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Company Core Strategy and Structure – Milestone 2

Context: In the discussion this week are you prompted to further explore your company’s strategy. This milestone will use the research and insights gained in your discussion and build on it to further assess your company.

First, be sure you have read Chapter 6 in the text.

Next, please watch the following video clip from the lab:

·         Chapter 06: Concept Clips: Organizational Design Based on the Environment

Requirements: Use the research and information you gained in the discussion this week to critically assess your company’s strategic planning process. Research the strategy of one of your company’s top three competitors, then compare and contrast their strategy to your organization’s strategy.

Your second milestone submission should address the following requirements:

1.    Provide a brief summary of your company’s strategy (do not copy word for word from your discussion post) and how it is impacted by the organization’s structure as well as the environmental factors you outlined in your first milestone.

2.    Describe the strategy of at least one of your company’s top three competitors and how their strategy is impacted by the environmental factors you outlined in your first milestone.

3.    Critically assess both strategies. Consider the following questions to help develop a full assessment:

a.    How are the strategies the same?

b.    How do the strategies differ?

c.     Are they impacted by the structure of the organization?

d.    Are they impacted by the same environmental factors?

e.    Is one better than the other? Or more successful than the other?

f.      What could your company change to improve their strategy?

Your second milestone submission should follow APA format, be well supported with a minimum of five recent sources, and be a minimum of four pages long.

Remember: The goal is to demonstrate critical thinking and application of concepts as well as how they interact. Focus the bulk of your efforts in this milestone not on summarizing strategies but rather in comparing and contrasting the two company’s strategies, assessing their effectiveness, and exploring what environmental factors are at play that impact the strategies.

Chapter Introduction

· 1-1An Introduction to Management

· An 
 is a group of people working together in a structured and coordinated fashion to achieve a set of goals, which may include profit (Netflix or Starbucks), the discovery of knowledge (the University of Nebraska or the National Science Foundation), national defense (the U.S. Navy or Marines), the coordination of various local charities (the United Way of America), or social satisfaction (a fraternity or sorority).

· Managers are responsible for using the organization’s resources to help achieve its goals. More precisely, 
 can be defined as a set of activities (including planning and decision making, organizing, leading, and controlling) directed at an organization’s resources (human, financial, physical, and information) with the aim of achieving organizational goals in an efficient and effective manner. A 
, then, is someone whose primary responsibility is to carry out the management process. By 
, we mean using resources wisely in a cost-effective way. By 
, we mean making the right decisions and successfully implementing them. In general, successful organizations are both efficient and effective.

· Today’s managers face myriad interesting and challenging situations. The average executive works at least 60 hours a week; has enormous demands placed on his or her time; and faces increased complexities posed by globalization, domestic competition, government regulation, shareholder pressure, emerging technologies, the growing impact of social media, and other technology-driven uncertainties. Their job is complicated even more by rapid changes, unexpected disruptions, and both minor and major crises. The manager’s job is unpredictable and fraught with challenges, but it is also filled with opportunities to make a difference. Good managers can propel an organization into unprecedented realms of success, whereas poor managers can devastate even the strongest of organizations.

1-1aKinds of Managers

Many different kinds of managers work in organizations today. Figure 1.1 shows how various kinds of managers within an organization can be differentiated by level and by area.

Figure 1.1Kinds of Managers by Level and Area

Organizations generally have three levels of management, represented by top managers, middle managers, and first-line managers. Regardless of level, managers are also usually associated with a specific area within the organization, such as marketing, finance, operations, human resources, administration, or some other area.

To be effective businesses must produce products that consumers are willing to buy. A company could very efficiently produce portable cassette tape players like this one but will not be successful.

Levels of Management

One way to classify managers is in terms of their level in the organization. Top managers make up the relatively small group of executives who manage the overall organization. Titles found in this group include president, vice president (VP), and chief executive officer (CEO). Top managers create the organization’s goals, overall strategy, and operating policies. They also officially represent the organization to the external environment by meeting with government officials, executives of other organizations, and so forth.

Reed Hastings is a top manager. Howard Schultz, CEO of Starbucks, is also a top manager, as are Michelle Burns and Rajiv Chandrasekaran, two of the firm’s executive VPs. Likewise, Sergey Brin and Larry Page (Google’s founders and top executives), Tim Cook (CEO of Apple), and Mary Barra (CEO of General Motors) are also top managers. The job of a top manager is likely to be complex and varied. Top managers make decisions about activities such as acquiring other companies, investing in R&D, entering or abandoning various markets, and building new plants and office facilities. They often work long hours and spend much of their time in meetings or on the telephone. In most cases, top managers are also very well paid. In fact, the elite top managers of very large firms sometimes make several million dollars a year in salary, bonuses, and stock. In 2017, Starbucks paid Howard Schultz $1,500,000 in salary for his work as CEO. Schultz was also awarded a bonus of $2,250,000, around $13,000,000 in stock and option awards, and $215,933 in other compensation.

Middle management is probably the largest group of managers in most organizations. Common middle-management titles include plant manager, operations manager, and division head. Middle managers are primarily responsible for implementing the policies and plans developed by top managers and for supervising and coordinating the activities of lower-level managers. Jason Hernandez, a regional manager at Starbucks responsible for the firm’s operations in three eastern states, is a middle manager.

First-line managers supervise and coordinate the activities of operating employees. Common titles for first-line managers are supervisor, coordinator, and office manager. Positions like these are often the first held by employees who enter management from the ranks of operating personnel. Wayne Maxwell and Jenny Wagner, managers of Starbucks coffee shops in Texas, are first-line managers. They oversee the day-to-day operations of their respective stores, hire operating employees to staff them, and handle other routine administrative duties required of them by the parent corporation. In contrast to top and middle managers, first-line managers typically spend a large proportion of their time supervising the work of their subordinates.

Denise Morrison, CEO of Campbell Soup, is a top manager. She makes major decisions about the firm’s competitive strategies, research and development investments, and new facilities.

Managing in Different Areas of the Organization

Regardless of their level, managers may work in various areas within an organization. In any given firm, for example, these areas may include marketing, financial, operations, human resources, administrative, and others.

Marketing managers work in areas related to the marketing function—getting consumers and clients to buy the organization’s products or services (be they Samsung smartphones, Toyota automobiles, Vogue magazines, Associated Press news reports, streaming video rentals from Netflix, or lattes at Starbucks). These areas include new product development, promotion, and distribution. Given the importance of marketing for virtually all organizations, developing good managers in this area is critical.

Financial managers deal primarily with an organization’s financial resources. They are responsible for activities such as accounting, cash management, and investments. In some businesses, especially banking and insurance, financial managers are found in large numbers.

Operations managers are concerned with creating and managing the systems that create an organization’s products and services. Typical responsibilities of operations managers include production control, inventory control, quality control, plant layout, and site selection.

Human resources managers are responsible for hiring and developing employees. They are typically involved in human resource planning, recruiting and selecting employees, training and development, designing compensation and benefit systems, formulating performance appraisal systems, and discharging low-performing and problem employees.

Administrative, or general, managers are not associated with any particular management specialty. Probably the best example of an administrative management position is that of a hospital or clinic administrator. Administrative managers tend to be generalists; they have some basic familiarity with all functional areas of management rather than specialized training in any one area.

Many organizations have specialized management positions in addition to those already described. Public relations managers, for example, deal with the public and media for firms such as Facebook, Instagram, and Unilever to protect and enhance the image of their organizations. R&D managers coordinate the activities of scientists and engineers working on scientific projects in organizations such as Google, Shell Oil, and NASA. Internal consultants are used in organizations such as Prudential Insurance to provide specialized expert advice to operating managers. International operations are often coordinated by specialized managers in organizations like Walmart and General Electric. The number, nature, and importance of these specialized managers vary tremendously from one organization to another. As contemporary organizations continue to grow in complexity and size, the number and importance of such managers are also likely to increase. Our “Tech Watch” feature highlights one newly emerging management position, the social media manager.

1-1bBasic Management Functions

Regardless of level or area, management involves the four basic functions of planning and decision making, organizing, leading, and controlling. This book is organized around these basic functions, as shown in Figure 1.2.

Planning and Decision Making

In its simplest form, 
 means setting an organization’s goals and deciding how best to achieve them. 
Decision making
, a part of the planning process, involves selecting a course of action from a set of alternatives. Planning and decision making help managers maintain their effectiveness by serving as guides for their future activities. In other words, the organization’s goals and plans clearly help managers know how to allocate their time and resources. Part 2 of this book is devoted to planning and decision-making activities and concepts.

Tech Watch

“. . . But What Is a Social Media Manager?”

The last few years have been big for social media—technologies that allow users to create and exchange content. Twitter, Facebook, Instagram, and YouTube play central roles in the daily activities of many people today, especially younger people. Spending on social media advertising is approaching $5 billion per year, up 35 percent from 2012. Seven out of ten marketers say that they are increasing social media spending each year (compared to only half who are increasing direct marketing spending and less than 10 percent who are spending more on TV advertising).

According to Ashley Coombe, social media strategist for All Inclusive Marketing, “2013 was the year social media managers earned legitimacy. . . . Business owners began to realize that they could no longer hire their friend’s daughter to do their social media just because she had a lot of friends on Facebook.”

Just what do social media managers do? Why is your friend’s daughter likely to be in over her head? It’s a pretty new position, so job descriptions understandably vary. Here, however, is a generic description crafted by a veteran social media executive:

· The social media manager will implement the company’s social media strategy, developing brand awareness, generating inbound traffic, and encouraging product adoption. This role coordinates with the internal marketing and PR teams to support their respective missions, ensuring consistency in voice and cultivating a social media referral network.

Primarily, social media managers handle information and communications through social media outlets—tracking trends and determining posting rates, creating positive communications, and maintaining a congenial media relationship with a company’s community of customers. As you can also see from the job description, a key function of the position is coordination. Typically, social media managers work out of marketing departments and perform a variety of marketing-related tasks—replying to customer inquiries (sales), responding to customer complaints (customer service), and handling external communications (public relations). At the same time, however, because they often manage the use of social media among all of a company’s employees and communicate information about all of its activities, the scope of responsibilities is companywide.

Even so, some social media managers aren’t quite sure how much “legitimacy” they’ve earned. “At the last place I was a social manager,” reports one brand specialist at a large corporation, “high-level VPs would come over and say I was messing around on the Internet too much.” According to another veteran of corporate media management, “The biggest misconception is that, compared to other marketers, we don’t understand analytics or don’t have the education or background when it comes to the technical side.” Old-school executives, charges a third social media strategist, “see [social media] as the warm and fuzzy side of marketing. In reality,” he says, “it’s a powerful revenue driver when it’s given proper funding and attention. . . . When you show them the ROI, people start changing their minds.”

References: Kelly Clay, “What Social Media Managers Need to Know about Facebook,”, accessed on January 4, 2017; Jennifer Beese, “The Top 7 Social Media Stories of 2013,” SproutSocial, December 27, 2013,, accessed on January 4, 2017; Erik Sass, “Most Marketers Will Spend More on Social Media in 2014,” The Social Graf, November 19, 2013,, accessed on January 4, 2017; The CMO Survey, “Social Media Spend Continues to Soar,”, accessed on January 4, 2017; Blaise Grimes-Viort, “Social Media Manager Job Description,” Online Communities and Social Media,, accessed on January 4, 2017; Julian Rio, “Social Media Manager: What Role Does He Really Have?” Marketing Solutions,, accessed on January 4, 2017; and “Confessions of Big Brand Social Media Managers,” Digiday,, accessed on January 4, 2017.


Once a manager has set goals and developed a workable plan, his or her next management function is to organize people and the other resources necessary to carry out the plan. Specifically, 
 involves determining how activities and resources are to be grouped. Although some people equate this function with the creation of an organization chart, we will see in Part 3 that it is actually much more.


The third basic managerial function is leading. Some people consider leading to be both the most important and the most challenging of all managerial activities. 
 is the set of processes used to get members of the organization to work together to further the interests of the organization. We cover the leading function in detail in Part 4.


The final phase of the management process is 
, or monitoring the organization’s progress toward its goals. As the organization moves toward its goals, managers must monitor progress to ensure that it is performing in such a way as to arrive at its “destination” at the appointed time. Part 5 explores the control function.

1-1cFundamental Management Skills

To carry out these management functions most effectively, managers rely on a number of different fundamental management skills of which the most important are technical, interpersonal, conceptual, diagnostic, communication, decision-making, and time management skills. Our “Leading the Way” feature also illustrates how one successful manager has relied on both the basic management functions and fundamental management skills to propel herself to the top of a successful corporation.

Technical Skills

Technical skills
 are necessary to accomplish or understand the specific kind of work done in an organization. Technical skills are especially important for first-line managers. These managers spend much of their time training their subordinates and answering questions about work-related problems. If they are to be effective managers, they must know how to perform the tasks assigned to those they supervise. While Reed Hastings spends most of his time now dealing with strategic and management issues, he also keeps abreast of new and emerging technologies and trends that may affect Netflix.

Interpersonal Skills

Managers spend considerable time interacting with people both inside and outside the organization. For obvious reasons, then, they also need 
interpersonal skills
—the ability to communicate with, understand, and motivate both individuals and groups. As a manager climbs the organizational ladder, he or she must be able to get along with subordinates, peers, and those at higher levels of the organization. Because of the multitude of roles that managers must fulfill, a manager must also be able to work with suppliers, customers, investors, and others outside the organization.

Conceptual Skills

Conceptual skills
 depend on the manager’s ability to think in the abstract. Managers need the mental capacity to understand the overall workings of the organization and its environment, to grasp how all the parts of the organization fit together, and to view the organization in a holistic manner. This ability allows them to think strategically, to see the “big picture,” and to make broad-based decisions that serve the overall organization. Reed Hastings’s idea to extend the paymentmodel used by health clubs to the video rental market came from his strong conceptual skills.

Diagnostic Skills

Successful managers also possess 
diagnostic skills
 or skills that enable them to visualize the most appropriate response to a situation. A physician diagnoses a patient’s illness by analyzing symptoms and determining their probable cause. Similarly, a manager can diagnose and analyze a problem in the organization by studying its symptoms and then developing a solution.

Communication Skills

Communication skills
 refer to the manager’s abilities to both effectively convey ideas and information to others and effectively receive ideas and information from others. These skills enable a manager to transmit ideas to subordinates so that they know what is expected, to coordinate work with peers and colleagues so that they work well together, and to keep higher-level managers informed about what is going on. In addition, communication skills help the manager listen to what others say and to understand the real meaning behind e-mails, letters, reports, and other written communication.

Decision-Making Skills

Effective managers also have good decision-making skills. 
Decision-making skills
 refer to the manager’s ability to correctly recognize and define problems and opportunities and to then select an appropriate course of action to solve problems and capitalize on opportunities. No manager makes the right decision all the time. However, effective managers make good decisions most of the time. And, when they do make a bad decision, they usually recognize their mistake quickly and then make good decisions to recover with as little cost or damage to their organization as possible. Managers at Netflix made a poor decision when they decided to split their mail delivery and streaming services into two businesses, but they quickly reversed themselves before things got too bad.

Time Management Skills

Finally, effective managers usually have good time management skills. 
Time management skills
 refer to the manager’s ability to prioritize work, to work efficiently, and to delegate work appropriately. As already noted, managers face many different pressures and challenges. It is too easy for a manager to get bogged down doing work that can easily be postponed or delegated to others. When this happens, unfortunately, more pressing and higher-priority work may get neglected.

1-1dThe Science and the Art of Management

Given the complexity inherent in the manager’s job, a reasonable question relates to whether management is a science or an art. In fact, effective management is a blend of both science and art. And successful executives recognize the importance of combining both the science and art of management as they practice their craft.

The Egyptians used basic management functions to construct the pyramids.

The Science of Management

Many management problems and issues can be approached in ways that are rational, logical, objective, and systematic. Managers can gather data, facts, and objective information. They can use quantitative models and decision-making techniques to arrive at “correct” decisions. And they need to take such a scientific approach to solving problems whenever possible, especially when they are dealing with relatively routine and straightforward issues. When Starbucks considers entering a new market, its managers look closely at a wide variety of objective details as they formulate their plans. Technical, diagnostic, and decision-making skills are especially important when approaching a management task or problem from a scientific perspective.

Leading the Way

“On the Fast Track”

Kat Cole started her climb up the corporate ladder in orange shorts. At 16, she took a part-time job serving chicken wings and beer at Hooters, and 19 years later—at the relatively young age of 35—she was president of Cinnabon, a franchise that sells cinnamon-laced concoctions out of 1,100 locations in 56 countries. Cole now leads a team of employees that ranges over four generations in age and includes many men who are much older than she is.

Obviously, it was a fast climb, but Cole didn’t skip any rungs (except getting a college degree—she dropped out but eventually earned an MBA). She got started by taking advantage of opportunities that opened up in the Hooters outlet where she was waiting tables. “When the cook quit,” Cole reports, “I learned how to run the kitchen, and when the manager quit, I learned how to run a shift.” By the time she was 18, her responsibilities included training new employees. “My general manager saw the potential in me,” she recalls, “and my role as a trainer expanded to other stores.”

A year later, while still in college, she was asked to join the company’s international expansion team, which was headed to Australia. She spent 40 days with the team in Sydney, and within 10 days of her return to the United States, Cole was on her way to open the first Hooters in Central America, “then ones in South America, Asia, Africa, and Canada. By the time I was 20, I’d opened up the first Hooters on most continents outside the U.S. and was failing school. So I quit to become head of Hooters corporate training.”

It was worth a 50 percent pay cut, because Cole rose quickly through the ranks, becoming an executive VP at age 26. When she was 29, mentors urged her to go back to school, and so she entered the MBA program at Georgia State. Companies like Cinnabon were already calling, but in 2010, Cole decided to stay at Hooters long enough to take advantage of one more opportunity—helping to manage the sale of the company. She found herself “dealing with analysts, brokers, investors, and the internal team. . . . I would go to class one day and learn about transactions, and I would go to work on Monday and be in the middle of the transaction, and I’d think, ‘Thank God I went to class that day.’ ”

Later in 2010, at age 32, Cole took the job as chief operating officer (COO) of Cinnabon, and two months later, she finished her MBA. She was appointed president of the company in 2011. Under Cole’s leadership, Cinnabon has opened 200 new outlets (called “bakeries”) and entered licensing programs with such franchises as Burger King and Taco Bell. Cole has also launched a host of branded products, including a cinnamon-scented air freshener, a cinnamon-flavored vodka, and a cinnamon-spiced Keurig coffee blend (although she vetoed a cinnamon-flavored mouthwash). She has also partnered with international packaged-goods companies such as Pillsbury and Kellogg’s and such big-box retailers as Costco, Walmart, and Target. Cinnabon now has 50,000 points of distribution around the world and is fast approaching $1 billion in annual sales. “My management style,” she says, “is fast and direct. . . . We totally celebrate fast failure,” adds Cole, who’s perfectly willing to launch a product that’s only 75 percent ready for market. “We move as fast as something feels good.”

Clearly, speed to market isn’t a strategy for the risk averse. Taking risks means making tough calls, but Cole figures that if she has to make a tough call, it’s better to make it too soon rather than too late: “If you don’t take a risk,” she advises, “your competition will.” Ironically, Cole regards moving fast and taking risks as good reasons for pausing to get other people’s opinions. Her thinking? By the time you get around to making a decision, “there are usually lots of people around you who’ve known that it’s the right thing to do for a long time. The key, in business and in leadership, is staying really close to the other people who kind of know what’s going on so that it doesn’t take you too long to figure it out.”

References: Catherine Clifford, “How Kat Cole Went from Hooters Girl to President of Cinnabon by Age 32,”, accessed on January 3, 2017; Jenna Goudreau, “From Hooters to Hot Buns: How Kat Cole Turned Cinnabon into a $1 Billion Brand,”, November 27, 2012,, accessed on January 3, 2017; Barbara Babbit Kaufman, “Kat Cole: From Hooters Girl to CEO, by Age 35,” Atlanta Business Chronicle, August 23, 2013,, accessed on January 3, 2017; Laura Dunn, “Women in Business: Q&A with Kat Cole, President of Cinnabon,” Huffington Post, August 8, 2013,, accessed on April 28, 2017; Lydia Dishman, “How Kat Cole Operates Cinnabon Like a Tech Startup,” Fast Company, April 9, 2014,, accessed on April 28, 2017; and Blair Chancey, “Leadership: Kat Cole Style,” QSR Magazine, September 2011,, accessed on June April 28, 2017.

The Art of Management

Even though managers may try to be scientific as often as possible, they must frequently make decisions and solve problems on the basis of intuition, experience, instinct, and personal insights. Relying heavily on conceptual, communication, interpersonal, and time management skills, for example, a manager may have to decide among multiple courses of action that look equally attractive. And even “objective facts” may prove to be wrong. When Starbucks was planning its first store in New York City, market research clearly showed that New Yorkers strongly preferred drip coffee to more exotic espresso-style coffees. After first installing more drip coffee makers and fewer espresso makers than in their other stores, managers had to backtrack when the New Yorkers lined up clamoring for espresso. Starbucks now introduces a standard menu and layout in all its stores, regardless of presumed market differences, and makes necessary adjustments later. Thus, managers must blend an element of intuition and personal insight with hard data and objective facts.

1-2The Evolution of Management

Most managers today recognize the importance of history and theory in their work. For instance, knowing the origins of their organization and the kinds of practices that have led to success—or failure—can be an indispensable tool in managing the contemporary organization. Thus, in our next section, we briefly trace the history of management thought. Then we move forward to the present day by introducing contemporary management issues and challenges.

1-2aThe Importance of Theory and History

Some people question the value of history and theory. Their arguments are usually based on the assumptions that history is not relevant to contemporary society and that theory is abstract and of no practical use. In reality, however, both theory and history are important to all managers today.

Why Theory?

 is simply a conceptual framework for organizing knowledge and providing a blueprint for action. Although some theories seem abstract and irrelevant, others appear very simple and practical. Management theories, which are used to build organizations and guide them toward their goals, are grounded in reality. Practically any organization that uses assembly lines (such as Nissan and Samsung) is drawing on what we describe later in this chapter as scientific management. Many organizations, including Nucor and Google, use the behavioral perspective (also introduced later in this chapter) to improve employee satisfaction and motivation. And naming a large company that does not use one or more techniques from the quantitative management perspective would be difficult. For example, retailers such as Best Buy and Target routinely use operations management to determine how many checkout lines they need to have open at any given time. In addition, most managers develop and refine their own theories of how they should run their organizations and manage the behavior of their employees. James Sinegal, founder and former CEO of Costco Wholesale, always argued that paying his employees above-market wages while focusing cost-cutting measure elsewhere were the key ingredients in the early success for his business. This belief was essentially based on his personal theory of competition in the warehouse retailing industry.

Why History?

Awareness and understanding of important historical developments are also important to contemporary managers. Understanding the historical context of management provides a sense of heritage and can help managers avoid the mistakes of others. Most courses in U.S. history devote time to business and economic developments in this country, including the Industrial Revolution, the early labor movement, and the Great Depression, and to captains of U.S. industry such as Cornelius Vanderbilt (railroads), John D. Rockefeller (oil), and Andrew Carnegie (steel). The contributions of those and other industrialists left a profound imprint on contemporary culture.

Many managers are also realizing that they can benefit from a greater understanding of history in general. For example, Ian M. Ross of AT&T’s Bell Laboratories cites The Second World War by Winston Churchill as a major influence on his approach to leadership. Other books often mentioned by managers for their relevance to today’s business problems include such classics as Plato’s Republic, Homer’s Iliad, Sun Tzu’s The Art of War, and Machiavelli’s The Prince. And recent business history books have also been directed at women managers and the lessons they can learn from the past.

Managers at Wells Fargo clearly recognize the value of history. For example, the company maintains an extensive archival library of its old banking documents and records, and even employs a full-time corporate historian. As part of their orientation and training, new managers at Wells Fargo take courses to become acquainted with the bank’s history. Similarly, Shell Oil, Levi Strauss, Walmart, Lloyd’s of London, Disney, Honda, and Unilever all maintain significant archives about their pasts and frequently evoke images from those pasts in their orientation and training programs, advertising campaigns, and other public relations activities.

1-2bThe Historical Context of Management

The practice of management can be traced back thousands of years. The Egyptians used the management functions of planning, organizing, and controlling when they constructed the pyramids. Alexander the Great employed a staff organization to coordinate activities during his military campaigns. The Roman Empire developed a well-defined organizational structure that greatly facilitated communication and control. Socrates discussed management practices and concepts in 400 BC, Plato described job specialization in 350 BC, and the Persian scientist and philosopher al-Farabi listed several leadership traits in AD 900.

In spite of this history, the serious study of management did not begin until the nineteenth century. Two of its pioneers were Robert Owen and Charles Babbage. Owen (1771–1858), a British industrialist and reformer, was one of the first managers to recognize the importance of an organization’s human resources and to express concern for the personal welfare of his workers. Babbage (1792–1871), an English mathematician, focused his attention on efficiencies of production. He placed great faith in the division of labor and advocated the application of mathematics to such problems as the efficient use of facilities and materials.

1-2cThe Classical Management Perspective

Early in the twentieth century, the preliminary ideas and writings of these and other managers and theorists converged with the emergence and evolution of large-scale businesses and management practices. This created interest and focused attention on how businesses should be operated. The first important ideas to emerge are now called the 
classical management perspective
, which actually includes two different viewpoints: scientific management and administrative management.

Scientific Management

Productivity emerged as a serious business problem during the early years of the twentieth century. Business was expanding and capital was readily available, but labor was in short supply. Hence, managers began to search for ways to use existing labor more efficiently. In response to this need, experts began to focus on ways to improve the performance of individual workers. Their work led to the development of 
scientific management
. Some of the earliest advocates of scientific management included Frederick W. Taylor (1856–1915), Frank Gilbreth (1868–1924), and Lillian Gilbreth (1878–1972). Taylor played the dominant role.

One of Taylor’s first jobs was as a foreman at the Midvale Steel Company in Philadelphia. There he observed what he called 
—employees deliberately working at a pace slower than their capabilities. Taylor studied and timed each element of the steelworkers’ jobs. He determined what each worker should be producing, and then he designed the most efficient way of doing each part of the overall task. Next he implemented a piecework pay system. Rather than paying all employees the same wage, he began increasing the pay of each worker who met and exceeded the target level of output set for his or her job.

Frederick W. Taylor was one of the first management consultants and helped create scientific management. Time-andmotion studies and performance-based pay systems were among the innovations Taylor and his associates introduced. Mass production assembly line technologies also benefited from Taylor’s ideas and insights.

After Taylor left Midvale, he worked as a consultant for several companies, including Simonds Rolling Machine Company and Bethlehem Steel. At Simonds he studied and redesigned jobs, introduced rest periods to reduce fatigue, and implemented a piecework pay system. The results were higher quality and quantity of output, and improved morale. At Bethlehem Steel, Taylor studied efficient ways of loading and unloading railcars and applied his conclusions with equally impressive results. During these experiences, he formulated the basic ideas that he called scientific management
Figure 1.3
 illustrates the basic steps Taylor suggested. He believed that managers who followed his guidelines would improve the efficiency of their workers.

Figure 1.3Steps in Scientific Management

Frederick Taylor developed this system of scientific management, which he believed would lead to a more efficient and productive workforce. Bethlehem Steel was among the first organizations to profit from scientific management and still practices some parts of it today.

Taylor’s work had a major impact on U.S. industry. By applying his principles, many organizations achieved major gains in efficiency. Taylor was not without his detractors, however. Labor argued that scientific management was just a device to get more work from each employee and to reduce the total number of workers needed by a firm. There was a congressional investigation into Taylor’s ideas, and evidence suggests that he falsified some of his findings. Nevertheless, Taylor’s work left a lasting imprint on business.

Frank and Lillian Gilbreth, contemporaries of Taylor, were a husband-and-wife team of industrial engineers. One of Frank Gilbreth’s most interesting contributions was to the craft of bricklaying. After studying bricklayers at work, he developed several procedures for doing the job more efficiently. For example, he specified standard materials and techniques, including the positioning of the bricklayer, the bricks, and the mortar at different levels. The results of these changes were a reduction from 18 separate physical movements to 5 and an increase in the output of about 200 percent. Lillian Gilbreth made equally important contributions to several different areas of work, helped shape the field of industrial psychology, and made substantive contributions to the field of personnel management. Working individually and together, the Gilbreths developed numerous techniques and strategies for eliminating inefficiency. They applied many of their ideas to their family and documented their experiences raising 12 children in the book and original 1950 movie Cheaper by the Dozen.

Administrative Management

Whereas scientific management deals with the jobs of individual employees, 
administrative management
 focuses on managing the total organization. The primary contributors to administrative management were Henri Fayol (1841–1925), Lyndall Urwick (1891–1983), and Max Weber (1864–1920).

Henri Fayol was administrative management’s most articulate spokesperson. A French industrialist, Fayol was unknown to U.S. managers and scholars until his most important work, General and Industrial Management, was translated into English in 1930. Drawing on his own managerial experience, he attempted to systematize management practice to provide guidance and direction to other managers. Fayol was also the first to identify the specific managerial functions of planning, organizing, leading, and controlling. He believed that these functions accurately reflect the core of the management process. Most contemporary management books (including this one) still use this framework, and practicing managers agree that these functions are critical parts of their jobs.

After a career as a British army officer, Lyndall Urwick became a noted management theorist and consultant. He integrated scientific management with the work of Fayol and other administrative management theorists. He also advanced modern thinking about the functions of planning, organizing, and controlling. Like Fayol, he developed a list of guidelines for improving managerial effectiveness. Urwick is noted not so much for his own contributions as for his synthesis and integration of the work of others.

Although Max Weber lived and worked at the same time as Fayol and Taylor, his contributions were not recognized until some years had passed. Weber was a German sociologist, and his most important work was not translated into English until 1947. Weber’s work on bureaucracy laid the foundation for contemporary organization theory, which is discussed in detail in Chapter 6. The concept of bureaucracy, as we discuss later in this book, is based on a rational set of guidelines for structuring organizations in the most efficient manner.

The Classical Management Perspective Today

The classical management perspective provides many management techniques and approaches that are still relevant today. For example, many of the job specialization techniques and scientific methods espoused by Taylor and his contemporaries are still reflected in how several industrial jobs are designed today. Moreover, many contemporary organizations still use some of the bureaucratic procedures suggested by Weber. Also, these early theorists were the first to focus attention on management as a meaningful field of study. Several aspects of the classical perspective are also relevant to our later discussions of planning, organizing, and controlling. And recent advances in areas such as business-to-business (B2B) digital commerce and supply chain management also have efficiency as their primary goal. On the other hand, the classical perspective focused on stable, simple organizations; many organizations today, in contrast, are changing and complex. They also proposed universal guidelines that we now recognize do not fit every organization. A third limitation of the classical management perspective is that it slighted the role of the individual in organizations. This role was much more fully developed by advocates of the behavioral management perspective.

1-2dThe Behavioral Management Perspective

Early advocates of the classical management perspective viewed organizations and jobs from an essentially mechanistic point of view; that is, they essentially sought to conceptualize organizations as machines and workers as cogs within those machines. Even though many early writers recognized the role of individuals, their focus tended to be on how managers could control and standardize the behavior of their employees. In contrast, the 
behavioral management perspective
 placed much more emphasis on individual attitudes, behaviors, and group processes and recognized the importance of behavioral processes in the workplace.

The behavioral management perspective was stimulated by many writers and theoretical movements. One of those movements was industrial psychology, the practice of applying psychological concepts to industrial settings. Hugo Munsterberg (1863–1916), a noted German psychologist, is recognized as the father of industrial psychology. He established a psychological laboratory at Harvard University in 1892, and his pioneering book, Psychology and Industrial Efficiency, was translated into English in 1913. Munsterberg suggested that psychologists could make valuable contributions to managers in the areas of employee selection and motivation. Industrial psychology is still a major course of study at many colleges and universities. Another early advocate of the behavioral approach to management was Mary Parker Follett (1868–1933). Follett worked during the scientific management era but quickly came to recognize the human element in the workplace. Indeed, her work clearly anticipated the behavioral management perspective, and she appreciated the need to understand the role of behavior in organizations.

The Hawthorne Studies

Although Munsterberg and Follett made major contributions to the development of the behavioral approach to management, its primary catalyst was a series of studies conducted near Chicago at Western Electric’s Hawthorne plant between 1927 and 1932. The research, originally sponsored by General Electric, was conducted by Elton Mayo and his associates. Mayo was a faculty member and consultant at Harvard. The first study involved manipulating illumination for one group of workers and comparing their subsequent productivity with the productivity of another group whose illumination was not changed. Surprisingly, when illumination was increased for the experimental group, productivity went up in both groups. Productivity continued to increase in both groups, even when the lighting for the experimental group was decreased. Not until the lighting was reduced to the level of moonlight did productivity begin to decline (and General Electric withdrew its sponsorship).

Another experiment established a piecework incentive pay plan for a group of nine men assembling terminal banks for telephone exchanges. Scientific management would have predicted that each man would try to maximize his pay by producing as many units as possible. Mayo and his associates, however, found that the group itself informally established an acceptable level of output for its members. Workers who overproduced were branded rate busters, and underproducers were labeled chiselers. To be accepted by the group, workers produced at the accepted level. As they approached this acceptable level of output, workers slacked off to avoid overproducing.

Other studies, including an interview program involving several thousand workers, led Mayo and his associates to conclude that human behavior was much more important in the workplace than had been previously believed. In the lighting experiment, for example, the results were attributed to the fact that both groups received special attention and sympathetic supervision for perhaps the first time. The incentive pay plans did not work because wage incentives were less important to the individual workers than was social acceptance in determining output. In short, individual and social processes played major roles in shaping worker attitudes and behavior.

The Hawthorne studies were a series of early experiments that focused on behavior in the workplace. In one experiment involving this group of workers, for example, researchers monitored how productivity changed as a result of changes in working conditions. The Hawthorne studies and subsequent experiments led scientists to the conclusion that the human element is very important in the workplace.

The Human Relations Movement

The human relations movement, which grew from the Hawthorne studies and was a popular approach to management for many years, proposed that workers respond primarily to the social context of the workplace, including social conditioning, group norms, and interpersonal dynamics. A basic assumption of the human relations movement was that the manager’s concern for workers would lead to increased satisfaction, which would in turn result in improved performance. Two writers who helped advance the human relations movement were Abraham Maslow (1908–1970) and Douglas McGregor (1906–1964).

In 1943, Maslow advanced a theory suggesting that people are motivated by a hierarchy of needs, including monetary incentives and social acceptance. Maslow’s hierarchy, perhaps the best-known human relations theory, is described in detail in Chapter 10. Meanwhile, Douglas McGregor’s Theory X and Theory Y model best represents the essence of the human relations movement (see Table 1.1). According to McGregor, Theory X and Theory Y reflect two extreme belief sets that different managers have about their workers. 
Theory X
 is a relatively pessimistic and negative view of workers and is consistent with the views of scientific management. 
Theory Y
 is more positive and represents the assumptions made by human relations advocates. In McGregor’s view, Theory Y was a more appropriate philosophy for managers to adhere to. Both Maslow and McGregor notably influenced the thinking of many practicing managers.

Table 1.1

Theory X and Theory Y

Douglas McGregor developed Theory X and Theory Y. He argued that Theory X best represented the views of scientific management and Theory Y represented the human relations approach. McGregor believed that Theory Y was the best philosophy for all managers.

Theory X Assumptions

1. People do not like work and try to avoid it.

2. People do not like work, so managers have to control, direct, coerce, and threaten employees to get them to work toward organizational goals.

3. People prefer to be directed, to avoid responsibility, and to want security; they have little ambition.

Theory Y Assumptions

1. People do not naturally dislike work; work is a natural part of their lives.

2. People are internally motivated to reach objectives to which they are committed.

3. People are committed to goals to the degree that they receive personal rewards when they reach their objectives.

4. People will both seek and accept responsibility under favorable conditions.

5. People have the capacity to be innovative in solving organizational problems.

6. People are bright, but under most organizational conditions, their potential is underutilized.

Source: D. McGregor and W. Bennis, The Human Side Enterprise: 25th Anniversary Printing, 1960. Copyright © 1960 The McGraw-Hill Companies, Inc. Reprinted with permission.

Contemporary Behavioral Science in Management

Munsterberg, Mayo, Maslow, McGregor, and others have made valuable contributions to management. Contemporary theorists, however, have noted that many of the human relationists’ assertions were simplistic and provided inadequate descriptions of work behavior. Current behavioral perspectives on management, known as 
organizational behavior
, acknowledge that human behavior in organizations is much more complex than the human relationists realized. The field of organizational behavior draws from a broad, interdisciplinary base of psychology, sociology, anthropology, economics, and medicine. Organizational behavior takes a holistic view of behavior and addresses individual, group, and organization processes. These processes are major elements in contemporary management theory. Important topics in this field include job satisfaction, stress, motivation, leadership, group dynamics, organizational politics, interpersonal conflict, and the structure and design of organizations. A contingency orientation also characterizes the field (discussed more fully later in this chapter). Our discussions of organizing (Chapters 67, and 8) and leading (Chapters 9101112, and 13) are heavily influenced by organizational behavior. And, finally, managers need a solid understanding of human behavior as they address diversity-related issues such as ethnicity and religion in the workplace. Indeed, all these topics are useful to help managers better deal with the consequences of layoffs and job cuts and to motivate today’s workers.

Automobile manufacturers around the world today use crash test dummies like this one to test safety features in their cars. Statistical techniques and methods derived from management science help engineers and managers assess the effectiveness of various safety features. The results include safer vehicles and lower costs for manufacturers.

The Behavioral Management Perspective Today

The primary contributions of this approach relate to how it has changed managerial thinking. Managers are now more likely to recognize the importance of behavioral processes and to view employees as valuable resources instead of mere tools. However, organizational behavior is still relatively imprecise in its ability to predict behavior, especially the behavior of a specific individual. It is not always accepted or understood by practicing managers. Hence the contributions of the behavioral school are just beginning to be fully realized.

1-2eThe Quantitative Management Perspective

The third major school of management thought began to emerge during World War II. During the war, government officials and scientists in England and the United States worked to help the military deploy its resources more efficiently and effectively. These groups took some of the mathematical approaches to management developed decades earlier by Taylor and Gantt and applied these approaches to logistical problems during the war. They learned that problems regarding troop, equipment, and submarine deployment, for example, could all be solved through mathematical analysis. After the war, companies such as DuPont and General Electric began to use the same techniques for deploying employees, choosing plant locations, and planning warehouses. Basically, then, this perspective is concerned with applying quantitative techniques to management. More specifically, the 
quantitative management perspective
 focuses on decision making, cost-effectiveness, mathematical models, and the use of computers. There are two branches of the quantitative approach: management science and operations management.

Management Science

Unfortunately, the term management science appears to be related to scientific management, the approach developed by Taylor and others early in the twentieth century. But the two have little in common and should not be confused. 
Management science
 focuses specifically on the development of mathematical models. A mathematical model is a simplified representation of a system, process, or relationship.

At its most basic level, management science focuses on models, equations, and similar representations of reality. For example, managers at Detroit Edison use mathematical models to determine how best to route repair crews during blackouts. Citizens Bank of New England uses models to figure out how many tellers need to be on duty at each location at various times throughout the day. In recent years, paralleling the advent of the personal computer, management science techniques have become increasingly sophisticated. For example, automobile manufacturers Daimler AG and General Motors use realistic computer simulations to study collision damage to cars. These simulations help them lower costs by crashing actual test cars only after multiple simulations.

Operations Management

Operations management is somewhat less mathematical and statistically sophisticated than management science, and it can be applied more directly to managerial situations. Indeed, we can think of 
operations management
 as a form of applied management science. Operations management techniques are generally concerned with helping the organization produce its products or services more efficiently and can be applied to a wide range of problems.

For example, Unilever and Home Depot, each uses operations management techniques to manage its inventories. (Inventory management is concerned with specific inventory problems, such as balancing carrying costs and ordering costs and determining the optimal order quantity.) Linear programming (which involves computing simultaneous solutions to a set of linear equations) helps United Airlines plan its flight schedules, Consolidated Freightways develop its shipping routes, and General Instrument Corporation plan what instruments to produce at various times. Other operations management techniques include queuing theory, break-even analysis, and simulation. All these techniques and procedures apply directly to operations, but they are also helpful in areas such as finance, marketing, and human resource management.

Disney is a master of synergy. The firm’s movies, theme park attractions, and merchandise, for example, are all linked together so that each enhances the others. For instance, the Disney movie Frozen was widely promoted at Disney World and Disneyland before the movie ever opened. And long after the movie left theaters, people could still buy Frozen DVDs and merchandise throughout all Disney retail outlets.

The Quantitative Management Perspective Today

Like the other management perspectives, the quantitative management perspective has made important contributions and has certain limitations. It has provided managers with an abundance of decision-making tools and techniques and has increased understanding of overall organizational processes. This perspective has been particularly useful in the areas of planning and controlling. Relatively new management concepts such as supply chain management and new techniques such as enterprise resource planning, both discussed later in this book, also evolved from the quantitative management perspective. Even more recently, mathematicians are using tools and techniques from the quantitative perspective to develop models that might be helpful in the war against terrorism. However, mathematical models cannot fully account for individual behaviors and attitudes. Some believe that the time needed to develop competence in quantitative techniques retards the development of other managerial skills. Finally, mathematical models typically require a set of assumptions that may not be realistic.

1-3Contemporary Management Perspectives

It is important to recognize that the classical, behavioral, and quantitative approaches to management are not necessarily contradictory or mutually exclusive. Even though each of the three perspectives makes very different assumptions and predictions, each can also complement the others. Indeed, a complete understanding of management requires an appreciation of all three perspectives. The systems and contingency perspectives can help us integrate these earlier approaches and enlarge our understanding of all three.

1-3aThe Systems Perspective

The systems perspective is one important contemporary management perspective. A 
 is an interrelated set of elements functioning as a whole. As shown in Figure 1.4, by viewing an organization as a system, we can identify four basic elements: inputs, transformation processes, outputs, and feedback. First, inputs are the material, human, financial, and information resources that an organization gets from its environment. Next, through technological and managerial processes, inputs are transformed into outputs. Outputs include products, services, or both (tangible and intangible); profits, losses, or both (even not-for-profit organizations must operate within their budgets); employee behaviors; and information. Finally, the environment reacts to these outputs and provides feedback to the system.

Figure 1.4The Systems Perspective of Organizations

By viewing organizations as systems, managers can better understand the importance of their environment and the level of interdependence among their organization’s subsystems. Managers must also understand how their decisions affect and are affected by the organization’s other subsystems.

Thinking of organizations as systems provides us with a variety of important viewpoints on organizations, such as the concepts of open systems, subsystems, synergy, and entropy. 
Open systems
 are systems that interact with their environment, whereas 
closed systems
 do not interact with their environment. Although organizations are open systems, some make the mistake of ignoring their environment and behaving as though it is not important.

The systems perspective also stresses the importance of 
—systems within a broader system. For example, the marketing, production, and finance functions within Mattel are systems in their own right but are also subsystems within the overall organization. Because they are interdependent, a change in one subsystem can affect other subsystems as well. If the production department at Mattel lowers the quality of the toys being made (by buying lower-quality materials, for example), the effects are felt in finance (improved cash flow in the short run owing to lower costs) and marketing (decreased sales in the long run because of customer dissatisfaction). Managers must therefore remember that although organizational subsystems can be managed with some degree of autonomy, their interdependence should not be overlooked. For instance, recent research has underscored the interdependence of strategy and operations in businesses.

 suggests that organizational units (or subsystems) may often be more successful working together than working alone. The Walt Disney Company, for example, benefits greatly from synergy. The company’s movies, theme parks, television programs, and merchandise-licensing programs, all benefit one another. Children who enjoy Disney movies like Finding Dory and Frozen want to go to Disney World to see the attractions and shows based on the movies and their favorite characters; and when they shop at Target, they see and want to buy stuffed toys and action figures of the same characters. Music from the films generates additional revenues for the firm, as do computer games and other licensing arrangements for lunchboxes, clothing, and so forth. Synergy is an important concept for managers because it emphasizes the importance of working together in a cooperative and coordinated fashion.

 is a normal process that leads to system decline. When an organization does not monitor feedback from its environment and make appropriate adjustments, it may fail. For example, witness the problems and eventual demise of Blockbuster and Circuit City. Each of these organizations went bankrupt because it failed to revitalize itself and keep pace with changes in its environment. A primary objective of management, from a systems perspective, is to continually reenergize the organization to avoid entropy.

1-3bThe Contingency Perspective

Another noteworthy recent addition to management thinking is the contingency perspective. The classical, behavioral, and quantitative approaches are considered 
universal perspectives
 because they try to identify the “one best way” to manage organizations. The 
contingency perspective
, in contrast, suggests that universal theories cannot be applied to organizations because each organization is unique. Instead, the contingency perspective suggests that appropriate managerial behavior in a given situation depends on, or is contingent on, unique elements in that situation.

Stated differently, effective managerial behavior in one situation cannot always be generalized to other situations. Recall, for example, that Frederick Taylor assumed that all workers would generate the highest possible level of output to maximize their own personal economic gain. We can imagine some people being motivated primarily by money—but we can just as easily imagine other people being motivated by the desire for leisure time, status, social acceptance, or any combination of these (as Mayo found at the Hawthorne plant). When Reed Hastings launched Netflix, he was intimately involved with virtually every small decision made to get the company up and running. But as the firm grew into a major international business he has stepped back and taken on a more strategic role. Hence, his management style and approach have changed because the situation in which he manages has changed.

1-3cContemporary Management Issues and Challenges

Interest in management theory and practice has heightened in recent years as new issues and challenges have emerged. No new paradigm has been formulated that replaces the traditional views, but managers continue to strive toward a better understanding of how they can better compete and lead their organizations toward improved effectiveness.

Contemporary Applied Perspectives

Several applied authors have significant influence on modern management theory and practice. Among the most popular applied authors today are Peter Senge, Stephen Covey, Tom Peters, Jim Collins, Michael Porter, John Kotter, and Gary Hamel. Their books highlight the management practices of successful firms such as Shell Oil, Ford, and IBM, or they outline conceptual or theoretical models or frameworks to guide managers as they formulate strategies or motivate their employees. Malcolm Gladwell’s books The Tipping Point, Blink, and Outliers have all caught the attention of many contemporary managers. Scott Adams, creator of the popular comic strip Dilbert, also remains popular today. Adams is a former communications industry worker who developed his strip to illustrate some of the absurdities that occasionally afflict contemporary organizational life. The daily strip is routinely e-mailed and posted outside office doors, above copy machines, and beside water coolers in hundreds of offices.

Contemporary Management Challenges

Managers today also face an imposing set of challenges as they guide and direct the fortunes of their companies. Coverage of each of these challenges is thoroughly integrated throughout this book. In addition, many of them are highlighted or given focused coverage in one or more special ways.

One significant challenge (and opportunity) is globalization. Managing in a global economy poses many different challenges and opportunities. For example, at a macro level, property ownership arrangements vary widely. So does the availability of natural resources and infrastructure components, as well as government’s role in business. Moreover, behavioral processes vary widely across cultural and national boundaries. For example, values, symbols, and beliefs differ sharply among cultures. Different work norms and the role that work plays in a person’s life, for example, influence patterns of both work-related behavior and attitudes toward work. They also affect the nature of supervisory relationships, decision-making styles and processes, and organizational configurations. Group and intergroup processes, responses to stress, and the nature of political behaviors also differ from culture to culture.

Another management challenge that has taken on renewed importance is ethics and social responsibility and their relationship to corporate governance. Unfortunately, business scandals involving unethical conduct have become almost commonplace today. For example, the effects of Allen Stanford’s alleged $7 billion Ponzi scheme ruined the financial futures of thousands of people. From a social responsibility perspective, increasing attention has been focused on pollution and business’s obligation to help clean up our environment, business contributions to social causes, and so forth. The proper framework for corporate governance is often at the center of these debates and discussions.

Quality also continues to pose an important management challenge today. Quality is an important issue for several reasons. First, more and more organizations are using quality as a basis for competition. Lexus, for example, stresses its high rankings in the J. D. Power survey of customer satisfaction in its print advertising. Second, improving quality tends to increase productivity because making higher-quality products generally results in less waste and rework. Third, enhancing quality lowers costs. Managers at Whistler Corporation once realized that the firm was using 100 of its 250 employees to repair defective radar detectors that had been built incorrectly in the first place.

The shift toward a service economy also continues to be important. Traditionally, most U.S. businesses were manufacturers—using tangible resources like raw materials and machinery to create tangible products like automobiles and steel. And manufacturing is indeed still important in the U.S. economy. In the last few decades, however, the service sector of the economy has become much more important. Although there are obviously many similarities between managing in a manufacturing organization and managing in a service organization, there are also many fundamental differences.

The economic recession of 2008–2010 and slow recovery in 2011–2017 have also created myriad challenges, as well as some opportunities, for managers. Most businesses struggled, and some failed to survive. But some managers also used this period as a framework for reducing their costs, streamlining their operating systems and procedures, and fine-tuning their business strategies. As the economy slowly began to rebound in 2015, firms like Ford, Target, and Delia seemed to be well positioned for new growth and cautiously began hiring new employees.

A related challenge for managers is the rapidly changing workplace. Indeed, this new workplace is accompanied by both dramatic challenges and amazing opportunities. Among other things, workplace changes relate in part to both workforce reductions and expansion. For example, many firms hired large numbers of new workers during the economic expansion that was taking place between 2002 and early 2008. But as the recession of 2008–2010 took hold, many of those same firms had to reduce their workforces, while others cut hours and pay and suspended all hiring until conditions showed signs of improvement. But even more central to the idea of workplace change are developments such as workforce diversity and the characteristics of new workers themselves.

The management of diversity continues to be an important organizational opportunity—and challenge—today. The term diversity refers to differences among people. Diversity may be reflected along numerous dimensions, but most managers tend to focus on age, gender, ethnicity, and physical abilities and disabilities. For example, the average age of workers in the United States is gradually increasing. An increasing number of women have also entered the U.S. workforce. Fifty years ago, only about one-third of U.S. women worked outside their homes; today, 60 percent of women aged 16 and older are in the workforce. The ethnic composition of the workplace is also changing.

Aside from its demographic composition, the workforce today is changing in other ways. During the 1980s, many people entering the workforce came to be called yuppies, slang for young urban professionals. These individuals were highly motivated by career prospects, sought employment with big corporations, and often were willing to make work their highest priority. Thus, they put in long hours and could be expected to remain loyal to the company, regardless of what happened.

But younger people entering the workforce over the past 20–30 years are frequently quite different from their parents and other older workers. Generation X, Generation Y, and the Millennials, as these groups are called, tend to be less devoted to long-term career prospects and less willing to adapt to a corporate mind-set that stresses conformity and uniformity. Instead, they often seek work in smaller, more entrepreneurial firms that allow flexibility and individuality. They also place a premium on lifestyle preferences, often putting location high on their list of priorities when selecting an employer.

Thus, managers are increasingly faced with the challenge of, first, creating an environment that will be attractive to today’s worker; and, second, addressing the challenge of providing new and different incentives to keep people motivated and interested in their work. They must build enough flexibility into the organization to accommodate an ever-changing set of lifestyles and preferences. And, of course, as these generations eventually move into top spots of major corporations, there may even be entirely new paradigms for managing that cannot be foreseen today.

Managers must also be prepared to address organization change. This has always been a concern, but the rapid, constant environmental change faced by businesses today has made change management even more critical. Simply put, an organization that fails to monitor its environment and to change to keep pace with that environment is doomed to failure. But more and more managers are seeing change as an opportunity, not a cause for alarm. Indeed, some managers think that if things get too calm in an organization and people start to become complacent, they should shake things up to get everyone energized.

New technology, especially as it relates to information, also poses an increasingly important challenge for managers. Communications advances such as smartphones and other wireless communication networks have made it easier than ever for managers to communicate with one another. Social media has also quickly established itself as a major force in all walks of contemporary life. At the same time, these innovations have increased the work pace for managers, cut into their time for thoughtful contemplation of decisions, and increased the amount of information they must process. Issues associated with employee privacy have also emerged. For instance, controversies have arisen when businesses take action against people for things they do in their personal lives—posting negative comments about their employer on Facebook, for example.

Chapter Review

Summary of Learning Outcomes and Key Points

· 1Define management, describe the kinds of managers found in organizations, identify and explain the four basic management functions, describe the fundamental management skills, and comment on management as a science and art.


Management is a set of activities (planning and decision making, organizing, leading, and controlling) directed at using an organization’s resources (human, financial, physical, and information) to achieve organizational goals in an efficient and effective manner.


A manager is someone whose primary responsibility is to carry out the management process within an organization.


Managers can be classified by level: top managers, middle managers, and first-line managers.


Managers can also be classified by area: marketing, finances, operations, human resources, administration, and specialized.


The basic activities of the management process include planning and decision making (determining courses of action), organizing (coordinating activities and resources), leading (motivating and managing people), and controlling (monitoring and evaluating activities).


Effective managers also tend to have the following skills: technical, interpersonal, conceptual, diagnostic, communication, decision making, and time management.


The effective practice of management requires a synthesis of science and art: a blend of rational objectivity and intuitive insight.

· 2Justify the importance of history and theory to managers, and explain the evolution of management thought through the classical, behavioral, and quantitative perspectives.


Understanding the historical context and precursors of management and organizations provides a sense of heritage and can also help managers avoid repeating the mistakes of others.


The classical management perspective, which paid little attention to the role of workers, had two major branches: scientific management (concerned with improving efficiency and work methods for individual workers) and administrative management (concerned with how organizations themselves should be structured and arranged for efficient operations).


The behavioral management perspective, characterized by a concern for individual and group behavior, emerged primarily as a result of the Hawthorne studies. The human relations movement recognized the importance and potential of behavioral processes in organizations but made many overly simplistic assumptions about those processes. Organizational behavior, a more realistic outgrowth of the behavioral perspective, is of interest to many contemporary managers.


The quantitative management perspective, which attempts to apply quantitative techniques to decision making and problem solving, has two components: management science and operations management. These areas are also of considerable importance to contemporary managers. Their contributions have been facilitated by the tremendous increase in the use of personal computers and integrated information networks.

· 3Identify and discuss key contemporary management perspectives represented by the systems and contingency perspectives, and identify the major challenges and opportunities faced by managers today.


There are two relatively recent additions to management theory that can serve as frameworks for integrating the other perspectives: the systems perspective and the contingency perspective.


The important issues and challenges that contemporary managers face include globalization, ethics and social responsibility, product and service quality, the service economy, the economic recession of 2008–2010, the new workplace, workforce diversity, organization change, and technology.

Chapter Review

Discussion Questions

Questions for Review

1. What are the three basic levels of management that can be identified in most organizations? How precise are the lines differentiating these levels? In which of the basic areas do managers work?

2. What are the four basic functions that make up the management process? How are they related to one another?

3. Identify several of the important skills that help managers succeed. Give an example of each. How might the importance of different skills vary by level and area within an organization?

4. Briefly describe the principles of scientific management and administrative management. What assumptions do these perspectives make about workers? To what extent are these assumptions still valid today?

5. Describe the systems perspective. Why is a business organization considered an open system?

Chapter Review

Experiential Exercise

Johari Window

Purpose: This exercise has two purposes: to encourage you to analyze yourself more accurately and to start you working on small-group cohesiveness. This exercise encourages you to share data about yourself and then to assimilate and process feedback. Small groups are typically more trusting and work better together, as you will be able to see after this exercise has been completed. The Johari Window is a particularly good model for understanding the perceptual process in interpersonal relationships.

This skill builder focuses on the human resources model and will help you develop your mentor role. One of the skills of a mentor is self-awareness.

Introduction: Each individual has four sets of personality characteristics. One set, which includes such characteristics as working hard, is well known to the individual and to others. A second set is unknown to the individual but obvious to others. For example, in a working situation, a peer group might observe that your jumping in to move the group off dead center is appropriate. At other times, you jump in when the group is not really finished, and you seem to interrupt. A third set of personality characteristics is known to the individual but not to others. These are situations that you have elected not to share, perhaps because of a lack of trust. Finally, there is a fourth set, which is not known to the individual or to others, such as why you are uncomfortable at office parties.

Instructions: Look at the Johari Window. In quadrant 1, list three things that you know about yourself and that you think others know. List three things in quadrant 3 that others do not know about you. Finally, in quadrant 2, list three things that you did not know about yourself last semester that you learned from others.

Source: Adapted from Joseph Luft, Group Processes: An Introduction to Group Dynamics (Palo Alto, CA: Mayfield, 1970), pp. 10–11; and William C. Morris and Marshall Sashkin, Organizational Behavior in Action (St. Paul, MN: West, 1976), p. 56.

Chapter Review

Building Effective Time Management Skills

Exercise Overview

Time management skills refer to the ability to prioritize tasks, to work efficiently, and to delegate appropriately. This exercise allows you to assess your own current time management skills and to gather some suggestions for how you can improve in this area.

Exercise Background

As we saw in this chapter, effective managers must be prepared to switch back and forth among the four basic activities in the management process. They must also be able to fulfill a number of different roles in their organizations, and they must exercise various managerial skills in doing so. On top of everything else, their schedules are busy and full of tasks—personal and job-related activities that require them to “switch gears” frequently throughout the workday.

Stephen Covey, a management consultant and the author of The 7 Habits of Highly Effective People, has developed a system for prioritizing tasks. First, he divides them into two categories—urgent and critical. Urgent tasks, such as those with approaching deadlines, must be performed right away. Critical tasks are tasks of high importance—say, those that will affect significant areas of one’s life or work. Next, Covey plots both types of tasks on a grid with four quadrants: A task may be urgent, critical, urgent and critical, or not urgent and not critical.

Most managers, says Covey, spend too much time on tasks that are urgent when in fact they should be focused on tasks that are critical. He observes, for example, that managers who concentrate on urgent tasks meet their deadlines but tend to neglect critical areas such as long-term planning. (Unfortunately, the same people are also prone to neglect critical areas of their personal lives.) In short, effective managers must learn to balance the demands of urgent tasks with those of critical tasks by redistributing the amount of time devoted to each type.

Exercise Task

1. Visit one of the websites of Franklin Covey (the firm cofounded by Stephen Covey) and locate a time management survey. If you cannot locate one associated with Franklin Covey, there are many others available through a quick Internet search. Complete a survey that will provide you with a time management score.

2. Now spend some time interpreting your score, examine the assessment of your current use of time and the suggestions for how you can improve your time management. In what ways do you agree and disagree with your personal assessment? Explain your reasons for agreeing or disagreeing.

3. Think of a task that you regularly perform and that, if you were being perfectly honest, you could label not urgent and not critical. How much time do you spend on this task? What might be a more appropriate amount of time? To what other tasks could you give some of the time that you spend on this not urgent and not critical task?

4. What one thing can you do today to make better use of your time? Try it to see if your time management improves.

Chapter Review

Management at Work

Some Keys to Making a Steinway

Everybody knows what a grand piano looks like, although it’s hard to describe its contour as anything other than “piano shaped.” From a bird’s-eye view, you might recognize something like a great big holster. The case—the curved lateral surface that runs around the whole instrument—appears to be a single continuous piece of wood, but it isn’t really. If you look carefully at the case of a piano built by Steinway & Sons, you’ll see that you’re actually looking at a remarkable composite of raw material, craftsmanship, and technology. The process by which this component is made—like most of the processes for making a Steinway grand—is a prime example of a technical, or task, subsystem at work in a highly specialized factory.

The case starts out as a rim, which is constructed out of separate slats of wood, mostly maple (eastern rock maple, to be precise). Once raw boards have been cut and planed, they’re glued along their lengthwise edges to the width of  inches. These composite pieces are then jointed and glued end to end to form slats 22 feet long—the measure of the piano’s perimeter. Next, a total of 18 separate slats—14 layers of maple and 4 layers of other types of wood—are glued and stacked together to form a book—one (seemingly) continuous “board”  inches thick. Then comes the process that’s a favorite of visitors on the Steinway factory tour—bending this rim into the shape of a piano. Steinway does it pretty much the same way that it has for more than a century—by hand and all at once. Because the special glue is in the process of drying, a crew of six has just 20 minutes to wrestle the book, with block and tackle and wooden levers and mallets, into a rim-bending press—”a giant piano-shaped vise,” as Steinway describes it—which will force the wood to “forget” its natural inclination to be straight and assume the familiar contour of a grand piano.

Visitors report the sound of splintering wood, but Steinway artisans assure them that the specially cured wood isn’t likely to break or the specially mixed glue to lose its grip. It’s a good thing, too, both because the wood is expensive and because the precision Steinway process can’t afford much wasted effort. The company needs 12 months, 12,000 parts, 450 craftspeople, and countless hours of skilled labor to produce a grand piano. Today, the New York factory turns out about 10 pianos in a day or 2,500 a year. (A mass producer might build 2,000 pianos a week.) The result of this painstaking task system, according to one business journalist with a good ear, is “both impossibly perfect instruments and a scarcity,” and that’s why Steinways are so expensive—currently, somewhere between $45,000 and $110,000.

But Steinway pianos, the company reminds potential buyers, have always been “built to a standard, not to a price.” “It’s a product,” says company executive Leo F. Spellman, “that in some sense speaks to people and will have a legacy long after we’re gone. What [Steinway] craftsmen work on today will be here for another 50 or 100 years.” Approximately 90 percent of all concert pianists prefer the sound of a Steinway, and the company’s attention to manufacturing detail reflects the fact that when a piano is being played, the entire instrument vibrates—and thus affects its sound. In other words—and not surprisingly—the better the raw materials, design, and construction, the better the sound.

That’s one of the reasons Steinway craftsmen put so much care into the construction of the piano’s case: It’s a major factor in the way the body of the instrument resonates. The maple wood for the case, for example, arrives at the factory with water content of 80 percent. It’s then dried, both in the open air and in kilns, until the water content is reduced to about 10 percent—suitable for both strength and pliability. To ensure that strength and pliability remain stable, the slats must be cut so that they’re horizontally grained and arranged, with the “inside” of one slat—the side that grew toward the center of the tree—facing the “outside” of the next one in the book. The case is removed from the press after one day and then stored for ten weeks in a humidity-controlled rim-bending room. Afterward, it’s ready to be sawed, planed, and sanded to specification—a process called frazing. A black lacquer finish is added, and only then is the case ready to be installed as a component of a grand piano in progress.

The Steinway process also puts a premium on skilled workers. Steinway has always been an employer of immigrant labor, beginning with the German craftsmen and laborers hired by founder Henry Steinway in the 1860s and 1870s. Today, Steinway employees come from much different places—Haitians and Dominicans in the 1980s, exiles from war-torn Yugoslavia in the 1990s—and it still takes time to train them. It takes about a year, for instance, to train a case maker, and “when you lose one of them for a long period of time,” says Gino Romano, a senior supervisor hired in 1964, “it has a serious effect on our output.” Romano recalls one year in mid-June when a case maker was injured in a car accident and was out for several weeks. His department fell behind schedule, and it was September before Romano could find a suitable replacement (an experienced case maker in Florida who happened to be a relative of another Steinway worker).

The company’s employees don’t necessarily share Spellman’s sense of the company’s legacy, but many of them are well aware of the brand recognition commanded by the products they craft, according to Romano:

The payback is not in [the factory]. The payback is outside, when you get the celebrity treatment for building a Steinway, when you meet somebody for the first time and they ooh and ahh: “You build Steinways? Wow.” You’re automatically put on a higher level, and you go, “I didn’t realize I was that notable.”

Case Questions

1. Explain the process by which a Steinway grand piano is constructed as a subsystem of a larger system. From what the text tells you, give some examples of how the production subsystem is affected by the management, financial, and marketing subsystems.

2. Discuss the Steinway process in terms of the systems perspective of organizations summarized in Figure 1.4. Explain the role of each of the three elements highlighted by the figure—inputs from the environment, the transformation process, and outputs into the environment.

3. Discuss some of the ways the principles of behavioral management and operations management can throw light on the Steinway process. How about the contingency perspective? In what ways does the Steinway process reflect a universal perspective, and in what ways does it reflect a contingency perspective?

Case References


Steinway & Sons, “The Steinway Restoration Center,”, accessed on January 3, 2017; WGBH (Boston), “Note by Note: The Making of Steinway L1037,”, accessed on January 3, 2017; Maya Roney, “Steinway: Worth Much More than a Song,” BusinessWeek,, accessed on January 3, 2017; James Barron, “88 Keys, Many Languages, One Proud Name,” New York Times,, accessed on January 3, 2017; Michael Lenehen, “K 2571: The Making of a Steinway Grand,” Atlantic Monthly, August 1982,, accessed on January 3, 2017; and Rick Rogers, “Steinway Builds a Legacy with Distinctive Pianos,” Daily Oklahoman (Oklahoma City),, accessed on January 3, 2017.

Chapter Review

You Make the Call: Reed Hastings Doesn’t like Standing Still

1. You’re a Netflix employee, and Reed Hastings has just stopped by your desk. “I’d like to know,” he says, “what you like most and least about working here.” How do you think you might respond?

2. You’re a major Netflix stockholder attending the firm’s annual board meeting. When you bump into Reed Hastings at a reception, he asks you, “How do you think we’re doing with this company?” How would you respond?

3. You’re the founder and owner of a small media company, and Netflix has indicated an interest in buying your business. Reed Hastings wants you to stay on and run the business as a unit of Netflix. In addition to price, what other factors (if any) are important to you?

4. You’ve been contacted by a marketing research company doing work for Netflix. The researcher asks if you use Netflix and, if not, why? If you do use Netflix, the researcher asks what you like and dislike most about it. What would you say?

Chapter 2 Introduction

· 2-1

The Organization’s Environments

· 2-1a

The General Environment

· 2-1b

The Task Environment

· 2-1c

The Internal Environment

· 2-2

The Ethical and Social Environment of Management

· 2-2a

Individual Ethics in Organizations

· 2-2b

Emerging Ethical Issues

· 2-2c

Social Responsibility in Organizations

· 2-2d

Managing Social Responsibility

· 2-3

The International Environment of Management

· 2-3a

Trends in International Business

· 2-3b

Levels of International Business Activity

· 2-3c

The Context of International Business

· 2-4

The Organization’s Culture

· 2-4a

The Importance of Organizational Culture

· 2-4b

Determinants of Organizational Culture

· 2-4c

Managing Organizational Culture

Chapter Review

Summary of Learning Outcomes and Key Points

Discussion Questions

Experiential Exercise

Building Effective Communication Skills

Management at Work

You Make the Call: The Canary in Starbucks’ Coal Mine

Chapter Introduction

Learning Outcomes

After studying this chapter, you should be able to:

· 1Discuss the nature of an organization’s environments and identify the components of its general, task, and internal environments.

· 2Describe the ethical and social environment of management, including individual ethics, the concept of social responsibility, and how organizations can manage social responsibility.

· 3Discuss the international environment of management, including trends in international business, levels of international business activities, and the context of international business.

· 4Describe the importance and determinants of an organization’s culture, as well as how organizational culture can be managed.

Management in Action

The Canary in Starbucks’ Coal Mine

“If the only reason you’re invested in sustainability is because it’s the ‘right thing to do,’ you’re in trouble.”

—Jim Hanna, director of environmental affairs, Starbucks

According to Starbucks VP of Global Responsibility Ben Packard, the company’s efforts to establish itself as a leading sustainable brand start with part of its mission: “We aim to take care of the communities that we depend on for our retail business by … finding meaningful ways to be engaged with those communities,” says Packard. “And we aim to take care of those communities where we source our core products, like coffee, tea, and cocoa.” It’s a matter of “nurturing the human spirit,” explains Packard, who adds that incorporating that value into the firm’s culture has allowed Starbucks to set and meet “very bold standards” in sustainability.

Starbucks sells hot and cold beverages out of more than 23,000 stores in 64 countries, and those stores account for about 80 percent of the company’s carbon footprint—the total of its greenhouse gas emissions (primarily carbon dioxide). In order to reduce its footprint, Starbucks has set a series of realistic goals to be met by 2020, including the widespread recycling of the disposable cups that it hands out with almost every beverage sold—about 4 billion per year. Actually, those cups constitute only a miniscule fraction of Starbucks’ carbon footprint, but according to Jim Hanna, the company’s director of environmental affairs, “perception is reality” when it comes to disposable cups: What most people see is the litter strewn about the streets or tumbling out of overflowing trash cans.

Starbucks is dedicated to sustainability as a fundamental part of its business practices but also believes that these practices should have visibility in order to build goodwill among customers and employees. This Starbucks shop in Chicago is built from recycled shipping containers.

Before we go any further, we should point out that although Starbucks has incorporated sustainability practices into its operations since 1990, it hasn’t always been as sensitive to environmental issues as some people would like. If you were a regular at Starbucks before 2008, you might have noticed a sink called a “dipper well.” Baristas used it to quick-rinse equipment, and the water was kept running to ensure that pipes stayed clean. Unfortunately, leaving the water running in 10,000 stores worldwide used up more than 6 million gallons of water per day—enough to fill an Olympic-size swimming pool every 83 minutes. The company had been warned that the dipper-well system wasn’t good for its environmental reputation, but only after a blitz of bad PR in the global press did Starbucks finally turn off the water. Today, says Ben Packard, “we look at water on the supply side of coffee”—as a resource to be protected—and Starbucks has plans to cut in-store water consumption by 25 percent.

That goal is part of the company’s Shared Planet Program, which was launched in 2008. A year later, Starbucks announced that, as part of the same initiative, all of its new stores would satisfy certification requirements for LEED (Leadership in Energy & Environmental Design), a rating system for the construction and operation of environment-friendly buildings. Because the guidelines were developed for office buildings, Starbucks helped to create programs for both new and renovated retail spaces, and 75 percent of all Starbucks locations opening in 2014 attained LEED certification. “My dream,” says Hanna, “is that we solve the cup issue and a customer walks into a store and says, ‘Look at that ultra-efficient air conditioning unit.’ “

By 2020, Starbucks also plans to “ethically source” 100 percent of the coffee that it buys from producers. Over the past 40 years, Starbucks has invested more than $70 million in programs to support sustainable and socially sound agricultural practices among the roughly 1 million people—most of them in Latin America—who represent its coffee supply chain. Programs include loans to help farmers develop not only sustainable growing practices but forest-conservation practices as well.

Since 2008, Starbucks has partnered with Conservation International (CI), a U.S.-based nonprofit environmental organization, to implement C.A.F.E. (Coffee and Farmer Equity) practices—a set of independently developed guidelines for monitoring the economic, social, and environmental impact of coffee-production programs and practices. By 2012, 98 percent of the small coffee farms operating according to Starbucks-promoted C.A.F.E. practices had managed to improve soil fertility, and 100 percent of the school-age children on those farms were able to attend school.

CI chairman and CEO Peter Seligmann points out that Starbucks’ sustainability efforts are motivated in large part by the need to deal with a major issue in the company’s environment, both business and natural: namely, climate change—”figuring out how to ensure that coffee farming can be a part of the climate solution,” as Ben Packard puts it. “The convergence of climate change and ecosystem deterioration,” explains Seligmann, “is what creates stress on the ability of coffee farmers to produce crops.” The coffee bean grows only in specific climates, and those climates are particularly vulnerable to rising global temperatures. Thus if Starbucks intends to survive over the long term, it makes good business sense to ensure that it has access to its most important ingredient. “We’re the canary in the coal mine,” quips Jim Hanna, likening the fate of the first victim of unbreathable air to the company’s potential fate as one of the first victims of climate change.

Starbucks, then, sees sustainability as a matter of business survival, and if business isn’t the operative word, at least it’s at the top of the list. “If the only reason you’re invested in sustainability is because it’s the ‘right thing to do,’ ” says Hanna, “you’re in trouble.” A business enterprise needs to see some return on investment, and as Clarice Turner, VP of Starbucks of U.S. business, puts it, that return “can manifest itself in many ways.” Front-of-store recycling, for example, saves thousands of dollars annually in trash-hauling costs.” Of course, says Turner, working to reduce the company’s environmental impact “is the right thing to do,” but she hastens to add that highly visible sustainability efforts also “put a halo on your brand and business, which is very real to both consumers and employees. If done right, those efforts have a tangible bottom-line impact.”

Organizations exist for a variety of reasons. Some, like Starbucks, pursue profits. Others exist to serve the public good. But regardless of its purpose or mission, any organization must be properly aligned with its environment if it is to be effective. Of course, there are disparate views on how this alignment should be achieved and how an organization can legitimately pursue and then use revenues or profits. Some companies aggressively seek to maximize their profits, grow at any cost, and focus on nothing but what is best for the company. Others take a much different approach to business and actively work for the betterment of society, even when it means less profit for the owners. Clearly, then, the environmental context of business today is changing in unprecedented—and often unpredictable—ways.

2-1The Organization’s Environments

external environment
 is everything outside an organization’s boundaries that might affect it. It is actually most helpful, though, to talk about two separate external environments: the 
general environment
 and the 
task environment
. An organization’s 
internal environment
 consists of conditions and forces within the organization.

2-1aThe General Environment

Each of the following dimensions embodies conditions and events that have the potential to influence the organization in significant ways.

The Economic Dimension

economic dimension
 of an organization’s general environment is the overall health and vitality of the economic system in which the organization operates. Particularly important economic factors for business are general economic growth, inflation, interest rates, and unemployment. After several strong years of growth, the U.S. economy fell into recession during 2008 and only began to recover from it in 2012. During this period, energy and related prices jumped, business and economic growth slowed dramatically, and unemployment mushroomed as one struggling business after another made workforce cuts. As the economy began to recover in 2013, though, prices stabilized, businesses began to grow again, and unemployment began to decline as companies again started to hire new employees.

Consider how these factors affect an organization like McDonald’s. When unemployment is low, McDonald’s may have difficulty hiring new employees because higher paying full-time jobs are available elsewhere. But at the same time more people may be eating at McDonald’s because of its low prices. Similarly, low inflation means that the prices McDonald’s must pay for its supplies remain relatively constant, but it also is somewhat constrained from increasing the prices it charges consumers for a hamburger or milkshake. The economic dimension is also important to nonbusiness organizations. For example, during weak economic conditions, funding for state universities may drop, and charitable organizations such as the Salvation Army are asked to provide greater assistance at the same time that their incoming contributions dwindle. Similarly, hospitals are affected by the number of uninsured patients who come to their emergency rooms for treatment.

The Technological Dimension

technological dimension
 of the general environment is made up of the methods available for converting resources into products or services. Although technology is applied within the organization, the forms and availability of that technology come from the general environment. Computer-assisted manufacturing and design techniques, for example, allowed Boeing to simulate the more than three miles of hydraulic tubing that runs through its 787 aircraft. The results include decreased warehouse needs, higher-quality tube fittings, lower labor costs, and major time savings. Although some people associate technology with manufacturing firms, it is also relevant in the service sector. For example, just as an automobile follows a predetermined path along an assembly line as it is built, a hamburger at McDonald’s follows a predefined path as the meat is cooked, the burger assembled, and the finished product wrapped and bagged for a customer. The rapid infusion of web-based technologies into all areas of business also reflects the technological dimension. Another recent advancement is the rapid growth of integrated business software systems. Relatively new approaches to communication, ranging from social media to hardware, are also influencing businesses in many different ways.

Most people associate the word “technology” with “tangible” products such as airplanes, smartphones, and so forth. But technology also applies to service organizations as well. Take this food service operation, for instance. Workers are preparing and serving food using assembly-line technology pioneered in the manufacturing sector.

The Political–Legal Dimension

political–legal dimension
 of the general environment consists of government regulation of business and the relationship between business and government. This dimension is important for three basic reasons. First, the legal system partially defines what an organization can and cannot do. Although the United States is basically a free-market economy, major regulation of business activity still exits. McDonald’s, for example, is subject to a variety of political and legal forces, including food preparation standards and local zoning requirements.

Second, pro- or anti-business sentiment in government influences business activity. For example, during periods of pro-business sentiment, firms find it easier to compete and have fewer concerns about antitrust issues. On the other hand, during a period of anti-business sentiment, firms may find their competitive strategies more restricted and have fewer opportunities for mergers and acquisitions because of antitrust concerns. During the prolonged period of economic growth that ended in 2008, the U.S. government adopted a very “hands-off” approach to business, letting market forces determine business successes and failures. However, as the economy ground to a halt in 2008 and first one and then another industry began to stumble, critics began to point to lack of regulation and oversight as contributing factors. As a result, lawmakers began to take a much more pronounced interest in adopting new and stricter regulations for business.

Finally, political stability has ramifications for planning. No business wants to set up shop in another country unless trade relationships with that country are relatively well defined and stable. Hence, U.S. firms are more likely to do business in Germany, Mexico, and Canada than in Syria and Afghanistan. Similar issues are relevant to assessments of local and state governments. A new city council or governor can affect many organizations, especially small firms that do business in only one location and are susceptible to deed and zoning restrictions, property and school taxes, and the like.

McDonald’s has historically competed with other hamburger chains such as Burger King and Wendy’s. Recently, though, it has also taken on Starbucks with its line of McCafe premium coffee products and its more casual and comfortable in-store seating areas.

2-1bThe Task Environment

Because the general environment’s impact is often vague, imprecise, and long term, most organizations tend to focus attention on their task environment, which includes competitors, customers, suppliers, strategic partners, and regulators. Although the task environment is also quite complex, it provides useful information more readily than the general environment, because the manager can identify environmental factors of specific interest to the organization, rather than deal with the more abstract dimensions of the general environment. Figure 2.1 illustrates the task environment of McDonald’s.

Figure 2.1McDonald’s Task Environment

An organization’s task environment includes its competitors, customers, suppliers, strategic partners, and regulators. This figure clearly highlights how managers at McDonald’s can use this framework to identify and understand their key constituents.

© Cengage


An organization’s 
 are other organizations that compete with it for resources. The most obvious resources that competitors vie for are customer dollars. Nike and Under Armour are competitors, as are Albertson’s, Safeway, and Kroger. McDonald’s competes with other fast-food operations, such as Burger King, Wendy’s, Subway, and Dairy Queen; it has also taken on Starbucks with its McCafe line of premium coffee products. But competition also occurs between substitute products. Thus Ford competes with Yamaha (motorcycles), Schwinn (bicycles), and various public transportation systems for your transportation dollars; and Walt Disney World, Carnival Cruise Lines, and the National Park system compete for your vacation dollars. Nor is competition limited to business firms. Universities compete with trade schools, the military, other universities, and the external labor market to attract good students; and art galleries compete with one another to attract the best collections and exhibits.


A second dimension of the task environment is 
 or whoever pays money to acquire an organization’s products or services. Most McDonald’s customers are individuals who buy food. But customers need not be individuals. Schools, hospitals, government agencies, wholesalers, retailers, and manufacturers are just a few of the many kinds of organizations that may be major customers of other organizations. Some institutional customers, such as schools, prisons, and hospitals, also buy food in bulk from restaurants such as McDonald’s.


 are organizations that provide resources for other organizations. McDonald’s buys soft-drink products from Coca-Cola; individually packaged servings of salt, pepper, and ketchup from various suppliers; Big Mac ingredients from wholesale food processors; and napkins, sacks, and sandwich wrappers from packaging manufacturers. Besides material resources such as these, businesses also rely on suppliers for information (such as economic statistics), labor (in the form of employment agencies), and capital (from lenders such as banks). Some businesses strive to avoid depending exclusively on particular suppliers. Others, however, find it beneficial to create strong relationships with single suppliers.

Organizations can serve a variety of different kinds of customers. For example, customers can be individuals, the government, or other businesses. This pizza deliveryman, for example, is dropping off pizzas for the staff of a hospital emergency room.



 are elements of the task environment that have the potential to control, legislate, or otherwise influence an organization’s policies and practices. There are two important kinds of regulators. 
Regulatory agencies
 are created by the government to protect the public from certain business practices or to protect organizations from one another. Powerful federal regulatory agencies include the Environmental Protection Agency (EPA), the Securities and Exchange Commission (SEC), the Food and Drug Administration (FDA), and the Equal Employment Opportunity Commission (EEOC). Many of these agencies play important roles in protecting the rights of individuals. The FDA, for example, helps ensure that the food is free from contaminants; thus it is an important regulator for McDonald’s and Starbucks. There are also numerous state, regional, and local regulatory agencies that also affect businesses. Perhaps not surprisingly, some managers complain that there is too much government regulation. Most large companies must dedicate thousands of labor hours and hundreds of thousands of dollars a year to comply with government regulations. To complicate managers’ lives even more, different regulatory agencies sometimes provide inconsistent—and even contradictory—mandates.

The other basic form of regulator is the 
interest group
. Prominent interest groups include Mothers Against Drunk Driving (MADD), the National Rifle Association (NRA), the League of Women Voters, the Sierra Club, Ralph Nader’s Center for the Study of Responsive Law, Consumers Union, and industry self-regulation groups such as the Council of Better Business Bureaus. Although interest groups lack the official power of government agencies, they can exert considerable influence by using the media to call attention to their positions. MADD, for example, puts considerable pressure on alcoholic-beverage producers (to put warning labels on their products), automobile companies (to make it more difficult for intoxicated people to start their cars), local governments (to stiffen drinking ordinances), and bars and restaurants (to refuse to sell alcohol to people who are drinking too much).

Strategic Partners

Another dimension of the task environment is 
strategic partners
 (also called strategic allies)—two or more companies that work together in joint ventures or other partnerships. As shown in Figure 2.1, McDonald’s has several strategic partners. For example, it has one arrangement with Walmart whereby small McDonald’s restaurants are built inside some Walmart stores. The firm also has a long-term deal with Disney: McDonald’s promotes Disney movies in its stores, and Disney has allowed McDonald’s to open restaurants near its resorts. And many of the firm’s foreign stores are built in collaboration with local investors. Strategic partnerships help companies get from other companies the expertise they lack. The partnerships also help spread risk and open new market opportunities. Indeed, most strategic partnerships are actually among international firms. For example, Ford has had strategic partnerships with Volkswagen (sharing a distribution and service center in South America) and Nissan (building minivans in the United States). Even bitter rivals Ford and General Motors have recently worked together as strategic partners to design a new 10-speed transmission.

McDonald’s and Walmart have a strategic partnership. Under the terms of this partnership McDonald’s owns and operates restaurants inside many Walmart stores. Note, for example, the distinctive “Golden Arches” on this Walmart sign.

Marianna Day Massey/ZUMA Press/Los Angeles/CA/USA/Newscom

Doing Business on Planet Earth

Raising the CSR Bar

To celebrate its twentieth anniversary, Clif Bar & Co., a maker of organic nutrition foods and beverages, gave all of its employees—more than 250 of them—new bicycles. It may not be the workplace perk for everyone, but it caught the eye of Leon Kaye, a consultant specializing in corporate social responsibility (CSR). Kaye put the company’s bicycle giveaway on his list of the year’s “Top 10 Employee Engagement Strategies.”

As a matter of fact, bicycles figure prominently in Clif Bar’s “Cool Commute” program: Employees can take advantage of financial incentives for riding their bicycles to work, and those who missed out on a free bike can still get a $500 stipend toward the purchase of one. Other programs provide incentives for buying fuel-efficient cars and making eco-friendly home improvements. In turn, the “Cool Commute” program reflects two of Clif Bar’s five core values—”Sustaining Our Planet” and “Sustaining Our People.” The company is also committed to sustaining its community, business, and brands, and taken together, these five values constitute its “Five Aspirations.”

Kit Crawford, who co-owns Clif Bar with husband Gary Erickson, stresses “the interconnectivity of the Five Aspirations,” which, as she is also quick to point out, serves as the company’s “five bottom lines.” “Gary and I,” she says, “use these bottom lines … as a measurement of our return on investment,” and all five are “of equal importance” in determining how well the company is using its resources to achieve its goals. In addition, says Crawford, the five commitments ensure that “our people have a clear understanding of Clif Bar’s values.” By providing a clear “decision-making framework,” they also guide employees in “exploring, creating, and launching ideas that are in tune with the company’s priorities.” Finally, they figure into each employee’s annual review: “Our people,” explains Crawford, “receive specific feedback on their contributions to each of the Five Aspirations…. These assessments determine each employee’s bonus for the year.”

The company itself works out of a state-of-the-art solar-powered facility in Emeryville, California, where 80 percent of the waste is reused or recycled. There’s even a staff ecologist on the payroll. For founder Gary Erickson, the goals of sustaining the planet and sustaining his company’s people are inseparable threads in a single fabric of socially responsible leadership: “We want to sustain a business,” he says, “where people can live, not just make a living. We believe that if we provide meaningful work as well as something beyond work, people will do their jobs well and lead healthier, more balanced lives.”

Clif Bar thus maintains an elaborate wellness program that encourages employees to get out and enjoy the natural environment that they’re working to sustain. Employees who’ve been with the company for seven years, for instance, can take six to eight weeks of paid sabbatical, and the Emeryville facility boasts an in-house fitness center where employees can get paid time-off to work out under the guidance of full-time personal trainers.

How has all of this socially responsible conduct affected the bottom line—that is, the bottom line which is typically defined as how much money a company makes? In 1992, its first year of business, Clif Bar had $700,000 in sales. That figure doubled every year up to 1997, when sales hit $20 million. Since then, the company has grown rapidly (“stratospherically,” as Leon Kaye would have it), achieving a remarkable compounded annual growth rate of 23 percent in the ten years from 2002 to 2011, when sales reached $340 million. A year later, sales topped $500 million and have continued to grow ever since.

References: Leon Kaye, “Top 10 Employment Engagement Strategies,” TriplePundit, April 15, 2013,, accessed on January 2, 2017; Susan McPherson, “The Most Dynamic Social Innovation Initiatives of 2012,”, December 17, 2012,, accessed on January 2, 2017; Bob Vanourek and Gregg Vanourek, “‘Sustainable Leadership’: Interview with Kit Crawford,” Triple Crown Leadership, October 18, 2012,, accessed on January 2, 2017; Robert Girling, “Good Companies Like Clif Bar: How They Do It,” TriplePundit, July 17, 2012,, accessed on January 2, 2017; Great Place to Work, “Clif Bar & Company,” Great Rated, 2014,, accessed on January 2, 2017; and Lauren Drell, “Six Companies with Awesome Employee Perks,” Mashable, August 7, 2011,, accessed on January 2, 2017.

2-1cThe Internal Environment

Organizations also have an internal environment that consists of their owners, board of directors, employees, and physical work environment. (Another especially important part of the internal environment is the organization’s culture, discussed separately later in this chapter.)


 of a business are, of course, the people who have legal property rights to that business. Owners can be a single individual who establishes and runs a small business, partners who jointly own the business, individual investors who buy stock in a corporation, or other organizations. McDonald’s has 853.36 million shares of stock, each of which represents one unit of ownership in the firm. The family of McDonald’s founder Ray Kroc stills owns a large block of this stock, as do several large institutional investors. In addition, there are thousands of individuals who own just a few shares each. McDonald’s, in turn, owns other businesses. For example, it owns several large regional bakeries that supply its restaurants with buns. Each of these is incorporated as a separate legal entity and managed as a wholly owned subsidiary by the parent company. McDonald’s is also a partner in some Russian farms that grow potatoes to supply regional restaurants with french fries.

Board of Directors

A corporate 
board of directors
 is a governing body that is elected by the stockholders and charged with overseeing a firm’s general management to ensure that it is run to best serve the stockholders’ interests. Some boards are relatively passive: They perform a general oversight function but seldom get actively involved in how the company is really run. But this trend is changing, as more and more boards are carefully scrutinizing the firms they oversee and exerting more influence over how they are being managed. This trend has been accelerated by numerous recent business scandals. In some cases, board members have been accused of wrongdoing. In other cases, boards have been found negligent for failing to monitor the actions of the firm’s executives. At issue is the concept of corporate governance—who is responsible for governing the actions of a business? McDonald’s has a board of directors composed of 13 members. This board includes 3 inside members (full-time executives of the firm) and 10 outside members (individuals who do not work directly for the firm). This presumably allows decisions to be made in ways that protect the interests of diverse stakeholders.


An organization’s employees are also a major element of its internal environment. Of particular interest to managers today is the changing nature of the workforce, which is becoming increasingly more diverse in terms of gender, ethnicity, age, and other dimensions. Workers are also calling for more job ownership—either partial ownership in the company or at least more say in how they perform their jobs. Another trend in many firms is increased reliance on temporary workers—individuals hired for short periods of time with no expectation of permanent employment. Employers often prefer to use “temps” because they provide greater flexibility, earn lower wages, and often do not participate in benefits programs. But these managers also have to deal with what often amounts to a two-class workforce and with a growing number of employees who have no loyalty to the organization where they work because they may be working for a different one tomorrow. Our “Doing Business on Planet Earth” feature highlights an interesting twist on how one company is succeeding by providing its employees with some unusual perks.

Physical Work Environment

A final part of the internal environment is the organization’s actual physical environment and the work that people do. Some firms have their facilities in downtown skyscrapers, usually spread across several floors. Others locate in suburban or rural settings and may have facilities more closely resembling a college campus. Some facilities have long halls lined with traditional offices. Others have modular cubicles with partial walls and no doors. Pitney Bowes Credit Corporation remodeled its offices to create something like an indoor theme park with cobblestone look-alike carpet, a town square clock, a café, and a diner. Increasingly, newer facilities have an even more open arrangement, where people work in large rooms, moving among different tables to interact with different people on different projects. Freestanding computer workstations are available for those who need them, and a few small rooms might be off to the side for private business.

Corporate expense accounts are sometimes the subject of ethical lapses. For instance, these two colleagues are having lunch together and discussing business. In theory, it may be easy for one of them to “pad” the lunch expense so as to be reimbursed for more money than was actually spent.


Employee safety and health regulations have caused many organizations to pay more attention to their internal environment. This concern, in turn, has also fostered new business opportunities. Rebecca Boenigk, founder and CEO of Neutral Posture, turned a small operation in her garage into an international company selling neutral body posture chairs designed by her father, Dr. Jerome Congleton.

2-2The Ethical and Social Environment of Management

The ethical and social environment has become an especially important area for managers in the last few years. In this section, we first explore the concept of individual ethics and then describe social responsibility.

2-2aIndividual Ethics in Organizations

We define 
 as an individual’s personal beliefs about whether a behavior, action, or decision is right or wrong. Note that we define ethics in the context of the individual—people have ethics, whereas organizations do not. Likewise, what constitutes ethical behavior varies from one person to another. For example, one person who finds a $20 bill on the floor of an empty room may believe that it is okay to keep it, whereas another may feel compelled to turn it in to the lost-and-found department. Further, although 
ethical behavior
 is in the eye of the beholder, the term usually refers to behavior that conforms to generally accepted social norms. 
unethical behavior
, then, is behavior that does not conform to generally accepted social norms.

Managerial Ethics

Managerial ethics
 consists of the standards of behavior that guide individual managers in their work. One important area of managerial ethics is the treatment of employees by the organization. It includes, for example, hiring and firing, wages and working conditions, and employee privacy and respect. An example of how different managers might approach this area involves minimum wages. While the U.S. government sets a minimum hourly wage, this amount is often not enough to live above the poverty level in high-cost areas such as New York and San Francisco. Some managers might say that paying only the legal minimum is the right business practice, while others might be inclined to pay a wage more attuned to local conditions (sometimes called a living wage).

Numerous ethical issues stem from how employees treat the organization, especially in regard to conflicts of interest, secrecy and confidentiality, and honesty. A conflict of interest occurs when an employee’s decision potentially benefits the individual to the possible detriment of the organization. To guard against such practices, most companies have policies that forbid their buyers from accepting gifts from suppliers. Divulging company secrets is also clearly unethical. A few employees who work for businesses in highly competitive industries—electronics, software, and fashion apparel, for example—have been caught selling information about their companies’ plans to competitors. Another area of concern is honesty in general. Relatively common problems in this area include activities such as using a business telephone to make personal calls, using social media during work hours, stealing supplies, and padding expense accounts. Although most employees are inherently honest, organizations must nevertheless be vigilant to avoid problems with such behaviors.

Unethical behavior refers to behavior that does not conform to generally accepted social norms. Bribery is one form of behavior that is both illegal and unethical. This individual, for example, might be paying off a building inspector to get a favorable inspection or a customer to get a big order.

James Lauritz/Digital Vision/Getty Images

Managerial ethics also comes into play in the relationship between the firm and its employees with other economic agents. The primary agents of interest include customers, competitors, stockholders, suppliers, dealers, and unions. The behaviors between the organization and these agents that may be subject to ethical ambiguity include advertising and promotions, financial disclosures, ordering and purchasing, shipping and solicitations, bargaining and negotiation, and other business relationships.

For example, state pharmacy boards are charged with overseeing prescription drug safety in the United States. All told, almost 300 pharmacists serve on such boards. One study found that 72 of these pharmacists were actually employees of major drugstore chains and supermarket pharmacies. These arrangements, while legal, could create the potential for conflicts of interest because they might give the pharmacist’s employers influence over the regulatory system designed to monitor their own business practices.

Another recent area of concern involves financial reporting by various e-commerce firms. Because of the complexities inherent in valuing the assets and revenues of these firms, some of them have been very aggressive in presenting their financial position in a highly positive light. And at least a few firms have substantially overstated their earnings projections to entice more investment. Moreover, some of today’s accounting scandals in traditional firms have stemmed from similarly questionable practices. For example, Diamond Foods, a distributor of nuts and popcorn snacks, had to restate its earnings twice because it had improperly accounted for $80 million in payments to almond growers.

Managing Ethical Behavior

Spurred partially by increased awareness of ethics scandals in business and partially by a sense of enhanced corporate consciousness about the distinction between ethical and unethical behaviors, many organizations have reemphasized ethical behavior on the part of employees. This emphasis takes many forms, but any effort to enhance ethical behavior must begin with top management. It is top managers, for example, who establish the organization’s culture and define what will and what will not be acceptable behavior. Some companies have also started offering employees training in how to cope with ethical dilemmas. At Boeing, for example, line managers lead training sessions for other employees, and the company has an ethics committee that reports directly to the board of directors. The training sessions involve discussions of different ethical dilemmas that employees might face and how managers might handle those dilemmas. Chemical Bank, Halliburton, and Xerox also have ethics training programs for their managers. Still, issues continue to arise. For instance, one recent study found an increase in the number of employees who called in sick when they were not, in fact, ill but just wanted to have a day off.

Organizations are also making greater efforts to formalize their ethical standards. Some, such as General Mills and Johnson & Johnson, have prepared guidelines that detail how employees are to treat suppliers, customers, competitors, and other constituents. Others, such as Whirlpool, Texas Instruments, and Hewlett-Packard, have developed formal 
code of ethics
—written statements of the values and ethical standards that guide the firms’ actions. Of course, firms must adhere to such codes if they are to be of value. In one now-infamous case, Enron’s board of directors voted to set aside the firm’s code of ethics to implement a business plan that was in violation of that code.

Of course, no code, guideline, or training program can truly substitute for the quality of an individual’s personal judgment about what is right behavior and what is wrong behavior in a particular situation. Such devices may prescribe what people should do, but they often fail to help people understand and live with the consequences of their choices. Making ethical choices may lead to very unpleasant outcomes—firing, rejection by colleagues, and the forfeiture of monetary gain, to name a few. Thus, managers must be prepared to confront their own conscience and weigh the options available when making difficult ethical decisions.

2-2bEmerging Ethical Issues

Ethical scandals have become almost commonplace in today’s world. Ranging from business and sports to politics and the entertainment industry, these scandals have rocked stakeholder confidence and called into question the moral integrity of our society. At the same time, most women and men today conduct themselves and their affairs in accordance with high ethical standards. Hence, as we summarize several emerging ethical issues in organizations, it is important to remember that one cannot judge everyone by the transgressions of a few.

Ethical Leadership

In recent years, the media have been rife with stories about unscrupulous corporate leaders. For every unethical senior manager, of course, there are many highly ethical ones. But the actions of such high-profile deposed executives as Mark Hurd (Hewlett Packard), Kenneth Lay (Enron), and Allen Stanford (Stanford Financial Group) have substantially increased the scrutiny directed at all executives. As a direct result, executives everywhere are expected to exhibit nothing but the strongest ethical conduct. This leadership, in turn, is expected to help set the tone for the rest of the organization and to establish both norms and a culture that reinforce the importance of ethical behavior.

How businesses interact with the natural environment plays a complex role in social responsibility. This scene alone, for example, shows a wind farm set near an industrial site spewing black smoke into the environment.

AniphaeS/Getty Images

The basic premise behind ethical leadership is that because leaders serve as role models for others, their every action is subject to scrutiny. If a senior executive exercises questionable judgment, this sends a signal to others that such actions are acceptable. This signal may, in turn, be remembered by others when they face similar situations. As a result, CEOs such as American Express’s Kenneth Chenault and Starbucks’ Howard Schultz are now being held up as the standard against which others are being measured. The basic premise is that CEOs must set their company’s moral tone by being honest and straightforward and by taking responsibility for any shortcomings that are identified. To support this view, Congress passed the 
Sarbanes–Oxley Act of 2002
, requiring CEOs and CFOs to vouch personally for the truthfulness and fairness of their firms’ financial disclosures. The law also imposes tough new measures to deter and punish corporate and accounting fraud and corruption.

Corporate Governance

A related area of emerging concern is ethical issues in corporate governance. As discussed earlier in this chapter, the board of directors of a public corporation is expected to ensure that the business is being properly managed and that the decisions made by its senior management are in the best interests of shareholders and other stakeholders. But many of the recent ethical scandals discussed here actually started with a breakdown in the corporate governance structure. For instance, World-Com’s board once approved a personal loan to the firm’s then-CEO, Bernard Ebbers, for $366 million, even though there was little evidence that he could repay it. And Tyco’s board approved a $20 million bonus for one of its own members for helping with the acquisition of another firm. Boards of directors are also criticized when they are seen as not being sufficiently independent from senior management. Only 3 of the 13 directors at McDonald’s are also members of the firm’s top management team.

Ethics and Information Technology

A final set of issues that has emerged in recent times involves information technology. Among the specific focal points in this area are individual rights to privacy and individuals’ potential abuse of information technology. Indeed, online privacy has become a hot topic as companies sort out the related ethical and management issues. Both Facebook and Google have come under fire in recent years when it was discovered that these firms were looking into ways to track people’s movement as individuals logged into the sites.

One way in which management can address these concerns is to post a privacy policy on the company website. The policy should explain exactly what data the company collects and who gets to see the data. It should also allow people a choice about having their information shared with others and indicate how people can opt out of data collection. Disney, IBM, and other companies support this position by refusing to advertise on websites that have no posted privacy policies.

In addition, companies can offer web surfers the opportunity to review and correct information that has been collected, especially medical and financial data. In the offline world, consumers are legally allowed to inspect their own credit and medical records. In the online world, this kind of access can be costly and cumbersome, because data are often spread across several computer systems. Despite the technical difficulties, government agencies are already working on online privacy guidelines, which means that companies will need internal guidelines, training, and leadership to ensure that they are in compliance.

2-2cSocial Responsibility in Organizations

As we have seen in this chapter, ethics are associated with individuals and their decisions and behaviors. Organizations themselves do not have ethics, but they relate to their environments in ways that often involve ethical dilemmas and decisions. These situations are generally referred to within the context of the organization’s 
social responsibility
. Specifically, social responsibility is the set of obligations an organization has to protect and enhance the societal context in which it functions. Some of the more salient arguments on both sides of this contemporary debate are summarized in Figure 2.2 and are further explained in the following sections.

Figure 2.2Arguments for and against Social Responsibility

Although many people want everyone to see social responsibility as a desirable aim, there are in fact several strong arguments that can be advanced both for and against social responsibility. Hence organizations and their managers should carefully assess their own values, beliefs, and priorities when deciding which stance and approach to take regarding social responsibility.

© Cengage

Arguments for Social Responsibility

People who argue in favor of social responsibility claim that—because organizations create many of the problems that need to be addressed, such as air and water pollution and resource depletion—organizations should play a major role in solving them. They also argue that, because corporations are legally defined entities with most of the same privileges as private citizens, businesses should not try to avoid their obligations as citizens. Advocates of social responsibility point out that, whereas governmental organizations have stretched their budgets to the limit, many large businesses often have surplus revenues that could be used to help solve social problems. For example, Dell donates surplus computers to schools, and many restaurants give leftover food to homeless shelters.

Arguments against Social Responsibility

Some people, however, including the famous economist Milton Friedman, argue that widening the interpretation of social responsibility will undermine the U.S. economy by detracting from the basic mission of business: to earn profits for owners. For example, money that Chevron or General Electric contributes to social causes or charities is money that could otherwise be distributed to owners in the form of dividends. Shareholders of Ben & Jerry’s Homemade Holdings once expressed outrage when the firm refused to accept a lucrative exporting deal to Japan simply because the Japanese distributor did not have a strong social agenda.

Another objection to increasing the social responsibility of businesses reflects the position that corporations already wield enormous power and that involvement in social programs gives them even more power. Still another argument against social responsibility focuses on the potential for conflicts of interest. Suppose, for example, that one manager is in charge of deciding which local social program or charity will receive a large grant from her business. The local civic opera company (a not-for-profit organization that relies on contributions for its existence) might offer her front-row tickets for the upcoming season in exchange for her support. If opera is her favorite form of music, she may be tempted to direct the money toward the local company when it might actually be needed more in other areas.

Finally, critics argue that organizations lack the expertise to understand how to assess and make decisions about worthy social programs. How can a company truly know, they ask, which cause or program is most deserving of its support or how money might best be spent?

2-2dManaging Social Responsibility

The demands for social responsibility placed on contemporary organizations by an increasingly sophisticated and educated public are probably stronger than ever. As we have seen, there are pitfalls for managers who fail to adhere to high ethical standards and for companies that try to circumvent their legal obligations. Organizations therefore need to fashion an approach to social responsibility in the same way that they develop any other business strategy. In other words, they should view social responsibility as a major challenge that requires careful planning, decision making, consideration, and evaluation. They may accomplish this through both formal and informal dimensions of managing social responsibility.

Formal Organizational Dimensions

Some dimensions of managing social responsibility are formal and planned activities on the part of the organization. The formal organizational dimensions through which businesses can manage social responsibility include legal compliance, ethical compliance, and philanthropic giving.

Legal compliance
 is the extent to which the organization conforms to local, state, federal, and international laws. The task of managing legal compliance is generally assigned to the appropriate functional managers. For example, the organization’s top human resource executive is responsible for ensuring compliance with regulations concerning hiring, pay, and workplace safety and health. Likewise, the top finance executive generally oversees compliance with securities and banking regulations. The organization’s legal department is likely to contribute to this effort by providing general oversight and answering queries from managers about the appropriate interpretation of laws and regulations. Unfortunately, though, legal compliance may not be enough—in some cases, for instance, perfectly legal accounting practices have still resulted in deception and other problems.

Ethical compliance
 is the extent to which the organization’s members follow basic ethical (and legal) standards of behavior. We noted earlier that organizations have increased their efforts in this area—providing training in ethics and developing guidelines and codes of conduct, for example. These activities serve as vehicles for enhancing ethical compliance. Many organizations also establish formal ethics committees, which may be asked to review proposals for new projects, to help evaluate new hiring strategies or to assess a new environmental protection plan. They might also serve as a peer review panel to evaluate alleged ethical misconduct by an employee.

philanthropic giving
 is the awarding of funds or gifts to charities or other worthy causes. Target routinely gives a share pretax income to charity and social programs. Omaha Steaks gives more than $100,000 per year to support the arts. Giving across national boundaries is also becoming more common. For example, Alcoa gave $112,000 to a small town in Brazil to build a sewage treatment plant. And Japanese firms such as Sony and Mitsubishi make contributions to many social programs in the United States. During the recession that began in 2008 many corporations cutback on their charitable gifts and have only recently began to increase them again. Moreover, many firms that make contributions are increasingly targeting them to programs or areas where the firm will get something in return. For example, firms today are more likely than they were a few years ago to give money to job-training programs rather than to the arts. The logic is that they get a more direct payoff from the former type of contribution—in this instance, a better-trained workforce from which to hire new employees.

Informal Organizational Dimensions

In addition to these formal dimensions of managing social responsibility, there are also informal ones. Leadership, organizational culture, and how the organization responds to whistle-blowers all help shape and define people’s perceptions of the organization’s stance on social responsibility.

Leadership practices and organizational culture can go a long way toward defining the social responsibility stance an organization and its members will adopt. As described earlier in this chapter, for example, ethical leadership often sets the tone for the entire organization. For example, Johnson & Johnson executives for years provided a consistent message to employees that customers, employees, communities where the company did business, and shareholders were all important—and primarily in that order. Thus, when packages of poisoned Tylenol showed up on store shelves, Johnson & Johnson employees did not need to wait for orders from headquarters to know what to do: They immediately pulled all the packages from shelves before any other customers could buy them. From a different perspective, Walmart was charged with bribing officials in other countries in order to sidestep local regulations and expedite building permits for new stores. Investigators alleged that top managers, including the CEO at the time, knew about these practices but did nothing to stop them.

 is an employee’s disclosure of illegal or unethical conduct by others within the organization. How an organization responds to this practice often indicates its values as they relate to social responsibility. Whistle-blowers may have to proceed through a number of channels to be heard, and they may even get fired for their efforts. Many organizations, however, welcome their contributions. A person who observes questionable behavior typically first reports the incident to his or her boss. If nothing is done, the whistle-blower may then inform higher-level managers or an ethics committee, if one exists. Eventually, the person may have to go to a regulatory agency or even the media to be heard. Harry Markopolos, a portfolio manager at Rampart Investments, spent nine years trying to convince the SEC that a money management firm run by Bernard Madoff was falsifying the results it was reporting to investors. Only when the U.S. economy went into recession in 2008 did the truth about Madoff come out. In response, the SEC announced plans to overhaul its whistle-blowing system. More recently, Bradley Birkenfeld provided evidence proving that Swiss banking giant UBS was evading corporate taxes. UBS eventually was fined $780 million for its transgressions.

2-3The International Environment of Management

Another important competitive issue for managers today is the international environment. After describing recent trends in international business, we examine levels of internationalization and the international context of business.

Main content

2-3aTrends in International Business

The stage for today’s international business environment was set at the end of World War II. Businesses in war-torn countries such as Germany and Japan had no choice but to rebuild from scratch. Consequently, they had to rethink every facet of their operations, including technology, production, finance, and marketing. Although these countries took many years to recover, they eventually did so, and their economic systems were subsequently poised for growth. During the same era, many U.S. companies grew somewhat complacent. Their customer base was growing rapidly. Increased population, spurred by the baby boom, and increased affluence resulting from the postwar economic boom greatly raised the average person’s standard of living and expectations. The U.S. public continually wanted newer and better products and services. Many U.S. companies profited greatly from this pattern, but most were also guilty of taking it for granted.

U.S. firms are no longer isolated from global competition or the global market. A few simple numbers help tell the full story of international trade and industry. First of all, the volume of international trade increased more than 3,000 percent between 1960 and 2015. Further, although 134 of the world’s largest corporations are headquartered in the United States, there are also 68 in Japan, 35 in France, 34 in Germany, and 30 in Britain. Within certain industries, the preeminence of non-U.S. firms is even more striking. For example, only three of the world’s ten largest banks and one of the largest electronics companies are based in the United States. Only two of the ten largest chemical companies are U.S. firms. On the other hand, U.S. firms comprise six of the eight largest aerospace companies, three of the seven largest airlines, four of the ten largest information technology companies, four of the five largest diversified financial companies, and six of the ten largest retailers.

Importing and exporting are common forms of international business. Exporters load their products into cargo containers such as these. The containers are shipped to foreign markets and unloaded for distribution and sale there.

Cristina Negoita/

U.S. firms are also finding that international operations are an increasingly important element of their sales and profits. For example, in 2016 ExxonMobil realized 67 percent of its revenues and 61 percent of its profits abroad. For Avon, these percentages were 73 percent and 68 percent, respectively. Hollywood is also getting in on the act. Fantastic Beasts and Where to Find Them grossed a healthy $224 million in the United States but then raked in another $529 million abroad. Overseas markets are even more important when a film bombs domestically. For example, Warcraft cost $150 million to make and then earned a paltry $47 million at the domestic box office. But $386 million in foreign sales pushed the movie into the black. From any perspective, then, it is clear that we live in a truly global economy. Virtually all businesses today must be concerned with the competitive situations they face in lands far from home and with how companies from distant lands are competing in their homelands.

2-3bLevels of International Business Activity

Firms can choose various levels of international business activity as they seek to gain a competitive advantage in other countries. The general levels are exporting and importing, licensing, strategic alliances, and direct investment. Table 2.1 summarizes the advantages and disadvantages of each approach.

Table 2.1

Advantages and Disadvantages of Different Approaches to Internationalization

Approach to Internationalization



Importing or exporting

1. Small cash outlay

2. Little risk

3. No adaptation necessary

1. Tariffs and taxes

2. High transportation costs

3. Government restrictions


1. Increased profitability

2. Extended profitability

1. Inflexibility

2. Competition

Strategic alliances or joint ventures

1. Quick market entry

2. Access to materials and technology

1. Shared ownership (limits control and profits)

Direct investment

1. Enhanced control

2. Existing infrastructure

1. Complexity

2. Greater economic and political risk

3. Greater uncertainty

© Cengage

Exporting and Importing

Importing or exporting (or both) is usually the first type of international business in which a firm gets involved. 
, or making a product in the firm’s domestic marketplace and selling it in another country, can involve both merchandise and services. 
 is bringing a good, service, or capital into the home country from abroad. For example, automobiles (Mazda, Ford, Volkswagen, Mercedes-Benz, and Ferrari) and stereo equipment (Sony, Bang & Olufsen, and Sanyo) are routinely exported by their manufacturers to other countries. Likewise, many wine distributors buy products from vineyards in France, Italy, or the United States and import them into their own country for resale. U.S. sports brands, such as team jerseys and logo caps, have become one of the latest hot exports.

When organizations decide to increase their level of internationalization, they can adopt several strategies. Each strategy is a matter of degree, as opposed to being a discrete and mutually exclusive category. And each has unique advantages that must be considered.


A company may prefer to arrange for a foreign company to manufacture or market its products under a licensing agreement. Factors leading to this decision may include excessive transportation costs, government regulations, and home production costs. 
 is an arrangement whereby a firm allows another company to use its brand name, trademark, technology, patent, copyright, or other assets. In return, the licensee pays a royalty, usually based on sales. Franchising, a special form of licensing, is also widely used in international business. Kirin Brewery, Japan’s largest producer of beer, wanted to expand its international operations but feared that the time involved in shipping it from Japan would cause the beer to lose its freshness. Thus it has entered into a number of licensing arrangements with breweries in other markets. These brewers make beer according to strict guidelines provided by the Japanese firm and then package and market it as Kirin Beer. They pay a royalty to Kirin for each case sold. Molson produces Kirin in Canada under such an agreement, and the Charles Wells Brewery does the same in England.

Strategic Alliances

In a 
strategic alliance
, two or more firms jointly cooperate for mutual gain. For example, Unisys and Oracle have a strategic alliance that provides customers with the service and technology of Unisys and the enterprise software of Oracle. A 
joint venture
 is special type of strategic alliance in which the partners actually share ownership of a new enterprise. Strategic alliances have enjoyed a tremendous upsurge in the past few years.

Direct Investment

Another level of commitment to internationalization is direct investment. 
Direct investment
 occurs when a firm headquartered in one country builds or purchases operating facilities or subsidiaries in a foreign country. The foreign operations then become wholly owned subsidiaries of the firm. Examples are British Petroleum’s acquisition of Amoco, Dell Computer’s massive factory in China, and the newest Disney theme park in Shanghai. Coca-Cola invested $150 million to build a new bottling and distribution network in India. Similarly, PepsiCo paid $4.2 billion for a Russian yogurt company. Many U.S. firms use maquiladoras for the same purpose. 
 are light assembly plants built in northern Mexico close to the U.S. border. The plants are given special tax breaks by the Mexican government, and the area is populated with workers willing to work for low wages.

Licensing can allow a company to extend the life of its technology. For instance, older versions of computer hardware and software that have limited markets in industrialized countries may still be widely used in lessdeveloped parts of the world. This Egyptian library, for example, uses computers that have little market value in the United States.

2-3cThe Context of International Business

Managers involved in international business should also be aware of the cultural environment, controls on international trade, the importance of economic communities, and the role of the GATT and WTO.

The Cultural Environment

One significant contextual challenge for the international manager is the cultural environment and how it affects business. A country’s culture includes all the values, symbols, beliefs, and language that guide behavior. Cultural values and beliefs are often unspoken; they may even be taken for granted by those who live in a particular country. Cultural factors do not necessarily cause problems for managers when the cultures of two countries are similar. Difficulties can arise, however, when there is little overlap between a manager’s home culture and the culture of the country in which business is to be conducted. For example, most U.S. managers find the culture and traditions of England relatively familiar. The people of both countries speak the same language and share strong historical roots, and there is a history of strong commerce between the two countries. When U.S. managers begin operations in Vietnam, the People’s Republic of China, or the Middle East, however, many of those commonalities disappear.

Cultural differences between countries can have a direct impact on business practice. For example, the religion of Islam teaches that people should not make a living by exploiting the misfortune of others; as a result, charging interest is seen as immoral. This means that in Saudi Arabia, few businesses provide towing services to transport stalled cars to repair shop (because doing so would be capitalizing on misfortune), and in the Sudan, banks cannot pay or charge interest. Given these cultural and religious constraints, those two businesses—automobile towing and banking—seem to hold little promise for international managers in those particular countries!

Some cultural differences between countries can be even more subtle and yet have a major impact on business activities. For example, in the United States most managers clearly agree about the value of time. Most U.S. managers schedule their activities very tightly and then try hard to adhere to their schedules. Other cultures do not put such a premium on time. In the Middle East, managers do not like to set appointments, and they rarely keep appointments set too far into the future. U.S. managers interacting with managers from the Middle East might misinterpret the late arrival of a potential business partner as a negotiation ploy or an insult, when it is merely a simple reflection of different views of time and its value.

Language itself can be an important factor. Beyond the obvious and clear barriers posed when people speak different languages, subtle differences in meaning can also play a major role. For example, Imperial Oil of Canada markets gasoline under the brand name Esso. When the firm tried to sell its gasoline in Japan, it learned that esso means “stalled car” in Japanese. Likewise, when Chevrolet first introduced a U.S. model called the Nova in Latin America, General Motors executives could not understand why the car sold poorly. They eventually learned, though, that, in Spanish, no va means “it doesn’t go.” The color green is used extensively in Muslim countries, but it signifies death in some other lands. The color associated with femininity in the United States is pink, but in many other countries yellow is the most feminine color. And when Disney was initially promoting one of its theme parks in Hong Kong, its print ads featured a family consisting of two parents and two children, failing to consider that the Chinese government limits most families to a single child. As a result, people who saw the ad were confused until Disney relaunched the campaign to show parents and a single child visiting the park.

Controls on International Trade

Another element of the international context that managers need to consider is the extent to which there are controls on international trade. These controls include tariffs, quotas, export restraint agreements, and “buy national” laws. A 
 is a tax collected on goods shipped across national boundaries. Tariffs can be collected by the exporting country, by countries through which goods pass, or by the importing country. Import tariffs, which are the most common, can be levied to protect domestic companies by increasing the cost of foreign goods. Japan charges U.S. tobacco producers a tariff on cigarettes imported into Japan as a way to keep their prices higher than the prices charged by domestic firms. Tariffs can also be levied, usually by less developed countries, to raise money for the government.

Quotas are the most common form of trade restriction. A 
 is a limit on the number or value of goods that can be traded. The quota amount is typically designed to ensure that domestic competitors will be able to maintain a certain market share. Honda is allowed to import 425,000 autos each year into the United States. This quota is one reason why Honda opened manufacturing facilities here. The quota applies to cars imported into the United States, but the company can produce as many other cars within U.S. borders as it wants; such cars are not considered imports. 
Export restraint agreements
 are designed to convince other governments to limit voluntarily the volume or value of goods exported to or imported from a particular country. They are, in effect, export quotas. Japanese steel producers voluntarily limit the amount of steel they send to the United States each year.

“Buy national” legislation gives preference to domestic producers through content or price restrictions. Several countries have this type of legislation. Brazil requires that Brazilian companies purchase only Brazilian-made computers. The United States requires that the Department of Defense purchase military uniforms manufactured only in the United States, even though the price of foreign uniforms would be only half as much. Mexico requires that 50 percent of the parts of cars sold in Mexico be manufactured inside its own borders.

Most countries impose controls on international trade. These U.S. Customs Inspectors in El Paso, Texas, are verifying that proper tariffs were paid on merchandise being exported from Mexico into the United States.

Economic Communities

Just as government policies can either increase or decrease the political risk that international managers face, trade relations between countries can either help or hinder international business. Relations dictated by quotas, tariffs, and so forth can hurt international trade. There is currently a strong movement around the world to reduce many of these barriers. This movement takes its most obvious form in international economic communities.

An international 
economic community
 is a set of countries that agrees to markedly reduce or eliminate trade barriers among member nations. The first (and in many ways still the most important) of these economic communities is the European Union. The 
European Union
 (or EU, as it is often called) can be traced to 1957 when Belgium, France, Luxembourg, Germany, Italy, and the Netherlands signed the Treaty of Rome to promote economic integration. Between 1973 and 1986 these countries were joined by Denmark, Ireland, the United Kingdom, Greece, Spain, and Portugal, and the group became known first as the European Committee and then as the European Union. Austria, Finland, and Sweden joined the EU in 1995; 12 additional countries (mostly from the formerly communist-controlled eastern European region) joined between 2004 and 2007, bringing the EU’s membership to 27 countries. For years these countries have followed a basic plan that led to the systematic elimination of most trade barriers. The new market system achieved significantly more potential when most of the EU members eliminated their home currencies (such as French francs and Italian lira) beginning on January 1, 2002, and adopted a new common currency called the euro. The EU was dealt a setback in 2016, however, when the citizens of Great Britain voted to withdraw from the EU. This withdrawal will take some time to negotiate, however, and its effects will be complex and potentially far reaching.

Another important economic community encompasses the United States, Canada, and Mexico. These countries have long been major trading partners with one another; more than 80 percent of Mexico’s exports go to the United States, and more than 50 percent of Mexico’s imports come from the United States. During the last several years, these countries have negotiated a variety of agreements to make trade even easier. The most important of these, the 
North American Free Trade Agreement (NAFTA)
, eliminates many of the trade barriers—such as quotas and tariffs—that existed previously. During his campaign for U.S. president in 2016, Donald Trump argued that NAFTA had hurt the U.S. economy and pledged to work toward eliminating it.

The Role of the GATT and WTO

The context of international business is also increasingly being influenced by the 
General Agreement on Tariffs and Trade (GATT)
 and the World Trade Organization (WTO). The GATT was first negotiated following World War II in an effort to avoid trade wars that would benefit rich nations and harm poorer ones. Essentially, the GATT is a trade agreement intended to promote international trade by reducing trade barriers and making it easier for all nations to compete in international markets. The GATT was a major stimulus to international trade after it was first ratified in 1948 by 23 countries; by 1994, a total of 117 countries had signed the agreement.

One key component of the GATT was the identification of the so-called most favored national (MFN) principle. This provision stipulates that if a country extends preferential treatment to any other nation that has signed the agreement, then that preferential treatment must be extended to all signatories to the agreement. Members can extend such treatment to nonsignatories as well, but they are not required to do so.

World Trade Organization (WTO)
 came into existence on January 1, 1995. The WTO replaced the GATT and absorbed its mission. The WTO is headquartered in Geneva, Switzerland, and currently includes 164 member nations and 20 observer countries. Members are required to open their markets to international trade and to follow WTO rules. The WTO has three basic goals:

1. To promote trade flows by encouraging nations to adopt nondiscriminatory and predictable trade policies

2. To reduce remaining trade barriers through multilateral negotiations

3. To establish impartial procedures for resolving trade disputes among its members

The WTO is certain to continue to play a major role in the evolution of the global economy. At the same time, it has also become a lightning rod for protesters and other activists, who argue that the WTO focuses too narrowly on globalization issues to the detriment of human rights and the environment.

2-4The Organization’s Culture

As we noted earlier in this chapter, an especially important part of an organization’s internal environment is its culture. 
Organizational culture
 is the set of values, beliefs, behaviors, customs, and attitudes that helps the organization’s members understand what it stands for, how it does things, and what it considers important. The importance of organizational culture is introduced in our “Leading the Way” feature.

2-4aThe Importance of Organizational Culture

Culture determines the organization’s “feel.” A strong and clear culture can play an important role in the competitiveness of a business. At the same time, though, there is no universal culture that will help all organizations. The stereotypic image of Microsoft, for example, is that of a workplace where people dress very casually and work very long hours. In contrast, the image of Bank of America for some observers is that of a formal setting with rigid work rules and people dressed in conservative business attire. And Texas Instruments likes to talk about its “shirtsleeve” culture, in which ties are avoided and few managers even wear jackets. Southwest Airlines maintains a culture that stresses fun and excitement.

Of course, the same culture is not necessarily found throughout an entire organization. For example, the sales and marketing department may have a culture quite different from that of the operations and manufacturing department. Regardless of its nature, however, culture is a powerful force in organizations, one that can shape the firm’s overall effectiveness and long-term success. Companies that can develop and maintain a strong culture, such as Starbucks and Procter & Gamble, tend to be more effective than companies that have trouble developing and maintaining a strong culture, such as Kmart.

Main content

2-4bDeterminants of Organizational Culture

Where does an organization’s culture come from? Typically, it develops and blossoms over a long period of time. Its starting point is often the organization’s founder. For example, James Cash Penney believed in treating employees and customers with respect and dignity. Employees at JC Penney are still called associates rather than employees (to reflect partnership), and customer satisfaction is of paramount importance. The impact of Sam Walton, Ross Perot, and Walt Disney is still felt in the organizations they founded. As an organization grows, its culture is modified, shaped, and refined by symbols, stories, heroes, slogans, and ceremonies. And many decisions at Walt Disney Company today are still framed by asking, “What would Walt have done?”

Corporate success and shared experiences also shape culture. For example, Hallmark Cards has a strong culture derived from its years of success in the greeting card industry. Employees speak of “the Hallmark family” and care deeply about the company; many have worked there for years. At Kmart, in contrast, the culture is quite weak, the management team changes rapidly, and few people sense any direction or purpose in the company. The differences in culture at Hallmark and Kmart are in part attributable to past successes and shared experiences.

2-4cManaging Organizational Culture

How can managers deal with culture, given its clear importance but intangible nature? Essentially, the manager must understand the current culture and then decide whether it should be maintained or changed. By understanding the organization’s current culture, managers can take appropriate actions. Culture can also be maintained by rewarding and promoting people whose behaviors are consistent with the existing culture and by articulating the culture through slogans, ceremonies, and so forth.

Leading the Way

Happy Fit

Tony Hsieh (pronounced Shay), the son of Taiwanese immigrants, started his first company in 1996, just after he graduated from Harvard. LinkExchange was an ingenious Internet advertising network that permitted members to exchange ad space on their own sites in exchange for space on other members’ sites. Two and a half years later, Hsieh and his partner sold their company to Microsoft for $265 million. It wasn’t the money, says Hsieh; LinkExchange “just wasn’t a fun place to work at anymore.”

“It worked great,” he recalls, “until we got to about 15 or 20 people, and then we ran out of friends to hire. So then we started hiring people who had all the right skill sets but weren’t necessarily great for the company culture. By the time we got to 100 people, I myself dreaded getting out of bed in the morning.” He knew it was time to move on, recalls Hsieh, when “the culture just went completely downhill.”

What does Hsieh want in a company culture? “For me,” he says, “the initial motivation was what would make me happy…. If I was going to go to an office, I wanted it to be with people I would choose to be around even if we didn’t have to work together.” Fortunately, Hsieh had a choice of the office he worked in the people he worked with. He originally joined an online shoe retailer as an investor and advisor but soon became co-CEO, and the company, now known as Zappos, reached two of his chief goals by 2008: It topped $1 billion in sales (two years early) and made Fortune magazine’s list (at #23) of the top 100 companies to work for.

In November 2009, Hsieh and his partners sold Zappos to Amazon for $1.2 billion. Amazon agreed to let its new acquisition operate independently, and Hsieh agreed to stay on as CEO—for a salary of $36,000. “That’s my way of making sure that I’m actually there for my own happiness,” explains Hsieh, “not for the money.” This time, he was determined to foster the kind of company culture that he deemed optimum for both personal satisfaction and business success: “I didn’t want to repeat the same mistake I’d made at” LinkExchange, where, he admits, we hadn’t “paid any attention to company culture [because] we just didn’t know any better.”

As far as Hsieh is concerned, “company culture is all about making employees happy,” and Zappos is certainly an employee-friendly workplace: cafeteria food is free, for instance, and the company covers all medical benefits. In November 2013, however, Hsieh unveiled plans to take his concept of “company culture” a giant step further: By the end of 2014, he announced, Zappos would be a full-fledged holacracy. It’s one of the latest concepts in radical management, and, basically, it calls for two things that should make employees happy: Bosses quit being bosses, and all employees are authorized to do whatever they want (especially to experiment with innovative ideas) until they entirely screw up. The CEO gives up his or her centralized authority, and the whole company is reorganized into decentralized teams, usually called “circles,” that choose their own goals and assign their own roles in order to perform whatever organizational task needs to be done.

According to Hsieh, holacracy holds out the possibility of turning the bureaucratic model of organization into one that reflects the model of a city. He points out that when cities double in size, innovation and productivity per citizen go up by 15 percent, whereas corporations that double in size typically decline on both measures. Why? “In a city,” says Hsieh, “people are self-organizing.” He wants Zappos to “function more like a city and less like an organization” because self-organized employees “actually increase the innovation and productivity of an organization.” In theory, everyone should be happier.

References: Rob Wallace and Marc Dorian, “More Than Money: Surprising Stories of the Superrich and How They Gave Back,” ABC News, October 28, 2011,, accessed on January 2, 2017; Peter Hopkins, “Big Think Interview with Tony Hsieh,” Big Think, October, 11, 2010,, accessed on July 22, 2014; Gregory Ferenstein, “Zappos Just Abolished Bosses: Inside Tech’s Latest Management Craze,” Vox, July 11, 2014,, accessed on January 2, 2017; Nicole Leinbach-Reyhle, “Shedding Hierarchy: Could Zappos Be Setting an Innovative Trend?” Forbes, July 15, 2014,, accessed on January 2, 2017.

But managers must walk a fine line between maintaining a culture that still works effectively and changing a culture that has become dysfunctional. For example, many of the firms already noted, as well as numerous others, take pride in perpetuating their culture. Shell Oil, for example, has an elaborate display in the lobby of its Houston headquarters that tells the story of the firm’s past. But other companies may face situations in which their culture is no longer a strength. For example, some critics feel that General Motors’ culture places too much emphasis on product development and internal competition among divisions and not enough on marketing and competition with other firms. They even argue that this culture was a major contributing factor in the business crisis that General Motors faced in 2009.

Culture problems sometimes arise from mergers or the growth of rival factions within an organization. For example, Delta recently merged with Northwest Airlines. Combining the two companies led to numerous cases of conflict and operational difficulties because the cultures of the two firms were so different. To change culture, managers must have a clear idea of what they want to create. When United and Continental Airlines merged, top managers stressed that they wanted the new firm to personify Continental’s employee-friendly culture and avoid the old United culture that was fraught with hostility and mistrust between management and labor.

Main content

Chapter Review

Summary of Learning Outcomes and Key Points

· 1Discuss the nature of an organization’s environments, and identify and describe the components of its general, task, and internal environments.


Managers need to have a thorough understanding of the environment in which they operate and compete. The general environment consists of the economy, technology, and the political–legal climate. The task environment consists of competitors, customers, suppliers, strategic partners, and regulators.


The internal environment consists of the organization’s owners, board of directors, employees, physical environment, and culture. Owners are those who have claims on the property rights of the organization. The board of directors, elected by stockholders, is responsible for overseeing a firm’s top managers. Individual employees are other important parts of the internal environment. The physical environment, yet another part of the internal environment, varies greatly across organizations.

· 2Describe the ethical and social environment of management, including individual ethics, the concept of social responsibility, and how organizations can manage social responsibility.


The ethical and social environment of management is also quite important. Understanding the differences between ethical and unethical behavior, as well as appreciating the special nature of managerial ethics, can help guide effective decision making. Understanding the meaning of and arguments for and against social responsibility can help a manager effectively address both the formal and informal dimensions of social responsibility.

· 3Discuss the international environment of management, including trends in international business, levels of international business activities, and the context of international business.


The international environment of management can be a crucial one. Current trends have resulted in the increasing globalization of markets, industries, and businesses. Organizations seeking to become more international can rely on importing, exporting, licensing (including franchising), strategic alliances, and direct investment to do so. National culture, controls on international trade, economic communities, and the WTO combine to determine the context of international business.

· 4Describe the importance and determinants of an organization’s culture, as well as how organizational culture can be managed.


Organizational culture is the set of values, beliefs, behaviors, customs, and attitudes that helps the organization’s members understand what it stands for, how it does things, and what it considers important. Organizational culture is an important environmental concern for managers. Managers must understand that culture is a key determinant of how well their organization will perform. Culture can be assessed and managed in a number of different ways.

Chapter Review

Discussion Questions

Questions for Review

1. Identify and discuss each major dimension of the general environment and the task environment.

2. Do organizations have ethics? Why or why not?

3. What are the arguments for and against social responsibility on the part of businesses? In your opinion, which set of arguments is more compelling?

4. Describe the basic levels of international business involvement. Why might a firm use more than one level at the same time?

5. Describe various barriers to international trade. Why do such barriers exist?

Questions for Analysis

1. Can you think of dimensions of the task environment that are not discussed in this chapter? Indicate their linkages to those that are discussed.

2. What is the relationship between the law and ethical behavior? Can a behavior be ethical but illegal at the same time?

3. What is your opinion of whistle-blowing? If you were aware of criminal activity in your organization but knew that reporting it would probably cost you your job, what would you do?

4. What industries do you think will feel the greatest impact of international business in the future? Will some industries remain relatively unaffected by globalization? If so, which ones? If not, explain why not.

5. What is the culture of your college, university, or place of employment? How clear is it? What are its most positive and its most negative characteristics?

Chapter Review

Experiential Exercise

Assessing Organizational Culture

Purpose: While organizational culture is intangible, it is not difficult to observe. This activity will help you improve your skills in observing and interpreting organizational culture, which can help to make you a more effective participant and leader in organizations.

Introduction: Clues to organizational culture may be found by observing details that relate to member behavior, traditions or customs, stories, attitudes, values, communication patterns, organizational structure, employee dress and appearance, and even office space arrangements. Do members address each other by first names? Are office doors left open or closed? What do members wear? How are achievements recognized? Does the workplace feel energized or laid-back? Do members smile and laugh often? Does seniority or expertise earn more respect?

Instructions: First, observe clues to organizational behavior at your school, college, or university. To the extent possible, observe a diversity of members including students, teaching faculty, and nonteaching staff. Write down specific examples. For example, students typically wear blue jeans while instructors usually wear suits. In the cafeteria, freshmen sit mainly with other freshmen. A professor may be referred to as “Doctor” by staff, while he or she may refer to staff by their first name.

Second, interpret the facts. Use your observations to describe the organization’s core values. What does it value most? How did you come to that conclusion?

Third, with the class or in small groups, discuss your facts and interpretations. Focus especially on areas of disagreement. Where individuals disagree about the culture, try to understand why the disagreement occurs. If the facts differ, perhaps the individuals observed two different groups. For example, students majoring in business may be different from students in engineering or education. Or perhaps the organizational culture tolerates or encourages lots of differences. If there is agreement on facts but interpretations differ, then perhaps the individuals making the interpretations can explore their differing perceptions.

Chapter Review

Building Effective Communication Skills

Exercise Overview

Communication skills consist of a manager’s ability to effectively receive information and ideas from others and to effectively convey information and ideas to others. This exercise will help you develop your communication skills while also helping you understand the importance of knowing the customer segments in an organization’s task environment.

Exercise Background

Assume that you are a newly hired middle manager in the marketing department of a large food manufacturer. You have just completed your formal study of management and are excited about the opportunity to apply some of those theories to the real-life problems of your firm. One problem in particular intrigues you. Your boss, the marketing VP, recently developed a consumer survey to solicit feedback about products from customers. The feedback the firm has received varies considerably, ranging from 2 to 5 on a scale from 1 to 5, which gives your firm no helpful data. In addition, sales of your company’s products have been slowly but steadily declining over time, and the marketing department is under some pressure from upper management to determine why. You have an idea that the survey is not an accurate reflection of consumer preferences, so you make a suggestion to your boss: “Why don’t we gather some information about our customers, in order to understand their needs better? For example, our products are purchased by individual consumers, schools, restaurants, and other organizations. Maybe each type of consumer wants something different from our product.” Your boss’s response is to stare at you, perplexed, and say, “No. We’re not changing anything about the survey.” When you ask, “Why?” the boss responds that the product has been a bestseller for years, that “good quality is good quality,” and thus that all customers must want the same thing. He then says, “I’ll spare you the embarrassment of failure by refusing your request.”

Exercise Task

1. With this background in mind, compose a written proposal for your boss, outlining your position. Be sure to emphasize your fundamental concern—that the marketing department must understand the needs of each customer segment better in order to provide products that meet those needs. Consider ways to persuade your boss to change his mind. (Hint: Telling him bluntly that he is wrong is unlikely to be effective.)

2. On the basis of what you wrote in response to Exercise Task 1, do you think your boss will change his mind? If yes, exactly what will persuade him to change his mind? If no, what other actions could you take in a further effort to have your ideas adopted by the firm?

3. Main content

Chapter Review

Management at Work

Harley Invades Africa

With engines thundering, a pack of some 30 chrome-girded Harleys descends like a squad of nomadic storm troopers on the sleepy town of San Pedro. The riders are garbed in bandanas, ripped jeans, studded boots, and black leather bedecked with emblems of an anarchic motorcycle culture. You can tell, however, that it’s not your ordinary gang of Hells Angels by the group’s logo—an elephant in cowboy boots. They call themselves the Elephant’s Bikers, and they ride the poorly maintained highways and dusty byways of the West African nation of Côte d’Ivoire (aka Ivory Coast).

The Elephant’s Bikers club was founded in 2003 to celebrate the 100th birthday of the iconic American motorcycle maker Harley-Davidson. The members, of course, ride Harleys, even though they tend to be rather pricey: Taking import costs into account, the club’s preferred models run from US$8,200 (the cheapest) to US$52,000. Obviously, club members are fairly affluent, and they include the son of a former president and a current cabinet official. “You’ll often see a big boss show up with ripped jeans and skulls even though he’s in charge of a highly rated company,” reports one member. “That’s the paradox among Harley Davidson lovers” in Côte d’Ivoire. In San Pedro, a port town of about 150,000 in which a few residents get around on rickety mopeds, a contingent of men, women, and children turns out to greet the riders and snap pictures from aging cellphones.

In May 2014, a similar scene played out in Margate, South Africa—multiplied by a hundred times. The coastal town of Margate is home to Africa Bike Week, an annual Harley-sponsored event catering to riders and enthusiasts. The 2014 version—held a year after Harley had hosted a worldwide 110th anniversary celebration—attracted some 3,000 bikers and a throng of 110,000 enthusiasts. Located on the southern tip of the continent some 3,000 miles from Côte d’Ivoire, South Africa boasts Africa’s second-largest economy (behind Nigeria) and is one of only four African countries ranked as upper-middle income by the World Bank.

Harley launched in South Africa in 1996—two years after the country abandoned the notorious policies of racial segregation known as apartheid. It was a well-timed move: With the end of apartheid, the South African economy was finally liberated from 12 years of international sanctions. Since 1996, South Africa’s gross domestic product (the value of all goods and services produced annually) has tripled, and a sizable middle class has emerged.

It’s this growing middle class that interests Harley, particularly because it includes so many black consumers. According to Michael Carney, who is in charge of the company’s African marketing efforts, Harley’s African strategy calls for bypassing its traditional core market—41-year-old-plus white males—in favor of “an emerging middle-class black market hungry for the lifestyle of Harley Davidson…. We foresee this market becoming our main market in the not too distant future in Africa.” Harley opened a subsidiary office in Cape Town in 2008, and of 11 authorized dealerships in sub-Saharan Africa, 9 are located in South Africa.

South Africa was a logical point of entry into the African market. Along with Nigeria, South Africa accounts for more than half of all spending in sub-Saharan Africa. Perhaps more importantly, the black middle class has grown from 1.7 billion in 2004 to 4.2 million in 2013, and its spending power has also increased significantly: In 2013, black middle-class South Africans spent US$3.7 billion compared to US$3.0 billion by their white counterparts. The label “middle class,” however, can be misleading in South Africa, where the distribution of wealth along racial lines is extremely unequal. A so-called actual middle class, for instance, falls in the “actual middle” of the spread of household incomes. According to one recent study, this segment consists of households with monthly income between US$142 and US$426. It is overwhelmingly black. Some economists also identify an “affluent middle class” consisting of households with monthly income ranging from US$523 to US$3,733. Blacks make up 52 percent of this group and whites 29 percent. (Only 4 percent of South Africans enjoy higher incomes than this “affluent middle class,” and this group is 60 percent white and 20 percent black.)

Now consider these numbers in light of the fact that nearly 80 percent of the total South African population is black and less than 9 percent white. Blacks, therefore, are significantly underrepresented in both categories of “middle class.” In reality, concludes one South African economist, “the ‘middle class’ is not in the middle of the income distribution, and those who are in the middle are not ‘middle class’ in the sense of being above some minimum level of affluence…. It follows,” he adds, “that the differences between the two groups go beyond income and can be expected to reflect aspects of poverty and deprivation.” In fact, South Africa has an extremely high rate of unemployment—about 25 percent. Among blacks, the unemployment rate is 41 percent; among whites, it’s 6.3 percent.

So why is Harley so bullish on South Africa? Indeed, why does it have such high expectations for sub-Saharan Africa as a whole, especially among middle-class consumers? After all, the sub-Saharan middle class is typically defined as households with US$2 to US$20 to spend per day. Given the fact that the cheapest model currently sells in South Africa for US$9,166, Harleys are clearly out of reach even for “middle-class” sub-Saharan consumers. Why, then, do so many people flock around the Elephant’s Bikers club whenever it makes a pit stop in a town where a rundown moped is a luxury? “We’re sharing a pleasure, a dream,” explains one club member. “People identify with that. They see that it’s accessible, that it’s not just on television.”

Michael Carney sees a similar dynamic at work in the attraction of Africa Bike Week. The success of the event, he believes, is due in large part to Harley’s brand image: “Owning and riding a Harley-Davidson motorcycle,” he says, “is a unique experience and lifestyle that unites people from all walks of life. As a brand, we’ve been fulfilling dreams of personal freedom for 110 years.” According to Carney, the Harley image thus appeals to a key psychographic dimension of the company’s target market—namely, aspirations of upward social mobility.

Nick Blazquez, head of African operations for the European beverage company Diageo, agrees that well-known brands benefit from the personal and social aspirations of middle-class African consumers: “The African middle class,” he says, “aspires to improve their lot…. In that regard, they aspire to brands in the same way as consumers around the world aspire to brands. I’m just not sure,” Blazquez admits, “what the middle class is in the context of Africa.”

The influential American investor George Soros, however, is sure about one thing: The African middle class is the fastest-growing middle class in the world. That US$2–US$20 in per diem spending power, for example, represents an increase of more than 100 percent in less than 20 years. It also represents 123 million people, or 13 percent of the population, and will include 1.1 billion by 2060 (42 percent). African consumers spent US$860 billion in 2008 (the most recent year for which official numbers are available) and will spend US$1.4 trillion in 2020. This trajectory, according to the World Bank, is “unstoppable,” and Soros calls Africa “one of the few bright spots on the gloomy global economic horizon.”

Case Questions

1. According to Harley-Davidson’s Africa country manager, Celine Gruizinga, “No one who comes here is going to make a quick buck. It’s no small feat. It’s a type of commitment that takes decades.” Let’s say that you’re the CEO of a publicly owned U.S. company that manufactures fashion footwear. You’re interested in getting involved in the sub-Saharan Africa market, which will eventually total 1.1 billion middle-class consumers—50 years from now. You need to decide which sort of globalization strategy would work best for you: exporting, licensing, joint venture (or some other form of strategic alliance), or direct investment. Generally speaking—and given Gruizinga’s warning—what are the pros and cons of each option?

2. As it happens, Celine Gruizinga is also Harley’s first-ever female country manager. She’s also an avid Harley rider. The company is targeting women buyers in sub-Saharan Africa, who already account for 26 percent of Harley riders in a region where the company reports “a significant increase in the number of both white and black women riders.” Interestingly, Harley is also targeting women in the United States. What kinds of marketing appeals might Harley make to female consumers in both markets? What kinds of appeals will probably have to be distinctive for each market? Why do you think more women are interested in buying Harleys?

3. Nigeria has the largest economy in Africa. It’s oil rich, and the economy is growing rapidly, driven by agriculture, telecommunications, and services. The banking sector is strong. Unfortunately, Nigeria is also a serious security risk. How should Harley-Davidson proceed with any plans to do business in Nigeria? (“Cautiously” is a good answer, but try to be more thorough in analyzing the situation.)

Case References


Joris Fioriti, “Meet the Elephant’s Bikers, Côte d’Ivoire’s Version of Hells Angels,” Voices of Africa (South Africa), November 27, 2013,, accessed on January 1, 2017; Anthony Volastro, “Harleys, Hogs and Hells Angels Ride on Africa,” CNBC, December 5, 2013,, accessed on January 2, 2017; Elaine King, “Motorcycling: Harley-Davidson Rides into Africa,” Financial Mail (South Africa), May 22, 2017,, accessed on January 2, 2017; Zwelakhe Shangase, “Mike Rides in for Harley,” The New Age (South Africa), March 21, 2013,, accessed on January 1, 2017; Sulaiman Philip, “South Africa’s Black Middle Class on the Rise,” Media Club South Africa, November 22, 2013,, accessed on January 1, 2017; and “The World’s Fastest-Growing Middle Class,” UHY International, July 12, 2012,, accessed on January 2, 2017.

Main content

Chapter Review

You Make the Call: The Canary in Starbucks’ Coal Mine

1. The term sustainability refers generally to the maintenance and preservation of systems and processes. At what types of systems and processes are Starbucks’ sustainability efforts directed?

2. In what ways might Starbucks’ sustainability efforts be affected by events in each dimension of its general external environment—economic, technological, sociocultural, political–legal, and international?

3. In what ways might each group in Starbucks’ task environment–competitors, customers, suppliers, strategic partners, and regulators—be involved in its sustainability efforts? Be sure to include competitors in you answer. List each group in order of its importance to Starbucks’ sustainability efforts; explain your ranking.

4. According to Ben Packard, “One of the strengths of Starbucks’ culture is treating the people and places where our products come from and are served in a better way. Not delivering on that vision and mission would be a problem in the culture of this company.” Why is the management of its culture important to the success of the company’s sustainability efforts? In what ways can Starbucks work to ensure that the values reflected in its sustainability commitment are embraced by members of the organization?

Week 2 reading

Planning and Strategic Management

Chapter 3 Introduction

· 3-1

Planning and Organizational Goals

· 3-1a

Organizational Goals

· 3-1b

Kinds of Organizational Plans

· 3-2

The Nature of Strategic Management

· 3-2a

The Components of Strategy

· 3-2b

Types of Strategic Alternatives

· 3-3

Using Swot Analysis to Formulate Strategy

· 3-3a

Evaluating an Organization’s Strengths

· 3-3b

Evaluating an Organization’s Weaknesses

· 3-3c

Evaluating an Organization’s Opportunities and Threats

· 3-4

Formulating Business-Level Strategies

· 3-4a

Generic Strategies

· 3-4b

Strategies Based on the Product Life Cycle

· 3-5

Formulating Corporate-Level Strategies

· 3-5a

Single-Product Strategy

· 3-5b

Related Diversification

· 3-5c

Unrelated Related Diversification

· 3-5d

Managing Diversification

· 3-6

Tactical Planning

· 3-6a

Developing Tactical Plans

· 3-6b

Executing Tactical Plans

· 3-7

Operational Planning

· 3-7a

Single-Use Plans

· 3-7b

Standing Plans

· 3-7c

Contingency Planning and Crisis Management

Chapter Review

Summary of Learning Outcomes and Key Points

Discussion Questions

Experiential Exercise

Discussion Questions

Building Effective Communication and Interpersonal Skills

Management at Work

You Make the Call: Cruise Control

Chapter Introduction

Learning Outcomes

After studying this chapter, you should be able to:

· 1Summarize the planning process and describe organizational goals.

· 2Discuss the components of strategy and the types of strategic alternatives.

· 3Describe how to use SWOT analysis in formulating strategy.

· 4Identify and describe various alternative approaches to business-level strategy formulation.

· 5Identify and describe various alternative approaches to corporate-level strategy formulation.

· 6Discuss how tactical plans are developed and implemented.

· 7Describe the basic types of operational plans used by organizations.

Management in Action

Cruise Control Isn’t Good Planning

“Is this really smart crisis communications—to get into a p—–g contest with 3,000 angry customers with full bladders?”

—Crisis management expert Steven Fink

A few years ago passengers aboard the Carnival cruise ship Triumph were busy texting, tweeting, and posting digital photographs to document their latest vacation adventures. Most of the photographs showed overflowing toilets and bags of human waste lined up in the hallways. “Just on our deck alone,” reported one passenger, “there were biohazard bags lined up across the floor. We’re talking about raw sewage. It was repulsive.” Not exactly what the travel brochure promised.

It all started with a fire in one of the engine rooms, which caused the ship to lose power, including propulsion, and the Triumph was left adrift in the Gulf of Mexico for five days. As passengers took to their cell phones to provide family and friends with a constant flow of updates, reports and pictures were quickly relayed to the media and the public was soon getting news of the so-called poop cruise in virtual real time. Carnival president Gerry Cahill responded by stating publicly that passenger reports weren’t entirely accurate: In truth, said Cahill, toilet facilities, running water, and air conditioning had been partially restored. True enough, admits crisis management expert Steven Fink, “but is this really smart crisis communications—to get into a p—–g contest with 3,000 angry customers with full bladders?”

Carnival Cruise Lines has had a number of problems in recent years, most notably with the Carnival Triumph (in the Gulf of Mexico) and the Costa Concordia (shown here off the coast of Italy). In both cases Carnival was widely criticized for its poor approach to crisis management.


The fuel-hose leak that caused the Triumph fire was similar to the problem that set fire to Carnival’s Costa Allegra one year earlier. The Costa Allegra drifted for three days in pirate-infested waters in the Indian Ocean. The propulsion-unit issues that canceled the cruises of both the Carnival Legend and the Carnival Elation on the same weekend in March 2013 were described by the company as “minor.” The generator problem that stalled the Carnival Dream during the same week was unrelated.

What did the company have to say for itself about the cruise ship turned garbage scow? Not much. Fink, who is president of Lexicon Communications, the country’s oldest crisis management firm, was reminded of Carnival’s response to the Costa Concordia disaster of January 2012. The Costa Concordia hit a rock off the western coast of Italy, tearing a 160-foot gash through which water rushed into the engine room, cutting off power to the ship’s electrical and propulsion systems. The Costa Concordia was eventually grounded with most of her starboard side under water. After a chaotic six-hour evacuation effort, 32 people were left dead.

Fink recalls (correctly) that Carnival CEO Micky Arison’s crisis communications from company headquarters in Miami consisted of “a handful of tweets on his Twitter account as. …the ship’s personnel and captain pointed fingers. …at each other.” Meanwhile, Cruise Law News was reporting that “some Carnival executives have been gallivanting around town at black-tie gala parties and Miami Heat basketball games.” Arison, who owns the Heat, apparently did not participate in the gallivanting, but neither did he consider it necessary to leave the comfort of his 200-foot yacht, where, five days later, he tweeted his condolences and “my personal assurance that we will take care of each & every one of our guests, crew and their families.”

A week after the accident, Carnival vice chairman and COO Howard Frank arrived at the crash site with CEO Pier Luigi Foschi of Costa Cruises, the Carnival subsidiary that operated the Costa Concordia. It was bad enough that Foschi’s compensation offer to Concordia passengers was a mere 30 percent off their next Costa cruise. The press and public were locked on the question posed in a Wall Street Journal headline: “Where’s Micky?” “Who is this mysterious boss,” wondered the Italian newspaper La Repubblica, “and how has he managed to remain like a ghost since the tragedy?”

Adds David Bartlett, senior VP of the crisis management firm Levick: “Crisis management experts know that customers and the general public are more likely to judge an organization by how it handles a problem than how it got into the problem in the first place.” Executing the crisis management plan, says Bartlett, means being fast as well as effective—”aggressively and clearly delivering [the company’s] message now.” The CEO, says Larry Berg of the media and marketing company Valassis, should both act with a sense of urgency and focus on the company’s long-term reputation: “Rebuilding after a crisis,” he explains, “is all about how you handle the situation as it occurred. Did you communicate openly to consumers, or were you evasive and not directly involved. People sense this.”

“No plan survives first contact with the enemy”—historians are not sure who said this first—Dwight Eisenhower, Napoleon, Patton, or (most likely) a nineteenth century Prussian field marshal named Helmuth Von Moltke. The sentiment, however, is undeniable. No matter how effectively leaders make decisions, plan, and strategize, it is impossible to predict with certainty exactly how well those decisions, plans, and strategies will work once they are set in motion. Unexpected responses by other businesses, faulty assumptions, human error, or simple luck can all cause business plans to fail or to succeed far better than expected. Nevertheless, when leaders do work to make good decisions and develop effective plans and strategies they substantially increase their chances of success. Similarly, though, when leaders like top managers at Carnival make bad decisions and execute plans poorly when things do go wrong they will likely make matters far worse.

This chapter discusses how organizations manage strategy and how managers engage in strategic planning. As we note in Chapter 1, planning and decision making comprise the first managerial functions that organizations must address. This chapter is the first of three that explore planning and decision making.

3-1Planning and Organizational Goals

All organizations engage in planning activities, but no two organizations plan in exactly the same fashion. Figure 3.1 is a general representation of the planning process that many organizations attempt to follow. But although most firms follow this general framework, each also has its own nuances and variations.

Figure 3.1The Planning Process

The planning process takes place within an environmental context. Managers must develop a complete and thorough understanding of this context to determine the organization’s mission and to develop its strategic, tactical, and operational goals and plans.

As Figure 3.1 shows, all planning occurs within an environmental context. If managers do not understand this context, they are unable to develop effective plans. Thus understanding the environment is essentially the first step in planning. Chapter 2 covered many of the basic environmental issues that affect organizations and how they plan. With this understanding as a foundation, managers must then establish the organization’s mission. The mission outlines the organization’s purpose, premises, values, and directions. Flowing from the mission are parallel streams of goals and plans. Directly following the mission are strategic goals. These goals and the mission help determine strategic plans. Strategic goals and plans are primary inputs for developing tactical goals. Tactical goals and the original strategic plans help shape tactical plans. Tactical plans, in turn, combine with the tactical goals to shape operational goals. These goals and the appropriate tactical plans determine operational plans. Finally, goals and plans at each level can also be used as inputs for future activities at all levels.

3-1aOrganizational Goals

Goals are critical to organizational effectiveness, and they serve a number of purposes. Organizations can also have several different kinds of goals, all of which must be appropriately managed. And a number of different kinds of managers must be involved in setting goals.

Purposes of Goals

Goals serve four important purposes. First, they provide guidance and a unified direction for people in the organization. Goals can help everyone understand where the organization is going and why getting there is important. Mark Pincus, founder and CEO of the social-gaming company Zynga, recently noted that “it’s important to know what your goal is, because if you don’t know what your goal is, you will. …never achieve it.” For example, the National Football League (NFL) has a stated goal of reaching annual revenue of $25 billion by the year 2027, almost double its 2017 revenues. Top managers at General Electric (GE) have a long-standing goal that every business owned by the firm will be either number one or number two in its industry. This goal helps set the tone for decisions made by GE managers as it competes with other firms such as Whirlpool and Electrolux.

Second, goal-setting practices strongly affect other aspects of planning. Effective goal setting promotes good planning, and good planning facilitates future goal setting. For example, the NFL’s revenue goal demonstrates how setting goals and developing plans to reach them should be seen as complementary activities. Specifically, the league will need to work aggressively to boost income from ticket sales, broadcasts rights, merchandising, licensing, corporate sponsorships, and other avenues to meet its goals.

Third, goals can serve as a source of motivation for an organization’s employees. Goals that are specific and moderately difficult can motivate people to work harder, especially if attaining the goal is likely to result in rewards. The Italian furniture manufacturer Industrie Natuzzi SpA uses goals to motivate its workers. Each craftsperson has a goal for how long it should take to perform his or her job, such as sewing leather sheets together to make a sofa cushion or building wooden frames for chair arms. At the completion of assigned tasks, workers enter their ID numbers and job numbers into the firm’s computer system. If they get a job done faster than their goal, a bonus is automatically added to their paycheck.

Finally, goals provide an effective mechanism for evaluation and control. This means that performance can be assessed in the future in terms of how successfully today’s goals are accomplished. For example, suppose that officials of the United Way of America set a goal of collecting $350,000 from a particular small community. If, midway through the campaign, they have raised only $100,000, they know that they need to change or intensify their efforts. If they raise only $200,000 by the end of their drive, they will carefully study why they did not reach their goal and what they need to do differently next year. On the other hand, if they succeed in raising, say, $375,000 or more, evaluations of their efforts will take on an entirely different character.

Kinds of Goals

Goals are set for and by different levels within an organization. An organization’s 
 is a statement of its “fundamental, unique purpose that sets a business apart from other firms of its type and identifies the scope of the business’s operations in product and market terms.” For instance, Starbucks’ mission statement is to be “the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles while we grow.” The principles referred to in the mission help managers at Starbucks make decisions and direct resources in clear and specific ways.

Strategic goals
 are set by and for an organization’s top management. They focus on broad, general issues. For example, Starbucks has a strategic goal of increasing the profitability of each of its coffee stores by 20 percent over the next five years. 
Tactical goals
 are set by and for middle managers. Their focus is on how to operationalize actions necessary to achieve the strategic goals. To achieve Starbucks’ goal of increasing its per-store profitability, managers are working on tactical goals related to company-owned versus licensed stores and the global distribution of stores in different countries. 
Operational goals
 are set by and for lower-level managers. Their concern is with shorter-term issues associated with the tactical goals. An operational goal for Starbucks might be to boost the profitability of a certain number of stores in each of the next five years. (Some managers use the words objective and goal interchangeably. When they are differentiated, however, the term objective is usually used instead of operational goal.)

3-1bKinds of Organizational Plans

Organizations establish many different kinds of plans. At a general level, these include strategic, tactical, and operational plans.

Strategic Plan

Strategic plans are developed to achieve strategic goals. More precisely, a 
strategic plan
 is a general plan outlining decisions about resource allocation, priorities, and action steps necessary to reach strategic goals. These plans are set by the board of directors and top management, generally have an extended time horizon, and address questions of scope, resource deployment, competitive advantage, and synergy. We discuss strategic planning further in the next major section of this chapter.

Tactical Plans

A tactical plan, aimed at achieving tactical goals, is developed to implement specific parts of a strategic plan. Tactical plans typically involve upper and middle management and, compared with strategic plans, have a somewhat shorter time horizon and a more specific and concrete focus. Thus, tactical plans are concerned more with actually getting things done than with deciding what to do. Tactical planning is covered in detail later in this chapter.

Operational Plans

operational plan
 focuses on carrying out tactical plans to achieve operational goals. Developed by middle- and lower-level managers, operational plans have a short-term focus and are relatively narrow in scope. Each one deals with a fairly small set of activities. We also cover operational planning in more detail later in this chapter.

3-2The Nature of Strategic Management

 is a comprehensive plan for accomplishing an organization’s goals. 
Strategic management
, in turn, is a way of approaching business opportunities and challenges—it is a comprehensive and ongoing management process aimed at formulating and implementing effective strategies. Finally, 
effective strategies
 are those that promote a superior alignment between the organization and its environment and the achievement of strategic goals.

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3-2aThe Components of Strategy

In general, a well-conceived strategy addresses three areas: distinctive competence, scope, and resource deployment. A 
distinctive competence
 is something the organization does exceptionally well. A distinctive competence of Abercrombie & Fitch is its speed in moving inventory. It tracks consumer preferences daily with point-of-sale computers, transmits orders electronically to suppliers in Hong Kong, charters 747 cargo plane to fly new products to the United States, and makes available those products in stores 48 hours later. Because other retailers take weeks or sometimes months to accomplish the same things, Abercrombie & Fitch uses this distinctive competence to remain competitive.

 of a strategy specifies the range of markets in which an organization will compete. Hershey Foods has essentially restricted its scope to the confectionery business, with a few related activities in other food-processing areas. In contrast, its biggest competitor, Mars, has adopted a broader scope by competing in the pet food business and the electronics industry, among others. Some organizations, called conglomerates, compete in dozens or even hundreds of markets.

A strategy should also include an outline of the organization’s projected 
resource deployment
—how it will distribute its resources across the areas in which it competes. GE, for example, has been using profits from its highly successful U.S. operations to invest heavily in new businesses in Europe and Asia. Alternatively, the firm might have chosen to invest in different industries in its domestic market or to invest more heavily in Latin America. The choices it makes as to where and how much to invest reflect decisions about resource deployment.

3-2bTypes of Strategic Alternatives

Most businesses today develop strategies at two distinct levels: the business level and corporate level. These levels provide a rich combination of strategic alternatives for organizations. 
Business-level strategy
 is the set of strategic alternatives from which an organization chooses as it conducts business in a particular industry or market. Such alternatives help the organization focus its competitive efforts for each industry or market in a targeted and focused manner.

Abercrombie and Fitch’s Management Dynamics’ Supply Chain Visibility makes it possible to manage their 30 trading partners and international business units, including off shore factories like this one.

SCPhotos/Alamy Stock Photo

Corporate-level strategy
 is the set of strategic alternatives from which an organization chooses as it manages its operations simultaneously across several industries and several markets. As we discuss later in this chapter, most large companies today compete in various industries and markets. Thus, although they develop business-level strategies for each industry or market, they also develop an overall strategy that helps define the mix of industries and markets that are of interest to the firm.

Resource deployment is an essential element of strategic planning. General Electric is using profits from its U.S. operations to invest in new business opportunities in Europe and Asia.

AP Images/Weng lei

Drawing a distinction between strategy formulation and strategy implementation is also instructive. 
Strategy formulation
 is the set of processes involved in creating or determining the organization’s strategies, whereas 
strategy implementation
 is the methods by which those strategies are operationalized or executed. The primary distinction is along the lines of content versus process: The formulation stage determines what the strategy is, and the implementation stage focuses on how the strategy is achieved.

3-3Using Swot Analysis to Formulate Strategy

The starting point in formulating strategy is usually 
 (strengths, weaknesses, opportunities, and threats) analysis. As shown in 
Figure 3.2
, SWOT analysis is a careful evaluation of an organization’s internal strengths and weaknesses as well as its environmental opportunities and threats. In SWOT analysis, the best strategies accomplish an organization’s mission by

· (1)

exploiting an organization’s opportunities and strengths while

· (2)

neutralizing its threats and

· (3)

avoiding (or correcting) its weaknesses.

Figure 3.2SWOT Analysis

SWOT analysis is one of the most important steps in formulating strategy. Using the organization’s mission as a context, managers assess internal strengths (distinctive competencies) and weaknesses as well as external opportunities and threats. The goal is then to develop good strategies that exploit opportunities and strengths, neutralize threats, and avoid weaknesses.

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3-3aEvaluating an Organization’s Strengths

Organizational strengths
 are skills and capabilities that enable an organization to create and implement its strategies. Strengths may include things like a deep pool of managerial talent, surplus capital, a unique reputation and/or brand name, and well-established distribution channels. Sears, for example, has a nationwide network of trained service employees who repair its appliances. Jane Thompson, a Sears executive, created a plan to consolidate repair and home improvement services nationwide under the well-known Sears brand name and to promote them as a general repair operation for all appliances, not just those purchased from Sears. Thus the firm capitalized on existing capabilities and the strength of its name to launch a new operation.

A distinctive competence is a strength possessed by only a small number of competing firms. Industrial Lights & Magic, founded by George Lucas in 1975, remains a leading provider of special visual effects for major movies due to its patented technologies. In addition to all of the Star Wars movies, IL&M has also contributed to such recent blockbusters as The Great Gatsby (2013), Noah and Captain America: The Winter Solder (2014), Avengers: The Age of Ultron and Jurassic World (2015), and Captain America: Civil War (2016).

Pictorial Press Ltd/Alamy Stock Photo

A distinctive competence, introduced earlier in this chapter, is a strength possessed by only a small number of competing firms. Distinctive competencies are rare among a set of competitors. When George Lucas founded Industrial Light & Magic (ILM), for example, the new venture brought the cinematic art of special effects to new heights. Some of ILM’s special effects can be produced by no other organization; these rare special effects are thus ILM’s distinctive competencies. Indeed, ILM (now owned by Disney) had no real competitor until Peter Jackson formed Weta Digital Effects to help bring The Lord of the Rings to the screen. But even so, although ILM and Weta have some of the same competences, each also has proprietary technology that gives it certain unique advantages. Organizations that exploit their distinctive competencies often obtain a competitive advantage and attain above-normal economic performance. Indeed, a main purpose of SWOT analysis is to discover an organization’s distinctive competencies so that the organization can choose and implement strategies that exploit its unique organizational strengths.

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3-3bEvaluating an Organization’s Weaknesses

Organizational weaknesses
 are skills and capabilities that do not enable an organization to choose and implement strategies that support its mission. An organization has essentially two ways of addressing weaknesses. First, it may need to make investments to obtain the strengths required to implement strategies that support its mission. Second, it may need to modify its mission so that it can be accomplished with the skills and capabilities that the organization already possesses.

In practice, organizations have a difficult time focusing on weaknesses, in part because organization members are often reluctant to admit that they do not possess all the skills and capabilities needed. Evaluating weaknesses also calls into question the judgment of managers who chose the organization’s mission in the first place and who failed to invest in the skills and capabilities needed to accomplish it.

American Airlines sought bankruptcy protection a few years ago in order to restructure itself. Poor labor relations, a reputation for indifferent customer service, insufficient cash reserves, and an aging jet fleet were all organizational weaknesses that led to the firm’s problems.

3-3cEvaluating an Organization’s Opportunities and Threats

Whereas evaluating strengths and weaknesses focuses attention on the internal workings of an organization, evaluating opportunities and threats requires analyzing an organization’s environment. 
Organizational opportunities
 are areas that may generate higher performance. 
Organizational threats
 are areas that increase the difficulty of an organization performing at a high level. As discussed more fully in our “Tech Watch” feature, managers are beginning to realize that a strong social media strategy can be an opportunity whereas the absence of such a strategy can be a threat.

Tech Watch

Starting Conversations

If you run a business and are aware of the fact that 75 percent of all American adults have a social media account, then you have undoubtedly arrived at an inescapable conclusion: Your business needs a social media strategy. What you need, in other words, is a set of goals and objectives for your social media marketing efforts, as well as a set of marketing tools and a set of metrics to figure out if those tools are getting the job done.

Fortunately, there’s no shortage of specialized consultancies out there ready to help you maximize your social media strategy. Many of them have even prepared step-by-step procedures for developing or massaging strategies. The plan of one agency, for example, promises that you can develop a “Social Media Strategy in 8 Steps.” Here are a few highlights:

· Build an Ark. “Your social media strategy should be more like air everywhere) than like water (you have to go get it).”

· What’s Your One Thing? “How will your company appeal to the heart of your audience rather than the head?”

· How Will You Be Human? “Your company has to act like a person, not an entity.”

To be fair, some of the plan’s recommendations make common sense and have obvious practical value. For example: Analyze Your Audiences: “What are the characteristics of your current or prospective customers? How does the answer to that question effect what you can and should attempt in social media?” Jess Collins, of Type Communications, a full-service ad agency in Britain, offers an increasingly common answer to these questions: “It’s not quantity,” she says. “It’s quality. It’s about attracting fans/followers that are your target market, and so you need to make sure you’re speaking to real fans rather than looking popular but not being seen by the people who matter most.”

“Fans and follower counts are over,” adds Jan Rezab, CEO of the social media metrics company Socialbakers. “Now it’s about what is social doing for you and your real business objectives.” Take, for example, the Ritz-Carlton Hotel Co., which operates luxury hotels and resorts in 26 countries. In May 2013, the company bought a series of Facebook ads to promote its brand page. The ads attracted a large number of fans—too many, as far as Ritz-Carlton was concerned. “We were fearful that our engagement and connection with our community was dropping,” explains VP of global public relations Allison Sitch. Rather than amassing fans and followers, Ritz-Carlton’s strategy calls for analyzing its social media conversations—the networks of connections built and sustained by the most “passionate” users of a company’s social media—in order to determine what real customers really do and don’t like about the company’s products.

Today, even social networking services admit that companies should start rethinking their social media strategies. Not surprisingly, for example, Twitter maintains that it’s a good thing for companies to have big followings, but director of brand strategy Ross Hoffman hastens to add that “engagement is the key and. …can in turn further grow your audience.” A spokesman for Facebook agrees: “Fans,” he says, “should be a means to positive business outcomes, not the end in themselves.”

References: Lisa Parkin, “Why Businesses Don’t Need a Social Media Strategy,” Huffington Post,, accessed on February 1, 2017; Jay Baer, “Social Media Strategy in Eight Steps,” Convince & Convert LLC,, accessed on February 1, 2017; Jess Collins, “Social Media Strategy: Seven Lessons for Engaging Your Fanbase,” The Guardian (UK), August 8, 2014,, accessed on February 1, 2017; Jeff Elder, “Social Media Fail to Live Up to Early Marketing Hype,” Wall Street Journal, June 23, 2014,, accessed on February 1, 2017; and John Rampton, “Why Most Social Media Strategies Fail,” Forbes, April 22, 2014,, accessed on February 1, 2017.

3-4Formulating Business-Level Strategies

A number of frameworks have been developed for identifying the major strategic alternatives that organizations should consider when choosing their business-level strategies. Two of the most important ones are Porter’s generic strategies and strategies based on the product life cycle.

Rolex has been very successful in using a a differentiation strategy based on product quality. Its differentiated image, in turn, allows Rolex to charge premium prices for its watches. Rolex also maintains its differentiated image through exclusive partnerships with high-end retailers, celebrity endorsements, and not offering discounted prices.

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3-4aGeneric Strategies

According to Harvard’s Michael Porter, organizations may pursue a differentiation, overall cost leadership, or focus strategy at the business level. An organization that pursues a 
differentiation strategy
 seeks to distinguish itself from competitors through the quality (broadly defined) of its products or services. Firms that successfully implement a differentiation strategy are able to charge more than competitors because customers are willing to pay more to obtain the extra value they perceive. Rolex pursues a differentiation strategy. Rolex watches are handmade of stainless steel and precious metals such as gold or platinum, and they are subjected to strenuous tests of quality and reliability. The firm’s reputation enables it to charge thousands of dollars for its watches. Coca-Cola and Pepsi compete in the market for bottled water on the basis of differentiation. Coke touts its Dasani brand on the basis of its fresh taste, whereas Pepsi promotes its Aquafina brand on the basis of its purity. Other firms that use differentiation strategies are Lexus, Godiva, Nikon, Mont Blanc, Apple, and Ralph Lauren. Retailers such as American Eagle Outfitters, Quiksilver, and Aéropostale attempt to differentiate on the basis of style. Similarly, other firms tried to provide strong differentiation on the basis of outstanding customer service.

An organization implementing an 
overall cost leadership strategy
 attempts to gain a competitive advantage by reducing its costs below the costs of competing firms. By keeping costs low, the organization is able to sell its products at low prices and still make a profit. Timex uses an overall cost leadership strategy. For decades, this firm has specialized in manufacturing relatively simple, low-cost watches for the mass market. The price of Timex watches, starting around $39.95, is low because of the company’s efficient high-volume manufacturing capacity. Poland Springs and Crystal Geyser bottled waters are promoted on the basis of their low cost. Other firms that implement overall cost leadership strategies are Hyundai, BIC, Old Navy, and Hershey. When the economy slumps, Hershey usually experiences a jump in sales—during hard times, consumers may cut back on high-end chocolate products from Godiva but aren’t willing to forgo chocolate altogether. Likewise, other low-cost producers also benefit as consumers avoid higher-priced brand-name products (i.e., those with a differentiation strategy) in favor of lower-priced goods. For instance, both P&G and Colgate may see sales of products such as Tide, Pampers, and Colgate toothpaste decline, whereas sales of lower-priced private-label products increase.

The venerable Tropicana casino in Las Vegas lost much of its market share to newer and glitzier casinos like Winn and The Mirage. Two savvy investors, however, have rejuvenated the Tropicana by focusing on middle-aged and older gamblers who are not interested in high-stakes gambling but instead are drawn to smaller stakes games.

Gistimages/Alamy Stock Photo

A firm pursuing a 
focus strategy
 concentrates on a specific regional market, product line, or group of buyers. This strategy may have either a differentiation focus, whereby the firm differentiates its products in the focus market, or an overall cost leadership focus, whereby the firm manufactures and sells its products at low cost in the focus market. In the watch industry, Tag Heuer follows a focus differentiation strategy by selling only rugged waterproof watches to active consumers. Tata Motors follows a focus cost leadership strategy by selling its inexpensive automobiles only in India. Alfa Romeo uses focus differentiation to sell its high-performance cars only in markets where customers can pay over a $100,000 for a car. Fisher-Price uses focus differentiation to sell electronic calculators with large, brightly colored buttons to the parents of preschoolers; stockbroker Edward Jones focuses on small-town settings. General Mills focuses one part of its new-product development on consumers who eat meals while driving—its watchword is “Can we make it ‘one-handed’?” so that drivers can safely eat or drink it. Two investors realized that most Las Vegas casinos were targeting either high-end big spenders or the young hip market. So, they bought the venerable old Tropicana casino, renovated it, and began marketing it to so-called Middle America—middle-aged or older gamblers who aren’t into big dollar wagering. Their occupancy rates have soared, as have their profits.

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3-4bStrategies Based on the Product Life Cycle

product life cycle
 is a model that shows how sales volume changes over the life of products. Understanding the four stages in the product life cycle helps managers recognize that strategies need to evolve over time. As Figure 3.3 shows, the cycle begins when a new product or technology is first introduced. In this introduction stage, demand may be very high and sometimes outpaces the firm’s ability to supply the product. At this stage, managers need to focus their efforts on “getting product out the door” without sacrificing quality. Managing growth by hiring new employees and managing inventories and cash flow are also concerns during this stage.

Figure 3.3The Product Life Cycle

Managers can use the framework of the product life cycle—introduction, growth, maturity, and decline—to plot strategy. For example, management may decide on a differentiation strategy for a product in the introduction stage and a prospector approach for a product in the growth stage. By understanding this cycle and where a particular product falls within it, managers can develop more effective strategies for extending product life.

During the growth stage, more firms begin producing the product, and sales continue to grow. Important management issues include ensuring quality and delivery and beginning to differentiate an organization’s product from competitors’ products. Entry into the industry during the growth stage may threaten an organization’s competitive advantage; thus, strategies to slow the entry of competitors are important.

Hershey uses an overall cost leadership strategy to promote its candy bars. By keeping its costs as low as possible, the firm can provide good-quality snacks at competitive prices. This strategy benefited the firm during the recent recession as customers cut back on higher-priced candy, allowing Hershey to gain new market share.

After a period of growth, products enter a third phase. During this maturity stage, overall demand growth for a product begins to slow down, and the number of new firms producing the product begins to decline. The number of established firms producing the product may also begin to decline. This period of maturity is essential if an organization is going to survive in the long run. Product differentiation concerns are still important during this stage, but keeping costs low and beginning the search for new products or services are also important strategic considerations.

In the decline stage, demand for the product or technology decreases, the number of organizations producing the product drops, and total sales drop. Demand often declines because all those who were interested in purchasing a particular product have already done so. Organizations that fail to anticipate the decline stage in earlier stages of the life cycle may go out of business. Those that differentiate their product, keep their costs low, or develop new products or services may do well during this stage.

3-5Formulating Corporate-Level Strategies

Most large organizations are engaged in several businesses, industries, and markets. Each business or set of businesses within such an organization is frequently referred to as a strategic business unit (SBU). An organization such as GE operates hundreds of different businesses, making and selling products as diverse as jet engines, nuclear power plants, and light bulbs. GE organizes these businesses into approximately 20 SBUs. Even organizations that sell only one product may operate in several distinct markets.

Decisions about which businesses, industries, and markets an organization will enter, and how to manage these different businesses, are based on an organization’s corporate strategy. The most important strategic issue at the corporate level concerns the extent and nature of organizational diversification. 
 describes the number of different businesses that an organization is engaged in and the extent to which these businesses are related to one another. There are three types of diversification strategies: single-product strategy, related diversification, and unrelated diversification.

3-5a Single-Product Strategy

An organization that pursues a 
single-product strategy
 manufactures just one product or service and sells it in a single geographic market. The WD-40 Company, for example, basically manufactures one product, WD-40 spray lubricant, and for years sold it just in North America. WD-40 has started selling its lubricant in Europe and Asia, but it continues to center all manufacturing, sales, and marketing efforts on one product. Similarly, Michelin has remained faithful to the cause of strictly manufacturing quality tires.

The single-product strategy has one major strength and one major weakness. By concentrating its efforts so completely on one product and market, a firm is likely to be very successful in manufacturing and marketing that product. Because it has staked its survival on a single product, the organization works very hard to make sure that the product is a success. Of course, if the product is not accepted by the market or is replaced by a new one, the firm will suffer. Typewriters essentially became obsolete when electronic word processers were introduced.

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3-5bRelated Diversification

Given the disadvantage of the single-product strategy, most large businesses today operate in several different businesses, industries, or markets. If the businesses are somehow linked, that organization is implementing a strategy of 
related diversification
. Virtually all larger businesses in the United States use related diversification.

Pursuing a strategy of related diversification has three primary advantages. First, it reduces an organization’s dependence on any one of its business activities and thus reduces economic risk. Even if one or two of a firm’s businesses lose money, the organization as a whole may still survive because the healthy businesses will generate enough cash to support the others. At Disney, a decline in theme park attendance may be offset by an increase in box office and DVD sales of Disney movies. And when the firm lost millions on poorly conceived movies like John Carter and The Lone Ranger, Disney was still profitable due to strong theme park revenues and other hit movies like The Avengers, Iron Man, and Frozen.

Disney has successfully used related diversification strategies for years. For instance, its annual slate of both animated and live-action movies complements its attractions at theme parks and retail outlets and then feeds directly into DVD and streaming video services. Recent smash hits such as Beauty and the Beast (shown here), Zootopia, and its Marvel and Star Wars series, for example, will help fuel Disney profits for years.

Entertainment Pictures/Alamy Stock Photo

Second, by managing several businesses at the same time, an organization can reduce the overhead costs associated with managing any one business. In other words, if the normal administrative costs required to operate any business, such as legal services and accounting, can be spread over a large number of businesses, then the overhead costs per business will be lower than they would be if each business had to absorb all costs itself. Thus the overhead costs of businesses in a firm that pursues related diversification are usually lower than those of similar businesses that are not part of a larger corporation.

Third, related diversification allows an organization to exploit its strengths and capabilities in more than one business. When organizations do this successfully, they capitalize on synergies, which are complementary effects that exist among their businesses. Synergy exists among a set of businesses when the businesses’ economic value together is greater than their economic value separately. McDonald’s is using synergy as it diversifies into other restaurant and food businesses. For example, both its McCafe premium coffee stands in some McDonald’s restaurants and its investments in Pret A Manger, a European chain of sandwich shops, allow the firm to create new revenue opportunities while using the firm’s existing strengths in food-product purchasing and distribution. “Leading the Way” provides another example of effective related diversification.

3-5cUnrelated Related Diversification

Firms that implement a strategy of 
unrelated diversification
 operate multiple businesses that are not logically associated with one another. At one time, for example, Quaker Oats owned clothing chains, toy companies, and a restaurant business. Unrelated diversification was once a very popular strategy. During that time, several conglomerates such as ITT and Transamerica grew by acquiring literally hundreds of other organizations and then running these numerous businesses as independent entities. Today TRT Holdings is a Dallas-based company that owns Omni Hotels, Gold’s Gym, Tana Exploration (an oil and gas exploration company), and Waldo’s Dollar Martin Mexico. Even if there are potential synergies among their different businesses, organizations implementing a strategy of unrelated diversification do not attempt to exploit them.

Leading the Way

The Beauty of Differentiation

One day an urbane Englishman stopped two Chinese women on a street in Shanghai. He wanted to know if they used L’Oréal products to color their hair. No, they replied, they had it done in a salon. The gentleman promptly escorted them to the nearest department store, where a couple of models in shimmering Lycra were dancing in front of a huge backdrop of the New York City skyline. “This brand comes from America,” intoned a Chinese saleswoman. “It’s very trendy.” The Englishman offered the two women that he’d brought with him free hair-color kits.

The L’Oréal front man was actually the company’s CEO, Lindsay Owen-Jones, and the hair color was from Maybelline, which L’Oréal had acquired a few years earlier. “We have made a conscious effort to diversify the cultural origins of our brands,” said Owen-Jones at the time. The giant French cosmetics and beauty company had given Maybelline a radical makeover, promoting it as “urban American chic” to underscore both its bold new product line and its U.S. origins.

When he took over L’Oréal in 1988, Owen-Jones (who recently stepped down) was faced with a problem confronting many global companies—how to resolve the tension between “global integration” and “local responsiveness.” Owen-Jones saw the issue as a question of how far to optimize the mass-market appeal of L’Oréal’s product lines or how far to diversify them in an effort to appeal to a range of multicultural markets. He chose multiculturalism, especially in light of emerging markets in the Asia Pacific region, Africa, and the Middle East.

The strategy is called “global branding,” and Owen-Jones’s version called for a two-pronged approach: diversifying L’Oréal’s brands according to countries of origin (which include France, Britain, Germany, Italy, and Japan) and then calling upon the company’s marketing expertise to cultivate the allure of different cultures and exotic brand offerings in markets from China to Mexico. Once dominated by French executives, the company’s management team now features a staff of professionals with multicultural backgrounds in new product design. “We like to try stuff,” explains Stéphane Bérubé, chief marketing officer of L’Oréal Canada, “and we’re not afraid to go first into testing and new adventures.” When it expanded in India, for example, L’Oréal was the first company to offer any hair-color alternatives to black.

Bérubé reports that the company has recently done a lot of research into three global-market segments: “the South Asian consumer, the Chinese consumer, and the baby boomers, which are three booming markets in terms of both growth and buying power. … We have products from most of our brands,” he adds, “that are targeted to these three segments,” but he admits that the company can still do better in two areas which reflect Owen-Jones’s original two-pronged marketing strategy: “One, to have more offerings and, two, to better target” selected consumers.

“The name of the game right now,” says Bérubé, “is to have the right product at the right time in front of the consumer. And that,” he states, “can be done through digital or in-store.” Thus in 2014, L’Oréal signed on with Sitecore, a marketing-technology firm whose platform can be used to connect across media and electronic consumer touch points with thousands of stores and millions of customers, potentially on a one-to-one basis. “The goal,” says Sitecore chief strategy officer Darren Guarnaccia, “is understanding the person behind the keyboard and then delivering experiences that matter.”

References: Hae-Jung Hong and Yves Doz, “L’Oréal Masters Multiculturalism,” Harvard Business Review, June 2013,, accessed on February 2, 2017; Gail Edmondson et al., “L’Oréal: The Beauty of Global Branding,” Bloomberg Businessweek, June 28, 1999,, accessed on February 2, 2017; Tanya Kostiw, “L’Oréal Homes in on a One-on-One Approach with Shoppers,” Strategy,, accessed on February 2, 2017; and John Koetsier, “One-to-One Marketing, Global Scale: Sitecore Lands L’Oréal to Personalize Beauty,” VentureBeat,, accessed on February 2, 2017.

In theory, unrelated diversification has two advantages. First, a business that uses this strategy should be able to achieve stable performance over time. During any given period, some businesses owned by the organization are in a cycle of decline, whereas others may be in a cycle of growth. Second, unrelated diversification is also thought to have resource allocation advantages. Every year, when a corporation allocates capital, people, and other resources among its various businesses, it must evaluate information about the future of those businesses so that it can place its resources where they have the highest potential for return. Given that it owns the businesses in question and thus has full access to information about the future of those businesses, a firm implementing unrelated diversification should be able to allocate capital to maximize corporate performance.

Despite these presumed advantages, research suggests that unrelated diversification usually does not lead to high performance. First, corporate-level managers in such a company usually do not know enough about the unrelated businesses to provide helpful strategic guidance or to allocate capital appropriately. To make strategic decisions, managers must have complete and subtle understanding of a business and its environment. Because corporate managers often have difficulty fully evaluating the economic importance of investments for all the businesses under their wing, they tend to concentrate only on a business’s current performance. This narrow attention at the expense of broader planning eventually hobbles the entire organization.

Second, because organizations that implement unrelated diversification fail to exploit important synergies, they may be at a competitive disadvantage compared to organizations that use related diversification. Universal Studios has been at a competitive disadvantage relative to Disney because its theme parks, movie studios, and licensing divisions are less integrated and therefore achieve less synergy.

For these reasons, most companies have abandoned unrelated diversification as a corporate-level strategy. Transamerica, for instance, sold off numerous unrelated businesses and now concentrates on a core set of related businesses and markets. Large corporations that have not concentrated on a core set of businesses have eventually been acquired by other companies and then broken up. Research suggests that these organizations are often worth more when broken up into smaller pieces than when joined.

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3-5dManaging Diversification

However, when an organization implements diversification—whether through internal development, vertical integration, or mergers and acquisitions—it must monitor and manage its strategy. 
Portfolio management techniques
 are methods that diversified organizations use to determine which businesses to engage in and how to manage these businesses to maximize corporate performance. Two important portfolio management techniques are the BCG matrix and the GE Business Screen.

BCG Matrix

 (Boston Consulting Group) matrix provides a framework for evaluating the relative performance of businesses in which a diversified organization operates. It also prescribes the preferred distribution of cash and other resources among these businesses. The BCG matrix uses two factors to evaluate an organization’s set of businesses: the growth rate of a particular market and the organization’s share of that market. The matrix suggests that fast-growing markets in which an organization has the highest market share are more attractive business opportunities than slow-growing markets in which an organization has small market share. Dividing market growth and market share into two categories (low and high) creates the simple matrix shown in Figure 3.4.

Figure 3.4The BCG Matrix

The BCG matrix helps managers develop a better understanding of how different SBUs contribute to the overall organization. By assessing each SBU on the basis of its market growth rate and relative market share, managers can make decisions about whether to commit further financial resources to the SBU or to sell or liquidate it.

Source: Perspectives, No. 66, “The Product Portfolio.” Adapted by permission from The Boston Consulting Group, Inc., 1970.

The matrix classifies the types of businesses in which a diversified organization can engage as dogs, cash cows, question marks, and stars. Dogs are businesses that have a very small share of a market that is not expected to grow. Because these businesses do not hold much economic promise, the BCG matrix suggests that organizations either should not invest in them or should consider selling them as soon as possible. Cash cows are businesses that have a large share of a market that is not expected to grow substantially. These businesses characteristically generate high profits that the organization should use to support question marks and stars. (Cash cows are “milked” for cash to support businesses in markets that have greater growth potential.)

Question marks are businesses that have only a small share of a fast-growing market. The future performance of these businesses is uncertain. A question mark that is able to capture increasing amounts of this growing market may be very profitable. On the other hand, a question mark unable to keep up with market growth is likely to have low profits. The BCG matrix suggests that organizations should invest carefully in question marks. If their performance does not live up to expectations, question marks should be reclassified as dogs and divested. Stars are businesses that have the largest share of a rapidly growing market. Cash generated by cash cows should be invested in stars to ensure their preeminent position. For example, BMW bought Rover a few years ago, thinking that its products would help the German automaker reach new consumers. But the company was not able to capitalize on this opportunity, so it ended up selling Rover’s car business to a British firm and Land Rover to Ford. Ford couldn’t get leverage out of Rover either and ended up selling it (along with Jaguar) to India’s Tata Motors.

GE Business Screen

Because the BCG matrix is relatively narrow and overly simplistic, GE developed the 
GE Business Screen
, a more sophisticated approach to managing diversified business units. The GE Business Screen is a portfolio management technique that can also be represented in the form of a matrix. Rather than focusing solely on market growth and market share, however, the GE Business Screen considers industry attractiveness and competitive position. These two factors are divided into three categories to make the nine-cell matrix shown in Figure 3.5. These cells, in turn, classify business units as winners, losers, question marks, average businesses, or profit producers.

Figure 3.5The GE Business Screen

The GE Business Screen is a more sophisticated approach to portfolio management than the BCG matrix. As shown here, several factors combine to determine a business’s competitive position and the attractiveness of its industry. These two dimensions, in turn, can be used to classify businesses as winners, question marks, average businesses, losers, or profit producers. Such a classification enables managers to allocate the organization’s resources more effectively across various business opportunities.

Source: From Strategy Formulation: Analytical Concepts, 1st edition, by Charles W. Hofer and Dan Schendel. Copyright © 1978. Reprinted with permission of South-Western, a division of Thomson Learning:

As Figure 3.5 shows, both market growth and market share appear in a broad list of factors that determine the overall attractiveness of an industry and the overall quality of a firm’s competitive position. Other determinants of an industry’s attractiveness (in addition to market growth) include market size, capital requirements, and competitive intensity. In general, the greater the market growth, the larger the market, the smaller the capital requirements, and the less the competitive intensity, the more attractive an industry will be. Other determinants of an organization’s competitive position in an industry (besides market share) include technological know-how, product quality, service network, price competitiveness, and operating costs. In general, businesses with large market share, technological know-how, high product quality, a quality service network, competitive prices, and low operating costs are in a favorable competitive position.

Think of the GE Business Screen as a way of applying SWOT analysis to the implementation and management of a diversification strategy. The determinants of industry attractiveness are similar to the environmental opportunities and threats in SWOT analysis, and the determinants of competitive position are similar to organizational strengths and weaknesses. By conducting this type of SWOT analysis across several businesses, a diversified organization can decide how to invest its resources to maximize corporate performance. In general, organizations should invest in winners and question marks (where industry attractiveness and competitive position are both favorable), should maintain the market position of average businesses and profit producers (where industry attractiveness and competitive position are average), and should sell losers.

For example, Unilever recently assessed its business portfolio using a similar framework and, as a result, decided to sell off several specialty chemical units that were not contributing to the firm’s profitability as much as other businesses. The firm then used the revenues from these divestitures and bought more related businesses such as the Dollar Shave Club. During the recent economic recession, many diversified businesses took an especially aggressive approach to selling or closing underperforming businesses. For instance, Japan’s Pioneer electronics business sold its television business, Home Depot shut down its Expo home-design stores, and Textron closed a business unit that financed real estate deals.

3-6 Tactical Planning

As we noted earlier in the chapter, tactical plans are developed to implement specific parts of a strategic plan. You have probably heard the saying about winning the battle but losing the war. 
Tactical plans
 are to battles what strategy is to a war: an organized sequence of steps designed to execute strategic plans. Strategy focuses on resources, environment, and mission, whereas tactics focus primarily on people and action.

3-6aDeveloping Tactical Plans

Although effective tactical planning depends on many factors, which vary from one situation to another, we can identify some basic guidelines. First, the manager needs to recognize that tactical planning must address a number of tactical goals derived from a broader strategic goal. An occasional situation may call for a stand-alone tactical plan, but most of the time tactical plans flow from and must be consistent with a strategic plan.

For example, a few years ago Disney developed a strategy calling for growth through the acquisition of new intellectual properties. Over the next several years the firm acquired the Muppets, Pixar, Marvel, and Lucasfilm. After acquiring each of these properties Disney next needed to create various tactical plans for developing new sources of revenue for each property. These tactical plans involved television programs, movies, theme park attractions, merchandising, and so forth.

Second, although strategies are often stated in general terms, tactics must specify resources and time frames. A strategy can call for being number one in a particular market or industry, but a tactical plan must specify precisely what activities will be undertaken to achieve that goal. Consider the Disney example again. Due to a preexisting licensing agreement with Universal, Disney cannot use Marvel characters in its theme parks in Orlando. However, it is building major new theme park attractions in its Hollywood Studios theme park at Disney World. Each attraction is part of a tactical plan with its own time frame, budget, and so forth.

Finally, tactical planning requires the use of human resources. Managers involved in tactical planning spend a great deal of time working with other people. They must be in a position to receive information from others within and outside the organization, process that information most effectively, and then pass it on to others who might use it. Disney has designated teams assigned to each of its new intellectual properties. Each team, in turn, is tasked with looking for ways to best capitalize on that property.

3-6b Executing Tactical Plans

Regardless of how well a tactical plan is formulated, its ultimate success depends on the way it is carried out. Successful implementation, in turn, depends on the astute use of resources, effective decision making, and insightful steps to ensure that the right things are done at the right times and in the right ways. A manager can see an absolutely brilliant idea fail because of improper execution.

Proper execution depends on a number of important factors. First, the manager needs to evaluate every possible course of action in light of the goal it is intended to reach. Next, he or she needs to make sure that each decision maker has the information and resources necessary to get the job done. Vertical and horizontal communication and integration of activities must be present to minimize conflict and inconsistent activities. And, finally, the manager must monitor ongoing activities derived from the plan to make sure they are achieving the desired results. This monitoring typically takes place within the context of the organization’s ongoing control systems.

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3-7Operational Planning

Another critical element in effective organizational planning is the development and implementation of operational plans. Operational plans are derived from tactical plans and are aimed at achieving operational goals. Thus operational plans tend to be narrowly focused, have relatively short time horizons, and involve lower-level managers. The two most basic forms of operational plans and specific types of each are summarized in Table 3.1.

Table 3.1

Types of Operational Plans



Single-use plan

Developed to carry out a course of action not likely to be repeated in the future


Single-use plan for a large set of activities


Single-use plan of less scope and complexity than a program

Standing plan

Developed for activities that recur regularly over a period of time


Standing plan specifying the organization’s general response to a designated problem or situation

Standard operating procedure

Standing plan outlining steps to be followed in particular circumstances

Rules and regulations

Standing plans describing exactly how specific activities are to be carried out

Organizations develop various operational plans to help achieve operational goals. In general, there are two types of single-use plans and three types of standing plans.

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3-7aSingle-Use Plans

single-use plan
 is developed to carry out a course of action that is not likely to be repeated in the future. As Disney planned its newest theme park in Shanghai, it developed numerous single-use plans for individual rides, attractions, and hotels. The two most common forms of single-use plans are programs and projects.


 is a single-use plan for a large set of activities. It might consist of identifying procedures for introducing a new product line, opening a new facility, or changing the organization’s mission. When United and Continental Airlines merged, a program was needed to integrate every facet of the two firm’s operations. The overall program required the integration of 1,400 technology systems (600 at Continental and 800 at United) and took three years to complete.


 is similar to a program but is generally of less scope and complexity. A project may be a part of a broader program, or it may be a self-contained single-use plan. During the United–Continental merger, one project that was handled by the beverage committee involved deciding what coffee to use on the new airline. What might seem like a simple decision required thousands of taste tests and changes in both coffee suppliers and coffee-making equipment and took over a year. Projects are also used to introduce a new product within an existing product line or to add a new benefit option to an existing salary package.

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3-7bStanding Plans

Whereas single-use plans are developed for nonrecurring situations, a 
standing plan
 is used for activities that recur regularly over a period of time. Standing plans can greatly enhance efficiency by making decision-making routine. Policies, standard operating procedures (SOPs), and rules and regulations are three kinds of standing plans.


As a general guide for action, a 
 is the most general form of standing plan that specifies the organization’s general response to a designated problem or situation. For example, McDonald’s has a policy that it will not grant a franchise to an individual who already owns a competing fast-food restaurant. Similarly, Starbucks has a policy that it will not franchise to individuals at all, instead retaining ownership of all Starbucks coffee shops. Likewise, a university admissions office might establish a policy that admission will be granted only to applicants with a minimum SAT score of 1,200 and a ranking in the top quarter of their high school class. Admissions officers may routinely deny admission to applicants who fail to reach these minimums. A policy is also likely to describe how exceptions are to be handled. The university’s policy statement, for example, might create an admissions appeals committee to evaluate applicants who do not meet minimum requirements but may warrant special consideration.

Standard Operating Procedures

Another type of standing plan is the 
. An SOP is more specific than a policy, in that it outlines the steps to be followed in particular circumstances. The admissions clerk at the university, for example, might be told that, when an application is received, he or she should

· (1)

set up an electronic file for the applicant;

· (2)

merge test score records, transcripts, and letters of reference to the electronic file as they are received; and

· (3)

forward the electronic file to the appropriate admissions director when it is complete.

Gallo Vineyards in California has a 300-page manual of SOPs. This planning manual is credited with making Gallo one of the most efficient wine-making operations in the United States. McDonald’s has SOPs explaining exactly how Big Macs are to be cooked, how long they can stay in the warming rack, and so forth.

Rules and Regulations

The narrowest of the standing plans, 
rules and regulations
, describe exactly how specific activities are to be carried out. Rather than guiding decision making, rules and regulations actually take the place of decision making in various situations. Each McDonald’s restaurant has a rule prohibiting customers from using its telephones, for example. The university admissions office might have a rule stipulating that if an applicant’s file is not complete two months before the beginning of a semester, the student cannot be admitted until the next semester. Of course, in most organizations a manager at a higher level can suspend or bend the rules. If the high school transcript of the child of a prominent university alumnus and donor arrives a few days late, the director of admissions might waive the two-month rule. Indeed, rules and regulations can become problematic if they are excessive or enforced too rigidly.

Rules and regulations and SOPs are similar in many ways. They are both relatively narrow in scope, and each can serve as a substitute for decision making. An SOP typically describes a sequence of activities, whereas rules and regulations focus on one activity. Recall our examples: The admissions SOP consisted of three activities, whereas the two-month rule related to only one activity. In an industrial setting, the SOP for orienting a new employee could involve enrolling the person in various benefit options, introducing him or her to coworkers and supervisors, and providing a tour of the facilities. A pertinent rule for the new employee might involve when to come to work each day.

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3-7cContingency Planning and Crisis Management

Another important type of planning is 
contingency planning
, or the determination of alternative courses of action to be taken if an intended plan of action is unexpectedly disrupted or rendered inappropriate. 
Crisis management
, a related concept, is the set of procedures the organization uses in the event of a disaster or other unexpected calamity. Some elements of crisis management may be orderly and systematic, whereas others may be more ad hoc and develop as events unfold.

A classic example of widespread contingency planning occurred during the late 1990s in anticipation of what was popularly known as the Y2K bug. Concerns about the impact of technical glitches in computers stemming from their internal clocks’ changing from 1999 to 2000 resulted in contingency planning for most organizations. Many banks and hospitals, for example, had extra staff available; some organizations created backup computer systems; and some even stockpiled inventory in case they could not purchase new products or materials.

The devastating hurricanes—Katrina and Rita—that hit the Gulf Coast in 2005 dramatically underscored the importance of effective crisis management. For example, inadequate and ineffective responses by the Federal Emergency Management Agency (FEMA) illustrated to many people that organization’s weaknesses in coping with crisis situations. On the other hand, some organizations responded much more effectively. Walmart began ramping up its emergency preparedness on the same day when Katrina was upgraded from a tropical depression to a tropical storm. In the days before the storm struck, Walmart stores in the region were supplied with powerful generators and large supplies of dry ice so they could reopen as quickly as possible after the storm had passed. In neighboring states, the firm also had scores of trucks standing by crammed with both emergency-related inventory for its stores and emergency supplies it was prepared to donate—bottled water, medical supplies, and so forth. And Walmart often beat FEMA by several days in getting those supplies delivered.

Natural disasters like hurricanes and earthquakes can have a devastating impact on business. Large companies often have crisis management plans in place to provide at least partial direction and support for those affected by such a disaster. But smaller businesses like this one are likely to suffer long-term financial consequences and many do not survive.


Seeing the consequences of poor crisis management after the terrorist attacks of September 11, 2001, and the 2005 hurricanes, many firms today are actively working to create new and better crisis management plans and procedures. For example, both Reliant Energy and Duke Energy rely on computer trading centers where trading managers actively buy and sell energy-related commodities. If a terrorist attack or a natural disaster such as a hurricane were to strike their trading centers, they would essentially be out of business. Prior to September 11, each firm had relatively vague and superficial crisis plans. But now they and most other companies have much more detailed and comprehensive plans in the event of another crisis. Both Reliant and Duke, for example, have created secondary trading centers at other locations. In the event of a shutdown at their main trading centers, these firms can quickly transfer virtually all their core trading activities to their secondary centers within 30 minutes or less. More recently, many businesses have developed contingency plans for dealing with a potential pandemic such as the H1N1 virus.

Unfortunately, however, because it is impossible to forecast the future precisely, no organization can ever be perfectly prepared for all crises. For example, due to 2011’s disastrous earthquake and tsunami in Japan, many U.S. companies faced shortages of goods and materials imported from that country. General Motors was the first automaker forced to temporarily shut down one of its truck plants because it could not get enough Japanese-made parts. Two months after the disaster, Toyota’s facilities in the United States were operating at less than 30 percent of capacity and did not return to full production until several months later.

More recently, United Airlines faced a public relations nightmare in 2017 when a passenger was forcibly dragged off of an airplane after refusing to give up his seat to accommodate an airline employee. Other passengers filmed the scene on smartphones, their videos went viral, and United’s stock price plunged. United’s CEO only made things worse when he sent employees an e-mail praising them for doing a good job. Only after several days of harsh criticism by the media and government officials did the airline make what experts considered to be a true apology and announce procedures to keep such an event from happening in the future.

The mechanics of contingency planning are shown in Figure 3.6. In relation to an organization’s other plans, contingency planning comes into play at four action points. At action point 1, management develops the organization’s basic plans. These may include strategic, tactical, and operational plans. As part of this development process, managers usually consider various contingency events. Some management groups even assign someone the role of devil’s advocate, who asks, “But what if. …?” about each course of action. A variety of contingencies is usually considered.

Figure 3.6Contingency Planning

Most organizations develop contingency plans. These plans specify alternative courses of action to be taken if an intended plan is unexpectedly disrupted or rendered inappropriate.

At action point 2, the plan that management chooses is put into effect. The most important contingency events are also defined. Only the events that are likely to occur and whose effects will have a substantial impact on the organization are used in the contingency-planning process. Next, at action point 3, the company specifies certain indicators or signs that suggest that a contingency event is about to take place. A bank might decide that a 2 percent drop in interest rates should be considered a contingency event. An indicator might be two consecutive months with a drop of 0.5 percent in each. As indicators of contingency events are being defined, the contingency plans themselves should also be developed. Examples of contingency plans for various situations are delaying plant construction, developing a new manufacturing process, and cutting prices.

After this stage, the organization’s managers monitor the indicators identified at action point 3. If the situation dictates, a contingency plan is implemented. Otherwise, the primary plan of action continues in force. Finally, action point 4 marks the successful completion of either the original or a contingency plan.

Contingency planning is becoming increasingly important for most organizations, especially for those operating in particularly complex or dynamic environments. Few managers have such an accurate view of the future that they can anticipate and plan for everything. Contingency planning is a useful technique for helping managers cope with uncertainty and change. However, crisis management, by its very nature, is more difficult to anticipate. But organizations that have a strong culture, strong leadership, and a capacity to deal with the unexpected stand a better chance of successfully weathering a crisis than other organizations.

Chapter Review

Summary of Learning Outcomes and Key Points

1. Summarize the planning process, and describe organizational goals.

· The planning process includes understanding the environment, formulating a mission, and creating goals and plans.

· Goals serve four basic purposes: They provide guidance and direction, facilitate planning, inspire motivation and commitment, and promote evaluation and control.

· With an understanding of the environmental context, managers develop a number of different types of goals and plans, including strategic, tactical, and operational plans.

2. Discuss the components of strategy and types of strategic alternatives.

· A strategy is a comprehensive plan for accomplishing the organization’s goals.

· Effective strategies address three organizational issues: distinctive competence, scope, and resource deployment.

3. Describe how to use SWOT analysis in formulating strategy.

· SWOT analysis considers an organization’s strengths, weaknesses, opportunities, and threats.

· Using SWOT analysis, an organization chooses strategies that support its mission, exploit its opportunities and strengths, neutralize its threats, and avoid its weaknesses.

4. Identify and describe various alternative approaches to business-level strategy formulation.

· A business-level strategy is the plan an organization uses to conduct business in a particular industry or market.

· Porter suggests that businesses may formulate a differentiation strategy, an overall cost leadership strategy, or a focus strategy.

· Business-level strategies may also take into account the stages in its products’ life cycles.

5. Identify and describe various alternative approaches to corporate-level strategy formulation.

· A corporate-level strategy is the plan an organization uses to manage its operations across several businesses.

· A firm that does not diversify is implementing a single-product strategy.

· An organization pursues a strategy of related diversification when it operates a set of businesses that are somehow linked.

· An organization pursues a strategy of unrelated diversification when it operates a set of businesses that are not logically associated with one another.

· Organizations manage diversification through the organization structure that they adopt and through portfolio management techniques. The BCG matrix classifies an organization’s diversified businesses as dogs, cash cows, question marks, or stars according to market share and market growth rate. The GE Business Screen classifies businesses as winners, losers, question marks, average businesses, or profit producers according to industry attractiveness and competitive position.

6. Discuss how tactical plans are developed and executed.

· Tactical plans are at the middle of the organization, have an intermediate time horizon, and are moderate in scope.

· Tactical plans are developed to implement specific parts of a strategic plan.

· Tactical plans must flow from strategy, specify resource and time issues, and commit human resources.

7. Describe the basic types of operational plans used by organizations.

· Operational plans are at the lower level of the organization, have a shorter time horizon, and are narrower in scope. They are derived from a tactical plan and are aimed at achieving one or more operational goals.

· Two major types of operational plans are single-use and standing plans. Single-use plans are designed to carry out a course of action that is not likely to be repeated in the future. Programs and projects are examples of single-use plans. Standing plans are designed to carry out a course of action that is likely to be repeated several times. Policies, SOPs, and rules and regulations are all standing plans.

· Contingency planning and crisis management are also emerging as very important forms of operational planning.

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Chapter Review

Discussion Questions

Questions for Review

1. Describe the nature of organizational goals. Be certain to include both the purposes and the kinds of goals.

2. Identify and describe Porter’s generic strategies.

3. What are the basic differences among a single-product strategy, a strategy based on related diversification, and one based on unrelated diversification?

4. What is tactical planning? What is operational planning? What are the similarities and differences between them?

5. What is contingency planning? How is it similar to and different from crisis management?

Questions for Analysis

1. Managers are sometimes criticized for focusing too much attention on the achievement of short-term goals. In your opinion, how much attention should be given to long-term versus short-term goals? In the event of a conflict, which should be given priority? Explain your answers.

2. Which strategy—business or corporate level—should a firm develop first? Describe the relationship between a firm’s business- and corporate-level strategies.

3. Volkswagen sold its original Beetle automobile in the United States until the 1970s. The original Beetle was made of inexpensive materials, was built using an efficient mass production technology, and offered few options. Then, in the 1990s, Volkswagen introduced its new Beetle, which has a distinctive style, provides more optional features, and is priced for upscale buyers. What was Volkswagen’s strategy with the original Beetle—product differentiation, low cost, or focus? Which strategy did Volkswagen implement with its new Beetle? Explain your answers.

4. What kind of plan—tactical or operational—should be developed first? Why? Does the order really matter? Why or why not?

5. Cite examples of operational plans that you use or encounter (now or in the past) at work, at school, or in your personal life.

Chapter Review

Experiential Exercise

The SWOT Analysis

Purpose: The SWOT analysis provides the manager with a cognitive model of the organization and its environmental forces. By developing the ability to conduct such an analysis, the manager builds both process knowledge and a conceptual skill. This skill builder focuses on the administrative management model. It will help you develop the coordinator role of the administrative management model. One of the skills of the coordinator is the ability to plan.

Introduction: This exercise helps you understand the complex interrelationships between environmental opportunities and threats and organizational strengths and weaknesses. Strategy formulation is facilitated by a SWOT analysis. First, the organization should study its internal operations to identify its strengths and weaknesses. Next, the organization should scan the environment to identify existing and future opportunities and threats. Then, the organization should identify the relationships that exist among these strengths, weaknesses, opportunities, and threats. Finally, major business strategies usually result from matching an organization’s strengths with appropriate opportunities or from matching the threats it faces with weaknesses that have been identified.

Instructions: First, read the short narrative of the Trek Bicycle Corporation’s external and internal environments found next in this chapter.

Second, divide into small group, and conduct a SWOT analysis for Trek based on the short narrative. You may also use your general knowledge and any information you have about Trek or the bicycle-manufacturing industry. Then prepare a group response to the discussion questions.

Third, as a class, discuss both the SWOT analysis and the groups’ responses to the discussion questions.

Main content

Chapter Review

Discussion Questions

1. What was the most difficult part of the SWOT analysis?

2. Why do most firms not develop major strategies for matches between threats and strengths?

3. Under what conditions might a firm develop a major strategy around a match between an opportunity and a weakness?

Trek’s External and Internal Environments

Today in the United States, inflation, cost of materials, and unemployment are fairly low and are not increasing. Emerging economies are growing more rapidly than the U.S. economy in general. Foreign trade is relatively open, so manufacturers face intense international and local competition, with pressure to keep prices low and opportunities to utilize low-cost labor and raw materials from around the world. New manufacturing technologies, futuristic materials, and e-commerce are becoming more prevalent and affordable. The political–legal climate is favorable to business in the United States and most developing nations, whereas regulation is higher in the European Union. The standard of living is stable, the population is aging, and ethnic diversity is increasing.

Today in the bicycle-manufacturing industry, manufacturers must invest very heavily in research and development (R&D) to compete effectively on a global scale. Domestically, the bicycle-manufacturing industry is fragmented, with the largest firm, Trek, controlling just 24 percent of sales. The industry’s customers are primarily local, independent bike retailers, a very fragmented group. The Internet, and eBay in particular, provides alternate channels for new and used bike sales. Bike riders, the ultimate purchasers, are interested in style, comfort, and high-tech features, as well as environmental and health issues. Suppliers of many bike components are small, local manufacturers located in developing countries. However, a few suppliers are more powerful, such as Shimano, an internationally known maker of bicycle components and cycling gear. Regulators are not a significant force for bicycle manufacturers, but Trek and others have numerous joint ventures. In one example, Trek teamed with AMD, Nike, and other companies to produce the high-performance cycle used by Lance Armstrong in the Tour de France and other races.

Trek has excellent R&D capability and effectively utilizes low-cost manufacturers in producing the more affordable products in its broad line of bikes. However, its Wisconsin factory produces its high-end lines and can customize a bike to a customer’s exact specifications. Trek is beginning to push to improve the customer bike-buying experience. The company will limit the number of retailers it uses and requires retailers to stock a higher percentage of Trek products. In return, it will provide training and funds to improve in-store marketing and increase customer loyalty.

Main content

Chapter Review

Building Effective Communication and Interpersonal Skills

Exercise Overview

Interpersonal skills refer to the manager’s ability to communicate with, understand, and motivate individuals and groups. Communication skills are used both to convey information to others effectively and to receive ideas and information effectively from others. Communicating and interacting effectively with many different types of individuals are essential planning skills. This exercise allows you to think through communication and interaction issues as they relate to an actual planning situation.

Exercise Background

Larger and more complex organizations require greater planning complexity to achieve their goals. NASA is responsible for the very complex task of managing U.S. space exploration and therefore has very complex planning needs.

In April 1970, NASA launched the Apollo 13 manned space mission, which was charged with exploration of the lunar surface. On its way to the moon, the ship developed a malfunction that could have resulted in the death of all the crew members. The crew members worked with scientists in Houston to develop a solution to the problem. The capsule was successful in returning to Earth, and no lives were lost.

Exercise Task

1. Watch and listen to the short clip from Apollo 13. (This movie was made by Universal Studios in 1995 and was directed by Ron Howard. The script was based on a memoir by astronaut and Apollo 13 mission captain Jim Lovell.) Describe the various types of planning and decision-making activities taking place at NASA during the unfolding of the disaster.

2. The biggest obstacles to effective planning in the first few minutes of this crisis were the rapid and unexpected changes occurring in a dynamic and complex environment. List elements of the situation that contributed to dynamism (elements that were rapidly changing). List elements that contributed to complexity. What kinds of actions did NASA’s planning staff take to overcome the obstacles presented by the dynamic and complex environment? Suggest any other useful actions the staff could have taken.

3. NASA managers and astronauts did not use a formal planning process in their approach to this situation. Why not? Is there any part of the formal planning process that could have been helpful? What does this example suggest to you about the advantages and limitations of the formal planning process?

Chapter Review

Management at Work

The Ingredients of a Sustainability Plan

“We can have real impact on the ground.”

—Roland Weening, president of coffee, Mondelēz International

As one of the world’s largest snack food companies, Mondelēz International operates in more than 80 countries, sourcing ingredients for coffee products from such countries as Vietnam, Indonesia, and Brazil and cocoa for chocolate from Côte d’Ivoire, Ghana, India, and the Dominican Republic. Mondelēz, which is headquartered in the Chicago suburb of Deerfield, Illinois, is committed to promoting sustainability throughout its supply chain and such initiatives as its Cocoa Life and Coffee Made Happy programs are designed to ensure that agricultural supplies are sustainably sourced.

In its “2013 Call for Well-Being Progress Report,” for instance, Mondelēz announced that with 10 percent of its cocoa supply sustainably sourced, the company is on target to reach its longer-term goals. In order to reach those goals, Mondelēz plans to spend $400 million over 10 years to train cocoa farmers in better agricultural and business practices and to provide them with access to planting materials. “We’re investing in much more than farming,” explains Bharat Puri, president of global chocolate and candy. “It’s about empowering cocoa communities as a whole so cocoa-farming villages become places where people want to live.”

President of coffee division Roland Weening agrees: “Together with our partners,” he says, “we can help farmers solve challenges and secure a more sustainable coffee supply.” For Mondelēz, then, working closely with communities of growers is not simply a matter of improving supply-chain efficiency: It also reflects the principle that the power of a big company to contribute to global sustainability can be harnessed most effectively when it’s extended to the activities of the smaller organizations with which it does business. “We can have real impact on the ground,” says Weening.

As of 2013, Weening’s division was sustainably sourcing 56 percent of its coffee and was well on its way to its goal of 70 percent by 2015. As a matter of fact, Mondelēz is big on goal setting in all of its sustainability initiatives. In wheat, for example, which is a core ingredient in the company’s line of biscuits, Mondelēz established the Harmony Charter, a partnership with members of its wheat supply chain designed to encourage “more respectful agricultural practices, which include wheat variety selection, soil management, limiting fertilizers and pesticides, and smart water use.” The company has set a goal of using Harmony wheat in 75 percent of its total biscuit volume by 2015. According to its 2013 report, it has reached a volume of 44 percent and is on target to meet that goal.

Mondelēz is also a member of the Roundtable on Sustainable Palm Oil (RSPO), which was established in 2004 to promote the production of sustainable oil palm products through the certification of industry practices. The company set a goal of having 100 percent of its palm oil supply RSPO certified by 2015, and in 2013, Mondelēz announced that the goal had been reached two years ahead of schedule. Now that the goal has been attained, says Dave Brown, VP of global commodities and strategic sourcing, we recognize the need to go further, so we also challenged our palm oil suppliers to provide transparency on the levels of traceability in their palm oil supply chains. Knowing the sources of palm oil supplies is an essential first step to enable scrutiny and promote improvements in practice on the ground.

Not surprisingly, Mondelēz set a goal for ensuring acceptable levels of supply-chain traceability—the ability to trace an ingredient through every stage of production and distribution. The company plans to review suppliers’ traceability practices and then publish an action plan for giving priority to suppliers whose practices are consistent with companywide sustainability principles. The goal is to eliminate all supplies that don’t meet standards by 2020.

To understand how Mondelēz wants to coordinate the entire range of its sustainability efforts, we might take a look at one of its most recent initiatives. In 2014, Mondelēz Ireland announced a partnership with Bord Bia Origin Green, a nationwide Irish food-related sustainability program, to promote sustainability throughout the country’s food sector. “We have already achieved significant positive change in Ireland,” explains Patrick Miskelly, manufacturing director of Mondelēz Ireland, “but we have a lot more goals to achieve,” and the company sees the Origin Green partnership as the means of taking its sustainability plans to the next level.

These plans revolve around the three manufacturing plants that Mondelēz operates in Ireland, and the immediate focus will be on the supply chain—in particular, the sourcing of raw materials. The company is already committed to local sourcing. At one plant, for example, 37 percent of all raw materials originate locally; another plant uses 21 million gallons of milk from local cooperatives that have adopted sustainable farming practices. Origin Green will add independent verification of farmers’ and food suppliers’ success in setting and achieving measurable sustainability goals.

Sustainable sourcing, however, is only one aspect of Mondelēz Ireland’s sustainability strategy. In terms of organizational planning, sustainable-sourcing programs reflect a set of carefully developed tactical plans designed to further a larger strategic plan. Sustainability goals, for example, also include the protection of Ireland’s rich natural resources and a reduction of the company’s overall environmental impact. Between 2005 and 2010, the company reduced waste at all three Irish plants by 42 percent, and the largest of the three has already met its goal of diverting all of its waste from Irish landfills by 2014.

Mondelēz Ireland also plans to reduce carbon emissions from natural gas consumption by 15 percent by 2016, and like most sustainability-conscious organizations, Mondelēz International regards its various sustainability plans as part of an overarching strategy to reduce its carbon footprint—the total of greenhouse gas (GHG) emissions for which it’s responsible. Between 2005 and 2010, the company reduced GHG emissions by 18 percent and then set a goal of another 15 percent reduction by 2015. As of 2013, it had attained a 9 percent reduction and considered itself on target. As for reducing energy use, Mondelēz admits that “more improvement is needed” if it’s to meet its goal of a 15 percent reduction by 2015; as of 2013, it had cut energy use by only 6 percent. On the upside, the company has exceeded its 2015 goal of reducing manufacturing waste by 15 percent, having achieved a 46 percent reduction by 2013.

Case Questions

1. Here are a series of Mondelēz’s publicly announced objectives for enhancing sustainability:

· Reducing production waste to landfill sites by 60 percent

· Reducing our energy and GHG in manufacturing

· Educating employees to reuse water and improve processes

· Reducing the impact of our operations

· Addressing child labor in the cocoa supply chain

· Reducing packaging material

· Eliminating 50 million pounds of packaging material

· Buying certified commodities

Which of these are best considered strategic plans? Tactical plans? Operational plans? Which ones might qualify as programs? Projects? Policies? Be sure to explain your reasoning for each item.

2. “Our business success,” says Mondelēz chairman and CEO Irene Rosenfeld, “is directly linked to enhancing the well-being of the people who make and enjoy our products and to supporting the communities where we grow our ingredients.”

· Assume that you’re a Mondelēz representative who’s been asked to give a presentation to students in an introductory management class. Explain Rosenfeld’s reasoning or her “philosophy” of “business success.” Be sure to give some examples of how and why this approach works at Mondelēz (which, remember, is a global snack food company).

3. Explain—hypothetically—how the following might emerge as barriers to sustainability planning at Mondelēz:

· Inappropriate goals

· An improper reward system

· A dynamic and complex environment

· Resistance to change

· Constraints

4. According to a 2014 McKinsey & Co. survey of executives, 36 percent included reputation management—building, maintaining, or improving corporate reputation—among the top three reasons for addressing sustainability. Explain how the following management strategies can help to enhance both sustainability and reputation:

· Setting aggressive internal goals for sustainability initiatives

· Adopting a unified sustainability strategy with clearly articulated priorities

· Building a broad leadership coalition in shaping sustainability strategy

· Ensuring that everyone in the organization understands the financial benefits of sustainability

Case References


Mondelēz International, “Environmental Footprint,” “Sustainable Resources and Agriculture,” “Agricultural Supply Chain,” “Cocoa,” 2014,, accessed on September 12, 2014; “Mondelēz International Releases First Well-Being Progress Report,” Market Watch (PR Newswire), September 9, 2014,, accessed on September 12, 2014; “Mondelēz ‘On Target’ to Meet Sustainability Goals,” Environmental Leader, September 10, 2014,, accessed on September 11, 2014; Max Sosland, “Mondelēz on Pace toward Wellness, Sustainability Goals,” Food Business News, September 10, 2014,, accessed on September 11, 2014; Eric Schroeder, “Mondelēz Reaches Palm Oil Goal Two Years Early,” Food Business News, January 16, 2014,, accessed on September 11, 2014; and Sorcha Corcoran, “Mondelēz Ireland Partners with Origin Green to Promote Sustainability,” Business & Leadership, May 9, 2014,, accessed on September 11, 2014.

Main content

Chapter Review

You Make the Call: Cruise Control

1. As a consumer, how has your attitude toward Carnival been affected by your understanding of this case? How about your attitude toward the cruise industry as a whole?

2. Says one specialist in digital strategy: In the online era, it becomes critical for the business of any size to have a social media crisis management plan—or even better, a crisis prevention plan—in place for those times when things go wrong. And it is truly the matter of “when” versus “if.”

Social media played a big role in both the Carnival Triumph and Costa Concordia crises. In what ways did the availability of social media undoubtedly make the crises more difficult for Carnival management to deal with? In what way could Carnival have used social media as a tool in its crisis management strategy?

3. Maritime lawyer Jim Walker believes that companies should be forgiven for such episodes as the grounding of the Costa Concordia—if they apply what he calls “the ‘three A’s’ of cruise line crisis management”:

· Companies should be forgiven if they demonstrate a humble and respectful attitude; if they appear on the scene to take stock of the problems they caused; and if they take prompt action to help those injured by their conduct. 

In what ways did Carnival fail to apply Walker’s “three A’s”? What should the company have done in order to apply Walker’s “three A’s”? Had you been a passenger on either the Carnival Triumph or Costa Concordia, what would it have taken for you to “forgive” the company?

4. “After a crisis,” says Andrew Griffin, CEO of the crisis management company Regester Larkin,

· stakeholders will be re-evaluating their opinions of the organization, which in turn affects its wider reputation. Reputations that have been built over many years can be severely challenged or destroyed in a small number of days. … This means that reaching out to stakeholders becomes even more important.

Recall our discussion of “Organizational Stakeholders” in Chapter 4. Who are the stakeholders of Carnival Cruise Lines? How is each group of stakeholders affected by such crises as the Triumph and Costa Concordia? How might each group affect the company’s reputation? How can the company deal with each group as part of its crisis management strategy?

Managing Decision Making

Chapter 4 Introduction

· 4-1

The Nature of Decision Making

· 4-1a

Decision Making Defined

· 4-1b

Types of Decisions

· 4-1c

Decision-Making Conditions

· 4-2

Rational Perspectives on Decision Making

· 4-2a

The Classical Model of Decision Making

· 4-2b

Steps in Rational Decision Making

· 4-2c

Evidence-Based Management

· 4-3

Behavioral Aspects of Decision Making

· 4-3a

The Administrative Model

· 4-3b

Political Forces in Decision Making

· 4-3c

Intuition and Escalation of Commitment

· 4-3d

Risk Propensity and Decision Making

· 4-3e

Ethics and Decision Making

· 4-4

Group and Team Decision Making in Organizations

· 4-4a

Forms of Group and Team Decision Making

· 4-4b

Advantages of Group and Team Decision Making

· 4-4c

Disadvantages of Group and Team Decision Making

· 4-4d

Managing Group and Team Decision-Making Processes

Chapter Review

Summary of Learning Outcomes and Key Points

Discussion Questions

Experiential Exercise

Building Effective Conceptual Skills

Management at Work

You Make the Call: Moneyball on Steroids

Main content

Chapter Introduction

Learning Outcomes

After studying this chapter, you should be able to:

· 1Define decision making and discuss types of decisions and decision-making conditions.

· 2Discuss rational perspectives on decision making, including the steps involved.

· 3Describe the behavioral aspects of decision making.

· 4Discuss group and team decision making, including its advantages and disadvantages and how it can be more effectively managed.

Management in Action

Moneyball on Steroids

“All we can really control is the process and the decision making that comes from that.”

—Sig Mejdal, Houston Astros director of decision sciences

Back in 1989 Jeff Luhnow, a Northwestern University MBA candidate, started dabbling with fantasy baseball. Once a week, he’d enter USA Today statistics into a personal spreadsheet and fax copies to team owners. He was also a team owner himself and reports that he was pretty successful at drafting the right Major League players to fill out his fantasy roster. “I probably won the league about four times in the ten years I did it,” Luhnow recalls. “If you had to punch in every player in the National League by hand, you got to know them pretty well.” After finishing his MBA he joined McKinsey and Co., one of the world’s premier consulting agencies. Luhnow’s specialty was the application of advanced analytics to business decision making. In other words, he collected massive amounts of data and made sense—and use—of it.

The Houston Astros pair their algorithm-oriented management team, along with the quantitative information that their scouts and coaches amass. This combination may prove to be a winner in seasons to come.

Eric Christian Smith/Getty Images

Eventually, though, in 2003 his analytics skills and love of baseball merged and he left McKinsey to join the scouting department for the St. Louis Cardinals, who hired him to design a better system for evaluating players. The challenge, as Luhnow understood it, was “creating and sustaining a scouting and player-development pipeline that can consistently produce Major League players.” One of the first things that he did was hire former NASA engineer Sig Mejdal to design a system for organizing all the new data sources that were becoming available to baseball analysts and executives. “These sorts of skills,” admits Luhnow, “weren’t valued 10 or 15 years ago—or really valuable—because the data that you can use today to help you makes decisions wasn’t available.”

That data are not only more useful—there’s a lot more of it. In fact, says Luhnow, “it’s overload for any human being.” He hastens to point out that, however, human beings have to make decisions at critical points in the process—who to draft, who to promote, who to re-sign, and who to release. Baseball decision makers, adds Mejdal, whose NASA research was designed to uncover the limits of human intuition in making predictions, must deal with an “overwhelming amount of information from different sources with different degrees of certainty associated with each.” Technically speaking, it’s his responsibility, explains Mejdal, to “identify the attributes that lead to an understanding of the expectancies and variabilities relevant to a particular decision. … That’s my job: Creating decision aids based on the analysis in order to assist our decision makers.”

In 2006, the Cardinals promoted Luhnow to VP of scouting and player development, and while he oversaw the team’s amateur draft, no team in baseball selected more players who would make it to the Majors. In 2009, Luhnow left the Cardinals to become the general manager of the Houston Astros. He immediately hired Mejdal as “Director of Decision Sciences.” New Astros owner Jim Crane had made his fortune in the logistics business and attributed his success to better data: “If you have better information,” he says, “you can run your competitors ragged.” He wanted to turn the Astros into the Cardinals, and, fortunately, he also brought a wealth of patience to the task. When Luhnow and Mejdal got their first look at the numbers, they knew what their strategy had to be: They would have to be ruthlessly efficient in stripping down the organization in order to rebuild it. That meant that Crane would have to put up with a few years of losing both baseball games and money before things would turn around.

In Luhnow’s first two years, the Astros won 106 games and lost 218. They drew a total of 3.3 million fans—about the same number as they drew in 2007 alone—and local TV ratings occasionally came in at 0.0. Even worse, little help was on the way from the team’s minor league system: In 2010, Baseball America declared it the worst in baseball. Luhnow, however, was thinking ahead: “When you’re in 2017,” he hypothesized, “you don’t really care that much about whether you lost 98 or 107 games in 2012. You care about how close you are to winning a championship in 2017.”

The Astros lost 107 games in 2012—and 111 in 2013—but things started to look up in 2014, when they lost only 92. Attendance started to pick up, and, more importantly, ESPN ranked the Houston farm system the best in baseball. Like the benchmark Cardinals, the Astros want to build a perennial mid-market contender from within, and 2014 witnessed the first fruits of that strategy, as young talent from the minor league system began taking the field with the Major League team. Mejdal admits, of course, that the Astros’ algorithm-oriented management team can’t guarantee results over which it has no control. “All we can really control,” he says, “is the process and the decision making that comes from that.… Our attention and energies are focused on the process. There are no guarantees in baseball, but we feel that if we have a good process, as time goes on, we will have good results.”

What is that process? “The basis of all our decisions,” explains Luhnow, “is the reports we get from our scouts.” All of those reports then go into the team’s proprietary system—dubbed Ground Control—where they’re collated with scouting reports from previous years. Some of the data are “hard”—how fast is a pitcher’s fastball, how fast can a player get to first base—a lot of it is “soft”—what’s a player’s work ethic, how likely is he to get injured. An algorithm-driven system translates every piece of information into a single language and runs regressions against a database stretching back to the mid-1990s. If a young pitcher’s mechanics don’t conform to a model described by reports, the system tells Luhnow and Mejdal how often previous pitchers with the same variation got hurt. If a young hitter’s power stroke is similar to that of past players at his age, it tells them how his swing is likely to develop. The final result is a numerical projection that gives a quantitative answer to a single bottom-line question: How many runs is a player likely to produce (or prevent) compared with what the team will probably have to pay him?

Astro scouts, most of them longtime baseball men, are apparently comfortable with the system: “They’re not asking us to be [statisticians],” says one veteran scout. “They’re asking us to do what we’ve always done.” The difference is the analytics-driven approach of Luhnow’s front-office team to the synthesis of quantitative and qualitative information. “How do you combine the soft information with the hard information,” asks Luhnow, “in a way that allows you to make the best decisions? That’s the crux of what we’re trying to do here.” The question, in other words, is how do you make decision making more reliable, and the answer—at least for ex-blackjack dealer Sig Mejdal—is to produce a metric that will make decisions about baseball players as simple as hit or stay.

Regardless of their industry—banking, retailing, manufacturing, transportation, health care, or professional sports—all managers have to make decisions about resource allocations, goals, options, and strategies. Indeed, making effective decisions, as well as recognizing when bad decisions have been made and quickly responding to mistakes, is a key ingredient in organizational effectiveness. Indeed, some experts believe that decision making is the most basic and fundamental of all managerial activities. Thus we discuss it here in the context of the first management function, planning. Keep in mind, however, that although decision making is perhaps most closely linked to the planning function, it is also part of organizing, leading, and controlling.

We begin our discussion by exploring the nature of decision making. We then describe rational perspectives on decision making. Behavioral aspects of decision making are then introduced and described. We conclude with a discussion of group and team decision making.

4-1 The Nature of Decision Making

A few years ago managers at Disney made the decision to pay somewhat more than $4 billion for the Lucasfilm properties, including the characters and stories in the Star Wars mythology. At about the same time, the general manager of the Ford dealership in Bryan, Texas, made a decision to sponsor a local youth soccer team for $200. Each of these examples reflects a decision, but the decisions differ in many ways. Thus, as a starting point in understanding decision making, we must first explore the meaning of decision making as well as types of decisions and the conditions under which decisions are made.

4-1aDecision Making Defined

Decision making can refer to either a specific act or a general process. 
Decision making
 is the act of choosing one alternative from among a set of alternatives. The decision-making process, however, is much more than this. One step of the process, for example, is that the person making the decision must both recognize that a decision is necessary and identify the set of feasible alternatives before selecting one. Hence, the 
decision-making process
 includes recognizing and defining the nature of a decision situation, identifying alternatives, choosing the “best” alternative, and putting it into practice.

Disney’s decision to buy Lucasfilms was a nonprogrammed decision. Since the acquisition Disney has invested hundreds of millions of additional dollars in new Star Wars movies and new Star Wars attractions at its theme parks in order to leverage the acquisition and will almost certainly generate huge profits for years to come.

Handout/Getty Images Entertainment/Getty Images

The word best, of course, implies effectiveness. Effective decision making requires that the decision maker understands the situation driving the decision. Most people would consider an effective decision to be one that optimizes some set of factors, such as profits, sales, employee welfare, and market share. In some situations, though, an effective decision may be one that minimizes loss, expense, or employee turnover. It may even mean selecting the best method for going out of business, laying off employees, or terminating a strategic alliance.

We should also note that managers make decisions about both problems and opportunities. For example, making decisions about how to cut costs by 10 percent reflects a problem—an undesirable situation that requires a solution. But decisions are also necessary in situations of opportunity. Learning that the firm is earning higher-than-projected profits, for example, requires a subsequent decision. Should the extra funds be used to increase shareholder dividends, reinvest in current operations, or expand into new markets?

Of course, it may take a long time before managers can know if the right decision was made. For example, was the $4 billion price tag for Lucasfilm too high? Too low? Disney has started churning out new Star Wars movies but also investing heavily in new Star Wars attractions at theme parks in Florida and California. The movies have been successful but will the new theme park attractions pay for themselves? The price tag also included the rights to other Lucasfilm properties such as Indiana Jones, but Disney hasn’t decided what to do with those assets yet. And from the other side of the table could George Lucas have gotten more money if he had gotten Disney and other movie studios into a bidding war? It will be years before the effectiveness of these decisions can be truly assessed.

4-1bTypes of Decisions

Managers must make many different types of decisions. In general, however, most decisions fall into one of two categories: programmed and nonprogrammed.

Programmed decisions
 are relatively structured or recur with some frequency (or both). Starbucks uses programmed decisions to purchase new supplies of coffee beans, cups, and napkins, and its employees are trained in exact procedures for brewing coffee. Likewise, the Bryan Ford dealer made a decision that he will sponsor a youth soccer team each year. Thus, when the soccer club president calls, the dealer already knows what he will do. Many decisions regarding basic operating systems and procedures and standard organizational transactions are of this variety and can therefore be programmed.

Nonprogrammed decisions
, on the other hand, are relatively unstructured and occur much less often than programmed decisions. Disney’s decision to buy Lucasfilm was a nonprogrammed decision. Managers faced with such decisions must treat each one as unique, investing enormous amounts of time, energy, and resources into exploring the situation from all perspectives. Intuition and experience are major factors in nonprogrammed decisions. Most of the decisions made by top managers involving strategy (including mergers, acquisitions, and takeovers) and organization design are nonprogrammed. So are decisions about new facilities, new products, labor contracts, and legal issues.

4-1cDecision-Making Conditions

Just as there are different kinds of decisions, there are also different conditions under which decisions are made. Managers sometimes have an almost perfect understanding of the conditions surrounding a decision, but at other times they have few clues about those conditions. In general, as shown in Figure 4.1, the circumstances that exist for the decision maker are conditions of certainty, risk, or uncertainty.

Figure 4.1Decision-Making Conditions

Most major organizational decisions today are made under a state of uncertainty. Managers making decisions in these circumstances must be sure to learn as much as possible about the situation and approach the decision from a logical and rational perspective.

© Cengage

Decision Making under Certainty

When the decision maker knows with reasonable certainty what the alternatives are and what conditions are associated with each alternative, a 
state of certainty
 exists. Suppose, for example, that managers at Singapore Airlines make a decision to buy five new jumbo jets. Their next decision would be from whom to buy them. Because there are only two companies in the world that make jumbo jets, Boeing and Airbus, Singapore Airlines knows its options exactly. Each has proven products and will guarantee prices and delivery dates. The airline thus knows the alternative conditions associated with each. There is little ambiguity and relatively little chance of making a bad decision.

Few organizational decisions, however, are made under conditions of true certainty. The complexity and turbulence of the contemporary business world make such situations rare. Even the airplane purchase decision we just considered has less certainty than it appears. The aircraft companies may not be able to really guarantee delivery dates, so they may write cost increase or inflation clauses into contracts. Thus the airline may be only partially certain of the conditions surrounding each alternative.

Many bargaining sessions between representatives of management and labor unions occur under conditions of risk, especially during the early stages of negotiations. Each side may take extreme positions, and the other side may be unsure about how much they may be willing to compromise and about which issues are more important than others.

Bloomberg/Getty Images

Decision Making under Risk

A more common decision-making condition is a state of risk. Under a 
state of risk
, the availability of each alternative and its potential payoffs and costs are all associated with probability estimates. Suppose, for example, that a labor contract negotiator for a company receives a “final” offer from the union right before a strike deadline. The negotiator will have two alternatives: to accept or to reject the offer. The risk centers on whether the union representatives are bluffing. If the company negotiator accepts the offer, she avoids a strike but commits to a relatively costly labor contract. If she rejects the contract, she may get a more favorable contract if the union is bluffing, but she may provoke a strike if it is not.

On the basis of past experiences, relevant information, the advice of others, and her own judgment, she may conclude that there is about a 75 percent chance that union representatives are bluffing and about a 25 percent chance that they will back up their threats. Thus she can base a calculated decision on the two alternatives (accept or reject the contract demands) and the probable consequences of each. When making decisions under a state of risk, managers must reasonably estimate the probabilities associated with each alternative. For example, if the union negotiators are committed to a strike if their demands are not met, and the company negotiator rejects their demands because she guesses they will not strike, her miscalculation will prove costly. As indicated in Figure 4.1, decision making under conditions of risk is accompanied by moderate ambiguity and the chances of a bad decision.

Decision Making under Uncertainty

Most of the major decision making in contemporary organizations is done under a 
state of uncertainty
, where the decision maker does not know all the alternatives, the risks associated with each, or the likely consequences of each alternative. This uncertainty stems from the complexity and dynamism of contemporary organizations and their environments. For example, airlines continually face uncertainty stemming from fluctuations in fuel costs. In large part to reduce this uncertainty, Delta Air Lines took the unusual step of buying its own oil refinery. The emergence of the new technology and social media as significant forces in today’s competitive environment has served to increase both revenue potential and uncertainty for most managers.

To make effective decisions in these circumstances, managers must acquire as much relevant information as possible and approach the situation from a logical and rational perspective. Intuition, judgment, and experience always play major roles in the decision-making process under conditions of uncertainty. Even so, uncertainty is the most ambiguous condition for managers and the one in which they are most prone to error. Indeed, many of the problems associated with the downfall of Arthur Andersen resulted from the firm’s apparent difficulties in responding to ambiguous and uncertain decision parameters regarding the firm’s moral, ethical, and legal responsibilities.

4-2 Rational Perspectives on Decision Making

Most managers like to think of themselves as rational decision makers. And, indeed, many experts argue that managers should try to be as rational as possible in making decisions. This section highlights the fundamental and rational perspectives on decision making.

4-2aThe Classical Model of Decision Making

classical decision model
 is a prescriptive approach that tells managers how they should make decisions. It rests on the assumptions that managers are logical and rational and that they make decisions that are in the organization’s best interests. Figure 4.2 shows how the classical model views the decision-making process:

1. Decision makers have complete information about the decision situation and possible alternatives.

2. They can effectively eliminate uncertainty to achieve a decision condition of certainty.

3. They evaluate all aspects of the decision situation logically and rationally.

Figure 4.2The Classical Model of Decision Making

© Cengage

As we see later, these conditions rarely, if ever, actually exist.

4-2bSteps in Rational Decision Making

A manager who really wants to approach a decision rationally and logically should try to follow the 
steps in rational decision making
, listed in Table 4.1. These steps in rational decision making help keep the decision maker focused on facts and logic and help guard against inappropriate assumptions and pitfalls.

Table 4.1

Steps in the Rational Decision-Making Process





Recognizing and defining the decision situation

Some stimulus indicates that a decision must be made. The stimulus may be positive or negative.

A plant manager sees that employee turnover has increased by 5 percent.


Identifying alternatives

Both obvious and creative alternatives are desired. In general, the more important the decision, the more alternatives should be generated.

The plant manager can increase wages, increase benefits, or change hiring standards.


Evaluating alternatives

Each alternative is evaluated to determine its feasibility, its satisfactoriness, and its consequences.

Increasing benefits may not be feasible. Increasing wages and changing hiring standards may satisfy all conditions.


Selecting the best alternative

Consider all situational factors, and choose the alternative that best fits the manager’s situation.

Changing hiring standards will take an extended period of time to cut turnover, so increase wages.


Implementing the chosen alternative

The chosen alternative is implemented into the organizational system.

The plant manager may need permission from corporate headquarters. The human resources department establishes a new wage structure.


Following up and evaluating the results

At some time in the future, the manager should ascertain the extent to which the alternative chosen in Step 4 and implemented in Step 5 has worked.

The plant manager notes that, six months later, turnover dropped to its previous level.

© Cengage

Although the presumptions of the classical decision model rarely exist, managers can still approach decision making with rationality. By following the steps of rational decision making, managers ensure that they are learning as much as possible about the decision situation and its alternatives.

Recognizing and Defining the Decision Situation

The first step in rational decision making is recognizing that a decision is necessary—that is, there must be some stimulus or spark to initiate the process. For many decisions and problem situations, the stimulus may occur without any prior warning. When equipment malfunctions, the manager must decide whether to repair or replace it. Or, when a major crisis erupts, as described in Chapter 3, the manager must quickly decide how to deal with it. As we already note, the stimulus for a decision may be either positive or negative. A manager who must decide how to invest surplus funds, for example, faces a positive decision situation. A negative financial stimulus could involve having to trim budgets because of cost overruns.

Inherent in problem recognition is the need to define precisely what the problem is. The manager must develop a complete understanding of the problem, its causes, and its relationship to other factors. This understanding comes from careful analysis and thoughtful consideration of the situation. Consider the situation currently being faced in the international air travel industry. Because of the growth of international travel related to business, education, and tourism, global carriers such as Singapore Airlines, KLM, JAL, Emirates, British Airways, and American Airlines need to increase their capacity for international travel. Because most major international airports are already operating at or near capacity, adding a significant number of new flights to existing schedules is not feasible. As a result, the most logical alternative is to increase capacity on existing flights. Thus Boeing and Airbus, the world’s only manufacturers of large commercial aircraft, recognized an important opportunity and defined their decision situation as how to best respond to the need for increased global travel capacity.

Identifying alternatives sometimes requires managers to carefully reflect on and consider all aspects of the decision situation. This process may be based partially on rational analytical thinking but also requires creativity in many cases.

Peter Ruter/

Identifying Alternatives

Once the decision situation has been recognized and defined, the second step is to identify alternative courses of effective action. Developing both obvious, standard alternatives and creative, innovative alternatives are generally useful. In general, the more important the decision, the more attention is directed to developing alternatives. If the decision involves a multimillion-dollar relocation, a great deal of time and expertise will be devoted to identifying the best locations. AT&T spent over a year searching before selecting the Dallas–Fort Worth area for its new corporate headquarters. If the problem is to choose a color for the company softball team’s uniforms, less time and expertise will be brought to bear.

Increased international air travel led both Boeing and Airbus to decide to invest in new aircraft capable of transporting more passengers over greater distances. However, the two companies came to very different decisions about the best kinds of aircraft to serve this growing demand.


Although managers should seek creative solutions, they must also recognize that various constraints often limit their alternatives. Common constraints include legal restrictions, moral and ethical norms, authority constraints, available technology, economic considerations, and unofficial social norms. Boeing and Airbus identified three different alternatives to address the decision situation of increasing international airline travel capacity: They could independently develop new large planes, they could collaborate in a joint venture to create a single new large plane, or they could modify their largest existing planes to increase their capacity.

Evaluating Alternatives

The third step in the decision-making process is evaluating each of the alternatives. Figure 4.3 presents a decision tree that can be used to judge different alternatives. The figure suggests that each alternative be evaluated in terms of its feasibility, satisfactoriness, and consequences. The first question to ask is whether an alternative is feasible. Is it within the realm of probability and practicality? For a small, struggling firm, an alternative requiring a huge financial outlay is probably out of the question. Other alternatives may not be feasible because of legal barriers. And limited human, material, and information resources may make other alternatives impractical.

Figure 4.3Evaluating Alternatives in the Decision-Making Process

Managers must thoroughly evaluate all the alternatives; this increases the chances that the alternative that is finally chosen will be successful. Failure to evaluate an alternative’s feasibility, satisfactoriness, and consequences can lead to a wrong decision.

© Cengage

When an alternative has passed the test of feasibility, it must next be examined to see how well it satisfies the conditions of the decision situation. For example, a manager searching for ways to double production capacity might initially consider purchasing an existing plant from another company. If more detailed analysis reveals that the new plant would increase production capacity by only 35 percent, this alternative may not be satisfactory. Finally, when an alternative has proven both feasible and satisfactory, its probable consequences must still be assessed. To what extent will a particular alternative influence other parts of the organization? What financial and nonfinancial costs will be associated with such influences? For example, a plan to boost sales by cutting prices may disrupt cash flows, require a new advertising program, and alter the behavior of sales representatives because it requires a different commission structure. The manager, then, must put “price tags” on the consequences of each alternative. Even an alternative that is both feasible and satisfactory must be eliminated if its consequences are too expensive for the total system. Airbus felt it would be at a disadvantage if it tried to simply enlarge its existing planes, because the Boeing 747 was already the largest aircraft being made and could readily be expanded to remain the largest. Boeing, meanwhile, was seriously concerned about the risk inherent in building a new and even larger plane, even if it shared the risk with Airbus as a joint venture.

Selecting the Best Alternative

Even though many alternatives fail to pass the triple tests of feasibility, satisfactoriness, and affordable consequences, two or more alternatives may remain. Choosing the best of these is the real crux of decision making. One approach is to choose the alternative with the optimal combination of feasibility, satisfactoriness, and affordable consequences. Even though most situations do not lend themselves to objective, mathematical analysis, the manager can often develop subjective estimates and weights for choosing an alternative.

Optimization is also a frequent goal. Because a decision is likely to affect several individuals or units, any feasible alternative will probably not maximize all of the relevant goals. Suppose that the manager of the Kansas City Royals needs to select a new outfielder for the upcoming baseball season. Bill hits .350 but has difficulty catching fly balls, Joe hits only .175 but is outstanding in the field, and Sam hits .290 and is a solid but not an outstanding fielder. The manager would probably select Sam because of the optimal balance of hitting and fielding. Decision makers should also remember that finding multiple acceptable alternatives may be possible; selecting just one alternative and rejecting all the others might not be necessary. For example, the Royals’ manager might decide that Sam will start each game, Bill will be retained as a pinch hitter, and Joe will be retained as a defensive substitute. In many hiring decisions, the candidates remaining after evaluation are ranked. If the top candidate rejects the offer, it may be automatically extended to the number-two candidate and, if necessary, to the remaining candidates in order. For the reasons noted earlier, Airbus proposed a joint venture with Boeing. Boeing, meanwhile, decided that its best course of action was to modify its existing 747 to increase its capacity. As a result, Airbus then decided to proceed on its own to develop and manufacture a new jumbo jet. Boeing, however, also decided that in addition to modifying its 747, it would also develop a new plane to offer as an alternative, albeit one not as large as the 747 or the proposed Airbus plane.

Implementing the Chosen Alternative

After an alternative has been selected, the manager must put it into effect. In some decision situations, implementation is fairly easy; in others, it is more difficult. In the case of an acquisition, for example, managers must decide how to integrate all of the new business’s activities, including purchasing, human resource practices, and distribution, into an ongoing organizational framework. For example, when Hewlett-Packard made the decision to buy Compaq Computer, managers estimated that it would take at least a year to integrate the two firms into a single one. Operational plans, which we discussed in Chapter 3, are useful in implementing alternatives.

Managers must also consider people’s resistance to change when implementing decisions. The reasons for such resistance include insecurity, inconvenience, and fear of the unknown. Managers should anticipate potential resistance at various stages of the implementation process. (Resistance to change is covered in Chapter 7.) Managers should also recognize that even when all alternatives have been evaluated as precisely as possible and the consequences of each alternative weighed, unanticipated consequences are still likely. Any number of factors—such as unexpected cost increases, a less-than-perfect fit with existing organizational subsystems, or unpredicted effects on cash flow or operating expenses—could develop after implementation has begun. Boeing set its engineers to work expanding the capacity of its 747 from 416 passengers to as many as 520 passengers by adding 30 feet to the plane’s body. The company has also been developing its new plane intended for international travel, the Boeing 787 Dreamliner. Airbus engineers, meanwhile, spent years developing and constructing its new jumbo jet, the A380; it can be equipped with escalators and elevators, and is capable of carrying 655 passengers. Airbus’s development costs alone were estimated to be more than $12 billion.

Airbus and Boeing used rational perspectives to arrive at different decisions about major investments in development new long-haul aircraft. Airbus decided to build the A380, the world’s largest passenger plane. Boeing, on the other hand, made the decision to build the smaller but much more fuel-efficient 787 Dreamliner.

Ventura/ & vaalaa/

Following up and Evaluating the Results

The final step in the decision-making process requires that managers evaluate the effectiveness of their decision—that is, they should make sure that the chosen alternative has served its original purpose. If an implemented alternative appears not to be working, the manager can respond in several ways. Another previously identified alternative (the original second or third choice, for instance) could be adopted. Or the manager might recognize that the situation was not correctly defined to begin with and start the process all over again. Finally, the manager might decide that the original alternative is in fact appropriate but has not yet had time to work or should be implemented in a different way.

Failure to evaluate decision effectiveness may have serious consequences. The Pentagon once spent $1.8 billion and eight years developing the Sergeant York antiaircraft gun. From the beginning, tests revealed major problems with the weapon system, but not until it was in its final stages, when it was demonstrated to be completely ineffective, was the project scrapped.

At this point, both Boeing and Airbus are still learning about the consequences of their decisions. Airbus’s A380 has been placed in commercial service. Airbus estimated that it would need to sell 420 A380s before it starts making a profit, and it may never reach that level. A few global airlines bought A380s but only Emirates has current orders for the plane. Boeing’s redesigned 747 also stalled out and is being phased out of passenger service. Meanwhile, it appeared for a while that Boeing’s commitment to the new 787 might prove to be the best decision of all. A key element of the new plane is that it is much more fuel efficient than other international airplanes. Given the dramatic surge in fuel costs in recent years, a fuel-efficient option like the 787 is likely to be an enormous success. However, the 787 suffered from numerous manufacturing problems and was not available for passenger service until 2012 (over three years late). The plane also experienced problems in 2013 and was grounded for several weeks. Fortunately for Boeing, however, those issues appear to have been resolved and the 787 now seems to be performing well.

4-2cEvidence-Based Management

Rational perspectives on decision making have recently been reformulated under the concept of evidence-based management. Stanford University professors Jeffrey Pfeffer and Bob Sutton, authors of Hard Facts, Dangerous Half-Truths, and Total Nonsense, have put out a call for a renewed reliance on rationality in managerial decision making—an approach that they call evidence-based management (EBM). “Management decisions,” they argue, “[should] be based on the best evidence, managers [should] systematically learn from experience, and organizational practices [should] reflect sound principles of thought and analysis.” They define evidence-based management as “a commitment to finding and using the best theory and data available at the time to make decisions,” but their “Five Principles of Evidence-Based Management” make it clear that EBM means more than just sifting through data and crunching numbers. Here’s what they recommend:

1. Face the hard facts and build a culture in which people are encouraged to tell the truth, even if it’s unpleasant.

2. Be committed to “fact-based” decision making—which means being committed to getting the best evidence and using it to guide actions.

3. Treat your organization as an unfinished prototype—encourage experimentation and learning by doing.

4. Look for the risks and drawbacks in what people recommend (even the best medicine has side effects).

5. Avoid basing decisions on untested but strongly held beliefs, what you have done in the past, or uncritical “benchmarking” of what winners do.

Pfeffer and Sutton are particularly persuasive when they use EBM to question the outcomes of decisions based on “untested but strongly held beliefs” or on “uncritical ‘benchmarking.’” Take, for instance, the popular policy of paying high performers significantly more than low performers. Pfeffer and Sutton’s research shows that pay-for-performance policies get good results when employees work solo or independently. But it’s another matter altogether when it comes to collaborative teams—the kind of teams that make so many organizational decisions today. Under these circumstances, the greater the gap between highest- and lowest-paid executives, the weaker the firm’s financial performance. Why? According to Pfeffer and Sutton, wide disparities in pay often weaken both trust among team members and the social connectivity that contributes to strong team-based decision making.

Or consider another policy for evaluating and rewarding talent. Pioneered at General Electric by the legendary Jack Welch, the practice of “forced ranking” divides employees into three groups based on performance—the top 20 percent, middle 70 percent, and bottom 10 percent—and terminates those at the bottom. Pfeffer and Sutton found that, according to many HR managers, forced ranking impaired morale and collaboration and ultimately reduced productivity. They also concluded that automatically firing the bottom 10 percent resulted too often in the unnecessary disruption of otherwise effective teamwork. That’s how they found out that 73 percent of the errors committed by commercial airline pilots occur on the first day that reconfigured crews work together.

4-3Behavioral Aspects of Decision Making

If all decision situations were approached as logically as described in the previous section, more decisions might prove to be successful. Yet decisions are often made with little consideration for logic and rationality. Some experts have estimated that U.S. companies use rational decision-making techniques less than 20 percent of the time. And, even when organizations try to be logical, they sometimes fail. For example, when Starbucks opened its first coffee shop in New York, it relied on scientific marketing research, taste tests, and rational deliberation in making a decision to emphasize drip over espresso coffee. However, that decision still proved wrong, as New Yorkers strongly preferred the same espresso-style coffees that were Starbucks mainstays in the West. Hence, the firm had to hastily reconfigure its stores to better meet customer preferences.

On the other hand, sometimes when a decision is made with little regard for logic, it can still turn out to be correct. An important ingredient in how these forces work is the behavioral aspect of decision making. The administrative model better reflects these subjective considerations. Other behavioral aspects include political forces, intuition and escalation of commitment, risk propensity, and ethics.

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4-3aThe Administrative Model

Herbert A. Simon was one of the first experts to recognize that decisions are not always made with rationality and logic. Simon was subsequently awarded the Nobel Prize in Economics. Rather than prescribing how decisions should be made, his view of decision making, now called the 
administrative model
, describes how decisions often actually are made. As illustrated in Figure 4.4, the model holds that decision makers

· (1)

use incomplete and imperfect information,

· (2)

are constrained by bounded rationality, and

· (3)

tend to “satisfice” when making decisions.

Figure 4.4The Administrative Model of Decision Making

The administrative model is based on behavioral processes that affect how managers make decisions. Rather than prescribing how decisions should be made, it focuses more on describing how they are made.

© Cengage

The administrative model of decision making acknowledges that managers are not always logical and rational when they make decisions. These two managers, for instance, are exchanging personal information during a meeting. Their personal views, in turn, may influence how they vote or the position they take on important organizational decisions.


Bounded rationality
 suggests that decision makers are limited by their values and unconscious reflexes, skills, and habits. They are also limited by less-than-complete information and knowledge. Bounded rationality partially explains how U.S. auto executives allowed Japanese automakers to get such a strong foothold in the U.S. domestic market several decades ago. For years, executives at General Motors (GM), Ford, and Chrysler compared their companies’ performance only to one another’s and essentially ignored foreign imports. The foreign “threat” was not acknowledged until the domestic auto market had been changed forever. If managers had gathered complete information from the beginning, they might have been better able to thwart foreign competitors. Essentially, then, the concept of bounded rationality suggests that although people try to be rational decision makers, their rationality has limits. This point is vividly illustrated in our “A World of Difference” feature.

A World of Difference

A Verdict on Diversity

Do race, skin color, or language affect how people are viewed? About how we make decisions? While we would like to think they do not, in reality these and related factors may indeed play a role. Consider, for example, a controversial legal case from a few years ago. On the night of February 26, 2012, George Zimmerman, a watch volunteer at a gated community in Sanford, Florida, spotted a young black man in his neighborhood. His suspicions aroused, he called police, referring to “f—ing punks,” and despite the warning of the police dispatcher, continued to follow the “suspect.” The details of what happened next are murky, but shortly thereafter, 17-year-old Trayvon Martin was dead. Zimmerman had shot him, explaining that Martin had jumped out of some bushes and begun punching him and slamming his head on the concrete sidewalk.

Zimmerman was indicted for second-degree murder and tried in July 2013. His lawyers argued that Zimmerman acted in self-defense, while the prosecution contended that he “didn’t shoot Trayvon Martin because he had to. He shot him because he wanted to.” A jury of six women—five of them white and one of them a minority—found Zimmerman not guilty of either second-degree murder or manslaughter.

“We’d be intellectually dishonest,” said a lawyer for Martin’s family, “if we didn’t acknowledge racial undertones in this case.” One of the prosecution witnesses was Rachel Jeantel, whom Martin had phoned, complaining about being followed by “a creepy-a-cracker,” shortly before he was killed. Speaking after the trial, one jury member, identified only as Juror B37, admitted that she found Jeantel’s speech “hard to understand;” her testimony, said Juror B37, was peppered with “phrases I had never understood before.”

Jeantel, a 19-year-old black woman, comes from a Haitian–Dominican background, and her English tends to be inflected by Creole and Spanish. Juror B37, says Richard Gabriel, “could more easily relate to Zimmerman as the watch volunteer trying to protect his neighborhood.” Gabriel, president of the American Society of Trial Consultants, believes that Juror B37’s decision to vote for Zimmerman’s acquittal was less a matter of racial bias than of “ingroup-outgroup bias, which is the tendency to judge members of your own group more favorably and others more harshly.” The effect of such “implicit bias,” warns Gabriel, is “a pernicious form of decay in our justice system.”

Gabriel’s recommendation? “The courts and local communities,” he says, “would benefit from greater diversity.” Studies show, he argues, “that diverse juries make better decisions because the different perspectives make them more thorough and less likely to make factual errors.” As a matter of fact, those studies show that racially diverse juries are more conscientious in their efforts to process information presented at trials: They engage in deeper analysis of the facts, participate in lengthier deliberations, and make fewer inaccurate statements. When issues of race are directly involved, they’re more likely to discuss relevant race-related topics and entertain relevant race-related factors.

According to Kathleen Nalty, executive director of the Denver-based Center for Legal Inclusiveness, studies also demonstrate that “interacting with people who are different helps interrupt and reduce unconscious bias.” “Generally speaking,” explains Katherine Phillips of the Kellogg School for Management, “people would prefer to spend time with others who agree with them rather than disagree with them. But diversity often comes with more cognitive processing and more exchange of information and more perceptions of conflict.”

References: Greg Botelho, “George Zimmerman Found Not Guilty of Murder in Trayvon Martin’s Death,”, July 14, 2014,, accessed on February 10, 2017; Richard Gabriel, “Race, Bias and the Zimmerman Jury,”,, accessed on February 10, 2017; Sonia Chopra, “Preserving Jury Diversity by Preventing Illegal Peremptory Challenges,” The Trial Lawyer,, accessed on February 10, 2017; Kathleen Nalty and Andrea Juarez, “Diversity Really Does Matter,” NALP Bulletin,, accessed on February 10, 2017; and Bunkhuon Chhun, “Better Decisions through Diversity,” Kellogg Insight,, accessed on February 10, 2017.

Another important part of the administrative model is 
, which suggests that rather than conducting an exhaustive search for the best possible alternative, decision makers tend to search only until they identify an alternative that meets some minimum standard of sufficiency. A manager looking for a new plant site, for example, may select the first site she finds that meets basic requirements for transportation, utilities, and price, even though further searching might yield a better location. People satisfice for a variety of reasons. Managers may simply be unwilling to ignore their own motives (such as reluctance to spend time making a decision) and therefore not be able to continue searching after a minimally acceptable alternative is identified. The decision maker may be unable to weigh and evaluate large numbers of alternatives and criteria. Also, subjective and personal considerations often intervene in decision situations.

Because of the inherent imperfection of information, bounded rationality, and satisficing, a manager’s decisions may or may not actually be in the organization’s best interests. A manager may choose a particular location for a new plant because it offers the lowest price and best availability of utilities and transportation. Or she may choose the location because it is located in a community where she wants to live.

In summary, then, the classical and administrative models paint quite different pictures of decision making. Which is more correct? Actually, each can be used to better understand how managers make decisions. The classical model is prescriptive: It explains how managers can at least attempt to be more rational and logical in their approaches to decisions. The administrative model can be used by managers to develop a better understanding of their inherent biases and limitations. In the following sections, we describe more fully other behavioral forces that can influence decisions.

4-3bPolitical Forces in Decision Making

Political forces are another major element that contributes to the behavioral nature of decision making. Organizational politics is covered in Chapter 11, but one major element of politics, coalitions, is especially relevant to decision making. A 
 is an informal alliance of individuals or groups formed to achieve a common goal. This common goal is often a preferred decision alternative. For example, coalitions of stockholders frequently band together to force a board of directors to make a certain decision.

When GM decided to launch Saturn as a new automobile company several years ago, the idea had the full backing and support of its CEO, Roger Smith. Saturn was to have its own factories, design teams, and dealer networks and was to compete directly with high quality foreign imports such as Toyota and Honda. Just as the first Saturn cars were being introduced, however, Smith retired. As it turned out, there was a coalition of senior GM executives who had opposed the Saturn concept but had been unable to do anything about it since Smith was such a powerful product champion. When Smith left GM, though, the coalition managed to divert resources intended for Saturn to other GM brands. As a result, new Saturn products were delayed, the brand received weak marketing support, and it never lived up to expectations.

The impact of coalitions can be either positive or negative. They can help astute managers get their organization on a path toward effectiveness and profitability, or they can strangle well-conceived strategies and decisions. Managers must recognize when to use coalitions, how to assess whether coalitions are acting in the organization’s best interests, and how to constrain their dysfunctional effects.

4-3cIntuition and Escalation of Commitment

Two other important decision processes that go beyond logic and rationality are intuition and escalation of commitment to a chosen course of action.


Intuition is an innate belief about something without conscious consideration. Managers sometimes decide to do something because it “feels right” or they have a “hunch.” This feeling usually is not arbitrary, however. Rather, it is based on years of experience and practice in making decisions in similar situations. An inner sense may help managers make an occasional decision without going through a full-blown rational sequence of steps. For example, Kip Tindell, CEO of The Container Store, emphasizes the use of intuition throughout his company and urges employees to believe that it is critical in the workplace. He is quoted as saying, “Intuition is only the sum total of your life experiences. So why would you want to leave it at home when you come to work in the morning?” Of course, all managers, but most especially inexperienced ones, should be careful not to rely too heavily on intuition. If rationality and logic are continually flouted for “what feels right,” the odds are that disaster will strike one day.

Escalation of Commitment

Another important behavioral process that influences decision making is 
escalation of commitment
 to a chosen course of action. In particular, decision makers sometimes make decisions and then become so committed to the courses of action suggested by those decisions that they stay with them, even when the decisions appear to have been wrong. For example, when people buy stock in a company, they sometimes refuse to sell it even after repeated drops in price. They choose a course of action—buying the stock in anticipation of making a profit—and then stay with it even in the face of increasing losses. Moreover, after the value drops, they rationalize that they can’t sell now because they will lose money.

For years Pan American World Airways ruled the skies and used its profits to diversify into real estate and other businesses. But, with the advent of deregulation, Pan Am began to struggle and lose market share to other carriers. When Pan Am managers finally realized how ineffective their airline operations had become, experts today point out that the “rational” decision would have been to sell off the remaining airline operations and concentrate on the firm’s more profitable businesses. But because they still saw the company as being first and foremost an airline, they instead began to slowly sell off the firm’s profitable holdings to keep the airline flying. Eventually, the company was left with nothing but an ineffective and inefficient airline, and then it had to sell off its more profitable routes before being taken over by Delta. Had Pan Am managers made the more rational decision years earlier, chances are the firm could still be a profitable enterprise today, albeit one with no involvement in the airline industry.

In contrast, a group of investors licensed the use of Hard Rock logos and trademarks for a large theme park—Hard Rock Park—to be built in South Carolina. After six years of planning and construction and an investment of over $400 million, the park in Myrtle Beach opened to dismal reviews and poor attendance. Rather than increasing their investment and trying to increase attendance, owners decided after only nine months to shut down the park and sell off its assets.

It is both unethical and illegal to make a decision to improperly dump trash and hazardous waste. Nevertheless, some people make this decision in order to save time and money. Of course, others incur additional costs in cleaning up dumping sites such as this one.

Arterra Picture Library/Alamy Stock Photo

Thus decision makers must walk a fine line. On the one hand, they must guard against sticking too long with an incorrect decision. To do so can bring about financial decline. On the other hand, they should not bail out of a seemingly incorrect decision too soon.

4-3dRisk Propensity and Decision Making

The behavioral element of 
risk propensity
 is the extent to which a decision maker is willing to gamble when making a decision. Some managers are cautious about every decision they make. They try to adhere to the rational model and are extremely conservative in what they do. Such managers are more likely to avoid mistakes, and they infrequently make decisions that lead to big losses. Other managers are extremely aggressive in making decisions and are willing to take risks. They rely heavily on intuition, reach decisions quickly, and often risk big investments on their decisions. As in gambling, these managers are more likely than their conservative counterparts to achieve big successes with their decisions; they are also more likely to incur greater losses. The organization’s culture is a prime ingredient in fostering different levels of risk propensity.

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4-3eEthics and Decision Making

As we introduced in Chapter 2, individual ethics are personal beliefs about right and wrong behavior. Ethics are clearly related to decision making in a number of ways. For example, suppose that, after careful analysis, a manager realizes that his company could save money by closing his department and subcontracting with a supplier for the same services. But to recommend this course of action would result in the loss of several jobs, including his own. His own ethical standards will clearly shape how he proceeds. Indeed, each component of managerial ethics (relationships of the firm to its employees, of employees to the firm, and of the firm to other economic agents) involves a wide variety of decisions, all of which are likely to have an ethical component. Thus a manager must remember that, just as behavioral processes such as politics and risk propensity affect the decisions he makes, so, too, do his ethical beliefs. The “Doing Business on Plant Earth” feature examines an interesting situation involving ethics and decision making.

Doing Business on Planet Earth

Sealing the Deal

Let’s say that you’re out to dinner with an old high school friend—we’ll call him Vinny Devine. Vinny has become a connoisseur of fine wines, so you invite him to make a selection. After carefully perusing the wine list, he asks the waiter for a Rodney Strong Pinot Noir 2011, a wine from Sonoma County, California. “It has a nice toasty vanilla flavor,” he promises.

When the wine arrives, he shows you the label on the back of the bottle, which features an array of certification seals. Vinny explains them one at a time. The first one says “USDA Organic.” “It means that the grapes are grown without synthetic pesticides or fertilizers,” says Vinny. Another seal says “Demeter,” which, according to Vinny, “means Demeter Certified Biodynamic—the winemaker maintains a healthy ecosystem.” Then there’s rectangular seal featuring a smiling fish in a clear blue stream. “Fish Friendly Farming,” says Vinny, “means that the winegrower conserves natural creek banks to protect native species.”

The pinot noir is very good, but you’re thinking that perhaps Vinny knows more about the winery than he needs to know in order to enjoy drinking the wine. A recent survey, however, found that 34 percent of all U.S. wine consumers consider a winemaker’s sustainability practices when selecting a purchase. Among consumers who identify themselves as buyers of eco-friendly, environmentally responsible products, 52 percent look for evidence of sustainable growing and processing practices. Bottles like the Rodney Strong pinot noir that you’re drinking feature certification seals because that’s how 66 percent of environmentally conscious consumers find out what they want to know about a wine. And that, in turn, is why 70–80 percent of wine distributors, retailers, and restaurant buyers rely on certification organizations and the seals they authorize. “Customers care about sustainability,” says the aptly named Emily Wines of Kimpton Hotels & Restaurants, “and they look to retailers and restaurateurs to do the research and make those wines available.”

It should come as no surprise, then, that the wine industry recognizes consumer and trade demand for sustainability as a stimulus for some rational decision making. “Many consumers and the trade are showing interest in sustainably grown and produced wines,” says Robert P. Koch, president of the Wine Institute, an association of California winemakers. “With 1,800 California winegrape growers and winemakers participating in the California Sustainable Winegrowing Alliance (CSWA) program,” adds Koch, “it’s clear that we’re committed to sustainable practices.”

In evaluating the alternatives for meeting its sustainability goals, Rodney Strong is guided by the “three E’s” of the CSWA: The vineyard strives to be environmentally sound, socially equitable, and economically feasible. “Considering the environment,” says director of winegrowing Douglas McIlroy, “is part of the core company values and has always been part of our business practices. … As far as Sonoma County goes, we’re the poster child for sustainability. We’re not just here supporting the county since our winemaking business is here—we also care about the longevity of the community.”

In 2003, for example, Rodney Strong completed construction of 4,032-panel solar array and made the transition to 100 percent solar power. About half the cost of $980,000 was defrayed by a state grant, and the almost maintenance-free system has already paid for the rest. By 2020, Rodney Strong will have reduced its carbon emissions by nearly 90,000 tons—the equivalent of planting 2,500 acres of trees or not driving 22 million miles. “Sustainable farming,” says CEO Tom Klein, led us to install solar panels to conserve energy, audit our whole winery’s green practices for immediate and ongoing environmental progress, and hold ourselves accountable for our carbon footprint. Global warming is real and one of today’s biggest threats to our future. This is something we had to do. The whole world needs to get involved in solving this problem.

References: Rodney Strong Vineyards, “Sustainable Practices: Our Unwavering Commitment,” 2014,, accessed on February 10, 2017; California Sustainable Winegrowing Alliance, “CCSW—Certified Participants,” 2006–2017,, accessed on February 10, 2017; Wine Institute, “New Research on Sustainability’s Impact on Wine Buying Decisions,” May 7, 2013,, accessed on February 10, 2017; Amy Payne, “Sustainable Sonoma,” FSR Magazine, February 6, 2013, pp. 26–30; Kara DiCarrillo, “California Wineries Switch to Solar Power,” TreeHugger, June 15, 2005,, accessed on February 10, 2017; and “Rodney Strong Vineyards First Carbon Neutral Winery,” Wine Country This Week, November 13, 2009,, accessed on February 10, 2017.

4-4 Group and Team Decision Making in Organizations

In more and more organizations today, important decisions are made by groups and teams rather than by individuals. Examples are the executive committee of Abercrombie & Fitch, product design teams at Texas Instruments, and marketing planning groups at Red Lobster. Managers can typically choose whether to have individuals or groups and teams make a particular decision. Thus knowing about forms of group and team decision making and their advantages and disadvantages is important.

4-4aForms of Group and Team Decision Making

The most common methods of group and team decision making are interacting groups, Delphi groups, and nominal groups. Increasingly, these methods of group decision making are being conducted online.

Interacting Groups or Teams

Interacting groups or teams
 are the most common decision-making group. The format is simple—either an existing or a newly designated group or team is asked to make a decision. Existing groups or teams might be functional departments, regular work teams, or standing committees. Newly designated groups or teams can be ad hoc committees, task forces, or newly constituted work teams. The group or team members talk among themselves, argue, agree, form internal coalitions, and so forth. Finally, after some period of deliberation, the group or team makes its decision. An advantage of this method is that the interaction among people often sparks new ideas and promotes understanding. A major disadvantage, though, is that political processes can play too big a role.

Most organizations use interacting groups or teams such as this one to make many different kinds of decisions.

Konstantin Chagin/

Delphi Groups

Delphi group
 is sometimes used to arrive at a consensus of expert opinion. The Delphi procedure solicits input from a panel of experts who contribute individually. Their opinions are combined and, in effect, averaged. Assume, for example, that the problem is to establish an expected date for a major technological breakthrough in converting coal into usable energy. The first step in using the Delphi procedure is to obtain the cooperation of a panel of experts. For this situation, experts might include various research scientists, university researchers, and executives in a relevant energy industry. At first, the experts are asked to anonymously predict a time frame for the expected breakthrough. The persons coordinating the Delphi group collect the responses, average them, and ask the experts for another prediction. In this round, the experts who provided unusual or extreme predictions may be asked to justify them. These explanations may then be relayed to the other experts. When the predictions stabilize, the average prediction is taken to represent the decision of the group of experts. The time, expense, and logistics of the Delphi technique rule out its use for routine, everyday decisions, but it has been successfully used for forecasting technological breakthroughs at Boeing, market potential for new products at GM, research and development patterns at Eli Lilly, and future economic conditions by the U.S. government.

Nominal Groups

Another useful group and team decision-making technique that is occasionally used is the 
nominal group
. Unlike the Delphi method, in which group members do not see one another, nominal group members are brought together in a face-to-face setting. The members represent a group in name only, however; they do not talk to one another freely like the members of interacting groups. Nominal groups are used most often to generate creative and innovative alternatives or ideas. To begin, the manager assembles a group of knowledgeable experts and outlines the problem to them. The group members are then asked to individually write down as many alternatives as they can think of. The members then take turns stating their ideas, which are recorded on a flip chart or board at the front of the room. Discussion is limited to simple clarification. After all alternatives have been listed, more open discussion takes place. Group members then vote, usually by rank, ordering the various alternatives. The highest-ranking alternative represents the decision of the group. Of course, the manager in charge may retain the authority to accept or reject the group decision.

To increase the chances that a group or team decision will be successful, managers must learn how to manage the process of group and team decision making. Federal Express and IBM are increasingly using groups and teams for decision making.

Nominal groups are sometimes used to make decisions. In a nominal group members engage in a limited amount of structured discussion and then members vote to determine on the alternative to be selected.


4-4bAdvantages of Group and Team Decision Making

The advantages and disadvantages of group and team decision making relative to individual decision making are summarized in Table 4.2. One advantage is simply that more information is available in a group or team setting—as suggested by the old axiom, “Two heads are better than one.” A group or team represents a variety of education, experience, and perspective. Partly as a result of this increased information, groups and teams typically can identify and evaluate more alternatives than can one person. The people involved in a group or team decision understand the logic and rationale behind it, are more likely to accept it, and are equipped to communicate the decision to their work group or department. Finally, research evidence suggests that groups may make better decisions than individuals.

Table 4.2

Advantages and Disadvantages of Group and Team Decision Making



More information and knowledge are available.

The process takes longer than individual decision making, so it is costlier.

More alternatives are likely to be generated.

Compromise decisions resulting from indecisiveness may emerge.

More acceptance of the final decision is likely.

One person may dominate the group.

Enhanced communication of the decision may result.

Groupthink may occur.

Better decisions generally emerge.

4-4cDisadvantages of Group and Team Decision Making

Perhaps the biggest drawback of group and team decision making is the additional time and hence the greater expense entailed. The increased time stems from interaction and discussion among group or team members. If a given manager’s time is worth, say, $50 an hour, and if the manager spends two hours making a decision, the decision “costs” the organization $100. For the same decision, a group of five managers might require three hours of time. At the same $50-an-hour rate, the decision “costs” the organization $750. Assuming the group or team decision is better, the additional expense may be justified, but the fact remains that group and team decision making is more costly.

Group or team decisions may also represent undesirable compromises. For example, hiring a compromise top manager may be a bad decision in the long run because he or she may not be able to respond adequately to various subunits in the organization and not have everyone’s complete support. Sometimes one individual dominates the group process to the point where others cannot make a full contribution. This dominance may stem from a desire for power or from a naturally dominant personality. The problem is that what appears to emerge as a group decision may actually be the decision of one person.

Finally, a group or team may succumb to a phenomenon known as 
, which occurs when the desire for consensus and cohesiveness overwhelms the goal of reaching the best possible decision. Under the influence of groupthink, the group may arrive at decisions that are made not in the best interests of either the group or the organization but rather to avoid conflict among group members. One of the most clearly documented examples of groupthink involved the space shuttle Challenger disaster. As NASA was preparing to launch the shuttle, numerous problems and questions arose. At each step of the way, however, decision makers argued that there was no reason to delay and that everything would be fine. Shortly after its launch, the shuttle exploded, killing all seven crew members.

4-4dManaging Group and Team Decision-Making Processes

Managers can do several things to help promote the effectiveness of group and team decision making. One is simply being aware of the pros and cons of having a group or team make a decision to start with. Time and cost can be managed by setting a deadline by which the decision must be made final. Dominance can be at least partially avoided if a special group is formed just to make the decision. An astute manager, for example, should know who in the organization may try to dominate and can either avoid putting that person in the group or put several strong-willed people together.

To avoid groupthink, each member of the group or team should critically evaluate all alternatives. So that members present divergent viewpoints, the leader should not make his or her position known too early. At least one member of the group or team might be assigned the role of devil’s advocate. And, after reaching a preliminary decision, the group or team should hold a follow-up meeting wherein divergent viewpoints can be raised again if any group members wish to do so. Gould Paper Corporation used these methods by assigning managers to two different teams. The teams then spent an entire day in a structured debate presenting the pros and cons of each side of an issue to ensure the best possible decision.

Main content

Chapter Review

Summary of Learning Outcomes and Key Points

· 1Define decision making, and discuss types of decisions and decision-making conditions.


Decision making is the act of choosing one alternative from among a set of alternatives.


The decision-making process includes recognizing and defining the nature of a decision situation, identifying alternatives, choosing the “best” alternative, and putting it into practice.


Two common types of decisions are programmed and nonprogrammed.


Decisions may be made under states of certainty, risk, or uncertainty.

· 2Discuss rational perspectives on decision making, including the steps involved.


Rational perspectives on decision making rest on the classical model.


This model assumes that managers have complete information and that they will behave rationally. The primary steps in rational decision making are:


recognizing and defining the situation


identifying alternatives


evaluating alternatives


selecting the best alternative


implementing the chosen alternative


following up and evaluating the effectiveness of the alternative after it is implemented

· 3Describe the behavioral aspects of decision making.


Behavioral aspects of decision making rely on the administrative model.


This model recognizes that managers use incomplete information and do not always behave rationally.


The administrative model also recognizes the concepts of bounded rationality and satisficing.


Political activities by coalitions, managerial intuition, and the tendency to become increasingly committed to a chosen course of action are all important.


Risk propensity is also an important behavioral perspective on decision making.


Ethics also affect how managers make decisions.

· 4Discuss group and team decision making, including its advantages and disadvantages and how it can be more effectively managed.


To help enhance decision-making effectiveness, managers often use interacting, Delphi, or nominal groups or teams.


Group and team decision making in general has several advantages and disadvantages relative to individual decision making.


Managers can adopt a number of strategies to help groups and teams make better decisions.

Chapter Review

Discussion Questions

Questions for Review

1. Describe the difference between programmed and nonprogrammed decisions. What are the implications of these differences for decision makers?

2. What are the different conditions under which decisions are made?

3. Describe the behavioral nature of decision making. Be certain to provide some detail about political forces, risk propensity, ethics, and commitment in your description.

4. What is meant by the term escalation of commitment? In your opinion, under what conditions is escalation of commitment likely to occur?

5. Explain the differences between three common methods of group decision making—interacting groups, Delphi groups, and nominal groups.

Questions for Analysis

1. Was your decision about what college or university to attend a rational decision? Did you go through each step in rational decision making? If not, why not?

2. Most business decisions are made under conditions of either risk or uncertainty. In your opinion, is it easier to make a decision under a condition of risk or a condition of uncertainty? Why?

3. Recall a decision that you recently made that had ethical implications. Did these implications make the decision easier or harder?

4. In what ways are escalation of commitment and decision making under conditions of risk related to one another?

5. Consider the following list of business decisions. Which decisions would be handled most effectively by group or team decision making? Which would be handled most effectively by individual decision making? Explain your answers.

· A decision about switching pencil suppliers

· A decision about hiring a new CEO

· A decision about firing an employee for stealing

· A decision about calling 911 to report a fire in the warehouse

· A decision about introducing a brand-new product

Main content

Chapter Review

Experiential Exercise

Decision Making with Journaling and Affinity Diagrams

Purpose: This exercise gives you practice in using both journaling and affinity diagrams, both of which are tools for effective decision making. These techniques can be used to help expand and improve your decision making in many areas of your life, both personal and professional.

Introduction: The chemist Linus Pauling, winner of Nobel Prizes in both Chemistry and Peace, said, “The best way to have a good idea is to have a lot of ideas.” Journaling is one technique to increase the quantity of ideas generated in response to a decision situation. Affinity diagrams can be used alone or in conjunction with journaling or other idea-generating techniques. Affinity diagrams help you to interpret and organize a quantity of diverse ideas. The diagrams are particularly useful in decision situations that involve lots of ideas, where the ideas are very different from each other and the relationships between the ideas are not well understood, and where the underlying questions seem overwhelming or too complex to analyze rationally.


1. Have on hand a number of index cards or sticky notes, at least 50. Or use several sheets of paper cut into at least 50 smaller slips. Set aside 30 minutes or so of quiet time. Assume that graduation day is approaching and you are faced with the decision about where to live. Assume that your options are broad and that the decision will be for at least five years but would not necessarily commit you for the rest of your life. You could choose to live in an urban, suburban, or rural community. You could choose a large or small community, various regions of the country or world, and many different types of social and economic settings.

2. Think about the qualities you desire for your future hometown. Briefly jot qualities that you desire, putting one quality on each piece of paper. Relax and visualize your ideal community, and then commit the ideas to paper. For example, your ideas might include “ethnic diversity” or “upscale suburb.” Or something quite different might be important to you. Allow the answers to just “come to” you. Don’t try to force your thinking along any one path, and don’t edit yourself or criticize your thoughts at this point in the process. It’s okay to have some ideas that don’t seem rational, that are duplicates, or even that seem meaningless.

If you can, work quickly and without interruption. Try to generate at least 25 ideas. If that number comes easily to you, generate some more. Stop when you feel that you’ve exhausted your supply of ideas. This process is one way to use the technique known as journaling.

3. Lay out the slips of paper so you can see all of them, and then read them. Begin to move the slips of paper into groups of ideas that are similar to each other. Gradually, as you rearrange the slips, patterns of ideas will emerge. Again, don’t try to be critical or rational at this point; simply consider the relationships between the ideas. Keep moving the slips into different combinations until you find a set of groups that “feels right.”

Then assign each of these groups a theme that identifies the common element. For example, you might group the ideas green housing, good public transportation, and vegetarian restaurants into a theme called environmentally conscious. Or you might group good public transportation, short commute to work, and walk to restaurants and stores into a theme called convenience. The finished project, a grouping of a diverse set of ideas into related themes, is called an affinity diagram.

Follow-Up Questions:

1. Did the techniques of journaling and affinity diagramming help you generate more ideas and better see the connections between ideas? If so, explain how. If not, what technique(s) would have worked better?

2. Note that both techniques explicitly encourage the behavioral aspects of decision making, especially intuition. Do you think this is appropriate when making this type of decision? Or would a more rational approach be more effective?

3. How might a manager use these techniques at work? What situations would not be appropriate for the use of these techniques?

Main content

Chapter Review

Building Effective Conceptual Skills

Exercise Overview

Conceptual skills refer to the manager’s ability to think in the abstract. This exercise will aid you in understanding the effects that nonrational biases and risk propensity can have on decision making.

Exercise Background

Two psychologists, Amos Tversky and Daniel Kahneman, conducted much of the research that led to our knowledge of decision-making biases. Tversky and Kahneman found that they could understand individuals’ real-life choices by presenting experimental subjects with simulated decisions in a laboratory setting. They developed a theory called prospect theory, which uses behavioral psychology to explain why individuals are nonrational when making economic decisions. Their work has contributed a great deal to the developing discipline of behavioral economics. In fact, Kahneman won the 2002 Nobel Prize in Economics for development of these concepts. (Tversky could not share in the award because the Nobel Prize cannot be given posthumously.)

Tversky and Kahneman’s most important finding was that an individual’s perception of gain or loss in a situation is more important than an objective measure of gain or loss. Thus individuals are nonrational—that is, they do not make decisions based purely on rational criteria.

Related to this conclusion, Tversky and Kahneman found that humans think differently about gains and losses. This is called framing. Another finding is that people allow their perceptions to be skewed positively or negatively, depending on information they receive. Later, when new information becomes available, people have a hard time letting go of their initial perceptions, even if the new information contradicts their original impressions. This effect is referred to as anchoring and adjustment.

To answer the following questions, you must be able to calculate an expected value. To calculate an expected value, multiply each possible outcome value by the probability of its occurrence, and then sum all the results. Here is a simple example: You have a 50 percent chance of earning 80 points on an exam and a 50 percent chance of earning 70 points. The expected value can be calculated as (.5 × 80) + (.5 × 70), or a .5 chance of 80 points (equal to 40 points) plus a .5 chance of 70 points (equal to 35 points). Therefore, the expected value of your exam is 75 points.

Exercise Task

1. Answer the list of brief questions that your professor provides to you. No answer is correct or incorrect; simply choose your most likely response. Then, when the professor asks, share your answers with the class.

2. Discuss the answers given by the class. Why do students’ answers differ?

3. What have you learned about decision-making biases and risk propensity from these experiments?

Chapter Review

Management at Work

The Not-So-Smart Phone Company

“We would say, ‘We know better, and they’ll eventually figure it out.’”

—Former BlackBerry executive on customer relations at RIM

During the run up to his first inauguration, in 2009, president-elect Barack Obama was informed by security advisors that his beloved BlackBerry smartphone was a potential security risk. Hackers and spy agencies, they warned him, might figure out how to get into his e-mail. “They’re going to pry it out of my hands,” joked Obama, but he was adamant about his phone privileges, and security officials ultimately gave in. For one thing, BlackBerry was already known for such features as Secure Work Space and was the phone of choice for business leaders in security-sensitive positions. In addition, it was possible to modify the BlackBerry with enhanced encryption, and Obama soon became the first president to be connected by e-mail.

In 2014, however, the White House Communications Agency announced that it was testing smartphones from Samsung and LG for future use by administration officials. President Obama would be holding on to his BlackBerry, but the announcement was bad news for the Canadian maker of Blackberrys, especially coming on the heels of a $423 million loss for the quarter ending on March 1. The company’s U.S. market share had also plunged to 3 percent—down from 43 percent just four years earlier. What had happened to the corporate inventor of the smartphone and one of the world’s most influential technology companies?

Arguably, bad decision making.

In 1999, Research in Motion (RIM), as the company was originally known, released the first version of its mobile e-mail device. The RIM 5810, with a tactile keyboard and preinstalled app for e-mail, became an instant hit—indeed, a cultural icon—and in the next decade, RIM would become the global leader in mobile e-mail communications. The BlackBerry was designed for and marketed to business customers—the executives who ran corporate IT programs and selected devices for use by all of the company’s employees who needed to stay in constant touch. RIM management assumed that mobile e-mail adoption would follow the same pattern as so much previous technology: Like the typewriter and the computer, the BlackBerry would win over business users and then extend its reach to individual consumers.

Unfortunately, the world was on the verge of a revolution in technological diffusion: It’s commonly called the consumerization of IT, and it means that the adoption process started to flow in the opposite direction—from consumers to corporate buyers. New products like the iPhone (which was introduced in 2007) and Androids (2008) caught on with consumers, and although they came with a lot of extraneous apps, businesses began to consider them because employees were so attached to them.

When it was first introduced, RIM co-CEOs Mike Lazaridis and Jim Balsillie publicly dismissed the iPhone as a potential threat to their product line. Said Balsillie: “It’s kind of one more entrant into an already busy space with lots of choice for consumers. … But in terms of a sea-change for BlackBerry, I think that’s overstating it.” According to some insiders, BlackBerry management suspected that iPhone technology was superior, but Lazaridis and Balsillie continued to express confidence in the BlackBerry’s security features and, especially, its tactile QWERTY keyboard: “Try typing a web key on an iPhone touchscreen,” suggested Lazaridis. “It’s a real challenge—you can’t see what you type.” As late as 2012, Lazaridis would hold up a BlackBerry for his board to see: “I get this,” he’d say. “It’s clearly differentiated.” Then he’d hold up a touchscreen phone: “I don’t get this,” he would declare. Lazaridis saw no reason to abandon RIM’s core corporate customers in order to cater to the perceived needs of consumers in a rapidly crowding market.

It’s important to point out that the Apple iPhone had been developed in collaboration with Internet provider AT&T. Its touchscreen was more responsive, its browser was faster, and it was loaded with more apps, and it wasn’t long before it was being touted as a “BlackBerry killer.” As early as July 2007, RIM had been approached by AT&T competitor Verizon with a plan to develop an “iPhone killer” (which would feature a touchscreen and no keyboard). When the BlackBerry Storm was released in November 2008, however, customers didn’t like it. The touchscreen was awkward and the processor was slow. “The technology,” admitted one RIM executive, “was cobbled together quickly and wasn’t quite ready.” RIM abandoned the Storm, and Verizon turned to Motorola, which succeeded in adapting Google’s new Android operating system to its Droid phone, which came out in 2009 with a user-friendly interface.

Not only was the Droid itself immensely successful, but Android quickly became the most popular mobile OS, with Android devices now outselling those with Windows, iOS, and Mac OS combined. Within 14 months, Android’s market share had climbed from 5.2 percent to 23.5 percent, while RIM’s share dropped 10 points, to 31.6 percent. A year later, Android commanded a 47.3 percent share and RIM a mere 16 percent.

Back in 2007, when he first opened up an iPhone to have a look inside, Lazaridis, an engineer who’d founded RIM in 1984, was surprised to find that the device broke most of the rules that he’d helped to write. For one thing, the iPhone had a fully Internet capable browser—one of two—and its Android OS took up 700 megabytes. RIM’s OS, which had been designed in the 1990s, ran on one processor and used 32 megabytes. “I said, ‘How did they get AT&T to allow that?’” Lazaridis later recalled. He was certain that the iPhone would overstrain the network of its wireless partner. AT&T, however, was preparing to ride the consumerization wave. “There was a time,” says former RIM executive VP Patrick Spence, “when wireless carriers tried to keep data usage predictable. Then, when the iPhone became compelling, they shifted to. … trying to drive much more usage in different packages.”

BlackBerry users told RIM that they wanted features like those on the iPhone, but RIM held on to the business rationale that it had pioneered—the one which operated on the assumption that the value of a smartphone lay in its hardware rather than in its software applications. Says a former company insider:

We believed we knew better what customers needed long term than they did. Consumers would say, “I want a faster browser.” We might say, “You might think you want a faster browser, but you don’t want to pay overage on your bill.” “Well, I want a super-big very responsive touchscreen.” “Well, you might think you want that, but you don’t want your phone to die at 2 p.m.” We would say, “We know better, and they’ll eventually figure it out.”

Case Questions

1. Once the iPhone and Androids had penetrated the market, RIM faced a serious challenge: It had two distinct groups of customers to which it had to market its products. What were those two groups, and why were their needs and wants incompatible? Explain how this situation put RIM in a state of uncertainty. What risks did it face in making decisions to respond to this situation?

2. When RIM decided to incorporate personal apps into the BlackBerry, developers were required to use the company’s Java-based operating system, which had been created in the 1990s. In addition, they were required to submit apps for prior approval. Several apps—including Instagram and Tumblr—went elsewhere. Explain this problem as a problem in bounded rationality. Judging from what you know about RIM from the case, in what other ways would you say that RIM decision makers were hampered by bounded rationality?

3. Hersh Schefrin, a pioneer in the behavioral aspects of financial decision making, studies how a specific set of psychological traps snare decision makers, causing them to make inferior decisions. [Two] of the most common are excessive optimism [and] overconfidence. … People learn to be excessively optimistic and overconfident. This means that successful people over-estimate their past successes, which feeds these biases.

Judging from the details of the case, show how these two forms of “bias” affected decision making at RIM. How might RIM’s “inferior decisions” have been avoided if executives like Lazaridis and Balsillie had applied the steps in rational decision making?

4. The workplace is clearly changing. The barrier between work and home has been eroded, and if people are going to have to be constantly connected, they at least want to use their own phones. Companies have quickly come to love consumerization, too: A recent study. … found that executives like the way it keeps workers plugged in all day long. And since workers often end up paying for their own devices, it can also help businesses cut costs. What about you? Do you ever use your own phone for work-related activities? If so, what kinds of activities? Do you sometimes feel that your employer is taking advantage of the fact that you’re “plugged in all day long”? Or do you feel that the tradeoff—at least you’re allowed to use your own phone—is worth it? Do you sometimes take advantage of your employer—do you use your phone for personal business when you’re at work?

Case References


Sean Silcoff et al., “Inside the Fall of BlackBerry: How the Smartphone Inventor Failed to Adapt,” The (Toronto) Globe and Mail, September 27, 2013,, accessed on February 12, 2017; Jeff de Cagna, “BlackBerry Breakdown: How a Smartphone Lost Its Way,” Associations Now,, accessed on February 12, 2017; James Surowiecki, “BlackBerry Season,” The New Yorker, February 13, 2012,, accessed on February 12, 2017; Jay Yarrow, “All the Dumb Things RIM’s CEOs Said While Apple and Android Ate Their Lunch,” Business Insider, September 16, 2011,, accessed on February 12, 2017; “Psychological Traps Snare BlackBerry Decision Makers,” Forbes, November 7, 2013,, accessed on February 12, 2017; and James Surowiecki, “BlackBerry Season,” The New Yorker, February 13, 2012,, accessed on February 12, 2017.

Chapter Review

You Make the Call: Moneyball on Steroids

1. As general manager of the Astros, Jeff Luhnow is responsible for player-related operations. Owner Jim Crane is responsible for organizational strategy. Describe a few circumstances under which nonprogrammed decisions made by Crane might affect Luhnow’s system of highly programmed decision making.

2. What conditions contribute to the state of certainty under which Luhnow does his job? What conditions contribute to the state of risk under which he does his job? What conditions might contribute to the state of uncertainty under which he does his job? (Remember: Risk and uncertainty are not the same thing.) Be as specific as you can in giving examples of each set of conditions.

3. According to Luhnow, “it’s our job in player development to turn the raw material that the scouts provide into Major League players. The more efficient and effective we can be at doing this, the bigger the edge we might have over other teams.” Recall the distinction that we make between efficiency and effectiveness in Chapter 1. What must Luhnow do in order to make sure that his system is as efficient as possible? What must he do in order to make sure that it’s as effective as possible?

4. What about you? Is your decision making susceptible to any of the following behavioral tendencies—bounded rationality, intuition, escalation of commitment? Do you prefer to gather information or to accept recommendations? Have you ever made a decision that you’d like to undo and reconsider? What steps might you take to improve your overall decision making?

Week 3 reading

Organization Structure and Design

Chapter Introduction

· 6-1

The Basic Elements of Organizing

· 6-1a

Job Specialization

· 6-1b

Grouping Jobs: Departmentalization

· 6-1c

Establishing Reporting Relationships

· 6-1d

Distributing Authority

· 6-1e

Coordinating Activities

· 6-2

The Bureaucratic Model of Organization Design

· 6-3

Situational Influences on Organization Design

· 6-3a

Core Technology

· 6-3b


· 6-3c

Organizational Size and Life Cycle

· 6-4

Basic Forms of Organization Design

· 6-4a

Functional (U-Form) Design

· 6-4b

Conglomerate (H-Form) Design

· 6-4c

Divisional (M-Form) Design

· 6-4d

Matrix Design

· 6-4e

Hybrid Designs

· 6-5

Emerging Issues in Organization Design

· 6-5a

The Team Organization

· 6-5b

The Virtual Organization

· 6-5c

The Learning Organization

Chapter Review

Summary of Learning Outcomes and Key Points

Discussion Questions

Experiential Exercise

Building Effective Conceptual Skills

Management at Work

You Make the Call: Who’s the Boss?

Chapter Introduction

Learning Outcomes

After studying this chapter, you should be able to:

· 1Identify the basic elements of organizations.

· 2Describe the bureaucratic perspective on organization design.

· 3Identify and explain key situational influences on organization design.

· 4Describe the basic forms of organization design that characterize many organizations.

· 5Identify and describe emerging issues in organization design.

Management in Action

Who’s the Boss?

“This is what people do when you put managers over them. The managers start acting like parents, and the people they’re managing start acting like children.”

—Ryan Carson, CEO of Treehouse

Ryan Carson and Alan Johnson founded Treehouse as an online interactive education platform. Officially known as Treehouse Island Inc., the company produces courses in web development and programming and business education, using such tools as videos and interactive code challenges to teach students a range of technology-related skills. Or, as one journalist put it, Treehouse is “an online trade school whose mission is to get students jobs” without having to spend years pursuing expensive college degrees. Fueled by millions in venture capital, Treehouse quickly became the largest computer science school in the world.

Ryan Carson is a co-founder of Treehouse Island, an online interactive education platform. Treehouse has used several experimental approaches to management and organization structure since it was founded. For example, for awhile the firm did away with all management positions but then found it necessary to reinstate some of them as the firm grew larger.

The Washington Post/Getty Images

It wasn’t long, however, before Carson and Johnson were hearing rumblings of discontent from their employees. Recalls Carson, “We had grown to 60 people with seven managers and four executives. As we added more people to the team, we noticed something disconcerting: rumors, politics, and complaints started appearing.” Putting their joint ears to the ground, the cofounders learned that some front-line employees felt that their input was being ignored. The news was disturbing because Carson and Johnson believed that it was important for employees to be involved in the decision-making process. “If they’re feeling disempowered at the bottom,” suggested Carson, “maybe we have too many managers.” Seven managers didn’t exactly seem like an army of overseers, but it did amount to more than 10 percent of the workforce. According to Carson,

Alan and I started exploring possible solutions and considered removing the lowest layer of managers and asking them to go back into producing. … Then we went up the chain and asked hard questions about the value of the mid-tier managers. Then we kept going all the way to the executives at the top.

Eventually, the conversation reached an interesting hypothesis: “What if we removed all management and simply empowered everyone to choose what they do every day? We laughed at first and then the conversation turned serious. We had hired talented and motivated people. Did they need managers?”

Having reached a logical jumping-off point in their meditations about management, Carson and Johnson decided to take the plunge: They wrote up a “manifesto” about how the company might work without managers, posted it on an internal forum, and invited everyone to “discuss” the matter. “The company ground to a halt for two days,” reports Carson, while the workforce generated 447 comments. When the proposal was put to a vote, 90 percent of Treehouse employees endorsed a boss-less workplace.

So, says Carson, “We removed all managers. … We changed the way the company operated and gave all employees 100 percent control of their time and let them decide what they work on each day. From then on, no one would tell anyone what to do, not even the CEO.” The result? At first, Carson admits, “it was total chaos,” but Carson and Johnson quickly realized what we’ll find out in Chapter 12—namely, that much of a manager’s job involves communication and that subordinates mostly need managers because they need information.

In short, even if you’ve addressed a problem of “overmanaging,” running an organization is basically a matter of coordination. “The chaos,” contends Carson, “came from the fact that. … non-managers aren’t used to the level of communication needed to coordinate with other teams and projects, so there’s often not enough proactive communication and coordination. We don’t have managers to coordinate across projects, so it’s up to individuals to take time to communicate what’s happening on their projects and how it affects other people.” Thus, one of the first corrective measures taken by the two (former) top managers was building a new internal-information tool called Canopy, a sort of open-source Gmail account that gives everyone the capability to access and contribute to companywide communications.

Not surprisingly, shared information was also crucial to the process of getting along without bosses. Projects were proposed by employees, who used Canopy to circulate the information needed to get other employees interested. If a proposal attracted sufficient interest, it moved forward, with the employees who’ve chosen to get involved selecting a manager for the project. “There are still going to be managers at Treehouse,” explained Carson at the time. “There just aren’t titles. The only way you can be a leader is if you lead and people want to follow.” The system, of course, had its drawbacks. For one thing, said Carson, “I can’t make people do things. … I’ve even had people tell me they don’t have time or aren’t interested in my ideas. It sucks, but it’s part of running a no-manager company.”

Needless to say, Carson was also frustrated by the fact that “I can’t make things happen very fast. There are many times I just want to say, ‘Do this right now,’ but I can’t. It’s basically against the rules.” More importantly, it often took quite a while to get projects off the ground. According to Treehouse rules, “you have to propose a project, explain it thoroughly, and convince people to join. The process,” Carson admitted, “can take weeks or months.” Perhaps the biggest problem, however, was still ahead. “We have 70 employees now,” said Carson, “and for a company our size, this model works. However, it’s probably going to start showing serious signs of trouble at around 150 people. But then again, we’ll figure it out.”

As it turned out, though, Carson underestimated the impact of size. As Treehouse approached 100 employees, the manager-less model really began to show signs of strain. Projects started taking longer and longer to complete and people began to grumble about the lack of coordination. And the impact started showing up on the bottom line. So, in 2015, and with some admitted reluctance, Carson decided to reintroduce a few middle managers to Treehouse. In some ways people can still work under the experimental structure, developing proposals, selling them to colleagues, and moving them forward with a lot of autonomy, but there are now managers keeping watch on things—creating budgets, setting deadlines, and so forth. As a result, projects are moving forward more quickly and profits are again on the upswing.

Most organizations are structured into various positions or jobs. Some jobs are very complex or technical while others may be simple and straightforward. The working relationships between jobs and people in a team or organization are some of the most critical elements in managing an organization. As you will see in this chapter, addressing the basic frameworks that organizations use to get their work done—structure and design—is a fundamental part of the management process.

This chapter, the first of three devoted to organizing, discusses many of the critical elements of organization structure and design that managers can control. We first identify and describe the various elements of organizing. Next we explore how those elements can be combined to create an overall design for the organization. Then we introduce situational factors and how they impact organization design. We conclude by describing three emerging issues in organization design.

6-1The Basic Elements of Organizing

The term organization structure and design refers to the overall set of elements that can be used to configure an organization. This section introduces and describes these elements: job specialization, departmentalization, reporting relationships, distribution of authority, and coordination.

6-1aJob Specialization

The first building block of organization structure is job specialization. 
Job specialization
 is the degree to which the overall task of the organization is broken down and divided into smaller component parts. For example, when Walt Disney started his company, he did everything himself—wrote cartoons, drew them, added the character voices, and then marketed them to theaters. As the business grew, though, he eventually hired others to perform many of these same functions. As growth continued, so, too, did specialization. For example, as animation artists work on Disney movies today, they may specialize in generating computer images of a single character or doing only background scenery. Others provide voices, and marketing specialists develop promotional campaigns. And today, the Walt Disney Company has literally thousands of different specialized jobs. Clearly, no one person could perform them all.

Benefits and Limitations of Specialization

Job specialization provides four basic benefits to organizations. First, workers performing small, simple tasks will become very proficient at each task. Second, transfer time between tasks decreases. If employees perform several different tasks, some time is lost as they stop doing the first task and start doing the next. Third, the more narrowly defined a job is, the easier it is to develop specialized equipment to assist with that job. Fourth, when an employee who performs a highly specialized job is absent or resigns, the manager is able to train someone new at relatively low cost. Although specialization is generally thought of in terms of operating jobs, organizations have also extended the basic elements of specialization to managerial and professional levels.

Job specialization is the basis for mass-production assembly lines such as this one. Tasks are broken down into small component elements. Partially assembled products move along the assembly line as each worker adds to the product by attaching or building new parts of the product.

BartlomiejMagierowski /

On the other hand, job specialization can have negative consequences. The foremost criticism is that workers who perform highly specialized jobs quickly become bored and dissatisfied. The job may be so specialized that it offers no challenge or stimulation. Boredom and monotony set in, absenteeism rises, and the quality of work may suffer. Furthermore, the anticipated benefits of specialization do not always occur. For example, a classic study conducted at Maytag found that the time spent moving work in process from one worker to another was greater than the time needed for the same individual to change from job to job. Thus, although some degree of specialization is necessary, it should not be carried to extremes because of the possible negative consequences. Managers must be sensitive to situations in which extreme specialization should be avoided. And indeed, several alternative approaches to designing jobs have been developed.

Alternatives to Specialization

To counter the problems associated with specialization, managers have sought other approaches to job design that achieve a better balance between organizational demands for efficiency and productivity and individual needs for creativity and autonomy. Five alternative approaches are job rotation, job enlargement, job enrichment, job characteristics approach, and work teams.

By utilizing job rotation, the Transportation Security Administration (TSA) security can employ less workers. The screener below, rotating jobs every 15 minutes, will head to the entryway checkpoint entrance next. Rotation also helps offset monotony and keeps screeners focused on their tasks.

Wally Skalij/Getty Images

Job rotation
 involves systematically moving employees from one job to another. A worker in a warehouse might unload trucks on Monday, carry incoming inventory to storage on Tuesday, verify invoices on Wednesday, pull outgoing inventory from storage on Thursday, and load trucks on Friday. Thus, the jobs do not change, but instead workers move from job to job. Unfortunately, for this very reason, job rotation has not been especially successful in enhancing employee motivation or satisfaction. Jobs that are amenable to rotation tend to be relatively standard and routine. Workers who are rotated to a “new” job may be more satisfied at first, but satisfaction soon wanes. Although many companies (among them Raytheon, Ford, and Prudential Insurance) have tried job rotation, it is most often used today as a training device to improve worker skills and flexibility. The TSA (Transportation Security Administration) also rotates security screeners at airports several times a day to offset problems of boredom that might set in if the same task were being performed all the time.

Many products like Maytag washers and dryers are manufactured using job specialization and assembly line technology. While this approach promotes efficiency, it can also lead to monotony and worker boredom. To help counter these negative effects, Maytag has experimented with job enlargement and other alternatives to job specialization.

Paulo Fridman/Corbis Historical/Getty Images

Job enlargement
 was developed to increase the total number of tasks workers perform. As a result, all workers perform a wide variety of tasks, which presumably reduces the level of job dissatisfaction. Many organizations have used job enlargement, including IBM, Detroit Edison, AT&T, the U.S. Civil Service, and Maytag. At Maytag, for example, the assembly line for producing washing machine water pumps was systematically changed so that work that had originally been performed by six workers, who passed the work sequentially from one person to another, was performed by four workers, each of whom assembled a complete pump. Unfortunately, although job enlargement does have some positive consequences, they are often offset by some disadvantages:

· (1)

training costs usually increase,

· (2)

unions argued that pay should increase because the worker is doing more tasks, and

· (3)

in many cases the work tends to remain boring and routine even after job enlargement.

A more comprehensive approach, 
job enrichment
, assumes that increasing the range and variety of tasks is not sufficient by itself to improve employee motivation. Thus, job enrichment attempts to increase both the number of tasks a worker does and the control the worker has over the job. To implement job enrichment, managers remove some controls from the job, delegate more authority to employees, and structure the work in complete, natural units. These changes increase subordinates’ sense of responsibility. Another part of job enrichment is to continually assign new and challenging tasks, thereby increasing employees’ opportunity for growth and advancement. AT&T, Texas Instruments, IBM, and General Foods are among the firms that have used job enrichment. This approach, however, also has disadvantages. For example, work systems need to be analyzed before enrichment, but this seldom happens, and managers rarely ask for employee preferences when enriching jobs.

job characteristics approach
 is an alternative to job specialization that does take into account the work system and employee preferences. As illustrated in Figure 6.1, the job characteristics approach suggests that jobs should be diagnosed and improved along five core dimensions:

1. Skill variety, the number of things a person does in a job

2. Task identity, the extent to which the worker does a complete or identifiable portion of the total job

3. Task significance, the perceived importance of the task

4. Autonomy, the degree of control the worker has over how the work is performed

5. Feedback, the extent to which the worker knows how well the job is being performed

Figure 6.1The Job Characteristics Approach

The job characteristics approach to job design provides a viable alternative to job specialization. Five core job dimensions may lead to critical psychological states that, in turn, may enhance motivation, performance, and satisfaction while also reducing absenteeism and turnover.

© Academic Press, Inc. Reprinted by permission of Academic Press and the authors.

Source: J. R. Hackman and G. R. Oldham, “Motivation through the Design of Work: Test of a Theory,” Organizational Behavior and Human Performance, 1976, Vol. 16, pp. 250–279.

Increasing the presence of these dimensions in a job presumably leads to higher motivation, higher-quality performance, higher satisfaction, and lower absenteeism and turnover. A large number of studies have been conducted to test the usefulness of the job characteristics approach. Prudential Insurance, for example, implemented this approach in its claims division. Results included moderate declines in turnover and a small but measurable improvement in work quality. A few studies, though, have not supported this approach as strongly. Thus, although the job characteristics approach is one of the most promising alternatives to job specialization, it is probably not the final answer.

Another alternative to job specialization is 
work teams
. Under this arrangement, a group is given responsibility for designing the work system to be used in performing an interrelated set of tasks. In the typical assembly-line system, the work flows from one worker to the next, and each worker has a specified job to perform. In a work team, however, the group itself decides how jobs will be allocated. For example, the work team assigns specific tasks to members, monitors and controls its own performance, and has autonomy over work scheduling.

6-1bGrouping Jobs: Departmentalization

The second element of organization structure is the grouping of jobs according to some logical arrangement. The process of grouping jobs is called 
. When organizations are small, the owner-manager can personally oversee everyone who works there. As an organization grows, however, personally supervising all the employees becomes more and more difficult for the owner-manager. Consequently, new managerial positions are created to supervise the work of others. Employees are not assigned to particular managers randomly. Rather, jobs are grouped according to some plan. The logic embodied in such a plan is the basis for all departmentalization.

Departmentalization involves grouping jobs according to a logical arrangement. Individuals needing out-patient services at this hospital know to follow the directional markers on this sign, as do patients coming for x-ray services. The hospital will also have multiple other departments such as emergency, surgery, physical therapy, and so forth.

Paul Doyle/Alamy Stock Photo

Functional Departmentalization

The most common base for departmentalization, especially among smaller organizations, is by function. 
Functional departmentalization
 groups together those jobs involving the same or similar activities. (The word function is used here to mean organizational functions such as finance and production, rather than the basic managerial functions, such as planning or controlling.) This approach, which is most common in smaller organizations, has three primary advantages. First, each department can be staffed by experts in that functional area. Marketing experts can be hired to run the marketing function, for example. Second, supervision is facilitated because an individual manager needs to be familiar with only a relatively narrow set of skills. And, third, coordinating activities inside each department is easier.

On the other hand, as an organization begins to grow in size, several disadvantages of this approach may emerge. For one, decision making tends to become slower and more bureaucratic. Employees may also begin to concentrate too narrowly on their own function and lose sight of the total organizational system. Finally, accountability and performance become increasingly difficult to monitor. For example, determining whether a new product fails because of production deficiencies or a poor marketing campaign may not be possible.

Product Departmentalization

Product departmentalization
, a second common approach, involves grouping and arranging activities around products or product groups. Most larger businesses adopt this form of departmentalization for grouping activities at the business or corporate level. Product departmentalization has three major advantages. First, all activities associated with one product or product group can be easily integrated and coordinated. Second, the speed and effectiveness of decision making are enhanced. Third, the performance of individual products or product groups can be assessed more easily and objectively, thereby improving the accountability of departments for the results of their activities.

Product departmentalization also has two major disadvantages. For one, managers in each department may focus on their own product or product group to the exclusion of the rest of the organization. For example, a marketing manager may see his or her primary duty as helping the group rather than helping the overall organization. For another, administrative costs rise because each department must have its own functional specialists for areas such as market research and financial analysis.

Customer Departmentalization

customer departmentalization
, the organization structures its activities to respond to and interact with specific customers or customer groups. The lending activities in most banks, for example, are usually tailored to meet the needs of different kinds of customers (business, consumer, mortgage, and agricultural loans, for instance). The basic advantage of this approach is that the organization is able to use skilled specialists to deal with unique customers or customer groups. It takes one set of skills to evaluate a business’s balance sheet and lend $5,000,000 for operating capital and a different set of skills to evaluate an individual’s creditworthiness and lend $40,000 for a new car. However, a fairly large administrative staff is required to integrate the activities of the various departments. In banks, for example, coordination is necessary to make sure that the organization does not overcommit itself in any one area and to handle collections on delinquent accounts from a diverse set of customers.

Location Departmentalization

Location departmentalization
 groups jobs on the basis of defined geographic sites or areas. The defined sites or areas may range in size from a hemisphere to only a few blocks of a large city. Transportation companies, police departments (precincts represent geographic areas of a city), and the Federal Reserve Bank all use location departmentalization. The primary advantage of location departmentalization is that it enables the organization to respond easily to unique customer and environmental characteristics in the various regions. On the negative side, a larger administrative staff may be required if the organization must keep track of units in scattered locations.

6-1cEstablishing Reporting Relationships

The third basic element of organizing is the establishment of reporting relationships among positions. The purpose of this activity is to clarify the chain of command and the span of management.

This shift of factory workers is leaving the plant floor. They have just been relieved by the second shift crew.

Sean Gallup/Getty Images

Chain of Command

Chain of command is an old concept, first popularized over a hundred years ago. For example, early writers about the 
chain of command
 argued that clear and distinct lines of authority need to be established among all positions in an organization. The chain of command actually has two components. The first, called unity of command, suggests that each person within an organization must have a clear reporting relationship to one and only one boss (as we see later, newer models of organization design routinely—and successfully—violate this premise). The second, called the scalar principle, suggests that there must be a clear and unbroken line of authority that extends from the lowest to the highest position in the organization. The popular saying “The buck stops here” is derived from this idea—someone in the organization must ultimately be responsible for every decision.

Span of Management

Another part of establishing reporting relationships is determining how many people will report to each manager. This defines the 
span of management
 (sometimes called the span of control). For years, managers and researchers sought to determine the optimal span of management. Today we recognize that the span of management is a crucial factor in structuring organizations but that there are no universal, cut-and-dried prescriptions for an ideal or optimal span.

Tall versus Flat Organizations

In recent years, managers have begun to focus attention on the optimal number of layers in their organizational hierarchy. Having more layers results in a taller organization, whereas having fewer layers results in a flatter organization. What difference does it make whether the organization is tall or flat? One early study at Sears found that a flat structure led to higher levels of employee morale and productivity. Researchers have also argued that a tall structure is more expensive (because of the larger number of managers involved) and that it fosters more communication problems (because of the increased number of people through whom information must pass). On the other hand, a wide span of management in a flat organization may result in a manager having more administrative responsibility (because there are fewer managers) and more supervisory responsibility (because there are more subordinates reporting to each manager). If these additional responsibilities become excessive, the flat organization may suffer.

Many experts agree that businesses can function effectively with fewer layers of organization than they currently have. The Franklin Mint, for example, reduced its number of management layers from 6 to 4. At the same time, the CEO increased his span of management from 6 to 12. The British firm Cadbury PLC, maker of Cadbury Dairy chocolates, Trident gum, and other confectionary products, eliminated a layer of management separating the CEO and the firm’s operating units. The specific reasons for the change were to improve communication between the CEO and the operating unit heads and to speed up decision making. One additional reason for this trend is that improved communication technologies allow managers to stay in touch with a larger number of subordinates than was possible even just a few years ago.

Main content

6-1dDistributing Authority

Another important building block in structuring organizations is the determination of how authority is to be distributed among positions. 
 is power that has been legitimized by the organization. Two specific issues that managers must address when distributing authority are delegation and decentralization.

The Delegation Process

Delegation is the establishment of a pattern of authority between a superior and one or more subordinates. Specifically, 
 is the process by which managers assign a portion of their total workload to others. In concept, the delegation process involves three steps. First, the manager assigns responsibility or gives the subordinate a job to do. The assignment of responsibility might range from telling a subordinate to prepare a report to placing the person in charge of a task force. Along with the assignment, the individual is also given the authority to do the job. The manager may give the subordinate the power to requisition needed information from confidential files or to direct a group of other workers. Finally, the manager establishes the subordinate’s accountability—that is, the subordinate accepts an obligation to carry out the task assigned by the manager. For instance, the CEO of AutoZone will sign off for the company on financial performance only when the individual manager responsible for each unit has certified his or her own results as being accurate. The firm believes that this high level of accountability will help it avoid the kind of accounting scandal that has hit many businesses in recent times.

Authority is power that has been legitimized by the organization. This supply chain manager is using her authority to instruct one of her subordinates on how to complete a project at one of the firm’s distribution centers.


Decentralization and Centralization

Just as authority can be delegated from one individual to another, organizations also develop patterns of authority across a wide variety of positions and departments. 
 is the process of systematically delegating power and authority throughout the organization to middle- and lower-level managers. It is important to remember that decentralization is actually one end of a continuum anchored at the other end by 
, the process of systematically retaining power and authority in the hands of higher-level managers. Hence, a decentralized organization is one in which decision-making power and authority are delegated as far down the chain of command as possible. Conversely, in a centralized organization, decision-making power and authority are retained at higher levels in the organization. Our “Leading the Way” feature illustrates how one fast-growing restaurant chain has prospered by moving from a centralized to a decentralized training model for its restaurants.

Leading the Way

Feeding the Chicken

Jessica Webb started working at Zaxby’s, a Georgia-based franchise chain of fast-casual restaurants, when she was still in high school. “I didn’t like cleaning up after people,” she admits, and when she was assigned to the kitchen, she found that she didn’t like to cook either. “But,” she hastens to add, “it was all a part of getting more on-the-job training.” Today, she confesses that “nothing can replace the experience I got in the kitchen. … I kept trying to improve myself because I was young, and I needed to learn all I could as fast as I could.” Now 25, Webb has been general manager of the outlet for six years. When it comes to training new managers (many of whom are older than she is), “I tell them that it doesn’t make any difference how long any of us work, there will still be things to learn.”

It’s an ideal attitude for getting ahead at Zaxby’s, which puts a premium on employee learning and companywide continuous improvement. “We want someone who wants to get better every day,” says COO Robert Baxley. “Success is the development of people.” Zaxby’s share of success—it’s grown to 640 outlets in just over two decades—derives in large part from its conviction that employee training reduces turnover, improves standards of performance, and, in the process, helps it meet such business goals as maintaining brand consistency and preserving the company’s Southern culture. “Our mission,” explains Richard Fletcher, vice president (VP) of talent management, “is to attract and retain a talented workforce and provide them with a supportive learning environment that enhances performance in alignment with the company’s vision and values.”

Much of Zaxby’s learning and training program is designed for franchisees, who own 80 percent of those 640 restaurants. Originally, CEO Zach McLeroy believed that centralized training was essential to maintaining brand consistency, so a franchisee’s management candidates traveled to corporate classrooms and certified training restaurants at the franchisee’s expense (an average of $6,000 per student). Unfortunately, trainees were absent from their home restaurants for six weeks. Many quit during training, while others failed to attain certification and others were deemed unsuitable. As a result, certified managers were running only 25 percent of Zaxby’s outlets, where turnover was a robust 100 percent.

As a matter of fact, those numbers were about par for the industry, but corporate leadership was unhappy, and so were franchisees, who wanted more control over training. “We had to find a way,” recalls Fletcher, “to balance the need for consistent training with franchisee demand for control over training.” So in 2012, Zaxby’s unveiled its Licensee Managed Training Program. It begins with an online licensed management system (LMS) that allows trainees to customize their learning plans within a basic modular structure. The company also provides material pegged to such specific managerial roles as “front of the house,” “back of the house,” “manager,” and even “owner.” Franchisees are free to alter materials to suit their own needs. Finally, the program tracks progress through both conventional and hands-on tests that allow trainees to demonstrate the skills that they’ve learned.

A trainee’s success is acknowledged by a program called “feeding the chicken.” Each individual’s learning plan features Zaxby’s learning logo—a cartoon chicken sporting a mortarboard—and as he or she meets a customized goal, the chicken turns increasingly gold, culminating in a solid-gold image when training has been completed.

References: Dwight Dana, “Worker Sticks with Zaxby’s for Nine Years,” SCNow, January 2, 2013,, accessed on February 20, 2017; Christine LaFave Grace, “Chasing Improvement, Not Trends,” Technomic,, accessed on February 20, 2017; Terry Mayhew, “Zaxby’s Appoints a New VP of Talent Management,” QSR, November 19, 2012,, accessed on February 20, 2017; John Tabellione, “Zaxby’s CEO McLeroy Drums Up Decades of Growth,” Savannah CEO,, accessed on February 20, 2017; and Paul Harris, “’The Chicken’ Rules Zaxby’s Learning Roost,” T&D,, accessed on February 20, 2017.

What factors determine an organization’s position on the decentralization–centralization continuum? One common determinant is the organization’s external environment. In general, the greater the complexity and uncertainty of the environment, the greater is the tendency to decentralize. Another crucial factor is the history of the organization. Firms have a tendency to do what they have done in the past, so there is likely to be some relationship between what an organization did in its early history and what it chooses to do today in terms of centralization or decentralization. The nature of the decisions being made is also considered. The costlier and riskier the decisions, the more pressure there is to centralize. In short, managers have no clear-cut guidelines for determining whether to centralize or decentralize. Many successful organizations, such as General Electric and Johnson & Johnson, are quite decentralized. But many equally successful firms, such as McDonald’s and Walmart, have remained centralized.

IBM has recently undergone a transformation from using a highly centralized approach to a much more decentralized approach to managing its operations. A great deal of decision-making authority was passed from the hands of a select group of top executives down to six product and marketing groups. The reason for the move was to speed up the company’s ability to make decisions, introduce new products, and respond to customers. Similarly, Toyota recently announced its intent to provide more autonomy to country managers, especially those in the United States. This move came in part because of poor and slow decision making during a recent quality crisis involving Toyota products. In contrast, Royal Dutch Shell, long operated in a highly decentralized manner, has recently gone through several major changes all intended to make the firm more centralized. The firm’s new CEO Peter Voser went so far as to note that “fewer people will make strategic decisions.”

6-1eCoordinating Activities

The fifth major element of organizing is coordination. As we discussed earlier, job specialization and departmentalization involve breaking down jobs into small units and then combining those jobs into departments. Once this has been accomplished, the activities of the departments must be linked—systems must be put into place to keep the activities of each department focused on the attainment of organizational goals. This is accomplished by 
—the process of linking the activities of the various departments of the organization.

The Need for Coordination

The primary reason for coordination is that departments and work groups are interdependent—they depend on one another for information and resources to perform their respective activities. The greater the interdependence between departments, the more coordination the organization requires if departments are to be able to perform effectively. There are three major forms of interdependence: pooled, sequential, and reciprocal.

Pooled interdependence
 represents the lowest level of interdependence. Units with pooled interdependence operate with little interaction—the output of the units is pooled at the organizational level. Old Navy clothing stores operate with pooled interdependence. Each store is considered a “department” by the parent corporation. Each has its own operating budget, staff, and so forth. The profits or losses from each store are simply “added together” at the organizational level. The stores are interdependent to the extent that the final success or failure of one store affects the others, but they do not generally interact on a day-to-day basis.

sequential interdependence
, the output of one unit becomes the input for another in a sequential fashion. This creates a moderate level of interdependence. At Nissan, for example, one plant assembles engines and then ships them to a final assembly site at another plant, where the cars are completed. The plants are interdependent in that the final assembly plant must have the engines from engine assembly before it can perform its primary function of producing finished automobiles. But the level of interdependence is generally one way—the engine plant is not necessarily dependent on the final assembly plant.

Reciprocal interdependence
 exists when activities flow both ways between units. This form is clearly the most complex. Within a Marriott hotel, for example, the reservations department, front-desk check-in, and housekeeping are all reciprocally interdependent. Reservations has to provide front-desk employees with information about how many guests to expect each day, and housekeeping needs to know which rooms require priority cleaning. If any of the three units does not do its job properly, all the others will be affected. The “Doing Business on Planet Earth” feature describes an especially complex set of interdependent activities that require coordination.

Doing Business on Planet Earth

Collaboration, Connection, and Chromosomal Configuration

Kathrin Winkler is chief sustainability officer (CSO) and senior VP of EMC Corporation, a worldwide leader in data storage. She’s been at the job (originally as senior director of corporate sustainability) since 2008, but she was passionate about the possibilities of corporate sustainability even before the CSO job opened up. When the position was announced, recalls Winkler, “I told my boss I absolutely had to apply for this job,” and she’s still excited today by “those amazing moments of satisfaction when. … an employee shows pride over a process redesign or the lights go on in a middle manager’s eyes.” Besides, as she likes to remind herself, “someone is paying me to try to make the world a better place.”

Winkler admits, however, that there are “some things I don’t love so much about my job.” One pet peeve is having to deal with surveys. “We get lots of surveys from analysts and self-appointed rating systems,” she explains, most of which have some really annoying questions that have no regard for the core purpose of our business. … For example, we’re often docked points because we don’t have a line of “green” products. But whenever we find a way to reduce the negative impact or improve the positive impact of our products, we try to put it across the entire product line. Isn’t that a good thing?

Likewise—and this may come as a bit of a surprise—Winkler doesn’t like getting sponsorship requests. Once in a while, she says, “it’s useful for our customers to know what’s important to us,” but EMC customers—whether money-center banks, telecommunications providers, airlines, or educational institutions—”aren’t often primary audiences for these events.” In any case, she adds, “I’m not convinced that the best use of our money is putting our logo on things. Mostly, I try to use the majority of my budget to fulfill the mission of embedding sustainability into how we conduct business.”

Clearly, Winkler is a little skeptical when it comes to how much people know about the job responsibilities of a CSO, especially at a company like EMC. So, when asked exactly what they are, Winkler answers with a statement like the following:

I’m responsible for making sure that the interdependencies between our business, the environment, and society are identified and explicit in our strategy and that the opportunities and risks from environmental and social developments are integrated into our day-to-day decision making.

The goal at EMC is to make sure that sustainability is considered in every aspect of the company’s business, and Winkler’s job is ensuring that sustainability goes hand in hand with company growth. “We want sustainability to be a core value—like quality and customer responsiveness. It requires a culture change,” she admits, “and that’s always the hardest thing to do.” That’s why the reach of EMC’s Office of Sustainability is designed to embrace the entire organization. “I have a virtual cross-functional team,” explains Winkler. “There are many people whose job titles do not include ‘sustainability’ but whose jobs could be framed as sustainable development roles, such as those who are managing marketing and communications.”

It’s all about “collaboration and connection,” she says, and she suspects that women’s leadership styles tend to be especially open to consultation and collaboration. While I believe that my chromosomal configuration doesn’t make me any better at my job or any more attracted to it, there are a number of characteristics—often considered more prevalent in women than in men—that are beneficial to the role. For the record, one of the things that Winkler likes about her job is “collaborating rather than competing with my counterparts.”

References: Kathrin Winkler, “Ten Challenges of Being the CSO,”, accessed on February 20, 2017; Weinreb Group, CSO Backstory: How Chief Sustainability Officers Reached the C-Suite,, accessed on February 20, 2017; Winkler, “Building a Green Company Culture, One Day at a Time,”, accessed on February 20, 2017; Kyle Alspach, “EMC Goes Green,” Boston Business Journal, July 15, 2011,, accessed on February 20, 2017; Maya Albanese, “How She Leads: Kathrin Winkler of EMC Corporation,”, accessed on November 14, 2014; and Kathrin Winkler, “Do Women Make Better Sustainability Leaders?” The Guardian, May 5, 2015,, accessed on November 14, 2014.

Structural Coordination Techniques

Because of the obvious coordination requirements that characterize most organizations, many techniques for achieving coordination have been developed. Some of the most useful devices for maintaining coordination among interdependent units are the managerial hierarchy, rules and procedures, liaison roles, task forces, and integrating departments.

Organizations that use the hierarchy to achieve coordination place one manager in charge of interdependent departments or units. In Walmart distribution centers, major activities include receiving and unloading bulk shipments from railroad cars and loading other shipments onto trucks for distribution to retail outlets. The two groups (receiving and shipping) are interdependent in that they share the same loading docks and some equipment. To ensure coordination and minimize conflict, one manager is in charge of the whole operation.

A warehouse facility like this one often requires considerable coordination. At any given time shipments are coming in while other shipments are going out. Boxes and crates are also being moved from one location to another at the same time that merchandise is being packed for shipment.


Routine coordination activities can be handled through rules and standard procedures. In the Walmart distribution center, an outgoing truck shipment has priority over an incoming rail shipment. Thus, when trucks are to be loaded, the shipping unit is given access to all of the center’s auxiliary forklifts. This priority is specifically stated in a rule. But, as useful as rules and procedures often are in routine situations, they are not particularly effective when coordination problems are complex or unusual.

As a device for coordination, a manager in a liaison role coordinates interdependent units by acting as a common point of contact. This individual may not have any formal authority over the groups but instead simply facilitates the flow of information between units. Two engineering groups working on component systems for a large project might interact through a liaison. The liaison maintains familiarity with each group as well as with the overall project. She can answer questions and otherwise serve to integrate the activities of all the groups.

A task force may be created when the need for coordination is acute. When interdependence is complex and several units are involved, a single liaison person may not be sufficient. Instead, a task force might be assembled by drawing one representative from each group. The coordination function is thus spread across several individuals, each of whom has special information about one of the groups involved. When the project is completed, task force members return to their original positions. For example, a college overhauling its degree requirements might establish a task force made up of representatives from each department affected by the change. Each person not only retains his or her regular departmental affiliation and duties but also serves on the special task force. After the new requirements are agreed on, the task force is dissolved.

Integrating departments are occasionally used for high-level coordination. These are somewhat similar to task forces but are more permanent. An integrating department generally has some permanent members as well as members who are assigned temporarily from units that are particularly in need of coordination. One study found that successful firms in the plastics industry, which is characterized by complex and dynamic environments, used integrating departments to maintain internal integration and coordination. An integrating department usually has more authority than a task force and may even be given some budgetary control by the organization.

Electronic Coordination

Advances in information technology are also providing useful mechanisms for coordination. Email, for example, makes it easier for people to communicate with one another. This communication, in turn, enhances coordination. Similarly, many people in organizations today use electronic scheduling, at least some of which is accessible to others. Hence, if someone needs to set up a meeting with two colleagues, he can often check their electronic schedules to determine their availability, making it easier to coordinate their activities.

Local networks, increasingly managed by handheld electronic devices, are also making it easier to coordinate activities. Bechtel, for example, now requires its contractors, subcontractors, and suppliers to use a common web-based communication system to improve coordination among their myriad activities. The firm estimates that this improved coordination technology routinely saves it thousands of dollars on every big construction project it undertakes. Similarly, shared communication networks allow people working together to access, edit, comment, and post documents for everyone to see.

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6-2The Bureaucratic Model of Organization Design

The various elements of organizing discussed in the previous section—job specialization, departmentalization, reporting relationships, distribution of authority, and coordination—are all parts of an overall organization design. We now turn our attention to the organization itself. As we will see, managers can combine these various elements in many different ways to create an overall organization design that best fits their needs. We start with a brief look back at some of the early thinking about organization design.

Max Weber, an influential German sociologist, was a pioneer in the study of organization design. At the core of Weber’s writings was what he called the bureaucratic model of organizations. The Weberian perspective suggests that a 
 is a model of organization design based on a legitimate and formal system of authority. Many people associate bureaucracy with “red tape,” rigidity, and passing the buck. For example, how many times have you heard people refer disparagingly to “the federal bureaucracy”? And many U.S. managers believe that bureaucracy in the Chinese government is a major impediment to U.S. firms’ ability to do business there.

But Weber originally viewed the bureaucratic form of organization as logical, rational, and efficient. He offered the model as a framework to which all organizations should aspire—the “one best way” of doing things. According to Weber, the ideal bureaucracy exhibits five basic characteristics:

1. The organization should adopt a distinct division of labor, and each position should be filled by an expert.

2. The organization should develop a consistent set of rules to ensure that task performance is uniform.

3. The organization should establish a hierarchy of positions or offices that creates a chain of command from the top of the organization to the bottom.

4. Managers should conduct business in an impersonal way and maintain an appropriate social distance between themselves and their subordinates.

5. Employment and advancement in the organization should be based on technical expertise, and employees should be protected from arbitrary dismissal.

Perhaps the best examples of bureaucracies today are government agencies and universities. Consider, for example, the steps you must go through and the forms you must fill out to apply for admission to college, request housing, register each semester, change majors, submit a degree plan, substitute a course, and file for graduation. Even as paper has been replaced with electronic media, the steps are often the same. The reason these procedures are necessary is that universities deal with large numbers of potential and accepted students who must be treated equally and fairly. Hence, rules, regulations, and standard operating procedures are needed. Large labor unions are also usually organized as bureaucracies. Some bureaucracies, such as the U.S. Postal Service, have been trying to portray themselves as less mechanistic and impersonal. The strategy of the Postal Service is to become more service oriented as a way to fight back against competitors such as FedEx and UPS.

This woman pulls a number while at the Department of Motor Vehicles. She is in line to renew her license. Many drivers often complain about the DMV’s bureaucratic and archaic processes.

dlewis33/Getty Images

A primary strength of the bureaucratic model is that several of its elements (such as reliance on rules and employment based on expertise) do, in fact, often improve efficiency. Bureaucracies also help minimize favoritism or bias (because everyone must follow the rules) and make procedures and practices very clear to everyone. Unfortunately, however, this approach also has several disadvantages. One major disadvantage is that the bureaucratic model results in inflexibility and rigidity. Once rules are created and put in place, making exceptions (even when warranted) or changing them (when circumstances change) is often difficult. In addition, the bureaucracy often results in the neglect of human and social processes within the organization.

6-3Situational Influences on Organization Design

Weber argued that the bureaucratic model would always be ideal. Other experts subsequently began to offer different models that they argued could be used in any situation. It eventually became apparent, though, that no one universal model of organization design would ever be identified. Instead, experts now acknowledge that there is no one best form of organization design. That is, the 
situational view of organization design
 is based on the assumption that the optimal design for any given organization depends on a set of relevant situational factors. In other words, situational factors play a role in determining the best organization design for any particular circumstance. Four basic situational factors—technology, environment, size, and organizational life cycle—are discussed here.

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6-3aCore Technology

 consists of the conversion processes used to transform inputs (such as materials or information) into outputs (such as products or services). Most organizations use multiple technologies, but an organization’s most important one is called its core technology. Although most people visualize assembly lines and machinery when they think of technology, the term can also be applied to service organizations. For example, an investment firm like Fidelity uses technology to transform investment dollars into income in much the same way that Union Carbide uses natural resources to manufacture chemical products.

Fidelity Investments uses technology to transform investment dollars into growth and income for investors. This technology, in turn, plays a significant role in the kind of organization design that best serves Fidelity. Other firms that use different technologies, meanwhile, will likely use different forms of organization design.

NetPhotos/Alamy Stock Photo

The link between technology and organization design was first recognized by Joan Woodward. Woodward studied 100 manufacturing firms in southern England. She collected information about aspects such as the history of each organization, its manufacturing processes, its forms and procedures, and its financial performance. Woodward expected to find a relationship between the size of an organization and its design, but no such relationship emerged. As a result, she began to seek other explanations for differences. Close scrutiny of the firms in her sample led her to recognize a potential relationship between technology and organization design. This follow-up analysis led Woodward to first classify the organizations according to their technology. Three basic forms of technology were identified by Woodward:

1. Unit or small-batch technology. The product is custom-made to customer specifications or produced in small quantities. Organizations using this form of technology include a tailor shop specializing in custom suits, a printing shop that produces business cards and company stationery, and a photography studio.

2. Large-batch or mass-production technology. The product is manufactured in assembly-line fashion by combining component parts into another part or finished product. Examples are automobile manufacturers like Subaru, appliance makers like Whirlpool Corporation, and electronics firms like Philips.

3. Continuous-process technology. Raw materials are transformed to a finished product by a series of machine or process transformations. The composition of the materials themselves is changed. Examples are petroleum refineries like ExxonMobil and Shell, and chemical refineries like Dow Chemical and Hoechst AG.

An organization’s core technology can play an important role in organization design. A hospital, for example, uses many different kinds of equipment, and this equipment is often assigned to specific departments.

Dmitry Kalinovsky/

These forms of technology are listed in order of their assumed levels of complexity. In other words, unit or small-batch technology is presumed to be the least complex and continuous-process technology the most complex. Woodward found that different configurations of organization design were associated with each technology.

Specifically, Woodward found that the two extremes (unit or small-batch and continuous-process) tended to have very little bureaucracy, whereas the middle-range organizations (large-batch or mass-production) were much more bureaucratic. The large-batch and mass-production organizations also had a higher level of specialization. Finally, she found that organizational success was related to the extent to which organizations followed the typical pattern. For example, successful continuous-process organizations tended to have less bureaucracy, whereas less successful firms with the same technology tended to be more bureaucratic.

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Environmental elements and organization design are specifically linked in a number of ways. The first widely recognized analysis of environment–organization design linkages was provided by Tom Burns and G. M. Stalker. Like Woodward, Burns and Stalker worked in England. Their first step was identifying two extreme forms of organizational environment: stable (one that remains relatively constant over time) and unstable (subject to uncertainty and rapid change). Next they studied the designs of organizations in each type of environment. Not surprisingly, they found that organizations in stable environments tended to have a different kind of design than organizations in unstable environments. The two kinds of design that emerged were called mechanistic and organic organization.

mechanistic organization
, quite similar to the bureaucratic model, was most frequently found in stable environments. Free from uncertainty, organizations structured their activities in rather predictable ways by means of rules, specialized jobs, and centralized authority. Mechanistic organizations are also quite similar to bureaucracies. Although no environment is completely stable, Abercrombie & Fitch and Wendy’s use mechanistic designs. Each A&F store, for example, has prescribed methods for store design and merchandise-ordering processes. Little or no deviation is allowed from these methods. An 
organic organization
, on the other hand, was most often found in unstable and unpredictable environments, in which constant change and uncertainty usually dictate a much higher level of fluidity and flexibility. Verizon (facing rapid technological change) and Apple (facing both technological change and constant change in consumer tastes) both use organic designs. A manager at Verizon, for example, has considerable discretion over how work is performed and how problems can be solved.

These ideas were extended in the United States by Paul R. Lawrence and Jay W. Lorsch. They agreed that environmental factors influence organization design but believed that this influence varies between different units of the same organization. In fact, they predicted that each organizational unit has a unique environment and responds by developing unique attributes. Lawrence and Lorsch suggested that organizations could be characterized along two primary dimensions.

One of these dimensions, 
, is the extent to which the organization is broken down into subunits. A firm with many subunits is highly differentiated; one with few subunits has a low level of differentiation. The second dimension, 
, is the degree to which the various subunits must work together in a coordinated fashion. For example, if each unit competes in a different market and has its own production facilities, they may need little integration. Lawrence and Lorsch reasoned that the degree of differentiation and integration needed by an organization depends on the stability of the environments that its subunits face.

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6-3cOrganizational Size and Life Cycle

The size and life cycle of an organization may also affect its design. Although several definitions of size exist, we define 
organizational size
 as the total number of full-time or full-time-equivalent employees. A team of researchers at the University of Aston in Birmingham, England, believed that Woodward had failed to find a size–structure relationship (which was her original expectation) because almost all the organizations she studied were relatively small (three-fourths had fewer than 500 employees). Thus they decided to undertake a study of a wider array of organizations to determine how size and technology both individually and jointly affect an organization’s design.

Their primary finding was that technology did in fact influence structural variables in small firms, probably because all their activities tend to be centered on their core technologies. In large firms, however, the strong technology–design link broke down, most likely because technology is not as central to ongoing activities in large organizations. The Aston studies yielded a number of basic generalizations: When compared to small organizations, large organizations tend to be characterized by higher levels of job specialization, more standard operating procedures, more rules, more regulations, and a greater degree of decentralization. Walmart is a good case in point. The firm expects to continue to grow for the foreseeable future, adding several thousand new jobs in the next few years. But, as it grows, the firm acknowledges that it will have to become more decentralized for its first-line managers to stay in tune with their customers. Of course, size is not constant. As we noted in Chapter 5, for example, some small businesses are formed but soon disappear. Others remain as small, independently operated enterprises as long as their owner-manager lives. A few, such as Facebook, JetBlue, and Starbucks, skyrocket to become organizational giants. And occasionally large organizations reduce their size through layoffs or divestitures. Marathon Oil, for instance, split into two independent businesses a few years ago. One business retained Marathon’s core operations and name but became a much smaller entity.

Organizational life cycle affects organization design. New and modern firms such as this one are often designed in ways that are very different from older, more traditional companies.

Monkey Business Images/

Although no clear pattern explains changes in size, many organizations progress through a four-stage 
organizational life cycle
. The first stage is the birth of the organization. The second stage, youth, is characterized by growth and the expansion of organizational resources. Midlife is a period of gradual growth evolving eventually into stability. Finally, maturity is a period of stability, perhaps eventually evolving into decline. Firms like NetFlix and Starbucks, for instance, are still in their youth stage; Halliburton and Chevron are in midlife; and Ford and Boeing are in maturity. (A key challenge for managers, of course, is to avoid allowing a mature organization to begin to decline. Hence, they must be alert for opportunities to reenergize the organization with new products and new markets.)

Managers must confront a number of organization design issues as the organization progresses through these stages. In general, as an organization passes from one stage to the next, it becomes bigger, more mechanistic, and more decentralized. It also becomes more specialized, devotes more attention to planning, and takes on an increasingly large staff component. Finally, coordination demands increase, formalization increases, organizational units become geographically more dispersed, and control systems become more extensive. Thus an organization’s size and design are clearly linked, and this link is dynamic because of the organizational life cycle.

6-4Basic Forms of Organization Design

Because technology, environment, size, and life cycle can all influence organization design, it should come as no surprise that organizations adopt many different kinds of designs. Most designs, however, fall into one of four basic categories. Others are hybrids based on two or more of the basic forms.

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6-4aFunctional (U-Form) Design

functional design
 is an arrangement based on the functional approach to departmentalization. This design has been termed the U-form (for unitary) approach. Under the U-form arrangement, the members and units in the organization are grouped into functional departments such as marketing and production.

For the organization to operate efficiently in this design, there must be considerable coordination across departments. This integration and coordination are most commonly the responsibility of the CEO and members of senior management. Figure 6.2 shows the U-form design applied to the corporate level of a small manufacturing company. In a U-form organization, none of the functional areas can survive without the others. Marketing, for example, needs products from operations to sell and funds from finance to pay for advertising. The WD-40 Company, which makes a popular lubricating oil, and the McIlhenny Company, which makes tabasco sauce, are both examples of firms that use the U-form design.

Figure 6.2Functional (U-Form) Design for a Small Manufacturing Company

The U-form design is based on functional departmentalization. This small manufacturing firm uses managers at the vice presidential level to coordinate activities within each functional area of the organization. Note that each functional area is dependent on the others.

In general, this approach shares the basic advantages and disadvantages of functional departmentalization. Thus it allows the organization to staff all important positions with functional experts, and it facilitates coordination and integration. On the other hand, it also promotes a functional, rather than an organizational, focus and tends to promote centralization. Functionally based designs are most commonly used in small organizations because an individual CEO can easily oversee and coordinate the entire organization. As an organization grows, the CEO finds staying on top of all functional areas increasingly difficult.

6-4bConglomerate (H-Form) Design

Another common form of organization design is the conglomerate, or H-form (for holding, as in holding company), approach. The 
conglomerate design
 is used by an organization made up of a set of unrelated businesses. Thus, the H-form design is essentially a holding company that results from unrelated diversification.

This approach is based loosely on the product form of departmentalization. Each business or set of businesses is operated by a general manager who is responsible for its profits or losses, and each general manager functions independently of the others. Samsung Electronics Company, a South Korean firm, uses the H-form design. As illustrated in Figure 6.3, Samsung consists of four basic business groups. Other firms that use the H-form design include General Electric (aircraft engines, appliances, medical equipment, financial services, lighting products, plastics, and other unrelated businesses) and Tenneco (pipelines, auto parts, financial services, and other unrelated businesses). Honeywell has also recently adopted the H-form design.

Figure 6.3Conglomerate (H-Form) Design at Samsung

Samsung Electronics Company, a South Korean firm, uses the conglomerate form of organization design. This design, which results from a strategy of unrelated diversification, is a complex one to manage. Managers find that comparing and integrating activities among the dissimilar operations are difficult. Companies may abandon this design for another approach, such as the M-form design.

In an H-form organization, a corporate staff usually evaluates the performance of each business, allocates corporate resources across companies, and shapes decisions about buying and selling businesses. The basic shortcoming of the H-form design is the complexity associated with holding diverse and unrelated businesses. Managers usually find comparing and integrating activities across a large number of diverse operations difficult. Research suggests that many organizations following this approach achieve only average-to-weak financial performance. Thus, although some U.S. firms are still using the H-form design, many have abandoned it for other approaches.

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6-4cDivisional (M-Form) Design

In the 
divisional design
, which is becoming increasingly popular, a product form of organization is also used; in contrast to the H-form approach, however, the divisions are related. Thus the divisional design, or M-form (for multidivisional) approach, is based on multiple businesses in related areas operating within a larger organizational framework. This design results from a strategy of related diversification.

Some activities are extremely decentralized down to the divisional level; others are centralized at the corporate level. For example, as shown in Figure 6.4, Hilton Hotels uses this approach. Each of its divisions is headed by a president or executive VP and operates with reasonable autonomy, but the divisions also coordinate their activities as is appropriate. Other firms that use this approach are the Walt Disney Company (theme parks, movies, television, and merchandising units, all interrelated) and Hewlett-Packard (computers, printers, scanners, electronic medical equipment, and other electronic instrumentation).

Figure 6.4Multidivisional (M-Form) Design at Hilton Hotels

Hilton Hotels uses the multidivisional approach to organization design. Although each unit operates with relative autonomy, all units function in the same general market. This design resulted from a strategy of related diversification. Other firms that use M-form designs include PepsiCo and the Walt Disney Company.

The opportunities for coordination and shared resources represent one of the biggest advantages of the M-form design. Hilton’s market research and purchasing departments are centralized. Thus a site selector can visit a city and look for possible locations for different Hilton brands, and a buyer can purchase bed linens for multiple Hilton brands from the same supplier. The M-form design’s basic objective is to optimize internal competition and cooperation. Healthy competition for resources among divisions can enhance effectiveness, but cooperation should also be promoted. Research suggests that the M-form organization that can achieve and maintain this balance will outperform large U-form and all H-form organizations.

6-4dMatrix Design

matrix design
, another common approach to organization design, is based on two overlapping bases of departmentalization. The foundation of a matrix is a set of functional departments. A set of product groups, or temporary departments, is then superimposed across the functional departments. Employees in a matrix are simultaneously members of a functional department (such as engineering) and of a project team.

Figure 6.5 shows a basic matrix design. At the top of the organization are functional units headed by VPs of engineering, production, finance, and marketing. Each of these managers has several subordinates. Along the side of the organization are a number of positions called project manager. Each project manager heads a project group composed of representatives or workers from the functional departments. Note from the figure that a matrix reflects a multiple-command structure—any given individual reports to both a functional superior and one or more project managers.

Figure 6.5A Matrix Organization

A matrix organization design is created by superimposing a product form of departmentalization on an existing functional organization. Project managers coordinate teams of employees drawn from different functional departments. Thus, a matrix relies on a multiple-command structure.

The project groups, or teams, are assigned to designated projects or programs. For example, the company might be developing a new product. Representatives are chosen from each functional area to work as a team on the new product. They also retain membership in the original functional group. At any given time, a person may be a member of several teams as well as a member of a functional group. Ford used this approach in creating its popular Focus automobile. It formed a group called Team Focus made up of designers, engineers, production specialists, marketing specialists, and other experts from different areas of the company. This group facilitated getting a very successful product to the market at least a year earlier than would have been possible using Ford’s previous approaches.

Martha Stewart also uses a matrix organization for her lifestyle business. The company was first organized broadly into media and merchandising groups, each of which has specific product and product groups. Layered on top of this structure are teams of lifestyle experts organized into groups such as cooking, crafts, and weddings. Each of these groups is targeted toward specific customer needs, but they work as necessary across all of the product groups. For example, a wedding expert might contribute to an article on wedding planning for a Martha Stewart Living magazine, contribute a story idea for a cable TV program, and supply content for a Martha Stewart website. This same individual might also help select fabrics suitable for wedding gowns for retailing.

The matrix form of organization design is most often used in one of three situations. First, a matrix may work when there is strong pressure from the environment. For example, intense external competition may dictate the sort of strong marketing thrust that is best spearheaded by a functional department, but the diversity of a company’s products may argue for product departments. Second, a matrix may be appropriate when large amounts of information need to be processed. For example, creating lateral relationships by means of a matrix is one effective way to increase the organization’s capacity for processing information. Third, the matrix design may work when there is pressure for shared resources. For example, a company with ten product departments may have resources for only three marketing specialists. A matrix design would allow all the departments to share the company’s scarce marketing resources.

Both advantages and disadvantages are associated with the matrix design. Researchers have observed six primary advantages of matrix designs. First, they enhance flexibility because teams can be created, redefined, and dissolved as needed. Second, because they assume a major role in decision making, team members are likely to be highly motivated and committed to the organization. Third, employees in a matrix organization have considerable opportunity to learn new skills. Fourth, the matrix design provides an efficient way for the organization to take full advantage of its human resources. Fifth, team members retain membership in their functional unit so that they can serve as a bridge between the functional unit and the team, enhancing cooperation. Sixth, the matrix design gives top management a useful vehicle for decentralization. Once the day-to-day operations have been delegated, top management can devote more attention to areas such as long-range planning.

On the other hand, the matrix design also has some major disadvantages. Employees may be uncertain about reporting relationships, especially if they are simultaneously assigned to a functional manager and to several project managers. To complicate matters, some managers see the matrix as a form of anarchy in which they have unlimited freedom. Another set of problems is associated with the dynamics of group behavior. Groups take longer than individuals to make decisions, may be dominated by one individual, and may compromise too much. They may also get bogged down in discussion and not focus on their primary objectives. Finally, in a matrix, more time may also be required for coordinating task-related activities.

6-4eHybrid Designs

Some organizations use a design that represents a hybrid of two or more of the common forms of organization design. For example, an organization may have five related divisions and one unrelated division, making its design a cross between an M form and an H form. Indeed, few companies use a design in its pure form; most firms have one basic organization design as a foundation for managing the business but maintain sufficient flexibility so that temporary or permanent modifications can be made for strategic purposes. Ford, for example, used the matrix approach to design the Focus and the newest Mustang, but the company is basically a U-form organization showing signs of moving to an M-form design. As we noted earlier, any combination of factors may dictate the appropriate form of design for any particular company.

6-5Emerging Issues in Organization Design

In today’s complex and ever-changing environment, it should come as no surprise that managers continue to explore and experiment with new forms of organization design. Many organizations are creating designs for themselves that maximize their ability to adapt to changing circumstances and to a changing environment. They try to accomplish this by not becoming too compartmentalized or too rigid. As we noted earlier, bureaucratic organizations are hard to change, slow, and inflexible. To avoid these problems, then, organizations can try to be as different from bureaucracies as possible—relatively few rules, general job descriptions, and so forth. This final section highlights some of the most important emerging issues.

6-5aThe Team Organization

Some organizations today are using the 
team organization
, an approach to organization design that relies almost exclusively on project-type teams, with little or no underlying functional hierarchy. Within such an organization, people float from project to project as necessitated by their skills and the demands of those projects. At Cypress Semiconductor, founder and long-time CEO T. J. Rodgers refused to allow the organization to grow so large that it could not function this way. Whenever a unit or group started getting too large, he simply split it into smaller units. Consequently, all units within the organization remained small. This allowed them to change direction, explore new ideas, and try new methods without dealing with a rigid bureaucratic organizational context. Although few large organizations are actually able to maintain a pure team organization, Apple and Facebook have retained a very strong team orientation in how they structure their work activities.

6-5bThe Virtual Organization

Closely related to the team organization is the 
virtual organization
 that has little or no formal structure. Such an organization typically has only a handful of permanent employees and a very small staff and administrative headquarters facility. As the needs of the organization change, its managers bring in temporary workers, lease facilities, and outsource basic support services to meet the demands of each unique situation. As the situation changes, the temporary workforce changes in parallel, with some people leaving the organization and others entering. Facilities and the services subcontracted to others change as well. Thus, the organization exists only in response to its needs. And, increasingly, virtual organizations are conducting most—if not all—of their businesses online.

For example, TLG Research Inc. was founded as a virtual organization focused on marketing research for automotive, aviation, marine, and industrial markets for original equipment and replacement parts. Currently, the company consists of an in-house project management staff of ten people and a virtual network of industry professionals. It also has a global business and research sources in Europe, Latin America, and Asia–Pacific to refer to for consulting and research services as needed.

6-5cThe Learning Organization

Another recent approach to organization design is the so-called learning organization. Organizations that adopt this approach work to integrate continuous improvement with continuous employee learning and development. Specifically, a 
learning organization
 is one that works to facilitate the lifelong learning and personal development of all its employees while continually transforming itself to respond to changing demands and needs.

Although managers might approach the concept of a learning organization from a variety of perspectives, improved quality, continuous improvement, and performance measurement are frequent goals. The idea is that the most consistent and logical strategy for achieving continuous improvement is by constantly upgrading employee talent, skill, and knowledge. For example, if each employee in an organization learns one new thing each day and can translate that knowledge into work-related practice, continuous improvement will logically follow. Indeed, organizations that wholeheartedly embrace this approach believe that only through constant learning by employees can continuous improvement really occur.

In recent years, many different organizations have implemented this approach. For example, Shell Oil purchased an executive conference center north of its headquarters in Houston. The center boasts state-of-the-art classrooms and instructional technology, lodging facilities, a restaurant, and recreational amenities such as a golf course, a swimming pool, and tennis courts. Line managers at the firm rotate through the Shell Learning Center, as the facility has been renamed, and serve as teaching faculty. Such teaching assignments last anywhere from a few days to several months. At the same time, all Shell employees routinely attend training programs, seminars, and related activities, all the while learning the latest information they need to contribute more effectively to the firm. Recent seminar topics have ranged from time management, to the implications of Great Britain’s impending exit from the European Union, to balancing work and family demands, to international trade theory. The idea is that by continuously immersing people in shared learning experiences, the firm will promote an organic design populated by people with common knowledge, goals, and expectations.

Main content

Chapter Review

Summary of Learning Outcomes and Key Points

· 1Identify the basic elements of organizations.


Organizations are made up of a series of elements:


Designing jobs


Grouping jobs


Establishing reporting relationships


Distributing authority


Coordinating activities

· 2Describe the bureaucratic perspective on organization design.


The bureaucratic model attempted to prescribe how all organizations should be designed.


It is based on the presumed need for legitimate, logical, and formal rules, regulations, and procedures.

3Identify and explain key situational influences on organization design.


The situational view of organization design is based on the assumption that the optimal organization design is a function of situational factors.


Four important situational factors are the following:








Organizational life cycle

· 4Describe the basic forms of organization design that characterize many organizations.


Many organizations today adopt one of four basic organization designs:


Functional (U form)


Conglomerate (H form)


Divisional (M form)




Other organizations use a hybrid design derived from two or more of these basic designs.

· 5Identify and describe emerging issues in organization design.


Three emerging issues in organization design are the following:


Team organization


Virtual organization


Learning organization

Chapter Review

Discussion Questions

Questions for Review

1. What is job specialization? What are its advantages and disadvantages?

2. What is departmentalization? What are its most common forms?

3. Distinguish between centralization and decentralization, and comment on their relative advantages and disadvantages.

4. Describe the basic forms of organization design. What are the advantages and disadvantages of each?

5. Compare and contrast the matrix organization and the team organization, citing their similarities and differences.

Questions for Analysis

1. How is specialization applied in settings such as a hospital, restaurant, and church?

2. Learn how your school or business is organized. Analyze the advantages and disadvantages of this form of departmentalization, and then comment on how well or how poorly other forms of organization might work.

3. Identify five ways in which electronic coordination affects your daily life.

4. Each of the organization designs is appropriate for some firms but not for others. Describe the characteristics that a firm using the U form should have. Then do the same for the H form, the M form, and the matrix design. For each item, explain the relationship between that set of characteristics and the choice of organization design.

5. What are the benefits of using the learning organization approach to design? Now consider that, to learn, organizations must be willing to tolerate many mistakes because it is only through the effort of understanding mistakes that learning can occur. With this statement in mind, what are some of the potential problems with the use of the learning organization approach?

Chapter Review

Experiential Exercise

Purpose: Organization design refers to the overall set of elements used to configure an organization. The purpose of this exercise is to give you insights into how managers must make decisions within the context of creating an organization design.

Introduction: Whenever a new enterprise is started, the owner must make decisions about how to structure the organization. For example, he or she must decide what functions are required, how those functions will be broken down into individual jobs, how those jobs will be grouped back together into logical departments, and how authority and responsibility will be allocated across positions.

Instructions: Assume that you have decided to open a handmade chocolate business in your local community. Your products will be traditional bars and novelty-shaped chocolates, truffles, other chocolate products such as ice cream, and gift baskets and boxes featuring chocolates. You have hired a talented chef and believe that her expertise, coupled with your unique designs and high-quality ingredients, will make your products very popular. You have also inherited enough money to get your business up and running and to cover about one year of living expenses (in other words, you do not need to pay yourself a salary).

You intend to buy food items including chocolate, cocoa, white chocolate, nuts, and fruit from suppliers who deliver to your area. Your chef will then turn those ingredients into luscious products that will then be attractively packaged. Local grocery store owners and restaurant chefs have seen samples of your products and indicated a keen interest in selling them. You know, however, that you will still need to service accounts and keep your customers happy. At the present time, you are trying to determine how many people you need to get your business going and how to group them most effectively into an organization. You realize that you can start out quite small and then expand as sales warrant. However, you also worry that if you are continually adding people and rearranging your organization, confusion and inefficiency may result.

Under each of the following scenarios, decide how best to design your organization. Sketch a basic organization chart to show your thoughts.

· Scenario 1. You will design and sell the products yourself, as well as oversee production. You will start with a workforce of five people.

· Scenario 2. You intend to devote all of your time to sales to increase revenues, leaving all other functions to others. You will start with a workforce of nine people.

· Scenario 3. You do not intend to handle any one function yourself but will instead oversee the entire operation and will start with a workforce of 15 people.

1. After you have created your organization chart, form small groups of four to five people each. Compare your various organization charts, focusing on similarities and differences.

2. Working in the same group, assume that five years have passed and that your business has been a big success. You have a large factory for making your chocolates and are shipping them to 15 states. You employ almost 500 people. Create an organization design that you think fits this organization best.

Discussion Questions

1. How clear (or how ambiguous) were the decisions about organization design?

2. What are your thoughts about starting out too large to maintain stability, as opposed to starting small and then growing?

3. What basic factors did you consider in choosing a design?

Main content

Chapter Review

Building Effective Conceptual Skills

Exercise Overview

Conceptual skills require you to think in the abstract. In this exercise, you’ll use your conceptual skills in analyzing organizational structure.

Exercise Background

Looking at its organization chart allows you to understand a company’s structure, including its distribution of authority, its divisional breakdown, its levels of hierarchy, and its reporting relationships. The reverse is also true: When you understand the elements of a company’s structure, you can draw up an organization chart to reflect it. In this exercise, that’s just what you’ll do: You’ll use the Internet to research a firm’s structure and then draw an appropriate organization chart.

Exercise Task

1. Alone or with a partner, go online to research a publicly traded U.S. firm in which you’re interested. Focus on information that will help you understand the company’s structure. If you research Ford Motor Company, for example, you should look for information about different types of vehicles, different regions in which Ford products are sold, and different functions that the company performs. (Hint: The firm’s annual report is usually available online and typically contains a great deal of helpful information. In particular, take a look at the section containing an editorial message from the chairman or CEO and the section summarizing financial information. In many cases, “segment” data reveal a lot about divisional structure.)

2. Draw an organization chart based on your research.

3. Share your results with another group or with the class as a whole. Be prepared to explain and justify the decisions that you made in determining the firm’s structure.

Main content

Chapter Review

Management at Work

Unstructuring Structure

Many companies have “specialized in innovative ways of saying no to innovation.”

—Jim Lavoie, cofounder, Rite-Solutions

Jim Lavoie boasts an impressive résumé as an executive manager, especially in manufacturing and operations. In addition to directing test manufacturing at Xerox, he served as senior industrial engineer at Hughes Aircraft and director of operations at Emerson Technologies. With partner Joe Marino, he cofounded Analysis & Technology, a provider of engineering and information technology and technology-based training systems for the military, and served as CEO until he and Marino sold the firm for $100 million in 1999.

Looking back in 2011, Lavoie declared that “for my whole career, I did it wrong.” What aspect of a distinguished career had left him unsatisfied? Generally speaking, organizational structure and, in particular, the kind of organizational behavior that was encouraged by the pyramid model of both manager-to-manager and manager-to-employee relations (recall the levels of management pyramid from Chapter 1). “The hierarchical pyramid,” contends Lavoie, “is a relic of command-and-control conventional wisdom—more suited to controlling information flow than fostering innovation.”

Over the years, Lavoie experienced firsthand the rapidly increasing importance of innovation to organizational survival, especially in a Web 2.0 world. All too often, however, he found that companies “specialized in innovative ways of saying ‘no’ to innovation.” Take, for instance, the “murder board”—Lavoie and Marino’s epithet for the innovation committee at a company where they once worked. Anyone with a promising idea took it before the committee, where members would bombard the hopeful intrapreneur with questions about market size and cost projections. In the end, reports Lavoie, “you’re standing in front of six fat white guys who say that they’re there to help with your idea, but what they’re doing is shooting down your relevance.”

Ironically, adds Lavoie, he prospered under the very same system: In one firm, he reports, “I made it to executive VP not by being bright, but by being theatrical.” And that, he realized, was a widespread problem with the system: “Most people,” says Lavoie, “make innovation a contact sport. Which automatically leaves out the introverts. … Innovation offsites, jams, and ‘war rooms’ have the same effect: the idea with the most theater wins and the people with the most charisma suck all of the oxygen out of the room.”

Again, Lavoie found himself calling on personal experience as an executive manager: “I had spent 30 years in highly structured organizations where good ideas could only flow from the top down. … The relationship I had with people was transactional—‘I pay you, you work. You behave, you stay.’ … In the old world, your relevance to the organization was defined more by the level of your box in the pyramid than by your actual insight.…” “The best thing for an idea,” says Lavoie, “is air, and the more air you give it, and the more people who breathe the air, the better it will become.” So Lavoie and Marino decided to start up another company, and this time they would commit themselves to “two fundamental beliefs.” The first was the conviction that the pyramid was a relic, and the second held that “nobody is as smart as everybody—good ideas are not bounded by organizational structure, but can come from anyone, in any place, at any time. … So we scrapped the pyramid and the power politics that go along with it,” explains Lavoie, “to rethink the company as a community.”

The company, called Rite-Solutions, builds advanced software for the military and defense contractors as well as consumer-gaming platforms for casinos. The company employs approximately 175 engineers, programmers, and analysts and is 100 percent employee owned. Community building begins on Day 1, when new employees are given a birthday party—to show, says Lavoie, “that you’ve arrived at a new place where you belong, you were expected, and you’re important.”

It’s on Day 2, however, that you’re invited to “buy in” to the Rite-Solutions way of doing things. You’re given $10,000 in virtual money with which you can invest in portfolios of ideas proposed by Rite-Solutions employees. You can also volunteer time to any project that you deem promising. Most importantly, you can float your own idea on one of three indices: “Savings Bonds” (for efficiency measures), “Bow Jones” (for extensions of current company capabilities), or “Spazdaq” (for ventures into new businesses or technologies). You begin by drawing up an “Expect-Us” (as opposed to prospectus), whereupon you’re assigned a ticker symbol and an offering price of $10. An algorithm then determines the daily value of your idea, which is derived from the level of interest expressed by your fellow employees. If yours is among the top ideas on the board, management will help you flesh out an official proposal, and when it’s ready, company employees can invest money in or volunteer an “assist” with your project. If your project attracts sufficient employee-investor interest, you get a project manager who may take your idea all the way through production. In that case, your name will go on the patent filing, and you—and everyone who invested in your idea—will share in the financial rewards that your product generates.

The game, which is called “Mutual Fun,” was launched in 2005 “with the aim,” as Lavoie explains it, “of making our people feel relevant to the success of the business. … and tapping their amazing intellectual bandwidth far beyond assigned ‘job tasks.’ We wanted to entrust them with the future of the company.” Besides, adds Lavoie, “if it’s not fun, it’s work; and if it’s work, it sucks.”

Does Mutual Fun produce results? One of the very first ideas on the board (ticker symbol: VIEW) proposed an application of the company’s three-dimensional visualization technology to a program for teaching Naval and security-industry personnel to practice decision making in emergency situations. In its first year, the resulting product, called Rite-View, accounted for 30 percent of the company’s total sales. “Would this have happened if it were just up to the guys at the top?” asks Marino. “Absolutely not. But we could not ignore the fact that so many people were rallying around the idea. This system removes the terrible burden of us always having to be right.”

To date, Mutual Fun has generated more than 50 innovative product and process ideas. Fifteen have been launched and currently account for 20 percent of Rite-Solutions’ total revenue. Interestingly, Mutual Fun itself has turned into one of the company’s biggest revenue producers: By building in appropriate variations, Rite-Solutions has turned its in-house game into a cloud-based application for such customers as major universities, defense-industry clients, and large corporations. In its first year on the market, 2006, Mutual Fun accounted for 50 percent of the company’s new-business growth, and it has since certified Rite-Solutions as a pioneer in the growing trend toward gamification—the incorporation of competition, reward, and other game mechanics and techniques into business applications.

Case Questions

1. Obviously, Jim Lavoie and Joe Marino have little confidence in the chain of command principle as a means of fostering success in today’s business world. Explain why. How would Lavoie and Marino respond to the criticism that, under their system, “the buck doesn’t stop anywhere in particular”?

2. Says Jim Lavoie: “Being acknowledged as part of an organization’s future is all it takes for an employee to grow deeper roots in it.” First of all, explain what Lavoie means. Then consider the following questions: Do you basically agree or disagree with Lavoie? Do you think that it’s important to “grow roots” in an organization that you work for? What might it take for you to feel that you’re “part of an organization’s future”—that it’s worth it to sink “deeper roots”? What other factors might be important to you in feeling that you’re something more than a mere cog in some organizational machine?

3. According to Lavoie, Mutual Fun is Rite-Solutions’ “Innovation Engine” (IE). Its function, he says, is twofold: (1) It generates the good ideas that “fuel a Web 2.0 environment,” and (2) it “engages the Y Generation to strive for the betterment of the organization.” What is a Web 2.0 environment? What is the Y Generation? Do you work, or are you likely to be working, in a Web 2.0 environment? What do you think you need to learn in order to succeed in such an environment? Are you a member of the Y Generation? What values do you have that reflect Y Generation values?

4. According to one researcher on the role of gamification in business, the difference between a product created in a factory and one that is crowdsourced is that in the former case, coordination is supplied by managers. In the latter case, it is provided by a structure that emerges spontaneously through the actions of the crowd.

What about you? Are you more comfortable working with other people when the requirements of the work are handed down by someone in “authority” or more comfortable when they “emerge spontaneously” from the interactions of a group? Under which circumstances are you more “creative”? Has your experience with social media influenced your attitude toward game playing as a way of connecting or even collaborating with other people?



Polly LaBarre, “Provoking the Future to Arrive—Constructive Disruption and Collective Genius,” MIX Mashup,, accessed on February 20, 2017; William C. Taylor, “Here’s an Idea: Let Everyone Have Ideas,”, March 26, 2006,, accessed on February 20, 2017; Jim Lavoie, “Nobody’s as Smart as Everybody—Unleashing Individual Brilliance and Aligning Collective Genius,” Management Innovation eXchange, April 8, 2010,, accessed on February 20, 2017; “How to Kickstart Your Company’s Idea Market,” Inc., September 16, 2014,, accessed on February 20, 2017; Emily Greenhaigh, “No Longer Taboo in the Workplace, Games Tap Creativity,”, February 4, 2013,, accessed on February 20, 2017; and Brandon Butler, “Competition, Games Can Bring About Enterprise App Advances,” Network World,, accessed on February 20, 2017.

Chapter Review

You Make the Call: Who’s the Boss?

1. For most of its existence Treehouse has been closed on Fridays. Employees work four eight-hour days, and “so far it’s gone really well for us,” says cofounder Alan Johnson. Ryan Carson says that the company is productive on such a schedule because its structure allows people to stay focused on what they’re doing. Treehouse, he says, has “a culture of non-interruption.” What aspects of a no-manager structure probably contribute to the development of “a culture of non-interruption”? Under a no-manager structure, what daily activities have probably changed so that “a culture of non-interruption” has taken hold?

Do you think the reintroduction of managers might threaten this?

2. Recalling that Treehouse first experienced “morale problems” back when it had 60 employees and seven managers, Carson projects that if the company grew to 500 employees, “we’d need at least 50 managers. What would that be like?” he shudders. Do you think the presence of managers was really the problem? Why or why not, given that reintroducing managers seems to have gone smoothly. What sort of problems will Treehouse face as it continues to grow? What kind of steps will Carson and Johnson probably have to take?

3. “A lot of people think they want to work without managers,” says Carson, “but actually they like the security of someone telling them what to do every day. This means working at a no-manager company isn’t right for everyone.” Among other things, he adds, the need to find people for whom a no-manager company is a good fit “cuts down the potential number of people we can hire.”

What about you? Would you be comfortable working in a no-manager company? Or would you prefer a more conventional organizational structure in which you perform assigned tasks? Under which type of system do you think that you would ultimately prosper, both as a member of the workforce and as a human being? If you wanted to try working at Treehouse, how would you present yourself at an interview held today? Why might you be more interested in, say, five years?

4. In what ways was Treehouse a logical company in which to experiment with a no-manager, project-based structure? Why, for example, is a high reliance on workplace collaboration appropriate in the development of products for the contemporary education industry? Would you call Treehouse’s experiment with no managers a success or a failure? Why?

Week 4 reading

Chapter 7

The company I have chosen to study this term is Commerce Bankshares (CBSH), which is a resgionally based bank and traded on the Nasdaq.  Having no background in banking or the banking industry, I am interested to know the revenue drivers, earnings ability and culture of the industry.  In this particular case, Commerce Bankshares has a history in Missouri dating back over 100 years.  They have never stood out for negative events as other banks have, but continue to thrive.  According to their investor pdate, dated 11/09/2021. Commerce Bankshares offers that their success is due to two primary factors: a very strong company culture; and a very strong social and environmental governance.  These are two management factors that we looked at in the first chapters of the text.  From a laymans point of view, I would expect the company culture to play a large role in the guiding the companies moral compass as it assesses business relationships and transparency in fair banking with the population it serves.  

Commerce Bankshares has full service banks in five states, banking business in an additional eleven states, and ober $35 billion in assets managed.  The bank headquarters is in Kansas City, Missouri.

The current executive management of the company is centered around one family, which holds the top two positions.  Three family members sit on the board of directors.  I would be interested in knowing if the culture extends from the families set of values, or if it is driven by the board, offering more diverse backgrounds.  An interesting aspect of the board of directors is the tenure to which many have served, some over thirty years.  Again, in my opinion, if the board has that retention rate it must reflect confidence and pride in the company and a willingness to continue the relationship.

Investor Update, 3rd Quarter 2021 (11/09/2021);

Organization Change and Innovation

Chapter Introduction

· 7-1

The Nature of Organization Change

· 7-1a

Forces for Change

· 7-1b

Planned versus Reactive Change

· 7-2

Managing Change in Organizations

· 7-2a

Steps in the Change Process

· 7-2b

Understanding Resistance to Change

· 7-2c

Overcoming Resistance to Change

· 7-3

Areas of Organization Change

· 7-3a

Changing Organization Structure and Design

· 7-3b

Changing Technology and Operations

· 7-3c

Changing People, Attitudes, and Behaviors

· 7-3d

Changing Business Processes

· 7-3e

Organization Development

· 7-4

Organizational Innovation

· 7-4a

The Innovation Process

· 7-4b

Forms of Innovation

· 7-4c

The Failure to Innovate

Chapter Review

Summary of Learning Outcomes and Key Points

Discussion Questions

Experiential Exercise

Building Effective Decision-Making Skills

Management at Work

You Make the Call: Cultivating Innovation at IKEA

Main content

Chapter Introduction

Learning Outcomes

After studying this chapter, you should be able to:

· 1Describe the nature of organization change, including forces for change and planned versus reactive change.

· 2Discuss the steps in organization change and how to manage resistance to change.

· 3Identify and describe major areas of organization change, and discuss the assumptions, techniques, and effectiveness of organization development (OD).

· 4Describe the innovation process, forms of innovation, the failure to innovate, and how organizations can promote innovation.

Management in Action

Cultivating Innovation at IKEA

“Designing beautiful-but-expensive products is easy. Designing beautiful products that are inexpensive and functional is a huge challenge.”

—IKEA Executive

According to BusinessWeek magazine, IKEA “is the quintessential cult brand,” and its customers belong to “a like-minded cost/design/environmentally-sensitive global tribe.” The founder of this global “cult” is a Swedish entrepreneur named Ingvar Kamprad. Kamprad has always referred to his targeted customers as “the many,” and his plan has been to bring affordable, well-designed furniture to this target market. “The many,” then, is hardly a “mass” market: In reality, it’s a profitable niche consisting primarily of consumers who want stylish furniture at a low cost. Its goal, says the company, is to offer “affordable solutions for better living,” with “better living” referring to a range of well-designed furniture and furnishings and “affordable” referring to the price range of consumers who are starting up their own homes and/or expanding their families.

IKEA is known for its innovative approach to retailing and its ability to implement change efficiently and effectively.

RSBPhoto/Alamy Stock Photo

IKEA’s marketing strategy depends on constant innovation, and the company’s ability to innovate successfully depends in part on an organizational structure that encourages creativity and communication. In order to understand how it’s all designed to work, however, we first need to break down the elements of “the IKEA way”—the factors which, taken in combination, have made the IKEA approach so successful. The target market that we’ve just described is the first of these factors, and we can identify four others in terms that any marketer would recognize:

· Product. With over 12,000 items, the IKEA product line is quite large, and because smaller products complement larger products, customers can experiment with ensembles that satisfy their own needs and tastes while calculating total costs as they proceed through the store or catalog. The company didn’t pay much attention to product design at first, but today, admits one expert, “you will always find some pieces which are good designs and very reasonable in pricing.” IKEA also wants consumers—especially Americans—to stop thinking of furniture as durable goods. Older Americans, says one company marketing manager, “keep a sofa longer than a car” because they believe that it’s going to be the long-term “icon of the living room.” IKEA wants to appeal to the willingness of younger consumers to experiment with changes, and its price structure makes it possible for them to do it.

· Price. “Designing beautiful-but-expensive products is easy,” says one IKEA executive. “Designing beautiful products that are inexpensive and functional is a huge challenge.” Nevertheless, IKEA prices are typically from 20 percent to 50 percent below those of stores selling fully assembled furniture. “When we decide about a product, we always start with the price,” reports one product developer, and after starting with an original competitive price, IKEA then proceeds to drive it even lower. The company maintains price leadership not only by purchasing in large quantities but also by constantly looking for cheaper suppliers; nearly 50 percent of IKEA’s outsourcing partners are located in developing economies.

· Distribution. In addition to a global network of thousands of manufacturers and nearly 1,400 suppliers in 54 countries, IKEA maintains a system of 27 distribution centers (which ship products to stores) and 11 customer-distribution centers (which ship goods to consumers) in 48 countries. Its stores, too, are an important facet of IKEA’s distribution strategy. A key innovation is the way they’re laid out. Unlike the traditional furniture outlet, which directs customers to separate sections to view multiple versions of one product (e.g., beds) or one room (e.g., bedrooms), IKEA stores are laid out around a wide one-way path—the “natural path,” according to the company—that carries customers directly from one section to the next. The “natural path” not only exposes them to the whole range of IKEA offerings but also encourages them to extend their in-store visits.

· Promotion. Promotion at IKEA revolves around the near-legendary annual catalog, a 300-page compendium of color photos and blurbs for about 12,000 products. Boasting a circulation of 197 million copies worldwide, the catalog covers the whole range of the company’s new products, focuses on ideas for innovations in the customer’s home, and relies on word-of-mouth publicity among the faithful. Not surprisingly, IKEA stores are arranged to accomplish essentially the same goals. Like the IKEA catalog, for example, they’re designed to encourage repeat visits by showcasing the company’s regular turnover in new products (about one-third per year).

The IKEA store is also the company’s most obvious and most important process innovation. Averaging around 300,000 square feet, most boxlike blue-and-yellow stores feature both the series of showrooms arranged along the “natural path” and an in-store self-serve warehouse. After choosing items from the Showroom, customers collect trolleys for transporting their purchases and pass into the Market Hall, where they can pick up smaller items, such as linen, lighting, glassware, and rugs. Next along the path is the Self-Serve Warehouse, where they collect their furniture purchases in flat-pack form and then proceed to the rows of cashier’s stations to pay for everything. Once they’ve paid for their purchases, customers can arrange for delivery or roll them to the loading dock, pack them in or on their vehicles, and take them home.

As important as process innovation has been to the company’s success, the IKEA engine is powered by the introduction of new products and a constant stream of product innovations. Finding new products from outside sources, however, isn’t the same thing as innovating within the company. At IKEA, innovation from within signals the company’s commitment not only to respond to changes in the needs of customers all around the world, but also to maintain a global brand identity and convey an ongoing sense of excitement among the brand-loyal faithful.

About 50 designers at the company’s Swedish workshop are always busy creating new products, but designers aren’t the only people in the organization who are responsible for innovative ideas. “[E]veryone contributes,” says Bill Agee, head of marketing at IKEA USA “Whoever you are within the IKEA organization, you’re expected to contribute your ideas—your new ideas, your old ideas or whatever it may be—and every idea is welcome.” The concept works, explains Agee, because “we’re a very process-oriented company… . [W]e have three basic processes: creating, communicating, and selling the home-furnishings offer. Each of these processes,” he adds, “has a matrix structure”: Working as members of what amounts to a companywide team, designers design products, marketers like Agee communicate the product message, and “coworkers” in the company’s warehouses and stores deliver the product to the customer. “Our independence,” Agee thinks, “has a lot to do with our innovation because we don’t know any better… . We feel that we are, to a certain extent, operating outside of standard operating procedures.”

Managers at IKEA are fueling growth and profitability through the astute management of innovation. In particular, the company relies on the development and marketing of innovative products to grow and prosper. At a broader level, IKEA also relies heavily on change. As we will see, understanding when and how to implement change is a vital part of management. This chapter describes how organizations manage change. We first examine the nature of organization change and identify the basic issues of managing change. We then identify and describe major areas of change, including business process change, a major type of change undertaken by many firms recently. We then examine a special form of change referred to as organization development, or OD, and conclude by discussing organizational innovation as a vital form of change.

7-1The Nature of Organization Change

Organization change
 is any substantive modification to some part of the organization. Thus change can involve virtually any aspect of an organization: work schedules, bases for departmentalization, span of management, machinery, organization design, people themselves, and so on. It is important to keep in mind that any change in an organization may have effects extending beyond the actual area where the change is implemented. For example, when General Motors (GM) recently installed a new automated production system at one of its plants, employees were trained to operate new equipment, the compensation system was adjusted to reflect new skill levels, the span of management for supervisors was altered, and several related jobs were redesigned. Selection criteria for new employees were also changed, and a new quality control system was installed. In addition, it is quite common for multiple organization change activities to be going on simultaneously.

7-1aForces for Change

Why do organizations find change necessary? The basic reason is that something relevant to the organization either has changed or is likely to change in the foreseeable future. The organization therefore may have little choice but to change as well. Indeed, a primary reason for the problems that organizations often face is failure to anticipate or respond properly to changing circumstances. The forces that compel change may be external or internal to the organization.

Boeing simultaneously underwent many organization change activities when it installed a new automated production system at one of its plants.

Bloomberg/Getty Images

External Forces

External forces for change come from the organization’s general and task environments. For example, steep increases in oil prices a few years ago caused consumer demand for low gas mileage big cars and trucks to plummet and demand for fuel efficient smaller cars and trucks to increase. These trends, in turn, led automakers to increase production of smaller fuel efficient vehicles and to invest more heavily in research and development related to hybrid vehicles and new technologies related to alternative fuel sources. As oil prices have dropped, though, consumer demand has now trended back toward larger vehicles, although many consumers remain wary about future oil prices. In the political arena, new laws, court decisions, and regulations affect organizations. The technological dimension may yield new production techniques that organization needs to explore. The economic dimension is affected by inflation, the cost of living, and money supplies. The sociocultural dimension, reflecting societal values, determines what kinds of products or services will be accepted in the market.

The task environment is a force for change in this shopping area. Often when one clothing store advertises a sale, others on the block follow suit.

Q-Images/Alamy Stock Photo

Because of its proximity to the organization, the task environment is an even more powerful force for change. Competitors influence an organization through their price structures and product lines. When LG lowers the prices it charges for televisions, Samsung and Sony may have little choice but to follow suit. Because customers determine what products can be sold at what prices, organizations must be concerned with consumer tastes and preferences. Suppliers affect organizations by raising or lowering prices or changing product lines. Regulators can have dramatic effects on an organization. For example, if the Occupational Safety and Health Administration (OSHA) rules that a particular production process is dangerous to workers, it can force a firm to close a plant until it meets higher safety standards. Unions can force change when they have the clout to negotiate for higher wages or if they go on strike.

Internal Forces

A variety of forces inside the organization may cause change. If top management revises the organization’s strategy, organization change is likely to result. A decision by an electronics company to enter the home computer market or a decision to increase a ten-year product sales goal by, say, 10 percent would necessitate several related organization changes. Other internal forces for change may be reflections of external forces. As sociocultural values shift, for example, workers’ attitudes toward their job may also shift—and workers may demand a change in working hours or working conditions. In such a case, even though the force is rooted in the external environment, the organization must respond directly to the internal pressure it generates.

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7-1bPlanned versus Reactive Change

Some change is anticipated and planned well in advance; other change comes about as a reaction to unexpected events. 
Planned change
 is designed and implemented in an orderly and timely fashion in anticipation of future events. 
Reactive change
 is a piecemeal response to circumstances as they develop. Because reactive change may be hurried, the potential for poorly conceived and executed change is increased. Planned change is almost always preferable to reactive change.

Georgia-Pacific, a large forest products business, is an excellent example of a firm that went through a planned and well-managed change process. When a new CEO was hired to take control of the firm, he quickly became alarmed at the company’s high accident rate—9 serious injuries per 100 employees each year, and 26 deaths during the most recent five-year period. Although the forest products business is inherently dangerous, the new CEO believed that the accident rate was far too high and set out on a major change effort to improve things. He and other top managers systematically developed a multistage change program intended to educate workers about safety, improve safety equipment in the company’s mills and plants, and eliminate a long-standing part of the firm’s culture that made injuries almost a badge of courage. As a result, Georgia-Pacific soon achieved the best safety record in the industry, with relatively few injuries.

Accident rates in saw mills and other forest product businesses are often high. One company, Georgia-Pacific, initiated a multistage change process to educate workers, improve safety equipment, and adjust corporate culture.


On the other hand, Caterpillar was caught flat-footed by a worldwide recession in the construction industry, suffered enormous losses, and took several years to recover. Had managers at Caterpillar anticipated the need for change earlier, they might have been able to respond more quickly. The importance of approaching change from a planned perspective is reinforced by the frequency of organization change. Most companies or divisions of large companies implement some form of moderate change at least every year and one or more major changes every four to five years. Managers who sit back and respond only when they have to are likely to spend a lot of time hastily changing things and then quickly changing them again. A more effective approach is to anticipate forces pushing change and plan ahead to deal with them. The “Leading the Way” feature highlights how American Express has confronted both reactive and planned change in the last several years.

Leading the Way

Am(Ortizing) Ex(Penses)

American Express (Amex) recently announced that it was cutting 5,400 jobs—about 8.5 percent of its total workforce of 63,500. The cuts were scheduled to take place over a period of one year and CFO Dan Henry announced that they would be “spread proportionally between U.S. and international markets and occur primarily among positions that do not directly generate revenues.”

Amex had last cut its workforce as a response to the financial crisis of 2007–2008, eliminating 7,000 jobs in October 2008 and, as part of the same cost-cutting measure, another 4,000 in May 2009. CEO Kenneth Chenault had referred to that plan as a “reengineering program” designed to “help us manage through one of the most challenging economic environments we’ve seen in many decades.”

The “reengineering program” that Amex initiated in late 2008, a reactive change, is an example of restructuring—generally speaking, a modification in a firm’s operations or structure, usually as a result of financial pressure. As part of the process, Amex took large restructuring charges totaling around $500 million. A restructuring charge is a one-time expense—a short-term loss meant to save money in the long run. At the end of 2009, Chenault reported that operating costs had been cut by 14 percent: “We took a long-term approach,” he told shareholders in the company’s annual report. “We didn’t just want to reduce expenses for 2009; we wanted to prepare our expense base for the conditions we saw ahead, a period of relatively weak economic growth after the recession.” And those spending cuts eventually saved Amex approximately $2.6 billion

But what about the most recent round of job reductions? Those cuts represented a planned change related to the firm’s travel business. Amex is not only the country’s largest credit card issuer by client purchases but also the biggest U.S.-based travel agency. In this sector, it competes not with Visa and MasterCard but with online travel agencies like Priceline and Expedia. “We’ve delivered strong results coming out of the recession,” said Chenault in January 2013, but in the five years leading up to the latest round of job cuts, as more and more customers turned to online companies for travel booking and advisory services, the Corporate Travel division had seen a decline in billings of $6 billion.

“The economics of business travel,” said Chenault, “has changed more dramatically… . than any part of the business.” Thus “the biggest impact” of the 4,500 job cuts, he explained, would be felt in “global business travel, where we are reengineering the business model to reduce its cost structure and invest in capabilities that will help us better align with the shift of customer volumes to online channels and automated servicing areas.” For the fourth quarter of 2012, Amex took a $400 million restructuring charge for the job cuts, resulting in a 47 percent decline in net income from the previous year.

Theresa Jameson, an analyst at marketing-intelligence provider Datamonitor, called the Amex measures “drastic” but saw them as part of “a conscious move… . to address the growing popularity of online and mobile-service use among consumers.” Throughout 2012, she points out, Amex had unveiled “a number of products and services across the mobile and online spaces geared at a more youthful and technological savvy audience… . The company,” she concluded, “is strategically adapting to the digital age.”

References: Mary Ann McNulty, “Amex to Trim 5,400 Jobs amid Changing Business Travel Economics,” Business Travel News, January 11, 2013,, accessed on February 28, 2017; Jennifer Booton, “American Express to Slice Up to 6% of Workforce in ‘13,” Fox Business, January 10, 2013,, accessed on February 28, 2017; Andrew Clark, “American Express Sheds 7,000 Jobs,” The Guardian, October 30, 2008,, accessed on February 28, 2017; Dawn Kopecki, “AmEx Cuts Jobs as Digital Age Transforms Travel Business,” Bloomberg, January 11, 2013,, accessed on February 28, 2017; Theresa Jameson, “Amex to Restructure Business with a Renewed Focus on Digital,”, accessed on February 28, 2017; and Michael J. de la Merced, “American Express to Sell Half of Its Business Travel Arm for $900 Million,” New York Times, May 17, 2014,, accessed on February 28, 2017.

7-2Managing Change in Organizations

Organization change is a complex phenomenon. A manager cannot simply wave a wand and implement a planned change like magic. Instead, any change must be systematic and logical to have a realistic opportunity to succeed. To carry this off, the manager needs to understand the steps of effective change and how to counter employee resistance to change.

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7-2aSteps in the Change Process

Researchers have over the years developed a number of models or frameworks outlining steps for change. The Lewin model was one of the first, although a more comprehensive approach is usually more useful in today’s complex business environment.

The Lewin Model

Kurt Lewin, a noted organizational theorist, suggested that every change requires three steps. The first step is unfreezing—individuals who will be affected by the impending change must be led to recognize why the change is necessary. The second step is the implementation of the change itself. The third step is refreezing, which involves reinforcing and supporting the change so that it becomes a part of the system. For example, one of the changes that Caterpillar faced in response to the recession noted earlier involved a massive workforce reduction. The first step (unfreezing) was convincing the United Auto Workers (UAW) to support the reduction because of its importance to long-term effectiveness. After this unfreezing was accomplished, 30,000 jobs were eliminated (implementation). Then it worked to improve its damaged relationship with its workers (refreezing) by guaranteeing future pay hikes and promising no more cutbacks. As interesting as the Lewin model is, it unfortunately lacks operational specificity. Thus, a more comprehensive perspective is often needed.

A Comprehensive Approach to Change

The comprehensive approach to change takes a systems view and delineates a series of specific steps that often leads to successful change. This expanded model is illustrated in Figure 7.1. The first step is recognizing the need for change. Reactive change might be triggered by employee complaints, declines in productivity or turnover, court injunctions, sales slumps, or labor strikes. Recognition may simply be managers’ awareness that change in a certain area is inevitable. For example, managers may be aware of the general frequency of organizational change undertaken by most organizations and recognize that their organization should probably follow the same pattern. The immediate stimulus might be the result of a forecast indicating new market potential, the accumulation of a large cash surplus for possible investment, or an opportunity to achieve and capitalize on a major technological breakthrough. Managers might also initiate change today because indicators suggest that it will be necessary in the near future.

Figure 7.1Steps in the Change Process

Managers must understand how and why to implement change. A manager who, when implementing change, follows a logical and orderly sequence like the one shown here is more likely to succeed than a manager whose change process is haphazard and poorly conceived.

Second, managers should then set goals for the change. To increase market share, to enter new markets, to restore employee morale, to settle a strike, and to identify investment opportunities—all might be goals for change. Third, managers need to diagnose what brought on the need for change. Turnover, for example, might be caused by low pay, poor working conditions, poor supervisors, or employee dissatisfaction. Thus, although turnover may be the immediate stimulus for change, managers have to understand its causes to make the right changes.

The next step is to select a change technique that will accomplish the intended goals. If turnover is caused by low pay, a new reward system may be needed. If the cause is poor supervision, interpersonal skills training may be called for. (Various change techniques are summarized later in this chapter.) After the appropriate technique has been chosen, its implementation has to be planned. Issues to consider include the costs of the change, its effects on other areas of the organization, and the degree of employee participation appropriate for the situation. If the change is implemented as planned, the results should then be evaluated. If the change was intended to reduce turnover, managers must check turnover after the change has been in effect for a while. If turnover is still too high, other changes may be necessary.

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7-2bUnderstanding Resistance to Change

Another element in the effective management of change is understanding the resistance that often accompanies change. Managers need to know why people resist change and what can be done about their resistance. When Schlumberger first provided all its managers with smartphones, most people responded favorably. One manager, however, resisted the change to the point where he maintained two telephone numbers, one on his new smartphone (which he actually left with his assistant) and his old “standard” cell phone that he continued to use. Such resistance is common for a variety of reasons.


Perhaps the biggest cause of employee resistance to change is uncertainty. In the face of impending change, employees may become anxious and nervous. They may worry about their ability to meet new job demands, they may think that their job security is threatened, or they may simply dislike ambiguity. British Airways cabin crew members recently voted to participate in a strike over a heavily traveled holiday season. The action against the airlines was spurred by high levels of uncertainty as British Airways planned to merge with another airline and announced its intentions to cut hundreds of jobs and freeze employee wages in the process.

Threatened Self-Interests

Many impending changes threaten the self-interests of some managers within the organization. A change might diminish their power or influence within the company, so they fight it. Managers at Sears once developed a plan calling for a new type of store. The new stores would be somewhat smaller than a typical Sears store and would not be located in large shopping malls. Instead, they would be located in smaller strip centers. They would carry clothes and other “soft goods” but not hardware, appliances, furniture, or automotive products. When executives in charge of the excluded product lines heard about the plan, they raised such strong objections that the plan was cancelled.

Different Perceptions

A third reason that people resist change is due to different perceptions. A manager may make a decision and recommend a plan for change on the basis of his or her own assessment of a situation. Others in the organization may resist the change because they do not agree with the manager’s assessment or perceive the situation differently. Executives at 7-Eleven battled this problem as they attempted to enact a major organizational change. The corporation wanted to take its convenience stores a bit “upscale” and begin selling fancy fresh foods to go, the newest hardcover novels, some gourmet products, and higher-quality coffee. But many franchisees balked because they saw this move as taking the firm away from its core blue-collar customers.

Feelings of Loss

Many changes involve altering work arrangements in ways that disrupt existing social networks. Because social relationships are important, most people resist any change that might adversely affect those relationships. Other intangibles threatened by change include power, status, security, familiarity with existing procedures, and self-confidence.

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7-2cOvercoming Resistance to Change

Of course, a manager should not give up in the face of resistance to change. Although there are no surefire cures, there are several techniques that at least have the potential to overcome resistance.


Participation is often the most effective technique for overcoming resistance to change. Employees who participate in planning and implementing a change are better able to understand the reasons for the change. Uncertainty is reduced, and self-interests and social relationships are less threatened. Having had an opportunity to express their ideas and assume the perspectives of others, employees are more likely to accept the change gracefully. A classic study of participation monitored the introduction of a change in production methods among four groups in a Virginia pajama factory. The two groups that were allowed to fully participate in planning and implementing the change improved significantly in their productivity and satisfaction, relative to the two groups that did not participate. 3M Company recently attributed several millions in cost savings to employee participation in several organization change activities.

Education and Communication

Educating employees about the need for and the expected results of an impending change should reduce their resistance. If open communication is established and maintained during the change process, uncertainty can be minimized. Caterpillar used these methods during many of its cutbacks to reduce resistance. First, it educated UAW representatives about the need for and potential value of the planned changes. Then management told all employees what was happening, when it would happen, and how it would affect them individually.


Several facilitation procedures are also advisable. For instance, making only necessary changes, announcing those changes well in advance, and allowing time for people to adjust to new ways of doing things can help reduce resistance to change. One manager at a Prudential regional office spent several months systematically planning a change in work procedures and job design. He then became too impatient, coming in over the weekend with a work crew and rearranging the office layout. When employees walked in on Monday morning and saw what he had done, they were hostile, anxious, and resentful. What was a promising change became a disaster, and the manager had to scrap the entire plan.

Force-Field Analysis

Although force-field analysis may sound like something out of a Star Trek movie, it can help overcome resistance to change. In almost any change situation, forces are acting for and against the change. To facilitate the change, managers start by listing each set of forces and then trying to tip the balance so that the forces facilitating the change outweigh those hindering the change. It is especially important to try to remove or at least minimize some of the forces acting against the change. Suppose, for example, that GM is considering a plant closing as part of a change. As shown in Figure 7.2, three factors are reinforcing the change: GM needs to cut costs, it has excess capacity, and the plant has outmoded production facilities. At the same time, there is resistance from the UAW, concern for workers being put out of their jobs, and a feeling that the plant might be needed again in the future. GM might start by convincing the UAW that the closing is necessary by presenting profit and loss figures. It could then offer relocation and retraining to displaced workers. And it might shut down the plant and put it in “mothballs” so that it can be renovated later. The three major factors hindering the change are thus eliminated or reduced in importance.

Figure 7.2Force-Field Analysis for Plant Closing at General Motors

A force-field analysis can help a manager facilitate change. A manager able to identify forces acting both for and against a change can see where to focus efforts to remove barriers to change (such as offering training and relocation to displaced workers). Removing the forces against the change can at least partially overcome resistance.

7-3Areas of Organization Change

We noted earlier that change can involve virtually any part of an organization. In general, however, most change interventions involve organization structure and design, technology and operations, or people. The most common areas of change within each of these broad categories are listed in Table 7.1. In addition, many organizations have gone through massive and comprehensive business process change programs.

Table 7.1

Areas of Organization Change

Organization Structure and Design

Technology and Operations


Job design

Information technology

Abilities and skills




Reporting relationships

Work processes


Authority distribution

Work sequences


Coordination mechanisms

Control systems


Line-staff structure

Enterprise resource planning


Overall design


Human resource management

7-3aChanging Organization Structure and Design

Organization change might be focused on any of the basic components of organization structure or on the organization’s overall design. Thus the organization might change the way it designs its jobs or its bases of departmentalization. Likewise, it might change reporting relationships or the distribution of authority. For example, we noted in Chapter 6 the trend toward flatter organizations. Coordination mechanisms and line-and-staff configurations are also subject to change. On a larger scale, the organization might change its overall design. For example, a growing business could decide to drop its functional design and adopt a divisional design. Or it might transform itself into a matrix. Changes in culture usually involve the structure and design of the organization as well (recall that we discussed changing culture back in Chapter 2). Finally, the organization might change any part of its human resource management system, such as its selection criteria, its performance appraisal methods, or its compensation package.

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7-3bChanging Technology and Operations

Technology is the conversion process used by an organization to transform inputs into outputs. Because of the rapid rate of all technological innovation, technological changes are becoming increasingly important to many organizations. Table 7.1 lists several areas where technological change is likely to be experienced. One important area of change today revolves around information technology. The adoption and institutionalization of information technology innovations are almost constant in most firms. Sun Microsystems, for example, adopted a very short-range planning cycle to be best prepared for environmental changes. Another important form of technological change involves equipment. To keep pace with competitors, manufacturers periodically find that replacing existing machinery and equipment with newer models is necessary.

A change in work processes or work activities, in turn, may be necessary if new equipment is introduced or new products are manufactured. In manufacturing industries, the major reason for changing a work process is to accommodate a change in the materials used to produce a finished product. Consider a firm that manufactures battery-operated flashlights. For many years flashlights were made of metal, but now most are made of plastic. A firm might decide to move from metal to plastic flashlights because of consumer preferences, raw materials’ costs, or other reasons. Whatever the reason, the technology necessary to make flashlights from plastic differs importantly from that used to make flashlights from metal. Work process changes may occur in service organizations as well as in manufacturing firms. As traditional barbershops and beauty parlors are replaced by hair salons catering to both sexes, for example, the hybrid organizations have to develop new methods for handling appointments and setting prices.

A change in work sequence may or may not accompany a change in equipment or a change in work processes. Making a change in work sequence means altering the order or sequence of the workstations involved in a particular manufacturing process. For example, a manufacturer might have two parallel assembly lines producing two similar sets of machine parts. The lines might converge at one central quality control unit, where inspectors verify tolerances. The manager, however, might decide to change to periodic rather than final inspection. Under this arrangement, one or more inspections are established farther up the line.

Work sequence changes can also be made in service organizations. The processing of insurance claims, for example, could be changed. The sequence of logging and verifying claims, requesting checks, getting countersignatures, and mailing checks could be altered in several ways, such as combining the first two steps or routing the claims through one person while another handles checks. Organizational control systems may also be targets of change. For example, a firm attempting to improve the quality of its products might develop and implement a set of more rigorous and comprehensive quality control procedures.

Finally, many businesses have been working to implement technological and operations change by installing and using complex and integrated software systems. Such systems—generally called enterprise resource planning (ERP)—link virtually all facets of the business, making it easier for managers to keep abreast of related developments. 
 is a large-scale information system for integrating and synchronizing the many activities in the extended enterprise. In most cases, these systems are purchased from external vendors who then tailor their products to the client’s unique needs and requirements. Companywide processes—such as materials management, production planning, order management, and financial reporting—can all be managed through ERP. In effect, these are the processes that cut across product lines, departments, and geographic locations.

Developing the ERP system starts by identifying the key processes that need critical attention, such as supplier relationships, material flows, or customer order fulfillment. The system could result, for instance, in sales processes being integrated with production planning and then integrating both of these into the firm’s financial accounting system. For example, a customer in Rome can place an order that is to be produced in Ireland, schedule it to be shipped through air cargo to Rome, and then have it picked up by a truck at the airport and delivered to the customer’s warehouse by a specified date. All of these activities are synchronized by activities linkages in one massive database.

The ERP integrates all activities and information flows that relate to the firm’s critical processes. It also keeps updated real-time information on their current status, reports recent past transactions and upcoming planned transactions, and provides electronic notices that action is required on some items if planned schedules are to be met. It coordinates internal operations with activities by outside suppliers and notifies business partners and customers of current status and upcoming deliveries and billings. It can integrate financial flows among the firm, its suppliers, its customers, and commercial bank deposits for up-to-the-minute status reports that can be used to create real-time financial reports at a moment’s notice, rather than in the traditional one-month (or longer) time span for producing a financial statement. ERP’s multilanguage capabilities also allow real-time correspondence in various languages to facilitate international transactions.

7-3cChanging People, Attitudes, and Behaviors

A third area of organization change has to do with human resources. For example, an organization might decide to change the skill level of its workforce. This change might be prompted by changes in technology or by a general desire to upgrade the quality of the workforce. Thus training programs and new selection criteria might be needed. The organization might also decide to improve its workers’ performance level. In this instance, a new incentive system or performance-based training might be in order. Confronting the shift from paper-based publishing to digital publishing, one large publisher recently eliminated 25 percent of its employees, reduced retirement benefits, and took away many of the “perks” (perquisites, or job benefits) that employees once enjoyed. Part of the reason for the changes was to instill in the remaining employees a sense of urgency and the need to adopt a new perspective on how they do their jobs. Similarly, Saks Fifth Avenue changed its entire top management team as a way to breathe new life into the luxury retailer.

Perceptions and expectations are also a common focus of organization change. Workers in an organization might believe that their wages and benefits are not as high as they should be. Management, however, might have evidence that shows the firm is paying a competitive wage and providing a superior benefit package. The change, then, would be centered on informing and educating the workforce about the comparative value of its compensation package. A common way to do this is to publish a statement that places an actual dollar value on each benefit provided and compares that amount to what other local organizations are providing their workers. Change might also be directed at employee attitudes and values. In many organizations today, managers are trying to eliminate adversarial relationships with workers and to adopt a more collaborative relationship. In many ways, changing attitudes and values is perhaps the hardest thing to do.

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7-3dChanging Business Processes

Many organizations today have also gone through massive and comprehensive change programs involving all aspects of organization design, technology, and people. Although various descriptions are used, the terms currently in vogue for these changes are 
business process change, or reengineering
, which is the radical redesign of all aspects of a business to achieve major gains in cost, service, or time. ERP, as described earlier, is a common platform for changing business processes. However, business process change is a more comprehensive set of changes that goes beyond software and information systems.

Corning, for example, has undergone major reengineering. Whereas the 150-year-old business once manufactured cookware and other durable consumer goods, it has transformed itself into a high-tech powerhouse making products such as the ultrathin screens used in products such as video monitors, smartphones, and laptops. Similarly, the dramatic overhauls of Yellow into a sophisticated freight delivery firm and of UPS into a major international delivery giant all required business process changes throughout these organizations. The “World of Difference” box examines another trend in business process change, offshoring.

World of Difference

To Offshore or Not to Offshore

From computer programmers in the Philippines and molecular biologists in Russia to customer-service agents in India, the practice of offshoring is bringing workers from around the world into the workforces of U.S. corporations in a broad range of industries. When U.S. firms “offshore,” they’re hiring foreign firms and foreign personnel to perform their business functions. In so doing, they’re not only increasing the diversity of their workforces but also altering the processes by which they conduct organizational business. At Penske Truck Leasing, for instance, drivers submit their paper logs for data entry to a facility in Mexico, which forwards them to Hyderabad, India, where they’re analyzed, and the results are reported to Penske management back in the United States. How does a company function with such far-flung operations? As in most other decisions, companies choose operational partners according to the value-creation capabilities that they bring to the overall process.

Ideally, of course, offshoring should benefit the contractor as well as the contracting firm. Take, for example, the case of Wisconsin-based Paper Converting Machine Company (PCMC), which designs and makes paper packaging. PCMC had a problem with its engineering function: Although it had a large base of potential customers, it often lost them because its engineering group was too small to create new designs fast enough to keep pace with customer needs. Nor could the company afford to expand its engineering department. To solve the problem, PCMC entered into an offshoring contract with an Indian company that agreed to provide a 160-member staff to support PCMC’s engineering function. The result? Not only 160 new jobs in India but more orders and more jobs in Wisconsin as well.

Obviously, offshoring arrangements don’t always work out as well as the one established by PCMC and its Indian partner. For one thing, language and culture differences can make communication difficult, especially when it’s conducted by email or phone. When 1-800-FLOWERS tried to expand its customer-service operation by outsourcing customer calls to India, the results were disastrous. Why? When customers called to order flowers, florists may have to do more than merely process orders: They’re often called upon to offer interior-design tips (for instance, when the flowers are a gift), relationship counseling (when the flowers are for an apology), and even to console the grieving (such as when the flowers are for a funereal). Indian workers could neither fully understand the psychology of U.S. flower buyers nor communicate the nuances necessary to serve their needs. After just a few weeks 1-800-FLOWERS terminated the experiment. “The folks were difficult to understand,” admitted one company executive. “We were afraid that we would lose sales, and we couldn’t risk that.”

Many businesses today have offshored various operations to foreign countries. These offshoring initiatives often involve call centers, and many businesses have found this approach to be very effective. But others, like 1-800-FLOWERS, have experienced problems with offshoring and some have even moved operations back to their home country.

ZUMA Press, Inc./Alamy Stock Photo

The decision made sense: Typically, it costs six times as much to replace a customer as to keep one. Fortunately, the company had a plan B—homeshoring or hiring in-country contract workers. Homeshoring employees are more expensive than overseas contractors, but they’re less expensive than full-time on-site employees. They connect with American customers, and they also alleviate the concerns that some U.S. consumers have about their private data being shipped overseas.

References: Michelle Conlin, “Call Centers in the Rec Room,” BusinessWeek,, accessed on February 26, 2017; Pete Engardio, “The Future of Outsourcing,” BusinessWeek,, accessed on February 26, 2017; and Manjeet Kripalani with Brian Grow, “Offshoring: Spreading the Gospel,” BusinessWeek,, accessed on February 26, 2017.

The Need for Business Process Change

Why are so many organizations finding it necessary to undergo business process change? We noted in Chapter 1 that all systems, including organizations, are subject to entropy—a normal process leading to system decline. An organization is behaving most typically when it maintains the status quo, does not change in synch with its environment, and starts consuming its own resources to survive. In a sense, that is what happened to Kmart. In the early and mid-1970s, Kmart was in such a high-flying growth mode that it passed first J. C. Penney and then Sears to become the world’s largest retailer. But then the firm’s managers grew complacent and assumed that the discount retailer’s prosperity would continue and that they need not worry about environmental shifts, the growth of Walmart, and so forth—and entropy set in. Likewise, both J. C. Penney and Sears failed to keep pace with environmental shifts and now they, to, are struggling. The key is to recognize the beginning of the decline and immediately move toward changing relevant business processes. Major problems occur when managers either do not recognize the onset of entropy until it is well advanced or are complacent in taking steps to correct it.

Approaches to Business Process Change

Figure 7.3 shows general steps in reengineering. The first step is setting goals and developing a strategy for the changes. The organization must know in advance what new business processes are supposed to accomplish and how those accomplishments will be achieved. Next, top managers must begin and direct the reengineering effort. If a CEO simply announces that business process change is to occur but does nothing else, the program is unlikely to be successful. But, if the CEO is constantly involved in the process, underscoring its importance and taking the lead, business process change stands a much better chance of success.

Figure 7.3The Reengineering Process

Reengineering is a major redesign of all areas of an organization. To be successful, reengineering requires a systematic and comprehensive assessment of the entire organization. Goals, top management support, and a sense of urgency help the organization recreate itself and blend both top-down and bottom-up perspectives.

Most experts also agree that successful business process change is usually accompanied by a sense of urgency. People in the organization must see the clear and present need for the changes being implemented and appreciate their importance. In addition, most successful reengineering efforts start with a new, clean slate. In other words, rather than assuming that the existing organization is a starting point and then trying to modify it, business process change usually starts by asking questions such as how customers are best served and competitors best neutralized. New approaches and systems are then created and imposed in place of existing ones.

Finally, business process change requires a careful blend of top-down and bottom-up involvement. On the one hand, strong leadership is necessary, but too much involvement by top management can make the changes seem autocratic. On the other hand, employee participation is also important, but too little involvement by leaders can undermine the program’s importance and create a sense that top managers do not care. Thus care must be taken to carefully balance these two countervailing forces. Our next section explores more fully one related but distinct approach called organization development or OD.

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7-3eOrganization Development

We noted in several places the importance of people and change. Beyond those change interests discussed earlier, a special area of interest that focuses almost exclusively on people is OD.

OD Assumptions

OD is concerned with changing attitudes, perceptions, behaviors, and expectations. More precisely, 
organization development
 is a planned effort that is organization-wide, managed from the top, and intended to increase organizational effectiveness and health through planned interventions in the organization’s process, using behavioral science knowledge. The theory and practice of OD are based on several very important assumptions. The first is that employees have a desire to grow and develop. Another is that employees have a strong need to be accepted by others within the organization. Still another critical assumption of OD is that the total organization and the way it is designed will influence the way individuals and groups within the organization behave. Thus some form of collaboration between managers and their employees is necessary to

· (1)

take advantage of the skills and abilities of the employees and

· (2)

eliminate aspects of the organization that retard employee growth, development, and group acceptance.

Because of the intense personal nature of many OD activities, many large organizations rely on one or more OD consultants (either full-time employees assigned to this function or outside experts hired specifically for OD purposes) to implement and manage their OD program.

OD Techniques

Several kinds of interventions or activities are generally considered part of OD. Some OD programs may use only one or a few of these; other programs use several of them at once.

· Diagnostic activities. Just as a physician examines patients to diagnose their current condition, an OD diagnosis analyzes the current condition of an organization. To carry out this diagnosis, managers use questionnaires, opinion or attitude surveys, interviews, archival data, and meetings to assess various characteristics of the organization. The results of this diagnosis may generate profiles of the organization’s activities, which can then be used to identify problem areas in need of correction.

· Team building. Team-building activities are intended to enhance the effectiveness and satisfaction of individuals who work in groups or teams and to promote overall group effectiveness. Given the widespread use of teams today, these activities have taken on increased importance. An OD consultant might interview team members to determine how they feel about the group; then an off-site meeting could be held to discuss the issues that surfaced and iron out any problem areas or member concerns. Caterpillar used team building as one method for changing the working relationships between workers and supervisors from confrontational to cooperative. One novel new approach to team building involves executive teams participating in group cooking classes to teach them the importance of interdependence and coordination.

· Survey feedback. In survey feedback, each employee responds to a questionnaire intended to measure perceptions and attitudes (e.g., satisfaction and supervisory style). Everyone involved, including the supervisor, receives the results of the survey. The aim of this approach is usually to change the behavior of supervisors by showing them how their subordinates view them. After the feedback has been provided, workshops may be conducted to evaluate results and suggest constructive changes.

· Third-party peacemaking. Another approach to OD is through third-party peacemaking, which is most often used when substantial conflict exists within the organization. Third-party peacemaking can be appropriate at the individual, group, or organizational level. The third party, usually an OD consultant, uses a variety of mediation or negotiation techniques to resolve any problems or conflicts among individuals or groups.

· Process consultation. In process consultation, an OD consultant observes groups in the organization to develop an understanding of their communication patterns, decision-making and leadership processes, and methods of cooperation and conflict resolution. The consultant then provides feedback to the involved parties about the processes he or she has observed. The goal of this form of intervention is to improve the observed processes. A leader who is presented with feedback outlining deficiencies in his or her leadership style, for example, might be expected to change to overcome them.

· Life and career planning. Life and career planning helps employees formulate their personal goals and evaluate strategies for integrating their goals with the goals of the organization. Such activities might include specification of training needs and plotting a career map. General Electric has a reputation for doing an outstanding job in this area.

· Coaching and counseling. Coaching and counseling provide nonevaluative feedback to individuals. The purpose is to help people develop a better sense of how others see them and learn behaviors that will assist others in achieving their work-related goals. The focus is not on how the individual is performing today; instead, it is on how the person can perform better in the future.

These two functional groups are involved in an intergroup activity. As part of a companywide initiative to improve dialogue between all facets of the company, retreats such as this one filled with team-building exercises are occurring on a quarterly basis.


The Effectiveness of OD

Given the diversity of activities encompassed by OD, it is not surprising that managers have reported mixed results from various OD interventions. Organizations that actively practice some form of OD include American Airlines, Texas Instruments, Procter & Gamble, and BF Goodrich. Goodrich, for example, has trained 60 persons in OD processes and techniques. These trained experts have subsequently become internal OD consultants to assist other managers in applying the techniques. Many other managers, in contrast, report that they have tried OD but discarded it.

OD will probably remain an important part of management theory and practice. Of course, there are no sure things when dealing with social systems such as organizations, and the effectiveness of many OD techniques is difficult to evaluate. Because all organizations are open systems interacting with their environments, an improvement in an organization after an OD intervention may be attributable to the intervention, but it may also be attributable to changes in economic conditions, luck, or other factors.

7-4Organizational Innovation

A final element of organization change that we address here is 
, which is the managed effort of an organization to develop new products or services or new uses for existing products or services. Innovation is clearly important because without new products or services an organization will eventually fail.

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7-4aThe Innovation Process

The organizational innovation process consists of developing, applying, launching, growing, and managing the maturity and decline of creative ideas. This process is depicted in Figure 7.4.

Figure 7.4The Innovation Process

Organizations actively seek to manage the innovation process. These steps illustrate the general life cycle that characterizes most innovations. Of course, as with creativity, the innovation process will suffer if it is approached too mechanically and rigidly.

Innovation Development

Innovation development involves the evaluation, modification, and improvement of creative ideas. It can transform a product or service with only modest potential into a product or service with significant potential. Parker Brothers, for example, decided during innovation development not to market an indoor volleyball game but instead to sell separately the appealing little foam ball designed for the game. The firm will never know how well the volleyball game would have sold, but the Nerf ball and numerous related products generated millions of dollars in revenues for it.

Application launch is a critical element in the success or failure of a new product. Polaroid spent over $3 billion in developing this camera but only recouped a small fraction of its investment when the product failed.


Innovation Application

Innovation application is the stage in which an organization takes a developed idea and uses it in the design, manufacturing, or delivery of new products, services, or processes. At this point, the innovation emerges from the laboratory and is transformed into tangible goods or services. Business incubators and similar concepts are often used to facilitate innovation application.

Application Launch

Application launch is the stage at which an organization introduces new products or services to the marketplace. The important question is not “Does the innovation work?” but “Will customers want to purchase the innovative product and service?” History is full of creative ideas that did not generate enough interest among customers to be successful. Some notable innovation failures include a portable seat warmer from Sony, “New” Coke, the Flip video recorder, Google Glass, 3D television, and Amazon’s Fire phone. Thus, despite development and application, new products and services can still fail at the launch phase.

Application Growth

Once an innovation has been successfully launched, it then enters the stage of application growth. This is a period of high economic performance for an organization because demand for the product or service is often greater than supply. Organizations that fail to anticipate this stage may unintentionally limit their growth, as Apple did by not anticipating demand for the first iPhones. At the same time, overestimating demand for a new product can be just as detrimental to performance. Unsold products can sit in warehouses for years.

Innovation Maturity

After a period of growing demand, an innovative product or service often enters a period of maturity. Innovation maturity is the stage at which most organizations in an industry have access to an innovation and are applying it in approximately the same way. The technological application of an innovation during this stage of the innovation process can be very sophisticated. Because most firms have access to the innovation, however, as a result of either developing the innovation on their own or copying the innovation from others, it does not provide competitive advantage to any one of them. The time that elapses between innovation development and innovation maturity varies notably depending on the particular product or service. Whenever an innovation involves the use of complex skills (such as a complicated manufacturing process or highly sophisticated teamwork), moving from the growth phase to the maturity phase will take longer. In addition, if the skills needed to implement these innovations are rare and difficult to imitate, then strategic imitation may be delayed, and the organization may enjoy a period of sustained competitive advantage.

Innovation Decline

Every successful innovation bears its own seeds of decline. Because an organization does not gain a competitive advantage from an innovation at maturity, it must encourage its creative scientists, engineers, and managers to begin looking for new innovations. This continued search for competitive advantage usually leads new products and services to move from the creative process through innovation maturity and finally to innovation decline. Innovation decline is the stage during which demand for an innovation decreases and substitute innovations are developed and applied.

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7-4bForms of Innovation

Each creative idea that an organization develops poses a different challenge for the innovation process. Innovations can be radical or incremental, technical or managerial, and product or process innovations.

Amazon has pioneered several new processes for selling and distributing products. One of its most recent experiments involves the potential use of drones such as this one to deliver products to customers the same day as their order.

Peter Endig/dpa/picture-alliance/Newscom

Radical versus Incremental Innovations

Radical innovations
 are new products, services, or technologies developed by an organization that completely replace the existing products, services, or technologies in an industry. 
Incremental innovations
 are new products, services, or processes that modify existing ones. Firms that implement radical innovations fundamentally shift the nature of competition and the interaction of firms within their environments. Firms that implement incremental innovations alter, but do not fundamentally change, competitive interaction in an industry.

Over the last several years, organizations have introduced many radical innovations. For example, compact disk (CD) technology replaced long-playing vinyl records in the recording industry and now digital downloading is replacing CDs, DVDs have replaced videocassettes but are now being supplanted by Blu-ray DVDs and online streaming, and high-definition television is replacing regular television technology. Whereas radical innovations like these tend to be very visible and public, incremental innovations actually are more numerous. For instance, each new generation of the iPhone and the iPad represents relatively minor changes over previous versions.

Technical versus Managerial Innovations

Technical innovations
 are changes in the physical appearance or performance of a product or service or of the physical processes through which a product or service is manufactured. Many of the most important innovations over the last 50 years have been technical. For example, the serial replacement of the vacuum tube with the transistor, the transistor with the integrated circuit, and the integrated circuit with the microchip has greatly enhanced the power, ease of use, and speed of operation of a wide variety of electronic products. Not all innovations developed by organizations are technical, however. 
Managerial innovations
 are changes in the management process by which products and services are conceived, built, and delivered to customers. They do not necessarily affect the physical appearance or performance of products or services directly. In effect, reengineering, as we discussed earlier, represents a managerial innovation.

Product versus Process Innovations

Perhaps the two most important types of technical innovations are product innovations and process innovations. 
Product innovations
 are changes in the physical characteristics or performance of existing products or services or the creation of brand-new products or services. 
Process innovations
 are changes in the way products or services are manufactured, created, or distributed. Whereas managerial innovations generally affect the broader context of development, process innovations directly affect manufacturing.

The implementation of robotics is a process innovation. The effect of product and process innovations on economic return depends on the stage of the innovation process that a new product or service occupies. At first, during development, application, and launch, the physical attributes and capabilities of an innovation mostly affect organizational performance. Thus product innovations are particularly important during these beginning phases. Later, as an innovation enters the phases of growth, maturity, and decline, an organization’s ability to develop process innovations, such as fine-tuning manufacturing, increasing product quality, and improving product distribution, becomes important to maintaining economic return.

The original iPhones and iPads were in many ways radical innovations in that they redefined product categories. Each subsequent generation of these products, however, such as the iPad Air shown here, are incremental innovations that take previous versions and introduce relatively minor improvements and/or new design features.

Japanese organizations have often excelled at process innovation. The market for SLR cameras was dominated by German and other European manufacturers when, in the early 1960s, Japanese organizations such as Canon and Nikon began making cameras. Some of these early Japanese products were not very successful, but these companies continued to invest in their process technology and eventually were able to increase quality and decrease manufacturing costs. The Japanese organizations came to dominate the worldwide market for SLR cameras, and the German companies, because they were not able to maintain the same pace of process innovation, struggled to maintain market share and profitability. And as film technology gave way to digital photography, the same Japanese firms effectively transitioned to leadership in this market as well.

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7-4cThe Failure to Innovate

To remain competitive in today’s economy, organizations must be innovative. And yet many organizations that should be innovative are not successful at bringing out new products or services, or they do so only after innovations created by others are very mature. Organizations may fail to innovate for at least three reasons.

Lack of Resources

Innovation is expensive in terms of money, time, and energy. If a firm does not have sufficient money to fund a program of innovation or does not currently employ the kinds of employees it needs to be innovative, it may lag behind in innovation. Even highly innovative organizations cannot become involved in every new product or service its employees think up. For example, numerous other commitments in the electronic instruments and computer industry forestalled Hewlett-Packard (HP) from investing in Steve Jobs and Steve Wozniak’s original idea for a personal computer. With infinite resources of money, time, and technical and managerial expertise, HP might have entered this market early. Because the firm did not have this flexibility, however, it had to make some difficult choices about which innovations to invest in.

Failure to Recognize Opportunities

Because firms cannot pursue all innovations, they need to develop the capability to carefully evaluate innovations and to select the ones that hold the greatest potential. To obtain a competitive advantage, an organization must usually make investment decisions before the innovation process reaches the mature stage. The earlier the investment, however, the greater the risk. If organizations are not skilled at recognizing and evaluating opportunities, they may be overly cautious and fail to invest in innovations that later turn out to be successful for other firms.

Resistance to Change

As we discussed earlier, many organizations tend to resist change. Innovation means giving up old products and old ways of doing things in favor of new products and new ways of doing things. These kinds of changes can be personally difficult for managers and other members of an organization. Thus resistance to change can slow the innovation process.

Promoting Innovation in Organizations

A wide variety of ideas for promoting innovation in organizations has been developed over the years. Three specific ways for promoting innovation are through the reward system, through the organizational culture, and through a process called intrapreneurship.

The Reward System

A firm’s reward system is the means by which it encourages and discourages certain behaviors by employees. Major components of the reward system include salaries, bonuses, and perquisites. Using the reward system to promote innovation is a fairly mechanical but nevertheless effective management technique. The idea is to provide financial and nonfinancial rewards to people and groups who develop innovative ideas. Once the members of an organization understand that they will be rewarded for such activities, they are more likely to work creatively. With this end in mind, Monsanto gives a $50,000 award each year to the scientist or group of scientists who develop the biggest commercial breakthrough.

It is important for organizations to reward creative behavior, but it is vital to avoid punishing creativity when it does not result in highly successful innovations. It is the nature of the creative and innovative processes that many new-product ideas will simply not work out in the marketplace. Each process is fraught with too many uncertainties to generate positive results every time. An individual may have prepared herself to be creative, but an insight may not be forthcoming. Or managers may attempt to apply a developed innovation, only to recognize that it does not work. Indeed, some organizations operate according to the assumption that, if all their innovative efforts succeed, then they are probably not taking enough risks in research and development. At 3M, nearly 60 percent of the creative ideas suggested each year do not succeed in the marketplace. The firm accepts this failure rate, however, because of its emphasis on innovation and the fact that the 40 percent of creative ideas that do work are generally very successful and highly profitable.

Managers need to be very careful in responding to innovative failure. If innovative failure is due to incompetence, systematic errors, or managerial sloppiness, then a firm should respond appropriately, for example by withholding raises or reducing promotion opportunities. People who act in good faith to develop an innovation that simply does not work out, however, should not be punished for failure. If they are, they will probably not be creative in the future. A punitive reward system will discourage people from taking risks and therefore reduce the organization’s ability to obtain competitive advantages. is known for its innovative business practices. The firm’s culture helps promote individual creativity, risk taking, and inventiveness. This distribution center, for example, was developed using new methods devised by Amazon employees.

Bernhard Classen/Alamy Stock Photo

Organization Culture

As we discussed in Chapter 2, an organization’s culture is the set of values, beliefs, and symbols that help guide behavior. A strong, appropriately focused organizational culture can be used to support innovative activity. A well-managed culture can communicate a sense that innovation is valued and will be rewarded and that occasional failure in the pursuit of new ideas is not only acceptable but even expected. In addition to reward systems and intrapreneurial activities, firms such as Apple, Google, LG Electronics, Tata, Amazon, and HP are all known to have strong, innovation-oriented cultures that value individual creativity, risk taking, and inventiveness.

Intrapreneurship in Larger Organizations

In recent years, many large businesses have realized that the entrepreneurial spirit that propelled their growth becomes stagnant after they transform themselves from a small but growing concern into a larger one. To help revitalize this spirit, some firms today encourage intrapreneurship. 
 are similar to entrepreneurs except that they develop a new business in the context of a large organization. There are three intrapreneurial roles in large organizations. To successfully use intrapreneurship to encourage creativity and innovation, the organization must find one or more individuals to perform these roles.

The inventor is the person who actually conceives of and develops the new idea, product, or service by means of the creative process. Because the inventor may lack the expertise or motivation to oversee the transformation of the product or service from an idea into a marketable entity, however, a second role comes into play. A product champion is usually a middle manager who learns about the project and becomes committed to it. He or she helps overcome organizational resistance and convinces others to take the innovation seriously. The product champion may have only limited understanding of the technological aspects of the innovation. Nevertheless, product champions are skilled at knowing how the organization works, whose support is needed to push the project forward, and where to go to secure the resources necessary for successful development. A sponsor is a top-level manager who approves of and supports a project. This person may fight for the budget needed to develop an idea, overcome arguments against a project, and use organizational politics to ensure the project’s survival. With a sponsor in place, the inventor’s idea has a much better chance of being successfully developed.

Many firms have embraced intrapreneurship as a way to encourage creativity and innovation. Colgate-Palmolive has created a separate unit, Colgate Venture Company, staffed with intrapreneurs who develop new products. General Foods developed Culinova as a unit to which employees can take their ideas for possible development. S. C. Johnson & Son established a $250,000 fund to support new-product ideas, and Texas Instruments refuses to approve a new innovative project unless it has an acknowledged inventor, champion, and sponsor.

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Chapter Review

Summary of Learning Outcomes and Key Points

· 1Describe the nature of organization change, including forces for change and planned versus reactive change.


Organization change is any substantive modification to some part of the organization.


Change may be prompted by forces internal or external to the organization.


In general, planned change is preferable to reactive change.

· 2Discuss the steps in organization change and how to manage resistance to change.


The Lewin model provides a general perspective on the steps involved in change.


A comprehensive model is usually more effective.


People tend to resist change because of uncertainty, threatened self-interests, different perceptions, and feelings of loss.


Participation, education and communication, facilitation, and force-field analysis are methods for overcoming this resistance.

· 3Identify and describe major areas of organization change and discuss the assumptions, techniques, and effectiveness of OD.


The most common areas of change involve changing organizational structure and design, technology, and people.


Business process change is a more massive and comprehensive change.


OD is concerned with changing attitudes, perceptions, behaviors, and expectations. Its effective use relies on an important set of assumptions.


There are conflicting opinions about the effectiveness of several OD techniques.

· 4Describe the innovation process, forms of innovation, the failure to innovate, and how organizations can promote innovation.


The innovation process has six steps: development, application, launch, growth, maturity, and decline.


Basic categories of innovation include radical, incremental, technical, managerial, product, and process innovations.


Despite the importance of innovation, many organizations fail to innovate because they lack the required creative individuals or are committed to too many other creative activities, fail to recognize opportunities, or resist the change that innovation requires.


Organizations can use a variety of tools to overcome these problems, including the reward system, organizational culture, and intrapreneurship.

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Chapter Review

Discussion Questions

Questions for Review

1. What forces or kinds of events lead to organization change? Identify each force or event as the primary determinant of a planned or a reactive change.

2. Compare planned and reactive change. What are the advantages of planned change, as compared to reactive change?

3. Identify the primary reasons people resist change, and then summarize the primary methods managers can use to overcome this resistance.

4. In a brief sentence or just a phrase, describe each of the OD techniques.

5. Consider the following list. Categorize each along all three dimensions of innovation, if possible (radical versus incremental, technical versus managerial, and product versus process). Explain your answers.

· Teaching college courses by digitally recording the instructor and then making the digital file available online

· The rise in popularity of virtual organizations (discussed in Chapter 6)

· Checking the security of packages on airlines with the type of magnetic resonance imaging (MRI) scanning devices that are common in health care

· Smartphone devices such as the iPhone

· Robotic arms that can perform surgery that is too precise for a human surgeon’s hands

· Hybrid automobiles, which run on both batteries and gasoline

· Using video games to teach soldiers how to plan and execute battles

Questions for Analysis

1. What are the symptoms that a manager should look for in determining whether an organization needs to change? What are the symptoms that indicate that an organization has been through too much change?

2. Assume that you are the manager of an organization that has a routine way of performing a task and now faces a major change in how it performs that task. Using the Lewin model, tell what steps you would take to implement the change. Using the comprehensive approach, tell what steps you would take. For each step, give specific examples of actions you would take at that step.

3. Think back to a time when a professor announced a change that you, the student, did not want to adopt. What were the reasons for your resistance to change? Was the professor able to overcome your resistance? If so, tell what he or she did. If not, tell what he or she could have done that might have been successful.

4. Some people resist change, whereas others welcome it enthusiastically. To deal with the first group, one needs to overcome resistance to change; to deal with the second, one needs to overcome resistance to stability. What advice can you give a manager facing the latter situation?

5. Can a change made in one area of an organization—in technology, for instance—not lead to change in other areas? If you think that change in one area must lead to change in other areas, describe an example of an organization change to illustrate your point. If you think that change can occur in just one area without causing change in other areas, describe an example of an organization change that illustrates your point.

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Chapter Review

Experiential Exercise

Team Innovation

Purpose: To give you practice related to innovation as a team activity.

Introduction: Assume that your group is a team of professionals who are in charge of new-product design at your company.


· Step 1: Using only the materials your professor will give to you, design and construct a new product. This product can be something wholly new or an improvement on an existing product.

· Step 2: Present your product to the class. Explain its use, features, and appeal to consumers.

Follow-Up Questions

· How much influence did the selection of materials have on your design?

1. What, if anything, does this suggest to you about organization resources and their effect on innovation?

2. Explain the process your group used to come up with the design. Describe the number of people participated, how they participated, how any disagreements were resolved, and so on. What, if anything, does this suggest to you about some of the potential advantages as well as the challenges of team-based innovation in organizations?

3. Describe the various roles played by members of your group. For example, did anyone function primarily as a “voice of caution”? Did anyone serve as a devil’s advocate? Did anyone work as a facilitator, smoothing over feelings and resolving conflicts? Were some members better at design or at implementation? What, if anything, does this tell you regarding the various roles that individuals take in the innovation process in organizations?

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Chapter Review

Building Effective Decision-Making Skills

Exercise Overview

Decision-making skills refer to the ability to recognize and define problems and opportunities correctly, and then to select an appropriate course of action for solving problems or capitalizing on opportunities. This exercise gives you some practice in making decisions about organizational innovation.

Exercise Background

You’re a manager at a venture capital firm that seeks out companies with promising new ideas for technological improvements and then provides financing, advice, and expertise in exchange for part ownership. Your firm makes money when an idea is successfully brought to market and the value of your ownership shares increases. Your personal compensation—not to mention your continued employment—is therefore based on your ability to choose the right ideas and to provide entrepreneurs with the right support.

Exercise Task

1. Use the Internet to locate information about at least five promising new technologies. (Hint: The websites of publications that report technology news, such as TechWeb, are good sources, as are the corporate websites of innovative companies like 3M. Or search the term technology venture capital to locate firms that invest in new technologies, and then find out what you can about their clients.) Then choose the new technology that interests you the most.

2. Next, describe the current status of your chosen technology in the innovation process. Explain how you arrived at your decision about where to place the technology in the process.

3. Finally, discuss the kinds of advice and expertise that this idea and its company need to grow into a successful start-up.

Chapter Review

Management at Work

Kodak Fails to Focus on the Big Picture

As recently as 1994 Eastman Kodak was among the top 20 companies in the Fortune 500. In 1996, the renowned manufacturer of photographic film and equipment employed 145,000 workers and enjoyed revenues of more than $13 billion. As of 2005, the workforce had been trimmed to 51,000 but revenues still topped $14 billion. In 2017 what remained of Kodak employed only 6,400 and was controlled by several other companies.

What had happened to the one time corporate giant? Among other things, bankruptcy. Kodak filed for Chapter 11 bankruptcy protection in January 2012, citing “restructuring costs and recessionary forces” and claiming $5.1 billion in assets against $6.8 billion in debts. Since 2004, the company had posted only one full year of profit. Former Kodak executive Larry Matteson says that the company was hit by a perfect storm: “I can’t think of another major company in the U.S. that has undergone as tough a transformation as Kodak. When IBM changed,” explains Matteson, “its core capabilities remained essentially the same; at Kodak, everything changed, right through research, to marketing, to sales.”

So—more to the point—what changed everything and reduced a blue-chip corporation to a shadow of itself in just a couple of decades? Most analysts approach this question by citing the advent of digital technology—the capacity to store and process data as computerized bits and bytes rather than as streams of electronic signals loaded onto such physical materials as magnetic tape or silver halide film (known as analog technology). The so-called Digital Revolution—the widespread transition from analog to digital—took off in the 1980s and 1990s, as cellphones became ubiquitous and the Internet became a fixture in business operations.

According to Harvard’s John Kotter, a widely acknowledged authority on organizational change, “Kodak’s problem… . is that it did not move into the digital world well enough and fast enough.” It’s pretty much a consensus opinion, but Kotter is careful to add the qualifier “on the surface.” Below the surface, suggests Kotter, where Kodak made the business decisions that led to bankruptcy, it’s an opinion that needs further investigation. Kodak, for example, pioneered digital technologies throughout the 1970s and 1980s, including innovations in color digital cameras, digital print kiosks, and digital image compression. Kodak, says Bill Fischer, CEO of the private equity firm Manzanita Capital, “played along the entire ‘imaging’ value chain and was certainly in an excellent position to be intimately familiar with whatever was going on within and around the imaging business.”

Unfortunately, says Fischer, top Kodak managers “failed to take advantage of their unique perspective.” Fischer concludes that Kodak ultimately succumbed to “creeping disruption by digital imaging.” As for Kotter, he argues that Kodak was facing a “technological discontinuities challenge,” which occurs when a new technology features “low margins and cannibalizes your high-margin core business.” In Kotter’s estimation, “Kodak did not take decisive action to combat the inevitable challenges” posed by such technologies.

The challenge can be particularly difficult when the discontinuity comes from an unexpected source. The first “smartphone” was rolled out in 1994 and the first camera-equipped smartphone in 2000. By 2010, smartphone manufacturers were shipping more units (100.9 million) than PC makers (92.1 million). A year later, the iPad 2 hit the market. Says Bill Fischer: “We can suspect that Kodak, while recognizing the impending threat of a digital ‘something,’ probably did not immediately imagine that it would be a ‘telephone’ that would ultimately be the most damaging agent of disruption” to its core film- and camera-making businesses.

Some of the company’s critics charge that, even on the brink of bankruptcy, Kodak managers failed—or refused—to acknowledge that many of the company’s products had been marginalized by digital substitutions. According to George T. Conboy, chairman of Brighton Securities, Kodak “made a big mistake of riding the cash cow—film—to the point that there was simply no more milk coming from it.” During the bankruptcy process, for example, Kodak management hoped to sell one of the firm’s prized assets—a package of 1,100 digital-imaging patents—for as much as $2.6 billion. Ultimately, the portfolio brought in only $527 million. Says Jay T. Westbrook, a bankruptcy specialist at the University of Texas law school: “What that situation signified—which was part of the problem with the whole business model—is that they thought their technology and their patents were more valuable than they really were. They clung to that belief right until the end.”

Kotter agrees with the consensus opinion that Kodak’s demise was a result of “strategic decisions either avoided or made poorly.” He reminds us, however, that there’s still an underlying question to be answered: “Why did Kodak managers make the poor strategic decisions they made?” His own answer is fairly simple—on the surface: “The organization,” he charges, “overflowed with complacency.” In particular, says Kotter, Kodak failed to recognize that digital was a “huge opportunity” only if the company acted with equally “huge urgency.” As a matter of fact, Kodak had developed the first electronic photographic camera in 1975, and as of 2005, it was the number-one seller of digital cameras in the U.S. Within two years, however, it had slipped to fourth, and by 2010 it had plummeted to number seven.

Kodak, it seems, was too slow in realizing that in order to make the transition to digital, it would have to give up the comfort of dominance in an analog technology that was facing a rapidly diminishing market. In 1976, for instance, Kodak commanded 90 percent of film sales and 85 percent of camera sales in the United States. As of 1996, it controlled over two-thirds of global market share in both categories. According to Andrew Salzman, former VP of Kodak for worldwide marketing, top managers at the company were well aware that its markets were “being reinvented” but failed to commit themselves to

its next generation of revenue drivers… . Kodak had tomes of research on how digital would develop, how the whole notion of image capture, storage, manipulation, and retrieval would reinvent the category. But from a go-to-market point of view, from an organizational prioritization vantage point, it was tethered to the 95 percent of revenue coming from paper and film.

Or, as Kotter puts it, although “there were people who saw the problem coming,” they were “buried in the organization.” Says one former executive who was hired in the 1990s to help bring the company into the digital era: “I couldn’t get anywhere without running into the consumer product or professional division selling film or paper. Every time I wanted to make a move, they would argue that I was destroying margin and value.”

Kodak, concludes Allen Adamson of Landor Associates, a global consultant on branding research and design,

was built on a manufacturing mindset, a business model in which you build something, put it in front of consumers, and they come… . Despite an abundance of superior technology, it was this intransigent culture that was among the reasons Kodak failed to move forward. The world is moving so much faster that no matter how strong or powerful your brand name may be, you have to think in terms of revolution, not evolution.

Case Questions

1. Explain how—theoretically, anyway—making “change innovations” in each of the following Areas of Organizational Change might have helped Kodak ease the severity of the conditions that led it to bankruptcy and the challenges facing it now that it’s emerged from bankruptcy: changing organization structure and design, changing people and attitudes, and changing processes.

2. Judging from the case, explain how, at one point or another, each of the following reasons for Failure to Innovate played a role in the process that brought Kodak to bankruptcy: lack of resources, failure to recognize opportunities, and resistance to change.

3. You can still buy a digital camera with the Kodak name on it, and you can still print pictures at digital kiosks in many local drugstores. These businesses, however, are no longer owned by Kodak. In addition, Kodak no longer publishes photos online or makes pocket video cameras, camera film, or photographic paper. Having emerged from bankruptcy, Kodak tried to focus on the commercial side of the imaging business, such as packaging labels and graphics and printing solutions to client businesses. It also tried to make components and products that other companies can sell under their own brands. In what ways does each of the following Forms of Innovation figure to play a role in Kodak’s efforts to rebuild itself after bankruptcy: radical innovations, incremental innovations, technical innovations, product innovations, and process innovations?

4. How about you? How surprised are you to learn how fast a blue-chip corporation with a line of household-name products can collapse? Do you think that we live in times that make such stories as Kodak’s more or less likely? In your opinion, what’s the most important downside of the demise of a company such as Kodak? What’s the most important upside?

Case References


John Kotter, “Barriers to Change: The Real Reason behind the Kodak Downfall,” Forbes, May 2, 2012,, accessed on February 28, 2017; David DiSalvo, “The Fall of Kodak: A Tale of Disruptive Technology and Bad Business,” Forbes, October 2, 2011,, accessed on February 28, 2017; Bill Fischer, “There Are No ‘Kodak Moments,’” Forbes, July 4, 2014,, accessed on February 28, 2017; Julie Creswell, “Kodak’s Fuzzy Future,” New York Times, May 3, 2013,, accessed on February 28, 2017; Jim Riley, “Organisational Culture: When Culture Needs to Change,”, accessed on February 28, 2017; Andrew Hill, “Kodak—A Victim of Its Own Success,” Financial Times, April 5, 2012,, accessed on February 28, 2017; and Allen Adamson, “For BlackBerry, For All Brands: Three Lessons Learned from the Demise of Kodak,” Digital Imaging Reporter, October 2013,, accessed on February 28, 2017.

Chapter Review

You Make the Call: Cultivating Innovation at IKEA

1. You’re an IKEA store manager, and corporate headquarters has instructed you to change the layout of your store. The change must be “dramatic,” but the details are up to you. What steps will you take to ensure that you’ll be successful?

2. There’s an IKEA TV ad that features a discarded lamp, forsaken on a rainy night in some American city. A man looks at the camera and says in a sympathetic Swedish accent, “Many of you feel bad for this lamp,” and then, after a well-timed pause, “That’s because you’re crazy.” What’s the message of the commercial?

3. One IKEA executive says that the current global economic situation has “pushed innovation” at the company. In fact, he says, “This is a great time to be more innovative.” Explain what he most likely means.

4. Would you want to manage an IKEA store? Why or why not?

Main content



Managing Human Resources in Organizations

Chapter Introduction

· 8-1

The Environmental Context of HRM

· 8-1a

The Strategic Importance of HRM

· 8-1b

The Legal Environment of HRM

· 8-2

Attracting Human Resources

· 8-2a

Human Resource Planning

· 8-2b

Recruiting Human Resources

· 8-2c

Selecting Human Resources

· 8-3

Developing Human Resources

· 8-3a

Training and Development

· 8-3b

Performance Appraisal

· 8-3c

Performance Feedback

· 8-4

Maintaining Human Resources

· 8-4a

Determining Compensation

· 8-4b

Determining Benefits

· 8-5

Managing Workforce Diversity

· 8-5a

The Meaning of Diversity

· 8-5b

The Impact of Diversity

· 8-5b

Managing Diversity in Organizations

· 8-6

Managing Labor Relations

· 8-6a

How Employees Form Unions

· 8-6b

Collective Bargaining

· 8-7

New Challenges in the Changing Workplace

· 8-7a

Managing Knowledge Workers

· 8-7b

Contingent and Temporary Workers

Chapter Review

Summary of Learning Outcomes and Key Points

Discussion Questions

Experiential Exercise

Building Effective Technical Skills

Management at Work

You Make the Call: No Company for Old-Fashioned Management

Main content

Chapter Introduction

Learning Outcomes

After studying this chapter, you should be able to:

· 1Describe the environmental context of human resource management, including its strategic importance and its relationship with legal and social factors.

· 2Discuss how organizations attract human resources, including human resource planning, recruiting, and selecting.

· 3Describe how organizations develop human resources, including training and development, performance appraisal, and performance feedback.

· 4Discuss how organizations maintain human resources, including the determination of compensation and benefits and career planning.

· 5Discuss the nature of diversity, including its meaning, associated trends, impact, and management.

· 6Describe labor relations, including how employees form unions and the mechanics of collective bargaining.

· 7Describe the issues associated with managing knowledge and contingent and temporary workers.

Management in Action

No Company for Old-Fashioned Management

“Anything that requires knowledge and service gives us a reason to be.”

—Danny Wegman, CEO of Wegmans Food Markets

Wegmans, a family-owned East Coast grocery store chain, is known for its innovative human resource management practices. Wegmans employees are very knowledgeable about the products carried in the stores, as well as how to use Wegmans products to prepare unusual dishes. These Wegmans employees are learning how to cook wild boar.

Boston Globe/Getty Images

If you’re looking for the best Parmesan cheese for your chicken parmigiana recipe, you might try Wegmans, especially if you happen to live in the vicinity of Pittsford, New York. Cheese department manager Carol Kent will be happy to recommend the best brand because her job calls for knowing cheese as well as managing some 20 subordinates. Kent is a knowledgeable employee, and knowledgeable employees, says Wegmans CEO Danny Wegman, are “something our competitors don’t have and our customers couldn’t get anywhere else.”

Wegmans Food Markets, a family owned East Coast chain with more than 90 stores in six states, prides itself on its commitment to customers, and it shows: It ranks at the top of the latest Consumer Reports survey of the best national and regional grocery stores. But commitment to customers is only half of Wegmans’ overall strategy, which calls for reaching its customers through its employees. “How do we differentiate ourselves?” asks Wegman, who then proceeds to answer his own question: “If we can sell products that require knowledge in terms of how you use them, that’s our strategy. Anything that requires knowledge and service gives us a reason to be.” That’s the logic behind one of Carol Kent’s recent assignments—one which she understandably regards as a perk: Wegmans sent her to Italy to conduct a personal study of Italian cheese. “We sat with the families” that make the cheeses, she recalls, and “broke bread with them. It helped me understand that we’re not just selling a piece of cheese. We’re selling a tradition, a quality.”

Kent and the employees in her department also enjoy the best benefits package in the industry, including fully paid health insurance. And that includes part-timers, who make up about two-thirds of the company’s workforce of more than 58,000. In part, the strategy of extending benefits to this large segment of the labor force is intended to make sure that stores have enough good workers for crucial peak periods, but there’s no denying that the costs of employee-friendly policies can mount up. At 15 to 17 percent of sales, for example, Wegmans’ labor costs are well above the 12 percent figure for most supermarkets. But according to one company HR executive, holding down labor costs isn’t necessarily a strategic priority: “We would have stopped offering free health insurance [to part-timers] a long time ago,” she admits, “if we tried to justify the costs.”

Besides, employee turnover at Wegmans is about 6 percent—a mere fraction of an industry average that hovers around 19 percent (and can approach 100 percent for part-timers). And this is an industry in which total turnover costs have been known to outstrip total annual profits by 40 percent. Wegmans employees tend to be knowledgeable because about 20 percent of them have been with the company for at least ten years, and many have logged at least a quarter century. Says one 19-year-old college student who works at an upstate New York Wegmans while pursuing a career as a high school history teacher, “I love this place. If teaching doesn’t work out, I would so totally work at Wegmans.” Edward McLaughlin, who directs the Food Industry Management Program at Cornell University, understands this sort of attitude: “When you’re a 16-year-old kid, the last thing you want to do is wear a geeky shirt and work for a supermarket,” but at Wegmans, he explains, “it’s a badge of honor. You’re not a geeky cashier. You’re part of the social fabric.”

Wegmans has been on Fortune magazine’s annual list of “100 Best Companies to Work For” every year since the list started in 1998 and was number four on the most recent list. “It says that we’re doing something right,” says a company spokesperson, “and that there’s no better way to take care of our customers than to be a great place for our employees to work.” In addition to its health care package, Wegmans has been cited for such perks as fitness center discounts, compressed work weeks, telecommuting, and domestic-partner benefits (which extend to same-sex partners).

Finally, under the company’s Employee Scholarship Program, full-time workers can receive up to $2,200 a year for four years and part-timers up to $1,500. Since its inception in 1984, the program has handed out over $86 million in scholarships to more than 25,000 employees. Like most Wegman policies, this one combines employee outreach with long-term corporate strategy: “This program has made a real difference in the lives of many young people,” says President Colleen Wegman, who adds that it’s also“one of the reasons we’ve been able to attract the best and the brightest to work at Wegmans.”

Granted, Wegmans, which has remained in family hands since its founding in 1915, has an advantage in being as generous with its resources as its family of top executives wants to be: It doesn’t have to do everything with quarterly profits in mind, and the firm likes to point out that taking care of its employees is a long-standing priority. Profit sharing and fully funded medical coverage were introduced in 1950 by Robert Wegman, son and nephew of brothers Walter and John, who opened the firm’s original flagship store in Rochester, New York, in 1930. Why did Robert Wegman make such generous gestures to his employees way back then? “Because,” he says simply, “I was no different from them.”

This chapter is about how organizations manage the people that comprise them. That’s why our opening story is about a company that has reaped big dividends from a strategy that integrates customer satisfaction with employee satisfaction. The set of processes by which Wegmans and other companies manage their people is called “human resource management,” or HRM. We start by describing the environmental context of HRM. We then discuss how organizations attract human resources. Next we describe how organizations seek to further develop the capacities of their human resources. We also examine how high-quality human resources are maintained by organizations. We conclude by discussing workforce diversity, labor relations, and new challenges in the changing workplace.

8-1The Environmental Context of HRM

Human resource management (HRM)
 is the set of organizational activities directed at attracting, developing, and maintaining an effective workforce. HRM takes place within a complex and ever-changing environmental context. Two particularly vital components of this context are HRM’s strategic importance and the legal environment of HRM.

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8-1aThe Strategic Importance of HRM

Human resources are critical for effective organizational functioning. HRM (or “personnel,” as it is sometimes called) was once relegated to second-class status in many organizations, but its importance has grown dramatically in the last few decades. Its new importance stems from increased legal complexities, the recognition that human resources are a valuable means for improving productivity, and the awareness today of the costs associated with poor HRM. For example, Microsoft recently eliminated 14,000 jobs in business areas that are expected to shrink. At the same time, though, the firm began developing strategies for hiring several thousand new high-talent people for jobs related to important new growth areas for the company. This careful and systematic approach of reducing human resources in areas where they are no longer needed and adding new human resources to key growth areas reflects a rational and strategic approach to HRM.

Indeed, managers now realize that the effectiveness of their HR function has a substantial impact on the bottom-line performance of the firm. Poor human resource planning can result in spurts of hiring followed by layoffs—costly in terms of unemployment compensation payments, training expenses, and morale. Haphazard compensation systems do not attract, keep, or motivate good employees, and outmoded recruitment practices can expose the firm to expensive and embarrassing discrimination lawsuits. Consequently, the chief human resource executive of most large businesses is a senior vice president directly accountable to the CEO, and many firms are developing strategic HR plans and integrating those plans with other strategic planning activities.

Even organizations with as few as 200 employees usually have a human resource manager and a human resource department charged with overseeing these activities. Responsibility for HR activities, however, is shared between the HR department and line managers. The HR department may recruit and initially screen candidates, but the final selection is usually made by managers in the department where the new employee will work. Similarly, although the HR department may establish performance appraisal policies and procedures, the actual evaluation and coaching of employees are done by their immediate superiors.

The growing awareness of the strategic significance of HRM has even led to new terminology to reflect a firm’s commitment to people. 
Human capital
 reflects the organization’s investment in attracting, retaining, and motivating an effective workforce. Hence, just as the phrase financial capital is an indicator of a firm’s financial resources and reserves, so, too, does human capital serve as a tangible indicator of the value of the people who comprise an organization

8-1bThe Legal Environment of HRM

A number of laws regulate various aspects of employee–employer relations, especially in the areas of equal employment opportunity, compensation and benefits, labor relations, and occupational safety and health. Several major ones are summarized in Table 8.1.

Table 8.1

The Legal Environment of Human Resource Management

As much as any area of management, HRM is subject to wide-ranging laws and court decisions. These laws and decisions affect the human resource function in many areas.

Equal Employment Opportunity

Title VII of the Civil Rights Act of 1964 (as amended by the Equal Employment Opportunity Act of 1972). Forbids discrimination in all areas of the employment relationship.

Age Discrimination in Employment Act. Outlaws discrimination against people older than 40 years.

Various executive orders, especially Executive Order 11246 in 1965. Requires employers with government contracts to engage in affirmative action.

Pregnancy Discrimination Act. Specifically outlaws discrimination on the basis of pregnancy.

Vietnam Era Veterans Readjustment Assistance Act. Extends affirmative action mandate to military veterans who served during the Vietnam War.

Americans with Disabilities Act. Specifically outlaws discrimination against disabled persons.

Civil Rights Act of 1991. Makes it easier for employees to sue an organization for discrimination but limits punitive damage awards if they win.

Compensation and Benefits

Fair Labor Standards Act. Establishes minimum wage and mandated overtime pay for work in excess of 40 hours per week.

Equal Pay Act of 1963. Requires that men and women be paid the same amount for doing the same job.

Employee Retirement Income Security Act of 1974 (ERISA). Regulates how organizations manage their pension funds.

Family and Medical Leave Act of 1993. Requires employers to provide up to 12 weeks of unpaid leave for family and medical emergencies.

Labor Relations

National Labor Relations Act. Spells out procedures by which employees can establish labor unions and requires organizations to bargain collectively with legally formed unions; also known as the Wagner Act.

Labor Management Relations Act. Limits union power and specifies management rights during union-organizing campaign; also known as the Taft–Hartley Act.

Health and Safety

Occupational Safety and Health Act of 1970 (OSHA). Mandates the provision of safe working conditions.

Equal Employment Opportunity

Title VII of the Civil Rights Act of 1964
 forbids discrimination in all areas of the employment relationship. The intent of Title VII is to ensure that employment decisions are made on the basis of an individual’s qualifications rather than on the basis of personal biases. The law has reduced direct forms of discrimination (such as refusing to promote African Americans into management, failing to hire men as flight attendants, or refusing to hire women as construction workers) as well as indirect forms of discrimination (such as using employment tests that whites pass at a higher rate than African Americans).

Employment requirements such as test scores and other qualifications are legally defined as having an 
adverse impact
 on minorities and women when such individuals meet or pass the requirement at a rate less than 80 percent of the rate of majority group members. Criteria that have an adverse impact on protected groups can be used only when there is solid evidence that they effectively identify individuals who are better able than others to do the job. The 
Equal Employment Opportunity Commission
 is charged with enforcing Title VII as well as several other employment-related laws.

Age Discrimination in Employment Act
, passed in 1967, amended in 1978, and amended again in 1986, is an attempt to prevent organizations from discriminating against older workers. In its current form, it outlaws discrimination against people older than 40 years. Both the Age Discrimination in Employment Act and Title VII require passive nondiscrimination or equal employment opportunity. Employers are not required to seek out and hire minorities, but they must treat all who apply fairly.

Several executive orders, however, require that employers holding government contracts engage in 
affirmative action
—intentionally seeking and hiring employees from groups that are underrepresented in the organization. These organizations must have a written affirmative action plan that spells out employment goals for underutilized groups and how those goals will be met. These employers are also required to act affirmatively in hiring Vietnam-era veterans (as a result of the Vietnam Era Veterans Readjustment Assistance Act) and qualified handicapped individuals. Finally, the Pregnancy Discrimination Act forbids discrimination against women who are pregnant.

In 1990, Congress passed the 
Americans with Disabilities Act
, which forbids discrimination on the basis of disabilities and requires employers to provide reasonable accommodations for disabled employees. More recently, the 
Civil Rights Act of 1991
 amended the original Civil Rights Act as well as other related laws by both making it easier to bring discrimination lawsuits (which partially explains the aforementioned backlog of cases) and limiting the amount of punitive damages that can be awarded in those lawsuits.

Compensation and Benefits

Laws also regulate compensation and benefits. The 
Fair Labor Standards Act
, passed in 1938 and amended frequently since then, sets a minimum wage and requires the payment of overtime rates for work in excess of 40 hours per week. Salaried professional, executive, and administrative employees are exempt from the minimum hourly wage and overtime provisions. The 
Equal Pay Act of 1963
 requires that men and women be paid the same amount for doing the same job. Attempts to circumvent the law by having different job titles and pay rates for men and women who perform the same work are also illegal. Basing an employee’s pay on seniority or performance is legal, however, even if it means that a man and woman are paid different amounts for doing the same job.

The provision of benefits is also regulated in some ways by state and federal laws. Certain benefits are mandatory—for example, worker’s compensation insurance for employees who are injured on the job. Employers who provide a pension plan for their employees are regulated by the 
Employee Retirement Income Security Act of 1974 (ERISA)
. The purpose of this act is to help ensure the financial security of pension funds by regulating how they can be invested. The 
Family and Medical Leave Act of 1993
 requires employers to provide up to 12 weeks of unpaid leave for family and medical emergencies.

Labor Relations

Union activities and management’s behavior toward unions constitute another heavily regulated area. The 
National Labor Relations Act
 (also known as the Wagner Act), passed in 1935, sets up a procedure for employees to vote on whether to have a union. If they vote for a union, management is required to bargain collectively with the union. The 
National Labor Relations Board (NLRB)
 was established by the Wagner Act to enforce its provisions. Following a series of severe strikes in 1946, the 
Labor Management Relations Act
 (also known as the Taft–Hartley Act) was passed in 1947 to limit union power. The law increases management’s rights during an organizing campaign. The Taft–Hartley Act also contains the National Emergency Strike provision, which allows the president of the United States to prevent or end a strike that endangers national security. Taken together, these laws balance union and management power. Employees can be represented by a legally created and managed union, but the business can make nonemployee-related business decisions without interference.

The Occupational Safety and Health Act (OSHA), passed in 1970, mandates that organizations provide their employees with a workplace that is free from hazards, provide necessary safety equipment, and follow guidelines to minimize potential occupational diseases. This worker, for instance, is using several forms of safety equipment while performing a potentially hazardous job. All of this equipment meets OSHA requirements.

Hywit Dimyadi/

Health and Safety

Occupational Safety and Health Act of 1970 (OSHA)
 directly mandates the provision of safe working conditions. It requires that employers

· (1)

provide a place of employment that is free from hazards that may cause death or serious physical harm, and

· (2)

obey the safety and health standards established by the U.S. Department of Labor.

Safety standards are intended to prevent accidents, whereas occupational health standards are concerned with preventing occupational disease. For example, standards limit the concentration of cotton dust in the air because this contaminant has been associated with lung disease in textile workers. The standards are enforced by OSHA inspections, which are conducted when an employee files a complaint of unsafe conditions or when a serious accident occurs. Spot inspections of plants in especially hazardous industries such as mining and chemicals are also made. Employers who fail to meet OSHA standards may be fined.

Emerging Legal Issues

Several other areas of legal concern have emerged during the past few years. One is sexual harassment. Although sexual harassment is forbidden under Title VII, it has received additional attention in the courts recently, as more and more victims have decided to publicly confront the problem. Another emerging HRM issue is alcohol and drug abuse. Both alcoholism and drug dependence are major problems today. Recent court rulings have tended to define alcoholics and drug addicts as disabled, protecting them under the same laws that protect other handicapped people. Finally, AIDS has emerged as an important legal issue as well. AIDS victims, too, are most often protected under various laws protecting the disabled.

8-2Attracting Human Resources

With an understanding of the environmental context of HRM as a foundation, we are now ready to address its first substantive concern—attracting qualified people who are interested in employment with the organization.

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8-2aHuman Resource Planning

The starting point in attracting qualified human resources is planning. HR planning, in turn, involves job analysis and forecasting the demand and supply of labor.

Job Analysis

Job analysis
 is a systematic analysis of jobs within an organization. A job analysis is made up of two parts. The job description lists the duties of a job; the job’s working conditions; and the tools, materials, and equipment used to perform it. The job specification lists the skills, abilities, and other credentials needed to do the job. Job analysis information is used in many human resource activities. For instance, knowing about job content and job requirements is necessary to develop appropriate selection methods and job-relevant performance appraisal systems and to set equitable compensation rates.

Forecasting Human Resource Demand and Supply

After managers fully understand the jobs to be performed within the organization, they can start planning for the organization’s future human resource needs. Figure 8.1 summarizes the steps most often followed. The manager starts by assessing trends in past human resource usage, future organizational plans, and general economic trends. A good sales or revenue forecast may be a good place to start, especially for smaller organizations. Historical ratios can then be used to predict demand for employees such as operating employees and sales representatives. For example, suppose an organization has generally needed one employee to generate $150,000 in revenue. If forecasts suggest potential revenue growth of $900,000 next year, the firm may need to hire six new employees.

Figure 8.1Human Resource Planning

Attracting human resources cannot be left to chance if an organization expects to function at peak efficiency. Human resource planning involves assessing trends, forecasting supply and demand of labor, and then developing appropriate strategies for addressing any differences.

Of course, large organizations use much more complicated models to predict their future human resource needs. A few years ago Walmart went through an exhaustive planning process that projected that the firm would need to hire 1 million people over the decade ahead. Of this projected total, 800,000 were to be new positions created as the firm grew and the other 200,000 were to replace current workers who were expected to leave for various reasons. As the years passed, Walmart adjusted these figures both up and down. But as things turned out, by the end the forecast period Walmart did indeed employ about 800,000 more people than it did when the plan was first completed.

Forecasting the supply of labor is really two tasks: forecasting the internal supply (the number and type of employees who will be in the firm at some future date) and forecasting the external supply (the number and type of people who will be available for hiring in the labor market at large). The simplest approach merely adjusts present staffing levels for anticipated turnover and promotions. Again, though, large organizations use extremely sophisticated models to make these forecasts. At higher levels of the organization, managers plan for specific people and positions. The technique most commonly used is the 
replacement chart
, which lists each important managerial position, who occupies it, how long he or she will probably stay in it before moving on, and who (by name) is now qualified or soon will be qualified to move into the position. This technique allows ample time to plan developmental experiences for persons identified as potential successors to critical managerial jobs.

To facilitate both planning and identifying persons for current transfer or promotion, some organizations also have an 
employee information system (skills inventory)
, which is usually computerized and contains information on each employee’s education, skills, work experience, and career aspirations. Such a system can quickly locate all the employees in the organization who are qualified to fill a position requiring, for instance, a degree in chemical engineering, three years of experience in an oil refinery, and fluency in Spanish. Enterprise resource planning (ERP) systems, as described in Chapter 7, generally include capabilities for measuring and managing the internal supply of labor in ways that best fit the needs of the organization.

Forecasting the external supply of labor is a different problem altogether. How does a manager, for example, predict how many electrical engineers will be seeking work in Georgia three years from now? To get an idea of the future availability of labor, planners must rely on information from outside sources such as state employment commissions, government reports, and figures supplied by colleges on the number of students in major fields.

Matching Human Resource Supply and Demand

After comparing future demand and internal supply, managers can make plans to manage predicted shortfalls or overstaffing. If a shortfall is predicted, new employees can be hired, present employees can be retrained and transferred into the understaffed area, individuals approaching retirement can be convinced to stay on, or labor-saving or productivity-enhancing systems can be installed.

If the organization needs to hire, the external labor supply forecast helps managers plan how to recruit, based on whether the type of person needed is readily available or scarce in the labor market. As we noted earlier in this chapter, the trend in temporary workers also helps managers in staffing by affording them extra flexibility. If overstaffing is expected to be a problem, the main options are transferring the extra employees, not replacing individuals who quit, encouraging early retirement, and/or laying people off.

8-2bRecruiting Human Resources

Once an organization has an idea of its future human resource needs, the next phase is usually recruiting new employees. 
 is the process of attracting qualified persons to apply for jobs that are open. Where do recruits come from? Some recruits are found internally; others come from outside the organization.

Internal recruiting
 means considering present employees as candidates for openings. Promotion from within can help build morale and keep high-quality employees from leaving the firm. In unionized firms, the procedures for notifying employees of internal job change opportunities are usually spelled out in the union contract. For higher-level positions, a skills inventory system may be used to identify internal candidates, or managers may be asked to recommend individuals who should be considered. Most businesses today routinely post job openings on their internal communication network or intranet. One disadvantage of internal recruiting is its ripple effect. When an employee moves to a different job, someone else must be found to take his or her old job. In one organization, for instance, 454 job movements were necessary as a result of filling 195 initial openings.

External recruiting
 involves attracting persons outside the organization to apply for jobs. External recruiting methods include online postings, traditional advertising, campus interviews, employment agencies or executive search firms, union hiring halls, referrals by present employees, and hiring “walk-ins” or “gate-hires” (people who show up without being solicited). Of course, a manager must select the most appropriate methods, using the state employment service to find maintenance workers but not a nuclear physicist, for example. Private employment agencies can be a good source of clerical and technical employees, and executive search firms specialize in locating top-management talent. In general, online postings and “help wanted” ads in newspapers are often used because they reach a wide audience and thus allow a large number of people to find out about and apply for job openings.

One generally successful method for facilitating a good person–job fit is the so-called 
realistic job preview (RJP)
, which involves providing the applicant with a real picture of what performing the job that the organization is trying to fill would be like. For example, it would not make sense for a firm to tell an applicant that the job is exciting and challenging when in fact it is routine and straightforward, yet some managers do just this to hire talented and motivated people. The likely outcome, though, will be a dissatisfied employee who will quickly be looking for a better job. If the company is more realistic about a job, on the other hand, the person hired will be more likely to remain in the job for a longer period of time.

Realistic job previews play a big role in helping people better understand the nature of potential job opportunities. This senior manager, for example, is explaining the details of a potential new work assignment to one of his subordinates. By building familiarity and awareness in advance, businesses can reduce turnover and dissatisfaction later.

© Michal Kowalski/

8-2cSelecting Human Resources

Once the recruiting process has attracted a pool of applicants, the next step is to select the person or persons to hire. The intent of the selection process is to gather from applicants information that will predict their job success and then to hire the candidate(s) likely to be most successful. Of course, the organization can gather information only about factors that are predictive of future performance. The process of determining the predictive value of information is called 

Application Blanks

The first step in selection is usually asking the candidate to fill out an application blank. Application blanks are an efficient method of gathering information about the applicant’s previous work history, educational background, and other job-related demographic data. They should not contain questions about areas not related to the job, such as gender, religion, or national origin. Application blank data are generally used informally to decide whether a candidate merits further evaluation, and interviewers use application blanks to familiarize themselves with candidates before interviewing them. Unfortunately, in recent years there has been a trend toward job applicants’ either falsifying or inflating their credentials to stand a better chance of getting a job. Indeed, one recent study suggests that more than 50 percent of all resumes contained at least some inflated information.


Tests of ability, skill, aptitude, or knowledge that is relevant to the particular job are usually the best predictors of job success, although tests of general intelligence or personality are occasionally useful. In addition to being validated, tests should be administered and scored consistently. All candidates should be given the same directions, should be allowed the same amount of time, and should experience the same testing environment (temperature, lighting, and distractions).

In this interview, the HR representative is explaining to the candidate how to perform a test. All candidates have been asked to perform the same test. The test requires them to analyze sales data and research to propose a marketing plan for a new product. Their performance on this test will be used as one measure to determine the best candidate for the job.

Africa Studio/


Although a popular selection device, interviews are often poor predictors of job success. For example, biases inherent in the way that people perceive and judge others at a first meeting affect subsequent evaluations by the interviewer. Interview validity can be improved by training interviewers to be aware of potential biases and by increasing the structure of the interview. In a structured interview, questions are written in advance, and all interviewers follow the same question list with each candidate they interview. This procedure introduces consistency into the interview procedure and allows the organization to validate the content of the questions to be asked.

Assessment Centers

Assessment centers are a common method used to select managers and are particularly good for selecting current employees for promotion. The assessment center is a content-valid simulation of major parts of the managerial job. A typical center lasts two to three days, with groups of 6 to 12 persons participating in a variety of managerial exercises. Centers may also include interviews, public speaking, and standardized ability tests. Candidates are assessed by several trained observers, usually managers several levels above the job for which the candidates are being considered. Assessment centers are quite valid if properly designed and are generally fair to members of minority groups and women. For some firms, the assessment center is a permanent facility created for these activities. For other firms, the assessment activities are performed in a multipurpose location such as a conference facility. AT&T pioneered the assessment center concept. For years, the firm has used assessment centers to make most of its selection decisions for management positions.

Other Techniques

Organizations also use other selection techniques depending on the circumstances. Polygraph tests, once popular, are declining in popularity. On the other hand, more and more organizations are requiring that applicants in whom they are interested take physical exams. Organizations are also increasingly using drug tests, especially in situations in which drug-related performance problems could create serious safety hazards. For example, applicants for jobs in a nuclear power plant would likely be tested for drug use. Criminal background checks are also becoming increasingly common.

8-3Developing Human Resources

Regardless of how effective a selection system is, however, most employees need additional training if they are to grow and develop in their jobs. Evaluating their performance and providing feedback are also necessary.

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8-3aTraining and Development

In HRM, 
 usually refers to teaching operational or technical employees how to do the job for which they were hired. 
 generally refers to teaching managers and professionals the skills needed for both present and future jobs. Most organizations provide regular training and development programs for managers and employees. For example, IBM spends more than $565 million annually on programs and has a vice president in charge of employee education. U.S. businesses spend more than $165 billion annually on training and development programs away from the workplace. And this figure does not include wages and benefits paid to employees while they are participating in such programs.

Assessing Training Needs

The first step in developing a training plan is to determine what needs exist. For example, if employees do not know how to operate the machinery necessary to do their job, a training program on how to operate the machinery is clearly needed. On the other hand, when a group of office workers is performing poorly, training may not be the answer. The problem could be motivation, aging equipment, outdated software, poor supervision, inefficient work design, or a deficiency of skills and knowledge. Only the last could be remedied by training. As training programs are being developed, the manager should set specific and measurable goals specifying what participants are to learn. The manager should also plan to evaluate the training program after employees complete it to insure that the performance deficiency has been corrected.

Common Training Methods

Many different training and development methods are available. Selection of methods depends on many considerations, but perhaps the most important is training content. When the training content is factual material (such as company rules or explanations for how to fill out forms), assigned reading, programmed learning, and lecture methods work well. When the content is interpersonal relations or group decision making, however, firms must use a method that allows interpersonal contact, such as role-playing or case discussion groups. When employees must learn a physical skill, methods allowing practice and the actual use of tools and materials are needed, as in on-the-job training or vestibule training. (Vestibule training enables participants to focus on safety, learning, and feedback rather than on productivity.)

Web-based and other digital–media-based training are very common today. Such methods allow a mix of training content, are relatively easy to update and revise, let participants use a variable schedule, and lower travel costs. On the other hand, they are limited in their capacity to simulate real activities and facilitate face-to-face interaction. Xerox, Massachusetts Mutual Life Insurance, and Ford have all reported tremendous success with these methods. In addition, most training programs actually rely on a mix of methods. Boeing, for example, sends managers to an intensive two-week training seminar involving tests, simulations, role-playing exercises, and DVD flight simulation exercises. Our “Tech Watch” feature highlights other new perspectives on learning and training methods.

Tech Watch

What You Can Learn from Math Media

Matthew Carpenter peers at the screen of his laptop, which presents him with an inverse trigonometric function: . A few seconds later, he clicks on “0 degrees” and is immediately informed by the computer that he’s correct. “It took a while for me to get it,” he admits, but that’s understandable. After all, Matthew is only 10 years old, and as his fifth-grade math teacher is quick to point out, most students don’t get around to inverse trig until they’re in high school (if even then).

Is Matthew a math prodigy? Not necessarily. And he might not end up with an appointment at, say, the Center for Computational Relativity and Gravitation, but he will probably be prepared for a lot of jobs that other people won’t be. “Math is the killer,” says Microsoft founder Bill Gates, whose foundation has conducted studies on unemployment. “If you ask people, ‘Hey, why don’t you get one of these nursing jobs?’ math is often the reason they give for not applying. ‘Why didn’t you pass the police exam?’ Math.”

Matthew Carpenter and Bill Gates have more in common than a positive attitude toward math: They’re both excited by a certain way of learning it. Matthew’s math class in Los Altos, California, is a test classroom for a system devised by former hedge-fund manager Sal Khan, whose nonprofit Khan Academy consists of about 6,000 mini-lectures and tutorials accessible as videos on YouTube. Most of these videos are pretty low tech, consisting of handwritten visuals and voiceovers recorded by Khan from a closet in his office. Following an educational strategy known as flipping the classroom model, students like Matthew Carpenter sit through lectures (watch videos) at home and do their homework (work problems) in the classroom, where teachers are available to help out. Students work at their own pace, advancing and winning badges when the computer recognizes certain achievements. Considerably more high tech than Khan’s videos are the dashboards—user interfaces that organize information in easy-to-read format—on which teachers can track students’ individual efforts (how many videos they’ve watched and problems they’ve worked). Everything from Khan Academy is free.

As the organization has grown—it now reaches 6 million students in 23 languages in some 200 countries—it has expanded its software platform to accommodate such features as rigorous online diagnostic and assessment tools. Khan’s growth strategy also involves the expansion of MOOC (massive open online course) technology into the world of professional training and development (T&D). “When they do training,” says Khan, “a lot of corporations mimic the classroom. They create corporate universities at which people have to take time off and listen to lectures… . But the whole self-paced model makes a lot more sense. If you’re sitting at your desk and you want to improve your skills at something, you can do it at your own time and pace.”

The Association for Talent Development (ADT), a nonprofit organization of workplace learning and performance professionals, recently awarded Khan its Champion of Learning award for “his revolutionary work at the intersection of technology and learning.” According to the ADT, “the Khan Academy model that leverages today’s technology to create educational tools and resources that are accessible and customizable to the individual has spurred the T&D profession to reimagine the possibilities available for adult learners.”

References: Clive Thompson, “How Khan Academy Is Changing the Rules of Education,” Wired, July 15, 2011,, accessed on March 6, 2017; Candace Walters, “Re-evaluate Approach to Training, Reap Benefits from Technology,” Rochester Business Journal, October 26, 2012,, accessed on March 6, 2017; edSurge, “Khan Academy,” EdTech Index (2011–2015),, March 6, 2017; Tracy M. Flynn, “What Can Khan Academy Teach Corporate Training?” eLearning Industry, October 7, 2013,, accessed on March 6, 2017; “Salman Khan on Charlie Rose 2013” (video), Khan Academy (2015),, accessed on March 6, 2017; and “ASTD Presents Lifetime Achievement Award, Honors Others for Contributions to the Training and Development Profession,” Association for Talent Development (2014),, accessed on March 6, 2017.

Finally, some larger businesses have their own self-contained training facility, often called a corporate university. McDonald’s was among the first to start this practice with its so-called Hamburger University in Illinois. All management trainees of the firm attend training programs there to learn exactly how long to grill a burger, how to maintain good customer service, and so on. The cult hamburger chain In-N-Out Burger also has a similar training venue called In-N-Out University. Other firms that use this approach include Shell Oil and General Electric (GE).

Training refers to teaching operational or technical employees how to better perform the jobs for which they were hired. This manager is showing two new employees how to monitor a complex production system and what steps to take in the event of a system malfunction.

Monkey Business Images/

Evaluation of Training

Training and development programs should always be evaluated. Typical evaluation approaches include measuring one or more relevant criteria (such as attitudes or performance) before and after the training, and determining whether the criteria changed. Evaluation measures collected at the end of training are easy to get, but actual performance measures collected when the trainee is on the job are more important. Trainees may say that they enjoyed the training and learned a lot, but the true test is whether their job performance improves after their training.

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8-3bPerformance Appraisal

Once employees are trained and settled into their jobs, one of management’s next concerns is performance appraisal. 
Performance appraisal
 is a formal assessment of how well employees are doing their jobs. Employees’ performance should be evaluated regularly for many reasons. One reason is that performance appraisal may be necessary for validating selection devices or assessing the impact of training programs. A second reason is managerial—to aid in making decisions about pay raises, promotions, and training. Still another reason is to provide feedback to employees to help them improve their present performance and plan future careers. Because performance evaluations often help determine wages and promotions, they must be fair and nondiscriminatory.

Common Appraisal Methods

Two basic categories of appraisal methods commonly used in organizations are objective methods and judgmental methods. Objective measures of performance include actual output (i.e., number of units produced), scrap rate, dollar volume of sales, and number of claims processed. This may be contaminated by “opportunity bias” if some persons have a better chance to perform than others. For example, a sales representative selling snow blowers in Michigan has a greater opportunity than a colleague selling the same product in Arkansas. Fortunately, adjusting raw performance figures for the effect of opportunity bias and thereby arriving at figures that accurately represent each individual’s performance are often possible.

Another type of objective measure, the special performance test, is a method in which each employee is assessed under standardized conditions. This kind of appraisal also eliminates opportunity bias. For example, Verizon Southwest has a series of prerecorded calls that operators in a test booth answer. The operators are graded on speed, accuracy, and courtesy in handling the calls. Performance tests measure ability but do not measure the extent to which one is motivated to use that ability on a daily basis. (A high-ability person may be a lazy performer except when being tested, for instance.) Special performance tests must therefore be supplemented by other appraisal methods to provide a complete picture of performance.

Judgmental methods, including ranking and rating techniques, are the most common ways to measure performance. Ranking compares employees directly with one another and orders them from best to worst. Ranking has a number of drawbacks. Ranking is difficult for large groups, because the persons in the middle of the distribution may be hard to accurately distinguish from one another. Comparisons of people in different work groups are also difficult. For example, an employee ranked third in a strong group may be more valuable than an employee ranked first in a weak group. Another criticism of ranking is that the manager must rank people on the basis of overall performance, although each person likely has both strengths and weaknesses. Furthermore, rankings do not provide useful information for feedback. To be told that one is ranked third is not nearly as helpful as to be told that the quality of one’s work is outstanding, its quantity is satisfactory, one’s punctuality could use improvement, or one’s supervisory skills are seriously deficient.

Rating differs from ranking in that it compares each employee with a fixed standard rather than comparison with other employees. A rating scale provides the standard. Figure 8.2 gives examples of three graphic rating scales for a bank teller. Each consists of a performance dimension to be rated (punctuality, congeniality, and accuracy) followed by a scale on which to make the rating. In constructing graphic rating scales, performance dimensions that are relevant to job performance must be selected. In particular, they should focus on job behaviors and results rather than on personality traits or attitudes.

Figure 8.2Graphic Rating Scales for a Bank Teller

Graphic rating scales are very common methods for evaluating employee performance. The manager who is doing the rating circles the point on each scale that best reflects her or his assessment of the employee on that scale. Graphic rating scales are widely used for many different kinds of jobs.

Behaviorally Anchored Rating Scale (BARS)
 is a sophisticated and useful rating method. Supervisors construct rating scales associated with behavioral anchors. They first identify relevant performance dimensions and then generate anchors—specific, observable behaviors typical of each performance level. Figure 8.3 shows an example of BARS for the dimension “Inventory control.”

Figure 8.3Behaviorally Anchored Rating Scale

Behaviorally anchored rating scales help overcome some of the limitations of standard rating scales. Each point on the scale is accompanied by a behavioral anchor—a summary of an employee behavior that fits that spot on the scale.

The other scales in this set, developed for the job of department manager in a chain of specialty stores, include “Handling customer complaints,” “Planning special promotions,” “Following company procedures,” “Supervising sales personnel,” and “Diagnosing and solving special problems.” BARS can be effective because it requires that management takes proper care in constructing the scales, and it provides useful anchors for supervisors to use in evaluating people. It is costly, however, because outside expertise is usually needed and because scales must be developed for each job within the organization.

Errors in Performance Appraisal

Errors or biases can occur in any kind of rating or ranking system. One common problem is recency error—the tendency to base judgments on the subordinate’s most recent performance because it is most easily recalled. Often a rating or ranking is intended to evaluate performance over an entire time period, such as six months or a year, so the recency error does introduce error into the judgment. Other errors include overuse of one part of the scale—being too lenient, being too severe, or giving everyone a rating of “average.” Halo error is allowing the assessment of an employee on one dimension to “spread” to ratings of that employee on other dimensions. For instance, if an employee is outstanding on quality of output, a rater might tend to give him or her higher marks than deserved on other dimensions. Errors can also occur because of race, sex, or age bias, intentionally or unintentionally. The best way to offset these errors is to ensure that a valid rating system is developed at the outset and then to train managers in how to use it.

One interesting method in performance appraisal used in some organizations today is called 
360-degree feedback
, in which managers are evaluated by everyone around them—their boss, their peers, and their subordinates. Such a complete and thorough approach provides people with a far richer array of information about their performance than does a conventional appraisal given just by the boss. Of course, such a system also takes considerable time and must be handled so as not to breed fear and mistrust in the workplace.

In this meeting, the manager is sharing the 360-degree feedback he has gathered. This feedback is useful to the employee because it relates to all aspects of her day to day job. She can use that feedback to improve her performance and calibrate her goals.

ESB Professional/

8-3cPerformance Feedback

The last step in most performance appraisal systems is giving feedback to subordinates about their performance. This is usually done in a private meeting between the person being evaluated and his or her boss. The discussion should generally be focused on the facts—the assessed level of performance, how and why that assessment was made, and how it can be improved in the future. Feedback interviews are not easy to conduct. Many managers are uncomfortable with the task, especially if feedback is negative and subordinates are disappointed by what they hear. Properly training managers, however, can help them conduct more effective feedback interviews.

Some firms use a very aggressive approach to terminating people who do not meet expectations. For many years GE used a system whereby each year the bottom 10 percent of its workforce was terminated and replaced with new employees. Company executives claimed that this approach, although stressful for all employees, helped it to continuously upgrade its workforce. While GE is still very aggressive in its approach to terminating underperforming employees, it has now developed new programs that provide opportunities for them to learn new skills and improve their performance during an extended probationary period. Netflix is also known for both rewarding high performers but also aggressively pushing underperforming employees to either improve or leave.

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8-4Maintaining Human Resources

After organizations have attracted and developed an effective workforce, they must also make strategic investments to keep their most valued employees. To do so requires effective compensation and benefits programs. “Leading the Way” describes how one firm, Nucor Steel, uses compensation to retain a strong workforce. (Other methods for retaining employees are discussed in our next chapter.)

Leading the Way

Holding True at Nucor Steel

Nucor Steel, the largest steelmaker in the United States, has achieved consistent profits and low employee turnover by using an innovative compensation model. Nucor Steel employees have a base guaranteed wage that is somewhat lower than the industry average but can earn considerably more than average wages by being productive. Compensation for every Nucor employee includes some form of incentive pay.

AP Images/The Decatur Daily/John Godbey

Nucor, the country’s largest steelmaker, has never laid employees off or eliminated jobs. During the last recession the U.S. steel industry laid off some 10,000 workers in January 2009 alone. But while Nucor employees had few steel orders to fill, they were busy rewriting safety manuals, getting a head start on maintenance jobs, mowing the lawns, and cleaning the bathrooms—and still drawing paychecks. How has Nucor been able to pull this off? Experts point to two things: the firm’s employees and its culture. The firm’s culture originated in the 1960s as the result of policies established by Ken Iverson, who brought a radical perspective on how to manage a company’s human resources to the job of CEO. Iverson figured that workers would be much more productive if an employer went out of its way to share authority with them, respect what they accomplished, and compensate them as handsomely as possible. Today, the basics of the company’s HR model are summed up in its “Employee Relations Principles”:

· Management is obligated to manage Nucor in such a way that employees will have the opportunity to earn according to their productivity.

· Employees should feel confident that if they do their jobs properly, they will have a job tomorrow.

· Employees have the right to be treated fairly and must believe that they will be.

· Employees must have an avenue of appeal when they believe they are being treated unfairly.

The Iverson approach is based on a highly original pay system. Base pay is actually below the industry average, but the Nucor compensation plan is designed to pay more if employees perform better. For example, if a shift can turn out a defect-free batch of steel, every worker is entitled to a bonus that’s paid weekly and that can potentially triple his or her take-home pay. In addition, there are one-time annual bonuses and profit-sharing payouts. In a good year, for example, the average steelworker can take home $79,000 in base pay and weekly bonuses, plus a $2,000 year-end bonus and as much as $18,000 more in profit-sharing money. The system, however, cuts both ways. Take that defect-free batch of steel, for example. If there’s a problem with a batch, workers on the shift obviously don’t get any weekly bonus. And that’s if they catch the problem before the batch leaves the plant. If it reaches the customer, they may lose up to three times what they would have received as a bonus.

Everybody in the company, from janitors to the CEO, is covered by some form of incentive plan tied to various goals and targets. Bonuses for department managers are based on a return-on-assets formula tied to divisional performance, as are bonuses under the non-production and non-department–manager plan, which covers everyone, except senior officers, not included in either of the first two plans; bonuses under both manager plans may increase base pay by 75 percent to 90 percent. Senior officers don’t work under contracts or get pension or retirement plans, and their base salaries are below industry average. In a world in which the typical CEO makes more than 400 times what a factory worker makes, Nucor’s CEO makes considerably less. In 2016, for example, his combined salary and bonus (about $2.4 million) came to 23 times the total taken home by the average Nucor factory worker. His bonus and those of other top managers are based on a ratio of net income to stockholder’s equity.

References: “Employee Relations Principles,” Nucor Corporation,, accessed on June 9, 2017; “Pain, but No Layoffs at Nucor,” BusinessWeek, accessed on March 7, 2017; “The Art of Motivation,” BusinessWeek, accessed on March 7, 2017; “About Us,” Nucor website, accessed on March 7, 2017; and Kathy Mayer, “Nucor Steel: Pioneering Mill in Crawfordsville Celebrates 20 Years and 30 Million Tons,” , accessed on March 7, 2017.

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8-4aDetermining Compensation

 is the financial remuneration given by the organization to its employees in exchange for their work. There are three basic forms of compensation used by most organizations. Wages are the hourly compensation paid to operating employees. The minimum hourly wage paid in the United States today is $7.25 (some states have higher minimums). Salary refers to compensation paid for total contributions, as opposed to pay based on hours worked. For example, managers and other professionals earn an annual salary, usually paid monthly. They receive this salary regardless of the number of hours they work. Finally, incentives represent special compensation opportunities that are directly tied to performance. Sales commissions and bonuses are among the most common incentives.

Compensation is an important and complex part of the organization–employee relationship. Basic compensation is necessary to provide employees with the means to maintain a reasonable standard of living. Beyond this, however, compensation also provides a tangible measure of the value of the individual to the organization. If employees do not earn enough to meet their basic economic goals, they will seek employment elsewhere. Likewise, if they believe that their contributions are undervalued by the organization, they may leave or exhibit poor work habits, low morale, and little commitment to the organization. Thus, designing an effective compensation system is clearly in the organization’s best interests.

A good compensation system can help attract qualified applicants, retain current employees, and stimulate high performance at a cost reasonable for a firm’s industry and geographic area. To set up a successful system, management must make decisions about wage levels, the wage structure, and the individual wage determination system. Some firms use recessions and similar economic downturns as opportunities to refine their compensation systems. For instance, during the 2009 recession many firms reduced their workforces through layoffs while others used targeted salary cuts to avoid layoffs. For instance, at Hewlett–Packard the CEO first cut his own salary by 20 percent. The firm’s very top performers kept their same pay levels. But others were given tiered salary cuts ranging from as little as 2.5 percent to as much as 20 percent. A few firms went even further., for instance, not only instituted pay cuts for all employees but also reduced the workweek by half a day.

Wage-Level Decision

The wage-level decision is a management policy decision about whether the firm wants to pay above, at, or below the going rate for labor in the industry or the geographic area. Most firms choose to pay near the average, although those that cannot afford more pay below average. Large, successful firms may like to cultivate the image of being “wage leaders” by intentionally paying more than average and thus attracting and keeping higher-talent employees. IBM, Netflix, and Google, for example, pay top dollar to get the new employees they want. McDonald’s and Walmart, on the other hand, often pay only slightly above the minimum wage. The level of unemployment in the labor force also affects wage levels. Pay generally declines (or remains flat) when labor is plentiful and increases when labor is scarce. Once managers make the wage-level decision, they need information to help set actual wage rates. Managers need to know what the maximum, minimum, and average wages are for particular jobs in the appropriate labor market. This information is collected by means of a wage survey. Area wage surveys can be conducted by individual firms or by local HR or business associations. Professional and industry associations often conduct surveys and make the results available to employers.

Wage Structure Decision

Wage structures are usually set up through a procedure called 
job evaluation
—an attempt to assess the worth of each job relative to other jobs. At Ben & Jerry’s Homemade, company policy once dictated that the highest-paid employee in the firm could not make more than seven times what the lowest-paid employee earned. But this policy had to be modified when the company found that it was simply unable to hire a new CEO without paying more than this amount. The simplest method for creating a wage structure is to rank jobs from those that should be paid the most (e.g., the president) to those that should be paid the least (e.g., a mail clerk or a janitor). In a smaller firm with few jobs (like Ben & Jerry’s, for example), this method is quick and practical, but larger firms with many job titles require more sophisticated methods. The next step is setting actual wage rates based on a combination of survey data and the wage structure that results from job evaluation. Jobs of equal value are often grouped into wage grades for ease of administration.

Individual Wage Decisions

After wage-level and wage structure decisions are made, the individual wage decision must be addressed. This decision concerns how much to pay each employee in a particular job. Although the easiest decision is to pay a single rate for each job, more typically a range of pay rates is associated with each job. For example, the pay range for an individual job might be $10.00 to $ 14.40 per hour, with different employees earning different rates within the range.

A system is then needed for setting individual rates. This may be done on the basis of seniority (enter the job at $10.00, for example, and increase 50 cents per hour every six months on the job), initial qualifications (inexperienced people start at $10.00; more experienced people start at a higher rate), or merit (raises above the entering rate are given for good performance). Combinations of these bases may also be used.

Numerous online resources affect compensation patterns today because both job seekers and current employees can more easily get a sense of what their true market value is. If they can document the claim that their value is higher than what their current employer now pays or is offering, they are in a position to lobby for a higher salary. Of course, the reverse may also be the case.

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8-4bDetermining Benefits

 are things of value other than direct compensation that the organization provides to its workers. (Benefits are sometimes called indirect compensation.) The average company once spent an amount roughly equal to a third of its wage and salary payroll on employee benefits. Thus an average employee who was paid, say, $60,000 per year averaged a bit over $20,000 more per year in benefits. Benefits come in several forms. Pay for time not worked includes sick leave, vacation, holidays, and unemployment compensation. Insurance benefits often include life and health insurance for employees and their dependents. Workers’ compensation is a legally required insurance benefit that provides medical care and disability income for employees injured on the job. Social security is a government pension plan to which both employers and employees contribute. Some employers also provide a private pension plan to which they and their employees contribute. Employee service benefits include extras such as tuition reimbursement and recreational opportunities.

Some organizations offer cafeteria benefit plans, whereby basic coverage is provided for all employees but employees are then allowed to choose which additional benefits they want (up to a cost limit based on salary). An employee with five children might choose enhanced medical and dental coverage for dependents, an unmarried employee might prefer more vacation time, and an older employee might elect increased pension benefits. Flexible systems are expected to encourage people to stay in the organization and even help the company attract new employees.

In response to economic pressures, many firms have gradually reduced employee benefits. These reductions have generally focused on cuts to health care coverage and/or reduced retirement plan contributions. For instance, during the 2008–2009 recession a number of major companies announced that they would reduce or eliminate employer contributions to employee retirement plans. Among these were Wells Fargo, Anheuser-Busch, Boise Cascade, Cooper Tire & Rubber, Kimberly-Clark, and Saks. And in 2012, both Ford and General Motors offered lump-sum payoffs to retired workers currently drawing defined pensions. Meanwhile, while the Affordable Healthcare Act was supposed to provide more health care coverage to more employees, major problems with its implementation raised new concerns. Further, efforts by the Republican Party to modify or overturn the act in 2017 have further complicated the health care situation for both employers and employees alike.

8-5Managing Workforce Diversity

Workforce diversity has become a very important issue in today’s world. The management of diversity in organizations is often seen as a key human resource function.

8-5aThe Meaning of Diversity

 exists in a community of people when its members differ from one another along one or more important dimensions. In the business world, the term diversity is generally used to refer to demographic differences among people—differences in gender, age, ethnicity, and so forth. For instance, the average age of the U.S. workforce is gradually increasing, and so is the number of women in the labor force. Likewise, the labor force reflects growing numbers of African Americans, Latinos, and Asians, as well as more dual-career couples, same-gender couples, single parents, and physically challenged employees.

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8-5bThe Impact of Diversity

There is no question that organizations are becoming ever more diverse. But how does this affect organizations? Diversity provides both opportunities and challenges for organizations.

Diversity as a Competitive Advantage

Many organizations have found that diversity can be a source of competitive advantage in the marketplace (in addition to the fact that hiring and promoting in such a way as to enhance diversity is simply the right thing to do). For instance, organizations that manage diversity effectively often have higher levels of productivity and lower levels of turnover and absenteeism. Likewise, organizations that manage diversity effectively become known among women and minorities as good places to work. These organizations are thus better able to attract qualified employees from among these groups. Organizations with a diverse workforce are also better able to understand different market segments than are less diverse organizations. For example, a cosmetics firm such as Avon, which wants to sell its products to women and African Americans, can better understand how to create such products and effectively market them if women and African-American managers are available to provide and solicit inputs into product development, design, packaging, advertising, and so forth. Finally, organizations with diverse workforces are generally more creative and innovative than other organizations.

Diversity as a Source of Conflict

Unfortunately, diversity in an organization can also create conflict. This conflict can arise for a variety of reasons. One potential source of conflict exists when an individual thinks that someone else has been hired, promoted, or fired primarily because of his or her diversity status. Another source of conflict is when diversity is misunderstood or misinterpreted or as a result of inappropriate interactions among people of different groups. Conflict may also arise if there is an environment of fear, distrust, or individual prejudice. Members of the dominant group in an organization may worry that newcomers from other groups pose a personal threat to their own position in the organization. For example, when U.S. firms have been taken over by foreign firms, U.S. managers have sometimes been resentful about or hostile toward foreign managers assigned to work with them. A final source of conflict exists when people are unwilling to accept people different from themselves. Personal bias and prejudices are still very real among some people today and can lead to potentially harmful conflict.

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8-5bManaging Diversity in Organizations

Because of the tremendous potential that diversity holds for competitive advantage, as well as the importance of trying to avoid the negative consequences of associated conflict, much attention has been focused in recent years on how individuals and organizations can function more effectively in diverse contexts.

Individual Strategies

One important element of managing diversity and multiculturalism in an organization consists of things that individuals themselves can do. Understanding, of course, is the starting point. For instance, although people need to be treated fairly and equitably, managers must understand that differences among people do, in fact, exist. Thus any effort to treat everyone the same, without regard for their fundamental human differences, will lead only to problems. People in an organization should also try to understand the perspectives of others. Further, even though people may learn to understand others, and even though they may try to empathize with others, the fact remains that they still may not accept or enjoy some aspect of their behavior. So, tolerance is also required. Finally, communication is also important. For example, suppose that a young employee has a habit of making jokes about the age of an older colleague. Perhaps the young colleague means no harm and is just engaging in what he or she sees as good-natured kidding. But the older employee may find the jokes offensive. If the two do not communicate, the jokes will continue, and the resentment will grow. Eventually, what started as a minor problem may erupt into a much bigger one.

Organizational Approaches

Whereas individuals are important in managing diversity and multiculturalism, the organization itself must also play a fundamental role. The starting point in managing diversity and multiculturalism is an organization’s policies that directly or indirectly affect how people are treated. Another aspect of organizational policies that affects diversity and multiculturalism is how the organization addresses and responds to problems that arise from differences among people. For example, consider the example of a manager charged with sexual harassment. If the organization’s policies put an excessive burden of proof on the individual being harassed and invoke only minor sanctions against the guilty party, it is sending a clear signal about the importance of such matters. But the organization that has a balanced set of policies for addressing questions like sexual harassment sends its employees a message that diversity and individual rights and privileges are important.

Organizations can also help manage diversity and multiculturalism through a variety of ongoing practices and procedures. Avon’s creation of networks for various groups represents one example of an organizational practice that fosters diversity. In general, the idea is that, because diversity and multiculturalism are characterized by differences among people, organizations can more effectively manage that diversity by following practices and procedures that are based on flexibility rather than on rigidity. Many organizations are finding that diversity and multicultural training is an effective means for managing diversity and minimizing its associated conflict. More specifically, 
diversity and multicultural training
 is designed to better enable members of an organization to function in a diverse and multicultural workplace. Some organizations even go so far as to provide language training for their employees as a vehicle for managing diversity and multiculturalism. Motorola, for example, provides English-language training for its foreign employees on assignment in the United States. At Pace Foods in San Antonio, with a total payroll of over 450 employees, staff meetings and employee handbooks are translated into Spanish for the benefit of the company’s 200 or so Latino employees.

Managing Labor Relations

Labor relations
 is the process of dealing with employees who are represented by a union. At one time, almost one-third of the entire U.S. labor force belonged to a labor union. Unions enjoyed their largest membership between 1940 and 1955. Membership began to steadily decline in the mid-1950s, though, for several reasons:

· (1)

increased standards of living made union membership seem less important,

· (2)

traditionally unionized industries in the manufacturing sector began to decline, and

· (3)

the globalization of business operations caused many unionized jobs to be lost to foreign workers.

This downward trend continued until 2008, when union membership rose by the largest amount in over a quarter century, a gain of 428,000 members. Much of this increase was attributable to fears of job insecurity due to the recession that hit that year. However, union membership began to decline again shortly thereafter and by 2017 only around 10.5 percent of the U.S. work force belonged to unions. Managing labor relations is an important part of HRM. However, most large firms have separate labor relations specialists to handle these activities apart from other human resource functions.

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8-6aHow Employees Form Unions

For employees to form a new local union, several things must occur. First, employees must become interested in having a union. Nonemployees who are professional organizers employed by a national union (such as the Teamsters or United Auto Workers [UAW]) may generate interest by making speeches and distributing literature outside the workplace. Inside, employees who want a union try to convince other workers of the benefits of a union.

The second step is to collect employees’ signatures on authorization cards. These cards state that the signer wishes to vote to determine whether the union will represent him or her. To show the NLRB that interest is sufficient to justify holding an election, 30 percent of the employees in the potential bargaining unit must sign these cards. Before an election can be held, however, the bargaining unit must be defined. The bargaining unit consists of all employees who will be eligible to vote in the election and to join and be represented by the union if one is formed.

The election is supervised by an NLRB representative (or, if both parties agree, the American Arbitration Association—a professional association of arbitrators) and is conducted by secret ballot. If a simple majority of those voting (not of all those eligible to vote) votes for the union, then the union becomes certified as the official representative of the bargaining unit. The new union then organizes itself by officially signing up members and electing officers; it will soon be ready to negotiate the first contract. The union-organizing process is diagrammed in Figure 8.4. If workers become disgruntled with their union or if management presents strong evidence that the union is not representing workers appropriately, the NLRB can arrange a decertification election. The results of such an election determine whether the union remains certified.

Figure 8.4The Union-Organizing Process

If employees of an organization want to form a union, the law prescribes a specific set of procedures that both employees and the organization must follow. Assuming that these procedures are followed and the union is approved, the organization must engage in collective bargaining with the new union.

A strike by a unionized workforce can be a debilitating event for any organization. Chris Langness is a machinist at the Boeing plant in Huntington Beach, California. He and 1,500 other members of the International Association of Machinists and Aerospace Workers (IAM) went on strike against Boeing when the two sides couldn’t reach agreement over health insurance premiums and retirement benefits.


Organizations usually prefer that employees not be unionized because unions limit management’s freedom in many areas. Management may thus wage its own campaign to convince employees to vote against the union. “Unfair labor practices” are often committed at this point. For instance, it is an unfair labor practice for management to promise to give employees a raise (or any other benefit) if the union is defeated. Experts agree that the best way to avoid unionization is to ‘simply’ practice good employee relations all the time—not just when threatened by a union election. Providing absolutely fair treatment with clear standards in the areas of pay, promotion, layoffs, and discipline; having a complaint or appeal system for persons who feel unfairly treated; and avoiding any kind of favoritism will help make employees feel that a union is unnecessary. Walmart strives to avoid unionization through these practices.

8-6bCollective Bargaining

The intent of 
collective bargaining
 is to agree on a labor contract between management and the union that is satisfactory to both parties. The contract contains agreements about issues such as wages, work hours, job security, promotion, layoffs, discipline, benefits, methods of allocating overtime, vacations, rest periods, and the grievance procedure. The process of bargaining may go on for weeks, months, or longer, with representatives of management and the union meeting to make proposals and counterproposals. The resulting agreement must be ratified by the union membership. If it is not approved, the union may strike to put pressure on management, or it may choose not to strike and simply continue negotiating until a more acceptable agreement is reached. For example, Verizon workers went on strike in 2016 in order to protect their pensions and health care benefits.

Occasionally circumstances cause management and labor to bargain over changes in existing contracts even before a new contract is needed. This is most likely to happen when unforeseen problems jeopardize the future of the business, and hence the jobs of union members. For example, when General Motors, Ford, and Chrysler were facing financial crisis in 2008–2009, the UAW agreed to contract concessions with the automakers to help give the firms the flexibility they claimed they needed to restructure their operations. Among others things, for instance, the UAW agreed to allow the companies to delay billions of dollars in payments for health care costs for retirees and to eliminate a controversial job bank program that allowed workers to get most of their wages even when they had been laid off.

grievance procedure
 is the means by which the contract is enforced. Most of what is in a contract concerns how management will treat employees. When employees feel that they have not been treated fairly under the contract, they file a grievance to correct the problem. The first step in a grievance procedure is for the aggrieved employee to discuss the alleged contract violation with her immediate superior. Often the grievance is resolved at this stage. If the employee still believes that she is being mistreated, however, the grievance can be appealed to the next level. A union official can help an aggrieved employee present her case. If the manager’s decision is also unsatisfactory to the employee, additional appeals to successively higher levels are made until, finally, all in-company steps are exhausted. The final step is to submit the grievance to binding arbitration. An arbitrator is a labor law expert who is paid jointly by the union and management. The arbitrator studies the contract, hears both sides of the case, and renders a decision that both parties must obey. The grievance system for resolving disputes about contract enforcement prevents any need to strike during the term of the contract.

8-7New Challenges in the Changing Workplace

As we have seen throughout this chapter, human resource managers face several ongoing challenges in their efforts to keep their organizations staffed with effective workforces. To complicate matters, new challenges arise as the economic and social environments of business change. We conclude this chapter with a look at two of the most important HRM issues facing business today.

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8-7aManaging Knowledge Workers

Employees traditionally added value to organizations because of what they did or because of their experience. In the “information age,” however, many employees add value because of what they know.

The Nature of Knowledge Work

These employees are usually called 
knowledge workers
, and the skill with which they are managed is a major factor in determining which firms will be successful in the future. Knowledge workers, including computer scientists, engineers, and physical scientists, provide special challenges for the HR manager. They tend to work in high-technology firms and are usually experts in some abstract knowledge base. They often like to work independently and tend to identify more strongly with their profession than with any organization—even to the extent of defining performance in terms recognized by other members of their profession.

As the importance of information-driven jobs grows, the need for knowledge workers continues to grow as well. But these employees require extensive and highly specialized training, and not every organization is willing to make the human capital investments necessary to take advantage of these jobs. In fact, even after knowledge workers are on the job, retraining and training updates are critical to prevent their skills from becoming obsolete. It has been suggested, for example, that the “half-life” of a technical education in engineering is about three years. The failure to update such skills will not only result in the loss of competitive advantage but also increase the likelihood that the knowledge worker will go to another firm that is more committed to updating them.

Knowledge Worker Management and Labor Markets

Even though overall demand for labor has remained relatively stable in recent years, the demand for knowledge workers remains strong. As a result, organizations that need these workers must introduce regular market adjustments (upward) to pay them enough to keep them. This is especially critical in areas in which demand is growing, as even entry-level salaries for these employees are high. Once an employee accepts a job with a firm, the employer faces yet another dilemma. Once hired, workers are more subject to the company’s internal labor market, which is not likely to be growing as quickly as the external market for knowledge workers as a whole. Consequently, the longer an employee remains with a firm, the further behind the market his or her pay falls—unless, of course, it is regularly adjusted (upward).

Not surprisingly, strong demand for these workers has inspired some fairly extreme measures for attracting them in the first place. High starting salaries and sign-on bonuses are common. BP Exploration was recently paying starting petroleum engineers with undersea platform-drilling knowledge—not experience, just knowledge—salaries in the six figures, plus sign-on bonuses of over $50,000 and immediate profit sharing. Even with these incentives, HR managers complain that, in the Gulf Coast region, they cannot retain specialists because young engineers soon leave to accept sign-on bonuses with competitors.

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8-7bContingent and Temporary Workers

A final contemporary HR issue of note involves the use of contingent or temporary workers. Indeed, recent years have seen an explosion in the use of such workers by organizations. The FBI, for example, routinely employs a cadre of retired agents in various temporary jobs.

Trends in Contingent and Temporary Employment

In recent years, the number of contingent workers in the workforce has increased dramatically. A contingent worker is a person who works for an organization on something other than a permanent or full-time basis. Categories of contingent workers include independent contractors, on-call workers, temporary employees (usually hired through outside agencies), and contract and leased employees. Another category is part-time workers. The financial services giant Citigroup, for example, makes extensive use of part-time sales agents to pursue new clients.

Managing Contingent and Temporary Workers

Given the widespread use of contingent and temporary workers, HR managers must understand how to use such employees most effectively. In other words, they need to understand how to manage contingent and temporary workers. One key is careful planning. Even though one of the presumed benefits of using contingent workers is flexibility, it is still important to integrate such workers in a coordinated fashion. Rather than having to call in workers sporadically and with no prior notice, organizations try to bring in specified numbers of workers for well-defined periods of time. The ability to do so comes from careful planning.

A second key is understanding contingent workers and acknowledging both their advantages and their disadvantages. In other words, the organization must recognize what it can and cannot achieve from the use of contingent and temporary workers. Expecting too much from such workers, for example, is a mistake that managers should avoid. Third, managers must carefully assess the real cost of using contingent workers. We noted earlier, for example, that many firms adopt this course of action to save labor costs. The organization should be able to document precisely its labor-cost savings. How much would it be paying people in wages and benefits if they were on permanent staff? How does this cost compare with the amount spent on contingent workers? This difference, however, could be misleading. We also noted, for instance, that contingent workers might be less-effective performers than permanent and full-time employees. Comparing employee for employee on a direct-cost basis, therefore, is not necessarily valid. Organizations must learn to adjust the direct differences in labor costs to account for differences in productivity and performance.

Finally, managers must fully understand their own strategies and decide in advance how they intend to manage temporary workers, specifically focusing on how to integrate them into the organization. On a very simplistic level, for example, an organization with a large contingent workforce must make some decisions about the treatment of contingent workers relative to the treatment of permanent, full-time workers. Should contingent workers be invited to the company holiday party? Should they have the same access to such employee benefits as counseling services and childcare? There are no right or wrong answers to such questions. Managers must understand that they need to develop a strategy for integrating contingent workers according to some sound logic and then follow that strategy consistently over time.

Indeed, this last point has become part of a legal battleground in recent years as some workers hired under the rubric of contingent workers have subsequently argued that this has been a title in name only, and that their employers use this title to discriminate against them in various ways. For instance, FedEx relies on over 8,800 “contract” drivers. These individuals wear FedEx uniforms, drive FedEx trucks, and must follow FedEx rules and procedures. However, because the firm has hired them under a different employment agreement than its “regular” employees, it does not provide them with benefits. Some of those individuals have taken legal action against FedEx on the grounds that, for all practical purposes, they are employees and should enjoy the same benefits as other drivers. To date FedEx has managed to settle these actions out of court but the underlying issues remain.

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Chapter Review

Summary of Learning Outcomes and Key Points

1. Describe the environmental context of HRM, including its strategic importance and its relationship with legal and social factors.

· HRM is concerned with attracting, developing, and maintaining the human resources that an organization needs.

· Its environmental context consists of its strategic importance and the legal and social environments that affect HRM.

· Discuss how organizations attract human resources, including human resource planning, recruiting, and selecting.

· Attracting human resources is an important part of the HRM function.

· Human resource planning starts with job analysis and then focuses on forecasting the organization’s future need for employees, forecasting the availability of employees both within and outside the organization, and planning programs to ensure that the proper number and type of employees will be available when needed.

· Recruitment and selection are the processes by which job applicants are attracted, assessed, and hired.

· Methods for selecting applicants include application blanks, tests, interviews, and assessment centers.

· Any method used for selection should be properly validated.

2. Describe how organizations develop human resources, including training and development, performance appraisal, and performance feedback.

· Organizations must also work to develop their human resources.

· Training and development enable employees to perform their present job effectively and to prepare for future jobs.

· Performance appraisals are important for validating selection devices, assessing the impact of training programs, deciding pay raises and promotions, and determining training needs.

· Both objective and judgmental methods of appraisal can be applied, and a good system usually includes several methods.

· The validity of appraisal information is always a concern, because it is difficult to accurately evaluate the many aspects of a person’s job performance.

3. Discuss how organizations maintain human resources, including the determination of compensation and benefits and career planning.

· Maintaining human resources is also important.

· Compensation rates must be fair compared with rates for other jobs within the organization and with rates for the same or similar jobs in other organizations in the labor market.

· Properly designed incentive or merit pay systems can encourage high performance, and a good benefits program can help attract and retain employees.

· Career planning is also a major aspect of HRM.

4. Discuss the nature of diversity, including its meaning, associated trends, impact, and management.

· Diversity exists in an organization when its members differ from one another along one or more important dimensions, including gender, age, and ethnicity.

· Individual strategies for managing diversity include being understanding, tolerant, and communicative with those who are different.

· Organizational strategies include having fair policies, practices, and procedures; providing diversity training; and maintaining a tolerant culture.

5. Discuss labor relations, including how employees form unions and the mechanics of collective bargaining.

· If a majority of a company’s nonmanagement employees so desire, they have the right to be represented by a union.

· Management must engage in collective bargaining with the union in an effort to agree on a contract.

· While a union contract is in effect, the grievance system is used to settle disputes with management.

6. Describe the issues associated with managing knowledge and contingent and temporary workers.

· Two important new challenges in the workplace include:

· the management of knowledge workers.

· issues associated with the use of contingent and temporary workers.

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Chapter Review

Discussion Questions

Questions for Review

1. Describe the steps in the process of human resource planning. Explain the relationships between the steps.

2. Describe the common selection methods. Which method or methods are the best predictors of future job performance? Which are the worst? Why?

3. Compare training and development, noting any similarities and differences. What are some commonly used training methods?

4. Define wages and benefits. List different benefits that organizations can offer. What are the three decisions that managers must make to determine compensation and benefits? Explain each decision.

5. What are the potential benefits of diversity? How can individuals and organizations more effectively manage diversity?

Questions for Analysis

1. The Family and Medical Leave Act of 1993 is seen as providing much-needed flexibility and security for families and workers. Others think that it places an unnecessary burden on business. Yet another opinion is that the act hurts women, who are more likely to ask for leave, and shuffles them off to a low-paid “mommy track” career path. In your opinion, what are the likely consequences of the act? You can adopt one of the viewpoints expressed above or develop another. Explain your answer.

2. How do you know a selection device is valid? What are the possible consequences of using invalid selection methods? How can an organization ensure that its selection methods are valid?

3. Consider a job that you have held or with which you are familiar. Describe how you think an organization could best provide an RJP for that position. What types of information and experiences should be conveyed to applicants? What techniques should be used to convey the information and experiences?

4. How would managing nonunionized workers differ from managing workers who elected to be in a union? Which would be easier? Why?

5. In what ways would managing temporary workers be easier than managing traditional permanent employees? In what ways would it be more difficult? What differences would likely exist in your own behavior if you were in a contingent or temporary job versus a traditional permanent job?

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Chapter Review

Experiential Exercise

Choosing a Compensation Strategy

Purpose: This exercise helps you better understand how internal and external market forces affect compensation strategies.

Introduction: Assume that you are the head of a large academic department in a major research university. Your salaries are a bit below external market averages. For example, your assistant professors make between $45,000 and $55,000 a year, your associate professors make between $57,000 and $65,000 a year, and your full professors make between $80,000 and $90,000 a year.

Faculty who have been in your department for a long time enjoy the work environment and appreciate the low cost of living in the area. They know that they are somewhat underpaid but have tended to regard the advantages of being in your department as offsetting this disadvantage. Recently, however, external market forces have caused salaries for people in your field to escalate rapidly. Unfortunately, although your university acknowledges this problem, you have been told that no additional funds will be provided to your department.

You currently have four vacant positions that need to be filled. One of these is at the rank of associate professor, and the other three are at the rank of assistant professor. You have surveyed other departments in similar universities, and you realize that to hire the best new assistant professors, you will need to offer at least $60,000 a year and that to get a qualified associate professor, you will need to pay at least $70,000. You have been given the budget to hire new employees at more competitive salaries but cannot do anything to raise the salaries of faculty currently in your department. You have identified the following options:

1. You can hire new faculty from lower-quality schools. They will likely accept salaries below market rate.

2. You can hire the best people available, pay market salaries, and deal with internal inequities later.

3. You can hire fewer new faculty, use the extra money to boost the salaries of your current faculty, and cut class offerings in the future.


1. Step 1

Working alone, decide how you will proceed.

2. Step 2

Form small groups with your classmates, and compare solutions.

3. Step 3

Identify the strengths and weaknesses of each option.

Follow-Up Questions:

1. Are there other options that might be pursued?

2. Assume that you chose Option 2. How would you go about dealing with the internal inequity problems?

3. Discuss with your instructor the extent to which this problem exists at your school.

Chapter Review

Building Effective Technical Skills

Exercise Overview

Technical skills are necessary to understand or perform the specific kind of work that an organization does. In many organizations, this work includes hiring appropriate people to fill positions. This exercise will help you apply certain technical skills to the process of employee selection.

Exercise Background

You may choose either of the following exercise variations. We tend to favor Variation 1 because the exercise is usually more useful if you can relate to real job requirements on a personal level.

Variation 1. If you currently work or have worked in the past, select two jobs with which you have some familiarity. Try to select one job that entails relatively low levels of skill, responsibility, education, and pay and one job that entails relatively high levels in the same categories.

Variation 2. If you’ve never worked or you’re not personally familiar with an array of jobs, assume that you’re a manager of a small manufacturing plant. You need to hire people to fill two jobs. One job is for a plant custodian to sweep floors, clean bathrooms, empty trash cans, and so forth. The other job is for an office manager who will supervise a staff of three clerks and secretaries, administer the plant payroll, and coordinate the administrative operations of the plant.

Exercise Task

Reviewing what you’ve done so far, now do the following:

1. Identify the most basic skills needed to perform each of the two jobs effectively.

2. Identify the general indicators or predictors of whether a given individual can perform each job.

3. Develop a brief set of interview questions that you might use to determine whether an applicant has the qualifications for each job.

4. How important is it for you, as a manager hiring an employee to perform a job, to possess the technical skills needed to perform the job that you’re trying to fill?

Chapter Review

Management at Work

Elementary, Watson

In January 2012, Geoff Colvin, a longtime editor at Fortune magazine and a respected commentator on economics and infotech, agreed to play a special game of Jeopardy. The occasion was the annual convention of the National Retail Federation in New York, and Colvin’s opponents were a woman named Vicki and an empty podium with the name tag “Watson.” Watson’s sponsors at IBM wanted to show retailers how smart Watson is. “I wasn’t expecting this to go well,” recalls Colvin, who knew that Watson had already defeated Jeopardy’s two greatest champions. As it turned out, it was even worse than he had expected. “I don’t remember the score,” says Colvin, “but at the end of our one round I had been shellacked.”

Obviously, Watson isn’t your average Jeopardy savant. It’s a cognitive computing system that can handle complex problems in which there is ambiguity and uncertainty and draw inferences from data in a way that mimics the human brain. In short, it can deal with the kinds of problems faced by real people. Watson, explains Colvin, “is not connected to the Internet. It’s a freestanding machine just like me, relying only on what it knows… . So let’s confront reality: Watson is smarter than I am.”

Watson is also smarter than anyone who’s ever been on Jeopardy, but it’s not going to replace human gameshow contestants any time soon. Watson, however, has quite an impressive skill set beyond its game-playing prowess. For example, it has a lot to offer to medical science. At the University of Texas, Watson is employed by the MD Anderson Cancer Center’s “Moon Shots” program, whose stated goal is the elimination of cancer. This version of Watson, says John Kelly, who oversees the development of IBM’s microelectronics technologies, including Watson, is already “dramatically faster” than the one that was introduced on Jeopardy back in February 2011 (about three times as fast).

Already, reports Kelly, “Watson has ingested a large portion of the world’s medical information,” and it’s currently “in the final stages of learning the details of cancer.” Then what? “Then Watson has to be trained,” explains Kelly. Here’s how it works: Watson is presented with complex health care problems where the treatment and outcome are known. So you literally have Watson try to determine the best diagnosis or therapy. And then you look to see whether that was the proper outcome. You do this several times, and the learning engines in Watson begin to make connections between pieces of information. The system learns patterns, it learns outcomes, it learns what sources to trust (emphasis added).

Working with Watson, doctors at the Anderson Center, who are especially interested in leukemia, have made significant headway in their efforts to understand and treat the disease. Watson’s role in this process has been twofold:

1. Expanding capacity: It helps to make sense out of so-called big data—the mountain of text, images, and statistics that, according to Kelly, “is so large that traditional databases and query systems can’t deal with it.” Moreover, says Kelly, big data is “unstructured” and flows “at incredible speeds… . With big data, we’re not always looking for precise answers; we’re looking for information that will help us make decisions.”

2. Increasing speed: Kelly also points out that “Watson can do in seconds what would take people years.” The system can, for example, process 500GB of information—the equivalent of a million books—per second. When it comes to making sense out of the enormous amount of data concerning the genetic factors in cancer, says Kelly, “Watson is like big data on steroids.”

Clearly, however, Watson is not replacing “knowledge workers” (doctors) at the Anderson Center. Rather, it’s being used to augment their knowledge work. In this respect, argues Thomas H. Davenport, a widely recognized specialist in knowledge management, Watson is confirming “one of the great clichés of cognitive business technology—that it should be used not to replace knowledge workers, but rather to augment them.” On the one hand, even Davenport admits that some jobs have been lost to cognitive technology. In the field of financial services, for instance, “many lower-level” decision makers—loan and insurance-policy originators, credit-fraud detectors—have been replaced by automated systems. At the same time, however, Davenport observes that “experts” typically retain the jobs that call for “reviewing and refining the rules and algorithms [generated by] automated decision systems.”

Likewise, human data analysts can create only a few statistical models per week, while machines can churn out a couple of thousand. Even so, observes Davenport, “there are still hundreds of thousands of jobs open for quantitative analysts and big data specialists.” Why? “Even though machine learning systems can do a lot of the grunt work,” suggests Davenport, “data modeling is complex enough that humans still have to train the systems in the first place and check on them occasionally to see if they’re making sense.”

Colvin, however, isn’t sure that these trends will hold true for much longer. Two years after he competed against Watson, Colvin reported that “Watson is [now] 240 percent faster. I am not.” He adds that by 2034—when Watson will probably be an antiquated curiosity—its successors will be another 32 times more powerful. “For over two centuries,” admits Colvin, “practically every advance in technology has sparked worries that it would destroy jobs, and it did… . But it also created even more new jobs, and the improved technology made those jobs more productive and higher paying… . Technology has lifted living standards spectacularly.”

Today, however, Colvin is among many experts who question the assumption that the newest generations of technologies will conform to the same pattern. “Until a few years ago,” acknowledges former Treasury Secretary Larry Summers, “I didn’t think [technological job loss] was a very complicated subject. I’m not so completely certain now.” Microsoft founder Bill Gates, on the other hand, is not quite so ambivalent: “Twenty years from now,” predicts Gates, “labor demand for lots of skill sets will be substantially lower. I don’t think people have that in their mental model.”

According to Colvin, today’s technology already reflects a different pattern in job displacement: It’s “advancing steadily into both ends of the spectrum” occupied by knowledge workers, replacing both low- and high-level positions and “threatening workers who thought they didn’t have to worry.” Take lawyers, for instance. In the legal-discovery process of gathering information for a trial, computers are already performing the document-sorting process that can otherwise require small armies of attorneys. They can scan legal literature for precedents much more thoroughly and will soon be able to identify relevant matters of law without human help. Before long, says Colvin, they “will move nearer to the heart of what lawyers do” by offering better advice on such critical decisions as whether to sue or settle or go to trial.

So what appears to be the long-term fate of high-end knowledge workers? Davenport thinks that the picture is “still unclear,” but he suggests that, in order to be on the safe side, would-be knowledge workers should consider reversing the cliché about technology as a means of augmenting human activity: “If there is any overall lesson” to be learned from current trends, “it is to make sure you are capable of augmenting an automated system. If the decisions and actions that you make at work are remarkably similar to those made by a computer, that computer will probably be taking your paycheck before long.”

Case Questions

1. These days, according to more and more experts, “every worker is a knowledge worker.” Consider the definition of knowledge workers in the text: “workers whose contributions to an organization are based on what they know.” In what sense might just about any employee qualify as a “knowledge worker”? For example, what qualifies as “knowledge” in an organization’s operational activities (i.e., in the work of creating its products and services)? What’s the advantage to an organization of regarding all employees as knowledge workers?

2. Review the sections in Chapter 4 entitled “Decision-Making Defined” and “Decision-Making Conditions.” Why are computers, especially cognitive computing systems, so effective in assisting the decision-making process? In particular, how can they increase the likelihood of good decisions under conditions of risk and uncertainty?

3. “The overwhelming message,” says Geoff Colvin, seems to be that no one is safe. Technological unemployment… . may finally be here. But even if that’s true… . it will also be true that, as always, technology is making some skills more valuable and others less so… . Which skills will be the winners? Colvin supplies at least one answer to his own question: “It just seems common sense that the skills that computers can’t acquire—forming emotional bonds, making human judgments—will be valuable.” Thomas Davenport agrees: “It’s probably not a bad idea,” he suggests, “to improve your human-relationship skills.”

Think of a few jobs in which the application of “human-relationship skills” is important—even absolutely necessary. Explain why these jobs require more than just decision-making skills. How about you? Does the job that you want require good human-relationship skills? Do your human-relationship skills need some improvement? What sort of things can you do to improve them?

4. Science journalist Patrick J. Kiger reports that students of the future are likely to have it a lot easier because digital textbooks equipped with artificial intelligence capabilities will guide them along with the patience and perceptiveness of their favorite kindly professors. Take the newly developed Inquire intelligent biology textbook for the iPad. It allows students to stop and type in a question like “What does a protein do?” and then presents them with a page full of information specific to whatever concept they’re stuck on. Using “What does a protein do?” as a model, think of three questions that you would like to ask this book about topics in this chapter. Explain why you chose the questions that you did and what sort of information you’d find helpful in response to each of your questions.

Case References

Geoff Colvin, “In the Future, Will There Be Any Work Left for People to Do?” Fortune, June 16, 2014,, accessed on March 7, 2017; Larry Greenemeier, “Will IBM’s Watson Usher in a New Era of Cognitive Computing?” Scientific American, November 13, 2013,, accessed on March 7, 2017; Thomas H. Davenport, “Cognitive Technology—Replacing or Augmenting Knowledge Workers?” Wall Street Journal, June 18, 2014,, accessed on March 7, 2017; Marcelo Dascal and Itiel Dror, “The Impact of Cognitive Technologies: Towards a Pragmatic Approach,” Pragmatics & Cognition 13:3 (2005), 451–457,, accessed on March 7, 2017; and “IBM’s Supercomputer Watson to Help Fight Brain Cancer,” BBC News Technology, March 20, 2014,, accessed on March 7, 2017.

Chapter Review

You Make the Call: No Company for Old-Fashioned Management

1. If you were an HR executive at Wegmans, would you focus more on internal recruiting or on external recruiting? Would your strategy for higher-level positions differ from your strategy for lower-level positions? How would current economic conditions influence your strategy?

2. As an HR executive at Wegmans, you need to hire a group of new employees as part of your management-trainee program—people who will be put on a track leading, ultimately, to positions as store managers. Briefly outline your program for developing these employees.

3. If you were an employee at Wegmans, how would you expect your annual performance appraisal to be conducted? Given the company’s customer-relations strategy, which appraisal methods do you think would be most appropriate?

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