of offense has occurred. The level of the offense (i.e., the seriousness of the problem) is figured by examining the kind of crime, the loss incurred by the victims, and how much planning went into the crime.
After assessing a base fine, the judge computes a culpability score, which is a way of assigning blame to the company. Higher culpability scores suggest greater corporate responsibility in conducting, encouraging, or sanctioning illegal or unethical activity. The culpability score is a number ranging from a minimum of 0.05 to a maximum of 4.0.
The culpability score is critical, because the total fine is computed by multiplying the base fine by the culpability score. Going back to our level 24 fraud offense, a company with a compliance program that turns itself in will only be fined $105,000 ($2,100,000 x 0.05). However, a company that secretly plans, approves, and participates in illegal activity will be fined $8.4 million ($2,100,000 x 4.0)!
*
The method used to determine a company’s punishment illustrates the importance of establishing a compliance program, as illustrated in Exhibit 3.1.
*
*
Source: D.R. Dalton, M.B. Metzger, & J.W. Hill, “The ‘New’ U.S. Sentencing Commission Guidelines: A Wake-up Call for Corporate America,” Academy of Management Executive 8 (1994): 7-16.
Fortunately, for those who want to avoid paying these stiff fines, the 1991 U.S. Sentencing Guidelines are clear on the seven necessary components of an effective compliance program. These guidelines are listed in Exhibit 3.2.

*
While some ethical issues are easily solved, for many there are no clearly right or wrong answers. The ethical answers that managers choose depend on the ethical intensity of the decision and the moral development of the manager.
*
Managers don’t treat all ethical decisions the same. The manager who has to decide whether to deny or extend full benefits to Joan Addessi and her family is going to treat that decision much more seriously than the manager who has to deal with an assistant who has been taking paper home for personal use. The difference between these decisions is one of ethical intensity, which is how concerned people are about an ethical issue.
Magnitude of consequences is the total harm or benefit derived from an ethical decision.
Social consensus is agreement on whether behavior is bad or good.
Probability of effect is the chance that something will happen and then result in harm to others.
Temporal immediacy is the time between an act and the consequences the act produces.
Proximity of effect is the social, psychological, cultural, or physical distance of a decision maker to those affected by his or her decisions.
Finally, whereas the magnitude of consequences is the total effect across all people, concentration of effect is how much an act affects the average person.
*
In part, according to Lawrence Kohlberg, ethical decisions are based on a person’s level of moral development. Kohlberg identified three phases of moral development, with two stages in each phase.
At the preconventional level of moral development, people decide based on selfish reasons. For example, if you were in Stage 1, the punishment and obedience stage, your primary concern would be not to get in trouble. Yet, in Stage 2, the instrumental exchange stage, you make decisions that advance your wants and needs.
People at the conventional level of moral development make decisions that conform to societal expectations. In Stage 3, the good boy–nice girl stage, you normally do what the other “good boys” and “nice girls” are doing. In the law and order stage, Stage 4, you do whatever the law permits.
People at the postconventional level of moral maturity always use internalized ethical principles to solve ethical dilemmas. In Stage 5, the social contract stage, you would consider the effects of your decision on others. In Stage 6, the universal principle stage, you make ethical decisions based on your principles of right and wrong.
*
Managers can encourage more ethical decision making in their organizations by carefully selecting and hiring ethical employees, establishing a specific code of ethics, training employees how to make ethical decisions, and creating an ethical climate.
*
Overt integrity tests estimate honesty by directly asking job applicants what they think or feel about theft or about punishment of unethical behaviors. For example, an employer might ask an applicant, “Would you would ever consider buying something from somebody if you knew the person had stolen the item?” or, “Don’t most people steal from their companies?” Surprisingly, because they believe that the world is basically dishonest and that dishonest behavior is normal, unethical people will usually answer yes to such questions.
Personality-based integrity tests indirectly estimate employee honesty by measuring psychological traits such as dependability and conscientiousness. For example, prison inmates serving time for white-collar crimes (counterfeiting, embezzlement, and fraud) scored much lower than a comparison group of middle-level managers on scales measuring reliability, dependability, honesty, and being conscientious and rule-abiding. These results show that companies can selectively hire and promote people who will be more ethical.
*
Today, almost all large corporations have an ethics code in place. However, two things must happen if those codes are to encourage ethical decision making and behavior. First, companies must communicate the codes to others both within and outside the company.
An excellent example of a well-communicated code of ethics can be found at Nortel Networks Internet site, at http://www.nortel-us.com. With the click of a computer mouse, anyone inside or outside the company can obtain detailed information about the company’s core values, specific ethical business practices, and much more.
Second, in addition to general guidelines and ethics codes like “do unto others as you would have others do unto you,” management must also develop practical ethical standards and procedures specific to the company’s line of business. Visitors to Nortel’s Internet site can instantly access references to specific ethics codes, ranging from bribes and kickbacks to expense vouchers and illegal copying of software.
Specific codes of ethics such as these make it much easier for employees to decide what they should do when they want to do the “right thing.”
*
The first objective of ethics training is to develop employee awareness about ethics. This means helping employees recognize what issues are ethical issues, and then avoid the rationalization of unethical behavior: “This isn’t really illegal or immoral.” “No one will ever find out.”
The second objective for ethics training programs is to achieve credibility with employees. Not surprisingly, employees can be highly suspicious of management’s reasons for offering ethics training.
The third objective of ethics training is to teach employees a practical model of ethical decision making. A basic model should help them think about the consequences their choices will have on others and consider how they will choose between different solutions. This model is shown on the next slide.
Exhibit 3.4 presents a basic model of ethical decision making.
*
*
The first step in establishing an ethical climate is for managers—especially top managers—to act ethically themselves. Managers who decline to accept lavish gifts from company suppliers; who only use the company phone, fax, and copier for business and not personal use; or who keep their promises to employees, suppliers, and customers encourage others to believe that ethical behavior is normal and acceptable.
A second step in establishing an ethical climate is for top management to be active in the company ethics program.
A third step is to put in place a reporting system that encourages managers and employees to report potential ethics violations. Whistleblowing, which is reporting others’ ethics violations, is a difficult step for most people to take. Potential whistleblowers often fear that they will be punished rather than the ethics violators.
The final step in developing an ethical climate is for management to fairly and consistently punish those who violate the company’s code of ethics.
*
Compared with job applicants who score low, there is an 82 percent chance that job applicants who score high on overt integrity tests will participate in
less illegal activity, unethical behavior, drug abuse, or workplace violence. Personality-based integrity tests also do a good job of predicting who will engage in workplace deviance. Compared with job applicants who score low, there is a 68 percent chance that job applicants who score high on personality-based integrity tests will participate in less illegal activity, unethical behavior, excessive absences, drug abuse, or workplace violence.
In addition to reducing unethical behavior and workplace deviance, integrity tests can help companies hire better performers. Compared with employees who score low, there is a 69 percent chance that employees who score high on overt integrity tests will be better performers.
*
There are two perspectives regarding to whom organizations are socially responsible: the shareholder model and the stakeholder model. According to Nobel prize-winning economist Milton Friedman, the only social responsibility that organizations have is to satisfy their owners, that is, company shareholders. This view–called the shareholder model–holds that the only social responsibility that businesses have is to maximize profits. By maximizing profit, the firm maximizes shareholder wealth and satisfaction. More specifically, as profits rise, the company stock owned by company shareholders generally increases in value.
By contrast, under the stakeholder model, management’s most important responsibility is long-term survival (not just maximizing profits), which is achieved by satisfying the interests of multiple corporate stakeholders (not just shareholders). Stakeholders are people or groups with a legitimate interest in a company. Since stakeholders are interested in and affected by the organization’s actions, they have a “stake” in what those actions are. Consequently, stakeholder groups may try to influence the firm to act in their own interests.

*
The shareholder model holds that the only social responsibility that businesses have is to maximize profits. By maximizing profit, the firm maximizes shareholder wealth and satisfaction. More specifically, as profits rise, the company stock owned by shareholders generally increases in value. By contrast, under the stakeholder model, management’s most important responsibility is the firm’s long-term survival (not just maximizing profits), which is achieved by satisfying the interests of multiple corporate stakeholders (not just shareholders).
Some stakeholders are more important to the firm’s survival than others.
Primary stakeholders are groups, such as shareholders, employees, customers, suppliers, governments, and local communities, on which the organization depends for long-term survival. So when managers are struggling to balance the needs of different stakeholders, the stakeholder model suggests that the needs of primary stakeholders take precedence over the needs of secondary stakeholders. According to the life-cycle theory of organizations, some primary stakeholders are more important than others. In practice, though, CEOs typically give somewhat higher priority to shareholders, employees, and customers than to suppliers, governments, and local communities, no matter what stage of the life cycle a company is in.
Secondary stakeholders, such as the media and special interest groups, can influence or be influenced by the company. Yet in contrast to primary stakeholders, they do not engage in regular transactions with the company and are not critical to its long-term survival. Consequently, meeting the needs of primary stakeholders is usually more important than meeting the needs of secondary stakeholders. While not critical to long-term survival, secondary stakeholders are still important, because they can affect public perceptions and opinions about socially responsible behavior.
Exhibit 3.5 shows the various stakeholder groups that the organization must satisfy to assure its long-term survival.
*
*
A century ago, society expected businesses to meet their economic and legal responsibilities and little else. Today, however, when society judges whether businesses are socially responsible, ethical and discretionary responsibilities are considerably more important than they used to be.
Historically, economic responsibility, or making a profit by producing a product or service valued by society, has been a business’s most basic social responsibility. Organizations that don’t meet their financial and economic expectations come under tremendous pressure.
Legal responsibility is the expectation that companies will obey a society’s laws and regulations as they try to meet their economic responsibilities.
Ethical responsibility is society’s expectation that organizations will not violate accepted principles of right and wrong when conducting their business. Because different stakeholders may disagree about what is or is not ethical, meeting ethical responsibilities is more difficult than meeting economic or legal responsibilities.
Discretionary responsibilities pertain to the social roles that businesses play in society beyond their economic, legal, and ethical responsibilities.
*
Historically, economic responsibility, or making a profit by producing a product or service valued by society, has been a business’s most basic social responsibility. Legal responsibility is a company’s social responsibility to obey society’s laws and regulations as it tries to meet its economic responsibilities. Ethical responsibility is a company’s social responsibility not to violate accepted principles of right and wrong when conducting its business. Discretionary responsibilities pertain to the social roles that businesses play in society beyond their economic, legal, and ethical responsibilities.
*
The model of social responsiveness, shown in Exhibit 3.7, identifies four strategies for responding to social responsibility problems: reactive, defensive, accommodative, and proactive. These strategies differ in the extent to which the company is wiling to act to meet or exceed society’s expectations.
*
A company using a reactive strategy will do less than society expects. It may deny responsibility for a problem or fight any suggestions that the company should solve a problem. By contrast, a company using a defensive strategy would admit responsibility for a problem but would do the least required to meet societal expectations. A company using an accommodative strategy will accept responsibility for a problem and take a progressive approach by doing all that could be expected to solve the problem. Finally, a company using a proactive strategy will anticipate responsibility for a problem before it occurs, do more than expected to address the problem, and lead the industry in its approach.
*
One question that managers often ask is, “Does it pay to be socially responsible?” While this is an understandable question, asking whether social responsibility pays is a bit like asking if giving to your favorite charity will help you get a better-paying job. The obvious answer is no. There is not an inherent relationship between social responsibility and economic performance. However, this doesn’t stop supporters of corporate social responsibility from claiming a positive relationship.
In the end, if company management chooses a proactive or accommodative strategy toward social responsibility (rather than a defensive or reactive strategy), it should do so because it wants to benefit society and its corporate stakeholders, not because it expects a better financial return.
*
Theo Chocolate: Managing Ethics and Social Responsibility
Joe Whinney exudes a sense of mission in everything he does. After a trip to cacao farms in Central America, Whinney decided to build the first organic fair trade chocoloate factory in the U.S. By building the first sustainable chocolate maker in the nation, Whinney hoped to help solve social and environmental issues by operating a profitable and ethical business. While Theo Chocolate is finding good success in the organic foods industry, perhaps the most exciting thing for “Theonistas” is that the company is being hailed as a voice for change. Employees say they have gained a loyal following for their efforts in the developing world, and business success has opened up new opportunities for sharing their vision of a better world.

What Would You Do?
Netflix (Los Gatos, California)
Does Netflix have deep enough pockets to outbid its rivals for broad access to the studios’ TV and movie content? Can it convince the studios that it is not a direct competitor?
Should CEO Hastings and his executive team be directly involved in hiring, or should he delegate?
What can Netflix, which is located near Silicon Valley, provide in the way of pay, perks, and company culture that will attract, inspire, and motivate top talent to achieve organizational goals?

*
Management is getting work done through others.
Managers have to be concerned with efficiency and effectiveness in the workplace. Efficiency is getting work done with a minimum of effort, expense, or waste. Effectiveness is accomplishing tasks that help fulfill organizational objectives, such as customer service and satisfaction.

Effectiveness

Four Management Functions
Planning
Organizing
Leading
Controlling

*
Functions of management include planning, organizing, leading, and controlling.
Planning is determining organizational goals and a means for achieving them. Organizing is deciding where decisions will be made, who will do what jobs and tasks, and who will work for whom in the company. Leading is inspiring and motivating workers to work hard to achieve organizational goals. Controlling is monitoring progress toward goal achievement and taking corrective action when progress isn’t being made.
The textbook is organized based on the four management functions, as shown on this slide.

Planning
Determining organizational goals and a means for achieving them.

Organizing
Deciding…
where decisions will be made.
who will do what jobs and tasks.
who will work for whom.

Controlling
Monitoring progress toward goal achievement and taking corrective action when needed.
© 2016 Cengage Learning
1-2

what really works
Meta-Analysis

Meta-analyses suggest that it’s wise to have job applicants take a general mental-ability test.
The probability of success is 76 percent.
This means that an employee hired on the basis of a good score on a general mental-ability test stands a 76 percent chance of being a better performer than someone picked at random from the pool of all job applicants.

*
Meta-analysis, which is a study of studies, is helping management scholars understand how well their research supports management theories.
Each meta-analysis reported in the What Really Works sections of this textbook is accompanied by an easy-to-understand statistic called the probability of success. The probability of success shows how often a management technique will work.
Meta-analyses suggest that it’s wise to have job applicants take a general mental-ability test. In fact, the probability of success is 76 percent. This means that an employee hired on the basis of a good score on a general mental-ability test stands a 76 percent chance of being a better performer than someone picked at random from the pool of all job applicants. So chances are you’re going to be right much more often than wrong if you use a general mental-ability test to make hiring decisions.

The Control Process
Set standards to achieve goals
© 2016 Cengage Learning
Compare actual performance to standards
Make changes to return performance to standards

1-2

Kinds of Managers
Top Managers
Middle Managers
First-Line Managers
Team Leaders

*
There are four kinds of managers, each with different jobs and responsibilities.
A discussion of managers follows on the following slides.
The jobs and responsibilities of the four kinds of managers are summarized in Exhibit 1.2.

As shown in Exhibit 1.2, there are four kinds of managers, each with different jobs and responsibilities.
*

Top Managers
Positions include CEO, CIO, CFO, and COO. They…
create a context for change.
develop employees’ commitment to and ownership of the company’s performance.
create a positive organizational
culture through language and action.
monitor their business environments.

Middle Managers
© 2016 Cengage Learning
Positions include plant manager, regional manager, and divisional manager. They…
plan and allocate resources to meet objectives.
coordinate and link groups, departments, and divisions within a company.
monitor and manage the performance of subunits and managers who report to them.
implement changes or strategies generated by top managers.
1-3

First-Line Managers
Positions include office manager, shift supervisor, and department manager. They…
manage the performance of entry-level employees.
encourage, monitor, and reward
the performance of workers.
teach entry-level employees how to do their jobs.
make detailed schedules and operating plans.

Team Leaders
They…
facilitate team activities towards accomplishing a goal.
foster good relationships and address problematic ones within teams.
manage external relationships.

*
This is a relatively new kind of management job that developed as companies shifted to self-managing teams, which, by definition, have no formal supervisor.
Instead of directing individuals’ work, team leaders facilitate team activities toward goal accomplishment. They have less formal authority, so they lead more through relationships and respect.

As shown in Exhibit 1.3, the three major roles can be subdivided into 10 subroles.
*

Interpersonal Roles
Interpersonal roles include:
Figurehead
Leader
Liaison

*
In the figurehead role, managers perform ceremonial duties like greeting company visitors, speaking at the opening of a new facility, or representing the company at a community luncheon to support local charities. In the leader role, managers motivate and encourage workers to accomplish organizational objectives. In the liaison role, managers deal with people outside their units. Studies consistently indicate that managers spend as much time with outsiders as they do with their own subordinates and their own bosses.

Informational Roles
Informational roles include:
Monitor
Disseminator
Spokesperson

*
In the monitor role, managers scan their environment for information, actively contact others for information, and, because of their personal contacts, receive a great deal of unsolicited information. In the disseminator role, managers share the information they have collected with their subordinates and others in the company. In contrast to the disseminator role, in which managers distribute information to employees inside the company, managers in the spokesperson role share information with people outside their departments and companies.

Decisional Roles
Decisional roles include:
Entrepreneur
Disturbance handler
Resource allocator
Negotiator
1-4
© 2016 Cengage Learning

*
In the entrepreneur role, managers adapt themselves, their subordinates, and their units to change. In the disturbance handler role, managers respond to pressures and problems so severe that they demand immediate attention and action. In the resource allocator role, managers decide who will get what resources and how many resources they will get. In the negotiator role, managers negotiate schedules, projects, goals, outcomes, resources, and employee raises.

What Companies Look For
Technical skills
Human skills
Conceptual skills
Motivation to manage

*
Technical skills are the specialized procedures, techniques, and knowledge required to get the job done. Human skills can be summarized as the ability to work well with others. Managers with human skills work effectively within groups, encourage others to express their thoughts and feelings, are sensitive to others’ needs and viewpoints, and are good listeners and communicators. Conceptual skills are the ability to see the organization as a whole, to understand how the different parts of the company affect each other, and to recognize how the company fits into or is affected by its external environment such as the local community, social and economic forces, customers, and the competition. Motivation to manage is an assessment of how motivated employees are to interact with superiors, participate in competitive situations, behave assertively toward others, tell others what to do, reward good behavior and punish poor behavior, perform actions that are highly visible to others, and handle and organize administrative tasks.

*
Technical skills are the ability to apply the specialized procedures, techniques, and knowledge required to get the job done.
Technical skills are most important for lower level managers, because these managers supervise the workers who produce products or serve customers. Team leaders and first-line managers need technical knowledge and skills to train new employees and help employees solve problems. Technical skills become less important as managers rise through the managerial ranks, but they are still important.
Human skills, the ability to work well with others, are equally important at all levels of management, from first-line supervisors to CEOs. However, because lower level managers spend much of their time solving technical problems, upper level managers may actually spend more time dealing directly with people.
Conceptual skills are the ability to see the organization as a whole, how the different parts of the company affect each other, and how the company fits into or is affected by its external environment. Conceptual skill increases in importance as managers rise through the management hierarchy.
Managers typically have a stronger motivation to manage than their subordinates, and managers at higher levels usually have stronger motivation to manage than managers at lower levels.
Furthermore, managers with stronger motivation to manage are promoted faster, are rated by their employees as better managers, and earn more money than managers with a weak motivation to manage.

*
Exhibit 1.5 lists the top 10 mistakes that managers make.
These mistakes make the difference between “arrivers”—managers who made it all the way to the top of their companies—and “derailers”—managers who were successful early in their careers but were knocked off the fast track at the middle to upper management levels. Both groups were very similar and had enjoyed past success. The biggest difference between the two were how they managed people. Arrivers were much more effective in their interpersonal skills than were derailers.
Derailers were insensitive to others by…
using an abrasive, intimidating, and bullying management style
being cold, aloof, or arrogant
lacking concern for others
being overly political

Use this fact to reinforce the importance of being able to manage people rather than just processes, when it comes to management effectiveness.

*
In the book Becoming a Manager: Mastery of a New Identity, Harvard Business School professor Linda Hill followed the development of 19 people in their first year as managers. Becoming a manager produced a profound psychological transition that changed the way these managers viewed themselves and others.
Exhibit 1.6 describes the transition to management.

*
In a study by Stanford University professor Jeffrey Pfeffer, companies who used the management practices listed on this slide achieved financial performance that, on average, was 40 percent higher than that of other companies.

1. List the four functions of management and explain which might be most needed for the Camp Bow Wow leaders highlighted in the video.
2. Which activities at Camp Bow Wow require high efficiency? Which activities require high effectiveness?
3. List two activities that leaders at Camp Bow Wow perform daily, and identify which of the managerial roles discussed in the chapter figure prominently for each.
Camp Bow Wow
© 2016 Cengage Learning

*
Camp Bow Wow: Innovative Management for a Changing World
Sue Ryan, a Camp Bow Wow franchisee from Colorado, knows the ins and outs of managing a care center for pets. To help launch her business a few years ago, Ryan recruited experienced pet care worker Candace Stathis, who came on as a camp counselor. Ryan soon recognized that Stathis was a star performer with a natural ability to work with clients and pets alike, and today Stathis serves as the camp’s general manager. At Camp Bow Wow, store managers have distinct roles from camp counselors. Whereas counselors typically take care of dogs, answer phones, and book reservations, managers must know how to run all operations and mange people as well. To keep camp running as efficiently as possible, Stathis maintains a strict daily schedule for doggie baths, nail trimmings, feedings, and play time.

Netflix Headquarters, Los Gatos, California
CEO Reed Hastings started Netflix in 1997 after becoming angry about paying Blockbuster Video $40 for a late return of Apollo 13. Hastings and Netflix struck back with flat monthly fees for unlimited DVD rentals, easy home delivery and returns via prepaid postage envelopes, and no late fees, which let customers keep DVDs as long as they wanted. Blockbuster, which earned up to $800 million annually from late returns, was slow to respond and lost customers in droves.
When Blockbuster, Amazon, and Walmart started their own mail-delivery video rentals, Hastings recognized that Netflix was in competition with “the biggest rental company, the biggest e-commerce company, and the biggest company, period.” But with an average subscriber cost of just $4 a month compared to an average subscriber fee of $15, Netflix, unlike its competitors, made money from each customer. Three years later, Walmart abandoned the business, asking Netflix to handle DVD rentals on Walmart.com. Amazon entered the DVD rental business in Great Britain, expecting that experience to prepare it to beat Netflix in the United States. But, like Walmart, Amazon quit after four years of losses. Finally, 13 years after Netflix’s founding, Blockbuster declared bankruptcy. With DVDs mailed to 17 million monthly subscribers from 50 distribution centers nationwide, Netflix is now the industry leader in DVD rentals.
However, its expertise in shipping and distributing DVDs won’t provide a competitive advantage when streaming files over the Internet. Indeed, Netflix’s streaming video service is in competition with Amazon’s Video on Demand, Apple’s iTunes, Hulu Plus, and others. Moreover, unlike DVDs, which can be rented without studio approval, U.S. copyright laws require streaming rights to be purchased from TV and movie studios before downloading content into people’s homes. And that creates two new issues. First, does Netflix have deep enough pockets to outbid its rivals for broad access to the studios’ TV and movie content? Second, can it convince the studios that it is not a direct competitor so they will agree to license their content?
Netflix must also address the significant organizational challenges accompanying accelerated growth. Hastings experienced the same problem in his first company, Pure Software, where he admitted, “Management was my biggest challenge; every year there were twice as many people and it was trial by fire. I was underprepared for the complexities and personalities.” With blazing growth on one hand and the strategic challenge of obtaining studio content on the other, how much time should he and his executive team devote directly to hiring? Deciding where decisions will be made is a key part of the management function of organizing. So, should he and his executive team be directly involved, or is this something that he should delegate? Finally, what can Netflix, which is located near Silicon Valley, home to some of the most attractive employers in the world, provide in the way of pay, perks, and company culture that will attract, inspire, and motivate top talent to achieve organizational goals?
If you were in charge of Netflix, what would you do?
*
*
Management is getting work done through others.
Managers have to be concerned with efficiency and effectiveness in the workplace. Efficiency is getting work done with a minimum of effort, expense, or waste. Effectiveness is accomplishing tasks that help fulfill organizational objectives, such as customer service and satisfaction.
*
Functions of management include planning, organizing, leading, and controlling.
Planning is determining organizational goals and a means for achieving them. Organizing is deciding where decisions will be made, who will do what jobs and tasks, and who will work for whom in the company. Leading is inspiring and motivating workers to work hard to achieve organizational goals. Controlling is monitoring progress toward goal achievement and taking corrective action when progress isn’t being made.
The textbook is organized based on the four management functions, as shown on this slide.
*
Meta-analysis, which is a study of studies, is helping management scholars understand how well their research supports management theories.
Each meta-analysis reported in the What Really Works sections of this textbook is accompanied by an easy-to-understand statistic called the probability of success. The probability of success shows how often a management technique will work.
Meta-analyses suggest that it’s wise to have job applicants take a general mental-ability test. In fact, the probability of success is 76 percent. This means that an employee hired on the basis of a good score on a general mental-ability test stands a 76 percent chance of being a better performer than someone picked at random from the pool of all job applicants. So chances are you’re going to be right much more often than wrong if you use a general mental-ability test to make hiring decisions.
*
There are four kinds of managers, each with different jobs and responsibilities.
A discussion of managers follows on the following slides.
The jobs and responsibilities of the four kinds of managers are summarized in Exhibit 1.2.
As shown in Exhibit 1.2, there are four kinds of managers, each with different jobs and responsibilities.
*
*
This is a relatively new kind of management job that developed as companies shifted to self-managing teams, which, by definition, have no formal supervisor.
Instead of directing individuals’ work, team leaders facilitate team activities toward goal accomplishment. They have less formal authority, so they lead more through relationships and respect.

As shown in Exhibit 1.3, the three major roles can be subdivided into 10 subroles.
*
*
In the figurehead role, managers perform ceremonial duties like greeting company visitors, speaking at the opening of a new facility, or representing the company at a community luncheon to support local charities. In the leader role, managers motivate and encourage workers to accomplish organizational objectives. In the liaison role, managers deal with people outside their units. Studies consistently indicate that managers spend as much time with outsiders as they do with their own subordinates and their own bosses.
*
In the monitor role, managers scan their environment for information, actively contact others for information, and, because of their personal contacts, receive a great deal of unsolicited information. In the disseminator role, managers share the information they have collected with their subordinates and others in the company. In contrast to the disseminator role, in which managers distribute information to employees inside the company, managers in the spokesperson role share information with people outside their departments and companies.
*
In the entrepreneur role, managers adapt themselves, their subordinates, and their units to change. In the disturbance handler role, managers respond to pressures and problems so severe that they demand immediate attention and action. In the resource allocator role, managers decide who will get what resources and how many resources they will get. In the negotiator role, managers negotiate schedules, projects, goals, outcomes, resources, and employee raises.
*
Technical skills are the specialized procedures, techniques, and knowledge required to get the job done. Human skills can be summarized as the ability to work well with others. Managers with human skills work effectively within groups, encourage others to express their thoughts and feelings, are sensitive to others’ needs and viewpoints, and are good listeners and communicators. Conceptual skills are the ability to see the organization as a whole, to understand how the different parts of the company affect each other, and to recognize how the company fits into or is affected by its external environment such as the local community, social and economic forces, customers, and the competition. Motivation to manage is an assessment of how motivated employees are to interact with superiors, participate in competitive situations, behave assertively toward others, tell others what to do, reward good behavior and punish poor behavior, perform actions that are highly visible to others, and handle and organize administrative tasks.
*
Technical skills are the ability to apply the specialized procedures, techniques, and knowledge required to get the job done.
Technical skills are most important for lower level managers, because these managers supervise the workers who produce products or serve customers. Team leaders and first-line managers need technical knowledge and skills to train new employees and help employees solve problems. Technical skills become less important as managers rise through the managerial ranks, but they are still important.
Human skills, the ability to work well with others, are equally important at all levels of management, from first-line supervisors to CEOs. However, because lower level managers spend much of their time solving technical problems, upper level managers may actually spend more time dealing directly with people.
Conceptual skills are the ability to see the organization as a whole, how the different parts of the company affect each other, and how the company fits into or is affected by its external environment. Conceptual skill increases in importance as managers rise through the management hierarchy.
Managers typically have a stronger motivation to manage than their subordinates, and managers at higher levels usually have stronger motivation to manage than managers at lower levels.
Furthermore, managers with stronger motivation to manage are promoted faster, are rated by their employees as better managers, and earn more money than managers with a weak motivation to manage.
*
Exhibit 1.5 lists the top 10 mistakes that managers make.
These mistakes make the difference between “arrivers”—managers who made it all the way to the top of their companies—and “derailers”—managers who were successful early in their careers but were knocked off the fast track at the middle to upper management levels. Both groups were very similar and had enjoyed past success. The biggest difference between the two were how they managed people. Arrivers were much more effective in their interpersonal skills than were derailers.
Derailers were insensitive to others by…
using an abrasive, intimidating, and bullying management style
being cold, aloof, or arrogant
lacking concern for others
being overly political

Use this fact to reinforce the importance of being able to manage people rather than just processes, when it comes to management effectiveness.
*
In the book Becoming a Manager: Mastery of a New Identity, Harvard Business School professor Linda Hill followed the development of 19 people in their first year as managers. Becoming a manager produced a profound psychological transition that changed the way these managers viewed themselves and others.
Exhibit 1.6 describes the transition to management.
*
In a study by Stanford University professor Jeffrey Pfeffer, companies who used the management practices listed on this slide achieved financial performance that, on average, was 40 percent higher than that of other companies.
*
Camp Bow Wow: Innovative Management for a Changing World
Sue Ryan, a Camp Bow Wow franchisee from Colorado, knows the ins and outs of managing a care center for pets. To help launch her business a few years ago, Ryan recruited experienced pet care worker Candace Stathis, who came on as a camp counselor. Ryan soon recognized that Stathis was a star performer with a natural ability to work with clients and pets alike, and today Stathis serves as the camp’s general manager. At Camp Bow Wow, store managers have distinct roles from camp counselors. Whereas counselors typically take care of dogs, answer phones, and book reservations, managers must know how to run all operations and mange people as well. To keep camp running as efficiently as possible, Stathis maintains a strict daily schedule for doggie baths, nail trimmings, feedings, and play time.

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