Management, 5th Asia-Pacific Edition 9780170259798

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MANAGEMENT

5TH ASI A-PACI FI C EDITION

DANNY SA MSON

MANAGEMENT RICHARD L. DAFT

Management 5th Edition Danny Samson Richard L. Daft

© 2015 Cengage Learning Australia Pty Limited

Publishing manager: Dorothy Chiu Publishing editor: Michelle Aarons Developmental editor: Duncan Campbell-Avenell Senior project editor: Nathan Katz Cover designer: Emilie Pfitzner Text designer: Leigh Ashforth (Watershed Design) Editor: Anne Mulvaney Proofreader: James Anderson Indexer: Russell Brooks Permissions/Photo researcher: Wendy Duncan Art direction: Danielle Maccarone Cover: iStockphoto/Arda Guldogan; Shutterstock.com/Ivelin Radkov Typeset by MPS Limited

Copyright Notice This Work is copyright. No part of this Work may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without prior written permission of the Publisher. Except as permitted under the Copyright Act 1968, for example any fair dealing for the purposes of private study, research, criticism or review, subject to certain limitations. These limitations include: Restricting the copying to a maximum of one chapter or 10% of this book, whichever is greater; providing an appropriate notice and warning with the copies of the Work disseminated; taking all reasonable steps to limit access to these copies to people authorised to receive these copies; ensuring you hold the appropriate Licences issued by the Copyright Agency Limited (“CAL”), supply a remuneration notice to CAL and pay any required fees. For details of CAL licences and remuneration notices please contact CAL at Level 15, 233 Castlereagh Street, Sydney NSW 2000, Tel: (02) 9394 7600, Fax: (02) 9394 7601 Email: [email protected] Website: www.copyright.com.au

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First published as Management by Dryden Press in 2000. Authorised adaptation of the fifth edition by the Dryden Press, Orlando, Florida.

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Adaptation first published in 2003 Second edition published in 2005 Third edition published in 2008 Fourth edition published in 2012 This fifth edition published in 2015 Part-opening images courtesy of: iStockphoto/nickp37 (boxer); iStockphoto/Goldmund (fencer); iStockphoto/MichaelSvoboda (runner/swimmer); iStockphoto/woraput (golfer); Shutterstock. com/Fisher Photostudio (tennis).

National Library of Australia Cataloguing-in-Publication Data Author: Samson, Danny, author. Title: Management / Danny Samson, Richard L. Daft. Edition: 5th edition. ISBN: 9780170259798 (paperback) Notes: Includes bibliographical references and index. Subjects: Industrial management--Textbooks. Management--Textbooks. Other Authors/Contributors: Daft, Richard L, author. Dewey Number: 658

Cengage Learning Australia Level 7, 80 Dorcas Street South Melbourne, Victoria Australia 3205 Cengage Learning New Zealand Unit 4B Rosedale Office Park 331 Rosedale Road, Albany, North Shore 0632, NZ For learning solutions, visit cengage.com.au Printed in China by China Translation & Printing Services. 1 2 3 4 5 6 7 18 17 16 15 14

Brief contents

Part one

Part two

I nnovative M anag e m ent for a Chan g in g World

1

1 The changing world of management 2 The evolution of management thinking

2 48

Th e Environm ent of M anag e m ent

87

3 The environment and corporate culture 4 Managing in a global environment 5 Ethics, social responsibility and sustainable development 6 The environment of entrepreneurship and small-business management

Part three Plannin g 7 Organisational planning and goal setting 8 Strategy formulation and implementation 9 Managerial decision making

Part four O rganisin g 10 11 12 13

Fundamentals of organising Managing change and innovation Human resource management Managing diversity

Part five L e adin g 14 15 16 17 18

Individual behaviour in organisations Leading in organisations Motivating employees Communication in organisations Teamwork in organisations

Part Six Controllin g 19 Managerial and quality control 20 Managing the value chain, information technology and e-business Capstone Chapter: Making effective management happen

88 134 178 224

269 270 308 350

387 388 432 476 516

555 556 602 644 684 724

759 760 798 836

v

Contents

Preface XVI Resources guide XX Features matrix XXVI Acknowledgements XXVIII About the authors XXIX

Part One

Innovative M anagement for a Changing World 1 Chapter 1

the changing world of management

Why innovative management matters_____________________6 Current challenges for managers________________________6 Challenges for government 6 Challenges for business 7 Challenges for the individual employee 9 Managers who make a difference__________________________9 The definition of management______________________________10 The four management functions___________________________11 Planning 11 Organising 13 Leading 13 Controlling 14 Organisational performance_______________________________ 15 Management skills________________________________________________ 17 Conceptual skills 18 Human skills 18 Technical skills 19 When skills fail 20 Management types_________________________________________________ 21 Vertical differences 22 Horizontal differences 23 What is it like to be a manager?_____________________________ 24 Making the leap: becoming a new manager 24 Manager activities_______________________________________________ 26 Adventures in multitasking 26 Life on speed dial 27 Where does a manager find the time? 28 Manager roles 29

2

Managing in small businesses and not-for-profit organisations_____________________________ 32 State-of-the-art management competencies_________ 34 Turbulent times: managing crises and unexpected events________________________________________ 36 Stay calm 36 Be visible 36 Put people before business 36 Tell the truth 36 Know when to get back to business 37 Australia’s managers: improving from a low base____________________________________________________________ 38 Manager strengths 38 Manager weaknesses 38 Sustainable development: now a core issue for managers_______________________________________________________41 Discussion questions 43 Ethical challenge 43 »» Can management afford to look the other way?

Group challenge »» Your best and worst managers

Case for critical analysis »» SharpStyle Salons

On the job video case »» C  amp Bow Wow: Innovative management for a changing world

Classical perspective___________________________________________ 55 Scientific management 56 Bureaucratic organisations 57 Administrative principles 59 Humanistic perspective_________________________________________61 Early advocates 61

vi

44

44 44

45 45

CourseMate 47 Chapter Case Studies

India: A hotbed of competition for mobile phones Extraordinary crisis management

Chapter 2 The evolution of management thinking Management and organisation____________________________ 53

43

44

12 37

48

The human relations movement The human resources perspective The behavioural sciences approach Management science

61 63 66 67

Recent historical trends_____________________________________ 69 Systems thinking 69 Contingency view 70 Total quality management 71

Innovative management thinking for a changing world________________________________________________72 Contemporary management tools 72 Managing the technology-driven workplace 74 The shifting world of e-business 74 Knowledge management 76 Social media programs 76 Sustainable development and management thinking_______________________________________________________________ 78 Discussion questions 80 Ethical challenge 80 »» The supervisor

Group challenge »» Turning points on the road to management

Case for critical analysis »» More hassle from HR?

80

On the job video case

82

»» B  arcelona Restaurant Group: The evolution of management thinking

82

CourseMate 84 Chapter Case Studies

Switching to green power Brumby’s Bakeries cooking along Atlassian: supporting collaboration and innovation Enjo: a friend of its customers

51 68 75 77

Continuing case: General Motors Part One: Introduction to Management______________________________ 85

81 81

81 81

Part T wo

The environment of management 87 Chapter 3 The environment and corporate culture The external environment___________________________________ 92 General environment 93 Task environment 101 The organisation–environment relationship_______________________________________________________ 105 Environmental uncertainty 105 Adapting to the environment 106 Influencing the environment 110 The internal environment: corporate culture______________________________________________ 112 Symbols 115 Stories 116 Heroes 116 Slogans 116 Ceremonies 117 Types of culture___________________________________________________118 Adaptability culture 118 Achievement culture 120 Involvement culture 120 Consistency culture 120

88

Shaping corporate culture for innovative response______________________________________122 Managing the high-performance culture 122 Cultural leadership 124 Changing and merging corporate cultures 125 Sustainable development and the business environment____________________________________127 Discussion questions 128 Ethical challenge 129 »» Competitive intelligence predicament

Group challenge »» Should you go global?

Case for critical analysis On the job video case »» C  amp Bow Wow: The environment and corporate culture

129

129 129

130 130 130

CourseMate 133 Chapter Case Studies

Growing a business from scratch: lavender! 102 Green power 114 McDonald’s 119

Chapter 4 Managing in a global environment

134

A borderless world____________________________________________ 139 Globalisation 140 Developing a global mindset 142

Outsourcing 149 Licensing 149 Direct investing 150

Multinational corporations______________________________ 143

The international business environment________________________________________________________ 151

Globalisation backlash______________________________________ 145 Serving the bottom of the pyramid (BOP) 145 Getting started internationally_________________________ 148 Exporting 148

The economic environment_________________________________152 Economic development 152 Infrastructure 153

contents

vii

Economic interdependence Resource and product markets Exchange rates Inflation, interest rates and economic growth

153 155 155 155

The legal–political environment________________________ 156 Political risk 156 Political instability 157 Laws and regulations 157 The sociocultural environment_________________________ 158 Social values 158 Communication differences 163 The changing international landscape___________________________________________________________ 164 China, Inc. 164 India, the service giant 165 Brazil’s growing clout 165 International trade alliances 166

Sustainable development: a global issue and opportunity_________________________________________________________ 171 Discussion questions 172 Ethical challenge 173 »» Quality or closing

Group challenge »» Considerations for overseas expansion

Case for critical analysis

173

173 173

174

»» Shui Fabrics

174

On the job video case

175

»» Holden Outerware: Managing in a global environment175

CourseMate 177 Chapter Case Studies

Shifting international services and jobs The axis of India Globalising from an Australian base LG Electronics

139 142 144 170

Chapter 5 Ethics, social responsibility and sustainable development  178 What is managerial ethics?___________________________________181 Ethical management today 183

Managerial ethics and sustainable development in Australia____________________________________ 210

Ethical dilemmas: what would you do?________________ 185

Organisational sustainable development___________ 210 The ‘why’ of sustainable development 212 The ‘what’ of sustainable development 213 The ‘when’ of sustainable development 214

Criteria for ethical decision making__________________ 186 Utilitarian approach 186 Individualism approach 187 Moral rights approach 187 Justice approach 187 Practical approach 188 The individual manager and ethical choices______ 189 The organisation 193 What is corporate social responsibility?____________ 194

Taking managerial action on sustainable development_____________________________________215 Discussion questions 216 Ethical challenge 217 »» What is right?

Group challenge »» Ethics and business costs

Organisational stakeholders_____________________________ 195

Case for critical analysis

The green movement___________________________________________ 199 Sustainability and the triple bottom line 200

On the job video case

Evaluating corporate social responsibility________ 201 Managing company ethics and social responsibility___________________________________________203 Codes of ethics 205 Ethical structures 206 Whistle-blowing 207 The business case for ethics and social responsibility __________________________________________207

»» Too much intelligence? »» Theo Chocolate: managing ethics and social responsibility

217

218 218

218 218

219 219

CourseMate 222 Chapter Case Studies

Philanthropy goes up a gear Ecomagination A leadership dilemma at Timberland A crisis to milk

186 199 201 209

Chapter 6 The environment of entrepreneurship and small-business management 224 What is entrepreneurship?__________________________________ 227 Entrepreneurship as an option 229

Social entrepreneurship: an innovative approach to small business________________________________242

Entrepreneurship internationally_____________________ 229 Entrepreneurship and the business environment 231 Impact of entrepreneurial organisations 233 Organisational innovation 235

Starting an entrepreneurial firm_______________________245 Start with the new-business idea 245 The business plan 246 Choosing a legal structure 247 Arranging financing 249 Tactics for becoming a business owner 251 Starting an online business 254

Who are entrepreneurs? ____________________________________ 239 Traits of entrepreneurs 240

viii

contents

Stages of growth________________________________________________ 257 Planning 258 Organising 258 Decision making 259 Leading 259 Controlling 260 Intrapreneurship in a growing business_____________ 262 Sustainability and the small or start-up organisation______________________________________________________ 263 Discussion questions 264 Ethical challenge 264 »» To grow or not to grow?

Group challenge

264

265

»» What counts?

265

Case for critical analysis

265

»» Emma’s Parlour

On the job video case

266

»» Urban Escapes: managing small business start-ups

266

Chapter Case studies

Cleanevent (division of Spotless Group) 233 Competitive innovation in the mining industry 238 Wesfarmers 239 HealthMastery: entrepreneurship in the NZ health services industry 245 Entrepreneurship in solar energy 250 The high and lows of franchising entrepreneurship 252 Franchises in Australia and New Zealand 253 Entrepreneurship: from ‘sparky’ to CEO 257 Continuing case: General Motors Part Two: The environment of management_______________________268

265

part thr ee

Pl anning 269 Chapter 7 Organisational planning and goal setting 270 Goals, plans and performance___________________________ 273 Messages and values contained in goals and plans 274 Goals in organisations_______________________________________ 277 Organisational mission 277 Planning a digital strategy 279 Goals and plans 279 Aligning goals with strategy maps 282 Aligned hierarchy of goals 283 Criteria for effective goals________________________________285 Management by objectives 287 Single-use and standing plans 291 Benefits and limitations of planning__________________ 293 Planning in a turbulent environment________________294 Contingency plans 294 Scenario planning 294 Crisis planning___________________________________________________ 295 Prevention 295 Preparation 295 Containment 297

Planning time horizons______________________________________298 The new planning approach________________________________299 Traditional approaches to planning 299 Modern approaches to planning 300 Innovative approaches to planning 300 Sustainable development and goal setting_________303 Discussion questions 304 Ethical summary 304 »» Repair or replace?

Group challenge »» Course goal setting

Case for critical analysis

304

305 305

305

»» HID 305

On the job video case

306

»» Modern Shed: managerial planning and goal setting 306

Chapter Case Studies

Planning and implementing an amazing country growth strategy Siemens

286 289

Chapter 8 Strategy formulation and implementation 308 Thinking strategically_________________________________________ 311 What is strategic management? 312 Purpose of strategy 312 Levels of strategy 317

Formulating corporate-level strategy______________ 326 The portfolio strategy 326 The BCG matrix 327 Diversification strategy 328

The strategic management process_____________________320 Strategy formulation versus execution 323 SWOT analysis 323

Formulating business-level strategy__________________330 Porter’s competitive forces and strategies 330 Formulating functional-level strategy_____________334

contents

ix

New trends in strategy________________________________________ 335 Innovation from within 335 Strategic partnerships 336 Global strategy___________________________________________________ 337 Multidomestic strategy 339 Transnational strategy 339 Strategy execution_____________________________________________ 341 Implementing global strategies 343 Testing the quality of strategy 343 Developing a sustainability strategy as part of business strategy____________________________________________344 Discussion questions 345 Ethical challenge 346 »» A great deal for whom?

Group challenge

346

»» Developing strategy for a small business

Case for critical analysis

346

346

»» Starbucks coffee

346

On the job video case

347

»» Theo Chocolate: strategy formulation and execution 347

CourseMate 349 Chapter Case Studies

Austal Ltd 315 MYOB 316 Apple Inc.’s strategy: much more than iPod, iPhone, iPad and Mac 319 Chip competition in overdrive 323 Ferragamo: family business or not? 334

346

Chapter 9 Managerial decision making Types of decisions and problems_________________________ 353 Programmed and non-programmed decisions 354 Certainty, risk, uncertainty and ambiguity 356 Decision-making models_____________________________________ 362 The classical model: rational decision making 362 The administrative model: how managers actually make decisions 363 The political model 365 Decision-making steps_________________________________________ 367 Recognition of decision requirement 367 Diagnosis and analysis of causes 368 Development of alternatives 368 Selection of desired alternative 370 Implementation of chosen alternative 370 Evaluation and feedback 371 Personal decision framework____________________________ 374

350 Sustainable development decisions____________________ 379 Discussion questions 380 Ethical challenge 381 »» The unhealthy hospital

381

Group challenge Case for critical analysis

381 382

»» Decisions at Paradox

382

On the job video case

383

»» Plant Fantasies: managerial decision making

383

CourseMate 384 Chapter Case Studies

Len Jury Limited, stamp dealer 355 Pepsi-Cola 359 Continuing case: General Motors Part Three: Planning___________________________________________385

Innovative decision making________________________________ 376 Start with brainstorming 376 Engage in rigorous debate 377 Avoid groupthink 378 Know when to pull the plug 378

part four

Organising 387 Chapter 10 Fundamentals of organising Organising the vertical structure_____________________ 392 Work specialisation 393 Chain of command 394 Authority, responsibility and delegation 395 Span of management 397 Centralisation and decentralisation 400 Formalisation 400 Departmentalisation___________________________________________ 401 Vertical functional approach 402 Divisional approach 405

x

contents

388 Matrix approach Hybrid structure Team-based approach Network approach

408 410 411 413

Organising for horizontal coordination_________ 418 The need for Coordination 418 Task forces, teams and project management 419 Relational coordination 420 Factors shaping structure_________________________________423 Structure follows strategy 423

Organising for sustainable development___________425 Discussion questions 427 Ethical challenge 427 »» Caught in the middle

Group challenge »» Family business

Case for critical analysis »» Abraham’s Grocery

427

428

On the job video case »» Modern Shed: designing adaptive organisations

429 429

CourseMate 431 Chapter Case Studies

Fonterra’s global management structure Strida Bicycles: a globally networked company

428

428

392 416

428

Chapter 11 Managing change and innovation Turbulent times and the changing workplace__________________________________________________________435 Innovation and the changing workplace___________435 Changing things: new products and technologies______________________________________________________437 Exploration 438 Cooperation 443 Entrepreneurship and innovation roles 449

432

Implementing sustainable development in the organisation____________________________________________467 Discussion questions 469 Ethical challenge 469 »» Crowdsourcing 469

Group challenge »» Are you ready to implement personal change?

Case for critical analysis »» Malard Manufacturing Company

Changing people and culture_____________________________ 451 Training and development 453 Organisation development 454

On the job video case

Implementing change__________________________________________458 Need for change 459 Resistance to change 460 Force-field analysis 461 Implementation tactics 464

Chapter Case Studies

Chapter 12 Human resource management

470 470

471 471

471

»» Holden Outerwear: managing change and innovation 471

CourseMate 474 Building a better mouse . . . 437 General Electric 453 3M 462 A mini crisis of culture and performance 466

476

The strategic role of HRM is to drive organisational performance_____________________________479 The strategic approach 479

Compensation 504 Benefits 505 Termination 506

Competitive strategy__________________________________________ 480 Building human capital to drive performance 480 External forces 482

Sustainability and people____________________________________509 Discussion questions 510 Ethical challenge 510

The changing nature of careers_________________________483 The changing social contract 483 Innovations in HRM 485 Finding the right people_____________________________________486 Human resource planning 487 Recruiting 488 Assessing jobs 488 Selecting 491 Managing talent: developing an effective workforce______________________________________496 Training and development 496 Performance appraisal 500 Maintaining an effective workforce_________________ 504

Chapter 13 Managing diversity Valuing diversity_________________________________________________ 519 Diversity in the corporate world 522 The changing nature of diversity in Australia 522

»» Research for sale

Group challenge »» Management competencies

Case for critical analysis »» The right way with employees?

On the job video case »» B  arcelona Restaurant Group: managing human resources

510

511 511

511 511

512 512

CourseMate 515 Chapter Case Studies

Container Store VIVO Cafe: all in the family … the business is people Biotechnology companies in turbulent environments and challenging times

491 503 507

516 Diversity on a global scale_________________________________524 Diversity of perspective 525 Inclusion 526 Dividends of workplace diversity 526 contents

xi

Factors shaping personal bias____________________________ 527 Workplace prejudice, discrimination and stereotypes 527 Ethnocentrism 529 Factors affecting women’s careers_____________________531 The glass ceiling 531 The opt-out trend 532 The female advantage 533 The changing workplace____________________________________534 Diversity challenges 534 Implications of a globally diverse workforce___536 Achieving cultural competence_________________________538 Current responses to diversity__________________________ 540 Enhancing structures and policies 540 Expanding recruitment efforts 540 Establishing mentor relationships 540 Increasing awareness of sexual harassment 541 Using multicultural teams 542 Positive assistance for women at work in Australia 542

Ethical challenge

548

»» Sunset prayers

548

Group challenge

548

»» Personal diversity

548

Case for critical analysis

549

»» Waterway Industries

549

On the job video case

550

»» M  itchell Gold 1 Bob Williams: managing diversity

550

CourseMate 552 Chapter Case Studies

Lenovo Corp. Australian Federal Police on the case Diversity still a big issue, problem and opportunity

537 545 546

Continuing case: General Motors Part Four: Organising_________________________________________ 553

Driving sustainability through effectively managing diversity_____________________________________________546 Discussion questions 547

part five

Leading 555 Chapter 14 Individual behaviour in organisations Understanding yourself and others__________________560 The value of knowing yourself 560 Attitudes_____________________________________________________________ 562 High-performance work attitudes 562 Conflicts among attitudes 566 Perception__________________________________________________________ 567 Attributions________________________________________________________569 Personality and behaviour_________________________________570 Personality traits 570 Attitudes and behaviours influenced by personality 573 Problem-solving styles and the Myers-Briggs Type Indicator 576 Emotions_____________________________________________________________ 579 Positive and negative emotions 579 Emotional intelligence_______________________________________580 Managing yourself_____________________________________________582 Basic principles for self-management 583 A step-by-step guide for managing your time 583

Chapter 15 LEADING IN ORGANISATIONS The nature of leadership____________________________________605 Contemporary leadership__________________________________605 Level 5 leadership 606 Servant leadership 607

xii

contents

556

Stress and stress management____________________________586 Challenge stress and threat stress 587 Type A and Type B behaviour 587 Causes of work stress 588 Innovative responses to stress management 589 Sustainability and organisational behaviour_____594 Discussion questions 595 Ethical challenge 596 »» Should I fudge the numbers?

Group challenge »» Personality role play

Case for critical analysis »» Volkswagen’s Ferdinand Piëch

On the job video case »» M  itchell Gold 1 Bob Williams: understanding individual behaviour

596

596 596

597 597

598 598

CourseMate 601 Chapter Case StudY

The Carlson companies

575

602 Authentic leadership Gender differences

608 609

From management to leadership_________________________ 611 Leadership traits 612

Behavioural approaches Task versus people The Leadership Grid

613 613 614

Contingency approaches___________________________________ 616 The situational model of leadership 616 Fiedler’s contingency theory 618

Contemporary leaders_______________________________________634 Leadership of sustainable development______________638 Discussion questions 639 Ethical challenge 640 »» Does wage reform start at the top?

Group challenge »» Which leadership styles are more effective?

Situational substitutes for leadership_________________621 Charismatic and transformational leadership__________________________________________________________ 623 Charismatic leadership 624 Transformational versus transactional leadership 625 Followership______________________________________________________ 627

Case for critical analysis »» DGL International

On the job video case »» Camp Bow Wow: Leadership

News Corporation In the hands of a matador Asea Brown Boveri

Chapter 16 Motivating employees

Content perspectives on motivation___________________650 The hierarchy of needs 650 ERG theory 653 A two-factor approach to motivation 654 Acquired needs theory 656

640

641 641

615 625 626

644 Empowering people to meet higher needs Giving meaning to work through engagement

671 672

Keeping staff motivated in Australia and New Zealand_______________________________________________________ 675 Motivation for sustainability______________________________ 677 Discussion questions 678 Ethical challenge 679 »» Compensation showdown

Group challenge

Process perspectives on motivation___________________658 Goal setting 658 Equity theory 660 Expectancy theory 661

»» Should, need, like, love

Case for critical analysis »» Lauren’s balancing act

On the job video case

Reinforcement perspective on motivation__________664 Direct reinforcement 664 Social learning theory 666 Job design for motivation___________________________________ 667 Job enrichment 668 Job characteristics model 668

640

640

Chapter Case Studies

Power and influence__________________________________________629 Position power 630 Personal power 630 Other sources of power 631 Interpersonal influence tactics 632

The concept of motivation__________________________________647 Individual needs and motivation 647 Managers as motivators 650

640

640

»» Urban Escapes: motivating employees

679

679 679

680 680

681 681

CourseMate 683 Chapter Case Studies

Managing motivation at Degussa Peroxide Ltd ACER Group Computers: coping with fierce competition in the world’s PC market Outback Steakhouse Hilcorp Energy

Innovative ideas for motivating_________________________670 Building a thriving workforce 671

Chapter 17 Communication in organisations

647 652 657 672

684

Communication is the manager’s Job___________________ 687 What is communication? 688 A model of communication 688

Organisational communication_________________________702 Formal communication channels 702 Personal communication channels 706

Communicating among people____________________________690 Open communication climate 690 Communication channels 692 Communicating to persuade and influence others 695 Communicating with candour 695 Asking questions 698 Listening 699 Non-verbal communication 700

Workplace communication________________________________ 710 Social media 710 Listening to customers 711 Communicating to customers 711 Connecting employees 711 Crisis communication 712 Communications and sustainability_____________________717 Discussion questions 718

contents

xiii

Ethical challenge »» The voice of authority

Group challenge »» Listen like a professional

Case for critical analysis »» WA manufacturing

719

On the job video case

719

719 719

720

Chapter Case Studies

General Electric Susan Williams Rhonda White achieved her vision

Chapter 18 Teamwork in organisations

Implementing sustainable development through teamwork_____________________________________________ 752 Discussion questions 753 Ethical challenge 753 »» Consumer safety or team commitment?

Group challenge

753

754

»» Feedback exercise

754

Case for critical analysis

Team characteristics__________________________________________ 739 Size 739 Diversity 739 Member roles 739

Managing team conflict_____________________________________ 747 Types of conflict 747 Balancing conflict and cooperation 747 Causes of conflict 748 Styles to handle conflict 748

696 705 707

724

The dilemma of teams__________________________________________ 732 Model of team effectiveness 734 Virtual teams 736

Team processes___________________________________________________ 742 Stages of team development 742 Team cohesiveness 744 Team norms 745

720

CourseMate 722

720

The value of teams_______________________________________________ 727 What is a team? 728 Contributions of teams 728 Types of teams 729

720

»» Plant Fantasies: managing communication

754

»» Are we a team?

754

On the job video case

755

»» Holden Outerware: leading teams

755

CourseMate 757 Chapter Case Studies

The team’s the thing The Aconex team in Melbourne Transport Corporation of India (TCI)

727 738 740

Continuing case: General Motors Part Five: Leading________________________________________________ 758

Negotiation________________________________________________________ 749 Types of negotiation 750 Rules for reaching a win-win solution 751

part six

Controlling 759 Chapter 19 Managerial and quality control The meaning of control_____________________________________ 763

Open-book management

779

Feedback control model____________________________________764 Steps of feedback control 764 The balanced scorecard 767

Total quality management (TQM)__________________________ 782 TQM techniques 783 TQM success factors 786

Budgetary control_____________________________________________ 769 Expense budget 770 Revenue budget 770 Cash budget 770 Capital budget 771 Zero-based budget 771

Trends in quality and financial control____________788 International quality standards 788 Corporate governance 789

Financial control______________________________________________ 772 Financial statements 772 Financial analysis: interpreting the numbers 774 The changing philosophy of control_________________ 777 Hierarchical versus decentralised approaches 777

xiv

760

contents

Qualities of effective control systems_______________790 Sustainable development and management control_________________________________________ 792 Discussion questions 793 Ethical challenge 794 »» The wages of sin?

Group challenge »» Create a group control system

794

794 794

Case for critical analysis

795

»» Lincoln Electric

795

On the job video case »» B  arcelona Restaurant Group: managing quality and performance

796 796

Chapter Case Studies

Semco’s open-book policy A lesson in quality from China The honeybee style

781 782 784

CourseMate 797

Chapter 20 Managing the value chain, information technology and e-business

798

The organisation as a value chain______________________802 Service and manufacturing operations 804 Supply chain management 805

The Internet and e-business_________________________________822 e-business strategy: market expansion 824 e-business strategy: increasing efficiency 824

Facilities layout__________________________________________________806 Process layout 808 Product layout 809 Cellular layout 809 Fixed-position layout 810

Operations management, information and sustainable development_____________________________826 Discussion questions 828 Ethical challenge 829

Technology automation_____________________________________ 810 Radio-frequency identification (RFID) 810 Digital manufacturing systems 811 Lean thinking 812 Inventory management_______________________________________ 813 The importance of inventory 814 Just-in-time inventory 815 Operations deliver outcomes_____________________________ 816 Information technology has transformed management________________________________________________________817 Boundaries dissolve; collaboration reigns 817 Knowledge management and Web 2.0 818 Enterprise resource planning systems 821

»» Manipulative or not?

Group challenge »» Developing an online strategy

Case for critical analysis »» SunBright Outdoor Furniture, Inc.

829

829 829

830 830

CourseMate 833 Chapter Case Studies

Managing the professional services firm 803 IKEA 813 Profiting in a depressed smoke stack industry 815 NTT DoCoMo: the leading edge of the mobile phone business 818 Harvest FreshCuts 827 Continuing case: General Motors Part Six: Controlling_______________________________________________________834

Capstone Chapter Making effective management happen 836 Fundamental practices common to winning organisations___________________________________839 Leadership practices 840 People management practices 844 Customer focus practices 848 Quality management practices 849 Innovation practices 851 Knowledge management practices 852 Deeper principles common to the world’s best organisations______________________________________________853

Putting it all together: the organisation as a system___________________________________________________________ 857 Discussion questions 858 Group challenge 859 »» Understanding how an organisation works

859

CourseMate 859 Chapter Case Studies

Google: a great place to search – and work Values can come from Mars

847 856

Glossary 860 Name index 872 Subject index 879

contents

xv

Preface

Takin g th e le ad

The world seems to be changing ever faster, with social, technological, economic and political forces reverberating around the globe every day. Volatility seems to be increasing: just consider the 2011 earthquakes in New Zealand and Japan, and the 2008–10 global financial crisis, the recent financial difficulties in Greece and Spain and the political and military problems in Syria and Ukraine. Managers need to know what is going on in their industries and economies on a current and ongoing basis. In Australia, New Zealand and other Asia–Pacific countries, the challenges and opportunities facing managers have never been greater. New technology and globalisation mean that managers in these countries must not just be competitive with the organisation ‘down the road’ or across the country, but must also recognise that the only realistic standard for comparison of performance in the new millennium is ‘world’s best’. The announced demise of Australia’s automotive assembly industry (effective 2017) after more than 50 years of operations demonstrates the intensity of global competitive forces. In every industry, competition is becoming fiercer each month, and there are always winners and losers. Winners grow and prosper, but uncompetitive companies quickly wither away and their shareholders lose their investments, while managers and other staff lose their jobs. Not-for-profit organisations such as government service suppliers, charities and clubs must also excel in their focus and use of resources, since their employees, consumers and suppliers have high expectations of effectiveness and output. Technological change is accelerating and driving exciting new competitive dynamics in most industries. This includes new process technologies such as manufacturing automation, and in particular the web-based and social networking technologies such as Facebook, Instagram, Google and Twitter that are making information available to people as never before. The Internet has a profound effect on all forms of organisation, business and consumer behaviour. Consider how Amazon and EBay have impacted on consumer shopping habits. New business models and innovative ways to combine products and services are made possible by the Internet, as well as much richer, faster, cheaper and more detailed information exchange between businesses. The cost of close coordination between organisations is lower as a result of these new technologies, leading to new networks of collaboration within supply networks. Another major trend that will impact on managers and businesses all over the world is the coming of age of the Chinese economy and, behind that, India, Brazil and others. These low-wage countries, which have over half of the world’s people living in them and hence huge internal developing markets, provide both opportunity and threat for all Asia–Pacific-based companies and countries. In addition, political instability, terrorism, disease such as bird flu, climate change and other unanticipated events, coupled with the rise of regional trade blocs and free trade agreements, will impact substantially on the opportunities for companies to export and trade globally. Managers must be capable of planning and leading their organisations under both stable and unstable conditions. Risk management and crisis management are new processes with which managers must formally engage and become competent. Further, brought on by the collapse of major companies such as Lehman Brothers and many others as part of the global financial crisis, managers must now demonstrate the quality of governance in their systems and decisions, through compliance with strict new procedures, as legislated by governments and required by shareholders. And through all this, the fundamental management requirements – being highly competent in managing people, processes, customers, products and services; devising and planning strategies; organising resources; and leading and controlling work – have not gone away and never will. Rather, they must now be conducted at higher standards than ever in order to keep customers, employees and shareholders satisfied. A further requirement comes with the challenge of ‘sustainable development’, of being socially and environmentally responsible, while still maximising profits and behaving with high standards of ethics and integrity. This book gives the reader a realistic perspective of what management is and what managers really do. Management as a profession is dynamic, challenging and exciting for those who want to excel at it. Each day brings new and often unanticipated challenges despite the plans made by even the best managers and leaders. The relatively new challenges of sustainable development are integrated into every chapter of this book.

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Management involves creating and conducting the affairs of organisations so as to achieve valuable outcomes for many different stakeholders, particularly staff, owners, and clients or customers. In order to do this well, leaders in organisations must achieve many things at high levels – including motivating staff and themselves, ensuring that their products and services match customer requirements, efficiently managing finances and resources, and, above all else, assembling all this into an overall strategy that makes sense for all participants. Good managers need to understand and apply the fundamentals of fields as diverse as economics and psychology, as well as using various analytical techniques. We chose a sporting theme and analogy for this book because the challenges facing managers have so much in common with those of competitive sports. In both sports and management, no matter how well you’re doing, improvement is always possible. There is no such thing as the perfect tennis game, golf swing or score, and no such thing as the perfect manager or organisation. There is always room for improvement. In both sport and management, planning and strategising usually helps. What are our competitors likely to be doing? What are the conditions in the field, economy or marketplace that we participate in? In both sport and management, the best-laid plans often don’t come to fruition because things keep changing, so adjustments, sometimes radical, must be made to the planned business or sporting tactics. Decisions must be made under pressure – whether it’s during a tennis match or a business day – because unforeseen events occur, and unanticipated consequences develop in real time. At its extreme, this is referred to as ‘crisis management’. Finally, in both sport and management, there are always new competitors, new technologies, new strategies developing and new products that we must adapt to and find ways to turn into opportunities. Just like sport, management is dynamic and challenging. Just as new technologies, such as graphite tennis racquets and titanium golf clubs, changed those games and allowed for new levels of performance, so, too, has the Internet significantly created new opportunities and business strategies. Learning and innovation are the keys. For those who excel, the personal rewards that come from the satisfaction of achievement – as well as the creation of value for many stakeholders in the community – can be immense. While the challenges of achieving competitiveness and organisational effectiveness through excellent leadership and management have never been greater, the other side of the same coin is that for those who ‘get it right’, the opportunities have never been greater! Products and services can be developed by small and large companies and sold globally over the Internet. Consider Apple’s success with its iPhone and iPad, or the achievements of Samsung, Google or General Electric. Entrepreneurs are springing up and starting companies in all industries, challenging market leaders as never before. A small, new software company in Auckland, New Zealand, can now effectively sell and distribute its products in Sydney, Perth, Fiji, Moscow and New York – which would have been far too expensive to contemplate in the ‘pre-Internet’ world of just a decade ago. These new international sales or ‘extended market reach’ will only occur if the products and services offered by the company are competitive and provide superior value for customers. One vital thing that all successful organisations need, no matter whether their products are very simple or incredibly sophisticated, is solid management. Even the strongest of technological leadership in a product or industry will not lead to commercial success if the enterprise that owns and controls it is not managed well. The field of management is continually changing, yet some fundamental foundations remain the same. Demands made on today’s managers go well beyond the techniques and ideas traditionally taught in management courses. The traditional management paradigm assumes that the purpose of management is to control and limit people, enforce rules and regulations, seek stability and efficiency, design a top-down hierarchy to direct people and achieve bottom-line results. The emerging paradigm recognises that today’s managers need different skills to engage workers’ hearts and minds, as well as take advantage of their physical labour. The emerging management paradigm focuses on leadership, on harnessing people’s creativity and enthusiasm, finding shared vision and values, and sharing information and power. Teamwork, collaboration, participation and learning are guiding principles that help managers and employees. One of the key skills of great managers is the ability to achieve a blending and balancing of controls needed within a business with the leadership actions to achieve high levels of human motivation across the organisation. It’s all about balance and ‘shades of grey’, not ‘black and white’. Both the new and the traditional paradigms are guiding management actions in the world today. Our vision for Management is to explore the new paradigm in a way that is interesting and valuable to students, while retaining the best p r e fa c e

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of traditional management ideas. To achieve this vision, we have included the most recent management thinking and research, as well as the contemporary application of management ideas in organisations. The combination of established scholarship, new ideas and real-life applications gives students a taste of the energy, challenge and adventure inherent in the dynamic field of management. We have worked together to provide a textbook better than any other at capturing the excitement of organisational management. We wrote Management to provide a book of the highest quality – one that will create in students both respect for the changing field of management and confidence that they can understand and master it. The textual portion of this book has been enhanced by an engaging, easy-to-understand writing style and many in-text examples and boxed items that bring concepts to life for students.

O rganisation The chapter sequence in Management is organised around the management functions of planning, organising, leading and controlling. These four functions effectively encompass both management research and real-life characteristics of the manager’s job. Part One introduces the world of management, including the nature of management, the emerging management paradigm, the learning organisation and historical perspectives on management. Part Two examines the environments of management and organisations. This section includes material on the business environment and corporate culture, the global environment, ethics and social responsibility, the natural environment, and the environment of entrepreneurship and small-business management. Part Three presents chapters on planning, including organisational goal setting and planning, strategy formulation and implementation, and the decision-making process. Part Four focuses on organising processes. These chapters describe the dimensions of structural design, the design alternatives managers can use to achieve strategic objectives, structural designs for promoting innovation and change, the design and use of the human resource function, and the ways managing diverse employees are significant to the organising function. Part Five is devoted to leadership. This section begins with a chapter on organisational behaviour, providing a grounding in understanding people in organisations. This foundation paves the way for subsequent discussions of leadership, motivating employees, communication and team management. Part Six describes the controlling functions of management, including basic principles of quality improvement, the design of control systems, information technology and techniques for control of operations management. Finally, our Capstone chapter integrates many of the themes of management and considers ‘best practices’ in organisations, at the cutting edge of our dynamic field. It provides a practical yet integrative way to think about the ‘world of work’, and how to succeed in it.

Special featu res One major goal of this book is to offer better ways of using the textbook medium to convey management knowledge to the reader. To this end, the book includes several special features. ●● Chapter outline and objectives. Each chapter begins with a clear statement of its learning objectives and an outline of its contents. These devices provide an overview of what is to come and can also be used by students to see whether they understand and have retained important points. ●● Management challenge and response. The text portion of each chapter begins with a real-life problem faced by organisation managers. The problem pertains to the topic of the chapter and will heighten students’ interest in chapter concepts. The questions posed in the Management challenge are resolved in the Response at the end of the chapter, where chapter concepts guiding management’s actions are highlighted.

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●● Contemporary examples from all over the Asia–Pacific region – and, indeed, the world. Every chapter contains a number of examples of real-life management incidents. These are placed at strategic points in the chapters and are designed to demonstrate the application of management concepts in specific companies. These in-text examples include well-known companies such as National Australia Bank, BHP Billiton, McDonald’s, ANZ, General Electric and Google, as well as less-well-known companies and not-for-profit organisations such as Austel, Dryen Australia and TAC. These examples put students in touch with the real world of organisations so they can appreciate the value of management concepts. ●● Exhibits. Many aspects of management are research based, and some concepts tend to be abstract and theoretical. To enhance students’ awareness and understanding of these concepts, many exhibits have been included throughout the book. These exhibits consolidate key points, indicate relationships among variables and visually illustrate concepts. They also make effective use of colour to enhance their imagery and appeal. ●● Glossary. Learning the management vocabulary is essential to understanding contemporary management. This process is facilitated in three ways. First, key terms and concepts are coloured and defined where they first appear in the text. Second, brief definitions are set out in the margin for easy review and follow-up. Third, a glossary summarising all key terms and definitions appears at the end of the book for handy reference. ●● ‘Remember this’ summaries and Discussion questions. Each chapter contains a number of Remember this boxes, summaries of key points that students should retain. The end-of-chapter discussion questions are a complementary learning tool that will enable students to check their understanding of key issues, to think beyond basic concepts and to determine areas that require further study. The Remember this summaries and Discussion questions help students to discriminate between the text’s main and supporting points, and provide mechanisms for self-teaching. ●● Management in practice exercises. Management in practice, Ethical challenge, Group challenge, Case for critical analysis and New manager self-test exercises provide students with an opportunity to experience management issues in a personal way. These exercises take the form of questionnaires, scenarios and activities, and also provide opportunities for students to work in teams. ●● Video cases. The chapters of the book conclude with video cases that illustrate concepts discussed in the text. The videos will enable students to consider the practical applications of management theory. ●● Continuing Case. Each Part of the book finishes with a contemporary continuing case study, of General Motors (US) and its Australian business, Holden, which face many managerial challenges and opportunities. ●● New icons. A Linkage icon and an Entrepreneurship icon have been added to this new edition. The Linkage icon highlights links between topics within and across chapters, and the Entrepreneurship icon points to examples and issues related to new value creation.

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Resources guide

FO R TH E STU D ENT As you read this text you will find a number of features designed to enhance your study of management, and to help you understand how management is applied in the real world.

Learning objectives are listed at the start of each chapter, and give a clear sense of what you can expect to learn from the chapter. Chapter outlines are also listed at the start of each chapter, clearly outlining each main heading for the chapter’s key topics.

New manager self-tests encourage you to analyse how you would respond in certain managerial situations, and provide insight into what to expect and how you might perform.

The Management challenge at the start of each chapter presents a real-life management scenario that relates to key chapter concepts, and encourages you to think about how best to resolve it.

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Later in each chapter, the Response to the management challenge offers a conclusion to this scenario, describing how the issue was overcome.

Remember this lists throughout chapters summarise the key points covered in preceding sections. They are useful for quick reference and assisting with revision.

Take a moment pop-ups provide tips and suggestions about how you might apply the concepts discussed in the text as a practising new manager. They also direct you to relevant ‘New manager self-tests’ and specific end-ofchapter materials.

When key terms are used for the first time, they are bolded for easy identification, and a definition of the term is provided in the margin.These definitions are collected in the Glossary at the back of the text.

Australian manager profiles provide a candid window into some of the individual and organisational challenges that Australian managers have had to overcome in their careers.

Innovative way boxes highlight companies and managers at the forefront of innovation in the field of contemporary management practice, in both an Australian and global context.

Management in practice boxes highlight a specific aspect of management and offer in-depth, practical advice about how to address it in a work context. Resources guide

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Case study boxes give real-world examples of how management theory is being applied by some of its leading practitioners. Cases marked with a Green icon deal with topics related to sustainability. Sustainable development boxes describe aspects of sustainability that are relevant to the management concepts described in each chapter.

Linkage icons draw attention to connections between topics within individual chapters and across the text; an in-text reference adjacent to the icon directs you to the relevant material.

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Entrepreneurship icons highlight discussion of contemporary entrepreneurship and related activities throughout the text, such as innovation.

Concept revision and Concept extension icons refer you to online exercises that will reinforce and expand your knowledge of management concepts. This material is available on the Management CourseMate website.

Concept extension

Case project 1.1

Concept Revision

Experiential exercise

At the end of each chapter, you will find several tools to help you to review each chapter’s contents and key learning concepts, and to help extend your learning. The Ethical challenge offers a hypothetical scenario involving ethics or social responsibility in management, and then asks you to choose how you would act.

Discussion questions enable you to apply the theory you have learned, think beyond the conceptual level and identify any areas that require further study.

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The Group challenge is an activity or exercise that is suitable for tutorials. It encourages discussion, the development of teamwork and analytical skills.

The Case for critical analysis describes a real-world management situation. Each case concludes with a set of questions that encourage you to sharpen your diagnostic skills for management problem solving.

On the job video cases ask questions about videos available on the Management CourseMate that show the direct application of management theories by real-world business leaders.

The Continuing case at the end of each Part offers a running description of the ongoing management issues faced by one organisation. Each of the case’s six sections relates to the management topics described in the preceding Part.

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Resources guide

Online resources FOR ST U DE N TS Visit http://login.cengagebrain.com and login using the code card in the front of this text for 12 months’ access to the Management CourseMate website. You’ll find an e-book, audio summaries, case projects, interactive self-tests, internet research activities, revision quizzes, videos, a glossary, flashcards, games, crosswords and more tools to help you excel in your studies.

From http://login.cengagebrain.com you can also access a 12-month subscription to Search me! Management. Fast and convenient, this resource is updated daily and provides you with 24-hour access to full-text articles from hundreds of scholarly and popular journals, e-books, and The New York Times.

Use the Search me! Management keywords provided in the margins of each chapter to further explore topics and find current references. Get started with these search terms, and then try some of your own to expand your knowledge. Search tip: Search me! Management contains information from both local and international sources. To get the greatest number of search results, try using both Australian and American spellings in your searches, e.g. ‘globalisation’ and ‘globalization’; ‘organisation’ and ‘organization’.

FO R TH E INSTRU CTO R Cengage Learning is pleased to provide you with a selection of resources that will help you prepare your lectures. These teaching tools are available on the companion website, accessible via http://login.cengage.com.

Inst r u ct o r ’ s man u a l The Instructor’s manual provides you with a wealth of content to help set up and administer a management subject. It includes learning objectives, chapter outlines, key points, figures from the text, further teaching tips and materials, tutorial warm-up activities, as well as solutions to problems in the text.

P o w e r P o i nt T M p r esentat i o ns Chapter-by-chapter PowerPoint presentations cover the main concepts addressed within the text and can be edited to suit your own requirements. Use these slides to enhance your lecture presentations and to reinforce the key principles of your subject, or for student handouts.

E x amV i e w test b an k ExamView helps you to create, customise and deliver tests in minutes, for both print and online applications. The Quick Test Wizard and Online test Wizard guide you step by step through the test-creation process. With ExamView’s complete word-processing abilities, you can add an unlimited number of new questions to the

bank, edit existing questions and build tests of up to 250 questions using up to 12 question types. You can also export the files into Blackboard or WebCT.

T eac h i ng n o tes Teaching notes for student case projects, internet research activities and interactive self-tests will assist you in preparing tutorial discussion, setting activities and providing feedback.

Artwork These digital files of graphs, pictures and flowcharts from the text can be used in a variety of media. Add them into your course management system, use them within student handouts or copy them into lecture presentations.

M a n a g e m e n t l o ca l v i d e o pac k age This video package, featuring large and small local companies, provides a relevant and engaging visual teaching tool for the classroom. Scenarios will link the application of management concepts to key graduate outcomes.

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Features matrix Part 1

Chapters

1

IN-CHAPTER Features New manager Are you ready to self-test be a manager, p. 3

Case study

India: A hotbed of competition for mobile phones, p. 12 Extraodinary crisis management, p. 37

Australian manager profile

Part 2

4

5

6

7

8

9

10

Are you a new-style or an old-style manager?, p. 49 What’s your mach?, p. 65

Are you fit for managerial uncertainty?, p. 89 Culture preference, p. 121 Working in an adaptive culture, p. 126

Are you ready to work internationally?, p. 135 What are your social values?, p. 162

Will you be a courageous manager?, p. 179 Servant leadership, p. 191 Ethical work climates, p. 213

Do you think like an entrepreneur?, p. 225

Does goal setting fit your management style?, p. 271

What is your strategy strength?, p. 309

How do you make decisions?, p. 351 Intolerance of ambiguity, p. 360 Making important decisions, p. 365

What are your leadership beliefs?, p. 389 Delegation, p. 396 Authority role models, p. 421

Switching to green power, p. 51 Brumby's Bakeries cooking along, p. 68 Atlassian : supporting collaboration and innovation, p. 75 Enjo: a friend of its customers, p. 77

Growing a business from scratch: lavender!, p. 102

Shifting international services and jobs!, p. 139 The axis of India, p. 142 LG Electronics, p. 170

Philanthropy goes up a gear, p. 186 A leadership dilemma at Timberland, p. 201 A crisis to milk, p. 209

Siemens, p. 289

Austal Ltd, p. 315 MYOB, p. 316 Chip competition in overdrive, p. 323 Ferragamo: family business or not?, p. 334

Len Jury Limited, stamp dealer, p. 355 Pepsi-Cola, p. 359

Fonterra's global management structure, p. 392 Strida Bicycles: A globally networked company, p. 416

Noreen Kam, National Procurement Manager, Silliker Australia, p. 64

Dr Justin Pierce, Glenn Barnes, Susan Mizrahi, Cotton On Chairman, human rights Group, p. 111 Ansell Ltd and advocate, p. 198 Australian Unity Ltd, p. 146

Cleanevent, p. 223 Competitive innovation in the mining industry, p. 238 Wesfarmers, p. 239 Health Mastery: Entrepreneurship in the NZ health services industry, p. 245 Entrepreneurship in solar energy, p. 250 The high and lows of franchising entrepreneurship, p. 252 Franchises in Australia and New Zealand, p. 253 Entrepreneurship: from 'sparky' to CEO, p. 257 Laura Mae Davey: Founder and director of Maer Snowboarding, p. 261

Maureen and James Campbell, Tony Wheeler, Biotech Executive, co-founders, p. 329 Lonely Planet Publications, p. 276

Grant Anderson, chief executive officer, ANCA Group, p. 369

Rachael Robertson: leadership lessons from the world’s toughest workplace, p. 405

Challenging the boss on ethical issues, p. 190 Guidelines for ethical decision making, p. 192 Cultivating a service mindset, p. 205

Why start-ups fail, p. 248

Who sets the goals? Manager versus coalition, p. 282

Will strategy ever be the same?, p. 321

Why do managers make bad decisions? Biases to avoid, p. 372 Evidence-based management, p. 377

How to delegate, p. 398 Would you like to work in your pyjamas?, p. 417

Godrej & Boyce, p. 146 Hollywood studios, p. 149 Lenovo in China, p. 165 Global operating, p. 169 India’s tech talent, p. 170

Gap Inc., p. 196 Harvard Business School, Columbia Business School, Yale School of Management, p. 204 Google, p. 206 Lifebuoy to glowing health, p. 208

Fast growing companies: What are they like?, p. 231 The reluctant social entrepreneur, p. 243 Instagram, p. 256

Planning for not just a little toll, p. 287 JetBlue, p. 298 The birth of the Kindle, p. 301

Amazon Prime, p. 316 Facebook, p. 325 Focused innovation in marketing, p. 336 The Dodo is not extinct!, p. 340 Dell Computer, p. 321

Bremen Castings, p. 356 The New York Times, p. 371

The ‘no structure’ structure, p. 390 Caterpillar, p. 395 Teams work at Imagination Ltd, p. 412 Flight coordianation, p. 422

Do you really want Management tools to be a manager? and trends, p. 73 p. 28 Time management tips for new managers, p. 29

Innovative way

Twitter and Square, p. 5 Budget blockbusters, p. 17 Clickcorp: Taking Ugg to the world, p. 35

Creating guanxi in China, p. 95 Green power, p. 114 St Luke's, p. 115 Unlocking innovative solutions through people p. 125 Sony: Experiencing Shopping online, the thrills and even cars, p. 98 uncertainties of Costco’s winning innovation, p. 55 formula, p. 103 UPS : leading the Zappos Family, world in parcel p. 113 delivery, p. 59 Semco: Giving power to the employee, p. 65

Sustainable development and management thinking, p. 78

Sustainable development and the business environment, p. 127

Sustainable development: a global issue and opportunity, p. 171

Taking managerial action on sustainable development, p. 215

Sustainability and the small or start-up organisation, p. 263

Sustainable Developing a development and sustainability goal setting, p. 303 strategy as part of business strategy, p. 344

Sustainable development decisions, p. 379

Organising for sustainable development, p. 425

Competitive intelligence predicament, p. 129 Should you go global?, p. 129

Quality or closing, p. 173

What is right?, p. 217

To grow or not to grow?, p. 264

Repair or replace?, p. 304

The unhealthy hospital, p. 381

Caught in the middle, p. 427

Considerations for overseas expansion, p. 173 Shui Fabrics, p. 174

Ethics and business costs, p. 218

What counts?, p. 265

Course goal setting, Developing strategy A new approach to p. 305 for small business, making decisions, p. 381 p. 346

Family business, p. 428

Too much intelligence, p. 218

Emma's Parlour, p. 265

HID, p. 305

Starbucks Coffee, p. 346

Decisions at Paradox, p. 382

Abraham's Grocery, p. 428

Theo Chocolate: Managing ethics and social responsibility, p. 219

Urban escapes: Managing small business start-ups, p. 266

Modern Shed: Managerial planning and goal setting, p. 306

Theo Chocolate: Strategy formulation and execution, p. 347

Plant fantasies: Modern Shed: Managerial decision Designing adaptive making, p. 383 organisations, p. 429

Ethical challenge

Can management afford to look the other way? p. 43

The supervisor, p. 80

Group challenge

Your best and worst managers, p. 44

Turning points on the road to management, p. 81

Case for critical analysis

Sharpstyle Salons, p. 44

More hassle from HR?, p. 81

Richmond Supply Co., p. 130

On the job video case

Camp Bow Wow: Innovative management for a changing world, p. 45

Barcelona Restaurant Group: The evolution of management thinking, p. 82

Camp Bow Wow: The environment and corporate culture, p. 130

Continuing Case

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Part 4

3

Management in practice

END-OF-CHAPTER FEATURES Sustainable Sustrainable development development: Now a core issue for managers, p. 41

Part 3

2

General Motors Part One: Introduction to Management, p. 85

Holden outerware: Managing in a global environment, p. 175

General Motors Part Two: The environment of management, p. 268

A great deal for whom?, p. 346

General Motors Part Three: Planning, p. 385

Part 4

11

Part 5

12

Chapter Body Features Are you innovative?, Getting the right p. 433 people on the bus, p. 477 Assess your creativity, p. 439 Do you want to be an HR Taking charge of change, manager?, p. 508 p. 452

Building a better mouse…, p. 437 General electric, p. 453 Making change stick, p. 459 3m, p. 462 A mini crisis of culture and performance, p. 467

Container Store, p. 491 Vivo Café, All in the family…the business is people, p. 503

Part 6

13

14

15

16

17

18

19

20

Do you know your biases?, p. 517 Are you attuned to gender differences?, p. 545

Are you selfconfident?, p. 557 Expressed emotions, p. 582 Personality assessment: Jung’s typology, p. 591

What ’s your personal style?, p. 603 Interpersonal patterns, p. 632 What is the impact of leadership? p. 637

Are you engaged or disengaged?, p. 645 Need for achievement, affiliation and power, p. 656 What motivates you?, p. 675

Are you building a personal network?, p. 683 What is your social disposition?, p. 690 Candour, p. 697 Personal assessment of communication apprehension, p. 715

How do you like to work?, p. 725 Are you a contributing team member?, p. 741 Managing conflict, p. 750

What is your attitude towards organisational regulation and control?, p. 761

Which side of your brain do you use?, p. 799

Lenovo Corp., p. 537 Diversity still a big issue, problem and opportunity, p. 546

The Carlson Companies, p. 575

News Corporation, p. 615 In the hands of a matador, p. 626 Asea Brown Boveri, p. 626

Managing motivation at Degussa Peroxide Ltd, p. 647 Acer Group Computers: coping with fierce competition in the world's PC market, p. 652 Outback Steakhouse, p. 658 Hilcorp Energy, p. 672

General Electric, p . 696 Susan Williams, p. 705 Rhonda White achieved her vision, p. 707

The team’s the thing, p. 727 The Aconex team in Melbourne, p. 739 Transport Corporation of India (TCI) p. 741

A lesson in quality from China, p. 782 Semco's open book policy, p. 782 The honeybee style, p. 784

Managing the professional services firm, p. 803 IKEA, p. 813 Profiting in a depressed smoke stack industry, p. 815 NTT DoCoMo: the leading edge of the mobile phone business, p. 818 Harvest FreshCuts, p. 827

Dr Greg Smith, Co-Founder of SciV entures Investments, p. 586

Patricia Neden, p. 623

From engineer to manager, p. 663

Jane Evans, p. 710

Invention is singular; innovation is plural: Peter Richardson, p. 732

Roger Perry, chief executive officer, Bevington Group, p. 769

Richard Gunn, Director of Property, PGA Group, p. 441

Capstone chapter

Google: A great place to search - and work, p. 848 Values can come from Mars, p. 857

Richard Goyder: Managing director of Wesfarmers, p. 845

Use six thinking hats for better ideas, p. 443

The right way to interview a job applicant, p. 494

Change your frame, p. 525 A guide for expatriate managers, p. 537

Getting the right fit, p. 559 The rise of the introverted manager, p. 572

How to delegate, p. 620 Are you a charismatic leader? p. 623

How to utterly destroy motivation, p. 649 Th e carrot-and-stick controversy, p. 667

Leaping over language barriers, p. 714

How to be a great team leader, p. 735 Team leader qualities, p. 746

Quantify yourself, p. 765 Cyberslackers beware: the boss is watching, p. 789

A German factory shows how to be fast and flexible, p. 808

Two useful theoretical frames: resources and capabilities, p. 839

PWC, p. 442 Corning, p. 446 Procter & Gamble, p. 448 General Electric’s work-out, p. 457 ENSR, p. 458 Staying in the picture: Ted's cameras, p. 460 Advertisers change their ways, p. 465

Red 5 Studios Inc. p. 490 The GE Way, p. 497

Google, p. 530 IBM, p. 540 Women in IT, p. 544

Innovation in a logistics business, p. 565 eHarmony, p. 570 Understanding your leadership style, p. 578 Dow Chemical, p. 580

Level 5 leaders hip at work, p. 607 Charismatic leadership, p. 624

Flexible work policies, p. 654 Fun goal setting, p. 660 Employee engagement, p. 674 Respect: from peers to Australian corporate leaders, p. 676

Valuedance, p. 694 Cisco systems, p. 699 SuperValu, p. 712 NECX, p. 714

Nokia, p. 737 Spring Company, p. 744 McDevitt Street Bovis, p. 749

7-Eleven, p. 774 Campbell Soup, p. 779 The global success of eBay, p. 787 Toyota, p. 788

Dell’s electronic communication systems, p. 813 AGL, p. 825

GE people/ talent management, p. 846

Sustainability and Leadership of organisational sustainable behaviour, p. 594 development, p. 638

Motivation for sustainability, p. 677

Communications and sustainability, p. 717

Sustainable development and management control, p. 792

Should I fudge the numbers?, p. 596

Does wage reform start at the top?, p. 640

Compensation showdown, p. 679

The voice of authority, p. 719

The wages of sin?, p. 794

Operations management, information and sustainable development, p. 826 Manipulative or not?, p. 829

Create a group control system, p. 794

Developing an online strategy, p. 829

END OF CHAPTER FEATURES Implementing sustainable Sustainability and development in the people, p. 509 organisation, p. 467

Are you ready to implement personal change?, p. 470

Management competencies, p. 511

Personal Diversity, Personality role p. 548 play, p. 596

Which leadership styles are more effective?, p. 640

Should, need, like, love, p. 679

Listen like a professional, p. 719

Implementing sustainable development through teamwork, p. 752 Consumer safety or team commitment? p. 753 Feedback exercise, p. 754

Malard Manufacturing Company, p. 471

The right ways with employess, p. 511

Waterway Industries, p. 550

DGL International, p. 640

Lauren's balancing act, p. 680

WA Manufacturing, p. 720

Are we a team?, Lincoln Electric, p. 754 p. 795

Holden outerwear: Managing change and innovation, p. 471

Barcelona Mitchell Gold Restaurant group: + Bob Williams, managing human p. 550 resources, p. 512

Mitchell Gold Camp Bow Wow: + Bob Williams: Leadership, p. 641 Understanding individual behaviour, p. 599

Urban Escapes: Motivating employees, p. 681

Plant Fantasies: Managing communication, p. 720

Holden outerware: Leading teams, p. 755

Crowdsourcing, p. 469

Driving sustainability through effectively managing diversity, p. 546 Research for sale, Sunset prayers, p. 510 p. 548

General Motors Part Four: Organising, p. 553

Volkswagen's Ferdinand Piëch, p. 597

General Motors Part Five: Leading, p. 758

Understanding how an organisation works, p. 859

Sunbright Outdoor Furniture, Inc. p. 830

Barcelona Restaurant group: Managing quality control and performance, p. 796 General Motors Part Six: Controlling, p. 834

F e at u r e s m at r i x

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Acknowledgements

A gratifying experience for us was working with the teams of publishing professionals who were committed to the vision of producing the best management text ever. In particular, we thank the Cengage Learning Australia team of Dorothy Chiu, Kylie McInnes, Nathan Katz, Michelle Aarons and Duncan Campbell-Avenell, as well as the University of Melbourne’s Sally Lawson and many others who worked on this edition. Another group of people who made a major contribution to this textbook are the management experts who provided advice, reviews, answers to questions, and suggestions for changes, insertions and clarifications. We want to thank all of these colleagues for their valuable feedback and suggestions. Finally we thank those professional managers from whom we have learned so much about ‘what works’ in building, running and sustaining effective organisations.

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Danny A. Samson, BE, PhD, is Professor of Management and was Head of the Department of Management at the University of Melbourne, where he has also been Associate Dean (Development) of the Faculty of Economics and Commerce and Director of the Foundation for Sustainable Economic Development and the Centre for Manufacturing Management. Professor Samson has been a member of a number of boards of directors, committees and industry bodies, including appointments as a member of the TAC Board, Australian Manufacturing Council and the Commonwealth Government Industry Task Force on Leadership and Management (Karpin committee). He has written eight books in the fields of decision analysis, manufacturing and production strategy, strategy, e-business and technology management. He has won research and best paper awards from leading journals, as well as teaching excellence awards, and has been Associate Editor of various management journals, such as the Journal of Operations Management. His principal research interests are in the strategic competitiveness of organisations and in the effective use of operations systems towards achieving that competitiveness. He has won numerous competitive research grants and published in a variety of journals that reflect the breadth of his research interests, including the Academy of Management Executive, Journal of the Operational Research Society, European Journal of Operational Research, Journal of Risk and Insurance, Journal of Business Research, International Journal of Management Science, ASTIN Bulletin, Journal of Operations Management, Interfaces, Decision Sciences Journal, International Journal of Technology Management, Australian Accounting Review, Decision Support Systems and the International Journal of Production and Operations Management. In addition to teaching many thousands of business and commerce students over the past 25 years, Professor Samson has conducted over 100 public education short courses in engineering management, manufacturing management, strategy, general management and professional practice management, as well as numerous executive seminars in decision analysis, business strategy, total quality and related fields, logistics and statistical analysis. His work history includes three years as an engineer at ICI Australia, appointment as a lecturer at AGSM, five years as an Assistant Professor of Business Administration at the University of Illinois, and 10 years as a professor at the Melbourne Business School, University of Melbourne. During his career he has been a consultant to senior executives in most manufacturing industries and in numerous service sector organisations in Australia, New Zealand, the US, the UK and Europe. These include major companies in food, building products, pharmaceuticals, aerospace, paper and printing, chemicals, processing, banking, government and other industries. He is currently a board member of the Australian Institute of Management.

Ab o u t t h e authors

Richard L. Daft, PhD, is Associate Dean for Academic Programs and the Brownlee O. Currey, Jr Professor in Management in the Owen Graduate School of Management at Vanderbilt University. Professor Daft specialises in the study of organisation theory and leadership, and enjoys applying these ideas in his roles as Associate Dean. Professor Daft is a Fellow of the Academy of Management and has served on the editorial boards of Academy of Management Journal, Administrative Science Quarterly and Journal of Management Education. He was the Associate Editor-in-Chief of Organization Science and served for three years as associate editor of Administrative Science Quarterly. Professor Daft has authored or co-authored 13 books and has also authored dozens of scholarly articles, papers and chapters. His work has been published in Administrative Science Quarterly, Academy of Management Journal, Academy of Management Review, Strategic Management Journal, Journal of Management, Accounting Organizations and Society, Management Science, MIS Quarterly, California Management Review and Organizational Behavior Teaching Review. Professor Daft has been awarded several government research grants to pursue studies of organisation design, organisational innovation and change, strategy implementation and organisational information processing. Professor Daft also is an active teacher and consultant. He has taught management, leadership, organisational change, organisational theory and organisational behaviour. He has been involved in management development and consulting for many companies and government organisations.

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Chapter 1

The changing world of management

Chapter 2

The evolution of management thinking

Par t one

Australia is often described as a country that plays above its weight when it comes to sporting achievement – an accurate description, as we see in the Australian team’s achievements at Olympic and Commonwealth Games. The same can be said for New Zealand in respect of its tremendous rugby union accomplishments.

Whether in rugby or hockey or business management, innovation is perhaps the ultimate competitive battleground. Innovative tactics in sport can take the opposition by surprise and create a winning advantage, just as the iPod, iPhone and iPad have been winners for Apple. Most people can relate to sporting excellence and the levels achieved by elite athletes because they have played sports themselves. But what do sporting efforts and achievements have to do with management? According to Rod McQueen,1 the former coach and manager of the Wallabies, the team that took Australian rugby union to its unprecedented domination of the sport from 1990 to 2000, the answer is that sporting success and business management success come from the same roots. McQueen says his success with the Wallabies resulted from his use of the same strategies and tactics that have driven his own success in his business display and services organisation. He had the Wallabies plan by conducting Strengths– Weaknesses–Opportunities–Threats (SWOT) analyses of

I n n ovat i v e Management for a Changing World competitors. McQueen also motivated his staff, and the Wallabies, by using innovative management techniques that developed from the bottom up, increasing motivation and ownership of these ideas. What is the ultimate goal of a sportsperson, a team or a manager? Doing everything they can to achieve success by planning and implementing strategies and tactics that lead to that success. In management, as in sport, there are strong connections between actions – what you do – and outcomes – how well you do. This explains why so many high achievers in sport go on to achieve success in business or government. Examples abound, and there are too many leaders who were once great athletes for this to be a coincidence. Perhaps the common factor is sheer drive and ambition – or, as Rod McQueen puts it, the same human and organisational factors and techniques that work when innovation and high levels of performance are needed, whatever the activity. In Part One of this textbook, we look at the skills and roles of managers, and the history and new models of management. 1

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Understand the personal challenges involved in becoming a new manager in an organisation in today’s world.

2 Describe the four management functions and

5 Describe management types and the horizontal and vertical differences between them.

6 Discuss the innovative management

competencies needed to deal with today’s turbulent environment, including issues such as diversity, globalisation and rapid change.

the type of management activity associated with each.

3 Explain the difference between efficiency

and effectiveness and their importance for organisational performance, including in terms of innovation outcomes.

4 Describe conceptual, human and technical skills, and their relevance for managers and employees.

7 Explain the leadership skills needed for effective crisis management.

8 Discuss the future challenges for Australian managers.

9 Discuss the meaning of sustainable development.

Chapter 1

the changing world of management Chapter outline

➜ M  anaging in small businesses and not-

➜ Why innovative management matters ➜ Current challenges for managers

➜ S tate-of-the-art management

Challenges for government Challenges for business Challenges for the individual employee

➜ Managers who make a difference ➜ The definition of management ➜ The four management functions Planning Organising Leading Controlling

for-profit organisations competencies

➜ Organisational performance ➜ Management skills Conceptual skills Human skills Technical skills When skills fail

➜ Management types

Vertical differences Horizontal differences

➜ What is it like to be a manager?

Making the leap: becoming a new manager

➜ Manager activities

Adventures in multitasking Life on a speed dial Where does a manager find the time? Manager roles

2

➜ T urbulent times: managing crises and

unexpected events Stay calm Be visible Put people before business Tell the truth Know when to get back to business

➜  Australia’s managers: improving from a low base Manager strengths Manager weaknesses

➜ S ustainable development: now a core issue for managers

New Manager Self-test Are you ready to be a manager? Welcome to the world of management. Are you ready for it? This questionnaire will help you see whether your priorities align with the demands placed on today’s managers. Rate each of the following items based on what you think is the appropriate emphasis for that task to your success as a new manager of a department. Your task is to rate the four top-priority items as ‘High priority’ and the other four as ‘Low priority’ (that is, four of the items should be rated high and four rated low.) Priorities

High priority

Low priority

1 Spend 50 per cent or more of your time in the care and feeding of people. 2 Make sure people understand that you are in control of the department. 3 Use lunches to meet and network with peers in other departments. 4 Implement the changes you believe will improve department performance. 5 Spend as much time as possible talking with and listening to subordinates. 6 Make sure jobs get done on time. 7 Reach out to your boss to discuss his expectations for you and your department. 8 Make sure you set clear expectations and policies for your department. Scoring and interpretation: All eight items in the list may be important, but the odd-numbered items are considered more important than the even-numbered items for long-term success as a manager. If you checked three or four of the odd-numbered items, consider yourself ready for a management position. A successful new manager discovers that a lot of time has to be spent in the care and feeding of people, including direct reports and colleagues. People who fail in new management jobs often do so because they have poor working relationships or they misjudge management philosophy or cultural values. Developing good relationships in all directions is typically more important than holding on to old work skills or emphasising control and task outcomes. Successful outcomes typically will occur when relationships are solid. After a year or so in a managerial role, successful people learn that more than half their time is spent networking and building relationships. Note: This questionnaire is adapted from research findings reported in Linda A. Hill, Becoming a Manager: How New Managers Master the Challenges of Leadership, 2nd ed. (Boston, MA: Harvard Business School Press, 2003); and John J. Gabarro, The Dynamics of Taking Charge (Boston, MA: Harvard Business School Press, 1987).

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The business environment, in which managers try to steer their companies towards achieving their goals, seems to be changing faster and more unpredictably than ever before. Management Consider executives in the oil industry, Challenge who are responsible for exploring, finding, evaluating, developing and then producing oil and gas which they then convert (refine) into valuable petroleum products. These products keep the world moving, and without them we could not power cars, buses, planes, ships and trucks. These core products are also the raw materials for most forms of plastics, petrochemicals, fertilisers and other categories of goods that we all take for granted as consumers. For the better part of 200 years, companies such as Shell, Exxon Mobil and BP had a quite stable world in which to operate. They were relatively unfettered by government controls on pollution and able to count on stable prices and predictable costs, and hence on profits and returns on invested funds. Those factors have changed dramatically in the past decade, necessitating a complete rethink of how these businesses are run. Consider the very successful national oil company of Malaysia, called PETRONAS. From its beginning in 1974, this company has operated in Malaysia, and more recently it has branched out successfully into over 30 other countries, operating exploration, oilfield development and even petrol retailing outlets in countries as diverse as South Africa, Thailand and Sudan, as well as many other Asian, European and African countries. Recent major PETRONAS investments are in gas field development and export in Queensland and Western Australia. The world that these international oil companies operate in has changed a lot recently, for example, as prices have spiked and fallen fast and unpredictably. Consider such factors as: PETRONAS executives have had to do their planning, investment decision making and run their operations as the global price of oil rose from around $23 per barrel to over $140 per barrel within a period of five years. They were then forced to plan for the possibility that the price would go up to a massive $200 per barrel, which was being forecast by some industry experts. Such high prices made oilfields that were previously unfeasible into highly profitable enterprises. Large expansions became viable. But then the global oil price quickly and unpredictably fell to below $40 per barrel, bottoming briefly at $34. Plans went out the window: a new world emerged almost overnight. Then, just when PETRONAS was getting used to a world of low oil prices, low profit margins and tightening operations and costs, prices shot back up to over $90 in 2011 and have hovered within this range since. What is next? This is the environment in which managers must plan and execute their strategies: one of high uncertainty and unpredictable volatility. The unfortunate disaster experienced by BP in the Gulf of Mexico in April 2010, in which one of its oil wells leaked large amounts of crude oil (5 million barrels) into the sea led to governments and communities globally taking a negative attitude

towards BP and the industry in general; this brought about tougher regulation, and, at least for a while, a ban on further exploration and oilfield development. Despite ‘best efforts’, this whole industry suffers from unpredictable safety and environmental events and outcomes. The global financial crisis (GFC) of 2008–10 was also in full swing during this period, such that consumer demand went into meltdown in the USA and then elsewhere. In countries such as Iceland, Spain, Ireland, Greece, Portugal and many others, unprecedented recessions took place. Not since the Great Depression of 1930 had such events occurred. More recently, major markets in which PETRONAS and other leading oil companies have investments and operations have experienced significant political instability, such as the ’Arab Spring’ revolutions in Egypt and Libya, and the splitting of Sudan into two countries. In 2013 the major ongoing problems in Syria and Egypt made it even more challenging than usual to do business. What’s next? The natural environment appears to be increasingly volatile. PETRONAS managers signed up for a major investment in Central Queensland, Australia, where major storms in 2010 and 2011 led to extreme flooding and one of the biggest cyclones in recorded history, delaying and disrupting operations, destroying assets and interfering with markets. PETRONAS is losing its staff on a significant and regular basis. They are being poached by competitors from developing Middle Eastern companies, which operate in countries that are oil-rich and able to offer large cash salary packages to the best engineers and others in these companies. Climate change and the danger of the world choking itself on carbon released from oil and coal into the environment are threats to the core business of companies in this industry, and come simultaneously with predictions that global oil reserves are dwindling anyway. The potential for carbon taxes and emission trading schemes (ETS) can add costs and complexity to energy businesses. Sources: http://en.wikipedia.org/wiki/2000s_energy_crisis (accessed 6 March 2014); http://tfc-charts.com/chart/QM/W (accessed 6 March 2014).

Question How can the managers in PETRONAS and other oil companies, large and small, have any confidence in their decisions and plans in an environment that is changing so rapidly that, almost every day, a surprising event somewhere in the world impacts significantly on their business?

1: The changing world of management

When Steve Jobs died in October 2011, Apple, the company he cofounded in 1976, was the most valuable company in the world in terms of market capitalisation. Millions of people are devoted to Apple’s innovative products, including the iPhone and the iPad. After Jobs’s death, magazines, newspapers, scholarly journals and websites rushed to publish articles about the legendary CEO’s legacy and his management style. In his 600-plus-page biography of Jobs, Walter Isaacson calls him ‘the greatest business executive of our era’, and managers around the world began reading the book to tap into the power of Jobs’s management ideas.2 It seems hard to believe that 26 years earlier, after founding Apple, Jobs had been fired from his own company at the age of 30. During his first 10 years with Apple, Jobs was clearly visionary and innovative – characteristics that he continued to display throughout his lifetime. But he didn’t know or care much for the ‘management’ side of the business, and that led to a humiliating and humbling fall which provided Jobs with the chance to learn some management lessons that eventually took him back to Apple and produced one of the greatest corporate success stories of all time. For most people, being a manager doesn’t come naturally. Steve Jobs had both positive and negative qualities as a manager, but over the course of his career he learned how to coordinate and lead people effectively to accomplish amazing results. One surprise for many people when they first step into a management role is that they are far less in control of things than they expected to be. The nature of management is to motivate and coordinate others to cope with diverse and far-reaching challenges. Many new managers expect to have power, to be in control and to be personally responsible for departmental outcomes. However, managers depend on subordinates more than the reverse, and they are evaluated on the work of other people rather than their own achievements. Managers set up the systems and conditions that help other people perform well. In the past, many managers did exercise tight control over employees. But the field of management is undergoing a revolution that asks managers to do more with less, to engage employees’ hearts and minds as well as their physical energy, to see change rather than stability as natural, and to inspire vision and cultural values that allow people to create a truly collaborative and productive workplace. This textbook introduces and explains the process of management and the changing ways of thinking about the world that are critical for today’s managers. By reviewing the actions of some successful and not-so-successful managers, you will learn the fundamentals of management. By the end of this chapter, you will already recognise some of the skills that managers use to keep organisations on track, and you will begin to understand how managers can achieve astonishing results through people. By the end of this book, you will understand the fundamental management skills for planning, organising, leading and controlling a department or an entire organisation.

Twitter and Square ‘By inventing Twitter, Jack may have well brought down dictators in North Africa and the Middle East,’ said Virgin Group CEO Richard Branson. He was talking about Jack Dorsey, one of the cofounders of the microblogging service Twitter, which has more than 500 million users and processes over 340 million ‘tweets’ a day. As Branson’s comment reflects, tweeting isn’t just about gossiping or showing off. It’s used for all sorts of activities, from organising protests and spreading

Innovative Way the word about political turbulence or natural disasters to marketing products and gathering customer feedback. Ultimately, though, Dorsey’s other company, Square, founded in 2010, may eventually have even greater impact and influence. Square started with one product – a simple credit card reader that can be plugged into an iPhone and allow anyone to accept credit card payments. Today, more than a million small businesses and individuals in the United States use Square to

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process credit cards, and Dorsey’s team is looking for how to expand into Australia, Latin America, Asia and Europe. Square is also creating a variety of other products and services and is growing rapidly. Much of the success of Twitter and Square can be attributed to managers’ effectiveness at innovation. Dorsey

refers to new initiatives at Square as ‘resets’ because they aim to be so groundbreaking that they reset the nature of the financial world. ‘Everything we do is about getting people to be more open, more creative, more courageous,’ says Dorsey. Square quickly zoomed to No. 5 on Fast Company’s list of the world’s most innovative companies.

Sources: Quoted in Ellen McGirt. (March 2012). 05: Square, For Making Magic Out of the Mercantile. Fast Company, 82–5, 146–7 (part of the section, The World’s 50 Most Innovative Companies); Will Self. (26 March 2012). Twitter Is Just a New Home for Old Bores. New Statesman, 53; (13 January 2011). Could Tunisia Be the Next Twitter Revolution? The Atlantic, http://www.theatlantic.com/daily-dish/archive/2011/01/could-tunisia-be-the-next-twitter-revolution /177302/ (accessed 11 June 2012); Alexander Mills et al. (2009). Web 2.0 Emergency Applications: How Useful Can Twitter Be For Emergency Response? Twitter for Emergency Management and Mitigation, http://denman-mills.net/web_ documents/jips_mills.etal._2009.07.22_finalsubmission.pdf (accessed 11 June 2012).

Why innovative management matters A major theme of this text is innovation, and related to that, sustainable development. To gain or keep a competitive edge, today’s managers have renewed their emphasis on innovation, shifting away from a relentless focus on controlling costs towards investing in the future. In a survey of nearly 1000 executives in North America, Europe, South America and Asia, 86 per cent agreed that ‘innovation is more important than cost reduction for long-term success’.3 Why does innovative management matter? Innovations in products, services, management systems, production processes, corporate values, and other aspects of the organisation are what keep companies growing, changing and thriving. Without innovation, no company can survive over the long run. Industries, technologies, economies, governments and societies are in constant flux, and managers are responsible for helping their organisations navigate through the unpredictable with flexibility and innovation.4 The growing clout and expertise of companies in developing countries, particularly China and India, have many Western managers worried. In a hypercompetitive global environment, companies must innovate more – and more quickly – than ever. Throughout this text, we will spotlight various companies that reflect this new innovation imperative. In addition, Chapter 11 discusses innovation and change in detail. First, let’s begin our adventure into the world of management by learning about some of the current challenges for managers, and what it means to be a manager.

Current challenges for managers Managers have both challenges and opportunities, whatever the size and industry or sector that they work in. We can consider the new challenges of the workplace at three levels: government, business and individual.

Challen ges fo r govern m ent Imagine the vast range of challenging issues managers face in the three levels of government in Australia: federal, state and municipal (that is, local shire or council). Consider the challenges of providing competitive services and sound policy frameworks on such difficult issues as healthcare, education, transport, economic management, local services, defence and protection and environmental management,

1: The changing world of management

among a host of others. What regulations should govern the growing telecommunications industry and the competition between mobile phone suppliers? In Australia, former Prime Minister Julia Gillard was in charge of introducing a multi-billion-dollar investment in telecommunications infrastructure called the National Broadband Network (NBN), a plan that Tony Abbott’s Liberal government is, with some amendments, currently proceeding with. Will the NBN be successful, or will it become redundant? As another example: What safety standards should apply in the chemical industry, and what hygiene standards in the food industry? An issue may be specific, such as what to do about the acute shortage of capacity for aircraft movement in Sydney (the ‘second Sydney airport’ problem) or what to do about floods, droughts, cyclones and climate change, or it may be more general, such as how to fund healthcare as our population continues to age. The list of challenges for government at all three levels is virtually endless. Most involve allocating limited resources between alternatives, where conflicting objectives and tradeoffs between interest groups need to be considered. Although most of the challenges of government are managerial challenges, many are also policy challenges. Some are purely policy issues without much direct monetary cost to the government. For example, should the government preserve or relax the existing ‘four pillars’ policy in our banking industry, which prevents mergers or acquisitions between the big banks (ANZ, Commonwealth, NAB and Westpac) and limits competition? Should they allow or disallow same-sex marriage? Governments in Asia have also faced many challenges, including dealing with economic uncertainty and responding to the critical levels of air, water and land pollution that have occurred as they have industrialised. Asia’s 4.3 billion people are breathing toxins at unacceptable levels, with many of the world’s worst-polluted cities being in Asia. The past decades of growth and increased prosperity in Asia have led to these outcomes, which are not sustainable in the long term. The estimated total costs of pollution in China are as high as 10 per cent of gross domestic product (GDP). Hotels in Hong Kong have banded together to improve their energy consumption and reduce their pollutants. Pollution from forest burning in Indonesia is impacting on the air quality and reducing tourism in Indonesia and Malaysia. Governments also face many challenges in regulating the way that business does business. In Australia, New Zealand and elsewhere, government regulators are constantly working to ensure that businesses do not unfairly take advantage of consumers, workers or competitors. Governments make and implement laws against unfair trading, paying below minimum wage levels, unsafe workplaces or practices, pollution, nondisclosure of information, monopolistic practices and cartel behaviours, misinforming consumers and a host of other issues. Managers within government have great responsibility on their shoulders in advising politicians and interpreting and implementing policies. Managers in industry must ensure that their firms continuously comply with literally hundreds of laws.

Challen ges fo r busin ess The challenge of pollution control and sustainable development is not just for governments, but clearly also for the business sector and for individuals as consumers. For example, the tourism industry of a region or country can be significantly affected by air pollution, undrinkable water and other environmental

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problems. In Australia, the Murray–Darling River system has been compromised and continues to be threatened by pollutants, and salinity and water shortage are widespread problems in the farming sector. Vast resources are needed to address these problems and farming businesses will need to work cooperatively with governments for decades to come.5 Many Australian businesses sell their products and services overseas as well as domestically and many Australian managers have consequently been exposed to the sharp competitive forces of the Asian, American and European marketplaces in which they do business. They have learned a great deal as a result. Even more important has been the translation of that learning into improved and widespread knowledge, practices and behaviour in Australian-based organisations. Further, many Australian businesses are not just buying and selling their raw materials and products and services outside Australia, but are also establishing operations outside Australia. These include retailers, banks, mining companies, manufacturers, distributors, software houses, Internet-based businesses and a variety of other enterprises. In the business sector, large enterprises such as Telstra, Coles and the big banks each employ tens of thousands of people and are constantly faced with the challenge of managing the enormous costs of these labour forces. The challenge is smaller in scale, but similar, in the local milk bar or petrol station. In essence, this challenge is to continually generate enough revenue to pay all the firm’s costs for labour, rent, materials, energy, advertising and other expenses, while also producing a profit for the business owner that will be a sufficient return on investment. And while doing all this, managers must ensure that they and their companies comply with myriad laws: tax laws, labour standards, reporting of information, environmental regulations, consumer protection and many others. The strategies and decisions that governments, businesses and individuals make increasingly are being taken in the face of uncertainty. A study of senior executives conducted at London Business School found that decision making, negotiation skills and agility in dealing with people and customers were key to what makes for successful leaders and managers at all levels. And we must remember how easy it is to ‘fall off the log’ of success: just consider the National Australia Bank. It went from being a darling of the Australian market and the leader in its industry in the 1990s under the leadership of Don Argus to a scandal-ridden company with a falling share price after Mr Argus passed on the reins of leadership to a successor. This led to shareholders losing about a quarter of their wealth, and the embarrassing resignations of the board chairman, board members and the managing director. Many employees were sadly ‘shed’ in the related tightening associated with this major Australian corporate crisis in 2004. This shows how even the mightiest companies can fall from grace when leaders and managers get it wrong. Under Don Argus, the bank grew its share price 600 per cent, moved towards globalisation and increased annual profits from A$500 million to over A$3 billion. Its market leadership was unquestioned for a decade. Under the next CEO, overseas assets were sold, the bank had to pull back from the global model it had aspired to, and shareholders suffered badly with long-lasting negative impacts. In 2014, this company has still not been able to recover its industry leadership position; in fact, it is seen generally as underperforming, as exemplified by its lagging share price and profitability, relative to industry leaders, which it used to outperform. Management missteps can occur in businesses of any size and in any industry, and customers, shareholders and regulators are generally unforgiving in today’s frenetic business world.

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Challen ges fo r th e in d ivi dual em ployee For the individual who wants to exchange work for money in the labour market, the challenge of getting and keeping a job is to demonstrate the skills, attitude and continuing performance of output that are valuable to the employer and justify the costs of employment. In a business environment that has spent the last decade shedding labour, individual competitiveness for jobs is a continuing challenge, and the notion of ‘job security’ is, for most people, a thing of the past. This poses a challenge to individuals: planning for their next job. A career becomes a series of employment relationships. Most university graduates will have many different roles and jobs over their working lives. How do we, as individuals wanting to achieve a good return on the human capital we invest in our work, maximise our competitiveness in achieving and retaining a series of suitable jobs? Individuals must value-add to the organisations that employ them. The challenge of being individually competitive in the workplace follows the challenge of being competitive in school, getting into a suitable course at university, then graduating and getting a job that meets expectations. For governments, companies and individuals, the challenge of being competitive never stops!

Managers who make a difference The turbulence and change in today’s competitive business environment has led to a revolution in the field of management. A new kind of leader is needed who can guide organisations through this turbulence – a strong leader who recognises the complexity of today’s world and realises there are no perfect answers. Unanticipated crises must somehow be prepared for. As we discussed earlier, the revolution asks managers to see change rather than stability as the nature of things, and to create vision and cultural values that allow people to foster a truly collaborative workplace, even under the most difficult conditions. This new management approach is very different from a traditional mindset that emphasises fixed, tight, top-down control, employee separation and specialisation, and management by impersonal measurement and analysis. Australian enterprises that want to be part of a successful and positive economic future are responding to this revolution towards a new management paradigm, or way of thinking. Making a difference as a manager today and tomorrow requires a different approach from yesterday. Successful departments and organisations do not just happen – they are managed to be that way. Managers in every organisation face major challenges and have an opportunity to make a difference. Flexibility and agility are important new approaches and capabilities needed by managers and their organisations. Chanut Piyaoui made a difference by changing the somewhat unsavoury reputation of Thai hotels as ‘places of entertainment’, as she delicately phrased it. With little initial capital, Chanut’s vision and management skills created Thailand’s leading hotel chain, one that Asiamoney magazine has ranked one of the 100 best-managed companies in Asia.6 An initial change in the market positioning of the chain was pivotal, and has now led to international expansion of the hotel group into China, Dubai and India – all growth markets – and the development and operation of other hospitality businesses, including a training college. With further international expansion into related businesses being planned, Chanut’s vision is coming to fruition. Such managers are not unusual. Every day, managers solve difficult problems, turn organisations around and achieve astonishing performances. To be successful, every organisation needs skilled managers.

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The definition of management

management The attainment of organisational goals in an effective and efficient manner through planning, organising, leading and controlling organisational resources.

So what do managers actually do? The late, famed management theorist Peter Drucker, who is often credited with creating the modern study of management, summed up the job of the manager by specifying five tasks, as outlined in Exhibit 1.1.7 In essence, managers set goals, organise activities, motivate and communicate, measure performance and develop people. These five manager activities apply not only to top executives such as Mark Zuckerberg at Facebook, Alan Mulally at Ford Motor Company and Ursula Burns at Xerox, but also to the manager of a restaurant in your home suburb, the leader of an airport security team, a supervisor at a web hosting service, or the director of sales and marketing for a local Coles or Woolworths supermarket. The activities outlined in Exhibit 1.1 fall into four core management functions: planning (setting goals and deciding activities), organising (organising activities and people), leading (motivating, communicating with and developing people) and controlling (establishing targets and measuring performance). Depending on their job situation, managers perform numerous and varied tasks, but they all can be categorised under these four primary functions. Thus, our definition of management is as follows: Management is the attainment of organisational goals in an effective and efficient manner through planning, organising, leading and controlling organisational resources. This definition includes two important ideas: (1) the four functions of planning, organising, leading and controlling, and (2) the attainment of organisational goals in an effective and efficient manner. Let’s first look at the four primary management functions. Later in this chapter, we’ll discuss organisational effectiveness and efficiency, as well as the multitude of skills that managers use to perform their jobs successfully.

Exhibit 1.1 What do managers do?

1. Set Objectives Source: Based on ‘What Do Managers Do?’, The Wall Street Journal Online, http://guides.wsj. com/management/developingaleadership-style/what-domanagers-do/ (accessed 11 August 2010), article adapted from Alan Murray, The Wall Street Journal Essential Guide to Management (New York: Harper Business, 2010).

Establish goals for the group and decide what must be done to achieve them

5. Develop People Recognise the value of employees and develop this critical organisational asset

4. Measure Set targets and standards; appraise performance

2. Organise Divide work into manageable activities and select people to accomplish tasks

3. Motivate and Communicate Create teamwork via decisions on pay, promotions, etc., and through communication

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➜➜ Managers get things done by coordinating and motivating other people. ➜➜ Management often is a different experience from what people expect.

➜➜ Innovative management is critical in today’s turbulent world. ➜➜ Management is defined as the attainment of organisational goals in an effective and efficient manner through planning, organising, leading and controlling organisational resources.

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➜➜ Managers at all levels, from those running a country to those managing just themselves or a small team, must meet many challenges of creating and delivering value to their organisation and its stakeholders.

The four management functions Exhibit 1.2 illustrates the process of how managers use resources to attain organisational goals through the functions of planning, organising, leading and controlling. Chapters of this book are devoted to the multiple activities and skills associated with each function, as well as to the environment, global competitiveness and ethics that influence how managers perform these functions.

Exhibit 1.2 The process of management

Management Functions Planning

Select goals and ways to attain them

Resources Human Financial Raw materials Technological Information

Organising

Controlling

Assign responsibility for task accomplishment

Monitor activities and make corrections

Performance Attain goals Products Services Efficiency Effectiveness

Leading

Use influence to motivate employees

Pl ann in g Planning means identifying goals for future organisational performance and deciding on the tasks and use

of resources needed to attain them. In other words, managerial planning defines where the organisation wants to be in the future and how to get there. A good example of planning comes from General Electric (GE) – a company that will be repeatedly referred to throughout this book – where managers have sold off such divisions as Plastics, Insurance and Media to focus company resources on four key business areas: energy, aircraft engines, healthcare and financial services. GE used to relocate senior executives every few years to different divisions so that they developed broad, general expertise. In line with the strategic refocusing, the company now will keep people in their business units longer so they gain a deeper understanding of products and customers within each of the four core businesses.8

planning planning The management function concerned with defining goals for future organisational performance and deciding on the tasks and resource use needed to attain them.

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Case study

Good planning must be more than just aspirational statements such as, ‘How many can we make and sell?’ Good planning involves understanding the enterprise’s environment and how it is changing, forecasting changes as best you can, and considering how to position the enterprise to make its market offerings (products and services) attractive. Good planning, then, overlaps with organising: working out the details of the resources necessary to achieve all this, and how they will be marshalled.

India: A hotbed of competition for mobile phones Fortune magazine’s 2007 Asian Businessman of the Year was Sunil Mittal, who has achieved a 20 per cent market share in the booming Indian mobile phone market. His company, Bharti Airtel Ltd, has outgrown the traditionally large Indian firms, Tata and Reliance. The growth in the mobile phone market has been little short of incredible in India. Mittal had to hire some 20 000 people to serve over 30 million customers with mobile phone services and reported some $4 billion in revenue, which is eightfold growth in just four years. By 2012, Bharti Airtel’s competitive landscape had changed. Bharti’s business model was so successful that other operators in India reproduced Mittal’s original strategy, so much so that the sector is now highly competitive. Bharti has lost market share to tough new competitors, such as Vodafone and Idea Cellular, resulting in a net profit drop of 72 per cent. In a period of hyper competition Bharti Airtel has been forced to undergo significant internal restructuring and as a result Bharti’s shares have managed to recover some 80 per cent since the GFC. Sunil Mittal is one of India’s richest men and was appointed Vice-Chairman of the prestigious International Chamber of Commerce (ICC) in early 2013. The most important strategy for Mittal in achieving such growth and doing so at a profit was not to try and do it all himself. Learning from what happened in China, Mittal realised that many well-established foreign companies were very keen to get a foothold in the potentially huge and rapidly

growing markets in India. Mittal took good business advantage of that. He did deals with Ericsson of Sweden, Siemens of Germany, IBM of USA and Nokia of Finland which brought him excellent quality of technology and service standards and also brought strong leadership and management systems. By bringing in technology and service providers and having a solid and reliable backing to his business, Mittal was able to focus on marketing and sales growth rather than being preoccupied with service and technology and the product challenges, which would be very substantial in an independent start-up. He clearly started with some of the world’s best technology and infrastructure providers. Mittal has gone against conventional wisdom in making these strategic partnerships a central element of his business strategy. He has used his business knowledge to expand from mobile phones into other industries. He is using his brand and reputation to do similarly in these industries as he did in telecommunications. He has launched a joint venture with France’s AXA to sell life insurance in India and an independent business venture is moving fresh fruit and vegetables from India to European supermarkets. A recent announcement was to team up with America’s Walmart and drive forward in retailing. Mittal takes great advantage of these mature companies’ systems in each of his business ventures. Such joint ventures provide an excellent match of Mittal’s reputation and marketing

knowledge in the local Indian market and the back office excellence of Walmart. This is not really different from AXA’s back office management of insurance and Nokia’s, Siemens’, IBM’s and Ericsson’s expertise in mobile phones. Mittal has shown great shrewdness and business acumen in tying up these global giants and leveraging their knowledge in the fastgrowing market of India. Sunil Mittal’s Bharti competes fiercely with Vodafone and at the same time shares the 70 000 telecom tower network that they had separately established, but now collaborate on, with something approaching 60 million customers. These two companies have been competing fiercely for customers’ attention and business. While the possibility of a full merger appeals to some shareholders but not to others, billions of dollars are at stake. Interestingly, mobile phones are rapidly becoming much more than just a medium for communication using voice and SMS messaging. Email and Internet access and even increasingly widespread consumer advertising is occurring in the world’s mobile phone markets. A new trend in the USA and Europe, one spreading to virtually every mobile phone market, is the possibility of customising mobile phone advertisements such as those by Coca-Cola, Canon, BMW, Pepsi and Nike, knowing their individual demographic properties. Mobile telephony is likely to get a reasonable slice of the roughly $800 billion in annual global advertising expenditure. Mittal has built a

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formidable empire in one of the world’s hot growth markets with the aim of growing as these technology trends develop. By 2012, the company had achieved sales revenue of $27 billion and was operating in over 20 countries with more than 262 million customers. The company had expanded into digital TV services and other related businesses, and is now seen as an innovative technology leader, even by global standards, thanks to its dynamic leadership. Bharti has also demonstrated a commitment to sustainability through social and environmental initiatives such as a schools program, through which they deliver education to approximately 35 000 children across India. The program has

been so beneficial to the children of poor, rural communities that in 2013 they expanded it into Africa, where they also recently launched the Airtel brand. The company’s first ever Sustainability Report identified an 11 per cent reduction in greenhouse gas emissions and a saving of 20 million Kw/h of energy through energy efficiency measures. Bharti has grown its revenue stream significantly and regularly and is highly profitable, hence sustainable. Sources: http://bharti.com/home (accessed 6 May 2013), Bharti homepage; http://forbesindia.com/article/ richest-indians-in-2012/sunil-mittal-time-is-runningout-for-him/34117/1#ixzz2SUKDnp (accessed 6 May 2013), ‘Richest Indians in 2012 Forbes’; http://www. forbes.com/profile/sunil-mittal/ (accessed 6 May 2013), ‘Forbes Profiles 2013’; http://investing.

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businessweek.com/research/stocks/charts/charts. asp?ticker=BHARTI:IN (accessed 7 May 2013), Bloomberg Businessweek; http://www.bharti.com/wps/wcm/connect/BhartiPortal/ bharti/home/media_centre/press_releases/fy2013-2014/ sunil-bharti-mittal-appointed-as-vice-chairmanof-international-chamber-of-commerce (accessed 7 May 2013), Bharti website; ‘Richest Indians in 2012 Forbes http://www.airtel.in/QuarterlyResult/ Press_release_Q3_13N.pdf (p.1) (accessed 7 May 2013) Bharti website; http://www.airtel.in/AnnualResults/ Bharti_Airtel_annual_report_full_2010-2011.pdf (p. 8) (accessed 7 May 2013), Bharti Airtel Annual Report 2010–11; http://www.airtel.in/sustainabilitypdf/ sustainabilityreport.pdf (accessed 7 May 2013), Bharti Airtel Sustainability Report 2012, pp. 24, 43 and 42; Helper, M. (5 March 2007). Advertising Goes Mobile. Fortune, 14; Elliot, J. (5 March 2007). Friends, Foes – and Future Phone Mates. Fortune, 12; Levinsteen, J. (22 January 2007). Businessman of the Year: Asia. Fortune, 35–9.

O rgan isin g Organising typically follows planning and reflects the way the organisation tries to accomplish the plan. Organising involves the assignment of tasks, the grouping of tasks into departments and the allocation of resources to departments. For example, Hewlett-Packard, National Australia Bank and Xerox have all undergone structural reorganisations to accommodate their changing plans. Semco, a Brazilian company making industrial pumps, mixers, propellers and other products, reorganised from a highly structured, autocratic business into a company run on trust, freedom and democracy. Six people rotate as CEO, each putting in six-month stints. Employees set their own work schedules, organising themselves to accomplish their tasks. Semco’s loose organisation has been so successful that executives from Mobil, IBM and hundreds of other organisations have travelled to São Paulo to study Semco and see the operation first-hand.9 Organising is a key task for Oprah Winfrey as she strives to turn around her struggling start-up cable network, OWN. Winfrey took over as CEO of the company, repositioned some executives and hired new ones, and cut jobs to reduce costs and streamline the company. She is hoping the structural changes will bring a lean, entrepreneurial approach that will get OWN on solid ground. Winfrey said, ‘I prided myself on leanness’, referring to the early days of her TV talk show. ‘The opposite was done here.’10

organising organising The management function concerned with assigning tasks, grouping tasks into departments and allocating resources to departments.

Le ad in g Leading is the use of influence to motivate employees to achieve organisational goals. Leading means

creating a shared culture and values, communicating goals to people throughout the organisation and infusing employees with the desire to perform at a high level. One doesn’t have to be a top manager of a big corporation to be an exceptional leader. Many managers working quietly in both large and small organisations around the world provide strong leadership within departments, teams, non-profit organisations and small businesses. Well-known managers such as Don Argus and the late Steve Jobs are (and were) exceptional leaders. They are able to communicate their vision throughout the organisation and energise employees into action.

leading The management function that involves the use of influence to motivate employees to achieve the organisation’s goals.

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In times of uncertainty, international competition and growing diversity in the workforce, the ability of leaders to shape culture, communicate goals and motivate employees is critical to business success. Change is scary and difficult for the unimaginative manager, but a positive opportunity for those who are forward-looking.11

Co ntro llin g controlling The management function concerned with monitoring employees’ activities, keeping the organisation on track towards its goals and making corrections as needed.

Controlling is the fourth function in the management process. Controlling means monitoring employees’ activities, determining whether the organisation is on target towards its goals and making corrections as necessary. Managers must ensure that the organisation is moving towards its goals. New trends towards empowerment and trust of employees have led many organisations to place less emphasis on top-down control and more on training employees to monitor and correct themselves. At International Service System (ISS), the Danish company that grew from a local office-cleaning contractor to a US$2 billion multinational business, the entire control system is built on the belief that people at all levels will make the right decisions if they are provided with the appropriate information. Front-line employees are thoroughly trained to measure their own performance against company standards and make corrections needed. Ongoing training programs at Accenture (formerly Andersen Consulting) instil into every employee the firm’s core values and standards of expected performance, enabling the firm to give its employees great freedom without endangering its high standards. However, managers must realise that what works in one organisation or one situation may not work in another. The Mars (Uncle Ben’s) pet-food operations in Australia are responsible for most of the major brands of pet food (such as Pal) in Australian supermarkets. The company runs an open-styled culture: at Uncle Ben’s head office in Wodonga, Victoria, even the most senior executives sit near sales clerks in a single, large, open-plan office area. However, an example of a managerial control in Mars is that everyone, without exception, clocks on when they arrive at work each day. It works for them, and is a part of the way Mars organises all around the world.12 The challenge to managers is to find the right mix between employee empowerment and maintaining adequate control. While many companies were trimming their sails and seeking conservative positions and strategies following the turmoil of the 2001 terrorist attacks in the US, Peter Lau and his staff at Giordano were doing virtually the opposite. Lau claimed to have been waiting for a downturn to gain market advantage. Born in Hong Kong and trained in accounting in Canada, Lau expanded Giordano’s number of clothing outlets in Asia from 360 to more than 1000, while generating an impressive US$100 million profit from US$850 million of sales. He repositioned the brand and company from cut-price to middle market, and appealed to the growing middle class of Asia. Lau cut costs and halved inventory turnover time from 52 days to 26. This meant extremely rapid turnover of stock, so new fashions could be offered, stockholding costs reduced and the risk of being caught with redundant garments minimised. Lau’s plan to aggressively expand Giordano while others were closing stores around Asia was a success and sales growth has continued. Giordano now has over 2700 shops in 40 territories worldwide, and a major online presence. Massive expansion has occurred in the fast-growing countries of China, Taiwan and South Korea, as well as Australia. Online sales growth continues.13 New information technology is also helping managers provide necessary organisational control without strict top-down constraints. Companies such as Cisco Systems use the Internet and other information technology to coordinate and monitor virtually every aspect of operations, which enables managers to keep

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tabs on performance without maintaining daily authoritarian control over employees. Cisco employees have amazing freedom to make decisions and take action, but they also know that top managers can keep a close eye on what’s going on throughout the company with just a few mouse clicks. ➜➜ Managers perform a wide variety of activities that fall within four primary management functions. ➜➜ Planning is the management function concerned with defining goals for

future performance and how to attain them. ➜➜ Organising involves assigning tasks, grouping tasks into departments and allocating resources.

➜➜ Leading means using influence to motivate employees to achieve the organisation’s goals.

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➜➜ Controlling is concerned with monitoring employees’ activities, keeping the organisation on track towards meeting its goals and making corrections as necessary.

Organisational performance The other part of our definition of management is the attainment of organisational goals in an efficient and effective manner. Management is important because organisations are important. In an industrialised society where complex technologies dominate, organisations bring together knowledge, people and raw materials to perform tasks no individual could do alone. Without organisations, how could thousands of airline flights a day be accomplished without accident? How could electricity be produced from large dams or wind generators, millions of cars be manufactured, or hundreds of films and books be made available for our entertainment? Organisations pervade our society. Many students will work in an organisation – perhaps a Coles or Woolworths supermarket, a BP or Shell petrol station, or a McDonald’s fast-food restaurant. Students are already members of several organisations: university or TAFE, sporting clubs, churches or social organisations. Students also deal with organisations every day to get or renew a driver’s licence, be treated in a hospital emergency department, buy food from a supermarket, eat in a restaurant or buy new clothes. Managers are responsible for these organisations and for seeing that resources are used wisely to attain organisational goals. Our formal definition of an organisation is a social entity that is goal-directed and deliberately structured. A social entity is made up of two or more people. Goal directed means being designed to achieve some outcome, such as make a profit (all companies seek this), win pay increases for members (unions), meet spiritual needs (any church) or provide social satisfaction (clubs). Being deliberately structured means that tasks are divided, and responsibility for their performance is assigned to organisation members. This definition applies to all organisations, whether profit-making or not-for-profit. Based on our definition of management, the manager’s responsibility is to coordinate resources in an effective and efficient manner to accomplish the organisation’s goals. Organisational effectiveness is the degree to which the organisation achieves a stated goal. It means that the organisation succeeds in accomplishing what it tries to do. Organisational effectiveness means providing a product or service that customers value. Organisational efficiency refers to the amount of resources used to achieve an organisational goal. It is based on how much raw materials, money and people are necessary for producing a given volume of output. Efficiency can be calculated as the amount of resources used to produce a product or service.

organisational performance organisation A social entity that is goaldirected and deliberately structured.

effectiveness The degree to which the organisation achieves a stated goal. efficiency The use of minimal resources – raw materials, money and people – to produce a desired volume of output.

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Both efficiency and effectiveness can be high in the one organisation. For example, at the Orica Botany site in Sydney – a large petrochemical complex that makes basic plastics and related chemicals needed for everyday life, such as soap and plastic bags – productivity was low due to the poor management relationship with plant operating staff and maintenance workers. After a long and difficult strike, a new management approach succeeded in bringing the workforce into alignment with management goals and nearly all workers were put into staff and salaried positions. New cooperative working arrangements led to dramatic improvements in efficiency – more than 100 per cent in many parts of the business. These efficiency improvements went hand in hand with improvements in areas such as quality and service, and delivery reliability. The improved customer satisfaction led to higher sales volumes and the achievement of business effectiveness as measured by the goals of significantly improved cash flow and profitability.14 Similarly, the Australian automotive industry spent 20 years reinventing itself in terms of its efficiency and effectiveness. All the car assemblers in Australia – principally Ford, General Motors Holden and Toyota – increased their labour efficiency from low levels in the 1980s to those approaching internationally competitive standards, involving productivity increases of more than 50 per cent over five or 10 years.15 To achieve this, they had to work closely with numerous component suppliers who make their parts. At the same time, they have made their cars much more to the taste and liking of consumers. Increased customer satisfaction has kept them in business and helped achieve their ‘effectiveness’ goals of survival and profitability. With their increased efficiency and effectiveness, they all began or expanded export programs. It is important to note that such organisations can never afford to sit back and enjoy their success for long. Fierce levels of international competition mean that no matter how much better they are than before, they must constantly strive to improve their ‘Quality, Cost, Delivery’ (QCD) profile. If they do not, they will quickly lose market share, sales and profits, and ultimately be closed down. Ford, for example, will close its manufacturing operations in Australia as of 2016: the company is just not cost competitive. General Motors Holden and Toyota Australia have announced similar departures from manufacturing in Australia as of 2017. This is the marketplace challenge for managers and all others who work in organisations. All markets require organisations to continually work at levels today that are simultaneously ‘faster, better, cheaper’ than yesterday. These challenges are tough to meet. Despite strenuous efforts, Australia’s automotive industry is shrinking, producing only some 221 000 vehicles in 2012, a major reduction from a peak of 408 000 vehicles in 2004, as locally produced cars have been replaced in the market by imported models. Similarly, components companies are increasingly moving overseas, with tyres, airbags and most other parts being built in lower-cost countries in Asia.16 Australia’s automotive assembly industry is expected to be completely extinguished after 2017 with only small niche players remaining. In service businesses, as in manufacturing, executives know they cannot implement business improvement, efficiency and effectiveness gains without the active help and drive of their whole workforce. This applies to the Woolworths group, which employs some 190 000-plus people, as much as it does to an owner of a small business that employs three people offering hair styling services in almost every suburban shopping centre in the world.17 This challenge is never-ending for a manager. Source: Courtesy of Toyota Australia

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Toyota has made massive investments in its Altona car plant in Victoria, where it produces Camry, Hybrid Camry and other models for the Australian market and for export. Managing this complex operation provides many challenges for managers. In 2011 it produced over 90 000 vehicles and 54 000 engines in Australia for domestic and export markets. Thousands of parts and components must be brought together to produce vehicles that are as close as possible to perfectly assembled. One of these challenges is how best to combine labour input with sophisticated technologies, such as the robots shown here, in order to maximise the productivity and quality of the operation. Toyota’s quality and performance in Australia is as good as or better than anywhere else in the world, but it is still challenged by its cost position and lack of market scale in Australia, which has necessitated the closure of its Australian operations scheduled for 2017.

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Innovative Way

Budget blockbusters You can’t quite make a blockbuster movie without a substantial budget, but Christopher Meledandri is out to prove that strict cost controls and hit animated films aren’t mutually exclusive. Most computer-generated animated films cost at least US$100 million, with some budgets pushing US$150 million. In contrast, Illumination Entertainment made the hit film Despicable Me for only US$69 million; the budget for Hop came in at a mere US$63 million; and the company produced its third blockbuster, Dr. Seuss’ The Lorax, for US$70 million – less than the movie brought in at the box office on its opening weekend. Managers at the company use many approaches to increase efficiency. For example, when making Despicable Me, they decided to eliminate details such as animal fur, which the audience couldn’t see on the screen. Other details that were extremely costly to render in computer graphics but that weren’t central to the story were also cut, saving the detail work for sets that were used repeatedly. The company paid big bucks for the voice of Steve Carell, but hired other vocal talent

with less star power, a practice that the company’s managers follow for all their films. They also seek out first-time directors and young, enthusiastic, less-experienced animators, who often cost less than half what a more experienced artist commands. Organisational details also contribute to efficiency – Meledandri keeps layers of the hierarchy to a minimum so that decisions can be made quickly and movies don’t languish for years in development, eating up money. Offices are in a low-rent area behind a cement plant rather than in sumptuous surroundings. Illumination Entertainment is quickly becoming the envy of Hollywood. Movie-going in general is down, but animated family films are hot. And Illumination has had some of the hottest ones going. Peter Chernin, former president of News Corporation, said of Meledandri: ‘It is rare to find people whose business sense is as strong as their creative sense.’ Meledandri and his management team are using their business sense to run an efficient operation, and their creative instincts to put money in the right places to produce popular, often critically acclaimed animated films.

Sources: Based on Lauren A. E. Schuker. (15 July 2010). Movie Budget Lesson #1: Skip the Fur. The Wall Street Journal, B1; Brooks Barnes. (4 April 2011). Animation Meets Economic Reality. The New York Times, B1; and Allison Corneau. (4 March 2012). The Lorax Tops Weekend Box Office. US Weekly, http://www.usmagazine.com/entertainment/news/the-lorax-tops-weekend-box-office-201243 (accessed 12 June 2012).

➜➜ An organisation is a social entity that is goal directed and deliberately structured. ➜➜ Good management is important because organisations contribute so much to society.

➜➜ Efficiency pertains to the amount of resources – raw materials, money and people – used to produce a desired volume of output.

➜➜ Performance is defined as the organisation’s ability to attain its goals by using resources in an efficient and effective manner.

➜➜ Effectiveness refers to the degree to which the organisation achieves a stated goal.

Management skills A manager’s job requires a range of skills. Although some management theorists propose a long list of skills, the necessary skills for managing a department or an organisation can be placed in three categories: conceptual, human and technical.18 As illustrated in Exhibit 1.3, the application of these skills changes dramatically when a person is promoted to management. Although the degree of each skill that is required at different levels of an organisation may vary, all managers must possess some skill in each of these important areas to perform effectively.

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Conceptual skills

Co n ceptual ski lls Conceptual skill is the cognitive

ability to see the organisation as a whole and the relationship between Technical skills its parts. Conceptual skill involves the manager’s thinking, informationprocessing and planning abilities. It involves knowing where one’s Conceptual skills department fits into the total organisation and how the organisation Human skills fits into the industry, the community, and the broader business and social Technical skills environment. It means the ability to ‘think strategically’ – to take the broad, long-term view. Conceptual skills are needed by all managers, but especially by managers at the top. Many of the responsibilities of top managers, such as decision making, resource allocation and innovation, require a broad view. For example, Ursula Burns, who in 2009 became the first African-American woman to lead a major US corporation, needs superb conceptual skills to steer Xerox through a tough economy and the rapidly changing technology industry. Sales of copiers and printers have remained flat, prices have declined, and Xerox is battling stronger competitors in a consolidating industry. To keep the company thriving, Burns needed a strong understanding not only of the company, but also of shifts in the industry and the larger environment.19 Human skills

Middle managers

Exhibit 1.3 Relationship of conceptual, human and technical skills to management

Non-managers (Individual contributors)

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conceptual skill The cognitive ability to see the organisation as a whole and the relationship among its parts.

H um an ski lls human skill The ability to work with and through other people and to work effectively as a group member.

Human skill is the manager’s ability to work with and through other people and to work effectively as

a group member. This skill is demonstrated in the way a manager relates to other people, including the ability to motivate, facilitate, coordinate, lead, communicate and resolve conflicts. A manager with human skills allows subordinates to express themselves without fear of ridicule and encourages participation. The ANZ Bank is a company that relies heavily on the quality of its people for its success. This bank took tremendous strides consistently over 10 years, led by its very personable (now-retired) CEO, John McFarlane, who introduced a whole new culture of making the ANZ ‘people friendly’ to its staff. Staff satisfaction at ANZ rose from 49 per cent to 85 per cent, with a resultant rise in customer satisfaction, and increased profitability. Interestingly, such initiatives, even when they are strong and successful, rarely last forever, and after the retirement of McFarlane, a new CEO with a different strategic focus (growth in Asia) allowed this staff- and culture-led strategy to dissipate. Google is almost always acknowledged as one of the world’s most innovative companies. Even at a company such as Google that depends on technical expertise, human skills are considered essential

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for managers. Google analysed performance reviews and feedback surveys to find out what makes a good manager of technical people and found that technical expertise ranked dead last among a list of eight desired manager qualities, as shown in Exhibit 1.4. The exhibit lists eight effective behaviours of good managers. Notice that almost all of them relate to human skills, such as communication, coaching and teamwork. People want managers who listen to them, build positive relationships, and show an interest in their lives and careers.20 A recent survey comparing the importance of managerial skills today with those from the late 1980s found a decided increase in the role of skills for building relationships with others.21 Exhibit 1.4 Google’s rules: eight good behaviours for managers

To know how to build better managers, Google executives studied performance reviews, feedback surveys, and award nominations to see what qualities made a good manager. Here are the ‘Eight Good Behaviors’ they found, in order of importance: 1 Be a good coach. 2 Empower your team and don’t micromanage. 3 Express interest in team members’ success and personal well-being. 4 Don’t be a sissy: Be productive and results-oriented. 5 Be a good communicator and listen to your team. 6 Help your employees with career development. 7 Have a clear vision and strategy for the team. 8 Have key technical skills so you can help advise the team. Source: ‘Google’s Quest to Build a Better Boss’, by Adam Bryant, published 12 March 2011 in The New York Times. Courtesy of Google, Inc.

Techn i cal ski lls Technical skill is the understanding of and proficiency in the performance of specific tasks. Technical

technical skill The understanding of and proficiency in the performance of specific tasks.

skill includes mastery of the methods, techniques and equipment involved in specific functions such as engineering, manufacturing or finance. Technical skill also includes specialised knowledge, analytical ability and the competent use of tools and techniques to solve problems in that specific discipline. Technical skills are particularly important at lower organisational levels. Many managers get promoted to their first management jobs by having excellent technical skills. However, technical skills become less important than human and conceptual skills as managers Take a move up the hierarchy. Top managers with strong technical skills sometimes have to Moment learn to step back so others can do their jobs effectively. David Sacks, founder and Complete the online Management skills self-test. CEO of enterprise social network Yammer, designed the first version of the product Reflect on the strength of your himself, but now the company has 200 employees and a dozen or so product managers preferences among the three and design teams. Sacks used to ‘walk around and look over the designers’ shoulders skills and the implications to see what they were doing’, but says that habit prevented some people from doing for you as a manager. their best work.22

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Wh en ski lls fai l Everyone has flaws and weaknesses, and these shortcomings become most apparent under conditions of rapid change, uncertainty or crisis.23 Consider how Tony Hayward, a geologist by training, handled the BP Deepwater Horizon crisis in the Gulf of Mexico, which we alluded to earlier, an event that ended his career as the company’s CEO and further damaged BP’s reputation. Until the spring of 2010, Hayward had been praised for leading a successful turnaround at the oil giant. Yet, after an oil rig drilling a well for BP exploded in April, killing 11 workers and sending hundreds of millions of gallons of oil spewing into the Gulf of Mexico, Hayward faltered in his role as a crisis leader. His ill-advised comment that he wanted the crisis over as much as anyone because he ‘wanted his life back’ showed an insensitivity and lack of diplomacy that angered the public. Hayward’s poor handling of the crisis eventually led to calls for his departure, and he resigned in July 2010.24 During turbulent times, managers have to stay on their toes and apply all their skills and competencies in a way that benefits the organisation and its stakeholders – employees, customers, investors, the community and so on. In recent years, numerous highly publicised examples have shown what happens when managers fail to apply their skills effectively to meet the demands of an uncertain, rapidly changing world. Ethical and financial scandals have left people cynical about business managers and even less willing to overlook their mistakes. Crises and examples of corporate deceit and greed grab the headlines, but many more companies falter or fail less spectacularly, when managers fail to listen to customers, are unable to motivate employees or can’t build a cohesive team. For example, Australia’s biggest supermarket chain, Woolworths, has experienced a horde of problems since entering the home hardware division in 2011 with its 31 new Masters stores. Eager to compete in the $40 billion home improvement market, ‘Woolies’ invested $2 billion into establishing the stores nationally. Together with its American joint partner, Lowes, Woolworths has been forced to acknowledge the errors it made in selecting inappropriate stock for the Australian seasons and customer wants, which gave rise to heavy discounting of unwanted stock. Masters has also grappled with premium suppliers who have refused to sell to them in preference for the wellestablished, 300-strong Bunnings stores. Analysts have been concerned about the current management’s ability to generate profit with average sales of $22 million, but losses of $29 million. At the current rate Woolworths will have to spend $5 billion to break even.25 Exhibit 1.5 shows the top 10 factors that cause managers to fail to achieve desired results, based on a survey of managers in US organisations operating in rapidly changing business environments.26 Notice that many of these factors are due to poor human skills, such as the inability to develop good work relationships, a failure to clarify direction and performance expectations, or an inability to create cooperation and teamwork. The number one reason for manager failure is ineffective communication skills and practices, which were cited by 81 per cent of managers surveyed. Especially in times of uncertainty or crisis, if managers do not communicate effectively, including by listening to employees and customers and showing genuine care and concern, organisational performance and reputation suffer.

1: The changing world of management

1. Ineffective communication skills and practices

81%

2. Poor work relationships/interpersonal skills

78%

3. Person - job mismatch

5. Failure to adapt and break old habits

57% 56%

7. Lack of personal integrity and trustworthiness

10. Poor planning practices/reactionary behaviour 0%

➜➜ Managers have complex jobs that require a range of abilities and skills. ➜➜ Conceptual skill is the cognitive ability to see the organisation as a whole and the relationship among its parts.

Source: Adapted from Clinton O. Longenecker, Mitchell J. Neubert and Laurence S. Fink, ‘Causes and Consequences of Managerial Failure in Rapidly Changing Organizations’, Business Horizons 50 (2007): 145–55, Table 1, with permission from Elsevier.

64%

6. Breakdown of delegation and empowerment

9. Inability to lead/motivate others

Exhibit 1.5 Top causes of manager failure

69%

4. Failure to clarify direction or performance expectations

8. Inability to develop cooperation and teamwork

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52% 50% 47% 45% 50%

90%

remember this

➜➜ Human skill refers to a manager’s ability to work with and through other people and to work effectively as part of a group.

➜➜ The two major reasons that managers fail are poor communication and poor interpersonal skills.

➜➜ Technical skill is the understanding of and proficiency in the performance of specific tasks.

➜➜ A manager’s weaknesses become more apparent during stressful times of uncertainty, change or crisis.

Management types Managers use conceptual, human and technical skills to perform the four management functions of planning, organising, leading and controlling in all organisations – large and small, manufacturing and service, profit and not-for-profit. But not all managers’ jobs are the same. Managers are responsible for different departments, work at different levels in the hierarchy and meet different requirements for achieving high performance. For example, Gail Kelly made her name as a CEO in building St George Bank into having a very high reputation for good customer service, profitability and growth, and then took on the major challenge of moving into the same role in the bigger and more complex Westpac Bank. Once she became chief executive of Westpac Banking Group, she engineered a Westpac takeover of her former company, St George! In a much smaller business (Dryen Australia), Peter Dryen assumed the top job as Chairman and owner in the business his father, George, started 40 years ago. Dryen has all the same types of responsibilities as Kelly has at Westpac, ranging from employee safety and motivation, through customer satisfaction to the financial bottom line, as well as many types of legal compliance. The difference, of course, is in the scale and the resources that are involved in these executives’ challenges and opportunities. All managers must contribute to planning, organising, leading and controlling their organisations – but in different amounts and ways.

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Verti cal d i fferen ces

top manager A manager who is at the top of the organisational hierarchy and is responsible for the entire organisation.

middle manager A manager who works at the middle levels of the organisation and is responsible for major departments.

project manager A manager responsible for a temporary work project that involves the participation of other people in the organisation.

An important determinant of the manager’s job is the hierarchical level. Exhibit 1.6 illustrates the three levels in the hierarchy. A study of more than 1400 managers examined how the manager’s job differs across these three hierarchical levels and found that the primary focus changes at different levels.27 For first-level managers, the main concern is facilitating individual employee performance. Middle managers, though, are concerned less with individual performance and more with linking groups of people, such as by allocating resources, coordinating teams or putting top management plans into action across the organisation. For top-level managers, the primary focus is monitoring the external environment and determining the best strategy to be competitive. Let’s look in more detail at differences across hierarchical levels. Top managers are at the top of the hierarchy and are responsible for the entire organisation. They have titles such as president, chairperson, executive director, CEO and executive vice president. Top managers are responsible for setting organisational goals, defining strategies for achieving them, monitoring and interpreting the external environment, and making decisions that affect the entire organisation. They look to the long-term future and concern themselves with general environmental trends and the organisation’s overall success. Top managers are also responsible for communicating a shared vision for the organisation, shaping corporate culture, and nurturing an entrepreneurial spirit that can help the company innovate and keep pace with rapid change.28 Middle managers work at middle levels of the organisation and are responsible for business units and major departments. Examples of middle managers are department head, division head, manager of quality control and director of the research lab. Middle managers typically have two or more management levels beneath them. They are responsible for implementing the overall strategies and policies defined by top managers. Middle managers are generally concerned with the near future, rather than with longrange planning. The middle manager’s job has changed dramatically over the past two decades. Many organisations improved efficiency by laying off middle managers and slashing middle management levels. Traditional pyramidal organisation charts were flattened to allow information to flow quickly from top to bottom and decisions to be made with greater speed. In addition, technology has taken over many tasks once performed by middle managers, such as monitoring performance and creating reports.29 Exhibit 1.6 illustrates the shrinking middle management. Yet even as middle management levels have been reduced, the middle manager’s job has taken on a new vitality. Research shows that middle managers play a crucial role in driving innovation and enabling organisations to respond to rapid shifts in the environment.30 As Ralph Stayer, CEO of Johnsonville Sausage, said, ‘Leaders can design wonderful strategies, but the success of the organisation resides in the execution of those strategies. The people in the middle are the ones who make it work.’31 A study by Nicholas Bloom and John Van Reenen seems to support Stayer’s observation. In an experiment with textile factories in India, improved middle management practices were introduced into 20 facilities, and the results were compared to factories that did not improve management procedures. After just four months of training in better management methods, the 20 factories cut defects by 50 per cent, boosted productivity and output, and improved profits by $200 000 per year.32 Middle managers’ status also has escalated because of the growing use of teams and projects. A project manager is responsible for a temporary work project that involves the participation of people from various functions and levels of the organisation, and perhaps from outside the company as well. Many of today’s middle managers work with a variety of projects and teams at the same time, some of which cross geographical and cultural boundaries as well as functional ones.

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Exhibit 1.6 Management levels in the organisational hierarchy CEO Source: Adapted from Bonoma, T. V. and Lawler, J. C. (Spring 1989). Chutes and Ladders: Growing the General Manager. Sloan Management Review, 27–37.

Top managers Corporate General or Group Manager, Administration Head Business Unit Head People at these levels may also have horizontal project manager responsibility

General Manager

Administrator Middle managers

Department Manager Information Product Line or Services Manager Service Manager

Functional Head Production, Sales, R&D Supervisor

MIS, HRM, Accounting Supervisor

First-line managers

Non-managerial employees Line jobs

Staff jobs

First-line managers are directly responsible for the production of goods and services. They are the

first or second level of management and have such titles as supervisor, line manager, section chief and office manager. They are responsible for teams and non-management employees. Their primary concern is the application of rules and procedures to achieve efficient production, provide technical assistance and motivate subordinates. The time horizon at this level is short, with the emphasis on accomplishing day-to-day goals. This type of managerial job might also involve motivating and guiding young, often inexperienced workers, providing assistance as needed and ensuring adherence to company policies.

first-line manager A manager who is at the first or second management level and is directly responsible for the production of goods and services.

Ho rizo ntal d i fferen ces The other major difference in management jobs occurs horizontally across the organisation. Functional managers are responsible for departments that perform a single functional task and have employees with

similar training and skills. Functional departments include advertising, sales, finance, human resources, manufacturing and accounting. Line managers are responsible for the manufacturing and marketing departments that make or sell the product or service. Staff managers are in charge of departments, such as finance and human resources, that support line departments. General managers are responsible for several departments that perform different functions. A general manager is responsible for a self-contained division, such as a David Jones or Myer department store or a Toyota assembly plant, and for all the functional departments within it. Project managers also have general management responsibility because they coordinate people across several departments to accomplish a specific project.

functional manager A manager who is responsible for a department that performs a single functional task and has employees with similar training and skills.

general manager A manager who is responsible for several departments that perform different functions.

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➜➜ There are many types of managers, based on their purpose and location in an organisation. ➜➜ A top manager is one who is at the apex of the organisational hierarchy and is responsible for the entire organisation. ➜➜ Middle managers work at the middle level of the organisation and are



responsible for major divisions or departments.

➜➜ A project manager is a manager who is responsible for a temporary work project that involves people from various functions and levels of the organisation. ➜➜ Most new managers are first-line managers – managers who are at the first or second level of the hierarchy and are directly responsible for

overseeing groups of production employees.

remember this

➜➜ A functional manager is responsible for a department that performs a single functional task, such as finance or marketing. ➜➜ General managers are responsible for several departments that perform different functions, such as the manager of a David Jones department store or a Toyota assembly plant.

What is it like to be a manager? Unless you have actually performed managerial work, it can be hard to understand exactly what managers do hour by hour, day by day. The manager’s job is so diverse that a number of studies have been undertaken in an attempt to describe exactly what happens. The question of what managers actually do to plan, organise, lead and control was first answered by Henry Mintzberg, who followed managers around and recorded all their activities.33 He developed a description of managerial work that included three general characteristics and 10 roles. Subsequent research supported his categorisation.34 More recently, research looked at what managers like to do. The research found that both male and female managers most enjoy activities such as leading others, networking and leading innovation. Activities managers enjoy least include controlling subordinates, handling paperwork and managing time pressures. Interestingly, managers in five different countries have shown substantial agreement among these preferences.35 Many new managers in particular find the intense time pressures of management, the load of administrative paperwork and the challenge of directing others to be quite stressful as they adjust to their new roles and responsibilities. Indeed, the initial leap into management can be one of the scariest moments in a person’s career.36

Makin g th e leap: becom in g a n ew m anager Many people who are promoted into a manager position have little idea what the job actually entails and receive little training about how to handle their new role. It’s no wonder that, among managers, first-line supervisors tend to experience the most job burnout and attrition.37 Making the shift from individual contributor to manager is often tricky. Mark Zuckerberg, whose company, Facebook, went public a week before he turned 28, provides an example. In a sense, the public has been able to watch as Zuckerberg ‘grows up’ as a manager. He was a strong individual performer in creating the social media platform and forming the company, but he fumbled with day-to-day management, such as interactions with employees and communicating with people both inside and outside Facebook. Zuckerberg was smart enough to hire seasoned managers, including former Google executive Sheryl Sandberg, and cultivate advisers and mentors who have coached him in areas where he is weak. He also shadowed David Graham at the offices of the Post Company (publisher of The Washington Post) for four days to try to learn what it is like to manage a large organisation. Now that Facebook is a public company, Zuckerberg is being watched more closely than ever to see if he has what it takes to be a manager of a big public corporation.38

1: The changing world of management

From individual identity

Specialist; performs specific tasks

Gets things done through own efforts

An individual actor

Works relatively independently

To manager identity

25

Exhibit 1.7 Making the leap from individual performer to manager Generalist; coordinates diverse tasks

Gets things done through others

A network builder

Works in highly interdependent manner

Harvard professor Linda Hill followed a group of 19 managers over the first year of their managerial careers and found that one key to success is to recognise that becoming a manager involves more than learning a new set of skills. Rather, becoming a manager means a profound transformation in the way people think of themselves, called personal identity, which includes letting go of deeply held attitudes and habits and learning new ways of thinking.39 Exhibit 1.7 outlines the transformation from individual performer to manager. Recall our earlier discussion of the role of manager as the person who builds systems rather than doing specific tasks. The individual performer is a specialist and a ‘doer’. His or her mind is conditioned to think in terms of performing specific tasks and activities as expertly as possible. The manager, on the other hand, has to be a generalist and learn to coordinate a broad range of activities. Whereas the individual performer strongly identifies with his or her specific tasks, the manager has to identify with the broader organisation and industry. In addition, the individual performer gets things done mostly through his or her own efforts and develops the habit of relying on him- or herself rather than on others. The manager, though, gets things done through other people. Indeed, one of the most common mistakes that new managers make is wanting to do all the work themselves, rather than delegating to others and developing others’ abilities.40 Hill offers a reminder that, as a manager, you must ‘be an instrument to get things done in the organisation by working with and through others, rather than being the one doing the work’.41 Another problem for many new managers is that they expect to have greater freedom to do what they think is best for the organisation. In reality, though, managers find themselves hemmed in by interdependencies. Being a successful manager means thinking in terms of building teams and networks and becoming a motivator and organiser within a highly interdependent system of people and work. Although the distinctions may sound simple in the abstract, they are anything but in reality. In essence, becoming a manager means becoming a new person and viewing yourself in a completely new way. Many new managers have to make the transformation in a ‘trial by fire’, learning on the job as they go, but organisations are beginning to be more responsive to the need for new manager training. The cost to

Source: Based on Exhibit 1.1, ‘Transformation of Identity’, in Linda A. Hill, Becoming a Manager: Mastery of a New Identity, 2nd edn (Boston, MA: Harvard Business School Press, 2003), p. 6.

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organisations of losing good employees who can’t make the transition is greater than the cost of providing training to help new managers cope, learn and grow. In addition, some organisations use great care in selecting people for managerial positions, including ensuring that each candidate understands what management involves and really wants to be a manager.

Manager activities Most new managers are unprepared for the variety of activities that they must routinely perform. One of the most interesting findings about managerial activities is how busy managers are and how hectic the average workday can be.

Adventu res in mu ltitaskin g Managerial activity is characterised by variety, fragmentation and brevity.42 The widespread and voluminous nature of a manager’s tasks leaves little time for quiet reflection. A recent study by a team from the London School of Economics and Harvard Business School found that the time CEOs spend working alone averages a mere six hours a week. The rest of their time is spent in meetings, on the phone, travelling, and talking with others inside and outside the organisation.43 Managers shift gears quickly. In his study, Mintzberg found that the average time a top executive spends on any one activity is less than nine minutes, and another survey indicates that some first-line supervisors average one activity every 48 seconds!44 Significant crises are interspersed with trivial events in no predictable sequence. Every manager’s job is similar in its diversity and fragmentation to what Workforce Management described as a typical day in the life of human resources (HR) manager Kathy Davis:45 ●● 6.55 a.m. – Arrives at work early to begin investigating a complaint of sexual harassment at one of the factories, but as she’s walking to her office, she bumps into someone carrying a picket sign that reads ‘Unfair Hiring! Who Needs HR?’ Spends a few minutes talking with the young man, who is a temp who she had let go due to sloppy work. ●● 7.10 a.m. – Finds the factory shift supervisor and a security staff member already waiting outside her door to discuss the sexual harassment complaint. ●● 7.55 a.m. – Sue, a member of Kathy’s team who has just arrived and is unaware of the meeting, interrupts to let Kathy know there is someone picketing in the hallway outside her office and the CEO wants to know what’s going on. ●● 8.00 a.m. – Alone at last, Kathy calls the CEO and explains the picketing situation, and then begins her morning routine. Checking her voicemail, she finds three messages that she must respond to immediately, and passes four others to members of her team. She begins checking her email but is interrupted again by Sue, who reminds her they have to review the recent HR audit so that the company can respond promptly and avoid penalties. ●● 9.15 a.m. – As she is reviewing the audit, Kathy gets a call from manager Pete Channing, asking if she’s sent the offer letter to a prospective hire. ‘Don’t send it,’ Pete said, ‘I’ve changed my mind.’ Weeks of interviewing and background checks, and now Pete wants to start over!

1: The changing world of management

●● 11.20 a.m. – Kathy is getting to the end of her critical email list when she hears a commotion outside her door and finds Linda and Sue arguing. ‘This report IT did for us is full of errors,’ Linda says, ‘but Sue says we should let it go.’ Kathy agrees to take a look at the IT department’s report and discovers that there are only a few errors, but they have critical implications. ●● 12.25 p.m. – As she’s nearing the end of the IT report, Kathy’s email pings an ‘urgent’ message from a supervisor informing her that one of his employees will be absent from work for a few weeks ‘while a harassment charge is worked out’. This is the first she’s heard about it, so she picks up the phone to call the supervisor. ●● 1.20 p.m. – Time for lunch – finally. She grabs a sandwich at a local cafe and brings one back for the picketer, who thanks her and continues his march. ●● 2.00 p.m. – Meets with CEO Henry Luker to review the audit and IT reports, discuss changes to the company’s superannuation plan and talk about ideas for reducing turnover. ●● 3.00 p.m. – Rushes back to her office to grab her keys so that she can drive to a meeting with the manufacturing facilities manager, who has asked Kathy to ‘shadow’ him and share ideas about training and skills development. ●● 3.15 p.m. – As she gets out of her car at the facility, Kathy runs into a man who had attended a supervision training course a few months earlier. He tells her that the class really helped him – there are fewer misunderstandings, and the staff seems to respect him more. ●● 3.30 p.m. – Arrives right on time and spends the next couple of hours observing and asking questions, talking to employees to learn about the problems and obstacles they face. ●● 5.40 p.m. – All is quiet back in the HR department, but there’s a message from Sue that Kathy has an appointment first thing tomorrow morning with two women who had gotten into a fight in the elevator. Sighing, Kathy returns to her investigation of the sexual harassment complaint that she had begun at 7.00 that morning.

Li fe on speed d ial The manager performs a great deal of work at an unrelenting pace.46 Managers’ work is fast paced and requires great energy. The managers observed by Mintzberg processed 36 pieces of written correspondence each day, attended eight meetings and took a tour through the building or factory. Most top executives routinely work at least 12 hours a day and spend 50 per cent or more of their time travelling. Calendars are often booked months in advance, but unexpected disturbances erupt every day.47 Mintzberg found that the majority of executives’ meetings and other contacts are ad hoc, and even scheduled meetings are typically surrounded by other events such as quick phone calls, scanning of email or spontaneous encounters. During time away from the office, executives catch up on work-related reading, paperwork, phone calls and email. Technology, such as email, text messaging, smartphones and tablets, only intensifies the pace leading to even further pressure on all managers to be ‘interruptable’ and instantly available, hence making it harder to find even small blocks of time to think and strategise. Management can be rewarding, but it can also be frustrating and stressful, as discussed in the Management in Practice box. As the job of a manager becomes increasingly tough, a certain degree of ‘staying power’ is essential for success.

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management in pr actice

Do you really want to be a manager?

Is management for you? Becoming a manager is considered by most people to be a positive, forward-looking career move and, indeed, life as a manager offers appealing aspects. However, it also holds many challenges, and not every person will be happy and fulfilled in a management position. Here are some of the issues would-be managers should consider before deciding they want to pursue a management career.

➜➜ The increased workload. It isn’t unusual for managers to work 70–80 hours per week, and some work even longer hours. A manager’s job always starts before a shift and ends hours after the shift is over. When Ray Sarnacki was promoted to manager at an aerospace company, he found himself frustrated by the incessant travel, endless paperwork and crowded meeting schedule. He eventually left the job and found happiness in a position earning about one-fifth of his peak managerial salary.

➜➜ The challenge of supervising former peers. This issue can be one of the toughest for new managers. They frequently struggle to find the right approach, with some trying too hard to remain ‘one of the gang’, and others asserting their authority too harshly. In almost all cases, the transition from a peer-to-peer relationship to a manager-to-subordinate one is challenging and stressful.

➜➜ The headache of responsibility for other people. A lot of people get into management because they like the idea of

having power, but the reality is that many managers feel overwhelmed by the responsibility of hiring, supervising and disciplining others. Laura Kelso, who today thrives on the fast pace and responsibility of being a manager, says that the first time she had to fire someone, she agonised for weeks over how to do it. New managers are often astonished at the amount of time it takes to handle ‘people problems’. Kelly Cannell, who quit her job as a manager, puts it this way: ‘What’s the big deal [about managing people]? The big deal is that people are human . . . To be a good manager, you have to mentor them, listen to their problems, counsel them, and at the end of the day you still have your own work on your plate . . . Don’t take the responsibility lightly, because no matter what you think, managing people is not easy.’

➜➜ Being caught in the middle. Except for those in the top echelons, managers find themselves acting as a backstop, caught between upper management and the workforce. Even when managers disagree with the decisions of top executives, they are responsible for implementing them. For some people, the frustrations of management aren’t worth it. For others, management is a fulfilling and satisfying career choice and the emotional rewards can be great. One key to being happy as a manager may be carefully evaluating whether you can answer yes to the question, ‘Do I really want to be a manager?’

Sources: White, Erin (21 November 2005). Learning to Be the Boss. The Wall Street Journal, B1; Sandberg, Jared (27 July 2005). Down Over Moving Up: Some New Bosses Find They Hate Their Jobs. The Wall Street Journal, B1; Row, Heath (February–March 1998). Is Management for Me? That Is the Question. Fast Company, 50–2; Schellhardt, Timothy D. (4 April 1997). Want to Be a Manager? Many People Say No, Calling Job Miserable. The Wall Street Journal, A1, A4; Murray, Matt (25 July 2000). Managing your Career – the Midcareer Crisis: Am I in This Business to Become a Manager? The Wall Street Journal, B1.

Wh ere do es a m anager fin d th e ti m e? With so many responsibilities and so many competing demands on their time, how do managers cope? The Wall Street Journal’s ‘Lessons in Leadership’ video series asked CEOs of big companies how they managed their time, and found that many of them carve out time just to think about how to manage their time.48 Time is a manager’s most valuable resource, and one characteristic of successful managers is that they know how to use time effectively to accomplish the important things first and the less important things later.49 Time management refers to the use of techniques that enable you to get more done in less time and with better results, be more relaxed, and have more time to enjoy your work and your life. The Management in Practice box offers some tips for time management.

1: The changing world of management

management in pr actice

Time management tips for new managers One of the main challenges of life as a manager is the increased workload and the difficulty of finding the time to accomplish everything on one’s expanded list of duties and responsibilities. The following classic time management techniques can help you eliminate major time-wasters in your daily routines.

➜➜ Keep a to-do list. If you don’t use any other system for keeping track of your responsibilities and commitments, at the very least you should maintain a ‘To Do’ list that identifies all the things you need to do during the day. Although the nature of management means that new responsibilities and shifting priorities occur frequently, it’s a fact that people accomplish more with a list than without one.

➜➜ Remember your ABCs. This is a highly effective system for prioritising tasks or activities on your To Do list: An ‘A’ item is something highly important. It must be done, or you’ll face serious consequences. ■■ A ‘B’ item is a should do, but consequences will be minor if you don’t get it done. ■■ ‘C’ items are things that would be nice to get done, but there are no consequences at all if you don’t accomplish them. ■■

■■

‘D’ items are tasks that you can delegate to someone else.

➜➜ Do a daily review and look-ahead. Spend 10–15 minutes each evening reviewing the day and then thinking ahead to the next day. Reviewing what worked well and what didn’t will increase your awareness of your behaviour and reduce your bad habits the next day. Then, look ahead and plan what you want to accomplish the next day. Some experts propose that every minute spent in planning saves 10 minutes in execution.

➜➜ Do one thing at a time. Multitasking has become the motto of the early twenty-first century, but too much multitasking is a time waster. Research has shown that multitasking reduces rather than enhances productivity. The authors of one study suggest that an inability to focus on one thing at a time could reduce efficiency by 20 to 40 per cent. Even for those whose job requires numerous brief activities, the ability to concentrate fully on each one (sometimes called spotlighting) saves time. Give each task your full attention, and you’ll get more done and get it done better, too.

Sources: Based on information in Pamela Dodd and Doug Sundheim, The 25 Best Time Management Tools & Techniques (Ann Arbor, MI: Peak Performance Press, Inc., 2005); Brian Tracy, Eat That Frog: 21 Great Ways to Stop Procrastinating and Get More Done in Less Time (San Francisco: Berrett-Koehler, 2002); Joshua S. Rubinstein, David E. Meyer and Jeffrey E. Evans. (August 2001). Executive Control of Cognitive Processes in Task Switching. Journal of Experimental Psychology: Human Perception and Performance, 27:4, 763–97; and Sue Shellenbarger. (27 February 2003). Multitasking Makes You Stupid: Studies Show Pitfalls of Doing Too Much at Once. The Wall Street Journal, D1.

Manager ro les Mintzberg’s observations and subsequent research indicate that diverse manager activities can be organised into 10 roles.50 A role is a set of expectations for a manager’s behaviour. Exhibit 1.8 describes activities associated with each of the roles. These roles are divided into three conceptual categories: informational (managing by information), interpersonal (managing through people) and decisional (managing through action). Each role represents activities that managers undertake to ultimately accomplish the functions of planning, organising, leading and controlling. Although it is necessary to separate the components of the manager’s job to understand the different roles and activities of a manager, it is important to remember that the real job of management isn’t practised as a set of independent parts; all the roles interact in the real world of management.

role A set of expectations for one’s behaviour.

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Exhibit 1.8 Ten manager roles Sources: Adapted from Henry Mintzberg, The Nature of Managerial Work (New York: Harper & Row, 1973), pp. 92–3; and Henry Mintzberg. (1971). Managerial Work: Analysis from Observation. Management Science, 18, B97–B110.

Informational

Interpersonal

Monitor: Seek and receive information; scan web, periodicals, reports; maintain personal contacts Disseminator: Forward information to other organisation members; send memos and reports, make phone calls Spokesperson: Transmit information to outsiders through speeches, reports

Figurehead: Perform ceremonial and symbolic duties such as greeting visitors, signing legal documents Leader: Direct and motivate subordinates; train, counsel and communicate with subordinates Liaison: Maintain information links inside and outside the organisation; use email, phone, meetings

Decisional Entrepreneur: Initiate improvement projects; identify new ideas, delegate idea responsibility to others Disturbance Handler: Take corrective action during conflicts or crises; resolve disputes among subordinates Resource Allocator: Decide who gets resources; schedule, budget, set priorities Negotiator : Represent team or department’s interests; represent department during negotiation of budgets, union contracts, purchases

Infor mat i onal r ol es Informational roles describe the activities used to maintain and Take a Moment develop an information network. General managers spend about Are you ready to step into a 75 per cent of their time communicating with other people. job as a new manager? Consider the The monitor role involves seeking current information from hectic pace and varied activities managers many sources. The manager acquires information from perform. Are you prepared to make a personal others and scans written materials to stay well informed. transformation from individual performer to accomplishing work by engaging and coordinating The disseminator and spokesperson roles are just the other people? If you haven’t already completed opposite: the manager transmits current information to the ‘Are you ready to be a manager?’ selfothers, both inside and outside the organisation, who can test at the beginning of this chapter, take it use it. Steve Jobs was a master of the spokesperson role now to see whether your priorities align with the demands placed on a new when introducing new Apple products to the public, and manager’s job. employees and the media are watching to see if new CEO Tim Cook can match his predecessor’s proficiency in this area.

1: The changing world of management

Cook has a distinctly different style from Jobs – less passionate and more controlled – but the comments about his first appearances as spokesperson for Apple have been generally positive.51 The pragmatic new CEO, who was hand-picked by Jobs, has encouraged greater collaboration and more team work within Apple and has increased the company’s charitable contributions. Yet he is known to be meticulous on details in meetings and can calmly terrify ill-prepared managers.52

In te rper sonal r oles Interpersonal roles pertain to relationships with others and are related to the human skills described earlier. The figurehead role involves handling ceremonial and symbolic activities for the department or organisation. The manager represents the organisation in his or her formal managerial capacity as the head of the unit. The presentation of employee awards by a branch manager for a bank is an example of the figurehead role. The leader role encompasses relationships with subordinates, including motivation, communication and influence. The liaison role pertains to the development of information sources both inside and outside the organisation. Consider the challenge of the leader and liaison roles for managers at National Foods Limited, Pakistan’s largest maker of spices and pickles. Managers in companies throughout Pakistan struggle with political instability, frequent power outages, government corruption and inefficiency, and increasing threats of terrorism, all of which makes the leader role even more challenging. ‘In the morning, I assess my workers’, says Sajjad Farooqi, a supervisor at National Foods. If Farooqi finds people who are too stressed out or haven’t slept the night before, he changes their shift or gives them easier work. Farooqi also pays a lot of attention to incentives because people are under so much pressure. As for the liaison role, managers have to develop information sources not only related to the business, but related to safety and security concerns.53

De cisio nal r oles Decisional roles pertain to those events about which the manager must make a choice and take action. These roles often require conceptual as well as human skills. The entrepreneur role involves the initiation of change. Managers are constantly thinking about the future and how to get there.54 The disturbance handler role involves resolving conflicts among subordinates or between the manager’s department and other departments. The resource allocator role pertains to decisions about how to assign people, time, equipment, money and other resources to attain desired outcomes. The manager must decide which projects receive budget allocations, which of several customer complaints receive priority, and even how to spend his or her own time. The founders and co-CEOs of Research in Motion (RIM), Mike Lazaridis and Jim Balsillie, were not very effective in fulfilling their decisional roles in the several years before the two resigned under pressure from angry shareholders and frustrated board members in early 2012. Rather than pushing for innovative new products and change at RIM, they kept pouring more resources into the BlackBerry, even as the iPhone and Android models devastated that product’s market share.55 The relative emphasis that a manager puts on these 10 roles depends on a number of factors, such as the manager’s position in the hierarchy, his or her natural skills and abilities, the type of organisation or the departmental goals to be achieved. Exhibit 1.9 illustrates the varying importance of the leader and liaison roles as reported in a survey of top-, middle- and lower-level managers. Note that the importance of the leader role typically declines, while the importance of the liaison role increases, as a manager moves up the organisational hierarchy. Other factors, such as changing environmental conditions, also may determine which roles are more important for a manager at any given time. Robert Dudley, who took over as CEO of troubled oil giant BP after Tony Hayward was forced out due to mishandling the Deepwater Horizon crisis, has found informational roles and decisional roles at the top of his list as he has personally worked to repair

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relationships with US government officials, mend fences with local communities, carve a path towards restoring the company’s reputation, and take steps to prevent such a disastrous event from happening again.56 Managers stay alert to needs both within and outside the organisation to determine which roles are most critical at various times. A top manager may regularly put more emphasis on the roles of spokesperson, figurehead and negotiator, but the emergence of new competitors may require more attention to the monitor role, or a severe decline in employee morale and direction may mean that the CEO has to put more emphasis on the leader role. A marketing manager may focus on interpersonal roles because of the importance of personal contacts in the marketing process, whereas a financial manager may be more likely to emphasise decisional roles such as resource allocator and negotiator. Despite these differences, all managers carry out informational, interpersonal and decisional roles to meet the needs of the organisation.

Exhibit 1.9 Hierarchical levels and importance of leader and liaison roles Source: Based on information from A. I. Kraut, P. R. Pedigo, D. D. McKenna and M. D. Dunnette. (1989). The Role of the Manager: What’s Really Important in Different Management Jobs. Academy of Management Executive, 3, 286–93.

Med

Importance

High

Leader role Liaison role

Low

Supervisory managers

➜➜ Becoming a new manager requires a shift in thinking from being an individual performer to playing an interdependent role of coordinating and developing others.

Middle managers

➜➜ Because of the interdependent nature of management, new managers often have less freedom and control than they expect to have. ➜➜ The job of a manager is highly diverse and fast-paced, so managers need good time-management skills.

Top managers

➜➜ A role is a set of expectations for one’s behaviour.

remember this

➜➜ Managers at every level perform 10 roles, which are grouped into informational roles, interpersonal roles and decisional roles.

Managing in small businesses and not-for-profit organisations Small businesses are growing in importance. Hundreds of small businesses open every month, but the environment for small business today is highly complicated. Chapter 6 provides detailed information about managing small businesses and entrepreneurial start-ups. One interesting finding is that managers

1: The changing world of management

in small businesses tend to emphasise roles differently from those of managers in large corporations. Managers in small companies often see their most important role as that of spokesperson because they must promote the small, growing company to the outside world. The entrepreneur role is also critical in small businesses because managers have to be innovative and help their organisations develop new ideas to remain competitive. At LivingSocial, for example, retiring founder and CEO Tim O’Shaughnessy dedicated a lot of his time to promoting the rapidly growing daily-deal site and talking with department heads about potential new products and services.57 Small business managers tend to rate lower on the leader role and on information-processing roles, compared with their counterparts in large corporations. Not-for-profit organisations also represent a major application of management talent.58 Organisations such as the Salvation Army, Nature Conservancy, Girl Guides, the Big Issue and sporting clubs all require excellent management. The functions of planning, organising, leading and controlling apply to not-forprofit organisations just as they do to business organisations, and managers in not-for-profit organisations use similar skills and perform similar activities. The primary difference is that managers in businesses direct their activities towards earning money for the company, whereas managers in not-for-profit organisations direct their efforts towards generating some kind of social impact. The characteristics and needs of not-for-profit organisations created by this distinction present unique challenges for managers.59 Financial resources for not-for-profit organisations typically come from government appropriations, grants and donations rather than from the sale of products or services to customers. In businesses, managers focus on improving the organisation’s products and services to increase sales revenues. In not-for-profit organisations, however, services are often provided to non-paying clients, and a major problem for many organisations is securing a steady stream of funds to continue operating. Not-for-profit managers, committed to serving clients with limited resources, must focus on keeping organisational costs as low as possible.60 Donors generally want their money to go directly to helping clients rather than for overhead costs. If not-forprofit managers can’t demonstrate a highly efficient use of resources, they might have a hard time securing additional donations or government appropriations. In addition, because not-for-profit organisations do not have a conventional bottom line, managers often struggle with the question of what constitutes results and effectiveness. It is easy to measure dollars and cents, but the metrics of success in not-for-profit organisations are much more ambiguous. Managers have to measure intangibles such as ‘improve public health’, ‘make a difference in the lives of the disenfranchised’ or ‘increase appreciation for the arts’. This intangible nature also makes it more difficult to gauge the performance of employees and managers. An added complication is that managers often depend on volunteers and donors who cannot be supervised and controlled in the same way that a business manager deals with employees. Many people who move from the corporate world to a not-for-profit organisation are surprised to find that the work hours are often longer and the stress greater than in their previous management jobs.61 The roles defined by Mintzberg also apply to not-for-profit managers, but these may differ somewhat. We might expect managers in not-for-profit organisations to place more emphasis on the roles of spokesperson (to ‘sell’ the organisation to donors and the public), leader (to build a mission-driven community of employees and volunteers) and resource allocator (to distribute government resources or grant funds that are often assigned top-down). Managers in all organisations – large corporations, small businesses and not-for-profit organisations – carefully integrate and adjust the management functions and roles to meet challenges within their own circumstances and keep their organisations healthy.

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➜➜ Good management is just as important for small businesses and not-for-profit organisations as it is for large corporations.

➜➜ Managers in small businesses often see their most important roles as being a spokesperson for the business and acting as an entrepreneur. ➜➜ Managers in not-for-profit organisations direct their efforts towards generating some kind of



social impact rather than towards making money for the organisation.

remember this

➜➜ Not-for-profit organisations don’t have a conventional bottom line, so managers often struggle with what constitutes effectiveness.

State-of-the-art management competencies In recent years, rapid environmental shifts have caused a fundamental transformation in what is required of effective managers. Technological advances and the rise of virtual work, global market forces, and shifting employee and customer expectations have led to a decline in organisational hierarchies and more empowered workers, which calls for a new approach to management that may be quite different from managing in the past.62 Exhibit 1.10 shows the shift from the traditional management approach to the new management competencies that are effective in today’s environment. Instead of being a controller, today’s effective manager is an enabler who helps people do and be their best. Managers help people get what they need, remove obstacles, provide learning opportunities and offer feedback, coaching and career guidance. Instead of ‘management by keeping tabs’, they employ an empowering leadership style. Much work is done in teams rather than by individuals, so team leadership skills are crucial. People in many organisations work at scattered locations, so managers can’t monitor behaviour continually. In addition, managers sometimes are coordinating the work of people who aren’t under their direct control, such as those in partner organisations, sometimes even working with competitors. Managing relationships based on authentic conversation and collaboration is essential for successful outcomes. In addition, today’s best managers are ‘future-facing’. That is, they design the organisation and culture for creativity, adaptation and innovation rather than maintaining the status quo. Today’s world is constantly changing, and success depends on innovation and continuous improvement.

Exhibit 1.10 Stateof-the-art management competencies for today’s world

From Traditional Approach

To New Competencies

Management Principle Overseeing Work

From Controller

To Enabler

Accomplishing Tasks

From supervising individuals

To leading teams

Managing Relationships

From conflict and competition

To conversation and collaboration

Leading

From autocratic

To dispersed and empowering

Designing

From maintaining stability

To mobilising for change

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One manager who exemplifies the new management competencies is Vineet Nayar, retired CEO of India’s HCL, which has 80 000 employees and operations in more than 25 countries. When Nayar took over as CEO, HCL was a traditional, hierarchical, command-and-control workplace, but he shifted the mindset to treat employees like customers. He was always on the lookout for opportunities to upgrade management competencies to serve employees and help them do their jobs better. When HCL needed to cut expenses by $100 million due to the GFC, managers asked the employees to come up with ideas for cutting costs without issuing massive layoffs.63 The shift to a new way of managing isn’t easy for traditional managers who are accustomed to being ‘in charge’, making all the decisions, and knowing where their subordinates are and what they’re doing at every moment. Even more changes and challenges are on the horizon for organisations and managers. This is an exciting and challenging time to be entering the field of management. Throughout this book, you will learn much more about the new workplace, about the new and dynamic roles managers are playing in the twenty-first century, and about how you can be an effective manager in a complex, ever-changing world. ➜➜ Turbulent environmental forces have caused a significant shift in the competencies required for effective managers.

➜➜ Traditional management competencies could include a command-and-control leadership style, a focus on individual tasks and standardising procedures to maintain stability.

Source: Newspix/Aaron Francis

Clickcorp: taking Ugg to the world When entrepreneurs Igor Fenster and Alexander Tsintsiper started their company in 2006, they probably didn’t realise that just five years later, they would be able to reflect back on a sales revenue of nearly A$20 million, a large web presence in worldwide online retailing, and a growing strategy for retail outlets in places like Melbourne’s Docklands precinct. The humble Australian Ugg Boot is now being bought through Clickcorp by people all over the world. Clickcorp’s factory has 30 people in it, of a total of 40 employees in the company. Having started and grown fast, one of the important aspects

remember this

➜➜ New management competencies include the ability to be an enabler rather than a controller, using an empowering leadership style, encouraging collaboration, leading teams and mobilising for change and innovation.

Innovative Way of growth that these two entrepreneurs are aware of is that they must now invest some time and money in building management systems. This includes human resources, financial controls and other elements of what growing companies require. This company has achieved an amazing statistic for an Australian-based manufacturing company: when it was a purely online retailer, 95 per cent of its sales were exported! To boost domestic sales, the retail outlets are likely to be a major part of its future growth strategy. This company has shown that while it is not easily possible to be cost competitive from Australia in the world that comprises many low cost countries and companies, there are many profitable niches to be filled by high energy entrepreneurs. These business builders have started other niche online stores, brands and products.

Sources: L. D’Angelo Fisher. (4–10 November 2010). If the Ugg Fits. BRW, 15; Clickcorp website, http://www.clickcorp.com.au (accessed 20 March 2014).

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Turbulent times: managing crises and unexpected events Many managers may dream of working in an organisation and a world in which life is relatively calm, orderly and predictable, but their reality is one of increasing turbulence and disorder. Today’s managers and organisations face various levels of crisis every day – everything from an organisation’s intranet or Internet servers unexpectedly going offline to claims of harassment or discrimination, to a factory fire or workplace accidents. However, these organisational crises have been compounded by crises on a more global level. These and other events have brought uncertainty and turbulence clearly to the forefront of everyone’s mind, and crisis management has become a critical skill for every manager. Dealing with the unexpected has always been part of the manager’s job, but our world has become so fast, interconnected and complex that unexpected events happen more frequently and often with greater and more painful consequences. All of the new management skills and competencies we have discussed are important to managers in such an environment. In addition, crisis management places further demands on today’s managers. Some of the tried and true thinking on crisis management suggests the importance of five leadership skills.64 1 Stay calm. 2 Be visible. 3 Put people before business. 4 Tell the truth. 5 Know when to get back to business.

Stay cal m A leader’s emotions are contagious, so leaders have to stay calm, focused and optimistic about the future. Perhaps the most important part of a manager’s job in a crisis situation is to absorb people’s fears and uncertainties. Leaders have to suppress their own fears, doubts and pain to encourage others. Although they acknowledge the difficulties, they remain rock-steady and hopeful, which gives comfort, inspiration and hope to others.

Be visi ble When people’s worlds have become ambiguous and uncertain, they need to feel that someone is in control.

Put peo ple befo re busin ess The companies that weather a crisis best, whether the crisis is large or small, are those in which managers make people and human feelings their top priority.

Tell th e truth Managers should get as much information from as many diverse sources as they can, do their best to determine the facts, and then be open and straightforward about what’s going on.

1: The changing world of management

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Know wh en to get back to busin ess Although managers should first deal with the physical and emotional needs of people, they also need to get back to business as soon as possible. The company has to keep going, and there’s a natural human tendency to want to rebuild and move forward. The rejuvenation of the business is a sign of hope and an inspiration to employees. Moments of crisis also present excellent opportunities for looking forward and using the emotional energy that has emerged to build a better company.

in the earthquake, 600 were Dongfang’s employees and family members, and another 1000 employees were injured. Production of all types crashed to a halt, mostly under rubble. This was a major crisis. Customers were waiting for their power plants, of all types. The company recovered much of the equipment and moved to another factory complex, resuming production and business in general in just five days. That year, 80 per cent of production targets were met, yet $700 million was lost. Chief Executive Wen Shugang turned adversity into opportunity. Old factories and product designs were not rebuilt and replaced, but massively renewed. In line with the demand for low carbon emissions, manufacturing was modernised, as was the design of Dongfang’s products. Sales grew to over $8.3 billion in 2009, over one quarter being exported to growing markets such as India. The company’s strength was quickly restored. It is increasing its investments in Research and Development, a sure sign of a healthy outlook for its future. Fast-forward to 2013 and Dongfang has continued to manage through turbulent times. In March 2011 Japan suffered a tragic earthquake and tsunami in which reactors at a Fukushima nuclear power plant were compromised, resulting in radioactive gasses

being released into the air and general public alarm. As a consequence, the Chinese state has postponed or suspended planned approvals to Dongfang nuclear projects. Together with a slowing of growth in the global and economic spheres Dongfang is faced with a tumultuous environment. Operating income decreased 11.27 per cent and net profit was down nearly 30 per cent from 2011. What will happen next to challenge the world’s largest producer of nuclear energy? Sources: Brian Mertens. (17 September 2010). Sichuan Gusto. Forbes Asia, 100–3; Dongfang Electric Corporation Annual Report 2012, p. 12, http://dfem.wsfg.hk/preview/?docid=16455 (accessed 8 May 2013).

Source: Corbis/Xinhua Press/Du Huaju

Dongfang Electric was perhaps just one of China’s many success stories, albeit one of the very best of those. The company employed 20 000 people in Chengdu province, designing and manufacturing power plants of many types, including coal fired, nuclear, wind generated, hydroelectric and solar. The company had been competing successfully, with both Chinese and foreign customers. The company has 26 nuclear plant orders, making it the world’s largest producer. It was the key supplier to iconic projects such as the famous Three Gorges dam in China, and others such as Ethiopia’s Gibe 3 Dam. With sales of $5 billion per year, a competitive position based on cost competitiveness and speed of delivery, this company is also advancing its technological prowess through learning from its international partners then moving forward through innovation. Things were ticking along nicely on 12 May 2008, when the company’s president was chairing a meeting of executives in Chengdu, and the building started to shake. This was the big earthquake that shook the region, devastating many communities. The massive complex where Dongfang produced most of its equipment, a complex maze of factories, was essentially destroyed. Of the 70 000 people who died

Case study

Extraordinary crisis management

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Australia’s managers: improving from a low base

Australia’s managers

Each year, the World Economic Forum and the Institute for Management Development in Europe rank countries in terms of their competitiveness. On the ‘management’ criterion, defined by the World Economic Forum as ‘the extent to which enterprises are managed in an innovative, profitable and responsible manner’, Australia ranked 18th out of 41 countries in 1994. This was behind such nations as Japan, Hong Kong, New Zealand, Malaysia, Chile, Norway, the UK, Germany, the Netherlands and the US. By 2013, Australia’s position had hardly changed, at 20th, behind the top 10 global competitiveness leaders of Switzerland, Singapore, Finland, Sweden, Netherlands, Germany, the US, United Kingdom, Hong Kong and Japan.65 In 1994, the Australian government commissioned the Karpin task force to examine and recommend how to improve the leadership and management of Australian enterprises. The task force published its report in 1995.66 At the time, the task force estimated that there were approximately one million managers in Australia, in businesses ranging from very small to relatively large. The findings showed that the typical Australian manager had certain strengths and weaknesses.

Manager stren gths Australian managers were: ●● hardworking ●● egalitarian ●● open, genuine and direct ●● honest and ethical ●● innovative ●● independent thinkers ●● flexible, adaptable and resourceful (around products and processes) ●● technically sound.

Manager weakn esses However, Australian managers also: ●● took a short-term view ●● lacked strategic perspective ●● lacked open-mindedness and showed rigidity towards learning ●● were complacent ●● were poor at teamwork and empowerment ●● showed inability to cope with differences ●● had poor people skills ●● lacked self-confidence. The Karpin inquiry was also concerned about how Australian managers were perceived internationally. In a survey of more than 500 Asian managers, the Karpin task force ascertained that Australian managers were perceived as being relatively low on the following important managerial qualities:

1: The changing world of management

●● ability to look well into the future ●● acceptance of responsibility ●● management skills ●● entrepreneurial skills ●● leadership skills ●● cross-cultural skills. In the survey, Asian managers ranked their Australian counterparts generally below managers from Germany, Japan, Taiwan, the UK and the US on scales associated with these measures. Further, Australian managers tended to be poorly qualified relative to managers from other major nations. Between 65 and 80 per cent of managers from France, Germany, Japan and the US had university degrees. In Australia, only 29 per cent of Australian managers held a bachelor’s degree, and 60 per cent of Australia’s managers had no formal educational qualifications beyond secondary school. The task force also found that management development was generally not perceived to be a major strategic issue in most Australian enterprises. Management development was generally delegated to human resource departments rather than being considered a key responsibility of line managers. Managers were traditionally developed within narrow functional confines, without due regard for the development of broader skills, and up to 90 per cent of Australian industry had no access to any form of systematic management development. The Karpin task force identified five key challenges that had to be addressed in order to improve Australia’s competitiveness in its global context. These were: ●● developing a positive enterprise culture through education and training ●● upgrading vocational education, training and business support ●● harnessing the talents of diversity ●● achieving best practice management development ●● reforming management education. The task force provided a vision statement called Australia 2010 to encourage improved productivity and profitability in enterprises through a concerted commitment to continual improvement. By 2010, this document asserted, Australian enterprises and their managers should be focused on: ●● knowledge ●● the ability to learn, change and innovate in the new marketplace, as the accepted manager selection criteria, rather than gender, ethnicity or even prior experience ●● the learning organisation as a standard philosophy for many Australian enterprises, and as a major way to cope with change and turbulence ●● managers creating conditions conducive to learning for both individuals and the enterprise as a whole, both across individual business units and between enterprises and their external environments ●● employees being more motivated and skilled ●● quality acting as a guiding light within all organisations, with a customer-first mentality being all-pervasive. Much of the data reported by the Karpin task force about Australian managers painted a rather gloomy picture. However, the data was based on research during the early 1990s. The twenty-first century has seen a flurry of activity in management development, and in the increasing competence of Australia’s managers at all levels towards international best practice. The Australian dollar was floated only in 1983 and the Australian economy was opened up to the world relatively recently, through the reduction of substantial tariff protection and import quotas in the second half of the 1990s. The advent and dramatic growth of the Internet has had a

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major impact on lowering the ‘tyranny of distance’ that kept the Australian island nation somewhat separate, protected and distant from the rest of the world. This has led to a substantial improvement in the international exposure of Australia’s managers and in their outlook and behaviour. Australia’s economy has been regarded by the OECD as being one of the most robust in the world over the past decade, as is the case for New Zealand. As small economies, these countries have done extremely well in terms of growth and stability despite global crises. Some of this success must be attributed to sound and improving leadership and managerial skills. A detailed review of the Karpin study in 2011 found that some challenges were well met, new challenges had arisen and some were ongoing.67 The new challenges facing Australian managers for the next 20 years were found by panels of experts to be as shown in Exhibit 1.11. Indeed, it is an exciting time to be entering the field of management. In the rest of this book, you will learn much more about Australian, New Zealand and Asia–Pacific enterprises, the learning organisation, managing in ‘turbulent times’, responding with innovation capabilities, and the new and dynamic roles managers are playing in the twenty-first century. Exhibit 1.11 Managerial challenges for future research and policy development

1

ICT, e-business and knowledge management

What are the best ways to develop, manage and lead initiatives in this domain? What new entrepreneurial opportunities exist? How should we educate Australians for this future?

2

Sustainable development

What are the best ways to achieve sound standards of ethical behaviour in our businesses and government? How can we best guide corporate social responsibility and sustainable development?

3

Innovation and entrepreneurship

How can we create the culture, behaviour, incentives, knowledge and widespread capabilities and structures to promote these? How can we encourage participation in new ventures, industries and enterprises? How can Australian firms best respond to global competitors?

4

Management education

How best can management education grow and thrive in Australia? How can we encourage business schools to stay current? This includes business schools but also includes the management and leadership education of all other professions.

5

Diversity

There is still a major shortfall of women and minorities in positions of senior responsibility. How can this be redressed?

6

Global influences and international business opportunities

How can we best prepare and encourage businesses and leaders/managers to engage globally and acquire the skills to effectively take local businesses global?

7

Leading people in the ‘war for talent’

How can we spread ‘best practices’ in leadership of organisations so as to encourage ‘everybody to be a self-leader’ to maximise performance/outcomes?

8

Risk and volatility

How best can we encourage learning for and effective management of risk, volatility and crisis?

9

Organisational forms and business structures

How best can we facilitate advantages to organisations through new ways of conducting business, from joint ventures, alliances, collaborations, co-opetition (a combination of cooperation and competition), franchises, supply chains and networks?

How can Australian firms best promote their offerings internationally?

How can staff and other stakeholders be best led and managed in the complex circumstances of businesses post 2010, in order to achieve win-win outcomes? Source: Samson D., Karpin Revisited, IBSA, 2011, p. 39.

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For managers today the world in which they manage is in some ways becoming more complex; this will certainly hold true in the future, too. This complexity brings new challenges and also opportunities. It used to be that an acceptable and standard approach to running a business was to simply maximise profitability while not breaking the law, and behaving acceptably in terms of community expectations. There is indeed nothing wrong with this approach; but having said that, it is also true that advanced and progressive managers are doing even more and even better than that. In short, they are ‘Doing well by doing good.’ This means balancing the short-term need to be profitable, with the long-term opportunities to invest in initiatives that drive efficiency, stakeholder relationships and marketplace advantages. These sustainable development practices can lead to improvements of all kinds, often expressed in terms of the ‘triple bottom line’ of organisations, that being the financial bottom line that is traditional for all organisations, plus the environmental bottom line (meaning the ‘green’ outcomes of the organisation) and the social/community bottom line (meaning the contribution and outcomes that the organisation creates in the communities and societies within which it operates). Companies that are progressive in this regard have implemented numerous initiatives aimed at achieving win–win outcomes on these bottom lines. Examples are: ●● using materials that can be effectively recycled, thus saving on the creation of new materials and hence saving resources ●● conducting energy and water audits then reducing energy use, saving both money and the creation of unnecessary greenhouse gases ●● providing employees with flexible working conditions and health checks, gyms, etc., making their lives better and enhancing motivation and workplace productivity ●● working proactively with suppliers and customers on issues such as reducing the amount of packaging used on products to save costs and improve environmental outcomes ●● providing information about nutrition and food content in the food production industries, so that consumers can make healthier choices ●● working closely with regional small businesses to develop local economies and ‘quality of life’ factors, for example, in the case of resource companies where their mines and oil wells are close to residents. There is no limit to the opportunities for organisations to work closely and to engage and empower their stakeholders to find win–win outcomes on the triple bottom line. While many of these approaches and examples are not new, it is true that many organisations have not done much about them in the past, having been overly focused on short-term financial outcomes. Leading organisations in all industries, without exception, have seized the opportunities to advance their financial outcomes through incorporating these sustainable development principles and practices in their strategies, operations, measures, reward systems and ultimately into their culture and value systems. This is not a short-term ‘management fad’ that will be gone in just a few years: it is an opportunity that leading companies will use to advantage, and those that ignore it or lag behind will suffer. Further, working on advancing an organisation’s sustainable development outcomes will drive innovation. In this book we will connect the various traditional themes of management covered in each chapter to the emerging themes of sustainable development. In Chapter 5, which focuses on business ethics and corporate social responsibility, we give a more detailed account of the core elements of this important aspect and how managers will increasingly need to ‘sustainably’ manage in the future.

sustainable development

Sustainable development: now a core issue for managers

41

sustainable development Involves making balanced and equitable decisions so that financial, environmental and social outcomes are achieved in both the short and longer terms.

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➜➜ Today’s managers and organisations face various levels of crisis every day. ➜➜ Daily uncertainty and turbulence has meant that crisis management has become a critical skill for every manager. ➜➜ The five leadership skills required for crisis management are stay calm, be visible, put people before business, tell the truth and know when to get back to business.

➜➜ Australian managers are ranked 20th out of 41 countries by the World Economic Forum in an assessment of management competency. ➜➜ Australian manager strengths include their openness and honesty and their egalitarian, hard-working attitudes. ➜➜ Australian manager weaknesses include their lack of long-term vision and strategic perspective as well as their poor ability to manage teams and empower others. ➜➜ Australian managers tend to be poorly qualified in comparison to managers from other major nations.

Response to the Management Challenge

PETRONAS executives have a lot of pressure on them to deliver continually improved results, as the whole country of Malaysia is dependent on income coming from this company into the government to fund national development. Clearly there are some important things that managers in PETRONAS, and indeed every company, cannot exercise control over, such as natural disasters, political instability in foreign countries and, for PETRONAS, the global price of oil. However, these things can be taken into account as risk factors in planning business investments and operations. Further, the company can diversify its operations so that no single event, such as the political events in Sudan, will have too big an impact on it. Other effective elements of executive strategies in PETRONAS include:

➜➜ investments in new technologies, aimed at keeping this company up with the leaders in its industry, such as new technologies for deep-sea exploration

➜➜ driving the culture of the company so that staff at all levels will find PETRONAS an interesting, rewarding and motivating place to work

➜➜ leadership development, which it does well, to create long-term capability for new staff to develop to their fullest ability

➜➜ Advanced and progressive managers are balancing the short-term need to be profitable with long-term opportunities that drive efficiency, stakeholder relationships and marketplace advantages.

remember this

➜➜ The ‘triple bottom line’ requires an organisation to balance their financial, environmental and social obligations. ➜➜ Leading organisations in all industries have advanced their financial outcomes through incorporating sustainable development principles and practices.

➜➜ large efforts in managing and controlling quality of processes and products, to drive high service levels and competitiveness in marketplaces

➜➜ planning long-term development strategies for the company, in terms of products, countries of operation and technologies, such as in renewable energy sources

➜➜ being a leader in its industry in ‘Safety, Health and Environment’ (referred to in PETRONAS by the acronym SHE), in which staff and community wellbeing is seen as paramount in importance

➜➜ sustainable development and corporate responsibility to society, in which PETRONAS has always been a leader, engaging in what Malaysians refer to as nation-building activities. Through a combination of strategies in these areas above, PETRONAS continues to ‘earn its way’ in its local country, and in over 35 other countries where it has oiland gas-related businesses. This company has taken a very enlightened approach to its relationships in overseas markets, which is often referred to as ‘energy received– energy returned’, referring to the partnership-like approach that leads it to mutual success with its international collaborators.

1: The changing world of management

1 How do you feel about having a manager’s responsibility in today’s world, which is characterised by uncertainty, ambiguity and sudden changes or threats from the environment? Describe some skills and qualities that are important to managers under these conditions. 2 Assume you are a project manager at a biotechnology company, working with managers from research, production and marketing on a major product modification. You notice that every email you receive from the marketing manager has been copied to senior management. At every company function, she spends time talking to the big shots. You are also aware that sometimes when you and the other project members are slaving away over the project, she is playing golf with senior managers. What is your evaluation of her behaviour? As project manager, what do you do? 3 Jeff Immelt of GE has said that the most valuable thing he learned in business school was that ‘there are 24 hours in a day, and you can use all of them’. Do you agree or disagree? What are some of the advantages to this approach to being a manager? What are some of the drawbacks? 4 Why do some organisations seem to have a new CEO every year or two, whereas others have top leaders who stay with the company for many years (for example, Jack Welch’s 20 years as CEO at General Electric)? What factors about the manager or about the company might account for this difference? 5 Is efficiency or effectiveness more important to organisational performance? Can managers improve both simultaneously?

Discussion questions

6 Suppose you are a bright, hard-working entry-level manager who fully intends to rise through the ranks. Your performance evaluation gives you high marks for your technical skills but low marks when it comes to people skills. Do you think people skills can be learned, or do you need to rethink your career path? If people skills can be learned, how would you go about it?

7 If managerial work is characterised by variety, fragmentation and brevity, how do managers perform basic management functions such as planning, which would seem to require reflection and analysis? 8 A university professor once told her students, ‘The purpose of a management course is to teach students about management, not to teach them to be managers.’ Do you agree or disagree with this statement? Discuss. 9 Discuss some of the ways organisations and jobs have changed over the past 10 years. What changes do you anticipate over the next 10 years? How might these changes affect the manager’s job and the skills a manager needs to be successful? 10 How might the teaching of a management course be designed to help people make the transition from individual performer to manager and to prepare them for the challenges they will face? Explain. 11 How does sustainable development as a concept guide managers to do more than just maximise financial outcomes in the short term? What is the fit between the concepts of sustainable development and innovation?

C a n m a n a g e m e n t a f f o r d t o l o o k t h e o t h e r way ? John Graham had been with Shellington Pharmaceuticals for 18 years. After a tour of duty in the various plants, and seven years overseas, John was back at headquarters, looking forward to his new role as director of Asia–Pacific marketing. Two weeks into his new job, John received some unsettling news about one of the managers under his supervision. Over a casual lunch conversation, the director of human resources, Rose Anastasiou, mentioned that John should expect a phone call about Roger Jacobs, manager of new product development. Jacobs had a history of being ‘pretty horrible’ to his employees, she said, and one disgruntled employee had asked to speak to someone in senior management. After lunch, John did some follow-up work. Jacobs’ performance reviews had been stellar, but his personnel file also contained a large number of notes documenting charges of Jacobs’ mistreatment of employees. The complaints ranged from ‘inappropriate and derogatory remarks’ to subsequently dropped

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Ethical challenge

charges of sexual harassment. What was more disturbing was that the number as well as the severity of complaints had increased with each of Jacobs’ 10 years with Shellington. When John questioned the company CEO about the issue, he was told: ‘Yeah, he’s had some problems, but you just can’t replace someone like him with such a great eye for new products. You’re a bottom-line man; you understand why we let these things slide.’ Not sure how to handle the situation, John met briefly with Jacobs and reminded him to ‘keep the team’s morale up’. Just after the meeting, Rose Anastasiou from HR called to let John know the problem she’d mentioned over lunch had been sorted out. However, she warned that another employee had now come forward demanding that her complaints be addressed by senior management.

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pa r t o n e : I n n o vat i v e M a n a g e m e n t f o r a C h a n g i n g W o r l d

W hat do you do? 1 Ignore the problem. Jacobs’ contributions to new product development are too valuable to risk losing him, and the problems over the past 10 years have always worked themselves out anyway. There’s no sense starting something that could make you look bad. 2 Launch a full-scale investigation of employee complaints about Jacobs, and make Jacobs aware that the documented history over the past 10 years has put him on thin ice.

3 Meet with Jacobs and the employee to try to resolve the current issue; then start working with Rose Anastasiou from HR and other senior managers to develop stronger policies regarding sexual harassment and treatment of employees, including clear-cut procedures for handling complaints.

Source: Based on Wallace, D. (November–December 1992). A Talent for Mismanagement: What Would You Do? Business Ethics, 2, 3–4.

Gr oup challenge

Your best and worst managers

Step 1. On your own, think of two managers that you have had – the best and the worst. The managers could be anyone who served as an authority figure over you, including an instructor, a boss at work, a manager of a student organisation, a leader of a student group, a coach, a volunteer in a not-for-profit organisation, and so on. Think carefully about the specific behaviours that made each manager the best or the worst and write down what that manager did. The best manager I ever had did the following:

Case for cr itical analysis

The worst manager I ever had did the following:

Step 2. Divide into groups of four to six members. Each person should share his or her experiences, one at a time. Write on a sheet or a whiteboard separate lists of best-manager and worst-manager behaviours. Step 3. Analyse the two lists. What themes or patterns characterise ‘best’ and ‘worst’ manager behaviours? What are the key differences between the two sets of behaviours? Step 4. What lessons does your group learn from its analysis? What advice would you give to managers to help them be more effective?

SharpStyle Salons

Jamie Westbrook takes pride in her position as salon manager for SharpStyle Salon, one of a chain of hairdressing salons under the Gold Group umbrella. She oversees a staff of 15 including hairdressers, a nail technician, receptionists and hairdressing apprentices. Jamie enjoys a reputation as a manager who works very hard and takes care of her people. Hairdressers want to work for her. Following the salon’s new-hire policy, Jamie began as a hairdressing apprentice and quickly became a top hairdresser in the company through a combination of skill, a large and loyal client base and long hours at work. In 2013, retiring manager Carla Weems hand-picked Jamie as her successor, and the board quickly approved. Initially, the salon, located in a suburban shopping centre, managed a strong, steady increase, holding its position as one of the company’s top performers. But an economic crisis hit the area hard, with increases in unemployment and mortgage woes among current and potential customers. As families sought ways to save, the luxury of regular visits to the hair salon was among the first logical budget cuts. The past year has reflected this economic reality, and Jamie’s salon saw a sharp decrease in profits.

Jamie’s stomach is in knots as she arrives at the salon on Monday. Scheduled to fly interstate the next morning for a meeting at head office, she fears potential staffing cuts, but more important, she fears the loss of opportunity to secure her dream job, replacing the retiring manager at Riverwood Shopping Centre, the top-performing salon located in an upscale area of the city. Distracted, Jamie walks past the receptionist, Marianne, who is busily answering the phones. Hanging up the phone, Marianne tells Jamie that Holly and Carol Jean, two popular hairdressers, called in sick, and Jamie now has to reschedule their clients. Jamie had denied their earlier request to travel out of town to attend a concert, and her irritation is obvious. She orders Marianne to call both women and instruct them that, when they return to work, they are each to bring a medical certificate. ‘They had better be sick!’ Jamie shouts as she enters her office, slamming the door more forcefully than she intended. Startled employees and early-morning customers heard the outburst, and, after a momentary pause, they resumed their activities and quiet conversation, surprised by the show of managerial anger. Jamie knows she has let Holly and Carol Jean get away with unwarranted absences before and worries that she will do it again. She needs every head of hair they can style to help the salon’s profit.

1: The changing world of management

Jamie takes a deep breath and sits at her desk, turning on the computer and checking emails, including one from the group manager reminding her to send the salon’s status report in advance of tomorrow’s meeting. She asks Marianne to have final figures for the report on her desk by 1.00 p.m. Picking up the phone, she calls Sharon, a manager at another SharpStyle salon. ‘I really lost my cool in front of everyone, but I’m not apologising,’ Jamie admits, adding that she wished she had the guts to fire both stylists. ‘But this is not the day for that drama. I’ve got that report hanging over my head. I have no idea how to make things look better than they are, but I have to come up with something. Things look pretty dismal.’ Sharon assures her that she did the best she could dealing with two ‘irresponsible’ employees. ‘What will you do if they show up tomorrow with no medical certificates?’ ‘I don’t know. I hope I scared them enough so that they’ll come in with something.’ ‘I know you’re worried about the report and the effect it might have on the Riverwood job,’ Sharon says. ‘But everyone knows you can’t control the economy and its effect on the business. Just focus on the positive. You’ll be fine.’ At 10.30, as Jamie struggles to put the best possible spin on the report, she is called to the receptionist desk to speak to an angry customer. ‘Another interruption,’ Jamie fumes to herself. Just then, the door opens and top stylist/assistant manager Victoria Boone sticks her head into the office.

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‘I know you’re busy with the report. I’ll handle this,’ she says enthusiastically. ‘Thanks,’ Jamie replies. No sooner had she handed off the irate client to Victoria than she second-guessed the decision. In addition to her talents as a hairdresser, Victoria had experience as the manager of a successful salon in another city before moving to the area. Recognising her organisational and people skills, Jamie promoted Victoria to assistant manager soon after her arrival. Now each ‘I’ll handle this’ remark by Victoria convinces Jamie that her assistant manager is positioning herself as a potential rival for the Riverwood job. Jamie appreciates her enthusiastic attitude, but she’s also trying to limit her opportunities to lead or appear too competent before staff, customers and company officials. Jamie finds herself wanting to hide Victoria’s competence, and she has condescendingly reminded management that Victoria is a ‘great help to me’. Now, thinking of Victoria’s cheerful ‘I’ll handle this,’ Jamie rises from her desk and marches to the door. No, Jamie thinks, I’ll take care of this personally. Questions 1 What positive and negative managerial characteristics does Jamie possess? 2 How do these traits help or hinder her potential to get the top position at the Riverwood Shopping Centre salon? 3 How do you think Jamie should have handled each of the incidents with Marianne? Holly and Carol Jean? Victoria?

C a m p B o w W o w : I n n o vat i v e m a n a g e m e n t f o r a c h a n g i n g w o r l d For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

On the job video case

Q uestions 1 List the three broad management skill categories and explain which skills are needed most for each of the Camp Bow Wow leaders highlighted in the video.

3 List two activities that leaders at Camp Bow Wow perform daily, and identify which of the ten managerial roles discussed in the chapter figure prominently for each.

2 Which activities at Camp Bow Wow require high efficiency? Which activities require high effectiveness?

1  McQueen, R. (2001). One Step Ahead, Random House: Sydney. 2 This example is based on J. Katzenbach. (Summer 2012). The Steve Jobs Way. Strategy 1 Business, http://www.strategy-business.com/ article/00109?gko=d331b (accessed 11 June 2012); Leslie Kwoh and Emma Silverman. (31 March 2012). Bio as Bible: Managers Imitate Steve Jobs. The Wall Street Journal, B1; and Joel Siegel. (6 October 2011). When Steve Jobs Got Fired by Apple. ABC News, http://abcnews.go.com/ Technology/steve-jobs-fire-company/story?id=14683754 (accessed 11 June 2012). 3 Rigby, D. and Bilodeau, B. (2005). The Bain 2005 Management Tool Survey. Strategy & Leadership, 33:4, 4–12; D. Rigby and B. Bilodeau. Management Tools and Trends 2011. Bain and Company, Inc., http://www.bain.com/

endnotes

publications/articles/Managementtoolstrends-2011.aspx (accessed 22 June 2012). 4 See Joshua Cooper Ramo. (2009). The Age of the Unthinkable: Why the New World Disorder Constantly Surprises Us and What We Can Do About It (New York: Little Brown); and Richard Florida. (2010). The Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity (New York: Harper Collins). 5 Finer, J. (25 October 2001). To Cleanse a Poisoned Land. Far Eastern Economic Review, 42. 6  Kraar, L. (7 October 1991). Iron Butterflies. Fortune, 143–54.

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pa r t o n e : I n n o vat i v e M a n a g e m e n t f o r a C h a n g i n g W o r l d

7 What Do Managers Do? The Wall Street Journal Online, http://guides.wsj .com/management/developing- a-leadership-style/what-do-managers-do/ (accessed 11 August 2010); article adapted from Alan Murray. (2010). The Wall Street Journal Essential Guide to Management (New York: Harper Business). 8 Linebaugh, K. (7 March 2012). The New GE Way: Go Deep, Not Wide. The Wall Street Journal, B1. 9 Semler, R. (1993). Maverick: The Success Story Behind the World’s Most Unusual Workplace (New York: Warner Books). 10 Stewart, C. S. (7 May 2012). Oprah Struggles to Build Her Network. The Wall Street Journal, A1. 11 Bartlett, C. A. and Ghoshal, S. (January–February 1995). Changing the Role of Top Management: Beyond Structure to Processes. Harvard Business Review, 86–96. 12 Newton, A. and Castledine, G. (22 January 1999). Personal communication with executives Alan Newton and Geoff Castledine of Mars Corporation. 13  Asiaweek.com, 2001; http://www.giordano.com.hk. 14 Howie, R. and Moore, J. (12 April 1995). Personal communication with Orica executives Ross Howie and Jess Moore. 15 Thomas, P. (6 November 1999). Personal communication with GMH executive Peter Thomas. 16 Automotive Industry Data Card, March 2013 update, Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education, http://www.innovation.gov.au/Industry/Automotive/Statistics/ Pages/automotivedatacard.aspx and the further text description of the data http://www.innovation.gov.au/Industry/Automotive/Statistics/Pages/ AutomotiveDataCardTextMarch2013.aspx#1. 17 Woolworths Limited. Working at Woolworths. http://www.woolworthslimited .com.au. 18 Katz, R. L. (September–October 1974). Skills of an Effective Administrator. Harvard Business Review 52, 90–102. 19 Byrnes, N. and Crockett, R. O. (8 June 2009). An Historic Succession at Xerox. BusinessWeek, 18–22. 20 Bryant, A. (13 March 2011). The Quest to Build a Better Boss. The New York Times, BU1. 21 Gentry, W. A., Harris, L. S., Baker, B. A. and Leslie, J. B. (2008). Managerial Skills: What Has Changed Since the Late 1980s? Leadership and Organization Development Journal, 29:2, 167–81. 22 Sacks, D. (November 2011). The Way I Work: Yammer. Inc.,122–4. 23 Longenecker, C. O., Neubert, M. J. and Fink, L. S. (2007). Causes and Consequences of Managerial Failure in Rapidly Changing Organizations. Business Horizons, 50, 145–55. 24 Sonne, P. (26 July 2010). The Gulf Oil Spill: Hayward Fell Short of Modern CEO Demands. The Wall Street Journal. 25 Christian, K. (7 March 2012). Woolworths is Trialling a Joint Venture to Open McCafe Outlets in Its New Masters Hardware Stores. www.news .com.au, http://www.news.com.au/business/breaking-news/woolworthstrials-mccafe-at-masters-stores/story-e6frfkur-1226292493785; Speedy, B. (20 July 2013). Analysts Hammer Woolies’ Hardware Joint Venture. The Australian, http://www.theaustralian.com.au/ business/companies/analysts-hammer-woolies-hardware-joint-venture/ story-fn91v9q3-1226682228553; Speedy, B. (24 May 2013). Dulux Strips Masters of paints Due to its Cosy Link With Wattyl. The Australian, http://www.theaustralian.com.au/business/companies/ dulux-strips-masters-of-paints-due-to-its-cosy-link-with-wattyl/storyfn91v9q3-1226649522808 (accessed 22 July 2013). 26 Longenecker, Neubert and Fink. Causes and Consequences of Managerial Failure in Rapidly Changing Organizations. 27 A. I. Kraut, Pedigo, P. R., McKenna D. D. and Dunnette, M. D. (2005). The Role of the Manager: What’s Really Important in Different Management Jobs. Academy of Management Executive, 19:4, 122–9.

28 Bartlett, C. A. and Ghoshal, S. (May–June 1995). Changing the Role of Top Management: Beyond Systems to People. Harvard Business Review, 132–42; and S. Ghoshal and C. A. Bartlett. (January–February 1995). Changing the Role of Top Management: Beyond Structure to Processes. Harvard Business Review, 86–96. 29 Gratton, L. (January–February 2011). The End of the Middle Manager. Harvard Business Review, 36. 30 Osterman, P. (November–December 2009). Recognizing the Value of Middle Management. Ivey Business Journal, http://www.iveybusinessjournal.com/ article.asp?intArticle_id=866; Quy Nguyen Huy. (September 2003). In Praise of Middle Managers. Harvard Business Review, 72–9; R. M. Kanter. (2003). On the Frontiers of Management (Boston: Harvard Business School Press). 31 Quoted in L. Haneberg. (Fall 2005). Reinventing Middle Management. Leader to Leader, 13–18. 32 Reported in R. Fisman. (16 October 2010). In Defense of Middle Management. The Washington Post, http://www.washingtonpost.com /wp-dyn/content/article/2010/10/16/AR2010101604266_pf.html (accessed 13 June 2012). 33 Mintzberg, H. (1994). Rounding out the Manager’s Job. Sloan Management Review, 11–26; Mintzberg, H. (1973). The Nature of Managerial Work (New York: Harper & Row). 34 Kaplan, R. E. (Spring 1984). Trade Routes: The Manager’s Network of Relationships. Organizational Dynamics, 37–52; Stewart, R. (1984). The Nature of Management: A Problem for Management Education. Journal of Management Studies, 21, 323–30; Kotter, J. P. (November–December 1982). What Effective General Managers Really Do. Harvard Business Review, 156–67; McCall, M. W. Jr, Morrison, A. M. and Hannan, R. L. (1978). Studies of Managerial Work: Results and Methods. Technical Report No. 9, Centre for Creative Leadership, Greensboro. 35 Konrad, A. M., Kashlak, R., Yoshioka, I., Waryszak, R. and Toren, N. (December 2001). What Do Managers Like to Do? A Five-Country Study. Group and Organizational Management, 26:4, 401–33. 36 Slayter, M. E. (17 August 2005). New Managers Should Go Slow. The Ottawa Citizen, F2. 37 For a review of the problems faced by first-time managers, see Linda A. Hill. (January 2007). Becoming the Boss. Harvard Business Review, 49–56; Loren B. Belker and Gary S. Topchik. (2005). The First-Time Manager: A Practical Guide to the Management of People, 5th ed. (New York: AMACOM); J. W. Lorsch and P. F. Mathias. (July–August 1987). When Professionals Have to Manage. Harvard Business Review, 78–83; R. A. Webber. (1991). Becoming a Courageous Manager: Overcoming Career Problems of New Managers (Englewood Cliffs, NJ: Prentice Hall); D. E. Dougherty. (1984). From Technical Professional to Corporate Manager: A Guide to Career Transition (New York: Wiley); J. Falvey. (March 1989). The Making of a Manager. Sales and Marketing Management, 42–83; M. K. Badawy. (1982). Developing Managerial Skills in Engineers and Scientists: Succeeding as a Technical Manager (New York: Van Nostrand Reinhold); and M. London. (1985). Developing Managers: A Guide to Motivating and Preparing People for Successful Managerial Careers (San Francisco, CA: Jossey-Bass). 38 Based on E. Rusli, N. Perlroth and N. Bilton. (14 May 2012). The Hoodie amid the Pinstripes: As Facebook IPO Nears, Is Its Chief up to Running a Public Company? International Herald Tribune, 17. 39 This discussion is based on Linda A. Hill. (2003). Becoming a Manager: How New Managers Master the Challenges of Leadership, 2nd ed. (Boston, MA: Harvard Business School Press), pp. 6–8; and Hill. Becoming the Boss. 40 See also the ‘Boss’s First Steps’ sidebar in White. Learning to Be the Boss; and Belker and Topchik. The First-Time Manager. 41 Quoted in E. Zimmerman. (15 January 2011). Are You Cut Out for Management? (Career Couch column), The New York Times, http://www .nytimes.com/2011/01/16/jobs/16career.html (accessed 14 June 2012).

1: The changing world of management

42 Mintzberg, H. (2009). Managing (San Francisco: Berrett-Kohler Publishers), 17–41. 43 Study reported in R. E. Silverman. (14 February 2012). Where’s The Boss? Trapped in a Meeting. The Wall Street Journal, http://online.wsj.com/article/ SB10001424052970204642604577215013504567548.html (accessed 14 June 2012). 44 Ibid. 45 Based on A. Halcrow. (June 1998). A Day in the Life of Kathy Davis: Just Another Day in HR. Workforce Management, 77:6, 56–62. 46  Mintzberg, H. (1973). The Nature of Managerial Work (New York: Harper & Row). 47 Hymowitz, C. (16 June 2009). Packed Calendars Rule. The Asian Wall Street Journal; and (March–April 2008). The 18-Hour Day. The Conference Board Review, 20. 48 (14 February 2012). Four CEOs’ Tips on Managing Your Time. The Wall Street Journal, http://online.wsj.com/ article/SB10001424052970204883304 577221551714492724.html (accessed 14 June 2012). 49 A. Garrett. (July 2000). Buying Time to Do the Things That Really Matter. Management Today, 75; and R. S. Kaplan. (January 2007). What to Ask the Person in the Mirror. Harvard Business Review, 86–95. 50 Mintzberg, Managing; L. B. Kurke and H. E. Aldrich. (1983). Mintzberg Was Right! A Replication and Extension of The Nature of Managerial Work. Management Science, 29: 975–984; C. M. Pavett and A. W. Lau. (1983). Managerial Work: The Influence of Hierarchical Level and Functional Specialty. Academy of Management Journal, 26, 170–7; and C. P. Hales. (1986). What Do Managers Do? A Critical Review of the Evidence. Journal of Management Studies 23, 88–115. 51 Vascellaro, J. E. (29 May 2012). Apple Chief Executive Cook to Climb on a New Stage. The Wall Street Journal, B2; W. Mossberg and K. Swisher. (4 June 2012). All Things Digital (A Special Report) – Apple After Jobs. The Wall Street Journal, R3; and T. Wolverton. (29 May 2012). Apple CEO Tim Cook Isn’t Trying to Be the Next Steve Jobs. Oakland Tribune. 52 Yukari Iwantani Kane. (3 March 20140. The Job After Steve Jobs: Tim Cook and Apple. The Wall Street Journal, http://www.theaustralian .com.au/business/wall-street-journal/the-job-after-steve-jobs-tim-cook-andapple/story-fnay3ubk-1226843287325# (accessed 6 March 2014). 53 Mangi, N. (25 July–31 July 2011). Convoys and Patdowns: A Day at the Office in Pakistan. Bloomberg Businessweek, 11–13. 54 Jonas, H. S. III, Fry, R. E. and Srivastva, S. (August 1990). The Office of the CEO: Understanding the Executive Experience. Academy of Management Executive, 4, 36–48. 55 Connors, W. and Cummins, C. (23 January 2012). RIM CEOs Give up Top Posts in Shuffle. The Wall Street Journal Online, http://online.wsj.com/article/

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SB10001424052970204624204577177184275959856.html (accessed 9 July 2012); and S. Finkelstein. (27 December 2011). The Worst C.E.O.s of 2011. The New York Times. 56 Chazan, G. and Langley, M. (27 July 2010). Dudley Faces Daunting To-Do List. The Wall Street Journal Europe. 57 O’Shaughnessy, T. (March 2012). The Way I Work: LivingSocial. Inc., 104–8; Thomas Heath and Mohana Ravindranath. LivingSocial CEO Tim O’Shaughnessy Stepping Down. http://www.washingtonpost.com/ business/capitalbusiness/livingsocial-ceo-tim-oshaughnessy-steppingdown/2014/01/10/9f593fb0-7a12-11e3-b1c5-739e63e9c9a7_story.html. 58 Crawford, J. (May–June 2010). Profiling the Non-Profit Leader of Tomorrow. Ivey Business Journal, http://www.iveybusinessjournal.com/ topics/leadership/profiling-the-non-profit-leader-of-tomorrow (accessed 14 June 2012). 59 The following discussion is based on P. F. Drucker. (1992). Managing the Non-Profit Organization: Principles and Practices (New York: Harper Business); and Thomas Wolf. (1990). Managing a Nonprofit Organization (New York: Fireside/Simon & Schuster). 60 Letts, C. W., Ryan, W. P. and Grossman, A. (1999). High Performance Nonprofit Organizations (New York: Wiley & Sons), pp. 30–5. 61 Zimmerman, E. (6 April 2008). Your True Calling Could Suit a Nonprofit (interview, Career Couch column), The New York Times. 62 This discussion is based on ideas in S. Denning. (2011). Masterclass: The Reinvention of Management. Strategy & Leadership, 39:2, 9–17; J. Birkinshaw and J. Goddard. (Winter 2009). What Is Your Management Model? MIT Sloan Management Review, 81–90; P. McDonald. (October 2011). It’s Time for Management Version 2.0: Six Forces Redefining the Future of Modern Management. Futures, 797ff; J. C. Meister and K. Willyerrd. (July 2010). Leadership 2020: Start Preparing People Now. Leadership Excellence, 5. 63 Described in Birkinshaw and Goddard, What Is Your Management Model?; Denning, The Reinvention of Management; and T. L. Fenton. (Spring 2012). Inspiring Democracy in the Workplace: From Fear-Based to FreedomCentered Organizations. Leader to Leader, 57–63. 64 Bartlett, C. A. and Ghoshal, S. (Fall 1997). The Myth of the Generic Manager: New Personal Competencies for New Management Roles. California Management Review, 40:1, 92–116. 65 http://www3.weforum.org/docs/WEF_GlobalCompetitivenessRepo rt_2012-13.pdf. 66 Enterprising Nation: Report of the Industry Task Force on Leadership and Management Skills (April 1995), AGPS: Canberra, 55. 67  Samson D. (2011). Karpin Revisited, IBSA.

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ test your understanding of the changing world of management by taking the revision quiz ➜ use the interactive flashcards to revise relevant key terms and their definitions ➜ download the audio summary for an on-the-go review.

Cour seMate

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Understand how historical forces influence the

5 Explain the major concepts of systems thinking, the

2 Identify and explain major developments in the

6 Name contemporary management tools and some

3 Describe the major components of the classical and

7 Describe the management changes brought about

practice of management.

history of management thought.

humanistic management perspectives.

4 Discuss the management science approach and its current use in organisations.

contingency view and total quality management.

reasons that management trends change over time. by the technology driven workplace, including the role of social media programs and customer relationship management (CRM).

Chapter 2

The evolution of management thinking

Chapter outline ➜ Management and organisation ➜ Classical perspective Scientific management Bureaucratic organisations Administrative principles

➜ Humanistic perspective

Early advocates The human relations movement The human resources perspective The behavioural sciences approach Management science

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➜ Recent historical trends

Systems thinking Contingency view Total quality management

➜ Innovative management thinking for a changing world Contemporary management tools Managing the technology-driven workplace The shifting world of e-business Knowledge management Social media programs

➜ Sustainable development

New Manager Self-test A r e y o u a n e w- s t y l e o r a n o l d - s t y l e m a n a g e r ? The following are various behaviours in which a manager may engage when relating to subordinates. Read each statement carefully and rate each one mostly true or mostly false to reflect the extent to which you would use that behaviour. Mostly true

Mostly false

1 Supervise my subordinates closely in order to get better work from them. 2 Set the goals and objectives for my subordinates and sell them on the merits of my plans. 3 Set up controls to ensure that my subordinates are getting the job done. 4 Make sure that my subordinates’ work is planned out for them. 5 Check with my subordinates daily to see if they need any help. 6 Step in as soon as reports indicate that progress on a job is slipping. 7 Push my people if necessary in order to meet schedules. 8 Have frequent meetings to learn from others what is going on. Scoring and interpretation: Add the total number of Mostly true answers and mark your score on the scale below. Theory X tends to be ‘old-style’ management, and Theory Y ‘new-style’, because the styles are based on different assumptions about people. To learn more about these assumptions, you can refer to Exhibit 2.4 and review the assumptions related to Theory X and Theory Y. Strong Theory X assumptions are typically considered inappropriate for today’s workplace. Where do you fit on the X-Y scale? Does your score reflect your perception of yourself as a current or future manager? Theory X

X-Y Scale 10____ 5 ____0

Theory Y

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Management Challenge

Cementos Mexicanos (Cemex), based in Monterrey, Mexico, has been making and delivering concrete for over a century. The company specialises in delivering concrete in developing areas of the world, places where anything can, and usually does, go wrong. Even in Monterrey, for example, Cemex copes with unpredictable weather and traffic conditions, spontaneous labour disruptions, building permit chaos, and arbitrary government inspections of construction sites. In addition, more than half of all orders are changed or cancelled by customers, usually at the last minute. Considering that a load of concrete is never more than 90 minutes from spoiling, these chaotic conditions mean high costs, complex scheduling, and frustration for employees, managers, and customers. As competition in the industry increased, Cemex managers began looking for ways to stand out from the crowd. One idea was a guaranteed delivery time, but despite the efforts of employees, the best Cemex could do was promise delivery within a three-hour window. To make matters worse, the construction business itself was becoming increasingly complex and competitive,

leading to even more disruptions and cancellations. Builders were sometimes lucky to get their orders delivered on the right day, let alone at the right hour. Cemex managers began to consider that the company needed a whole new approach to doing business – one that accepted rather than resisted the natural chaos of the marketplace. It would mean massive changes in operations, as well as finding ways to get dispatchers and drivers (who had an average of six years of formal education) to think like entrepreneurs. Sources: Petzinger, T. Jr. (1999). The New Pioneers: The Men and Women Who Are Transforming the Workplace and Marketplace. New York: Simon & Schuster, 91–3; (April 1999). In Search of the New World of Work. Fast Company, 214–20; Katel, P. (July 1997). Bordering on Chaos. Wired, 98–107.

Question If you were a manager at Cemex, what changes would you implement to help the organisation thrive in the face of constant chaos? What advice would you give managers concerning their management approach and the kind of company they might create?

Cemex is faced with a situation similar to many companies. The methods and patterns that kept the organisation successful in the past no longer seem enough to keep it thriving in today’s turbulent environment. Unexpected market forces or other changes in the environment can devastate a company. Australian companies such as Aurora Energy, United Energy, Energex and Origin Energy face a crisis because of increasing deregulation and the growth of small, independent power producers. These include renewable energy suppliers such as Pacific Hydro,1 which uses wind and hydro-power sources.2 The airline industry has had to cope with a lot of change lately. Consider the changes that have occurred in the business environment surrounding Qantas over recent years, which have caused its executives and board of directors to make some big changes in the company’s strategy and operations. First its long-time competitor, Ansett, went bankrupt. The price of airfares has dropped substantially since Australian skies were dominated by a cosy, two-airline duopoly. At about the same time, both terrorism and severe acute respiratory syndrome (SARS) hit, causing worldwide crises in the travel industry. Many of the world’s longstanding airlines went bankrupt. In 2014 and beyond, Qantas is continually challenged by low-cost carriers and government-subsidised international airlines which have eroded its market share, making it increasingly difficult for Qantas to cover its fixed operating costs. Air New Zealand faced similar threats to Qantas and many other airlines. After some 90 years of essentially stable and profitable growth, turmoil like never before was hitting Qantas and Air New Zealand from all sides. Then Richard Branson decided to make a serious and well-funded entry into the domestic Australian market with Virgin Airlines, causing Qantas to lower its prices dramatically to match Virgin’s. Deeply discounted domestic airfares were previously unheard of on such a sustained basis. On top of this, the world’s oil prices skyrocketed to over US$80 per barrel in 2010, driving up Qantas’

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fuel costs. And from a management perspective, Qantas staff have always been highly unionised, and cooperation between management and unions has not always been as smooth as shareholders would like. This constrains the airline’s ability to change and react to crises. And airlines such as Singapore Airlines and Tiger are increasingly pressuring the local companies in local markets. Even Qantas’ reputation for safety was challenged in 2010 after a number of mechanical problems led to emergency landings and very worried passengers, followed by talk of whether it had cut its maintenance standards. A 2010 explosion in an engine of a brand new A380 Qantas plane received worldwide negative publicity.

Australia’s electricity industry is currently dominated by four major suppliers (Origin Energy, AGL, Energy Australia and TRUenergy) who, together, make up 80 per cent of the market. Despite the dominance of these few players the industry is still very competitive. Deregulation has opened up consumer choice and the top four companies now compete among themselves and many smaller electricity suppliers for customers. This competition has been made particularly dynamic because

of the introduction of Internet comparison sites that enable consumers to select a provider based on criteria such as price and service levels among other factors. With just a few clicks of a mouse button, websites like http//:switchwise.com.au enable a customer to view suppliers in their area, compare contract and payment alternatives and review company environmental performance. Consumers can also simply switch their energy supplier if a better option is presented. With

19 energy companies in Australia now providing Green Power and the cost of switching to renewable energy becoming more and more competitive (for instance, a household could move to 10 per cent GreenPower for only $1 per week or embark on 100 per cent renewable energy for around $8 per week) the electricity industry must continually battle to provide reliable, renewable and price competitive energy products. Source: http://switchwise.com.au

When everything changes suddenly, managers face a seemingly impossible situation and have to create a new kind of company – possibly one with which they have little experience or skill. Qantas has had to substantially cut its costs, and create a new set of business units such as Jetstar, to match the low-cost position of Virgin Australia. Qantas’ CEO, Allan Joyce, had to make many public statements to reduce customers’ fears related to its ‘close calls’ in 2010. In October 2011, Qantas had so much industrial turmoil that the CEO grounded the whole airline, and gave all Qantas stakeholders, including its many thousands of inconvenienced and sometimes outraged passengers, a sense of how much change was needed to that organisation. Qantas has faced more crises and changed more in its last 10 years than in its first 70 years of existence combined! Sometimes an entire industry can face a crisis. In 1984, the Australian government, through Industry Minister John Button, implemented a restructuring plan for the automotive industry. Its aim was to make the industry more efficient. The industry had been declining in relative competitiveness, while being highly protected by substantial import tariffs. It also involved significant reductions in tariffs, from a high of more than 50 per cent in the mid 1980s. At the time, Australian cars were clearly inferior to both Japanese and European imports, and Australian factories were much lower in productivity than the large-scale operations in the northern hemisphere. This was a significant challenge for the managers of the Australian Ford, Holden, Mitsubishi, Nissan and Toyota businesses. Nissan and then Mitsubishi closed their Australian assembly plants. Ford will do so in 2016, and Toyota in 2017. (See this book’s Continuing case at the end of each Part for details on Holden’s struggles in Australia.) The competitiveness of the Australian-based component suppliers was also an issue. The survival and prosperity of those businesses

Case study

Switching to green power

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were severely threatened when the government announced that tariffs would be reduced to approximately 15 per cent. The Australian automotive industry has been threatened by quality vehicles and low costs from other countries. The number of cars assembled in Australia has halved in the past six years. Imports have slowly but surely taken over much of the market. Only three companies continue to build cars in Australia, and all of these (Holden, Ford and Toyota) have announced their plant closures in coming years. Initial studies of Japanese car manufacturers showed that their focus on meeting customer needs, achieving quality and waste-free operations, and just-in-time manufacturing was leading them to continually improve the competitiveness of their offerings, which were already superior to Australianbuilt products. It was apparent that the Australian industry’s focus – creating a car industry to provide local strategic independence as well as job creation – came with a big price tag. Australian cars were low in quality, among the most expensive in the world, and the industry was generally in poor shape. The Australian companies’ first move was to study the way the Japanese companies had achieved so much progress while their own businesses fell behind. The same approach was taken in the Australian steel, paper, machinery, film and plastics industries, and many others. In the automotive industry, Australian companies have improved their competitiveness substantially, but competitiveness is a relative thing and despite the local improvements the Australian car assembly industry has been decimated and will soon (2017) not exist. Through massive modernisation programs, adoption of management procedures known as ‘lean manufacturing’ and with investments in new technology, the car assemblers and the component producers are now more competitive. Why should history matter to corporate managers in the Australian car industry? Some economic analysts were issuing warnings as early as the 1950s about the rapid rate at which the industry was declining in relative terms. Perhaps they could not have predicted all the things that were reshaping the world’s industry, such as the energy crisis, but studying historical trends could have helped Ford and Holden see the need to begin developing fuel-efficient, quality models and adopt new manufacturing methods much earlier. The industry’s future success may well depend on the ability to analyse trends and develop appropriate structures and ways of managing to remain competitive. Although Australia’s domestic car market passed the one million car level for the first time in 2007 and reached and remained over 1.1 million units sold in 2012–14, domestic producers of cars and components are under ever-increasing pressure from global competitors who offer lower-cost products. Cars from India’s and China’s awakening automotive industries are arriving in Australia. What do managers at India’s Tata Group, US-based General Electric (GE) and Africa’s M-Pesa mobile money transfer service have in common? The authors of a recent book on innovation say they have all applied a concept called jugaad (pronounced joo-gaardh). Jugaad is a Hindi word that refers to creating something of benefit from limited resources. Benjamin Franklin, the authors say, is a great historical example because he faced scarcity firsthand, but improvised to create inventions that were for the benefit of the masses.3 Management – like most disciplines – loves buzzwords, and jugaad is one of the most recent to appear on the radar. Jugaad basically refers to an innovation mindset, used widely by Indian companies, that strives to meet customers’ immediate needs quickly and inexpensively. With research and development budgets strained in today’s economy, Western managers have quickly picked up on the approach, sometimes calling it frugal engineering.4 Will this be a buzzword that quickly fades from managers’ vocabularies, or will it become as ubiquitous in management circles as terms such as total quality or kaizen? Managers are always on the lookout for fresh ideas, innovative management approaches, and new tools and techniques.

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Management philosophies and organisational forms change over time to meet new needs. The Self-test at the beginning of this chapter describes two differing philosophies about how people should be managed, and you will learn more about these ideas in this chapter. If management is always changing, why does history matter to managers? The workplace of today is different from what it was 50 years ago – indeed, from what it was even 10 years ago – yet historical concepts form the backbone of management education.5 One reason is that a historical perspective provides managers with a broader way of thinking, a way of searching for patterns and determining whether they recur across time periods. It is a way of learning from others’ mistakes so as not to repeat them; learning from others’ successes so as to repeat them in the appropriate situation; and most of all, learning to understand why things happen to improve organisations in the future. Certain management practices that seem modern, such as open-book management or employee stock ownership, have actually been around for a long time. These techniques have repeatedly gained and lost popularity since the early twentieth century because of shifting historical forces.6 This chapter provides a historical overview of the ideas, theories and management philosophies that have contributed to making the workplace what it is today. The final section of the chapter looks at some recent trends and current approaches that build on this foundation of management understanding. This foundation illustrates that the value of studying management lies not in learning current facts and research, but in developing a perspective that will facilitate the broad, long-term view needed for management success.

Management and organisation A historical perspective does not mean merely arranging events in chronological order; it means developing an understanding of the impact of societal forces on organisations. Studying history is a way to achieve strategic thinking, see the big picture and improve conceptual skills. We will start by examining the way social, political and economic forces have influenced organisations and the practice of management.7 Social forces refer to those aspects of a culture that guide and influence relationships among people. What do people value? What do people need? What are the standards of behaviour among people? These forces shape what is known as the social contract, which refers to the unwritten, common rules and perceptions about relationships among people, and between employees and management. Expressions such as ‘a man is as good as his word’ and ‘a day’s work for a day’s pay’ convey such perceptions. One social force is the changing attitudes, ideas and values of Generation Y employees (sometimes called Millennials).8 These young workers, the most educated generation in history, grew up technologically adept and globally conscious. Unlike many workers of the past, they typically are not hesitant to question their superiors and challenge the status quo. They want a flexible, collaborative work environment that is challenging and supportive, with access to cutting-edge technology, opportunities to learn and further their careers and personal goals, and the power to make substantive decisions and changes in the workplace. Political forces refer to the influence of political and legal institutions on people and organisations. One significant political force is the increased role of government in business after the collapse of companies in the financial services sector and major problems in the auto industry. Some managers expect

social forces The aspects of a culture that guide and influence relationships among people – their values, needs and standards of behaviour.

political forces The influence of political and legal institutions on people and organisations.

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increasing government regulation in the coming years.9 Political forces also include basic assumptions underlying the political system, such as the desirability of self-government, property rights, contract rights, the definition of justice, and the determination of innocence or guilt of a crime. Economic forces pertain to the availability, production and distribution of resources in a society. Governments, military agencies, churches, schools and business organisations in every society need resources to achieve their goals, and economic forces influence the allocation of scarce resources. Companies in every industry have been affected by the recent global financial crisis (GFC), which was the worst since the Great Depression of the 1930s. Reduced consumer spending and tighter access to credit have curtailed growth and left companies scrambling to meet goals with limited resources. Although liquidity for large corporations has increased, smaller companies continue to struggle to find funding.10 Another economic trend that affects managers worldwide is the growing economic power of countries such as China, India and Brazil.11 Australian companies that were selling into American and European markets suffered a lot more during the GFC than those selling to Asian markets. It is fascinating to acknowledge that while economies and societies that were previously so prominent in world history, such as Greece, Spain and Egypt, are struggling, China and India continue to grow and create wealth and jobs at quite amazing rates. Australia’s economy has been the envy of most others in the past decade, having been relatively immune to the shocks occurring in the northern hemisphere. Management practices and perspectives vary in response to these social, political and economic forces in society. Exhibit 2.1 illustrates the evolution of significant management perspectives over time. The timeline reflects the dominant time period for each approach, but elements of each are still used in today’s organisations.12

economic forces Forces that affect the availability, production and distribution of a society’s resources among competing users.

Exhibit 2.1 Management perspectives over time

Open (collaborative) Innovation The technology - driven workplace Total quality management Contingency view Systems thinking Management science perspective Humanistic perspective Classical perspective 1870

1880

1890

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

2020

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➜➜ Managers are always on the lookout for new techniques and approaches to meet shifting organisational needs. ➜➜ Looking at history gives managers a broader perspective for interpreting and responding to current opportunities and problems.

➜➜ Management and organisations are shaped by forces in the larger society. ➜➜ Social forces are aspects of a society that guide and influence relationships among people, such as their values, needs and standards of behaviour.

➜➜ Political forces relate to the influence of political and legal institutions on people and organisations. The increased role of government in business is one example of a political force.

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remember this

➜➜ Economic forces affect the availability, production and distribution of a society’s resources.

Classical perspective The practice of management can be traced to 3000 BCE, to the first government organisations developed by the Sumerians and Egyptians, but the formal study of management is relatively recent.13 The early study of management as we know it today began with what is now called the classical perspective. The classical perspective on management emerged during the nineteenth and early twentieth centuries. The factory system that began to appear in the 1800s posed challenges that earlier organisations had not encountered. Problems arose in tooling the plants, organising managerial structure, training employees (many of them non-English-speaking immigrants), scheduling complex manufacturing operations, and dealing with increased labour dissatisfaction and resulting strikes. These myriad new problems and the development of large, complex organisations demanded a new approach to coordination and control, and a ‘new sub-species of economic man – the salaried manager’14– was born. Between 1880 and 1920, the number of professional managers in the United States grew from 161 000 to more than 1 million, and similar growth occurred in other Western nations, such as Australia, the UK and New Zealand.15 These professional managers began developing and testing solutions to the mounting challenges of organising, coordinating and controlling large numbers of people and increasing worker productivity. Thus began the evolution of modern management with the classical perspective. This perspective contains three subfields, each with a slightly different emphasis: scientific management, bureaucratic organisations and administrative principles.16

Sony: experiencing the thrills and uncertainties of innovation

Innovative Way

was owned and patented by a smaller company called Michie Corp. Toshiba also had access to that technology and beat Sony to the market. Sony delayed the launch of its Source: Getty Images/Sean Gallup

Even massively successful companies occasionally trip over. The very nature of business involves taking risks in order to get returns. In this world of uncertainty and turbulence only one thing is certain: that not everything your company tries will work to plan. Even generally outstandingly successful companies such as Sony have had significant problems, including an episode of exploding batteries in personal computers. The subsequent massive recall was very expensive for Sony and damaged the company’s reputation. The Blu-Ray DVD format, which Sony pioneered and pushed very hard, seems also to have met with mixed success at best and at worst to be a real cost drain on the company. Sony had a great deal of trouble with its Blu-Ray technology and ended up having to license in a more durable blue laser device which

classical perspective A management perspective that emerged during the nineteenth and early twentieth centuries that emphasised a rational, scientific approach to the study of management and sought to make organisations efficient operating machines.

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Playstation 3 game console so that it could use Blu-Ray technology, but then got beaten to the gamers market by Microsoft with the Xbox 360 and by Nintendo with the Wii. Other examples of high-risk ventures include Microsoft’s Vista and Apple’s iPhone, which were clearly risky at the time they were developed and may have ended up being costly mistakes, although this proved not to be so with the benefit of hindsight. Even if these products are successful they provided ample illustration of the potential downsides of making massive investments in innovative new products which have no guarantee of success. Sony has a great track

record with Walkman, Discman and the first three models of Playstation. Companies like Sony need to keep on delivering a stream of breakthrough products to fuel continued growth and this presents great challenges and opportunities for up-and-coming managers. It requires effective investment in research and technology, and the ability to commercialise inventions (such as the recently launched Playstation 4), and Sony’s reputation as market leader in its industries has been strongly challenged by newer players such as Samsung of Korea, which has aggressively attacked its ‘leadership’ market position, with considerable success. Source: Adapted from Schlender, B. (5 March 2007). Fortune, 26.

Sci enti fi c m anagem ent scientific management

scientific management A subfield of the classical management perspective that emphasised scientifically determined changes in management practices as the solution to improving labour productivity.

Frederick Winslow Taylor (1856–1915): Taylor’s theory that labour productivity could be improved by scientifically determined management practices earned him the status of ‘father of scientific management’.

Scientific management emphasises scientifically determined jobs and management practices as the way to improve efficiency and labour productivity. In the late 1800s, a young engineer, Frederick Winslow Taylor (1856–1915), proposed that workers ‘could be retooled like machines, their physical and mental gears recalibrated for better productivity.’17 Taylor insisted that improving productivity meant that management itself would have to change and, further, that the manner of change could be determined only by scientific study; hence, the label scientific management emerged. Taylor suggested that decisions based on rules of thumb and tradition be replaced with precise procedures developed after careful study of individual situations.18 Taylor’s approach is illustrated by the unloading of iron from rail cars and reloading finished steel for the Bethlehem Steel plant in 1898. Taylor calculated that with correct movements, tools and sequencing, each man was capable of loading 47.5 tonnes per day instead of the typical 12.5 tonnes. He also worked out an incentive system that paid each man US$1.85 a day for meeting the new standard – an increase from the previous rate of US$1.15. Productivity at Bethlehem Steel shot up overnight. Although known as the ‘father of scientific management’, Taylor was not alone in this area. Henry Gantt, an associate of Taylor’s, developed the Gantt Chart – a bar graph that measures planned and completed work along each stage of production by time elapsed. Two other important pioneers in this area were the husband-and-wife team of Frank B. and Lillian M. Gilbreth. Frank B. Gilbreth (1868–1924) pioneered the time and motion study and arrived at many of his management techniques independently of Taylor. He stressed efficiency and was known for his quest for the ‘one best way’ to do work. Although Gilbreth is known for his early work with bricklayers, his work had a great impact on medical surgery by drastically reducing the time patients spent on the operating table. Surgeons were able to save countless lives through the application of time and motion studies. Lillian M. Gilbreth (1878–1972) was more interested in the human aspect of work. When her husband died at the age of 56, she had 12 children, aged between two and 19. The undaunted ‘first lady of management’ went right on with her work. She presented a paper in place of her late husband, continued their seminars and consulting, lectured, and eventually became a professor

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Lillian M. Gilbreth (1878−1972) and Frank B. Gilbreth (1868−1924), shown here using a ‘motion study’ device. The Gilbreths contributed to the principles of scientific management. His development of time and motion studies, and her work in industrial psychology, pioneered many of today’s management and human resources techniques.

at Purdue University.19 She pioneered in the field of industrial psychology and made substantial contributions to human resource management. The basic ideas of scientific management are shown in Exhibit 2.2. To use this approach, managers should develop standard methods for doing each job, select workers with the appropriate abilities, train workers in the standard methods, support workers and eliminate interruptions, and provide wage incentives.

Exhibit 2.2 Characteristics of scientific management General Approach

Contributions

Criticisms

Developed standard method for performing each job

Demonstrated the importance of compensation for performance

Selected workers with appropriate abilities for each job

Initiated the careful study of tasks and jobs

Did not appreciate the social context of work and higher needs of workers

Trained workers in standard methods

Demonstrated the importance of personnel selection and training

Supported workers by planning their work and eliminating interruptions

Did not acknowledge variance among individuals Tended to regard workers as uninformed and ignored their ideas and suggestions

Provided wage incentives to workers for increased output

The ideas of scientific management that began with Taylor dramatically increased productivity across all industries, and they are still important today. Indeed, the idea of engineering work for greater productivity has enjoyed a renaissance in the retail industry. Supermarket chains use computerised labour waste elimination systems based on scientific management principles. The system breaks down tasks such as greeting a customer, working the cash register, scanning items and so forth into quantifiable units, and devises standard times to complete each task. Executives say the computerised system has allowed them to staff stores more efficiently because people are routinely monitored by computer and are expected to meet strict standards.20 A Harvard Business Review article discussing innovations that shaped modern management puts scientific management at the top of its list of 12 influential innovations. Indeed, the ideas of creating a system for maximum efficiency and organising work for maximum productivity are deeply embedded in our organisations.21 However, because scientific management ignores the social context and workers’ needs, it can lead to increased conflict and clashes between managers and employees. Under such performance management systems, workers often feel exploited – a sharp contrast from the harmony and cooperation that Taylor and his followers had envisioned.

Bu reau cr ati c o rgan isations A systematic approach developed in Europe that looked at the organisation as a whole is the bureaucratic organisation approach, a subfield within the classical perspective. Max Weber (1864–1920), a German

theorist, introduced most of the concepts on bureaucratic organisations.22

bureaucratic organisation A subfield of the classical management perspective that emphasised management on an impersonal, rational basis through such elements as clearly defined authority and responsibility, formal record keeping, and separation of management and ownership.

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Exhibit 2.3 Characteristics of Weberian bureaucracy

During the late 1800s, many European organisations were managed on a ‘personal’, family-like basis. Employees were loyal to a single individual rather than to the organisation or its mission. The dysfunctional consequence of this management practice was that resources were used to realise individual desires rather than organisational goals. Employees in effect owned the organisation and used resources for their own gain rather than to serve customers. Weber envisioned organisations that would be managed on an impersonal, rational basis. This form of organisation was called a bureaucracy. Exhibit 2.3 summarises the six characteristics of bureaucracy as specified by Weber. Weber believed that an organisation based on rational authority would be more efficient and adaptable to change because continuity is related to formal structure and positions rather than to a particular person, who may leave or die. To Weber, rationality in organisations meant employee selection and advancement based on competence rather than on ‘who you know’. The organisation relies on rules and written records for continuity. The manager depends not on his or her personality for successfully giving orders but on the legal power invested in the managerial position. The term bureaucracy has taken on a negative meaning in today’s organisations and is associated with endless rules and red tape. We have all been frustrated by waiting in long lines or following seemingly silly procedures. On the other hand, rules and other bureaucratic procedures provide a standard way of dealing with employees. Everyone gets equal treatment, and everyone knows what the rules are. This has enabled many organisations to become extremely efficient.

Source: Adapted from Max Weber, The Theory of Social and Economic Organizations, ed. and trans. A. M. Henderson and Talcott Parsons (New York: Free Press, 1947), pp. 328–37.

Personnel selected and promoted based on technical qualifications

Division of labour, with clear definitions of authority and responsibility

THE IDEAL BUREAUCRACY

Positions organised in a hierarchy of authority

Managers subject to rules and procedures that will ensure reliable, predictable behaviour

Administrative acts and decisions recorded in writing

Management separate from the ownership of the organisation

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UPS: leading the world in parcel delivery UPS is the largest package delivery company in the world and a leading global provider of specialised transportation and logistics services. The company operates in more than 200 countries and territories worldwide. Why has UPS been so successful? One important factor is the concept of bureaucracy. UPS operates according to strict rules and regulations. It teaches drivers an astounding 340 steps for how to deliver a package correctly, such as how to load the truck, how to fasten their seat belts, how to walk and how to carry their keys. Specific safety rules apply to drivers, loaders, clerks, and managers. Strict dress codes are enforced – clean uniforms (called browns), every day, black or brown polished shoes with nonslip soles, no beards, no hair below the collar, no tattoos visible during deliveries and so on. Before each shift, drivers conduct a ‘Z-scan,’ a Z-shaped inspection of the sides and front of their vehicles. Employees

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are asked to clean off their desks at the end of each day so they can start fresh the next morning. Managers are given copies of policy books with the expectation that they will use them regularly, and memos on various policies and rules circulate by the hundreds every day. UPS has a well-defined division of labour. Each plant consists of specialised drivers, loaders, clerks, washers, sorters and maintenance personnel. UPS thrives on written records, and it has been a leader in using new technology to enhance reliability and efficiency. All drivers have daily worksheets that specify performance goals and work output. Technical qualification is the criterion for hiring and promotion. The UPS policy book says the leader is expected to have the knowledge and capacity to justify the position of leadership. Favouritism is forbidden. The bureaucratic model works just fine at UPS, ‘the tightest ship in the shipping business’.

Sources: Hira, N. A. (12 November 2007). The Making of a UPS Driver. Fortune, 118–29; D. J. Lynch. (24 July 2006). Thanks to Its CEO, UPS Doesn’t Just Deliver. USA Today, http://www.usatoday.com/money/companies/management/2006-07-23-ups_x.htm? tab1=t2 (accessed 24 July 2006); K. Barron. (10 January 2000). Logistics in Brown. Forbes, 78–83; S. Kirsner. (September 1999). Venture Vérité: United Parcel Service. Wired, 83–96; (26 April 1992). UPS. The Atlanta Journal and Constitution; K. Goode, B. Hahn and C. Seibert. (1981). United Parcel Service: The Brown Giant (unpublished manuscript, Texas A&M University); About UPS. UPS Corporate website, http://www.ups.com/content/us/en/about/index. html (accessed 19 June 2012).

As the example in the Innovative Way box shows, there are positive as well as negative aspects associated with bureaucratic principles. Weber also struggled with the good and bad sides of bureaucracy.23 Although he perceived bureaucracy as a threat to basic personal liberties, he recognised it as the most efficient and rational form of organising. Rules and other bureaucratic procedures provide a standard way of dealing with employees. Everyone gets equal treatment, and everyone knows what Take a Moment the rules are. Almost every organisation needs to have some rules, and rules multiply as Read the Ethical Challenge on organisations grow larger and more complex. Some examples of rules governing employee page 80 that relates to problems 24 behaviour in a furniture manufacturing company, for example, might include: ●● Employees must wear protective eye and ear equipment when using machines. ●● Employees must carry out any reasonable duty assigned to them, including workshop maintenance. ●● Employees must maintain an accurate time sheet, showing job and activity.

of bureaucracy. What would it be like for you to be a manager in a bureaucratic organisation? Would you thrive in that environment?

●● The following will be considered causes for dismissal: excessive tardiness or absenteeism; wilful damage to equipment; continual careless or unsafe behaviour; theft; being under the influence of alcohol or illegal drugs while at work.

Adm in istr ative prin ci ples Another major subfield within the classical perspective is known as the administrative principles approach. Whereas scientific management focused on the productivity of the individual worker, the administrative principles approach focused on the total organisation. The major contributor to this approach was Henri Fayol (1841–1925), a French mining engineer who worked his way up to become

administrative principles A subfield of the classical management perspective that focused on the total organisation rather than the individual worker, delineating the management functions of planning, organising, commanding, coordinating and controlling.

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head of a large mining group known as Comambault. Pieces of Comambault survive today as part of ArcelorMittal, the world’s largest steel and mining company. In his later years, Fayol wrote down his concepts on administration, based largely on his own management experiences.25 In his most significant work, General and Industrial Management, Fayol discussed 14 general principles of management, several of which remain part of management philosophy today. For example: ●● Unity of command. Each subordinate receives orders from one – and only one – superior. ●● Division of work. Managerial work and technical work are amenable to specialisation to produce more and better work with the same amount of effort. ●● Unity of direction. Similar activities in an organisation should be grouped together under one manager. Max Weber (1864−1920): This German theorist’s concepts of bureaucratic organisation have contributed to the efficiency of many of today’s corporations.

●● Scalar chain. A chain of authority extends from the top to the bottom of the organisation and should include every employee. Fayol felt that these principles could be applied in any organisational setting. He also identified five basic functions or elements of management: planning, organising, commanding, coordinating and controlling. These functions underlie much of the general approach to today’s management theory. The overall classical perspective as an approach to management was very powerful and gave organisations fundamental new skills for establishing high productivity and effective treatment of employees. Indeed, Western countries such as Australia and the US surged ahead of the world in management techniques, and other countries, especially Japan, borrowed heavily from their ideas.

➜➜ The study of modern management began in the late nineteenth century with the classical perspective, which took a rational, scientific approach to management and sought to turn organisations into efficient operating machines. ➜➜ Scientific management is a subfield of the classical perspective that emphasises scientifically determined changes in management practices as the solution to improving labour productivity.

➜➜ Frederick Winslow Taylor is known as ‘the father of scientific management’. ➜➜ Scientific management is considered one of the most significant innovations influencing modern management. ➜➜ Another subfield of the classical perspective is the bureaucratic organisations approach, which emphasises management on an impersonal, rational basis through elements such as clearly defined authority and responsibility, formal record keeping, and separation of management and ownership.

➜➜ Max Weber introduced most of the concepts about bureaucratic organisations.

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➜➜ The administrative principles approach is a subfield of the classical perspective that focuses on the total organisation rather than the individual worker and delineates the management functions of planning, organising, commanding, coordinating and controlling. ➜➜ Henri Fayol, a major contributor to the administrative principles approach, outlined 14 general principles of management, several of which are a part of management philosophy today.

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Humanistic perspective The humanistic perspective on management emphasised the importance of understanding human behaviours, needs and attitudes in the workplace, as well as social interactions and group processes.26 There are three primary subfields based on the humanistic perspective: the human relations movement, the human resources perspective and the behavioural sciences approach.

Early advo cates Two early advocates of a more humanistic approach were Mary Parker Follett and Chester Barnard. Mary Parker Follett (1868–1933) was trained in philosophy and political science, but she applied herself in many fields, including social psychology and management. She wrote of the importance of common superordinate goals for reducing conflict in organisations.27 Her work was popular with businesspeople of her day but was often overlooked by management scholars.28 Follett’s ideas served as a contrast to scientific management and are re-emerging as applicable for modern managers who are dealing with rapid changes in today’s global environment. Her approach to leadership stressed the importance of people rather than engineering techniques. She offered the pithy admonition, ‘Don’t hug your blueprints’, and analysed the dynamics of management–organisation interactions. Follett addressed issues that are still timely today, such as ethics, power and leading in a way that encourages employees to give their best. The concepts of empowerment, facilitating rather than controlling employees, and allowing employees to act depending on the authority of the situation opened new areas for theoretical study by Chester Barnard and others.29 Chester I. Barnard (1886–1961) studied economics at Harvard but failed to receive a degree because he did not take a course in laboratory science. He went to work in the statistical department of AT&T, and in 1927 he became president of New Jersey Bell. One of Barnard’s significant contributions was the concept of the informal organisation. Informal organisation occurs in all formal organisations and includes cliques, informal networks and naturally occurring social groupings. Barnard argued that organisations are not machines and stressed that informal relationships are powerful forces that can help the organisation if properly managed. Another significant contribution was the acceptance theory of authority, which states that people have free will and can choose whether to follow management orders. People typically follow orders because they perceive positive benefit to themselves, but they do have a choice. Managers should treat employees properly because their acceptance of authority may be critical to organisation success in important situations.30

humanistic perspective A management perspective that emerged around the late nineteenth century that emphasised understanding human behaviour, needs and attitudes in the workplace.

Mary Parker Follett (1868−1933): Follett was a major contributor to the humanistic principles approach to management. Her emphasis on worker participation and shared goals among managers was embraced by many businesspeople of the day, and has recently been rediscovered by corporate America.

Th e hum an rel ati o ns movem ent Australia and New Zealand have always espoused the spirit of human equality at least as much as any other nation, and possibly more. However, this spirit has not always been translated into practice when it comes to power sharing between managers and workers. The human relations movement was based on the idea that truly effective control comes from within the individual worker rather than from strict, authoritarian control.31 This school of thought recognised and directly responded to social pressures for enlightened treatment of employees. The early work on industrial psychology and

human relations movement A movement in management thinking and practice that emphasised satisfaction of employees’ basic needs as the key to increased worker productivity.

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personnel selection received little attention because of the prominence of scientific management. Then a series of studies at a Chicago electric company, which came to be known as the Hawthorne Studies, changed all that. Beginning in about 1895, a struggle developed between manufacturers of gas and electric lighting fixtures for control of the residential and industrial market.32 By 1909, electric lighting had begun to win, but the increasingly efficient electric fixtures used less total power. The electric companies began a campaign to convince industrial users that they needed more light to get more productivity. When advertising did not work, the industry began experimental tests to demonstrate their argument. Managers were sceptical about the results, so the Committee on Industrial Lighting (CIL) was set up to run the tests. To add to the tests’ credibility, Thomas Edison was made honorary chairman of the Take a CIL. At one test location – the Hawthorne plant of the Western Electric Company – some Moment interesting events occurred. Before reading on, go to the The major part of this work involved four experimental and three control groups. In Management CourseMate site and take the ‘Evolution of Style’ Self-Test all, five different ‘tests’ were conducted. These pointed to the importance of factors other online. This test will give you feedback than illumination in affecting productivity. To more carefully examine these factors, about how your personal manager numerous other experiments were conducted.33 The results of the most famous study, frame of reference relates to the the first Relay Assembly Test Room (RATR) experiment, were extremely controversial. human resources and other Under the guidance of two Harvard professors, Elton Mayo and Fritz Roethlisberger, the perspectives described in this chapter. RATR studies lasted for six years (10 May 1927 to 4 May 1933) and involved 24 separate experimental periods. So many factors were changed and so many unforeseen factors were uncontrolled that scholars disagree on the factors that truly contributed to the general increase in performance over that period. Most early interpretations, however, agreed on one thing: money was not the cause of the increased output.34 However, recent re-analyses of the experiments have revealed that a number of factors were different for the workers involved, and some suggest that money may well have been the single most important factor.35 An interview with one of the original participants revealed that just getting into the experimental group had meant a huge increase in income.36 The new data clearly shows that money mattered a great deal at Hawthorne. In addition, worker productivity increased partly as a result of the increased feelings of importance and group pride that employees felt by virtue of being selected for this important project.37 One unintended contribution of the experiments was a rethinking of field research practices. Researchers and scholars realised that the researcher can influence the outcome of an experiment by being too closely involved with research subjects. This phenomenon has This 1914 photograph come to be known as the Hawthorne effect in research methodology. Subjects behaved differently because shows the initiation of a new arrival at a of the active participation of researchers in the Hawthorne experiments.38 Nebraska planting camp. From a historical perspective, whether the studies were academically sound is less important than This initiation was not part of the formal the fact that they stimulated an increased interest in looking at employees as more than extensions rules; it illustrates the of production machinery. The interpretation that employees’ output increased when managers treated significance of the informal organisation them in a positive manner started a revolution in worker treatment for improving organisational described by Barnard; productivity. Despite flawed methodology or inaccurate conclusions, the findings provided the impetus social values and behaviour were powerful for the human relations movement. This approach shaped management theory and practice for well forces that could help over a quarter of a century, and the belief that human relations is the best area of focus for increasing or hurt the organisation, depending on how they productivity persists today. were managed.

Hawthorne studies A series of experiments on worker productivity, begun in 1924 at the Hawthorne plant of Western Electric Company in Illinois, attributed employees’ increased output to managers’ better treatment of them during the study.

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Th e hum an resou rces perspective The human relations movement initially espoused a ‘dairy farm’ view of management – contented cows give more milk, and so satisfied workers will give more work. Gradually, views with deeper content human resources began to emerge. The human resources perspective maintained an interest in worker participation perspective and considerate leadership but shifted the emphasis to consider the daily tasks that people perform. The A management perspective that suggests jobs should be human resources perspective combines prescriptions for design of job tasks with theories of motivation.39 designed to meet higherIn the human resources view, jobs should be designed so that tasks are not perceived as dehumanising level needs by allowing workers to use their full or demeaning but instead allow workers to use their full potential. Two of the best-known contributors to potential. the human resources perspective were Abraham Maslow and Douglas McGregor. Abraham Maslow (1908–70), a practising psychologist, observed that his patients’ problems usually stemmed from an inability to satisfy their needs. Thus, he generalised his work and suggested a hierarchy of needs. Maslow’s hierarchy started with physiological needs and progressed to safety, belongingness, esteem and, finally, self-actualisation needs. Chapter 16 discusses his ideas in more detail. Douglas McGregor (1906–64) had become frustrated with the early simplistic human relations notions while president of Antioch College in Ohio. He challenged both the classical perspective and the early human relations assumptions about human behaviour. Based on his experiences as a manager and consultant, his training as a psychologist and the work of Maslow, McGregor formulated his Theory X and Theory Y, which are explained in Exhibit 2.4.40 McGregor believed that the classical Take a perspective was based on Theory X assumptions about workers. He also felt that a slightly Moment modified version of Theory X would fit early human relations ideas. In other words, human If you haven’t already relations ideas did not go far enough. McGregor proposed Theory Y as a more realistic view completed the Self-test at the start of this chapter that pertains of workers for guiding management thinking. to old- and new-style management, The point of Theory Y is that organisations can take advantage of the imagination and take it now. How will your intellect of all their employees. Employees will exercise self-control and contribute to management assumptions organisational goals when given the opportunity. A few organisations today still use Theory X about people fit into an organisation today? management, but many are trying Theory Y techniques. The Danish company Oticon Holding A/S brings out the creativity and enthusiasm of its employees by operating from Theory Y assumptions. Exhibit 2.4 Theory X and Theory Y Assumptions of Theory X

Assumptions of Theory Y

The average human being has an inherent dislike of work and will avoid it if possible.

The expenditure of physical and mental effort in work is as natural as play or rest. The average human being does not inherently dislike work.

Because of the human characteristic of dislike for work, most people must be coerced, controlled, directed or threatened with punishment to get them to put forth adequate effort towards the achievement of organisational objectives.

External control and the threat of punishment are not the only means for bringing about effort towards organisational objectives. A person will exercise self-direction and self-control in the service of objectives to which he or she is committed.

The average human being prefers to be directed, wishes to avoid responsibility, has relatively little ambition and wants security above all.

The capacity to exercise a relatively high degree of imagination, ingenuity and creativity in the solution of organisational problems is widely, not narrowly, distributed in the population.

The average human being learns, under proper conditions, not only to accept but to seek responsibility.

Under the conditions of modern industrial life, the intellectual potentialities of the average human being are only partially utilised.

Source: D. McGregor, The Human Side of Enterprise, New York, McGraw-Hill, 1960. Reproduced by permission of McGraw-Hill; Graph page 71. Reprinted by permission of International Creative Management, Inc. Copyright © 1990 by Richard Pascale, pp. 33–48.

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Austr alian manager pr ofile

Noreen Kam, National Procurement Manager, Silliker Australia

As the National Procurement Manager of Silliker Australia I oversee the entire purchasing operations of the organisation, developing strategies for supplier management. Silliker Australia is a part of Merieux NutriSciences, a global laboratory testing corporation dedicated to providing food safety and quality. The challenges that confront the procurement function are not confined to formulating and implementing new cost-saving initiatives, but also developing measures to improve productivity in a keenly contested market. I began my career as a Research Assistant with RMIT University, developing postgraduate study guides in Logistics and Supply Chain Management. The theoretical knowledge of Supply Chain Management I acquired while working at the university helped build a strong foundation for my formative years in the logistics industry. From the university, I joined a tier-two pharmaceutical supplier that specialises in sterile process components, managing its supply chain operations. I later moved to Konica Minolta, a photocopier manufacturer, coordinating the sales and logistics functions. I moved into the publishing industry in 2007, becoming the Inventory Controller, and Shipping and Inventory Manager of Hinkler Books, a mass market children’s book publisher. In 2009, I was appointed the Logistics and Inventory Manager of Random House Australia, the world’s largest book publishing company. One of the main reasons I enjoy working in logistics and supply chain management is the applicability of the skills and experience I learnt in the field. The skills are readily transferable across industries. As a result, there have been countless opportunities for growth and continuous learning outcomes for me. Completing my Masters in Supply Chain Management at the University of Melbourne in 2012 further bolstered my versatility. The greatest challenge, and also opportunity, I have discovered in my career is that the business world is fluid Source: Courtesy Noreen Kam

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and constantly evolving. There is no place in business to be resistant to this change, and adaptability and innovation are critical to success in today’s workplace. For instance, the publishing industry evolved significantly between 2009–12 due to technological innovations and the emergence of e-books, tablets and iPads, as well as the surge in online e-tailers. Consequently, the traditional singular channel to market for publishers through book retailers needed redefinition within a short time. Random House’s conventional B2B supply chain required a dramatic overhaul to accommodate a multi-channel network to serve endconsumers and B2C distribution. As the business project manager orchestrating this major change initiative, I had to build and motivate a high-velocity response team to adapt to the market uncertainties that pervaded the publishing industry during this turbulent period. Candour and open communication are vital in gaining respect and cooperation from key stakeholders. Additionally, a workplace culture open to change management is critical to maintain successful collaboration and avoid the occurrence of double-marginalisation between business units. By being passionate about what I do, and resilient in my resolve, are where I have been able to make the biggest impact. Volunteering my time for charitable causes and building networks and affiliations with organisations dedicated to philanthropic endeavours are two of the most gratifying aspects of my personal development. I believe strongly in human rights and am an advocate for KIVA, a global not-forprofit micro-finance institution. I am also a volunteer mentor of refugee adults and children in Melbourne, teaching them to read and write English. Lastly, finding the right work-life balance and breaking through the glass ceiling of a male-dominant industry are other big challenges I face as a woman in operations. Being a committee member of NAWO (National Association of Women in Operations), an organisation with the objective to attract, develop and retain women in operational roles, has enabled me to build a network of like-minded women professionals. My career goal is to become an executive board member of a not-for-profit organisation where I feel I will really be able to make a difference to people’s lives. Source: Contributed by Noreen Kam.

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New Manager Self-Test W h at ’ s y o u r m a c h ? Instructions: Managers differ in how they view human nature and the tactics that they use to get things done through others. Answer the questions below based on how you view others. Think carefully about each question and be honest about what you feel inside. Please answer whether each item below is Mostly false or Mostly true for you. Mostly true

Mostly false

1 Overall, it is better to be humble and honest than to be successful and dishonest. 2  If you trust someone completely, you are asking for trouble. 3  A leader should take action only when it is morally right. 4  A good way to handle people is to tell them what they like to hear. 5  There is no excuse for telling a white lie to someone. 6  It makes sense to flatter important people.

Scoring and interpretation: To compute your Mach score, give yourself one point for each Mostly false answer to items 1, 3, 5, 7 and 9, and one point for each Mostly true answer to items 2, 4, 6, 8 and 10. These items were drawn from the works of Niccolò Machiavelli, an Italian political philosopher who wrote The Prince in 1513 to describe how a prince can retain control of his kingdom. Successful management intrigue at the time of Machiavelli was believed to require behaviours that today would be considered ego-centred and manipulative, which is almost the opposite of more enlightened management that arose from the human relations movement. A score of 8–10 points suggests that you have a high Mach score. From 4–7 points indicates a moderate score, and 0–3 points would indicate a low Mach score. Having a high Mach score does not mean that the individual is a sinister or vicious person, but it probably means that he or she has a cool detachment, sees life as a game and is not personally engaged with other people. Discuss your results with other students, and talk about whether you think politicians and top executives would have a high or a low Mach score. Source: Adapted from R. Christie and F. L. Geis, Studies in Machiavellianism (New York: Academic Press, 1970).

7  Most people who get ahead as leaders have led very moral lives. 8  It is better not to tell people the real reason you did something unless it benefits you to do so. 9  The vast majority of people are brave, good and kind. 10 It is hard to get to the top without sometimes cutting corners.

Semco: giving power to the employee The Brazil-based company Semco’s fundamental operating principle is to harness the wisdom of all its employees. It does this by letting people control their work hours, location, and even their pay plans. Employees also participate in all organisational decisions, including which businesses Semco should pursue. Semco leaders believe that economic success requires creating an atmosphere that puts power and control directly

Innovative Way in the hands of employees. People can veto any new product idea or business venture. They choose their own leaders and manage themselves to accomplish goals. Information is openly and broadly shared so that everyone knows where they and the company stand. Instead of dictating Semco’s identity and strategy, leaders allow it to be shaped by individual interests and efforts. People are encouraged to seek challenges, explore

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new ideas and business opportunities, and question the ideas of anyone in the company. This high level of trust in employees has helped Semco achieve decades of high profitability and growth despite fluctuations in the economy and shifting markets. ‘At Semco, we don’t play by the rules,’ says Ricardo Semler. Semler, whose father started the company in the 1950s, says it doesn’t unnerve him to ‘step back and see nothing on the company’s horizon’. He is happy to watch the company and

its employees ‘ramble through their days, running on instinct and opportunity’. For managers like Ricardo Semler, command and control is a thing of the past, with the future belonging to those companies that build leadership throughout the organisation. The Theory Y approach has helped Semco succeed in a tough environment. Although few go as far as Semco, other companies are also using Theory Y principles that are more in line with today’s emphasis on employee empowerment and involvement.

Source: Ricardo Semler. (July–August 2007). Out of This World: Doing Things the Semco Way. Global Business and Organizational Excellence, 13–21.

behavioural sciences approach A subfield of the humanistic management perspective that applies social science in an organisational context, drawing from economics, psychology, sociology and other disciplines.

Th e behavi o u r al sci en ces approach The behavioural sciences approach uses scientific methods and draws from sociology, psychology, anthropology, economics and other disciplines to develop theories about human behaviour and interaction in an organisational setting. This approach can be seen in practically every organisation. One specific set of management techniques based in the behavioural sciences approach is organisation development (OD). In the 1970s, OD evolved as a separate field that applied the behavioural sciences to improve the organisation’s health and effectiveness through its ability to cope with change, improve internal relationships and increase problem-solving capabilities.41 The techniques and concepts of OD have since been broadened and expanded to address the increasing complexity of organisations and the environment, and OD is still a vital approach for managers. OD will be discussed in detail in Chapter 11. Other concepts that grew out of the behavioural sciences approach include matrix organisations, selfmanaged teams, ideas about corporate culture and management by wandering around. Indeed, the behavioural sciences approach has influenced the majority of tools, techniques and approaches that managers have applied to organisations since the 1970s. All the remaining chapters of this book contain research findings and management applications that can be attributed to the behavioural sciences approach.

➜➜ The humanistic perspective emphasised understanding human behaviour, needs and attitudes in the workplace. ➜➜ Mary Parker Follett and Chester Barnard were early advocates of a more humanistic approach to management. Follett emphasised worker participation and empowerment, shared goals and facilitating rather than controlling



employees. Barnard’s contributions include the acceptance theory of authority.

➜➜ The human relations movement stresses the satisfaction of employees’ basic needs as the key to increased productivity. ➜➜ The Hawthorne studies were important in shaping ideas concerning how managers should treat workers. ➜➜ The human resources perspective suggests that jobs should be designed

to meet people’s higher-level needs by allowing employees to use their full potential. ➜➜ The behavioural sciences approach draws from psychology, sociology and other social sciences to develop theories about human behaviour and interaction in an organisational setting. ➜➜ Many current management ideas and practices can be traced to the behavioural sciences approach.

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M anagem ent sci en ce The Second World War caused many management changes. The massive and complicated problems associated with mass-scale global warfare presented managerial decision makers with the need for more sophisticated tools than ever before. The management science perspective emerged to treat those problems. This view is distinguished for its application of mathematics, statistics and other quantitative techniques to management decision making and problem solving. During the war, groups of mathematicians, physicists and other scientists were formed to solve military problems. Because those problems frequently involved moving massive amounts of materials and large numbers of people quickly and efficiently, the techniques had obvious applications to large-scale business firms.42 These management science techniques were enhanced with the development and perfection of the computer. Coupled with the growing body of statistical techniques, computers made it possible for managers to collect, store and process large volumes of data for quantitative decision making, and the quantitative approach is widely used today by managers in a variety of industries. The Walt Disney Company used quantitative techniques to develop FASTPASS, a sophisticated computerised system that spares parents the ordeal of standing in long lines for the most popular rides. Disney theme parks have machines that issue coupons with a return time that’s been calculated based on the number of people standing in the actual line, the number who have already obtained passes and each ride’s capacity. The next generation of technology, xPass, allows visitors to book times for rides before they even leave home.43 Let’s look at three subsets of management science. Operations research grew directly out of Second World War groups (called operational research teams in the UK and operations research teams in the US).44 It consists of mathematical model building and other applications of quantitative techniques to managerial problems. Operations management refers to the field of management that specialises in the physical production of goods or services. Operations management specialists use quantitative techniques to solve manufacturing problems. Some of the commonly used methods are forecasting, inventory modelling, linear and non-linear programming, queuing theory, scheduling, simulation and break-even analysis. See Chapter 20 for an in-depth discussion of some of these concepts. Management information systems (MIS) and information technology (IT) are the most recent subfields of the management science perspective. These systems are designed to provide relevant information to managers in a timely and cost-efficient manner. The advent of the high-speed digital computer opened up the full potential of this area for management. Many of today’s organisations have departments of management science specialists to help solve quantitatively based problems. When Coles Group revamped its approach to use an integrated logistics system across its major businesses, it was applying a quantitative approach to management in order to determine the best system design. When Telstra analysed its very large and complex telecommunications network to plan how best to further develop it, it was employing management science tools. One specific technique used in many organisations is queuing theory. Queuing theory uses mathematics to calculate how to provide services that will minimise the waiting time of customers. Queuing theory has been used to analyse the traffic flow through the CityLink road network in Melbourne, the Harbour Bridge in Auckland and the Harbour Tunnel in Sydney. Queuing theory was used to develop the single waiting line for tellers used in many banks.

management science perspective A management perspective that emerged after the Second World War and applied mathematics, statistics and other quantitative techniques to managerial problems

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Brumby’s Bakeries cooking along Michael Sherlock founded and built Brumby’s Bakeries into a significant business group in Australia. From a single store in Ashburton in 1975, the franchise now has 300 stores across Australia and New Zealand. The business and product strategy revolves around product quality and freshness, using authentic raw materials baked onsite from scratch. Brumby’s supplies some A$25 million each year to local communities as part

Source: Newspix/David Sproule

Case study

However, quantitative analysis did not stop managers in the USA and Europe from making thousands of bank loans to people and companies which proved to be unable to pay them back, which led to the GFC. Scott Patterson, a Wall Street Journal reporter and author of The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It, suggests that the financial crisis that began in 2008 occurred partly as a result of the quantitative analysts’ failure to observe market fundamentals, pay attention to human factors and heed their own intuition.45

➜➜ Management science became popular based on its successful application in solving military problems during the Second World War.

of its community engagement strategy. It engages in ‘strategic local marketing’. Mr Sherlock has remained deeply involved in the business as it has grown and transformed into a franchising powerhouse. To maximise its effectiveness, Brumby’s has standardised and systemised its operations and approach. The system is based on: ➜➜ operational manuals to assist in retailing, food quality, marketing, training and internal communications ➜➜ a product range, which we believe is second to none in both innovation, ➜➜ breadth of choice and consistency of quality ➜➜ product support by both trained Brumby’s team members and our preferred suppliers ➜➜ company-wide marketing campaigns focusing on building brand awareness, customer counts and sales per customer ➜➜ unique local area marketing strategies tailored for individual store requirements.

➜➜ Management science, also called the quantitative perspective, uses mathematics, statistical techniques and computer technology to facilitate management decision



Mr Sherlock has succeeded in taking the group from start-up to a large franchised chain by focusing on team work and team building. He equates ‘TEAM’ with the idea that Together Everyone Achieves More, but has made it much more than a catchy acronym and phrase. He works the team concept by having quarterly offsite strategy retreat meetings, usually at resorts. These came to also include suppliers who became part of the extended TEAM. These suppliers helped with product development. In a complex and competitive market where businesses such as bakeries often do not last very long, Brumby’s has survived, prospered and grown significantly, due in no small part to its strong TEAM based management. Sources: http://www.brumbys.com.au/ brumbys/ franchising; Michael Sherlock. (4–10 November 2010). Smart Talk. BRW, 16.

making, particularly for complex problems.

➜➜ Three subsets of management science are operations research, operations management and information technology.

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Recent historical trends Despite recent heavy use of management science techniques by some managers, of the approaches that we’ve discussed so far, the humanistic perspective has remained most prevalent from the 1950s until today. The post–Second World War period saw the rise of new concepts, along with a continued strong interest in the human aspect of managing, such as team and group dynamics and other ideas that relate to the humanistic perspective. Three new concepts that appeared were systems thinking, the contingency view and total quality management.

Systems th in kin g Systems thinking is the ability to see both the distinct elements of a system or situation and the

complex and changing interaction among those elements. A system is a set of interrelated parts that function as a whole to achieve a common purpose.46 Subsystems are parts of a system, such as an organisation, that depend on one another. Changes in one part of the system (the organisation) affect other parts. Managers need to understand the synergy of the whole organisation, rather than just the separate elements, and to learn to reinforce or change whole system patterns.47 Synergy means that the whole is greater than the sum of its parts. The organisation must be managed as a coordinated whole. Managers who understand subsystem interdependence and synergy are reluctant to make changes that do not recognise subsystem impact on the organisation as a whole. Many people have been trained to solve problems by breaking a complex system, such as an organisation, into discrete parts and working to make each part perform as well as possible. However, the success of each piece does not add up to the success of the whole. In fact, sometimes changing one part to make it better actually makes the whole system function less effectively. For example, a small city embarked on a road-building program to solve traffic congestion without whole-systems thinking. With new roads available, more people began moving to the suburbs. Rather than reduce congestion, the solution actually increased traffic congestion, delays and pollution by enabling suburban sprawl.48 It is the relationship among the parts that form a whole system – whether a community, a car, a notfor-profit agency, a human being or a business organisation – that matters. Systems thinking enables managers to look for patterns of movement over time and focus on the qualities of rhythm, flow, direction, shape and networks of relationships that accomplish the performance of the whole. When managers can see the structures that underlie complex situations, they can facilitate improvement. But doing that requires a focus on the big picture. An important element of systems thinking is to discern circles of causality. Peter Senge, author of The Fifth Discipline, argues that reality is made up of circles rather than straight lines.49 For example, Exhibit 2.5 shows circles of influence for increasing a retail business’s profits. The events in the circle on the left are caused by the decision to increase advertising; hence the retail business adds to the advertising budget to aggressively promote its products. The advertising promotions increase sales, which increase profits, which provide money to further increase the advertising budget. But another circle of causality is being influenced as well. The decision by marketing managers will have consequences for the operations department. As sales and profits

systems thinking systems thinking An extension of the humanistic perspective that describes organisations as open systems that are characterised by entropy synergy and subsystem interdependence. system A set of interrelated parts that function as a whole to achieve a common purpose. subsystems Parts of a system that depend on one another for their functioning. synergy The concept that the whole is greater than the sum of its parts.

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increase, operations will be forced to stock up with greater inventory. Additional inventory will create a need for additional warehouse space. Building a new warehouse will cause a delay in stocking up. After the warehouse is built, new people will be hired, all of which adds to company costs, which will have a negative impact on profits. Thus, understanding all the consequences of their decisions via circles of causality enables company leaders to plan and allocate resources to warehousing as well as to advertising to ensure stable increases in sales and profits. Without understanding system causality, top managers would fail to understand why increasing advertising budgets could cause inventory delays and temporarily reduce profits.

Build warehouse Sales

Decision to advertise

Exhibit 2.5 Systems thinking and circles of causality

Advertising budget

Source: Based on concepts presented in Peter M. Senge, The Fifth Discipline: The Art and Practice of the Learning Organization (New York: Doubleday/Currency, 1990).

Stocking up

Delay

Profits

Added cost

Hire people

Co ntin gen cy vi ew contingency view An extension of the humanistic perspective in which the successful resolution of organisational problems is thought to depend on managers’ identification of key variables (or contingencies) in the situation at hand.

A second recent extension to management thinking is the contingency view. The classical perspective assumed a universalist view. Management concepts were thought to be universal; that is, whatever worked in terms of management style, bureaucratic structure and so on in one organisation would work in any other one. In business education, however, an alternative view exists. In this case view, each situation is believed to be unique. Principles are not universal, and one learns about management by experiencing a large number of case problem situations. Managers face the task of determining what methods will work in every new situation. To integrate these views, the contingency view emerged, as illustrated in Exhibit 2.6.50 Here, neither of the other views is seen as entirely correct. Instead, certain contingencies, or variables, exist for helping managers identify and understand situations. The contingency view tells us that what works in one setting might not work in another. Contingency means that one thing depends on other things and a manager’s response to a situation depends on identifying key contingencies in an organisational situation. Important contingencies that managers must understand include the industry in which the organisation operates, technology, the environment and international cultures. The organisational structure that is effective for an Internet company, such as Google, would not be successful for a large car manufacturer, such as Ford. A management-by-objectives (MBO) system that works well in a manufacturing organisation, in turn, might not be right for a school system. When managers learn to identify important patterns and characteristics of their organisations, they can fit solutions to those characteristics.

2: The evolution of management thinking

Case view ‘Every situation is unique.’

Universalist view

‘There is one best way.’

Contingency view Organisational phenomena exist in logical patterns. Managers devise and apply similar responses to common types of problems.

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Exhibit 2.6 The contingency view of management

Total q ualit y m anagem ent The theme of quality is another concept that permeates current management thinking. The quality movement is strongly associated with Japanese companies, but these ideas emerged partly as a result of American influence after the Second World War. The ideas of W. Edwards Deming, known as the ‘father of the quality movement’, were initially scoffed at in the United States, but the Japanese embraced his theories and modified them to help rebuild their industries into world powers.51 Japanese companies achieved a significant departure from the American model by gradually shifting from an inspection-oriented approach to quality control towards an approach that emphasised employee involvement in the prevention of quality problems.52 During the 1980s and into the 1990s, total quality management (TQM), which focuses on managing the total organisation to deliver better quality to customers, moved to the forefront in helping US managers deal with global competition. The approach infuses high-quality values throughout every activity within a company, with frontline workers intimately involved in the process. Four significant elements of quality management are employee involvement, focus on the customer, benchmarking and continuous improvement (often referred to as kaizen). Employee involvement means that achieving better quality requires company-wide participation in quality control. All employees are focused on the customer; companies find out what customers want and try to meet their needs and expectations. Benchmarking refers to a process whereby companies find out how others do something better than they do and then try to imitate or improve on it. Continuous improvement is the implementation of small, incremental improvements in all areas of the organisation on an ongoing basis. TQM is not a quick fix, but companies such as BHP Billiton, IAG (Insurance Australia), GE, Texas Instruments, Procter & Gamble and DuPont achieved astonishing results in efficiency, quality and customer satisfaction through total quality management.53 TQM is still an important part of today’s organisations, and managers consider benchmarking in particular a highly effective and satisfying management technique.54 Some of today’s companies pursue highly ambitious quality goals to demonstrate their commitment to improving quality. For example, Six Sigma, popularised by Motorola and GE, specifies a goal of no more than 3.4 defects per million parts. However, the term also refers to a broad quality control approach that emphasises a disciplined and relentless pursuit of higher quality and lower costs. TQM will be discussed in detail in Chapter 19.

total quality management total quality management (TQM) A concept that focuses on managing the total organisation to deliver quality to customers. Four significant elements of TQM are employee involvement, focus on the customer, benchmarking and continuous improvement.

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➜➜ Systems thinking means looking not just at discrete parts of an organisational situation, but also at the continually changing interactions among the parts. ➜➜ When managers think systemically and understand subsystem interdependence and synergy, they can get a better handle on managing in a complex environment.

➜➜ The concept of synergy says that the whole is greater than the sum of its parts. The organisation must be managed as a whole. ➜➜ The contingency view tells managers that what works in one organisational situation might not work in others. Managers can identify important contingencies or variables that help guide their decisions regarding the organisation.

➜➜ The quality movement is associated with Japanese companies, but it emerged partly as a result of American influence after the Second World War.

remember this

➜➜ Total quality management (TQM) focuses on managing the total organisation to deliver quality to customers. ➜➜ Four significant elements of TQM are employee involvement, focus on the customer, benchmarking and continuous improvement.

Innovative management thinking for a changing world All of the ideas and approaches discussed so far in this chapter go into the mix that makes up modern management. Dozens of ideas and techniques in current use can trace their roots to these historical perspectives.55 In addition, innovative concepts continue to emerge to address new management challenges. Smart managers heed the past but know that they and their organisations have to change with the times. General Motors (GM) was the ‘ideal’ organisational model in a post-Second World War environment, but by 2009 it had collapsed into bankruptcy and sought billions of dollars in government aid because managers failed to pay attention as the world changed around them.56 (The case of GM is discussed in greater detail in this textbook’s Continuing Case.) GM managers assumed that the preeminence of their company would shelter it from change, and they stuck far too long with a strategy, culture and management approach that were out of tune with the shifting environment.

Co ntem po r ary m anagem ent too ls Recall from the beginning of this chapter our discussion of jugaad, an approach to innovation management used in India that many managers in other countries are trying. Management fads and fashions come and go, but managers are always looking for new techniques and approaches that more adequately respond to customer needs and the demands of the environment. A recent survey of European managers reflects that managers pay attention to currently fashionable management concepts. Exhibit 2.7 lists the percentage of managers reporting that they were aware of these selected management trends that have been popular over the past decade.57 Exhibit 2.7 Awareness of management trends Concept

Awareness Percentage

E-business

99.41

Decentralisation

99.12

Customer relationship management

97.50

Virtual organisation

91.19

Empowerment

83.41

Re-engineering

76.65

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Managers especially tend to look for fresh ideas to help them cope during difficult times. For instance, recent challenges such as the GFC (and accompanying public suspicion and scepticism), environmental and organisational crises and lingering anxieties over war and terrorism have left today’s executives searching for any management tool – new or old – that can help them get the most out of limited resources. The Management in Practice box below lists a wide variety of ideas and techniques used by today’s managers. Management idea life cycles have been shrinking as the pace of change has increased. A study by the University of Louisiana at Lafayette found that, from the 1950s to the 1970s, it typically took more than a decade for interest in a popular management idea to peak. Now, the interval has shrunk to fewer than three years, and some trends come and go even faster.58

management in pr actice

Management tools and trends Over the history of management, many fashions and fads have appeared. Critics argue that new techniques may not represent permanent solutions. Others feel that managers must adopt new techniques for continuous improvement in a fast-changing world. In 1993, Bain & Company initiated a large research project to interview and survey thousands of corporate executives about the 25 most popular management tools and techniques. The most recent results and usage rates are shown. How many of the tools do you know?

➜➜ Popularity. In the most recent

Benchmarking Strategic planning Mission and vision statements Customer relationship management Outsourcing Balanced scorecard Change management programs Core competencies Strategic alliances Customer segmentation Supply chain management Total quality management Knowledge management Business process re-engineering Mergers and acquisitions Satisfaction and loyalty management Scenario and contingency planning Enterprise risk management Social media programs Shared services centres Downsizing Open innovation Price optimisation models Decision rights tools Rapid prototyping

survey, benchmarking held onto the top spot as the most popular tool, reflecting managers’ concern with efficiency and cost-cutting in a difficult economy. Mergers and acquisitions have decreased in popularity, with only 35 per cent of managers using this technique. Three tools that ranked high in both use and satisfaction were strategic planning, mission and vision statements, and customer segmentation, tools that can guide managers’ thinking on strategic issues during times of rapid change.

67% 65% 63% 58% 55% 47% 46% 46% 45% 42% 39% 38% 38% 38% 35% 32% 30% 30% 29% 28% 25% 21% 21% 17% 11% 0

20

40

Significantly above overall mean

Mean

Significantly below overall mean

60

80

100

Usage

➜➜ Global trends. For the first time, firms in emerging markets reported using more tools than those in developed markets. More than half of emerging market executives reported using the balanced scorecard. North American managers decreased their use of outsourcing and were the largest users of social media programs.

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Managers in Latin American companies used more tools than any other region, but they were the lightest users of downsizing and customer relationship management (CRM). Asian companies were the greatest users of

knowledge management. Benchmarking and change management programs were top tools for managers in Europe, where acute economic uncertainty continues.

Source: Darrell Rigby and Barbara Bilodeau, Management Tools and Trends 2011. Copyright © 2011, Bain and Company, Inc., http://www.bain.com/publications/articles/Management-tools-trends-2011.aspx. Reprinted by permission.

M anagin g th e techn o lo gy- d riven wo rkpl ace The physical world that Frederick Taylor and other proponents of scientific management measured determines less and less of what is valued in organisations and society. Our lives and organisations have been engulfed by information technology. Ideas, information and relationships are becoming more important than production machinery, physical products and structured jobs. Many employees perform much of their work on computers and may work in virtual teams, connected electronically to colleagues around the world. Even in factories that produce physical goods, machines have taken over much of the routine and uniform work, freeing workers to use more of their minds and abilities. Managers and employees in today’s companies focus on opportunities rather than efficiencies, which requires that they be flexible, creative and unconstrained by rigid rules and structured tasks.

Th e shi f tin g wo rld o f e- busin ess Today, much business takes place by digital processes over a computer network rather than in physical space. E-business refers to the work an organisation does by using electronic linkages (including the Internet) with customers, partners, suppliers, employees or other key constituents. E-commerce is a narrower term referring specifically to business exchanges or transactions that occur electronically. E-commerce replaces or enhances the exchange of money and products with the exchange of data and information from one computer to another. Companies such as Dell, Amazon.com, Wishlist, Villagetheatres.com and Coles Online are engaged in what is referred to as business-to-consumer e-commerce (B2C) because they sell products and services to consumers over the Internet. Although this is probably the most visible expression of e-commerce to the public, the fastest-growing area of e-commerce is business-to-business e-commerce (B2B), which refers to electronic transactions between organisations. Large organisations such as Coles and Woolworths, Toyota and Ford Motor Company buy and sell billions of dollars worth of goods and services a year via either public or private Internet linkages. Some companies have taken e-commerce to very high levels to achieve amazing performance. Dell Computer pioneered the use of end-to-end digital supply chain networks to keep in touch with customers, take orders, buy components from suppliers, coordinate with manufacturing partners and ship customised products directly to consumers. These advances mean managers not only need to be technologically savvy, but they also become responsible for managing a web of relationships that reaches far beyond the boundaries of the physical organisation, building flexible e-links between a company and its employees, suppliers, partners and customers. The third area of e-commerce, consumer-to-consumer (C2C), is made possible when an Internet-based business acts as an intermediary between and among consumers. One of the best-known examples of C2C e-commerce is web-based auctions such as those made possible by eBay. Internet auctions have created a large electronic marketplace where consumers can buy and sell directly with one another, often handling

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practically the entire transaction via the web. New electronic technologies also shape the organisation and how it is managed. A century ago, Frederick Taylor described the kind of worker needed in the iron industry: ‘Now, one of the first requirements for a man who is fit to handle pig iron as a regular occupation is that he shall be so stupid and so phlegmatic that he more nearly resembles in his mental makeup the ox than any other type’.59 The philosophy of scientific management was that managers structured and controlled jobs so carefully that thinking on the part of employees wasn’t required – indeed, it was usually discouraged. How different things are today! Many organisations depend on employees’ minds more than their physical bodies. In companies where the power of an idea determines success, managers’ primary goal is to tap into the creativity and knowledge of every employee.

One company that has successfully tapped into the growing trend to work in virtual teams is Australian software firm Atlassian, which has designed software products to support collaboration among its team members. When cosmetic giant Lancôme looked to find a more effective way of coordinating the work of in-house and freelance web developers with creative staff from around the globe, they introduced Atlassian’s JIRA application. JIRA enables all team members to share access to the same information and track development changes, thus reducing confusion and costly time delays. It is a program that enables contributors to work cooperatively, view and participate in idea generation and make instant changes. This all speeds up the development process, allows ideas to be captured quickly and assists in new product innovation. With the company’s engineers being geographically displaced, the need for back and forth emails and the worry of trying to arrange meeting times across continents and time zones added to communication issues for Lancôme. JIRA improves collaboration and quickens the process of software development. Lancôme was so satisfied with how it enhanced their web development and the increased sales on their websites that they intend to roll it out to other divisions of the company. JIRA is now used by 19 000 customers in over 115 countries.

Atlassian’s software supports a more technology driven workplace and a burgeoning desire to find ways to enhance collaboration between employees. Many big companies now use a range of Atlassian products to assist them in managing intellectual capital and enable knowledge sharing. Another of their programs, called Confluence, is designed especially to prevent tacit knowledge being trapped in a person’s email inbox where it may not be accessed or even known to others who need the information. Being able to share knowledge and manage knowledge can often be a challenge for a large company where the doubling up on the search for information can create costly delays and inhibit speedy decision making. Atlassian’s customers include Citigroup, eBay, NASA and Microsoft; in fact, more than 85 per cent of Fortune 100 companies are users of Atlassian products. Co-founders Scott Farquhar and Mike Cannon Brookes recognise that their ability to produce innovative new solutions for their customers’ problems is through Atlassian’s own capacity to attract and retain the best software engineers and have a company culture that encourages risk taking and collaboration. Their now famous ‘ShipIt’ days where employees are given 24 hours in which to problem solve, develop and pitch a new

idea has resulted in the creation of 550 internal projects. One idea for a testing tool has collected more than $2 million in sales. The management support and encourage risk taking and learning and they value their employees’ ability to think creatively as they see this as an opportunity to keep an edge on their competitors. The company’s priority has been to create knowledge sharing among employees and cooperation with their customers through building strong relationships. They have even hosted a ShipIt day for one of their customers Nintendo, to encourage the same sort of innovation and creativity that Atlassian has enjoyed. Sources: Atlassian (2013), http://www.atlassian.com (accessed 22 March 2012); Nintendo Named Winner of Atlassian’s 24-Hour FedEx Day Innovation Campaign, http://www.atlassian.com/it/company/press/ press-releases/Nintendo-Named-Winner-ofAtlassians-24-Hour-ShipIt-Day-Innovation-Campaign (accessed 15 May 2013); ‘Atlassian’ (9 September 2012), http://www.atlassian.com/en/company/press/ press-releases/new-atlassian-marketplace-surpassed-1million-in-transactions (accessed 14 May 2013); Geron, T. (3 March 2012). We’re All Coders. Forbes, 189:4, 44–6, http://www.forbes.com/ forbes/2012/0312/technology-software-atlassianaustralian-all-coders.html (accessed 14 May 2013); Smith, F. (8 November 2012). Is Atlassian the Coolest Company in Australia? Business Review Weekly, http://www.brw.com.au/p/sections/features/is_atlassian_ the_coolest_company_877SCYxXLwl7N9cNiMF6vJ (accessed 14 May 2013); http://www.atlassian .com/software/confluence/overview/team-collaborationsoftware (accessed 15 May 2013).

Case study

Atlassian: supporting collaboration and innovation

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Kn owled ge m anagem ent For many of the world’s leading companies, only 10 to 20 per cent of their market value is accounted for by the value of their ‘hard’ assets. Much of the rest of a firm’s value is its Take a knowledge. Peter Drucker coined the term ‘knowledge work’ more than 40 years ago,60 Moment but it is only in recent years that managers have genuinely recognised knowledge as an As a new manager in today’s important organisational resource that should be managed just as they manage cash workplace, how would you develop your employees’ abilities to think flow or raw materials. Knowledge management refers to the efforts to systematically independently, build relationships and find, organise and make available a company’s intellectual capital and to foster a culture share knowledge? Be prepared to learn of continuous learning and knowledge sharing so that a company’s activities build on to use technology as a tool to tap what is already known.61 Information technology plays an important role by enabling the into the insight and creativity of each person in the storage and dissemination of data and information across the organisation, but technology organisation. is only one part of a larger management system.62 A complete knowledge management system includes not only the technology for capturing and storing knowledge for easy access, but also new management values that support risk taking, learning and collaboration. Rather than seeing employees as factors of production and looking for ways to use human and material resources for knowledge management The efforts to systematically greatest efficiency, today’s most successful managers cherish people for their ability to think, create, share find, organise and make knowledge and build relationships. available a company’s intellectual capital and One segment of knowledge management is the use of sophisticated customer relationship to foster a culture of management (CRM) systems, which collect and manage large amounts of data about customers and continuous learning and knowledge sharing so that make them available to employees, enabling better decision making and superior customer service. The a company’s activities build use of CRM has virtually exploded over the past several years. In Bain & Company’s 2011 management on what is already known. tool survey, for example, 58 per cent of companies reported using CRM, up from only 35 per cent of customer relationship management (CRM) companies in 2000, one of the largest and fastest usage increases ever revealed by the survey.63 Systems that help Information technology has also contributed to the rapid growth of outsourcing, which means companies keep in close touch with customers, contracting out selected functions or activities to other organisations that can do the work more costcollect and manage efficiently. Today’s companies are outsourcing to free up cash for investment in long-term research customer data, and collaborate with customers and innovation. Outsourcing – along with other trends such as supply chain management, customer to provide the most valuable relationship management, telecommuting and virtual teamwork – requires that managers decide exactly products and services. what they can do competitively and what they should be getting other firms to do via a series of supply outsourcing Contracting out to another and partnering relationships. company of a function or activity which could be or was previously produced in-house.

So cial m ed ia pro gr a ms Companies use social media programs to interact electronically with employees, customers, partners and other stakeholders. Although only 29 per cent of managers surveyed by Bain & Company said their companies used social media programs in 2010, more than half said they planned to use them that year.64 Social media programs include company online community pages, social media sites such as Facebook or LinkedIn, microblogging platforms such as Twitter and China’s Weibo, and company online forums. One frequent, and controversial, use of social media has been to look into the backgrounds and activities of job candidates. A survey by CareerBuilder found that 37 per cent of hiring managers said they had used social media sites to see if job applicants present themselves professionally, to learn more about an applicant’s

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qualifications or to see if the candidate would be a good fit with the organisational culture.65 Other uses of social media programs include generating awareness about the company’s products and services, sharing ideas and seeking feedback from customers and partners, strengthening relationships among employees and selling products. One concern for many managers is how to measure the effectiveness of the use of social media programs.

In 1990 Enjo, a company founded in Austria, developed an innovative cleaning product that uses just unique fibre cloths and water to clean. The company’s offering satisfies a growing consumer preference for products that allow them to feel good about their purchase. It supports a physical, social or environmental issue of concern to the consumer at the same time as they use the product. Enjo is currently sold in more than 26 countries and has traditionally used a model of direct selling where consultants meet potential customers through a party plan system. During the past two decades, as the brand has grown, Enjo has faced the challenge of maintaining awareness and relationships with both its thousands of customers and consultants. Changes in technology, in particular the advent of social media, have opened up avenues for Enjo to access new consumers, maintain interest with loyal customers and communicate with employees. Barb de Corti, the Australian head of Enjo, was convinced that her company was missing opportunities to engage with its customers by sticking to only the direct selling approach. She was eager to take the business online but had to persuade her 1000-plus consultants that it would not spoil their current earnings. De Corti then created a hybrid business model where her ‘ENJOpreneurers’ remained the primary face and selling method for Enjo products but customers could now also purchase online. From September 2012

Enjo’s online presence has opened up its products to a new market. In the first six months of the online strategy, 42 per cent of purchases were from new customers to Enjo. Figures have already suggested a 15 per cent increase in overall sales. The online store also directs customers to local ENJOpreneur contacts should they wish to see a demonstration or purchase directly from a consultant. De Corti is mindful of using the e-commerce strategy to support her existing model rather than have them compete against each other. Enjo have also looked to use social media such as Facebook and YouTube to spread information about their products and to facilitate interaction with their customers and employees. Customers can obtain information about how to use products and get excited about their purchases by viewing short video clips online. Approximately 85 per cent of Facebook users are over 24 years old and predominantly female which means that Enjo’s Facebook page is working at building relationships with their intended market. The site currently has over 12 500 ‘Likes’ and posts new ideas daily. Enjo also uses social media to inspire employees with motivating stories about good customer service and offers of employee rewards; it also posts suggestions to help consultants in their role. Followers are encouraged to provide feedback and contribute their own Enjo stories, which build collaboration between the company,

its employees and its consumers and provide Enjo with valuable insights. The company uses social media to maintain awareness about the key benefit of a chemical free, high value product that cleans without harm to people or the environment. Interestingly a recent survey commissioned by Enjo Australia found that women would spend up to $600 per year on cleaning products for their homes. De Corti has stated that Enjo’s recent turnover figures are close to $100 million and she has been on Australia’s Rich List since 2003. Clearly the triple benefit to health, value and the environment is working well for Enjo. Sources: Gardner, J. (19 September 2012). 10 Trends to Make You Money. BRW, http://www.brw.com.au/p/trends_to_make_you_ money_7MisCsL1AI4vyAUcCErRnN (accessed 16 May 2013); Enjo Australia Facebook Page (2013), https://www.facebook.com/ENJOAus (accessed 20 May 2013); Enjo (2013), http://www.enjo.net/#/int/ company/about-enjo (accessed 16 May 2013); Jones, K. (10 March 2013). Queen on Clean Gets Online Bug. Sydney Morning Herald, http://www.smh.com.au/ small-business/franchising/queen-of-clean-gets-onlinebug-20130310-2fuab.html (accessed 14 May 2013); Queensland Government (5 March 2013). Who Uses Facebook? Business and Industry, http://www .business.qld.gov.au/business/running/marketing/onlinemarketing/using-facebook-to-market-your-business/ who-uses-facebook (accessed 19 May 2013); White, A. (11 February 2013). Women Pay Up to $600 a Year For Cleaning Products and They Are the Ones To Use Them. Herald Sun, http://www.adelaidenow.com.au/news/ national/women-pay-up-to-600-a-year-for-cleaningproducts-and-they-are-the-ones-to-use-them/ story-fndo1svg-1226575723457 (accessed 14 May 2013).

Case study

Enjo: a friend of its customers

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sustainable development

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Sustainable development and management thinking Sustainable development is a relatively new term that refers to the way in which organisations engage with and satisfy a wide variety of stakeholders with whom they interact. This includes its shareholders, employees, suppliers, the environment (meaning the air, water, land resources and other aspects of keeping the planet in good shape for future generations in the long term) and the communities in which they operate. Executives are now recognising the requirement to satisfy not just shareholders, who principally demand profits, but also a wide variety of stakeholder groups, who place a range of demands on the company and its managers. To survive and prosper, firms must not pollute the environment, they must adhere to tightening safety and labour/employment standards, and they must act responsibly in balancing the needs of shareholders with other stakeholders, both in the present and the longer term. This means that life for managers has become even more complex and challenging as they pursue a broad set of objectives and try to satisfy many disparate requirements. In a nutshell, the things that employees want from a company are not necessarily the same things that environmentalists want, nor local communities, customers, government regulators, shareholders and so on.66 When one considers the history of the modern organisation, it is true that stakeholder relationships have not always been positive and seen as an opportunity to ‘Do well by doing good’. Employers and many managers often treated staff badly in the past, as against seeing and treating them as partners in an organisation’s success. Suppliers were often treated as adversaries in years gone by. Customers were even treated with disdain, as a source of problems and complaints, or as a necessary evil. And government was seen as a bureaucratic constraint making rules to make life difficult for business. Leading organisations have left all this behind. They have become proactive in all their relationships with stakeholders. They realise it is better to invite all stakeholders in to the organisation, than to hold them at arm’s length. They even share decision-making power with them. They engage in joint product development with suppliers and customers, negotiating working conditions with staff to ensure best outcomes for staff and the organisation, and they work with governments to ensure that issues like workplace safety, environmental outcomes and many other facets of work can lead to better outcomes on the overall triple bottom line (financial, environmental and societal outcomes). These leading organisations use sustainable development practices and opportunities to drive innovation, as a source and motivation for change. They are proactive. As companies become more and more pervasive as institutions in our societies, this relatively new approach to management, of long-term sustainability, asks organisations to assume a higher level of overall responsibility in society, as against the old approach of taking what can be taken from it in order to profit. And society is lifting its standards and expectations of organisations: we now expect them to not pollute the environment more than the bare minimum, to treat employees well and to care for the local communities that give them a ‘licence to operate’. And when companies do the wrong thing, they are increasingly punished by societies, consumers and the governments that represent these stakeholders. The motivation and opportunity exists for organisational managers to do more than ever: to not only work to achieve short-term efficiency, quality, innovation, customer satisfaction and employee satisfaction, but also to drive win–win results across a broader range of outcomes than ever before, and to do this on a long-term sustainable basis. The field of management just keeps evolving, and this modern manifestation of it promises to make managerial work ever more interesting and challenging. Compare a modern progressive, advanced company such as Google, which gives $5000 to its employees if they buy a fuel-efficient car and provides free unlimited food and many other benefits to staff at work, to the approach taken by generations of managers and business owners one hundred years ago, who often treated their workers as necessary evils.

2: The evolution of management thinking

➜➜ Modern management is a lively mix of ideas and techniques from varied historical perspectives, but new concepts continue to emerge. ➜➜ Managers tend to look for innovative ideas and approaches particularly during turbulent times. ➜➜ Many of today’s popular techniques are related to the transition to a technology-driven workplace. ➜➜ E-business refers to the work an organisation does by using electronic linkages with customers, partners, suppliers, employees and others.

remember this

➜➜ A complete knowledge management system includes technology for capturing and storing knowledge for easy access as well as management values that support risk taking, learning and collaborating.



➜➜ Customer relationship management (CRM) systems use information technology to keep in close touch with customers, collect and manage large amounts of customer data, and provide superior customer value.

➜➜ Sustainable development refers to the way in which organisations engage with and satisfy a wide variety of stakeholders with whom they interact.

➜➜ Social media programs include online community pages, social media sites such as Facebook and LinkedIn,

One century-old company that is thriving as a technologydriven learning organisation is Cementos Mexicanos (Cemex), described at the beginning of the chapter. To help the organisation compete in a turbulent environment, managers looked for both technological and management innovations. A core element of the new approach is the company’s complex information technology infrastructure, which includes a global positioning satellite system and onboard computers in all delivery trucks that are continuously fed with streams of day-to-day data on customer orders, production schedules, traffic problems, weather conditions and so forth. Even more important are changes in how managers and employees think about and do their work. All drivers and dispatchers attend weekly secondary education classes for two years. Regular training in quality, customer service and computer skills continues, with Cemex devoting at least 8 per cent of total work time to employee training and development. The company abolished strict, demanding work rules so that workers have more discretion and responsibility for identifying and solving problems. As a result, Cemex trucks now operate as selforganising business units, run by well-trained employees

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microblogging platforms such as Twitter, and company online forums that enable managers to interact electronically with employees, customers, partners and other stakeholders.

➜➜ These new approaches require managers to think in fresh ways about managing their relationships with employees, customers and business partners.

who think like businesspeople. The three-hour delivery window has been reduced to 20 minutes, and managers believe a goal of 10 minutes is within reach. According to Francisco Perez, operations manager at Cemex in Guadalajara: ‘They used to think of themselves as drivers. But anyone can deliver concrete. Now our people know that they’re delivering a service that the competition cannot deliver.’ Cemex transformed the industry by combining extensive networking technology with a new management approach that taps into the mind power of everyone in the company. People at Cemex learn constantly – on the job, in training classes, and through visits to other organisations. As a result, the company achieves a startling capacity to anticipate customer needs, solve problems, and innovate quickly. And more recently, outsourcing, sustainable development, and customer relationship management systems and other technologies have given managers more options and more pressure to get things right, or lose their right to manage. Sources: Petzinger, T. Jr (1999), The New Pioneers: The Men and Women Who Are Transforming the Workplace and Marketplace. New York: Simon & Schuster, 91–3. Fast Company (April 1999). In Search of the New World of Work. 214–20+; Katel, P. (July 1997). Bordering on Chaos. Wired, 98–107.

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discussion questions

1  How do you think management practices might change in response to increasing government regulation in the banking and healthcare industries? What other recent political, social or economic forces can you identify that might affect your job as a manager?

2  The 2010–11 Bain survey of management tools and trends, which was cited earlier in this chapter, found that the use of social media programs is growing, but that, as a tool, social media also has one of the lowest satisfaction ratings. How would you explain this? 3 Can you think of potential drawbacks to retailers using labour-waste elimination systems based on scientific management principles, as described in the text? Despite being around 100 years old, do you believe scientific management characteristics will ever cease to be a part of organisational life? Discuss. 4 A management lecturer once said that for successful management, studying the present was most important, studying the past was next and studying the future was least important. Do you agree? Why?

Ethical challenge

5 As organisations become more technology-driven, which do you think will become more important: the management of the human element of the organisation, or the management of technology? Discuss. 6 Why do you think Mary Parker Follett’s ideas tended to be popular with businesspeople of her day, but were ignored by management scholars? Why are her ideas appreciated more today? 7 Explain the basic idea underlying the contingency view. How would you go about identifying key contingencies facing an organisation? 8 Why can an event such as the Hawthorne studies be a major turning point in the history of management, even if the results of the studies are later shown to be in error? Discuss. 9 How would you apply systems thinking to a problem such as poor performance in your current academic studies? Or to a problem with a romantic partner or family member? Try to identify all the elements and their interdependencies. 10 Do you think management theory will ever be as precise as theories in the fields of finance, accounting or experimental psychology? Why or why not?

Th e s u p e r v i s o r

Karen Lowry, a manager of a social service welfare agency in a suburb of Brisbane, loved to see her employees learn and grow to their full potential. When a rare opening for a supervising clerk occurred, Karen quickly decided to give Charlotte Hines a shot at the job. Charlotte had been with the agency for 17 years and had shown herself to be a true leader. Charlotte worked hard at being a good supervisor, just as she had always worked hard at being a top-notch clerk. She paid attention to the human aspects of employee problems and introduced modern management techniques that strengthened the entire agency. However, the Public Service Board decided that a promotional exam should be given to find a permanent placement for the supervising clerk position. For the sake of fairness, the exam was an open competition – anyone, even a new employee, could sign up and take it. The board wanted the candidate with the highest score to get the job but allowed Karen, as manager of the agency, to have the final say-so. Since she had accepted the provisional opening and proven herself on the job, Charlotte was upset that the entire clerical force was deemed

qualified to take the test. When the results came back, Charlotte was devastated: she ranked twelfth in the field of candidates, while one of her newly hired clerks ranked first. The Public Service Board, impressed by the new clerk’s high score, is urging Karen to give her the permanent supervisory job. Karen wonders if it is fair to base her decision only on the test results. W h at d o yo u d o ? 1 Ignore the test. Charlotte has proven herself and deserves the job. 2 Give the job to the candidate with the highest score. You don’t need to make enemies on the Public Service Board and, after all, it is an objective way to select a permanent placement. 3 Devise a more comprehensive set of selection criteria – including test results as well as supervisory experience, ability to motivate employees and knowledge of agency procedures – that can be explained and justified to the board and to employees.

Source: Based on Harrigan, B. (July 1986). Career Advice. Working Woman, 22–4.

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Turning points on the road to management Step 1. Interview a manager you know at your university or place of employment, or a parent or friend who is a manager, and ask the following question: ‘What was a turning point in your life that led you to become the person, and manager, that you are today?’(A turning point could be an event, such as a divorce, the birth of a child, business failure or the loss of a job; or a decision, such as to quit university and start a business, enrol in a postgraduate degree, get married and so on.) Then collect information on a second turning point, if the interviewee has one to describe. Your goal is to learn the specifics about how each turning point led to the person’s current position in life. Step 2. Divide into groups of four to six members. One person at a time, share what you learnt about a manager’s career turning points. What

Gr oup Challenge

themes or patterns characterise the turning points among the managers interviewed? Step 3. Have you personally experienced any turning points in your life? Each group member should describe his or her personal turning point to the group. With these additional turning points, analyse again for themes and patterns across all the turning points. Step 4. What lessons does your group learn from its analysis? How does history (events, decisions) play a role in the lives and careers of the managers interviewed, and in the lives of your group members?

More hassle from HR? In their three years at Melbourne’s Vreeland Pharmaceuticals, Vitorio Nuños and Gary Shaw had rarely crossed paths, and they had exchanged no more than a dozen sentences. But here they were, seat mates on a plane headed to company headquarters in Sydney. And suddenly, they had a lot to say to each other. ‘What I’d like to know is why we’re wasting a trip to Sydney to thrash out some new policies about leader competencies,’ Vitorio said. ‘Because Connie Wyland is HR at Vreeland, and you and I both know that policies and models and all touchy-feely people stuff is the lifeblood of HR,’ Gary replied. ‘I also think a lot of this is the result of panic on the heels of the scandals in Sales last year.’ ‘I don’t think there’s any need to panic. The company fired the guys and apologised; you just move on,’ said Vitorio. Gary laughed sarcastically. ‘No, you fire them, you apologise, then you analyse the whole thing ad nauseam, and then you hamstring your management team with endless rules and bureaucratic standards just to make sure it doesn’t happen again.’ ‘So we all pay for their mistakes,’ replied Vitorio. ‘We pay because HR feels guilty that those guys moved up so high in the system,’ Gary replied. ‘So now Connie and her staff have devised the ultimate solution to the problem. I don’t know why we all have to go in to discuss it; she’s already decided what she’s going to do and she’s positive this is the cure-all to prevent any further embarrassment to the company.’ ‘Let’s look at the document,’ Vitorio said. He reached under the seat, retrieved and unpacked his tablet, placed it on the tray table, and turned it on. ‘Too much glare,’ Gary said, peeking over. Vitorio pulled down the window shade. ‘Is that better?’

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Case for

Gary nodded. The two men read cr itical through the document. analysis ‘I resent the term “rogue leaders”,’ Gary remarked, pointing to the phrase. Vitorio shrugged. ‘It’s a rough draft. They’ll clean up the language . . . I think.’ ‘It’s really just a rehash of the mission statement and all of the things we learnt in training. This is stuff we all learnt at university. I feel like I’m being lectured.’ ‘Yeah.’ Vitorio scrolled up and down the document. ‘Any business student could have written this.’ ‘I hear the HR crew put in lots of overtime,’ said Gary. Vitorio smirked. ‘For this? I’ll tell you – and this is just between you and me – but I really resent this, and we’re some of the newer members of management. I’d love to hear what the older managers are saying.’ ‘I know Connie,’ Gary said. ‘She and her staff are going to come in tomorrow all gung-ho on this.’ He turned the tablet in order to see it easier. ‘We already know what’s expected of us.’ He scrolled down, stopping at key phrases. ‘Look at this . . . “critical values” . . . “core behaviours” . . . “fostering conflict resolution” . . . and here’s one – “implementing employee involvement strategies”. How does she think we got these jobs in the first place?’ Gary paused. ‘What really makes me angry is that I heard Connie is going to start manager training sessions where she will teach us the behaviours associated with each value! Can you believe that? She will have us role-playing and stuff. I will fight this if it goes beyond general value statements that we can follow in our own way.’ ‘I can’t wait to hear what Vreeland says,’ Vitorio remarked. ‘Are you kidding? He’ll go along with it. He’ll spend 10 to 15 minutes telling us how great we all are and insinuating that we don’t really need this, and then he’ll back Connie all the way. Face it, this is the way it’s

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going to be, and he really doesn’t need our input or approval. It just looks good,’ commented Gary. Vitorio turned off and closed the tablet. ‘I just feel that imposing something like this on management is a slap at every one of us. We know what’s expected. We don’t need training. We also know our people and we have to have some flexibility within a broad set of boundaries. This sort of thing just hamstrings us.’ ‘I just hope a couple of senior managers speak up at this meeting and voice some concerns. Maybe it will be toned down a little,’ Gary said. ‘You and I are middle management and we haven’t been with the company long enough. All we can do at this meeting is sit and nod.’

On the job video case

Questions 1 Are Connie and her staff on the right track to avoid manager mishaps by defining a new set of leader rules and core values and imposing it by fiat from the top down? 2 Do you think a more participative and open culture can be imposed on managers with value statements and training sessions? Why? 3 Why do you think Vitorio and Gary are on the defensive? 4 Might the emphasis on core leadership behaviours be handled in a different way? What do you suggest?

B a r c e l o n a R e s ta u r a n t G r o u p : Th e e v o l u t i o n o f m a n a g e m e n t t h i n k i n g For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

Q uesti o n s 1  In what ways is Barcelona’s management approach consistent with modern developments in management thinking?

3 What aspects of restaurant work are especially challenging to wait staff, and how does Barcelona’s approach to management help employees overcome the downsides of the job?

2 In what ways does Barcelona’s management approach run counter to contemporary developments in management thinking?

endnotes 1  Pacific Hydro, http//:www.pacifichydro .com.au. 2  Huey, J. (5 April 1993). Managing in the Midst of Chaos. Fortune, 38–48; Greco, S. (December 1994). The Decade-long Overnight Success. Inc., 73–9. 3  (6 June 2012). Q&A: Why the West Needs ‘Jugaad’ Creativity (an interview with Navi Radjou, Jaideep Prabhu, and Simone Ahuja), The Wall Street Journal India Online, http://blogs.wsj.com/ indiarealtime/2012/06/06/qa-why-the-west-needs-jugaad-creativity (accessed 19 June 2012); and Navi Radjou, Jaideep Prabhu and Simone Ahuja. (2012). Jugaad Innovation: Think Frugal, Be Flexible, Generate Break-through Growth (San Francisco: Jossey-Bass). 4 Saraf, D. (13 July 2009). India’s Indigenous Genius: Jugaad. The Wall Street Journal Online, http://online.wsj.com/article/SB124745880685131765. html (accessed 19 June 2012); N. Kumar and P. Puranam. (March–April 2012). Frugal Engineering: An Emerging Innovation Paradigm. Ivey Business Journal, www.iveybusinessjournal.com/topics/innovation/frugal-engineeringan-emerging-innovation-paradigm (accessed 19 June 2012). 5 El Namaki, M. S. S. (March–April 2012). Does the Thinking of Yesterday’s Management Gurus Imperil Today’s Companies?’, Ivey Business Journal, http//:www.iveybusinessjournal.com/topics/strategy/does-the-thinking-ofyesterdays-management-gurus-imperil-todays-companies (accessed 19 June 2012). 6 Abrahamson, E. (January 1996). Management Fashion. Academy of Management Review 21:1, 254–85. Also see ‘75 Years of Management Ideas and Practice’, a supplement to the Harvard Business Review (September– October 1997), for a broad overview of historical trends in management thinking. 7 Munk, N. (16 March 1998). The New Organization Man. Fortune, 62–74.

8 Based on T. Henneman. (2 April 2012). Talkin’ About Their Generations: The Workforce of the ’50s and Today. Workforce, http://www.workforce .com/article/20120402/WORKFORCE90/120319965/talkin-about-theirgenerations-the-workforce-of-the-50s-and-today (accessed 19 June 2012); and Stephanie Armour. (6 November 2005). ‘Generation Y: They’ve Arrived at Work with a New Attitude’, USA Today, www.usatoday.com/money/ workplace/2005-11-06-gen-y_x.htm (accessed 10 November 2005). 9 McGregor, E. (23 and 30 March 2009). There Is No More Normal. Business-Week, 30–4. 10 Aneiro, M. (11 March 2010). Credit Market Springs to Life. The Wall Street Journal. 11 Hannifa, A. (2 November 2007). India, China Growth Dominates World Bank Meet. India Abroad (New York edition). 12 Tell, R. and Kleiner, B. (March–April 2009). Organizational Change Can Rescue Industry. Industrial Management, 20–4. 13 Wren, D. A. (1987). Management History: Issues and Ideas for Teaching and Research. Journal of Management, 13, 339–50. 14 Business historian Alfred D. Chandler, Jr., quoted in J. Useem. (20th Anniversary Issue, 1999). Entrepreneur of the Century. Inc., 159–74. 15 Useem. Entrepreneur of the Century. 16 The following is based on Wren, Evolution of Management Thought, Chapters 4 and 5; and C. S. George, Jr. (1968). The History of Management Thought (Englewood Cliffs, NJ: Prentice-Hall), Chapter 4. 17 Crossen, C. (6 November 2006). Early Industry Expert Soon Realized a Staff Has Its Own Efficiency. The Wall Street Journal. 18 Farnham, A. (21 July 1997). The Man Who Changed Work Forever. Fortune, 114; C. D. Wrege and A. M. Stoka. (October 1978). Cooke Creates a Classic: The Story Behind F. W. Taylor’s Principles of Scientific Management. Academy of Management Review, 736–49; R. Kanigel. (1997).

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The One Best Way: Frederick Winslow Taylor and the Enigma of Efficiency (New York: Viking); and ‘The X and Y Factors: What Goes Around Comes Around’, special section in (21–27 January 2006). The New Organisation: A Survey of the Company. The Economist, 17–18. 19 George, The History of Management Thought; Wren, D. A. (1979). The Evolution of Management Thought, 2nd edn (New York: Wiley). 20 O’Connell, V. (17 November 2008). Stores Count Seconds to Trim Labor Costs. The Wall Street Journal; and V. O’Connell. (10 September 2008). Retailers Reprogram Workers in Efficiency Push. The Wall Street Journal. 21 Hamel, G. (February 2006). The Why, What, and How of Management Innovation. Harvard Business Review, 72–84; Peter Coy. (20 and 27 August 2007). Cog or CoWorker? BusinessWeek, 58–60. 22 Weber, M. (1927). General Economic History (F. H. Knight, trans.) (London: Allen & Unwin); Weber, M. (1930). The Protestant Ethic and the Spirit of Capitalism (T. Parsons, trans.) (New York: Scribner); Weber, M. (1947). The Theory of Social and Economic Organizations (A. M. Henderson & T. Parsons, ed. and trans.) (New York: Free Press). 23 Cummings, S. and Bridgman, T. (2011). The Relevant Past: Why the History of Management Should Be Critical to Our Future. Academy of Management Learning & Education, 10:1, 77–93. 24 These are based on P. Downs. (4 June 2012). How I Fire People. You’re the Boss blog, The New York Times, http://boss.blogs.nytimes.com/2012/06/04/ how-i-fire-people (accessed 20 June 2012). 25 Fayol, H. (1930). Industrial and General Administration, trans. J. A. Coubrough (Geneva: International Management Institute); H. Fayol. (1949). General and Industrial Management, trans. C. Storrs (London: Pitman and Sons); and W. J. Arnold et al. (vol. I, 1965; vol. II, 1966). BusinessWeek, Milestones in Management (New York: McGraw-Hill). 26 Bounds, G. M., Dobbins, G. H. and Fowler, O. S. (1995). Management: A Total Quality Perspective (Cincinnati, OH: South-Western Publishing), pp. 52–3. 27 Follett M. P. (1918). The New State: Group Organization: The Solution of Popular Government (London: Longmans, Green); and M. P. Follett. (1924). Creative Experience (London: Longmans, Green). 28 Metcalf, H. C. and Urwick, L. eds. (1940). Dynamic Administration: The Collected Papers of Mary Parker Follett (New York: Harper & Row); Arnold et al. Milestones in Management. 29 Follett. The New State; Metcalf and Urwick. (1941). Dynamic Administration (London: Sir Isaac Pitman). 30 Wolf, William B. (1968). How to Understand Management: An Introduction to Chester I. Barnard (Los Angeles: Lucas Brothers); and D. D. Van Fleet. (Spring 1982). The Need-Hierarchy and Theories of Authority. Human Relations, 9, 111–18. 31 Wrege, C. D. (August 1976). Solving Mayo’s Mystery: The First Complete Account of the Origin of the Hawthorne Studies –The Forgotten Contributions of Charles E. Snow and Homer Hibarger. Paper presented to the Management History Division of the Academy of Management. 32 Greenwood, R. G., Bolton, A. A. and Greenwood, R. A. (Fall–Winter 1983). Hawthorne a Half-Century Later: Relay Assembly Participants Remember. Journal of Management, 9, 217–31. 33 Roethlisberger, F. J., Dickson, W. J. and Wright, H. A. (1939). Management and the Worker (Cambridge, Mass: Harvard University Press). 34 Parson, H. M. (1974). What Happened at Hawthorne? Science, 183, 922–32. Adair, J. G. (1984). The Hawthorne Effect: A Reconsideration of the Methodological Artifact. Journal of Applied Psychology, 69:2, 334–45. 35 Greenwood et al. Hawthorne a Half-Century Later: Relay Assembly Participants Remember. 36 Tausky, C. (1978). Work Organizations: Major Theoretical Perspectives. Itasca: F. E. Peacock, 42. 37 Roethlisberger and Dickson. Management and the Worker.

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38 Aldag, R. J. and Stearns, T. M. (1991). Management, 2nd ed. (Cincinnati, OH: South-Western Publishing), pp. 47–8. 39 McGregor, D. (1960). The Human Side of Enterprise (New York: McGraw-Hill), pp. 16–18. 40 McGregor. The Human Side of Enterprise, pp. 16–18; Robert A. Cunningham. (October 2011). Douglas McGregor: A Lasting Impression. Ivey Business Journal, 5–7. 41 French, W. L. and Bell, C. H. Jr. A History of Organizational Development. In W. L. French, C. H. Bell Jr. and R. A. Zawacki. (2000). Organization Development and Transformation: Managing Effective Change (Burr Ridge, IL: Irwin McGraw-Hill), pp. 20–42. 42 Austin, L. M. and Burns, J. R. (1985). Management Science (New York: Macmillan). 43 Barnes, B. (28 December 2010). Disney Technology Tackles a Theme-Park Headache: Lines. The New York Times, B1; and (9 March 2012). Disney Cracks Down on FastPass Enforcement. Tampa Bay Times, B2. 44 Bertalanffy, L. V., Hempel, C. G., Bass, R. E. and Jonas, H. (December 1951). General Systems Theory: A New Approach to Unity of Science. Human Biology, 23, 302–61; Boulding, K. E. (April 1956). General Systems Theory – The Skeleton of Science. Management Science, 2, 197–208. 45 Patterson, S. (2010). The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It (New York: Crown Business); and H. Hurt III. (21 February 2010). In Practice, Stock Formulas Weren’t Perfect. The New York Times. 46 Bertalanffy, Ludwig von et al. (December 1951). General Systems Theory: A New Approach to Unity of Science. Human Biology, 23, 302–61; and K. E. Boulding. (April 1956). General Systems Theory—The Skeleton of Science. Management Science, 2,197–208. 47 This section is based on P. M. Senge. (1990). The Fifth Discipline: The Art and Practice of the Learning Organization (New York: Doubleday); J. D. Sterman. (Summer 2001). Systems Dynamics Modeling: Tools for Learning in a Complex World. California Management Review, 43:4, 8–25; A. Gabor. (Summer 2010). Seeing Your Company as a System. Strategy 1 Business, http://www.strategy-business.com/ article/10210?gko=20cca (accessed 20 June 2012); and R. Zemke. (February 2001). Systems Thinking. Training, 40–6. 48 This example is cited in Sterman. Systems Dynamics Modeling. 49 In P. M. Senge. (1990). The Fifth Discipline: The Art and Practice of the Learning Organization (New York: Doubleday/Currency). 50 Luthans, F. (June 1973). The Contingency Theory of Management: A Path Out of the Jungle. Business Horizons, 16, 62–72; and F. E. Kast and J. E. Rosenzweig. (1973). Contingency Views of Organization and Management (Chicago: Science Research Associates). 51 Greengard, S. (January 1997). 25 Visionaries Who Shaped Today’s Workplace. Workforce, 50–9; and A. Harrington. (22 November 1999). The Big Ideas. Fortune, 152–4. 52 Guillen, M. F. (Fall 1994). The Age of Eclecticism: Current Organizational Trends and the Evolution of Managerial Models. Sloan Management Review, 75–86. 53 Main, J. (19 October 1992). How to Steal the Best Ideas Around. Fortune, 102–6. 54 Rigby, D. and Bilodeau, B. (2009). Management Tools and Trends 2009. Bain & Company Inc., http://www.bain.com/management_tools/home.asp (accessed 10 March 2010). 55 Davenport, T. H. and Prusak, L. with J. Wilson. (2003). What’s the Big Idea? Creating and Capitalizing on the Best Management Thinking (Boston, MA: Harvard Business School Press); T. Kinni. (March– April 2003). Have We Run out of Big Ideas? Across the Board, 16–21, Hamel. The Why, What, and How of Management Innovation; and J. Thompson Heames and M. Harvey. (2006). The Evolution of the

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Concept of the Executive from the 20th-Century Manager to the 21st-Century Global Leader. Journal of Leadership and Organizational Studies, 13:2, 29–41. 56 Hurst, D. (May–June 2012). The New Ecology of Leadership: Revisiting the Foundations of Management. Ivey Business Journal, 1–5; M. Murphy. (29 January 2010). The Race to Failure (a review of Crash Course by Paul Ingrassia, Random House 2010), The Wall Street Journal, A13. 57 Van Rossem, A. and Van Veen, K. (2011). Managers’ Awareness of Fashionable Management Concepts: An Empirical Study. European Management Journal, 29, 206–16. 58 Study reported in P. Dvorak. (26 June 2006). Why Management Trends Quickly Fade Away (Theory and Practice column). The Wall Street Journal. 59 Colvin, G. (6 March 2000). Managing in the Info Era. Fortune, F-5–F-9. 60 Drucker, P. (1993). Post-Capitalist Society (Oxford: Butterworth Heinemann), p. 5.

Cour seMate

61 Mayo, A. (22 January 1998). MemoryBankers. People Management, 34–8. Miller, W. (January 1999). Building the Ultimate Resource. Management Review, 42–5. Datz, T. (15 April 1999). How to Speak Geek. CIO Enterprise, 2, 46–52. 62 Wah, L. (April 1999). Behind the Buzz. Management Review, 17–26. 63 Rigby, D. and Bilodeau, B. (2005). The Bain 2005 Management Tool Survey. Strategy & Leadership, 33:4, 4–12. 64 Rigby and Bilodeau. Management Tools and Trends 2011. Bain and Company, Inc., http://www.bain.com/publications/articles/Managementtoolstrends-2011.aspx (accessed 22 June 2012). 65 (18 April 2012). Survey: 37% Use Social Media to Check Candidates. Workforce. http://www.workforce.com/article/20120418/ NEWS01/120419964 (accessed 22 June 2012). 66 Matson, E. (October–November 1997). You Can Teach This Old Company New Tricks. Fast Company, 44–6.

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ test your understanding of the evolution of management by taking the revision quiz ➜ use the interactive flashcards to revise relevant key terms and their definitions ➜ download the audio summary for an on-the-go review.

2: The evolution of management thinking

G e n e r a l M o t o r s Pa r t O n e : I n t r o d u c t i o n t o M a n a g e m e n t General Motors celebrates 100 years of change and innovation Of the many important dates in automotive history, 16 September 2008 marked both the end of an era and a bold new beginning. On that historic Tuesday, eager crowds packed the Renaissance Center in Detroit to celebrate a once-in-a-lifetime event: the 100-year anniversary of General Motors (GM). Following months of centennialthemed pageantry and parades, the American automaker’s towering headquarters had taken on a museum-like aura. On the ground floor sat immaculate showroom classics from the company’s fabled past: an orange 1963 Corvette Sting Ray; a shiny black 1955 Chevrolet Bel Air coupe; an apple-green 1973 Opel GT. Car enthusiasts, reporters and GM employees alike gazed nostalgically on the rows of vintage cars as the clock turned back to a glorious, bygone era in automotive history. In Australia, GM had similarly been celebrating its proud record of 50 years of locally manufacturing engines and vehicles; for much of this period, it had been the market leader. Yet just a few years later, in late 2013, GM was forced into massive restructuring processes, including the announcement of its complete withdrawal from manufacturing engines and cars in Australia, effective as of 2017. With Ford having made a similarly timed announcement of its withdrawal from producing cars in Australia, the car industry was in trouble ‘Down Under’. The forces of globalisation had caused GM to review all of its worldwide operations, and then rationalise them; the uncompetitive business units just had to go. Back in Detroit, despite the irresistible charm projected by the rows of solid-steel visitors from GM’s legendary past, it was a concept vehicle from the company’s future that had the crowd’s engines revving on the main floor. For years, management at GM had talked of introducing alternative-energy models that both excited consumers and protected the environment. Now, at this momentous celebration, the talk was over, and GM pulled back the curtain on what it said was the future of the auto industry: the Chevy Volt, to be branded in Australia as the Holden Volt. With its aerodynamic design and 70 kilometres of emissionfree driving on a single electric charge, GM’s first-ever plug-in electric vehicle was a far cry from the petrol-guzzling trucks, family cars and SUVs that had delivered the company’s greatest financial successes in recent decades. Indeed, the Volt represented a sea change for the world’s largest car manufacturer. Unlike hybrids that use electric power to improve the efficiency of their petrol engines, the Volt used a petrol generator to assist the range of its battery-powered electric drive unit. According to GM, driving the Volt would save owners $1500 annually in energy costs. It’s no wonder company officials cited the concept as proof of GM’s intention to lead the reinvention of the car. But the arrival of the Volt came at a pivotal moment in GM’s history. Ripple effects from the global financial crisis had triggered the industry’s worst sales slump since the one caused by 9/11. Soaring energy prices in the same period

Part 1

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Con tinuing had forced management to abandon the case Hummer and other super-sized models that once represented hope for a financial recovery. But the list went on. GM also faced slumping shares, stupefying quarterly losses, ballooning debt, steep competition from Toyota, precarious dealings with labour unions and almost insurmountable fuel-efficiency regulations from the US federal government. In Australia, things were little different from at its parent company in the US: the Australian arm of the company was under immense business pressure. Despite substantial government subsidies paid to car manufacturers, Holden’s 2017 plant closures are expected to put some 3000 workers out on the street, and to impact tens of thousands of others in the components supply chain. This announcement matched the recent announcement by Ford Motor Company to also cease its Australian production and become a pure importer of vehicles into Australia. It just costs too much to manufacture vehicles in Australia, according to GM’s local CEO Mike Devereux, and with Australia’s small market, and limited exports of GM vehicles from Australia, the decision was seen by many as ‘inevitable, just a matter of time’. While GM in America had rebounded from its provisional bankruptcy, it was rationalising its overseas operations and its brands. Manufacturing plants and businesses were being closed in Europe as well as Australia. Globally, it had been a business under a great deal of pressure from competitors, customers and regulators – a far cry from its glory days when, at its peak, GM was clearly the global industry leader and had a massive 52 per cent of market share in America. While the challenges were great, and newer companies such as Hyundai were taking market share fast, if history was any indication, GM would tackle these challenges head-on, displaying the same innovative spirit that had given the business its first 100 years of manufacturing excellence. Since its founding in 1908, the automaker has repeatedly demonstrated its strong capacity for innovation and change. From speedometers (1901 Oldsmobile) and electric headlights (1909 Cadillac) to automatic transmissions (1940 Oldsmobile) and mass-produced V8 engines (1914 Cadillac), GM teams have given the world hundreds of innovative firsts. Through big-idea concepts and smaller innovations to improve existing products, CEO Rick Wagoner and his management teams were developing strategies designed to guide the company successfully for the next 100 years. In his speech introducing the Volt’s historic unveiling, Wagoner underscored the remarkable times in which we live. ‘GM’s centennial comes at an incredible time in our industry. The entire world is watching, hoping for a breakthrough in personal transportation that will address the very real energy and environmental challenges facing the globe.’

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The stakes had never been higher. If GM was to avoid becoming a museum of America’s great car manufacturing past, management needed to deliver breakthrough ideas that would once again stoke consumers’ passions. With the Chevy Volt in production and a large cache of renowned brands, including Cadillac, Chevrolet, Pontiac and Saturn, there was every reason to believe GM would succeed. In December 2013, GM made another historic announcement: the appointment of its first female CEO, Mary Barra. Barra was a career GM executive, having risen through a number of manufacturing, engineering and executive roles over a 33-year period. She became the fifth CEO of GM in under five years, indicating just how much turbulence the company had endured. Appointing a new, and indeed a female, CEO was itself a signal of innovation and change within this old, traditional industrial company.

Questions 1 Which management functions and skills would enable GM’s leaders to create a bold vision for reinventing the car around green technology? 2 Identify the social, political and economic forces that you think would affect the auto industry and the practice of management at GM Holden in Australia. 3 Which historical management perspective fuelled GM’s transformation into a manufacturing powerhouse in the twentieth century? And can this trend continue this century? 4 Comment on the turbulence that GM experienced from 2008 to 2013, and its ability to develop the Volt in that period. 5 Once GM Holden ceases manufacturing in Australia in 2017, do you think its market share will be substantially reduced? Why or why not?

Sources: Robert Snell. (16 September 2008). GM Unveils Its Chevy Volt at Centennial Celebration. The Detroit News, http://www.detnews.com (accessed 8 October 2008); Anita Lienert. (16 September 2008). Aerodynamic Chevrolet Volt Electrifies GM’s 100th-Anniversary Celebration. Inside Line, http://www.edmunds.com/insideline (accessed 10 October 2008); David Phillips. (16 September 2008). Innovations Propel Success. The Detroit News, http://www.detnews.com (accessed 7 October 2008); (28 September 2008). GM Starts Its Next 100 Years with New Approach. The Bay City Times, http://blog.mlive.com/bcopinion/2008/09/gm_starts_its_next_100_years_w.html (accessed 11 October 2008); David Kiley. (8 October 2008). J.D. Power: Retail Sales To Be 2 Million Lower in 2008. BusinessWeek Online, http://www.businessweek .com/autos/autobeat/archives/2008/10/jd_power_retail.html (accessed 11 October 2008); Closure of GM Holden Australia on Cards for at Least Three Years, http://www.news.com.au/finance/business/closure-of-gm-holden-australia-on-cards-for-at-least-three-years/story-fnkgdhrc-1226782628206 (accessed 26 March 2014).

Chapter 3

The environment and corporate culture

Chapter 4 Managing in a global environment Chapter 5 Ethics, social responsibility and sustainable development Chapter 6

The environment of entrepreneurship and small-business management

Par t t Two the environment of Management

The environment surrounding a sporting contest

plays a significant part in determining the outcome. In Test cricket, the nature of the pitch determines whether spin bowlers or fast bowlers are favoured for selection; in most football codes, the direction and strength of the wind can make a difference, and this certainly is also the case in sailing. In Davis Cup tennis contests, the playing surface chosen by the home team and the partisan home crowd are important parts of the environment that affect the outcome. In golf, the weather conditions, speed of the greens, pin placement and other factors are the environment that must be accounted for by competitors. Similarly, in business and management, the environment affects the outcome. When organisations are considering starting a business in a new country, the prevailing work culture plays a significant part in determining the outcome. So do the state of the market, the intensity of competition in an industry and economic circumstances, such as interest rates and unemployment rates. Each has an impact on the

strategies and tactics managers must employ. What ethical standards are being applied in the industry and country of operation? What are the local idiosyncrasies in a foreign market, and how do customer preferences differ from those in the home market? These factors are dynamic, never static. In both sport and business, the environment in which we work and compete is forever changing. A change of wind can dramatically change a sailing competition or a football match, and these are difficult to predict in advance. In business, consider the 2008–10 global financial crisis (GFC): it was sudden and severe; impacting hard on most businesses in the world, and virtually no one was able to predict its onset, and which way it would go, even once it started. The recovery from the GFC has been slow, patchy and hard to predict. In Part 2, you will study the environment of management, including the trend towards globalisation, the importance of managerial ethics and social responsibility, and entrepreneurship and small-business management. 87

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Define an organisational ecosystem and how

4 Explain organisational symbols, stories, heroes,

2 Explain the strategies that managers use to help

5 Describe the four types of cultures and how

the general and task environments affect an organisation’s ability to thrive.

organisations adapt to an uncertain or turbulent environment.

3 Define corporate culture and give organisational examples.

slogans and ceremonies and their relationship to corporate culture. corporate culture relates to the environment.

6 Define a cultural leader and explain the tools that a cultural leader uses to create a high-performance culture.

Chapter 3

The environment and corporate culture

Chapter outline ➜ The external environment General environment Task environment

➜ The organisation-environment relationship Environmental uncertainty Adapting to the environment Influencing the environment

➜ The internal environment: corporate culture Symbols Stories Heroes Slogans Ceremonies

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➜ Types of culture

Adaptability culture Achievement culture Involvement culture Consistency culture

➜ Shaping corporate culture for innovative response Managing the high-performance culture Cultural leadership Changing and merging corporate cultures

➜ Sustainable development and the business environment

New Manager Self-test A r e y o u f i t f o r m a n a g e r i a l u n c e rta i n t y ? Do you approach uncertainty with an open mind? Think back to how you thought or behaved during a time of uncertainty when you were in a formal or informal leadership position. Please answer whether each of the following items was Mostly true or Mostly false in that circumstance. Mostly True

Mostly False

1 Enjoyed hearing about new ideas even when working towards a deadline. 2 Welcomed unusual viewpoints of others even if we were working under pressure. 3 Made it a point to attend industry trade shows and company events. 4 Specifically encouraged others to express opposing ideas and arguments. 5 Asked ‘dumb’ questions. 6 Always offered comments on the meaning of data or issues. 7 Expressed a controversial opinion to bosses and peers. 8 Suggested ways of improving my and others’ ways of doing things. Scoring and interpretation: Give yourself one point for each item you marked as Mostly true. If you scored less than 5 you might want to start your career as a manager in a stable environment rather than unstable environment. A score of 5 or above suggests a higher level of mindfulness and a better fit for a new manager in an organisation with an uncertain environment. In an organisation in a highly uncertain environment everything seems to be changing. In that case, an important quality for a new manager is ‘mindfulness’, which includes the qualities of being open-minded and an independent thinker. In a stable environment, a manager with a closed mind may perform okay because much work can be done in the same old way. In an uncertain environment, even a new manager needs to facilitate new thinking, new ideas and new ways of working. A high score on the preceding items suggests higher mindfulness and a better fit with an uncertain environment. Note: The self-test questions are based on ideas from R. L. Daft and R. M. Lengel, Fusion Leadership (San Francisco: Berrett Koehler, 2000): Chapter 4; B. Bass and B. Avolio, Multifactor Leadership Questionnaire, 2nd ed. (Menlo Park, CA: Mind Garden, Inc., 2004); and Karl E. Weick and Kathleen M. Sutcliffe, Managing the Unexpected: Assuring High Performance in an Age of Complexity (San Francisco: Jossey-Bass, 2001).

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Management Challenge

Many people think of Microsoft and software as being almost synonymous, the same way people once thought of Xerox and photocopying. But Xerox learned the hard way that a dominant position is not guaranteed. To avoid the same fate at Microsoft, managers warned the company’s founder and chairman Bill Gates that Microsoft’s PC software business was in danger of becoming ‘increasingly defunct’. For years, Microsoft exerted significant control over what appears on the PC desktop and which software programs the majority of customers use, but that control is changing. Most people, especially home users, set up a new PC by clicking through a series of introductory screens and selecting the software and services they want. Microsoft historically controlled this ‘first-boot’ sequence and the software that comes preinstalled on the computer. Now, though, PC makers are taking back control, selling desktop space to competing software and service providers and giving end users broader choices of software during setup. Google, for example, negotiated to have its software preinstalled on millions of Dell PCs. Hewlett-Packard gives users the option to sign up for a variety of programs and services from companies other than Microsoft. Because Microsoft has long garnered its

largest source of revenue and profit from PC software, it’s a shift that could spell big trouble. Google continues to move its Android software and operating systems into more prominent positions on devices ranging from mobile phones to tablets and other computers; Apple has also made significant headway, passing Microsoft in its market capitalisation value after being much the smaller company for the near 40 years that these companies have competed. As more telecommunications and computing moves onto mobile platforms, questions still hang over Microsoft, which was once industry-dominant under Bill Gates, but under Steve Ballmer, has not been as successful in the past decade. Sources: Guth, R. A. and Delaney, K. J. (7 February 2006). Default Lines; Pressuring Microsoft, PC Makers Team Up with Software Rivals. The Wall Street Journal, A1, A25.

Question If you were a manager at Microsoft, how might you have been more prepared for this shift in the way PC makers do business with software companies? What steps would you take to help Microsoft maintain its status in the software industry as it faces new threats from competitors in the environment?

In high-tech industries, environmental conditions are volatile. Telstra, Telecom NZ and Microsoft are currently in a situation similar to the one Xerox faced in the early 1990s. Xerox was dominant in its industry for many years, but managers missed cues from the environment and got blindsided by rivals Canon and Ricoh when they began selling comparable copy machines at lower prices. Moreover, Xerox failed to keep pace with changing methods of document management and had no new products to fill the gaps in the declining copy business. Consequently, the company struggled for more than a decade to find its footing in a vastly changed world. CEO Anne Mulcahy used her management skills to mastermind a hot turnaround at Xerox and get the company moving forward again.1 Similarly to Xerox, Microsoft has held a dominant position for nearly 40 years, but the environment is shifting dramatically and Microsoft will have to change significantly to remain competitive. The acquisition of Nokia’s phone division by Microsoft (who paid A$7.85 billion for the business in 2013) is an indication that Microsoft is aware of the need to adapt to changes in the business environment.2 In this instance Microsoft is looking to create a competitive response to Apple and Samsung’s smartphone dominance.3 The environment for Australia’s telecommunications company, Telstra, has changed dramatically since the mid-1990s because of increased competition, rapid advances in technology and growing demands from customers for enhanced networking services. Organisations around the world are waging war on a new level because of increased competition and advancing technology. In Thailand, Sony and Matsushita are battling for the consumer electronics market. As outlined above, Microsoft is facing challenges that may threaten the company’s pre-eminence in the software industry. Today, no company can rest on its laurels. The environment surprises many organisations. Mattel was shaken when it learned that a Chinese subcontractor used lead paint while manufacturing its toys. Because of the potential health

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hazard, Mattel recalled nearly 850 000 of its most popular toys – months before its holiday selling season. Not only did the recall frighten consumers, but it sparked a global debate about the safety of Chinesemade products. Mattel managers moved swiftly to reassure nervous parents of its high safety standards in its Chinese factories. In addition, then CEO Robert Eckert explained the recall to consumers on the company’s website and announced steps Mattel was taking to prevent further recalls being necessary.4 Mattel’s prompt response, teamed with its long-standing history of successful manufacturing in China, led many independent analysts and watchdog groups to say that it may be the best role model for how to operate prudently in China. ‘Mattel realised very early that they were always going to be in the crosshairs of sensitivities about child labour and product safety, and they knew they had to play it straight. Mattel was in China before China was cool, and they learned to do business there in a good way,’ says M. Eric Johnson, a Dartmouth management professor.5 Most managers don’t pop on a crash helmet and fire-resistant suit to guide an organisation through tumultuous change. But when Toyota Motor Corporation’s president, Akio Toyoda, faced a series of calamities during his first few years as president, he tapped into his skills as a certified test car driver – high endurance, precise steering and strong mental focus – to lead Toyota to a surprising rebound. In 2011, Toyota toppled from its number one position as the world’s largest automaker to third, behind General Motors and Volkswagen, after suffering the effects of a global recession, the recall of 8 million vehicles and a deadly tsunami in Japan. Within the organisation, storms were also brewing. Toyota’s tortuous bureaucracy slowed decision-making and response times. Plus, Toyota had lost touch with its customers. Toyota’s growth had been underpinned by ‘quality, dependability, and reliability’, but customers also wanted style and design, and they were flocking to Hyundai, which had seized design leadership.6 These environmental factors – both external and internal – served as wake-up calls for a company that had grown complacent. Akio Toyoda’s response was to upend the corporate culture and create a more responsive organisation – one that could navigate with ease through even subtle environmental shifts. Government actions, regulations and red tape can also affect an organisation’s environment and provoke a crisis. State and federal governments in Australia directly control the funding and rules of operation of major industries such as education and healthcare. With the privatisation of most utilities in Australia, some people question the effectiveness of regulations and regulators when water quality problems in Sydney and gas supply problems in Melbourne cause inconvenience and disruption. Although few organisations experience a crisis as serious as a gas leak causing a major explosion, unexpected events that can seriously harm performance occur in the environment of every organisation. During the massive global financial crisis (GFC) of 2008–10, companies such as ANZ, BHP Billiton and Westpac underwent major internal changes – restructuring, discarding product lines and trimming workforces. Without these major changes, the companies would no longer fit the reality of the changed external environment. General Motors, which for decades was dominant in American and indeed global automotive markets, fell from its pinnacle of having a massive 52 per cent market share at its peak to declaring provisional bankruptcy in 2009, and was bailed out by the US government. The environment surprises many managers and leaves them unable to adapt their companies to new competition, shifting consumer interests or new technologies. The study of management traditionally focused on factors within the organisation – a closed systems view – such as leading, motivating and controlling employees. The classical, behavioural and management science schools described in Chapter 2 looked at internal aspects of organisations over which managers have direct control. These views are accurate but incomplete. To be effective, managers must monitor and respond to the environment – in

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other words, they must adopt an open systems view. The events that have the greatest impact on an organisation typically originate in the external environment. In addition, globalisation and worldwide societal turbulence affect companies in new ways, making the international environment of growing concern to managers everywhere. This chapter explores in detail components of the external environment and the way they affect the organisation. We will also examine a major part of the organisation’s internal environment: corporate culture. Corporate culture is shaped by the external environment and is an important part of the context within which managers do their jobs.

The external environment

organisational environment All elements existing outside the organisation’s boundaries that have the potential to affect the organisation.

general environment The layer of the external environment that affects the organisation indirectly. task environment The layer of the external environment that directly influences the organisation’s operations and performance. organisational ecosystem Includes organisations in all the sectors of the task and general environments that provide the resource and information transactions, flows and linkages necessary for an organisation to thrive.

internal environment Includes elements within the organisation’s boundaries, such as employees, management and corporate culture.

The external environment The world is undergoing tremendous and far-reaching change. The environmental changes that shook Toyota’s leadership position in the auto industry – a global recession, natural disasters and changing customer needs – were part of its external organisational environment. The external organisational environment includes all elements existing outside the boundary of the organisation that have the potential to affect the organisation.7 The environment includes competitors, resources, technology and economic conditions that influence the organisation. It does not include events so far removed from the organisation that their impact is not perceived. The organisation’s external environment can be conceptualised further as having two components: general and task environments, as illustrated in Exhibit 3.1.8 The general environment affects organisations indirectly. It includes social, economic, legalpolitical, international, natural and technological factors that influence all organisations about equally. Changes in federal regulations or an economic recession are part of the organisation’s general environment. These events do not directly change day-to-day operations, but they do affect all organisations eventually. The task environment is closer to the organisation and includes the sectors that conduct day-to-day transactions with the organisation and directly influence its basic operations and performance. It is generally considered to include competitors, suppliers, customers and the labour market. A new view of the environment argues that organisations are now evolving into business ecosystems. An organisational ecosystem is a system formed by the interaction among a community of organisations in the environment. An ecosystem includes organisations in all the sectors of the task and general environments that provide the resource and information transactions, flows and linkages necessary for an organisation to thrive.9 For example, Apple’s ecosystem includes hundreds of suppliers and millions of customers for the products that it produces across several industries, including consumer electronics, Internet services, mobile phones, personal computers and entertainment.10 The organisation also has an internal environment, which includes the elements within the organisation’s boundaries. The internal environment is composed of current employees, management and especially corporate culture, which defines employee behaviour in the internal environment and how well the organisation will adapt to the external environment.

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General environment Technological

Task environment

Competitors

Suppliers

Exhibit 3.1 Dimensions of the organisation’s general, task and international environments

Natural

Customers

Internal environment Employees Culture Management

Labour market

Sociocultural

Economic

Legal/political

International

Exhibit 3.1 illustrates the relationship among the general, task and internal environments. As an open system, the organisation draws resources from the external environment and releases goods and services back to it. We will now discuss the two components of the external environment in more detail. Then we will discuss corporate culture, the key element in the internal environment. Other aspects of the internal environment, such as structure and technology, will be covered in later chapters of this book.

Gen er al envi ro n m ent The general environment is the outer layer of the environment: the dimensions that influence the organisation over time, but often are not involved in day-to-day transactions with it. The dimensions of the general environment include international, technological, sociocultural, economic, legal–political and natural.

In te rnati onal In his book The World Is Flat, Thomas Friedman challenges managers to view global markets as a level playing field where geographical divisions are irrelevant.11 A flat world, Friedman argues, creates opportunities for companies to expand into global markets and build a global supply chain. As managers plan for expansion into global markets, they have to consider the international dimension of the external environment, which includes events originating in foreign countries, as well as new opportunities for domestic companies in other countries. The international environment provides new competitors, customers, and suppliers and shapes social, technological and economic trends as well. Consider the mixed results Starbucks experienced as it expanded from its US base into Australian and European markets. Starbucks fans packed stores in Germany and the United Kingdom, for example, but sales and profits in the company’s Australian and French stores were disappointing. In fact, after eight years operating 63 stores, Starbucks never turned a profit in France. What international factors could be hindering the company’s success in France? First, a sluggish economy and Europe’s debt crisis hurt sales. Second, Starbucks faced high rent and labour costs in France, which eroded profits. The company was also slow to tailor the Starbucks experience to the well-established French café culture. Similarly in Australia, Starbucks closed 61 of its 84 stores because of flagging sales. Starbucks innovatively introduced the coffee culture into the USA, but Australia and France already had that culture in place! Whereas a New Yorker might grab a paper cup of coffee to go, the French and Australians prefer to linger over a

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international dimension The portion of the external environment that represents events originating in foreign countries, as well as opportunities for local organisations in other countries.

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large, ceramic mug of coffee with friends in a café-style environment. To respond to these challenges, Starbucks launched a multimillion-dollar campaign in France that includes an upscale makeover of stores, with more seating and customised beverages and blends that appeal to local tastes.12 As geographic boundaries dissolve and opportunities in developing economies like China increase, more companies are finding advantages in the global marketplace. For example, Coca-Cola’s CEO Muhtar Kent predicts that the China division will double its sales of Coke products, helping meet Kent’s goal of doubling Coke’s overall business by 2020. ‘China will be Coke’s largest market,’ Kent promises. ‘I can’t give you a time, but it will happen.’13 With more companies establishing a competitive presence in China, managers working in that country recognise that their competitive success begins with their ability to build personal relationships and emotional bonds with their Chinese contacts. This chapter’s Management in Practice offers tips for creating successful business relationships in China. Indeed, in many industries, companies will have to compete on a global basis or disappear. Highquality, low-priced cars from Japan and Korea, for instance, have permanently changed the Australian car industry. Many companies have parts supplied from countries such as Malaysia and China because of low-priced labour. A drop in the Australian dollar’s foreign exchange rate lowers the price of Australian products overseas, increasing export competitiveness, but also makes imported products and components more expensive. When the Australian dollar got up to US$1.10 in May 2011, the opposite happened, making Australian goods and services expensive in global terms. Industries from automotive to tourism and education were challenged by the high currency. Today, every organisation must think internationally. Managers who are used to thinking only about the domestic environment must learn new rules to cope with goods, services and ideas circulating around the globe. A better machine built in Adelaide, Perth or Brisbane will find buyers from Europe, the US and Asia. Moreover, competitors in a global village can come from anywhere. A company that does not export will still run into international competitors in its own marketplace, including some from developing nations. The world is also a source of supply as well as a market. For example, new products such as the latest mobile phones are made from materials and ideas from around the world. Companies find it more difficult to raise prices now than at virtually any time since the Second World War. Many companies have had to cut prices to remain competitive in the new global economy. Economic problems in other parts of the world now have a tremendous impact on local companies. The most dramatic change in the international environment in recent years is the shift of economic power to China and India. Together, these countries have the population, brainpower, and dynamism to transform the twenty-first-century global economy. If things continue on the current track, analysts predict that India will overtake Germany as the world’s third-largest economy within three decades, and that China would overtake the US as number one by mid-century. In China, per capita income has tripled in a generation, and leaders are building the infrastructure for decades of expansion, as reflected in the country’s hunger for raw materials. In 2010, China represented roughly 53 per cent of global cement consumption, 47 per cent of coal and 45 per cent of crude steel.14 No one can predict the future, but it is clear that however things in India and China shake out, Australian, New Zealand and other Western firms have no choice but to pay attention. Chapter 4 describes the way today’s businesses are operating in an increasingly borderless world and examines in detail how managing in a global environment differs from the management of domestic

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operations. Perhaps the hardest lesson for managers to learn is that they do not know best. Australian decision makers often know little about issues and competition in foreign countries. Arrogance is a short cut to failure. To counter this, many organisations increasingly employ people from a variety of national backgrounds, and send managers overseas to gather current information on markets and issues. Even small companies, such as bed linen manufacturer Dryen Australia, must use significant resources to send staff to trade shows in Europe, material suppliers in China and to look at recent product development trends in the US. Large organisations such as Amcor, Google, Rio Tinto and PwC have a constant stream of people travelling between Australia and their overseas operations.

Creating guanxi in China With its low labour costs and huge potential market, China is luring thousands of US companies in search of growth opportunities. Yet the University of New Haven’s Usha C. V. Haley recently found that only one-third of multinationals doing business in China have actually turned a profit. One reason many Western businesses fall short of expectations, experts agree, is that they fail to grasp the centuries-old concept of guanxi that lies at the heart of Chinese culture. At its simplest level, guanxi is a supportive, mutually beneficial connection between two people. Eventually, those personal relationships are linked together into a network, and it is through networks like this that business gets done. Anyone considering doing business in China should keep in mind the following basic rules:

➜➜ Business is always personal. It is impossible to translate ‘Don’t take it so personally – it’s only business’ into Chinese. Western managers tend to believe that if they conclude a successful transaction, a good business relationship will follow. The development of a personal relationship is an added bonus, but it is not really necessary when it comes to getting things done. In the Chinese business world, however, a personal relationship must be in place before managers even consider entering a business transaction. Western managers doing business in China should cultivate personal relationships – both during and outside business hours. Accept any and all social invitations – for drinks, a meal, or even a potentially embarrassing visit to a karaoke bar, which some Chinese businessmen consider an important part of solidifying good business relationships.

management in pr actice ➜➜ Don’t skip the small talk. Getting right down to business and bypassing the small talk during a meeting might feel like an efficient use of time to an American manager. To the Chinese, however, this approach neglects the all-important work of forging an emotional bond. Be aware that the real purpose of your initial meetings with potential business partners is to begin building a relationship, so keep your patience if the deal that you are planning to discuss never even comes up – there’s always tomorrow.

➜➜ Remember that relationships are not short-term. The work of establishing and nurturing guanxi relationships in China is never done. Western managers must put aside their usual focus on short-term results and recognise that it takes a long time for foreigners to be accepted into a guanxi network. Often, foreign companies must prove their trustworthiness and reliability over time. For example, firms that weathered the political instability that culminated in the 1989 student protests in Tiananmen Square found it much easier to do business afterward.

➜➜ Make contact frequently. Some experts recommend hiring ethnic Chinese staff members and then letting them do the heavy lifting of relationship building. Others emphasise that Westerners themselves should put plenty of time and energy into forging links with Chinese contacts; those efforts will pay off because the contacts can smooth the way by tapping into their own guanxi networks. Whatever the strategy, contact should be frequent and personal. In addition, be sure to keep careful track of the contacts that you make. In China, any and all relationships are bound to be important at some point in time.

Sources: Michelle Dammon Loyalka. (4 January 2006). Before You Set Up Shop in China. Part of the ‘Doing Business in China’ special report, BusinessWeek Online, http://www. businessweek.com/smallbiz/content/jan2006/sb20060104_466114.htm (accessed 6 January 2006); Los Angeles Chinese Learning Center. Chinese Business Culture. http:// chinese-school.netfirms.com/guanxi.html; Beijing British Embassy. Golden Hints for Doing Business in China. http://chinese-school.netfirms.com/goldenhints.html; and Emily Flitter. (9 June 2008). Faux Pas: With Karaoke, a Deal in China for a Song. The Wall Street Journal Online, http://online.wsj.com/article/SB121268021240548769.html (accessed 24 September 2012).

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T echnologi cal technological dimension The dimension of the general environment that includes scientific and technological advancements in the industry and society at large.

The technological dimension includes scientific and technological advancements in a specific industry as well as in society at large. Amazing breakthroughs are occurring in fields such as Internet technologies and biotechnology, coming together into ‘telemedicine’, with applications accelerating the progress of medical treatments, preventions and cures. Whole diseases are being wiped out. Automation of tasks in all sorts of businesses continues to accelerate. We are not too far away from having selfdriving cars. By mapping individuals’ human genomes, medicinal treatments can now be customised to each human’s specific needs. Genetic engineering is allowing for drought-and disease-resistant crops to be developed. Stem cell technologies advance medical treatments for diseases that were previously not treatable. Telecommunications technologies are bringing benefits to consumers as never before. Twenty years ago, many organisations didn’t even use desktop computers. Today, computer networks, Internet access, handheld devices, videoconferencing capabilities, cell phones and laptops are the minimum tools for doing business. A new generation of handhelds allows users to check their corporate email, daily calendars, business contacts and even customer orders from any location with a wireless network. Mobile phones can now switch seamlessly between mobile networks and corporate wi-fi connections. Some companies hand out wireless key fobs with continually updated security codes that enable employees to log onto their corporate networks and securely view data or write emails from any PC with a broadband connection.15 Many industries have been transformed by the Internet. Many people now choose and purchase hotel accommodation and many other goods and services over the Internet. Price competition has hurt the hotels’ profitability, and websites such as wotif.com.au, hotels.com, zuji.com and lastminute.com. au offer to find great deals for consumers on plane tickets, hotels, rental cars etc., essentially acting as travel agents that are available ‘24/7’ from our own homes. Consider too the recent fate of Australian bookstore chain Angus and Robertson: the liquidators were called in on 17 February 2011. The main reason was that massive changes in the business environment, namely a huge consumer shift to reading and purchasing books online, has left this traditional way of doing businesses behind, meaning that it is uncompetitive and unprofitable. This company, founded in the 1880s by entrepreneurs David Angus and George Robertson, lasted some 125 years, but came to a halt in 2011 because of a massive shift in its business environment. It also included Whitcoulls (newsagencies) in New Zealand, and some local Borders operations. This occurred just a day after the massive US company Borders filed for bankruptcy, for similar reasons. Other technological advances will also affect organisations and managers. The decoding of the human genome could lead to revolutionary medical advances. Cloning technology and stem cell research are raising both scientific and ethical concerns. Nanotechnology, which refers to manipulating matter at its tiniest scale, is moving from the research lab to the marketplace. General Electric is researching how nanoceramics can make turbines more efficient. Medical researchers are looking at the potential for portable labs that offer instant analysis for everything from diabetes to HIV. Nanoparticles could some day give us golf balls designed to fly straight, army fatigues that resist chemical weapons, dent-resistant cars and super-charged fuel cells that could replace fossil-fuel engines. Some 1200 nanotechnology start-ups have emerged around the world, and smart managers at established organisations such as 3M, Dow Chemical, Samsung, NASA, Intel, Johnson & Johnson and IBM are investing research dollars in this technological breakthrough.16

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Socioc ultur al The sociocultural dimension of the general environment represents the demographic characteristics as well as the norms, customs and values of the general population. Important sociocultural characteristics are geographical distribution and population density, age and education levels. Today’s demographic profiles are the foundation of tomorrow’s workforce and consumers. Forecasters see increased globalisation of consumer markets and the labour supply, with increasing diversity within organisations and consumer market.17 Consider the following key demographic trends: ●● Multiculturalism is increasingly important in the Australian and New Zealand populations and workforces.

sociocultural dimension The dimension of the general environment representing the demographic characteristics, norms, customs and values of the population within which the organisation operates.

●● The population and the workforce continue to age with the baby boomers, and there is a shortage of skilled workers, such as engineers. ●● Australia will continue to receive high numbers of immigrants, largely from Asia. ●● Low-carbohydrate diets have changed food consumption patterns. ●● New religious groups with particular behavioural norms attract significant masses of people. ●● Married couple households have halved as a proportion of the total in the past decade, with the increase being mostly single fathers and single mothers with children. ●● Couples with children total just 20 per cent, with the number projected to drop further. Some 30 per cent of homes are inhabited by someone who lives alone. ●● New generations of Gen Y and Gen Z employees want different things in their employment relationships from the retiring baby boomers, meaning that organisations are changing their cultures and ways of working to suit. How people want to consume has also changed, and will continue to change. A new generation of technologically savvy consumers, often called the Connected Generation or Generation C, has intimately woven technology into every aspect of their lives. Their primary digital devices (PDDs) shape the way they communicate, shop, travel and study. Generation C (typically defined as people born after 1990) will make up 40 per cent of the population by 2020 and will constitute the largest cohort of consumers worldwide.18 Additionally, as the population continues to age, organisations are rushing to create seniorfriendly products and services. Organisations realise that it makes good business sense to create products and services for this ageing population; in 2011, Australians aged 65 years and over accounted for 14 per cent of the population.19 The situation is similar in many parts of the globe: it is estimated that by 2050, more than 30 per cent of the population will be aged 65 and over in South Korea, Italy, Japan, Greece and Singapore. Australia, France and the UK will all be faced with 25 per cent of their population being over 65 and the US will have 20 per cent. Issues regarding how to satisfy the increasing medical needs of these ageing populations and who will pay for these needs are questions that both government and business are starting to grapple with.20

Econ o mi c The economic dimension represents the general economic health of the country or region in which the organisation operates. Consumer purchasing power, the unemployment rate and interest rates are part of an organisation’s economic environment. Because organisations today are operating in a global environment, the economic dimension has become exceedingly complex and creates even more uncertainty for managers. The economies of countries are more closely tied together than ever before.

economic dimension The dimension of the general environment representing the overall economic health of the country or region in which the organisation functions.

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In the last decade children have had greater purchasing power than at any time in the past, and this trend is expected to continue, with children becoming important market segments and consumers of mobile phone services and fast foods.

US  economic problems of recent years, for example, have had a significant impact on both local companies as well as the share market in virtually every country. One significant trend in the economic environment is the frequency of mergers and acquisitions. Industries of all types are consolidating and rationalising ownership and control. For example, during the past decade publishing companies have been buying each other out at an amazing rate, along with the 2013 merger of Penguin and Random House. Two gigantic insurance companies in Australia, National Mutual and AMP, demutualised; rather than remaining as mutual societies, owned by their policyholders, they transformed themselves and became publicly listed and traded companies owned by shareholders. National Mutual was immediately acquired by a multinational company, AXA, and AMP launched a banking operation and acquired another major insurance company, GIO, which itself had previously been converted from government ownership to the private sector. AMP then discovered that GIO brought with it huge losses on its books, due to catastrophes that it had insured or reinsured around the world. Procter & Gamble and Gillette became one giant company in a merger that began in 2005 and took some years to fully bed down. During the 2008–10 GFC, many financial industry companies merged, restructured or just disappeared through bankruptcy.

Innovative Way

Source: iStockPhoto.com/lika-Erika-Szasz-Fabian

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Shopping online, even cars

Anyone who has ever bought a new car remembers what an ordeal it can be fending off overly aggressive salespeople, haggling over price and sometimes driving away with the uncomfortable feeling that you have been had. The strain of car shopping, combined with a decrease in leisure time and a demand for convenience, have more and more people turning to the Internet to shop for their dream car. Market researcher J. D. Power & Associates indicated that a modest 16 per cent of new-car buyers used the Web for shopping in 1997. In Australia today, carsales.com has become a highly prominent search and sales channel for consumers in both new and used car markets. A 2012 analysis by PwC into Australian and New Zealand online shopping habits found some dramatic and interesting changes in consumer shopping trends during the past

15 years. Customers now research and compare prices for items and check reviewer feedback online before making purchases. The PwC study found that 94 per cent of Australian online shoppers will conduct some form of research before they purchase, indicating that online research behaviour has become a well-entrenched aspect of the shopping experience. Products like electrical goods, clothing, books and magazines are now commonly purchased via the Internet and almost 49 per cent of Australians who use the Internet made an online booking (most often for travel and accommodation), downloaded a song (34 per cent) or booked tickets to an event (29 per cent) in 2012. The study estimates that Australian online expenditure will increase from $16 billion in 2012 to $26.9 billion by 2016.

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Australian vehicle customers can compare prices, check the value of their trade-in and ask for bids from online car-buying services such as http://www.carpoint.com.au, http://www. carsales.com.au and http://www.redbook.com.au. Ford, Toyota, Mitsubishi, Honda and GMH also are running websites to link

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online shoppers with dealers. See http://www.ford.com.au, http://www.holden.com.au, http://www.toyota.com.au and http://www.honda.com.au. Consumers can now choose their optional colours and features online, seeing full specifications, reviews and then shop very efficiently for the best price.

Sources: Price Waterhouse Coopers PwC. Australian and New Zealand Online Shopping Market and Digital Insights July 2012. http://pwc.com.au/industry/retail-consumer/ assets/Digital-Media-Online-Shopping-Jul12.pdf (accessed 3 November 2013).

Le g al–p oli ti cal The legal–political dimension includes government regulations at the local, state and federal levels, as well as political activities designed to influence organisation behaviour. The Australian political system encourages capitalism, and the government tries not to over-regulate business. However, government laws do specify some rules of the game. Federal and state governments affect organisations with a vast range of legislation and regulation, including occupational health and safety, environmental protection, fair trade and competition practices, consumer protection legislation, product safety requirements, import and export restrictions, labour laws, and information and labelling requirements. Although regulation is designed to solve problems, complying with it often creates problems for organisations. For example, Australian unfair dismissal laws aimed at protecting the rights of employees against unscrupulous employers have been criticised as being ‘anti-business’ because they restrict the ability of employers to fire poor performers. The Australian government has also been criticised for its slowness in testing and approving new pharmaceuticals and for insisting on conducting its own trials rather than accepting selected foreign results, which means that some medicinal treatments are not available to Australian consumers as quickly as they could be.21 Managers must recognise a variety of pressure groups that work within the legal–political framework to influence organisations to behave in socially responsible ways. Car manufacturers, toy makers and airlines have been targeted by influential consumer advocacy groups. Tobacco companies today are certainly feeling the far-reaching power of anti-smoking groups. Local community groups in New Zealand and Australian suburbia and country towns have lobbied against bank branch closures and McDonald’s openings. Greenpeace has managed to force significant changes in the whaling, tuna fishing and seal fur industries.22

legal−political dimension The dimension of the general environment that includes federal, state and local government regulations, and political activities designed to control organisation behaviour.

pressure group An interest group that works within the legal– political framework to influence organisations to behave in certain ways.

Natu ral envi r onment In response to pressure from environmental advocates, organisations have become increasingly sensitive to the earth’s diminishing natural resources and the environmental impact of their products. As a result, the natural dimension of the external environment is growing in importance. The natural dimension includes all elements that occur naturally on earth, including plants, animals, rocks and natural resources such as air, water and climate. The natural dimension is different from other sectors of the general environment because it has no voice of its own. Influence on managers to meet needs in the natural environment may come from other sectors, such as government regulation, consumer concerns, pressure from the media, competitors’ actions or even employees. For example, environmental groups advocate various action and policy goals that include reduction and clean up of man-made pollution, development of renewable energy resources and sustainable use of scarce resources such as water, land and air. More recently, there has

natural dimension Dimension of the general environment that includes all elements that occur naturally on earth, including plants, animals, rocks and natural resources such as air, water and climate.

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been a strong concern about climate change such as global warming caused by greenhouse gases, most notably carbon dioxide. Concern about the environment has prompted companies to take these actions: ●● Eliminating non-biodegradable plastic bags from the environment. Australia’s Target stores banned plastic bags in June 2009. Target customers not bringing their own bags can purchase compostable bags from 10c each, or reusable bags starting from $1. This change means a saving of roughly 100 million plastic bags per year.23 ●● Improving efficiency of plants and factories. Nissan’s Sunderland (UK) factory will use eight wind turbines to generate 6 per cent of the plant’s energy requirement, cutting carbon dioxide emissions by 4000 tonnes per year. Toyota recycles 100 000 tonnes of wastewater a year in its reverse osmosis facility in its Burnaston (UK) plant.24 Environmental groups advocate various action and policy goals that include reduction and cleanup of pollution, development of renewable energy resources, reduction of greenhouse gases such as carbon dioxide, and sustainable use of scarce resources such as water, land, and air. The oil spill in the Gulf of Mexico in 2010 brought environmental issues to the forefront. Months after a BP-Transocean rig at the Deepwater Horizon oil well exploded, hundreds of thousands of gallons of oil were still flowing into open water each day, adding to the millions of gallons already contaminating the water and beaches along the coast in Louisiana, Mississippi, Alabama and Florida, and threatening the region’s fish, birds, turtles and vegetation. ‘One of the last pristine, most biologically diverse coastal habitats in the country is about to get wiped out,’ said Felicia Coleman, who directs the Florida State University Coastal and Marine Laboratory. ‘And there’s not much we can do about it.’ The effects of the devastating spill are likely to continue for many years.25

➜➜ The organisational environment, consisting of both general and task environments, includes all elements existing outside the boundary of the organisation that have the potential to affect the organisation. ➜➜ An organisational ecosystem includes organisations in all the sectors of the task and general environments that provide the resource and information transactions, flows and linkages necessary for an organisation to thrive. ➜➜ The general environment indirectly influences all organisations within an industry and includes five dimensions. ➜➜ The task environment includes the sectors that conduct day-to-day

transactions with the organisation and directly influence its basic operations and performance. ➜➜ The international dimension of the external environment represents events originating in foreign countries, as well as opportunities for Australian companies in other countries.

➜➜ The economic dimension represents the general economic health of the country or region in which the organisation operates.

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➜➜ The legal–political dimension includes government regulations at the local, state and federal levels, as well as political activities designed to influence company behaviour.

➜➜ The technological dimension of the general environment includes scientific and technological advances in society.

➜➜ The internal environment includes elements within the organisation’s boundaries, such as employees, management and corporate culture.

➜➜ The sociocultural dimension includes demographic characteristics, norms, customs and values of a population within which the organisation operates.

➜➜ The natural dimension includes all elements that occur naturally on Earth, including plants, animals, rocks and natural resources such as air, water and climate.

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Task envi ro n m ent As described earlier, the task environment includes those sectors that have a direct working relationship with the organisation, among them customers, competitors, suppliers and the labour market.

Cu stomer s Those people and organisations in the environment who acquire goods or services from the organisation are customers. As recipients of the organisation’s output, customers are important because they determine the organisation’s success. Patients are the customers of hospitals, students the customers of schools and travellers the customers of airlines. Many companies have designed special programs and advertising campaigns to court their older customers, who are, with the ageing of the baby boomers, becoming a larger percentage of their market. To survive in competition with mass merchandisers such as Target and Kmart, small retailers have been forced to come up with new ways to win and keep customers. Some small grocery and convenience stores have moved to seven-day, 24-hour operations to stay competitive with the bigger companies that have advantages of scale. Many companies are searching for ways to reach the coveted teen and youth market by tying marketing messages into online social networks such as Facebook and Instagram. With high school and university students representing a large spending market, it’s serious business for managers at companies such as Apple, Coca-Cola and Walt Disney. Apple sponsors an Apple-lovers group on Facebook.com, giving away iPod Shuffles in weekly contests. Customers today have greater power because of the Internet, which presents threats as well as opportunities for managers. Today’s customers can directly affect the organisation’s reputation and sales, for example, through gripe sites such as http://untied.com, where United Airlines employees and disgruntled fliers rail against the air carrier. ‘In this new information environment,’ says Kyle Shannon, former CEO of e-commerce consultancy Agency.com, ‘you’ve got to assume everyone knows everything’.26

customers People and organisations in the environment who acquire goods or services from the organisation.

Com peti tor s Specific competitive issues characterise each industry. Other organisations in the same industry or type of business that provide goods or services to the same set of customers are referred to as competitors. Each industry is characterised by specific competitive issues. The recording industry differs from the steel industry and the pharmaceutical industry. Competition in the steel industry, especially from international producers, has caused some companies to go bankrupt. Companies in the pharmaceutical industry are highly profitable because it is difficult for new firms to enter it. The two major supermarket chains in Australia, Coles and Woolworths, have both significantly expanded their home branded product ranges as a new way of trying to achieve competitive advantage. This chapter’s Management in Practice box reveals the extent to which some of today’s most competitive companies are cooperating to achieve common goals.

competitors Other organisations in the same industry or type of business that provide goods or services to the same set of customers.

Su pplier s Suppliers provide the raw materials that the organisation uses to produce its output. A chocolate manufacturer, for example, may use suppliers from around the globe for ingredients such as cocoa beans, sugar and cream. A supply chain is a network of multiple businesses and individuals that are connected through the flow of products or services. Every organisation survives and prospers, or otherwise, depending on the competitiveness and effectiveness of its supply chain partners. It is not unusual for manufacturing companies to pass on as much as 60 per cent of their revenue to their suppliers who provide the vital

suppliers Suppliers are individuals or organisations who provide goods or services to the buying entity.

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Source: Fairfax Syndication/Sandy Scheltema

Case study

inputs and ingredients within their products. For Toyota, the supply chain includes over 500 global parts suppliers organised by a production strategy called just-in-time (JIT).27 JIT improves an organisation’s return on investment, quality and efficiency because much less money is invested in idle inventory. ‘Instead of months’ worth of inventory, there are now days and even hours of inventory,’ says Jim Lawton, head of supply management solutions at consultant Dun & Bradstreet. Lawton points out that there is a downside, however – one that became dramatically clear after a March 2011 earthquake in Japan: ‘If supply is disrupted, as in this situation, there’s nowhere to get product.’28 The crisis in Japan revealed the fragility of today’s JIT supply chains. A powerful earthquake triggered a massive tsunami and caused the second-worst nuclear disaster in history, at the Fukushima power plant along the Pacific coastline. Japanese parts suppliers for the global auto industry were shut down, disrupting production at auto factories around the world. ‘Even a missing $5 part can stop an assembly line,’ said a Morgan Stanley representative.29 Because of this natural disaster, Toyota’s production was down 800 000 vehicles – 10 per cent of its annual output. Most organisations aren’t willing to boost inventory to minimise the risk of supply-chain disruptions. Boosting inventory even slightly to provide a cushion against disruptions can cost big companies millions of dollars. ‘I don’t see any of us moving away from a very disciplined supply chain management,’ says Ford Motor Co. finance chief Lewis Booth.30 Just-in-time is discussed in more detail in Chapter 20.

Growing a business from scratch: lavender! Carol White was not a businesswoman in any sense of the word. She was a nurse and mother who had gone through a marriage breakdown, when she fell in love with a property in rural Victoria, and bought it. Since then, she has developed the property into a thriving business offering products and services such as weddings venue

services, a cafe, accommodation and many others to the public. With an attractive website, http://www.lavandula.com.au, this business has grown to employ 14 local people from the Daylesford area, and attract many customers through the year, annually selling, for example, some 40 000 bunches of locally grown herbs, amongst its large range of services and products. So how did Carol acquire the skills and capabilities to grow and run a substantial business? She attests to her general organisational skills in running a household and being a nurse as providing a good basis for it, supplemented with a variety of small business courses that she undertook and a lot of learning from networking with other local businesspeople. Ms White has bought other properties nearby for wedding guests to use as accommodation, and recently has appointed managers to supervise her

Carol White and Lavendula Farm

operations so that she can be less hands-on in the business. Carol has built a vision based on knowing that women in particular like lavenderbased services and property. She started with some lavender seeds and an attractive property, and has acquired the business and management skills needed, along the way. Her support from other local businesses has been of great help; however, her challenge has been to find the right staff to buy into the vision and operate the business without her constant hands-on supervision. This business, and this entrepreneurial businesswoman, show that even without a long and strong corporate experience base, a niche operation can be incrementally built based on an attractive proposition to a focused market, and a lot of hard work. Source: Lindhe, J. (4–10 November 2010). Lavender Lessons. BRW, 42.

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Innovative Way

Costco’s winning formula Costco Wholesale Corporation, a no-frills, self-service warehouse club, operates an international chain of membership warehouses offering a limited selection of products at reduced prices. Costco’s business model focuses on maintaining its image as a pricing authority, consistently providing the most competitive prices. ‘Everything we do is to provide goods and services to the customer at a lower price,’ said Jim Sinegal, CEO and founder. Costco warehouses are designed to operate efficiently and to communicate value to members. The warehouse decor – high ceilings, metal roofs, exposed trusses – keeps costs low and contributes to the perception that Costco is for serious shoppers seeking serious bargains. Other strategies for keeping prices low include offering only 3600 unique products at a time and negotiating low prices with suppliers. Only about a quarter of sales come from outside the United States, but store sales in overseas markets – including Australia – have been growing about four times faster than those in the United States. Costco

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plans to expand its customer base by delving further into the Asian markets, where consumer spending and growth is higher than mature US and European markets. Costco’s complex environment is illustrated in Exhibit 3.2. Costco’s biggest competitive advantage is its workforce. ‘Costco compensates employees very well, well above the industry in terms of wages and benefits,’ says R. J. Hottovey, a retail analyst at Morningstar. ‘When retailers are cutting health benefits, Costco employees don’t have to worry about that,’ he says. The happiness and morale of employees is often overlooked in the retail industry, but not at Costco. Thanks to its good treatment of workers, Costco has one of the lowest turnovers in the retail industry (only 6 per cent), and it earns $530 000 of revenue per employee. Costco has successfully opened stores in Australia and is planning more, due to the great success it has achieved in Melbourne and Sydney. In 2014 and beyond, Costco plans to enter the petrol retailing market in Australia.

Sources: Sharon Edelson. (30 January 2012). Costco Keeps Formula as It Expands. Women’s Wear Daily, 19, 1; Andria Cheng. (2 April 2010). Costco Cracks Taiwan Market. The Wall Street Journal, B5; and Form 10-K for Costco Wholesale Corporation. Item 7 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations, Costco Annual Report, http://www.sec.gov/Archives/edgar/data/909832/000119312511271844/d203874d10k.htm#toc203874_9 (accessed 10 July 2012).

La bou r mar ket The labour market represents people in the environment who can be hired to work for the organisation. Every organisation needs a supply of trained, qualified personnel. Unions, employee associations and the availability of certain classes of employees can influence the organisation’s labour market. Labour market forces affecting organisations right now include (1) the growing need for computer-literate knowledge workers; (2) the necessity for continuous investment in human resources through recruitment, education and training to meet the competitive demands of the borderless world; and (3) the effects of international trading blocs, automation, outsourcing and shifting facility locations upon labour dislocations, creating unused labour pools in some areas and labour shortages in others.31 Argyle Diamonds in Western Australia is a company with substantial management challenges – in particular, the need to manage a large workforce at a very remote location. This is a typical challenge faced by mining and oil companies. Changes in these various sectors of the general and task environments can create tremendous challenges, especially for organisations operating in complex, rapidly changing industries.

labour market labour market The people available for hire by the organisation.

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General environment Exhibit 3.2 The external environment of Costco Wholesale Corporation Sources: Costco Wholesale Corporation website, http://www.costco.com (accessed 10 July 2012); (30 April 2012). Costco Wholesale Corporation. Marketline, 3–9; Alaric DeArment. (12 December 2011). Costco’s Lobbying Changes Washington State’s Liquor Laws: Who Is Next? DrugstoreNews.com, 12, http:// www.drugstorenews.com/ article/costco%E2%80%99slobbying-changes-%E2%80% A9wa%E2%80%99s-liquorlaws-who-next; and Sharon Edelson. (30 January 2012). Costco Keeps Formula As It Expands. Women’s Wear Daily, 1.

Technological Costco.com offers opportunities to reach a wider audience Applies technology to manage store and corporate operations

Task environment Natural Greenhouse inventories to track emission trends Energy-efficient building design Committed to aggressive environmental protection in the petrol business

Customers 66.5 million members 30% are small business owners Appeals to customers seeking high volume and low price 89% membership renewal

Sociocultural

Competitors Vigorous and widespread Woolworths, Coles, Kmart, Target, Lowe’s

Costco Wholesale Corporation

Focuses on bulk needs of families in suburban communities Targets wide range of customers Average customer income is US $57 000

Economic Suppliers Brand-name vendors, such as P&G, Kraft, and Whirlpool Builds close supplier relationships to keep prices low Supplier Diversity Program for minority- and women-owned businesses

Negatively affected by economic slowdown Susceptible to fluctuating currency exchange rates Value pricing drives customer traffic

Legal/political

Labour market 160 000 loyal, highly productive employees Considers employees a competitive advantage Lean and stable executive ranks Labour and benefits comprise 70% of operating costs

Government-mandated minimum wage Supports privatisation of liquor sales (licence states)

International Strong growth expected in Asian markets 27% of sales from countries outside of US

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➜➜ Customers are part of the task environment and include people and organisations that acquire goods or services from the organisation.

➜➜ Competitors are organisations within the same industry or type of business that vie for the same set of customers. ➜➜ Traditional stores such as Target and Kmart are competing with online retailers such as Amazon and eBay.

➜➜ Suppliers provide the raw materials the organisation uses to produce its output.

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➜➜ The labour market represents the people available for hire by the organisation.

The organisation– environment relationship Why do organisations care so much about factors in the external environment? The answer is that the environment creates uncertainty for organisation managers, who must respond by designing the organisation to adapt to the environment or influence the environment.

Envi ro n m ental u n certaint y Uncertainty means that managers do not have sufficient information about environmental

Take a Moment Refer to your score in the New Manager Self-Test at the start of this chapter to see how well you might adapt as a new manager in an uncertain environment.

factors to understand and predict environmental needs and changes.32 As indicated in Exhibit 3.3, environmental characteristics that influence uncertainty depend upon the number of factors that affect the organisation and the extent to which those factors change. A large multinational such as Costco has thousands of factors in the external environment creating uncertainty for managers. When external factors change rapidly, the organisation experiences very high uncertainty; examples include the electronics and aerospace industries. Firms must make efforts to adapt to these changes. When MySpace’s audience plummeted 27 per cent in 2010, managers struggled to identify the factors that were upending the then popular social media service. One factor was the changing tastes of fickle social media customers, which are difficult to predict. When Facebook provided a better customer experience and a simple Google-like interface, customers left MySpace in droves. In fact, MySpace lost 9 million customers between 2009 and 2010. ‘MySpace was like a big party, and then the party moved on,’ said Michael J. Wolf, the former president of Viacom’s MTV Networks and managing partner at media consulting firm Activate.33 When an organisation deals with only a few external factors and these factors are relatively stable, such as for soft-drink bottlers or food processors, managers experience low uncertainty and can devote less attention to external issues. Two basic strategies for coping with high environmental uncertainty are to adapt the organisation to changes in the environment and to influence the environment to make it more compatible with organisational needs.

uncertainty Managers know what goal they wish to achieve, but information about alternatives and future events is incomplete.

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Exhibit 3.3 The external environment and uncertainty

High

High uncertainty

Adapt to and influence environment

Rate of change in factors in environment

Low uncertainty Low Low

High Number of factors in organisation environment

Adaptin g to th e envi ro n m ent Environmental changes may evolve unexpectedly, as in the shifting customer tastes for social media sites, or they may occur violently, as in the devastating Japanese earthquake and tsunami. The level of turbulence created by an environmental shift will determine the type of response Read the Ethical Challenge on page 129 that pertains that managers must make in order for the organisation to survive. Managers continuously to competitive intelligence. scan the business horizon for both subtle and dramatic environmental changes, also called Would you have the courage to strategic issues, and identify those that require strategic responses. Strategic issues are ‘events risk your job by challenging or forces either inside or outside an organisation that are likely to alter its ability to achieve its your boss’s inappropriate objectives’. As environmental turbulence increases, strategic issues emerge more frequently.34 use of confidential information? Managers use several strategies to adapt to these strategic issues, including boundary-spanning roles, interorganisational partnerships, and mergers or joint ventures.

Take a Moment

Boundary-spanni ng r ol es boundary-spanning roles Roles assumed by people and/or departments that link and coordinate the organisation with key elements in the external environment.

Departments and boundary-spanning roles link and coordinate the organisation with key elements in the external environment. Boundary spanners serve two purposes for the organisation: they detect and process information about changes in the environment, and they represent the organisation’s interest to the environment.35 People in departments such as marketing and purchasing span the boundary to work with customers and suppliers, both face-to-face and through market research. For example, LEGO became frustrated with the long lead times it took in the production of their packaging as they wanted to be able to delay decisions about box design until the last minute. They coveted the ability to be able to delay box design up until the last minute so that they could integrate the most recent toy trends into their designs and this meant changes in their current processes. The quality and design of LEGO boxes is viewed as critical to both the retail and customer experience with the product and could not be compromised. The company looked to the external market and established a competitive process for suppliers to come up with creative solutions to their needs. From an application process that involved submitting ideas, a short list of potential suppliers was established. The suppliers were all invited to

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work collaboratively with LEGO managers and designers to understand the company’s needs and best generate original solutions. In this way the suppliers could utilise their own expertise and lean processes to come up with ideas to LEGO’s problems. After this collaborative process each supplier was given a day to make a presentation. This creative and competitive process can be lucrative to both LEGO and the supplier.36 Another recent approach to boundary spanning is the use of business intelligence, which results from using sophisticated software to search through large amounts of internal and external data to spot patterns, trends and relationships that might be significant. For example, Verizon uses business intelligence software to actively monitor customer interactions and fix problems almost immediately.37 Business intelligence is related to the growing area of boundary spanning known as competitive intelligence (CI), which refers to activities such as snooping as much information as possible about one’s rivals. Competitive intelligence specialists use websites, commercial databases, financial reports, market activity, news clippings, trade publications, personal contacts, and spying numerous on other sources to scan an organisation’s environment and spot potential threats or opportunities.38 Visa has an employee who searches the web for two hours each day for insights on MasterCard and other competitors. Harley-Davidson hires an outside research firm to search through massive amounts of data and reveal patterns that help decipher and predict competitors’ actions.39 Eighty per cent of large companies maintain in-house snoops, also known as competitive intelligence (CI) professionals. Companies such as Nortel Networks, Motorola, NutraSweet Co. and Xerox employ CI specialists to scope out their competitors and help managers make better decisions and plans. TELUS Corp., a Canadian telecommunications company, has beefed up its CI team to cope with a tidal wave of competition from rivals in long-distance, data communication, mobile phone and paging services. NutraSweet’s CI professionals helped the company delay a costly advertising campaign when the company learned that a rival sweetener was at least five years away from gaining government approval. Most CI work is strictly legal, relying on commercial databases, news clippings, employment advertisements, trade publications, product literature and personal contacts.40 Boundary spanning is an increasingly important task in organisations because environmental shifts can happen so quickly in today’s world. Managers need good information about their competitors, customers, and other elements of the environment to make good decisions. Thus, the most successful companies involve everyone in boundary-spanning activities. People at the grassroots often can see and interpret significant changes sooner than managers who are more removed from the day-to-day work.41 However, top executives, too, need to stay in tune with the environment. Tom Stemberg, CEO of Staples, visits a competitor’s store once a week and shares what he learns with others on the management team.42 Perceiving environmental shifts that could impact the organisation isn’t always easy. Managers must learn not only to interpret the data right in front of them but also to see weak signals on the periphery and answer the question, ‘What don’t we know that might matter?’43

F ore casti ng and p lanni ng Forecasting and planning for environmental changes are major activities in many organisations. Planning departments often are created when uncertainty is high.44 Forecasting is an effort to spot trends that enable managers to predict future events. Forecasting techniques range from quantitative economic models of environmental business activity to newspaper clipping services. For example, a company called iSentia provides media monitoring services to over 6000 clients in 15 countries and employees over 1200 people (http://isentia.com). iSentia started out as a small family business in Australia over 30 years ago.45

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Control Data, Heinz, Qantas, Malaysian, Singapore and Air New Zealand airlines, Shell, BP, Herron Pharmaceuticals and Arnott’s Biscuits have all devised specific management plans for handling crises. Whether the crisis is a hostile takeover attempt or product tampering, an organisation that does not have a plan will make mistakes. Planning can soften the adverse effect of rapid shifts in the environment.

Inter or gani sati onal part n er s h ips With tough global competition, constantly changing technology and shifting government regulations, few companies can compete effectively unless they join with other firms in various partnerships. Organisations around the world are embedded in complex networks of complicated relationships – collaborating in some markets, competing fiercely in others. The number of corporate alliances has been increasing at a rate of 25 per cent annually, and many of those have been between competitors.46 For example, in the auto industry, Ford and General Motors (GM) compete fiercely, but the two joined together to develop a six-speed transmission. Hyundai, Chrysler and Mitsubishi jointly run the Global Engine Manufacturing Alliance to build four-cylinder engines. Volvo is now owned by Zhejiang Geely Holding Group of China, but it maintains an alliance with its previous owner, Ford, to supply engines and certain other components.47 In a partnership, each organisation both supports and depends on the others for success, and perhaps for survival, but that doesn’t mean they don’t still compete fiercely in certain areas.48 Managers in partnering organisations shift from an adversarial orientation to a partnership orientation. The new paradigm, shown in Exhibit 3.4, is based on trust and the ability of partners to work out equitable solutions to conflicts so that everyone profits from the relationship. Managers work to reduce costs and add value to both sides, rather than trying to get all the benefits for their own company. The new model is also characterised by a high level of information sharing, including e-business links for automatic ordering, payments and other transactions. In addition, person-to-person interaction provides corrective feedback and solves problems. People from other companies may be on site, or they may participate in virtual teams to enable close coordination. Partners are frequently involved in one another’s product design and production, and they are committed for the long term. It is not unusual for business partners to help one another, even outside of what is specified in the contract.49 Exhibit 3.4 The shift to a partnership paradigm From adversarial orientation

To partnership orientation

Suspicion, competition, arm’s length

Trust, value added to both sides

Price, efficiency, own profits

Equity, fair dealing, everyone profits

Information and feedback limited

E-business links to share information and conduct digital transactions

Lawsuits to resolve conflict

Close coordination; virtual teams and people onsite

Minimal involvement and up-front investment

Involvement in partner’s product design and production

Short-term contracts

Long-term contracts

Contracts limit the relationship

Business assistance goes beyond the contract

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Me rg e r s and joi nt ventu r es Mergers are a major factor in an organisation’s external environment. A merger is also a way to reduce uncertainty. A merger occurs when two or more organisations combine to become one. In the Asia–Pacific region, Kim Jung Tae was CEO of Korea’s most successful bank, Kookmin Bank, and he oversaw the major merger of the previous Kookmin organisation with the Housing and Commercial Bank in Korea. The merged organisation became ranked number 60 in the world with US$200 billion in assets. The business environment of the Korean banking industry has been tough, thanks to the GFC. Kim refocused his bank away from the risky sectors, from a profit of some US$800 million in 2000, leading to the solid organisational base that achieved a listing on the New York Stock Exchange. The merger succeeded despite difficult economic circumstances that have sent competitors to the wall. On a more personal note, Kim did not draw a monetary salary from the Kookmin Bank that he led, preferring to engage in a performance-based system of share allocation. As in his previous company, he replaced the senioritybased system of promotion with a merit system, and accepted 400 000 shares when their value was US$7 each. He led the company to a position where these shares each have a market value of US$40, and his challenge, in rationalising a merged organisation with some 1100 branches and 23 000 staff, was to continue its stellar performance.50 A joint venture involves a strategic alliance or program by two or more organisations. This typically occurs when a project is too complex, expensive or uncertain for one firm to do alone. Today, keeping pace with rapid technological change and competing in the global environment have stretched the resources of even the richest companies. Oil and mining companies have used joint ventures to explore for oil on the North West Shelf or in remote regions of Western Australia. In 1998, 73 Australian automotive components makers joined together to design and build a car from scratch, independently of the major automotive assemblers. Their aim was to take the car around the world to car shows, to demonstrate their capabilities and sell up to A$1 billion worth of Australian automotive components overseas.51 Many small businesses are also turning to joint ventures with large firms or with international partners. A larger partner can provide sales staff, distribution channels, financial resources or research staff. Small businesses seldom have the expertise to deal internationally, and so a company such as Nypro Inc., a plastic injection-moulding manufacturer in Massachusetts, US, joins with overseas experts who are familiar with the local rules. Nypro now does business in four countries.52 ➜➜ When external factors change rapidly, the organisation experiences high uncertainty. ➜➜ Strategic issues are events and forces that alter an organisation’s ability to achieve its goals. As environmental turbulence increases, strategic issues emerge more frequently.

➜➜ Boundary-spanning roles link to and coordinate the organisation with key elements in the external environment. ➜➜ Interorganisational partnerships reduce boundaries and increase collaboration with other organisations. ➜➜ A merger occurs when two or more organisations combine to become one.

joint venture A variation of direct investment in which an organisation shares costs and risks with another firm to build a manufacturing facility, develop new products or set up a sales and distribution network.

➜➜ A joint venture is a strategic alliance or program by two or more organisations.Forecasting is an effort to spot trends that enable managers to predict future events. ➜➜ Planning can soften the adverse effect of rapid shifts in the environment.

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In flu en cin g th e envi ro n m ent The other major strategy for handling environmental uncertainty is to reach out and change those elements causing problems. Widely used techniques for changing the environment include advertising and public relations, political activity and trade associations. Exhibit 3.5 summarises the techniques organisations can use to adapt to and influence the external environment.

Adverti si ng and p ub l ic r el at ion s Advertising has become a very successful way to manage demand for an organisation’s products or services. Organisations spend large amounts of money to influence consumer tastes. Vodafone was established as the third mobile phone supplier in Australia in 1992 and had a slow and shaky start; five years later, brand awareness was only 28 per cent. A major investment in promotion, using Kramer (a character from the popular television show Seinfeld) and the Australian Wallabies rugby team, lifted brand awareness to 53 per cent in a relatively short time. Vodafone’s customer growth in 1998 was an amazing 83 per cent, from 500 000 to nearly 900 000, putting it in the big league behind Optus and Telstra.53 More recently, much of this advertising has moved onto the Internet, which attracted more advertising revenue than traditional television for the first time in 2010. Vodafone, Telstra and Optus all spent tens of millions of dollars in total on advertising in 2013 and were expected to do the same in 2014. Also in Australia, increased competitiveness among accounting and law firms has caused them to start advertising for clients, a practice unheard of a decade ago. Hospitals have also begun to advertise through newspapers and radio commercials to promote special services. So, increasingly in non-traditional sectors, advertising is being used as an important way to reduce uncertainty about customers. Public relations is similar to advertising, except that its goal is to influence public opinion about the organisation itself. Most organisations care a great deal about their public image. Each year the US magazine Fortune rates more than 300 companies to see which are the most and least admired in each of 32 industries. Public relations and a good public image are accomplished through advertising as well as speeches and press reports. In the 1990s, companies in the tobacco industry launched aggressive public relations campaigns touting smokers’ rights and freedom of choice in an effort to survive in this anti-smoking era.54 Today, their products, cigarettes, have been completely banned in Australia from all forms of advertising and even point of sale display, while ‘Quit’ campaigns continue to advertise ever more aggressively with their anti-smoking messages. In other countries, especially developing countries, this is still not the case and cigarette sales continue to grow.

Exhibit 3.5 Organisational responses to environmental changes Advertising/ Public relations

Organisation structures for adapting to the environment Boundary-spanning roles Forecasting/planning Flexible structures Mergers/joint ventures

Political activity

Trade associations

Techniques for influencing the environment

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As another example, Carlton & United Breweries (CUB), which has succeeded in making Foster’s a global brand name, has advertised sensible, limited and controlled consumption of their beer products, particularly in the context of discouraging drinking and driving.

Political acti vi ty Political activity represents organisational attempts to influence government legislation and regulation. Many companies pay lobbyists to express their views to federal and state politicians. The National Australia Bank (NAB) employs lobbyists to inform and influence key people in Canberra of its views on the anti-merger, ‘four-pillar’ bank policy and other issues, as do many of Australia’s other banks and major companies. Foreign companies also attempt to influence government policymakers on product design rules, import regulations and other elements of government activity influencing their businesses. Some retired politicians and business leaders become professional lobbyists after retiring from active political or executive life, using their networks and relationships for lobbying purposes.

Tra d e associ ati ons Most organisations join with others having similar interests; the result is a trade association. In this way, organisations work together to influence the environment, including federal legislation and regulation. Trade associations are numerous and varied. Most industries in Australia have industry-based trade associations to represent them collectively; for example, the Plastics and Chemicals Industry Association (PACIA) and the Metal Trades Industry Association (MTIA). These organisations are usually funded through a levy or fees from their industry members. They may also provide ‘fee for service’ information and activities. Higher-level organisations such as the Business Council of Australia (BCA) represent the corporate sector more generally, providing government and the community with their views on business, policy and economic issues.

Source: Courtesy Justin Pierce

Dr Justin Pierce, Cotton On Group Dr Justin Pierce is a project manager with the Cotton On Group, a nonexecutive director of Straight Jacket Capital and financial controller of a private equity firm. During high school and university, Justin’s career was settling in both the retail and education industries, as were his parttime roles. Justin now manages to fit both his passions together while he maintains two high-profile roles: one in retail and the other in education. Justin is also building a portfolio of non-executive directorial roles. In Justin’s own words, management is about people. ‘To get the most out of people, they must feel they are treated

trade association An association made up of organisations with similar interests for the purpose of influencing the environment.

Austr alian manager pr ofile like people, which means mutually respected and empathised with. When you think about it, your own needs and wants, your ambitions, your hopes and dreams – everybody has these things. Many philosophers over the years, and those we revere, have put the so-called ‘ethic of reciprocity’ this way: do unto others as you would have them do unto you (King James Bible), choose actions you can will to be universal (Immanuel Kant), never impose on others what you would not choose for yourself (Confucius). Living the reciprocity message as a manager will lead to better outcomes, an impassioned workforce and ultimately a more sustainable business.’ Justin says managers also must recognise that just as there are markets for their wares, markets exist for their workers, too! So there are supply and demand forces for the workforce. Staff become loyal for organisations that respect their positions as people. As one of very few retailers that bucked the trend

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of the post global financial crisis (GFC), Cotton On’s flat, nonhierarchical structure underpinned its ability to mobilise and react to what are sometimes phenomenal demands in retail. The workforce is energetic, agile and owns the Cotton On message. And getting them there didn’t happen by accident. Effective, two-way communication channels engage staff to be part of the outcome.

Initiatives such as ‘bring your dog to work day’, ‘bring your kids to work day’, the onsite osteopath and dietitian and the new Cotton On University are examples that delight staff on a daily basis. They all contribute to the message that the organisation cares about how the workforce feels about their employer and the employees are compelled to invest more of themselves in the organisation: reciprocity in action! Source: Contributed by Dr Justin Pierce.

The internal environment: corporate culture

culture The shared knowledge, beliefs, values, behaviours and ways of thinking among members of a society.

The internal environment within which managers work includes corporate culture, production technology, organisation structure and physical facilities. Of these, corporate culture surfaces as extremely important to competitive advantage. The internal culture must fit the needs of the external environment and company strategy. When this fit occurs, highly committed employees create a high-performance organisation that is tough to beat.55 Most people don’t think about culture; it’s just ‘how we do things around here’ or ‘the way things are here’. However, managers have to think about culture because it typically plays a significant role in organisational success. Organisational culture has been defined and studied in many and varied ways. For the purposes of this chapter, we define culture as the set of key values, beliefs, understandings and norms shared by members of an organisation.56 The concept of culture helps managers understand the hidden, complex aspects of organisational life. Culture is a pattern of shared values and assumptions about how things are done within the organisation. This pattern is learned by members as they cope with external and internal problems and taught to new members as the correct way to perceive, think and feel. Although strong corporate cultures are important, they can also sometimes promote negative values and behaviours. When the actions of top leaders are unethical, for instance, the entire culture can become contaminated. Consider what happened at News Corporation, a corporate giant with a lucrative string of

Exhibit 3.6 Levels of corporate culture Culture that can be seen at the surface level

Visible 1. Artefacts, such as dress, office layout, symbols, slogans, ceremonies

Invisible 2. Expressed values 3. Underlying assumptions and deep beliefs, such as ‘people here care about one another like a family’

Deeper values and shared understandings held by organisation members

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media properties all over the world. Rupert Murdoch, chairman and CEO, has been accused of frequently applying unethical, sometimes seedy tactics in his business dealings. In addition, Murdoch has allegedly used ‘blunt force’ spending to cover up unscrupulous tactics and silence critics with multimillion dollar payoffs. ‘Bury your mistakes,’ Murdoch was fond of saying, according to news reports.57 But he couldn’t bury the scandal that rocked the organisation after journalists working for News Corporation newspapers allegedly hacked private voice-mail messages and offered bribes to police in the pursuit of hot scoops. Journalists went so far as to hack the voicemail of a murdered 13-year-old girl, Milly Dowler, while she was still listed as missing.58 As this example illustrates, the values and behaviours of top leaders have the potential to shape significantly the decisions made by employees throughout the organisation. Mark Lewis, the lawyer for the family of the murdered girl, pointed out: ‘This is not just about one individual, but about the culture of an organization.’59 Culture can be analysed at two levels, as illustrated in Exhibit 3.6.60 At the surface level are visible artefacts, which include things such as manner of dress, patterns of behaviour, physical symbols, organisational ceremonies and office layout. Visible artefacts are all the things one can see, hear and observe by watching members of the organisation. At a deeper, less obvious level are values and beliefs, which are not observable but can be discerned from how people explain and justify what they do. Members of the organisation hold some values at a conscious level. These values can be interpreted from the stories, language and symbols that organisation members use to represent them. Some values become so deeply embedded in a culture that members are no longer consciously aware of them. These basic, underlying assumptions and beliefs are the essence of culture and subconsciously guide behaviour and decisions. In some organisations, a basic assumption might be that people are essentially lazy and will shirk their duties whenever possible; thus, employees are closely supervised and given little freedom and colleagues are frequently suspicious of one another. More enlightened organisations operate on the basic assumption that people want to do a good job; in these organisations, employees are given more freedom and responsibility and colleagues trust one another and work cooperatively. At the Zappos Family of companies, a culture of well-being and happiness has been instrumental in the growth of this successful online retailer. The company has created a unique culture that is reflected in its core values. Fundamental values are demonstrated in organisations through symbols, stories, heroes, slogans and ceremonies.

Zappos Family Zappos.com, an online retail site best known for its wide selection of shoes and its free shipping, boldly proclaims its unique culture in an offbeat set of ten core values. CEO Tony Hsieh believes that these values illustrate the company’s innovative culture and demonstrate its ultimate business goal:  cultivating happiness. Hsieh’s management theory goes like this: If you create a work culture that fosters well-being, good practices and (eventually) good profits will naturally flow out of the operation. So far, his theory is producing outstanding business results. Zappos.com, Inc. is raking in US$1 billion worth of annual gross sales, and employees widely report that their work is exciting and challenging. ‘We really buy into the idea

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Innovative Way that the better we treat each other, the better we’ll all be able to treat our customers’, says Rebecca Ratner, director of human resources. Hsieh knows firsthand how important a strong, positive culture is when it comes to employee and customer happiness. Before Zappos, he had experienced the joyless grind of working in a job that had no meaning, where technical skill was all that mattered. Hsieh decided to write the book Delivering Happiness to document his journey from ‘chasing profits to chasing passion,’ the life lessons he has learned, and how those lessons have been applied at Zappos. Here are some key points for business leaders:

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➜➜ Get the right values. Zappos has a set of 10 core values that include ‘Create fun and a little weirdness’; ‘Deliver WOW through service’; ‘Embrace and drive change’; ‘Be adventurous, creative, and open-minded’; ‘Pursue growth and learning’; and ‘Be humble’. But Hsieh didn’t dictate the values from on high. He sent an email to all employees asking them what values should guide the company. The responses were discussed, condensed, and combined to come up with the final list.

➜➜ Get the right people. Zappos does two sets of interviews when hiring new employees. The first focuses on relevant experience, professional and technical skills, and the ability

to work with the team. The second focuses purely on culture fit. There are questions for each of the core values, such as ‘How weird are you?’ People are carefully selected to fit the Zappos culture, even if that means rejecting people with stronger technical skills.

➜➜ Make culture a top priority. All employees attend a fourweek training session and commit the core values to memory. At the end of training, they’re offered US$2000 to resign if they believe that they aren’t a good fit with the culture. Every year, Zappos puts out a Culture Book, in which employees share their own stories about what the Zappos culture means to them. Copyright © 2010 Zappos.com, Inc. or its affiliates. Used by permission.

Case study

Sources: Carlin Flora. (September–October 2009). Paid to Smile. Psychology Today, 58–9; and Tony Hsieh, Delivering Happiness: A Path to Profits, Passion, and Purpose (New York: Business Plus, 2012).

Green power Toyota Motor Corporation, an automotive powerhouse, has been the most profitable car maker in the world for most of the last twenty years. Known for award-winning reliability and quality, Toyota leads the industry in manufacturing capability. Toyota is also a leader and innovator in hybrid technology. Toyota offers many Toyota and Lexus hybrid vehicles around the world, and it has sold more than 5 000 000 hybrids. Toyota’s development of the hybrid synergy drive which uses about half the petrol of a conventional engine is an example of substantial and environmental performance advance, whilst also helping it to lead in the marketplace. Although there is a long way

to go, Toyota is leading the way in turning one of the world’s most greenhouse gas intense industries towards being ‘green’. What makes this company so successful? For Toyota, the answer is a strong corporate culture based on ‘The Toyota Way.’ A popular story of Toyota’s founder Kiichiro Toyoda demonstrates his commitment to the culture during the early days of the company’s history. Toyoda visited a plant and found a worker scratching his head and muttering about how his grinding machine would not run. Toyoda rolled up his sleeves and thrust his hands into the machine’s oil pan. He came up with two handfuls of sludge and threw

them to the floor. ‘How can you expect to do your job without getting your hands dirty,’ he exclaimed. This was the origin of one of the key elements of Toyota’s culture: genchi genbutsu, meaning ‘go and see’. To Toyota employees, this means go and seek out facts and information that help you make good decisions – even if it means rolling up your sleeves and getting dirty. Sources: Toyota website, http://www.toyota.com (accessed 3 November 2013); Jarnagin, C. and Slocum, J. W. Jr. (2007). Creating Corporate Cultures through Mythopoetic Leadership. Organizational Dynamics, 36:3, 288–302; Global Sales of Toyota Hybrids Exceed 5 million. http:// www.toyota-europe.com/about/news_and_events/ editorial/5-million-hybrids-sold.tmex (accessed 7 March 2014).

Creating and influencing organisational culture is one of the most important things leaders do, because this has a significant impact on performance. In comparing 18 companies that have experienced longterm success with 18 similar companies that have not done so well, James C. Collins and Jerry I. Porras found the key determining factor in successful companies to be a culture in which employees share such a strong vision that they know in their hearts what is right for the company. Their book, Built to Last: Successful Habits of Visionary Companies, describes how companies such as Hewlett-Packard, Walt Disney and Procter & Gamble have successfully adapted to a changing world without losing sight of the core

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values that guide the organisation. Some companies put values in writing so they can be passed on to new generations of employees. Hewlett-Packard created a list of cultural concepts called ‘The HP Way’, which is evident wherever one goes in the Hewlett-Packard world. Companies known for their strong, distinctive cultures, such as Hewlett-Packard, regularly show up on lists of the best companies for which to work.61 The fundamental values that characterise cultures at these and other organisations can be understood through the visible manifestations of symbols, stories, heroes, slogans and ceremonies. Any organisation’s culture can be interpreted by observing these factors.

Sym bo ls

Source: Picture Media/Reuters/J.P. Moczulski

A symbol is an object, act or event that conveys meaning to others. Symbols can be considered a rich, non-verbal language that vibrantly conveys the organisation’s important values concerning how people relate to one another and interact with the environment.62 Mindy Grossman, CEO of HSN Inc., found that something as simple as an office chair can be symbolic. When Grossman became HSN’s eighth CEO in 10 years, she inherited a downtrodden workforce. During her first few months, Grossman learned as much about the business as possible. ‘As I grew to understand the business, it became clear that it was fundamentally broken. To fix it, I needed to dramatically alter the company’s culture,’ she said. Part of the cultural transformation included improving the work environment, which had dirty offices full of broken-down furniture and clutter. ‘I looked around and realized we had 40 different kinds of office chairs. So I bought several thousand Herman Miller Aeron chairs,’ said Grossman. She received over 100 emails expressing appreciation on the day they were delivered.63 For Grossman, the new office chairs were an important symbol of a new company value of caring for employees. Symbols are often used by senior executives to let staff and other stakeholders know of the expected standards of behaviour and service (refer also to Chapter 15, which focuses on leadership).

St Luke’s An advertising agency seems an unlikely place to find a cultural revolution. That may be why St Luke’s calls itself a communications resource office, not an ad agency. Its mission is to produce honest, ethical advertising that represents an organisation’s ‘Total Role in Society’, which is an evaluation of the organisation among the totality of its stakeholders: employees, customers, shareholders, the community, the environment, vendors, competitors, the families of employees, and so on. The agency preaches and practises a gospel of total ethics and common ownership. St Luke’s employees own the company – all of it; every employee holds equal shares, from the person who answers the phone to the creative director.

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symbol An object, act or event that conveys meaning to others.

In February 2014 Toyota voluntarily recalled 1.9 million Prius vehicles after concerns about a potential programming error. The recall was viewed as a significant change to how it handled the 2010 crisis and Toyota now recall more vehicles than any other automaker in the United States. Critics attributed the company’s reticence to go public in 2010 with its quality problems to its deep roots in Japanese culture, in which airing dirty linen in public is impolite. However, the Toyota culture has also been historically linked with a powerful commitment to quality, which has enabled the company, under the leadership of president and CEO Akio Toyoda, to return to its previous strong market position.

management in pr actice St Luke’s was once the London office of Chiat/Day, the agency known for creating the Energiser bunny. When communications conglomerate Omnicom bought the struggling agency and announced plans to merge Chiat/Day with a larger agency, Andy Law, managing director, bought the London office and then called in all the employees to let them decide their own future. The employees’ response was that they wanted to work for a company that embodied their own personal values. Further, they wanted a concrete mechanism for universal commitment and contribution. The physical layout of St Luke’s reflects the company’s cultural values. Employees have traded desks and personal

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work spaces for ‘brand rooms’ – large, client-specific, glassenclosed conference rooms where teams meet for each account to generate ideas and store work-in-progress. Between meetings and visits to clients, employees take a seat at any one of dozens of computers they share communally. Employees eat lunch together, play ping pong or crawl out the window to enjoy a moment of sunshine on the rooftop. There are no trophies or awards lining the walls and shelves at St Luke’s. The company has never won any advertising awards, for the simple reason that they refuse to enter any contests.

After only a year in business, St Luke’s was generating annual billings of around US$72 million and was the fastestgrowing agency in London. In a survey asking London’s art directors and copywriters where they would most like to work, tiny St Luke’s came in third. Law believes people want to work for a company they can be proud of, and he and his employees have created a distinctive culture at St Luke’s that emphasises self-motivation, personal growth and integrity in all actions. ‘We’ve created this company to live beyond us,’ says Law. ‘We’re just renting resources. Remember that we’re a collective here – everybody is equal. What’s disappeared are ego and greed.’

Source: Alburty, S. (December–January 1997). The Ad Agency to End All Ad Agencies. FastCompany, 116–24.

Sto ri es story A narrative based on true events that is repeated frequently and shared by organisational employees.

A story is a narrative based on true events and is repeated frequently and shared among organisational employees. Stories paint pictures that help symbolise the firm’s vision and values and help employees personalise and absorb them.64 A frequently told story at UPS concerns an employee who, without authorisation, ordered an extra Boeing 737 to ensure timely delivery of a load of Christmas packages that had been left behind in the holiday rush. As the story goes, rather than punishing the worker, UPS rewarded his initiative. By telling this story, UPS workers communicate that the company stands behind its commitment to worker autonomy and customer service.65

H ero es hero A figure who exemplifies the deeds, character and attributes of a strong corporate culture.

A hero is a figure who exemplifies the deeds, character and attributes of a strong corporate culture. Lee Iacocca is a well-known US hero who proved the courage of his convictions by working for US$1 a year when he first went to Chrysler. Heroes are role models for employees to follow. The deeds of heroes are out of the ordinary, but not so far out as to be unattainable by other employees. Heroes show how to do the right thing in the organisation. Organisations with strong cultures take advantage of achievements to define heroes who uphold key values. Many people have wondered if the culture that Steve Jobs created at Apple would be sustained after his death in 2011. Jobs exemplified the creativity, innovation, risk-taking and boundary-breaking thinking that made the company famous.66 When Jobs’ health began to fail, Apple’s board began considering replacements who could sustain the fertile culture that Jobs created. They chose Tim Cook, who long had served as second-in-command. Cook now cultivates a culture that reflects the values and behaviours of Apple’s hero, Steve Jobs. ‘Apple has a culture of excellence that is, I think, so unique and so special. I’m not going to witness or permit the change of it,’ he said.67

Slo gans slogan A phrase or sentence that succinctly expresses a key corporate value.

A slogan is a phrase or sentence that succinctly expresses a key corporate value. Many companies use a slogan or saying to convey special meaning to employees. For example, Disney uses the slogan ‘The happiest place on earth’. The Ritz-Carlton adopted the slogan, ‘Ladies and gentlemen taking care of ladies

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and gentlemen’ to demonstrate its cultural commitment to take care of both employees and customers. ‘We’re in the service business, and service comes only from people. Our promise is to take care of them, and provide a happy place for them to work,’ said former general manager Mark DeCocinis, who managed the Portman Hotel in Shanghai, recipient of the ‘Best Employer in Asia’ award for three consecutive years.68 Cultural values can also be discerned in written public statements, such as corporate mission statements or other formal statements that express the core values of the organisation. The mission statement for Hallmark Cards, for example, emphasises values of excellence, ethical and moral conduct in all relationships, business innovation and corporate social responsibility.69 In the Australian supermarket war between Coles and Woolworths, Coles focuses on its customer service using the slogan ‘Serving you better’, while Woolworths focuses on the quality of its products with its slogan ‘The fresh food people’.

Ceremo n i es A ceremony is a planned activity that makes up a special event and is conducted for the benefit of an audience. Managers hold ceremonies to provide dramatic examples of organisational values. Ceremonies are special occasions that reinforce valued accomplishments, create a bond among people by allowing them to share an important event, and anoint and celebrate heroes.70 The value of a ceremony can be illustrated by the presentation of a major award. Every year, the industry group that represents Australian engineers in business and built environment companies, Consult Australia, presents awards to the best projects and outstanding people in its industry. These prestigious projects for outstanding people, buildings and related projects give significant kudos to the award winners, which use them for marketing purposes and to promote their firms to all stakeholders (see, for example, http://www.consultaustralia.com.au). When Dryen Australia, a company in Melbourne of some 40 people that imports and manufactures sheets, wanted to recognise and reward its longest-serving staff, it presented plaques and significant monetary rewards at a celebratory dinner to its 10- and 15-year employees. When the company achieved record sales revenue, managing director Peter Dryen gave each employee a A$300 shopping centre gift voucher in recognition of their hard work and contribution.71 This practice led to higher levels of motivation and grew loyalty and has been repeated from time to time in that firm. Such ceremonies are a powerful form of communicating the values and priorities of an organisation (see Chapter 17, which focuses on communications). In summary, organisational culture represents the values, understandings and basic assumptions that employees share, and these values are signified by symbols, stories, heroes, slogans and ceremonies. Managers help to define important symbols, stories and heroes to shape the culture.

ceremony A planned activity that makes up a special event and is conducted for the benefit of an audience.

remember this

➜➜ Organisational culture is the set of key values, beliefs, understandings, and norms shared by members of an organisation.

➜➜ A story is a narrative based on true events and is repeated frequently and shared among organisational employees.

➜➜ A slogan, such as Disney’s ‘The happiest place on earth’, succinctly expresses a key corporate value.

➜➜ A symbol is an object, act or event that conveys meaning to others.

➜➜ A hero is a figure who exemplifies the deeds, character and attributes of a strong culture.

➜➜ Managers hold ceremonies, planned activities at special events to reinforce company values.

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Needs of the environment

Exhibit 3.7 Four types of corporate culture

Stability

Adaptability culture

Achievement culture

Involvement culture

Consistency culture

External

Strategic focus

Sources: Based on D. R. Denison and A. K. Mishra. (March–April 1995). Toward a Theory of Organizational Culture and Effectiveness. Organization Science, 6:2: 204–23; R. Hooijberg and F. Petrock. (1993). On Cultural Change: Using the Competing Values Framework to Help Leaders Execute a Transformational Strategy. Human Resource Management, 32:1, 29–50; and R. E. Quinn, Beyond Rational Management: Mastering the Paradoxes and Competing Demands of High Performance (San Francisco: Jossey-Bass, 1988).

Flexibility

Internal

Types of culture We have already established that the external environment is a big influence on internal corporate culture. Cultures can vary widely across organisations; however, organisations within the same industry often reveal similar cultural characteristics because they are operating in similar environments.72 The internal culture should embody what it takes to succeed in the environment. If the external environment requires extraordinary customer service, the culture should encourage good service; if it calls for careful technical decision making, cultural values should reinforce managerial decision making. In considering what cultural values are important for the organisation, managers consider the external environment, as well as the company’s strategy and goals. Studies suggest that the right fit between culture, strategy and the environment is associated with four categories or types of culture, as illustrated in Exhibit 3.7. These categories are based on two dimensions: (1) the extent to which the external environment requires flexibility or stability, and (2) the extent to which a company’s strategic focus is internal or external. The four categories associated with these differences are adaptability, achievement, involvement and consistency.73

Adaptabi lit y cu ltu re adaptability culture Characterised by values that support the company’s ability to interpret and translate signals from the environment into new behaviour responses.

The adaptability culture emerges in an environment that requires fast response and high-risk decision making. Managers encourage values that support the company’s ability to rapidly detect, interpret and translate signals from the environment into new behaviours. Employees have the autonomy to make decisions and act freely to meet new needs, and responsiveness to customers is highly valued. Managers also actively create change by encouraging and rewarding creativity, experimentation and risk taking. Lush Cosmetics, a fast-growing maker of shampoos, lotions and bath products made from fresh ingredients such as mangoes and avocados, provides a good example of an adaptability culture. A guiding motto at the company is ‘We reserve the right to make mistakes’. Founder and CEO Mark Constantine is passionately devoted to change and encourages employees to break boundaries, experiment and take risks. The company kills off one-third of its product line every year to offer new and offbeat products.74 Other companies in the cosmetics industry, as well as those involved in electronics, e-commerce and fashion, often use an adaptability culture because they must move quickly to respond to rapid changes in the environment.

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Ray Kroc, founder of McDonald’s, once said, ‘I don’t know what we’ll be serving in the year 2000, but we’ll be serving more of it than anybody’. From its founding through to the early 1980s, McDonald’s changed with consumers’ tastes, seeming to give us what we wanted before we even knew we wanted it. Today, however, Kroc’s bold claim does not seem so assured. Although McDonald’s still has a majority share of the US fast-food market and continues to expand internationally, the company is slipping fast in its ability to recognise and shape popular trends. Some analysts and investors believe the widespread problems with McDonald’s are due to the company’s insular, arrogant culture. The average top executive at McDonald’s started working at the company when Richard Nixon was President of the United States, and the company has been reluctant to bring in outside leaders to guide management as the external environment changes. And the board is made up of close-knit insiders who have done little to agitate for change. As performance

declined, top leaders tended to blame others, such as dissident franchisees, news reporters and Wall Street analysts. ‘If there were one thing I would change about McDonald’s,’ said senior vice-president Brad A. Ball, ‘it would be to correct the misconceptions and misperceptions that have become so pervasive in the last few years.’ In the late 1990s, McDonald’s embarked on an effort to reform. Management was reorganised, and the then-head of the US domestic division, Jack M. Greenberg, brought in at least a handful of new managers, including executives from Burger King, Boston Market and General Electric. He also divided the US into territories, creating smaller companies to recapture some of McDonald’s entrepreneurial zeal. ‘We are not afraid to do things differently,’ Greenberg said. Managers began to recognise that, even though McDonald’s was still the world’s most successful restaurant company, it was far from achieving its potential. They were trying to return McDonald’s to the healthy,

adaptive culture of the early years, when it was constantly in touch with the tastes of consumers. By the late 2000s, McDonald’s had made many changes, was operating more efficiently and sustainably and offering new products such as salads and café products. It increased sales across its 35 000 stores, obviously giving its 60 million customers per day an experience that they value, while also increasing the company’s stock price by a factor of three over the five years to 2007. Growth in emerging economies has been very solid. McDonald’s has more recently refurbished its stores and redesigned its products in leading markets such as Australia, now making many products to the specific orders of its customers. By 2014, McDonald’s had substantially accomplished this product and process upgrade through rolling it out on an international basis. Sources: Euromonitor International. (September 2013). Country Report: Fast Food In The US. http:// www.euromonitor.com/fast-food-in-the-us/report (accessed 3 November 2013; Leonardt, D. (9 March 1998). McDonald’s: Can it Regain its Golden Touch? BusinessWeek, 70–7.

Similarly, Malaysia’s biggest conglomerate company, Sime Darby, has had to adapt substantially to the rocky road of economic volatility in its environment. The business was coasting comfortably prior to 1997, when CEO Nik Mohamed had to drastically restructure the business. It was previously cash rich from being the Asia–Pacific distributor of BMW cars, successful palm oil plantations, and banking, engineering and property businesses. The stodgy culture was not prepared for a US$1 billion loss in bad loans in the Sime Bank division, after a nearly US$1 billion price tag on acquiring that bank just two years previously. After selling the bank for just a fraction of its purchase price, Nik Mohamed rebuilt the business by going back to the basics of its core businesses. He had previously frozen staff salaries and engaged in a number of other cost-cutting measures, but these were reversed in 2001 when the business was back in the black, making US$300 million profit on US$2 billion of sales. This blue-chip company had been through a painful process of rationalisation, and became nimbler in its culture and processes as a result.75 Its fortunes were significantly lifted in 2007 when the palm oil sector in Malaysia was rationalised and a merger of two other major companies into Sime Darby gave it technology and scale which provided for significantly improved performance going forward. The business had to become highly open to changes in these merger and integration processes.

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McDonald’s

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Most companies in the electronics industry – as well as those involved in e-commerce, cosmetics and fashion – also use an adaptive culture because they must move quickly to respond to rapid changes in the environment. Imagine if the ‘darlings’ of the Internet and electronics businesses, Google, Samsung, Apple and Facebook, were not highly adaptive and able to change fast and whenever needed: they would soon be left behind the competitors that are snapping at their heels and lose their ‘darling’ (meaning industry leadership) status, which gets them premium prices and constant, valuable, publicity.

Ach i evem ent cu ltu re

involvement culture A culture that places high value on meeting the needs of employees and values cooperation and equality. consistency culture A culture that values and rewards a methodical, rational, orderly way of doing things.

Richard Branson is well known as a leading business figure throughout the Western world. Although not all of his business ventures and investments have been successful, he has created a global airline and many other businesses, including a chain of music distribution and retail enterprises, most of which are marketed under the Virgin brand. Branson is one of a new breed of business leaders who combine personal flair and entrepreneurial vision with sound business logic and decision making. He initiated airline Virgin Australia, which has challenged the entrenched players in New Zealand and Australia.

The achievement culture is suited to organisations concerned with serving specific customers in the external environment, but without the intense need for flexibility and rapid change. This results-oriented culture values competitiveness, aggressiveness, personal initiative, cost-cutting and willingness to work long and hard to achieve results. An emphasis on winning and achieving specific ambitious goals is the glue that holds the organisation together.76 Brewing giant InBev provides an example. When InBev bought Anheuser-Busch, it replaced lavish perks and generous spending with a no-frills culture focused intently on cost cutting and meeting strict profit goals. Managers also created an incentive-based compensation system to reflect ‘an increased focus on meritocracy’. The system handsomely rewards high performers rather than spreading dollars more evenly among employees. ‘We always say, the leaner the business, the more money we’ll have at the end of the year to share,’ said Carlos Brito, InBev’s CEO.77

Invo lvem ent cu ltu re The involvement culture emphasises an internal focus on the involvement and participation of employees to adapt rapidly to changing needs from the environment. This culture places high value on meeting the needs of employees, and the organisation may be characterised by a caring, family-like atmosphere. Managers emphasise values such as cooperation, consideration of both employees and customers, and avoiding status differences.

Co nsisten cy cu ltu re Source: Shutterstock.com/stocklight

achievement culture A results-oriented culture that values competitiveness, personal initiative and achievement.

The final category of culture, the consistency culture, uses an internal focus and a consistency orientation for a stable environment. Following the rules and being thrifty are valued, and the culture supports and rewards a methodical, rational, orderly way of doing things. In today’s fast-changing world, few companies operate in a stable environment, and most managers are shifting towards cultures that are more flexible and in tune with changes in the environment. However, Pacific Edge Software (now part of Serena Software), successfully implemented elements of a consistency culture to ensure that all its projects stayed on time and under budget. The husbandand-wife team of Lisa Hjorten and Scott Fuller implanted a culture of order, discipline and control from the moment they founded the company. The emphasis on order and focus meant employees could generally go home by 6.00 p.m. rather than working all night to finish an important project. Although

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sometimes being careful means being slow, Pacific Edge managed to keep pace with the demands of the external environment.78 Each of these four categories of culture can be successful. In addition, organisations usually have values that fall into more than one category. The relative emphasis on various cultural values depends on the needs of the environment and the organisation’s focus. Managers are responsible for instilling the cultural values the organisation needs to be successful in its environment.

New Manager Self-Test C u lt u r e p r e f e r e n c e Instructions: The fit between a new manager and organisational culture can determine success and satisfaction. To understand your culture preference, rank the items below from 1 to 8 based on the strength of your preference (1 = strongest preference). 1. The organisation is very personal, much like an extended family. take risks.

of the four types of culture in Exhibit 3.7. To compute your preference for each type of culture, add together the scores for each set of two questions as follows: Adaptability culture – total for questions 2, 6: _____ Achievement culture – total for questions 3, 7: _____

3. The organisation is achievement oriented, with the focus on competition and getting jobs done.

4. The organisation is stable and structured, with clarity and established procedures.

5. Management style is characterised by teamwork and participation.

6. Management style is characterised by innovation and risk taking.

7. Management style is characterised by high performance

➜➜ For an organisation to be effective, corporate culture should be aligned with organisational strategy and the needs of the external environment.

predictability.

Scoring and interpretation: Each question pertains to one

Involvement culture – total for questions 1, 5: _____

2. The organisation is dynamic and changing, where people

demands and achievement.

8. Management style is characterised by security and

Consistency culture – total for questions 4, 8: _____ A lower score means a stronger culture preference. You will likely be more comfortable and more effective as a new manager in a corporate culture that is compatible with your personal preferences. A higher score means the culture would not fit your expectations, and you would have to change your style and preference to be comfortable. Review the text discussion of the four culture types. Do your cultural preference scores seem correct to you? Can you think of companies that fit your culture preference? Source: Adapted from Kim S. Cameron and Robert D. Quinn, Diagnosing and Changing Organizational Culture (Reading, MA: Addison-Wesley, 1999).

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➜➜ Organisations within the same industry often reveal similar cultural characteristics because they are operating in similar environments.

➜➜ An achievement culture is a results-oriented culture that values competitiveness, personal initiative and achievement.

➜➜ The adaptability culture is characterised by values that support the company’s ability to interpret and translate signals from the environment into new behaviour responses.

➜➜ A culture that places high value on meeting the needs of employees and values cooperation and equality is an involvement culture. ➜➜ A consistency culture values and rewards a methodical, rational, orderly way of doing things.

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Shaping corporate culture for innovative response Research conducted by a Stanford University professor indicates that the one factor that increases a company’s value the most is people and how they are treated.79 In addition, surveys show that CEOs often cite organisational culture as their most important mechanism for attracting, motivating and retaining talented employees, a capability considered the single best predictor of overall organisational excellence.80 In a survey of Canadian senior executives, fully 82 per cent believe a direct correlation exists between culture and financial performance.81 Consider how an ‘employees first’ corporate culture drives stellar financial performance at Southwest Airlines. Profitable for 38 consecutive years and touting the lowest ratio of complaints per passenger in the industry, Southwest offers industry-leading salaries and benefits, intense career development programs and a commitment to diversity among its workforce. In addition, Southwest promotes a strong collaborative culture and fosters good relationships with organised labour.82 At Southwest, a positive culture that reflects an intense commitment to employees results in a competitive advantage. Corporate culture plays a key role in creating an organisational climate that enables learning and innovative responses to threats from the external environment, challenging new opportunities or organisational crises. However, managers realise they can’t focus all their effort on values; they also need a commitment to solid business performance.

M anagin g th e h i gh - perfo r m an ce cu ltu re Companies that succeed in a turbulent world are those that pay careful attention to both cultural values and business performance. Cultural values can energise and motivate employees by appealing to higher ideals and unifying people around shared goals. In addition, values boost performance by shaping and guiding employee behaviour, so that everyone’s actions are aligned with strategic priorities.83 Exhibit 3.8 illustrates four organisational outcomes based on the relative attention managers pay to cultural values and business performance.84 For example, a company in Quadrant C pays little attention to either values or business results and is unlikely to survive for long. Managers in Quadrant D organisations are highly focused on creating a strong cohesive culture, but they don’t tie organisational values directly to goals and desired business results. When cultural values aren’t connected to business performance, they aren’t likely to benefit the organisation during hard times. The corporate culture at the LEGO Group, with headquarters in Billund, Denmark, nearly doomed the toymaker in the 1990s when sales plummeted as children turned from traditional toys to video games. At that time, LEGO reflected the characteristics found in Quadrant D of Exhibit 3.8. Imagination and creativity, not business performance, were what guided the company. The attitude among employees was, ‘We’re doing great stuff for kids – don’t bother us with financial goals.’ A new CEO, Jørgen Vig Knudstorp, upended the corporate culture with a new employee motto: ‘I am here to make money for the company.’ The shift to bottom-line results had a profound impact, and LEGO has become one of the most successful companies in the toy industry.85 Quadrant A represents organisations that are focused primarily on bottom-line results and pay little attention to organisational values. This approach may be profitable in the short run, but the success is difficult to sustain over the long term because the ‘glue’ that holds the organisation together – that is, shared cultural values – is missing. Finally, companies in Quadrant B put high emphasis on both culture and solid business performance as drivers of organisational success. Managers in these organisations align values with the company’s day-to-day operations – hiring practices, performance management, budgeting, criteria for promotions

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High

Attention to business performance

Quadrant A

Quadrant B

High performance Low cultural values

High performance High cultural values

Managers meet performance goals but fail to uphold cultural values.

Managers achieve performance goals and uphold desired cultural values.

Quadrant C

Quadrant D

Low performance Low cultural values

Low performance High cultural values

Managers do not meet performance goals or uphold cultural values.

Managers do not meet performance goals but do uphold cultural values.

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Exhibit 3.8 Combining culture and performance Sources: Adapted from Jeff Rosenthal and Mary Ann Masarech. (Spring 2003). High-Performance Cultures: How Values Can Drive Business Results. Journal of Organizational Excellence, 3–18; and Dave Ulrich, Steve Kerr and Ron Ashkenas, Figure 11-2, GE Leadership Decision Matrix, The GE Work-Out: How to Implement GE’s Revolutionary Method for Busting Bureaucracy and Attacking Organizational Problems – Fast! (New York: McGraw-Hill, 2002), p. 230.

Low Low

High

Attention to values

and rewards, and so forth. Consider the approach that General Electric (GE) took to accountability and performance management. When he was CEO, Jack Welch helped GE become one of the world’s most successful and admired companies. He achieved this by creating a culture in which risk was rewarded and accountability and measurable goals were keys to individual success and company profitability.86 The company’s traditional approach had achieved stellar financial results, but managers motivated people to perform primarily through control, intimidation and reliance on a small circle of staff. Welch was interested in more than just financial results – he wanted managers to exhibit the following cultural values in addition to ‘making their numbers’:87 ●● Have a passion for excellence and hate bureaucracy. ●● Be open to ideas from anywhere. ●● ‘Live’ quality, and drive cost and speed for competitive advantage. Welch knew that for the company to succeed in a rapidly changing world, managers needed to pay careful attention to both cultural values and business performance. Quadrant D organisations represent the high-performance culture, a culture that (1) is based on a solid organisational mission or purpose, (2) embodies shared adaptive values that guide decisions and business practices, and (3) encourages individual employee ownership of both bottom-line results and the organisation’s cultural backbone.88 One of the most important things managers do is create and influence organisational culture to meet strategic goals because culture has a significant impact on performance. In Corporate Culture and Performance, John Kotter and James Heskett provided evidence that companies that intentionally managed cultural values outperformed similar companies that did not. Recent research validates that elements of corporate culture are positively correlated with higher financial performance.89

high-performance culture Created when managers emphasise both values and business results.

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Consider Virgin Australia, the Australian airline that came into a market dominated by longstanding ‘corporate’ Qantas. Its culture and ways of working are vastly different from Qantas. One major difference comes from the behavioural expectations set by management in Virgin Australia. The process of selection of new staff is more like an audition than an interview process. The company is looking for ‘Virgin flair’ in its staff, according to its head of human resources management, Bruce Highfield. On each flight, every staff member is evaluated on seven dimensions of ‘people competencies’ and this information is taken very seriously, and hence drives behaviour. Virgin Australia staff are all multi-skilled and are expected to pitch in and do a number of different jobs as required by the company. These working conditions have been agreed to by the unions and are very different from the rigid demarcations between who does what at Qantas. Virgin has a new approach and four unions to deal with, whereas Qantas is a victim of its fine history, and must manage relations with 13 unions. Virgin Australia has been compared to the very successful US airline Southwest, whose CEO has the business philosophy that business should be about ‘fun, humour and celebration’. While these are not traditional work values, the runs are on the board at Southwest, as it is the only US airline to have made a profit every year since 1973.90 This raises the fundamental question: does making work a fun experience for staff increase their productivity and level of customer service? Virgin Australia and Southwest firmly believe the answer is yes. Whether this approach translates well to other companies and industries is yet to be seen. Could Qantas, Cathay, Air New Zealand or Singapore Airlines adopt this approach? 91

Cu ltu r al lead ersh i p

cultural leader Defines and articulates important values that are tied to a clear and compelling mission.

A primary way in which managers shape cultural norms and values to build a high-performance culture is through cultural leadership. Managers must overcommunicate to ensure that employees understand the new culture values, and they signal these values in actions as well as words. A cultural leader defines and uses signals and symbols to influence corporate culture. Cultural leaders influence culture in two key areas: 1 The cultural leader articulates a vision for the organisational culture that employees can believe

in. The leader defines and communicates central values that employees believe in and will rally around. Values are tied to a clear and compelling mission, or core purpose. 2 The cultural leader heeds the day-to-day activities that reinforce the cultural vision. The leader

makes sure that work procedures and reward systems match and reinforce the values. Actions speak louder than words, so cultural leaders ‘walk their talk’.92 Managers widely communicate the cultural values through words and actions. Values statements that aren’t reinforced by management behaviour are meaningless, or even harmful, for employees and the organisation. Whole Foods founder and CEO John Mackey wants his managers to place more value on creating ‘a better person, company, and world’ than on pursuing personal financial gain. To demonstrate his personal commitment to this belief, he asked the board of directors to donate all his future stock options to the company’s two foundations, the Animal Compassion Foundation and the Whole Planet Foundation.93 Cultural leaders also uphold their commitment to values during difficult times or crises. Upholding the cultural values helps organisations weather a crisis and come out stronger on the other side. Creating and maintaining a high-performance culture is not easy in today’s turbulent environment and changing workplace, but through their words – and particularly their actions – cultural leaders let everyone in the organisation know what really counts.

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➜➜ Managers emphasise both values and business results to create a highperformance culture.

➜➜ Culture enables solid business performance through the alignment of motivated employees with the mission and goals of the company. ➜➜ Managers create and sustain adaptive high-performance cultures through cultural leadership.

➜➜ Cultural leaders define and articulate important values that are tied to a clear and compelling mission, which they communicate widely and uphold through their actions.

remember this

Chan gin g an d m ergin g co rpo r ate cu ltu res Culture gaps can be immense, especially in mergers and acquisitions.94 Despite the popularity of mergers and acquisitions as a corporate strategy, many still fail. Almost half of acquired companies are sold within five years, and some experts claim that 90 per cent of mergers never live up to expectations.95 One reason for failure is that although managers are able to integrate the acquired firm’s financial systems and production technologies, they typically are unable to integrate the unwritten norms and values that have an even greater impact on an organisation’s success.96 These problems increase in scope and frequency with global companies and cross-cultural mergers and acquisitions. Culture gaps can also exist in organisations that have not gone through merger or acquisition. When Chuck Mitchell took over at GTO, a nearly bankrupt US maker of automatic gate openers, he quickly realised that the most damaging inefficiencies were not in the company’s products or processes but in the hearts of its employees. As described in the earlier example on St Luke’s, transforming an unadaptive culture requires leaders who are in tune with their own inner values and are motivated by seeing others learn and grow to their full potential. Many companies in Australia – from the biggest companies such as Telstra and NAB to smaller companies such as Dryen Australia – have used employee satisfaction questionnaires to measure the nature and extent of culture gaps, with a view towards driving improvement on the basis of facts.

Unlocking innovative solutions through people: it’s power (and responsibility) to the people Feeling all too burdened by responsibility, 24-year-old Ricardo Semler created a new vision for the culture of his family’s business in 1983, while recuperating from a stress-related illness. When Semler had taken over Brazil-based Semco Corp. from his father in 1980 as a freshly minted Harvard MBA (one of the youngest ever to earn the prestigious degree), the company was manufacturing equipment for a Brazilian shipbuilding industry that was in abysmal shape. As Semco’s president and majority owner, Semler fired most of the top management and used a series of strategic acquisitions to steer the company into more viable markets. Ironically, as the company’s fortunes began to revive, Semler’s own health took a nosedive. As he lay in a hospital bed, Semler had a vision for a new way to manage – by relinquishing control to his employees. Thus began a five-year process of building a radically

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management in pr actice

democratic culture based on open information and employee participation. Semler started modestly – letting employees choose their uniform colour, for example – and eventually moved to the creation of egalitarian project teams that had complete responsibility for particular projects, total authority regarding how to perform them, and the opportunity for team members to pocket a substantial percentage of any profits generated. Today, self-directed teams form the basis of the company’s loose, flexible organisation structure. People typically have a chance to choose what projects they will work on, based on how they think they can best make a contribution. Semco uses few job titles and only three management levels: counsellors (the name Semler now goes by), partners, and associates. The CEO position rotates every six months among the counsellors. Workers set their own hours, elect and

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evaluate supervisors, and have major input into how they are compensated, with some actually setting their own pay rates. All financial information, including salaries, is available to everyone, and any employee is eligible to attend any meeting, including board meetings, where two seats are reserved for employees on a first-come, first-served basis. The result of applying these rather radical cultural values is that Semco has not only survived but prospered in Brazil’s often chaotic economic and political climate. The conglomerate now produces a diverse range of products and services, from manufacturing giant oil pumps to participating in mail processing joint ventures. Its revenues grew from $4 million in 1982 to approximately $240 million recently.

‘It’s about competitive advantage,’ Semler says. ‘Once you stop trying to control employees,’ he insists, ‘you release the powerful twin forces of self-discipline and peer pressure. Performance becomes the only criterion for success.’ At Semco, treating employees like responsible adults is just good business. With this culture and the corporate capability it has brought, Semco has taken advantage of growth opportunities in new industries such as its intelligent systems business, called Pitney Bowes Semco, and its Branco (ethanol from sugarcane) business which are doing business successfully both domestically and internationally through the efforts of flexible, adaptable and creative staff.

Sources: Fisher, Lawrence (Winter 2005). Ricardo Semler Won’t Take Control. Strategy + Business, 78−88; Caulkin, Simon (29 April 2003). Who’s in Charge Here? No One. Observer, http://observer.guardian.co.uk; Ricardo Semler, Wikipedia, http://en.wikipedia.org; Easen, Nick (14 June 2004), Interview with Ricardo Semler. CNN.com, http://edition.cnn.com; and Lancourt, Joan and Savage, Charles (Autumn 1995). Organizational Transformation and the Changing Role of the Human Resource Function. Compensation & Benefits Management.

New Manager Self-Test W o r k i n g i n a n ada p t i v e c u lt u r e Think of a specific full-time job you have held. Please answer the following questions according to your perception of the managers above you in that job. Circle a number on the 1–5 scale based on the extent to which you agree with each statement about the managers above you: 5 Strongly agree; 4 Agree; 3 Neither agree nor disagree; 2 Disagree; 1 Strongly disagree.

1 Good ideas got serious consideration from management above me.

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2 Management above me was interested in ideas and suggestions from people at my level in the organisation.

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3 When suggestions were made to management above me, they received a fair evaluation.

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4 Management did not expect me to challenge or change the status quo.

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5 Management specifically encouraged me to bring about improvements in my workplace.

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6 Management above me took action on recommendations made from people at my level.

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7 Management rewarded me for correcting problems.

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8 Management clearly expected me to improve work unit procedures and practices.

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9 I felt free to make recommendations to management 12345 above me to change existing practices. 10 Good ideas did not get communicated upward because management above me was not very approachable.

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Scoring and interpretation: To compute your score: Subtract each of your scores for questions 4 and 10 from 6. Using your adjusted scores, add the numbers for all 10 questions to give you the total score. Divide that number by 10 to get your average score: ______. An adaptability culture is shaped by the values and actions of top and middle managers. When managers actively encourage and welcome change initiatives from below, the organisation will be infused with values for change. These ten questions measure your management’s openness to change. A typical average score for management openness to change is about 3. If your average score was 4 or higher, you worked in an organisation that expressed strong cultural values of adaptation. If your average score was 2 or below, the company probably did not have an adaptability culture. Think about this job. Was the level of management openness to change correct for the organisation? Why? Compare your scores to those of another student, and take turns describing what it was like working for the managers above you in your jobs. Do you sense a relationship between job satisfaction and your management’s openness to change? What specific management characteristics and corporate values explain the openness scores in the two jobs? Source: Based on S. J. Ashford et al. (1998). Out on a Limb: The Role of Context and Impression Management in Issue Selling. Administrative Science Quarterly, 43, 23–57; and E. W. Morrison and C. C. Phelps. (1999). Taking Charge at Work: Extrarole Efforts to Initiate Workplace Change. Academy of Management Journal, 42, 403–19.

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Some really important things have occurred in the world of organisations in the last 20 years. Five clear and pervasive aspects of the world that have major implications for managers are: 1 Globalisation: goods and services are now traded all over the world, and managers must compete with

the best in the world, not just other local industry players. 2 Advanced technology: related to globalisation, the Internet has empowered consumers who have

never been better informed, and can choose to buy goods and services in new and different ways. 3 Industry maturity: many industries have reached a point of overcapacity, where potential supply

much exceeds demand in industrialised economies. For example, in the automotive industry, if all the world’s car factories were producing at capacity, many more cars would be produced than consumers are willing to pay for. So competition is fierce in many industries. 4 Variance and volatility: inside many societies, the gap between rich and poor is not decreasing, and

on a global basis, there are some very rich countries and many which are still impoverished. Further, the stability of economies and markets has been strongly threatened in recent years by crises and recessions, in which there were many bankruptcies, job and home losses and disruption, that bounced around the whole world. 5 Climate change: although some still dispute it, most credible scientists clearly suggest that

human-induced global warming is a trend that cannot be ignored and that the current trajectory of environmental degradation is a journey towards planetary disaster if unchecked. How can managers and their organisations plan and execute strategies that will assure their success given these massive challenges in their external business environment? Perhaps the best way is to build close relationships with stakeholders and to integrate their success with ‘yours’, to show consumers that the organisation is doing good things and not bad things in terms of the environment, and to provide a fair and balanced set of outcomes to communities in which that organisation operates. Modern managers are doing just this. They are considering it as important to satisfy their customers and employees as their shareholders, and importantly, are finding ways to satisfy all these stakeholders, and others, at higher levels than previously on a broad (triple bottom line) set of measures. This proactive approach, of sustainable development, to ‘doing well by doing good’ ultimately becomes ingrained in every aspect of the progressive organisation; in other words, it becomes core to its culture. It can become more than just an afterthought, or something separate to the mainstream business activities; instead, it can be an integral part of them: namely, core to behaviours, ingrained into a broad range of the company’s key measures and its everyday behaviour. For a mining company, this means doing real, long-term good in the local community where its mines operate. For a supermarket chain, it might mean promoting recycling of packaging and eliminating the use of plastic bags. For a manufacturing company, university or bank, it might mean reducing electricity and water use, and providing support for employee health improvement initiatives. These ways of building stakeholder support, and organisational effectiveness are perhaps the best way of coping with the challenging circumstances of today’s business environment, and finding new and different ways of getting, and staying, ahead.

sustainable development

Sustainable development and the business environment

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Response to the Management Challenge

One problem for Microsoft, described in the chapteropening Management Challenge, is that the culture is out of alignment with its environment. Years of success led to complacency and even resistance to changes in key sectors of the environment. The company’s adaptability culture did not stay aggressive. The focus on protecting Microsoft’s dominance in PC software caused the company to miss two of the hottest technology advances: Internet search engines and downloading music. Now, its PC software business, which Microsoft still relies on for 80 per cent of its sales and 140 per cent of its profits, is under attack. Microsoft CEO Steven Ballmer is trying various structural alternatives and management changes to beef up boundary spanning and get employees more focused on customers and new trends in the shifting external environment. Microsoft has more than a dozen new products scheduled for release, which Ballmer believes will keep the company on top. However, most of those products are considered catch-up, while younger, more adaptable companies are already moving to the next level of new products. Microsoft is a large and powerful company, but it may have reached a midlife crisis and likely will need a cultural adjustment to stay in tune with changes in key environmental sectors. Managers can use symbols, stories, heroes, slogans and cultural leadership to engage adaptable values that will

discussion questions

1  What are the characteristics of a flat world, a term used by Thomas Friedman to describe today’s business environment?

2  What challenges do they pose? How can you prepare to manage in a flat world? 3  Would the task environment for a mobile phone company discussed in this chapter contain the same elements as that for a government welfare agency? Discuss. 4 What do you think are the most important forces in the external environment creating uncertainty for organisations today? Do the forces you identified typically arise in the task environment or the general environment? 5 Contemporary best-selling management books often argue that customers are the most important element in the external environment. Do you agree? In what company situations might this statement be untrue? 6 Why do you think many managers are surprised by environmental changes and unable to help their organisations adapt? Can a manager ever be prepared for an environmental change as dramatic

help Microsoft move fast in response to new opportunities. In recent years in Australia, Microsoft has made great strides to overcome its previous challenges. It has used global power and technology that comes from its global parent, which it combines with local managers and a culture that gives Australian flavour to its local customers. It fosters a high level of creativity and innovation in its local workplace, and uses its staff in Australia to achieve competitive advantage, having won the prestigious Hewitt award of ‘Best Employer in Australia’ more than once. This demonstrates clearly that Microsoft’s advantage which was originally technical, followed by one based on scale and the market dominance of being the standard setter in PC software operating systems, is (as it must be) now supplemented by a culture- and people-based capability. Without this enduring capability that comes from culture and inspired leadership, Microsoft would lose its industry leading position. Sources: Guth, Robert and Delaney, Kevin (2005). Microsoft tests software link of web searches to advertisers; pilot in France, Singapore engages Google and Yahoo in battle for ad dollars. The Wall Street Journal, http://online.wsj.com/news/articles/SB111093200460980588; Birger, J. and Stires, D. (20 February 2006). The Toughest Jobs in Business: 10 on the Spot. Fortune, 81–8. Krim, J. (22 December 2005). Microsoft Is Losing Some of Its Elbow Room; As Software King’s Growth Slows, Rivals Stake Out Their Own Territory. The Washington Post, D1.

as that experienced by airlines in the United States following the 11 September 2001 terrorist attacks in New York and Washington? 7 Why are interorganisational partnerships so important for today’s companies? What elements in the current environment might contribute to either an increase or a decrease in interorganisational collaboration? Discuss. 8 Many companies are ‘going green’ or adopting environmentally friendly business strategies. How do companies benefit from going green? 9 Why are symbols important to a corporate culture? Do stories, heroes, slogans and ceremonies have symbolic value? Discuss. 10 Both China and India are rising economic powers. How might your approach to doing business with communist China be different from your approach to doing business with India, the world’s most populous democracy? In which country would you expect to encounter the most rules? The most bureaucracy? 11 General Electric is famous for firing the lowest-performing 10 per cent of its managers each year. Valero Energy has a strict no-layoff policy, believing that people need to feel secure in their jobs to perform their best. Both General Electric and Valero Energy are high-performing companies. How do you account for the success of such opposite philosophies?

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Competitive intelligence predicament Michael Vasquez was proud of his job as a new product manager for a biotechnology start-up, and he loved the high stakes and tough decisions that went along with the job. But as he sat in his den after a long day, he was troubled, struggling over what had happened earlier that day and the information he now possessed. Just before lunch, Michael’s boss had handed him a stack of private strategic documents from their closest competitor. It was a competitive intelligence gold mine – product plans, pricing strategies, partnership agreements and other documents, most clearly marked ‘proprietary and confidential’. When Michael asked where the documents came from, his boss told him with a touch of pride that he had taken them right off the competing firm’s server. ‘I got into a private section of their intranet and downloaded everything that looked interesting,’ he said. Later, realising Michael was suspicious, the boss would say only that he had obtained ‘electronic access’ via a colleague and had not personally broken any passwords. Maybe not, Michael thought to himself, but this situation wouldn’t pass the 60 Minutes test. If word of this acquisition of a competitor’s confidential data ever got out to the press, the company’s reputation would be ruined. Michael didn’t feel good about using these materials. He spent the afternoon searching for answers to his dilemma, but found no clear company policies or regulations that offered any guidance. His sense

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of fair play told him that to use the challenge information was unethical, if not downright illegal. What bothered him even more was the knowledge that this kind of thing might happen again. Using this confidential information would certainly give him and his company a competitive advantage, but Michael wasn’t sure he wanted to work for a firm that would stoop to such tactics. W h at d o yo u d o ? 1 Go ahead and use the documents to the company’s benefit, but make clear to your boss that you don’t want him passing confidential information to you in the future. If he threatens to fire you, threaten to leak the news to the press. 2 Confront your boss privately and let him know you’re uncomfortable with how the documents were obtained and what possession of them says about the company’s culture. In addition to the question of the legality of using the information, point out that it is a public relations nightmare waiting to happen. 3 Talk to the company’s legal counsel and contact the Society of Competitive Intelligence Professionals for guidance. Then, with their opinions and facts to back you up, go to your boss.

Sources: Adapted from Weber, Kent (January−February 2001). Gold Mine or Fool’s Gold? Business Ethics, 18.

Should you go global?

Gr oup Challenge

Suppose you are running a family-owned business in Adelaide which gives financial advice and performs financial planning services for individuals, families and small businesses. Your business gives investment advice, sets up superannuation funds and helps retirees, business people and others with advice on how to plan their financial future. You operate out of rented premises near the city. You have heard that in Melbourne and Sydney, a global player out of the US has entered the market and basically wiped out the small independent firms such as yours. Conduct a board meeting of your company, in which the following strategic questions are on the agenda:

2 Can we improve our service levels to customers so they won’t switch when the global player (which has a very well respected brand) comes to town. How?

1 Is Adelaide too small a place for a global player to enter so will this factor protect us?

6 What other considerations are important in our planning: for example, can technology help us to cope?

3 Can we reduce our costs as a way of competing? 4 Should we try to partner with a bigger company in order to survive and what would this mean to our income levels and autonomy? 5 Should we ‘accept the inevitable’ and try to sell the business?

7 What decisions would you make on these questions?

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Case for cr itical analysis

R i ch m o n d S up p ly C o .

Jasper Hennings, owner of Richmond Supply Co., knew full well a company’s top executives were largely responsible for determining a firm’s corporate culture. That’s why he took such personal pride in the culture of his wholesale plumbing supply company. It didn’t just pay lip service to the values it espoused: integrity, honesty and a respect for each individual employee. His management team set a good example by living those principles. At least that’s what he’d believed until recently. The importance Jasper attached to respecting each individual was apparent in the company’s Internet use policy. It was abundantly clear that employees weren’t to use Richmond’s computers for anything but business-related activities. However, Jasper himself had vetoed the inclusion of what was becoming a standard provision in such policies that management had the right to access and review anything employees created, stored, sent or received on company equipment. He cut short any talk of installing software filters that would prevent abuse of the corporate computer system. Still, the company reserved the right to take disciplinary action, including possible termination, and to press criminal charges if an employee was found to have violated the policy. So how was he to square his cherished assumptions about his management team with what he’d just discovered? Henry Darger, his hard-working chief of operations, had summarily fired a female employee for having accessed another worker’s email surreptitiously. She hadn’t taken her dismissal well. ‘Just ask Darger what he’s up to when he shuts his office door,’ she snarled as she stormed out of Jasper’s office. She made what Jasper hoped was an idle threat to hire a lawyer. When Jasper asked Henry what the fired employee could possibly have meant, tears began to roll down the operations chief’s face. He admitted that ever since a young nephew had committed suicide the year before and a business he’d helped his wife start had failed, he’d increasingly been seeking escape from his troubles by logging onto adult pornography sites. At first, he’d indulged at home, but of late he’d found

himself spending hours at work visiting pornographic sites, the more explicit the better. Jasper was stunned. After a few speechless minutes, he told Henry to take the rest of the day off, go home and think things over. The owner himself needed the afternoon to gather his wits. How should he handle this turn of events? On the one hand, Henry’s immediate dismissal of the woman who’d tapped into another employee’s email when the operations chief was violating the Internet policy himself was hypocritical, to say the least. The person charged with enforcing that policy needed to be held to the highest standards. On the other hand, Jasper knew that Richmond employees routinely used computers at their desks to check personal email, do banking transactions, check the weather or make vacation arrangements. The company had turned a blind eye because it didn’t seem worth the effort of enforcing the hardand-fast policy for such minor infractions. Besides, Henry was a valued, if clearly troubled, employee. Replacing him would be costly and difficult. If Jasper decided to keep him on, the president clearly had no choice but to cross the line and get involved in Henry’s private life, and he would be treating Darger differently from the treatment the female employee received. When he met with Henry again first thing in the morning, he needed to have a plan of action. Questions 1 What environmental factors have helped to create the situation Jasper Hennings faces? What factors does Jasper need to consider when deciding on his course of action? 2 Analyse Richmond’s culture. In addition to the expressed cultural values and beliefs, what other subconscious values and beliefs do you detect? Are conflicting values present? When values are in conflict, how would you decide which ones take precedence? 3 Assume you are Jasper. What are the first two steps you would take to handle the Henry Darger situation? How would your role as a cultural leader influence your decision? What message will your solution send to the other managers and rank-and-file employees?

Sources: Based on Green, Willard P. (Summer 2003). Pornography at Work. Business Ethics, 19; Marley, Patrick (24 January 2006). Porn-Viewing Parole Agent Regains Job. Milwaukee Journal Sentinel: http://www.jsonline.com/story/idex.aspx?id=387492; Sample Internet Policies for Businesses and Organizations. Websense, http://www.websense-sales.com/internetaccess-policy.html; and Lambert, Art (14 February 2005). Technology in the Workplace: A Recipe for Legal Trouble. Workforce, http://www.workforce.com/archive/article/23/95/08.php.

On the job video case

C a m p B o w W o w : T h e e n v i r o n m e n t a n d c o r p o r at e c u lt u r e For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions. Discu ssio n q uesti o n s

1  What aspects of Camp Bow Wow’s corporate culture are visible and conscious? What aspects are invisible and unconscious?

2 Why did Camp Bow Wow have to change its culture when it became a national franchise? 3 What impact does Heidi Ganahl’s story have on employees at Camp Bow Wow?

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(29 May 1995). Change Is Good – But First Know What Should Never Change. Fortune, 141. 81 Wahl, A. Culture Shock. (10–23 October 2005). Canadian Business, 115–116. 82 Based on information in A. Beard and R. Hornik. (November 2011). It’s Hard to Be Good. Harvard Business Review, 88–96. 83 Chatman, J. A. and Cha, S. E. (Summer 2003). Leading by Leveraging Culture. California Management Review, 45:4, 20–34. 84 This section is based on J. Rosenthal and M. A. Masarech. (Spring 2003). High-Performance Cultures: How Values Can Drive Business Results. Journal of Organizational Excellence, 3–18. 85 Schwartz, N. D. (12 June 2006). One Brick at a Time. Fortune, 45–6; and N. D. Schwartz. Lego’s Rebuilds Legacy. (5 September 2009). International Herald Tribune. 86 This example is based on D. Ulrich, S. Kerr and R. Ashkenas. (2002). The GE Work-Out (New York: McGraw-Hill), pp. 238–40. 87 From Ulrich et al., GE Values. In The GE Work-Out, Figure 11-2. 88 Rosenthal and Masarech. High-Performance Cultures. 89 Kotter, J. P. and Heskett, J. L. (1992). Corporate Culture and Performance (New York: The Free Press); E. Flamholtz and R. Kannan-Narasimhan. Differential Impact of Cultural Elements on Financial Performance. (2005).

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European Management Journal, 23:1, 50–64. Also see J. M. Kouzes and B. Z. Posner. (2002). The Leadership Challenge: How to Keep Getting Extraordinary Things Done in Organizations, 3rd ed. (San Francisco: Jossey-Bass). 90 Southwest Airlines Reports Record Fourth Quarter and Full Year Profit; 41st Consecutive Year of Profitability, http://southwest.investorroom. com/2014-01-23-Southwest-Airlines-Reports-Record-Fourth-Quarter-AndFull-Year-Profit-41st-Consecutive-Year-Of-Profitability. 91 Long, S. (24 November 2001). On Virgin Ground. Australian Financial Review, 24–5. 92 Rosenthal and Masarech. (July 2002). High-Performance Cultures; P. Lencioni. Make Your Values Mean Something. Harvard Business Review, 113–17; and T. J. Peters and R. H. Waterman, Jr. (1988). In Search of Excellence (New York: Warner). 93 Jarnagin and Slocum. Creating Corporate Cultures through Mythopoetic Leadership. 94 Kilmann, R. (April 1985). Corporate Culture. Psychology Today, 62–8. 95 Lefkoe, M. (20 June 1987). Why So Many Mergers Fail. Fortune, 113–14. 96 Nahavandi, A. and Malekzadeh, A. R. (1988). Acculturation in Mergers and Acquisitions. Academy of Management Review, 13, 79–90; Lefkoe, M. Why So Many Mergers Fail.

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ test your understanding of the environment and corporate culture by taking the revision quiz ➜ identify your skills in different aspects of management with the online self-tests ➜ use the online crossword to revise relevant key terms and their definitions.

Cour seMate

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Define globalisation and explain how it is creating a borderless world for today’s managers.

2 Describe a global mindset and why it has become

imperative for companies operating internationally.

3 Describe the characteristics of a multinational

corporation and explain the ‘bottom of the pyramid’ concept.

4 Define international management and explain how it

5 Indicate how dissimilarities in the economic, legal–

political and sociocultural environments throughout the world can affect business operations.

6 Discuss how the international landscape is changing, including the growing power of China, India and Brazil.

7 Describe how regional trading alliances are reshaping the international business environment.

differs from the management of domestic business operations.

Chapter 4

Managing in a global environment Chapter outline ➜ A borderless world

Globalisation Developing a global mindset

➜ Multinational corporations ➜ Globalisation backlash

Serving the bottom of the pyramid (BOP)

➜ Getting started internationally Exporting Outsourcing Licensing Direct investing

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➜ The international business environment

➜ The economic environment

Economic development Infrastructure Economic interdependence Resource and product markets Exchange rates Inflation, interest rates and economic growth

➜ The legal–political environment Political risk Political instability Laws and regulations

➜ The sociocultural environment Social values Communication differences

➜ The changing international

landscape China, Inc. India, the service giant Brazil’s growing clout International trade alliances

➜ Sustainable development: a

global issue and opportunity

New Manager Self-test A r e y o u r e a d y t o w o r k i n t e r n at i o n a l ly ? Are you ready to negotiate a sales contract with someone from another country? Companies large and small deal on a global basis. To what extent are you guilty of the behaviour below? Please answer each item as Mostly true or Mostly false for you. Are you typically...

Mostly True

Mostly False

1 Impatient? Do you have a short attention span? Do you want to keep moving to the next topic? 2 A poor listener? Are you uncomfortable with silence? Does your mind think about what you want to say next? 3 Argumentative? Do you enjoy arguing for its own sake? 4 Unfamiliar with cultural specifics in other countries? Do you have limited experience in other countries? 5 Short-term oriented? Do you place more emphasis on the short term than on the long term in your thinking and planning? 6 ‘All business’? Do you think that it is a waste of time getting to know someone personally before discussing business? 7 Legalistic to win your point? Do you hold others to an agreement regardless of changing circumstances? 8 Thinking ‘win/lose’ when negotiating? Do you usually try to win a negotiation at the other’s expense? Scoring and interpretation: Western managers often display cross-cultural ignorance during business negotiations compared to counterparts in other countries. Western habits can be disturbing, such as emphasising areas of disagreement over agreement, spending little time understanding the views and interests of the other side, and adopting an adversarial attitude. Westerners often like to leave a negotiation thinking they won, which can be embarrassing to the other side. For this quiz, a low score shows better international presence. If you answered Mostly true to three or fewer questions, then consider yourself ready to assist with an international negotiation. If you scored six or more Mostly true responses, it is time to learn more about other national cultures before participating in international business deals. Try to develop greater focus on other people’s needs and an appreciation for different viewpoints. Be open to compromise and develop empathy for people who are different from you. Source: Adapted from Cynthia Barnum and Natasha Wolniansky. (October 1989). Why Americans Fail at Overseas Negotiations. Management Review, 54–7.

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Source: Fairfax Syndication/Andrew Quilty

Management Challenge

GPC Electronics Managing Director Christopher Janssen

Today, managers all over Australia are faced with the challenges and opportunities of global competitors and global markets. In Toyota’s Australian operations, based in an assembly facility in Melbourne, Camrys are assembled for the local market and also for export to Middle East countries. Historically, this has been a major export earner for both the company and the Australian economy, providing local employment not just for Toyota staff, but for the whole local automotive components industry that supplies Toyota. With help and financial support from the Australian and Victorian state governments, Toyota has introduced state-of-the-art technology, manufacturing its advanced hybrid system engines in Australia. However, the challenge from the parent company is its global facility location decisions. Sitting in the company’s global head office in Toyota City in Japan, executives are reconsidering on a continuing basis where in the world is the best place to produce its cars. And despite the high quality of the Camrys produced in Melbourne, it may be possible for a facility in Japan, Thailand or China that is operated by Toyota to build these vehicles at lower cost, making it always tempting to close the Australian facility and send cars from Thailand to the Middle East and to Australia. The challenge for the managers in Toyota’s Australian plant is to keep their costs and quality at levels of global competitiveness with other Toyota plants, as much as with Nissan, Honda,

GM, Ford and other brands. In February 2014, the global president of Toyota announced that the challenges of continuing to assemble cars in Australia had caused the company to reluctantly take the decision to close the local plant (effective 2017). Similarly, at GPC Electronics factory in Penrith, New South Wales, Managing Director, Christopher Janssen is trying to compete with the larger global players with a strategy based on supply chain innovation in providing not just electronic products but improved supply chain solutions to his customers. In order to be competitive and indeed be seen as competitive, GPC Electronics has established a facility and supply chain in China, from which it can organise supply of components too. Many Australian companies have adopted a strategy much like ‘If you can’t beat them, join them’, and have established supply lines from China, or partnerships in China, or even their own factories in China, in order to take advantage of the competitive results from those factories, particularly the lower costs. Ignoring these global opportunities and challenges is not an option for any company. Question What are the challenges facing executives in Australian manufacturing businesses? Similarly, for a company such as GPC Electronics, how can it maintain its competitive position with its global customers?

Do you think if you stay in your hometown as a manager, you won’t have to interact with people from other cultures? Think again. Many people who grew up in small towns with little diversity fail to appreciate the importance of cross-cultural skills. Yet in today’s world, every manager needs to think globally. Rapid advances in technology and communications have made the international dimension an increasingly important part of the external environment discussed in Chapter 3. The future of our businesses and our societies is being shaped by global rather than local relationships. A global mindset and international experience are fast becoming prerequisites for managerial success. Many organisations based in Australia, including the four big banks and BHP Billiton, have learned that the greatest potential for growth lies overseas. In addition, the demand for raw materials such as steel, aluminium, cement, and copper has slowed in Australia but is booming in countries such as China, India and Brazil. For online companies, too, going global is a key to growth. The number of residential Internet subscribers in China is growing significantly faster than that of Australia. Western Europe and Japan together account for a huge share of the world’s e-commerce revenue. Less-developed countries are challenging mature countries in a number of industries. China is the world’s largest maker of consumer electronics and is rapidly and expertly moving into biotechnology, computer manufacturing, and semiconductors. The pace of innovation in India is startling in industries as diverse as precision manufacturing, health care, and pharmaceuticals, and some observers see the beginnings of hypercompetitive multinationals in that country.1

4: Managing in a global environment

Managers around the world are eager to make a commitment to China and India, where the potential for growth is huge. Brazil, Russia, India and China (often referred to as BRIC), as well as other emerging economies, are growing rapidly as providers of both products and services to Australia, United States, Canada, Europe and other developed nations. At the same time, these regions are becoming major markets for the products and services of Australian firms. Finding managers with the mindset needed to succeed in these countries is proving difficult for multinational firms. China, India and Brazil are expected to see the greatest shortage of executive talent for the next few years.2 Every manager today needs to think globally because the whole world is a source of business threats and opportunities. Even managers who spend their entire careers working in their hometowns have to be aware of the international environment and most likely will interact with people from other cultures. This chapter introduces basic concepts about the global environment and international management. First, we provide an overview of today’s borderless world and the global mindset needed to be effective. Next, we discuss multinational corporations, consider the globalisation backlash and describe the ‘bottom of the pyramid’ concept. We then touch on various strategies and techniques for entering the global arena and take a look at the economic, legal–political and sociocultural challenges that companies encounter within the global business environment. The chapter also describes how emerging markets and regional trade agreements are reshaping the international business landscape. Consider Dell Computer. Michael Dell’s business idea was brilliant. Why not sell personal computers directly to consumers rather than going through distributors or retailers? Dell Computer Corporation was born, and the computer industry was never the same. Dell strove to apply its ultra-efficient processes to shake up the Chinese computer industry the same way it did in the US. But it was a shaky start, with the company encountering problems ranging from language barriers and cultural resistance to tough competition from Lenovo, a Chinese firm that was quickly becoming a global player in PCs and services. Even the term direct sales was a problem for Dell, translating into a Chinese term most often used to describe illegal pyramid marketing schemes. The language glitch was solved, but by sticking to its direct sales model, Dell lost Chinese customers, who typically want to see and touch products before they buy. Lenovo, with 4800 retail outlets, has long been the market leader in China and made a global push with the purchase of IBM’s PC unit in 2005. Dell lost its most experienced Asia–Pacific executive when Lenovo snared Dell’s Asia chief Bill Amelio as its CEO. Amelio and Lenovo chairman Yang Yuanqing vowed that Lenovo wouldn’t cede the Asian market to Dell. Moreover, Lenovo managers went after Dell in its established markets as well; they invested $60 million to become China’s first Olympic sponsor and provider of computers to the 2006 Turin Winter Games and the Take a Moment Beijing Summer Olympics in 2008.3 In this highly competitive business and industry, Do you believe Dell can CEO Amelio resigned at the end of his three-year contract, as the company suffered duplicate its US, European and large losses during the 2008–10 global financial crisis (GFC) and Mr Yang took back Australia/New Zealand success in control and leadership as the new CEO of the Lenovo group. Dell has been very China? How do you think Lenovo successful in penetrating the Australian market where both retail consumers and will fare as it tries to become a global brand? If you were a manager at Dell, business customers have flocked to the Dell website to buy PCs, laptops and servers, what recommendations would you which are flown to Australia from its Malaysian factory. have for Dell managers as they go Dell’s core US market is saturated, and its biggest potential for growth lies in head-to-head with Lenovo for emerging markets such as China. But managers at Dell are learning, as other companies control of the world’s fastestgrowing market? have, that they may have to adjust how the company operates to succeed in a new country or region. Walmart, for example, has faced significant challenges in Germany, where the

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giant US firm is still a secondary player after over 15 years of effort. The German market is dominated by local retail chains that cater to local tastes and are familiar with tough union rules and labour laws in that country. Walmart also struggled in South America and Japan, partly because of managers’ proclivity for doing things the Walmart way without adequately considering local customs. An Australian company that has experienced problems duplicating its success in some overseas markets is Foster’s Group. In 1993 Foster’s decided to pursue the huge market for beer consumption in China. Even though China’s share of world consumption of beer has gone up over the last decade from 6 per cent to 14 per cent, Foster’s has had some difficulties in pursuing the Chinese market of 1.3 billion people. The company’s initial ambition might well have been to sell beer to only 2 per cent of Chinese consumers, which would make its sales in China as large as they are in Australia, where it dominates the market. But Foster’s lost A$100 million from its China venture and wrote off (lost) another A$150 million through selling two of its three breweries in China just five years after its initial investment.4 To date, most other foreign beer companies that have entered China have had similar difficulties in achieving profitable market penetration. The opportunity presented by a big foreign market does not guarantee that money will be made in it. As one moves away from a ‘home market’, the risks go up, and quickly. Companies such as Amcor, McDonald’s, Visy Industries, BP, Shell, BHP Billiton, Ford, Toyota, IBM, Mazda, Coca-Cola, Honda, CSL, Qantas, Microsoft, LookSmart, Kellogg, Boeing, General Motors and Caterpillar Tractor all rely on international business for a substantial portion of their sales and profits. These companies face special problems in trying to tailor their products and business management to the unique needs of foreign countries – but if they succeed, the whole world is their marketplace. For example, Foster’s beer has to be brewed to a different formulation in countries foreign to Australia; the Kraft cheese exported to Japan from Melbourne tastes different to cater to different needs; and even the Australian-made Moran furniture is different in size and design because of different living conditions in Asian markets. How important is international business to the study of management? If you are not thinking international, you are not thinking business management. It is as serious as that. As you read this page, ideas, takeover plans, capital investments, business strategies, iPads, services, Toyota Corollas and T-shirts are travelling around the planet by email, telephone, computer, fax, container and overnight mail. Today’s companies can locate different parts of the organisation wherever it makes the most business sense – top leadership in one place, technical brainpower and production in other locales. Virtual connections enable close, rapid coordination and communication among people working in different parts of the world, so it is no longer necessary to keep all operations in one place. For example, Samsung, the Korean electronics giant, moved its semiconductor-making facilities to Silicon Valley, California, to be closer to the best scientific brains in the industry. Canada’s Northern Telecom (Nortel) selected a location in the southwest of England as its world manufacturing centre for a new fixed-access radio product. If you think you are isolated from global influence, think again. Even if you will not budge from your home base, your company may be purchased by the English, Japanese, Americans, Chinese or Germans tomorrow. Australians who work for BHP Billiton, Shell, McDonald’s or Pizza Hut, any of the car assembly companies, or for Goodyear, Michelin or Bridgestone tyres are already working for foreign bosses. A good deal of the Australian and New Zealand business sector is made up of ‘branch’ organisations owned by foreign parent companies. Their head offices may be in Tokyo, London, Shanghai, New York or Kuala Lumpur, or indeed anywhere on the planet. Or imagine this: you arrive at work tomorrow, and your CEO puts globalisation

4: Managing in a global environment

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in the company’s mission statement and orders promotion of employees who have international experience and foreign-language ability. Or a foreign competitor may be launching a competitive assault on your company. In recent times, much larger and more powerful foreign firms such as French insurer AXA easily swallowed up companies like National Mutual Insurance. When the food division of Pacific Dunlop (now Ansell) went on the market, it was an American company, Simplot, which came up with the cash to buy most of it and develop it to the next stage. With this kind of competition, is it any surprise that foreignborn people with international experience have been appointed to run such major Australian companies as Telstra, Westpac and BHP Billiton? These examples indicate that the environment for companies is becoming extremely complex and extremely competitive.

utilised by Western countries. The pattern has continued with both Latin America and Eastern Europe now providing higher-level outsourced jobs to corporations. Companies may outsource skilled, white collar work in areas such as research, accounting, procurement or financial analysis. The cost comparison is compelling to business where an entry level accountant can cost $12.33 in China, $19.90 in the Philippines, $11.22 in India and $23.00 In Australia. An analyst at Forrester Research Inc. predicts that at least 3.3 million mostly white-collar jobs and US$136 billion in wages will shift from the US to low-wage countries by 2015. The same is happening to jobs in Singapore, Australia and New Zealand.

Helyar, J. (15 March 2013). Outsourcing: A Passage Out of India. Business Week, http://www.businessweek. com/articles/2012-03-15/outsourcing-a-passageout-of-india (accessed 16 December 2013); Graduate Salaries 2011. A Report on the Earnings of New Australian Graduates in Their First FullTime Employment. Graduate Careers Australia, p. 9, http://www.graduatecareers.com.au/wp-content/ uploads/2012/08/Graduate-Salaries-2011-secured. pdf (accessed 16 December 2013).

Sources: Thottam, J. (1 March 2004). Is Your Job Going Abroad? Time, 26–36; Engardio, P., Hof, R. D., Malkin, E., Gross, N. and Miller, K. L. (18 November 1994). High-tech Jobs All Over the Map. BusinessWeek/21st Century Capitalism, 112–17; http://www.money.cnn.com (19 January 2004). IBM Data Give Rare Look at Sensitive ‘Offshoring’ Plans;

A borderless world Why do companies such as Federal Express, BHP Billiton and Foster’s Group want to pursue a global strategy, despite failures and losses? Because they recognise that business is becoming a unified global field as trade barriers fall, communication becomes faster and cheaper, and consumer tastes in everything from clothing to mobile phones converge. Thomas Middelhoff of Germany’s Bertelsmann AG, which purchased US publisher Random House (a company that later merged with British publishing giant

Source: iStockphoto

A primary concern is the loss of jobs as companies export work to countries with lower wages, from many regions such as Australia, New Zealand, Europe and US to India and China. Consider, for example, that a 26-year-old engineer in Bangalore, India, designs next-generation mobile phone chips at a Texas Instruments research centre for a salary of US$10 000 a year. Boeing has used aeronautical specialists in Russia to design luggage bins and wing parts for planes. They make around US$650 a month, compared with a counterpart in the US making $6000. IBM has plans to shift thousands of high-paying programming jobs to cheap-labour sites in China, India and Brazil. The transfer of jobs such as making shoes, clothing and toys began two decades ago. Today, services and knowledge work are rapidly moving to developing countries. By 2012 outsourcing to India had become a US$69 billion business with call centres and India’s tech talent being well

Case study

Shifting international services and jobs

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Penguin), put it this way: ‘There are no German and American companies. There are only successful and unsuccessful companies’.5 While there are clearly some significant differences in how business is done and in consumer tastes and preferences across countries, these differences are clearly reducing: for managers it is about getting the balance right, whether one is running a global bank or a new garment fashion label. Organisations that think globally have a competitive edge. Consider Hong Kong’s Johnson Electric Holdings Ltd, a multimillion-dollar producer of micromotors that power hair dryers, blenders and automobile power windows and door locks. With factories in South China and a research and development lab in Hong Kong, Johnson is thousands of kilometres away from a leading car maker. Yet the company has cornered the market for electric gizmos for the automotive industry by using new information technology. Using videoconferencing, Johnson design teams meet ‘face-to-face’ for two hours each morning with their customers in the US and Europe. The company’s processes and procedures are so streamlined that Johnson can take a concept and deliver a prototype anywhere in the world within six weeks.6 The reality facing most managers is that isolation from international forces is no longer possible. Organisations in all fields are being reordered around the goal of addressing needs and desires that transcend national boundaries. ‘The whole boundary mindset has been obliterated,’ says John Hering, the young Co-Founder and Executive Chairman of Lookout Mobile Security. Hering’s company has customers in 170 countries using 400 mobile networks around the world. ‘For many people, this is the only computer they have,’ he says. ‘The thought of something bad happening to your phone is untenable.’7 Many organisations expand overseas due to saturated domestic markets. For some companies, the only potential for significant growth lies overseas. For example, in the US, Kimberly-Clark and Procter & Gamble, which spent years slugging it out in the now-flat US nappy market, are targeting new markets such as China, India, Israel, Russia and Brazil. The demand for steel in China, India and Brazil together is expected to grow 10 per cent annually in the coming years. Source: Alamy/dpa picture alliance

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John Hering, Co-Founder and Executive Chairman of Lookout Mobile Security

Glo balisati o n The reality of today’s borderless companies also means consumers can no longer tell from which country they are buying. Your BMW may have come from Europe, while a neighbour’s Nissan may have been built in any of a number of places where Nissan has plants. A polo shirt may be made from cloth cut in Australia but sewn in Hong Kong. Eat an Aussie pie at the local cricket ground or put some Vegemite on your toast, and you have just purchased from a foreign company. Organisations can participate in the international arena on a variety of levels, and the process of globalisation typically passes through four distinct stages, as illustrated in Exhibit 4.1. 1 In the domestic stage, market potential is limited to the home country, with all production and

marketing facilities located at home. Managers may be aware of the global environment and may want to consider foreign involvement. 2 In the international stage, exports increase, and the organisation usually adopts a multidomestic

approach, probably using an international division to deal with the marketing of products in several countries individually. 3 In the multinational stage, the organisation has marketing and production facilities located in many

countries, with more than one-third of its sales outside the home country. Organisations typically

4: Managing in a global environment

have a single home country, although they may opt for a bi-national approach, whereby two parent organisations in separate countries maintain ownership and control. Examples are Unilever (manufacturer of household products, from detergents to ice cream) and the Royal Dutch Shell Group (petroleum and related products), both of which are based in the UK and the Netherlands. 4 Finally, the global stage (or stateless stage) of international development transcends any single home

country. These organisations operate in true global fashion, making sales and acquiring resources in whatever country offers the best opportunities and lowest cost. At this stage, ownership, control and top management tend to be dispersed among several nationalities.8 As the number of ‘stateless’ organisations increases, so too the awareness of national borders decreases, as reflected by the frequency of foreign participation at the management level. Take a Rising managers are expected to know a second or third language and to have international Moment As a new manager, learn to experience. The need for global managers is intense. Organisations around the world want ‘think globally’. Take an interest in the brightest and best candidates for global management, and young managers who want international people and issues. Don’t their careers to move forward recognise the importance of global experience. According hinder your own or your company’s to Harvard Business School professor Christopher Bartlett, author of Managing Across success by thinking only in terms of Borders, people should try to get global exposure when they are young in order to start domestic issues, competitors and markets. Expand your thinking building skills and networks that will grow throughout their careers.9 Consider the makeup by reading and networking of global organisations in today’s environment. Food processor Nestlé (Switzerland) broadly. typifies the stateless company, with 98 per cent of its sales and 96 per cent of its employees outside the home country. Nestlé’s CEO has great faith in regional managers who are native to the region and know the local culture. The combination of strong brands and autonomous regional managers has made Nestlé the largest branded food company in Mexico, Brazil, Chile and Thailand, and the company is on its way to becoming the leader in Vietnam and China as well. The global media giant Concept News Corporation, owner of Fox Broadcasting Company, is run by Rupert Murdoch, who was born in Revision Australia, partly educated in Britain and is now an American citizen. Australians have been the global Case project 4.1 heads of Coca-Cola, McDonald’s and Ford. At British firm ICI, 40 per cent of the top 170 executives are not British. Meanwhile, German companies such as Hoechst and BASF rely on local managers to run foreign operations.10 Both Ford Motor Company and IBM are globalising their management structures. To aid its efforts, IBM has studied power equipment giant Asea Brown Boveri Ltd (ABB), a major player in the global game.

Exhibit 4.1 Four stages of globalisation 1. Domestic

2. International

3. Multinational

4. Global

Strategic orientation

Domestically oriented

Export-oriented, multidomestic

Multinational

Global

Stage of development

Initial foreign involvement

Competitive positioning

Explosion of international operations

Global

Cultural sensitivity

Of little importance

Very important

Somewhat important

Critically important

Manager assumptions

‘One best way’

‘Many good ways’

‘The least-cost way’

‘Many good ways’

Source: Based on Nancy J. Adler, International Dimensions of Organizational Behavior, 4th edn (Cincinnati, OH: South-Western, 2002), pp. 8–9.

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Case study

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The axis of India Shikha Sharma is a leader with a difference. She has not worried at all about being a woman in what was traditionally a predominantly man’s world: high finance. As chief executive of one of Mumbai’s major banks, Axis, she has taken her 22 000 employees on a journey of 50 per cent sales growth and 90 per cent profit growth in the three years to 2010. Sharma has focused on sensible growth and risk management, adding some 200 branches, or 20 per cent. With degrees from the Indian Institute of Management and a background in insurance and finance, she has transferred her skills to retail banking with relish. Sharma’s style reflects the nontraditional new competency, somewhat

Source: Getty Images/The India Today Group

Shikha Sharma

rarely seen in businesses where control is paramount: she chooses good people and delegates to them. Through trust and honesty, this strategy has worked very well. She restructured the bank to put staff closer to their customers, clearly a good idea. She has instigated regular senior team meetings and strategy retreats, facilitating relationship building and team work. The delegation has worked to bring out her colleagues’ and staff’s best efforts. And the operating and business performance of the bank has shot up as a result. By 2013 Axis had increased its number of domestic branches to 1787 with 325 branches opened in 2013 alone and has begun to expand internationally with seven overseas branches now fully established. To put this into perspective, Australia’s largest bank, the Commonwealth Bank, has a total of 488 branches in Australia and two overseas. From 2010 to 2013, Axis’ gross profit has risen over 60 per cent and it is now the third-largest private bank in India (ninth among all Indian scheduled banks). Axis has added nearly 16 000 employees since 2010 with an average employee age of 29 years. Under Sharma’s leadership employee empowerment is viewed as a means to enhance customer experience

and deliver excellent customer service. Axis uses the HR function to focus on developing and training employees to meet the bank’s vision of being the preferred financial service provider. Axis founded the Axis Bank Foundation (ABF) in 2006 to contribute its three chosen CSR initiatives of education, health and sustainability. The bank has committed to contribute up to 1 per cent of its annual net profit to support this foundation. In 2013 Axis dispersed over US $1 million to various education programs. The foundation looks to support NGOs in providing care and assistance to those in need. Axis encourages employees to nurture their social obligation through participating in activities such as charity marathons, and even holds a very popular Blood Donation Drive at Axis House. Sources: Anuaradha Raghunathan. (17 September 2010). Bringing a Lot to the Table. Forbes Asia, pp. 98−9; Axis Annual Report 2013, pp. 3, 26, 30, http://www.axisbank.com/download/ Annual-Report-2013.pdf (accessed 25 June 2013); Commonwealth Bank of Australia website, http:// commonwealthbanklocations.com (accessed 25 June 2013); Axis Bank website, http://www.axisbank. com/media-center/bank-profile.aspx (accessed 25 June 2013); Axis Bank – Axis Foundation, http:// www.axisbankfoundation.org/whatsnew/whatsnew. asp?yearval=2010&id=2&key=SCMM (accessed 25 June 2013).

D evelo pin g a glo bal m in dset

global mindset The ability to appreciate and influence individuals, groups, organisations and systems that represent different social, cultural, political, institutional, intellectual and psychological characteristics.

Succeeding on a global level requires more than a desire to go global and a new set of skills and techniques; it requires that managers develop a global mindset. As more managers find themselves working in foreign countries or working with foreign firms within their own countries, they need a mindset that enables them to navigate through ambiguities and complexities that far exceed anything they encounter within their traditional management responsibilities.11 A global mindset can be defined as the ability of managers to appreciate and influence individuals, groups, organisations and systems that represent different social, cultural, political, institutional, intellectual and psychological characteristics.12 A manager with a global mindset can perceive and respond to many different perspectives at the same time rather than being stuck in a domestic mindset that sees everything from one’s own perspective. Reliance Industries, the largest private sector company in India, specifically lists ‘global mindset’ as one of the core competencies for its managers.13

4: Managing in a global environment

Source: Shutterstock.com/Denys Prykhodov

People who have had exposure to different cultures develop a global mindset more easily. For example, the Dutch have to learn English, German and French, as well as Dutch, to interact and trade with their economically dominant neighbours. Developing a global mindset requires managers who are genuinely curious and inquisitive about other people and cultures, are openminded and non-judgemental, and can deal with ambiguity and complexity without becoming overwhelmed or frustrated. One of the best ways managers develop a global mindset is by engaging with people from different cultures. In the past, many managers who were sent on overseas assignments lived an insular lifestyle that kept them from truly becoming immersed in the foreign culture. ‘You can lead a true-blue German lifestyle in China,’ says Siegfried Russwurm, former head of human resources at Siemens (now running the company’s industrial sector). ‘You can live in a gated community with German neighbors. They will tell you where you can find a German baker and butcher.’14 Today, though, the goal for managers who want to succeed is to globalise their thinking.

Multinational corporations The size and volume of international businesses are so large that it is hard to comprehend. For example, if revenues were valued at the equivalent of a country’s gross domestic product (GDP), the revenue of ExxonMobil is comparable in size to the GDP of Egypt. The revenue of Walmart is comparable to Greece’s GDP, Toyota’s to Algeria’s GDP and GE’s to Kazakhstan’s GDP.15 A large volume of international business is being carried out by large international businesses that can be thought of as global corporations, stateless corporations or transnational corporations. In the business world, these large international firms typically are called multinational corporations (MNCs), which have been the subject of enormous attention. MNCs can move a wealth of assets from country to country and influence national economies, politics and cultures. Although the term has no precise definition, a multinational corporation (MNC) typically receives more than 25 per cent of its total sales revenues from operations outside the parent’s home country. During the recent economic slump, the percentage of revenue from foreign operations increased for many multinationals because of stronger sales in developing markets such as China and India. In the third quarter of 2010, revenues for Yum! Brands (including restaurants such as KFC and Pizza Hut) in China surpassed those in the United States for the first time, and the company’s China business may be twice as large as that in the United States by 2015.16 MNCs also have the following distinctive managerial characteristics: 1 An MNC is managed as an integrated worldwide business system in which foreign affiliates act in

close alliance and cooperation with one another. Capital, technology and people are transferred among country affiliates. The MNC can acquire materials and manufacture parts wherever in the world it is most advantageous to do so. 2 An MNC is ultimately controlled by a single management authority that makes key strategic decisions

relating to the parent and all affiliates. Although some headquarters are binational, such as the Royal Dutch/Shell Group, some centralisation of management is required to maintain worldwide integration and profit maximisation for the enterprise as a whole.

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The iPad2 has taken the world of tablet computing by storm and been a huge market and financial success for Apple, but shortages of components from Japan due to the 2011 tsunami stopped Apple from selling even a lot more!

multinational companies or corporations (MNCs)

multinational corporation (MNC) An organisation that receives more than 25 per cent of its total sales revenues from operations outside the parent company’s home country; also called a global company or transnational company.

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3 MNC top managers are presumed to exercise a global perspective. They regard the entire world as

one market for strategic decisions, resource acquisition and location of production, advertising and marketing efficiency.

Case study

In a few cases, the MNC management philosophy may differ from that just described. For example, some researchers have distinguished among ethnocentric companies, which place emphasis on their home countries; polycentric companies, which are oriented towards the markets of individual foreign host countries; and geocentric companies, which are truly world oriented and favour no specific country.17 The truly global companies that transcend national boundaries are growing in number. These companies no longer see themselves as American, Chinese or German; they operate globally and serve a global market. Nestlé SA provides a good example. The company gets most of its sales from outside the ‘home’ country of Switzerland, and its 280 000 employees are spread all over the world. CEO Paul Bulcke is Belgian, chairman Peter BrabeckLetmathe was born in Austria, and more than half of the company’s managers are non-Swiss. Nestlé has hundreds of brands and has production facilities or other operations in almost every country in the world.18 National Australia Bank purchased banks in the UK and the Bank of New Zealand as an effective way of achieving a major market share and position in those markets. BHP Billiton continually looks to globalise and expand through acquisitions of assets that are related to and add value to its existing large set of mining operations. It has recently attempted to enter the potash business in North America through a major acquisition which would both broaden its industry basis and further diversify its international operations. It is working on options of buying a major company, or developing a new company in this industry in Canada. When BHP, which was founded in Broken Hill and known as ‘The Big Australian’ company, merged with South African mining company Billiton, many stakeholders were concerned about whether and how their entrenched cultures would mix. The merged entity, BHP Billiton, brought together a traditional Australian company – described as being open, stressing ‘mateship’ and allowing the questioning of authority – with a company that has been characterised as typically South African, involving strict hierarchy, authority and focus on results. While business strategies, systems and operations can be merged relatively quickly and easily, the challenge of merging cultures is much more problematic for managers.

Globalising from an Australian base Amcor was transformed from being an Australian paper-making company into a packaging enterprise that entered into international markets. Under the leadership of Stan Wallis, the company grew at compound rates of 15 per cent per year over a decade, mostly through acquisition of a variety of different overseas paper and packaging-related businesses. However, massive investments were required to sustain the competitiveness of these businesses and to automate the factories so that cost competitiveness could be achieved – Visy industries being the main competitor. Competition also came from New Zealand’s Carter Holt Harvey and

from low-cost Indonesian producers. The challenge of competitiveness never goes away, and Amcor, like many other businesses, has found that acquisition and growth is actually the easy part – sustaining the generation of high-quality profits and earnings is where the hard work is required. From a domestic Australian base, Amcor has become a global packaging company with only 19 per cent of its business activities in Australia, with the majority of its 33 000 employees working in its overseas factories, offices and distribution centres. Amcor has 300 sites and sales of A$12 billion globally, and generated over A$600 million in profit in 2013. This

company has benefited greatly from its focus as a packaging specialist company, and expanding fast into markets where it could be competitive. This is quite a story, considering that the company started operations in 1860 as a Sydney-based paper production company. Amcor has expanded into China in recent years, via joint ventures, in order to participate in that country’s and region’s rapid growth. Sources: Wallis, S. (20 May 1999), Personal communication with Stan Wallis; Amcor Annual Report 2013, pp. 4, 6, 150, http://media.amcor. com/documents/Amcor-Annual-Report-2013.pdf (accessed 6 March 2014).

4: Managing in a global environment

Globalisation backlash Many people are concerned about seemingly negative impacts of globalisation. In Western countries, the primary concern has been the loss of jobs as companies expanded their offshoring activities by exporting more and more work overseas. The transfer of jobs such as making shoes, clothing and toys began decades ago, and in recent years, services and knowledge work have also been outsourced to developing countries. Many Australian shoppers say they’d be willing to pay higher prices for locally made products to keep jobs from going overseas.19 Business leaders, meanwhile, insist that economic benefits of globalisation flow back to the Australian economy in the form of lower prices, expanded markets and increased profits that can fund innovation.20 A troubling issue for some people has been how overseas contractors and suppliers treat their employees. In the United States, for example, in the first few months of 2010, 10 employees at Foxconn Technologies, a Chinese contract manufacturer that makes electronic products for Apple, Dell and other US companies, committed suicide. After a coalition of advocacy groups sent an open letter to Apple calling for an investigation to ensure safe and decent working conditions at all its suppliers, managers asked the Fair Labor Association to investigate Foxconn. The group found widespread problems, including excessively long work hours, low pay, and unsafe working conditions. In a symbolic gesture to emphasise the company’s commitment, Apple’s new CEO, Tim Cook, visited Foxconn’s manufacturing plant where the iPhone is made and met with both company and government leaders in China.21 In June, 2012 Apple announced it would bring some of its Mac manufacturing back to the United States. Apple also negotiated a new partnership with a Taipei-based supplier named Pegatron Corp. to manufacture some of its iPhones and iPads. This strategic change seeks to minimise Apple’s heavy reliance on Foxconn and reduces its exposure to risk associated with the company.22 With concerns over jobs and labour practices, the anti-globalisation fervour is just getting hotter – and is not likely to dissipate any time soon. In the end, the question is not whether globalisation is good or bad, but how business and government managers can work together to ensure that the advantages of a global world are fully and fairly shared.

Servin g th e bot tom o f th e pyr a m i d (BOP) Although large multinational organisations are accused of many negative contributions to society, they also have the resources needed to do good things in the world. One approach that combines business with social responsibility is referred to as serving the bottom of the pyramid. This concept proposes that corporations can alleviate poverty and other social ills, as well as make significant profits, by selling to the world’s poorest people. The term bottom of the pyramid refers to the more than 4 billion people who make up the lowest level of the world’s economic ‘pyramid’ as defined by per-capita income. These people earn less than US$1500 a year, with about one-fourth of them earning less than a dollar a day.23 Traditionally, these people haven’t been served by most large businesses because products and services are too expensive, inaccessible and not suited to their needs; therefore, in many countries, the poor end up paying significantly more than their wealthier counterparts for some basic needs. A number of leading companies are changing that by adopting BOP business models geared to serving the poorest of the world’s consumers. Consider the following example from India’s Godrej & Boyce.

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Innovative Way

Godrej & Boyce

By one estimate, a third of India’s food is lost to spoilage due to lack of refrigeration; but in 2007, refrigerator market penetration in India was just 18 per cent. Many lower-income people couldn’t afford even a basic refrigerator. Another problem for poor people, particularly in rural areas, was that electricity was often unreliable. Godrej & Boyce managers decided it was time to do something about this. ‘As a company that made refrigerators for more than 50 years, we asked ourselves why it was that refrigerator penetration was just 18 per cent,’ said G. Sunderraman, vice president of corporate development. The first major insight was that many people not only couldn’t afford a refrigerator but didn’t need a large refrigerator that took up too much space in a small house and used a lot of electricity. What they needed was the ChotuKool (‘The Little Cool’), an innovative appliance introduced by Godrej & Boyce in 2010. The

ChotuKool, a mini-fridge designed to cool five or six bottles of water and store a few pounds of food, was portable, ran on batteries, and sold for about 3250 rupees (A$76), about 35 per cent less than the cheapest refrigerator on the market. To sell the new product, Godrej & Boyce trained rural villagers as salespeople. The villagers earn a commission of about A$3 for each refrigerator sold, and the system reduces Godrej’s distribution costs. When asked how many ChotuKools the company expected to sell, George Menezes, COO of Godrej Appliances, said, ‘In three years, probably millions.’ Godrej & Boyce managers spend a lot of time working directly with consumers and are now testing ideas for other low-cost products aimed at rural markets. ‘Currently, the rural market accounts for only 10 per cent, but it is all set to expand in a huge way,’ said Menezes.

Sources: Bala Chakravarthy and Sophie Coughlan. (2012) Emerging Market Strategy: Innovating Both Products and Delivery Systems. Strategy & Leadership, 40:1, 27–32; T. V. Mahalingam. (25 July 2010). Godrej’s Rediscovery of India: They Say They Touch More Consumers than Any Other Indian Company. Business Today, 58–64; and (12 July 2009). Godrej Eyes Youth to Expand Portfolio. Mail Today.

➜➜ A multinational corporation (MNC) is an organisation that receives more than 25 per cent of its total sales revenues from operations outside the parent company’s home country and has a number of distinctive managerial characteristics.

➜➜ Some researchers distinguish among ethnocentric companies, which place emphasis on their home countries, polycentric companies, which are oriented towards the markets of individual host countries and geocentric companies, which are truly world oriented. ➜➜ The increasing size and power of MNCs has sparked a globalisation backlash.

Austr alian manager pr ofile

remember this

➜➜ Multinational corporations have the resources to reach and serve the world’s poorest people who cannot afford the typical products and services offered by big companies.

➜➜ The bottom of the pyramid (BOP) concept proposes that corporations can alleviate poverty and other social ills, as well as make significant profits, by selling to the world’s poor.

Glenn Barnes, Chairman, Ansell Ltd and Australian Unity Ltd

After Glenn completed his studies in the biological sciences he commenced his career in the fast-moving consumer branded goods category with Unilever (Australia) Ltd. During his time at Unilever Glenn held various positions of responsibility, including executive roles in production management, product

and process development and methods engineering. Glenn credits his most significant achievement at Unilever as being part of a team at Streets Ice Cream who regained, and then held, the leadership in value share of the Australian Ice Cream market through their product and brand innovation.

Source: Courtesy Glenn Barnes

4: Managing in a global environment

From Unilever Glenn joined Mars Inc where he again covered various executive roles in product and process development, brand management, marketing and sales strategy and sales and marketing leadership. Glenn’s roles at Mars ranged from individual country to regional to global responsibilities and his successes with the company included developing a strategy for establishing businesses in China and being part of the team that developed Snickers into a leading global brand. Glenn’s career successes did not end there as he moved from consumer goods to the banking, insurance and financial services sectors with the National Australia Bank Ltd. His achievements at the NAB were extraordinary. In the ten years from 1990, when Glenn first joined, the group’s net income grew from $4 billion to $12.3 billion and net profit grew from $8 million to $3.4 billion. Share prices rose from A$6 to a rewarding A$26. The NAB went from being number three player in Australia to becoming the clear market leader in the country. During this time Glenn held individual country, regional and global roles and was part of the team that developed a clear and profitable customer focused strategy for the group. With 20 years in governance experience in banking and financial services and over 30 years in executive, business leadership and directorship roles as well as regional and global leadership roles, what has his journey taught him? 1. Understand and nurture your own growth and well-being: ■■ Keep your body and mind in good condition – you will need to call on substantial pools of strength and stamina if you are to succeed. ■■ Have a great support team (family, friends and mentors) to share with and who will both keep you going and help keep your feet on the ground. Reciprocate their support and extend this to others. ■■ Have a clear view of what you believe in, be true to this and draw strength from it.

■■

Have a stretching plan for personal growth and development.

2. Know who you are, what you stand for and be consistent: ■■ Share your value set and be clear on what you expect of your own and your teams’ behaviours. ■■ Be authentic. ■■ Maintain and protect your integrity. 3. Seek to understand before being understood: ■■ Be a good listener...champion best ideas...not your own. 4. Understand and practise team leadership: ■■ Regularly and clearly articulate the challenges – being respectful of the past, realistic about the present and optimistic about the future. ■■ All individuals should feel accountable to the team (as well as you). ■■ Support the team in achieving their tasks and challenges. ■■ Encourage innovation and stretch goals. ■■ Explore failures for what can be learned...don’t punish reasonable risk taking. ■■ Reward and celebrate successes. ■■ Invest in capability building of individuals and the team...do not ‘carry’ the unwilling or unable. 5. Continually challenge, improve or reinvent the business proposition you are promoting: ■■ Developing and defending competitive advantage is always challenging and usually rewarding. ■■ Continually reinvest in improving and or superseding your business model and proposition...you need to keep ahead of the competition and the game changers. ■■ Know your Brand, P&L, Balance Sheet and Cash position and dynamics...continually probe and model the impact of positive and negative possibilities. 6. Recruit and develop the best people you can afford: ■■ Good people are the life blood of any business...they will push you and your business to new heights. ■■ Invest in their becoming the best that they can be...don’t worry about losing some to better opportunities...view this as good PR. ■■ When you have found and/or developed someone who has the potential to do your job better than you...get out of the way and do something else! Source: Contributed by Glenn Barnes.

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Getting started internationally

market entry strategies The various tactics that managers use to enter foreign markets.

Exhibit 4.2 Strategies for entering the international arena

Organisations have a couple of ways to become involved internationally. One is to seek cheaper resources such as materials or labour offshore, which is called offshoring or global outsourcing. Another is to develop markets for finished products or services outside their home countries, which may include exporting, licensing and direct investing. Exporting, licensing and direct investing are called market entry strategies because they represent alternative ways to sell products and services in foreign markets. Exhibit 4.2 shows the strategies that companies can use to engage in the international arena, either to acquire resources or to enter new markets.

High Greenfield venture

Ownership of foreign operations

Acquisition

Joint venture

Franchising Licensing Global outsourcing Exporting Low Low

Cost to enter foreign operations

High

Expo rtin g exporting An entry strategy in which the organisation maintains its production facilities within its home country and transfers its products for sale in foreign markets.

With exporting, the company maintains its production facilities within the home nation and transfers its products for sale in foreign countries.24 Exporting enables a company to market its products in other countries at modest resource cost and with limited risk. Exporting does entail numerous problems based on physical distances, government regulations, foreign currencies, and cultural differences, but it is less expensive than committing the firm’s own capital to build plants in host countries. Hollywood movie studios have long exported films to foreign countries, but they’re taking a different approach than in the past.

4: Managing in a global environment

Hollywood studios Hollywood films have long been quintessentially American products, and years ago, audiences in Japan, Brazil or South Korea would faithfully watch movies that were written for and primarily marketed to Western audiences. No longer. Local films are giving Hollywood a run for its money. At the same time, audiences are declining in the United States but growing overseas. Hollywood movies now get about 70 per cent of their revenue from abroad. Today, a few Hollywood studios have gone as far as making movies specifically for certain foreign markets, and almost all of them are reframing their films to suit foreign tastes. Here are some examples of tactics they are using:

➜➜ Use foreign actors. For Paramount’s G.I. Joe, Byung-hun Lee, a major Korean movie star, was placed in a title role, and a South African actor played another key character.

➜➜ Set the movie in a growing market – or in no man’s land. Several recent films, such as Life of Pi and Captain Phillips, have been set in developing countries, which are rapidly

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Innovative Way growing entertainment markets for movies. Others, like Avatar and The Lord of the Rings films, are set in fantasy worlds that are home to no one nationality.

➜➜ Stuff the film with foreign brands. In the latest Transformers movie, DreamWorks Studios had a character gulping Shuhua low-lactose milk from China’s Yili dairy company.

➜➜ Shoot in foreign cities. Pixar’s Cars didn’t do well abroad, so the studio set the sequel in Paris, London, Tokyo and on the Italian Riviera. These and other techniques represent a whole new approach to making movies. Rather than trying to lure audiences to their films, studios are targeting their films to the audiences. In addition, managers are increasingly looking for films with global appeal. ‘I can tell you that no studio is going to make a big expensive movie that costs [US]$150 million or $200 million unless it has worldwide appeal,’ said Mark Zoradi, former president of Walt Disney Company’s Motion Pictures Group.

Sources: Lauren A. E. Schuker. (31 July 2010). Plot Change: Foreign Forces Transform Hollywood Films. The Wall Street Journal, A1; and Nicole Allan. (May 2012). How to Make a Hollywood Hit. The Atlantic, 70–1.

Outsou rcin g Global outsourcing, also called offshoring, means engaging in the international division of labour so that

work activities can be done in countries with the cheapest sources of labour and supplies. Millions of low-level jobs such as textile manufacturing, call centre operations, and credit card processing have been outsourced to low-wage countries in recent years. The Internet and plunging telecommunications costs have enabled companies to outsource more and higher-level work as well, such as software development, accounting or medical services. A patient might have a magnetic resonance imaging (MRI) test performed in Brisbane and have it read by doctors in India. Large pharmaceutical companies farm out much of their early-stage chemistry research to cheaper labs in China and India.25

Li censin g With licensing, a corporation (the licensor) in one country makes certain resources available to companies in another country (the licensee). These resources include technology, managerial skills, and patent or trademark rights. They enable the licensee to produce and market a product or service similar to what the licensor has been producing. Heineken, which has been called the world’s first truly global brand of beer, usually begins by exporting to help boost familiarity with its products; if the market looks enticing enough, Heineken then licenses its brands to a local brewer. Licensing offers a business firm relatively easy access to international markets at low cost, but it limits the company’s participation in and control over the development of those markets.

outsourcing

global outsourcing Engaging in the international division of labour so as to obtain the cheapest sources of labour and supplies regardless of country; also called global offshoring.

export Licensing licensing An entry strategy in which an organisation in one country makes certain resources available to organisations in another in order to participate in the production and sale of its products abroad.

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One special form of licensing is franchising, which occurs when a franchisee buys a complete package of materials and services, including equipment, products, product ingredients, trademark and trade name rights, managerial advice and a standardised operating system. Whereas with licensing, a licensee generally keeps its own company name, autonomy, and operating systems, a franchise takes the name and systems of the franchisor. The fast-food chains are some of the best-known franchisors. The story is often told of the Japanese child visiting Los Angeles who excitedly pointed out to his parents, ‘They have McDonald’s in America’.

D i rect investin g direct investing An entry strategy in which the organisation is involved in managing its production facilities in a foreign country.

wholly owned foreign affiliate A foreign subsidiary over which an organisation has complete control.

greenfield venture The most risky type of direct investment, in which a company builds a subsidiary from scratch in a foreign country.

A higher level of involvement in international trade is direct investment in facilities in a foreign country. Direct investing means that the company is involved in managing the productive assets, which distinguishes it from other entry strategies that permit less managerial control. Currently, the most popular type of direct investment is to engage in strategic alliances and partnerships. In a joint venture, a company shares costs and risks with another firm, typically in the host country, to develop new products, build a manufacturing facility, or set up a sales and distribution network.26 A partnership is often the fastest, cheapest and least risky way to get into the global game. For example, Abbott Laboratories has teamed up with an Indian drug firm, Biocon Ltd, to develop nutritional supplements and generic drugs tailored to the local market.27 A Chinese firm has formed a joint venture with an American partner to refurbish New York City’s Alexander Hamilton Bridge and work on other construction projects in the United States.28 In addition to joint ventures, the complexity of today’s global business environment is causing managers at many companies to develop alliance networks, which are collections of partnerships with various other firms, often across international boundaries.29 The other choice is to have a wholly owned foreign affiliate, over which the company has complete control. Direct acquisition of an affiliate may provide cost savings over exporting by shortening distribution channels and reducing storage and transportation costs. Local managers also have a better understanding of economic, cultural, and political conditions. Kraft Foods bought Cadbury PLC in large part because the firm had established local contacts and distribution networks in emerging markets. The most costly and risky direct investment is called a greenfield venture, which means a company builds a subsidiary from scratch in a foreign country. The advantage is that the subsidiary is exactly what the company wants and has the potential to be highly profitable. For example, in 2012, Airbus announced plans to build jetliners in its first assembly plant in the United States. By building a huge plant in Alabama and employing American workers, Airbus managers expect to become part of US culture, thereby reducing political opposition to the purchase of the company’s airplanes.30 The disadvantage is that the company has to acquire all market knowledge, materials, people and know-how in a different culture, and mistakes are possible.

4: Managing in a global environment

➜➜ Two major alternatives for engaging in the international arena are to seek cheaper resources via outsourcing and to develop markets outside the home country.

➜➜ Exporting is a market entry strategy in which a company maintains production facilities within its home country and transfers products for sale in foreign countries.

➜➜ Direct investing is a market entry strategy in which the organisation is directly involved in managing its production facilities in a foreign country.

➜➜ Global outsourcing, sometimes called offshoring, means engaging in the international division of labour so as to obtain the cheapest sources of labour and supplies, regardless of country.

➜➜ With a market entry strategy of licensing, a company in one country makes certain resources available to companies in other countries to participate in the production and sale of its products abroad.

➜➜ Alternatives for direct investing include engaging in joint ventures, acquiring foreign affiliates and initiating a greenfield venture.

➜➜ Market entry strategies are various tactics that managers use to enter foreign markets.

➜➜ Franchising is a form of licensing in which a company provides its foreign franchisees with a complete package of materials and services. ➜➜ McDonald’s and other fast-food companies have franchises all over the world.

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➜➜ With a joint venture, an organisation shares costs and risks with another firm in a foreign country to build a facility, develop new products or set up a sales and distribution network. ➜➜ A wholly owned foreign affiliate is a foreign subsidiary over which an organisation has complete control. ➜➜ The most risky type of direct investment is the greenfield venture, in which a company builds a subsidiary from scratch in a foreign country.

The international business environment International management is the management of business operations conducted in more than one

country. The fundamental tasks of business management – including the financing, production and distribution of products and services – do not change in any substantive way when a firm is transacting business across international borders. The basic management functions of planning, organising, leading and controlling are the same whether a company operates domestically or internationally. However, managers will experience greater difficulties and risks when performing these management functions on an international scale. Consider the following blunders: ●● It took McDonald’s more than a year to figure out that Hindus in India do not eat beef because they consider the cow to be sacred. The company’s sales took off only after McDonald’s started making burgers sold in India out of lamb.31 ●● When IKEA launched a superstore in Bangkok, managers learned that some of its Swedish product names sound like crude terms for sex when pronounced in Thai.32 ●● In Africa, the labels on bottles show pictures of what is inside so illiterate shoppers can know what they’re buying. When a baby-food company showed a picture of an infant on its label, the product didn’t sell very well.33 ●● United Airlines discovered that even colours can doom a product. The airline handed out white carnations when it started flying from Hong Kong, only to discover that, to many Asians, such flowers represent death and bad luck.34

international management The management of business operations conducted in more than one country.

international management

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Exhibit 4.3 Key factors in the international environment

Economic Economic development Infrastructure Resource and product markets Per capita income Exchange rates Economic conditions

Some of these examples might seem humorous, but there’s nothing funny about them to managers trying to operate in a highly competitive global environment. What should managers of emerging global Legal–political Political risk companies look for to avoid making Government obvious international mistakes? intervention Tariffs, quotas, When they are comparing one taxes country with another, the Terrorism, political instability economic, legal–political and Laws, regulations Organisation sociocultural sectors present the greatest difficulties. Key factors to understand in the Sociocultural international environment are Social values, beliefs summarised in Exhibit 4.3.35 Language Religion (objects, taboos, holidays) Demographic profile Formal education, literacy Time orientation

➜➜ The basic management functions are the same in either a domestic or an international subsidiary, but managers will experience greater

difficulties and risks when performing these functions internationally. ➜➜ International management means managing business operations in more than one country.

➜➜ When operating on an international basis, it is important for managers to give considerable thought to economic, legal– political and sociocultural factors.

remember this

The economic environment The economic environment represents the economic conditions in the country where the international organisation operates. This part of the environment includes factors such as economic development and resource and product markets. In addition, factors such as inflation, interest rates and economic growth are also part of the international economic environment.

Eco n om i c d evelo pm ent Economic development differs widely among the countries and regions of the world. Countries can be categorised as either ‘developing’ or ‘developed’. The developing countries are sometimes referred to as emerging or less-developed countries (LDCs). The criterion usually used to classify countries as developed or developing is per capita income, which is the income generated by the nation’s production of goods and services divided by total population. The developing countries have low per-capita incomes. LDCs

4: Managing in a global environment

are generally in the southern hemisphere, and include parts of Africa, Asia and South America, whereas developed countries (apart from Australia, New Zealand and South Africa) tend to be in the northern hemisphere; for example, the US, UK and Japan.36 Most international business firms are headquartered in the wealthier, economically advanced countries. However, based on the number of prospective customers, developing countries constitute an immense market that many organisations are beginning to tap. Major Australian organisations are moving across borders to take advantage of the burgeoning demand for goods and services in countries such as China and Indonesia. Large companies, such as Uncle Ben’s of Australia or Foster’s Group, ship many container loads of pet food and beer, respectively, to developing nations. Although these companies may face risks and challenges, they are positioning themselves for the future in emerging economies where most of the population are still at least 10 years away from their peak buying years.37 Juliana Chugg moved from Australia to Minneapolis, US to head up the baking division of General Mills Corporation.38 She was CEO of the Australian division of the company, during which time she almost doubled sales revenue to A$208 million. Still in her early 40s, Ms Chugg became a Senior Vice President of General Mills, a business that includes powerful billion-dollar brands such as Pillsbury. She is an example of a successful executive in the global market for such talent, who thrives on the principle of delegation, giving others around her the chance to make good, well-informed decisions. She is also an active proponent of achieving work–life balance, having made the unprecedented move to regularly close the Australian business on Friday afternoons, to give her colleagues an early start on weekends, an initiative that clearly did not hurt sales or productivity.

In fr astru ctu re A country’s physical facilities that support economic activities make up its infrastructure, which includes transportation facilities such as airports, highways and railways; energy-producing facilities such as utilities and power stations; and communication facilities such as telephone lines and radio stations. Organisations operating in LDCs must contend with lower levels of technology and perplexing logistical, distribution and communication problems. Mike Mazzola, an executive for Reuters Ltd, a major information services provider, found that getting a telephone installed in Mexico could take up to a year. Even after he got one, he often had to dial several times before the call would go through. Mobile telephone companies have found tremendous opportunities in LDCs, where land lines are still limited. China has the world’s biggest base of mobile phone subscribers at over 800 million, and the number is expected to continue growing.

Econom i c interd epen d en ce One thing the recent global financial crisis made abundantly clear is how economically interconnected the world is. Although the crisis might seem atypical, savvy international managers realise that their companies will probably be buffeted by similar crises fairly regularly. For example, most students are probably familiar with the bursting of the dot-com bubble in the early part of this century, which caused a severe drop in the stock market and affected companies around the globe. The Asian financial crisis of 1997–98 similarly affected firms in North America, Europe, and other parts of the world. More recently, Greece’s inability to make payments on its debt sparked a panic that devalued the euro and threatened the stability of financial markets worldwide.39

infrastructure A country’s physical facilities that support economic activities.

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Recent financial woes have left a number of countries reeling, as reflected in a ‘misery index’ created by a Moody’s economist and illustrated in Exhibit 4.4. The misery index adds together a country’s unemployment rate and the budget deficit as a percentage of gross domestic product (GDP). The 2010 figures suggest significantly greater misery for almost every country compared to the beginning of this century. Iceland and Ireland, two countries hit particularly hard by the recent economic crisis, had a negative misery index in 2000 but registered high scores for misery in 2010. The United States went from a misery score of less than 5 in 2000 to about 21 in 2010.40 Another reflection of economic interdependence is the fact that parts and supplies for many companies come from around the world, which presents managers with new complexities. For example, a recent challenge for Honda and Toyota auto plants in the United States, Canada and Asia was getting the electronics and other parts they needed from suppliers in Thailand, where flooding had swamped huge industrial sections of the country. Walmart, the world’s largest retailer, with stores around the world, has been under pressure to evaluate and disclose how suppliers treat workers. At a recent shareholder meeting, a Bangladeshi labour organiser complained that many factories that produce goods for the giant US-based chain mistreat workers, and he presented a proposal that the company require suppliers to describe working conditions in detail.41 Exhibit 4.4 How countries are bearing the economic crisis: Misery Index, 2013 compared to 2000

Greater misery +40 +35 +30 +25

−5 Greece

Iceland

Ireland

−10

Portugal

2013 2000

2000

2013 2000

0

2000

+5

2013

+10

2000

+15

2013

2013

2013

+20

2000

Source: Based on (18 December 2009). A New Definition of Misery. The New York Times, based on data from Moody’s; http://www .nytimes.com/imagepages/2009/12/18 /business/economy/20091219_CHARTS _GRAPHIC.html (accessed 19 December 2009) ; Measuring Misery Around the World, The Cato Institute blog. Based on data from the Economist Intelligence Unit, IMF, The Johns Hopkins University; calculations by Professor Steve H Hanke; http://www.cato.org /publications/commentary/measuring-misery -around-world (accessed 30 June 2014).

Spain

United States

Less misery

➜➜ Countries vary widely in terms of economic development and are classified as either developed countries or less-developed countries (LDCs).

➜➜ Infrastructure refers to a country’s physical facilities, such as highways, utilities and airports, that support economic activities. ➜➜ As recent financial crises in the United States and Europe show, countries are economically interconnected, and



financial problems in one area of the world can spread rapidly around the globe.

➜➜ International business managers can expect their companies to be affected periodically by economic problems that cross geographical boundaries.

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Resou rce an d pro du ct m arkets When operating in another country, managers must evaluate the market demand for their products. If market demand is high, managers may choose to export products to that country. To develop plants, however, resource markets for providing needed raw materials and labour also must be available. For example, the greatest challenge for McDonald’s, which now sells Big Macs on every continent except Antarctica, is to obtain supplies of everything from potatoes to hamburger buns to plastic straws. At McDonald’s in Krakow, the burgers come from a Polish plant partly owned by Chicago-based OSI Industries; the onions come from Fresno, California; the buns come from a production and distribution centre near Moscow; and the potatoes come from a plant in Aldrup, Germany. McDonald’s tries to contract with local suppliers when possible. In Thailand, McDonald’s actually helped farmers cultivate Idaho russet potatoes of sufficient quality to produce their golden French fries.42

Exchan ge r ates The exchange rate is the rate at which one country’s currency is exchanged for that of another country. Changes in the exchange rate can have major implications for the profitability of international operations that exchange millions of dollars into other currencies every day.43 For example, assume that the Australian dollar is exchanged for 90 US cents. If the Australian dollar increases in value to over US $1.10, Australian goods will be more expensive in the US because it will take more of the US currency to buy a dollar’s worth of Australian goods. It will be more difficult to export Australian goods to the US, and profits will be slim. On the other hand, if the Australian dollar drops to a value of 75 US cents, Australian goods could be cheaper in the US and can be exported at a profit. But at that lower rate, foreign goods would be more expensive to import.

exchange rate The rate at which one country’s currency is exchanged for that of another country.

Inflation rates measure the annual rate of growth of prices in the economy, and interest rates measure the cost of borrowing money. Australia’s inflation rate has fluctuated substantially over the past 30 years – more than 10 per cent in some years – and so have its prevailing interest rates. Australia’s economy surpassed all expectations of its strength and robustness when it did not fall prey to reverberations from the Asian economic crisis of the 1990s, and rode out the more recent GFC relatively well. The medium-term outlook for the Australian economy is for more stability, with low inflation and interest rates, and solid economic growth, predicted to continue at approximately 1.5 to 3 per cent per year. This means that the Australian economy will be an attractive place to do business, since stability and a solid, growing economy are two key factors that major companies look for in their global search for countries in which to locate their businesses. As this decade progresses, the start of an economic recovery in the USA

Source: Getty Images/Danita Delimont

In fl ati o n, interest r ates an d eco n om i c grow th Projects such as Beijing’s fourth ring road, Shenzhen’s subway, the incredibly fast Maglev train system (430 km/hour) and the Three Gorges dam project, are examples of ongoing mega-projects in China. Analysts expect the Chinese government to boost its spending by 20 per cent on public works and other projects to improve the infrastructure in China.

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has stimulated a renewal of business confidence in some industries in Australia even though growth in its most successful sector – mining – has plateaued. The Australian economy is prey to any significant changes in the demand for its commodity exports to China in particular. Fluctuating interest rates and a high Australian currency present ongoing challenges for many businesses.

The legal–political environment Source: Fairfax Syndication/Penny Stephens

Businesses must deal with unfamiliar political systems when they go international, as well as with higher levels of government supervision and regulation. Government officials and the general public often view foreign organisations as outsiders or even intruders and are suspicious of their impact on economic independence and political sovereignty. Some of the major legal–political concerns affecting international business are political risk, political instability, and laws and regulations. The executive chairman and a major shareholder of Australia’s Seven Network, Kerry Stokes, was reported as being very concerned about Singapore Telecommunications’ (SingTel) proposed A$14 billion takeover of Cable and Wireless Optus. Stokes expressed concern that SingTel is 78 per cent owned by the Singapore Government, and that foreign government control of such infrastructure is not in the national interest.44 It was argued that such technical infrastructure could be used to conduct surveillance on Australia and Australians by the Singapore Government. Sometimes it becomes difficult to separate the arguments made in the national interest from the commercial interests of profit-seeking companies. In countries such as Singapore and Australia, where important industries such as media and telecommunications are very concentrated in ownership and control, governments must work with these businesses to regulate their affairs and ensure a reasonable balance between national interests and corporate profit motives.45 Governments closely control many industries in Australia, often preserving monopolies (such as casinos) or duopolies (such as commercial TV broadcasting). The taxi industry is one in which governments have controlled standards and restricted supply of taxi licences, and as a result these licences are worth as much as A$300 000 each. Whereas Sydney has 1.14 taxis per 1000 people, Auckland and Wellington have approximately three times that rate in their deregulated environments. Balancing the wishes of various stakeholders in such industries is a major challenge for governments in making the industry’s rules and regulations.46

The taxi industry is regulated in terms both of prices and number of taxi licences. Consumers and taxi owners are the main stakeholders who attempt to influence regulations and policies.

Po liti cal risk political risk An organisation’s risk of loss of assets, earning power or managerial control due to politically based events or actions by host governments.

An organisation’s political risk is defined as its risk of loss of assets, earning power or managerial control due to politically based events or actions by host governments.47 Political risk includes government takeovers of property and acts of violence directed against a firm’s properties or employees. Because such acts are not uncommon, organisations must formulate special plans and programs to guard against unexpected losses. For example, Hercules Inc., a large US-based chemical company, has increased the number of security guards at several of its European plants. Difficulties in mining operations in Bougainville, Papua  New Guinea, have been very costly to some major Australian mining companies. Some companies actually buy political risk insurance, especially as they move into high-risk areas such as Eastern Europe, China and Brazil. Political risk analysis has emerged as a critical component of environmental assessment for multinational organisations.48

4: Managing in a global environment

Po liti cal instabi lit y Another frequently cited problem for international organisations is political instability, which includes riots, revolutions, civil disorder and frequent changes in government. Political instability increases uncertainty. Civil wars and large-scale violence have occurred in Indonesia, Iran, Iraq, Afghanistan, Libya, Tunisia, Egypt, Syria, Malaysia, Thailand, Sri Lanka, Greece and Myanmar in recent decades. Although most organisations would prefer to do business in stable countries, some of the greatest growth opportunities lie in areas characterised by instability. The greatest threat of violence is in countries experiencing political, ethnic or religious upheaval. In China, for example, political winds have shifted rapidly, and often dangerously. Yet it is the largest potential market in the world for the goods and services of developed countries, and Foster’s, Xerox, Ford, Volkswagen, Motorola and Kodak are busy making deals there. Foreign managers are often subject to major threats in countries characterised by political instability. In countries as different as Russia, France, Yemen and Brazil, business leaders have been kidnapped, sometimes by professional criminals who hold them for ransom, and sometimes by employees wanting better working conditions. In recent years many ships have been seized by pirates off the coast of Africa and in parts of Asia. Recent political instability in certain regions has put the investments and staff of foreign companies at risk, sometimes grave risk. The Arab Spring, for instance, a revolutionary wave of protests in the Arab world that began in late 2010, has created a tumultuous environment for businesses operating in the region (including Tunisia, Egypt, Libya, Syria, Yemen and Bahrain).49 Political risk and political instability remain elevated throughout the Arab world, causing problems for both local and foreign organisations. Zaid Qadoumi, the CEO of Canada’s BroadGrain, which has been delivering agricultural commodities to emerging markets and political hot spots since the company was founded, offered extra pay for a crew to deliver a load of wheat to Libya, but advised workers to ‘cut the ropes and leave’ if they believed the situation was too dangerous.50

L aws an d regu l ati o ns Government laws and regulations differ from country to country and make manufacturing and sales a true challenge for international firms. Host governments have many laws concerning libel, consumer protection, information and labelling, employment and safety, and wages. International organisations must learn these rules and regulations, and abide by them. For example, French law forbids the use of children in advertising, and Germany prohibits the use of competitive claims, both of which are allowable and widely used in New Zealand and Australia.51 China is an interesting example of the way government laws and regulations can present a challenge for international organisations. China has become not only one of the world’s most important economies, but also one in which the private and government sectors are learning to work together in new ways. The Chinese government conducted virtually all activities in past decades, but the private sector now accounts for 50 per cent of China’s GDP. This number is increasing as enterprises from all over the world seek to work with Chinese government agencies to secure their position in both investing and producing in China’s low-cost environment, and also to gain access to what will one day be the world’s largest market.52 The most visible changes in legal–political factors grow out of international trade agreements and the emerging international trade alliance system. Consider, for example, the impact of the General Agreement on Tariffs and Trade (GATT), the European Union (EU), the North American Free Trade Agreement (NAFTA) and the Association of South East Asian Nations (ASEAN).

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➜➜ Complicated legal and political forces can create huge risks for international managers and organisations. ➜➜ Political risk refers to a company’s risk of loss of assets, earning power or managerial control due to politically



based events or actions by host governments.

➜➜ Political instability includes events such as riots, revolutions or government upheavals that can affect the operations of an international company.

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➜➜ A revolutionary wave of protests in the Arab world that began in late 2010, known as the Arab Spring, has created a tumultuous environment for businesses operating in the region. ➜➜ Managers must understand and follow the differing laws and regulations in the various countries where they do business.

The sociocultural environment A nation’s culture includes the shared knowledge, beliefs and values, as well as the common modes of behaviour and ways of thinking, among members of the society. Cultural factors are more perplexing than political and economic factors in foreign countries. Culture is intangible, pervasive and difficult to learn. It is imperative for international businesses to comprehend the significance of local cultures and deal with them effectively.

So cial valu es

ethnocentrism A cultural attitude marked by the tendency to regard one’s own culture as superior to others.

Many managers fail to realise that the values and behaviour that typically govern how business is done in their own country don’t always translate to the rest of the world. Western managers in particular are regularly accused of an ethnocentric attitude that assumes their way is the best way. Ethnocentrism refers to a natural tendency of people to regard their own culture as superior and to downgrade or dismiss other cultural values. Ethnocentrism can be found in all countries, and strong ethnocentric attitudes within a country make it difficult for foreign firms to operate there. One way that managers can fight their own ethnocentric tendencies is to understand and appreciate differences in social values. Research done by Geert Hofstede on 116 000 IBM employees in 40 countries identified four dimensions of national value systems that influence organisational and employee working relationships.53 Examples of how countries rate on the four dimensions are shown in Exhibit 4.5.

power distance The degree to which people accept inequality in power among institutions, organisations and people.

1 Power distance. High power distance means that people accept inequality in power among institutions,

uncertainty avoidance A value characterised by people’s intolerance for uncertainty and ambiguity, resulting in support for beliefs that promise certainty and conformity.

2 Uncertainty avoidance. High uncertainty avoidance means that members of a society feel

organisations and people. Low power distance means that people expect equality in power. Countries that value high power distance include Malaysia, India and the Philippines. Countries that value low power distance include Denmark, Austria and New Zealand. uncomfortable with uncertainty and ambiguity, and thus support beliefs that promise certainty and conformity. Low uncertainty avoidance means that people have high tolerance for the unstructured, the unclear and the unpredictable. High uncertainty avoidance countries include Greece, Portugal and Uruguay. Countries with low uncertainty avoidance values are Sweden, Singapore and Jamaica.

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3 Individualism and collectivism. Individualism reflects a value for a loosely knit social framework

in which individuals are expected to take care of themselves. Collectivism means a preference for a tightly knit social framework in which individuals look after one another and organisations protect their members’ interests. Countries with individualist values include the US, Canada, Great Britain and Australia. Countries with collectivist values include China, Mexico and Brazil. 4 Masculinity/femininity. In this formulation, ‘masculinity’ stands for a preference for achievement,

heroism, assertiveness, work centrality (with resultant high stress) and material success. ‘Femininity’, on the other hand, reflects the values of relationships, cooperation, group decision making and quality of life. Societies with strong masculine values include Japan, Thailand, Austria, Mexico and Germany. Countries with feminine values include Sweden, Norway, Denmark and France. Men and women alike subscribe to the dominant values in masculine and feminine cultures. Hofstede and his colleagues later identified a fifth dimension, long-term orientation versus shortterm orientation. The long-term orientation, found in China and other Asian countries, includes a greater concern for the future and highly values thrift and perseverance. A short-term orientation, found in Russia and West Africa, is more concerned with the past and the present and places a high value on tradition and meeting social obligations.54 Researchers continue to explore and expand on Hofstede’s findings. For example, in just 25 years, more than 1400 articles and numerous books were published on individualism and collectivism alone.55 Social values influence organisational functioning and management styles. For example, organisations in France and the Latin and Mediterranean countries tend to be hierarchical bureaucracies. Germany and other central European countries have organisations that strive to be impersonal, well-oiled machines. In India, Asia and Africa, organisations are viewed as large families. Effective management styles differ in each country, depending on cultural characteristics.56 Exhibit 4.5 Rank orderings of 10 countries along four dimensions of national value systems Country

Power distancea

Uncertainty avoidanceb

Individualismc

Masculinityd

Australia

7

7

2

5

Costa Rica

8 (tie)

2 (tie)

10

9

France

3

2 (tie)

4

7

West Germany

8 (tie)

5

5

3

India

2

9

6

6

Japan

5

1

7

1

Mexico

1

4

8

2

Sweden

10

10

3

10

Thailand

4

6

9

8

United States

6

8

1

4

a. 1 5 Highest power distance, 10 5 Lowest power distance b. 1 5 Highest uncertainty avoidance, 10 5 Lowest uncertainty avoidance c. 1 5 Highest individualism, 10 5 Lowest individualism d. 1 5 Highest masculinity, 10 5 Lowest masculinity Sources: Dorothy Marcic, Organizational Behavior and Cases, 4th edn (St Paul, MN: West, 1995). Based on two books by Geert Hofstede: Culture’s Consequences (London: Sage Publications, 1984) and Cultures and Organizations: Software of the Mind (New York: McGraw-Hill, 1991).

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individualism A preference for a loosely knit social framework in which individuals are expected to take care of themselves. collectivism A preference for a tightly knit social framework in which individuals look after one another and organisations protect their members’ interests. masculinity A cultural preference for achievement, heroism, assertiveness, work centrality and material success. femininity A cultural preference for cooperation, group decision making and quality of life.

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GLOBE Pr oject valu e d im en s ion s Recent research by the Global Leadership and Organizational Behavior Effectiveness (GLOBE) Project extends Hofstede’s assessment and offers a broader understanding for today’s managers. The GLOBE Project used data collected from 18 000 managers in 62 countries to identify nine dimensions that explain cultural differences. In addition to the dimensions identified by Hofstede, the GLOBE project identifies the following characteristics:57 1 Assertiveness. A high value on assertiveness means a society encourages toughness, assertiveness and

competitiveness. Low assertiveness means that people value tenderness and concern for others over being competitive. 2 Future orientation. Similar to Hofstede’s time orientation, this dimension refers to the extent to

which a society encourages and rewards planning for the future over short-term results and quick gratification. 3 Gender differentiation. This dimension refers to the extent to which a society maximises gender role

differences. In countries with low gender differentiation, such as Denmark, women typically have a higher status and play a stronger role in decision making. Countries with high gender differentiation accord men higher social, political and economic status. 4 Performance orientation. A society with a high performance orientation places high emphasis on

performance and rewards people for performance improvements and excellence. A low performance orientation means people pay less attention to performance and more attention to loyalty, belonging and background. 5 Humane orientation. The final dimension refers to the degree to which a society encourages and

rewards people for being fair, altruistic, generous and caring. A country high on humane orientation places a great value on helping others and being kind. A country low on this orientation expects people to take care of themselves. Self-enhancement and gratification are of high importance. Exhibit 4.6 gives examples of how some countries rank on these GLOBE dimensions. These dimensions give managers an added tool for identifying and managing cultural differences. Social values greatly influence organisational functioning and management styles. Consider the difficulty that Emerson Electric managers had when Emerson opened a new manufacturing facility in Suzhou, China. One area in which the American view and the Chinese view differed widely was in terms of time orientation. The American managers favoured a short time horizon and quick results, and they viewed their assignments as stepping stones to future career advancement. The Chinese managers, on the other hand, favoured a long-term approach, building a system and setting a proper course of action to enable long-term success.58 Other companies have encountered similar cultural differences. Consider the American concept of self-directed teams, which emphasises shared power and authority, with team members working on a variety of problems without formal guidelines, rules and structure. Managers trying to implement teams have had trouble in areas where cultural values support high power distance and a low tolerance for uncertainty, such as Mexico. Many workers in Mexico, as well as in France and Mediterranean countries, expect organisations to be hierarchical. In Russia, people are good at working in groups and like competing as a team rather than on an individual basis. Organisations in Germany and other central European countries typically strive to be impersonal, welloiled machines. Effective management styles differ in each country, depending on cultural characteristics.59

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Exhibit 4.6 Examples of country rankings on selected GLOBE value Dimension

Low

Medium

High

Assertiveness

Sweden

Egypt

Spain

Switzerland

Iceland

United States

Japan

France

Germany (former East)

Russia

Slovenia

Denmark

Italy

Australia

Canada

Kuwait

India

Singapore

Sweden

Italy

South Korea

Denmark

Brazil

Egypt

Poland

Netherlands

China

Russia

Israel

United States

Greece

England

Taiwan

Venezuela

Japan

Hong Kong

Germany

New Zealand

Indonesia

France

Sweden

Egypt

Singapore

United States

Iceland

Future orientation

Gender differentiation

Performance orientation

Humane orientation

Source: Mansour Javidan and Robert J. House. (2001). Cultural Acumen for the Global Manager: Lessons from Project GLOBE. Organizational Dynamics, 29:4, 289–305, with permission from Elsevier.

➜➜ Managers working internationally should guard against ethnocentrism, which is the natural tendency among people to regard their own culture as superior to others.

➜➜ Uncertainty avoidance is characterised by people’s intolerance for uncertainty and ambiguity and resulting support for beliefs that promise certainty and conformity.

➜➜ Hofstede’s sociocultural value dimensions measure power distance, uncertainty avoidance, individualismcollectivism and masculinityfemininity.

➜➜ Individualism refers to a preference for a loosely knit social framework in which individuals are expected to take care of themselves.

➜➜ Power distance is the degree to which people accept inequality in power among institutions, organisations and people.

➜➜ Collectivism refers to a preference for a tightly knit social framework in which individuals look after one another and organisations protect their members’ interests. ➜➜ Masculinity is a cultural preference for achievement, heroism,



assertiveness, work centrality and material success.

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➜➜ Femininity is a cultural preference for relationships, cooperation, group decision making and quality of life. ➜➜ Hofstede later identified another dimension, long-term orientation, which reflects a greater concern for the future and a high value on thrift and perseverance, versus short-term orientation, which reflects a concern with the past and present and a high value on meeting current obligations. ➜➜ Additional value dimensions recently identified by Project GLOBE are assertiveness, future orientation, gender differentiation, performance orientation and humane orientation.

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New Manager Self-Test W h at a r e y o u r s o c i a l va l u e s ? Instructions: Respond to each of the following statements based on your beliefs, indicating whether the statement is Mostly true or Mostly false for you. Mostly true

Mostly false

1 Achieving one’s personal goals is more important than achieving team or organisation goals. 2 Children should take great pride in the individual accomplishments of their parents and vice versa. 3 Pay and bonus systems should be designed to maximise individual interests over mutual interests. 4 I believe that orderliness and consistency should be stressed in society, even at the expense of experimentation and innovation. 5 Organisations work better when people do not break rules. 6 Organisations should spell out job requirements in detail so employees know what they are supposed to do. 7 I want to compete for high level jobs and high earnings. 8 People should be encouraged to be assertive rather than non-assertive. 9 In an organisation, people should be encouraged to be tough more than tender. 10 As a manager, I would want an egalitarian working relationship with my direct reports rather than maintaining distance from them. 11 Organisations should encourage subordinates to question their leaders. 12 Authority should be based on one’s ability and contribution rather than on one’s position in the hierarchy. 13 People in society will be happier if they accept the status quo rather than try to change things for the days ahead. 14 I prefer a norm of taking life events as they occur rather than constantly planning ahead. 15 I believe in focusing on current problems rather than trying to make things happen for the future. Scoring and interpretation: These questions represent a measure of five cultural values as described by Geert Hofstede and the GLOBE Project, as described in the chapter. Give yourself one point for each answer marked Mostly true. Questions 1–3 are for individualism-collectivism. A higher score of 2–3 represents a belief toward individualism; a lower score of 0–1 means a belief more toward collectivism. Questions 4–6 are about uncertainty avoidance. A higher score of 2–3 means a value for low uncertainty in life; a lower score of 0–1 means a value for higher uncertainty. Questions 7–9 represent assertiveness. A higher score of 2–3 represents a value for people being assertive; a lower score of 0–1 means a value for people being non-assertive. Questions 10–12 represent power distance. A higher score of 2–3 means a value for low power distance; a lower score of 0–1 means a value for high power distance. Questions 13–15 represent time orientation. A higher score of 2–3 means an orientation towards the present; a lower score of 0–1 represents a future orientation.

Your scores have both individual and societal meaning. Compare your scores to other students to understand your perception of the different values in your colleague group. On which of the five values would you personally like to score higher? Lower? These five values also differ widely across national cultures. Go to the website http//:www.geerthofstede.com/hofstede_dimensions.php and compare your country’s scores on the five values to the scores of people from other countries. At this site, the term masculinity is used instead of assertiveness. What surprises you about the differences across countries? Sources: Adapted from Robert J. House et al. (eds), Culture, Leadership, and Organizations: The GLOBE Study of 62 Societies (Thousand Oaks, CA: Sage Publications, 2004); Geert Hofstede, Culture’s Consequences (London: Sage Publications, 1984); and D. Matsumoto et al. (1997). Context-Specific Measurement of Individualism-Collectivism on the Individual Level: The Individualism-Collectivism Interpersonal Assessment Inventory. Journal of Cross-Cultural Psychology, 28:6, 743–67.

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Com mu ni cati o n d i fferen ces People from some cultures tend to pay more attention to the social context (social setting, non-verbal behaviour, social status, etc.) of their verbal communication than Americans do. For example, Australian managers working in China have discovered that social context is considerably more important in that culture, and they need to learn to suppress their impatience and devote the time necessary to establish personal and social relationships. Exhibit 4.7 indicates how the emphasis on social context varies among countries. In a high-context culture, people are sensitive to circumstances surrounding social exchanges. People use communication primarily to build personal social relationships; meaning is derived from context – setting, status and nonverbal behaviour – more than from explicit words; relationships and trust are more important than business; and the welfare and harmony of the group are valued. In a low-context culture, people use communication primarily to exchange facts and information; meaning is derived primarily from words; business transactions are more important than building relationships and trust; and individual welfare and achievement are more important than the group.60 To understand how differences in cultural context affect communications, consider the Australian expression, ‘The squeaky wheel gets the oil’. It means that the loudest person will get the most attention, and attention is assumed to be favourable. Equivalent sayings in China and Japan are ‘Quacking ducks get shot’ and ‘The nail that sticks up gets hammered down’, respectively. In these latter two cultures, standing out as an individual merits unfavourable attention. Consider the culture gap when China’s Lenovo Group acquired IBM’s PC business. In meetings and conference calls, Western executives were frustrated by their Chinese counterparts’ reluctance to speak up, while the Chinese managers were irritated by the Americans’ propensity to ‘just talk and talk’, as one vice president of human resources put it.61 High-context cultures include Asian and Arab countries. LowHigh context cultures tend to be American and Northern European. Chinese context Korean Even within these countries, cultural subgroups vary in the Japanese extent to which context counts, explaining why differences among Vietnamese Arab groups can hinder successful communication. White females, and Greek indigenous people all tend to prefer higher context communication Spanish Italian than do white males. A high-context interaction requires more English time because a relationship has to be developed, and trust North American Scandinavian and friendship must be established. Furthermore, most male Swiss Low managers and most people doing the hiring in organisations are German context from low context cultures, which conflicts with people entering the organisation from a background in a higher-context culture. ➜➜ A high-context culture is one in which people use communication to build personal relationships.

➜➜ In a low-context culture, people use communication primarily to exchange facts and information.

➜➜ The United States is a lowcontext culture. China is an example of a high-context culture.

high-context culture A culture in which people use communication to build personal relationships. low-context culture A culture where people use communication primarily to exchange facts and information.

Exhibit 4.7 Highcontext and low-context cultures Sources: Edward T. Hall, Beyond Culture (Garden City, NY: Anchor Press/Doubleday, 1976); and J. Kennedy and A. Everest. (September 1991). Put Diversity in Context. Personnel Journal, 50–4.

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The changing international landscape Many companies today are going straight to China or India as a first step into international business, either through outsourcing or by using various market entry strategies. China Take a Moment and India have been the world’s fastest-growing economies in recent years. In addition, As a new manager, remember Brazil is coming on strong as a major player in the international business landscape.

that understanding national culture is as important as paying attention to economic and political matters when working Ch ina, In c. in or with a foreign country. Prepare yourself For over a decade, foreign companies have invested more in business in China by studying how the foreign country’s social and cultural values compare with your own than anywhere else in the world. A market that was of little interest a decade country. Avoid an ethnocentric attitude ago has become the one place nearly every manager is thinking about. China and recognise how the ethnocentrism is German car maker BMW’s biggest market for its largest and most profitable of others may affect your sedans.62 Apple has two stores in Shanghai, and they are so busy that the company perspective or work is opening a third, along with dozens of other stores throughout China. Apple’s four attitudes.

stores in Beijing and Shanghai are the company’s most heavily used – as well as the most profitable.63 Apple had to jump through all sorts of legal and regulatory hurdles to sell in China, but it was worth it to get the iPhone into the largest mobile phone market in the world.64 Although outsourcing has been the most widespread approach to involvement in China, the country is rapidly moving towards a consumer-driven economy, with the fastest-growing middle class in history. China is the largest or second-largest market for a variety of products and services, including mobile phones, automobiles, consumer electronics, luxury goods and Internet use.65 Yet, doing business in China has never been smooth, and it appears to be getting even tougher. New regulations and government policies are making life hard for foreign companies in all industries. For Internet companies such as Facebook, Twitter, eBay and Google, China has been more a source of trouble and frustration than of new customers.66 Google closed its Chinese site, Google.cn, in early 2010 because of government restrictions and censorship, although the company later renewed its licence to provide limited services in China. Some multinational firms doing business with Chinese organisations, particularly big state-owned companies, have also had problems getting payments on their contracts. ‘A contract is not an unchangeable bible for Chinese companies,’ said Beijing-based lawyer Jingzhou Tao. Chinese managers frequently withhold payments as a tactic in price negotiations. Part of the reason is that these organisations are not just companies but also political entities. But another reason is because of cultural differences. ‘Chinese culture will build a relationship before the contract,’ said Arthur Bowring, managing director of the Hong Kong Shipowners Association. ‘The relationship is always something that can be talked about. The contract is just a set of papers that you keep in your bottom drawer.’67 Despite the problems, China is a market that foreign managers can’t afford to ignore. However, competition from domestic companies in China is growing fast. In some industries, local companies have already become market leaders, such as Midea in consumer appliances and 7 Days Inn in budget hotels.68 One Chinese company that is rapidly becoming a global leader is Lenovo.

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Innovative Way

Lenovo in China The fastest-growing company in the PC industry is one that most people outside of China hadn’t even heard of a few years ago, even after it bought IBM’s ThinkPad brand in 2005. Lenovo is now the No. 2 seller of computers in the world (behind Hewlett-Packard) and is innovating in new product categories such as tablets, smartphones and smart TVs. Lenovo’s CEO, Yang Yuanqing, who started as a salesman and once delivered computers by bicycle, is now China’s highestpaid executive. With its emphasis on quality (its machines rank tops for reliability), Lenovo is redefining the perception of the phrase ‘made in China’. Moreover, it is redefining the meaning of a Chinese company, blending the best of Eastern philosophy and culture with the best of Western business and management

thinking. The company has headquarters in Beijing, but Yang spends a third of his time at Lenovo’s offices in Raleigh, North Carolina. Lenovo’s top managers, once almost all Chinese with no international experience, now come from 14 different nations. Most members of the top leadership team speak two or more languages. They live and work in six different cities on three continents. Dan Stone, who was born in Israel, has his office in the United States, while Gerry Smith, born in the United States, works out of Singapore. Lenovo’s top executives know that appreciating and merging Chinese and non-Chinese perspectives is crucial to success. It’s an idea that Australian managers need to be paying attention to.

Source: Chuck Salter. (December 2011–January 2012). Lenovo: Protect and Attack. Fast Company, 116–21, 154–5.

In d ia, th e servi ce giant India, second only to China in population, has taken a different path toward economic development. Whereas China is strong in manufacturing, India is a rising power in software design, services and precision engineering. Numerous companies see India as a major source of technological and scientific brainpower, and the country’s large English-speaking population makes it a natural for Western companies wanting to outsource services. One index lists more than 900 business services companies in India, which employ around 575 000 people.69 One of the fastest-growing industries in India is pharmaceuticals, medical devices and diagnostics. The country has a large number of highly trained scientists, doctors and researchers, and Western firms Abbott Laboratories and Covidien have both opened research and development centres there. India is the world’s largest exporter of generic drugs. By 2020, India’s pharmaceuticals industry will likely be a global leader, according to a report by PricewaterhouseCoopers.70

Br a zi l’s growin g clout Brazil is another country that is increasingly gaining managers’ attention. Although Brazil’s economic growth slowed in 2011, it is still a large producer and has a large domestic market, with large and growing agricultural, mining, manufacturing and service sectors.71 The country’s economy, already the seventh largest in the world, is projected to move into fourth place by 2050. The choice of Rio de Janeiro to host the 2016 Summer Olympics is also an indication of Brazil’s growing clout in the international arena. Brazil has a young, vibrant population, the largest in Latin America, and a rapidly growing middle class eager to experience the finer things in life. Consumer spending represents about 60 per cent of Brazil’s economy. The Brazilian government has initiated major investments in the development of infrastructure such as highways, ports and electricity projects, which is creating jobs as well as spurring the development of other businesses. In addition, in 2010, Brazil announced a $22 billion investment in science and technology innovation.

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➜➜ Many companies are going straight to China or India as a first step into international business.

➜➜ China is strong in manufacturing, whereas India is a major provider of services.

➜➜ Outsourcing is the most widespread involvement by foreign firms in these two countries.

➜➜ The Chinese company Lenovo is emerging as the country’s first global corporation, with managers coming from 14 different nations, living and working in six cities on three continents.

➜➜ Brazil, with its rapidly growing consumer market, is becoming a major player in the shifting international landscape.

remember this

➜➜ Managers also look to China, India and Brazil as sources of lowercost technological and scientific brainpower.

Internatio nal tr ad e allian ces GATT and t he Wor ld T r ad e O r g an ization The General Agreement on Tariffs and Trade (GATT), signed by 23 nations in 1947, started as a set of rules to ensure non-discrimination, clear procedures, the negotiation of disputes and the participation of less developed countries in international trade. GATT sponsored eight rounds of international trade negotiations aimed at reducing trade restrictions. The 1986 to 1994 Uruguay Round (the first to be named for a developing country) involved 125 countries and cut more tariffs than ever before. In addition to lowering tariffs 30 per cent from the previous level, it boldly moved the world closer to global free trade by calling for the establishment of the World Trade Organization (WTO). The WTO represents the maturation of GATT into a permanent global institution that can monitor international trade and has legal authority to arbitrate disputes on some 400 trade issues.72 As China increasingly becomes ‘the world’s factory’, and India becomes a major global player in information technology, call centres and servicing industries, the globalisation of business networks is expected to roll on rapidly. The WTO, with 153 member countries, seeks to increase the welfare of people in member nations, through improving trade, but also through improving the environment, contributing to anti-dumping, intellectual property management, transparency in government and other desirable international standards. See http://www.wto.org for more details of this interesting organisation. China has benefited substantially since joining the WTO in 2001. Further, India and China are developing into becoming massive consumer markets in their own right.

Eur op ean Uni on Formed as the European Economic Community in 1958 to improve economic and social conditions among its members, the European Union (EU) today is a 28-nation alliance, as illustrated in Exhibit 4.8. The biggest expansion came in 2004 when the EU welcomed 10 new members from Southern and Eastern Europe. The goal of the EU is to create a powerful single market system for Europe’s millions of consumers, allowing people, goods and services to move freely. The increased competition and economies of scale within Europe will enable organisations to grow large and efficient, becoming more competitive in the US and other world markets. Some observers fear that the EU will become a trade barrier, creating a ‘fortress Europe’ that will be difficult to penetrate by organisations in other nations.

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SWEDEN

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FINLAND

ESTONIA

LATVIA

DENMARK

LITHUANIA

NETHERLANDS IRELAND

UNITED BELGIUM KINGDOM POLAND

GERMANY

LUXEMBOURG FRANCE

CZECH REPUBLIC

AUSTRIA

SLOVAKIA HUNGARY ROMANIA

CROATIA SLOVENIA BULGARIA ITALY SPAIN GREECE PORTUGAL

MALTA

CYPRUS

Exhibit 4.8 The 27 nations within the EU

Another aspect of European unification is the introduction of the euro. Several member states of the EU have adopted the euro, a single European currency that replaced national currencies in Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.73 However, not all has gone smoothly for the integration, particularly since the global recession began. As economic stability varied from country to country, pitting winners against losers, the economic crisis revived national loyalties and cross-border resentments, slowing the move toward a unified and cohesive ‘European identity’.74 Spain, Ireland, Italy and particularly Greece have all had trouble paying their debts, putting the entire eurozone at risk and leading to a possible break-up of the euro system. As EU officials scrambled to dispel the fears that Greece would exit the euro, multinational firms doing business in EU countries were bracing for the worst and taking steps to protect themselves. Managers at companies such as Heineken NV and GlaxoSmithKline PLC, for instance, moved all cash reserves out of the eurozone and

euro The single European currency that has replaced 17 national currencies in the EU. The eight coins have one side common to all countries and a reverse side specific to each country. The seven different banknotes look the same in each country.

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into currencies such as the US dollar or British pound. Some analysts think that a broad break-up of the eurozone is unlikely, but the uncertainty has smart managers rethinking what they would do in the event that a return to national currencies required a rethinking of everything from how to expand operations to how to pick suppliers and pay employees.75

Nort h Amer i can Free T r ad e Ag r eem en t ( NAFTA ) NAFTA, which came into effect on 1 January 1994, merged the US, Canada and Mexico into a megamarket with more than 421 million consumers. The agreement broke down tariffs and trade restrictions on most agricultural and manufactured products over a 15-year period. Thus, virtually all US industrial exports into Canada and Mexico are duty free. NAFTA builds upon the 1989 US–Canada agreement and is aimed at spurring growth and investment, increasing exports and expanding jobs in all three nations.76 Although NAFTA has not lived up to its grand expectations, experts stress that it increased trade, investment and income and continues to enable companies in all three countries to compete more effectively with rival Asian and European firms.77

Associ at i on of So uth E as t A s ian N atio n s ( ASEAN ) ASEAN was founded in 1967 when the governments of five countries – Indonesia, Malaysia, the Philippines, Singapore and Thailand – joined together to pursue three mutual purposes: ●● jointly accelerating economic growth, social progress and cultural development ●● promoting regional peace and stability ●● actively collaborating on technical, scientific and economic matters. In the past 46 years, ASEAN has become a significant force in the fastest-growing region in the world, and has grown to a membership of 10 countries, having admitted Brunei Darussalam, Laos, Vietnam, Cambodia and Myanmar. ASEAN member countries established the AFTA arrangement (ASEAN Free Trade Area) in 1993, with a market of half a billion people, aimed at attracting investment, providing large companies with a large integrated market, and driving competitiveness and productivity forward. In 1994, the AFTA arrangements were brought forward to be fully implemented within a decade of that time, comprising the elimination of trade barriers between the member countries. Some arrangements came into place immediately to free up trade and promote business efficiency. In 1977, Australia was recognised as one of the ASEAN group’s important trading partners and was given ‘dialogue partner’ status. ASEAN keeps a committee and office in Canberra, and similar offices in other of its key trading partners, to coordinate business and other relationships. Along with Japan and China, ASEAN countries represent critically important trade partners for Australia, in terms both of imports and of exports. ASEAN countries have recently continued to expand their trading arrangements, moving forward with new agreements with Australia and New Zealand, China, India, Korea and Japan. For Australia and New Zealand, the AANZFTA (ASEAN–Australia and New Zealand Free Trade Area) agreement came into existence in 2010. It aims to make trading more efficient across these regions and countries by reducing tariffs, freeing up investment rules and making the transfer of goods, services, people and money more efficient and effective across the signatory countries.

Tr ade alli ances: p ro m is e or pitfal l ? The creation of trading blocs is an increasingly popular part of international business, and the future will likely see the creation of new trade alliances. These developments will provide cheaper Mexican watermelons in the US and South America, more Israeli shoes in Central Europe, and more Colombian

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roses in Venezuela. So, what challenges lie in store for organisations and countries that are not part of these alliances, such as in small economies and remote parts of the world, including Australia and New Zealand? Increasingly, Australia and New Zealand look due north to find their trading alliances and export destinations across Asia, from developed countries such as Japan to waking giants such as China and Indonesia, which each have relatively large populations. These agreements entail a new future for international organisations and pose a range of new questions for international managers. For example: ●● Will the creation of multiple trade blocs lead to economic warfare among them? ●● Will trade blocs gradually evolve into three powerful trading blocs composed of the American hemisphere, Europe (from Ireland across the former Soviet Union) and the ‘yen bloc’ encompassing the Pacific Rim? Where will China and India fit in? ●● Will the expansion of global, stateless organisations bypass trading zones and provide economic balance among them?78 Only the future will provide answers to these questions. International managers and global organisations will both shape and be shaped by these important trends. ➜➜ Regional trading alliances and international trade agreements are reshaping global business.



➜➜ The World Trade Organization (WTO) is a permanent membership

➜➜ Two important, yet sometimes controversial, regional alliances are the European Union (EU) and

organisation that monitors trade and has authority to arbitrate disputes among 153 member countries.

Global operating Camatic is an Australian company that makes stadium and theatre seats, including the seating for the Seattle Kingdome in the US. Most recently, Camatic produced and installed 19 000 seats for the refurbished and newly roofed Wimbledon centre court in London, which is a fine example of global operations, given that the company is based in suburban Melbourne. Camatic has won contracts and supplied seating for theatres and sporting venues all over the world. It invests significantly in its product design and in technology, and has the ability



the North American Free Trade Agreement (NAFTA).

remember this

➜➜ ASEAN is an important trading region near to Australia. ➜➜ The euro is a single European currency that has replaced the currencies of 17 EU member nations.

Innovative Way to internationally subcontract manufacturing to achieve sound cost control. Similarly, the Moran furniture company is successfully selling its leather reclining chairs in Japanese department stores. In all these cases, the companies find it easier and economically preferable to manufacture in Australia, or to produce under arrangement with subcontractors in low cost countries, where they can competitively develop and produce products in a single location, then ship or even air freight their products to their destinations.

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LG Electronics Two decades ago, managers at South Korea’s LG Electronics decided to solve a longtime problem for homemakers: how to keep the kimchi from stinking up the fridge. Kimchi, made from fermented cabbage seasoned with garlic and chilli, is served with most meals in Korea. Any leftovers in the refrigerator are inevitably going to taint other foods and leave a pungent odour that lingers for weeks. LG built a refrigerator with a special compartment to isolate the smelly kimchi and it quickly became a must-have in Korean homes. LG managers realised that their understanding of Korean culture led to an amazingly successful new product. So, they reasoned, why not apply that concept to designing products for other markets? LG doesn’t just build a standard appliance and expect the whole world to love it. Instead, it taps into local idiosyncrasies in key markets by opening in-country research, manufacturing and marketing facilities, enabling the company to ‘speak to consumers individually’, as one manager put it. The approach led to products such as the Kebab Microwave in Iran, which includes a microwave-safe skewer rack and a preset for reheating shish kebabs, and the Karaoke phone in Russia that can be programmed with the top 100 Russian songs, whose lyrics scroll across the screen when they’re

Innovative Way

played. The phone was an instant hit in a country where people like to entertain at home during the long winters. In India, LG has introduced a number of successful products, such as refrigerators with larger vegetable- and water-storage compartments, surge-resistant power supplies and brightly coloured finishes that reflect local preferences. Microwaves are designed with a dark interior to hide masala stains. After learning that many Indians use their televisions to listen to music, LG came out with a model featuring an ultra-sound system. These efforts made LG the unprecedented leader in appliance sales in India. Global sales reached US$2.27 billion in 2005 and LG’s market share in some categories was nearly twice that of the competition. By making an effort to learn about local tastes and preferences, LG has become the appliance maker to beat in emerging global markets. Managers have now turned their attention to China, where LG is building extensive in-country facilities and learning all it can about local cultural preferences in the world’s biggest consumer market. By 2012, LG’s globalisation led it to employ over 80 000 employees in its home country of Korea, and over 50 000 people abroad, and it continues to grow and prosper via a series of award-winning products for homes and business applications.

By the first quarter of 2013 LG had become the world’s third-largest vendor of smartphones, shipping 10.3 million units in just the first quarter of the year. LG wants to increase its market share in India and has invested in some Bollywood stars to promote their phones to the country’s youth. LG will offer the Indian market 40 different choices of handsets ranging from entry level to smart phones, some with Android operating systems and some with the less popular Windows platform. Unlike Nokia, LG has paid close attention to the expectations of the Indian youth, ensuring that even their cheapest phones have enough memory to play popular games such as ‘Temple Run’. Sources: Esfahani, E. (December 2005). Thinking Locally, Succeeding Globally. Business 2.0, 96–8; (22 February 2006). LG Electronics Record US$2.27 Billion Sales in 2005 in MEA. Albawaba Business, http://www.albawaba.com/business/ lg-electronics-records-us227-billion-sales2005-mea (accessed 16 December 2013); Lee, Min-Jeong, and Osawa, Juro. (6 May 2013). LG Takes No 3 Spot in Smartphone Market. The Wall Street Journal, http://blogs.wsj.com/digits/2013/05/06/ lg-takes-no-3-spot-in-smartphone-market/ (accessed 25 June 2013); (18 February 2010). LG Eyes 10% Market Share In Mobile Handset. Business Standard, http://www.business-standard.com/article/ companies/lg-eyes-10-market-share-in-mobilehandset-110021800214_1.html (accessed 25 June 2013).

India’s tech talent

Google didn’t go to India for cheap labour. It went there for technological talent. When the company wanted to open a new R&D centre, it chose Bangalore, partly because many of the Indian engineers working at Google’s California headquarters wanted to return home and participate in India’s growth. Managers knew Google would have a hard time finding the technological brainpower the company needed in the United States alone. The company also has a larger facility

in Hyderabad and two smaller offices in Mumbai and Delhi. In addition to its hopes for India as a hotbed of innovation, Google also sees India as a vast potential market. The country’s online advertising industry is minuscule today but projected to grow rapidly. Managers also believe that people in India are perfectly suited to help Google develop products for emerging markets where billions of people aren’t yet on the Internet. ‘The fact that they come from this culture, the

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fact that they’ve seen the population of the world that’s not on the Internet ... puts them in a fairly unique position to transcend both worlds and be creative about emerging-world products,’ says Prasad Ram who heads the Bangalore research centre. For one thing, Indian engineers know that developing markets have different priorities. For most people in developed countries like the United States, Internet use is about lifestyle,

but for those in developing nations such as India and China, it’s about livelihood. They want to know how the Internet can help them generate income, improve their communities, and further their own and the country’s economic development. That entrepreneurial spirit is a perfect fit for Google, where the guiding philosophy is to take risks and be aggressive in finding new applications to serve new markets. Source: Sheridan Prasso. (29 October 2007). Google Goes to India. Fortune, 160–6.

Take a Moment Before reading the next section, go to the Management CourseMate site and take the ‘Cultural Intelligence’ self-test. Your answers will indicate your level of cultural intelligence and help you relate to the concepts that follow. As a new manager, begin soon to develop cultural intelligence for other countries.

Slavery still exists in some countries that use organised child labour. This would be unacceptable in first-world countries such as Australia and New Zealand. A category of product that most of us enjoy is chocolate, most of which comes from the cocoa industry of West Africa, where slavery, including that of very young children, has been widely observed and reported. As a result of pressure from consumers, special interest groups and human rights advocates, major chocolate-producing companies are increasingly pressuring their suppliers in Africa to stop such inhumane practices. And while the major global chocolate producers, such as Nestlé, Cadbury, Mars, Lindt and Hershey, have worked with their suppliers to achieve improvements and certifications that the cocoa beans that they buy are ‘slavery free’, this is easier said than done. Without major resourcing by these companies, it is all too easy for suppliers to revert to bad practices once the company buyers and inspectors have left. Nike was famously exposed in the 1990s for selling highly priced shoes that were made in Asian sweatshops, and its reputation suffered significantly. While it was Nike that became infamous for being caught allowing these things to happen and indirectly profiting from the lower costs that come from these suppliers’ factories, it is still the case that despite improvements, sweatshops are a major global problem. One issue is safety standards, which are high in first-world countries such as Australia and New Zealand, and much lower in many operations in third-world countries. So what should managers in Australia do, when with just a little investigation they can and do know of the much lower standards being applied in these sweatshops? Whose job is it to ‘police’ labour and safety standards in the over 100 000 factories in low-wage countries, particularly in Asia, Africa and Central and South America, that are supplying almost everything for sale in our shops? These are challenging problems to solve, with massively widespread improvements needed. Yet those local factories that run substandard operations by our Western standards

sustainable development

Sustainable development: a global issue and opportunity

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are doing so to prosper, and have continuing strong incentives to shave costs by cutting all sorts of corners. This is indeed a global problem. The most progressive companies have worked hard to influence their suppliers to bring in high standards of work safety and other aspects of work. They do so from a belief that even if there are extra costs of doing so, there will be a reputational and efficiency benefit in the longer term. This will bring them a market edge, as consumers increasingly want to buy from companies that promote ‘doing good’ policies, and avoid companies that allow or turn a blind eye to substandard approaches in their supply chains. What will your stance be when you are a manager buying goods or components from relatively poor countries which do not have national workplace standards as high as yours? Nike has certainly lifted its standards of monitoring and control of these matters in its supplier companies from a low base, as has the chocolate industry. Unscrupulous employers who do not understand or cannot afford to invest in sustainable practices do the wrong thing by their workers.

Response to the Management Challenge

For managers at Toyota in Australia and GPC Electronics, the never-ending challenge is to justify the existence of their operations in a borderless world. Learning across borders is critical, where competitiveness has to be established and sustained on a global basis. GPC and Toyota recognise that they cannot be competitive on cost with low wage country operations, and because all manufacturers are achieving high quality these days they are turning to innovation as a differentiator. This means creating new services, product features and process improvements including new ways of doing business, that add value to customer outcomes. For large companies such as Toyota, and smaller firms such as GPC Electronics, innovation is a strategy for survival and a means towards

prosperity. However, it brings challenges for managers. These include how to stimulate creativity across the workforce and how to commercialise new ideas once they are invented and validated. (See also Chapter 21.) With the high Australian dollar, companies such as GPC and Toyota find it increasingly difficult to justify the existence of their manufacturing operations in Australia; indeed, Toyota has been forced to reduce its staff headcount in 2013–14 and announced its complete closure of Australian manufacturing as of 2017. On the other hand, GPC Electronics has found that through continuous and radical innovation it is possible to survive and prosper in the electronics industry in Australia.

discussion questions 1 Why do you think international businesses traditionally prefer to operate in industrialised countries? Discuss. 2 What specifically would the experience of living and working in another country contribute to your skills and effectiveness as a manager in your own country?

5 What steps could a company take to avoid making product design and marketing mistakes when introducing new products into a foreign country? 6 Compare the advantages associated with the foreign-market entry strategies of exporting, licensing and establishing wholly owned subsidiaries.

3 Do you think it is realistic that bottom of the pyramid (BOP) business practices can have a positive effect on poverty and other social problems in developing countries? Discuss.

7 Should a multinational company operate as an integrated, worldwide business system or would it be more effective to let each subsidiary operate autonomously?

4 What policies or actions would you recommend to an entrepreneurial Australian business wanting to do business in Asia, Europe or the US?

8 What does it mean to say that the world is becoming ‘borderless’ or that large organisations are ‘stateless’?

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9 Do you think it’s possible for someone to develop a global mindset if they never live outside their native country? How might they do that? 10 What is meant by the cultural values of individualism and masculinity or femininity? How might these values affect organisation design and management processes? 11 How do you think trade alliances such as the EU and ASEAN may affect you as a future manager?

12 Do you expect the trends of moving manufacturing operations to China will continue unabated? Will there be any factories left in New Zealand or Australia in the year 2030? 13 Why do you think many people are so frightened by globalisation? Based on what is occurring in the world today, do you expect the globalisation backlash to grow stronger or weaker over the next decade?

Quality or closing On the way home from the launch party celebrating Plaxcor Metals’ entrance into the international arena, Donald Fields should have been smiling. He was part of the team that had closed the deal to sell component parts to Asian Business Machine, after his company had spent millions trying to break into this lucrative market. Several more deals were riding on the successful outcome of the first international venture. The expansion into new markets was critical to Plaxcor’s survival. As CEO Leslie Hanson had put it: ‘If we aren’t global within five years, we may as well close up shop.’ Fields was tense because of news he learned tonight: intense bidding for the first sale and several last-minute changes requested by the customer had forced Plaxcor to heavily modify its production process. The production manager had confided that ‘The product is a mess but still better than most of the competition’. He went on to assure him that, although well below normal standards, the variability would ‘probably not cause any problems’ and could be worked out after a few more orders.

Ethical

challenge Fields had spent the last few months selling Plaxcor on its quality reputation. He knew they could probably get by with the first runs and meet the opening deadline. He was afraid that telling the customer of the potential problems or extending the deadline would risk not only this deal but pending projects as well. But he knew if problems arose with the products, Plaxcor’s future in the Asian market would be bleak. Donald Fields was not sure Plaxcor could afford to gamble its entrance in the international market on a substandard product. W h at d o yo u d o ? 1 Ask the customer for an extension of the deadline, and bring the products up to standard. 2 Gamble on the first runs, and hope the products do not fail. 3 Inform the customer of the problem, and let the customer make the decision.

C o n s i d e r at i o n s f o r o v e r s e a s e x pa n s i o n While at university, a friend of yours who is studying information systems developed a computer program which can predict stock price fluctuations faster than existing products. You and he have built a solid, growing business in Australia, selling and servicing this software package to stockbroking firms and in a cut down version, to professional private investors and ‘day traders’. Sales have recently slowed in Australia because the local market is quite saturated and mature; however upgrades and servicing of existing clients continues to be profitable. As the business owners and founders, you have decided to expand overseas and are considering the following questions, being discussed at your strategy meeting. 1 Which countries will be most attractive to go to in the first instance, and what are the criteria for choosing these? 2 Should your firm go it alone or seek to partner with firms in those countries, or acquire businesses there as a platform?

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3 What staffing capability will be required to expand outside Australia?

Gr oup challenge

4 Should you expect that the product will need no adaptation or some changes for foreign markets? 5 Will economic and business conditions, cultures, costs, wages and prices be the same overseas? 6 What are the key risks of overseas expansion and how will you manage them? 7 How can you best plan, organise, lead and control your overseas expansion?

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Case for cr itical analysis

S h u i Fa b r i c s

Ray Betzell, general manager for the past five years of a joint venture between Rocky River Industries and Shanghai Fabric Ltd., was feeling caught in the middle these days. As he looked out over Shanghai’s modern gleaming skyline from his corner office, Ray knew his Chinese deputy general manager, Chiu Wai, couldn’t be more pleased with the way things were going. Ten years ago, Rocky River had launched Shui Fabrics, a 50-50 joint venture between the domestic textile manufacturer and the Chinese company, to produce, dye and coat fabric for sale to both Chinese and international sportswear manufacturers. After many obstacles, considerable red tape and several money-losing years, the joint venture was fulfilling Chiu Wai’s expectations – and those of the local government and party officials who were keeping careful tabs on the enterprise – much more quickly than he’d anticipated. By providing jobs to close to 3000 people, Shui was making a real contribution to the local economy. Job creation was no small accomplishment in a country where outside experts estimated that the actual (as opposed to the official) unemployment rate routinely hovered at 20 per cent. From Chiu Wai’s point of view, Shui was generating just the right level of profit – not too little and, just as importantly, not too much. With so many Western–Chinese joint ventures still operating in the red, Chiu Wai saw no reason Ray’s Western bosses shouldn’t be more than satisfied with their 5 per cent annual return on investment. Those earnings weren’t going to land him in hot water with local authorities, many of whom still viewed profits made by Western companies on Chinese soil as just one more instance of exploitation in a long history of foreign attempts at domination. If Chiu Wai had been eavesdropping on the conversation Ray had just had with Rocky River president Paul Danvers, the Chinese manager would have certainly been dismayed. Ray, who’d thoroughly enjoyed his time in China, was painfully aware of the quiet frustration in his boss’s voice as it travelled over the phone lines from the other side of the world. To be sure, Paul conceded, Shui had cut Rocky River’s labour costs, given the company access to the potentially huge Chinese market, and helped inoculate the firm against the uncertainty surrounding the periodic, often

contentious Western–Chinese textile trade negotiations. Current import tariffs and quotas could change at any time. ‘But a 5 per cent ROI is just pathetic,’ Paul complained. ‘And we’ve been stuck there for three years now. At this point, I’d expected to be looking at something more in the order of 20 per cent.’ He pointed out that greater efficiency plus incorporating more sophisticated technology would allow Shui to reduce its workforce substantially and put it on the road to a more acceptable ROI. ‘I’m well aware of the fact that the Chinese work for a fraction of what we’d have to pay American workers, and I do appreciate the pressure the government is putting on you guys. But still, it doesn’t make any sense for us to hire more workers than we would in a comparable domestic plant.’ After an uncomfortable silence, during which Ray tried and failed to picture broaching the subject of possible layoffs to his Chinese counterparts, he heard Paul ask the question he’d been dreading: ‘I’m beginning to think it’s time to pull the plug on Shui. Is there any way you can see to turn this around, Ray, or should we start thinking about other options? Staying in China is a given, but there has to be a better way to do it.’ Questions 1 How would you characterise the main economic, legal–political and sociocultural differences influencing the relationship between the partners in Shui Fabrics? What GLOBE Project dimensions would help you understand the differences in Chinese and Western perspectives illustrated in the case? 2 How would you define Shui’s core problem? Are sociocultural differences the main underlying cause of this problem? Why or why not? How would you handle the conflict with your boss back in Australia, New Zealand or the United States? 3 If you were Ray Betzell, what other options to the 50–50 joint venture would you consider for manufacturing textiles in China? Make the argument that one of these options is more likely to meet Rocky River’s expectations than the partnership already in place.

Sources: Based on Katherine Xin and Vladimir Pucik. (August 2003). Trouble in Paradise. Harvard Business Review, 27–35; Lillian McClanaghan and Rosalie Tung. (21 March 1991). Summary of ‘Negotiating and Building Effective Working Relationships with People in China’. Presentation by Sidney Rittenberg, Pacific Region Forum on Business and Management Communication, Simon Fraser University, Harbour Centre, Vancouver, BC, http://www.cic.sfu.ca/forum/rittenbe.html; and Charles Wolfe Jr. China’s Rising Unemployment Challenge. Rand Corporation web page, http://www.rand.org/.

4: Managing in a global environment

H o l d e n O u t e r wa r e : M a n a g i n g i n a g l o b a l e n v i r o n m e n t For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

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On the job video case

Q uestions 1 Identify Holden’s primary approach to entering the international market. What are the benefits of this entry strategy?

3 What are the challenges of international management for leaders at Holden?

2 Based on what you know of Holden from this video, do managers seem to have a global mindset? Discuss.

endnotes 1 Engardio, P. (22–29 August 2005). A New World Economy. BusinessWeek, 52–8. 2 Lublin, J. S. (11 April 2011). Hunt Is on for Fresh Executive Talent – Cultural Flexibility in Demand. The Wall Street Journal, B1. 3 Ramstad, E. (10 February 2006). Lenovo Picks Turin for ‘Coming-Out Party’: Chinese PC Maker Uses Games to Move Beyond IBM Brand. Asian Wall Street Journal, 26; Forelle, C. (21 December 2005). Lenovo Taps Dell’s Asia Chief as CEO for Next Growth Phase. The Wall Street Journal, B2; Lee, L., Burrows, P. and Einhorn, B. (7 November 2005). Dell May Have to Reboot in China. BusinessWeek, 46; Ramstad, E. and McWilliams, G. (5 July 2005). Computer Savvy; For Dell, Success in China Tells Tale of Maturing Market. The Wall Street Journal, A1, A8. 4 Advertiser (29 September 1998). Fosters Puts China Breweries on Market, 28. 5 White, J. B. (7 May 1998). There Are No German or US Companies, Only Successful Ones. The Wall Street Journal, A1. 6 Engardio, P., Hof, R. D., Malkin, E., Gross, N. and Miller, K. L. (18 November 1994). High-tech Jobs All Over the Map. BusinessWeek/ 21st Century Capitalism, 112–17. 7 Underwood, R. (March 2011). Going Global. Inc, 96–8. 8 Daft, R. (1992). Organization Theory and Design. St Paul: West; Adler, N. J. (1991). International Dimensions of Organizational Behavior. Boston: PWS-Kent, 7–8; Holstein, W., Reed, S., Kapstein, J., Vogel, T. and Weber, J. (14 May 1990). The Stateless Corporation. BusinessWeek, 98–105. 9 Beeth, G. (May 1997). Multicultural Managers Wanted. Management Review, 17–21; Matson, E. (April–May 1997). How to Globalise Yourself. Fast Company, 133–9. 10 Holstein, W., Byrne, J. A. and Kerwin, K., with Cortese, A. and Dwyer, P. (23 May 1994). Borderless Management. BusinessWeek, 24–6; Landler, M., Barnathan, J., Smith, G. and Edmondson, G. (18 November 1994). Think Globally, Program Locally. BusinessWeek/21st Century Capitalism, 186–9. 11 This section is based on S. Beechler and D. Baltzley. (29 May 2008). Creating a Global Mindset. Chief Learning Officer, http://clomedia.com/ articles/view/creating_a_global_mindset/1 (accessed 26 June 2012); J. S. P. Story and J. E. Barbuto, Jr. (2011). Global Mindset: A Construct Clarification and Framework. Journal of Leadership and Organizational Studies, 18:3, 377– 384; and S. L. Cohen. (2010). Effective Global Leadership Requires a Global Mindset. Industrial and Commercial Training, 42:1, 3–10. 12 Definition based on M. Javidan and M. B. Teagarden. (2011). Conceptualizing and Measuring Global Mindset. Advances in Global Leadership, 6, 13–39; and Beechler and Baltzley. Creating a Global Mindset. 13 Titus, A. Competency of Intercultural Management. (11 March 2009). The Jakarta Post, http://www.thejakartapost.com/news/2009/03/11/competencyintercultural- management.html (accessed 30 June 2012).

14 Russwurm, S. et al. (March 2011). Developing Your Global Know-How. Harvard Business Review, 70–5. 15 Count: Really Big Business. (December 2008–January 2009). Fast Company, 46. 16 Bell, D. E. and Shelman, M. L. (November 2011). KFC’s Radical Approach to China. Harvard Business Review, 137–42. 17 Perlmutter, H. V. (January–February 1969). The Tortuous Evolution of the Multinational Corporation. Columbia Journal of World Business, 9–18; and Y. Wind, S. P. Douglas and H. V. Perlmutter. (April 1973). Guidelines for Developing International Marketing Strategies. Journal of Marketing, 14–23. 18 Ball, D. (2 November 2009). Boss Talk: Nestlé Focuses on Long Term. The Wall Street Journal; Transnationale website, http://www.transnationale. org/companies/nestle.php (accessed 17 March 2010); Company Analytics website, http://www.company-analytics.org/company/nestle.php (accessed 17 March 2010); and Nestlé SA website, http://www.nestle.com (accessed 17 March 2010). 19 Easton, N. (4 February 2008). Make the World Go Away. Fortune, 105–8. 20 Schroeder, M. and Aeppel, T. (10 December 2003). Skilled Workers Sway Politicians with Fervor Against Free Trade. The Wall Street Journal. 21 Wong, S., Liu J. and Culpan, T. (7–13 June 2010). Life and Death at the iPad Factory. Bloomberg BusinessWeek, 35–6; C. Duhigg and S. Greenhouse. (29 March 2012). Apple Supplier in China Pledges Big Labor Changes. The New York Times, http://www.nytimes. com/2012/03/30/business/apple-supplier-in-china-pledges-changes-inworking-conditions.html?pagewanted=all (accessed 30 June 2012); and K. Drew. (29 March 2012). Apple’s Chief Visits iPhone Factory in China. The New York Times, http://www.nytimes.com/2012/03/30/technology/ apples-chief-timothy-cook-visits-foxconn-factory.html (accessed 30 June 2012). 22 McQuaid, J. (12 June 2012). Why Apple Is Bringing Manufacturing Back To The United States. Forbes, http://www.forbes.com/sites/ johnmcquaid/2012/12/06/why-apple-is-bringing-manufacturing-back-to-theunited-states (accessed August 2013); E. Dou. (29 May 2013). Apple Shifts Supply Chain Away From Foxconn to Pegatron. The Wall Street Journal, http://online.wsj.com/article/SB10001424127887323855804578511122734 340726.html (accessed August 2013). 23 Prahalad, C. K. (13 April 2011). The Fortune at the Bottom of the Pyramid. Fast Company, http://www.fastcompany.com/1746818/fortune-at-thebottom-of-the-pyramid-ck-prahalad (accessed 30 June 2012); C. K. Prahalad and S. L. Hart. (2002). The Fortune at the Bottom of the Pyramid. Strategy + Business, 26, 54–67; and S. Johnson. (September–October 2007). SC

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Johnson Builds Business at the Base of the Pyramid. Global Business and Organizational Excellence, 6–17. 24 Kerr, J. (May 1989). Export Strategies. Small Business Reports, 20–5. 25 Wellner, A. S. (May 2006). Turning the Tables. Inc., 55–9. 26 Harrigan, K. R. (February 1987). Managing Joint Ventures. Management Review, 24–41; and T. R. Revesz and M. C. de la Sierra. (March 1987). Competitive Alliances: Forging Ties Abroad. Management Review, 57–9. 27 Weaver, C. 2 (May 2012). Abbott Looks to Consumer for Growth. The Wall Street Journal, http://online.wsj.com/article/SB100014240527023039906045 77367760661436198.html (accessed 28 June 2012). 28 Areddy, J. T. (4 June 2012). European Project Trips China Builder. The Wall Street Journal, A1; and K. Semple. (10 August 2011). Bridge Repairs by a Company Tied to Beijing. The New York Times, http://www.nytimes. com/2011/08/11/nyregion/china-construction-co-involved-in-new-yorkspublic-works.html (accessed 27 June 2012). 29 Goerzen, A. (2005). Managing Alliance Networks: Emerging Practices of Multinational Corporations. Academy of Management Executive, 19:2, 94–107. 30 Michaels, D., Ostrower, J. and Pearson, D. (2 July 2012). Airbus’s New Push: Made in the U.S.A. The Wall Street Journal. 31 Holt, J. Gone Global? Management Review (March 2000): 13. 32 Hookway, J. (5 June 2012). IKEA’s Products Make Shoppers Blush in Thailand. The Wall Street Journal, A1. 33 Holt. Gone Global? 34 Slogans Often Lose Something in Translation. The New Mexican. 3 July 1994. 35 For a recent overview of various environmental factors influencing firms that operate internationally, see D. Conklin. (July–August 2011). The Global Environment of Business: New Paradigms for International Management. Ivey Business Journal, http://www.iveybusinessjournal.com/topics/ global-business/the-global-environment-of-business-new-paradigms-forinternational-management (accessed 27 June 2012). 36 Richman, L. S. (1997). Global Growth is on a Tear, in F. Maidment (ed.) International Business 1997/98, Annual Editions, Guilford: Publishing Group, 6–11. 37 Henkoff, R. (27 October 1997). Asia: Why Business is Still Bullish. Fortune, 139–42. 38 Hall, J. (August 2004). Our Top Leaders. BOSS Magazine, 58–63. 39 Walker, M., Forelle, C. and Gauthier-Villars, D. (11 May 2010). Europe Bailout Lifts Gloom. The Wall Street Journal; and G. Bowley and C. Hauser. (21 May 2010). Stocks Plunge on Fears of a Spreading European Crisis. The New York Times. 40 A New Definition of Misery. (18 December 2009). The New York Times (based on data from Moody’s), http://www.nytimes.com/ imagepages/2009/12/18/business/economy/20091219_CHARTS_ GRAPHIC.html (accessed 27 September 2012). 41 Ramsey, M. and Takahashi, Y. (1 November 2011). Car Wreck: Honda and Toyota. The Wall Street Journal Online, http://online.wsj.com/article/SB10 001424052970204528204577009044170787650.html (accessed 29 June 2012); S. Clifford. (1 November 2011). Rattling Wal-Mart’s Supply Chain. International Herald Tribune, 17. 42 Serwer, A. E. (17 October 1994). McDonald’s Conquers the World. Fortune, 103–16; Deveny, K. (13 October 1986). McWorld? BusinessWeek, 78–86. 43 Kogut, B. (Fall 1985). Designing Global Strategies: Profiting from Operational Flexibility. Sloan Management Review, 27, 27–38. 44 Elliot, G. (2001) cited in Elliot, G. (27 October 2010). In June 2001 Kerry Stokes Was Critical of SingTel’s Bid for Optus. The Australian, http://www. theaustralian.com.au/media/in-june-2001-kerry-stokes-was-critical-of-singtelsbid-for-optus/story-e6frg996-1225944234091 (accessed 6 March 2014). 45 Ferguson, A. (23 August 2001). Strategy: Sovereign Stuff. Business Review Weekly, 38.

46 Ergas, H. (22 June 2001). The Meter is Ticking on Taxi Reform. Business Review Weekly, 24. 47 Fitzpatrick, M. (1983). The Definition and Assessment of Political Risk in International Business: A Review of the Literature. Academy of Management Review, 8, 249–54. 48 Bowman, R. J. (March 1995). Are You Covered? World Trade, 100–4; Stapenhurst, F. (March–April 1995). Political Risk Analysis in North American Multinationals: An Empirical Review and Assessment. International Executive, 127–45; (29 April 1986). Multinational Firms Act to Protect Overseas Workers from Terrorism, The Wall Street Journal, 31. 49 Wonacott, P. (17 January 2012). An Entrepreneur Weathers a Tumultuous Arab Spring. The Wall Street Journal, http://online.wsj.com/article/SB1000142 4052970203436904577150690233235850.html (accessed 27 June 2012). 50 Gooderham, M. (21 June 2012). Companies That Go Where Others Fear to Tread. The Globe and Mail, B7. 51 Borelli, R. (October 1997). A Worldwide Language TRAP. Management Review, 52–4; Pincus, L. B. and Belohlav, J. A. (1996). Legal Issues in Multinational Business: To Play the Game, You Have to Know the Rules. Academy of Management Executive, 10:3, 52–61. 52 Gilley, B. (30 August 2001). Jiang’s Turn Tempts Fate. Far Eastern Economic Review, 30. 53 Hofstede, G. (1984). Culture’s Consequences. London: Sage Publications; Hofstede, G. (1985). The Interaction between National and Organizational Value Systems. Journal of Management Studies, 22, 347–57. 54 Hofstede, G. (1993). Cultural Constraints in Management Theory. Academy of Management Executive, 7, 81–94. Hofstede, G. and Bond, M. H. (1988). The Confucian Connection: From Cultural Roots to Economic Growth. Organizational Dynamics, 16, 4–21. 55 Bing, J. W. (1 February 2004). Hofstede’s Consequences: The impact of his work on consulting and business practices. Academy of Management Executive, 18:1, http://eds.b.ebscohost.com.ezp.lib.unimelb.edu.au/eds/ pdfviewer/pdfviewer?sid=b4c29876-ba30-4c03-8aec-ff27318534ac%40se ssionmgr112&vid=35&hid=105; Gelfand, M. J., Bhawuk, D. P. S., Nishii, L. H. and Bechtold, D. J. (2004). Individualism and Collectivism, in House, et al. (eds). Culture, Leadership and Organizations: The Globe Study of 62 Societies (Thousand Oaks, CA: Sage). 56 Jackofsky, E. F., Slocum, J. W. Jr. and McQuaid, S. J. (1988). Cultural Values and the CEO: Alluring Companions? Academy of Management Executive, 2, 39–49. 57 Javidan M. et al. (February 2006). In the Eye of the Beholder: CrossCultural Lessons from Project GLOBE. Academy of Management Perspectives: 67–90; R. J. House et al. eds (2004). Culture, Leadership, and Organizations: The GLOBE Study of 62 Societies (Thousand Oaks, CA: Sage Publications); M. Javidan and R. J. House. (2001). Cultural Acumen for the Global Manager: Lessons from Project GLOBE. Organizational Dynamics, 29:4: 289–305; and R. J. House et al. (2002). Understanding Cultures and Implicit Leadership Theories Across the Globe: An Introduction to Project GLOBE. Journal of World Business, 37, 3–10. 58 Sanchez-Runde, C. et al. (2011). Looking Beyond Western Leadership Models: Implications for Global Managers. Organizational Dynamics 40, 207–13. 59 Nicholls, C. E., Lane, H. W. and Brehm Brechu, B. (1999). Taking SelfManaged Teams to Mexico. Academy of Management Executive 13:2: 15–27; C. F. Fey and D. R. Denison. (November–December 2003). Organizational Culture and Effectiveness: Can American Theory Be Applied in Russia? Organization Science, 14:6, 686–706; E. F. Jackofsky, J. W. Slocum, Jr. and S. J. McQuaid. (1988). Cultural Values and the CEO: Alluring Companions? Academy of Management Executive, 2: 39–49. 60 Kennedy, J. and Everest, A. (September 1991). Put Diversity in Context. Personnel Journal, 50–4.

4: Managing in a global environment

61 Spencer, J. (4 November 2008). Lenovo Goes Global, But Not Without Strife. The Wall Street Journal. 62 Davis, B. 7 (November 2010). As Global Economy Shifts, Companies Rethink, Retool. The Wall Street Journal, http://online.wsj.com/article/ SB10001424052 748704049904575554290932153112.html (accessed 29 June 2012). 63 Barboza, D. (26 July 2011). Apple Cracks the Code for Success in China. International Herald Tribune, 15. 64 Chao, L., Luk, L. and Back, A. (31 August 2009). Sales of iPhone in China Set Under 3-Year Accord. The Wall Street Journal; and L. Chao, J. Ye and Y. Iwatani Kane. (28 August 2009). Apple, Facing Competition, Readies iPhone for Launch in Giant China Market. The Wall Street Journal. 65 Stalk G. and Michael, D. (June 2011). What the West Doesn’t Get About China. Harvard Business Review, 25–7; Z. McKay. (15 June 2012). Consumer Spending in China: To Buy or Not to Buy. Forbes.com, http:// www.forbes.com/sites/insead/2012/06/15/consumer-spending-in-china-tobuy-or-not-to-buy (accessed 29 June 2012); and A. Davidson. (25 January 2012). Come On, China, Buy Our Stuff! The New York Times, http://www. nytimes.com/2012/01/29/magazine/come-on-china-buy-our-stuff.html? pagewanted=all (accessed 29 June 2012). 66 Barboza, D. and Stone, B. (16 January 2010). A Nation That Trips up Many. The New York Times. 67 Galbraith, A. and Dean, J. (6 September 2011). In China, Some Firms Defy Business Norms. The Wall Street Journal Online, http://online.wsj. com/article/SB10001424053111903895904576546381512015722.html (accessed 29 June 2012). 68 Stalk and Michael. What the West Doesn’t Get About China. 69 Cox, W. M. and Alm, R. (August 2008). China and India: Two Paths to Economic Power. Economic Letter, Federal Reserve Bank of Dallas, http:// www.dallasfed.org/research/eclett/2008/el0808.html (accessed 14 July 2010). 70 Pharmaceuticals. (May 2012). India Brand Equity Foundation, IBEF.org, http://www.ibef.org/industry/pharmaceuticals.aspx (accessed 29 June 2012); and S. Dey. (27 June 2012). Indian Pharma Eyes US Generic Gold Rush. Business Standard, http://www.business-standard.com/india/news/indianpharma-eyes-us-generic-gold-rush/478593/ (accessed 29 June 2012).

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71 This section is based on ‘Brazil GDP Growth Rate’, Trading Economics website, http://www.tradingeconomics.com/brazil/gdp-growth (accessed 29 June 2012); Brazil. The World Factbook, Central Intelligence Agency website, https://www.cia.gov/library/publications/the-world-factbook/ geos/br.html#top (accessed 29 June 2012); P. Prada. (29 March 2010). For Brazil, It’s Finally Tomorrow. The Wall Street Journal; M. Eversley. (5 October 2009). Brazil’s Olympian Growth. USA Today; and L. Denning. (16 February 2010). Are Cracks Forming in the BRICs? The Wall Street Journal. 72 Holt, D. H. (1998). International Management: Text and Cases. Fort Worth: The Dryden Press; Harmsen, R. (March 1995). The Uruguay Round: A Boon for the World Economy. Finance & Development, 24–6; Pitroda, S. S. (Spring 1995). From ATT to WTO: The Institutionalization of World Trade. Harvard International Review, 46–7, 66–7; The Economist (19 December 1998). Chinese Toy Making: Where the Furbies Come From, 95. 73 European Commission Economic and Financial Affairs website, http:// ec.europa.eu/economy_finance/euro/index_en.htm (accessed 18 March 2010). 74 Crook, C. (28 May–3 June 2012). Opening Remarks: Who Lost the Euro?, part of a ‘Special Euro Crisis’ section, Bloomberg Businessweek,10–12; and H. Schneider. (14 June 2012). In Greece, The Money Flowed Freely, Until It Didn’t. The Washington Post, http://www.washingtonpost.com/business/ economy/in-greece-the-money-flowed-freely-until-it-didnt/2012/06/14/ gJQA7Z4YcV_story.html (accessed 30 June 2012). 75 Fuhrmans, V. and Cimilluca, D. (1 June 2012). Business Braces for Europe’s Worst – Multinationals Scramble to Protect Cash, Revise Contracts, Tighten Payment Terms. The Wall Street Journal, B1. 76 Rudolph, B. (10 August 1992). Megamarket. Time, 43–4. 77 Munroe, T. (9 January 2004). NAFTA Still a Work in Progress. Knight Ridder/Tribune News Service; J. Sparshott. (18 December 2003). NAFTA Gets Mixed Reviews. The Washington Times; and A. Borrus. (24 August 1992). A Free-Trade Milestone, with Many More Miles to Go. BusinessWeek, 30–31. 78 Bradsher, K. (23 August 1992). As Global Talks Stall, Regional Trade Pacts Multiply. New York Times, F5.

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ download the audio summary for on-the-go review ➜ test your understanding of the issues involved for managing in a global environment by taking the revision quiz ➜ extend your knowledge with Internet research activities and useful weblinks.

Cour seMate

Lear ning objectives Af ter study ing this c hapte r, you s hou ld be ab le to:

1 Define ethics and explain how ethical behaviour

relates to behaviour governed by law and free choice.

2 Discuss why ethics is important for managers

and identify recent events that call for a renewed commitment to ethical management.

3 Explain the utilitarian, individualism, moral rights,

justice and practical approaches for making ethical decisions.

4 Describe the factors that shape a manager’s ethical

decision making, including levels of moral development.

6 Identify important stakeholders for an organisation and discuss how managers balance the interests of various stakeholders.

7 Explain the philosophy of sustainability and why organisations are embracing it.

8 Describe what is meant by ‘the triple bottom line’. Discuss how ethical organisations are created through ethical leadership and organisational structures and systems.

9 Explain particular issues of ethical behaviour and

5 Define corporate social responsibility and how

sustainable development applicable in Australia.

to evaluate it along economic, legal, ethical and discretionary criteria.

Chapter 5

Chapter outline

Ethics, social responsibility and sustainable development

➜ What is managerial ethics?

Ethical management today

➜ Ethical dilemmas: what would you do? ➜ Criteria for ethical decision making Utilitarian approach Individualism approach Moral rights approach Justice approach Practical approach

➜ T he individual manager and ethical choices The organisation

➜ What is corporate social responsibility?

➜ Organisational stakeholders ➜ The green movement

Sustainability and the triple bottom line

➜ E  valuating corporate social responsibility

➜ M  anaging company ethics and social responsibility Code of ethics Ethical structures Whistle-blowing

➜ T he business case for ethics and social responsibility

➜ M  anagerial ethics and sustainable development in Australia

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➜ Organisational sustainable

development The ‘why’ of sustainable development The ‘what’ of sustainable development The ‘when’ of sustainable development

➜ Taking managerial action on sustainable development

New Manager Self-test Will you be a courageous manager? It probably won’t happen right away, but soon enough in your duties as a new manager you will be confronted with a situation that will test the strength of your moral beliefs or your sense of justice. Are you ready? To find out, think about times when you were part of a student or work group. To what extent does each of the following statements characterise your behaviour? Please answer each of the following items as Mostly true or Mostly false for you. Mostly True

Mostly False

1 I risked substantial personal loss to achieve the vision. 2 I took personal risks to defend my beliefs. 3 I would say no to inappropriate things even if I had a lot to lose. 4 My significant actions were linked to higher values.

w

5 I easily acted against the opinions and approval of others. 6 I quickly told people the truth as I saw it, even when it was negative. 7 I spoke out against group or organisational injustice. 8 I acted according to my conscience even if I would lose stature. Scoring and interpretation: Each of these questions relates to some aspect of displaying courage in a group situation, which often reflects a person’s level of moral development. Count the number of checks for Mostly true. If you scored five or more, congratulations! That behaviour would enable you to become a courageous manager about moral issues. A score below four indicates that you may avoid difficult issues or have not been in situations that challenged your moral courage. Study the specific questions for which you scored Mostly true and Mostly false to learn more about your specific strengths and weaknesses. Think about what influences your moral behaviour and decisions, such as need for success or approval. Study the behaviour of others you consider to be moral individuals. How might you increase your courage as a new manager? What does courage have to do with a chapter on ethics? Unfortunately, many managers slide into unethical or illegal behaviour simply because they don’t have the courage to stand up and do the right thing.

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Management Challenge

Over the past decade or so, Monsanto has been transformed from a chemicals firm into a biotechnology company. The organisation’s vast array of stakeholders around the world includes customers, investors, suppliers, partners, health and agricultural organisations, regulatory agencies, research institutes and governments. Monsanto experienced some big problems in recent years because of its failure to satisfy various stakeholder groups. For example, the company’s genetic seed business has been the target of controversy and protest. Small farmers were concerned about new dependencies that might arise for them when using the new seeds. European consumers rebelled against a perceived imposition of unlabelled, genetically modified food ingredients. Research institutes and other organisations took offence at what they

perceived as Monsanto’s arrogant approach to the new business. Activist groups accused the company of creating ‘Frankenstein foods’. To make matters even worse, in seeking to sell genetically modified seeds in Indonesia, managers allegedly bribed government officials, which got Monsanto into hot water with the regulatory authorities. Question When and how does a company manage the tradeoffs and conflicts between the requirements and desires of its different stakeholder groups, which are often pulling it in different and sometimes opposite directions? How can Monsanto best manage its stakeholder relationships and perceived problems?

The situation at Monsanto illustrates how difficult ethical issues can be and symbolises the growing importance of discussing ethics and social responsibility. Organisations around the world are rushing to adopt codes of ethics and develop socially responsible policies: ethics consultants are doing huge amounts of business. Unfortunately, the trend is necessary. In this chapter, we will examine the challenging issues of the ethical dilemmas that all managers will face during their careers, and the core ideas of the role and relationship of organisations and their stakeholders. We will particularly examine the three major outputs of organisations, namely the ‘triple bottom line’ of financial/economic outcomes, environmental (green) outcomes and the social/ societal outcomes of organisations. An example of the environmental outcome of an organisation is its carbon footprint, and the social outcome can refer to the quantity and quality of jobs created in a community. The key point is that it is not enough for an organisation and its managers to simply be financially successful if it is not successful in satisfying the other two domains of environment and societal outcomes. Such a position is not ‘sustainable’ in the longer term. The term ‘sustainable development’ is introduced and discussed later in this chapter, and in the other chapters of this book. It relates to every aspect of management. It provides new opportunities and challenges for managers. ‘Stakeholder engagement’ must also be considered on a broader basis than past common practice has achieved. Every decade sees its share of corporate, political and social villains, but the pervasiveness of ethical lapses in the 2000s was astounding. Once-respected firms such as Enron, HIH, Arthur Andersen, Lehman Brothers, AWB, WorldCom, Tyco and HealthSouth became synonymous with greed, deceit and financial chicanery. No wonder a public poll found that 79 per cent of respondents believe questionable business practices are widespread. Fewer than one-third said they think most CEOs are honest.1 Moreover, more than 20 per cent of US employees surveyed report having first-hand knowledge of managers making false or misleading promises to customers, discriminating in hiring or promotions, and violating employees’ rights.2 In China, fraud and corruption are reported to be widespread and to consume 15 per cent of the country’s GDP. The underground economy is reported to be worth another 20 per cent of GDP. Most Chinese companies produce false sets of accounts, and tax evasion accounts for 50 per cent of taxes due

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in the private economy. Despite a variety of measures taken by authorities and international pressure, counterfeiting and piracy is widespread in China. Australia is not immune to such problems and practices, although they are not considered to be as widespread as in China and in countries such as Thailand, where rapidly developing economies seem to attract and even allow these unlawful practices to exist and flourish.3 On the other hand, there also is positive news to report. The international pharmaceutical company, GlaxoSmithKline, slashed the price of the AIDS drug AZT in developing nations by as much as 75 per cent. Many major manufacturers, including DuPont, Electrolux and Shell are embracing environmental goals and developing eco-friendly products. Several years ago, Eastman Kodak Company took an unprecedented step by tying a percentage of managers’ pay to factors such as how well they treat their employees.4 A host of companies gave large amounts of their goods as well as cash to help victims of the Queensland floods and the Christchurch earthquake in 2011. Many of these companies did not seek publicity for these good deeds, they just gave in the same way that many individuals gave, taking a discretionary response to the situation. This chapter expands on the ideas about environment, corporate culture and the international environment discussed in Chapters 3 and 4. We first focus on specific ethical values that build on the idea of corporate culture. Then we examine corporate relationships to the external environment as reflected in corporate social responsibility and sustainable development. We also discuss fundamental approaches that help managers think through ethical issues. Ethics and sustainable development are hot topics in corporate Australia, New Zealand and elsewhere. Understanding ethical approaches helps managers build a solid foundation on which to base future decision making.

What is managerial ethics? Ethics is difficult to define in a precise way. In a general sense, ethics is the code of moral principles and values that governs the behaviours of a person or group with respect to what is right or wrong. Ethics sets standards as to what is good or bad in conduct and decision making.5 An ethical issue is present in a situation when the actions of a person or organisation may harm or benefit others.6 Yet ethical issues sometimes can be exceedingly complex. People may hold widely divergent views about the most ethically appropriate or inappropriate actions related to a situation.7 Consider the issue of competitive intelligence. Companies are increasingly using social media sites to learn more about their competition, some even going so far as to ‘friend’ customers or employees of rivals and post seemingly innocuous questions to gather information that can provide

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Goldman Sachs CEO Lloyd Blankfein (centre) was in the hot seat as he defended the firm’s role in creating Abacus, a mortgage-backed investment fund allegedly designed to fail. While Goldman bet against the fund as a way to hedge against a weakening housing market, its trading side facilitated sales of Abacus to institutional customers. The manoeuvre helped Goldman weather the financial crisis but raised serious questions about its managerial ethics. Blankfein said that the firm’s trading side is simply ‘a machine that lets people buy and sell what they want to buy and sell’. Despite this defence, Goldman agreed in 2010 to pay US$550 million to settle federal claims that it misled investors. ethics The code of moral principles and values that governs the behaviour of a person or a group with respect to what is right or wrong.

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managerial ethics

Exhibit 5.1 Three domains of human action

them with a competitive advantage.8 The laws regarding information gathering aren’t clear-cut, and neither are opinions regarding the ethics of such tactics. What do you think? Whereas some people think any form of corporate spying is wrong, others think it is an acceptable way of learning about the competition.9 Managers frequently face situations in which it is difficult to determine what is right. In addition, they might be torn between their misgivings and their sense of duty to their bosses and the organisation. Ethics can be more clearly understood when compared with behaviours governed by law and by free choice. Exhibit 5.1 illustrates that human behaviour falls into three categories. The first is codified law, in which values and standards are written into the legal system and enforceable in the courts. In this area, lawmakers set rules that people and corporations must follow in a certain way, such as obtaining licences for cars, paying corporate taxes or following other local, state and national laws. For example, former vice chairman of Walmart, Thomas Coughlin, pleaded guilty to fraud and tax evasion charges. Coughlin resigned in 2005 amid allegations that he defrauded the giant retailer out of hundreds of thousands of dollars, and the investigation was turned over to federal prosecutors.10 Behaviours such as fraud and tax evasion are clearly against the law. The domain of free choice is at the opposite end of the scale and pertains to behaviour about which the law has no say and for which an individual or organisation enjoys complete freedom. An example is a manager’s choice of where to buy a new suit, or an organisation’s choice of which of two well-qualified candidates to hire for an open position. Between these domains lies the area of ethics. This domain has no specific laws, yet it does have standards of conduct based on shared principles and values about moral conduct that guide an individual or company. For example, it is not illegal for a manager like Harry Stonecipher, former CEO of Boeing, to have an extramarital affair with a female executive, but his behaviour violated Boeing’s code of ethical conduct, and Stonecipher was replaced. However, a manager who commits sexual harassment is not just being unethical but is breaking the law. Steven J. Heyer was fired as CEO of Starwood Hotels & Resorts Worldwide Inc. after the board received an anonymous letter that accused Heyer of inappropriately touching female employees and creating a hostile work environment.11 Many companies and individuals get into trouble with the simplified view that decisions are governed by either law or free choice. This view leads people to mistakenly assume that if it’s not illegal, it must be ethical, as if there were no third domain.12 A better option is to recognise the domain of ethics and accept moral values as a powerful force for good that can regulate behaviours both inside and outside organisations.

Domain of

Domain

Domain of

codified law (legal standard)

of ethics (social standard)

free choice (personal standard)

Amount of High

explicit control

Low

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➜➜ Managers face many pressures that can sometimes tempt them to engage in unethical behaviour. ➜➜ Ethics is the code of moral principles and values that governs the behaviours of a person or group

with respect to what is right or wrong.

necessarily mean they are being ethical.

➜➜ People may hold widely divergent views about the most ethically appropriate or inappropriate actions related to a situation.

➜➜ An ethical issue is present in any situation when the actions of an individual or organisation may harm or benefit others.

➜➜ Just because managers aren’t breaking the law doesn’t

➜➜ Managers sometimes need courage to stand up and do the right thing.

Eth i cal m anagem ent to day In Gallup’s 2010 poll regarding the perception of business leaders, just 15 per cent of respondents rated leaders’ honesty and ethical standards as ‘high’ or ‘very high’.13 Although public confidence in business managers in particular is at an all-time low, politics, sports and nonprofit organisations have also been affected. Cycling star Lance Armstrong was stripped of his seven Tour de France championship titles after an investigation showed that he used performance-enhancing drugs and gave them to teammates. At the nonprofit Wyckoff Heights Medical Center, located in one of the poorest neighbourhoods in America’s Brooklyn, an investigation revealed a pattern of insider dealing that lavishly benefited top managers, board members and local politicians, while damaging the organisation to the point that it might be closed, further limiting healthcare options for the poor.14 And the Catholic Church, already reeling from two decades of clergy sexual abuse scandals, was further tarnished when Pope Benedict XVI’s butler, Paolo Gabriele, was arrested and charged with leaking the pope’s confidential correspondence that revealed internal conflicts and accusations of cronyism and corruption.15 In Australia, 2013 brought a Royal Commission into child (sexual) abuse, focusing on institutions such as religious organisations, in which children should have been safe from harm, but as it turns out, were often not. In the business world, a series of corporate scandals have destroyed the reputations of a number of large companies: AIG, Lehman Brothers, Enron, Bear Stearns, Countrywide and WorldCom. No wonder a poll found that 76 per cent of people surveyed say corporate America’s moral compass is ‘pointing in the wrong direction’; 69 per cent say executives rarely consider the public good in making decisions; and a whopping 94 per cent say executives make decisions based primarily on advancing their own careers.16 Managers carry a tremendous responsibility for setting the ethical climate in an organisation and can act as role models for others.17 Managers are responsible for seeing that resources are used to serve the interests of stakeholders, including shareholders, employees, customers and society. Exhibit 5.2 details various ways that organisations sometimes behave unethically towards customers, employees and other stakeholders.18 Unfortunately, in today’s environment, an overemphasis on pleasing shareholders may cause some managers to behave unethically towards customers, employees and the broader society. Managers are under enormous pressure to meet short-term earnings goals, and some even use accounting gimmicks or other techniques to show returns that meet market expectations rather than ones that reflect true performance. Moreover, most executive compensation plans include hefty stock-based incentives, a practice that encourages managers to do whatever will increase the share price, even if it hurts the company in the long run. When managers ‘fall prey to the siren call of shareholder value’, all other stakeholders may suffer.19

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Executive compensation has become a hot-button issue, particularly in America.20 In 2011, the average pay of CEOs at large US corporations was 380 times what the average employee was paid. A study by the Economic Policy Institute found that between 1978 and 2011, the average US worker’s annual pay grew 5.7 per cent, while average CEO pay increased a whopping 726.7 per cent, and ratios similar to these occur in most developed Western nations.21 The question of whether it is ethical for managers to rake in huge sums of money compared to other employees is of growing concern, and in general, the widespread ethical lapses of the past decade have put managers under increasing scrutiny.

Towards customers

Exhibit 5.2 Examples of unethical and illegal organisational behaviour Source: Based on Muel Kaptein. (October 2008). Developing a Measure of Unethical Behavior in the Workplace: A Stakeholder Perspective. Journal of Management, 34:5, 978–1008.

False or deceptive sales practices Submitting misleading invoices Fabricating product quality data

Towards employees Discriminating against employees Creating a hostile work environment Violating health and safety rules

Towards suppliers Accepting favours or kickbacks Violating contract terms Paying without accurate records or invoices

➜➜ Managers are ethically responsible for seeing that organisational resources are used to serve the interests of stakeholders, including

shareholders, employees, customers and the broader society. ➜➜ Unethical managers seek to serve their own needs and interests at the expense of stakeholders.

Towards financiers Falsifying financial reports Breaching database controls Using confidential information

Towards society Violating environmental standards Exposing public to safety risks Violating international human rights

➜➜ Confidence in business managers and leaders in all walks of life is at an all-time low. ➜➜ One hot-button ethical issue concerns excessive executive compensation.

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Ethical dilemmas: what would you do? Being ethical is always about making decisions, and some issues are difficult to resolve. Because ethical standards are often not codified, disagreements and dilemmas about proper behaviour often occur. An ethical dilemma arises in a situation in which each alternative choice or behaviour is undesirable because of potentially harmful ethical consequences and right and wrong cannot always be clearly or crisply identified.22 The individual who must make an ethical choice in an organisation could be termed the moral agent.23 Here are some dilemmas that a manager in an organisation might face. Think about how you would handle them: 1 Your small company has clear procedures for providing supplies to employees who choose to work from

home, as well as a strict code of conduct specifying that any employee caught taking supplies without authorisation will be fired. At the end of a long, hard day, you notice Sarah, one of your best employees, putting printer paper, highlighters and notepads in her laptop bag. According to company policy, you are required to report her immediately to your superior, who is the only one who can authorise employees taking supplies. But your boss is gone for the day, and you know Sarah often works from home.24 2 As a sales manager for a major pharmaceuticals company, you’ve been asked to promote a new drug

that costs $2500 per dose. You’ve read reports that say the drug is only 1 per cent more effective than an alternative drug that costs less than $625 per dose. The vice president of sales wants you to promote the $2500-per-dose drug aggressively. He reminds you that if you don’t, lives could be lost that might have been saved with that 1 per cent increase in the drug’s effectiveness. 3 You work at a large corporation that requires a criminal background check for all new customers, which

takes approximately 24 hours from the time an order is placed. You have the opportunity to close a lucrative deal with a potential long-term customer if you agree to ship the products overnight, even though that means the required check will have to be done after the fact.25 4 On the train ride from your home in Geelong to your office in Melbourne, your peaceful morning routine

is disturbed by neighbouring passengers carrying on a loud mobile business meeting. After trying to quiet them with cold stares, you eventually decide to just listen in. Within minutes, you realise they are discussing a client that your own firm has been courting. Furthermore, you soon have the time, phone number and pass code for a conference call the consultants are having with the client later that day. It isn’t your fault that they gave out that information in a public place, but you wonder what you should do with it.26 These kinds of dilemmas and issues fall squarely in the domain of ethics. How would you handle each of the above situations? Now consider the following hypothetical dilemma, which scientists have used to study human morality:27 ●● A runaway trolley is heading down the tracks towards five unsuspecting people. You’re standing near a switch that will divert the trolley onto a siding, but there is a single workman on the siding who cannot be warned in time to escape and almost certainly will be killed. Would you throw the switch? ●● Now, what if the workman is standing on a bridge over the tracks and you have to push him off the bridge to stop the trolley with his body in order to save the five unsuspecting people? (Assume that his body is large enough to stop the trolley, and yours is not.) Would you push the man, even though he almost certainly will be killed? These dilemmas show how complex questions of ethics and morality can sometimes be. In Time magazine’s readers’ poll, 97 per cent of respondents said they could throw the switch (which would almost certainly lead to the death of the workman), but only 42 per cent said they could actually push the man to his death.28

ethical dilemma A situation that arises when all alternative choices or behaviours have been deemed undesirable because of potentially negative ethical consequences, making it difficult to distinguish right from wrong.

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➜➜ Ethics is about making choices.

Case study

➜➜ Most managers encounter ethical dilemmas that are tough to resolve.

➜➜ An ethical dilemma is a situation in which all alternative choices or behaviours have potentially

negative consequences. Right and wrong cannot be clearly distinguished.

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Phil anthropy goes up a gear One of the world’s most successful businessmen and investors, Warren Buffett, has accumulated over $50 billion of wealth during the past 40 years, and now he wants to give most of it away. He has set up foundations and charities, and much of his money will be distributed to the Bill and Melinda Gates Foundation as well as to three charities run by Buffett’s children and others. An interesting new development in such corporate philanthropy is that the Bill and Melinda Gates Foundation and the Buffett Foundation placed time limits on

the spending of all of the assets in these foundations. They are clearly destined not to be perpetual foundations, which only allow for the spending of the investment returns, but they must spend all of their assets within a certain amount of time. Buffett has specified a 10-year ultimate time limit on the dispersal of all of his funds, while Bill and Melinda Gates have opted for 50 years as a maximum. Source: Yang, G. L. (19 March 2007). Buffett to Gates: Spend it! Fortune, 13.

Source: Getty Images/Rob Kim

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Warren Buffett

Criteria for ethical decision making Most ethical dilemmas involve a conflict between the needs of the part and the needs of the whole – the individual against the organisation or the organisation against society as a whole. For example, should a company install mandatory alcohol and drug testing for employees, which may benefit the organisation as a whole but reduce the individual freedom of employees? Or should products that fail to meet tough safety standards be exported to other countries where government standards are lower, benefiting the company but being potentially harmful to world citizens? Sometimes ethical decisions entail a conflict between two groups; for example, should the potential for local health problems resulting from a company’s effluent take precedence over the jobs it creates as the town’s leading employer? Managers faced with these kinds of tough ethical choices often benefit from a normative strategy – one based on norms and values – to guide their decision making. Normative ethics uses several approaches to describe values for guiding ethical decision making. Five approaches that are relevant to managers are the utilitarian approach, individualism approach, moral-rights approach, justice approach and practical approach.29 utilitarian approach The ethical concept that moral behaviour produces the greatest good for the greatest number.

Uti litarian approach The utilitarian approach, espoused by the nineteenth-century philosophers Jeremy Bentham and John Stuart Mill, holds that moral behaviour produces the greatest good for the greatest number. Under this

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approach, a decision maker is expected to consider the effect of each decision alternative on all parties and select the one that optimises the benefits for the greatest number of people. In the ‘trolley dilemma’ described earlier in this chapter, for instance, the utilitarian approach would hold that it would be moral to push one person to his death in order to save five. The utilitarian ethic is cited as the basis for the recent trend among companies to monitor employee use of the Internet and police personal habits such as alcohol and tobacco consumption, because such behaviour affects the entire workplace.30

In d ivi dualism approach The individualism approach contends that acts are moral when they promote the individual’s best long-term interests.31 In theory, with everyone pursuing self-direction, the greater good is ultimately served because people learn to accommodate each other in their own long-term interest. Individualism is believed to lead to honesty and integrity because that works best in the long run. Lying and cheating for immediate self-interest just causes business associates to lie and cheat in return. Thus, proponents say, individualism ultimately leads to behaviour towards others that fits standards of behaviour that people want towards themselves.32 However, because individualism is easily misinterpreted to support immediate self-gain, it is not popular in the highly organised and group-oriented society of today.

Mo r al ri ghts approach Source: Shutterstock.com/Vasin Lee

The moral rights approach asserts that human beings have fundamental rights and liberties that cannot be taken away by an individual’s decision. Thus, an ethically correct decision is one that best maintains the rights of those affected by it. To make ethical decisions, managers need to avoid interfering with the fundamental rights of others, such as the right to privacy, the right of free consent or the right to freedom of speech. Performing experimental treatments on unconscious trauma patients, for example, might be construed to violate the right to free consent. A decision to monitor employees’ non-work activities violates the right to privacy. The right of free speech would support whistle-blowers who call attention to illegal or inappropriate actions within a company.

Justi ce approach The justice approach holds that moral decisions must be based on standards of equity, fairness and impartiality. Three types of justice are of concern to managers. Distributive justice requires that different treatment of people not be based on arbitrary characteristics. For example, men and women should not receive different salaries if they have the same qualifications and are performing the same job. Procedural justice requires that rules be administered fairly. Rules should be clearly stated and consistently and impartially enforced. Compensatory justice argues that individuals should be compensated for the cost of their injuries by the party responsible. The justice approach is closest to the thinking underlying the domain of law in Exhibit 5.1 (see p. 182) because it assumes that justice is applied through rules and regulations. Managers are expected to define attributes on which different treatment of employees is acceptable.

individualism approach The ethical concept that acts are moral when they promote the individual’s best long-term interests, which ultimately leads to the greater good.

moral rights approach The ethical concept that moral decisions are those that best maintain the rights of those people affected by them. justice approach The ethical concept that moral decisions must be based on standards of equity, fairness and impartiality. distributive justice The concept that different treatment of people should not be based on arbitrary characteristics. In the case of substantive differences, people should be treated differently in proportion to the differences among them. procedural justice The concept that rules should be clearly stated, and consistently and impartially enforced. compensatory justice The concept that individuals should be compensated for the cost of their injuries by the party responsible and also that individuals should not be held responsible for matters over which they have no control.

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Pr acti cal approach

practical approach Bases decisions on prevailing standards of the profession and larger society, taking the interests of all stakeholders into account.

The approaches discussed so far presume to determine what is ‘right’ or good in a moral sense. However, as has been mentioned, ethical issues are frequently not clear-cut and there are disagreements over what is the ethical choice. The practical approach sidesteps debates about what is right, good or just, and instead bases decisions on prevailing standards of the profession and the larger society, taking the interests of all stakeholders into account.33 With the practical approach, a decision would be considered ethical if it is one that would be considered acceptable by the professional community, one that the manager would not hesitate to publicise on the evening news, and one that a person would typically feel comfortable explaining to family and friends. One American Secret Service agency director offered this practical advice to his staff in a recent memo: ‘You should always assume you are being watched when on an official assignment. Do not put yourself in a situation in your personal or professional life that would cause embarrassment to you, your family, or the Secret Service.’34 Using the practical approach, managers may combine elements of the utilitarian, moral rights and justice approaches in their thinking and decision making. For example, one expert on business ethics suggests managers can ask themselves the following five questions to help resolve ethical dilemmas.35 Note that these questions cover a variety of the approaches discussed above. 1 What’s in it for me? 2 What decision would lead to the greatest good for the greatest number? 3 What rules, policies or social norms apply? 4 What are my obligations to others? 5 What will be the long-term impact for myself and important stakeholders?

➜➜ Most ethical dilemmas involve a conflict between the interests of different groups or between the needs of the individual versus the needs of the organisation. ➜➜ Managers can use various approaches based on norms and values to help them make ethical decisions. ➜➜ The utilitarian approach to ethical decision making says that the ethical choice is the one that produces the greatest good for the greatest number. ➜➜ The individualism approach suggests that actions are ethical when they promote the individual’s best longterm interests, because with

everyone pursuing self-interest, the greater good is ultimately served. ➜➜ The individualism approach is not considered appropriate today because it is easily misused to support one’s personal gain at the expense of others. ➜➜ Some managers rely on a moralrights approach, which holds that ethical decisions are those that best maintain the fundamental rights of the people affected by them. ➜➜ The justice approach says that ethical decisions must be based on standards of equity, fairness and impartiality. ➜➜ Distributive justice requires that different treatment of individuals

not be based on arbitrary characteristics.

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➜➜ Procedural justice holds that rules should be clearly stated and consistently and impartially enforced. ➜➜ Compensatory justice argues that individuals should be compensated for the cost of their injuries by the party responsible, and individuals should not be held responsible for matters over which they have no control. ➜➜ Many managers also use the practical approach, which sidesteps debates about what is right, good or just, and bases decisions on prevailing standards of the profession and the larger society, taking the interests of all stakeholders into account.

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The individual manager and ethical choices A number of factors influence a manager’s ability to make ethical decisions. Individuals bring specific personality and behavioural traits to their jobs. Personal needs, family influence and religious background all shape a manager’s value system. In addition, the corporate culture and pressures from superiors and colleagues can also influence an individual’s ethical choices. A recent study found that organisational pressures can indeed induce employees to behave unethically. Moreover, when people experience organisational pressure to go against their sense of what is right, they typically become frustrated and emotionally exhausted.36 Clearly, unethical behaviour inhibits a person’s ability to do his or her best for the company, as well as hindering the individual’s personal and professional wellbeing. Specific personality characteristics, such as ego strength, self-confidence and a strong sense of independence, may enable managers to make more ethical choices despite outside pressures and personal risks. One important personal trait is the stage of moral development.37 A simplified version of one model of personal moral development is shown in Exhibit 5.3. At the preconventional level, individuals are concerned with external rewards and punishments and obey authority to avoid detrimental personal consequences. In an organisational context, this level may be associated with managers who use an autocratic or coercive leadership style, with employees oriented towards dependable accomplishment of specific tasks. At level two, called the conventional level, people learn to conform to the expectations of good behaviour as defined by colleagues, family, friends and society. Meeting social and interpersonal obligations is important. Workgroup collaboration is the preferred manner of accomplishing organisational goals, and managers use a leadership style that encourages interpersonal relationships and cooperation. At the postconventional, or principled level, individuals are guided by an internal set of values based on universal principles of justice and right and will even disobey rules or laws that violate these principles. Internal values become more important than the expectations of significant others. One recent example of the postconventional or principled approach was the lifeguard in America’s Hallandale Beach, in Florida, who was fired for leaving his assigned zone to help a drowning man. Tomas Lopez rushed to offer assistance when he saw a man struggling, even though his supervisor ordered him not to leave his zone and to call Emergency instead. ‘What he did was his own decision,’ said manager Susan Ellis. ‘He knew the rules.’ The company cited liability issues as the reason for the rules, and later offered Lopez his job back (he refused).38 When managers operate from this highest level of development, they use transformative or servant leadership, focusing on the needs of followers and encouraging others to think for themselves and to engage in higher levels of moral reasoning. Employees are empowered and given opportunities for constructive participation in governance of the organisation. The great majority of managers operate at level two, meaning their ethical thought and behaviour is greatly influenced by their superiors, colleagues and other significant people in the organisation or industry. A few have not advanced beyond level one. Only about 20 per cent of adults reach the level-three post-conventional stage of moral development. People at level three are able to act in an independent, ethical manner regardless of expectations from others inside or outside the organisation. Managers at level three of moral development will make ethical decisions whatever the organisational consequences are for them.

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Challenging the boss on ethical issues

Many of today’s top executives put emphasis on ethics in light of serious ethical lapses that tarnished the reputations and hurt the performance of previously respected and successful companies. Yet keeping an organisation in ethical line is an ongoing challenge, and it requires that people at all levels be willing to stand up for what they think is right. Challenging the boss or other senior leaders on potentially unethical behaviours is particularly unnerving for most people. Here are some tips for talking to the boss about an ethically questionable decision or action. Following these guidelines can increase the odds that you’ll be heard and your opinions will be seriously considered.

➜➜ Do your research. Marshal any facts and figures that support your position on the issue at hand, and develop an alternative policy or course of action that you can suggest at the appropriate time. Prepare succinct answers to any questions you anticipate being asked about your plan.

➜➜ Begin the meeting by giving your boss the floor. Make sure you really do understand what the decision or policy is and the reasons behind it. Ask open-ended questions, and listen actively, showing through both your responses and your body language that you’re seriously listening and trying to understand the other person’s position. In particular, seek out information about what the senior manager sees as the decision or policy’s benefits as well as any potential downsides. It’ll give you information you can use later to highlight how your plan can produce similar benefits while avoiding the potential disadvantages.

➜➜ Pay attention to your word choice and demeanour. No matter how strongly you feel about the matter, don’t rant

and rave about it. You’re more likely to be heard if you remain calm, objective and professional. Try to disagree without making it personal. Avoid phrases such as ‘You’re wrong’, ‘You can’t’, ‘You should’ or ‘How could you?’ to prevent triggering the other person’s automatic defence mechanisms.

➜➜ Take care how you suggest your alternative solution. You can introduce your plan with phrases such as ‘Here’s another way to look at this’ or ‘What would you think about … ?’ Check for your superior’s reactions both by explicitly asking for feedback and by being sensitive to body language clues. Point out the potential negative consequences of implementing decisions that might be construed as unethical by customers, shareholders, suppliers or the public.

➜➜ Be patient. Don’t demand a resolution on the spot. During your conversation, you may realise that your plan needs some work, or your boss might just need time to digest the information and opinions you’ve presented. It’s often a good idea to ask for a follow-up meeting. If the decision or action being considered is clearly unethical or potentially illegal, and this meeting doesn’t provide a quick resolution, you might need to take your concerns to higher levels, or even blow the whistle to someone outside the organisation who can make sure the organisation stays in line. However, most managers don’t want to take actions that will harm the organisation, its people or the community. In many cases, questionable ethical issues can be resolved by open and honest communication. That, however, requires that people have the courage – and develop the skills – to confront their superiors in a calm and rational way.

Sources: Daley, Kevin (April 2004). How to Disagree: Go Up Against Your Boss or a Senior Executive and Live to Tell the Tale. T&D; Moore, Diane (12 November 2003). How to Disagree with Your Boss – and Keep Your Job. Toronto Star; How to Disagree with Your Boss. WikiHow, http://wiki.ehow.com/Disagree-With-Your-Boss; (23–29 October 1996). How to Confront Your Boss Constructively. The Buzz, http://www.hardatwork.com/Buzz/ten.html.

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Level 3: Postconventional Follows self-chosen principles of justice and right. Aware that people hold different values and seeks creative solutions to ethical dilemmas. Balances concern for individual with concern for common good.

Level 2: Conventional

Level 1: Preconventional Follows rules to avoid punishment. Acts in own interest. Obedience for its own sake.

Leadership style: Employee behaviour:

Lives up to expectations of others. Fulfils duties and obligations of social system. Upholds laws.

Autocratic/coercive

Guiding/encouraging, team oriented

Transforming, or servant leadership

Task accomplishment

Work group collaboration

Empowered employees, full participation

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Exhibit 5.3 Three levels of personal moral development Source: Based on L. Kohlberg. Moral Stages and Moralization: The Cognitive-Developmental Approach. In Moral Development and Behavior: Theory, Research, and Social Issues, ed. T. Lickona (New York: Holt, Rinehart, and Winston, 1976), pp. 31–53; and Jill W. Graham. (January 1995). Leadership, Moral Development and Citizenship Behavior. Business Ethics Quarterly, 5:1, 43–54.

New Manager Self-test Se rva n t l e a d e r s h i p Managers differ in how they view other people and the tactics they use to get things done. Respond to the items below based on how you view yourself and others. Please answer whether each item is Mostly true or Mostly false for you. Mostly true

1  My actions meet the needs of others before my own needs. 2  I am always offering a helping hand to those around me. 3  I give away credit and recognition to others. 4 I tend to feel competitive with my co-workers. 5 I often interrupt someone to make my point. 6  I encourage the growth of others, expecting nothing in return. 7 I like to be of service to others. 8  Giving makes me happier than receiving. 9  I reach out to orient new people even though it is not required.

Mostly false

Scoring and interpretation: Sum questions 1–3 and 6–9 with one point for each Mostly true, and sum questions 4–5 with one point for each Mostly false. Your score pertains to a concept that was introduced by Robert Greenleaf in his book, Servant Leadership. Servant leadership means that managers try to place service to others before self-interest, listen as a way to care about others and nourish others to help them become whole. This approach to management was based on Greenleaf ’s Quaker beliefs. A score of 7–9 would be considered high on servant leadership, and 0–3 low, with a score of 4–6 in the middle range. How do you feel about your score? Are you attracted to the qualities of servant leadership, or would you prefer a different approach to managing others? Source: Based on Robert Greenleaf, Servant Leadership: A Journey into the Nature of Legitimate Power and Greatness, 25th anniversary ed. (New York: Paulist Press, 2002).

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management in pr actice

Guidelines for ethical decision making

If a 60 Minutes crew was waiting on your doorstep one morning, would you feel comfortable justifying your actions to the camera? One young manager, when confronted with ethical dilemmas, gives them the ‘60 Minutes test’. Others say they use such criteria as whether they would be proud to tell their parents or grandparents about their decision, or whether they could sleep well at night and face themselves in the mirror in the morning. Managers often rely on their own personal integrity in making ethical decisions. But knowing what to do is not always easy. As a future manager, you will surely face ethical dilemmas one day. The following guidelines will not tell you exactly what to do, but taken in the context of the text discussion, they will help you evaluate the situation more clearly by examining your own values and those of your organisation. The answers to these questions will force you to think hard about the social and ethical consequences of your behaviour.

➜➜ Is the problem or dilemma really what it appears to be? If you are not sure, find out.

➜➜ Is the action you are considering legal? Is it ethical? If you are not sure, find out.

➜➜ Do you understand the position of those who oppose the action you are considering? Is it reasonable?

➜➜ Who does the action benefit? Who does it harm? How much? For how long?

➜➜ Would you be willing to allow everyone to do what you are considering doing?

➜➜ Have you sought the opinion of others who are knowledgeable on the subject and who would be objective?

➜➜ Would your action be embarrassing to you if it were made known to your family, friends, co-workers or superiors? There are no correct answers to these questions in an absolute sense. Yet, if you determine that an action is potentially harmful to someone or would be embarrassing to you, or if you do not know the ethical or legal consequences, these guidelines will help you clarify whether the action is socially responsible.

Source: Pagano, A. M. and Verdin, J. A. (1988), The External Environment of Business, Chap. 5. New York: Wiley.

➜➜ Organisational pressures can influence people to go against their own sense of right or wrong, and the resulting stress can lead to mental exhaustion and burnout.

remember this

➜➜ Personality characteristics, family influence, religious background and other factors influence a manager’s ability to make ethical choices.

➜➜ Most managers operate at a conventional level, conforming to standards of behaviour expected by society.

➜➜ One important factor is whether a manager is at a preconventional, conventional or postconventional level of moral development.

➜➜ Only about 20 per cent of adults reach the postconventional level and are able to act in an independent, ethical manner regardless of the expectations of others.

Globalisation makes ethical issues even more complicated for today’s managers.39 For example, although tolerance for bribery is waning, bribes are still considered a normal part of doing business in many foreign countries. Transparency International, an international organisation that monitors corruption, publishes a report ranking leading export countries based on the propensity of international businesses to offer bribes. Exhibit 5.4 shows results of the organisation’s report. Country scores have improved from the 2006 data, when international businesses based in countries such as Russia and China were found to be using bribes ‘on an exceptional and intolerable scale’, with Russia scoring 5.2 and China 4.9 in the 2006

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report.40 By 2011 Russia and China had maintained their improved scores but their ranking decreased (from 22 to 28 and 21 to 27 respectively) as other countries such as India, Brazil and South Korea made more significant improvements.41 It is not always easy to resolve international issues. There are, however, increasing calls for the development of global standards for ethical business conduct, which may help managers negotiate the difficult terrain of international ethics. Exhibit 5.4 The Transparency International Bribe Payers Index, 2011

Scores range from 0 to 10. The higher the score for the country, the lower the likelihood of companies from this country to engage in bribery when doing business abroad. Rank

Score

Rank

Score

1 Netherlands

8.8

11 Spain

8.0

1 Switzerland

8.8

13 South Korea

7.9

3 Belgium

8.7

14 Brazil

7.7

4 Germany

8.6

15 Hong Kong

7.6

4 Japan

8.6

15 Italy

7.6

6 Australia

8.5

15 Malaysia

7.6

6 Canada

8.5

15 South Africa

7.6

8 Singapore

8.3

19 Taiwan

7.5

8 United Kingdom

8.3

19 India

7.5

10 United States

8.1

19 Turkey

7.5

11 France

8.0

22 Saudi Arabia

7.4

Source: Reprinted from Bribe Payers Index. Copyright 2011. Transparency International: the global coalition against corruption. Used with permission. For more information, visit http://www.transparency.org.

Th e o rgan isati o n

Take

a Moment The values adopted within the organisation are important, especially when we understand As a new manager, you strive that most people are at the level-two stage of moral development, which means they for a high level of personal moral believe their duty is to fulfil the obligations and expectations of others. Research has development. To get some idea of your shown that the values of an organisation or department strongly influence employee own level of manager courage and moral behaviour and decision making.42 In particular, corporate culture serves to let development, complete the items in the self-test at the start of this chapter. As you employees know what beliefs and behaviour the organisation supports and those it read through this text be sure to resolve will not tolerate. For example, an investigation of thefts and kickbacks in the US oil the ethical dilemmas at the end of each business found that the cause was the historical acceptance of thefts and kickbacks. chapter and hone your skills in using Employees were socialised into those values and adopted them. In most organisations, the various ethical decision employees believe that if they do not go along with the ethical values expressed, their frameworks. jobs will be in jeopardy or they will not fit in.43 Culture can be examined to see the kinds of ethical signals given to employees. Exhibit 5.5 indicates questions to ask to understand the cultural system. Heroes provide role models that can either support or refute ethical decision making. With respect to company rituals, high ethical standards are affirmed and communicated through public awards and ceremonies. Myths and stories can reinforce heroic ethical behaviour. For example, a story at Johnson & Johnson describes its reaction to the cyanide poisoning

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of Tylenol capsule users in the US. After seven people in Chicago died, the capsules were removed from the market voluntarily, costing the company more than US$100 million. This action was taken against the advice of external agencies, but was necessary because of Johnson & Johnson’s ethical standards. Culture is not the only aspect of an organisation that influences ethics, but it is a major force because it defines organisational values. Other aspects of the organisation – such as explicit rules and policies, the reward system, the extent to which the organisation cares for its people, the selection system, emphasis on legal and professional standards, and leadership and decision processes – can also have an impact on ethical values and manager decision making.44 The respected watchdog website, Crikey.com.au, reported (3 March 2011) a problem in Australia’s second-largest chicken producer: Chickens come home to roost for Coles Supermarket giant Coles has launched a high-level independent probe into the employment practices of poultry giant Baiada following a string of alleged breaches of the retailer’s ethical sourcing policy at chicken plants across Australia. Baiada, the owner of dominant supermarket brands Lilydale and Steggles, has been accused of serious infringements of Coles’ expansive Ethical Sourcing Policy, after it allegedly embarked on a campaign of union busting, worker intimidation and sham contracting that has drawn the attention of unions and the Fair Work Ombudsman.45

This type of ethical ‘policing’ by a large retailer represents its attempt to ensure that ethical practices extend beyond its boundaries back through its supply chain. Exhibit 5.5 Questions for analysing a company’s cultural impact on ethics

1

Identify the organisation’s heroes. What values do they represent? Given an ambiguous ethical dilemma, what decision would they make and why?

2

What are some important organisational rituals? How do they encourage or discourage ethical behaviour? Who gets the awards: people of integrity or individuals who use unethical methods to attain success?

3

What are the ethical messages sent to new entrants into the organisation? Must they obey authority at all costs, or is questioning authority acceptable or even desirable?

4

Does analysis of organisational stories and myths reveal individuals who stand up for what’s right, or is conformity the valued characteristic? Do people get fired or promoted in these stories?

5

Does language exist for discussing ethical concerns? Is this language routinely incorporated and encouraged in business decision making? Source: Academy of Management Review by L. K. Trevino, 1990. Copyright by Academy of Management (NY). Reproduced with permission of Academy of Management (NY) in the format Textbook via Copyright Clearance Center.

What is corporate social responsibility? corporate social responsibility (CSR) The obligation of organisation management to make decisions and take actions that will enhance the welfare and interests of society as well as the organisation.

Now let us turn to the issue of social responsibility. In one sense, the concept of corporate social responsibility, like ethics, is easy to understand: it means distinguishing right from wrong, and doing right. It means being a good corporate citizen. The formal definition of corporate social responsibility (sometimes referred to as CSR) is management’s obligation to make choices and take actions that will contribute to the welfare and interests of society as well as the organisation.46 As straightforward as this definition seems, corporate social responsibility can be a difficult concept to grasp, because different people have different beliefs about which actions improve society’s welfare.47 To make matters worse, corporate social responsibility covers a range of issues, many of which are ambiguous

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with respect to right and wrong. For example, if a bank deposits the money from a trust fund into a lowinterest account for 90 days, from which it makes a substantial profit, has it been unethical? How about rival companies engaging in intense competition, such as that between Telstra and Optus, or Qantas and Virgin Australia? Is it socially responsible for a stronger company to drive a weaker one into bankruptcy? Or consider US companies such as A. H. Robins, maker of the Dalkon shield; Manville Corporation, maker of asbestos; General Motors; or Texaco, the oil company. All declared bankruptcy – which is perfectly legal – to avoid mounting financial obligations to suppliers, unions or competitors. James Hardie is a long-standing Australian company that tried to use restructuring tactics to avoid, and then to severely limit, payouts to asbestos victims who contracted serious and often fatal diseases from James Hardie products. Most Australians would argue that these actions were unethical. These examples pose moral, legal and economic questions that make socially responsible behaviour hard to define. An organisation’s environmental impact also must be taken into consideration. Managers must ultimately decide, on behalf of their company, their position and actions in terms of sustainable development. They must consider their strategy, cultures, values and motivations for their actions on sustainable development issues that impact on the environment, society and the company’s bottom line.

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corporate social responsibility

Organisational stakeholders One reason for the difficulty in understanding corporate social responsibility is that managers must confront the question: ‘responsibility to whom?’ Recall from Chapter 3 that the organisation’s environment consists of several sectors in both the task and the general environment. From a social responsibility perspective, enlightened organisations view the internal and external environment as a variety of stakeholders. A stakeholder is any group or person within or outside the organisation that has some type of investment or interest in the organisation’s performance and is affected by the organisation’s actions (employees, customers, shareholders and so forth). Each stakeholder has a different criterion of responsiveness because it has a different interest in the organisation.48 There is growing interest in a technique called stakeholder mapping, which basically provides a systematic way to identify the expectations, needs, importance and relative power of various stakeholders, which may change over time.49 Stakeholder mapping helps managers identify or prioritise the key stakeholders related to a specific issue or project. For instance, Gap Inc., struggling to cope with the turmoil created after the company was targeted by protesters for using contractors that polluted the environment and engaged in child labour practices, decided to use mapping to identify key stakeholders with which the firm could develop deeper, transparent relationships.

Gap Inc. When reports surfaced in 2009 that a contractor in Lesotho, Africa, making clothing for Gap Inc. and other US companies was dumping toxic materials into local landfills and discharging chemicals into the Caledon River, Gap managers swung into action. A similar crisis related to child labour and unsafe conditions ten years earlier had resulted in global

organisational stakeholders stakeholder Any group within or outside the organisation that has a stake in the organisation’s performance. stakeholder mapping Provides a systematic way to identify the expectations, needs, importance and relative power of various stakeholders.

Innovative Way protests that raged for months and tarnished Gap’s reputation, damaged employee morale, and devastated the firm’s performance. In contrast, the 2009 Lesotho story died down quickly and Gap came out stronger on the other side. What happened in those ten years to make a difference? It’s certainly not that the public was less

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outraged by the stories of poor children being harmed by dangerous chemicals while playing near the river or scavenging through refuse. The result was different this time, because Gap managers had carefully cultivated open relationships with labour groups, human rights organisations, trade unions, nongovernmental organisations and other stakeholders that enabled them to swing into action immediately and take specific steps to solve the problem. In the past, managers’ approach would have been to deny responsibility and blame the subcontractor. With the Lesotho incident, though, Gap’s top leaders immediately stepped forward to declare the company’s commitment to fair and safe conditions and outline the steps it would take. The company later joined Levi Strauss, which also had clothing made by this contractor, to issue a statement detailing actions that had been taken or were in progress.

Because of the relationships Gap had developed with numerous stakeholder groups, the company had the support of labour and human rights organisations, which praised managers’ commitment and actions. Gap embarked on the process of engaging with key stakeholders because even though the company had made a strong commitment to social and environmental responsibility since 1992, the previous approach wasn’t working. Multimillion-dollar efforts at solving ethical problems in the supply chain had failed. So, managers started by drawing a stakeholder map that listed as many stakeholders as possible, then ranked them by their importance. Starting with mapping gave managers a way to focus their efforts and join with the most influential stakeholders to improve labour practices. It was a long and difficult journey, but the results have been well worth it. The company has received awards and public recognition as a leader in ethics and social responsibility.

Source: N. Craig Smith, Sean Ansett and Lior Erex. (Summer 2011). How Gap Inc. Engaged with Its Stakeholders. MIT Sloan Management Review, 52:4, 69–76.

The global supply chain is a source of ongoing challenges for managers today. As Dan Rees, former director of the Ethical Trading Initiative (ETI) said, ‘It is not a crime to find child labour in your supply chain. What is important is what you do about it when you find out.’ By using stakeholder mapping and cultivating open, trust-based relationships with key stakeholders, Gap has ensured that managers are able to do the right thing swiftly, sometimes even turning crises into opportunities.50 Exhibit 5.6 illustrates important stakeholders for a large organisation such as Gap. Most organisations are influenced by a similar variety of stakeholder groups. Investors and shareholders, employees, customers and suppliers are considered primary stakeholders, without whom the organisation cannot survive. Investors, shareholders and suppliers’ interests are served by managerial efficiency – that is, use of resources to achieve profits. Employees expect work satisfaction, pay and good supervision. Customers are concerned with decisions about the quality, safety and availability of goods and services. When any primary stakeholder group becomes seriously dissatisfied, the organisation’s viability is threatened.51 Other important stakeholders are the government and the community, which have become increasingly important in recent years. Most corporations exist only under the proper charter and licences and operate within the limits of safety laws, environmental protection requirements, antitrust regulations, antibribery legislation, and other laws and regulations in the government sector. Government regulations affecting business are increasing because of recent events. The community includes local governments, the natural environment and the quality of life provided for residents. For many companies such as Gap, trade unions and human rights organisations are highly important stakeholders. Special interest groups may include trade associations, political action committees, professional associations and consumerists. One special interest group of particular importance today is the green movement. In Australia, the US and Asia, investment funds that limit themselves to investing in socially responsible companies have often done very well. Qualifying for such funds is becoming important for companies of all

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Exhibit 5.6 Major stakeholders relevant to Gap Inc.

Regulatory authorities

Customers

Communities Stockholders

Non-governmental organisations (NGOs)

Employees

Gap Inc. Creditors Suppliers

Trade unions Governments Human rights organisations Partners

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Sources: Based on information in D. Wheeler, B. Colbert and R. E. Freeman. (Spring 2003). Focusing on Value: Reconciling Corporate Social Responsibility, Sustainability, and a Stakeholder Approach in a Networked World. Journal of General Management, 28:3, 1–28; J. E. Post, L. E. Preston and S. Sachs. (Fall 2002). Managing the Extended Enterprise: The New Stakeholder View. California Management Review, 45:1, 6–28; and N. Craig Smith, Sean Ansett and Lior Erex. (Summer 2011). How Gap Inc. Engaged with Its Stakeholders. MIT Sloan Management Review, 52:4, 69–76.

Special interest groups

sizes so as not to reduce or restrict those who invest in them. In Australia, companies that are considered advanced in their corporate social responsibility include BHP Billiton, even though it mines uranium, and Southcorp (now part of Foster’s Group), a major supplier of alcoholic beverages. Socially responsible investing is not simply a matter of condemning companies as irresponsible because of the industry they participate in, but rather of measuring how they participate – their policies and practices within those industries.52 In the US and Europe, screened investment funds, which avoid investing in companies that produce goods or services in tobacco, weaponry, gambling and similar industries, grew to have assets over $4 trillion in 2011. By the end of 2012 the US had $13.6 trillion invested into environmental, social and governance considered funds, with 21.8 per cent of total assets invested responsibly. Europe is the largest region of screened investments with an incredible 65 per cent of assets managed.53 Investors have also discovered that socially responsible funds often perform better than the overall investment market. In Australia, responsible investment is now becoming mainstream. Responsible investment considers risk factors beyond purely financial risk when making investment decisions. Considerations might include the company culture or a measure of good corporate governance and ethics, health and safety records or carbon emissions, for example. Australian funds managed in responsible investment portfolios at the end of 2012 totalled $152 billion. The level of dollars invested increased an astounding 30 per cent from 2011 to 2012 and represents approximately 16 per cent of the total assets under management in Australia. Moreover, ethical and responsible investment funds returned on average 3 per cent more to investors than their rival, mainstream Australian share funds. This outperformance is consistent across global markets. 54

socially responsible investment Socially responsible investment involves investing in companies which, in the judgement of the investor, do not harm people or the environment through their activities.

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Environment

Exhibit 5.7 Stakeholders relevant to a car manufacturer

Community

OPEC Source: Based on Organizational Dynamics by Nancy C. Roberts and Paula J. King. Copyright 1989 by Elsevier Science & Technology Journals. Reproduced with permission of Elsevier Science & Technology Journals in the format Textbook via Copyright Clearance Center.

Trade associations

Creditors

Domestic customers International customers

Environmentalists Specialinterest groups

Domestic competition Major car manufacturer

Courts

Media

Investors

Shareholders

Foreign governments Owners State/federal government Employees/ unions

International competitors Foreign suppliers

Austr alian manager pr ofile

Susan Mizrahi, human rights advocate

‘The difference between what we do and what we are capable of doing would suffice to solve most of the world’s problems,’ said Mahatma Gandhi, in one of his many statements that has inspired me both professionally and personally. Unlike many of my peers, I did not have a specific career goal in mind when finishing high school or even my undergraduate degree. My study of Public Relations at university led me to a position in the Victorian public service where I was privileged to work closely with Ministers on communications and high-profile events, but I felt I was capable of doing more. To the surprise of colleagues at the time, I exchanged my promising career for a backpack, and flew to Asia to work as a tour leader for an adventure travel company. In South-East and East Asia, I saw poverty and injustice first-hand, and sought to use and further develop my skills in political Source: Courtesy Susan Mizrahi

Domestic suppliers

strategy and communications to address these. I volunteered with the Tibetan refugee community in northern India, which was eye-opening and rewarding, and then undertook postgraduate study in International Relations. These experiences opened up opportunities to work in Washington, DC and across Europe, where I lobbied the US Government, United Nations and European Union on the Sino–Tibet issue. Today, I manage a team of capable and motivated social justice campaigners at Australia’s largest aid organisation, World Vision Australia. To build a career and life that is impactful, exciting and satisfying, in my opinion you must ensure that your work and management style complements – and, ideally, advances – your personal values and interests. Every day, individuals are appointed as managers, but it is a challenge to be a great manager every day. While the non-profit sector is full of passionate, knowledgeable and committed individuals, I have seen that too few non-profit managers listen, evaluate and respond effectively to their teams. This is an ongoing management challenge that the sector must overcome to help solve the world’s problems.

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World Vision Australia operates in over 60 countries, striving to improve human outcomes on matters such as:

➜➜ Community development. World Vision works within communities and across geographical areas to help individuals and groups improve the well-being of children and overcome poverty. This is done through long-term projects aimed at empowering communities to sustainably manage their own development.

➜➜ Humanitarian and emergency relief. When disasters strike, World Vision has staff and supplies positioned around the globe to respond to immediate needs like food, water, shelter and safe spaces for children. World Vision also works with communities to recover from disasters and reduce the impacts of future events through planning and capacity building.

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➜➜ Tackling injustice through policy change and advocacy. We engage governments, institutions, donors, communities and the public to address the underlying issues that perpetuate poverty. World Vision aims to empower communities to speak up for their rights and influence change, both locally and globally.

➜➜ Engaging Australia. World Vision seeks to educate Australians about the causes of poverty and to challenge them to be involved in its alleviation, including by making financial and non-financial contributions to our work. With this ambitious and important program, World Vision Australia clearly needs to allocate its limited resources wisely and carefully, and this requires dedicated and capable managers! Source: Contributed by Susan Mizrahi.

The green movement The year was 2004, and Jeffrey Immelt, CEO of General Electric (GE), had just presented a plan for a ‘green’ business initiative to 35 top GE executives. They voted it down. But Immelt, in a rare move, overruled them, and Ecomagination was born. Today, GE’s Ecomagination is one of the world’s most widely recognised corporate green programs. It has not only cut GE’s greenhouse gas emissions by 30 per cent but also added innovative products that are generating billions of dollars in annual revenue.55 Going green has become a new business imperative, driven by shifting social attitudes, new governmental policies, climate changes and information technology (IT) that quickly spreads any news of a corporation’s negative impact on the environment. A recent survey found that 90 per cent of Americans agree that there are important ‘green’ issues and problems, and 82 per cent think that businesses should implement environmentally friendly practices.56

The question hovering on the horizon for enlightened CEOs such as General Electric’s Jeff Immelt: How do we apply technology and sustainability to addressing the economics of scarcity? Immelt had only to tap into the historical precedent of innovation and imagination set by the creative genius of GE founder Thomas Edison. The result was GE’s major commitment to social responsibility

through a green technology movement. GE became a CSR pioneer by initiating The Ecomagination Campaign, a plan that packs a punch. Immelt doubled R&D funding to establish new labs and load them with PhDs undertaking innovative sustainability research. The company also created an Ecomagination Advisory Council fuelled by ‘dreaming sessions’ that allowed customers

and stakeholders to envision the future and the products and services that can improve those futures while providing an innovative business opportunity for GE. Founder Edison must be smiling. Source: Philip Mirvis, Bradley Googins and Sylvia Kinnicutt. (2010). Vision, Mission, Values: Guideposts to Sustainability. Organizational Dynamics, 39, 316–24.

Case study

Ecomagination

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Sustainabi lit y an d th e tri ple bot tom lin e sustainability Economic development that generates wealth and meets the needs of the current population while preserving the environment for the needs of future generations. triple bottom line Triple bottom line performance of an organisation involves measuring the three types of outcomes of an organisation’s activities, namely financial, environmental and community/social.

As is discussed in the end-of-chapter sustainability examples throughout this textbook, many corporations have embraced the idea of sustainable development. Sustainability refers to economic development that generates wealth and meets the needs of the current generation while preserving the environment and society so future generations can meet their needs as well.57 With a philosophy of sustainability, managers weave environmental and social concerns into every strategic decision so that financial goals are achieved in a way that is socially and environmentally responsible. Managers in organisations that embrace sustainability measure their success in terms of a triple bottom line. The term triple bottom line refers to measuring an organisation’s social performance, its environmental performance and its financial performance. This is sometimes called the three Ps: People, Planet and Profit.58 The People part of the triple bottom line looks at how socially responsible the organisation is in terms of fair labour practices, diversity, supplier relationships, treatment of employees, contributions to the community and so forth. The Planet aspect measures the organisation’s commitment to environmental sustainability. The third P, of course, looks at the organisation’s profit, the financial bottom line. Based on the principle that what you measure is what you strive for and achieve, using a triple bottom line approach to measuring performance ensures that managers take social and environmental factors into account, rather than blindly pursuing profit no matter the cost to society and the natural environment.

➜➜ Corporate social responsibility refers to the obligation of organisational managers to make choices and take actions that will enhance the welfare and interests of society, as well as the organisation. ➜➜ Research has shown that the values of an organisation or department strongly influence employee behaviour and decision making. ➜➜ Culture can be examined to see the kinds of ethical signals given to employees. ➜➜ Different stakeholders have different interests in the organisation and thus different criteria for social responsiveness. ➜➜ The term stakeholder refers to any group or person within or outside

the organisation that has some type of investment or interest in the organisation’s performance. ➜➜ Shareholders, employees, customers and suppliers are considered primary stakeholders, without whom the organisation could not survive. ➜➜ Government, the community and special interest groups are also important stakeholders. ➜➜ Stakeholder mapping provides a systematic way to identify the expectations, needs, importance and relative power of various stakeholders. ➜➜ Socially responsible investment involves investing in companies, which, in the judgement of the investor, do not harm people or the environment through their activities.

➜➜ The green movement is a special interest group of particular importance today.

remember this

➜➜ Sustainability refers to economic development that generates wealth and meets the needs of the current population while preserving society and the environment for the needs of future generations. ➜➜ Companies that embrace sustainability measure performance in terms of financial performance, social performance and environmental performance, referred to as the triple bottom line. ➜➜ A survey found that 90 per cent of Americans agree that there are important ‘green’ issues and problems, and 82 per cent think that businesses should implement environmentally friendly practices.

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rough patch. It reported its first operating loss since going public, laid off some employees and shipped some work overseas to cut costs. One of Timberland’s bankers bluntly told Swartz that the company needed to ‘cut this civic stuff out and get back to business’. Swartz wondered if he was right. Maybe managers were failing the organisation and its stakeholders by ploughing too many resources into philanthropic activities. Timberland decided to continue its commitment to social causes. In fact, later the same year when Swartz was faced with this dilemma, the company doubled the number of hours it underwrote for employees to do community service. That number has now increased to a full 40-hour week, plus the company offers paid sabbaticals for people to work six months full-time in community nonprofits. This commitment to discretionary responsibility has contributed to exceptional loyalty among many employees, because people feel good about the work they do. One vice-president says she has turned down lucrative offers from other companies because at Timberland she doesn’t feel that she has to check her values at the door. Timberland consistently ranks in Fortune magazine’s survey of the 100 Best Companies to Work For, and more than 50 per cent of Timberland’s employees say the focus on community service is the main reason they work there. However, some people felt that Timberland should have cut out the charity activities to focus on meeting its economic responsibilities

when the company hit difficult times. In addition, some felt that the company was not meeting its ethical responsibilities by spending money on community service when it was laying people off and shipping jobs overseas. ‘Some employees asked, “Doesn’t charity begin at home?”’ Swartz said. He believed, however, that cutting out community service would damage morale and lower commitment without solving the financial problems. Fortunately, Timberland rebounded from its difficulties and continued to grow. However, managers will continue to face challenges concerning how to best meet their responsibilities to all stakeholders. Source: Marquis, C. (3 July 2003). Doing Well and Doing Good. New York Times, 3, 2; Pereira, J. (9 September 2003). Career Journal: Doing Good and Doing Well at Timberland. The Wall Street Journal, B1; Kang, S. (26 December 2003). Naming the Baby: Parents Brand Their Tot With What’s Hot. The Wall Street Journal, B1.

Source: Getty Images/Michael Springer

In the early 1990s, Jeffrey Swartz, the then chief operating officer of Timberland (who today is CEO), began transforming Timberland into a company known as much for philanthropy as for its boots. But Swartz found himself in a quandary when one of the company’s bankers implied that the focus on philanthropy was hurting the company and its stakeholders. Swartz’s transformation began when City Year, a non-profit agency involved in community projects such as violence prevention and AIDS education, asked for boots for its workers. Swartz convinced other Timberland executives to answer the call. Over time, Timberland provided free boots and uniforms for about 10 000 people. Visiting some of the community projects, Swartz was deeply moved by what volunteers were accomplishing. ‘I saw what real power was that day,’ Swartz recalls. ‘I didn’t realise how hungry I was for that kind of purpose.’ Timberland began shutting down operations one day each year so the company’s thousands of employees could get paid to take part in a variety of company-sponsored philanthropic projects – building homeless shelters or cleaning up playgrounds. The company also started giving employees 16 hours of paid leave annually to volunteer at charities of their choosing. But the emphasis on corporate social responsibility doesn’t come cheap. The all-day event alone costs about US$2 million a year in lost sales, project expenses and wages for employees. When Timberland’s profits were soaring, that seemed fine, but then the company hit a

Case study

A leadership dilemma at Timberl and

Jeffrey Swartz of Timberland

Evaluating corporate social responsibility A model for evaluating corporate social performance is presented in Exhibit 5.8. The model indicates that total corporate social responsibility can be divided into four primary criteria: economic, legal, ethical and discretionary responsibilities.59 These four criteria fit together to form the whole of a company’s social responsiveness.

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discretionary responsibility Organisational responsibility that is voluntary and guided by the organisation’s desire to make social contributions not mandated by economics, law or ethics.

The first criterion of social responsibility is economic responsibility. The business institution is, above all, the basic economic unit of society. Its responsibility is to produce the goods and services that society wants and to maximise profits for its owners and shareholders. Economic responsibility, carried to the extreme, is called the profit-maximising view, advocated by Nobel economist Milton Friedman. This view argues that the corporation should be operated on a profit-oriented basis, with its sole mission to increase its profits so long as it stays within the rules of the game.60 The purely profit-maximising view is no longer considered an adequate criterion of social performance in Australia, the United States and Europe. This approach means that economic gain is the only responsibility and can lead companies into trouble, as recent events in the mortgage and finance industries have clearly shown. Legal responsibility defines what society deems as important with respect to appropriate corporate behaviour.61 That is, businesses are expected to fulfil their economic goals within the framework of legal requirements imposed by local town councils, state legislators and federal regulatory agencies. Examples of illegal acts by corporations include corporate fraud, intentionally selling defective goods, performing unnecessary repairs or procedures, deliberately misleading consumers and billing clients for work not done. Organisations that knowingly break the law are poor performers in this category. Walmart, for example, has been embroiled in a bribery scandal amid allegations that the company’s largest foreign subsidiary, Walmart de Mexico, paid bribes to local officials and covered up the wrongdoing to corner every edge of the market in that country. Investigators found ‘reasonable suspicion’ that Walmart managers had violated US and Mexican laws and called for a broader inquiry into the allegations.62 Ethical responsibility includes behaviours that are not necessarily codified into law and may not serve the corporation’s direct economic interests. As described earlier in this chapter, to be ethical, organisation decision makers should act with equity, fairness and impartiality, respect the rights of individuals, and provide different treatment of individuals only when relevant to the organisation’s goals and tasks.63 Unethical behaviour occurs when decisions enable an individual or company to gain at the expense of other people or society as a whole. Managers at Merck & Company, for example, seriously damaged the company’s reputation by continuing to market the arthritis medication Vioxx aggressively even after they had information suggesting that there were heart attack and stroke risks associated with the drug. Merck was facing stiff competition from Pfizer’s Celebrex and chose to pursue profits, even at the risk of harming patients.64 Discretionary responsibility is purely voluntary and is guided by a company’s desire to make social contributions not mandated by economics, law or ethics. Discretionary activities include generous philanthropic contributions that offer no payback to the company and are not expected. For example, Royal DSM, a Netherlands-based company that produces nutritional supplements, pharmaceutical ingredients and energy-efficient building products, partners with the United Nations World Food Programme to give vitamins, supplements and fortified food products to malnourished people in Nepal, Kenya, Bangladesh and Afghanistan; offers free medical services to poor villagers in India; and has donated building supplies to construct schools in poor countries. ‘We don’t really put a value on it. . . . ,’ said Fokko Wientjes, DSM’s director of sustainability. ‘But shareholders haven’t ever called me up and said, "Please stop".'65 Gap Inc., described earlier, donates 50 per cent of profits on a particular line of ‘Red’-branded Gap products to lead U2 singer Bono’s Red campaign against HIV/AIDS.66 As another example, a week after a massive earthquake and tsunami devastated Japan, corporations had pledged about $151 million in cash and in-kind donations for disaster relief.67 Discretionary responsibility is the highest criterion of social responsibility because it goes beyond societal expectations to contribute to the community’s welfare.

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ili si b on sp re so cia l

Ethical responsibility

po co r al To t

Obey the law.

ty

Legal responsibility

ili ib ns po

es

Be ethical. Do what is right. Avoid harm.

r ial oc

te

Contribute to the community; be a good corporate citizen.

es at or rp co

ra

Discretionary responsibility

l ta To

ty

Exhibit 5.8 Criteria of corporate social performance Source: Based on Archie B. Carroll. A Three-Dimensional Conceptual Model of Corporate Performance. (1979). Academy of Management Review, 4, 499; A. B. Carroll. (July–August 1991). The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Corporate Stakeholders. Business Horizons, 34, 42; and Mark S. Schwartz and Archie B. Carroll. (2003). Corporate Social Responsibility: A Three-Domain Approach. Business Ethics Quarterly, 13:4, 503–30.

Economic responsibility Be profitable.

➜➜ The model for evaluating a company’s social performance uses four criteria: economic, legal, ethical and discretionary. ➜➜ Companies may get into trouble when they use economic criteria as

their only measure of responsibility, sometimes called the profitmaximising view. ➜➜ Discretionary responsibility is purely voluntary and is guided by the organisation’s desire to make social

contributions not mandated by economics, laws or ethics.

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➜➜ Corporations that sent generous donations to Japan following the devastating earthquake and tsunami were practising discretionary responsibility.

Managing company ethics and social responsibility An expert on the topic of ethics has said, ‘Management is responsible for creating and sustaining conditions in which people are likely to behave themselves.’68 Exhibit 5.9 illustrates ways in which managers create and support an ethical organisation. One of the most important steps managers can take is to practise ethical leadership. Ethical leadership means that managers are honest and trustworthy, fair in their dealings with employees and customers, and behave ethically in both their personal and professional lives. In response to recent ethical violations and critics of management education saying MBA stands for ‘Me Before Anyone’,69 some business schools and students are taking a fresh look at how future managers are trained. Changing how future managers are trained could be one key to solving the ethics deficit pervading organisations. Managers and first-line supervisors are important role models for ethical behaviour, and they strongly influence the ethical climate in the organisation by adhering to high ethical standards

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in their own behaviour and decisions. Moreover, managers are proactive in influencing employees to embody and reflect ethical values.70 This chapter’s Management in Practice describes an approach that some leading companies are taking to strengthen managers’ ethical and socially responsible underpinning. Managers can also implement organisational mechanisms to help employees and the company stay on an ethical footing. Some of the primary ones are codes of ethics, ethical structures and measures to protect whistle-blowers.

Innovative Way

Harvard Business School, Columbia Business School, Yale School of Management

Some members of a recent graduating class of Harvard Business School did something unusual. They signed a voluntary student-led pledge saying that the goal of a business manager is to ‘serve the greater good’ and promising that they will act responsibly and ethically and refrain from advancing their ‘own narrow ambitions’ at the expense of others. At Harvard and other business schools, there has been an explosion of interest in ethics classes and activities that focus on personal and corporate responsibility. Many students, as well as educators, are recognising a need to give future managers a deeper understanding of how to practise ethical leadership rather than just how to make money. At Columbia Business School, which requires an ethics course, students

formed a popular Leadership and Ethics Board that sponsors lectures and other activities. Yale School of Management developed sessions in its core curriculum related to the recent ethical crisis in the mortgage and finance industries and worked with the Aspen Institute to create a curriculum aimed at teaching business students how to act on their values at work. About 55 business schools are using all or part of the curriculum in pilot programs. ‘There is a feeling that we want our lives to mean something more and to run organisations for the greater good,’ said Max Anderson, one of the organisers of Harvard’s pledge. ‘No one wants to have their future criticised as a place filled with unethical behaviours.’

Sources: Leslie Wayne. (30 May 2009). A Promise to Be Ethical in an Era of Temptation. The New York Times; and Kelley Holland. (15 March 2009). Is It Time to Retrain B-Schools? The New York Times.

Exhibit 5.9 Building an ethical organisation Source: Adapted from Linda Klebe Treviño, Laura Pincus Hartman and Michael Brown. (Summer 2000). Moral Person and Moral Manager. California Management Review, 42:4, 128–42.

The ethical organisation

Ethical leadership Codes of ethics Ethics committee Chief ethics officer Ethics hotlines Ethics training Support for whistle-blowers

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Cultivating a service mindset

management in pr actice

Some of today’s best companies are taking a new approach to developing managers – global service programs that place employees with non-profit organisations or small businesses, often in developing countries, to provide free or low-cost technical and managerial assistance. In line with the growing emphasis on sustainability and the triple bottom line, organisations want managers who have a service and sustainability mindset rather than an attitude of getting all they can for themselves. In one survey, 88 per cent of top executives said it was important that future managers have the mindset and skills to address sustainability issues.

➜➜ Many managers view these opportunities as plum

➜➜ Global service programs benefit everyone. Global service

➜➜ How widespread is the trend? In early 2012, at least

programs have been described as a ‘win–win–win’. It might seem obvious that the non-profit organisations served by these programs benefit, but the companies investing in them and the employees participating in them gain just as much. IBM credits its program with generating about US$5 billion in new business. Companies gain greater knowledge of emerging markets, develop social capital and goodwill, and get more well-rounded managers with the service and sustainability mindset needed in today’s world. Participants benefit in numerous ways, including increased self-awareness, new skills and greater cross-cultural understanding.

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assignments. Laura Benetti of Dow Corning spent four weeks working nine-hour-days with rural women in India, helping them learn how to price and market the garments they made. She and nine colleagues slept in a lodge with limited access to hot water and electricity. ‘It gives more meaning to your career,’ said Benetti. Participants in global service also appreciate the opportunity to expand their understanding of global issues. ‘We all know about things like poverty in Africa and corruption and bribery . . .,’ said one IBM participant who spent time in Nigeria. ‘This kind of experience really brings . . . things to life, you really feel it.’ 27 Fortune 500 companies, including PepsiCo, IBM, FedEx, Dow Corning and Pfizer, had some type of global service program, up from only six in 2006. Since 2008, IBM has sent more than 1400 employees to work with projects such as reforming Kenya’s postal system or developing ecotourism in Tanzania. Pfizer’s program lends employees to nongovernmental organisations (NGOs) to address health care needs in Asia and Africa. The Accenture Development Partnership has been involved in more than 200 projects in 55 countries, where Accenture’s professionals work at 50 per cent pay for up to six months with organisations such as UNICEF and Freedom from Hunger.

Sources: Based on Philip Mirvis, Kevin Thompson and John Gohring. (Spring 2012). Toward Next-Generation Leadership: Global Service. Leader to Leader, 20–6; Matthew Gitsham. (2012). Experiential Learning for Leadership and Sustainability at IBM and HSBC. Journal of Management Development, 31:3, 298–307; and Anne Tergesen. (9 January 2012). Doing Good to Do Well. The Wall Street Journal, B7.

Co d e o f ethi cs A code of ethics is a formal statement of the company’s values concerning ethics and social issues; it communicates to employees what the company stands for. Codes of ethics tend to exist in two types: principle-based statements and policy-based statements. Principle-based statements are designed to affect corporate culture; they define fundamental values and contain general language about company responsibilities, quality of products and treatment of employees. Policy-based statements generally outline the procedures to be used in specific ethical situations. These situations include marketing practices, conflicts of interest, observance of laws, proprietary information, political gifts and equal opportunity. General statements of principle are often called corporate credos. One good example is Johnson & Johnson’s ‘The Credo’. Available in 36 languages, The Credo has guided Johnson & Johnson’s managers for more than 60 years in making decisions that honour the company’s responsibilities to employees, customers, the community and shareholders. Another example is Google’s Code of Conduct. Portions of the Google code are shown in the following Innovative Way.

code of ethics A formal statement of the organisation’s values regarding ethics and social issues.

code of ethics

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Innovative Way

Google

Google is one of the best-known companies in the world, and managers take seriously its reputation for both technological superiority and a commitment to ethics and social responsibility. Google’s Code of Conduct starts with these words: ‘Don’t be evil’. Googlers generally apply those words to how we serve our users. But ‘Don’t be evil’ is much more than that. Google uses a well-designed Code of Conduct to put the motto ‘Don’t be evil’ into practice. The code is divided into seven sections, with each subdivided into sections that describe specific values, policies and expectations. The code also clearly states that employees will be protected if they call attention to ethical violations or misconduct. Here are some excerpts from Google’s code: Serve our users Our users value Google not only because we deliver great products and services, but because we hold ourselves to a higher standard in how we treat users and operate more generally.

Respect each other We are committed to a supportive work environment, where employees have the opportunity to reach their fullest potential. Each Googler is expected to do his or her utmost to create a respectful workplace culture that is free of harassment, intimidation, bias and unlawful discrimination of any kind.

Preserve confidentiality We get a lot of press attention around our innovations and our culture, and that’s usually fine. However, company information that leaks prematurely into the press or to competitors can hurt our product launches, eliminate our competitive advantage and prove costly in other ways.

Ensure financial integrity and responsibility Financial integrity and fiscal responsibility are core aspects of corporate professionalism. . . . The money we spend on behalf of Google is not ours; it’s the company’s and, ultimately, our shareholders’.

Obey the law Google takes its responsibilities to comply with laws and regulations very seriously and each of us is expected to comply with applicable legal requirements and prohibitions.

Conclusion Google aspires to be a different kind of company. It’s impossible to spell out every possible ethical scenario we might face. Instead, we rely on one another’s good judgment to uphold a high standard of integrity for ourselves and our company. And remember . . . don’t be evil, and if you see something that you think isn’t right – speak up!

Source: (25 April 2012). Code of Conduct. Google Investor Relations, http://investor.google.com/corporate/code-of-conduct.html (accessed 28 September 2012).

Having a strong code of conduct or code of ethics doesn’t guarantee that companies won’t get into ethical trouble or be challenged by stakeholders on ethical issues. Codes of ethics in and of themselves do little to influence and ensure ethical behaviour among employees and managers.71 However, they are one key element of the organisation’s ethical framework. Codes of ethics state the values or behaviours expected and those that will not be tolerated. When top management supports and enforces these codes, including rewards for compliance and discipline for violation, ethics codes can boost a company’s ethical climate.72

Eth i cal stru ctu res ethics committee A group of executives assigned to oversee the organisation’s ethics by ruling on questionable issues and disciplining violators. chief ethics officer A manager who oversees all aspects of ethics and legal compliance.

Ethical structures represent the various systems, positions and programs that a company can undertake to encourage and support ethical behaviour.73 An ethics committee is a group of executives (and sometimes lower-level employees as well) appointed to oversee company ethics. The committee provides rulings on questionable ethical issues and assumes responsibility for disciplining wrongdoers. Motorola’s Ethics Compliance Committee, for instance, is charged with interpreting, clarifying and communicating the company’s code of ethics and with adjudicating suspected code violations. Many companies set up ethics offices with full-time staff to ensure that ethical standards are an integral part of company operations. These offices are headed by a chief ethics officer, sometimes called a

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chief ethics and compliance officer, a company executive who oversees all aspects of ethics and legal compliance, including establishing and broadly communicating standards, ethics training, dealing with exceptions or problems, and advising senior managers in the ethical and compliance aspects of decisions.74 The title chief ethics officer was almost unheard of a decade ago, but highly publicised ethical and legal problems in recent years have sparked a growing demand for these ethics specialists. The Ethics and Compliance Officer Association, a trade group, reports that membership soared 70 per cent, to more than 1260 companies, in the five years following the collapse of Enron due to financial wrongdoing.75 Most ethics offices also work as counselling centres to help employees resolve difficult ethical issues. A toll-free confidential ethics hotline allows employees to report questionable behaviour, as well as seek guidance concerning ethical dilemmas.

Wh istle- blowin g Employee disclosure of illegal, unethical or illegitimate practices on the employer’s part is called whistleblowing.76 No organisation can rely exclusively on codes of conduct and ethical structures to prevent all unethical behaviour. Holding organisations accountable depends to some degree on individuals who are willing to speak up if they detect illegal, dangerous or unethical activities. Whistle-blowers often report wrongdoing to outsiders, such as regulatory agencies, politicians or newspaper reporters. Some firms have instituted innovative programs and confidential hotlines to encourage and support internal whistle-blowing. For this practice to be an effective ethical safeguard, however, companies must view whistle-blowing as a benefit to the company and make dedicated efforts to encourage and protect whistle-blowers.77

The business case for ethics and social responsibility Most managers now realise that paying attention to ethics and social responsibility is as important a business issue as paying attention to costs, profits and growth. For one thing, in today’s information age, bad behaviour is increasingly hard to hide, and ‘outbehaving the competition’ can provide a real competitive advantage.78 Naturally, the relationship of a corporation’s ethics and social responsibility to its financial performance concerns both managers and management scholars and has generated a lively debate.79 One concern of managers is whether good citizenship will hurt performance – after all, ethics programs and social responsibility cost money. A commitment to sustainability means that things often have to be done in a more costly way. Hundreds of studies have been undertaken to determine whether heightened ethical and social responsiveness increases or decreases a company’s financial performance. Studies have provided varying results, but they have generally found a positive relationship between ethical and socially responsible behaviour and firm financial performance.80 For example, a recent study of the top 100 sustainable global companies found that they had significantly higher sales growth, return on assets, profits and cash flow from operations in at least some areas of business.81 Another review of the financial performance of large US corporations considered ‘best corporate citizens’ found that they enjoy both superior reputations and superior financial performance.82 Similarly, Governance Metrics International, an independent corporate governance ratings agency in New York, reports that the stocks of companies run on more selfless principles perform better than those run in a self-serving manner.83 Although results from these studies are not proof, they do provide an indication that using resources for ethics and social responsibility does not hurt companies.84

whistle-blowing Disclosure by an employee of illegal, immoral or illegitimate practices by the organisation.

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Companies are also making an effort to measure the non-financial factors that create value. Researchers find, for example, that people prefer to work for sustainable companies or companies that demonstrate a high level of ethics and social responsibility; thus, these organisations can attract and retain high-quality employees.85 Customers pay attention too. A study by Walker Research indicates that, price and quality being equal, two-thirds of customers say they would switch brands to do business with a company that is ethical and socially responsible.86 Another series of experiments by Remi Trudel and June Cotte of the University of Western Ontario’s Ivey School of Business found that consumers were willing to pay slightly more for products they were told had been made using high ethical standards.87 Enlightened managers realise that integrity and trust are essential elements in sustaining successful and profitable business relationships with an increasingly connected and well-informed web of employees, customers, suppliers and partners. Although doing the right thing might not always be profitable in the short run, many managers believe that it can provide a competitive advantage by developing a level of trust that money can’t buy.

➜➜ Managers are role models. One of the most important ways that managers create ethical and socially responsible organisations is by practising ethical leadership.

with overseeing company ethics by ruling on questionable issues and disciplining violators.

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➜➜ Companies that are ethical and socially responsible perform as well as – often even better than – those that are not socially responsible.

➜➜ A code of ethics is a formal statement of the organisation’s values regarding ethics and social issues.

➜➜ Some organisations have ethics offices headed by a chief ethics officer, a manager who oversees all aspects of ethics and legal compliance.

➜➜ An ethics committee is a group of executives (and sometimes lowerlevel employees as well) charged

➜➜ Managers who want ethical organisations support whistleblowing, the disclosure by employees

Innovative Way

of unethical, illegitimate or illegal practices by the organisation.

➜➜ One study found that sustainable companies have significantly higher sales growth, return on assets and profits than companies that are not run on a philosophy of sustainability.

Lifebuoy to glowing health

The World Health Organization estimates that diarrhoearelated illnesses kill more than 1.8 million people a year. One way to prevent the spread of these diseases is better hand-washing, and marketing managers for Lifebuoy soap are trying to make sure people are aware of that fact. British soap maker Lever Brothers (now the global organisation Unilever) introduced Lifebuoy to India more than a century ago, promoting it as the enemy of dirt and disease. The basic approach today is the same. Several years ago, the company’s India subsidiary, Hindustan Unilever Limited, introduced

a campaign called Swasthya Chetna (Glowing Health), sending Lifebuoy teams into rural villages with a ‘glo-germ kit’ to show people that even clean-looking hands can carry dangerous germs – and that soap-washed hands don’t. Sales of Lifebuoy have risen sharply since the campaign, aided by the introduction of a smaller-size bar that costs five rupees (about 12 cents). Just as importantly, says Hindustan Unilever’s chairman Harish Manwani, the campaign has reached around 80 million of the rural poor with education about how to prevent needless deaths. Source: Rob Walker. (10 June 2007). Cleaning Up. New York Times Magazine, 20.

Strive to be an ethical leader by adhering to high standards in your personal and business behaviour. As a new manager, use tools such as codes of ethics, ethics training programs and ethics officers to promote ethical behaviour in your unit and help people resolve ethical dilemmas. Treasure whistle-blowers who have the courage to point out wrongdoing, and set up organisational systems to nurture and protect them.

Pacific Hydro currently has over 1900 megawatts of hydro power and wind farm projects at various stages of development, construction and operation in Australia, Chile, Brazil and the Philippines. (see http:// www.pacifichydro. com.au).

The Mengniu Dairy in China was riding a wave. Producing some 10 000 tonnes of milk per day, it was not in control of its supply chain or its demand side operations, meaning that it did not own cows, nor did it control distribution of its milk, but essentially operated dairies. Growth was phenomenal when marketing coups meant that China’s first astronauts drank Mengniu milk on their flight and the TV show that Mengniu sponsored, Super Girl, also became a big hit. Sales growth and the brand moved ahead faster than quality control in its supply chain. When the whole industry crashed in September 2008, Mengniu was also brought to its corporate knees. From contamination of milk thought to be by downstream distributors, hundreds of thousands of babies were poisoned, with six babies

dying across the region. As a result, sales fell away completely. CEO Yang Wenjun played the classic crisis management moves, starting with a massive recall and offering full support to customers and staff. Even though milk wasn’t selling, he continued to buy milk from farmers during the crisis, to keep them afloat. At great expense, he invested in high-quality equipment and supply chain controls, restoring consumer confidence, albeit slowly. Eliminating middleman distributors is expected to eliminate the risk of future contamination, and these investments are expected to lead to sales not only being restored, but significantly increased in the next few years. The company is diversifying into other dairy products, such as yoghurt, and at one of its plants, a large entry sign says ‘It takes you 20 years to set up a good

reputation and 5 minutes to destroy it’. Arising from the crisis, this company has invested and set itself up to be milking its markets for many years to come. Source: Gady Epstein. (17 September 2010). Golden Cow. Forbes Asia, 108–11.

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A crisis to milk

Source: Corbis/Imaginechina

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Managerial ethics and sustainable development in Australia In a review of managerial and business ethics in Australia and New Zealand, J. Milton-Smith pointed out the mixed record of ethical standards.88 He asserted that the Royal Commissions that have been held in every state of Australia have identified that ‘in the 1980s, many senior people in Australian business and government were caught up in a culture of greed, opportunism and abuse of power’. There was ‘exposure and imprisonment of prominent politicians and corporate leaders’. Milton-Smith points to major ethical problems in companies such as BHP Billiton, CSR and Coles, with similar problems in most governments. Research at the St James Ethics Centre in Sydney has shown that the most pressing ethical issues facing executives in Australia are, in order of importance: ●● employment conflicts of interest ●● environmental issues ●● sexual harassment ●● workplace safety ●● employee privacy ●● conflicts between company ethics and foreign business practices ●● security of company records ●● affirmative action ●● employee health screening ●● inappropriate gifts to corporate personnel ●● unauthorised payments to foreign officials ●● balancing work and family commitments.

Concept extension

Internet research activity 5.2

Many industries are becoming steeped in ethical challenges and problems, including tobacco, timber, alcohol, gambling, uranium, weapons and fossil fuels (coal and oil). The Australian community is becoming increasingly vocal about issues of false advertising, exploitation of children, and exploitation of workers in low-wage situations. New forces are gaining power, such as those of shareholders who are watching over the actions of organisations with ever-increasing vigilance. The Australian media is also vigilant in watching both business and government actions, and actively reporting any indiscretion, however small. Many organisations and professional associations have published standards of ethical behaviour to which employees or members are expected to conform. These include the legal, accounting, engineering and medical professional bodies.

Organisational sustainable development Almost every business magazine and newspaper exhorts managers to become active in sustainable development. In most industries, sustainable development efforts have proceeded in fits and starts. Many initiatives, some expensive, have not lasted nor provided any benefits. Success has at best been mixed, from spectacularly useful through to a complete waste of effort and resources. The lack of clarity in terms of

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what a firm should do is holding many executives and their businesses back from a substantial engagement in sustainable development practices. However, the set of practices and potential outcomes are indeed not a fad when they are done well. Companies which are leading in this area of activity have found ways to simultaneously improve all their three areas of output, namely their economic/financial output of wealth creation, their ‘environmental footprint’ output and their social output, meaning their impact on the communities in which they operate and beyond. They have found ways of adapting their practices and innovating which have not involved tradeoffs or compromises, but rather have achieved ‘win–win’ outcomes for a range of their stakeholders. Sustainable development practices are defined (after World Commission on Economic Development, 1987): 89 Sustainable development practices manage technology and social organisation to make balanced and equitable progress on economic, environmental and social needs so that meeting these needs in the present does not compromise the ability of future generations to meet their own needs. The scope of the economic, environmental and social needs addressed by sustainable development practices is described in the Sustainability Reporting Guidelines 2002 published by the Global Reporting Initiative.

Doing business has become a lot more complex in the last 25 years. A major aspect of this is the attainment of approval, cooperation and satisfaction of a range of stakeholders, including customers, suppliers, owners, employees, financiers and regulators. These groups are demanding a broader set of performance outcomes than just profit. In the past, it has been possible to be anything from reactive and minimalist in dealing with these requirements through to proactive, strategic and therefore ahead of the pack. From a practical perspective, businesses and their executives can and increasingly must make concrete decisions, other than ‘do nothing’, about why, what, when, how and how much they should engage in sustainable development. The ‘profile’ and importance of sustainable development has increased such that many companies now refer to their stance on sustainable development in their annual reports, or indeed specially publish a separate report on it. Leading organisations such as Westpac and BHP Billiton have paid great attention to their policies and strategies on sustainable development, in which they run their businesses to achieve a high level of ‘sustainability’ and openly measure and report these activities (see http://www.bhpbilliton .com/home/aboutus/sustainability/Pages/default.aspx and http://www.westpac.com.au/about-westpac/ sustainability-and-community). More generally, many national and international systems of measuring and acknowledging the extent of progress made by organisations have been created. An example in Australia is the Banksia Awards (http://www.banksiafdn.com). These awards are in various categories, and are aimed at recognising and promoting their ‘sustainable development’ approach to business and management. Recent winners of the major Banksia Award have included the Torres Strait Regional Authority (2013 Banksia Gold Award) and Target 100 – Meat and Livestock Australia in 2012. Other winners have included Ferguson Plarre Bakehouses (2009 Gold Award winner), the World Wildlife Foundation, Westpac and Visy.90 Other specialised categories of these awards are in education, Indigenous activities, land and biodiversity, water, agriculture/food, transport, clean technology, leadership of sustainability and other important concerns. In short, the positive message for managers is that organisations must now take into full consideration a broad set of stakeholder requirements. For those who do this effectively, major advantages are available.

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Th e ‘why’ o f sustainable d evelo pm ent Businesses should work to limit the downside and expose the upside of their strategic opportunities by including sustainable development practices for consideration in their business practices choices. They can substantially assist in delivering a complete strategy and satisfying a variety of stakeholders at a higher level than would otherwise be the case. Indeed, advanced companies are proactive and innovative in leading stakeholder expectations and creating new and different forms of value for all players. The motivation need not be altruism, voluntarism and so on. Rather, it is a deep-seated set of principles that guides the organisation to develop its interdependence with its stakeholders, and grows through successive implementation of sustainable development practices. This guiding set of principles is a ‘sustainability orientation’, comprising breadth of vision, stakeholder empowerment and being progressive, as outlined below. The sustainability orientation of a company helps business leaders make the connection between their sustainable development practices and pursuit of the distinctive character and strategic advantage of their business.

Br eadt h of vi si on Although some leading companies in this domain are large and some are small, all are big-picture thinkers: in other words, they view the business in its broadest context and appreciate the needs, rights and interests of an extended array of stakeholders. This stakeholder approach goes far beyond a response model. Leading companies value highly the respect of their stakeholders and understand that they need to earn a community leadership position by establishing a reputation for trust and integrity that endures in the long term. Companies view this role as providing the opportunity for business to strive for performance beyond compliance, with the aim of generating sustainable futures for both the business and its stakeholders.

Stakeh older emp ow er m en t Stakeholder empowerment is clearly much deeper than engaging in transactional relationships even if these are long term. Stakeholder empowerment is perhaps the ‘newest’ practice area of the sustainability orientation of leading companies. It describes businesses’ active and consistent efforts to build, lengthen and strengthen relationships with their stakeholders. Where stakeholder empowerment differs from more traditional approaches to stakeholder relations is in the profound degree to which power and influence become shared between the two parties. It is this sharing of power that underpins the shared future described by the principle ‘breadth of vision’ and is the objective of stakeholder empowerment.

Bei ng p r ogr essi ve In keeping with their long-term vision and enthusiasm for change and new opportunities, the leading companies we studied also shared a commitment to progress through models such as excellence, best practice and high performance. How businesses operationalise the ‘being progressive’ principle depends on their business strategy. For companies like Eli Lilly, Multiplex and OneHarvest/Vegco, innovation is core to their competitiveness; whereas for companies like Blackmores, VicSuper and BHP Billiton, other forms of competitive advantage are supported by quality, service and reliability. These are all ‘being progressive’ practices that are chosen at the operational level to complement the strategy of the business.

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New manager self-test E t h i c a l w o r k c l i m at e s Think of an organisation by which you were employed. Answer the following questions twice: The first time, circle the number that best describes the way things actually were. The second time, answer the questions based on your beliefs about the ideal level that would meet the needs of both individuals and the organisation.

Disagree 1 2 3 4 5 Agree 1 What was best for everyone in the company was the major consideration there.

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2 Our major concern was always what was best for the 1 2 3 4 5 other person. 3 People were expected to comply with the law and professional standards over and above other considerations.

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4 In the company, the first consideration was whether a decision violated any law.

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5 It was very important to follow the company’s rules and procedures there.

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6 People in the company strictly obeyed the company policies.

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7 In the company, people were mostly out for themselves.

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8 People were expected to do anything to further the company’s interests, regardless of the consequences.

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9 In the company, people were guided by their own personal ethics.

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10 Each person in the company decided for himself or herself what was right and wrong.

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Scoring and interpretation: Subtract each of your scores for questions 7 and 8 from the number 6. Then, add up your score for all ten questions: Actual = ______. Ideal = ______. These questions measure the dimensions of an organisation’s ethical climate. Questions 1 and 2 measure caring for people; questions 3 and 4 measure lawfulness; questions 5 and 6 measure adherence to rules; questions 7 and 8 measure emphasis on financial and company performance; and questions 9 and 10 measure individual independence. A total score above 40 indicates a highly positive ethical climate. A score from 30 to 40 indicates above-average ethical climate. A score from 20 to 30 indicates a below-average ethical climate, and a score below 20 indicates a poor ethical climate. How far from your ideal score was the actual score for your organisation? What does that difference mean to you? Go back over the questions and think about changes that you could have made to improve the ethical climate in the organisation. Discuss with other students what you could do as a manager to improve ethics in future companies for which you work. Source: Based on Bart Victor and John B. Cullen. (1988). The Organizational Bases of Ethical Work Climates. Administrative Science Quarterly, 33, 101–25.

Th e ‘what’ o f sustainable d evelo pm ent Given this sustainability orientation, sustainable development practices are a subset of business practices, engaged in to achieve sound strategy and performance outcomes. Every firm has a unique business strategy. In essence, three generic strategic requirements can be pursued, namely: ●● stakeholder support ●● efficiency ●● market edge. These are critical to sustainable development.

Stake holder sup p ort This refers to all the stakeholders in the business. Their support as shareholders and debt-holders may be increased by an improved organisational risk profile; by recognition by socially responsible investment indices; or by improved communication.

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Employee support may be increased not only through programs directly related to their employment such as training and wage negotiation, but also by support programs such as child care and health and fitness provisions, and further by involvement in philanthropic programs such as charitable donations from wages matched by the company, special leave for charity work and so on. The support of suppliers may be increased through evidence of mutuality or partnering in the supply chain, whereby the company promotes, supports and brokers their efforts to improve efficiency or standards and agrees to share the benefits. Customer support may be increased by efforts that recognise their needs and preferences such as environmentally friendly products, health information and product security and quality control. Finally, the support of regulators may be increased by evidence of responsible and consistent adherence to required performance and reporting, support for international relations such as inter-country aid programs, and support for local programs such as community liaison committees and customer training and support.

Effi ci ency This refers to the range of sustainable development practices that makes a direct or indirect contribution to the company’s financial performance. Waste minimisation is an example of a practice that generates efficiency gains through reduced costs of raw materials, and reduced costs of treatment, storage, handling and disposal of wastes. Similar benefits apply to practices that reduce energy or water consumption and reduce greenhouse gas emissions. Areas of practice that are less commonly associated with efficiency gains, but which do have the potential to generate them, are multi-skilling and other forms of workforce training and support; and life-cycle analysis of products, whereby the costs of product maintenance and disposal are internalised to the business rather than being shifted to consumers and governments. Plastic bag bans and levies are a simple example of this kind of initiative, although much more complex versions are being developed in industries such as the information industry.

Mar ket edge This describes those practices that contribute to the company’s market opportunities in terms of new markets, market share and profit opportunity. Research and development, innovation and supply chain improvements are all examples of practices that can have a sustainable development component and that can open up new markets for a company or assist it to be more responsive to existing ones. Practices that contribute to the reputation of the company or brand can also increase its market edge. These practices may also contribute to the strategies of stakeholder support and efficiency mentioned earlier, but the company’s market orientation is the Take a driving force for their adoption.

Moment

Th e ‘wh en’ o f sustainable d evelo pm ent Businesses derive long-term success from sustainable development practices that they are well placed to broker and benefit from. Specifically, sustainable development practices give businesses a greater opportunity for long-term success when they are:

What will your position be in terms of sustainable development practices, as a manager? Do you have a personal ‘sustainability orientation’? What actions will that lead to in your managerial life?

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●● strategically congruent with the business – specifically, by contributing to the business strategic requirements of stakeholder support, efficiency and market edge ●● deep practices that achieve genuine improvements in sustainable development outcomes, rather than superficial tick-a-box efforts. ●● mature, leading-edge approaches that offer the best available value proposition for the business on the scale from comply through to transform ●● well-integrated with other business practices, thus promoting efficiency and effectiveness in implementation. ➜➜ Australian organisations face a wide range of ethical challenges.

behaviour from managers than ever before.

➜➜ Australian stakeholders are increasingly requiring higher standards of ethical and responsible

➜➜ Sustainability involves economic development that generates wealth and meets the needs of the current population while preserving the

environment for the needs of future generations.

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➜➜ Australian companies have increased the attention that they are paying to the environmental and social bottom lines of their organisations.

It is not possible to specify one single formula that connects sustainable development practices to business success. Further, there is no definitive set of sustainable development practices, nor is there a single persuasive argument or motivation for embarking on them. However, it is possible to recognise the high-level framework for sustainable development that is common to advanced companies. From our observations, companies that are successful: ●● review, recognise and acknowledge the company’s sustainability orientation as it develops as an integral part of the business strategy and culture ●● canvass their specific sustainable development issues and business activities for opportunities to make beneficial changes (implement sustainable development practices) ●● analyse the potential for these sustainable development practices to contribute to one or more of three strategic business requirements, namely stakeholder support, efficiency and market edge ●● choose, develop and implement their unique set of sustainable development practices ●● measure progress, adapt, review and extend their sustainable development practices within an evolving business environment, strategy, culture and business practice set. In short, companies can make the most of their sustainable development practices, not simply by reacting to a single stimulus like managing compliance or protecting their reputation. Rather, a stronger argument for sustainable development practices rests in the creation of business advantage and innovation.

sustainable development

Taking managerial action on sustainable development

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➜➜ In Australian, many challenges exist in the domain of managerial ethics, such as conflict of interest.

Response to the Management Challenge

In light of the stakeholder concerns about genetically modified food issues outlined in the chapter-opening Management Challenge, Monsanto CEO Hendrik Verfaillie offered an apology to some stakeholders at a Farm Journal Conference in Washington, DC, saying that Monsanto ‘was so blinded by its enthusiasm for this great new technology that it missed the concerns the technology raised for many people’. Verfaillie also announced a five-part pledge that aims to restore positive stakeholder relationships. Each of the five commitments requires an ongoing dialogue between Monsanto managers and various stakeholder constituencies. The company paid $1.5 million to settle the SEC charges and voluntarily cooperated with regulatory investigators. Monsanto managers understood the importance of effectively managing critical stakeholder relationships. Monsanto has published a pledge to stakeholders and measures itself against this pledge: We want to make the world a better place for future generations. As an agricultural company, Monsanto can do this best by providing value through the products and systems we offer to farmers. With the growth of modern agricultural practices and crops that generate everincreasing yields, we are helping farmers around the world to create a better future for human beings, the environment, and local economies.

discussion questions

1  Is it reasonable to expect that managers can measure their social and environmental performance on the same level as they measure financial performance with a triple bottom line? Discuss.

2  What various stakeholder groups did oil giant BP have to respond to following the massive 2010 oil spill in the Gulf of Mexico? From what you know about the BP oil spill, how would you evaluate BP executives’ behaviour in terms of corporate social responsibility?

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Monsanto’s long term vision and sustainability strategy is: By 2030, Monsanto globally commits to help farmers produce more and conserve more by:

➜➜ Developing improved seeds and traits that help farmers double yields from 2000 levels for corn, canola, soybeans and cotton, with a $10 million grant also pledged to improve wheat and rice yields globally.

➜➜ Conserving resources through developing seeds and traits that use one-third fewer key resources per unit of output to grow crops while working to lessen habitat loss and improve water quality.

➜➜ Helping improve the lives of all farmers who use our products, including an additional five million people in resource-poor farm families by 2020. And specifically in Australia, support the long-term viability of rural communities for future generations. Sources: Wheeler, D., Colbert, B. and Freeman, R. E. (Spring 2003). Focusing on Value: Reconciling Corporate Social Responsibility, Sustainability, and a Stakeholder Approach in a Networked World. Journal of General Management, 28:3, 1–28; Post, J. E., Preston, L. E. and Sachs, S. (Fall 2002). Managing the Extended Enterprise: The New Stakeholder. California Management Review, 45:1, 6–28.; Fritsch, P. and Mapes, T. (5 April 2005). Seed Money; In Indonesia, a Tangle of Bribes Creates Trouble for Monsanto. The Wall Street Journal; Monsanto website, http://www.monsanto.com.au/sustainable_agriculture/default.asp, http://www.monsanto.com.au/who_we_are/our_pledge.asp.

3 Imagine yourself in a situation of being encouraged by colleagues to inflate your expense account. What factors do you think would influence your decision? 4 Is it socially responsible for organisations to undertake political activity or join with others in a trade association to influence the government? Discuss. 5 Managers at some banks and mortgage companies have argued that providing subprime mortgages was based on their desire to give poor people a chance to participate in the dream of home ownership. What is your opinion of this explanation in terms of ethics and social responsibility?

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6 A noted business executive once said, ‘A company’s first obligation is to be profitable. Unprofitable enterprises can’t afford to be socially responsible’. Discuss why you agree or disagree with this statement. 7 Do you believe that it is ethical for organisational managers to try to get access to and scrutinise the Facebook pages of employees or job applicants? Discuss. 8 Which do you think would be more effective for shaping longterm ethical behaviour in an organisation: a written code of ethics combined with ethics training or strong ethical leadership? Which would have more impact on you? Why?

9 The technique of stakeholder mapping lets managers classify which stakeholders they consider more important and will invest more time in to satisfy. Is it appropriate for management to define some stakeholders as more important than others? Should all stakeholders be considered equal? 10 Many people think cheating is more common today than it was a decade ago. Do you think cheating is more common, or does it just seem so? Why?

W h at i s r i g h t ? It is often hard for a manager to determine what is ‘right’ and even more difficult to put ethical behaviour into practice. A manager’s ethical orientation often brings him or her into conflict with people, policies, customers or bosses. Consider the following dilemmas. How would you handle them? 1 A well-liked member of your staff with an excellent record confides to you that he has Acquired Immune Deficiency Syndrome (AIDS). Although his illness has not affected his performance, you are concerned about his future health and about the reactions of his co-workers. You: a tell him to keep you informed about his health and say nothing to his co-workers b arrange for him to transfer to an area of the organisation where he can work alone c hold a staff meeting to inform his co-workers and ask them how they feel about his continued presence on your team d consult your human resources officer on how to proceed. 2 During a reorganisation, you are told to reduce staff in the department you manage. After analysing staffing requirements, you realise the job would be a lot easier if two professionals, who are both over age 60, would retire. You: a say nothing and determine lay-offs based purely on performance and length of service b schedule a meeting with both employees and ask if they would consider early retirement c schedule a meeting with all staff and ask if anyone is interested in severance or early retirement d lay off the older workers. 3 One of your colleagues has recently experienced two personal tragedies – her husband filed for divorce and her mother died. Although you feel genuine sympathy for her, her work is suffering. A report you completed, based on inaccurate data she provided, has been criticised by management. Your manager asks you for an explanation. You: a apologise for the inaccuracies and correct the data b tell your manager that the data supplied by your colleague was the source of the problem

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c say your colleague has a problem and needs support d tell your manager that because of your work load, you did not have time to check the figures in the report.

4 Your firm recently hired a new manager who is at the same level you are. You do not like the man personally and consider him a rival professionally. You run into a friend who knows your rival well. You discover this man did not attend Sydney University, as he stated on his résumé, and that he in fact has not graduated from any institution. You know his supposed university background was instrumental in getting him hired. You: a expose the lie to your superiors b without naming names, consult your human resources officer on how to proceed c say nothing – the company obviously failed to check him out, and the lie probably will surface on its own d confront the man with the information and let him decide what to do. 5 During a changeover in the accounting department, you discover your company has been routinely overcharging members of the public for services provided to them. Your superiors say repayment of charges would wreak havoc on company profits. Your bosses say the problem will never come to light and they will take steps to correct the problem so it never happens again. You: a make the matter public, anonymously or otherwise b say nothing – it is now in the hands of the bosses c work with the bosses on a plan to recognise the company’s error and set up a schedule of rebates that would not unduly penalise the company. 6 In this morning’s mail, you received plans and samples for a promising new product from a competitor’s disgruntled employee. You: a throw the plans away b send the samples to your research department for analysis c notify your competitor about what is going on d call the police.

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Ad d it ional questio n s 1 Use the guidelines described in Management in Practice: ‘Guidelines for ethical decision making’ to determine the appropriate behaviour in these cases. Do you have all the information you need to make an ethical decision? How would family or friends react to each alternative if you were in these situations?

2 Which approach to ethical decision making – utilitarian, individualism, justice or moral rights – seems most appropriate for handling these situations?

Sources: Game developed by Nelson, K. (Spring 1990). Board Games. Owen Manager, 14–16; Dreilinger, C. and Rice, D. (December 1991). Office Ethics. Working Woman, 35–9; Kelly, K. and Weber, J. (20 May 1991). When a Rival’s Trade Secret Crosses Your Desk. BusinessWeek, 48.

Ethics and business costs

Gr oup challenge

Your discussion group is the leadership team of a company called Aussie Furniture Imports, which imports lounge and dining suites from China and Vietnam and sells them to Australian retailers. Your biggest customer has recently sent you a letter of demand requiring that you provide them with documentary evidence that all the furniture you sell them comes from factories that apply high standards of ethics, workplace health and safety, and environmental performance. This is a noble ideal, but it

Case for cr itical analysis

costs extra to do these things, and those foreign suppliers would not bear those costs. So you are stuck in the middle: a customer who is holding to high ideals and suppliers who will not comply. Switching suppliers will lead to higher costs and cut your profitability to the bone. What policy will you adopt? Generate some alternative responses to your customer’s demand and evaluate these, before making a decision. (This exercise is based closely on a real situation, one that is becoming increasingly common in Australian businesses.)

Too much intelligence?

The rapid growth of InPace Solutions occurred in no small part because of sales manager Ken Bodine and the skills of the savvy young sales team he had assembled. Bodine prided himself on finding and hiring top graduates from two major business schools in the state. In addition to the top salaries offered by InPace, the graduates were attracted by Bodine’s energy, innovative thinking and can-do attitude. He was the embodiment of InPace culture: moving fast and ahead of the knowledge curve in high-tech. InPace’s sales force consistently stunned the competition with their high performance level. Among other things, InPace had the reputation for aggressive business intelligence. Competitors found both amusing and frustrating the company’s ability to outmanoeuvre others and capture accounts. Bodine enjoyed the air of mystery surrounding the InPace organisation. Awareness that some competitor sat on the verge of a big sale always stirred Bodine’s passion for sales and ignited his desire to ‘one-up these guys’ and grab the sale out from under them. ‘If this was a poker game,’ one board member mused, ‘ InPace would win every hand. It’s like Bodine as well as his staff possess the uncanny ability to know the cards your company is holding. He keeps a straight face, a low profile throughout the game, and then suddenly he lays his cards on the table and you’re sunk. Here at InPace, we all love it.’ A former military intelligence officer, Bodine brought that ‘sneaky’ air into the InPace culture, adding a bit of excitement to the day-to-day business of sales. ‘With a great product, great staff, and great business intelligence,’ Bodine was fond of saying, ‘you can dominate the market.’ He wanted everyone – customers,

competitors and the media – to see InPace everywhere. ‘Every time the competition holds a staff meeting,’ he said, ‘the first question should be, “What’s InPace doing?”’ The sales staff was a mirror image of Bodine – younger, but with the same air of invincibility, and very competitive with one another. This, too, Bodine encouraged. A chess player, he enjoyed observing and encouraging the competition within his own sales staff. And seeing the thrill it brought ‘the boss’, ambitious salespeople worked vigorously to prove their competitive worth. Bodine’s latest competitive ‘match’ pitted Cody Rudisell and Ali Sloan in an intellectual and strategic struggle for a coveted assignment to a potential major account with a company that had just expanded into the state. Bodine let it be known that Cody and Ali were being considered for the assignment and that each could submit a proposal to lure the account to InPace and away from its top rival, Raleigh-Tech. Both Cody and Ali eagerly grabbed the opportunity to expand their influence within the company and to build their reputations. Putting together their presentations within a short time period meant working long days and late nights. On the night before the presentations, Cody bounded into Ali’s office and dropped a file on her desk. ‘Top that!’ he said. Ali began thumbing through the file, and as she looked up in startled amazement, Cody slammed the folder and jerked it from her desk. ‘That’s like a watershed of Raleigh-Tech’s trade secrets,’ Ali said. ‘Where did you get that?’ ‘That’s for me to know and you to find out,’ Cody replied, taking a seat and noisily drumming his fingers on the folder. ‘With this information, R-T doesn’t have a chance. And neither do you.’ ‘You could get into all sorts of trouble’, Ali said, ‘When you lay that on Bodine’s . . .’ ‘Bodine’s espionage side will love it,’ Cody interrupted. ‘This

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is classic Bodine, classic InPace. You can’t tell me that with all the brilliant moves he’s made over the years, Bodine hasn’t done the same thing. This is business, cut-throat business, and I may have just topped the master. See you tomorrow.’ As he left, Ali sat in stunned silence. ‘Cut-throat, indeed,’ she whispered, reaching for the phone. She held the phone for a moment, wondering who she should call. This is unethical and illegal, she thought. She hung up the phone. Should I let him hang himself tomorrow? What if Bodine really does love it? If I call some manager tonight, will everyone see me as a sore loser and a crybaby? Is this really what it takes to win in the big leagues? Is this really the culture of this organisation?

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Questions 1 How has Ken Bodine shaped the sales culture at InPace Solutions? Do you consider this culture to be at a preconventional, conventional or postconventional level of ethical development? Why? 2 What should Ali Sloan do? What would you do if you were in her place? Explain. 3 How might Cody Rudisell’s decision differ if he based it on the utilitarian approach vs individualism approach vs practical approach to ethical decision making? Which approach does he appear to be using?

T h e o C h o c o l at e : m a n a g i n g e t h i c s a n d s o c i a l r e s p o n s i b i l i t y For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

On the job video case

Q uestions 1 What practices at Theo Chocolate reflect the concept of sustainability? 2 What does vice president Debra Music mean when she says that Theo is a ‘triple bottom line’ company? How is this different from any other company?

1 Wallington, P. (15 March 2003). Honestly?! CIO, 41–2; McLean, B. (24 December 2001). Why Enron Went Bust. Fortune, 58–68. 2 Kaptein, M. (2003). The Diamond of Managerial Integrity. European Management Journal, 21:1, 99–108. 3 Gilley, B. (30 August 2001). Jiang’s Turn Tempts Fate. Far Eastern Economic Review, 30. 4 Waldholz, M. (5 March 1998). AZT Price Cut for Third World Mothers-tobe. The Wall Street Journal, B1, B12; Arnst, 1997; Franchise Inc. (November 1997). Inc., 121; Kurschner, D. (September–October 1995). Tying Executive Pay to Social Responsibility. Business Ethics, 47. 5 Gordon F. Shea, Practical Ethics (New York: American Management Association, 1988); and Linda K. Treviño. (1986). Ethical Decision Making in Organizations: A Person-Situation Interactionist Model. Academy of Management Review, 11, 601–17. 6 Thomas M. Jones. (1991). Ethical Decision Making by Individuals in Organizations: An Issue-Contingent Model. Academy of Management Review, 16: 366–95. 7 Shelby D. Hunt and Jared M. Hansen. (2007). Understanding Ethical Diversity in Organizations. Organizational Dynamics 36: 2, 202–16. 8 Socialising for Intelligence. (2 November 2011). Computer News Middle East. 9 Justin Scheck. (11 August 2009). Accusations of Snooping in InkCartridge Dispute. The Wall Street Journal Online, http://online.wsj.com/ article/SB124995836273921661.html?KEYWORDS=%22Accusations+ of+Snooping+in+Ink-Cartridge+Dispute%22 (accessed 14 August 2009). 10 Marcus Kabel. (27 January 2006). Former Walmart Executive to Plead Guilty to Fraud. USA Today, http://www.usatoday.com/money/industries/ retail/2006-01-27-retail-fraud_x.htm (accessed 2 July 2012); and A. Jones and N. Koppel. (7 August 2010). Ethical Lapses Felled Long List of Company Executives. The Wall Street Journal, http://online.wsj.com/article/ SB10001424052748703309704575413842089375632.html (accessed 2 July 2012).

3 What does the term fair trade mean to the leaders at Theo? What happens if fair trade goals conflict with a company’s primary responsibility to be profitable?

11 These examples are from Jones and Koppel. endnotes Ethical Lapses Felled Long List of Company Executives. 12 Rushworth M. Kidder. (30 January 1990). The Three Great Domains of Human Action. Christian Science Monitor. 13 Gallup Survey results reported in R. Martin. (2011). The CEO’s Ethical Dilemma in the Era of Earnings Management. Strategy & Leadership 39:6, 43–7. 14 John Revill and Vanessa O’Connell. (23 October 2012). Armstrong Is Stripped of Titles in Cycling. The Wall Street Journal, A4; and A. Hartocollis. (26 March 2012). At Ailing Brooklyn Hospital, Insider Deals and Lavish Perks. The New York Times, A1. 15 Elizabeth Povoledo. (28 May 2012). Vatican Allows That Butler Scandal Is Hurting Trust. The New York Times, http://www.nytimes.com/2012/05/29/ world/europe/vatican-says-scandal-involving-popes-butler-erodes-trust.html (accessed 2 July 2012). 16 Marist College Institute for Public Opinion and Knights of Columbus survey, results reported in K. Turner. (27 February 2009). Corporate Execs: Nobody Trusts Us; U.S. Lacks Confidence in Business Ethics, Poll Says. Florida Times Union. 17 Gary R. Weaver, Linda Klebe Treviño and Bradley Agle. (2005). ‘Somebody I Look Up To:’ Ethical Role Models in Organizations. Organizational Dynamics, 34:4, 313–30. 18 These measures of unethical behaviour are from Muel Kaptein. (October 2008). Developing a Measure of Unethical Behavior in the Workplace: A Stakeholder Perspective. Journal of Management, 34:5, 978–1008. 19 Roger Martin. (2011). The CEO’s Ethical Dilemma in the Era of Earnings Management. Strategy & Leadership, 39:6, 43–7. 20 Nicholas D. Kristof. (19 September 2008). Lehman CEO Fuld Takes the Prize; Need a Job?: $17,000 an Hour; No Success Required. The Gazette; P. Goodsell. (5 October 2008). Are CEOs Worth Their Salt? Omaha WorldHerald; J. Calmes and L. Story. (18 March 2009). AIG Bonus Outcry

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Builds: Troubled Insurance Giant Gave out More Millions Last Week. Pittsburgh Post Gazette; G. Bowley. (24 February 2010). Wall Street ’09 Bonuses Increase 17% to $20 Billion. The New York Times; and A. Shell. (24 February 2010). Despite Recession, Average Wall Street Bonus Leaps 25%; About $20.3 Billion Distributed in 2009. USA Today. 21 Jennifer Liberto. (19 April 2012). CEO Pay Is 380 Times Average Worker’s – AFL-CIO. CNNMoney, http://money.cnn.com/2012/04/19/news/economy/ ceo-pay/index.htm (accessed 3 July 2012); and J. McGregor. (11 May 2012). Crazy Data Point of the Day: How Much CEO Pay vs. Worker Pay Has Grown. Post Leadership Blog, WashingtonPost.com, http://www.washingtonpost.com/blogs/post-leadership/post/crazy-datapoint-of-the-day-how-much-ceo-vs-worker-pay-has-grown/2012/05/11/ gIQArUISIU_blog.html (accessed 3 July 2012). 22 Linda K. Treviño and Katherine A. Nelson. (1995). Managing Business Ethics: Straight Talk About How to Do It Right (New York: John Wiley & Sons, Inc), p. 4. 23 Jones. Ethical Decision Making by Individuals in Organizations. 24 This example is from Francis J. Flynn and Scott S. Wiltermuth. (2010). Who’s with Me? False Consensus, Brokerage, and Ethical Decision Making in Organizations. Academy of Management Journal, 53:5, 1074–89. 25 Based on a question from a General Electric (GE) employee ethics guide, reported in Kathryn Kranhold. (28 November 2005). U.S. Firms Raise Ethics Focus. The Wall Street Journal. 26 D. Wallis. (3 May 2012). Loose Lips Can Sink Trips. The New York Times, F1. 27 From Jeffrey Kluger. (3 December 2007). What Makes Us Moral? Time, 54–60. 28 The Morality Quiz. Time, http://www.time.com/morality (accessed 19 February 2008). 29 This discussion is based on Gerald F. Cavanagh, Dennis J. Moberg and Manuel Velasquez. (1981). The Ethics of Organizational Politics. Academy of Management Review, 6, 363–74; Justin G. Longenecker, Joseph A. McKinney and Carlos W. Moore. (Winter 1988). Egoism and Independence: Entrepreneurial Ethics. Organizational Dynamics: 64–72; Carolyn Wiley. (February 1995). The ABCs of Business Ethics: Definitions, Philosophies, and Implementation. IM, 22–7; and Mark Mallinger. (August 1997). Decisive Decision Making: An Exercise Using Ethical Frameworks. Journal of Management Education, 411–17. 30 Michael J. McCarthy. (21 October 1999). Now the Boss Knows Where You’re Clicking; and Virtual Morality: A New Workplace Quandary. The Wall Street Journal; and Jeffrey L. Seglin. (8 August 2000). Who’s Snooping on You? Business 2.0, 202–3. 31 John Kekes. (1988). Self-Direction: The Core of Ethical Individualism. In Organizations and Ethical Individualism, ed. Konstanian Kolenda (New York: Praeger), pp. 1–18. 32 Tad Tulega. (1987). Beyond the Bottom Line (New York: Penguin Books). 33 Bill Lynn. Ethics. Practical Ethics website, http://www.practicalethics. net/ethics.html (accessed 23 March 2010); Richard E. Thompson. (January 2003). So, Greed’s Not Good After All. Trustee, 28; and Dennis F. Thompson. What Is Practical Ethics? Harvard University Edmond J. Safra Foundation Center for Ethics website, http://www. ethics.harvard.edu/the-center/what-is-practical-ethics (accessed 23 March 2010). 34 Anonymous official quoted in Carol D. Leonnig and David Nakamura. (23 May 2012). Four in Secret Service Fight Back. The Washington Post, A1. 35 Gerard L. Rossy. (2011). Five Questions for Addressing Ethical Dilemmas. Strategy & Leadership, 39:6, 35–42. 36 John D. Kammeyer-Mueller, Lauren S. Simon and Bruce L. Rich. (May 2012). The Psychic Cost of Doing Wrong: Ethical Conflict, Divestiture Socialization, and Emotional Exhaustion. Journal of Management, 38:3, 784–808.

37 L. Kohlberg. (1976). Moral Stages and Moralization: The CognitiveDevelopmental Approach. In Moral Development and Behavior: Theory, Research, and Social Issues, ed. T. Lickona (New York: Holt, Rinehart and Winston), pp. 31–83; L. Kohlberg. (1969). Stage and Sequence: The Cognitive-Developmental Approach to Socialization. In Handbook of Socialization Theory and Research, ed. D. A. Goslin (Chicago: Rand McNally); Linda K. Treviño, Gary R. Weaver and Scott J. Reynolds. (December 2006). Behavioral Ethics in Organizations: A Review. Journal of Management, 32:6, 951–90; and Jill W. Graham. (January 1995). Leadership, Moral Development, and Citizenship Behavior. Business Ethics Quarterly, 5:1, 43–54. 38 Ihosvani Rodriguez. (3 July 2012). Hallandale Beach Lifeguard Fired After Participating in Beach Rescue. Sun Sentinel, http://articles.sun-sentinel .com/2012-07-03/news/fl-hallandale-beach-lifeguards-20120703_1_ lifeguard-services-jeff-ellis-beach-rescue (accessed 9 July 2012); and Gilma Avalos and Ari Odzer. (5 July 2012). Hallandale Beach Lifeguard Fired for Leaving His Zone to Rescue Drowning Man. NBCMiami.com, http://www .nbcmiami.com/news/local/Hallandale-Beach-Lifeguard-Fired-For-LeavingHis-Zone-For-Rescue-161372785.html (accessed 9 July 2012). 39 Donaldson, T. and Dunfee, T. W. (Summer 1999). When Ethics Travel: The Promise and Peril of Global Business Ethics. California Management Review, 41:4, 45–63. 40 Transparency International (2004). Transparency International Releases New Bribe Payers Index, http://www.transparency.org (accessed 24 February 2004). 41 Transparency International (2011). Bribe Payers Index Report 2011, pp. 8 and 9, http://bpi.transparency.org/bpi2011/results/ (accessed 11 March 2014). 42 Weber, J. (September–October 1995). Influences Upon Organizational Ethical Subclimates: A Multi-Departmental Analysis of a Single Firm. Organizational Science, 6:5, 509–23. 43 Treviño, L. K. (1990). A Cultural Perspective on Changing and Developing Organizational Ethics. In R. Woodman and W. Pasmore (eds) Research in Organizational Change and Development (Greenwich: JAI Press), p. 4. 44 Treviño, L. K. (1990). A Cultural Perspective on Changing and Developing Organizational Ethics; Cullen, J. B., Victor, B. and Stephens, C. (Autumn 1989). An Ethical Weather Report: Assessing the Organization’s Ethical Climate. Organizational Dynamics, 50–62; Cullen, J. B. and Victor, B. (1988). The Organizational Bases of Ethical Work Climates. Administrative Science Quarterly, 33, 101–25. 45 http://www.crikey.com.au/2011/03/03/chickens-come-home-to-roost-colesprobes-supplier-on-ethics/Andrew Crook 46 Szwajkowski, E. W. (1986). The Myths and Realities of Research on Organizational Misconduct, in J. E. Post (ed.) Research in Corporate Social Performance and Policy (Greenwich: JAI Press), 9:103–22; Davis, K., Frederick, W. C. and. Blostrom, R. L. (1979). Business and Society: Concepts and Policy Issues (New York: McGraw-Hill). 47 Sherwin, D. S. (November–December 1983). The Ethical Roots of the Business System. Harvard Business Review, 61, 183–92. 48 Nancy C. Roberts and Paula J. King. (Winter 1989). The Stakeholder Audit Goes Public. Organizational Dynamics, 63–79; Thomas Donaldson and Lee E. Preston. (1995). The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications. Academy of Management Review 20:1, 65–91; and Jeffrey S. Harrison and Caron H. St. John. (1996). Managing and Partnering with External Stakeholders. Academy of Management Executive, 10:2, 46–60. 49 R. Mitchell, B. Agle and D. J. Wood. (1997). Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who or What Really Counts. Academy of Management Review, 22, 853–86; Virginie Vial. (September–October 2011). Taking a Stakeholders’ Approach to Corporate Social Responsibility. Global Business and Organizational Excellence, 37–47; and Martijn Poel, Linda Kool and Annelieke van der Giessen. (2010).

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How to Decide on the Priorities and Coordination of Information Society Policy? Analytical Framework and Three Case Studies. Info: The Journal of Policy, Regulation and Strategy for Telecommunications, Information, and Media, 12:6, 21–39. 50 N. Craig Smith, Sean Ansett and Lior Erex. (Summer 2011). How Gap Inc. Engaged with Its Stakeholders. MIT Sloan Management Review, 52:4, 69–76. 51 Max B. E. Clarkson. (1995). A Stakeholder Framework for Analyzing and Evaluating Corporate Social Performance. Academy of Management Review, 20:1, 92–117. 52 Thomson, J. (27 July 2001). Test of Virtue. Business Review Weekly, 60–5. 53 2013 Responsible Investment Benchmark Report, p. 25, http://www. responsibleinvestment.org/wp-content/uploads/2013/07/2013-BenchmarkReport.pdf (accessed 15 July 2013). 54 Ibid. pp. 4,11,15,16. 55 Rich Kauffeld, Abhishek Malhotra and Susan Higgins. (21 December 2009). Green Is a Strategy. Strategy + Business. 56 Reported in Dung K. Nguyen and Stanley F. Slater. (2010). Hitting the Sustainability Sweet Spot: Having It All. Journal of Business Strategy, 31:3, 5–11. 57 This definition is based on Marc J. Epstein and Marie-Josée Roy. Improving Sustainability Performance: Specifying, Implementing and Measuring Key Principles. Journal of General Management, 29:1 (Autumn 2003): 15–31; World Commission on Economic Development. (1987). Our Common Future (Oxford, UK: Oxford University Press; and A. W. Savitz and K. Weber. (2006). The Triple Bottom Line: How Today’s Best-Run Companies Are Achieving Economic, Social, and Environmental Success (San Francisco: Jossey-Bass). 58 This discussion is based on Nguyen and Slater. Hitting the Sustainability Sweet Spot; Savitz and Weber. The Triple Bottom Line; and Triple Bottom Line, an article adapted from The Economist Guide to Management Ideas and Gurus, by Tim Hindle (London: Profile Books, 2008), The Economist (17 November 2009), http://www.economist .com/node/14301663 (accessed 5 July 2012). The ‘people, planet, profit’ phrase was first coined in 1994 by John Elkington, founder of a British consulting firm called SustainAbility. 59 Mark S. Schwartz and Archie B. Carroll. (2003). Corporate Social Responsibility: A Three-Domain Approach. Business Ethics Quarterly, 13:4, 503–30; and Archie B. Carroll. (1979). A Three-Dimensional Conceptual Model of Corporate Performance. Academy of Management Review, 4, 497–505. For a discussion of various models for evaluating corporate social performance, also see Diane L. Swanson. (1995). Addressing a Theoretical Problem by Reorienting the Corporate Social Performance Model. Academy of Management Review, 20:1, 43–64. 60 Milton Friedman. (1962). Capitalism and Freedom (Chicago: University of Chicago Press, p. 133; and Milton Friedman and Rose Friedman. (1979). Free to Choose (New York: Harcourt Brace Jovanovich. 61 Eugene W. Szwajkowski. (1985). Organizational Illegality: Theoretical Integration and Illustrative Application. Academy of Management Review, 10, 558–67. 62 David Barstow. (21 April 2012). Vast Mexico Bribery Case Hushed up by Walmart After Top-Level Struggle. The New York Times, http://www.nytimes.com/2012/04/22/business/at-walmart-in-mexico-abribe-inquiry-silenced.html?pagewanted=all (accessed 6 July 2012). 63 David J. Fritzsche and Helmut Becker. (1984). Linking Management Behavior to Ethical Philosophy – An Empirical Investigation. Academy of Management Journal, 27, 165–75. 64 Berenson, A., Harris, G., Meier, B and Pollack, A. (14 November 2004). Despite Warnings, Drug Giant Took Long Path to Vioxx Recall. The New York Times, http://www.nytimes.com/2004/11/14/business/14merck. html?pagewanted=1&_r=0 (accessed 12 March 2014).

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65 Royal DSM. Segment in Alison Beard and Richard Hornik. (November 2011). Spotlight on the Good Company: It’s Hard to Be Good. Harvard Business Review, 88–94. 66 Smith, Ansett and Erex. How Gap Inc. Engaged with Its Stakeholders. 67 Jessica Dickler. (18 March 2011). Donations to Japan Lag Far Behind Haiti or Katrina. CNNMoney.com, http://money.cnn.com/2011/03/18/pf/ japan_earthquake_aid/index.htm (accessed 6 July 2012). 68 Saul W. Gellerman. (Winter 1989). Managing Ethics from the Top Down. Sloan Management Review, 73–9. 69 Attributed to Philip Delves Broughton in David A. Kaplan. (26 October 2009). MBAs Get Schooled in Ethics. Fortune, 27–8. 70 Michael E. Brown and Linda K. Treviño. (2006). Ethical Leadership: A Review and Future Directions. The Leadership Quarterly, 17, 595–616; Weaver, Treviño and Agle. ‘Somebody I Look Up To’; and L. K. Treviño et al. (Winter 1999). Managing Ethics and Legal Compliance: What Works and What Hurts? California Management Review, 41:2, 131–51. 71 M. A. Cleek and S. L. Leonard. (1998). Can Corporate Codes of Ethics Influence Behavior? Journal of Business Ethics, 17:6, 619–30. 72 K. Matthew Gilley, Chris Robertson and Tim Mazur. (January–February 2010). The Bottom-Line Benefits of Ethics Code Commitment. Business Horizons, 53, 31–7; Joseph L. Badaracco and Allen P. Webb. (Winter 1995). Business Ethics: A View from the Trenches. California Management Review, 37:2, 8–28; and Ronald B. Morgan. (February 1993). Self- and Co-Worker Perceptions of Ethics and Their Relationships to Leadership and Salary. Academy of Management Journal, 36:1, 200–14. 73 Cheryl Rosen. (Summer 2006). A Measure of Success? Ethics After Enron. Business Ethics, 22–6. 74 Alan Yuspeh. (1 August 2000). Do the Right Thing. CIO, 56–8. 75 Reported in Rosen. A Measure of Success? Ethics After Enron. 76 Marcia P. Miceli and Janet P. Near. (1984). The Relationship Among Beliefs, Organizational Positions, and Whistle-Blowing Status: A Discriminant Analysis. Academy of Management Journal, 27, 687–705; and Michael T. Rehg et al. (March–April 2008). Antecedents and Outcomes of Retaliation Against Whistleblowers: Gender Differences and Power Relationships. Organization Science, 19:2, 221–40. 77 Eugene Garaventa. (December 1994). An Enemy of the People by Henrik Ibsen: The Politics of Whistle-Blowing. Journal of Management Inquiry, 3:4, 369–74; Marcia P. Miceli and Janet P. Near. (1994). Whistleblowing: Reaping the Benefits. Academy of Management Executive, 8:3, 65–74. 78 Richard McGill Murphy. (8 February 2010). Why Doing Good Is Good For Business. Fortune, 90–5. 79 Homer H. Johnson. (November–December 2003). Does It Pay to Be Good? Social Responsibility and Financial Performance. Business Horizons, 34–40; Jennifer J. Griffin and John F. Mahon. (March 1997). The Corporate Social Performance and Corporate Financial Performance Debate: Twenty-Five Years of Incomparable Research. Business and Society, 36:1, 5–31; Bernadette M. Ruf et al. (July 2001). An Empirical Investigation of the Relationship Between Change in Corporate Social Performance and Financial Performance: A Stakeholder Theory Perspective. Journal of Business Ethics, 32:2, 143ff; Philip L. Cochran and Robert A. Wood. (1984). Corporate Social Responsibility and Financial Performance. Academy of Management Journal, 27, 42–56. 80 Heli Wang, Jaepil Choi and Jiatao Li. (January–February 2008). Too Little or Too Much? Untangling the Relationship Between Corporate Philanthropy and Firm Financial Performance. Organization Science, 19:1, 143–59; Philip L. Cochran. The Evolution of Corporate Social Responsibility. Business Horizons 50 (2007): 449–54; Paul C. Godfrey. The Relationship Between Corporate Philanthropy and Shareholder Wealth: A Risk Management Perspective. Academy of Management Review, 30:4, 777–98; Oliver Falck and Stephan Heblich. (2007). Corporate Social Responsibility: Doing Well by Doing Good. Business Horizons, 50, 247–54; J. A. Pearce II

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and J. P. Doh. (Spring 2005). The High Impact of Collaborative Social Initiatives. MIT Sloan Management Review, 31–9; Curtis C. Verschoor and Elizabeth A. Murphy. (Fall 2002). The Financial Performance of Large U.S. Firms and Those with Global Prominence: How Do the Best Corporate Citizens Rate? Business and Society Review, 107:3, 371–81; Johnson. Does It Pay to Be Good?; Dale Kurschner. (March–April 1996). 5 Ways Ethical Business Creates Fatter Profits. Business Ethics, 20–3. 81 Rashid Ameer and Radiah Othman. (June 2012). Sustainability Practices and Corporate Financial Performance: A Study Based on the Top Global Corporations. Journal of Business Ethics, 108:1, 61–79. 82 Verschoor and Murphy. The Financial Performance of Large U.S. Firms. 83 Phred Dvorak. (2 July 2007). Finding the Best Measure of ‘Corporate Citizenship’. The Wall Street Journal. 84 Jean B. McGuire, Alison Sundgren and Thomas Schneeweis. (1988). Corporate Social Responsibility and Firm Financial Performance. Academy of Management Journal, 31, 854–72; and Falck and Heblich. Corporate Social Responsibility: Doing Well by Doing Good.

Cour seMate

85 Daniel W. Greening and Daniel B. Turban. (September 2000). Corporate Social Performance as a Competitive Advantage in Attracting a Quality Workforce. Business and Society, 39:3, 254; and Kate O’Sullivan. (October 2006). Virtue Rewarded. CFO, 47–52. 86 The Socially Correct Corporate Business. In Leslie Holstrom and Simon Brady. (24 July 2000). The Changing Face of Global Business. A special advertising section, Fortune, S1–S38. 87 Remi Trudel and June Cotte. (12 May 2008). Does Being Ethical Pay? The Wall Street Journal. 88 Milton-Smith, J. (1997). Business Ethics in Australia and New Zealand. Journal of Business Ethics, 16:14, 1485–97. 89 World Commission on Economic Development (1987). Our Common Future. Oxford: Oxford University Press. 90 http://www.banksiafdn.com/the-awards/42/239.html. The Banksia Gold Award: Torres Strait Regional Authority (TSRA), QLD (2013); Kimberly-Clark Australia and New Zealand Target 100 Meat & Livestock Australia, NSW (2012); Qantas – large organisation; Gippsland Water Factory – A new way to care for water Gippsland Water, VIC (2011); Fujitsu – large organisation.

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ test your understanding of ethics, social responsibility and sustainable development by taking the revision quiz ➜ identify your skills in different aspects of management with the online self-tests ➜ apply your knowledge of ethics to the case projects.

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Define entrepreneurship and the five classifications

5 Explain social entrepreneurship as a vital part of

2 Describe the importance of entrepreneurship to

6 Outline the planning necessary to launch an

3 Appreciate the influence of globalisation on

7 Describe the five stages of growth for an

4 Define the personality characteristics of a typical

8 Explain how the management activities of planning,

of entrepreneurs.

the global and Australian economies. entrepreneurship and innovation. entrepreneur.

today’s small business environment. entrepreneurial start-up.

entrepreneurial company.

organising, decision making, leading and controlling apply to a growing entrepreneurial company.

Chapter 6

T he env ironmen t of en t repreneur ship a nd s m a l l-busine ss m a n age men t Chapter outline ➜ What is entrepreneurship?

Entrepreneurship as an option

➜ Entrepreneurship internationally

Entrepreneurship and the business environment Impact of entrepreneurial organisations Organisational innovation

➜ Who are entrepreneurs?

Traits of entrepreneurs

➜ Social entrepreneurship: an innovative approach to small business

➜ Starting an entrepreneurial firm

Start with the new-business idea The business plan

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Choosing a legal structure Arranging financing Tactics for becoming a business owner Starting an online business

➜ Stages of growth

Planning Organising Decision making Leading Controlling

➜ Intrapreneurship in a growing business ➜ Sustainability and the small or start-up organisation

New Manager Self-test Do you think like an entrepreneur? An entrepreneur faces many demands. Do you have the inclination to start and build your own business? It is not for the faint of heart. To find out, consider the extent to which each of the following statements characterises your behaviour. Please answer each of the following items as Mostly true or Mostly false for you. Mostly True

Mostly False

1 G  ive me a little information and I can come up with a lot of ideas. 2 Pressure helps me to focus. 3 I don’t easily get frustrated when things don’t go my way. 4 I identify how resources can be recombined to produce novel outcomes. 5 I enjoy competing against the clock to meet deadlines. 6 P  eople in my life have to accept that nothing is more important than the achievement of my school, my sport or my career goals. 7 I serve as a role model for creativity. 8 I think on my feet when carrying out tasks. 9 I am determined and action oriented. Interpretation and scoring: Each question relates to some aspect of improvisation, which is a correlate of entrepreneurial intentions. Entrepreneurial improvisation consists of three elements. Questions 1, 4 and 7 relate to creativity/ingenuity, the ability to produce novel solutions under constrained conditions. Questions 2, 5 and 8 relate to working under pressure/stress, the ability to excel under pressure-filled circumstances. Questions 3, 6 and 9 relate to action/persistence, the determination to achieve goals and solve problems in the moment. If you answered ‘Mostly true’ to at least two of three questions for each subscale or six of nine for all the questions, then consider yourself an entrepreneur in the making with the potential to manage your own business. If you scored one or fewer ‘Mostly true’ on each subscale or three or fewer for all nine questions, you might want to consider becoming a manager by working for someone else. Sources: Based on Hmieleski, Keith M. and Corbett, Andrew C. January 2006. Proclivity for Improvisation as a Predictor of Entrepreneurial Intentions. Journal of Small Business Management, 44:1, 45–63; and (19 October 2005). Do You Have an Entrepreneurial Mind? Inc.com.

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Management Challenge

Gerry Harvey is one of Australia’s most successful entrepreneurs. He began his retailing activities by selling vacuum cleaners door to door before opening a furniture store known as Norman Ross with partner Ian Norman in 1961. Over 50 years later, Harvey is in control of a thriving and growing retail business that has been very well valued in the share market. When Alan Bond bought Norman Ross in 1981 and shortly afterwards sacked Harvey and his partner, the pair started again, showing the resilience that is characteristic of many entrepreneurs. Harvey has kept close control of this business, even as it has become very large, which is very different from other public companies such as Coles. Harvey’s wife is managing director and his son is also on the board, with the only other previous board member being a lawyer. However, the company has recently expanded its board of directors to include five independent directors as well as six executives, which many would see as an improvement in governance practice. Gerry Harvey points to his company’s superior growth and profitability compared with the more traditional retailing companies. Is successful performance sufficient justification of Gerry Harvey’s methods? He appeared on many of the retailer’s TV and radio advertisements, and some say his approach is egotistical, while others acknowledge that he has ‘runs on the board’ to back up this approach. Despite its success, the question asked about the Harvey Norman company is whether it is overly dominated by one person and one school of thought, and therefore vulnerable to mistakes. Will a company that has principally relied on the energy and strategies of one person be sustainable after that person retires? Are Harvey’s widely reported negative views on Internet retailing good for the company? With Mr Harvey owning 30 per cent of the group, is the control too concentrated?

Scott Adams, the

This company operated a scalable franchise model, and has opened new stores in recent years in Malaysia, Singapore, Slovenia, Ireland and New Zealand, in addition to Australia. 2012 was a very challenging year for the Harvey Norman company as consumers resisted the temptation to spend their earnings. In order to compete on price and tempt customers, the company had to drastically cut margins with ‘product being sold at never before seen prices’. The smaller margins and heavy competition for customers resulted in a year’s profit loss of nearly $150 million for the group. Despite a difficult business climate, the company still holds a strong position in the market, with nearly 290 destination stores and sales and profit of $4.8 billion and just over $227 million, respectively. This company is also a major holder of property investments, which were recently valued at over $2.12 billion. Harvey Norman must cope with the challenges of online retailing, which has become a global phenomenon, coupled with the vagaries of economic forces and the need to keep staff highly motivated. Question What advice would you give Gerry Harvey about continuing to build his business? Do you think one person can continue to build and grow a successful business using an entrepreneurial style such as this, in competition with the mainstream corporations such as Coles and Woolworths? Where is the future of online retailing going, and will start-ups take over, or can Harvey Norman adjust to new market forces and technologies? Sources: Thomson, J. (13 July 2001). Retail: Kings in Paper Castles. Business Review Weekly, 44–5; 2012 Harvey Norman Annual Report, p. 4, http://www.harveynormanholdings.com.au (accessed 13 August 2013).

creator of the satirical comic strip Dilbert, was a budding entrepreneur during his college years at Hartwick College in New York. An economics major who aspired to be a banker, Adams grew to see the world through an entrepreneur’s eyes during a variety of small-business ventures. First, he convinced his accounting professor to hire him as ‘Minister of Finance’ at the campus coffeehouse, where he created and oversaw an accounting system. The system replaced a previous one that Adams described as ‘seven students trying to remember where all the money went’. Adams’s next venture was a plan to become student manager of his dormitory and get paid to do it. ‘For the next two years, my friends and I each had a private room at no cost, a base salary, and the experience of managing the dorm. On some nights, I also got paid to do overnight security, while also getting paid to clean the laundry room,’ Adams said.

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After university, Adams started his career in banking, but it didn’t work out as he’d hoped, so he left to pursue a career in writing. He is convinced his experiences during his entrepreneurial stints in college paid off. ‘Every good thing that has happened to me as an adult can be traced back to that training,’ he says. What is Scott Adams’s advice to up-and-coming entrepreneurs? First, he says, take risks and try to get paid while you’re doing the failing, and learn new skills that will be useful later. Second, replace fear and shyness with enthusiasm and learn to enjoy speaking to a crowd. Third, learn how to persuade. ‘Students of entrepreneurship should learn the art of persuasion in all its forms, including psychology, sales, marketing, negotiating, statistics, and even design,’ says Adams.1 Starting and growing your own business requires a combination of many skills to be successful. Adams, a highly successful entrepreneur, combined business smarts, creativity, and passion when he left the corporate world for a writing career. His passion is shared by many other courageous self-starters, who take the leap and start a sole proprietorship, one of the fastest-growing segments of small business on a global basis.

What is entrepreneurship? Entrepreneurship is the process of initiating a business venture, organising the necessary resources, and

assuming the associated risks and rewards. An entrepreneur is someone who engages in entrepreneurship. An entrepreneur recognises a viable idea for a business product or service and carries it out. This means finding and assembling the necessary resources – money, people, machinery, location etc. – to undertake the business venture. The entrepreneur also assumes the risks and reaps the rewards of the business. He or she assumes the financial and legal risks of ownership and receives the business’s profits. For example, George Dryen started designing, producing and retailing bed linen in Broken Hill in 1940. In 2006, as he passed control of Dryen Australia to his son Peter, the business had revenues of some A$40 million and employed more than 40 people. The business faces risks every day in its supply chain and markets, and also in financial terms, because it buys supplies in US currency and its revenues are generated in Australia. The next generation of owners and managers, led by Peter, have taken the company to new heights, increasing sales by 40 per cent and dealing with risks such as the 2010 spike in the global price of cotton, which impacted hard on input costs, and the global financial crisis, which impacted on sales. Technico, a company based in Bowral, New South Wales, has taken the humble potato to new heights. Beginning in 1987, entrepreneurs David Montgomery and David Waterhouse developed a method for speeding up the propagation of potato seed production that reduced the cycle time from five years to just two. In March 2012, Technico became a direct subsidiary of an Indian-based company called ITC that maintains varied interests in agribusinesses, cigarettes and branded packaged foods. Their turnover and net profit of A$1.39 million and A$0.14 million, respectively, continue to climb as the company achieves better prices for their product and greater seed volumes.3 The company is now valued at around A$67 million, with major customers in China, India and Thailand as well as Australia. The finance for Technico’s original growth came from venture capitalists, and dealing with these groups required the entrepreneurs to develop a new set of skills. The company’s customers are companies as big as Frito Lay, McCain and Simplot – food industry giants. The company can provide seed potatoes in commercial quantities and at a cost to growers that increases their competitiveness. The company has not patented its technology of seed production because it operates in countries where patents are often not 2

entrepreneurship The process of initiating a business venture, organising the necessary resources, and assuming the associated risks and rewards. entrepreneur Someone who recognises a viable idea for a business product or service and carries it out.

entrepreneur

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U2 lead singer Bono is a classic example of an idealist entrepreneur. He started a fashion company, Edun (yes, that’s ‘nude’ spelled backwards) to reflect his strong commitment to social causes. The for-profit Dublin-based company’s high-end apparel is made in locally run African, South American, and Indian factories that use fair labour practices and, whenever possible, organic materials. Bono believes fostering increased participation in world trade is the best way to help developing nations.

Exhibit 6.1 Five types of small business owners

adhered to. Rather, Technico has chosen to move into scaled-up production to increase its ability to create value for customers and ensure its future viability as a user of its own technology.4 By 2014, Technico had gone global, with operations in major markets including North America, China and India. Successful entrepreneurs have many different motivations, and they measure rewards in different ways. One study classified small business owners in five different categories, as illustrated in Exhibit 6.1. Some people are idealists, who like the idea of working on something that is new, creative or personally meaningful. Optimisers are rewarded by the personal satisfaction of being business owners. Entrepreneurs in the sustainer category like the chance to balance work and personal life and often don’t want the business to grow too large, while hard workers enjoy putting in the long hours and dedication to build a larger, more profitable business. The juggler category includes entrepreneurs who like the chance a small business gives them to handle everything themselves. These high-energy people thrive on the pressure of paying bills, meeting deadlines and making payroll.5 Source: Getty Images/Peter Muhly

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Rewarded by chance to work on something new and creative

Source: Study conducted by Yankelovich Partners, reported in Mark Hendricks. (March 2000). Type-Cast. Entrepreneur, 14–16. Reproduced by permission of Harris Interactive.

Thrive on the challenge of building a larger, more profitable business

Idealists

Optimisers

Hard workers

Jugglers

Sustainers

24%

21%

20%

20%

15%

Get personal satisfaction from being business owners

➜➜ Entrepreneurship is the process of initiating a business, organising the necessary resources, and assuming the associated risks and rewards.

Enjoy chance to balance work and personal life

➜➜ One of the fastest-growing segments of small business is in one-owner operations, called sole proprietorships. ➜➜ An entrepreneur recognises a viable idea for a business product or service

High-energy people who enjoy handling every detail of their own businesses

and carries it out by finding and assembling the necessary resources to start the business. ➜➜ Entrepreneurs may be classified as idealists, optimisers, sustainers, hard workers or jugglers.

remember this

6: The environment of entrepreneurship and small-business management

Entrepren eu rshi p as an o ptio n Source: Corbis/Kim Kulish

For decades, half the working population has been confiding to friends and pollsters its desire to leave corporate life and go it alone or with a few partners, but until recently most of the ideas were just dreams, discouraged by worried parents, friends and partners. Clearly, times have changed. After growing steadily since the 1950s, many of the largest manufacturers began cutting their payrolls in the 1970s and have been doing so ever since. Downsizing throughout the corporate world forced many employees to consider other options. The global financial crisis (GFC) of 2008–10 accelerated the downsizing of many organisations and led many people to start up entrepreneurial businesses, especially in the ‘new economy’. In addition, many people are beginning to regard entrepreneurship as a better use of their time and skills. They see the opportunity to make more money on their own, while at the same time having more freedom and a better quality of life, through being their own boss. Advances in technology have also made it easier than ever for small organisations to compete in a global economy.6 However, it is not easy to create profits in most industries, as high levels of competition from all over the world exist. Entrepreneurs in recent decades have included Steve Jobs, Bill Gates, Richard Branson, Hugh Hefner and Oprah Winfrey, all of whom built successful business empires from scratch. More recently, Mark Zuckerberg started Facebook, following in the footsteps of Larry Page and Sergey Brin, who founded Google, and built the company into a multi-billion dollar enterprise. Australian entrepreneurs include Frank Lowy of Westfield Group and Andrew Forrest of Fortescue Metals Group, and Dick Smith, who started the Dick Smith retail chain and a number of Australian food products. More recently, Gina Rinehart has become Australia’s wealthiest person through very astute business development in the booming local mining sector.

Entrepreneurship internationally Globally, entrepreneurship has experienced a tremendous boost due to huge advances in technology and the rapid expansion of the middle class in countries such as China and India. Consider one of India’s most successful entrepreneurs, Narayana Murthy. He and several co-founders launched Infosys and sparked an outsourcing revolution that has brought billions of dollars into the Indian economy. Infosys offers business consulting, technology, engineering, and outsourcing services and has been ranked number one on the list of India’s most admired companies in the Wall Street Journal Asia 200 survey from 2000 up until 2012. Murthy started the organisation from scratch and, typical of most start-ups, endured years of hardship. ‘It is all about sacrifice, hard work, lots of frustration, being away from your family, in the hope that some day you will get adequate returns from that,’ explains Murthy.7 Entrepreneurship in other countries is also booming. The list of entrepreneurial countries around the world, shown in Exhibit 6.2, is intriguing. A project monitoring entrepreneurial activity reports that an

Sergey Brin, billionaire co-founder of Google.

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Exhibit 6.2 Entrepreneurial activity around the world

Country

Percentage of Individuals Age 18 to 64 Active in Starting or Managing a New Business, 2011

China

24

Chile

24

Peru

23

Argentina

22

Brazil

15

Jamaica

13

Turkey

12

United States

12

Mexico

 9

Poland

 8

Greece

 8

Portugal

 8

Germany

 6

Belgium

 6

Japan

 5

Note: Total early-stage Entrepreneurial Activity (TEA): % of 18–64 population who are either a ‘nascent entrepreneur’ or owner-manager of a ‘new business’. A ‘nascent entrepreneur’ is defined as someone actively involved in setting up a business they will own or co-own; this business has not paid salaries, wages or any other payments to the owners for more than three months. A ‘new business’ is defined as a running business that has paid salaries, wages or any other payments to the owners for more than three months, but not more than 42 months. Source: From Donna J. Kelley, Slavica Singer and Mike Herrington, Global Entrepreneurship Monitor 2011 Executive Report. Permission to reproduce a figure from the GEM 2011 Global Report, which appears here, has been kindly granted by the copyright holders. The Global Entrepreneurship Monitor (GEM) is an international consortium, and this report was produced from data collected in, and received from, 54 countries in 2011. Our thanks go to the authors, national teams, researchers, funding bodies and other contributors who have made this possible.

estimated 24 per cent of adults age 18 to 64 in China are either starting or managing new enterprises. The percentage in Chile is 24 per cent; in Peru, 23 per cent. Argentina, Brazil and Jamaica also show higher rates of entrepreneurial activity than the US rate of 12 per cent.8 In most countries, entrepreneurship and small business are the engines behind job creation and innovation: ●● Job creation. Researchers disagree over what percentage of new jobs is created by small business. Research indicates that the age of a company, more than its size, determines the number of jobs it creates. That is, virtually all new jobs in recent years have come from new companies, which include not only small companies, but also new branches of huge, multinational organisations.9 However, small companies still are thought to create a large percentage of new jobs. ●● Innovation. Small business owners typically gain an intimate understanding of their customers, which places them in an ideal position to innovate. According to research by entrepreneurship expert David Birch that traced the employment and sales records of some 9 million companies, new and smaller firms have been responsible for 55 per cent of the innovations in 362 different industries and 95 per cent of all radical innovations. In addition, fast-growing businesses, which Birch calls gazelles, produce twice as many product innovations per employee as do larger firms. Small firms that file for patents typically produce 13 times more patents per employee than large patenting firms.10

6: The environment of entrepreneurship and small-business management

➜➜ Entrepreneurship and small business are essential parts of the economy, representing the large majority of all firms and employing about half of all private sector employees.

➜➜ Entrepreneurial activity is booming in most countries, with some of the highest rates in developing nations.

➜➜ Entrepreneurship and small business is an engine for job creation and innovation.

remember this

Entrepren eu rsh i p an d th e busin ess envi ro n m ent Not so long ago, scholars and policymakers were worrying about the potential of small business to survive. Today, entrepreneurship and small business are increasingly important parts of the business world. In 2012 approximately 7.5 million people from 131 countries in thousands of businesses took part in Global Entrepreneurship Week activities, involving networking and seminars.11 The annual Doing Business Report published by the World Bank ranked Australia as the second easiest country in which to start a business in 2012.12 One-person offices constitute a large segment of the computer and office equipment markets, and marketing researchers believe solo professionals will continue to be the fastest-growing market for phone, printer/scanner and computer makers. Some of the more common businesses for solo professionals are financial services, high-tech marketing, political consultation and software. As organisations continue to downsize, decentralise operations and outsource more functions, the opportunities for solo professionals will increase.13 The long-term trend towards ever-larger organisations has been reversed for a number of reasons, including economic changes, globalisation and increased competition, technology, and new opportunities and market niches.14

Ec on o mi c ch anges Today’s economy is fertile soil for entrepreneurs. The economy changes constantly, providing opportunities for new businesses. For example, around a decade ago, the demand for services was booming and 97 per cent of service firms were small, with fewer than 100 employees. Landscaping, for example, was one of the fastest-growing small businesses, spurred by a surge in housing and office construction.15 Home and personal services such as cleaning and personal training have significantly grown in recent years. The trend towards outsourcing work to companies that can do it cheaper has also given entrepreneurs new openings. The 2011 Global Entrepreneurship Monitor reported that of its 175 000 surveyed entrepreneurs in 59 countries, in general, small and innovative businesses are mostly expecting to grow and employ large numbers of additional staff in coming years.16

Fast-growing companies: what are they like? What are some of the key characteristics of Australia’s fast-growth companies and their founders? The following statistics and examples will give readers an idea of what is involved in taking a company essentially from zero to profitable growth. According to BRW’’s study of ‘Fast 100’ companies:

Innovative Way ➜➜ only nine of the hundred had female chief executives ➜➜ average company size was 42 employees ➜➜ 95 per cent were still growing and hiring ➜➜ 24 per cent of company founders were in their 20s and 7 per cent of the companies were franchised

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➜➜ more than 50 per cent felt that the business had adversely impacted on their health and personal lives, and 37 per cent experienced anxiety or burnout

➜➜ 70 per cent of founders had at least one university degree. The founders who are running these businesses are generally doing better than average in their economic zones, and are more confident than average CEOs of their future. The Number One fast-growing company in Australia is Time Telcom, which started in 2008 and in 2012 had 86 employees and sales revenue of $51.1 million. The company is a fixed and mobile phone line reseller and in March 2012 sold access to its 30 000 customer data base for an impressive $18.5 million. Fast-growing companies in Australia operate in many industries, mostly in a variety of service sectors, from mining services, financial services and training to consulting and retailing. Their common characteristics that differentiate them from longer-established businesses include a focus on agility, simplicity, use of teams, niche and specialty services, and growth through and for people. They work hard on both culture and systems. They are led by passionate people who are prepared to invest and take a loss in the short term, yet look for quick wins in their marketplaces.

Source: Fairfax Syndication/Michel O'Sullivan

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They are opportunistic, keeping up with the pulse of market changes and moving with or ahead of the times. They are knowledgeable about new technology. However, there are clearly risks in smaller start-up businesses, such as receiving too high a proportion of revenue from a single client, technology or business idea. For most fast-growing companies, the rewards from growth and success, both financial and personal, are worth the risks!

Source: Sibllian, A. (18–24 November 2010). Fast Companies. BRW, 18–26 and http://www.brw.com.au/p/sections/features/brw_fast_the_top_qXQFiA9Cn2zixPhs83MYSJ (accessed 13 August 2013).

Glob ali sat i on an d in c r eas ed c o m petitio n Even the largest organisations can no longer dominate their industries in a fast-changing global marketplace. Globalisation demands entrepreneurial behaviour – organisations have to find ways to do things faster, better and less expensively. Large organisations are cutting costs by Are you interested in becoming a new manager by outsourcing work to smaller businesses or freelancers, and selling off non-core operations. starting your own business? Explore Globalisation and increased competition also give an advantage to small businesses, which your inclination for the efforts and can offer flexibility and fast responses, rather than to huge organisations, which rely on benefits of entrepreneurship by economies of scale. completing the items in the

Take a Moment

self-test at the beginning of this chapter.

Technology

Rapid advances and falling prices in technology have spawned whole new industries, as well as entirely new methods of producing goods and delivering services. Unlike technological advances of the past, many of these are within the reach of organisations of all sizes. The explosive growth of the Internet created tremendous opportunities for entrepreneurs. For every story of a failed Internet business, numerous other small companies are successfully using the web to sell products and services, to improve productivity, communications, and customer service, or to obtain information and market their services. You can buy groceries, books, software, gifts, sporting goods – indeed, almost anything – from the Internet in Australia, and the goods may come from anywhere in the world. If you bought a Dell computer

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directly from its website, you would not know where it had been built, warehoused or shipped, which in the case of Australia is most likely to be Malaysia. As the new millennium continues Take a to take shape, small businesses are starting up without the need for investment in retail Moment outlets, substituting ‘virtual’ outlets. This is clearly a lower-cost option, which can be more As an aspiring entrepreneur, convenient for consumers. can you see a market niche that

Ne w op p ort uni t i es and m ar k et n ic h es Entrepreneurs are taking advantage of the opportunity to meet changing needs in the marketplace. Cleanevent is an example of an Australian-based company that took advantage of an opportunity in an overseas market (see the Case Study). Exhibit 6.3 illustrates general categories of businesses most entrepreneurs start: retail, manufacturing and service. Additional categories of small businesses are construction, hospitality, communications, finance and real estate.

is not being met by an existing organisation? How do you feel about organising the necessary resources and taking the risks to start a company to serve that niche?

Craig Lovett was a bar manager in Australia in 1996. While in Atlanta to book accommodation for the Olympic Games, he negotiated an A$150 000 contract, putting him in charge of the cleaning budgets and cleaning operations for eight Olympic venues in Atlanta. He ultimately achieved A$500 000 of value from that event. By 1997 his company, Cleanevent, achieved sales of A$6 million and employed 25 full-time staff and over 1000 part-time cleaning staff in Australia. The company doubled its size to A$12 million in sales and 100 full-time people by 2002. By 2005, sales were A$48 million and the number of people employed was over 10 000,

including casuals. Lovett has gained the cleaning contracts for the Melbourne Cup and also had major success at the 2000 Sydney Olympics, as its official provider of waste management and cleaning services. Cleanevent has also achieved contracts for cleaning and waste management at the Formula 1 Grand Prix, the Australian and US Tennis Opens, and many other football, sporting and nonsporting events. Cleanevent has developed quickly and successfully in the US as well; operations there are twice the size of the Australian base operation. In March 2010, Cleanevent was regularly providing its services to some 350 events of all types

around the world, and the company was acquired and integrated into the larger Spotless group. Spotless is an Australian-based facilities management company, employing 45 000 people all over the world. It is estimated that it serves 77 million customers globally each year and is an ASX top 200 company. Cleanevent became the events division of this major listed company with profitable sales in 2013 of over A$2.0 billion. Sources: Spotless website, http://www.spotless.com/ au/About-Us/About-Us.htm (accessed 27 August 2013); Austrade website, http://www.austrade.gov.au/ Buy/Australian-Industry-Capability/Major-sportingevents/Track-Record/Event-Staging-Services/ Cleanevent---A-Spotless-Company (accessed 20 December 2013).

I m pact o f entrepren eu rial o rgan isations Entrepreneurs and small businesses are driving the Australian economy, and a similar phenomenon can be seen in Europe, the US and many Asian countries. Small businesses have traditionally employed about 50 per cent of the private workforce in Australia and New Zealand, generated 34 per cent of industry value-add (measured by their contribution to the nation’s GDP) in 2010–11 and are responsible for between 30 and 50 per cent of all business innovations.17

Case study

Cleanevent (division of Spotless Group)

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Exhibit 6.3 Examples of definitions of small business

Manufacturing Soft-drink manufacturing

Number of employees does not exceed 100

Electronic computer manufacturing

Number of employees does not exceed 300

Prerecorded CD, tape and record producing

Number of employees does not exceed 200

Retail (store and non-store) Sporting goods stores

Average annual receipts do not exceed $2.0 million

Electronic auctions

Average annual receipts do not exceed $5.0 million

Vending machine operators

Average annual receipts do not exceed $2.0 million

Miscellaneous Internet services Internet service providers

Average annual receipts do not exceed $5.0 million

Web search portals

Average annual receipts do not exceed $2.0 million

Internet publishing and broadcasting

Number of employees does not exceed 100

Source: Study conducted by Yankelovich Partners, reported in Mark Hendricks. (March 2000). Type-Cast. Entrepreneur, 14–16. Reproduced by permission of Harris Interactive.

$ Trillion 6 4.9 5

4 2.9 3

2

1

0 United States

Japan

Exhibit 6.4 Total output of small business in world’s largest economies (showing small business output in USA compared to total output in the USA and other countries)

Many converts to entrepreneurship are ‘corporate refugees’ (often middle-management victims of corporate layoffs and downsizing) and ‘corporate dropouts’ (those who prefer the uncertainty and flexibility of self-employment to the corporate bureaucracy). For over a decade, growing numbers of executives have been voluntarily leaving their big-company pay and perks to work for small start-up companies, citing 1.9 the opportunity to do something new, creative 1.4 and exciting.18 Exhibit 6.4 shows the relative 0.9 importance of small business when compared with 0.8 the world’s largest economies. Traditionally, new entrepreneurs have most frequently started businesses in the areas of Small Germany France United business services and restaurants. Today, inspired business Kingdom by the success of companies such as Amazon, in USA Google, eBay and many others, entrepreneurs are flocking to the Internet to start new businesses quickly and inexpensively. Demographic and lifestyle trends have created new opportunities in areas such as environmental services, children’s markets, fitness and home healthcare.

Job cr eat i on Source: Inc. Technology by John Case. Copyright 1995 by Mansueto Ventures LLC. Reproduced with permission of Mansueto Ventures LLC in the format textbook via Copyright Clearance Center, 27.

Researchers disagree about the percentage of new jobs created by small business. As large businesses have been downsizing their staff numbers and outsourcing their non-core activities, small businesses have been starting and growing as never before. The Global Entrepreneurship Monitor (2011) reports continue to support this view, with significant growth expected after the GFC in most countries. Small businesses are

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‘popping up’ all over the economy, and this, aided by the Internet as a source of data, marketing capacity and trading convenience, is a global phenomenon.

O rgan isati o nal inn ovatio n Organisational innovation can be considered as the processes of developing new products or services, technologies, systems, business models and ideas. Innovation is much more than invention. It involves taking an idea for something new or different through to full-scale commercialisation. Hence the act of invention is just the very first step in the broader process of innovation. Companies that are systematically and successfully innovative do not need to be the inventors of their new and innovative products and technologies; indeed, they can buy or license in such inventions, ideas or technologies. Innovation involves bringing together many aspects of a new idea to achieve overall feasibility for the new idea. Consider any new product idea or technology: it must pass a number of ‘tests’ to become commercially successful: 1 The innovation must be ‘fit for purpose’. It must functionally solve a need or satisfy a requirement

in a way that adds value and is competitive or superior relative to existing offerings or technologies. 2 The innovation must have a sound marketing strategy and selling proposition. This channel to

market and value proposition should be based on evidence of market research. 3 The capability to scale up must be established. It is not enough to build or make a prototype,

because wealth is only ultimately created through full-scale market and production operations. So the supply chain must be proven. 4 The team to bring the innovation from early stage to fruition must be capable of the many tasks

required. Successful entrepreneurs and innovation-focused companies require multiskilled managers who can champion and do the hard work required to overcome the many obstacles along the way. 5 The commercialisation should be positive from a sustainability perspective (see Chapter 5). This

means that it should produce positive outcomes for the society and community that it impacts on, and be acceptable from an environmental perspective. 6 Financial returns must be at least acceptable and are hopefully superior. Those who fund the

innovation have taken risks, and deserve rewards commensurate with such risk, so the innovation should demonstrate a positive net return to investors. Whether it’s a new e-business making some Internet-based idea work for consumers, a new manufactured product, or a new technology or business organisation idea that consumers will never see, the six criteria above can be applied to determine the value of proceeding with the innovation initiative. Consider a new product such as Apple’s latest iPhone or iPad, an Android app or even a sophisticated console computer game. Consider a new suburban residential building development, or a new technology for a vehicle such as electric engines, or a new flavour of a soft drink. The critical feasibility tests above must be considered to determine whether such products or services are developed. Innovation can sometimes occur as a single breakthrough idea, such as was the case with the establishment of Federal Express (FedEx), in which entrepreneur Fred Smith had one ‘gigantic’ idea of having a fleet of planes bring parcels from all over a country or region into one airport, sorting them into their destinations and then taking them immediately to those destinations. First in the US, then across Europe, then globally, FedEx needed to set up massive financial resources, marketing and sales processes, operational capabilities and a team of capable people to bring this idea to fruition. There was a substantial

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amount of hard work in getting from one possibly brilliant idea or invention to its accomplishment as a large, mature, operating business. Innovation involves taking risks. Consider the biotechnology companies searching for cures for diseases and attempting to find a variety of new products that will make human health, animal health and agribusinesses more effective. Just as for consumer products, such efforts at innovation are mostly doomed to fail; with the wisdom of hindsight, however, the possibility of substantial success in any case makes the effort worthwhile at the time. Research and development, new technology, new products etc. involve a lot of risk, and so a key skill for innovation activities is knowing when to take decisions to resource certain projects and not others, and also being able to decide to kill off projects when the prospective risks, costs and benefits looking forward indicate that the upside is not worth the downside. These can be called ‘stage-gate’ decision points, and in well-disciplined companies that are systematically good at innovation, these are formalised decision points that new ideas must pass through or fail on. In the development of pharmaceutical products, there is typically a decade of progress that must occur in testing and development before a new medicine can go into production and sale processes. The challenge is severe when it is considered that the revenue that might arise from the ‘one in 100’ that proves successful must pay for its development in discounted cash flow terms and also pay for the other 99 chemicals that were tried and did not make it to market because they failed one of the tests. Imagine if you were starting to conduct research on some chemicals, say 100 or 1000, in the hope that just one of them might, in 10 years, become a success. This requires an appetite for risk and a sharp ability to use judgement in managing this portfolio of investments, and rigorous application of the tests described above at stage-gate points. Innovation can be incremental or more radical. Incremental innovation is more like continuous improvement, meaning a series of relatively small ideas. A radical innovation is a product, service, system or technology which is brand new to the industry, country or world. For example, when 3M invented its Post-It Note, which has now become a familiar part of most of our homes and offices, it was a radically new product idea, brand new to the world. Since then a series of more incremental ideas has led to Post-It Notes of different sizes, colours, customised with images on them and many other variants. The same thing is apparent with the iPhone; the original radical innovation has been followed with a series of new models of different sizes, features, processes and so on, which are continuous or incremental innovations based around the original idea. Innovation can be in processes just as much as in new products. These processes might be to improve the production costs, service levels or quality of existing offerings. For example, Toyota uses incremental innovation in all its factories and businesses, drawing on the skills and knowledge that it imparts to all its workers, to drive for process improvement in every corner of its business activities. Simultaneously, Toyota made large investments in new product features and technologies such as the hybrid synergy drive, self-parking vehicles, new safety systems and many other technical aspects related to delivering new features and benefits to consumers. Proving that no organisation is perfect or even close to it, Toyota experienced significant quality issues and major recalls in the US in 2010, which is more something that car owners of other brands are used to. They have also downsized their workforce in Australia as they strive for higher efficiencies in their manufacturing operations. Toyota has since bounced back with new waves of innovation and product development, incorporating new features and technologies, and with new risk management practices in place, based on its hard-won lessons from the 2010 and 2013 recalls. Both in the large and in the small, in both product features and in processes, innovation is the lifeblood

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of progress in organisations, keeping them on the cutting edge of productivity and competitiveness, and keeping them in the limelight of consumer interest. There is a saying in business: ‘If you want to manage it well you have to be able to measure it.’ This applies to innovation just as much as to other aspects of business such as employee morale and customer satisfaction. So how is it possible to measure innovation? Considering innovation as a set of processes, we can imagine measuring the inputs and outputs of those processes, and the effectiveness or intensity of those innovation processes. Some companies measure and benchmark themselves in terms of how much resource they allocate to innovation. For example, some very innovation-intensive companies measure and report the amount of money they allocate to research and development as a proportion of their sales revenue, with 10 per cent being a high ratio. This can be thought of as the amount of resource going into the ‘innovation funnel’. The innovation process can be measured in technical terms by considering the number of new product developments being undertaken at a point in time. Innovation output can be measured in technical terms such as the number of patents successfully taken out by a company. Ultimately, the bottom line business measure is of money or return on investment, so companies such as 3M measure the percentage of sales revenue that they achieve from new products in any given year. All divisional executives in 3M must deliver on the annual stretch goal of 10 per cent of total sales revenue coming from new products. Innovation is not just a ‘high-tech’ phenomenon. It is occurring in all industries, from primary industries to pure services, and in industries with both short and long product life cycles, from mobile phones to basic mining and agriculture. For example: ●● in agriculture, the production of grains such as wheat and barley uses genetic engineering to produce crop varieties that need less water and are disease resistant. ●● in mining, new ways of obtaining and processing minerals and rock from the ground, such as block caving, allow for cheaper, better and more sustainable methods of extraction than traditional mechanical digging or blasting and explosives processes. Getting the minerals from the rock, which used to be a combination of crushing and chemical processes, now includes possible biological processes in which microbes are used to extract minerals such as copper from the ore body. ●● manufactured goods are continuously evolving and occasionally experiencing revolutionary innovations. New pharmaceuticals, medical implants and devices and technologies are continuously contributing to human health and longevity. New transport technologies, new communications technologies – indeed, new technologies for just about everything – pervade most industries. This is also the case with processes, such as the use of robots in factories, pilotless planes, artificial intelligence in consumer products and equipment for running business more efficiently. ●● new services and ways of producing services are being created innovatively in most industries. Free Internet audio and video services (for example, Skype), blogs and Wikis, YouTube and many social networking services are innovations from the past decade. Internet banking has reduced the cost and increased the convenience of such activities for consumers. Stockbroking has mostly moved online, as has quite a lot of shopping and advertising. Effective innovation requires certain capabilities and skills in organisations. How do Toyota, 3M, Google and a host of smaller and larger companies organise themselves to achieve innovation that is not just ‘one-off’ but is systematic? These companies invest in achieving the culture, mindset and

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skills which bring them a systematic ability to develop and implement new products, services and processes, including: ●● vision, stretch goals and a strategy for innovation ●● a measured approach to risk taking and a tolerance of failure in the culture ●● a knowledge management system that intelligently seeks out information and identifies and matches opportunity in both the supply side (technology) with the market requirement. This includes creativity and idea management systems ●● strong disciplines for project managing innovation initiatives ●● technical competence ●● structures that empower the ‘new-stream’ of innovative activities in parallel with mainstream business processes ●● rewards and recognition for people who contribute to innovation efforts, in addition to business-as-usual efforts ●● an organisation-wide ‘hunger’ for progress, in both dissatisfaction with the present state of products and services and a desire for improvement in all aspects of the organisation

Case study

●● a foundational and strong leadership of the systematic innovation value system of the firm and an entrepreneurial spirit.

Competitive innovation in the mining industry Mining is a high-volume commodity operation involving moving and crushing millions of tons of rocks that are dug up from the earth. This may at first sound like an industry that is purely about brawn, not brains. While it is essentially true that mining is all about large amounts of rock, therein also lies the prize for innovative methods. In mining, small improvements in efficiency and effectiveness are multiplied by very large volumes, and hence the business benefits of innovation can be substantial. As one of the world’s leading mining countries, Australia is not only very efficient at largescale mining operations, but is also a leader in the mining services industry and in driving mining innovation. Rio Tinto is a large miner with many operations in Australia as well as elsewhere. It has a two-level approach

to innovation: incremental innovations and radical/step change innovations. Innovation in mining can be thought of as continuous improvement, in a similar way to what one would see at companies such as Toyota, which has been practising this at a very effective level for 40 years. And Australia’s mining industries and companies are far from competitionfree. Other major mining nations include Chile, which is nationally funding its mine technology innovation and providing major research and development tax concessions to its miners, South Africa, the US and the United Kingdom, Germany and Sweden. Canada is a major mining nation that has allocated large amounts to mining technologies research and development. China, which is producing many thousands

of scientists and engineers, is expected to become a leading innovator in mining and many other sectors within a decade. An example of entrepreneurial excellence in this field is MineWare, a small company founded by Andrew Jessett. The company and Mr Jessett have won prestigious export awards and several ‘Entrepreneur of the Year’ awards for their accomplishments, and all that with only 16 employees! The company has found a special niche where its electrical and software services improve the effectiveness of major mining operations in its client firms, which are clearly very much larger organisations. Source: Forrestal, L. (8–14 March 2007). Mine Games. BRW, 43–8; MineWare website, http:// www.mineware.com.

Di ver si t y Entrepreneurship offers opportunities for individuals who may feel blocked in established organisations. Businesses owned by women may be the fastest-emerging growth organisations. Women have traditionally not progressed as fast as men in large, traditional or conservative businesses, but that is not the case in smaller,

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entrepreneurial businesses – from home-based accounting services, to Internet distribution businesses and specialised gymnasiums, to a wide variety of service businesses. The energy in the small-business sector and the new economies of the information and knowledge age have given our economy the opportunity to take fuller advantage of the capabilities of potential entrepreneurs from diverse backgrounds. In 2010, a study of Australia’s top female entrepreneurs listed 10 women whose businesses had annual revenue above $80 million. The top five were Jan Cameron of Retail Adventures; Naomi Milgram of Sussan Group; Julia Ross of Ross Human Directions; Maxine Horne of Vita Group; and Charlotte Vidor of Toga Group. These businesses are large and provide employment to many thousands of people. Jan Cameron is a leading example of a ‘serial entrepreneur’, having started the Kathmandu group, then sold it for some $300 million, followed by numerous further retail start-ups, such as Chickenfeed, Crazy Clark’s, Sam’s Warehouse and Go-Lo. ➜➜ Today, entrepreneurship and small business are increasingly important parts of the business world. ➜➜ The economy changes constantly, providing opportunities for new businesses. The trend towards outsourcing work to companies

that can do it cheaper has given entrepreneurs new openings. ➜➜ Globalisation demands entrepreneurial behaviour – organisations have to find ways to do things faster, better and less expensively. ➜➜ Rapid advances and falling prices in technology have spawned whole new

industries, as well as entirely new methods of producing goods and delivering services.

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➜➜ The explosive growth of the Internet created tremendous opportunities for entrepreneurs to take advantage of openings to meet changing needs in the marketplace.

Who are entrepreneurs? The heroes of business in Australia and elsewhere – such as George and Peter Dryen (Dryen Australia), Gerry Harvey (Harvey Norman), Ray Kroc (McDonald’s), Henry Ford (Ford Motor Company), Bill Gates (Microsoft), Steve Jobs (Apple), Mark Zuckerberg (Facebook), Sergey Brin and Larry Page (Google) and Michael Dell (Dell Computer) – are almost always entrepreneurs. Entrepreneurs start with a vision. Often they are unhappy with their present job and see an opportunity to bring together the resources needed for a new venture. However, the image of entrepreneurs as bold pioneers is probably overly romantic. In the US, a survey of the CEOs of the fastest-growing small firms found that entrepreneurs could best be characterised as hard-working and practical, with great familiarity with their market and industry.19

Michael Chaney is a former geologist who claims that patience is a virtue. As managing director of Wesfarmers from 1992 to 2005, Chaney doubled revenue to A$5 billion over five years to 2003, and more than doubled profits. Return on investment for shareholders was a healthy 18 per cent. Wesfarmers’ market value increased ninefold during his term of leadership. Moreover, his leadership was of a conglomerate with business operations in a number of different industries, a

set of circumstances which has proved a very difficult task for most companies who have tried it. The company began as a cooperative of farmers in Western Australia in 1914, but now participates successfully in industries as different as coal mining, hardware retailing, liquid petroleum gas, chemicals and fertiliser production, insurance, trucking and railways. One major takeover has been of the Howard Smith company, with the integration of its operations into Wesfarmers’ Bunnings retail

division. Chaney gained personally from his leadership of the company. Having made his shareholders happy, he was given more than 600 000 shares in the company, worth over A$24 million. Chaney sees himself as an innovator, and he consciously looked for innovators to work with him to build business divisions within Wesfarmers. He groomed a number of entrepreneurs within the company, but insisted that everyone in the business combine value-creating entrepreneurial skills with strict financial disciplines.

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Wesfarmers

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Source: Fairfax Syndication/Michele Mossop

Bunnings, which has been entrepreneurially grown by its parent company, Wesfarmers, took over the sleepy retail hardware market from less efficient corner stores; it provides a much wider range of choice for the customer and its supply chain efficiency ensures competitive prices. Like many business-builders, Chaney admits that luck plays a part. Perhaps the luckiest event in Wesfarmers’ recent history was the rejection by the British

Exhibit 6.5 Personal characteristics of entrepreneurs Source: Adapted from Leigh Buchanan. (March 2012). The Motivation Matrix. Inc., http://www.inc.com/ magazine/201203/motivationmatrix.html (accessed 20 August 2012); and Charles R. Kuehl and Peggy A. Lambing, Small Business: Planning and Management, Fort Worth, TX: The Dryden Press, 1994, p. 45.

Concept extension

Experiential exercise

parent company of Wesfarmers’ bid to buy chemical producer ICI Australia for A$12 per share. Those shares became worth only one-third of that on the market shortly after. Wesfarmers and Chaney won Most Admired Business and Business Leader awards in 2001 as recognition of their achievements. Chaney was named on the AFR BOSS True Leaders List four years in a row, from 2001 to 2004, and by the end of 2004 had increased Wesfarmers’ corporate value by a staggering 1000 per cent. When he moved on to new challenges, such as becoming chairman of the National Australia Bank board in 2005, he left very big shoes to fill at Wesfarmers. Under Chaney’s leadership, Wesfarmers grew 21.3 per cent compound over the decade to 2004, and outperformed the Australian Stock Exchange (All Ords) index by 357 per cent! Mr Chaney once said: ‘I guess we have been fortunate that, because we have been generating such good returns for shareholders, and employees have benefited from that, morale has always

Internal locus of control

High energy level

been good. If I do feel guilty about anything, however, it’s that I am not spending enough time on purely people issues, and am too bottom-line focused.’ Like almost all businesses, Wesfarmers had a challenging year in 2010, due to tough economic conditions and the acquisition of the large Coles retail group but by 2014 Wesfarmers celebrated continued growth with earnings of over A$4.5 billion (EBIT) from revenues of nearly A$60 billion. The ‘super star’ of the group was Coles which contributed over 40 per cent to earnings. Sources: Treadgold, T. (13 September 2001). Leadership: Wesfarmers’ Ways. Business Review Weekly, 48–51; Hall, J. (August 2004). True Leaders. Australian Financial Review BOSS, 63; http://www.ceoforum.com.au; http://www. businessspectator.com.au; http://www.ceoforum. com.au/article-detail.cfm?cid=6281&t=/ Michael-Chaney-National-Australia-Bank/ Uncommon-sense-Wesfarmers-Michael -Chaney-on-the-bottom-line; Wesfarmers Annual Report 2013, pp. 4, 10, 11, http://media.corporate-ir.net/media_files/ irol/14/144042/AR_2013/index.html (accessed 12 March 2014).

Tolerance for ambiguity

Entrepreneurial personality

Need to achieve

Awareness of passing time

Self-confidence

Tr aits o f entrepren eu rs A number of studies have investigated the characteristics of entrepreneurs and how they differ from successful managers in established organisations. Some suggest that entrepreneurs in general want something different from life than do traditional managers. Entrepreneurs seem to place high importance on being free to achieve and maximise their potential. Some 40 traits are identified as being associated with entrepreneurship, but seven have special importance.20 These characteristics are illustrated in Exhibit 6.5.

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Au tonomy In a survey of 2000 entrepreneurs, the desire for autonomy was the primary motivator for pursuing an entrepreneurial life. Entrepreneurs driven by the desire for autonomy cherish the freedom of making their own decisions about their business. Because of this desire for independent planning and decision making, these entrepreneurs may consider flying solo, without partners or significant investors. But flying solo has drawbacks. It may limit a firm’s growth and result in a smaller-scale business.21 For start-ups to succeed in the long run, a founder may have to forego autonomy and allow someone else with a different set of managerial skills to lead the company into the next phase of growth. ‘When you’re facing that tradeoff, you have to strike a stark balance. You’re going to have to give up something dear to you in order to get something that is even more dear to you,’ said Noam Wasserman, author of The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup.22 Sometimes, this means giving up the autonomy that motivated an entrepreneur to start a business in the first place.

En tre p r eneur i al st r uggle Another common trait among entrepreneurs is the ability to persevere and stay positive after long periods of struggle. Consider Justin Carden, a 29-year-old software engineer, who shares cramped, communal housing with other aspiring tech entrepreneurs near Silicon Valley. He and other hopeful entrepreneurs toil for long hours in tiny living spaces working to develop ideas for new apps and websites. These ‘hacker hostels’ often house ten or more people, crammed into two bedrooms. People try out their sales talks on one another before pitching them to investors.

Powe r and i nfluence Some entrepreneurs are driven by the desire for power and influence. Sam Walton, founder of Walmart, was the most successful retailer in US history, partly because he was far ahead of his competitors in bringing efficiency to the supply chain and selling goods at the lowest possible prices. Walton was able to exert significant pressure on manufacturers to improve their efficiency and bring down costs. As Walmart’s influence grew, so did Walton’s power to dictate price, volume, delivery, packaging and quality of many of its suppliers’ products. Walton was a man who was driven by power and influence and will long be recognised as the entrepreneur who flipped the supplier-retailer relationship upside down.23

Hig h ener gy A business start-up requires great effort. A survey of small business owners by Staples found that 43 per cent of small business owners work more than a regular 40-hour week, 31 per cent report working during holidays, and 13 per cent say they regularly work more than 80 hours a week.24 High levels of passion also help entrepreneurs overcome inevitable obstacles and traumas.25 You can recognise entrepreneurial passion in people by their unwavering belief in a dream, intense focus and unconventional risk taking. ‘To succeed, you have to believe in something with such a passion that it becomes a reality,’ said Anita Roddick of the Body Shop.26 Long before ‘going green’ was popular, Roddick created a business that was socially and environmentally responsible. By 2014, the Body Shop empire numbered more than 2605 stores in over 50 countries.27

Ne e d t o achi eve Another characteristic closely linked to entrepreneurship is the need to achieve, which means that people are motivated to excel and pick situations in which success is likely.28 People who have high achievement needs like to set their own goals, which are moderately difficult. Easy goals present no challenge;

need to achieve A human quality linked to entrepreneurship in which people are motivated to excel and pick situations in which success is likely.

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unrealistically difficult goals cannot be achieved. Intermediate goals are challenging and provide great satisfaction when achieved. High achievers also like to pursue goals for which they can obtain feedback about their success. ‘I was very low and I had to achieve something,’ recalls Harry Potter creator and billionaire author J. K. Rowling. ‘Without the challenge, I would have gone stark raving mad.’29

Self-confi dence People who start and run a business must act decisively. They need confidence about their ability to master the day-to-day tasks of the business. They must feel sure about their ability to win customers, handle the technical details and keep the business moving. Entrepreneurs also have a general feeling of confidence that they can deal with anything in the future; complex, unanticipated problems can be handled as they arise.

Toler ance for amb ig uity tolerance for ambiguity The psychological characteristic that allows a person to be untroubled by disorder and uncertainty.

Many people need work situations characterised by clear structure, specific instructions and complete information. Tolerance for ambiguity is the psychological characteristic that allows a person to be untroubled by disorder and uncertainty. This trait is important for entrepreneurs because few situations present more uncertainty than starting a new business. Decisions are made without clear understanding of options or certainty about which option will succeed. These traits and the demographic characteristics discussed earlier offer an insightful but imprecise picture of the entrepreneur. Successful entrepreneurs come in all ages, from all backgrounds, and may have a combination of personality traits and other characteristics. No one should be discouraged from starting a business because he or she doesn’t fit a specific profile. One review of small business suggests that the three most important traits of successful entrepreneurs, particularly in a turbulent environment, are realism, flexibility and passion. Even the most realistic entrepreneurs tend to underestimate the difficulties of building a business, so they need flexibility and a passion for their idea to survive the hurdles.30

➜➜ One survey suggests that the desire for autonomy is the primary motivator for people to pursue entrepreneurship.

➜➜ Characteristics common to entrepreneurs include the ability to persevere, a desire for power and influence, self-confidence, a high energy level, a need to achieve and a tolerance of ambiguity.

➜➜ The need to achieve means that entrepreneurs are motivated to excel and pick situations in which success is likely.

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➜➜ Tolerance for ambiguity is the psychological characteristic that allows a person to be untroubled by disorder and uncertainty.

Social entrepreneurship: an innovative approach to small business Today’s consumers have a growing expectation that organisations will operate in socially responsible ways. In response, a new breed of business is emerging that is motivated to help society solve all types of social problems, including environmental pollution, global hunger and deaths from treatable diseases. In many ways, these businesses function like traditional businesses, but their primary focus

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is on providing social benefits, not maximising financial returns. Social entrepreneurship focuses primarily on creating social value by providing solutions to social problems, with a secondary purpose of generating profit and returns.31 One well-known social entrepreneur is Muhammad Yunus, who founded Grameen Bank. Yunus pioneered the concept of lending small amounts of money, called microcredit, to small businesses in poverty-stricken villages in Bangladesh. By 2006, when Yunus won the Nobel Peace Prize, the Grameen Bank had outstanding loans to nearly 7 million poor people in 73 000 villages in Bangladesh. The Grameen model expanded into more than 100 countries and has helped millions of people rise out of poverty.32 As another example, Kathy Giusti unexpectedly became a social entrepreneur after a devastating medical diagnosis. The money that Giusti’s organisation MMRF has raised, and the research it has helped to fund, has seen patients with multiple myeloma now living seven years longer. Kathy herself is in remission and was included in Time magazine’s 2011 100 list of the world’s most influential people among her many other awards.33 Read Kathy Giusti’s story in the following Innovative Way feature.

The reluctant social entrepreneur Kathy Giusti never dreamed she would leave the corporate world to become an entrepreneur. She was on the fast track at the pharmaceutical company G. D. Searle and aspired to be one of the first women on the executive committee. At Searle, she was quickly identified as a ‘high-potential’ employee. Alan Heller, who was Searle’s co-president, described Giusti as ‘highly intelligent, highly analytical, and very driven.’ At Searle, she played an instrumental role in launching two successful drugs: Ambien and Daypro. An introvert by nature, she loved working for a big corporation and didn’t consider herself a risk taker. Then, Giusti received news that would change her life. She was diagnosed with multiple myeloma, a deadly blood cancer, and told that myeloma patients were living, on average, three or four years. She extensively researched treatments and was devastated by what she learned. The drugs used to fight the disease were from the 1960s, and no one was devoting research and development resources to it. Her next move was surprising. She resigned from Searle and started a nonprofit. She channeled her business smarts, passion for a cure, and high energy level to start two organisations for helping

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social entrepreneur A leader who is committed to both good business and positive social change. social entrepreneurship Focuses primarily on creating social value by providing solutions to social problems, with a secondary purpose of generating profit and returns.

Innovative Way accelerate the development of treatments for the disease: the Multiple Myeloma Research Foundation and the Multiple Myeloma Research Consortium. As a self-described ‘big-company person,’ Giusti had little respect for nonprofits because she thought most were not professionally managed. ‘I wanted people to see that I wasn’t going to run some schlocky nonprofit. I was going to try to do this right,’ she says. Giusti requires the foundation and the consortium to use metrics, benchmarking, and scorecards so that all parties know their individual and collective performance and are consistently striving to do better. The leaders of a 24-person staff hold a strategy meeting every Monday and an operations meeting every Tuesday. To date, Giusti has raised more than $250 million for myeloma research, an extraordinary achievement given that the vast majority of US nonprofits never surpass $1 million. ‘What Kathy brought to the table was an unwillingness to accept the norm,’ says Keith Stewart, dean for research at the Mayo Clinic in Arizona. ‘She’s a demanding person. She knows what she wants, and she doesn’t rest until she’s found a solution to thorny problems.’

Sources: Steven Prokesch. (June 2011). The Reluctant Social Entrepreneur. Harvard Business Review, 124–6; Le, V. (12 March 2013). A Mission With Precision: Kathy Giusti’s Ambitious Quest to Cure Multiple Myeloma. Forbes, http://www.forbes.com/sites/vannale/2013/12/03/a-mission-with-precision-kathygiustis-ambitious-quest-to-cure-multiple-myeloma (accessed 12 March 2014).

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While working as a New York investment banker, Bangladesh native Iqbal Quadir realised that connectivity equals productivity. He also knew his impoverished homeland was one of the least connected places on earth. That prompted him to collaborate with countryman Muhammad Yunus, Grameen Bank founder and 2006 Nobel Peace Prize winner, to create Village Phone. Entrepreneurs, mostly women, use Grameen Bank microloans to purchase cell phones. ‘Telephone ladies’ then earn the money to repay the debt by providing phone service to fellow villagers. Village Phone results in thousands of new small businesses, as well as an improved communication infrastructure that makes a wide range of economic development possible.

Source: Reuters/Lucas Jackson

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Take a Moment As a new manager, which personality traits do you have that would contribute to your success as an entrepreneur? Do you see qualities in yourself that might hinder your success? If so, how might you overcome or compensate for them?

Social entrepreneurship combines the creativity, business smarts, passion and hard work of the traditional entrepreneur with a mission to change the world for the better. One writer referred to this distinct breed of entrepreneurs as a cross between Richard Branson, the high-powered CEO of Virgin Airlines, and Mother Teresa, the Catholic nun who dedicated her life to serving the poor.34 Social entrepreneurs have a primary goal of improving society rather than maximising profits, but they also emphasise solid business results, high performance standards and accountability for results. The organisations created by social entrepreneurs may or may not make a profit, but the bottom line for these companies is always social betterment rather than economic return. Social entrepreneurship is not new, but the phenomenon has blossomed over the past 20 or so years. Exact figures for the number of social entrepreneurs are difficult to verify, but estimates number in the tens of thousands working around the world. The innovative organisations created by social entrepreneurs are defying the traditional boundaries between business and welfare.35 One good illustration is Project Impact, founded by David Green. Project Impact helped start a factory in India that makes inexpensive plastic lenses used in cataract surgery. The factory provides lenses, some at no cost, for 200 000 poor Indians a year. By 2013 the organisation was doing more than 300 000 cataract surgeries a year and had driven down the price of the necessary lenses from several hundred dollars each to two dollars.36 It has captured 10 per cent of the global market for intraocular lenses. Green expanded his approach to other parts of the world, and is adding hearing aids to the product mix.37

➜➜ A social entrepreneur is an entrepreneurial leader who is committed to both good business and changing the world for the better. ➜➜ Social entrepreneurs are creating new business models that meet

critical human needs and resolve important problems unsolved by current economic and social institutions. ➜➜ Social entrepreneurship combines the creativity, business smarts, passion and work of the traditional

entrepreneur with a social mission.

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➜➜ Social entrepreneurs have a primary goal of improving society rather than maximising profits, but they also emphasise solid business results, high performance standards and accountability for results.

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Starting an entrepreneurial firm Whether one starts a socially oriented company or a traditional for-profit small business, the first step in pursuing an entrepreneurial dream is to start with a viable idea for the new venture and plan like crazy. Once you have a new idea in mind, a business plan must be drawn up and decisions must be made about legal structure, financing and basic tactics, such as whether to start the business from scratch and whether to pursue international opportunities from the start.

Start with th e n ew- busin ess i d e a To some people, the idea for a new business is the easy part. They do not even consider entrepreneurship until they are inspired by an exciting idea. Other people decide they want to run their own business and set about looking for an idea or opportunity. Exhibit 6.6 shows the most important reasons people start a new business and the source of new-business ideas in the US. Note that 37 per cent of business founders got their idea from an in-depth understanding of the industry, primarily because of past job experience. Interestingly, almost as many – 36 per cent – spotted a market niche that was not being filled.38 For example, when American Michael Kares was just out of college and doing construction work, he saw a need for a national, standardised contracting firm to install steel storage systems in warehouses, stores and factories. Thus, what started as a way to make a few dollars until he found a ‘real job’ turned into a US$10 million-a-year business, Coast-to-Coast Installations.39 The trick for entrepreneurs is to blend their own skills and experience with a need in the marketplace. Acting strictly on one’s own skills may produce something no one wants to buy. On the other hand, finding a market niche that you do not have the ability to fill will not work either. Both personal skill and market need typically must be present.

business plan

The organisation was founded in 2004 after Nalisha saw a gap in the market for people who disliked working out in a gym environment. Her husband Janak joined the organisation in 2006 as it rapidly expanded, based on some of the publicity received through Nalisha’s writing and fitness work with celebrities, as well as thoughtfully crafted strategies. And in 2007 Nalisha and Janak were chosen to appear in a three-part television documentary on success. HealthMastery markets to people who have no desire to join a gym, but need the motivation and education pertaining to a ‘gameplan’ for excellent health and well-being. The organisation focuses on personal training of people in their homes and/or offices, using minimal equipment and educating people on

how to eat right. HealthMastery’s personal trainers offer goal setting, motivational

Source: Courtesy of HealthMastery

Moving from starting up a small family business to a larger and eventually global franchise network is a big step requiring resources and courage. The health and fitness industry is set to soon be a trilliondollar industry, especially with the rise in obesity. As people become more conscious of taking care of their health, many of them are likely to seek out convenient ways in which to improve it. Nalisha Patel is aiming for a market niche in this industry, with her company HealthMastery. HealthMastery offers comprehensive mobile personal training and health and fitness consulting services. ‘Take your health and fitness goals to another level and achieve success’ is the motto on its website, http://www.healthmastery.co.nz.

HealthMastery CEO Nalisha Patel

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HealthMastery: entrepreneurship in the NZ health services industry

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exercises, physical exercises and nutritional information, so success can be lifelong rather than a short-term fix. They encourage individuals to hire one of their personal trainers, who can ‘enhance your strength, endurance, posture, flexibility, balance and coordination along with your cardiovascular health’. NZ Fitness, Her Business and Pink magazines have articles on health and fitness, written by Nalisha Patel. Janak and Nalisha share a vision to take the company global through franchising and

to dominate the mobile health and fitness sector. They believe that it is impossible to live a rich, full life if one’s health is not good. Their aim is to inspire and motivate people to live healthier and better lives, and by educating people to lead healthier lives, and hence becoming more efficient, less strain will be placed on the economy. A current managerial challenge for the organisation is increasing cash flow funding to move to the next stage of the business which is franchising. They also want to

Reasons for starting a business To create something new To control my life

In-depth understanding of industry/profession

37% 36%

Market niche spotted

14%

To make money

7%

14%

To be my own boss

4% Copying someone else

10%

To prove I could do it

8% 2%

Source: Contributed by Edwina Pio, Auckland University of Technology.

Source of new-business ideas

29% 24%

hire a full-time customer service assistant. This would free up their time to focus on franchising and building future strategies to stay current in the market. Nalisha says: ‘A big problem with entrepreneurs is to do everything themselves so it’s done right. Yet, the best way to grow is often to leverage someone else’s time and skills, so the entrepreneurs can focus on other crucial issues such as continual expansion.’

Frustration at large company

Brainstorming

4% Hobby 11%

Other

Other

Exhibit 6.6 Sources of entrepreneurial motivation and new-business ideas Sources: John Case. (15 May 2001). The Rewards. Inc., 50–1; and Leslie Brokaw. (15 October 1994). How to Start an Inc. 500 Company. Inc., 51–65. Copyright 1994 and 2001 by Mansueto Ventures LLC. Reproduced with permission of Mansueto Ventures LLC in the format Textbook via Copyright Clearance Center.

business plan A document specifying the business details prepared by an entrepreneur in preparation for opening a new business.

Th e busin ess pl an Once an entrepreneur is inspired by a new-business idea, careful planning is crucial. A business plan is a document specifying the business details prepared by an entrepreneur prior to opening a new business. Planning forces the entrepreneur to carefully think through all of the issues and problems associated with starting and developing the business. Most entrepreneurs have to borrow money, and a business plan is absolutely critical to persuading lenders and investors to participate in the business. Studies have shown that small businesses with a carefully thought-out, written business plan are much more likely to succeed than those without one.40 To attract the interest of venture capitalists or other potential investors, the entrepreneur should keep the plan crisp and compelling. The details of a business plan may vary, but successful business plans generally share several characteristics; for example, they generally: ●● demonstrate a clear, compelling vision that creates an air of excitement ●● provide clear and realistic financial projections ●● give detailed information about potential customers and the target market ●● include detailed information about the industry and competitors ●● provide evidence of an effective entrepreneurial management team ●● pay attention to good formatting and clear writing ●● keep the plan short – no more than 50 pages long

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●● highlight critical risks that may threaten business success ●● spell out the sources and uses of start-up funds and operating funds ●● capture the reader’s interest with a killer summary.41 The business plan should indicate where the product or service fits into the overall industry and should draw on concepts that will be discussed throughout this book. For example, Chapter 8 describes competitive strategies that entrepreneurs can use. Starting a business is a rewarding and complex process that starts with good planning, preparation, and insight. A well-crafted business plan summarises the road map for success. As the business begins to grow, however, the entrepreneur should be prepared to handle common pitfalls, as described in this chapter’s Management in Practice.

Choosin g a legal stru ctu re Before entrepreneurs have started a business, and perhaps again as it expands, they must choose an appropriate legal structure for the business. The three basic choices are sole proprietorship, partnership or company.

Sole prop r i et or sh i p A sole proprietorship is an unincorporated business owned by an individual, carried on for profit. Sole proprietors (sole traders) own more than half of all businesses. Examples are one-person lawn-mowing or accounting businesses. This form is popular because it is easy to start and has few legal requirements. A sole proprietor has total ownership and control of the business and can make all decisions without consulting anyone. However, a sole proprietorship also has drawbacks. The owner has unlimited liability for the business, meaning that if someone sues, the owner’s personal assets, as well as business assets, are at risk. Also, financing can be harder to obtain because business success rests on one person’s shoulders.

sole proprietorship An unincorporated business owned by an individual for profit.

Partner shi p A partnership is an unincorporated business carried on by two or more people together, for the purpose of making a profit. Partnerships, like proprietorships, are relatively easy to start. Two friends may reach an agreement to start a pet store. To avoid misunderstandings and to make sure the business is well planned, it is wise to draw up and sign a formal partnership agreement with the help of a solicitor. The agreement specifies the way partners are to share responsibility and resources, and how they will contribute their expertise. The disadvantages of partnerships are the unlimited liability of the partners and the disagreements that almost always occur among strong-minded people. Just like marriages, which have a high divorce rate, business partnerships often lead to dissolution because of changed interests of the founders. Founders need to be flexible and adaptive, and prepared to share the workload equally, to allow partnerships to sustain themselves.

partnership An unincorporated business carried on by two or more people together, for the purpose of making a profit.

Com pany A company is created as a legal entity by the state and exists apart from its owners. As such, the company is liable for its actions and must pay taxes on its income. Unlike other forms of ownership, the company has a legal life of its own; it continues to exist regardless of whether the owners (shareholders) live or die. And the company, not the shareholders, is sued when the company is legally liable. Thus continuity and limits on owners’ liability are two principal advantages of forming a company. For example, a doctor can form a company so that liability for malpractice will not affect his or her personal assets. The main disadvantage of the company is that it can be expensive and complex to do the paperwork required to incorporate the business and to keep the records required by law. When sole ownerships and partnerships are successful and grow large, they often incorporate to limit liability and to raise funds through the sale of shares to investors.

company A legal entity created and registered by the government and existing apart from its owners.

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management in pr actice

Why start-ups fail

Small businesses face many challenges as they navigate through today’s economy and confront issues that jeopardise their success: slow job growth, weak consumer confidence, and a slow housing recovery. It’s no wonder that small business failure rates increased by 40 per cent from 2007 to 2010. To keep a small business running successfully, an entrepreneur should know how to avoid potential land mines that can knock a business off course. While it is impossible to avoid all risks, a savvy entrepreneur will be alert to the most frequent reasons small business ventures fail.

➜➜ Poor management. Many small business owners lack the necessary business skills to manage all areas of their business, such as finance, purchasing, inventory, sales, production and hiring. When Jay Bean founded sunglassesonly.com, he had no experience managing inventory. ‘Having inventory requires you to deal with a different set of complex issues, including theft control,’ he said. Bean’s sales plummeted during the global financial crisis, and he closed the business in November 2010, selling the assets at a loss.

➜➜ Overexpansion. Some overzealous business owners confuse success with the need to expand. This may include moving into markets that are not as profitable or borrowing too much money in an attempt to keep growth at a particular rate. When the co-founders of Large Format Digital spent over US$1 million to build their own installation facility, they believed it would save them money in the long term. The business had been growing at about 60 per cent each year since 2006. Within a month of building the facility in 2008, sales dropped 50 per cent, and the company closed in March 2011.

➜➜ Sloppy accounting. Financial statements are the backbone of a small business, and owners need to understand the numbers to control the business. The income statement and balance sheet help diagnose potential problems before they become fatal. It’s also important to understand the ratio of sales to expenses that will result in profitability. Managing

cash flow is another important role of the small business owner. Businesses go through cycles and smart managers have a cash cushion that helps them recover from the inevitable bumps.

➜➜ No website. As the number of online customers increases, it’s important for every business to have a professional, well-designed website. According to the US Department of Commerce, e-commerce sales totaled US$165.4 billion in 2010. The key to a successful website is to make it easy for users to navigate. Wesabe, a personal finance website, helped consumers budget their money and make smart buying decisions. With 150 000 members in the first year, the co-founders were ecstatic. A new competitor, Mint.com, launched a website with a better design and a more memorable name. Within three months, Mint had 300 000 users and $17 million in venture financing. Wesabe was unable to compete and closed its site soon after. Co-founder Marc Hedlund says the managers at Wesabe should have made the site easier to use. ‘We wanted to help people,’ he said, ‘but it was too much work to get that help.’

➜➜ Operational mediocrity. An important role of the entrepreneur is to set high standards in essential areas such as quality control, customer service and the company’s public image. Most businesses depend on repeat and referral business, so it’s important to create a positive first impression with customers. Franchisors often assist in providing high-quality products and services, reducing some of the stress entrepreneurs can face.

➜➜ Fear of firing. Firing an employee is uncomfortable and difficult, but if business owners plan to outperform competitors, it’s important to build and maintain an excellent staff. Unfortunately, it’s very easy to keep mediocre employees around, especially those who are nice and loyal. However, it will hurt the business in the long run. Ask yourself, ‘Would I be relieved if anyone on my team quit tomorrow?’ If the answer is yes, you may have a problem.

Sources: Patricia Schaefer. (April 2011). The Seven Pitfalls of Business Failures and How to Avoid Them. BusinessKnow-How.com, http://www .businessknowhow.com/startup/ business-failure.htm (accessed 14 August 2012); Jay Goltz. (5 January 2011). You’re the Boss: The Art of Running a Small Business. The New York Times, http://boss.blogs.nytimes. com/2011/01/05/top-10-reasons-small-businesses-fail (accessed 14 August 2012); Eilene Zimmerman. (5 January 2011). How Six Companies Failed to Survive 2010. The New York Times, http://www.nytimes.com/2011/01/06/business/smallbusiness/06sbiz.html (accessed 14 August 2012); (May 2011). The State of Small Businesses Post Great Recession: An Analysis of Small Businesses Between 2007 and 2011. Dun & Bradstreet, http://www.dnbgov.com/pdf/DNB_SMB_ Report_May2011.pdf (accessed 14 August 2012); Adriana Gardella. (13 April 2011). Advice From a Sticky Web Site on How to Make Yours the Same. The New York Times, http://www.nytimes.com/2011/04/14/business/ smallbusiness/14sbiz.html (accessed 14 August 2012).

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Arr an gin g finan cin g

Exhibit 6.7 Sources of start-up capital for entrepreneurs Source: Jim Melloan. (1 September 2006). The Inc. 5000. Inc., 187. Copyright 2006 by Mansueto Ventures LLC. Reproduced with permission of Mansueto Ventures LLC.

Venture capital

Lines of credit

Bank loans

Loans from friends, family or business associates

Self-financed from savings or credit cards

Most entrepreneurs are particularly concerned with financing the business. A few types of businesses can still be started with a few thousand dollars, but starting a business usually requires coming up with a significant amount of initial funding. An investment is required to acquire labour and raw materials, and perhaps a building and equipment as well. 100% High-tech businesses, for example, typically need from $50 000 to $500 000 just to get 80% through the first six months, even with the founder drawing no salary.42 60% Many entrepreneurs rely on their own resources for initial funding, but they often 40% have to mortgage their homes, depend on credit cards, borrow money from a bank or give part of the business to a venture 20% capitalist.43 Exhibit 6.7 summarises the most common sources of start-up capital 0% for entrepreneurs. The financing decision initially involves two options – whether to obtain loans that must be repaid (debt financing) or whether to share ownership (equity financing).

De bt f i nanci ng Borrowing money that has to be repaid at a later date to start a business is referred to as debt financing. One common source of debt financing for a start-up is to borrow from family and friends. Increasingly, entrepreneurs are using their personal credit cards as a form of debt financing. Another common source is a bank loan. Banks provide some 25 per cent of all financing for small business. Sometimes entrepreneurs can obtain money from a finance company, wealthy individuals or potential customers. A typical source of funds for businesses with high potential is through angel financing. Angels are wealthy individuals, typically with business experience and contacts, who believe in the idea for the start-up and are willing to invest their personal funds to help the business get started. Significantly, angels also provide advice and assistance as the entrepreneur is developing the company. The entrepreneur wants angels who can make business contacts, help find talented employees and serve as all-round advisers.

Equ ity fi nanci ng Any money invested by owners or by those who purchase shares in a corporation is considered equity. Equity financing consists of funds that are invested in exchange for ownership in the company. A venture capital firm is a group of companies or individuals that invests money in new or expanding businesses for ownership and potential profits. This is a potential source of capital for businesses with high earning and growth possibilities. Venture capitalists are particularly interested in high-tech businesses such as biotechnology, innovative online ventures or telecommunications because they have the potential for high rates of return on investment.44

debt financing Borrowing money that has to be repaid at a later date in order to start a business.

angel financing Financing provided by a wealthy individual who believes in the idea for a start-up and provides personal funds and advice to help the business get started. equity financing Financing that consists of funds that are invested in exchange for ownership in the company. venture capital firm A group of organisations or individuals that invest money in new or expanding businesses for ownership and potential profits.

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Case study

crowdfunding Funding that is raised from a large number of investors giving small amounts of money; typically through social media and the Internet.

Venture capitalist Andreessen Horowitz, a Facebook investor, contributed part of the $1 million seed money for an e-commerce start-up called the Dollar Shave Club, which hopes to claim a part of the razor market with home delivery and low prices. At the Dollar Shave Club, customers sign up for one of three plans that give them a razor and a supply of blades for $3 to $9 per month. Venture capitalists are hoping that the Dollar Shave Club totally upends the market for men’s razors and blades, where competitor Gillette controls 66 per cent of the market.45 A new option available to entrepreneurs is called crowdfunding, which is a way of raising capital by receiving small amounts of money from a large number of investors, usually through social media and the Internet. Currently, the most successful crowdfunding website is Kickstarter, which began as a way for people to raise money for quirky projects like offbeat documentaries and pop-up wedding chapels. Kickstarter has expanded to include video game production, innovative new gadgets and any number of other types of projects. It enables budding entrepreneurs to test new ideas and see if there’s a market for them before they trade ownership of their company for money from venture capitalists. Kickstarter has raised more than $200 million for 290 000 projects, or about 44 per cent of those that sought financing on the site.46

Entrepreneurship in sol ar energy Mr Jigar Shah became the CEO of Sun Edison at the age of 32 having raised millions of dollars after winning a business plan competition at Harvard University. He now produces and installs solar generating mini-power plants for local customers such as universities and department stores. Having achieved the design, construction and installation of approximately 150 of these solar-powered electricity sources, the company continues to build systems that make economic sense at a particular location. His solar-powered energy sources are not just commercially viable – with electricity running at peak rates at around a dollar per kilowatt hour – but are also making a contribution to the reduction

of greenhouse gases and climate change, because this solar energy source is entirely ‘clean’ and connects straight into the electricity grid, to which his clients are already connected. The company has become the largest solar energy provider of its kind through a balance of fundraising, acquisitions and organic growth. In 2012, Sun Edison was the largest company in its industry in the US, and it has rapidly expanded in Europe, generating a global total of 112 megawatts of solar-sourced electrical energy, cumulatively totalling some 400 million kilowatt hours. Source: McGregor, M. (19 March 2007). A Solar Wunderkind Sees a Brighter Future. Fortune, 15; Sun Edison website, http://www.sunedison.com.

Source: Getty Images/Torsten Blackwood

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Jigar Shah is creating wealth and environmental benefits through his entrepreneurship.

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➜➜ The two most common sources of new business ideas come from a thorough understanding of an industry, often derived from past job experience, and identifying a market niche.

➜➜ An unincorporated for-profit business owned by an individual is called a sole proprietorship.

the idea for a start-up provides personal funds and advice to help the business get started.

➜➜ Prior to opening a business, an entrepreneur should prepare a business plan, a document specifying the details of the business.

➜➜ A partnership is formed when two or more people choose to own an unincorporated business.

➜➜ Equity financing consists of funds that are invested in exchange for ownership in the company.

➜➜ A corporation is an artificial entity created by the state and existing apart from its owners.

➜➜ A venture capital firm is a group of companies or individuals that invests money in new or expanding businesses for ownership and potential profits.

➜➜ Businesses with carefully written business plans are more likely to succeed than those without business plans.

➜➜ Debt financing involves borrowing money, such as from friends, family or a bank, that has to be repaid at a later date in order to start a business. ➜➜ Angel financing occurs when a wealthy individual who believes in

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remember this

➜➜ Crowdfunding is a way of raising capital that involves getting small amounts of money from a large number of investors, usually using social media or the Internet.

Tacti cs fo r becom in g a busin ess own er An aspiring entrepreneur can become a business owner in one of many ways. These include starting a new business from scratch, buying an existing business or starting a franchise. Other entrepreneurial tactics include participation in a business incubator, being a spin-off from a large company or pursuing international markets from the beginning.

franchise

Start a new b usi ness Source: Newspix/Richard Walker

One of the most common ways to become an entrepreneur is to start a new business from scratch. This is exciting, because the entrepreneur sees a need for a product or service that has not been filled before, and then sees the idea or dream become a reality. The advantage of starting a business is the ability to develop and design the business in the entrepreneur’s own way. The entrepreneur is solely responsible for its success. A potential disadvantage is the long time it can take to get the business off the ground and make it profitable. The uphill battle is caused by the lack of established clientele and the many mistakes made by someone new to the business. Moreover, no matter how much planning is done, a start-up is risky as there is no guarantee that the new idea will work.

Bu y a n exi st i ng b usi ness Because of the long start-up time and the inevitable mistakes, some entrepreneurs prefer to reduce risk by purchasing an existing business. This direction offers the advantage of a shorter time to get started and an existing track record. The entrepreneur may get a bargain price if the owner wishes to retire or has other family considerations. Moreover, a new business may overwhelm an entrepreneur with the amount of work

Bakers Delight has grown from a single shop in Hawthorn, Melbourne, to a chain of over 700 franchised operations in Australia, New Zealand, Canada and the US. The chain employs a massive 15 000 people. Each shop costs about $380 000 to set up and the chain has a combined revenue exceeding A$575 million per year (in 2013). Franchisees’ average annual turnover is A$700 000 with an operating profit of A$120 000. With a mission of ‘Building better businesses by building better beings’, this franchise is a real Australian growth and success story (see http:// www.bakersdelight.com.au).

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to be done and procedures to be determined. An established business already has filing systems, a payroll tax system and other operating procedures. Potential disadvantages are the need to pay for goodwill that the owner believes exists and the possible existence of ill will towards the business. In addition, the company may have bad habits and procedures or outdated technology, which may be why the business is for sale.

Buy a fr anch i se

Case study

franchising An arrangement by which the owner of a product or service allows others to purchase the right to distribute the product or service with help from the owner; a form of licensing in which an organisation provides its foreign franchisees with a complete assortment of materials and services.

Franchising is perhaps the most rapidly growing path to entrepreneurship. Currently, about 10 per cent of businesses are franchised, and new franchise businesses open frequently. Franchising is an arrangement by which the owner of a product or service allows others to purchase the right to distribute the product or service with help from the owner. The franchisee invests his or her money and owns the business, but does not have to develop a new product, create a new company or test the market. The franchisee typically pays a flat fee plus a percentage of gross sales. Franchises exist for weight-loss clinics, pet-sitting services, sports photography, bakeries, car-repair shops, real estate offices and numerous other types of businesses. Start-up costs for a franchise can range from less than A$5000, for a business that does not require extensive facilities or equipment, to A$800 000 or more. A franchise in Ben and Jerry’s (ice cream) costs an initial $200 000 to $400 000, whereas for a McDonald’s franchise an initial fee of between $1 million and $2.8 million is payable (as of 2010). The powerful advantage of a franchise is that management help is provided by the owner. The rapidly growing Subway chain provides support and substantial training to its franchisees. The franchisor also provides an established name and national advertising to stimulate demand for the product or service. Potential disadvantages include the lack of control that can occur when franchisors want every business managed in exactly the same way, but rely on the franchisees to run the franchises uniformly. In some cases, franchisors require franchise owners to use certain contractors or suppliers, which may cost more than others would. In addition, franchises can be very expensive, and the high start-up costs are followed with monthly payments to the franchisor that can run at 2 to 15 per cent of sales. Entrepreneurs who are considering buying a franchise should investigate the company thoroughly. The prospective franchisee is legally entitled to a copy of franchisor disclosure statements, which include information on 20 topics, including litigation and bankruptcy history, identities of the directors and executive officers, financial information, identification of any products the franchisee is required to buy and from whom those purchases must be made.47 The entrepreneur should also talk with as many franchise owners as possible, since they are among the best sources of information about how the company really operates. Exhibit 6.8 lists some specific questions entrepreneurs should ask about themselves and the company when considering buying a franchise. Asking such questions may improve the chances for a successful career as a franchisee.

The high and lows of franchising entrepreneurship Stephan Donnelly opened a pie shop called Big Dad’s Pies in Ipswich near Brisbane in 2003. In just three years he had franchised out a remarkable 37 stores in the South East Queensland region. Stores averaged weekly turnover of $12 000, which is a lot of pie sales! Donnelly focused on the advertising, branding and documentation required to create his franchises and created detailed operations manuals which

helped with franchisee selection and training. His special recipe for franchise business success came to the attention of the Retail Food Group (RFG), which purchased the chain’s franchising rights and intellectual property in April 2010 for $3.1 million. RFG already owned several big-name Australian food chains such as the Donut King, BB’s Café, Brumby’s Bakeries and Michel’s Patisseries, which

they also manage under the franchise system. Hence this sizeable franchise business planned to use their economies of scale from their large infrastructure and purchasing power to grow Big Dad’s Pies. In 2010 Mr Donnelly projected store sizes to double within two years and reach beyond 150 within five. What happened next might come as a surprise. In October of 2010 Mr Donnelly unexpectedly closed

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the four stores he owned and his Big Dad’s pie supply business (the central company), leaving the remaining franchise stores with only the stock in their fridges. Mr Donnelly argued his insolvency was a result of heavy debt to creditors and increased overheads and he was forced to shut the supply business down. RFG had the intellectual property and rights to the pie recipes but

was left to find a new supplier for the pies; by 2011 RFG had completely repositioned the Big Dad’s Pies stores under the Brumby’s banner and 16 stores had been closed. In 2013, within 10 years from inception, there were only nine Big Dad’s Pies stores remaining. Sources: RFG Annual Report 2010, p. 39, http:// www.rfg.com.au/rfg/images/stories/financial_reports_ publications_pdfs/rfgl%20annual%20report%20

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fy2010.pdf (accessed 30 August 2013); Garry, C. (26 December 2009). Big Dad’s Gobbled Up. The Queensland Times, http://www.qt.com.au/news/big-dadsgobbled-up-by-aussie-food-giant/435422/ (accessed 30 August 2013); Jackson, Z. 9 October 2010. Big Dad’s Pies Founder: I’m broke. The Queensland Times, http://www.qt.com.au/news/big-dads-founder-imbroke-close-in-ipswich/655423/ (accessed 30 August 2013); RFG Annual Report 2011, pp. 6 and 11, http://www.rfg.com.au/rfg/images/stories/financial_ reports_publications_pdfs/annual_report_24-10-11.pdf (accessed 30 August 2013); Big Dad’s Pies, http://www. bigdadspies.com.au/ (accessed 30 August 2013).

Exhibit 6.8 Sample questions for choosing a franchise Questions about the entrepreneur

Questions about the franchisor

Before signing on the dotted line

Will I enjoy the day-to-day work of this business?

What assistance does the company provide in terms of: selection of location, set-up costs, securing credit, day-to-day technical assistance, marketing, and ongoing training and development?

Do I understand the risks associated with this business and am I willing to assume them?

Do my background, experience and goals make this a good choice for me?

How long does it take the typical franchise owner to start making a profit?

Have I had an adviser review the disclosure documents and franchise agreement?

Am I willing to work within the rules and guidelines established by the franchise?

How many franchises changed ownership within the past year and why?

Do I understand all the terms of the contract?

Sources: Based on Love, T. (April 1998). The Perfect Franchisee. Nation’s Business, 59–65; Maynard, R. (October 1996). Choosing a Franchise. Nation’s Business, 56–63.

Franchising in Australia is big business: in 2014 the Franchise Council of Australia reported the size of the sector at $131 billion. The Franchise Council of Australia lists more than 1200 franchise chains ranging from professional services such as legal and accounting through to retail outlets. It’s a growing and generally successful business model, from mowing grass to fruit juice bars, health spas, gyms, business advisory services, bakeries, child care centres, coffee shops and fast food. Indeed, half of all franchises are in the retail sector. Most of these chains (80 per cent) are domestically grown and 31 per cent required less than A$20 000 to start up.

Consider such well-known brands as Boost Juice, Nando’s, Gloria Jean’s Coffees, Mrs Field’s Cookies, Ella Bache, Bakers Delight, Domino Pizza and Brumby’s: all are franchised, as are similarly well-known brands such as McDonald’s and Subway. Boost Juice, with 110 outlets in mid 2004, grew some 600 per cent in three years. By 2013 this number had grown to over 200 outlets in Australia and 100 overseas! One Australian franchise that has gone international and succeeded is Granite Transformations, founded by CEO Colin MacKenzie and Bob Smith. Providing economical kitchen renovations, this business grew quickly from start-up to

having 60 franchise operators in Australia and New Zealand, and 48 in the US, generating revenue of $163 million in 2005. Since then, the company has expanded into Britain and Europe and now has 170 branches worldwide. Granite Transformations incorporates green practices into most aspects of its business and its products have been globally popular for their combination of being Eco-friendly, durable and aesthetically pleasing. With similar international success, Bryan Stokes and Paul Wheeler took their business, Cartridge World, from Adelaide to the world using a franchise model. Their businesses refill and provide computer

Case study

Franchises in Australia and New Zeal and

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printer cartridges at significantly lower cost than new ones. Cartridge World had a staggering 746 franchisees, and over 1000 outlets by March 2005. It was perfect for global expansion because printer cartridges are universal in their design, and at one point this business was opening a new shop every day in the US and at a similar rate in the rest of the world. This business is successful because it is simple, scalable and globally uniform, and because the founders appointed master franchisees who were

highly motivated to grow their region’s business volumes. By 2013 Cartridge World had opened 1450 stores in 56 countries, a long way indeed from its Adelaide start! This remarkable growth continues to fulfil the company’s vision and mission: To provide our retail and corporate customers with competitive pricing and superior products, while developing the brand into a market leader. To have a network of sites available to the consumer, which will cater for local requirements both within Australia and Internationally. To provide the best sales and service package on the supply of consumables

and printers, and provide information to the consumer on the benefits of recycling. Sources: Franchise Council of Australia website, http://www.franchise.org.au/ (accessed 28 November 2013); Boost Juice website, http://www.boostjuice. com.au/franchising (accessed 9 September 2013); Walker, J. (January 2005). The Franchise Fantastics. Business Review Weekly, 30–8; Thomson, J. (13 July 2001). Retail: Kings in Paper Castles. Business Review Weekly, 44–5; Cartridge World website, http:// www.cartridgeworld.com.au/about (accessed 9 September 2013).

Part i ci pat e i n a b us in ess in c ub ator business incubator An innovation that provides shared office space, management support services, and management and legal advice to entrepreneurs. spin-off An independent company producing a product or service similar to that produced by the entrepreneur’s former employer.

An attractive option for entrepreneurs who want to start a business from scratch is to join a business incubator. A business incubator typically provides shared office space, management support services, and management and legal advice to entrepreneurs. Incubators also give entrepreneurs a chance to share information with one another about local business, financial aid and market opportunities. A recent innovation is the virtual incubator, which does not require that people set up on-site. These virtual organisations connect entrepreneurs with a wide range of experts and mentors and offer lower overhead and cost savings for cash-strapped small business owners. Christie Stone, co-founder of Ticos Coffee, a coffee distributor in New Orleans, likes the virtual approach because it gives her access to topnotch advice while allowing her to keep her office near her inventory.48 Business incubators have become a significant segment of the small business economy, with approximately 17 000 worldwide.49 The incubators that are thriving are primarily non-profits and those that cater to niches or focus on helping women or minority entrepreneurs. These incubators include those run by government agencies and universities to boost the viability of small business and spur job creation. The great value of an incubator is the expertise of a mentor, who serves as adviser, role model and cheerleader, and ready access to a team of lawyers, accountants and other advisers. Incubators also give budding entrepreneurs a chance to network and learn from one another.50 ‘The really cool thing about a business incubator is that when you get entrepreneurial people in one place, there’s a synergistic effect,’ said Tracy Kitts, vice president and chief operating officer of the National Business Incubation Association. ‘Not only do they learn from staff, they learn tons from each other, and this really contributes to their successes.’51

Startin g an o n lin e busin ess Many entrepreneurs are turning to the Internet to expand their small businesses or launch a new venture. Anyone with an idea, a computer, access to the Internet and the tools to create a website can start an online business. These factors certainly fuelled Ashley Qualls’s motivation to create a website that has become a destination for millions of teenage girls. Starting at age 15, Ashley launched WhateverLife.com with a clever website, an $8 domain name, and a vision to provide free designs (hearts, flowers, celebrities) for social networking pages. Her hobby exploded into a thriving business, generating advertising revenue of more than $1 million within just a few years.52

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As WhateverLife.com illustrates, one incentive for starting an online business is that an entrepreneur can take a simple idea and turn it into a lucrative business. Another example comes from entrepreneurs Andrew Miller and Michael Zapolin. When they bought the generic domain name ‘chocolate.com’, Miller and Zapolin aspired to turn a simple web address into an online emporium. ‘We knew nobody was doing a good job with chocolate in the online space,’ says Miller. In two years, the partners built a business that was on track to clear $2 million in annual revenue. Always in pursuit of the next big online success story, Miller and Zapolin bought up numerous other domain names, including ‘software.com’ and ‘relationship.com’.53 Entrepreneurs who aspire to start online businesses follow the usual steps required to start a traditional business: identify a profitable market niche, develop an inspiring business plan, choose a legal structure and determine financial backing. Beyond that, they need to be unusually nimble, persistent in marketing, savvy with technology and skilful at building online relationships. Several steps required to start an online business are highlighted here. ●● Find a market niche. To succeed in the competitive online market, the entrepreneur needs to identify a market niche that isn’t being served by other companies. Online businesses succeed when they sell unique, customised or narrowly focused products or services to a well-defined target audience. ●● Create a professional website. Online shoppers have short attention spans, so a website should entice them to linger. In addition, websites should be easy to navigate and intuitive, and also offer menus that are easy to read and understand. Even ‘smalltime’ sites need ‘big-time’ designs and should avoid common mistakes such as typos, excessively large files that are slow to load, too much information and sensory overload.54 FragranceNet.com competes with big-time competitors with a website that clearly communicates its value proposition (designer brands at discount prices), easy navigation and superior customer service.55 ●● Choose a domain name. A domain name gives a company an address on the Web and a unique identity. Domain names should be chosen carefully and be easy to remember, pronounce and spell. How is a domain name selected? The crux of Miller and Zapolin’s business, described above, is the simplicity of their domain names. Chocolate.com, for example, gets thousands of visitors a day from anyone keying ‘chocolate’ into the address line of their web browser. There are many options for creating a domain name, including (1) using the company name (Dell.com); (2) creating a domain name that describes your product or service (1-800-Flowers.com); or (3) choosing a domain name that doesn’t have a specific meaning and provides options for expanding (Google.com).56 ●● Use social media. Social media sites, such as Facebook, Twitter and YouTube, have the potential to be powerful tools for small business owners. The benefits of using social media include gaining valuable feedback on products and services, building communities of loyal followers, and promoting special events and pricing. Under the best of circumstances, loyal customers view the business as a social activity itself, making recommendations that will stream on the Facebook news feeds of all their friends. Facebook won’t reveal how many businesses combine its core features with commerce, but more than 7 million apps and websites are integrated with the popular social network.57 For some start-ups, social media will help them grow. For others, such as Instagram (now owned by Facebook), it is the basis of the business.

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Innovative Way

Instagram

Crammed into a small ground-floor office in the South Park neighbourhood of San Francisco, Kevin Systrom and Mike Krieger worked tirelessly to develop a mobile app that would let people share pictures with friends. Recognising that consumers are increasingly mobile, the two Stanford graduates wanted to design a social network built around photography. Initially, they launched Burbn, which let people post photos and other updates. Burbn only attracted a few hundred users, but they uploaded thousands of photos. So Systrom and Krieger went back to work and released a sleeker version for the iPhone, calling it Instagram. Instagram lets people add quirky effects to their smartphone snapshots and share them with friends on Facebook and Twitter. Instagram became an immediate,

out-of-nowhere Internet success. Early users posted their pictures to Twitter, which then sparked greater interest when people saw links to the photos in their feeds. Today, Instagram has nearly a billion users. ‘It’s the Web fairy tale that all start-ups dream of,’ said Melissa Parrish, an analyst with Forrester Research, who added: ‘They took a simple behaviour – sharing pictures with friends – and made it a utility that people want.’ In September 2012, Facebook bought Instagram for around $750 million in cash and stock. Buying Instagram helps Facebook with one if its most urgent needs – making its service more appealing on smartphones. ‘It’s easier to update Facebook when you’re on the go with a snapshot rather than with text,’ says Rebecca Lieb of the Altimeter Group.

Sources: Jenna Wortham. (9 April 2012). Facebook to Buy Photo-Sharing Service Instagram for $1 Billion. The New York Times, http://bits.blogs.nytimes.com/2012/04/09/facebook-acquires-photo-sharing-serviceinstagram/?pagewanted=print (accessed 17 August 2012); and (6 September 2012). Benny Evangelista. Facebook’s Instagram Purchase Final. The San Francisco Chronicle, http://www.sfgate.com/technology/ article/Facebook-s-Instagram-purchase-final-3845127.php (accessed 8 September 2012).

➜➜ The most common way to become an entrepreneur is to create a new business based on a marketable idea.

➜➜ An entrepreneur may also choose to buy an existing business, shortening the time required to get started.

➜➜ The advantage of building a business from scratch is that the entrepreneur is solely responsible for its success; a potential drawback is the time required to make the business profitable.

➜➜ Franchising is an arrangement by which the owner of a product or service allows others to purchase the right to distribute the product or service with help from the owner. ➜➜ Business incubators help start-up companies by connecting them

with a range of experts and mentors who nurture them, thus increasing their likelihood of success.

remember this

➜➜ The steps in starting an online business include finding a market niche, creating a professional website, choosing a domain name and using social media.

6: The environment of entrepreneurship and small-business management

useful niche, being the primary installer for Foxtel cable services to people’s homes and also of computer broadband services. It also provides technical support for Telstra, Foxtel and other leading suppliers. From humble beginnings, Mark Folly found a niche, developed a strategy and employed principles of looking after his contractors and staff while giving excellent service and high quality work to customers.

Source: iStockphoto/Marco Marchi

Mark Folly, who started his working life as an electrician, now works with a suit on and drives a Mercedes, as he has built a firm that employs over 1600 contractors. From a modest start as an electrician’s apprentice, Folly built his company, BSA, to such an extent that it recently announced annual revenues of $492 million and profits of $5.8 million, doing 120 000 jobs per month. BSA provides internal training courses and a career structure for its electricians and its other staff. BSA has grown into a very

Sources: Braky, T. (8–14 March 2007). BRW, 73. and BSA Annual Report 2012, p. 4; BSA Limited website, http://www.bsa.com.au.

Case study

Entrepreneurship: from ‘sparky’ to CEO

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Stages of growth Entrepreneurial businesses go through distinct stages of growth, with each stage requiring different management skills. The five stages are illustrated in Exhibit 6.9. 1 Start-up and existence. In this stage, the main problems are producing the product or service and

obtaining customers. Key issues facing managers are: can we get enough customers? Will we survive? Do we have enough money? 2 Survival. At this stage, the business has demonstrated that it is a workable business entity. It is

producing a product or service and has sufficient customers. Concerns here have to do with finances: generating sufficient cash flow to run the business and making sure revenues exceed expenses. The organisation will grow in size and profitability during this period. 3 Success. At this point, the company is solidly based and profitable. Systems and procedures are in

place to allow the owner to slow down if desired. The owner can stay involved or consider turning the business over to professional managers. 4 Take-off. Here the key problem is how to grow rapidly and finance that growth. The owner must learn

to delegate, and the business must find sufficient capital to invest in major growth. This is a pivotal period in an entrepreneurial business’s life. Properly managed, it can become a big business. However, another problem for organisations at this stage is how to maintain the advantages of ‘smallness’ as the business grows. 5 Resource maturity. At this stage, the business has made substantial financial gains, but it may start

to lose the advantages of small size, including flexibility and the entrepreneurial spirit. A business in this stage has the staff and financial resources to begin acting like a mature business with detailed planning and control systems.

Concept extension

Case project 6.2

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Exhibit 6.9 Five stages of growth for an entrepreneurial company

5 Resource maturity

Large

4 Takeoff Size of company

Source: Reprinted by permission of Harvard Business Review. Based on ‘The Five Stages of Small Business Growth’ by Neil C. Churchill and Virginia L. Lewis, May–June 1993. Copyright © 1993 by the Harvard Business School Publishing Corporation. All rights reserved.

3 Success

2 Survival 1 Existence Small Young

Mature Age of company

Pl ann in g In the early start-up stage of existence, formal planning tends to be nonexistent except for the business plan described earlier in this chapter. The primary goal is simply to As a new manager considering remain alive. As the organisation grows, formal planning usually is not instituted entrepreneurship, think about whether until around the success stage. Recall from Chapter 1 that planning means defining you want to start a business from scratch, goals and deciding on the tasks and use of resources needed to attain them. buy an existing business or open a franchise. Chapters 7, 8 and 9 describe the ways entrepreneurs can define goals and Evaluate the advantages and disadvantages implement strategies and plans to meet them. It is important that entrepreneurs of each, and talk with other entrepreneurs for advice. Would you benefit from view their original business plan as a living document that evolves as the business joining a business incubator and grows or the market changes. gaining knowledge and expertise One planning concern for today’s small businesses is the need to be web-savvy. from a mentor? For many small companies today, their web operations are just as critical as traditional warehouse management or customer service operations. Entrepreneurs have to plan and allocate resources for Internet operations from the beginning and grow those plans as the company grows.

Take a Moment

O rgan isin g In the first two stages of growth, the organisation’s structure is very informal, with all employees reporting to the owner. At about stage three – success – functional managers often are hired to take over duties performed by the owner. A functional organisation structure will begin to evolve, with managers in charge of finance, manufacturing and marketing. During the later stages of entrepreneurial growth, managers must learn to delegate and decentralise authority. If the business has multiple product lines, the owner may consider creating teams or divisions responsible for each line. The organisation must hire competent managers and have sufficient management talent to handle fast growth and eliminate problems caused by increasing size. The later growth stages also are characterised by greater use of rules, procedures and written job descriptions.

6: The environment of entrepreneurship and small-business management

Some of today’s small organisations are finding creative ways to stay small but still grow. Chapters 10 to 13 discuss organising in detail. Sometimes, entrepreneurial ideas don’t work the first time and are resurrected in a different form. Iridium Co. filed for bankruptcy after Motorola spun off the multi-billion-dollar investment that failed commercially. The idea was to make mobile phones that transmitted and received straight from orbiting satellites, with 66 of these being placed in space above the planet. This was to be the ultimate in global coverage – and indeed that was later the case – but the large phone handsets (initially costing A$3000 each) and the expensive calling costs led to business failure. A business that spent over A$5 billion in innovation and infrastructure was sold for a mere A$25 million to a syndicate Take a led by Melbourne-based Quadrant Communications. The intention was to sell capacity Moment to SingTel-Optus and Telekom Malaysia, who would resell it to corporate clients. The As a new manager in an entrepreneurial company, US Department of Defense is now a major client, having signed a A$72 million per year pay attention to the stages of contract. Iridium provides a classic lesson of innovative new technology that did not have growth, and adapt your planning, a successful business and revenue model. Laden with debt, the business savaged the first organising, leading and set of owners in financial terms, but provided the new owners with a second chance to get controlling activities as the company progresses. pricing and value right in the market.58 Iridium now has revenue of some $383 million, and with only a quite small staff of 211 full-time people, continues to bring specialised services of truly global telecommunications to specialist users such as remote and defence sectors.59

D ecisio n m akin g When managing a growing business, owners face a multitude of decisions that affect the organisation’s performance. These decisions may include determining inventory levels, hiring new employees, choosing a domain name for a website or expanding into a new market. Every decision has the potential to alter the direction and success of the business. Paul Downs, who founded Paul Downs Cabinetmakers in 1986, confronts difficult decisions on a daily basis. With each decision, he considers alternatives, makes choices and then follows up with necessary actions. Sometimes the decisions are easy to make. Others require careful consideration on how to best allocate limited resources. Consider the following examples of decisions that Downs has had to make: ●● Should I buy a used sander that will decrease production time, or use that money to give my staff a 5 per cent bonus? ●● Do I purchase and move into a new building or renew my current lease that comes up next year? ●● What are the risks of outsourcing work to Dubai, where I can hire 10 workers for the price of one US employee? ●● How can I create a learning organisation where workers are improving work processes constantly? ●● Should I upgrade our database and customer files from an ageing server and move everything to cloud computing?60 Several models that can help managers make better decisions will be discussed in Chapter 9.

Le ad in g The driving force in the early stages of development is the leader’s vision. This vision, combined with the leader’s personality, shapes corporate culture. The leader can signal cultural values of service, efficiency, quality or ethics. Often entrepreneurs do not have good people skills, but do have excellent task skills

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in either manufacturing or marketing. By the success stage of growth, the owner must either learn to motivate employees or bring in managers who can. Rapid take-off is not likely to happen without employee cooperation. Leadership also is important because many small firms have a hard time hiring qualified employees. Labour shortages often hurt small firms that grow rapidly. A healthy corporate culture can help attract and retain good people.61 You will learn more about leadership in Chapters 14 to 18.

Co ntro llin g Financial control is important in each stage of the entrepreneurial firm’s growth. In the initial stages, control is exercised by simple accounting records and by personal supervision. By stage three – success – operational budgets are in place, and the owner should start implementing more structured control systems. During the take-off stage, the business will need to make greater use of budgets and standard cost systems, and perhaps acquire computers to provide statistical reports. These control techniques will become more sophisticated during the resource maturity stage. Control is discussed further in Chapters 19 to 21.

➜➜ Small businesses generally proceed through five stages of growth: start-up, survival, success, takeoff and resource maturity.

➜➜ The management activities of planning, organising, decision making, leading and controlling should be tailored to each stage of growth.

remember this

Source: Laura Davey and Maer Snowboarding

Austr alian Laura Mae Davey: Founder and Director of Maer Snowboarding manager pr ofile I graduated from the University of Melbourne in 2010 with a double degree in Commerce and Arts (with majors/honours in Management and Marketing). I thoroughly enjoyed my time at Melbourne Uni. I met a lot of great people, good friends and my partner (who I am still with today!). One of the best things about university for me was the Melbourne Uni Snowboard Team (MUST). I didn’t really get into snowboarding until I joined the team. When I did, I really felt like I was part of something. I competed for MUST, joined the committee, organised trips and met a great bunch of people doing it. To me, snowboarding was an escape, it was addictive, and I just wanted to get better and better. 

6: The environment of entrepreneurship and small-business management

I went on to graduate in 2010. After doing the full search into graduate programs and application after application, I managed to score a job with a business consulting firm based in the city. I thought it was great: I expanded my professional network, worked as a graduate business analyst and certainly gained a lot of experience working on different projects. I then moved to another consulting firm, and started working in project management positions. But something wasn’t quite right. I wasn’t excited about getting up every day. I thought to myself, Surely this isn’t it, is it? Is this what life is meant to be: doing something I’m only half-interested in? Despite being paid a reasonable amount, I wasn’t completely satisfied.  It was the start of 2012 when I decided to begin my own venture. I wanted to create a women’s snowboard brand that produced clothing that celebrated the snowboarding lifestyle. I had my heart set on it! I soon woke up to the reality of things – i.e., the cost of starting a capital-intensive business and not having a strong brand to leverage. I then undertook a business development program in mid-2012. This program gave me a bit of a reality check. After much thought and untangling a mess of ideas, I decided that I simply loved travel and I loved snowboarding. In fact, if someone gave me a million-dollar cheque to spend in one day, that’s what I would go and do: travel and ride. So Maer Snowboarding emerged as a business in the snow travel industry. And we do snow trips. Our trips are different because they consider five key things (which I like to call the ‘Peace’ Framework): 

➜➜ P = the right people (the best trips are those you go on with people who have similar interests to you) 

➜➜ E = an experience (what’s an epic trip without new experiences, right?)

➜➜ A = the adventure (really taking it up a notch and doing something that challenges your limits)

➜➜ C = the culture (going somewhere different, embracing a new culture)

➜➜ E = education. I believe the best trips occur when you are learning new things, about yourself and about others.  Add that altogether and you have epic snow trips; that’s what we do.  The logo of Maer Snowboarding is a bold shape: a magnet, an open heart and a mountain. It symbolises our passion for what we do. 

Since last year, we have run two international trips (to Japan and New Zealand) as well as several trips in Australia to Mount Hotham, Falls Creek and Mount Buller. Each has been a great success, and everyone who has come has had a blast. We also ran two pre-season parties this year, one in Sydney and one in Melbourne. These were a great way to platform the brand and put it out into the community, to give people the space to have a fun time, get amped about the ski season ahead and hopefully sign up on a Maer trip! For these events we partnered with Red Bull, Bacardi, BounceInc, Thredbo ski resort, Hotham ski resort, Coalition Brands and Arnette, which I believe was crucial for attracting the hundred-plus numbers we did.  While I am still certainly learning (as a first-time entrepreneur), and there is so much I want to do, I have enjoyed the ride. But I need to work on doing two key things: first, knowing the numbers (otherwise, you simply won’t be profitable) and understanding your income and expenditure. Second: don’t try and do everything yourself. I believe that is one of the most important skills of a great entrepreneur: being able to identify and leverage the passion and skills of people around you. I have done this with the people around me to create a team of (volunteer) ambassadors who all bring their ideas and personal brands to Maer. They are all fun-loving, young guys and girls who love to ride. We are all the face of the brand. For others starting out? I recommend making sure you tick these crucial boxes if you want to start your own business (thanks to KPI – the key person of influence program, for these). 1 Have a clear PITCH! (Be able to say what you do in literally 10 seconds) 2 PUBLISH (your IP, this is for credibility – whether it’s just a blog, or a book, get your ideas out there to get known). 3 PROFILE, get on social media whether you like it or not, and engage your audience across different platforms.  4 PRODUCTISE your offering (have a core product, don’t try and sell everything under the sun).  5 And finally, get PARTNERSHIPS! Develop strong relationships and partnerships with brands and people bigger and better than you.

Source: Contributed by Laura Mae Davey.

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Intrapreneurship in a growing business

intrapreneurship The process of recognising the need for innovation and promoting it within an organisation.

intrapreneurship

As the entrepreneurial firm grows in size, it has a tendency to lose its innovative spirit with the implementation of formal control systems and bureaucratic procedures. As a result, established firms often lose innovative ideas to entrepreneurial spin-offs by frustrated employees. The way to keep innovation within the organisation is to create conditions in which intrapreneurs can flourish. Intrapreneurship is the process whereby an individual sees the need for innovation and promotes it within an organisation. The goal for managers, who at one time were innovators themselves, is to create a climate that encourages intrapreneurs. Companies such as 3M are known for intrapreneurship. The 3M intrapreneur Art Frey invented the Post-it Note (using a glue invented by Dr Spencer Silver, a chemist at 3M) as the result of personal frustration when his page markers repeatedly fell out of his church hymn book. Even the best ideas need nurturing, support and financing in a large company. The following rules provide an approach for developing the necessary atmosphere:  1 Encourage action.  2 Use informal meetings whenever possible.  3 Tolerate failure and use it as a learning experience.  4 Be persistent in getting an idea to market.  5 Reward innovation for innovation’s sake.  6 Plan the physical layout of the firm to encourage informal communication.  7 Encourage clever bootlegging of ideas.  8 Organise people into small teams for future-oriented projects.  9 Strip away rigid procedures and encourage personnel to go around red tape when they find it. 10 Reward and promote innovative personnel.62

One company that maintains the innovative spirit is Google, which encourages all staff to spend 20 per cent of their time on creative projects. Google provides the structure, incentives and culture that bring intrapreneurs into the company, and once there it supports them to the hilt. In his book Intrapreneuring, Gifford Pinchot argues that intrapreneurial people are needed in organisations, and when spotted, they should be encouraged. Characteristics of intrapreneurs include: willingness to circumvent orders aimed at stopping their dream; willingness to do any job needed to make the project work; willingness to work underground for as long as they can; willingness to be true to their goals; and willingness to remember it is easier to ask for forgiveness than for permission.63 In Australia and the Asia–Pacific region, even global giants such as Coca-Cola are adopting intrapreneurial strategies. Coke adopts a strategy that each country and market is different, and has even found major differences between Australia and New Zealand in consumer tastes and preferences. Even for a well-established company such as Coca-Cola, sales growth is an important ongoing business requirement, and this can best come through intrapreneurship on both a local and a regional basis.64 More recently, Coca-Cola in Australia, run by the local company CCA, has introduced over 80 different types of drinks, including fruit juices, nutritional drinks and many other varieties: it has moved from having a quite small range of mature products to being an entrepreneurial and growing drinks company with a diverse portfolio.

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A key question for entrepreneurs is that in the busy ‘hurly-burly’ of trying to get a new venture or new business up and running, in which there are hundreds of important things to do, how can it possibly be a high priority to engage in sustainable development? Surely in such circumstances, sustainable development is a ‘nice to have’ item, not a ‘must have’, and ought to be pushed to the backburner while the core elements of a new venture or brand-new business become established. The challenge for many small to medium enterprise (SME) owners and managers is just dealing with ‘issues of the day’ and keeping the business running on a continuing basis, with little time to work on such matters as sustainable development. It is true that they often under-invest in considering matters of a longer term or strategic nature, and indeed this is part of the reason why so many small businesses and entrepreneurial ventures fail. By finding time to extract themselves from the daily rush of running the business, solving today’s problems and driving the cash cycle, entrepreneurs and SME managers can spend more time working on the business as well as spending time working in the business. Sustainable development concepts provide a great framework for doing just that. Managers are asked to answer the challenges of being progressive in driving towards higher performance on the triple bottom line. They are asked to consider building longer term win-win relationships with their stakeholders. They are asked to find practices that will allow them to implement their business strategies at higher levels of effectiveness than otherwise. And even in the smallest of businesses, they can take great satisfaction from the outcomes of their achievements in ‘doing well by doing good’. Indeed, there is no reasonable excuse for a business to consider itself too small or too new to engage in sustainable development practices, which is a recipe for the venture or initiative to become unsustainable in the longer term. Once such managers can step back from the day-to-day cycle and see the longer term vision, then sustainability practices make great sense and build robustness into their operations. For example, consider a transport company (one that one of the authors has worked with) and its proactive approach to safety and security in its dangerous goods transport and storage division. If its executives were so short-term-focused that they just worked hard at running today’s operations, then they might well not see the tighter legislation and new safety and security standards coming in to their industry and be caught short of capability, losing their market. However, by being proactive and having a broader vision than just driving today’s productivity, the CEO of this company drove his firm’s safety and security practices ahead of the rest of the industry, which made his firm more attractive to major customers and led him to win new orders at higher prices, which would otherwise have not been possible. Further, he was able to work with regulatory authorities and industry associations to lift the industry standards to a place where safety and security was increased, providing a bottom line improvement to the environment and the community, and also simultaneously providing competitive advantage for his firm, while the rest of the industry tried to catch up, and the laggards in the industry were caught short.

sustainable development

Sustainability and the small or start-up organisation

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small to medium enterprise (SME) Small to medium enterprise has a different meaning in different countries, for example, in Australia it refers to businesses generally having under 200 employees, but in the US, under 500 employees.

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Response to the Management Challenge

Harvey Norman, whose operations were described in the chapter-opening Management challenge, has clearly reached a mature stage in the entrepreneurial cycle. Its main founder, Gerry Harvey, has long resisted the notion of hiring professional managers and board members, and this may leave a hole in the company when he finishes his life’s work there. Harvey Norman should put in place the people and systems that will ensure that the excellent performance that Gerry Harvey has achieved will continue beyond his tenure. It is clearly part of his responsibilities to his shareholders, employees, suppliers and customers to ensure that the company outlives his personal reign, which is often a difficult task for entrepreneurs as successful as Harvey. The risk is that the company will go into decline if such measures are not in place. The balance between

Discussion questions

1  You are interested in being your own boss, and you have the chance to buy a franchise coffee and baked goods store that is for sale in your city. You will need outside investors to help pay the franchise fees and other start-up costs. How will you determine if this is a good entrepreneurial opportunity and make your decision about buying the store?

 2 Over the past 20 years, entrepreneurship has been the fastestgrowing course of study on campuses throughout the world. Do you think it is possible to teach someone to be an entrepreneur? Why or why not?

the entrepreneurial approach that has been so successful for Harvey Norman and the stability that comes from a diversity of views around the board table and from professionally educated managers is difficult to achieve. It should be remembered that for every Gerry Harvey, there are hundreds of entrepreneurs who have not been successful and are never heard from in the corporate world. However, Gerry Harvey is expanding his business empire overseas, and with new ventures, the rewards that come with success are great. Perhaps one of the most important success factors of such sustainably successful entrepreneurs as Gerry Harvey is to focus on core business, an approach sometimes described as ‘sticking to the knitting’!

 6 Many successful entrepreneurs say they did little planning, perhaps scratching notes on a legal pad. How was it possible for them to do well, even so?  7 What personal skills do you need to keep your financial backers feeling confident in your new business? Which skills are most useful when you’re dealing with more informal sources, such as family and friends, versus receiving funds from shareholders, a bank or a venture capital firm? Would these considerations affect your financing strategy?

 3 Why might small business ownership have great appeal to immigrants, women and minorities?

 8 Many people who are successful at the start-up stage of a business are not the right people to carry the venture forward. How do you decide whether you’re better suited to be a serial entrepreneur (start the business and then move on to start another) or can also guide the venture as it grows and matures?

 4 Consider the seven characteristics of entrepreneurs described in the chapter. Which two traits do you think are most like those of managers in large companies? Which two are least like those of managers in large companies?

 9 How does starting an online business differ from starting a small business such as a local auto repair shop or delicatessen? Is it really possible for businesses that operate totally in cyberspace to build close customer relationships? Discuss.

 5 How would you go about deciding whether you wanted to start a business from scratch, buy an existing business or buy into a franchise? What information would you collect and analyse?

10 Describe the benefits of using social media to help a start-up gain traction during the early stages of its life cycle. What are some possible disadvantages of using social media?

Ethical challenge

To grow or not to grow?

Charles Campbell is the founder of Expeditions Unlimited, a specialty travel service that researches and arranges trips to unlikely places. He is famous for his unconventional approach to business, in everything from his trademark blue jeans and baseball caps as working attire to his personal relationships with all clients. He is the type of entrepreneur who

makes deep commitments to his employees, with generous educational allowances, family leave and profit sharing for all of his staff. The office atmosphere is casual but professional. People dress any way they choose and music plays continually, but everyone works long hours and customer satisfaction is the ultimate goal. For example, a 24-hour answering service relays messages to agents at home if their clients have emergencies during a booked trip.

6: The environment of entrepreneurship and small-business management

Campbell previously consented to acquiring a computer system when his agents insisted it would help them in their jobs, but he does not use it. He pays two receptionists to work full-time, rather than have an automated phone system with voice mail. He believes his clients should be able to talk to a person whenever they call. The company has grown steadily, and he knows that at least two of his senior employees are ready to start branches on their own. They want his consent and his supervision, but Campbell is not sure he wants or can handle such a radical expansion. He knows he will need to compromise his level of contact with clients and embrace the new technology to make it work, and he is not sure that he will still enjoy his job after the transition. He also worries that the unique nature of this highly personal business may change with the growth. Campbell says employee satisfaction and growth are important. Does his commitment to employee development demand he expose his business and his personal job satisfaction to the risk of new business arrangements?

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W h at d o yo u d o ? 1 Refuse to expand your business. Stay within your comfort zone, but give your blessings to the senior employees who want to quit and start their own travel service in other cities. 2 Expand the business in its present location: delegate the bulk of the company and expedition management to the senior agents, with the rest doing the research and arrangements. Step back into a supervisory and client contact position only. Agents receive more responsibility, and you stay in control. 3 Train the senior agents to open branches under your corporate identity, trusting that your long association will ensure that they run the branches with the corporate values you instilled. Then let go and give them only as much supervision as you can comfortably afford to give.

W h at c o u n t s ?

Gr oup challenge

Step 1. Listed below are several qualities that experts suggest are required to be a successful entrepreneur. Rank the items from 1–8 in order of what you personally think is most important to least important for successfully starting a business.

7. ___ Be comfortable making decisions on the fly without good data.

1. ___ Be motivated to the point of sacrificing your finances and lifestyle for several years.

Step 2. In groups of three to five students, each person shares his or her individual ranking and reasoning.

2. ___ Enjoy all aspects of running a business, from accountant to receptionist.

Step 3. Discuss rankings as a group and arrive at a single ranking for the group as a whole.

3. ___ Have support from a mentor, business partner or significant other who can supply a sympathetic ear or expertise you don’t have.

Step 4. Discuss the following questions in the group: What accounted for the differences in rankings by group members? Would the ranking differ depending on the type of business to be started? Does the ranking vary by gender? What would motivate you to start a business? Which quality on the above list would be your strongest?

4. ___ Be personally persuasive and well-spoken. 5. ___ Have an idea or concept you are absolutely passionate about. 6. ___ Be a self-starter who can’t wait to make things happen.

8. ___ Possess a track record of successful implementation of your own ideas.

Source: Based on Kelly K. Spors. (23 February 2009). So, You Want to Be an Entrepreneur. The Wall Street Journal; and (23 January 2010). So You Want to Be an Entrepreneur. The Star-Phoenix.

E m m a’ s Pa r l o u r

Case for cr itical analysis

Emma Lathbury’s shoulders sagged as she flipped the cardboard sign hanging in the window of her tearoom’s front door from ‘Open’ to ‘Closed’. The normally indefatigable 52-year-old owner of Emma’s Parlour was bone-tired. Any doubts she’d harboured about the wisdom of seriously

and the answer to her dilemma came to her with a startling clarity. She’d get the financing, buy the house and open up a cosy Victorian tearoom. Emma was certain she could make it work.

considering some major changes in her business were fast disappearing. She hadn’t felt this weary since she’d left nursing in the late 1990s. After years of working as an intensive care nurse – with its gruelling hours, emotionally draining work and lack of both respect and autonomy – she’d developed a bad case of burnout. At the time, she was convinced she could walk away from a secure, if difficult, profession and figure out a way of making a living that suited her high-energy, outgoing personality. Then, one day, she noticed an 1870s-vintage Gothic Revival cottage for sale in the small Western Australian farming community near where she’d grown up,

And she had. Her success was due in part to her unintentionally perfect timing. Specialty teas had taken off, with no end in sight to the current double-digit annual growth rate. But of course the solid performance of Emma’s Parlour owed a good deal to its owner’s hard work and all those 60- and 70-hour weeks she’d put in, which was more fun when she worked for herself. She’d personally chosen the precise shades of purple and plum for the cottage’s exterior, hung the lace curtains, selected the fresh flowers that graced the small circular tables, hired the staff and tracked down and tested recipes for the finger

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sandwiches, scones, jams and lamingtons that earned her glowing reviews in numerous guidebooks and a national reputation. Quickly realising that special events were key to attracting customers, she organised and publicised fanciful gatherings that drew everyone from children toting their favourite stuffed animals to an Alice in Wonderland affair to women dressed in their best outfits, complete with big floppy hats, to an Australian outback version of a royal garden party. The tearoom, which now employed about 20 people, was nearly always completely booked. Most of all, the former nurse developed a real expertise when it came to teas, becoming particularly fascinated by the medicinal benefits of herbal teas. She started by conducting evening workshops on the efficacy of organic teas in treating everything from a simple upset stomach to menopausal distress. Eventually, she began blending her own Emma’s Parlour Organic Teas and selling them to retail stores, restaurants and individuals over the Internet. As more and more publicity pointed to the benefits of tea, her web-based business flourished, generating slightly less revenue than she was realising from the tearoom. The profit margins were higher. Despite the fulfilment she found in running her own business, it was getting too big for her to handle. Emma was beginning to experience the all-too-familiar symptoms of burnout. After she locked the front door, she

made herself a soothing cup of rosebud tea, kicked off her sensible shoes and sat down to review her options. Maybe she could drop the tearoom and focus on the Internet business, or vice versa. She could try to master the fine art of delegation and turn Emma’s Parlour over to an experienced restaurant manager, or she could take herself out of the picture by selling the tearoom outright. Then again, she could simply close the restaurant or the Internet business. Questions 1 At what business stage is Emma’s Parlour? At what stage is her web-based organic tea business? What synergies exist between the two businesses? How critical do you think those synergies are to the success of each business? 2 How does Emma Lathbury fit the profile of the typical entrepreneur? Which of those traits are likely to continue to serve her well, and which might be counterproductive at this stage of her business? 3 After listing the pros and cons for each of Emma’s options and considering her personality, which course of action would you recommend?

Sources: Based on Alison Stein Wellner. (April 2006). Business Was Booming but the Richardsons Were Seriously Burned Out. Inc., 52–4; Mark Blumenthal. (2004). Total Tea Sales in U.S. Forecast for $10 Billion in 2010. HerbalGram, 61–2; and TeaMap Tearoom Directory, http://www.teamap.com.

On the job video case

U r b a n E s c a p e s : m a n a g i n g s m a l l b u s i n e s s s ta r t- u p s For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

Q uestio n s 1  Are Maia Josebachvili and Bram Levy entrepreneurs, social entrepreneurs or both? Explain.

3 How did the founders of Urban Escapes finance the company’s growth and what options did they have for additional funding?

2  Describe the personality traits of the Urban Escapes founders.

Endnotes

1  Scott Adams. (9–10 April 2011). How to Get a Real Education. The Wall Street Journal, C1. 2  Hodgetts, R. M. and Kuratko, D. F. (1995). Effective Small Business Management, 5th edn, Fort Worth: The Dryden Press. 3  ITC Ltd Report and Accounts 2013, p. 61, http://www.itcportal. com/about-itc/shareholder-value/annual-reports/itc-annual-report-2013/ pdf/report-accounts-2013.pdf (accessed 20 August 2013) and http://www. itcportal.com/businesses/group-companies/technico.aspx (accessed 20 August 2013) 4 Quinlivan, B. (23 August 2001). Ahead of the Pack, with a High-tech Spud. Business Review Weekly, 60–1. 5 Study conducted by Yankelovich Partners, reported in Mark Henricks. (March 2000). Type-Cast. Entrepreneur, 14–16. 6 Moss, M. R. (May 1998). Fourth Time’s the Charm. Nation’s Business, 85; Tennessean (19 April 1998). Please, Thank You Still Go a Long Way, 2E.

7 John A. Byrne. (9 April 2012). The 12 Greatest Entrepreneurs of Our Time. Fortune, 67–86; (2 November 2010). Asia 200: Infosys Tops India’s Most Admired Companies. The Wall Street Journal Asia Online, http://online.wsj. com/article/SB10001424052702304173704575577683613256368.html (accessed 2 October 2012); and Asia 200 Interactive. The Wall Street Journal Online, http://online.wsj.com/article/SB10001424052702304410504575559 363431123480.html (accessed 2 October 2012). 8 Donna J. Kelley, Slavica Singer and Mike Herrington. (26 July 2012). Global Entrepreneurship Monitor 2011 Executive Report, http://www.gemconsortium. org/docs/2409/gem-2011-global-report (accessed 9 October 2012). 9 Research and statistics reported in (29 May 2001). The Job Factory. Inc., 40–3. 10 Ian Mount. (March 2005). The Return of the Lone Inventor. Fortune Small Business, 18; Magnus Aronsson. (2004). Education Matters – But Does Entrepreneurship Education? An Interview with David Birch. Academy of Management Learning and Education, 3:3, 289–92; Office of Advocacy, U.S. Small Business Administration, http://www.sba.gov/advo/stats/sbfaq.pdf (accessed 19 August 2010).

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11 Global Entrepreneurship Week 2012 Impact Report, p. 7, http://www.unleashingideas.org/impact (accessed 13 August 2013). 12 Doing Business, 2012. Doing Business in a More Transparent World, http://www.doingbusiness.org/rankings (accessed 13 August 2013). 13 Hodgetts, R. M. and Kuratko, D. F. Effective Small Business Management. 14 Case, J. (1995). The Wonderland Economy. Inc. special issue: The State of Small Business, 14–29; Daft, R. L. (1992). Management, 3rd edn, Fort Worth: The Dryden Press. 15 Bureau of Labor Statistics. Jobs for People with Green Thumbs. p. 34, Occupational Outlook Quarterly, Spring 2005, http://www.bls.gov/opub/ ooq/2005/spring/art03.pdf (accessed 12 March 2014). 16 Global Entrepreneurship Monitor website, http://www.gemconsortium.org (accessed 27 February 2014). 17 Department of Industry, Innovation, Science, Research and Tertiary Education. Australian Small Business Key Statistics and Analysis December 2012, http://www.innovation.gov.au/SmallBusiness/KeyFacts/ Documents/AustralianSmallBusinessKeyStatisticsAndAnalysis.pdf (accessed 20 December 2013). 18 Galuskza, P. (1 June 1998). The $44 Million Mom-and-Pop. BusinessWeek, 74, 76; Useem, J. (December 1997). The New Entrepreneurial Elite. Inc., 50–68. 19 John Case. (June 1989). The Origins of Entrepreneurship. Inc., 51–3. 20 This discussion is based in part on Charles R. Kuehl and Peggy A. Lambing. (1994).Small Business: Planning and Management, 3rd ed. (Fort Worth, TX: The Dryden Press). 21 Leigh Buchanan. (March 2012). The Motivation Matrix. Inc., http://www.inc. com/magazine/201203/motivation-matrix.html (accessed 20 August 2012). 22 Quoted in Jessica Bruder. (25 May 2012). A Harvard Professor Analyzes Why Start-Ups Fail. The New York Times, http://boss.blogs.nytimes. com/2012/05/25/a-harvard-professor-analyzes-whystart-ups-fail (accessed 9 August 2012). 23 Byrne. The 12 Greatest Entrepreneurs of Our Time. 24 Reported in Crunching the Numbers: Work-Life Balance. Inc. (July–August 2011): 30. 25 Melissa S. Cardon et al. (2009). The Nature and Experience of Entrepreneurial Passion. Academy of Management Review, 34:3, 511–32. 26 Quote from http://www.evancarmichael.com. 27 Byrne. The 12 Greatest Entrepreneurs of Our Time. 28 David C. McClelland. (1961). The Achieving Society (New York: Van Nostrand). 29 Quote from http://www.evancarmichael.com. 30 Paulette Thomas. (17 March 2003). Entrepreneurs’ Biggest Problems – and How They Solve Them. The Wall Street Journal. 31 M. Tina Dacin, Peter A. Dacin and Paul Tracey. (September–October 2011). Social Entrepreneurship: A Critique and Future Directions. Organization Science, 22:5, 1203–13. 32 Byrne. The 12 Greatest Entrepreneurs of Our Time. 33 Le, V. (12 March 2013). A Mission With Precision: Lathy Giusti’s Ambitious Quest to Cure Multiple Myeloma. Forbes, http://www.forbes.com/sites/ vannale/2013/12/03/a-mission-with-precision-kathy-giustis-ambitious-questto-cure-multiple-myeloma (accessed 12 March 2014); MMRF website, http://www.themmrf.org/about-the-mmrf/leadership/mmrf-founders.html (accessed 12 March 2014). 34 Puttnam, D. (9 February 2004). Hearts Before Pockets. New Statesman. Broadly speaking, social entrepreneurs are what you get when you cross Richard Branson with Mother Teresa, https://eds-a-ebscohost-m.ezp.lib. unimelb.edu.au/eds/pdfviewer/pdfviewer?vid=11&sid=60c83aa3-200446d1-a4fc-8e2648006acc%40sessionmgr4002&hid=4208. 35 Bornstein, D. (2004). How to Change the World: Social Entrepreneurs and the Power of New Ideas (Oxford University Press, New York).

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36 Health News from NPR website, http://www.npr.org/blogs/ health/2013/07/03/198065436/one-mans-quest-to-make-health-careaccessible-and-affordable#commentBlock (accessed 28 November 2013). 37 Dumaine, B. (27 October 2003). Fortune, 148:9, 188–94. 38 Brokaw, L. (1994). How to Start an Inc. 500 Company. Inc. 500, 51–65. 39 Success (August 1998). Scared to Be Great, 88. 40 Reynolds, P. (February 1995). The Truth about Start-ups. Inc., 23. 41 Brown, C. M. (April 1996). The Do’s and Don’ts of Writing a Winning Business Plan. Black Enterprise, 114–16; Elkins, L. (June 1996). Tips for Preparing a Business Plan. Nation’s Business, 60R–61R; Hodgetts, R. M. and Kuratko, D. F., Effective Small Business Management. 42 Duncan MacVicar. (October 1999). Ten Steps to a High-Tech Startup. The Industrial Physicist, 27–31. 43 Venture Capitalists’ Criteria. Management Review (November 1985): 7–8. 44 Where the Venture Money Is Going. Business 2.0 (January–February 2004): 98. 45 Emily Glazer. (12 April 2012). A David and Gillette Story. The Wall Street Journal, http://online.wsj.com/article/SB1000142405270230362400457733 8103789934144.html (accessed 14 August 2012). 46 Jenna Wortham. (29 April 2012). Start-ups Look to the Crowd. The New York Times, http://www.nytimes.com/2012/04/30/technology/kickstarter-setsoff-financingrush-for-a-watch-not-yet-made.html?pagewanted=all (accessed 14 August 2012). 47 Maynard, R. (October 1996). Choosing a Franchise. Nation’s Business, 56–63. 48 Darren Dahl. (February 2005). Getting Started: Percolating Profits. Inc., 38. See also http://ticoscoffee.com/about-us. 49 Statistics from the National Business Incubation Association, http://www. nbia.org/resource_library/faq/index.php#3 (accessed 31 July 2010). 50 Amy Oringel. (May 2001). Sowing Success. Working Woman, 72. 51 Laura Novak. (23 June 2007). For Women, a Recipe to Create a Successful Business. The New York Times, http://www.nytimes.com/2007/06/23/ business/smallbusiness/23cocina.html?_r=1&sq=Laura%20Novak,%20 â€oeFor%20Women,%20a%20Recipe%20to%20Create%20a%20 Successful%20Business&st=cse&adxnnl=1&oref=slogin&scp=1&adxnn lx=1225894278-APkyZ4 kswGDrm3QtejIg6A (accessed 23 June 2007). 52 Chuck Salter. (September 2007). Girl Power. Fast Company, 104. 53 Aaron Pressman. (25 June 2007). The Domains of the Day. Business-Week, 74. 54 Jason R. Rich. (2006). Unofficial Guide to Starting a Business Online, 2nd ed. (New York: Wiley Publishing), p. 116. 55 Ellen Reid Smith. (2000). e-loyalty: How to Keep Customers Coming Back to Your Website (New York: HarperBusiness), p. 19. 56 Ibid, p. 127. 57 Dennis Nishi. (14 November 2011). Click ‘Like’ if This Tactic Makes Sense at Start-Ups. The Wall Street Journal, R6. 58 Robertson, D. (29 November 2001). Total Recall. Far Eastern Economic Review. 59 Iridium Communications Inc. 2012 Annual Report, pp. 59, 19 (accessed 10 September 2013), http://files.shareholder.com/downloads/ABEA3ERWFI/2676907561x0x650466/EE9EBCEA-080C-40B8-8CB92B9749E591D5/499202_012.pdf. 60 Paul Downs. (11 March 2011). My Business Problems This Week. The New York Times, http://boss.blogs.nytimes.com/2011/03/11/my-businessproblems-thisweek (accessed 20 August 2012). 61 Klimas, M. (May 1995). How to Recruit a Smart Team. Nation’s Business, 26–7; Gupta, D. and Tannenbaum, J. A. (22 May 1989). Labor Shortages Force Changes at Small Firms. The Wall Street Journal, B1, B2; Harnessing Employee Productivity. (November 1987). Small Business Report, 46–9. 62 Hodgetts, R. M. and Kuratko, D. F. Effective Small Business Management. 63 Pinchot III, G. (1985). Intrapreneuring. New York: Harper & Row. 64 James, D. (20 September 2001). Strategy: Local Coke. Business Review Weekly, 70–4.

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Part 2 Continuing case

G e n e r a l M o t o r s Pa r t Tw o : T h e e n v i r o n m e n t o f m a n a g e m e n t The Volt: GM’s and Holden’s Ultimate Green Machine?

Imagine that you are one of a few million Australians whose commute to university or work is a less-than-70-kilometre round trip. Each morning, you hop into a sleek little car and drive off to your destination. At night, you park safely in the garage and plug your vehicle into a standard household electric socket for bedtime. After repeating this pattern for months, you never use a drop of petrol or directly emit a gram of harmful greenhouse gas emissions. Moreover, charging your vehicle costs you about two dollars each day and consumes less energy annually than the refrigerator you use at home. If you were one of the excited consumers lining up to purchase the Holden Volt, this scenario was not fantasy – it was your future, and the future that General Motors Holden envisions. In a move to reinvent the car for the needs of the twenty-first century, GM unveiled its first electric car during the company’s historic 2008 centennial celebration in the USA. The Volt, with its emissions-free driving, promised to become the ultimate green machine for eco-minded consumers everywhere. While the cost of operating the aerodynamic electric compact is roughly equivalent to the price of a daily cup of coffee, the driving experience is priceless. The electric drive unit delivers solid horsepower, 0-to-80 kph acceleration in nine seconds and top speeds of 160 kph. Drivers who make longer trips than the battery’s 80-kilometre range get an automatic recharge from Volt’s petrol-powered generator. And although it runs on batteries, the Volt is no golf cart. The environmentally friendly four-door vehicle features a sporty-yet-sophisticated stance, aerodynamic design, closed front grille and more. The futuristic cockpit takes cues from the latest in design trends – the metallic-white centre control console could pass for a next-generation iPod. How did GM go from being the world’s largest manufacturer of petrol-guzzling Commodores and other big cars to an electric-car company? The dramatic shift was related to multiple threats in the organisation’s external environment. First, oil: wildly fluctuating oil prices caused drivers to moderate driving habits and substantially switch from family sedans to either smaller cars or SUVs, particularly those with diesel engines. In Australia, the biggest-selling car in 2013 was the Mazda 3, with the larger Holden Commodore and Ford Falcon dropping significantly from their previous dominant market leadership positions.

Next, there’s the philosophy of sustainability: Many leaders in business and government see environmental ‘clean’ technology as a way of striking a balance between the economic development needs of today as well as those of future generations. Another pressure comes from lobbyists: Powerful voices sounding the alarm on impending global catastrophe have demanded that manufacturers put the brakes on industry to save the planet. Finally, there’s the competition: ‘Green’ is an important buzzword in business today, and vehicles like the Toyota Prius and the Tesla Roadster that leave a small carbon footprint are putting pressure on GM/ Holden to get out in front. Whatever the economic, political and social forces driving big changes at GM, leadership was determined to create a new culture of innovation and change. Whether it’s the emissions-free promise of the Volt, or other new vehicles that are low or free of emissions, the presence of exciting alternative-fuel vehicles sends a message to stakeholders that the car is still going to be an important part of society despite the pressures of global warming. A major further factor driving change was that GM went through a cathartic change itself: having gone essentially bankrupt in the global financial crisis of 2008–10, Holden’s US parent company was shaken to its core, and in such circumstances was finally able to make large-scale changes, from its lineup of vehicles to its management structure and global strategies. And the Volt was slated to be an important part of its future. Questions 1 What management strategies would be most effective in helping GM/Holden adapt to uncertainty and change in its external environment? 2 What obstacles does GM/Holden face as it attempts to bring its corporate culture into alignment with the needs and challenges of the twenty-first century? 3 As GM/Holden continues its attempts to demonstrate good corporate citizenship, what complex issues and obstacles may frustrate its efforts? 4 With the Volt initially priced at around $60 000 in Australia – a figure well above the price of standard cars of similar size – will it succeed in attracting many buyers based on its features and benefits?

Sources: Peter Fairley. (15 January 2008). The New CAFE Standards – Fuel Standards Will Likely Be Achievable But Won’t Encourage Innovation. TechnologyReview, http://www. technologyreview.com/energy/20067 (accessed 11 October 2008); Anita Lienert. (16 September 2008). Aerodynamic Chevrolet Volt Electrifies GM’s 100th-Anniversary Celebration. Inside Line, http://www.edmunds.com/95840_05_ch05_p128-157.indd 1561/13/0912:38:14PMinsideline (accessed 11 October 2008); Robert Snell. (17 September 2008). GM Enters Its Second Century by Finally Taking Wraps off Volt. The Detroit News, http://www.detnews.com (accessed 11 October 2008); U.S. Department of Transportation. Distribution of Licensed Drivers – 2006. Federal Highway Administration, Highway Statistics 2006 Table DL-20, http://www.fhwa.dot.gov/policy/ohim/hs06/htm/dl20.htm; David Welch. (17 September 2008). GM Charges Up the Electric Chevy Volt – GM Introduces the Chevy Volt, a Sleek Electric Car Capable of 40 mpg on a Single Charge. BusinessWeek, http://www.businessweek.com/ lifestyle/content/sep2008/bw20080916_356100.htm (accessed 11 October 2008).

Chapter 7

Organisational planning and goal setting

Chapter 8 Strategy formulation and implementation Chapter 9 Managerial decision making

Par t thr ee Par t Thr ee Pp l a n n i n g

As is emphasised throughout this textbook, sporting teams

are just like organisations in business or government. Both have specific goals that are best accomplished when things are well-planned. Both have a need for coordination of tasks and activities; for example, a good bowler in cricket ‘bowls to the field’, in the sense that he or she knows each batter’s weaknesses, and can coordinate field positions in order to exploit those weaknesses for the team’s advantage. Similarly, in business, it is vital that marketing, production, human resources and financial functions are acting in a coordinated manner. Good planning and decision making are essential in sporting contests: it is crucial to have a game plan of strategies based on an analysis of the rules of the game and the opposing players’ strengths and weaknesses. Imagine the planning and strategising that went into Australian Adam Scott’s historic victory at the 2013 US Masters golf tournament. Even average tennis players who play suburban club or junior tennis can improve their prospects significantly

if they play to their own strengths while sizing up their opponents in order to exploit the weaknesses of the latter. A plan provides a guide for the snap decisions that a tennis player is always making during a match. Without a game plan, a lot of random actions would occur, and those players would be far less effective than players who have a focused plan and strategy. Managing an organisation is like sport, in that planning certainly helps but does not guarantee success. Part 3 discusses goal setting, planning, strategy formulation and implementation, and the importance of good managerial decision making. This chapter discusses the process of planning. Chapter 8 looks at strategic planning in depth, and examines a number of strategic options managers can use in a competitive environment. In Chapter 9, we look at management decision making. Correct decision-making techniques are crucial to selecting the organisation’s goals, plans and strategic options.

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Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Define goals and plans, and explain the relationship between them. 2 Explain the concept of organisational mission and the way it influences goal setting and planning. 3 Describe the types of goals an organisation should have and why they resemble a hierarchy. 4 Define the characteristics of effective goals. 5 Describe the four essential steps in the process of management by objectives (MBO).

6 Explain the difference between single-use plans and standing plans.

7 Discuss the benefits and limitations of planning. 8 Describe and explain the importance of contingency planning, scenario building and crisis planning for today’s managers. 9 Identify innovative planning approaches that managers use in a fast-changing environment.

Chapter 7

Organisational planning and goal setting

Chapter outline ➜ Goals, plans and performance

Messages and values contained in goals and plans ➜ Goals in organisations Organisational mission Planning a digital strategy Goals and plans Aligning goals with strategy maps Aligned hierarchy of goals ➜ Criteria for effective goals Management by objectives Single-use and standing plans ➜ Benefits and limitations of planning

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➜ Planning in a turbulent environment ➜

➜ ➜

➜

Contingency plans Scenario planning Crisis planning Prevention Preparation Containment Planning time horizons The new planning approach Traditional approaches to planning Modern approaches to planning Innovative approaches to planning Sustainable development and goal setting

New Manager Self-test Do e s g o a l s e t t i n g f i t y o u r m a n a g e m e n t s t y l e ? Are you a good planner? Do you set goals and identify ways to accomplish them? This questionnaire will help you understand how your work habits fit with making plans and setting goals. Answer the following questions as they apply to your work or study habits. Please indicate whether each item is Mostly true or Mostly false for you. Mostly True

Mostly False

1 I have clear, specific goals in several areas. 2 I have a definite outcome in life that I want to achieve. 3 I prefer general to specific goals. 4 I work better without specific deadlines. 5 I set aside time each day or week to plan my work. 6 I am clear about the measures that indicate when I have achieved a goal. 7 I work better when I set more challenging goals for myself. 8 I help other people clarify and define their goals. Scoring and interpretation: Give yourself one point for each item you marked as Mostly true except items 3 and 4. For items 3 and 4 give yourself one point for each one you marked Mostly false. A score of 5 or higher suggests a positive level of goal-setting behaviour and good preparation for a new manager role in an organisation. If you scored 4 or less you might want to evaluate and begin to change your goal-setting behaviour. An important part of a new manager’s job is setting goals, measuring results and reviewing progress for the department and subordinates. These questions indicate the extent to which you have already adopted the disciplined use of goals in your life and work. But if you scored low, don’t despair. Goal setting can be learned. Most organisations have goal setting and review systems that new managers use. Not everyone thrives under a disciplined goal-setting system, but as a new manager, setting goals and assessing results are tools that will enhance your impact. Research indicates that setting clear, specific, and challenging goals in key areas will produce better performance.

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Management Challenge

When Don Argus finished as CEO of the National Australia Bank (NAB), after its most successful decade ever, he accepted an invitation to join the Board of Directors of BHP, which has been a long-standing steel making company in Australia. BHP has been through some significant turmoil in recent years, and indeed it was becoming very difficult to be competitive and profitable in this industry in Australia, due to the high cost base and small domestic market relative to global conditions. Before and during the appointment of new CEO Marius Kloppers, a plan was hatched to transform BHP from a steel company with patchy performance into a resources company, based on forecasts of the upcoming growth in demand for materials such as iron ore, coal and gas-based energy from Asian growth markets, principally China. Growth was planned and executed via both ‘organic’ means and through mergers and acquisitions. A major success was the merger with Billiton corporation, making the newly merged BHP Billiton the world’s biggest resources company, which created significant wealth for shareholders and led the mining boom from an Australian perspective. Further significant plans were developed including two major initiatives of acquiring the second-biggest

mining company in the world, Rio Tinto, and building the world’s biggest mining operation in South Australia, known as Olympic Dam. However these well-laid plans did not come to fruition, due to circumstances beyond BHP Billiton’s control. Geo-political and market forces led to the Rio Tinto acquisition being blocked and changes in prices and tax regimes caused the Olympic Dam investment to be shelved. BHP Billiton looked elsewhere for its next steps in continuing to grow its shareholder wealth creation path. This highly scrutinised company needed to plan some new initiatives to satisfy its shareholders who were used to and expecting continued double-digit shareholder value creation. Question How should Mr Argus and Mr Kloppers (and their successors Chairman Jacques Nasser and CEO Andrew Mackenzie) go about planning and executing further profitable growth initiatives? Should they stick to mining or diversify, and if so, where and into what? What geographical footprint should they pursue? How confident should they be that prices and demand for commodities such as iron ore and coal will remain at ‘high profit’ levels?

One of the primary responsibilities of managers is to decide where the organisation should go in the future and how to get it there. Without clear goals and plans, employees cannot perform to their potential and the organisation flounders. Lack of planning or poor planning can seriously hurt an organisation. For example, the nuclear accident at the Fukushima Daiichi nuclear power plant after the earthquake and tsunami in Japan in 2011 has been blamed partly on poor planning. Kiyoshi Kurokawa, the chairman of the Fukushima Nuclear Accident Independent Investigation Commission, said: ‘It was a profoundly manmade disaster – that could and should have been foreseen and prevented. And its effect could have been mitigated by a more effective human response.’1 Managers cannot see the future, nor can they prevent natural disasters such as earthquakes, but proper planning can enable them to respond swiftly and effectively to such unexpected events. At Fukushima, near-chaos reigned as communications broke down, the chain of command was confused, and no one seemed to know what to do to maintain safety or to follow up once the accident had occurred. In some organisations, typically small ones, planning is informal. In others, managers follow a welldefined planning framework. The organisation establishes a basic mission and develops formal goals and strategic plans for carrying it out. Shell, IBM, ANZ Bank and Mazda undertake a strategic planning exercise each year – reviewing their missions, goals and plans to meet environmental changes or the expectations of important stakeholders such as the community, owners or shareholders. Many of these companies also develop contingency plans or scenarios for unexpected circumstances and disaster recovery plans for what the organisation would do in the event of a major disaster such as a hurricane, earthquake or terrorist attack. Setting in place sound goals and plans for achieving them is fundamental to good management, at all levels of all organisations.

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Of the four management functions – planning, organising, leading and controlling – described in Chapter 1, planning is considered the most fundamental. Everything else stems from planning. Yet planning is also the most controversial management function. Planning cannot predict an uncertain future. Planning cannot tame a turbulent environment. A statement by former US Secretary of State Colin Powell offers a warning for managers: ‘No battle plan survives contact with the enemy.’ Consider the following comment by a noted authority on planning: Most corporate planning is like a ritual rain dance; it has no effect on the weather that follows, but it makes those who engage in it feel that they are in control. Most discussions of the role of models in planning are directed at improving the dancing, not the weather.2

In this chapter, we explore the process of planning and whether it can help bring needed ‘rain’. Special attention is given to goals and goal setting, for that is where planning starts. Then we discuss the types of plans organisations can use to achieve those goals. Finally, we discuss new approaches to planning that emphasise the involvement of all employees in strategic thinking and execution. Consider the changes brought into play by Renault when it bought 70 per cent of the bankrupt Korean company Samsung Motors. An enormous amount of planning and analysis went into the decision to commit US$140 million to the purchase (with an additional US$420 million due over 10 years, conditional on profits being achieved). Further, a very detailed plan was formulated, setting out the way the business could be revitalised from being a loss-maker to being viable and competitive. These plans, which were formulated in 2001, called for a profit to be earned in 2004 – such was the level of effort and time needed for achieving such a turnaround. The plan involved new product designs, cost reductions, exporting to new markets and bringing the Renault management disciplines into a Korean culture and workplace. This was an enormously complex and challenging task, and French executive Jerome Stoll, whom Renault installed in Korea to turn this business around, worked on all these fronts, with the culture change the most demanding of the challenges. The Renault plan was to produce a great car company within 10 years, and Stoll knew that he had to be flexible and regularly rework the plan as circumstances changed around him.3 By 2011, the company’s 7000 employees had doubled production to 250 000 vehicles per year and were successfully exporting them, and Renault had increased its ownership share to 80.1 per cent. The company had achieved a position in South Korea, a very competitive market, as the quality leader for nine consecutive years.4 In 2012, Renault (now Renault Samsung Motors) sold a record 1 279 598 vehicles outside of Europe, making more than half of its sales external to Europe for the first time in its history.5

Goals, plans and performance A goal is a desired future circumstance or condition that the organisation attempts to realise.6 Goals are important because organisations exist for a purpose, and goals define and state that purpose. A plan is a blueprint for goal achievement and specifies the necessary resource allocations, schedules, tasks and other actions. Goals specify future ends; plans specify today’s means. The concept of planning usually incorporates both ideas; it means determining the organisation’s goals and defining the means for achieving them.7

goal A desired future state that the organisation attempts to realise. plan A blueprint specifying the resource allocations, schedules and other actions necessary for attaining goals. planning The management function concerned with defining goals for future organisational performance and deciding on the tasks and resource use needed to attain them.

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Exhibit 7.1 Levels of goals or plans and their importance

Mission statement

External message Legitimacy for investors, customers, suppliers, community

Strategic goals/plans Senior management (Organisation as a whole)

Tactical goals/plans Middle management (Major divisions, functions)

Internal message Legitimacy, motivation, guides, rationale, standards

Operational goals/plans Lower management (Departments, individuals)

Exhibit 7.1 illustrates the levels of goals and plans in an organisation. The planning process starts with a formal mission that defines the basic purpose of the organisation, especially for external audiences. The mission is the basis for the strategic (organisation) level of goals and plans, which in turn shapes the tactical (divisional) level and the operational (departmental) level.8 Planning at each level supports the other levels. Top managers are typically responsible for establishing strategic goals and plans Take a that reflect a commitment to both organisational efficiency and effectiveness, as described in Moment Chapter 1. Tactical goals and plans are the responsibility of middle managers, such as the If you haven’t done so already, complete the Selfheads of major divisions or functional units. A division manager will formulate tactical plans test at the beginning of this that focus on the major actions the division must take to fulfil its part in the strategic plan set chapter to learn about your by top management. Operational plans identify the specific procedures or processes needed personal goal-setting at lower levels of the organisation, such as individual departments and employees. Front-line behaviour before you read on. managers and supervisors develop operational plans that focus on specific tasks and processes and that help to meet tactical and strategic goals. Planning at each level supports the other levels.

M essages an d valu es co ntain ed in goals an d pl ans In addition to improving financial and operational performance, developing explicit goals and plans at each level illustrated in Exhibit 7.1 is important because of the external and internal messages they send. These messages go to both external and internal audiences, and provide important benefits for the organisation.9

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Le g itimacy An organisation’s mission describes what the organisation stands for and its reason for existence. To external audiences such as investors, customers and suppliers, it symbolises legitimacy. The mission helps them, and the local community, to look on the organisation in a favourable light and thus accept its existence. A strong mission also has an impact on employees, enabling them to become committed to the organisation because they can identify with its general purpose and reason for existence.

Sou rce of mot i vat i on and com m itm en t Goals and plans facilitate employees’ identification with the organisation and help to motivate them by reducing uncertainty and clarifying what they should accomplish. Lack of a clear goal can damage employee motivation and commitment. Whereas a goal provides the ‘why’ of an organisation or subunit’s existence, a plan tells the ‘how’. A plan lets employees know what actions to undertake to achieve the goal.

Re sou rce allocat i on Goals help managers decide where they need to allocate resources, such as employees, money, and equipment. When the University of Melbourne’s Vice-Chancellor, Glyn Davis, decided in 2006 to institute a completely new set of degrees to be implemented as of 2008, the implementation plan that followed required a series of changes to the way that resources were allocated across the parts of that university.

Gu ide s t o act i on Goals and plans provide a sense of direction. They focus attention on specific targets and direct employees’ efforts towards important outcomes.

Rationale for deci si ons Through goal setting and planning, managers learn what the organisation is trying to accomplish. They can make decisions to ensure that internal policies, roles, performance, structure, products and expenditures will be made in accordance with desired outcomes. Decisions throughout the organisation will be in alignment with the plan.

Stan d ar d of p er for manc e Because goals define desired outcomes for the organisation, they also serve as performance criteria. They provide a standard of assessment. If an organisation wishes to grow by 15 per cent, and actual growth is 17 per cent, managers will have exceeded their prescribed standard. The overall planning process prevents managers from thinking merely in terms of day-to-day activities. When organisations drift away from goals and plans, they typically get into trouble.

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Austr alian manager pr ofile

Maureen and Tony Wheeler, co-founders, Lonely Planet Publications

After arriving in Sydney with 27 cents and a passion for travel, Maureen and Tony Wheeler started Lonely Planet Publications in 1973 in a basement flat. Since then, Lonely Planet has become a powerful brand right across the world, having printed over 100 million books in nine languages. The company’s website, www.lonelyplanet.com, has become a gathering point for global travellers, and the business is now a mature success story. From its humble origins, Lonely Planet became the acknowledged leader in travel publications. In publishing, you pay for everything upfront – shipping, printing and research. There is a wait of months for a return on investment. The Wheelers’ operation grew from a do-ityourself business to a global enterprise, with at one point over 450 staff working around the world and 200 authors contributing. Lonely Planet products have expanded to include phrasebooks, travel maps, pictorials, travel literature and reference books. The website receives millions of visitors per month and its active Thorn Tree forum receives 100 000 new posts each month. The books are now sold in many languages including French, Italian, Spanish, German, Chinese, Korean and Japanese. In reflecting on the company’s early life, Tony Wheeler says: ‘When Maureen and I put together Across Asia on the Cheap – that first amateurishly produced guidebook to kicking around Asia – we had no idea we were starting on the long road to running an amazingly successful business. First of all, we had a very good idea. Of course, we didn’t realise at the time how clever we’d been – so clearly there was a major element of luck in that good idea. Secondly, once we’d had that good idea we ran with it for all we were worth; the 1 per cent inspiration was definitely followed by the 99 per cent perspiration. Then, when our dream began to take wing, we haven’t been afraid to let other people take the controls; in fact we’ve welcomed that because flying isn’t all fun and I’m only too happy to escape from the routine.

Source: Reproduced with permission from Lonely Planet Publications © 2008.

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When they began producing a travel guide, Maureen and Tony Wheeler did not realise that it would bloom and grow into a significant corporate empire from its base in Melbourne (see http://www.lonelyplanet.com). ‘Way back down the evolutionary scale you can forget the little details. Will it fly or is it going to crash is all that matters. I’ve never been afraid to have a go at things; if it was something that I felt was going to work we’d try it. Gut feeling has always been just as important as careful analysis.’ In 1984, Lonely Planet opened its US office. In the late 1980s it opened an office in England serving Africa, Europe, the Middle East and Great Britain. In late 2007, the Wheelers sold a majority interest in the Lonely Planet business to BBC Worldwide, the main commercial arm of the British Broadcasting Corporation (BBC). The company has moved forward and embraced digital media, continuing to lead its industry. In 2011 BBC Worldwide took total control of the company when the Wheelers sold their remaining 25 per cent share for $67 million. Both Maureen and Tony still travel and are concerned with charitable causes. Their Planet Wheeler Foundation, which is funded solely by the two of them, supports educational and health projects in developing countries.

Sources: Lonely Planet website, http://www.lonelyplanet.com (accessed 21 December 2013); Sweney, M. (21 February 2011). BBC to Buy the Rest of Lonely Planet. http://www.theage.com.au/business/bbc-to-buy-the-rest-of-lonely-planet-20110220-1b112.html (accessed 19 March 2014).

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➜➜ Planning is the most fundamental of the four management functions. ➜➜ A goal is a desired future state that the organisation wants to realise.

➜➜ Planning is the act of determining goals and defining the means of achieving them. ➜➜ A plan is a blueprint specifying the resource allocations, schedules and



other actions necessary for attaining goals.

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remember this

➜➜ Developing explicit goals and plans at each level is important because of the external and internal messages they send.

Goals in organisations Goal-setting starts with top managers. The planning process begins with a mission statement and strategic goals for the organisation as a whole.

O rganisati o nal m issi o n At the top of the goal hierarchy is the mission – the organisation’s reason for existence. The mission describes the organisation’s values, aspirations and reason for being. A well-defined mission is the basis for development of all subsequent goals and plans. Without a clear mission, goals and plans may be developed haphazardly and not take the organisation in the direction it needs to go. By one estimate, more than half of all organisations in Australia now have a formal mission statement of some kind. The formal mission statement is a broadly stated definition of basic business scope and operations that distinguishes the organisation from others of a similar type.10 The content of a mission statement often focuses on the market and customers, and identifies desired fields of endeavour. Some mission statements describe organisational characteristics such as corporate values, product quality, location of facilities and attitude towards employees. Mission statements are often short and straightforward, describing basic business activities and purposes as well as the values that guide the organisation. Some companies have developed statements of values, company charters and principles statements, either in addition to or instead of mission statements. These are also attempts to provide guidance to employees and signals of purpose to other stakeholders. BHP Billiton, Virgin Australia and Tata Group examples are shown below: BHP Billiton charter We Are BHP Billiton, A Leading Global Resources Company Our purpose is to create long-term value through the discovery, acquisition, development and marketing of natural resources. Our strategy is to own and operate large, long-life, low cost, expendable, upstream assets diversified by commodity, geography and market. Our Values ●  Sustainability Putting health and safety first, being environmentally responsible and supporting our communities. ●  Integrity Doing what is right and doing what we say we will do ●  Respect Embracing openness, trust, teamwork, diversity and relationships that are mutually beneficial.

mission mission The organisation’s reason for existence. mission statement A broadly stated definition of the organisation’s basic business scope and operations that distinguishes it from similar types of organisations.

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●  Performance Achieving superior business results by stretching our capabilities. ●  Simplicity Focusing our efforts on the things that matter most. ●  Accountability Defining and accepting responsibility and delivering on our commitments We are successful when: ●  Our people start each day with a sense of purpose and end the day with a sense of accomplishment. ●  Our communities, customers and suppliers value their relationships with us. ●  Our asset portfolio is world class and sustainably developed. ●  Our operational discipline and financial strength enables our future growth. ●  Our shareholders receive a superior return on their investment.

Source: BHP Billiton Resourcing the Future; Our Charter, http://www.bhpbilliton.com/home/aboutus/ourcompany/Pages/Charter.aspx

Virgin Australia Culture and Values We believe that there is a market for an airline that provides service and value... one that carries both business and leisure guests. That’s where Virgin Australia comes in. We have embarked on a mission to redefine the airline industry in this country. It isn’t something that can be done by a single person in a single day. It will take the talent and determination of us, as Virgin Australia team members, to make it happen. It is our people who will put the magic back into flying, guided by our values, which define us as team members of this new airline and apply across every aspect of the business. Resourcefulness The ability to adapt and respond to circumstances. Innovation To lead the pack, not follow it. Caring A duty of care for guests, yourself, your colleagues, the environment and the community. Enthusiasm To love what we do. Excellence To always look to provide the best quality experience. Individuality To have respect for the individual. Integrity To act with honesty, openness and do what we say we’ll do.

Source: Virgin Australia: Values Compass, http://www.virginaustralia.com/au/en/about-us/careers/culture-and-values/

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Tata Group Values and Purpose Purpose At the Tata group we are committed to improving the quality of life of the communities we serve. We do this by striving for leadership and global competitiveness in the business sectors in which we operate. Our practice of returning to society what we earn evokes trust among consumers, employees, shareholders and the community. We are committed to protecting this heritage of leadership with trust through the manner in which we conduct our business. Core values Tata has always been values-driven. These values continue to direct the growth and business of Tata companies. The five core Tata values underpinning the way we do business are: ●  I ntegrity: We must conduct our business fairly, with honesty and transparency. Everything we do must stand the test of public scrutiny. ●  U  nderstanding: We must be caring, show respect, compassion and humanity for our colleagues and customers around the world, and always work for the benefit of the communities we serve. ●  E  xcellence: We must constantly strive to achieve the highest possible standards in our day-to-day work and in the quality of the goods and services we provide. ●  U  nity: We must work cohesively with our colleagues across the group and with our customers and partners around the world, building strong relationships based on tolerance, understanding and mutual cooperation. ●  R  esponsibility: We must continue to be responsible, sensitive to the countries, communities and environments in which we work, always ensuring that what comes from the people goes back to the people many times over. Source: Tata Leadership With Trust: Values and Purpose, http://tata.com/aboutus/articles/inside.aspx?artid=CKdRrD5ZDV4

Pl ann in g a d i gital str ategy Planning the future of a business these days usually needs to include a plan for how best to make use of the Internet, corporate websites and social media. For example, consider how professional accounting and consulting firms have used the Internet as part of their business models and communication networks. Ernst & Young places a lot of material on the web, including their mission statement and orientation. KPMG and PricewaterhouseCoopers also give large amounts of detail about their products and services, employee benefits, graduate programs, employment opportunities and more. A well-developed website is now a part of almost every major company’s marketing and operation plan. Corporate websites usually have mission statements available on or very close to the home page to convey direct statements of corporate intent.

Goals an d pl ans Broad statements describing where the organisation wants to be in the future are called strategic goals. They pertain to the organisation as a whole rather than to specific divisions or departments. Strategic goals are often called official goals, because they are the stated intentions of what the organisation wants to achieve. Several management scholars have suggested that business organisations’ goals must encompass more than profits, and that businesses actually suffer when profit and shareholder value become the primary goals. Peter Drucker suggests that organisations focus on eight content areas in developing goals:

strategic goals Broad statements of where the organisation wants to be in the future, they pertain to the organisation as a whole rather than to specific divisions or departments.

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strategic plans The action steps by which an organisation intends to attain its strategic goals.

tactical goals Goals that define the outcomes that major divisions and departments must achieve in order for the organisation to reach its overall goals. tactical plans Plans designed to help execute major strategic plans and to accomplish a specific part of the organisation’s strategy.

operational goals Specific, measurable results expected from departments, work groups and individuals within the organisation. operational plans Plans developed at the organisation’s lower levels that specify action steps towards achieving operational goals and that support tactical planning activities.

market standing, innovation, productivity, physical and financial resources, profitability, managerial performance and development, worker performance and attitude, and public responsibility.11 Strategic plans define the action steps by which the organisation intends to attain strategic goals. The strategic plan is the blueprint that defines the organisational activities and resource allocations – in the form of cash, personnel, space and facilities – required for meeting these targets. Strategic planning tends to be long term, and may define organisational action steps for between two and five years. The purpose of strategic plans is to turn organisational goals into realities within that period. As an example, a small company wanted to improve its market share from 15 to 20 per cent over the next three years. This strategic goal was pursued through the following strategic plans: (1) allocate resources for the development of new, competitive products with high-growth potential; (2) improve production methods to achieve higher output at lower costs; and (3) conduct research to develop alternative uses for current products and services.12 After strategic goals are formulated, the next step is defining tactical goals, which are the results that major divisions and departments within the organisation intend to achieve. These goals apply to middle management and describe what major subunits must do in order for the organisation to achieve its overall goals. Tactical plans are designed to help execute major strategic plans and to accomplish a specific part of the organisation’s strategy.13 Tactical plans typically have a shorter time horizon than strategic plans – the next year or so. The word ‘tactical’ comes from the military; for example, tactical weapon systems are designed to deliver major blows to the enemy. These weapon systems reflect a country’s overall strategic plan. Tactical weapon systems, such as fighter aeroplanes, are used to achieve just one part of the overall strategic plan. Similarly, in business, tactical plans define what the major departments and organisational subunits will do to implement the overall strategic plan. Generally it is the middle manager’s job to take the broad strategic plan and identify specific tactical actions. The specific results expected from departments, work groups and individuals are the operational goals. They are precise and measurable. ‘Process 150 sales applications each week’, ‘achieve 90 per cent of deliveries on time’, ‘reduce overtime by 10 per cent next month’ and ‘develop two new elective subjects in accounting’ are examples of operational goals. Operational plans are developed at the lower levels of the organisation to specify action steps towards achieving operational goals and to support tactical plans. The operational plan is the department manager’s tool for daily and weekly operations. Goals are stated in quantitative terms, and the department plan describes how goals will be achieved. Operational planning specifies plans for supervisors, department managers and individual employees. Schedules are an important component of operational planning. Schedules define precise time frames for the completion of each operational goal required for the organisation’s tactical and strategic goals. Operational planning must also be coordinated with the budget, because resources must be allocated for desired activities. One example of a company that is strong on operational planning is Boeing, an American company that employs around 3000 people in Australia. Some of these make aeroplane components in Melbourne, while others are engaged in very high-tech software developments in Brisbane. The systems analysis laboratory (SAL) in Brisbane conducts high-level, technical ‘systems of systems’ analysis work. SAL conducts military simulations, but it is also capable of many other applications, and is being used increasingly for nonBoeing applications. Boeing must plan and prioritise the way this line of business activity fits with its other mainstream businesses. Boeing is a major company by any standards, with more than 170 000 employees

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and revenues of more than US$81 billion in 2012.14 The SAL operation plans its activities separately from the main aeroplane manufacturing business, but must also fit strategically with the overall company mission and direction. Boeing sees such spin-offs as very positively adding value to its core capabilities.15 Plans need to be flexible and to evolve as learning occurs in a business. Juan Renshaw closed his Sydney café and started his Espressobus business so he could follow peak-hour crowds with his offerings, especially coffee. He moves his bus around Sydney each day, starting at Balmain wharf in the early morning, and moving during the day to various city locations and Fox Studios. Learning as he proceeded, he added pastry lines to his offerings and soon landed a contract to provide his products to the film team shooting the film Mission Impossible 2 at Fox – which meant his plans to visit Balmain wharf each morning had to be dropped. After a A$30 000 investment, he began to turn over A$230 000 per year, leading to A$40 000 in after-tax profit. Juan considered a plan to franchise his business system to others, but that aspect needed to be considered in relation to his prime business – serving more than 200 cups of quality coffee, and a lot of pastry, each day.16 The business went on to serve full breakfasts, and has expanded at a profit into other areas of Sydney.

The or gani sat i onal p lann in g pr oces s The overall planning process, which is illustrated in Exhibit 7.2, prevents managers from thinking merely in terms of day-to-day activities. This logical process takes managers and their organisations, large or small, from idea stage through very practical plan execution stages, and a ‘learning loop’.

Exhibit 7.2 The organisational planning process

1. Develop the plan Define mission, vision Set goals

Source: Based on Robert S. Kaplan and David P. Norton. (January 2008). Mastering the Management System. Harvard Business Review, 63–77.

2. Translate the plan Define tactical plans and objectives Develop strategy map Define contingency plans and scenarios Identify intelligence teams

3. Plan operations Define operational goals and plans Select measures and targets Set stretch goals Crisis planning

5. Monitor and learn Hold planning reviews Hold operational reviews

4. Execute the plan Use:

Management by objectives Performance dashboards Single use plans Decentralised responsibility

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management in pr actice

Who sets the goals? Manager versus coalition

Organisations perform many activities and pursue many goals simultaneously to accomplish an overall mission. But who decides what mission and goals to strive for? Pursuing some goals means that others have to be delayed or set aside, which means managers often disagree about priorities. After China’s Zhejiang Geely Holding Group bought Volvo Car Corporation, for example, the Chinese and European managers disagreed strongly. The European managers wanted to continue pursuing goals of providing safe, reliable, family-friendly vehicles for a stable market. The new Chinese owners and managers, on the other hand, wanted to expand aggressively into the super-luxury car market. The goals of the two sides were mutually exclusive, so managers had to negotiate and come to some agreement on which direction the company would take. Powerful, motivating goals that unite people are typically established not by a single manager, but by developing a coalition. Coalitional management involves building an alliance of people who support a manager’s goals and can influence other people to accept and work towards them. Being an effective coalitional manager involves three key steps:

➜➜ Talk to customers and other managers. Building a coalition requires talking to many people both inside and outside the organisation. Coalitional managers solicit the views of employees and key customers. They talk to other managers all across the organisation to get a sense of what people care about and learn what challenges and opportunities they face. A manager can learn who believes in and supports a particular direction and goals, and who is opposed to them and the reasons for the opposition.

➜➜ Address conflicts. Good managers don’t let conflicts over goals simmer and detract from goal accomplishment or hurt the organisation. At Toyota, for example, the 2010 recall crisis in the USA exposed a long-standing internal conflict between managers who wanted to pursue goals of faster growth and higher profit margins and those who believed that rapid growth would strain the company’s ability to ensure quality and reliability. Each side blamed the other for the recent problems, but it is the failure of managers to unite towards a shared goal that is largely to blame.

➜➜ Break down barriers and promote cross-silo cooperation. A final step is to break down boundaries and get people to cooperate and collaborate across departments, divisions, and levels. When Colin Powell was chairman of the US Joint Chiefs of Staff, he regularly brought together the heads of the Army, Air Force, Navy and Marines so they could understand one another’s viewpoints and come together around key goals. Crossenterprise understanding and cooperation is essential so that the entire organisation will be aligned towards accomplishing desired goals. As a manager, remember that you will accomplish more and be more effective as part of a coalition than as an individual actor. When there are goals that are highly important to you, take steps to build a coalition to support them. Throw your support behind other managers when appropriate. And remember that building positive relationships, discussion and negotiation are key skills for good management.

Sources: Stephen Friedman and James K. Sebenius. (January–February 2009). Organization Transformation: The Quiet Role of Coalitional Leadership. Ivey Business Journal, http://www.iveybusinessjournal.com/topics/leadershiporganizational-transformation-the-quietrole-of-coalitional-leadership (accessed 27 January 2012); Gerald R. Ferris et al. (June 2007). Political Skill in Organizations. Journal of Management, 290–320; Norihiko Shirouzu. (7 June 2011). Chinese Begin Volvo Overhaul. The Wall Street Journal, B1; and Norihiko Shirouzu. (14 April 2010). Inside Toyota, Executives Trade Blame Over Debacle. The Wall Street Journal, A1.

Ali gn in g goals with str ategy m aps Effectively designed organisational goals are aligned; that is, they are consistent and mutually supportive so that the achievement of goals at low levels permits the attainment of high-level goals. Organisational performance is an outcome of how well these interdependent elements are aligned, so that individuals, teams, departments and so forth are working in concert to attain specific goals that ultimately help the organisation achieve high performance and fulfil its mission.17 An increasingly

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popular technique for achieving goal alignment is the strategy map. A strategy map is a visual representation of the key drivers of an organisation’s success and shows how specific goals and plans in each area are linked.18 Exhibit 7.3 shows how a strategy map can be used to align and achieve a sense of hierarchy of plans and goals.

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strategy map A visual representation of the key drivers of an organisation’s success, showing the cause-andeffect relationships among goals and plans.

Accomplish mission; create optimal value

Financial performance goals:

Customer service goals:

Internal business process goals:

Learning and growth goals:

Increase revenues in existing markets

Increase productivity and efficiency

Increase revenues in new markets and products

Build and maintain good customer relationships

Be the leader in quality and reliability

Provide innovative solutions to customer needs

Build good relationships with suppliers and partners

Improve cost, quality and flexibility of operations

Excel at innovative product development and next-generation market opportunities

Promote employee development via ongoing training

Enable continuous learning and knowledge-sharing

Cultivate a culture of innovation and high performance

Ali gn ed hi er archy o f goals Effective organisational goals must align into a hierarchy; that is, the achievement of goals at low levels permits the attainment of high-level goals. This is called a means–ends chain, because low-level goals lead to accomplishment of high-level goals. Operational goals lead to the achievement of tactical goals, which in turn lead to the attainment of strategic goals. Strategic goals are traditionally considered the responsibility of top management, tactical goals that of middle management and operational goals that of first-line supervisors and workers. However, as we discuss later in the chapter, the shrinking of

Exhibit 7.3 A strategy map for aligning goals Source: Based on Robert S. Kaplan and David P. Norton. (January 2008). Mastering the Management System. Harvard Business Review, 63–77; and R. S. Kaplan and D. P. Norton. (September–October 2000). Having Trouble with Your Strategy? Then Map It. Harvard Business Review, 167–76.

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middle management combined with a new emphasis on employee empowerment have led to a greater involvement of all employees in goal setting and planning at each level. An example of a goal hierarchy is illustrated in Exhibit 7.4. Note the way the strategic goal of ‘excellent service to customers’ translates into ‘Open one new sales office’ and ‘Respond to customer inquiries within two hours’ at lower management levels. Mission

Exhibit 7.4 Hierarchy of goals for a manufacturing organisation

Manufacture both standard and custom metal products for various applications in the machine tool industry

Strategic goals CEO 12% return on investment 5% growth No employee layoffs Excellent service to customers

Tactical goals Finance Executive

Production Executive

Marketing Executive

Keep outstanding accounts below

Manufacture 1 200 000 products

Sell 1 200 000 units at average

$500 000

at average cost of $19

price of $27

Keep borrowing below $1 250 000

Scrap rate of 3% or less

Introduce 1 new product line

Provide monthly budget statements

Increase manufacturing

Increase sales by 5% in new

for departments

productivity by 2%

market areas

Have delinquent accounts of no

Resolve employee grievances

Open 1 new sales office

more than 2% of total

within 3 working days

Attain market share of 19%

Operational goals Accounts Receivable Manager

Supervisor – Automatic Machines

Sales Manager – Region 1

Issue invoices within 5 days of sale

Produce 150 000 standard units

Respond to customer inquiries

Check new customers’ credit

at average cost of $16

within 2 hours

within 1 working day

Have machine downtime of less

Meet sales quota of 120 600 units

Allow no account to be overdue

than 7%

Work with salespeople to:

more than 5 months

Achieve scrap rate of 3% or less

Visit 1 new customer each day

Call delinquent accounts weekly

Respond to employee grievances

Call on each large customer

within 24 hours

every 4 weeks Call on each small customer every 8 weeks

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➜➜ Planning starts with the organisation’s purpose or reason for existence, which is called its mission. ➜➜ A mission statement is a broadly stated definition of the organisation’s basic business scope and operations that distinguishes it from similar types of organisations. ➜➜ Goals begin with broad strategic goals, followed by more specific tactical goals and then operational goals. ➜➜ Plans are defined similarly, with strategic, tactical and operational plans used to achieve the goals.

➜➜ Strategic goals are broad statements of where the organisation wants to be in the future and pertain to the organisation as a whole rather than to specific divisions or departments. ➜➜ Strategic plans are the action steps by which an organisation intends to attain strategic goals. ➜➜ The outcomes that major divisions and departments must achieve for the organisation to reach its overall goals are called tactical goals. ➜➜ Tactical plans are designed to help execute major strategic plans and



to accomplish a specific part of the company’s strategy.

remember this

➜➜ Operational goals are specific, measurable results that are expected from departments, work groups and individuals. ➜➜ Operational plans specify the action steps towards achieving operational goals and support tactical activities. ➜➜ Goals and plans need to be in alignment so that they are consistent and mutually supportive. ➜➜ A strategy map is a visual representation of the key drivers of an organisation’s success, showing the cause-and-effect relationship among goals and plans.

Criteria for effective goals Research has identified certain factors, shown in Exhibit 7.5, that characterise effective goals. First and foremost, goals need to be specific and measurable. When possible, operational goals should be expressed in quantitative terms, such as increasing profits by 2 per cent, having zero incomplete sales order forms or increasing average teacher effectiveness ratings from 3.5 to 3.7. Not all goals can be expressed in numerical terms, but vague goals have little motivating power for employees. By necessity, goals are qualitative as well as quantitative. The important point is that the goals be precisely defined and allow for measurable progress. Effective goals also have a defined time period that specifies the date on which goal attainment will be measured. For instance, school administrators might set a deadline for improving teacher effectiveness ratings by the end of the 2013 school year. When a goal involves a two- to threeyear time horizon, setting specific dates for achieving parts of it is a good way to keep people on track towards the goal. Goals should cover key result areas. Goals cannot be set for every aspect of employee behaviour or organisational performance; if they were, their sheer number would render them meaningless. Instead, managers establish goals based on the idea of choice and clarity. A few carefully chosen, clear and direct goals can focus organisational attention, energy, and resources more powerfully.19 Managers should set goals that are challenging but realistic. When goals are unrealistic, they set employees up for failure and lead to a decrease in employee morale. However, if goals are too easy, employees may not feel motivated. Goals should also be linked to rewards. The ultimate impact of goals depends on the extent to which salary increases, promotions and awards are based on goal achievement. Employees pay attention to what gets noticed and rewarded in the organisation.20

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Are specific and measurable

Exhibit 7.5 Characteristics of effective goals

Are linked to rewards

Effective goals

Are challenging but realistic

Cover key result areas

Planning and implementing an amazing country growth strategy Abu Dhabi has undergone a $200 billion development of all of its forms of infrastructure. This is a tremendous investment in a relatively concentrated area. With just around 10 per cent of the world’s oil reserves, Abu Dhabi, the United Arab Emirates’ capital, is the richest city in the world. Its 921 000 people have approximately $1 trillion invested abroad. Abu Dhabi

Source: Shutterstock.com/zubair khan

Case study

Have a defined time period

The Abu Dhabi skyline

has a GDP per capita of A$82 000, thanks to its oil and gas wealth and its carefully planned investment strategies. About one million people have been brought to Abu Dhabi to work in building and operating their incredible new city. They are building new hotels and playgrounds for the rich and airports, apartments, skyscrapers, museums and all other forms of infrastructure and at an amazing speed – $200 billion builds a very great deal of infrastructure. There will clearly be lots of competition between Abu Dhabi’s new airline, Etihad Airways, and the existing Emirates Airline, which is based in Dubai, a city within close proximity of the UAE. Abu Dhabi’s $8 billion airport expansion includes a runway wide enough to land the biggest new planes, which Etihad Airways is buying. There is no doubt that the Abu Dhabi wealth is built almost entirely upon its oil and gas reserves; however, those in charge of its strategy – including the crown prince of Abu Dhabi – have cleverly invested

their $1 trillion in oil and other business outside of the region. Abu Dhabi does not come from a traditionally rich heritage, indeed quite the opposite. Some 50 years ago when oil began to flow there, its 46 000 citizens had very poor infrastructure and even its wealthiest people lived in mud houses. This is a great national level strategy of building enormous amounts of infrastructure including a $3 billion hotel, the world’s biggest mosque, a major new airline with hundreds of planes going to 57 destinations and 100 new other hotels as well as hospitals and universities, all of which are being designed and built to the highest possible standards. Growth indeed! Sources: Gimbel, B. (19 March 2007). The Richest City in the World. Fortune, 72–82; http://www .etihadairways.com/sites/etihad/uk/en/aboutetihad/ etihadstory/pages/etihadhistory.aspx; http://www .abudhabiairport.ae/theairport/index.asp; SCAD, https://business.abudhabi.ae/egovPoolPortal_WAR/ appmanager/ADeGP/Business?_nfpb=true&_pageLa bel=P3000230241204215145215&did=150258&la ng=en (accessed 20 September 2013).

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Innovative Way Source: Newspix/Aaron Francis

Planning for a bigger toll Since its beginnings in 1985, Paul Little has literally built a transport and supply chain empire in Australia. And he has realised his ambition of expansion well beyond his home country. This very busy last 20-plus years has involved both organic growth – growth in existing markets – and a series of well-planned and executed acquisitions of companies that can lead to a geographically diversified supply chain powerhouse. Mr Little’s strategy is to hold costs down by managing them carefully, while finding smart ways to provide innovative supply chain solutions to his clients. In recent years, Toll has expanded through buying businesses in the UK, US, Singapore, Japan and China. Toll is keenly aiming to participate fully in the growth of Asia, and expansion of supply chains from Asia into the Middle East and US, both being much bigger opportunities and markets than its Australian base. With about 20 per cent of the company now owned outside Australia, and a similar proportion of revenue coming from outside Australia, Toll has plenty of potential for expansion and diversification. When a company is bought by Toll and brought into the group, the key challenge is how to create and add

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value, in order to provide a superior return on investment, and with that come the challenges of leadership and business integration. Mr Little has shown sound judgement and flexibility, in sometimes keeping the acquired Paul Little companies’ leaders in place, and other times replacing them fast with proven Toll executives. Toll now employs 45 000 people and has revenue in excess of A$3.8 billion from operations in 50 countries across the globe. Mr Little has retired from the CEO position and is currently engaged in other entrepreneurial ventures worth over A$1 billion such as his Little Projects inner city apartment developments. He is also the chairman of Essendon Football Club in the Australian Football League (AFL).

Managem ent by o bj ectives Described by famed management scholar Peter Drucker in his 1954 book, The Practice of Management, management by objectives has remained a popular and compelling method for defining goals and monitoring progress towards achieving them. Management by objectives (MBO) is a system whereby managers and employees define goals for every department, project, and person and use them to monitor subsequent performance.21 A model of the essential steps of the MBO system is presented in Exhibit 7.6. Four major activities make MBO successful:22 1 Set goals. Setting goals involves employees at all levels and

looks beyond day-to-day activities to answer the question, ‘What are we trying to accomplish?’ Managers heed the criteria of effective goals described in the previous section and make sure to assign responsibility for goal accomplishment. However, goals should be derived jointly. Mutual

Source: Getty Images/Bloomberg

Sources: Stensholt, J. (14–20 October 2010). Big things from Little. BRW, 32 and 33; Hawthorne, M. and Williams, R. (24 August 2013). Calm in a Crisis and Ready for a Fight. The Age, http://www.theage.com.au/afl/afl-newscalm-in-a-crisis-and-ready-for-the-fight-20130823-2sh9x.html (accessed 21 December 2013).

Innovation is the cornerstone of 3M’s culture, and the company’s challenging but realistic goals have 3M employees turning new ideas into new products faster than ever before. The goal of achieving 30 per cent of sales from products introduced in the past four years was quickly met, thanks to the successful launch of new products.

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management by objectives (MBO) A method of management whereby managers and employees define goals for every department, project and person, and use them to monitor subsequent performance.

agreement between employee and supervisor creates the strongest commitment to achieving goals. In the case of teams, all team members may participate in setting goals. 2 Develop action plans. An action plan defines the course of action needed to achieve the stated goals.

Action plans are made for both individuals and departments. 3 Review progress. A periodic progress review is important to ensure that action plans are working.

These reviews can occur informally between managers and employees, where the organisation may wish to conduct three-, six- or nine-month reviews during the year. This periodic check-up allows managers and employees to see whether they are on target or whether corrective action is necessary. Managers and employees should not be locked into predefined behaviour and Take a must be willing to take whatever steps are necessary to produce meaningful results. The Moment point of MBO is to achieve goals. The action plan can be changed whenever goals are As a new manager, establish not being met. operational goals that are in alignment

with the tactical and strategic goals set at higher levels in the organisation. Make goals specific, measurable and challenging, but realistic. Remember that a few carefully chosen goals are powerful for directing employee energy and motivation. Reward people when they meet goals.

Step 1: Set goals

4  A  ppraise overall performance. The final step in MBO is to carefully evaluate

whether annual goals have been achieved for both individuals and departments. Success or failure to achieve goals can become part of the performance appraisal system and the designation of salary increases and other rewards. The appraisal of departmental and overall corporate performance shapes goals for the next year. The MBO cycle repeats itself on an annual basis. The specific application of MBO must fit the needs of each organisation. Siemens is an example of one company that used MBO to improve its financial performance, as discussed in the Case Study. MBO involves frank discussions with your boss about objectives and performance. Step 2: Develop action plans

Corporate strategic goals Departmental goals

Action plans

Individual goals

Review progress Step 3: Review progress Take corrective action

Appraise performance Step 4: Appraise overall performance Exhibit 7.6 Model of the MBO process

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Siemens of Germany, which makes everything from mobile phones to gasturbine generators to light bulbs, has always had great engineers bent on making products of the highest quality. But in the late 1990s, managers learned that competing with the likes of US-based General Electric, Korea’s Samsung and Finland’s Nokia takes more than quality – it also requires speed to market, relentless innovation and ruthless attention to costs. Between 1996 and 1998, profits sank by two-thirds and company shares fell even faster. Former CEO Heinrich von Pierer developed a plan for getting Siemens back on track, with a specific goal (MBO Step 1) of strengthening the overall business to be in financial shape for listing on the US stock exchange within three years. Managers developed an action plan (MBO Step 2) that included: (1) cutting the time it takes to develop and produce new products; (2) selling or closing poorly performing units and strengthening remaining businesses through acquisitions to achieve world leadership; (3) setting tough profit targets for managers and tying pay to performance; and (4) converting accounting practices to report results according to US accounting standards. Managers of the various business divisions then developed action plans for employees in their own units. Progress was reviewed (MBO Step 3) at quarterly meetings where managers from the 14 business units reported on their advancements directly to von Pierer. Managers were required to explain if benchmarks weren’t met and how shortcomings would be corrected. At the end of each year of the turnaround plan, an overall performance appraisal was held for each business and the corporation as a whole (MBO Step 4). Managers who met goals were rewarded; those who had consistently failed to meet them were let go, with the poorest performers going first.

After the plan was implemented, Siemens dramatically improved its speed and overall financial performance. For example, mobile phones that once took a painstaking 13 hours each to produce began sliding off the assembly line in five minutes. Many of Siemens’ businesses were transformed from money losers to profit drivers, and the stock performance took a sharp upturn. Siemens was on track to begin reporting results according to US principles and listing on the US stock exchange. The MBO system helped to energise manager and employee actions company-wide towards goals deemed critical by top management Siemens performance management system is based on its high level values, published in 2011 as: Our Values – responsible, excellent and innovative – have been the basis for Siemens’ success for over 160 years. Responsible: Committed to ethical and responsible actions At Siemens, we are determined to meet – and wherever possible, exceed – all legal and ethical requirements. Our responsibility is to conduct all business according to the highest professional and ethical standards and practices: there must be no tolerance for non-compliant behaviour. The principles related to ‘Responsible’ serve as the compass by which we navigate our way through our business decisions. We must also encourage business partners, suppliers and other stakeholders to adopt a similar standard of ethical behaviour. Excellent: Achieving high performance and excellent results We at Siemens set ourselves ambitious targets – derived from our vision and verified by benchmarks – and give our all to achieve them. We stand beside our customers in the search for perfect quality, coming up with solutions that exceed expectations.

Excellence demands we define a path of continuous improvement, constantly challenging existing processes. It also requires us to embrace change so we are in the right place when new opportunities open up. Excellence also means attracting the best talent in the marketplace and giving them the skills and opportunities they need to become high achievers. We are committed to living a high performance culture. Innovative: Being innovative to create sustainable value Innovation is a cornerstone of Siemens’ success. We closely align R&D activities with business strategy, hold key patents and have a strong position in both established and emerging technologies. Our goal is to be a trendsetter in all of our businesses. We unlock the energy and creativity of our employees, embracing the new and different. We are also ingenious and we embrace this quality in all its varied meanings – original, inventive and resourceful. We are entrepreneurs whose innovations are successful on a global scale. We measure the success of our innovations by our customer’s success. We constantly renew our portfolio to provide answers to societies’ most vital challenges, enabling us to create sustainable value. Source: Peter Loscher, CEO (http://www.siemens.com/ about/en/index/values.htm).

Siemens has since returned to a state of high levels of competitiveness and profitability, coming strongly out of the global financial crisis with strong investments in innovative new products, and in 2012 the 370 000 staff in this well managed company created $10 billion of profit. Sources: Ewing, J. (5 June 2000). Siemens Climbs Back. BusinessWeek, 79–82; Siemens’s Annual Report 2012, http://www.siemens.com/investor/pool/en/ investor_relations/siemens_ar_2012.pdf, pp.18, 88 (accessed 20 September 2013).

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Siemens

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Benefi t s and p r ob lem s w ith MBO Many companies, including ANZ, Westpac, Woolworths, Intel, Black & Decker and DuPont, have used MBO, and most managers think that it is an effective management tool.23 Tim O’Shaughnessy, founder and CEO of LivingSocial, a daily deal website with more than 5000 employees and 46 million members in 25 countries, uses the principles of MBO to keep the fast-growing business on track. O’Shaughnessy meets regularly with the heads of every department to set goals for items such as sales and membership growth and develop action plans for how to achieve them. Then, he is obsessive about tracking metrics to see whether things are on target towards meeting the numbers. Each week, O’Shaughnessy meets with department heads to talk about their key metrics and review their progress. ‘The more data you gather, the more likely you’ll be successful in the long term,’ he says.24 Most managers, like Tim O’Shaughnessy, believe they are better oriented towards goal achievement when MBO is used. MBO can provide a number of benefits, which are summarised in Exhibit 7.7. Corporate goals are more likely to be achieved when they focus manager and employee efforts. Using a performance measurement system such as MBO helps employees see how their jobs and performance contribute to the business, giving them a sense of ownership and commitment.25 Performance is improved when employees are committed to attaining the goal, are motivated because they help decide what is expected and are free to be resourceful. Goals at lower levels are aligned with and enable the attainment of goals at top management levels.

Exhibit 7.7 MBO benefits

MBO

Focuses manager and employee efforts on activities that will lead to goal attainment.

management by means (MBM) Focuses attention on the methods and processes used to achieve goals.

Can improve performance at all company levels.

Improves employee motivation.

Aligns individual and departmental goals with company goals.

However, like any system, MBO can cause problems when used improperly. For example, an overemphasis on ‘meeting the goals’ can obscure the means that people use to get there. People may cut corners, ignore potential problems or behave unethically just to meet the targets. In addition, MBO cannot stand alone; it is only a part of effectively managing people to achieve goals. MBO is ‘like training wheels on a bicycle’.26 It gets you started, but it isn’t all you need. In the United States, for example, the implementation of rigorous MBO-type systems in urban police departments and school systems has led to cheating on the numbers, with people lying about their work performance in order to score well on the metrics. The means for achieving goals is just as important as the outcomes. A new systematic approach that has recently emerged is called management by means (MBM), which focuses attention on the methods and processes used to achieve goals. A term coined by H. Thomas Johnson and his co-authors in the book Profit Beyond Measures, MBM is based on the idea that when managers pursue their activities in the right way, positive outcomes will result. MBM focuses people on considering the means rather than just on reaching the goals.27 At Toyota, a ‘sticky accelerator’ problem was blamed in part on a breakdown between goals and the methods used to achieve them. Years of aggressive growth goals eventually strained managers’ ability to

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control the means by which the goals were achieved. People had to be hired quickly, with little time for adequate training and development. Therefore, the limited number of highly trained managers and engineers had to do more to keep pace towards the goals. Since the crisis, Toyota has refocused on improving the abilities of managers and employees to use the right means of achieving ambitious goals.28

Sin gle- use an d stan d in g pl ans Single-use plans are developed to achieve a set of goals that are not likely to be repeated in the future. Standing plans are ongoing plans that provide guidance for tasks or situations that occur repeatedly

within the organisation. Exhibit 7.8 outlines the major types of single-use and standing plans. Single-use plans typically include both programs and projects. The primary standing plans are organisational policies, rules and procedures. Standing plans generally pertain to matters such as employee illness, absences, smoking, discipline, hiring and dismissal. Many companies are discovering a need to develop standing plans regarding the use of social media. According to the Society for Human Resource Management, 40 per cent of organisations surveyed have a formal social media policy, and more than half of them include a statement about the company’s right to monitor social media usage. Good social media policies are clear, simple and specific. They define appropriate behaviour, clearly specify what is off-limits, let employees know the company can monitor their online activities and explain the consequences of breaking the rules.29

single-use plans Plans that are developed to achieve a set of goals that are unlikely to be repeated in the future. standing plans Ongoing plans used to provide guidance for tasks performed repeatedly within the organisation.

Exhibit 7.8 Major types of single-use and standing plans Single-use plans

Standing plans

Program

Policy

Plans for attaining a one-time organisational goal

●

Major undertaking that may take several years to complete

●

Large in scope; may be associated with several projects

●

Examples: Boeing’s 7E7 aircraft NASA space station

Broad in scope – a general guide to action

●

Based on organisation’s overall goals/strategic plan

●

Defines boundaries within which to make decisions

●

Examples: Drug-free workplace policies; Sexual harassment policies; Continuous improvement Shewhart cycle

●

●

Project Also a set of plans for attaining a one-time goal

●

Smaller in scope and complexity than a program; shorter time horizon

●

Often one part of a larger program

●

Examples: Development of a rocket booster for NASA space station; Development of external shell for NASA space station

●

Rule Narrow in scope

●

Describes how a specific action is to be performed

●

May apply to specific setting

●

Examples: No-smoking rule in areas of plant where hazardous materials are stored

●

Procedure (sometimes called a standard operating procedure)

●

Defines a precise series of steps to attain certain goals

●

Examples: Procedures for issuing refunds; Procedures for handling employee grievances

●

Qu ality p lanni ng and t he S h ew h a rt c yc l e Many organisations have instituted standing plans for quality improvement, often based on W. Edwards Deming’s 14 points of quality management. Their employees are encouraged to participate in the continuous improvement of product and service quality. TQM (total quality management) is

Concept Revision

Case project 1.1

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Shewhart cycle A planning cycle used in organisations that have instituted quality management – also called the PDCA (plan, do, check, act) cycle.

discussed in more detail in Chapter 19. These companies often use the Shewhart cycle of continuous improvement – sometimes called the PDCA (plan, do, check, act) cycle – as illustrated in Exhibit 7.9. Managers first plan a test or change in a specific process, then do the test or carry out the change, check the results and, finally, act to improve the process based upon what they learn. A number of cycle iterations may be needed before satisfactory results are achieved. The cycle repeats itself continuously, planning is an ongoing activity, and everyone in the organisation can learn from experience and help the organisation improve.30

Exhibit 7.9 The Shewhart cycle of continuous improvement Source: Based on Business Horizons by Thomas F. Rienzo. Copyright 1993 by Elsevier Science & Technology Journals. Reproduced with permission of Elsevier Science & Technology Journals in the format Textbook via Copyright Clearance Center.

➜➜ Managers formulate goals that are specific and measurable, cover key result areas, are challenging but realistic, have a defined time period and are linked to rewards.



4 Act

1 Plan

Analyse results; put learning into action

Decide what changes are desirable, and plan a change or test

3 Check

2 Do

Observe the results

Carry out the change or test

employees define goals for every department, project and person and use them to monitor subsequent performance.



used to attain results, rather than on the results themselves, is called management by means (MBM).

remember this

➜➜ Types of operational planning include management by objectives, singleuse plans and standing plans.

➜➜ MBO includes the steps of setting goals, developing action plans, reviewing progress and appraising performance.

➜➜ Single-use plans are plans that are developed to achieve a set of goals that are unlikely to be repeated in the future.

➜➜ Management by objectives (MBO) is a method whereby managers and

➜➜ A recent approach that focuses people on the methods and processes

➜➜ Standing plans are ongoing plans that are used to provide guidance for tasks that occur repeatedly in the organisation.

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Benefits and limitations of planning Some managers believe planning ahead is necessary to accomplish anything, whereas others think planning limits personal and organisational performance. Both opinions have merit, because planning can have both advantages and disadvantages. Research indicates that planning generally positively affects a company’s performance.31 Here are some reasons why:32 ●● Goals and plans provide a source of motivation and commitment. Planning can reduce uncertainty for employees and clarify what they should accomplish. The lack of a clear goal hampers motivation because people don’t understand what they’re working towards. ●● Goals and plans guide resource allocation. Planning helps managers decide where they need to allocate resources, such as employees, money and equipment. At Netflix, for example, a goal of having more video offerings online rather than in DVD format means allocating more funds for Internet movie rights and spending more of managers’ time developing alliances with other companies.33 ●● Goals and plans are a guide to action. Planning focuses attention on specific targets and directs employee efforts towards important outcomes. Planning helps managers and other employees know what actions they need to take to achieve the goal. ●● Goals and plans set a standard of performance. Because planning and goal-setting define desired outcomes, they also establish performance criteria so managers can measure whether things are on- or off-track. Goals and plans provide a standard of assessment. Despite these benefits, some researchers also think planning can hurt organisational performance in some ways.34 Thus, managers should understand the limitations to planning, particularly when the organisation is operating in a turbulent environment: ●● Goals and plans can create a false sense of certainty. Having a plan can give managers a false sense that they know what the future will be like. However, all planning is based on assumptions, and managers can’t know what the future holds for their industry or for their competitors, suppliers and customers. ●● Goals and plans may cause rigidity in a turbulent environment. A related problem is that planning can lock the organisation into specific goals, plans and time frames, which may no longer be appropriate. Managing under conditions of change and uncertainty requires a degree of flexibility. Managers who believe in ‘staying the course’ will often stick with a faulty plan even when conditions change dramatically. ●● Goals and plans can get in the way of intuition and creativity. Success often comes from creativity and intuition, which can be hampered by too much routine planning. For example, during the process of setting goals in the MBO process described earlier, employees might play it safe to achieve objectives rather than offer creative ideas. Similarly, managers sometimes squelch creative ideas from employees that do not fit with predetermined action plans.35 ➜➜ Benefits of planning and goal setting include serving as a source of motivation, determining resource allocation, providing a guide to



action and setting a standard for performance measurement.

➜➜ Limitations of planning and goal setting include the potential to

create a false sense of certainty, create rigidity that hinders the response to a turbulent environment, and get in the way of creativity and intuition.

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Planning in a turbulent environment Considering the limitations of planning, what are managers to do? One way managers can gain benefits from planning and control its limitations is by using innovative planning approaches that are in tune with today’s turbulent environment. Three approaches that help brace the organisation for unexpected – even unimaginable – events are contingency planning, building scenarios and crisis planning.

Co ntin gen cy pl ans

contingency plans Plans that define organisation responses to specific situations, such as emergencies, setbacks or unexpected conditions.

When organisations are operating in a highly uncertain environment or dealing with long time horizons, sometimes planning can seem like a waste of time. In fact, strict plans may even hinder rather than help an organisation’s performance in the face of rapid technological, social, economic or other environmental changes. In these cases, managers can develop multiple future scenarios to help them form more flexible plans. Contingency plans define organisation responses to be taken in the case of emergencies, setbacks or unexpected conditions. To develop contingency plans, planners identify uncontrollable factors such as recession, inflation, technological developments or safety accidents. To minimise the impact of these potential factors, a planning team can forecast the worst-case scenarios. For example, if sales fall 20 per cent and prices drop 8 per cent, what will the company do? Contingency plans can then be defined for possible lay-offs, emergency budgets and sales efforts.36 A great example of where contingency plans were needed was the recent global financial crisis (GFC), which caused a recession in most of the world: it has since led companies to ‘stress test’ their businesses by examining what would need to be done if sharp falls in sales revenue were to occur in the future. These are a good planning device, a new form of contingency plan. Today, contingency planning takes on a whole new urgency as increasing turbulence and uncertainty shake the business world. Managers must renew their emphasis on bracing for unexpected – even unimaginable – events. Two more recent extensions of contingency planning are building scenarios and crisis planning.

Scenari o pl ann in g scenario building Scenario building is the planning activity in which future possibilities are visualised by extrapolating current trends and considering future discontinuities.

One way managers cope with greater uncertainty is with a forecasting technique known as scenario building. Scenario building involves looking at current trends and discontinuities and visualising future possibilities. Rather than looking only at history and thinking about what has been, managers think about what could be. The events that cause the most damage to companies are those that no one even conceived of, such as the 2001 collapse of the World Trade Center towers in New York due to terrorist attack. Managers can’t predict the future, but they can rehearse a framework within which future events can be managed.37 With scenario building, a broad base of managers mentally rehearses different scenarios based on anticipating varied changes that could impact on the organisation. Scenarios are like stories that offer alternative vivid pictures of what the future will be like and how managers will respond. Typically, two to five scenarios are developed for each set of factors, ranging from the most optimistic to the most pessimistic view.38 Scenario building forces managers to mentally rehearse what they would do if their best-laid plans collapse. Royal Dutch Shell Oil has used scenario planning since the 1970s, and has been consistently better in its oil forecasts than other major oil companies Contingency planning was used at Shell for dealing with a potential drop in oil prices that could be catastrophic. At the time, oil was US$28 a barrel and rising, but the planning group challenged Shell managers to consider what they would do in the unlikely event that oil suddenly dropped to US$15 a barrel. As it turned out, the price of oil did drop to US$15 a barrel within

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a few months, and Shell executives were ready because they had developed contingency plans.39 Many companies have been using scenario planning to consider possible discontinuous shifts, more recently including the impact of oil going and staying above US$100 per barrel! Executives often consider sharp changes in their business environment using scenario planning, such as major technological breakthroughs or big corporate takeovers. They are also used to develop plans for dealing with differing levels of economic or market growth, such as separate scenarios for ‘high growth’ and ‘low growth’.

Crisis planning As we have mentioned, managers can’t always anticipate future events and build scenarios to cope with them. In addition, some unexpected events are so sudden and devastating that they require immediate response. For managers to respond appropriately, they need carefully thought out and coordinated plans. Although crises may vary, a good crisis management plan can be used to respond to any disaster at any time of the day or night. Exhibit 7.10 outlines the three essential stages of crisis management.40 The prevention stage involves activities managers undertake to try to prevent crises from occurring and to detect warning signs of potential crises. The preparation stage includes all the detailed planning to handle a crisis when it occurs. Containment focuses on the organisation’s response to an actual crisis and any follow-up concerns.

Preventi o n Although unexpected events and disasters will happen, managers should do everything they can to prevent crises. A critical part of the prevention stage is building trusting relationships with key stakeholders such as employees, customers, suppliers, governments, unions and the community. By developing favourable relationships, managers can often prevent crises from happening and respond more effectively to those that cannot be avoided. For example, organisations that have open, trusting relationships with employees and unions may avoid crippling labour strikes. Open communication also helps managers identify problems early so they do not turn into major issues. For example, Nike had early warning from distributors in the Middle East that its flame logo on a basketball shoe looked like the word ‘Allah’ in Arabic script, and would be considered offensive to Muslims. Although the company made some minor changes, managers failed to take the warning seriously. Eventually, Nike had to recall nearly 40 000 pairs of the shoes and issue an apology to Muslims.41 Similarly, Coca-Cola suffered a major crisis in Europe because it failed to respond quickly to reports of ‘foul-smelling’ Coke in Belgium. The company’s former CEO, Australian Douglas Daft, observed that every problem the company has faced in recent years ‘can be traced to a singular cause: we neglected our relationships’.42

Prepar ati o n The three steps in the preparation stage are: designating a crisis management team and spokesperson, creating a detailed crisis management plan and setting up an effective communications system. Some companies are setting up crisis management offices, with high-level leaders who report directly to the CEO.43 For example, Monash University, one of Australia’s largest tertiary institutions, has created a permanent crisis management team and infrastructure, ready to move into action fast when the need comes to act decisively.44 Although these officers are in charge of crisis management, it is important

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crisis management plan (CMP) A detailed written plan that specifies the steps to be taken, and by whom, if a crisis occurs.

that people throughout the company be involved. The crisis management team, for example, is a crossfunctional group of people who are designated to swing into action if a crisis occurs. They are closely involved in creating the crisis management plan, and they’ll be called upon to implement the plan if a disaster hits. The US Office of Personnel Management in Washington, DC has nearly 200 people assigned and trained to take immediate action if a disaster occurs, including eight employees assigned to each of 10 floors to handle an evacuation.45 The organisation should also designate a spokesperson who will be the voice of the company during the crisis.46 The spokesperson in many cases is the top leader of the organisation. However, organisations typically assign more than one spokesperson so that someone else will be prepared if the top leader is not available. The crisis management plan (CMP) is a detailed written plan that specifies the steps to be taken, and by whom, if a crisis occurs. The CMP should include plans for dealing with various types of crises, such as natural disasters like fires or earthquakes, normal accidents like economic crises or industrial accidents, and abnormal events such as product tampering or acts of terrorism.47 The plan should include details for ensuring the well-being of employees and customers, procedures for back-up and recovery of computer systems and protecting proprietary information, details on where people should go if they need to be evacuated, plans for alternative work sites if needed, and guidelines for handling media and other outside communications. In 1991, Morgan Stanley Dean Witter, then the World Trade Center’s largest tenant, with 3700 employees, adopted a crisis management plan for abnormal events after bomb threats during the Persian Gulf War. Top managers credited its detailed evacuation procedures for saving the lives of all but six of its employees during the 11 September 2001 attack. ‘Everybody knew about the … plan,’ said a spokesman. ‘We met constantly to talk about it.’48 A key point is that a crisis management plan should be a living, changing document that is regularly reviewed, practised and updated as needed. A major part of the CMP is a communications plan that designates a crisis command centre and sets up a complete communications and messaging system. The command centre serves as a place for the crisis management team to meet, gather data and monitor incoming information, and disseminate information to the media, employees and the public. Exhibit 7.10 Three stages of crisis management

Prevention Build relationships.

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Detect signals from environment.

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Preparation Designate crisis management team and spokesperson.

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Create detailed crisis management plan.

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Set up effective communications system.

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Containment Rapid response: Activate the crisis management plan.

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Get the awful truth out.

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Meet safety and emotional needs.

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Return to business.

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Source: Based on information in Coombs, W. T. (1999). Ongoing Crisis Communication: Planning, Managing, and Responding. Thousand Oaks, California: Sage Publications.

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Contain m ent Some crises are inevitable no matter how well-prepared an organisation is. When crisis hits, a rapid response is crucial. The team should be able to immediately implement the crisis management plan, so training and practice are important. In addition, the organisation should ‘get the awful truth out’ to employees and the public as soon as possible.49 This is the stage where it becomes critical for the organisation to speak with one voice so people do not get conflicting stories about what’s going on and what the organisation is doing about it. Consider what happened when doctors at Duke University Hospital made one of the worst mistakes in medical history – transplanting the wrong heart and lungs into 17-year-old Jessica Santillan, who later died. Although the story was already out, it took nine days for Duke leaders to admit the hospital’s mistake. By that time, rumours and misinformation were rampant, further damaging the hospital’s reputation and prolonging its recovery from the crisis.50 After ensuring people’s physical safety in a crisis, the next focus should be on responding to the emotional needs of employees, customers and the public. Giving facts and statistics to try to downplay the disaster always backfires because it does not meet people’s emotional need to feel that someone cares about them and what the disaster has meant to their lives. After a devastating crisis, such as the earthquakes in Haiti, Chile and New Zealand in 2010 and 2011, companies may provide counselling and other services to help people cope.

Innovative Way

JetBlue Penny Neferis has been the ‘worrier in chief’ at American budget airline JetBlue Airways for more than 12 years. As director of care and emergency response, she leads a team that is always thinking about what could go wrong. Neferis’s team develops JetBlue’s emergency response plan and trains employees in handling a crisis, whether it be an accident, health scare, terrorist attack or natural disaster. Many organisations weren’t prepared when the swine flu outbreak hit the United States in 2009, but JetBlue had procedures in place that could be adapted to the crisis. They quickly set up training to help employees recognise symptoms, provided hand sanitiser and gloves for planes, established reporting procedures, and created a plan for how to operate if staff or headquarters personnel were affected. Regardless of where a crisis occurs in the world, Neferis and her team swing into action. Following the earthquake in Haiti, for instance, Neferis immediately set up a taskforce that coordinated with

the Haitian consulate and the Red Cross. The airport in Haiti was closed, but JetBlue, which flies to the Dominican Republic, was able to get supplies and people in. Neferis has always known that anything can happen in the airline business, but that was never clearer than on 11 September 2001. Neferis says she ‘went on autopilot’ during the emergency response at Kennedy Airport following the terrorist attacks. Because the airline had crisis plans in place, JetBlue was able to help passengers and ease some of the chaos. The team set up a passenger assistance centre that took passengers from any carrier, not just JetBlue. ‘You’ve got to stay strong and grounded in a crisis,’ Neferis says, ‘but eventually you have to deal with what you’ve experienced.’ She adds, ‘You’re also never done with planning. The minute you get comfortable, think you’re ready for anything and become overconfident, it’s an indication that you’re not in the right field. You’ve got to stay humble.’

Source: Penny Neferis, as told to Patricia R. Olsen. (30 April 2011). Call Her the Worrier in Chief. The New York Times, http://www.nytimes.com/2011/05/01/jobs/01pre.html (accessed 20 July 2012).

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➜➜ Managers use innovative planning approaches to cope with today’s turbulent environment. ➜➜ Contingency planning identifies important factors in the environment and defines a range of alternative responses to be taken in the case of emergencies, setbacks or unexpected conditions.

➜➜ With scenario building, managers look at trends and discontinuities and imagine possible alternative futures to build a framework within which unexpected future events can be managed. ➜➜ Scenarios are alternative vivid pictures of what the future might be like.

remember this

➜➜ Many companies have increased their use of contingency and scenario planning because of the global financial crisis and volatile economic conditions. ➜➜ Crisis planning involves the three major stages of prevention, preparation and containment.

Planning time horizons

Exhibit 7.11 Planning time horizon

Organisational goals and plans are associated with specific time horizons. The time horizons are long-term, intermediate term and short-term, as illustrated in Exhibit 7.11. Long-term planning includes strategic goals and plans and may extend as far as five years or further into the future. Intermediate-term planning includes tactical goals and has a time horizon of between one and two years. Short-term planning includes operational goals for specific departments and individuals, and has a time horizon of one year or less.

Today

1 year

Short-term planning (operational goals)

Intermediate-term planning (tactical goals)

2 years

3 years

4 years

5 years and beyond

Long-term planning (strategic goals)

One of the main problems in organisations today is the emphasis on short-term results. Long-term planning is difficult because the world is so uncertain. Moreover, the financial community, including share analysts and fund managers, push organisations for strong financial results in the short term. This pressure fits the natural inclination of many results-oriented managers, who are concerned with outcomes for today and next week – not next year, and certainly not five years out. These pressures tend to reward short-term performance and undercut long-range planning. For example, a Tennessee manufacturer of temperature control devices badly needed a new plant and facilities that required massive expenditures. The managers’ bonuses were calculated on profits for one year. In this case, the pressures for short-term results took precedence, and the managers did not invest money in new facilities because short-term profits would suffer. Focusing too heavily on short-term profitability as a goal has handicapped many Australian businesses competing internationally. Japanese organisations, by contrast, often take a long-term view and have multiple goals, giving equal weight to market share, profitability and innovation.51 Consider Matsushita Electric (now Panasonic), one of the world’s largest producers of consumer electronics. In 1920 Konosuke Matsushita foresaw the day when Western countries would provide both major markets and manufacturing

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centres for his company’s small appliances. In 1932 he announced an ambitious 250-year plan Take a for the company, perhaps an all-time record for long-range planning.52 Long-term planning Moment need not resort to such extremes. In 1987 senior executives redirected Matsushita into As a new manager, get in the four areas where future growth was expected: semiconductors, factory automation, mindset of scenario planning. Go to office automation and audiovisual products. At the time, these products generated only http://www.shell.com/scenarios, where 13 per cent of sales but were expected to do well in coming years, and thus received Shell Oil publishes the outline of its annual scenario planning exercise and 70 per cent of the company’s research expenditure.53 The company has now renamed http://gt2030.com, where America’s most of its products and business units to use its well-respected brand name, Panasonic, National Intelligence Council and in 2009 its ongoing success allowed it to acquire the large rival company, Sanyo. The (NIC) pictures possible futures company’s 300 000 staff generated $73 billion in sales in 2013.54 for the year 2030.

The new planning approach Tr ad iti o nal approach es to pl ann in g Traditionally, corporate planning has been done entirely by top executives, consulting firms or, most commonly, by central planning departments. Central planning departments are groups of planning specialists who report directly to the CEO, as illustrated in Exhibit 7.12. This approach was top-down because goals and plans were assigned to major divisions and departments from the planning department after approval by the CEO. This approach works well in many applications. For example, the Columbia Gas System has a corporate planning department with eight full-time specialists. The department has two sections. The operations analysis section is responsible for acquiring and analysing economic and other data for use in the strategic planning process. The planning section successfully prepares the strategic plan for the system and also provides guidance to subsidiary companies for strategic planning activities.55 Although traditional approaches to planning are still popular with many organisations, formal planning increasingly is being criticised as inappropriate for today’s fast-paced environment.

central planning departments A group of planning specialists who develop plans for the organisation as a whole and its major divisions and departments, and typically report to the CEO.

Exhibit 7.12 Structural location of central planning department

Managing Director

Planning Department

Division Heads

Line Managers

Frozen foods

Breakfast cereals

Finance

Production

Marketing

Finance

Production

Canned goods

Marketing

Finance

Production

Marketing

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Exhibit 7.13 Structural location of decentralised planning staff

Managing Director

Planning support staff members

Division Heads

Line Managers

Frozen foods

Breakfast cereals

Finance

Production

Marketing

Finance

Production

Canned goods

Marketing

Finance

Production

Marketing

Mo d ern approach es to pl ann in g

decentralised planning Managers work with planning experts to develop their own strategic plans.

To overcome some of the problems of traditional planning, managers are trying new approaches. As organisations modernise, they are removing central planning departments. A more recent approach to planning is decentralised planning, which evolved when planning experts were assignment to major departments and divisions to help managers develop their own strategic plans, as indicated in Exhibit 7.13. This change helped resolve some of the conflicts between planners and staff because corporate planners were no longer writing their own strategic plans and handing them down to line managers. This approach to planning is evident at Johnson & Johnson, which has mastered the art of decentralised management possibly better than any other organisation in the world. Top executives trust the managers at each business to set their own goals, finding that they often set far more ambitious ones than the top brass would expect. As former CEO Ralph Larsen once said: ‘The quickest way to destroy morale is to issue edicts from [headquarters]. We do best when we take time to describe the problem and let them come up with a solution.’56

Innovative approach es to pl ann in g The process of planning, like other aspects of managing, changes over time to become more in tune with shifts in the environment and employee attitudes. A fresh approach to planning is to involve everyone in the organisation, and sometimes outside stakeholders as well, in the planning process. The evolution to a new approach began with a shift to decentralised planning. Managers throughout the company come up with their own creative solutions to problems and become more committed to following through on the plans. As the environment became even more volatile, top executives saw the benefits of pushing decentralised planning even further by having planning experts work directly with line managers and frontline employees to develop dynamic plans that meet fast-changing needs. In a complex and competitive business environment, strategic thinking and execution become the expectation of every employee.57 Planning comes alive when employees are involved in setting goals and determining the means to reach them. The following sections provide some guidelines for innovative planning.

Set st r et ch goa ls f o r exc el l en c e Stretch goals are reasonable yet highly ambitious goals that are so clear, compelling and imaginative that they fire up employees and engender excellence. Stretch goals are typically so far beyond the current levels that people have to be innovative to find ways to reach them. Consider the following example from Amazon.com.

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The birth of the Kindle When Jeff Bezos, CEO of Amazon, first asked engineers in 2004 to create a lightweight, simple e-reader with built-in cellular access, systems engineer Jateen Parekh said, ‘I thought it was insane. I really did.’ At the time, nothing like that had ever been tried. But Bezos believed that configuring devices to Wi-Fi networks would be too complicated for many users, and he didn’t want people to have to connect to a personal computer. Essentially, he didn’t want people to even have to think about the wireless connection. The challenge eventually got Parekh and others fired up. It took the development group several years, but in 2007, the Kindle was born. It proved to be such a hit that the first batch sold out in just a few hours. Amazon had to scramble to find a key part that had been discontinued by a supplier to get more on the market. ‘You look at the history of the Kindle, they developed some real skills around the creation of that product. They cut their teeth, so to speak,’ said Brian Blair, an analyst with Wedge Partners. Building its own hardware – much less something that hadn’t been done before – was an audacious, high-stakes bet for Amazon, but it paid off. Moreover, making

Innovative Way four successive generations of the Kindle e-reader led down the path to the Kindle Fire, which became a serious competitor to Apple’s iPad. Asking a group of engineers to create the first Kindle e-reader might be considered what James Collins and Jerry Porras have called a big hairy audacious goal (BHAG). This phrase was first proposed by Collins and Porras in their 1996 article entitled ‘Building Your Company’s Vision.’ Since then, it has evolved to a term used to describe any goal that is so big, inspiring and outside the prevailing paradigm that it hits people in the gut and shifts their thinking. At the same time, however, goals must be seen as achievable or employees will be discouraged and demotivated, and some might resort to extreme or unethical measures to meet the targets. Stretch goals and BHAGs have become extremely important because things move fast. A company that focuses on gradual, incremental improvements in products, processes or systems will be left behind. Managers can use these goals to compel employees to think in new ways that can lead to bold, innovative breakthroughs.

Sources: Brad Stone. (3–9 October 2011). The Omnivore. Bloomberg Businessweek, 58–65; James C. Collins and Jerry I. Porras. (September–October 1996). Building Your Company’s Vision. Harvard Business Review, 65–77; Steven Kerr and Steffan Landauer. (November 2004). Using Stretch Goals to Promote Organizational Effectiveness and Personal Growth: General Electric and Goldman Sachs. Academy of Management Executive, 18:4, 134–8; and Lisa D. Ordóñez et al. (February 2009). Goals Gone Wild: The Systematic Side Effects of Overprescribing Goal Setting. Academy of Management Perspectives, 6–16; see Kenneth R. Thompson, Wayne A. Hockwarter and Nicholas J. Mathys. (August 1997). Stretch Targets: What Makes Them Effective? Academy of Management Executive, 11:3, 48.

Use pe r for mance dashb oa r ds People need a way to see how plans are progressing and gauge their progress towards achieving goals. Companies began using business performance dashboards as a way for executives to keep track of key performance metrics, such as sales in relation to targets, number of products on back order, or percentage of customer service calls resolved within specified time periods. Dashboards have evolved into organisation wide systems that help align and track goals across the enterprise. Exhibit 7.14 shows an example of a business performance dashboard that can deliver real-time key performance metrics. The true power of dashboards comes from applying them throughout the company, even on the factory or sales floor, so that all employees can track progress towards goals, see when things are falling short and find innovative ways to get back on course towards reaching the specified targets. At Emergency Medical Associates, a physician-owned medical group that manages emergency rooms for hospitals, dashboards enable the staff to see when performance thresholds related to patient wait times, for example, aren’t being met at various hospitals.58 Some dashboard systems also incorporate software that lets users perform what-if scenarios to evaluate the impact of various alternatives for meeting goals.

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Exhibit 7.14 A performance dashboard for planning Source: Sample Dashboard by Conflair, ‘Management Dashboards’, Conflair. com, http://www.conflair. com/ConflairServices/41_ ManagementDashboards.asp (accessed 23 July 2012).

Dep loy i nt elli gence tea m s

intelligence team A cross-functional group of managers and employees who work together to gain a deep understanding of a specific business issue and offer insight and recommendations for planning.

Anticipating and managing uncertainty and turbulence in the environment is a crucial part of planning, which means managers need good intelligence to make informed choices about goals and plans. A growing number of leading companies are using intelligence teams to manage this challenge. An intelligence team is a cross-functional group of managers and employees, usually led by a competitive intelligence professional, who work together to gain a deep understanding of a specific business issue, with the aim of presenting insights, possibilities and recommendations about goals and plans related to that issue.59 Intelligence teams are useful when the organisation confronts a major intelligence challenge. For example, consider a large financial services firm that learns that an even-larger rival is potentially moving to compete directly with one of its major profit-generating businesses. Top managers might form an intelligence team to identify when and how this might happen and how it might affect the organisation. Intelligence teams can provide insights that enable managers to make more informed decisions about goals, as well as to devise contingency plans and scenarios related to major strategic issues.

➜➜ Approaches to planning change with the times. In many companies today, planning is decentralised. ➜➜ Decentralised planning means that top executives or planning experts work with managers in major divisions



or departments to develop their own goals and plans.

➜➜ Stretch goals are reasonable yet highly ambitious and compelling goals that energise people and inspire excellence. ➜➜ Business performance dashboards can help managers oversee plans



and measure progress towards goals.

➜➜ An intelligence team is a cross-functional group of people who work together to gain a deep understanding of a specific competitive issue and offer insight and recommendations for planning.

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For organisations that wish to move up the ‘sustainability maturity’ curve, it is vitally important that the concepts of sustainable development be ‘mainstreamed’ via incorporating them into plans and goals. This means that business goals, which normally are primarily expressed in terms of financial, operational and market factors, need to be more broadly conceived. So, as well as perhaps setting goals for return on investment, sales revenue and profit, and perhaps customer satisfaction and product quality, sustainable organisations would set goals for their environmental performance. These might include goals such as reducing their carbon footprint by 20 per cent over three years, and community outcomes such as through job creation. It is generally important for an organisation to signal to all its stakeholders that it does have a strong sustainability orientation (see Chapter 5 for more on this term), through measuring and publicly reporting on its performance on all three bottom lines. This practice of embedding measures and goals of sustainable development into the organisation’s performance management systems can and should occur at all levels of the firm. There should be goals for the organisation as a whole, related to its policy on environmental outcomes and societal contributions. If it is a large multinational or multi-divisional organisation, these high level goals would then be cascaded down to each business unit. Within each business unit, goals for the environment and community would accompany financial goals that are formulated for each functional activity, such as marketing activities, production systems, etc. Ultimately these goals would be cascaded down to work teams and to individuals at all levels in the system of management by objectives. This means that the breadth brought by sustainable development needs to infuse all aspects of performance management. In a company that is mature in this regard, we should expect to see everyone’s job description and performance measure couched in these broad terms. Hand in hand with the establishment of this broader set of goals, incorporating financial, environmental and societal goals at all levels of an organisation, comes the formulation of accompanying activity plans at all levels. For the company as a whole, if there are plans to cut carbon output by 20 per cent over three years, then this requires a set of stepped activities spelling out how this will be achieved. For business units, the same would apply, in the sense that just as a hierarchy of goals would be established, so should plans be created at all levels, from the individual, through to the aggregated plans for the chief executive to oversee. This systematic way of organising goals and plans for the implementation of progress in sustainable development is the best way to achieve systematic and disciplined implementation, for otherwise there might well be a lot of talk about it, and not nearly enough action and achievement. Setting goals and asking people to effect plans and be accountable for their implementation is likely to be the best way to achieve maturity in sustainable development.

sustainable development

Sustainable development and goal setting

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Response to the Management Challenge

The new Chairman, Board of Directors, CEO and senior management team at BHP Billiton have had to reformulate their goals and plans as their business environment has changed quickly around them. The growth of the ‘mining boom’ in Australia and elsewhere seems to have ended, although the company’s successful mining operations continue. The company is formulating its next generation of plans and goals on energy supply, especially gas, and on agricultural products such as fertiliser and related chemical products that complement its existing capabilities and

discussion questions

1  Write a brief mission statement for a local business with which you are familiar. How might having a clear, written mission statement benefit a small organisation?

2  What strategic plans could the university at which you are taking this management course adopt to compete for students in the marketplace? Would these plans depend on the school’s goals? 3 One of the benefits of a strategy map is that goals and how they are linked can be communicated clearly to everyone in the organisation. Does a minimum-wage maintenance worker in a hospital really need to understand any goals beyond keeping the place clean? Discuss. 4 The MBO technique has been criticised for putting too much emphasis on achieving goals (ends) and not enough on the methods that people use to achieve them (means). Do you think this is a flaw in the technique, or in the way managers apply it? How would you place a balanced emphasis on ends and means? 5 A new business venture must develop a comprehensive business plan to borrow money to get started. Companies such as FedEx and Nike say they did not follow the original plan closely. Does that mean that developing the plan was a waste of time for these eventually successful companies? 6 How do you think planning in today’s organisations compares to planning 25 years ago? Do you think planning becomes more important or less important in a world where everything is

ethical summary

assets. The company has also restructured its business, and looked for cost savings in its overhead structure. An example is the establishment of a state-of-the-art servicing centre in Kuala Lumpur which replaces three lower scale centres in other countries. It continues to drive forward to build capabilities that match its business opportunities and environment. It is also examining opportunities to add value through involvement in some downstream businesses and services which complement its existing activities.

changing quickly and crises are a regular part of organisational life? Why? 7 Assume that Southern University decides to do two things: (1) raise its admission standards, and (2) initiate a business fair to which local townspeople will be invited. What types of plans might it use to carry out these two activities? 8 LivingSocial started with one ‘daily deal’, a $25 voucher for $50 worth of food at a Washington, DC restaurant. Since then, the company has grown at breakneck speed, has 60 million members in 27 countries, and has acquired a dozen companies that offer related deals and services. Why and how might a company such as LivingSocial want to use an intelligence team? Discuss. 9 Some people say an organisation could never be ‘prepared’ for a disaster such as the Japan nuclear disaster, or the huge BP oil spill in the Gulf of Mexico. Discuss the potential value of crisis planning in situations like these, even if the situations are difficult to plan for. 10 Goals that are overly ambitious can discourage employees and decrease motivation, yet the idea of stretch goals is proposed as a way to get people fired up and motivated. As a manager, how might you decide where to draw the line between a ‘good’ stretch goal and a ‘bad’ one that is unrealistic? 11 Come up with a stretch goal for some aspect of your own life. How do you determine whether it makes sense to pursue a stretch goal?

R e pa i r o r r e p l a c e ?

After only a few months in sales at ComputerSource, a full-service computer business, Sam Nolan realised there were serious problems in the software department. Most of the complaints from customers were related to the incorrect selection or installation of the software needed to meet their needs. He discussed the problem with his sales manager, who was part-owner and partner with the head of service for

ComputerSource. They both were aware of the problem, but they were facing an industry-wide shortage of qualified software engineers. Nolan received an urgent call from Katherine Perry, operations manager for Ross & Lindsey, a fast-growing financial management firm that was becoming one of his best accounts. She was calling to report that they were having daily network problems that were interfering with her staff’s productivity and morale. She needed an immediate solution to the problem. Like many firms, Ross & Lindsey had a hotchpotch of

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computer equipment and software on their network. They had bought from a series of vendors, with a patchwork approach to problems. Nolan realised it would take an expert software engineer days or weeks of work to fix all the bugs in their existing system, which ComputerSource could not afford. A costlier alternative was to recommend a system upgrade, replacing the older hardware and loading a newer software version on the entire network. Perry had already confided that she had pushed her bosses as far as they wanted to go on computer expenditures this year, but Nolan knew she was desperate. He did not want to risk losing her business, but he did not trust the software engineers to fix the problems. He was also pretty sure Perry would face the same dilemma at any computer retailer in town.

W h at d o yo u d o ? 1 Gamble on the service department to fix their existing system, within the limits of their budget and their frustration. If it does not work, it is their problem. 2 Recommend a system upgrade to correct the problem, even though it will cost the clients more than they want to pay and may jeopardise future sales. 3 Confide in the clients about your perception of the problem, give them the chance to make an informed choice and risk having them take their business elsewhere.

Course goal setting Step 1.  Make your goals for yourself regarding desired outcomes for this course explicit. What is your goal for a grade? Your goal for learning specific knowledge or skills? Define at least two goals for this course. Step 2.  The next step is to break down each goal into ‘goal behaviours’. These are the specific behaviours that will allow you to achieve each goal in Step 1. Examples of goal behaviours might include 100 per cent attendance, taking good class notes every day, reading assigned chapters before class, outlining chapters, writing definitions of new words, participating in class discussions, setting specific study times for exams, answering end-of-chapter questions, or completing ‘Workbook’ assignments. Define a minimum of four goal behaviours that will lead to the achievement of each goal in Step 1.

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Gr oup Challenge

Step 3.  In groups of three to five students, compare your goals and goal behaviours. Students should take turns sharing goals and behaviours with the group. Step 4.  What did you learn from hearing the goals and goal behaviours of group members? How different were the goals and behaviours of group members? Which combination of goals and goal behaviours seems most likely to be successful? Step 5.  On the last day of class, meet again as a group. Each student should report on the degree of success following goal behaviours and achieving goals. Share what you learned from this experience. Your instructor may ask your group members to report their findings to the class.

Source: Adapted by Dorothy Marcic from Nancy C. Morey. (1986–1987). Applying Goal Setting in the Classroom. The Organizational Behavior Teaching Review, 11:4, 53–9.

HID Dave Collins, CEO of HID, sat down at the conference table with his management team members, Karen Setz, Tony Briggs, Dave King and Andy Johnson. HID owns 10 Holiday Inns, eight hotels of different types and one property in Fiji. It also owns two Quality Inns. Dave Collins and his managers got together to define their mission and goals, and to set strategic plans. As they began their strategic planning session, the consultant they had hired suggested that each describe what he or she wanted for the company’s Australian operations in the next 10 years – how many hotels it should own, where to locate them and who the target market was. Another question he asked them to consider was what the driving force of the company should be; that is, the single characteristic that would separate HID from other companies. The team members wrote their answers on flip-charts, and the consultant summarised the results. Dave Collins’ goal included 50 hotels in 10 years, with the number increasing to 26 or 27 in five years. All the other members saw no more than 20 hotels in 10 years and a maximum of 15 or 16 within five years. Clearly there was disagreement among the top managers about long-term goals and the desirable growth rate.

Case for

cr itical With the consultant’s direction, analysis the team members began to critique their growth targets. Dave King, director of operations and development, observed: ‘We just can’t build that many hotels in that time period, certainly not given our current staffing, or any reasonable staffing we could afford. I don’t see how we could achieve that goal.’ Andy Johnson, the accountant, agreed. Karen Setz then asked: ‘Could we build them all in Australia? You know we’ve centred on the medium-priced hotel in smaller towns. Do we need to move to bigger towns now, or add another to the one we have in Sydney?’ Dave Collins responded: ‘We have an opportunity out in Newcastle, we may have one in Coffs Harbour, and we are looking at the possibility of going to New Zealand.’ The consultant attempted to refocus the discussion: ‘Well, how does this all fit with your mission? Where are you willing to locate geographically? Most of your operation is in certain limited areas of Australia. Can you adequately support a national building effort?’

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Tony Briggs responded: ‘Well, you know we have always looked at the smaller-town hotels as being our niche, although we deviated from that for the hotel in Fiji. But we generally stay in smaller towns where we don’t have much competition. Now we are talking about an expensive hotel in New Zealand, too.’ Dave Collins suggested: ‘Maybe it’s time we changed our target market, changed our pricing strategy and went for larger hotels in urban areas across the whole country. Maybe we need to change a lot of factors about our company.’

Questions 1 What is HID’s mission at present? How may this mission change? 2 What do you think HID’s mission, strategic goals and strategic plans are likely to be at the end of this planning session? Why? 3 What goal-setting behaviour is being used here to reach agreement among HID’s managers? Do managers typically disagree about the direction of their organisation?

Source: Adapted from a case provided by James Higgins.

On the job video case

Modern Shed: managerial planning and goal setting For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

Q uesti o n s 1   What level of planning and goal setting does marketer Scott Pearl perform for Modern Shed? 2  Do Scott Pearl’s goals meet the criteria of effective goal setting as discussed in the chapter? Explain.

endnotes

1  Tabuchi, H. (5 July 2012). Inquiry Declares Fukushima Crisis a Man-Made Disaster. The New York Times, http://www.nytimes.com/2012/07/06/world/asia/ fukushima-nuclear-crisis-a-man-made-disaster-reportsays.html (accessed 19 July 2012). 2  Wylie, I. (December 2001). He’s Belfast’s Security Blanket. Fast Company, 54–8. 3  Mars, R. D. D. (16 November 2001). Tough Act to Follow, http://www.asiaweek.com (accessed 30 June 2004). 4 Renault website, http://www.media.renault.com/global/en-gb/rsm/Media/ PressRelease.aspx?mediaid=25390. 5 Sales in 2012. http://www.renault.com/en/groupe/renault-dans-le-monde/ pages/ventes.aspx (accessed 18 September 2013). 6 Etzioni, A. (1984). Modern Organizations (Englewood Cliffs, NJ: Prentice Hall), p. 6. 7 Ibid. 8 Richards, M. D. (1986). Setting Strategic Goals and Objectives, 2nd edn, St Paul: West. 9 Daft, R. L. and Steers, R. M. (1986). Organizations: A Micro/Macro Approach. Glenview: Scott, Foresman; Saunders, C. B. and Tuggel, F. D. (1980). Corporate Goals. Journal of General Management, 5, 3–13; Simon, H. A. (1964). On the Concept of Organizational Goals. Administrative Science Quarterly, 9, 1–22. 10 Farnham, A. (1 May 1995). Brushing Up Your Vision Thing. Fortune, 129; Klemm, M., Sanderson, S. and Luffman, G. (1991). Mission Statements: Selling Corporate Values to Employees. Longrange Planning, 24:3, 73–8; Pearce, J. A. II and David, F. (1987). Corporate Mission Statements: The Bottom Line. Academy of Management Executive, 109–16;

3 What are some of the ways in which Scott Pearl’s plans and goals benefit Modern Shed as an organisation? Are there potential downsides to such planning?

Want, J. H. (August 1986). Corporate Mission: The Intangible Contributor to Performance. Management Review, 46–50. 11 Doyle, P. (Winter 1994). Setting Business Objectives and Measuring Performance. Journal of General Management, 20:2, 1–19; Drucker, P. F. (1954). The Practice of Management. New York: Harper & Brothers, 65–83. 12 Small Business Report (March 1983). Strategic Planning: Part 2, 28–32. 13 Meising, P. and Wolfe, J. (1985). The Art and Science of Planning at the Business Unit Level. Management Science, 31, 773–81. 14 Boeing website, http://www.boeing.com/boeing/companyoffices/ aboutus (accessed 17 September 2013); http://www.boeing.com/ assets/pdf/news/releases/2013/q1/130130_nr.pdf, p.1 (accessed 17 September 2013). 15 Head B. (12 April 2001). Boeing Pitches IT to the World. Business Review Weekly, 26; Boeing website, http://www.boeing.com/companyoffices/aboutus /brief.html. 16 Baltazar, M. (8 March 1999). Espressobus. Business Review Weekly, 45. 17 Crotts, John C. Dickson, D. R. and Ford, R. C. (August 2005). Aligning Organizational Processes with Mission: The Case of Service Excellence. Academy of Management Executive, 19:3, 54–68; Rummler, G. A. and Morrill, K. (February 2005). The Results Chain. TD, 27–35. 18 Kaplan, R. S. and Norton, D. P. (September–October 2000). Having Trouble with Your Strategy? Then Map It. Harvard Business Review, 167–76. Kaplan, R. S. and Norton, D. P. (January 2008). Mastering the Management System. Harvard Business Review, 63–77. 19 Chatterjee, S. (Winter 2005). Core Objectives: Clarity in Designing Strategy. California Management Review, 47:2, 33–49. 20 Edwin A. Locke, Gary P. Latham and Miriam Erez. (1988). The Determinants of Goal Commitment. Academy of Management Review, 13, 23–39.

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21 Drucker, P. F. (1954). The Practice of Management (New York: Harper & Row); George S. Odiorne. (October 1978). MBO: A Backward Glance. Business Horizons, 21, 14–24; and William F. Roth. (May–June 2009). Is Management by Objectives Obsolete? Global Business and Organizational Excellence, 36–43. 22 Jan P. Muczyk and Bernard C. Reimann. (1989). MBO as a Complement to Effective Leadership. The Academy of Management Executive, 3, 131–38; and W. Giegold. (1978). Objective Setting and the MBO Process, vol. 2 (New York: McGraw-Hill). 23 John Ivancevich et al. (Winter 1978). Goal Setting: The Tenneco Approach to Personnel Development and Management Effectiveness. Organizational Dynamics, 48–80. 24 Tim O’Shaughnessy, as told to Liz Welch. (March 2012). The Way I Work: Tim O’Shaughnessy, LivingSocial. Inc., 1048. 25 Eileen M. Van Aken and Garry D. Coleman. (July–August 2002). Building Better Measurement. Industrial Management, 28–33. 26 This analogy is from Jeffrey K. Liker and Timothy N. Ogden. (November– December 2011). The Toyota Recall: Missing the Forest for the Trees. Ivey Business Journal, http://www.iveybusinessjournal.com/topics/marketing/ the-toyota-recall-missing-the-forest-for-the-trees (accessed 19 July 2012). 27 Reylito A. H. Elbo. (11 June 2012). MBM: Management by Means, Not Results. The Manila Times, http://www.manilatimes.net/index.php/business/ business-columnist/24633-mbm-management-by-means-not-results (accessed 8 August 2012); and Liker and Ogden. The Toyota Recall. 28 Liker and Ogden. The Toyota Recall. 29 Sarah Fister Gale. (21 June 2012) Big Brother Is Watching: Why Social Media Policies Make Good Business Sense. Workforce, http://www .workforce.com/article/20120621/NEWS02/120629994/big-brother-iswatching-why-social-media-policies-make-good-business-sense# (accessed 18 July 2012); and Sarah Fister Gale. (21 June 2012). Five Things Every Social Media Policy Should Do. Workforce, http://www.workforce.com/ article/20120621/NEWS02/120629995 (accessed 18 July 2012). 30 Bounds, G. M., Dobbins, G. H. and Fowler, O. S. (1995). Management: A Total Quality Perspective (Cincinnati: South-Western College Publishing), pp. 219–20; Luecke, R. A. (1994). Scuttle Your Ships before Advancing (New York: Oxford University Press), pp. 64–8; Rienzo, T. F. (May–June 1993). Planning Deming Management for Service Organisations. Business Horizons, 36:3, 19–29. 31 C. Chet Miller and Laura B. Cardinal. (1994). Strategic Planning and Firm Performance: A Synthesis of More than Two Decades of Research. Academy of Management Journal, 37:6, 1649–85. 32 These are based on E. A. Locke and G. P. Latham. (1990). A Theory of Goal Setting & Task Performance (Englewood Cliffs, NJ: Prentice Hall); Richard L. Daft and Richard M. Steers (1986). Organizations: A Micro/Macro Approach (Glenview, IL: Scott, Foresman), pp. 319–321; Herbert A. Simon. (1964). On the Concept of Organizational Goals. Administrative Science Quarterly, 9, 1–22; and Charles B. Saunders and Francis D. Tuggel. (1980). Corporate Goals. Journal of General Management, 5, 3–13. 33 Nick Wingfield. (23 June 2009). Netflix Boss Plots Life After the DVD. The Wall Street Journal. 34 These are based on Henry Mintzberg. (1994).The Rise and Fall of Strategic Planning (New York: The Free Press); H. Mintzberg. (1994). Rethinking Strategic Planning, Part I: Pitfalls and Fallacies. Long Range Planning, 27, 12–21; and H. Mintzberg. (1993). The Pitfalls of Strategic Planning. California Management Review, 36, 32–47.

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35 Roth. Is Management by Objectives Obsolete? 36 Small Business (August 1987). Corporate Planning: Drafting a Blueprint for Success, 40–4. 37 Syed H. Akhter. Strategic planning, hypercompetition, and knowledge management. Business Horizons, 46:1, 19–24; Schnaars, S. and Ziamou, P. (July–August 2001). The Essentials of Scenario Writing. Business Horizons; Colvin, G. (6 March 2000). Managing in the Info Era. Fortune, F-5–F-9. 38 Schnaars and Ziamou. The Essentials of Scenario Writing. 39 Schoemaker, P. J. H. (Winter 1995). Scenario Planning: A Tool for Strategic Thinking. Sloan Management Review, 25–40; Knowlton, C. (21 August 1991). Shell Gets Rich by Beating Risk. Fortune, 79–82; Geus, A. P. (March–April 1988). Planning as Learning. Harvard Business Review, 70–4. 40 Coombs, W. T. (1999). Ongoing Crisis Communication: Planning, Managing, and Responding (Thousand Oaks: Sage Publications). 41 Coombs. Ongoing Crisis Communication: Planning, Managing, and Responding. 42 Bowen, A. (August 2001). Crisis Procedures That Stand the Test of Time. Public Relations Tactics, 16; Mitroff, I. (August 2001). Crisis Leadership. Executive Excellence, 19. 43 Mitroff, I. and Alpaslan, M. C. (April 2003). Preparing for Evil. Harvard Business Review, 109–15. 44 Monash University website, http://www.adm.monash.edu/audit/risk/ crisismanagement.html. 45 Grimsley, K. D. (October 2001). Many Firms Lack Plans for Disaster. The Washington Post, E1; Grimsley, K. D. (8 October 2001). Many Firms Lack Plans for Disaster. Girding Against New Risks: Global Executives Are Working to Better Protect Their Employees and Businesses from Calamity. Time, B8+. 46 Pearson, C. (January–February 2002). A Blueprint for Crisis Management. Ivey Business Journal, 69–73. 47 Mitroff and Alpaslan. Preparing for Evil. 48 Grimsley, K. D. Many Firms Lack Plans for Disaster. Girding Against New Risks: Global Executives Are Working to Better Protect Their Employees and Businesses from Calamity. 49 Argenti, P. (December 2002). Crisis Communication: Lessons from 9/11. Harvard Business Review, 103–9; Ucelli, L. (2002). The CEO’s How To Guide to Crisis Communications. Strategy & Leadership, 30:2, 21–4; Mitroff. Crisis Leadership. 50 Fass, A. (9 June 2003). Duking It Out. Forbes, 74–6. 51 Doyle, P. Setting Business Objectives and Measuring Performance. 52 Fisher, A. B. (23 April 1990). Is Long-range Planning Worth It? Fortune, 281–4. 53 Tanzer, A. (13 July 1987). We Do Not Take a Short-term View. Forbes, 372–4. 54 Panasonic website, Company Overview, http://www.panasonic.net; Panasonic Corporation Annual Report 2013, p. 7, http://panasonic.net/ir/annual/2013/ pdf/panasonic_ar2013_e.pdf (accessed 20 September 2013). 55 Columbia Today (Winter 1985–86). Preparing for the Unexpected, 2–4. 56 O’Reilly, B. (26 December 1994). J&J Is on a Roll. Fortune, 178–91. 57 Harari, O. (July 1995). Good News/Bad News about Strategy. Management Review. 58 Doug Bartholomew. (Summer 2005). Gauging Success. CFO-IT, 17–19. 59 This section is based on Liam Fahey and Jan Herring. (2007). Intelligence Teams. Strategy & Leadership, 35:1, 13–20.

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Define the components of strategic management. 2 Describe the strategic planning process and SWOT (strengths, weaknesses, opportunities and threats) analysis.

3 Understand strategic capabilities.

5 Describe business-level strategies, including Porter’s competitive forces and strategies, and cooperative strategies.

6 Discuss the organisational dimensions used for implementing strategy.

4 Define corporate-level strategies and explain the portfolio approach.

Chapter 8

Strategy formul ation and implementation

Chapter outline ➜ Thinking strategically

What is strategic management? Purpose of strategy Levels of strategy

➜ The strategic management process

Strategy formulation versus execution SWOT analysis

➜ Formulating corporate-level strategy The portfolio strategy The BCG matrix Diversification strategy

➜ Formulating business-level strategy

Porter’s competitive forces and strategies

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➜ Formulating functional-level strategy ➜ New trends in strategy Innovation from within Strategic partnerships

➜ Global strategy

Multidomestic strategy Transnational strategy

➜ Strategy execution

Implementing global strategies Testing the quality of strategy

➜ D  eveloping a sustainability strategy as part of business strategy

New Manager Self-test W h at i s y o u r s t r at e g y s t r e n g t h ? As a new manager, what are your strengths concerning strategy formulation and implementation? To find out, think about how you handle challenges and issues in your university or job. Then mark (a) or (b) for each of the following items, depending on which is more descriptive of your behaviour. There are no right or wrong answers. Respond to each item as it best describes how you respond to work situations.

1 When keeping records, I tend to: a be careful about documentation. b be haphazard about documentation. 2 If I run a group or a project, I: a have the general idea and let others figure out how to do the tasks.

b try to figure out specific goals, timelines, and expected outcomes.

3 My thinking style could be more accurately described as: a linear thinker, going from A to B to C. b thinking like a grasshopper, hopping from one idea to another.

4 In my office or home things are: a here and there in various piles. b laid out neatly or at least in reasonable order. 5 I take pride in developing: a ways to overcome a barrier to a solution. b new hypotheses about the underlying cause of a problem.

6 I can best help strategy by encouraging: a openness to a wide range of assumptions and ideas. b thoroughness when implementing new ideas. 7 One of my strengths is: a commitment to making things work. b commitment to a dream for the future.

8 I am most effective when I emphasise: a inventing original solutions. b making practical improvements. Scoring and interpretation: Managers have differing strengths and capabilities when it comes to formulating and implementing strategy. Here’s how to determine yours. For Strategic Formulator strength, score one point for each (a) answer marked for questions 2, 4, 6 and 8, and for each (b) answer marked for questions 1, 3, 5 and 7. For Strategic Implementer strength, score one point for each (b) answer marked for questions 2, 4, 6 and 8, and for each (a) answer marked for questions 1, 3, 5 and 7. Which of your two scores is higher and by how much? The higher score indicates your strategy strength. Formulator and Implementer are two important ways new managers bring value to strategic management. New managers with implementer strengths tend to work within the situation and improve it by making it more efficient and reliable. Leaders with the formulator strength push towards out-of-the-box strategies and like to seek dramatic breakthroughs. Both styles are essential to strategic management. Strategic formulators often use their skills in creating whole new strategies, and strategic implementers often work with strategic improvements and implementation. If the difference between your two scores is two or less, you have a balanced formulator/implementer style and work well in both arenas. If the difference is four or five points, you have a moderately strong style and probably work best in the area of your strength. And if the difference is seven or eight points, you have a distinctive strength and almost certainly would want to work in the area of your strength rather than in the opposite domain. Source: This questionnaire is adapted from Dorothy Marcic and Joe Seltzer, Organizational Behavior: Experiences and Cases (Cincinnati, OH: South-Western, 1998), pp. 284–87, and William Miller, Innovation Styles (Global Creativity Corporation, 1997).

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Australia Post CEO Ahmed Fahour

Source: Fairfax Syndication/Jessica Shapiro

Imagine that you were running Australia Post or New Zealand Post in the late 1990s, when it became plain that the increasing use of facsimile (fax) transmission of documents Management instead of postal letters was the least of your Challenge competitive threats. Indeed, email, mobile phones and text messaging, and, of course, Facebook, Twitter and the Internet, have meant that most of us send far fewer letters than we used to, as individuals and businesses now do most of their transactions digitally (for example, e-banking). The old Australia Post, and its counterparts in New Zealand and elsewhere, which had retail outlets primarily selling stamps and envelopes, and mail sorting and delivery networks (what we now call ‘snail mail’), must surely have been doomed to fail completely, given the digital revolution. Right? Actually, that couldn’t be further from the truth. What was needed, and what Graeme John, former CEO of Australia Post, and then his successor, Ahmed Fahour, delivered, was a new strategy that took account of changes in technology and consumer needs and embraced new business opportunities to stay with or ahead of the rapidly moving curve. Australia Post achieved a profit of A$371 million on revenue of A$4.16 billion in 2003–04, which gave it the impressive return on revenue of 17 per cent and return on assets of 13 per cent. What a change from the slow-moving, industrial relations nightmare of the past. The new strategy included licensing or franchising of Australia Post shops, mail bar-coding and new sorting technology (a A$700 million investment), giving postal delivery workers motorcycles to improve productivity, and achieving 95 per cent on-time delivery. New Zealand Post made similar steps forward. Taking on new opportunities was a big step forward for Australia Post, such as introducing comprehensive financial services, investing in parcel delivery via purchasing Star Track Express, and a joint venture with China Post to capture some of the massive goods supply line between these two countries. Increases in efficiency have meant that Australia Post and New Zealand Post can offer attractive package delivery and direct promotional mail-outs.

However, by 2011, it was clear that new ways of communicating electronically, such as Twitter and Facebook, were going to make conventional companies that moved letters by physical rather than electronic means close to redundant. Australia Post remains one of

Australia’s strongest brands, with outlets in every major suburb and town in the country. How could it use its strengths to respond to the clear threats of new technology? Newly appointed CEO Ahmed Fahour has both opportunities and major challenges facing him and his leadership team! The GFC and some major restructuring had reduced Australia Post’s profit level dramatically, by some 80 per cent (from 2007) to $103 million in 2010. While not in crisis, the company needed to regenerate itself through formulating and implementing a new strategy: and it did! It lost money on its letter business in 2010, and expects to continue to do so. The new strategy, ‘Future Ready’ emphasises four business streams:

➜➜ postal services ➜➜ retail services ➜➜ distribution and express services ➜➜ e-services. The company has also restructured and is trying to implement a new matching culture. The aim is to continue its traditional services, but to also move with changing technologies and market needs, with a customer-centric new culture driving all activities. With over 4000 retail sites, a trusted brand and 34 000 staff, Australia Post needs intelligent strategy and disciplined execution to use these great assets and assure its future. In 2012, Australia Post had achieved:

➜➜ a before-tax profit of $366.7 million and total revenue of $5.1 billion

➜➜ a dividend to the Australian Government of $213.7 million ➜➜ delivery of 93.1 million items every week ➜➜ annual online sales of $11.1 billion ➜➜ delivery of 95.6 per cent of domestic letters on time ➜➜ 4428 postal outlets, with 2560 of these in rural and remote areas ➜➜ 15 995 street posting boxes ➜➜ winner of BRW magazine’s ‘freshest idea’ for their 24/7 Parcel lockers. Sources: Skotnicki, T. (18 November 2004). Government enterprises: First Class Delivery, Business Review Weekly; Australia Post website, http://auspost.com.au/ about-us/fast-facts-about-australia-post.html.

Question For Mr Fahour and his colleagues, and for his counterparts in New Zealand Post and elsewhere, their progress in developing and implementing new service and technology strategies has been impressive, growing revenue in spite of lower ‘snail-mail’ volumes. Clearly, though, they cannot rest easy and must keep adapting and developing their organisations’ strategies. What strategies and opportunities would you be working on in the next five years if you were running a Post company? (See http://www.auspost.com.au and http://www.nzpost.co.nz) How, if at all, should they further develop their financial services offerings? For example, Singapore Post has teamed up with Prudential insurance company to offer life insurance products (see http://www.singpost.com.sg).

8 : S t r at e g y f o r m u l at i o n a n d i m p l e m e n tat i o n

How important is strategic management? It largely determines which organisations succeed and which ones struggle. Effectiveness of the strategies that managers chose and how effectively they executed them help explain why companies like Facebook and Amazon.com are thriving, how Facebook and Instagram all but killed MySpace in social networking, and why Apple is beating Microsoft in the world of mobile computing. Every organisation is concerned with strategy. Strategic blunders can hurt. For instance, Kodak, which in 2012 stopped manufacturing cameras, still hasn’t recovered from its managers’ failure to plan for the rapid rise of digital photography. Organisations formulate and implement strategies, not just tactics. They find ways to respond to competitors, cope with difficult environmental changes, meet changing customer needs and effectively use available resources. Strategic planning has taken on new importance in today’s world of globalisation, deregulation, advancing technology, and changing demographics and lifestyles. Managers are responsible for positioning their organisations for success in a world that is constantly changing. Top organisations thrive by changing the rules of an industry to their advantage or by creating entirely new industries.1 For example, Dell Computer changed the rules of computer manufacturing and supply by making and selling its PCs and laptops direct to customers rather than making its computers available in retail outlets. Dell products are ordered by telephone or online (http://www.dell.com.au) from Australia and New Zealand, manufactured very quickly in Malaysia and then shipped direct to customers.2 Chapter 7 gave an overview of the types of goals and plans that organisations use. In this chapter, we explore one specific type of planning: strategic management. First we define the components of strategic management and then we discuss a model of the strategic management process. Next, we examine several models of strategy formulation. Finally, we discuss the tools managers use to implement their strategic plans.

Thinking strategically What does it mean to think strategically? Strategic thinking means to take the long-term view and to see the big picture, including the organisation and the competitive environment, and consider how they fit together. Strategic thinking is important for both businesses and non-profit organisations. In for-profit firms, strategic planning typically pertains to competitive actions in the marketplace. In non-profit organisations such as the Red Cross or the Salvation Army, strategic planning pertains to events Take a in the external environment. Moment Research has shown that strategic thinking and planning positively affect a firm’s As a potential new manager, performance and financial success.3 Most managers are aware of the importance of practise thinking strategically by strategic planning, as evidenced by a McKinsey Quarterly survey. Fifty-one per cent of studying your department’s or your responding executives whose companies had no formal strategic planning process said organisation’s environment, market and competitors. Think about what the they were dissatisfied with the company’s development of strategy, compared to only long-term future might hold and 20 per cent of those at companies that had a formal planning process.4 CEOs at successful how you think the company can companies make strategic thinking and planning a top management priority. For an best be positioned to stay organisation to succeed, the CEO must be actively involved in making the tough choices competitive. and trade-offs that define and support strategy.5 However, senior executives at today’s leading companies want middle- and low-level managers to think strategically as well. Understanding the strategy concept and the levels of strategy is an important start towards strategic thinking.

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➜➜ To think strategically means to take the long-term view and see the big picture.

strategic management The set of decisions and actions used to formulate and implement strategies that will provide a competitively superior fit between the organisation and its environment so as to achieve organisational goals.

Syd Howard Fireworks International takes great pride in its creations around the world, including the New Year celebrations in Sydney.

strategy A plan of action that describes resource allocation and activities for dealing with the environment, achieving a competitive advantage, and attaining goals. competitive advantage What sets the organisation apart from others and provides it with a distinctive edge in the marketplace.

remember this

What is str ategi c m anagem ent? Strategic management is the set of decisions and actions used to formulate and implement strategies

that will provide a competitively superior fit between an organisation and its environment so as to achieve organisational goals.6 Managers ask questions such as: what changes and trends are occurring in the competitive environment? Who are our customers? What products or services should we offer? How can we offer those products and services most efficiently? Answers to these questions help managers make choices about how to position their organisation in the environment with respect to rival companies.7 Superior organisational performance is not a matter of luck; it is determined by the choices managers make. One Australian company that has successfully pursued a strategy of growth, first in the Australian market and then in the Asian market, is Syd Howard Fireworks International. Managing director Syd Howard claims to have been born into the fireworks business: he created his first display of fireworks at the age of 11 in his father’s business. The company has designed and provided the fireworks for many large events including the display on the final night of the Sydney 2000 Olympics, and the 2006 Melbourne Commonwealth Games. The company uses sophisticated computer-aided designs in its pyrotechnics displays and has fired off fireworks from the Sydney Harbour Bridge and the Sydney Opera House on numerous occasions. It exported its services to mark the reunification of Hong Kong with China in 1997. In that display, the company fired 37 tonnes of fireworks from eight barges in Hong Kong’s Victoria Harbour – a feat that required 80 tonnes of equipment to be shipped from Australia to set up the display. The company now operates as a true international firm; for example, it provided the spectacular fireworks for the Delhi 2010 Commonwealth Games and the 2011 Arab Games Opening Ceremony in Qatar.8 Source: Shutterstock.com/Max Earey

strategic management

➜➜ In for-profit firms, strategic planning typically pertains to competitive actions in the marketplace. In non-profit organisations, strategic planning pertains to events in the external environment.

Pu rpose o f str ategy The first step in strategic management is to define an explicit strategy, which is the plan of action that describes resource allocation and activities for dealing with the environment, achieving a competitive advantage and attaining the organisation’s goals. Competitive advantage refers to what sets the organisation apart from others and provides it with a distinctive edge for meeting customer or client needs in the marketplace. The essence of formulating strategy is choosing how the organisation will be different.9 Managers make decisions about whether the company will perform different activities or will execute similar

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activities differently than its rivals do. Strategy necessarily changes over time to fit environmental conditions, but to achieve competitive advantage, companies develop strategies that incorporate the elements illustrated in Exhibit 8.1: target specific customers, focus on core competencies, provide synergy and create value.

Exhibit 8.1 The elements of competitive advantage

Target customers

Take a Moment Exploit core competence

Competitive advantage

Create value

Achieve synergy

As a new manager, can you identify the core competency of your team or department and identify ways that it can contribute to the organisation’s overall strategy? Who are your team’s or department’s customers, and how can you deliver value?

Targ e t cust omer s An effective strategy is to target customers, that is, it defines the customers and which of their needs are to be served by the company.10 Managers can define a target market geographically, such as serving people in a certain part of the country; demographically, such as aiming towards people in a certain income bracket or targeting middle-aged women; or by a variety of other means. Some firms target people who purchase primarily over the Internet, whereas others aim to serve people who like to shop in small stores with a limited selection of high-quality merchandise. When America’s Southwest Airlines was founded, managers identified the target customer as regular bus travellers, people who wanted to get from one place to another in a convenient, lost-cost way.11 Volvo’s new owners and managers are shifting the company’s strategy towards a new target customer. Rather than aiming for people who appreciate the brand’s reputation for safe, reliable family vehicles, Li Shufu, the company’s Chinese owner, is aiming to expand aggressively into the luxury car market. Volvo is particularly courting the emerging class of rich consumers in China and other overseas markets. Li wants Volvo to offer innovative, electrifying designs that turn heads and win new luxury-minded customers with flashy tastes.12

target customer An effective strategy defines the customers to be targeted and which of their needs are to be served by the company.

Ex ploit cor e comp et ence A company’s core competence is something the organisation does especially well in comparison to its competitors. A core competence represents a competitive advantage because the company acquires expertise that competitors do not have. A core competence may be in the area of superior research and development, expert technological know-how, process efficiency or exceptional customer service.13 At VF Corporation, a large apparel company that owns Vanity Fair, Nautica, Wrangler and The North Face, among other brands, strategy focuses on the company’s core competencies of operational efficiency and merchandising know-how. When VF bought The North Face, for example, its distribution systems were so poor that stores were getting

core competence A business activity that an organisation does particularly well in comparison to competitors.

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ski apparel at the end of winter and camping gear at the end of summer. The company’s operating profit margin was minus 35 per cent. Managers at VF revamped The North Face’s sourcing, distribution and financial systems, and within five years doubled sales to $500 million and improved profit margins to a healthy 13 per cent.14 Robinson Helicopter succeeds through superior technological know-how for building small, two-seater helicopters used for everything from police patrols in Los Angeles to herding cattle in Australia.15 In such cases, leaders identified what their company does especially well and built strategy around it.

B ui ld syner gy synergy The condition that exists when the organisation’s parts interact to produce a joint effect that is greater than the sum of the parts acting alone.

When organisational parts interact to produce a joint effect that is greater than the sum of the parts acting alone, synergy occurs. The organisation may attain a special advantage with respect to cost, market power, technology or management skill. When properly managed, synergy can create additional value with existing resources, providing a big boost to the bottom line.16 Synergy was the motivation for Kraft to buy Cadbury, for instance, and for Oracle to buy Sun Microsystems. Kraft can use Cadbury’s established distribution network in emerging markets to share trucks and store contacts and sell more Kraft products. Oracle’s purchase of Sun gives the software company a giant hardware business, enabling Oracle to provide corporations with most of the technology they need in a single package.17 In the small companies segment, Dryen Australia is attempting to achieve synergies by using its supply chain and marketing core competencies and applying these to new categories of goods that would allow it to fulfil its business strategy of ‘further profitable growth’.

Deli ver value Delivering value to the customer is at the heart of strategy. Value can be defined as the combination of benefits received and costs paid. Managers help their companies create value by devising strategies that exploit core competencies and attain synergy. To compete with the rising clout of satellite television, for example, cable companies such as Telstra are offering value packages that provide a combination of Foxtel television, including optional digital premium channels, video on demand, high-speed Internet and digital phone service for a reduced cost. Value can mean different things to different consuming groups in a market. For example, consider how Aldi is positioned to offer different elements of value at different prices to Coles and Woolworths, which are different again from offerings of convenience stores such as 7-Eleven. The benefits are different in these cases and so are the prices. By growing through acquisitions and ‘organic’ growth – meaning natural growth in markets – companies and their managers can give value to customers and shareholders. This often includes using existing core competencies over a larger base of assets or finding synergies between a company and a potential merger partner or acquisition target. National Australia Bank’s series of acquisitions of banks in England, Scotland, Ireland, New Zealand and the US was a successful strategy of growth and geographical diversification that was implemented more than two decades ago. The bank was able to add value to the banks it took over in those foreign countries by sending a number of key executives on assignments, of about three years each, to lead the change process. However, few such strategies are perfect – or even close to it. After a decade of successful expansion and 15 per cent annual profit growth for many years, this banking group had to step back from its global growth aspirations, and downsize its key US-based banking and other activities, when significant losses occurred in that market. Consider Austal, another successful Australian company that has grown through a combination of developing, manufacturing and selling new products, as well as the acquisition of businesses (see the Case Study).

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➜➜

➜➜

➜➜

➜➜

assistance of a good agent based in Hong Kong. It has also meant not treating the various countries and markets in Asia as a single marketplace, but recognising the differences, for example, between China and Japan. Market-driven development. This has meant being responsive to the needs of customers and the market, rather than telling the market what is possible. These vessels contain a great deal of high-level technology, such as ride-control technology, which is fully automated and enhances passenger comfort through its stabilisation system. Austal is not only using this technology in its own products but also retrofitting vessels built by others. The company has a reputation for innovation and has won a number of awards for excellence in design. Financial management. This is seen as critical to the success and growth of the company. Most of Austal’s growth has been funded internally from profits and reinvestment, and since it has developed a very good relationship with its bank, financing has not been a difficult issue for Austal. A quality culture. Austal has benchmarked itself in terms of its manufacturing and design performance against companies such as Boeing, British Aerospace and Daimler-Benz, as well as Japanese car manufacturers. The productivity and efficiency that results from managing to achieve a highperformance workforce has been an important element in Austal’s success. Good people management. The management of professional people such as naval architects, skilled tradespeople and engineers has been very important to Austal’s growth and success. Austal’s workforce

has grown from 30 people to more than 3200. The company has an apprentice system and has developed a training partnership with the local TAFE college. It has since won many awards for its excellence in people management, ship design and manufacturing excellence. The essentials of Austal’s success are sticking with the simple business fundamentals: having a strategic vision, a quality product and a strong work ethic. Austal has established a shipyard in Mobile, Alabama, from which it supplies the US market including the US military forces with fast ships. This US facility is much bigger than its West Australian and Tasmanian facilities combined, reflecting its significant success and growth into the US. Its 2012 business performance was a profit of $11 million on sales of $650 million, and these numbers are steadily growing (contracts in hand amount to over $1.6 billion) while the business also diversifies into new applications and global markets for its innovative ships. Sources: Austal website, http://www.austal.com; Department of Industry, Science and Resources, 1999, Austal Annual Report 2012.

Source: Fairfax Syndication/Erin Jonasson

Austal Ltd is a Perth-based designer and manufacturer of aluminium ships ranging from 30 to 90 metres in length and designed to carry passengers or vehicles. These ferries have been sold all around the world, including the major markets of Sweden, Germany, Japan, Greece and Turkey. Interestingly, Austal’s main global competitor Incat is based in Tasmania; together these two Australian companies are estimated to hold about two-thirds of the world market for passenger and vehicle ferries. Austal has grown through new-product development as well as the acquisition of businesses such as Image Marine and Ocean Fast Limited. Austal achieved a large contract to supply fast ships to the US military, and established a production facility in the US to support that work, which took its 2004 sales to nearly A$300 million. Incat, on the other hand, suffered financial difficulties, and a receiver and manager were appointed to rationalise the company’s operations. Incat has rebounded and continues to trade well, delivering numerous vessels to many markets all around the world (see http://www.incat. com.au). Austal won a contract to supply vessels to the Australian Customs Service for surveillance around Australia. The company also has ambitious growth plans: the strategy is to grow to several times its present size within just a few years. Although Austal has mostly built its vehicles to order in the past, part of its future strategy is the manufacture of stock, or standard, vehicles that are built without having an order. While this means taking more risk, it does improve the availability of vessels and levels the otherwise cyclic demands on the workforce. Austal’s success has been built on a number of factors: ➜➜ Aggressive marketing. This has meant entering the Chinese market with the

Case study

Austal Ltd

John Rothwell, Non-executive Chairman and founder of Austal

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MYOB MYOB is clearly a great Australian business success story. MYOB develops and publishes award-winning software solutions that have revolutionised the way small- and medium-sized businesses do their accounting and solve their financial management problems. The introduction of the GST (goods and services tax) in Australia in 2000 helped MYOB’s growth. Craig Winkler established MYOB in 1997 and is its CEO and managing director. He was able to bring together computing skills and the accounting expertise needed to produce a user-friendly accounting package. The original MYOB software was produced by a US company called BestWare, and Winkler secured the rights to develop and provide the Australian, New Zealand, Malaysian, South African and Singaporean versions. This required significant development, as accounting standards and tax laws are different across countries. In 1996, the Australian company took a big risk and seized the opportunity to buy BestWare and become the worldwide owners and controllers of the MYOB software package. MYOB offers ongoing product support for its software and upgrades.

Innovative Way

Businesspeople can join the MYOB cover plan, which provides telephone support and upgrades as well as training. In July 1999, MYOB listed on the Australian Stock Exchange, which enabled the company to accelerate product development and fund increased growth in the business. MYOB has also diversified through acquiring other software products and companies such as RetailManager. MYOB has a focused strategy of helping small business achieve better results by providing solutions that greatly simplify business operations and management. By 2008, MYOB was selling and servicing its software to 500 000 businesses and over 10 000 accounting firms, and a large amount of revenue had been re-invested into further product and market development. By 2010, new CEO Tim Reed had taken MYOB back into private ownership through a buyout, and had expanded sales to well over $200 million, with operations becoming increasingly global and over 1 200 000 businesses using it every day to run their accounts and other information infrastructure. Bain Capital purchased MYOB in 2011 for

more than $1 billion, in Australia’s thirdbiggest private equity deal. The company has broadened its product base from essentially book keeping and accounting software to other business applications and now offers a wide range of accounting solutions through their recent union with BankLink and development of cloud facilities. MYOB is focused on convincing the remaining 40 per cent of SMEs (small and medium enterprises) to move away from Microsoft’s Excel and use their highly efficient cloud product instead. Sources: Bingemann, M. (10 September 2012). MYOB chief Tim Reed says life under Bain Capital ownership has been good. The Australian. http://www.theaustralian.com.au/business/ mergers-acquisitions/myob-chief-tim-reed-sayslife-under-bain-capital-ownership-has-been-good/ story-fn91vdzj-1226468520756 (accessed 23 September 2013); Carter, B. (17 September 2013). MYOB looks to Libs for confidence lift. The Australian, http://www.theaustralian.com.au/ business/companies/myob-looks-to-libs-forconfidence-lift/story-fn91v9q3-1226720479137 (accessed 26 September 2013); MYOB website, http://www.myob.com.au; Moran, S. (24 July 2013). Sage ups the ante in archers MYOB case. The Australian, http://www.theaustralian.com.au/business/ companies/sage-ups-the-ante-in-archers-myobcase/story-fn91v9q3-1226683993127 (accessed 7 October 2013).

Amazon Prime

It’s hard to believe Amazon was once a struggling online bookseller. Today, it is ‘an existential threat’ to every retailer, as Fiona Dias, executive vice president of GSI Commerce, put it. Amazon targets customers who want to find good deals and purchase products conveniently over the Internet. Those customers can find just about anything they want on Amazon.com. They often pay less for it there than they would anywhere else. And if they belong to Amazon Prime, they get free two-day shipping.

Amazon wants to provide ‘premium products at nonpremium prices’. To do that, it has developed an extensive network of third-party merchants – partners with whom it maintains close, mutually beneficial relationships, is constantly honing its operational efficiency, and has created one of the most finely tuned distribution systems around. As if all that wasn’t enough, along came Prime. For $US79 a year, customers get free two-day shipping, as well as free streaming video and other perks. Prime allows

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Amazon to capitalise on its core competencies of wide selection, cost efficiency and slick distribution. When asked how they decided on the $79 price tag, a member of the Prime team said it ‘was never about the $79. It was really about changing people’s mentality so they wouldn’t shop anywhere else’. Prime was conceived as a way to further cement the loyalty of Amazon’s best customers, and it has been more successful than even CEO Jeff Bezos imagined.

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Amazon Prime, said one recent business article ‘turns casual shoppers . . . into Amazon addicts’, It provides value to customers, but it also increases sales for Amazon. According to some estimates, customers increase their purchases on the site by about 150 per cent after joining Prime. It is credited for helping Amazon’s sales zoom 30 per cent during the global financial crisis while other retailers struggled to attract customers.

Sources: Brad Stone. (29 November–5 December 2010). What’s in the Box? Instant Gratification. Bloomberg Businessweek, 39–40; and S. Levy. (December 2011). CEO of the Internet: Jeff Bezos Owns the Web in More Ways than You Think. Wired, http://www.wired.com/magazine/2011/11/ff_bezos/ (accessed 24 July 2012).

Levels o f str ategy Another aspect of strategic management concerns the organisational level to which strategic issues apply. Strategic managers normally think in terms of three levels of strategy, as illustrated in Exhibit 8.2.18 ●● What business are we in? This is the question managers address when they consider corporate-level strategy. Corporate-level strategy pertains to the organisation as a whole and the combination of business units and product lines that make up the corporate entity. Strategic actions at this level usually relate to the acquisition of new businesses; additions or divestments of business units, plants or product lines; and joint ventures with other corporations in new areas. For the National Australia Bank (NAB), the core business is clearly financial services; for Austal, it is designing and building a particular type of boat. It is often risky to venture too far from your core business area. ●● How do we compete? Business-level strategy pertains to each business unit or product line. Strategic decisions at this level concern amount of advertising, direction and extent of research and development, product changes, new-product development, equipment and facilities, and

Corporate-level strategy: What business are we in?

corporate-level strategy The level of strategy concerned with the question ‘What business are we in?’ It relates to the organisation as a whole and the combination of business units and product lines that make it up. business-level strategy The level of strategy concerned with the question: ‘How do we compete?’ It relates to each business unit or product line within the organisation.

Corporation Exhibit 8.2 Three levels of strategy in organisations

Business-level strategy: How do we compete? Textiles unit

Chemicals unit

Auto parts unit

Functional-level strategy: How do we support the business-level strategy? Finance

R&D

Manufacturing

Marketing

Sources: Milton Leontiades, Strategies for Diversification and Change (Boston: Little, Brown, 1980): 63; and Dan E. Schendel and Charles W. Hofer, eds., Strategic Management: A New View of Business Policy and Planning (Boston: Little, Brown, 1979): 11–14.

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functional-level strategy The level of strategy concerned with the question: ‘How do we support the business-level strategy?’ It relates to all of the organisation’s major departments

expansion or contraction of product and service lines. Many companies have opened e-commerce units as a part of business-level strategy. For example, NutriSystem Inc. was bankrupt a decade ago, but managers reinvented the company as an Internet distributor, shipping customers a month’s worth of shelf-stable diet food.19 People can track their progress online and get virtual counselling when they need a boost. The Internet strategy and a new approach to advertising pushed sales from just $27 million in 2002 to $397 million in 2012.20 NutriSystem has also pressed forward with their distribution strategy and is now selling its product though Walmart stores in America. The company was founded in 1972 and has 466 employees with a market valuation (capitalisation) of US$547 million. ●● How do we support the business-level strategy? Functional-level strategy pertains to the major functional departments within the business unit. Functional strategies involve all of the major functions, including finance, research and development, marketing and manufacturing. The functional-level strategy for NutriSystem’s marketing department, for example, is to feature real-life customers in direct-response print and television ads that steer dieters to the company’s website.

➜➜ Strategic management refers to the set of decisions and actions used to formulate and implement strategies that will provide a competitively superior fit between the organisation and its environment so as to achieve organisational goals. ➜➜ A strategy is the plan of action that describes resource allocation and activities for dealing with the environment, achieving a competitive advantage and attaining goals. ➜➜ Competitive advantage refers to what sets the organisation apart



from others and provides it with a distinctive edge in the marketplace.

➜➜ The heart of strategy is to deliver value to customers.

remember this

➜➜ Four elements of competitive advantage are the company’s target customer, core competencies, synergy and value.

➜➜ Corporate-level strategy pertains to the organisation as a whole and the combination of business units and products that make it up.

➜➜ A core competence is something that the organisation does particularly well in comparison to others.

➜➜ Business-level strategy pertains to each business unit or product line within the organisation.

➜➜ Synergy exists when the organisation’s parts interact to produce a joint effect that is greater than the sum of the parts acting alone.

➜➜ Functional-level strategy pertains to the major functional departments within each business unit, such as manufacturing, marketing and research and development.

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decided to move down the value chain and enter the retailing segment itself in order to reduce this dependence. Apple put one of the world’s most highly respected retailers, Mickey Doexler, on to its board of directors. Doexler had been successfully running The Gap chain at the time. Being a computer company, Apple built a prototype store near its campus in California. The Apple store Version 0.0 was built in a warehouse and it was experimented with in the same way one would experiment with an electronic gadget. The prototype store was redesigned a few times and after a lot of redesign and brainstorming, Apple came up with innovations such as the ‘Genius Bar’ in the back of the store, which doesn’t dispense alcoholic beverages but dispenses advice of a very high level for anyone who has questions about any of Apple’s products. Apple has attempted to give its customers and potential customers outstanding service in terms of very fast repair times and it deploys technical people with real know-how. Stores are very much designed to eliminate clutter. The design is brilliant in its simplicity with the stores being made of only glass, stainless steel and wood and carefully designed lighting, which fits the Apple highquality image of ‘nice design’. Apple’s profits increased year on year for nine years until the first quarter of 2013. In 2012 Apple earned over $40 billion in profit from revenue of nearly $155 billion and in September 2012 their share price peaked at an astounding US$700 per share. Its share price has reduced since then but Apple’s dominance continues. Apple now has over 72 500 fulltime employees, a market value estimated at about $416 billion and projections of an unheard of $156 billion in cash and investments in 2013. In 2013 Apple became the world’s most valuable brand (based on Interbrand’s annual report), finally dislodging Coca-Cola from the number one spot – a position that company had held since the report’s inception in 2000. An example of Apple’s astonishing market success is demonstrated with the

release of new versions of iPhones: in 2011 Apple recorded 4 million sales of the 4s in its first three days on the market, in 2012 sales of the iPhone 5 topped five million over the first three days and in 2013 the release of the 5s and 5c sold over 9 million in the same time period – a record breaking amount. Serious challenges to Apple’s market dominance have finally come from Samsung with their Galaxy smartphones topping annual sales and Apple’s own challenges to maintain healthy margins. Sources: Useem, J. (19 March 2007). Fortune, pp. 55–60, http://www.businessweek.com/ news/2010-05-26/apple-overtakes-microsoft-inmarket-capitalization-update3-.html; marketwatch. com; Apple Annual Report 2012; Jones, C. 12 December 2012). How Much Extra Cash Does Apple Really Have? Forbes, http://www.forbes.com/sites/ chuckjones/2012/12/12/how-much-extra-cashdoes-apple-really-have (accessed 26 September 2013); Elliot, S. (29 September 2013). Apple Passes Coca-Cola as Most Valuable Brand. The New York Times, http://www.nytimes.com/2013/09/30/business/ media/apple-passes-coca-cola-as-most-valuablebrand.html?_r=0 (accessed 8 October 2013); http:// investorplace.com; Oleaga, M. (15 August 2013). Apple vs Samsung Sales Figures 2013 Q2: Samsung Extends Lead Against Apple Inc., LG Electronics; Smartphones Top Feature Phones, Says Gartner. Latinos Post, http:// www.latinospost.com/articles/25603/20130815/ apple-vs-samsung-sales-figures-2013-q2-extendslead-against.htm (accessed 26 September 2013); Apple Retail Store, http://www.apple.com/retail/storelist/ (accessed 27 September 2013).

Source: Getty Images/Brian Kersey

Apple Inc. has become an extremely successful retailer in the last decade, with its Apple stores surpassing expectations in retail performance by a huge margin. The most important performance measure for retail stores is sales revenue per square metre, and Apple stores average sales per square metre better then famed brand name retailers such as Tiffany and Company, Nieman Marcus, Saks and Best Buy. People just seem to love visiting Apple stores – especially Apple ‘fans’. With over 415 retail stores in total globally (including 20 in Australia and eight in China), the most remarkable statistic is that Apple stores each attract on average nearly 14 000 people per week and the Fifth Avenue store in New York averages over 50 000 people per week. In retailing terms, Apple’s astonishing growth goal was to reach $1 billion in retail per year, being faster than any other retailer at that level. Former Apple CEO, the late Steve Jobs, who led Apple’s strategies through both good and not-so-good times, had a platform to move the newest product from his Apple innovation engine, iPhone, into the mainstream of retailing. In 2010, Apple’s capital (shareholder) value jumped from previously being not in the world’s top 10 to being the biggest company in the world, on a par with the giant oil company Exxon Mobil, and well ahead of its rivals. By 2011, Apple had achieved a massive 10 billion downloads by consumers. Apple rapidly expanded its online and offline presence, with its 49 000 employees creating a remarkable $14 billion of profit on $65 billion of revenue. The company’s share price tripled during and after the GFC from $100 to $300. Sadly, the company’s hands-on CEO, who was widely recognised as a key to this company’s spectacular success, passed away in October 2011. Apple’s move in retail was a very deliberate strategy as led by Jobs. First it came from the realisation of the strategic threat that Apple was increasingly becoming dependent on large, powerful retailers; in response, the company

Case study

Apple Inc.’s strategy: much more than iPod, iPhone, iPad and Mac

Apple stores are distinctive in their offerings and style.

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The strategic management process

Apple

The overall strategic management process is illustrated in Exhibit 8.3. It begins when executives evaluate their current position with respect to mission, goals and strategies. They then scan the organisation’s internal and external environments and identify strategic issues that might require change. Managers at BP didn’t have to look far to see a need for change after a giant drilling rig exploded and sank in April 2010, killing 11 crew members and spilling massive amounts of oil into the Gulf of Mexico. BP’s strategy had been based on being a leader in pushing the frontiers of the oil industry, such as drilling the world’s deepest wells, scouting for oil in the Arctic and other aggressive efforts. The strategy succeeded; BP steadily increased production and overtook Royal Dutch Shell PLC in market capitalisation in January 2010.21 A few months later, though, disaster struck, presenting a crisis that required a new approach to strategy for the oil giant. BP managers evaluated whether the company’s strategy fitted the environment and its own capabilities and shifted strategic goals to focus on safety and consistency. For all organisations, internal or external events sometimes indicate a need to redefine the mission or goals or to formulate a new strategy at the corporate, business or functional level. Factors that alter a company’s ability to achieve its goals are called strategic issues, as described in Chapter 3. In turbulent environments and fast-changing industries, managers have to stay alert to strategic issues that require a shift in strategy to stay in line with both internal and external changes.22 This chapter’s Management in Practice discusses some recent trends in strategy formulation and execution.

Scan external environment: national global

Evaluate current: mission goals grand strategy

Sources: Based on Stevenson, H. H. (Spring 1976). Defining Corporate Strengths and Weaknesses. Sloan Management Review, 17, 51–68; Kastens, M. L. (1976), Long-range Planning for Your Business. New York: American Management Association.

Define new: mission goals grand strategy

SWOT

Scan internal environment: core competence

Exhibit 8.3 The strategic management process

Identify strategic factors: opportunities threats

synergy value creation

Identify strategic factors: strengths weaknesses

Formulate strategy: corporate business functional

Implement strategy by changes in: leadership/culture structure human resources information and control systems

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Will strategy ever be the same? ‘Strategy, as we knew it, is dead,’ said Walt Shill, head of management consulting in North America for Accenture Ltd. It might be an overstatement, but during the economic turmoil of the past few years many managers have discovered they need new approaches to strategy.

➜➜ Managers build flexibility into strategic plans. Management scholar and strategic thinker Gary Hamel uses the term strategic decay to describe the fact that the value of even the most brilliant strategy declines over time. Static long-range strategic plans can be a liability in a topsyturvy world. What was a strength yesterday might be the beginnings of a weakness today. To overcome the natural tendency to depend on what has worked in the past, managers at organisations such as McKinsey & Company build a culture of inquiry, healthy debate and constructive conflict.

➜➜ Strategy is built actively and interactively. Managers don’t sit at their desks and dream up strategy. They get out and talk to employees, customers, suppliers and other stakeholders. In the early days of Hewlett-Packard, for example, Dave Packard and Bill Hewlett were seldom at their desks. They were out talking to people and gaining a solid, realistic grounding for the creation of effective strategy.

management in pr actice ➜➜ Strategic partnerships are key components of strategy. Collaboration with other organisations is an important part of how successful companies enter new areas of business. To find new ways to make money as e-books, which provide less revenue per unit than traditional hardcover books, become more popular, Random House is striking deals with video game publishers to write original stories for games and offer advice to developers on their own storylines.

➜➜ Strategy comes to life with creative execution. Creative execution is the implementation of a strategy that is so well conceived, compelling and embraced by everyone throughout the organisation that it practically guarantees a successful outcome. For example, Google’s strategy of focusing on search rather than content – on organising existing information and making it accessible and useful – was so clear and compelling that employees rallied behind it. Managers use visionary leadership, open and honest communication, and bold action to drive strategy. Ignoring the seemingly impossible nature of the task, Google managers have inspired people with a strategic goal to digitise every book in the world’s libraries.

Sources: Gary Hamel. (21 October 2009). Outrunning Change – The CliffsNotes Version. Gary Hamel’s Management 2.0, WSJ Blogs, http://blogs.wsj.com/ management/2009/10/21/outrunningchange-the-cliffsnotes-version/ (accessed 31 July 2012); Eric Beaudan. (March–April 2010). Creative Execution. Ivey Business Journal, http://www.iveybusinessjournal.com/article.asp?intArticle_ID=891 (accessed 26 March 2010); Jeffrey A. Trachtenberg. (1 March 2010). Random House Harnesses Skills to Venture into Videogame Action. The Wall Street Journal; and Don Tapscott. (Third Quarter 2001). Rethinking Strategy in a Networked World. Strategy & Business, 24, 34–41.

Dell Computer For years, Michael Dell put up with sceptics predicting that direct sales of PCs would never capture more than 15 per cent of the market. Today, though, direct buyers make up over a third of the market, and the percentage is growing. Suddenly, everyone wants to be in Dell’s position. Now, the company that invented direct selling of PCs is taking the concept a step further. Dell has become an Internet phenomenon, selling well over US$1 million worth of computers a day on its website, and electronic sales are growing by 20 per cent a month. Dell is making buying over the Internet even more attractive by customising web

Innovative Way pages for its biggest buyers, including Eastman Chemical, Monsanto and Wells Fargo, and by developing a new feature that can dash off a digital configuration to customers within five minutes of placing an order. Taking advantage of the Internet is just one more way for Dell to get more bang for its buck – in contrast to the 700 sales reps needed to take orders over the phone, Dell had only 30 people managing web sales. Dell’s simple secret for turning a classically low-margin mail-order operation into a high-profit business is speed. A custom order placed with Dell at 9 a.m. on Monday can

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be on a delivery truck by 9 p.m. on Tuesday. The company has spent years developing a core competency in speedy delivery by squeezing time lags and inefficiencies out of the manufacturing and assembly process. Now Dell has applied the same brutal standards to the supply chain. Good relationships with key suppliers and precise coordination mean that sometimes Dell can receive parts in 15 minutes that could take two days to reach IBM or Gateway. Dell also achieves synergy by turning to logistics specialists, such as Caliber Logistics Inc., to manage supply chains. Speed has enabled Dell to slash inventories and parts costs so low that it can under-price rivals by 10 to 15 per cent. Combine all that with electronic sales – the ultimate in low-cost, fast-paced business – and Dell is tough to beat. Now Michael Dell is looking for the next breakthrough. Dell has moved into the US$10 billion network server business, exploring ways to combine its PC knowledge with better networking service. Dell Computer is constantly changing, adapting and finding new ways to master its environment, but one thing hasn’t changed since the days Michael Dell first began building computers in his dorm room: the focus on speed and low cost. A major factor in Dell’s success is that it has retained a clear image of what it does best. The company spent years developing a core competence in low cost and speedy delivery by squeezing time lags and inefficiencies out of the manufacturing and assembly process, then extended the same brutal standards to the supply chain. Consider how the system worked at the Topfer Manufacturing Center, the newest of Dell’s seven plants. Inside the cavernous factory, located near Dell’s headquarters in Round Rock, Texas, parts storage takes up about the space of an average bedroom. The factory is a blur of activity. Boxes of microchips and electronic components skitter by on double-decker conveyor belts. Assembly workers use an integrated computer system that practically hands them the right part – whether it be any of a dozen different microprocessors or a combination of software – at just the right time. The system not only cuts costs, but also

Source: Getty Images/AFP/Kimihiro Hoshino

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Michael Dell has built an empire based on very smart strategies. saves time by decreasing the number of worker touches per machine. On a typical day, 25 000 finished computers head off towards happy customers. Precise coordination, aided by sophisticated supply-chain software, means Dell can keep just two hours’ worth of parts inventory and replenish only what it needs throughout the day. The just-in-time system works so smoothly that nearly 85 per cent of orders are built, customised and shipped within eight hours. Dell’s fixation on speed and thrift is being challenged as the company moves into new areas of business, such as storage systems, networking gear, and information services. However, founder and chairman Michael Dell believes the core competencies that made Dell a star in PCs and servers can also make the company a winner as it seizes new opportunities. To anyone who doubts that Dell can compete in new markets, he says: ‘Bring them on. We’re coming right at them.’ Competitors, having watched as more and more customers turned to Dell, are trying to imitate the company’s way of doing business. ‘In the ideal world,’ said a HewlettPackard marketer, ‘your customer wants to buy a PC, you source all the parts that day, ship it that day, and get it to the customer that day … Michael Dell is probably as close to that as anybody.’

Sources: McWilliams, G. (7 April 1997). Whirlwind on the Web. BusinessWeek, 132–6; Kirkpatrick, D. (8 September 1997). Now Everybody in PCs Wants to Be Like Mike. Fortune, 91–2; Dell website, http://www.dell.com.

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powerful chips involved ‘quad-core’ computing which increases the capacity of processing information on a chip by a substantial amount and increases the electrical efficiency as well. Intel began to take market share back from AMD and also aggressively lowered its prices with its quad-core, causing AMD to lose profitability. AMD then responded with its own quad-core computer chip, which it claims is superior in performance to the Intel model. These two companies have certainly not formed a cosy cartel, as can happen in some other industries that only have two major players in them. Such healthy competition is producing wave after wave of better, faster, cheaper computer chips. By 2014, as global PC sales shrink and mobile phone and tablet sales take over the growth segments of the market, both Intel and AMD face new challenges

in keeping up with each other and with aggressive new entrants into the market. Intel has used strategies of capital investment in its own technologies and acquisitions to try and stay competitive and current. Source: Patrick, D. (19 March 2006), Fortune, 27.

Source: iiStockphoto/Petrovich9

The world’s two major makers of computer chips, Intel and AMD, are working furiously in a battle for the market share and technological lead for both computer chips and service. They tend to leapfrog each other in steps that last between one and two years with their new technologies and this extreme form of head-to-head competition benefits direct customers such as IBM, HewlettPackard, Dell and others and works through the value chain to benefit consumers. Such healthy competition, however, is fierce, with each company working to outdo the other in terms of better, faster, more reliable computer chips. Intel had a big lead and until 2003 was the dominant player in the world’s chip markets. It was with the AMD Opteron chip that AMD was able to achieve some 20 per cent market share by the end of 2006. Intel’s next generation of very

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Chip competition in overdrive

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Str ategy fo r mu l ati o n versus executio n The final aspect of strategic management involves the stages of formulation and implementation. Strategy formulation includes the planning and decision making that lead to the establishment of the firm’s goals

and the development of a specific strategic plan.23 Strategy formulation may include assessing the external environment and internal problems, and integrating the results into goals and strategy. This contrasts with strategy implementation, which is the use of managerial and organisational tools to direct resources towards accomplishing strategic results.24 Strategy execution is the administration and implementation of the strategic plan. Managers may use persuasion, new equipment, changes in organisation structure or a reward system to ensure that employees and resources are used to make formulated strategy a reality.

SWOT analysis Formulating strategy often begins with an assessment of the internal and external factors that will affect the organisation’s competitive situation. SWOT analysis is a search for strengths, weaknesses, opportunities and threats that affect organisational performance. External information about opportunities and threats may be obtained from a variety of sources, including customers, government reports, professional journals, suppliers, bankers, friends in other organisations, consultants or association meetings. Many firms hire special scanning organisations to provide them with newspaper clippings, Internet research and analyses of relevant domestic and global trends. In addition, many companies are hiring competitive intelligence professionals to scope out competitors, as we discussed in Chapter 3, and using intelligence teams, as described in Chapter 7.

strategy formulation The stage of strategic management that involves the planning and decision making that lead to the establishment of the organisation’s goals and of a specific strategic plan. strategy implementation The stage of strategic management that involves the use of managerial and organisational tools to direct resources towards achieving strategic outcomes. SWOT (situation) analysis Analysis of the strengths, weaknesses, opportunities and threats (SWOT) that affect organisational performance.

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Executives acquire information about internal strengths and weaknesses from a variety of reports, including budgets, financial ratios, profit and loss statements, and surveys of employee attitudes and satisfaction. In addition, managers build an understanding of the company’s internal strengths and weaknesses by talking with people at all levels of the hierarchy in frequent face-to-face discussions and meetings.

Int er nal st r engt h s an d w eak n es s es Strengths are positive internal characteristics that the organisation can exploit to achieve its strategic performance goals. Weaknesses are internal characteristics that may inhibit or restrict the organisation’s performance. Some examples of what executives evaluate to interpret strengths and weaknesses are given in Exhibit 8.4. The information sought typically relates to specific functions such as marketing, finance, production, and research and development. Internal analysis also examines overall organisation structure, management competence and quality, and human resource characteristics. Based on their understanding of these areas, managers can determine their strengths or weaknesses when compared with other organisations. For example, Marriott Corporation was able to grow rapidly because of its financial strength. It has a strong financial base, enjoys an excellent reputation with creditors, and has always been able to acquire financing needed to support its strategy of constructing hotels in new locations.25 The company that began in 1927 as a root beer stand has proceeded to acquire businesses, open international hotels and launch new brands. Marriott International (after its name change in 1993) includes over 3800 properties in 72 countries and has operating profit of over US$571 million. It also maintains a strong reputation as an employer of choice.26 The Commonwealth Bank took a technological lead relative to the other major Australian banks in building its technical platform and systems for online stockbroking, with the other banks following a few years behind (see http://www.comsec.com.au). Exhibit 8.4 Checklist for analysing organisational strengths and weaknesses Management and organisation

Marketing

Management quality

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Staff quality

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Degree of centralisation

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Organisation charts

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Planning, information, control systems

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Finance

Distribution channels

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Employee experience, education

Market share

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Union status

Advertising efficiency

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Turnover, absenteeism

Customer satisfaction

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Work satisfaction

Service reputation

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Sales force turnover

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Production

Profit margin

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Debt-equity ratio

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Inventory ratio

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Return on investment

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Credit rating

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Human resources

Research and development

Plant location

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Basic applied research

Machinery obsolescence

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Laboratory capabilities

Purchasing system

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Research programs

Quality control

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New-product innovations

Productivity/efficiency

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Technology innovations

Ext er nal op p ort unities an d th r eats Threats are characteristics of the external environment that may prevent the organisation from achieving its strategic goals. One threat to Microsoft, for example, is the proliferation of cheap or free software available over the Internet.27 Opportunities are characteristics of the external environment that have the potential to help the organisation achieve or exceed its strategic goals. Executives evaluate the external environment

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with information about the sectors described in Chapter 2. The task environment sectors are the most relevant to strategic behaviour and include the behaviour of competitors, customers, suppliers and the labour supply. The general environment contains those sectors that have an indirect influence on the organisation, but nevertheless must be understood and incorporated into strategic behaviour. The general environment includes technological developments, the economy, legal–political and international events and sociocultural changes. Additional areas that might reveal opportunities or threats include pressure groups, interest groups, creditors and potentially competitive industries. Social networking company Facebook, which was at first a site for college students, provides an example of how managers can use SWOT analysis in formulating an appropriate strategy, as explained in the Innovative Way box.

Source: Corbis/Wu Kaixiang

Facebook

In the early 2000s, MySpace was clearly the leading online social networking site; but Facebook soon went flying past it. The Facebook start-up grew rapidly in the first four years after 23-year-old Mark Zuckerberg founded it while still a student at Harvard University. To keep Facebook growing, the young CEO made some strategic decisions that can be understood by analysing the company’s strengths, weaknesses, opportunities and threats. Facebook’s strengths include technological know-how and an aggressive and innovative culture. In addition, Facebook has a major partnership with Microsoft, which has invested heavily in it, brokers banner ads for the company, and is developing tools that make it easy to create links between Windows applications and Facebook’s network. When Facebook expanded beyond American college students, its membership boomed. The primary weakness is a lack of management expertise to help the company meet the challenges of growing up. The biggest threat to the company is that Facebook is spending more cash than it is bringing in.

Innovative Way

In addition, Zuckerberg is gaining a reputation in the industry as an arrogant and standoffish manager, which could hurt Facebook’s chances of successful partnerships. Opportunities abound to expand the company’s operations internationally and to take advantage of Facebook’s popularity to introduce features that can command higher web advertising rates and bring in more revenue. What does SWOT analysis suggest for Facebook? Zuckerberg is trying to capitalise on Facebook’s popularity by making it a place for companies to provide services to members. For example, Prosper.com developed a Facebook application for its service that allows members to lend one another money at negotiated interest rates. NonInternet companies such as Red Bull have also developed Facebook applications to reach Facebook’s vast customer base. Companies that put applications on Facebook can experience a sort of viral popularity as word spreads among millions of members. To implement the strategy, Zuckerberg brought in executives with more strategy experience than himself, such as Chamath Palihapitiya, a former AOL manager, as vice president of product marketing, and Sheryl Sandberg, formerly of Google, as chief operating officer. These managers have the traditional skills Facebook needs to execute the new strategy both in the United States and internationally. For some time, it was unclear if Facebook’s strategy was working. Zuckerberg is continuing his efforts to build a more seasoned executive team to keep growing and avoid damaging mistakes as Facebook pursues its strategy. In April 2012 Facebook purchased a nascent photo-sharing service called Instagram for a dazzling $1 billion. The price paid for the start-up generated tremendous speculation in the media, but Zuckerberg saw strategic alignment with the fun social networking app and was eager to hook up with the 20 million users who had already downloaded it. In just over a year Instagram climbed to 100 million users and introduced mobile video sharing. Facebook listed as a public company in the

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US in May 2012 with an Initial Price Offering (IPO) of US$38. The public listing would give Facebook a valuation of around $100 billion and defy usual price to earnings ratios used to estimate a company’s value. Facebook hit several large benchmarks in 2013 where it reached record levels of monthly mobile users and achieved over a billion monthly active users.

Its market capitalisation is over $63 billion, trading at $50 for the first time in 2013 with $5 billion in sales and $9 billion in cash on hand. It now employs 5000 people and is ranked in the Forbes top 80 most powerful brands. It seems that Zuckerberg’s plan of putting the right people in charge of the company has certainly helped Facebook.

Sources: Kirkpatrick, D. (11 June 2007). Facebook’s Plan To Hook Up the World. Fortune, 127–30.; Stone, B. (25 May 2007). Facebook Expands Into MySpace’s Territory. The New York Times; Vara, V. (5 March 2008). Facebook CEO Seeks Help as Site Suffers Growing Pains. The Wall Street Journal; Dominic Rushe. (10 April 2012). $1b Deal: Facebook Buys Instagram Mobile Photo Sharing App. The Sydney Morning Herald, http://www.smh.com.au/technology/technology-news/1b-deal-facebook-buys-instagram-mobile-photosharing-app-20120410-1wllb.html#ixzz2g2Yjecpd (accessed 26 September 2013); Barbara Ortutay. (21 June 2013). Facebook Introduces Video on Instagram. The Sydney Morning Herald, http://www.smh.com.au/digital-life/digital-life-news/facebook-introduces-video-on-instagram-20130621-2omgv.html#ixzz2g2ljA5o0 (accessed 26 September 2013); http://money.cnn.com/2012/05/23/technology/facebook-ipo-what-went-wrong/index.htm (accessed 27 September 2013); Todd Ganos. (1 February 2012). Is Facebook Really Worth $100 Billion? Forbes, http://www.forbes.com/sites/toddganos/2012/02/01/is-facebook-really-worth-100-billion/ (accessed 27 September 2013); http://newsroom.fb.com/Key-Facts/ (accessed September 2013); http://www.forbes.com/companies/facebook/ (accessed 27 September 2013); and http://www.nasdaq.com/symbol/fb/historical (accessed 27 September 2013).

➜➜ Strategy formulation is the stage of strategic management that includes the planning and decision making that lead to the establishment of the organisation’s goals and a specific strategic plan.

➜➜ Managers often start with a SWOT analysis, an audit or careful examination of strengths, weaknesses, opportunities and threats that affect organisational performance.

remember this

➜➜ Strategy implementation (execution) is the stage of strategic management that involves the use of managerial and organisational tools to direct resources towards achieving strategic outcomes.

Formulating corporate-level strategy portfolio strategy A type of corporate-level strategy that relates to the organisation’s mix of strategic business units and product lines that fit together in such a way as to provide the organisation with synergy and competitive advantage. strategic business units (SBUs) A division of the organisation that has a unique business mission, product line, competitors and markets relative to other SBUs in the same organisation.

Three approaches to understanding corporate-level strategy are the portfolio strategy, the BCG matrix, and diversification.

Th e po rtfo lio str ategy Individual investors often wish to diversify in an investment portfolio with some high-risk stocks, some low-risk stocks, some growth stocks and perhaps a few income bonds. In much the same way, corporations like to have a balanced mix of business divisions, called strategic business units (SBUs). An SBU has a unique business mission, product line, competitors and markets relative to other SBUs in the corporation.28 Executives in charge of the entire corporation generally define an overall strategy and then bring together a portfolio of SBUs to carry it out. Managers don’t like to become too dependent on one business. The portfolio strategy pertains to the mix of business units and product lines that fit together in a logical way to provide synergy and competitive advantage for the corporation.

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Th e BCG m atrix The BCG (Boston Consulting Group) matrix is illustrated in Exhibit 8.5. The BCG matrix organises businesses along two dimensions – business growth rate and market share.29 Business growth rate relates to how rapidly the entire industry is increasing. Market share defines whether a business unit has a larger or smaller share than competitors. The combinations of high and low market share and high and low business growth provide four categories for a corporate portfolio. The star has a large market share in a rapidly growing industry. The star is important because it has additional growth potential, and profits should be ploughed into this business as investment for future growth and profits. The star is visible and attractive and will generate profits and a positive cash flow even as the industry matures and market growth slows. The cash cow exists in a mature, slow-growth industry but is a dominant business in the industry, with a large market share. Because heavy investments in advertising and plant expansion are no longer required, the company earns a positive cash flow. It can milk the cash cow to invest in other, riskier businesses. The question mark exists in a new, rapidly growing industry but has only a small market share. The question mark business is risky: it could become a star, or it could fail. The company can invest the cash earned from cash cows in question marks with the goal of nurturing them into future stars. The dog is a poor performer. It has only a small share of a slow-growth market. The dog provides little profit for the company and may be targeted for divestment or liquidation if turnaround is not possible. High High

Business growth rate

Low

Stars Rapid growth and expansion

Cash cows Milk to finance question marks and stars

Low

Market share Question marks New ventures. Risky – a few become stars, others divested

Dogs No investment. Keep if some profit. Consider divestment

?

BCG matrix A concept developed by the Boston Consulting Group that evaluates strategic business units with respect to the dimensions of business growth rate and market share.

Concept Revision

Case project 8.1

Exhibit 8.5 The BCG matrix

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The circles in Exhibit 8.5 represent the business portfolio for a hypothetical corporation. Circle size represents the relative size of each business in the company’s portfolio. Most large organisations, such as General Electric (GE), have businesses in more than one quadrant, thereby representing different market shares and growth rates. The most famous cash cow in GE’s portfolio, for example, is the appliance division. This business holds a large share of a stable market and accounts for a big portion of GE’s sales and profits. The GE Healthcare and Aviation divisions have star status, and GE is pumping money into development of new products in these fast-growing areas, such as products for wind energy. GE’s consumer finance division is a question mark. The division expanded too aggressively into areas such as real estate and took a big hit during the recent financial crisis. The media division has probably gained dog status because it doesn’t fit well in the GE portfolio. A dog for GE might be a star for someone else, so in 2010 GE executives sold a majority stake in NBC Universal to Comcast; in 2013, Comcast purchased the remainder of GE’s stake in NBC.30

D iversi fi cati o n str ategy diversification The strategy of moving into new lines of business.

The strategy of moving into new lines of business, as GE did by getting into healthcare, finance and alternative forms of energy, is called diversification. Other examples of diversification include Apple’s entry into the mobile phone business with the iPhone; Amazon.com’s move into consumer electronics, with the Kindle electronic reader, and the mainstream media, with the 2013 purchase of the Washington Post; and Nestlé’s entry into the pet food business with the purchase of Ralston. The purpose of diversification is to expand the organisation’s business operations to produce new kinds of valuable products and services. When the new business is related to the company’s existing business activities, the organisation is implementing a strategy of related diversification. For example, GE’s move into renewable energy and Nestlé’s move into pet foods are linked to these firms’ existing energy and nutrition businesses. Unrelated diversification occurs when an organisation expands into a totally new line of business, such as GE’s entry into consumer finance or food company Sara Lee’s move into the intimate apparel business. With unrelated diversification, the company’s lines of business aren’t logically associated with one another; therefore, it can be difficult to make the strategy successful. Most companies are giving up on unrelated diversification strategies, and are selling off unrelated businesses to focus on core areas. A firm’s managers may also pursue diversification opportunities to create value through a strategy of vertical integration. Vertical integration means the company expands into businesses that either produce the supplies needed to make products or that distribute and sell those products to customers. For example, E & J Gallo Winery started a new business to make its own wine bottles rather than buying them from a supplier.31 Gallo could make bottles more cheaply than it could buy them, enabling managers to reduce costs. In addition, the new division enabled the company to distinguish its wines with unique bottle shapes. An example of diversifying to distribute products comes from Apple, which opened retail stores to increase visibility and sell its innovative products to customers. The strategy was a big success. Customers can try the products before they buy and get free help on how to use Macintosh computers, iPods and iPhones, Apple software and accessories like digital cameras.32

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➜➜ Frameworks for corporate-level strategy include portfolio strategy, the BCG matrix and diversification strategy. ➜➜ Portfolio strategy pertains to the mix of SBUs and product lines that fit together in a logical way to provide synergy and competitive advantage. ➜➜ A strategic business unit (SBU) is a division of the organisation that has a unique business, mission, product or service line, competitors and markets



relative to other units of the same organisation.

to the corporation’s existing business activities.

➜➜ The BCG matrix is a concept developed by the Boston Consulting Group that evaluates SBUs with respect to two dimensions – business growth rate and market share – and classifies them as cash cows, stars, question marks or dogs.

➜➜ Unrelated diversification refers to expanding into totally new lines of business.

➜➜ The strategy of moving into new lines of business is called diversification. ➜➜ Related diversification means moving into a new business that is related

Source: Courtesy James Campbell

James Campbell, BIOTECH EXECUTIVE After completing a PhD in biochemistry and then working as a scientist in both France and Australia I became frustrated with the way research was managed. I completed an MBA at the Melbourne Business School, with the goal of enhancing the interface between innovation and commercialisation in Australia. Following my MBA I worked with the international management consultancy Booz & Co for two years – an excellent experience that honed my ability to focus on the core issues underlying business performance and improvement. I then moved to the technology transfer group of the University of Melbourne, which had just established a joint venture pre-seed venture capital fund. This gave me the opportunity to combine my scientific background and management experience to guide the formation of several small biotech companies. In 2002 I was offered the role of COO in a small ASX-listed biotech company, Autogen Limited. Working closely with the CEO, Greg Collier, I worked on a number of transactions that transformed a $10 million R&D focused company into one of Australia’s leading clinical stage biotech companies, ChemGenex Pharmaceuticals. Over

remember this

➜➜ Some managers pursue diversification through a strategy of vertical integration, which means expanding into businesses that either provide the supplies needed to make products or distribute and sell the company’s products.

Austr alian manager pr ofile a nine-year period this small and cohesive management team completed several major transactions; a $14 million M&A with a US-based private biotech company; merger integration; $70 million of capital raisings; listing on NASDAQ, intellectual property acquisitions worth more than $30M, research alliances with pharmaceutical companies worth more than $30M; and a $130M licensing deal and the eventual sale of the company to a US company, Cephalon, for A$230M in 2011. At the time the ChemGenex transaction was the second largest acquisition of an Australian biotech company in terms of enterprise value. Since 2011 I have worked as a consultant, sharing the learnings (both positive and negative) of the ChemGenex story:

➜➜ I work in an industry based on innovation, intellectual property and risk. These are difficult things to qualify, quantify and manage, and while risk can be abated by processes to monitor the technology and commercial landscapes, challenges will always appear from ‘left field’. That is when processes fail and you need to fall back on the quality of your people.

➜➜ Seek to work with people who have complementary skills to yours – both professional and interpersonal. This provides a great learning experience and allows you to guide and mentor others.

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➜➜ Steer clear of micromanagement: it disempowers and demotivates. If you have staff that need micromanagement, then you have the wrong staff or the wrong managerial attitude. Give your staff the opportunity to shine, and reward them appropriately when they do.

➜➜ Seek to work with people with a passion for their role and their industry. When times get tough, passion can get you through a lot. Finally, if you don’t have passion or interest in your own role, then get out – you’re doing a disservice to both the company and yourself (and you both deserve better). Source: Contributed by James Campbell.

Formulating business-level strategy Now we turn to strategy formulation within the strategic business unit, in which the concern is how to compete. A popular and effective model for formulating strategy is Porter’s competitive forces and strategies. More recently, Porter examined the impact of the Internet on business-level strategy.33 New web-based technology is influencing industries in both positive and negative ways, and understanding this impact is essential for managers to accurately analyse their competitive environments and design appropriate strategic actions.

Po rter’s com petitive fo rces an d str ategi es Fi ve comp et i t i ve fo r c es Exhibit 8.6 illustrates the competitive forces in an organisation’s environment. These forces help determine an organisation’s position when compared with its competitors in the industry environment. 1 Potential new entrants. Capital requirements and economies of scale are examples of two potential

barriers to entry that can keep out new competitors. It is far more costly to enter the automobile industry, for example, than to start a specialised mail-order business. In general, Internet technology has made it much easier for new companies to enter an industry by curtailing the need for such organisational elements as an established sales force, physical assets such as buildings and machinery, or access to existing supplier and sales channels. 2 Bargaining power of buyers. Informed customers become empowered customers. As advertising and

buyer information educates customers about the full range of price and product options available in the marketplace, their influence on an organisation increases. This is especially true when an organisation relies on one or two large, powerful customers for the majority of its sales. For example, a customer shopping for a car can gather extensive information about various options, such as wholesale prices for new cars or average value for used vehicles, detailed specifications, repair records and even whether a used car has ever been involved in an accident. 3 Bargaining power of suppliers. The concentration of suppliers and the availability of substitute

suppliers are significant factors in determining supplier power. The sole supplier of engines to a manufacturer of small aeroplanes will have great power. Other factors include whether a supplier can survive without a particular purchaser, or whether the purchaser can threaten to self-manufacture the needed supplies. The impact of the Internet in this area can be both positive and negative. That is, procurement over the web tends to give a company greater power over suppliers, but the web also gives

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suppliers access to a greater number of customers, as well as the ability to reach end users. Overall, the Internet tends to raise the bargaining power of suppliers. 4 Threat of substitute products. The power of alternatives and substitutes for an organisation’s

product may be affected by cost changes or trends such as increased health consciousness that will deflect buyer loyalty to organisations. For example, companies in the sugar industry suffered from the growth of sugar substitutes, and manufacturers of aerosol spray cans lost business as environmentally conscious consumers chose other products. The Internet created a greater threat of new substitutes by enabling new approaches to meeting customer needs. For example, offers of low-cost airline tickets over the Internet hurt traditional travel agencies. 5 Rivalry among competitors. The scrambling and jockeying for position is often exemplified by what

Porter called the ‘advertising slugfest’. As illustrated in Exhibit 8.6, these rivalries are influenced by the preceding four forces as well as by cost and product differentiation. A famous example of competitive rivalry is the battle between Pepsi and Coke. Similar rivalries between Virgin and Qantas, between Ford, Toyota and Holden, and between Woolworths and Coles see these companies continually trying to win the attention and business of customers from one another. Exhibit 8.6 Forces affecting industry competition Potential new entrants

Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analysing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press. All rights reserved.

Threat of new entrants

Substitute products from other industries

Threat of substitute products

The firm’s rivalry versus industry competitors

Bargaining power of suppliers

Suppliers

Buyers Bargaining power of buyers

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Comp et i t i ve st r at eg ies In finding its competitive edge within these five forces, Porter suggests that an organisation can adopt one of three strategies: differentiation, cost leadership or focus. The organisational characteristics typically associated with each strategy are summarised in Exhibit 8.7. Broad

Exhibit 8.7 Organisational characteristics of Porter’s competitive strategies

Strategic target

Sources: Based on Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: The Free Press, 1980); Michael Treacy and Fred Wiersema. (6 February 1995). How Market Leaders Keep Their Edge. Fortune, 88–98; and Michael A. Hitt, R. Duane Ireland and Robert E. Hoskisson, Strategic Management (St Paul, MN: West, 1995), pp. 100–113.

Differentiation

Cost leadership

Acts in a flexible, loosely knit way; strong coordination among departments Strong capability in basic research Creative flair, thinks ‘out of the box’ Strong marketing abilities Rewards employee innovation Corporate reputation for quality or technological leadership

Focused differentiation

Strong central authority; tight cost controls Maintains standard operating procedures Easy-to-use manufacturing technologies Highly efficient procurement and distribution systems Close supervision; finite employee empowerment

Focused cost leadership

Uses characteristics of differentiation strategy directed at particular target customer Values flexibility and customer intimacy Pushes empowerment to employees with customer contact

Uses characteristics of cost leadership strategy directed at particular target customer Frequent detailed control reports Measures cost of providing product or service and maintaining customer loyalty

Narrow Distinctiveness

Low costs

Source of advantage

Take a Moment As a new manager, examine the competitive forces that are affecting your organisation. What can you do as a lower-level manager to help the firm find or keep its competitive edge through a differentiation, cost-leadership, or focus strategy?

differentiation A type of competitive strategy with which the organisation seeks to distinguish its products or services from those of its competitors.

1  Differentiation. The differentiation strategy involves an attempt to distinguish the firm’s

products or services from others in the industry. The organisation may use advertising, distinctive product features, exceptional service or new technology to achieve a product perceived as unique. The differentiation strategy can be profitable because customers are loyal and will pay high prices for the product. Examples of products that have benefited from a differentiation strategy include Harley-Davidson motorcycles, Mercedes-Benz automobiles, Apple computers and phones, Intercontinental hotels and Grange Hermitage wine, all of which are perceived as distinctive in their markets. Organisations that pursue a differentiation strategy typically need strong marketing abilities, a creative flair and a reputation for leadership.34 A differentiation strategy can reduce rivalry with competitors if buyers are loyal to an organisation’s brand. For example, successful differentiation reduces the bargaining power of large buyers because other products are less attractive, and this also helps the firm fight off threats of substitute products. Differentiation also erects entry barriers in the form of customer loyalty that a new entrant into the market would have difficulty overcoming.

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2 Cost leadership. With a cost leadership strategy, the organisation aggressively seeks efficient facilities,

pursues cost reductions and uses tight cost controls to produce products more efficiently than competitors. A low-cost position means that the organisation can undercut competitors’ prices and still offer comparable quality and earn a reasonable profit. Dell Computer, described in the Innovative Way box earlier in this chapter, has used a cost-leadership strategy to gain a competitive edge over larger organisations. Dell Computer declared a brutal price war just as the PC industry entered its worst slump ever. The result? Dell racked up US$361 million in profits while the rest of the industry reported losses of US$1.1 billion. Aldi has benefited from a similar strategy in grocery retailing, the Hyundai brand has gone from nowhere to being very popular on this basis, as has Tiger Airlines. Being a low-cost producer provides a successful strategy to defend against the five competitive forces shown in Exhibit 8.6. For example, the most efficient, low-cost producer is in the best position to succeed in a price war while still making a profit. Likewise, the low-cost producer is protected from powerful customers and suppliers, because customers cannot find lower prices elsewhere, and other buyers would have less slack for price negotiation with suppliers. If substitute products or potential new entrants occur, the low-cost producer is better positioned than higher-cost rivals to prevent loss of market share. The low price acts as a barrier against new entrants and substitute products.35 The Internet tends to erode both cost-leadership and differentiation advantages by providing new tools for managing costs and giving consumers greater access to comparison shopping. However, managers can find ways to incorporate the Internet into their strategic approaches in a way that provides unique value to customers in an efficient way. Commsec and other online share brokers have transformed the share trading industry, slashing process and costs, yet improving speed of service from the old technology service model.36 With the help of a cost leadership strategy, Acer Inc. has grown to be the world’s second-largest computer maker. Acer has a bare-bones cost structure. Its overhead expenses are about 8 per cent of sales, compared to around 14 to 15 per cent for rival companies. Cost savings are passed on to consumers, with a high-quality ultrathin laptop selling for around $650, compared to $1800 for a similar Hewlett-Packard (HP) model and $2000 for Dell’s ultrathin version. Acer has now moved into the smartphone market. With its cost leadership position, Acer can give consumers quality smartphones at lower prices and still see profit margins in the range of 15 per cent to 20 per cent.37 3 Focus. With a focus strategy, the organisation concentrates on a specific regional market or buyer

group. The organisation will use either a differentiation or low-cost approach, but only for a narrow target market. In the US, Enterprise Rent-A-Car has made its mark by focusing on a market that the major companies such as Hertz and Avis do not even play in – the low-budget insurance replacement market. Drivers whose cars have been wrecked or stolen have one less thing to worry about when Enterprise delivers a car right to their driveway. By using a focus strategy, Enterprise has been able to grow rapidly.38 Managers think carefully about which strategy will provide their organisation with its competitive advantage. Gibson Guitar Corporation, famous in the music world for its innovative, high-quality products, found that switching to a low-cost strategy to compete against Japanese rivals such as Yamaha and Ibanez actually hurt the company. When managers realised people wanted Gibson products because of their reputation, not their price, they went back to a differentiation strategy and invested in new technology and marketing.39 In his studies, Porter found that some businesses did not consciously adopt one of these three strategies and were stuck with no strategic advantage. Without a strategic advantage, businesses

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cost leadership A type of competitive strategy with which the organisation aggressively seeks efficient facilities, cuts costs and employs tight cost controls to be more efficient than competitors.

focus strategy A type of competitive strategy that emphasises concentration on a specific regional market or buyer group.

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Case study

earned below-average profits compared with those that used differentiation, cost leadership or focus strategies. Similarly, a five-year study of management practices in hundreds of businesses, referred to as the Evergreen Project, found that a clear strategic direction was a key factor that distinguished winners from losers.40

Ferragamo: family business or not? Branden Ferragamo has 22 grandchildren and 23 great-grandchildren. The 85-year-old took control of the company in 1960 upon her husband’s death and has built this exclusive shoe company globally. In 2006 the company reached the landmark of $500 million in sales, with a profit margin of 12 per cent, and growth has continued to occur since then. The company has been a closely held family enterprise since it began, but in business as in other things, nothing lasts forever and times are changing. In October 2006, Michele Norsa was appointed as the first non-family CEO in the company’s 80-year history and the transition of the company into a publicly owned and listed company began. Ferragamo’s operations are almost entirely based in Italy; however, Ferragamo’s markets are all over the world. Even though the company was expected to sell shares, the plan was to keep 52 per cent of the company’s ownership and hence control within the extended family.

Ferragamo’s factories are located northwest of Italy, with the exception of its Swiss watchmaking factory. The shoes are handmade, and hence this is far from a low-cost business. The story of Salvatore Ferragamo, who founded the firm, is not one of an unprofessional working-class man, but a well-educated technician. Born in 1888, Mr Ferragamo studied human anatomy, mathematics and chemical engineering in the US and filed about 300 patents related to shoe features, including the steel reinforced stiletto heel, open shoes for women and many others, including the cork wedge and heel. His company produced over 10 000 shoe styles during his lifetime. His company has clearly competed, survived and prospered based on innovation. The Ferragamo brand was then extended to include silk scarfs and other fashion items. Its dedicated stores are on Fifth Avenue in New York, Rodeo Drive in Beverly Hills, Bond Street in London and the Ginza of Tokyo. The Ferragamo family

story is an impressive story of tradition but is also a story, with the appointment of a non-family CEO and the public listing, of a company that is clearly moving with modern times. Ferragamo’s 600 international store outlets generate approximately 65 per cent of its total revenue, with the Asia–Pacific region generating the majority of total sales (at 35 per cent) and the Central and South American region becoming their fastestgrowing market. Its luxury footwear remains the most popular and profitable product in its range and in 2012 the group was one of the highest performing in its luxury sector. Despite challenging economic conditions, Ferragamo continues to reap financial rewards; its operating profit increased an impressive 125 per cent in two years and revenues climbed to over €1 billion. Source: Faros, S. (22 January 2007). Ferragamo’s Step. Fortune, 25–7. Ferragamo Annual Report 2012, http://group.ferragamo.com/ documents/10180/45374/Consolidated%20 Annual%20Report%202012, pp. 8, 9, 11, 12, 13 and 18 (accessed 27 September 2013).

Formulating functional-level strategy Functional-level strategies are the action plans used by major departments to support the execution of business-level strategy. Major organisational functions include marketing, production, finance, human resources and research and development. Managers in these and other departments adopt strategies that are coordinated with business-level strategy to achieve the organisation’s strategic goals. For example, consider a company that has adopted a differentiation strategy and is introducing new products that are expected to experience rapid growth. The human resources department should adopt a strategy appropriate for growth, which would mean recruiting additional personnel and training middle- and lower-level managers for new positions, as well as developing strategies for retaining and developing a stable workforce. The marketing department should undertake test marketing, aggressive advertising campaigns and consumer product trials. The finance department should adopt plans to borrow money, handle large cash investments and authorise construction of new facilities. A company with mature products or a cost

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leadership strategy will have different functional-level strategies. Marketing should stress brand loyalty and the development of established, reliable distribution channels. Production should use a strategy of long production runs, standard procedures and cost reduction. Finance should focus on net cash flows and positive cash balances. ➜➜ A popular model for formulating business-level strategy is Porter’s competitive strategies. ➜➜ Managers analyse the competitive environment and adopt one of three types of strategy: differentiation, cost leadership or focus.

➜➜ A differentiation strategy is a strategy with which managers seek to distinguish the organisation’s products and services from those of others in the industry. ➜➜ A cost leadership strategy is a strategy with which managers aggressively seek efficient facilities, cut costs and use tight cost controls to be more efficient than others in the industry.

➜➜ With a focus strategy, managers use either a differentiation or a cost leadership approach, but they concentrate on a specific regional market or buyer group.

remember this

➜➜ Once business-level strategies are formulated, managers in functional departments devise functional-level strategies to support them.

New trends in strategy Organisations have been in a merger and acquisition frenzy in recent decades. Some companies still seek to gain or keep a competitive edge by acquiring new capabilities via mergers and acquisitions. Yet today, a decided shift has occurred towards enhancing the organisation’s existing capabilities as the primary means of growing and innovating. Another current trend is using strategic partnerships as an alternative to mergers and acquisitions.

Innovati o n from with in The strategic approach referred to as dynamic capabilities means that managers focus on leveraging and developing more from the firm’s existing assets, capabilities and core competencies in a way that will provide a sustained competitive advantage.41 Learning, reallocation of existing assets and internal innovation are the route to addressing new challenges in the competitive environment and meeting new customer needs. For example, General Electric, as described earlier, has acquired a number of other companies to enter a variety of diverse businesses. Yet today, the emphasis at GE is not on making deals but rather on stimulating and supporting internal innovation. Instead of spending billions to buy new businesses, CEO Jeff Immelt has invested in internal ‘Imagination Breakthrough’ projects to take GE into internally developed new lines of business, new geographic areas or a new customer base. The idea is that getting growth out of existing businesses is cheaper and more effective than trying to buy it from outside.42 Another GE initiative to stimulate internal innovation is through the Commercial Council in which sales and marketing leaders meet regularly to share ideas and growth plans. In 2012 this resulted in the successful ‘Growth Sprints’ initiative where growth opportunities for GE in Germany and Brazil were identified.43 Another example of dynamic capabilities is IBM, which many analysts had written off as a has-been by the early 1990s. Since then, new top managers have steered the company through a remarkable transformation by capitalising on IBM’s core competence of expert technology by learning new ways to

dynamic capabilities Leveraging and developing more from the firm’s existing assets, capabilities and core competencies in a way that will provide a sustained competitive advantage.

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apply it to meet changing customer needs. By leveraging existing capabilities to provide solutions to major customer problems rather than just selling hardware, IBM has moved into businesses as diverse as life sciences, banking and automotive.44

Str ategi c partn ersh i ps Internal innovation doesn’t mean companies always go it alone, however. Collaboration with other organisations, sometimes even with competitors, is an important part of how today’s successful companies enter new areas of business. Consider Procter & Gamble (P&G) and Clorox. The companies are fierce rivals in cleaning products and water purification, but both profited by collaborating on a new plastic wrap. P&G researchers invented a wrap that seals tightly only where it is pressed, but P&G didn’t have a plastic wrap category. Managers negotiated a strategic partnership with Clorox to market the wrap under the well-established Glad brand name, and Glad Press & Seal became one of the company’s most popular products.45 The Internet is both driving and supporting the move towards partnership thinking. The ability to rapidly and smoothly conduct transactions, communicate information, exchange ideas and collaborate on complex projects via the Internet means that companies such as Citigroup, Dow Chemical and Herman Miller have been able to enter entirely new businesses by partnering in business areas that were previously unimaginable.46

Innovative Way

Focused innovation in marketing

With shifting tides in social media, and a move towards online marketing, firms are finding it difficult to saturate their prospective customers with brand exposure via traditional marketing means. This has given rise to a new trend in marketing known as cultural marketing. Cultural marketing – meaning marketing to a particular demographic or cultural segment – can be a more effective, targeted marketing approach than traditional advertising. A good example is that of German spirits brand Jägermeister, which has combined the usual forms of media, such as TV, billboards or ‘mass media’ with a focus on it strategy of cultural marketing, by branding and promoting itself at the point of sale. The ethos is that instead of just saturating the wider public with expensive broad brush media campaigns, Jägermeister is targeted more directly at potential consumers, and focused on aligning itself with the culture of these consumers. According to James Young of Melbourne’s Cherry Bar, ‘traditional advertising is outdated, it is anachronistic and is not working. It used to be the case that all you had to do was advertise during the 8.30 movie on Sunday night television. But the family doesn’t sit down together on a Sunday night any more. It is much

Source: iStockphoto/Stratol

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more challenging for marketers because they have to go to where the consumers are’. Young adds that cultural marketing asks whether a potential consumer ‘wants to be a part of this tribe’. At present, cultural marketing is not commonplace, accounting for a small amount of total spend in Australia, the US and Europe, but it is a growing opportunity for those whose business strategy is that of a focused niche. Source: James, David. (25 November 2010). Cultural Marketing. BRW.

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Exhibit 8.8 A continuum of cooperative strategies

Acquisitions

Mergers

Strategic alliances

Source: Originally published October 1990. Reprinted by permission, Nation’s Business, July 2007. Copyright 1990, US Chamber of Commerce; Adapted from Maynard, 1996.

Joint ventures Strategic business partnering

Preferred supplier arrangements

Low

High Degree of collaboration

Fast-growing high-tech companies, such as Cisco Systems, depend on strategic partnering. Take a A still higher degree of collaboration is reflected in joint ventures, which are separate entities Moment created with two or more active firms as sponsors. For example, MTV Networks was If you haven’t completed the Self-test at the beginning originally created as a joint venture of Warner Communications and American Express in of this chapter yet, take it now. the late 1970s. In a joint venture, organisations share the risks and costs associated with This assessment will give you a sense the new venture. of your strategic strengths and how Mergers and acquisitions represent the ultimate in collaborative relationships. you can best contribute to Businesses all over the world are in the midst of the biggest merger and acquisition boom your organisation’s 47 strategy. in history. The ‘Big Australian’, BHP, merged with Billiton to form the global mining giant BHP Billiton; and another Australian mining giant, CRA, joined with the RTZ mining company to form the Rio Tinto Group. Today’s organisations simultaneously embrace both competition and cooperation. Few organisations can go it alone under a constant onslaught of international competition, changing technology and new regulations. In this new environment, businesses choose a combination of competitive and cooperative strategies that add to their overall sustainable advantage.48

Global strategy Many organisations operate globally and pursue a distinct strategy as the focus of globalisation. Ultimately, when businesses are successful and competitive, they can grow, and this means that they outgrow their original ‘home market’. They can move towards becoming a global business. Senior executives try to formulate coherent strategies to provide synergy among worldwide operations for the purpose of fulfilling common goals. Yet managers face a strategic dilemma between the need for global integration and national responsiveness.

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High

Exhibit 8.9 Global corporate strategies

Globalisation strategy

Sources: Based on Michael A. Hitt, R. Duane Ireland and Robert E. Hoskisson, Strategic Management: Competitiveness and Globalization (St Paul, MN; West, 1995), p. 239; and Thomas M. Begley and David P. Boyd. (Winter 2003). The Need for a Corporate Global Mindset. MIT Sloan Management Review, 25–32.

Treats world as a single global market Need for global integration

Standardises global product/advertising strategies

Export strategy Domestically focused Exports a few domestically produced products to selected countries

Transnational strategy Seeks to balance global efficiencies and local responsiveness Combines standardisation and customisation for product/advertising strategies

Multidomestic strategy Handles markets independently for each country Adapts product/ advertising to local tastes and needs

Low Low

High

Source: © Munshi Ahmed

Need for national responsiveness

These KitKat chocolate bars, stocked by a salesman in a Malaysian shop, are manufactured with locally grown beans – at a price 30 per cent below imports. Nestlé, the world’s biggest branded food company, rejects the idea of a single global market, opting for a multidomestic strategy that handles competition in each country independently. The Switzerland-based powerhouse is charging across the developing world by hiring people in the region, manipulating ingredients or technology for local conditions, and slapping on one of the company’s 8000 brand names. Of those 8000 worldwide brands, only 750 are registered in more than one country.

The various global strategies are shown in Exhibit 8.9. Recall from Chapter 3 that the first step towards a greater international presence is when companies begin exporting domestically produced products to selected countries. The export strategy is shown in the lower left corner of the exhibit. Because the organisation is domestically focused, with only a few exports, managers have little need to pay attention to issues of either local responsiveness or global integration. Organisations that pursue further international expansion must decide whether they want each global affiliate to act autonomously or whether activities should be standardised and centralised across countries. This choice leads managers to select a basic strategy alternative such as globalisation versus multidomestic strategy. Some corporations may seek to achieve both global integration and national responsiveness by using a transnational strategy. When an organisation chooses a strategy of globalisation, it means that product design and advertising strategies are standardised throughout the world.49 This approach is based on the assumption that a single global market exists for many consumer and industrial products. The theory is that people everywhere want to buy the same products and live the same way. People everywhere want to drink Coca-Cola and eat

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McDonald’s hamburgers.50 A globalisation strategy can help an organisation reap efficiencies by standardising product design and manufacturing, using common suppliers, introducing products around the world more quickly, coordinating prices and eliminating overlapping facilities. For example, Gillette Company has large production facilities that use common suppliers and processes to manufacture products whose technical specifications are standardised around the world.51 Globalisation enables marketing departments alone to save millions of dollars. One consumer products company reports that, for every country where the same commercial runs, the company saves $1 million to $2 million in production costs alone. More millions have been saved by standardising the look and packaging of brands.52

Mu lti dom esti c str ategy When an organisation chooses a multidomestic strategy, it means that competition in each country is handled independently of industry competition in other countries. Thus, a multinational company is present in many countries, but it encourages marketing, advertising, and product design to be modified and adapted to the specific needs of each country.53 Many companies reject the idea of a single global market. While working from a standard product design many companies that want to work internationally have found it necessary to adjust their offerings because of the varying requirements of consumers around the world. They have found that the French do not drink orange juice for breakfast, that laundry detergent is used to wash dishes in parts of Mexico, and that people in the Middle East prefer toothpaste that tastes spicy. Service companies also have to consider their global strategies carefully. Kraft biscuit flavours include green tea, ice cream, and mango and mandarin orange; and Ritz crackers are offered in flavours such as ‘fantastic beef stew’ and ‘very spicy chicken’ and sold in portable cuplike packages that resemble ramen-noodle containers.54 The 7-Eleven convenience store chain uses a multidomestic strategy because the product mix, advertising approach and payment methods need to be tailored to preferences, values and government regulations in different parts of the world. For example, in Japan, customers like to use convenience stores to pay utility and other bills. 7-Eleven Japan also set up a way for people to pick up and pay for purchases made over the Internet at their local 7-Eleven store.55

multidomestic strategy The modification of product design and advertising strategies to suit the specific needs of individual countries.

Tr ansnatio nal str ategy A transnational strategy seeks to achieve both global integration and national responsiveness.56 A true transnational strategy is difficult to achieve, because one goal requires close global coordination while the other goal requires local flexibility. A well-known adage often used to describe this conundrum is ‘Think global, act local’. Many industries are finding that, although increased competition means they must achieve global efficiency, growing pressure to meet local needs demands national responsiveness.57 One company that effectively uses a transnational strategy is Caterpillar, Inc., a heavy equipment manufacturer. Caterpillar achieves global efficiencies by designing its products to use many identical components and centralising manufacturing of components in a few large-scale facilities. However, assembly plants located in each of Caterpillar’s major markets add certain product features tailored to meet local needs.58 Another company that effectively achieves both aspects of a transnational strategy is Coca-Cola. The giant soft drink company can attain efficiencies by manufacturing, advertising and distributing well-known brands such as Coke, Fanta and Sprite on a global basis. However, CEO Muhtar Kent has pushed the company to

transnational strategy A strategy that combines global coordination to attain efficiency with flexibility to meet specific needs in various countries.

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expand beyond well-known brands and embrace local tastes. The company sells more than 400 different drinks globally. In Russia, for instance, Coca-Cola’s version of the traditional kvas is the fastest-growing soft drink.59 Although most multinational companies want to achieve some degree of global integration to hold costs down, even global products may require some customisation to meet government regulations in various countries or some tailoring to fit consumer preferences. In addition, some products are better suited for standardisation than others. Most large multinational corporations with diverse products and services will attempt to use a partial multidomestic strategy for some product or service lines and global strategies for others. Coordinating global integration with a responsiveness to the heterogeneity of international markets is a difficult balancing act for managers, but it is increasingly important in today’s global business world.

Innovative Way

The dodo is not extinct!

Can a small company compete with the giants in telecommunications, and energy supply industries, and if so, how? One of Australia’s cut-price telecommunications businesses, Dodo, utilised an expansionist strategy in searching for further business growth. Founder and former chief executive Larry Kestelman, who sold the company in 2013, explains that Dodo moved into the retail utilities provider space with the launch of Dodo Power and Gas. The innovative strategic idea was to combine utility bills for their customers, providing one consolidated bill for electricity, phone, Internet and gas. Kestelman says that ‘If you go back 4 years … our strategy was all about launching a multiproduct

service so that customers could get mobile, Internet and home phone on one bill. This is just an extension of that’. Kestelman believes his strategy of providing competitive pricing and consolidated billing services will extend to the utilities retail industry, and provide consumers with convenient and competitive solutions. Dodo’s is an offer of a differentiated (convenience) service, at a lower price, attempting to work both the ‘higher benefits’ and the ‘lower price’ end of the value equation. This has been the established competitive position of this company since its inception. Dodo made A$29 million profit in 2013 and their latest foray has been into general insurance.

Source: Larry Kestelman and Douglas, Jeanne-Vida. Expansion. (25 November 2010). BRW; Stafford, P. (18 March 2013). Dodo chief Larry Kestelman tells SmartCompany: Why I just sold my company for $203 million. http://www.smartcompany.com.au/growth/30832-dodo-chief-larry-kestelman-tells-smartcompany-why-i-just-sold-mycompany-for--203-million.html (accessed 28 November 2013)

➜➜ When formulating a strategy as the focus for global operations, managers face a dilemma between the need for global standardisation and the need for local responsiveness. ➜➜ With a globalisation strategy, product design and advertising are standardised throughout the world.

➜➜ A multidomestic strategy means that competition in each country is handled independently; product design and advertising are modified to suit the specific needs of individual countries. ➜➜ A transnational strategy is a strategy that combines global coordination to



attain efficiency with local flexibility to meet needs in different countries.

remember this

➜➜ Most large companies use a combination of global strategies to achieve global standardisation and efficiency, as well as respond to local needs and preferences in various countries.

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Strategy execution The final step in the strategic management process is strategy execution – how strategy is implemented or put into action. Many companies have file drawers full of winning strategies, but still struggle to succeed. Why? Practising managers remind us that ‘strategy is easy, but execution is hard’.60 Indeed, many strategy experts agree that execution is the most important, yet the most difficult, part of strategic management.61 No matter how brilliant the formulated strategy, the organisation will not benefit if it is not skilfully executed. One key to effective strategy execution is alignment, so that all aspects of the organisation are in congruence with the strategy and every department and individual’s efforts are coordinated towards accomplishing strategic goals. Alignment basically means that everyone is moving in the same direction. Grand goals have to be translated into a clear blueprint for execution, so that everyone’s actions are in line with managers’ strategic intentions.62 Recall our discussion of strategy maps from the previous chapter. Just as managers make sure goals are in alignment, they check that all aspects of the organisation are coordinated to be supportive of the strategies designed to achieve those goals. Exhibit 8.10 illustrates the primary tools that managers use to implement strategy effectively: visible leadership, clear roles and accountability, candid communication and appropriate human resource practices.63 ●● Visible leadership. The primary key to successful strategy execution is good leadership. Leadership is the ability to influence people to adopt the new behaviours needed for putting the strategy into action. Leaders actively use persuasion, motivation techniques, and cultural values that support the new strategy. They might make speeches to employees, build coalitions of people who support the new strategic direction, and persuade middle managers to go along with their vision for the company. Most important, they lead by example.64 Pixar, the animation studio, has a rule about leadership that supports its strategy of producing highly creative animated films: no studio executives. Pixar’s leaders are the creative artists, an approach that maintains a ‘film school without the teachers’ culture that gives people maximum freedom to develop and pursue unique, innovative ideas. At Pixar, everyone from janitors to auditors is encouraged to submit ideas for new films.65 ●● Clear roles and accountability. People need to understand how their individual actions can contribute to achieving the strategy. Trying to execute a strategy that conflicts with structural design, particularly in relation to managers’ roles, authority and accountability, is a top obstacle to putting strategy into action.66 To execute strategy effectively, top executives clearly define roles and delegate authority to individuals and teams who are accountable for results. A lack of clear roles and accountability is partly to blame for the debacle at JPMorgan Chase, which announced a multi-billion-dollar loss in May 2012. Why did implementation of the company’s careful, low-risk trading strategy falter? Ina Drew, the senior banker who has been blamed for the problems, had won the complete trust of CEO Jamie Dimon after she steered the company through the 2008 financial crisis. However, Drew was out of the office a great deal of the time due to an illness beginning in 2010, and long-simmering conflicts and divisions over roles and responsibilities emerged. Drew’s deputy in New York, Althea Duersten, disagreed with the risky, outsized bets being made by Achilles Macris, the deputy in London, but the London deputy used his stronger personality to shout down Duersten’s objections and gain more power. ‘It felt like there was a land grab where no one was pushing back because Althea and Achilles both wanted more responsibility’, a former trader said. Another trader underscored the lack of clear roles when he said he ‘didn’t know who to listen to’.67

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●● Candid communication. Managers openly and avidly promote their strategic ideas, but they also listen to others and encourage disagreement and debate. They create a culture based on openness and honesty, which encourages teamwork and collaboration across hierarchical and departmental boundaries. Effective strategy execution also requires candid communication with shareholders, customers and other stakeholders. Sergey Brin and Larry Page, the founders of Google, take turns writing a direct and open letter to shareholders each year. The original letter written for the initial public offering (IPO) makes clear that Google wouldn’t try to ‘smooth out’ its quarterly results, as some publicly traded companies do.68 Candid communication with customers was part of a strategy implementation at JCPenney. When Ron Johnson announced his new ‘fair and square price’ strategy, he told customers that the regular prices in stores have long been ‘fake and inflated’. Johnson felt that the company’s rejection of marketing gimmicks would win trust and support for the new strategy.69 ●● Appropriate human resource practices. The organisation’s human resources are its employees. The human resource function recruits, selects, trains, compensates, transfers, promotes and lays off employees to achieve strategic goals. Managers make sure human resource practices are aligned with the strategy.

Environment

Organisation Leadership Persuasion Motivation Culture/values

Structural design Strategy

Human resources

Organisation chart

Recruitment/selection

Teams Centralisation/decentralisation Facilities, task design

Performance

Transfers/promotions/training Layoffs/recalls

Information and control systems Pay, reward system Budget allocations Information systems Rules/procedures

Exhibit 8.10 Tools for putting strategy into action Source: From Galbraith/ Kazanjian. Strategy Implementation, 2E. © 1986 South-Western, Cengage Learning. Reproduced by permission. http://www. cengage.com/permissions.

Successful strategy execution creates substantial benefits for organisations. At the Transport Accident Commission in Victoria, a leading insurance and accident prevention agency, former CEO John Lees drove reductions in the claims costs associated with motor accident injuries. He tied management bonuses to the achievement of these targets. A reduction of more than A$100 million in claims liability was quickly achieved.70 Another example of an effective reward system is Outback Steakhouse, which has taken an Australian-styled eating experience to the US. Outback has built one of the US’s hottest restaurant chains by giving managers a significant ownership stake, including 10 per cent of

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their restaurant’s cash flow as well as shares in the company. Outback’s incentive program, believed to be unique among casual-restaurant chains, helped founders Chris Sullivan, Robert Basham and Timothy Gannon to move in only six years from their modest goal of five restaurants to more than 1400 restaurants in 22 countries, by 2013.71

I m plem entin g glo bal str ategi es The difficulty of implementing strategy is greater when an organisation goes global. In the international arena, flexibility and superb communication emerge as mandatory leadership skills. Likewise, structural design must merge successfully with foreign cultures as well as link foreign operations to the home country. Information and control systems must fit the needs and incentives within local cultures. In a country such as Japan or China, financial bonuses for star performance would be humiliating to an individual, whereas group motivation and reward are acceptable. In Australia and other Western countries, control is typically created through timetables and budgets, and by monitoring progress towards desired goals. Finally, the recruitment, training, transfer, promotion and lay-off of international human resources create an array of problems not confronted in the organisation’s home country. Labour laws, guaranteed jobs and cultural traditions of keeping unproductive employees on the job provide special problems for strategy implementation. Subsequently, strategy implementation must receive even more attention in the international domain than in the domestic realm. ➜➜ Even the most creative strategies have no value if they cannot be translated into action.

➜➜ Execution is the most important, but also the most difficult, part of strategy. ➜➜ One key to effective execution is making sure that all parts of the organisation are in alignment to support the strategy.

➜➜ Managers use visible leadership, clear roles and accountability, candid communication and appropriate human resource practices to execute strategy effectively.

Testin g th e q ualit y o f str ategy Recent research by McKinsey has suggested that strategy can be evaluated using 10 tests, which we summarise below. For any strategy, a key issue is how many and which of these tests does it pass, and what are the implications of passing, versus failing, these tests. These tests also usefully prompt managers to work on improving and refining their strategies, and hence can be used as a checklist during strategy formulation processes: Test 1

Does this strategy beat the market?

Test 2

Does it tap into our competitive advantage?

Test 3

Is the strategy detailed enough about where to compete?

Test 4

Is the strategy at the cutting edge of new trends?

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Test 5

Does the strategy make use of up-to-date information?

Test 6

Does the strategy fully account for uncertainty?

Test 7

Does the strategy contain both commitment and flexibility?

Test 8

Is it unbiased, rational and logical?

Test 9

Is there a strong commitment to execute the strategy?

Test 10

Is there an effective action plan?72

These clear and powerful test questions should serve to make sure that fundamental errors are not made in strategic management processes.

sustainable development

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Developing a sustainability strategy as part of business strategy Exhibit 8.10 shows the strategy formulation process. The sustainable development formulation policy can first parallel this, and then, once maturity is achieved, be fully integrated as part of the mainstream strategy and its formulation process. This means that to begin with, the mission, goals and high level strategy would be re-examined for potential inclusion of a broader set of conditions, along the lines of the triple bottom line (financial, economic and social/community bottom lines). Breadth of vision would be incorporated into these high-level elements of strategy. The internal and external environmental scans would also include aspects of sustainability. They would take note of industry trends and norms, stakeholder interests, and this would lead straight into the SWOT analysis, with particular emphasis placed here on opportunities for moving forward with sustainability. The strategy would then be fleshed out, evaluated and set up for implementation in the usual way, and would incorporate sustainability aspects throughout. It is important that sustainability elements are indeed included in overall strategy formulations, because the breadth of vision and sustainability orientation (see Chapter 5) are necessary prerequisites for mature approaches to sustainability to be ingrained into operating practices and measures. Sydney’s Olympic Park is managed by an authority which has developed and published a comprehensive sustainability strategy.73 It serves as a guide to action, provides performance targets and sets the tone for the organisation’s approach. This includes comprehensive environmental and community outcomes of the operations of Sydney Olympic Park. Many government and private sector organisations have published sustainability strategy statements and produced these to be used as comprehensive guides to action. For example Manly Council (in Sydney) has published a sustainability strategy each year since 1998. The strategy aims to enhance the social inclusion of the Manly area as well as to improve the environmental outcomes of activities of the Manly council and its residents.74 In the private sector, most large companies have established statements regarding their position on sustainability. NAB has done so very effectively with its environment policies,75 and a number of other aspects of its work such as its community policies. Westpac and ANZ Bank have made similar statements, and indeed ANZ has incorporated a broad set of stakeholder concerns into its core value statements.

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Returning to the chapter-opening case, Australia Post and New Zealand Post have to face challenges such as:

➜➜ capturing a good share of parcel delivery, which is increasing due to growing Internet purchasing

➜➜ using Post shops to offer additional services, such as identity checks, issuing passports and driving licences, car registration and so on

➜➜ maintaining innovation and revenue in the light of increasing digitisation of communication and transactions

➜➜ increasing direct mail volumes, which is lower in Australia than many other developed countries

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➜➜ keeping prices low (the Australian 60-cent post rate is one of the world’s lowest), and delivery performance excellent. Mr Fahour will need to find innovative new business models and business strategies that make use of Australia Post’s capabilities in related technological and business areas. For example, in some countries, prescription pharmaceuticals and virtually everything that a chemist shop sells is delivered to homes via Post-like delivery networks. Is this an opportunity? More broadly, can Australia Post and New Zealand Post set up grocery delivery and full financial services operations that are efficient and attractive to consumers? These are real opportunities that require careful analysis blended with innovative thinking.

1 Assume you are the general manager of a large hotel and have formulated a strategy of renting banquet facilities to organisations for big events. At a monthly management meeting, your sales manager informs the head of food operations that a big reception in one week will require converting a large hall from a meeting room to a banquet facility in only 60 minutes – a difficult but achievable operation that will require precise planning and extra help. The food operations manager is furious about not being informed earlier. What is wrong here? 2 Which is more important, strategy formulation or strategy implementation? Do they depend on one another? Is it possible for strategy implementation to occur first? 3 If an organisation has hired strategic management professionals to help top managers, during which part of the strategic management process would they play the largest role? 4 Perform a SWOT analysis for the university you attend. Do you think university administrators consider these factors when devising their strategy? 5 What is meant by the core competency and synergy components of strategy? Give examples. 6 Using Porter’s competitive strategies, how would you describe the strategies of Target, Coles Supermarkets, David Jones and Kmart? Do any of these companies also use cooperative strategies? Discuss. 7 Walt Disney Company has four major strategic business units (SBUs): films, theme parks, consumer products and television (primarily pay/ cable). Place each of these SBUs on the BCG matrix based on your knowledge of them. 8 As administrator for a medium-sized hospital, you and the board of directors have decided to change from a short-term, acute-care facility

to a drug-dependency hospital. Which organisational dimensions would you use to implement this strategy?

Response to the Management Challenge

Discussion questions

9 How would functional strategies in marketing, research and development and production departments differ if a business changed from a differentiation to a lowcost strategy? 10 Do you think the movement towards corporate collaborations, alliances and partnership rather than competition is a passing phenomenon or here to stay? What skills would make a good manager in a strategic alliance with another company? What skills would make a good manager operating in competition with another company? 11 You are a middle manager helping to implement a new corporate cost-cutting strategy, and you’re meeting scepticism, resistance and, in some cases, outright hostility from your subordinates. In what ways might you or the company have been able to avoid this situation? Where do you go from here? 12 If you are the CEO of a global company, how might you determine whether a globalisation, a transnational or a multidomestic strategy would work best for your enterprise? What factors would influence your decision? How would your choice reflect the products or services your company is offering? 13 Describe how the Internet increases the bargaining power of consumers, one of Porter’s five competitive forces. Have you felt increased power as a consumer because of the Internet? Explain. 14 How might a corporate management team go about determining whether the company should diversify? What factors should they consider? What kinds of information should they collect?

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Ethical challenge

A g r e at d e a l f o r w h o m ?

It seemed like a great deal for Kevin Haley, the retired managing partner of a small accounting firm, when he took the job. To sit on the board of Keldine Technologies, all he had to do was listen to some general talk about the company at bi-monthly meetings, vote on operations issues and collect a nice fee. He did not worry about his lack of expertise in the company’s business of manufacturing transistors, because ‘nothing ever changed at Keldine’. That was two years ago. Now Keldine Technologies, with 250 employees and 10 years in business, is faced with a buyout offer from Graham Industries. Keldine’s chairman of the board, Greg Bingham, calls the deal a ‘no-brainer’. Graham Industries’ offer of A$6 a share is high – a great deal for shareholders. The problem for Haley is that he knows Graham Industries is close to bankruptcy, and that it is probably only buying Keldine to leverage some of its debt and hold off creditors. The odds are that both companies will be wiped out within a year if the sale goes through. As news of a buyout offer spreads, Keldine shares have changed hands rapidly, and speculators in the shareholder ranks are pressuring for a sale. Bingham asserts: ‘Our mission is to create as much value for shareholders as possible.’

He also assures the board that the executives are protected by contingency compensation packages in the event of a ‘downturn for Keldine’. But Haley is torn. The deal is a short-term money-maker but almost a guaranteed disaster for the company’s future and the majority of its employees. Haley’s commitment to shareholders seems compromised by the presence of speculators in their ranks. He questions whether the interests of loyal, long-time employees are not a higher priority than those of speculators. W h at d o yo u d o ? 1 Vote to accept the offer of Graham Industries and assure a shortterm profit for the shareholders and executives. They are your first responsibility. 2 Reject the buyout bid. Providing Keldine with a future, even if uncertain because of its resistance to change, is more important than accepting what may be the best offer ever received. 3 Pass, and hope a board majority prevails without your vote. You are not qualified to make a decision on this anyway.

Source: Based on Wallace, D. (September–October 1991). When the Sharks Are Circling, What Would You Do? Business Ethics, 1, 42–4.

Gr oup challenge

D e v e l o p i n g s t r at e g y f o r a s m a l l b u s i n e s s

Step 1. In a group of three to five students, select a local eating establishment for a SWOT analysis. This could be a restaurant, an ice cream store or a bakery with which your group is familiar. Step 2. Write a statement of what you perceive to be the business’s current strategy. Step 3. What do you perceive to be the key strengths and weaknesses of this business from a customer’s perspective? Make one list for strengths and another list for weaknesses. Step 4. What do you perceive to be potential opportunities and threats for this business? Make one list for opportunities and another for threats.

Step 5. If the store manager or owner is available, interview the person for his or her perception of strategy strengths, weaknesses, opportunities and threats. Add new items to your lists. Step 6. Use your SWOT analysis findings to set a goal of where this business could be in two years in terms of growth, size, new offerings or expanded customer base. What steps do you recommend to achieve this goal? Step 7. How did your SWOT analysis help you determine the goal and how to accomplish it during the next two years? What did you learn from this exercise?

Source: Adapted from Richard L. Daft and Dorothy Marcic, Understanding Management (Mason, OH: South-Western, 2008), pp. 177–8.

Case for cr itical analysis

Sta r b u c k s c o ff e e

Beginning with nine Seattle stores in 1987, Starbucks chairman and chief global strategist, Howard Schultz, has dramatically expanded the company’s cafés throughout the US and internationally. Service is anything but fast, and the coffee is expensive, but each week millions of customers around the globe hit Starbucks to sip skinny lattes or no-whip mochas.

Since it made its first acquisition in 1994, buying The Coffee Connection Inc., a 23-store Boston rival, Starbucks has pursued rapid expansion. Schultz had grown his enterprise from 400 stores in the US in 1994 to a global enterprise with 17 651 locations in 60 markets outside of North America, including Australia, New Zealand, China, Hong Kong, Taiwan, Singapore, the Philippines and India. Starbucks teamed up with foreign partners to open its first international coffeehouse in 1996 in Tokyo. Since then, Peter Maslin, president of Starbucks Coffee

8 : S t r at e g y f o r m u l at i o n a n d i m p l e m e n tat i o n

International, has ‘been amazed by the global acceptance and visibility of Starbucks’ brand in all our international markets’. Starbucks adapts its development strategy to different markets by addressing local needs and requirements. It currently uses three business strategies in developing its international operations: joint ventures, licences and company-owned operations. Starbucks views its international partners as critical to its global success. Partners are carefully chosen for their shared values and corporate culture, strong multiunit retail/restaurant experience, dedicated human resources, commitment to customer service, quality image, creative ability, local knowledge and brand-building skills as well as for their strong financial resources. In 1994, some analysts thought Schultz’s strategies were risky, but Starbucks has proved it had the flexibility and management strength to succeed. In the US, Starbucks has formed joint ventures with the Pepsi-Cola Company to make a bottled Frappuccino, and with Dreyer’s Grand Ice Cream Inc. to produce the number one brand of coffee ice cream in the US. Starbucks also supplies airlines such as United and Canadian Airlines and hotel chains (Starwood Hotel, Host Marriott International and Hyatt Hotel Corp.), and has extended its brand into grocery channels across the US. Many of Starbucks’ managers have years of experience from such companies as Burger King, Taco Bell, Wendy’s and Blockbuster. Schultz believes a CEO should ‘hire people smarter than you are and get out of their way’. Equally crucial to Starbucks’ success are the ‘baristas’ who

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prepare coffee drinks. Starbucks recruits its workers from universities and community groups and gives them 24 hours’ training in coffee-making and lore – a key to creating the company’s hip image and quality service. To maintain quality control, Starbucks roasts all its coffee in-house. A computer network links the expanding Starbucks empire, and Schultz hired a top information technology specialist from McDonald’s to design a point-of-sale system to enable managers to track sales. Every night, computers from all stores send information to headquarters in Seattle so that executives can spot regional buying trends. For Schultz, a man who has already changed people’s coffee-drinking habits around the world, the challenge is ‘to become a great enduring company with the most recognised and respected brand in the world’ – a challenge Starbucks is rapidly achieving through skilful strategic management. Questions 1 Which of Porter’s competitive strategies is Starbucks using? 2 Discuss how Schultz is using leadership, structure, information and control systems, and human resources to implement strategy at Starbucks. 3 What strategies has Schultz used in expanding Starbucks internationally?

Sources: Yang, D. J. (24 October 1994). The Starbucks Enterprise Shifts into Warp Speed. BusinessWeek, 76; Treacy, M. (17 April 1995). You Need a Value Discipline – But Which One? Fortune, 195; Starbucks website, http://www.starbucks.com.

T h e o C h o c o l at e : s t r at e g y f o r m u l at i o n a n d e x e c u t i o n For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

On the job video case

Q uestions 1 Evaluate Theo’s new strategy in light of the company’s strengths, weaknesses, opportunities and threats. 2 Using the BCG matrix, explain Theo’s decision to offer a classic line of chocolate bars after having limited success with Fantasy Flavor chocolates.

3 Which of the three competitive strategies – differentiation, cost leadership, or focus – do you think is right for Theo Chocolate? Explain.

endnotes 1 Hamel, G. (23 June 1997). Killer Strategies. Fortune, 70–84; Markides, C. (Spring 1997). Strategic Innovation. Sloan Management Review, 9–23. 2  Dell website, http://www.dell.com.au. 3 Miller, C. C. and Cardinal, L. B. (1994). Strategic Planning and Firm Performance: A Synthesis of More than Two Decades of Research. Academy of Management Journal, 37:6, 1649–65. 4 Dye, R. and Sibony, O. (2007). How to Improve Strategic Planning. McKinsey Quarterly, 3. 5 Hammonds, K. H. (March 2001). Michael Porter’s Big Ideas. Fast Company, 150–6. 6 Prescott, J. E. (1986). Environments as Moderators of the Relationship between Strategy and Performance. Academy of Management Journal, 29,

329–46; Pearce, J. A. II and Robinson, R. B. Jr (1985). Strategic Management: Strategy, Formulation, and Implementation, 2nd edn, Homewood: Irwin; Teece, D. J. (Spring 1984). Economic Analysis and Strategic Management. California Management Review, 26, 87–110. 7  Markides. Strategic Innovation. 8  http://www.howardfireworks.com.au (accessed 23 September 2013). 9 Michael E. Porter. (November–December 1996). What Is Strategy? Harvard Business Review, 61–78. 10 This discussion is based on Ken Favaro with Kasturi Rangan and Evan Hirsh. (5 March 2012). Strategy: An Executive’s Definition. Strategy 1

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Business, http://www.strategy-business.com/article/cs00002?gko=d59c2 (accessed 24 July 2012). 11  Example from Favaro et al. Strategy: An Executive’s Definition. 12 Norihiko Shirouzu. (7 June 2011). Chinese Begin Volvo Overhaul. The Wall Street Journal, B1. 13 Thompson, A. A. Jr and Strickland, A. J. III (1992). Strategic Management: Concepts and Cases, 6th edn, Homewood: Irwin; Briance Mascarenhas, Alok Baveja and Mamnoon Jamil. (Summer 1998). Dynamics of Core Competencies in Leading Multinational Companies. California Management Review, 40:4, 117–32. 14 Copeland, M. V. (April 2005). Stitching Together an Apparel Power-house. Business2, 52–4. 15 Woodyard, C. (11 September 2005). Big Dreams for Small Choppers Paid Off. USA Today, http://www.usatoday.com. 16 Michael Goold and Andrew Campbell. (September–October 1998). Desperately Seeking Synergy. Harvard Business Review, 131–43. 17 Anjali Cordeiro. (19 April 2010). Boss Talk: Tang in India and Other Kraft Synergies. The Wall Street Journal Online, http://online.wsj.com/article /SB10001424052702303348504575184103106388686.html (accessed 8 October 2012); and Ashlee Vance. (28 January 2010). Oracle Elbows Its Way into a Crowded Fight; With Close of Sun Deal, It Hopes to Beat Out Rivals Offering One-Stop Shops. International Herald Tribune. 18 Leontiades, M. (1980). Strategies for Diversification and Change. Boston: Little, Brown, 63; Schendel, D. E. and Hofer, C. W. (eds). (1979). Strategic Management: A New View of Business Policy and Planning. Boston: Little, Brown, 11–14. 19 Yahoo 7 Finance, http://au.finance.yahoo.com/q/ks?s=NTRI (accessed 28 November 2013). 20 BusinessWeek (5 June 2006). NutriSystem profile, Hot Growth Special Report 2006; Palmeri, C. (19 September 2005). How NutriSystem Got Fat and Happy. BusinessWeek, 82–4, http://phx.corporate-ir.net/phoenix.zhtml?c= 66836&p=irolnewsArticle&ID=1109858&highlight= 21 Guy Chazan. (3 May 2010). BP’s Worsening Spill Crisis Undermines CEO’s Reforms. The Wall Street Journal. 22 Bruce E. Perrott. (2011). Strategic Issue Management as Change Catalyst. Strategy & Leadership, 39:5, 20–9. 23 Leontiades, M. (1982). The Confusing Words of Business Policy. Academy of Management Review, 7, 45–8. 24 Hrebiniak, L. G. and Joyce, W. F. (1984). Implementing Strategy (New York: Macmillan). 25 Swartz, S. (18 September 1985). Basic Bedrooms: How Marriott Changes Hotel Design to Tap Mid-priced Market. The Wall Street Journal, 1. 26 Marriott Hotels Annual Report 2012, http://investor.shareholder.com/ MAR/marriottAR12/financials/fs_01.html (accessed 13 March 2014); http://timeline.marriott.com/resource/OurHistory.pdf (accessed 13 March 2014) and Touryalai, H. Marriott’s Upgrade: New CEO Arne Sorenson Freshens Up the Brand for Millennials. Forbes, 26 June 2013, http://www.forbes.com/sites/halahtouryalai/2013/06/26/marriottsupgrade-new-ceo-arne-sorenson-enlivens-the-hotel-giant-aims-for1-million-rooms (accessed 13 March 2014). 27 Peter Burrows. (6 July 2009). Microsoft Defends Its Empire. BusinessWeek, 28–33. 28 Frederick W. Gluck. (Fall 1985). A Fresh Look at Strategic Management. Journal of Business Strategy, 6, 4–19. 29 Thompson and Strickland. Strategic Management: Concepts and Cases; Shanklin, W. L. and Ryans, J. K. Jr (1981). Is the International Cash Cow Really a Prize Heifer? Business Horizons, 24, 10–16. 30 William E. Rothschild. (November–December 2009). GE and Its Naysayers. Chief Executive, 46–50; Paul Glader. (15 December 2009). Corporate News: GE’s Immelt to Cite Lessons Learned. The Wall Street Journal; Shital Vakhariya and Menaka Rao. (August–November 2009). Innovate for

Growth: Immelt’s Strategy for GE. Journal of Operations Management, 8:3–4, 86–92; and General Electric website, http://www.ge.com/products_services/ index.html (accessed 10 August 2010). 31 Jones, G. R. and George, J. M. (2006). Contemporary Management, 4th edn (Boston, MA: McGraw-Hill Irwin), p. 283. 32 Lohr, S. (19 May 2006). Apple, a Success at Stores, Bets Big on Fifth Avenue. The New York Times; Schlender, B. (21 February 2005). How Big Can Apple Get? Fortune, 66–76. 33 Porter, M. E. (March 2001). Strategy and the Internet. Harvard Business Review, 63–78. 34 Wheelen, T. L. and Hunger, J. D. (1989). Strategic Management and Business Policy. Reading: Addison-Wesley. 35 Thompson and Strickland. Strategic Management: Concepts and Cases. 36 Lumpkin, G. T., Droege, S. B. and Dess, G. G. (Spring 2002). E-Commerce Strategies: Achieving Sustainable Competitive Advantage and Avoiding Pitfalls. Organizational Dynamics, 81, 1–17. 37 Bruce Einhorn. (20 April 2009). Acer’s Game-Changing PC Offensive. BusinessWeek, 65; Charmian Kok and Ting-I Tsai. (1 April 2010). Acer Makes China Push from Taiwan; PC Maker’s Chief Expects Best Gains in New Markets, Including Brazil, as Aims to Surpass H-P. The Wall Street Journal; and (22 January 2010). Experience Will Propel Acer to Top of Smartphone Market by 2013. Gulf News. 38 Burns, G. (12 December 1994). It Only Hertz When Enterprise Laughs. BusinessWeek, 44. 39 Rosenbaum, J. (1998). Guitar Maker Looks for a New Key. The Wall Street Journal, B1, B5. 40 Nohria, N., Joyce, W. and Roberson, B. (July 2003). What Really Works. Harvard Business Review, 43–52. 41 Harreld, J. B., O’Reilly, C. A. III and Tushman, M. L. (2007). Dynamic Capabilities at IBM: Driving Strategy into Action. California Management Review, 49:4. 42 Brady, D. (28 March 2005). The Immelt Revolution. BusinessWeek, 64–73. 43 Christine Moorman, Marketing in a Technology Company: GE’s Organizational Platform for Innovation. Forbes, http://www.forbes.com/sites/ christinemoorman/2013/01/29/marketing-in-a-technology-company-gesorganizational-platform-for-innovation/ (accessed 13 March 2014). 44 Harreld et al. Dynamic Capabilities at IBM: Driving Strategy into Action. 45 Dragoon, A. (15 November 2004). A Travel Guide to Collaboration. CIO, 68–75. 46 Tapscott, D. (Third Quarter 2001). Rethinking Strategy in a Networked World. Strategy & Business, 24, 34–41. 47 Aley, J. and Siegel, M. (2 March 1998). The Fallout from Merger Mania. Fortune, 26–7. 48 Burton, J. (Autumn 1995). Composite Strategy: The Combination of Collaboration and Competition. Journal of General Management, 21:1, 1–23. 49 Ohmae, K. (May–June 1990). Managing in a Borderless World. Harvard Business Review, 152–61. 50 Levitt, T. (May–June 1983). The Globalization of Markets. Harvard Business Review, 92–102. 51 Mainardi, M. S., Salva, C. M. and Sanderson, M. (Second Quarter, 1999). Label of Origin: Made on Earth. strategy 1 business, 15. 52 Lipman, J. (12 May 1988). Marketers Turn Sour on Global Sales Pitch Harvard Guru Makes. The Wall Street Journal, 1, 8. 53 Porter, M. E. (Winter 1986). Changing Patterns of International Competition. California Management Review, 28, 40. 54 Laurie Burkitt. (30 May 2012). Kraft Craves More of China’s Snacks Market. The Wall Street Journal, B6. 55 Sawhney, M. and Mandal, S. (May 2000). What Kind of Global Organization Should You Build? Business 2.0, 213. 56 Hitt, M. A., Ireland, R. D. and Hoskisson, R. E. (1995). Strategic Management: Competitiveness and Globalization. St Paul: West.

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57 Gupta, A. K. and Govindarajan, V. (2001). Converting Global Presence into Global Competitive Advantage. Academy of Management Executive, 15:2, 45–56. 58 Bateman, T. S. and Zeithaml, C. P. (1993). Management: Function and Strategy, 2nd edn, Homewood: Irwin, 231. 59 Betsy McKay. (28 January 2009). Coke Bets on Russia for Sales Even as Economy Falls Flat. The Wall Street Journal. 60 Quote from Gary Getz, Chris Jones and Pierre Loewe. (2009). Migration Management: An Approach for Improving Strategy Implementation. Strategy & Leadership, 37: 6,18–24. 61 Lawrence G. Hrebiniak. (2006). Obstacles to Effective Strategy Implementation. Organizational Dynamics, 35:1, 12–31; Eric M. Olson, Stanley F. Slater and G. Tomas M. Hult. (2005). The Importance of Structure and Process to Strategy Implementation. Business Horizons, 48, 47–54; L. J. Bourgeois III and David R. Brodwin. (1984). Strategic Implementation: Five Approaches to an Elusive Phenomenon. Strategic Management Journal, 5, 241–64; Anil K. Gupta and V. Govindarajan. (1984). Business Unit Strategy, Managerial Characteristics, and Business Unit Effectiveness at Strategy Implementation. Academy of Management Journal, 25–41; and Jeffrey G. Covin, Dennis P. Slevin and Randall L. Schultz. (1994). Implementing Strategic Missions: Effective Strategic, Structural, and Tactical Choices. Journal of Management Studies, 31:4, 481–505. 62 Riaz Khadem. (2008). Alignment and Follow-Up: Steps to Strategy Execution. Journal of Business Strategy, 29:6, 29–35; Stephen Bungay. (January–February 2011). How to Make the Most of Your Company’s Strategy. Harvard Business Review, 32–40; and Olson, Slater and Hult. The Importance of Structure and Process to Strategy Implementation. 63 This discussion is based on Eric Beaudan. (March–April 2010). Creative Execution. Ivey Business Journal, http://www.iveybusinessjournal.com/article .asp?intArticle_ID=891 (accessed 26 March 2010); Jay R. Galbraith and Robert K. Kazanjian. (1986). Strategy Implementation: Structure, Systems and Process, 2nd ed. (St Paul, MN: West); Victoria L. Crittenden and

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William F. Crittenden. (2008). Building a Capable Organization: The Eight Levers of Strategy Implementation. Business Horizons, 51, 301–9; Paul C. Nutt. (1989). Selecting Tactics to Implement Strategic Plans. Strategic Management Journal, 10, 145–61; and Lawrence G. Hrebiniak. (2005). Making Strategy Work: Leading Effective Execution and Change (Upper Saddle River, NJ: Wharton School Publishing/Pearson Education Inc.). 64 Crittenden and Crittenden. Building a Capable Organization. 65 This example is from Christopher B. Bingham, Kathleen M. Eisenhardt and Nathan R. Furr. (Fall 2011). Which Strategy When? MIT Sloan Management Review, 71–8. 66 Based on survey results reported in Hrebiniak. Obstacles to Effective Strategy Implementation. 67 Jessica Silver-Greenberg and Nelson D. Schwartz. (20 May 2012). Discord at Key JPMorgan Unit Is Blamed in Bank’s Huge Loss. The New York Times, A1. 68 Beaudan. Creative Execution. 69 Brad Tuttle. (13 February 2012). The Price Is Righter. Time, http://www .time.com/time/magazine/article/0,9171,2105961,00.html#ixzz2275GLNTv (accessed 30 July 2012). 70 Transport Accident Commission website, http://www.tac.vic.gov.au. 71 Finegan, J. (December 1994). Unconventional Wisdom. Inc., 44–59; Outback Steakhouse website, http://www.outback.com/companyinfo; Bloomin’ Brands website http://www.bloominbrands.com/ourcompany/. 72 Bradley, C., Hirt, M. and Smit, S. (January 2011). Have you tested your strategy lately? McKinsey Quarterly, 1–14. 73 Sydney Olympic Park website, http://www.sydneyolympicpark.com.au/ (accessed 25 March 2013). 74 Manly Council website, http://www.manly.nsw.gov.au/environment/climatechange-and-sustainability/sustainability-strategy/ (accessed 28 November 2013). 75 National Australia Bank website, http://www.nab.com.au/wps/wcm/connect/ nab/nab/home/About_Us/7/5/?ncID=ZBA (accessed 3 March 2014).

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ test your understanding of strategy formulation and implementation by taking the revision quiz ➜ extend your knowledge with Internet research activities and useful weblinks ➜ revise relevant key terms and their definitions with the online flashcards.

Cour seMate

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Explain why decision making is an important

5 Identify the six steps used in managerial decision

2 Discuss the difference between programmed

6 Describe four personal decision styles used by

component of good management.

and non-programmed decisions and the decision characteristics of certainty and uncertainty.

3 Describe the ideal, rational model of decision making and the political model of decision making.

4 Explain the process by which managers actually

making.

managers.

7 Identify and explain innovative techniques

for decision making, including brainstorming, evidence-based management and after-action reviews.

make decisions in the real world.

Chapter 9

Managerial decision making

Chapter outline ➜ Types of decisions and problems

Programmed and non-programmed decisions Certainty, risk, uncertainty and ambiguity

➜ Decision-making models

The classical model: rational decision making The administrative model: how managers actually make decisions The political model

➜ Decision-making steps

Recognition of decision requirement Diagnosis and analysis of causes

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Development of alternatives Selection of desired alternative Implementation of chosen alternative Evaluation and feedback

➜ Personal decision framework ➜ Innovative decision making

Start with brainstorming Engage in rigorous debate Avoid groupthink Know when to pull the plug

➜ Sustainable development decisions

New Manager Self-test How do you make decisions? Most of us make decisions automatically and without realising that people have diverse decision-making behaviours, which they bring to management positions. Think back to how you make decisions in your personal, student or work life, especially where other people are involved. Please answer whether each of the following items is Mostly true or Mostly false for you. Mostly True

Mostly False

1 I like to decide quickly and move on to the next thing. 2 I would use my authority to make the decision if certain I was right. 3 I appreciate decisiveness. 4 There is usually one correct solution to a problem. 5 I identify everyone who needs to be involved in the decision. 6 I explicitly seek conflicting perspectives. 7 I use discussion strategies to reach a solution. 8  I look for different meanings when faced with a great deal of data. 9 I take time to reason things through and use systematic logic. Scoring and interpretation: All nine items in the list reflect appropriate decisionmaking behaviour, but items 1–4 are more typical of new managers. Items 5–8 are typical of successful senior manager decision making. Item 9 is considered part of good decision making at all levels. If you checked Mostly true for three or four of items 1–4 and 9, consider yourself typical of a new manager. If you checked Mostly true for three or four of items 5–8 and 9, you are using behaviour consistent with top managers. If you checked a similar number of both sets of items, your behaviour is probably flexible and balanced. New managers typically use different decision behaviour from seasoned executives. The decision behaviour of a successful CEO may be almost the opposite of that of a first-level supervisor. The difference is due partly to the types of decisions and partly to learning what works at each level. New managers often start out with more directive, decisive, command-oriented behaviour and gradually move towards more openness, diversity of viewpoints and interactions with others as they move up the hierarchy. Source: Brousseau, K. R., Driver, M. L., Hourihan, G. and Larsson, R. (February 2006). The Seasoned Executive’s Decision Making Style. Harvard Business Review, 110ff.

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Management Challenge

Marjorie Yang was contemplating the biggest decision of her career – perhaps the biggest decision in her company’s history. As chairperson and CEO of Esquel Group, a textile manufacturer in Hong Kong that makes clothes for J. Crew, Tommy Hilfiger, Brooks Brothers and other top brands, Yang had the ultimate say as to whether the company invested $150 million in a brand-new fabric mill that would be the best in China, and could make Esquel the top shirt maker in the world. At the time, like most textile manufacturers, Esquel was going through a rough period. With the end of US textile quotas and of tariffs in Australia and New Zealand, world capacity was going up, prices were going down, and profit margins were being squeezed in the middle. Esquel’s strategy for years had been to produce topquality products; it had first aimed to achieve Japanese quality in the 1980s and now it was shooting to reach Italian quality, the best in the world. Esquel grows its own high-quality cotton in western China, and Yang figured the new factory could help them make the most

of it. With the end of quotas, she reasoned that more competitors would be investing in the low-quality end of the market; thus, if Esquel could be the first company in China to reach the pinnacle of quality, it would have a huge advantage over its competitors, with higher profit margins and less competition. Yet the deal was risky. At least half of the money would have to be borrowed, and profits were sure to suffer in the short term. Although most of Esquel’s top executives agreed that the idea was good, at least half of them believed that building the factory was too risky, and that Yang should wait a couple of years until the industry settled down and trends were clearer. Source: Murphy, Cait. (14 November 2005). Building a New Factory. Fortune, 152:10, 149.

Question If you were Marjorie Yang, how would you decide whether to wait or to move ahead with the $150 million factory? What decision would you make and why?

Welcome to the world of managerial decision making. Every organisation grows, prospers or fails as a result of decisions by its managers, and top executives like Marjorie Yang make difficult decisions every day. Managers are often referred to as decision makers. Although many of their important decisions are strategic, managers also make decisions about every other aspect of an organisation, including structure, control systems, responses to the environment and human resources. Managers scout for problems, make decisions for solving them and monitor the consequences to see whether additional decisions are required. Good decision making is a vital part of good management, because decisions determine how the organisation solves its problems, allocates resources and accomplishes its goals. However, managers can sometimes make the wrong decision, even when their intentions are right. Decision making is not easy. It must be done amid ever-changing factors, unclear information and conflicting points of view. For example, in 2013 and 2014 the newly elected Australian government had to make tough decisions about how to deal with the continuing influx of people seeking asylum or to illegally emigrate to Australia by boat from Indonesia and other countries. The previous government had investigated and tried many strategies to both prevent and deal with this pressing problem, and despite large government expenditure, the problem remains. The difficulty is to find solutions that are effective in stopping illegal immigration that are also humane and cost-effective. A further element of complexity in this decision is that many Australians would like to allow genuine refugees to be fully accepted and resettled in Australia. In Sydney, the decision about what to do to increase the city’s capacity to move aircraft and passengers has been a problem for more than 30 years. It involves all three levels of government – federal, state and local – as well as travellers and tourism groups, airlines, local residents and numerous others. Many sites for the second Sydney airport have been examined, but no major decision has been made or implemented. The stakeholders are often in conflict. For example, when flight paths have been changed at the existing airport, local residents have organised demonstrations and blockaded the airport. The decision concerning what to do about Sydney’s air transport is particularly complex, with far-reaching consequences and very

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high stakes. It involves politics and the interests of private operators of small planes as well as the needs of large commercial organisations and their customers. In the lead-up to the Australian federal election of 2013, each party had to make decisions about which policy positions to adopt on such issues. Decisions on both sides led to the outcome. The major opposing parties had to present their policies to the voting public, based on what they thought would work and what they thought would be popular with voters. The technology world is also full of evidence of both good and poor decisions. Apple, which seemed all but dead in the mid-1990s, is now one of the world’s most admired companies, thanks to decisions made by its former CEO, the late Steve Jobs, and other top managers. No longer just a maker of computers, Apple is now in the music player business, the smartphone business and the retailing business, among others. Even after its chief decision maker’s untimely death in 2011, the company’s managers continue to make decisions about new products, services and a host of other elements of organisational strategy and operations. YouTube was once referred to as ‘Google’s Folly’, but decisions made by the video-hosting platform’s managers have more than justified the US$1.65 billion that Google paid for it and turned YouTube into a highly admired company that is redefining the entertainment industry.1 On the other hand, Microsoft’s decision to purchase ad giant aQuantive for US$6.3 billion in 2007 hasn’t turned out so well. Microsoft managers believed that aQuantive, at the time a thriving, 2600-employee company with rapidly growing sales and profits, would help the software giant be more competitive against Google and establish it as a leader in online advertising. But poor decision making regarding how to integrate aQuantive into the larger software company contributed to a disaster that required Microsoft to take a US$6.2 billion write-down. Today, aQuantive is a shell of its former self. ‘From the initial decision to put aQuantive under the absolutely wrong Microsoft leadership – who had no knowledge or interest or skills in it . . . this acquisition had snafu written on it from day one,’ said a former aQuantive employee.2 Chapters 7 and 8 described strategic planning; this chapter explores the decision process that underlies strategic planning. Good decision making is a vital part of good management, because decisions determine how the organisation solves problems, allocates resources and accomplishes its goals. Plans and strategies are arrived at through decision making; the better the decision making, the better the strategic planning. First, we examine decision characteristics. Then we look at decision-making models and the steps executives should take when making important decisions. We also examine participative decision making and discuss techniques for improving decision making in organisations.

Types of decisions and problems A decision is a choice made from available alternatives. For example, an accounting manager’s selection of a junior auditor – whether to appoint Matthew, Chris or Sarah to the position – is a decision. Many people assume that making a choice is the main part of decision making, but it is only a part. Decision making is the process of identifying problems and opportunities and then resolving them.3 Decision making involves effort both before and after the actual choice. Decisions require analysis, choice, commitment to the chosen path and then implementation and monitoring of the results. Thus, the decision of whether to select Matthew, Chris or Sarah requires the accounting manager to ascertain whether a new junior auditor is needed, determine the availability of potential job candidates, interview candidates to acquire necessary information, select one candidate, and follow up with the socialisation of the new employee into the organisation to ensure the decision’s success.

decision decision A choice made from available alternatives. decision making The process of identifying problems and opportunities and then resolving them.

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Pro gr a m m ed an d n o n - pro gr a m m ed d ecisions

non-programmed decisions A decision made in response to a situation that is unique, is poorly defined and largely unstructured, and has important consequences for the organisation.

Having filled in for Steve Jobs during three medical leaves, COO Tim Cook was ready and able to take the helm of Apple when Jobs had to step down shortly before his death in 2011. The choice of Cook as the new CEO was a non-programmed decision that had been made well in advance, giving Cook some time to prepare for a seamless transition to his new role. Since then, investors, employees and customers alike seem impressed with his abilities and generally happy with his performance.

Source: Reuters/Robert Galbraith

programmed decisions A decision made in response to a situation that has occurred often enough to enable decision rules to be developed and applied in the future.

Management decisions typically fall into one of two categories: programmed and non-programmed. Programmed decisions involve situations that have occurred often enough to enable decision rules to be developed and applied in the future.4 Programmed decisions are made in response to recurring organisational problems. The decision to reorder paper and other office supplies when inventories drop to a certain level is a programmed decision. Other programmed decisions may concern the types of skills required to fill certain jobs, the reorder point for manufacturing inventory, exception reporting for expenditures 10 per cent or more over budget, and selection of freight routes for product deliveries. Once managers formulate decision rules, employees and others can make the decision, freeing managers for other tasks. For example, many hotels, when staffing banquets, use a rule that specifies having one server per 30 guests for a sit-down function, and one per 20 guests for a buffet.5 Non-programmed decisions are made in response to situations that are unique, poorly defined and largely unstructured, and have important consequences for the organisation. Many non-programmed decisions involve strategic planning, because uncertainty is great and decisions are complex. Decisions to build a new factory, develop a new product or service, enter a new geographical market or relocate headquarters to another city are all non-programmed decisions. One example of a non-programmed decision is American network CBS’s search for a new sitcom. When its most recent big hit, The Big Bang Theory, comes to its natural end, the network will need to replace it with a series that is, the company hopes, as popular. But the process of finding a hit sitcom is complex, not subject to rational analysis and decision rules. The stakes are high in terms of money and the network’s image.6 Consider the decisions made by Toyota and General Motors some years ago about whether to make a massive investment in developing the hybrid synergy drive for their car engines. Toyota decided to ‘go for it’, and made a huge effort which proved successful, whereas GM decided to stop its development. Toyota has made and sold over three million of these newgeneration engines as a result of taking a good decision, and achieved market leadership in these ‘green-friendly’ cars, whereas GM is now in catch-up mode, having recently launched the Chevy Volt in the US in 2010 and marketed it as the Holden Volt in Australia from 2012, many years behind Toyota’s Prius. Another good example of a non-programmed decision is ExxonMobil’s recent decision to form a consortium to drill for oil in Siberia. One of the largest foreign investments in Russia, the consortium committed $4.5 billion before pumping the first barrel and expects a total capital cost of $12 billion-plus. The venture could produce 250 000 barrels a day, about 10 per cent of ExxonMobil’s global production. But if things go wrong, the oil giant will take a crippling hit.

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Len Jury is the owner–manager of a central Auckland stamp dealership. The business has five full-time staff and is a New Zealand market leader. A large proportion of the firm’s sales are export orders, and Len Jury’s New Zealand Stamp Catalogue, now in its fourth decade, is recognised as the leading full-colour reference to New Zealand stamps. Jury has over 40 years’ experience in the industry and managed to turn what started out as a hobby into a profitable and longlasting business. Jury has been trading in stamps since 1963. Starting with £50 his parents gave him on his 21st birthday, he developed a small mail-order business producing first-day covers and exporting these to Australia. When he married in 1967, he and his wife decided to formalise the business and opened their first retail location in New Plymouth, offering collectible stamps as well as buying and selling stamp collections. Early on, innovation characterised Jury’s business development. In the late 1960s, stamp collecting was popular, but supply in the market was limited. Believing there existed an opportunity to sell stamps through bookshops, Jury enlisted the help of a salesperson and toured retailers throughout New Zealand, taking orders solely on the basis of a concept. The market responded enthusiastically, and Jury was able to manufacture and distribute pre-packed stamp packets and albums on the strength of guaranteed orders. Based on this income stream, Jury expanded his initial mail-order business into a retail outlet, wholesaler of stamp products (in which he became the dominant national supplier to the book trade) and catalogue retailer, and also produced a trade magazine. By the early 1970s, staff numbers had increased to 20. Throughout this time,

Jury continued to manage his family farm – this second stream of income helping to support his business, as well as providing the necessary capital for expansion. Jury, a confident and outgoing person, responded to the increasing managerial demands in the business in a ‘learn-asyou-go’ fashion. He did not seek any formal management training, instead cultivating a long-term relationship with his accountant, with whom he discusses business-related issues. As well, Jury and his wife discuss changes in the business. As the firm expanded, Jury commenced a mail-order auction, which became the basis of future business direction. On a 28-day cycle, a catalogue was mailed out to collectors who then would submit bids by mail on the stamps. The highest bidder on each parcel at the conclusion of the cycle would receive the stamps. Demand for the mail-order auctions enabled Jury to open an Auckland branch in 1978, commuting by plane each week from New Plymouth. Jury developed the organisational and business systems required to run such an auction himself, and he regards this as an essential part of his organisation’s intellectual property. While other stamp dealers hold public auctions, no other dealer has been able to match the frequency of Jury’s 28-day cycle in the market. It was at this point that Jury appointed managerial staff in the firm. However, thefts and stock losses caused him to reassess this position, and revert to exerting a higher degree of personal control over the business, which he has maintained to the present day. In the early 1980s, a change in market structure also influenced the future direction of Jury’s business. New Zealand Post entered the first-day cover market, with a mailing list of around 70 000 people. With this section

of the market flooded, and faced with falling sales, Jury gradually closed down the New Plymouth operation (selling the wholesale arm to a staff member) in favour of an Auckland presence. Wanting to focus more on stamp auctions, as he believed this was where he had a competitive advantage, Jury attended toastmaster courses and obtained a Public Auctioneering Licence, believing these were core capabilities in his business. For advice on specific compliance issues, Jury became a member of the Employers and Manufacturers Association, and he receives their regular mailings. At times, he has attended seminars on specific topics around Occupational Health and Safety (OSH) and employment issues, though he has since stopped this practice, as he finds himself too pressed for time. Given the highly specialised nature of Jury’s business, technical knowledge remains a vital component. Much of this resides in Jury himself. However, he has personally trained his present staff of five, a number of whom are long-serving, in customer service, business systems and stamp valuation. Jury supplements his own knowledge through regular attendance at international trade fairs and stamp shows, which he attends four times per year. He was a founding member of the New Zealand Stamp Dealers Association. As a result, he is well networked in the international stamp community, and sees this as a source of competitive advantage. Though he does not use the Internet to look for business advice, Jury has put his own stamp catalogue online. Although Internet sales do not outweigh turnover from the mail order auctions, sales are regular. Source: Contributed by Ian Hunter, University of Auckland.

Case study

Len Jury Limited, stamp dealer

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Certaint y, risk, u n certaint y an d a m bi gu it y One primary difference between programmed and non-programmed decisions relates to the degree of certainty or uncertainty managers deal with in making the decision. In a perfect world, managers would have all the information necessary for making decisions. In reality, however, some things are unknowable; thus, some decisions will fail to solve the problem or attain the desired outcome. Managers try to obtain information about decision alternatives that will reduce decision uncertainty. Every decision situation can be organised on a scale according to the availability of information and the possibility of failure. The four positions on the scale are certainty, risk, uncertainty and ambiguity, as illustrated in Exhibit 9.1. Whereas programmed decisions can be made in situations involving certainty, many situations that managers deal with every day involve at least some degree of uncertainty and require non-programmed decision making.

Innovative Way

Bremen Castings

What would you do if you were about halfway into a $10 million expansion when the economy crashed, the stock market tumbled, and business confidence plummeted? Suppose you’d already invested $5 million; if you continued with the expansion plan, it would require getting another $5 million bank loan right away. That’s the non-programmed decision situation that J. B. Brown, president of Bremen Castings, an American company, discussed for four hours with his top managers in the midst of the largest expansion plan in the company’s 72-year history. Should they halt the expansion and start cutting costs rather than spend more money? Would the increased capacity be worth the risk they were taking? The uncertainties were tremendous. The executive team reviewed order rates and relationships with customers and considered what-ifs: What would happen if

Bremen’s 15 largest customers cut their order rates by 30 to 40 per cent, or if agricultural customers stopped picking cotton and corn, or if new environmental regulations created a decline in demand from trucking customers? ‘If we go out and spend another 3 or 4 million and that work is not there,’ Brown asked, ‘what are we going to do to capture more market share?’ The team also looked at the positive side of the slow economy. Casting companies like Bremen face tough competition from lower-cost Chinese producers, but the uncertain economy means some customers have turned back to smaller domestic suppliers who will fill small orders. Eventually, the team decided to go forward with the planned expansion. ‘If we don’t, someone else will,’ said Brown. ‘Those are the chances you take in business.’

Source: Kris Maher. (10 August 2011). At Indiana Machine Shop, Tough Calls Amid Turmoil. The Wall Street Journal, B1.

Certai nt y certainty All the information the decision maker needs is fully available.

Certainty means that all the information the decision maker needs is fully available.7 Managers have

information on operating conditions, resource costs or constraints, and each course of action and possible outcome. For example, if a company considers a $10 000 investment in new equipment that it knows for certain will yield $4000 in cost savings per year over the next five years, managers can calculate a before-tax rate of return of about 40 per cent (i.e. with certainty). If managers compare this investment with one that will yield only $3000 per year in cost savings, they can confidently select the 40 per cent return. However, few decisions are certain in the real world: most contain either risk or uncertainty.

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Exhibit 9.1 Conditions that affect the possibility of decision failure

Organisational problem

Low Certainty

Possibility of failure Risk

Uncertainty

Programmed decisions

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High Ambiguity

Non-programmed decisions

Problem solution

Risk Risk means that a decision has clear-cut goals and that good information is available, but that the

future outcomes associated with each alternative are subject to chance. However, enough information is available to allow the probability of a successful outcome for each alternative to be estimated.8 Statistical analysis might be used to calculate the probabilities of success or failure. The measure of risk captures the possibility that future events will render the alternative unsuccessful. Some oil companies use a quantitative simulation approach to estimate hydrocarbon reserves, enabling oil executives to evaluate the variation in risk at each stage of exploration and production, and make better decisions. At Boeing, for instance, managers had to decide whether to build a new version of the company’s single-aisle 737 jet. They noted that European rival Airbus was getting a lot of orders for the redesigned A320, which included a more fuel-efficient engine, something Boeing’s customers also wanted. Perhaps installing new engines on 737 jets was a better alternative than building a completely new plane, Boeing managers thought. They projected production costs for designing and building a new plane versus designing and installing new engines, calculated potential increases in fuel efficiency, considered whether new engines rather than a new plane would meet customers’ needs, and looked at total operating costs. CEO James McNerney and other managers eventually decided to go with the new engines. McNerney said Boeing believed that new engines would yield 10 to 12 per cent fuel savings on 737 planes, while also enabling the company to maintain a cost advantage over the Airbus A320. It proved to be a good decision: in mid-2012, Boeing was on track to retake the lead from Airbus as the world’s top producer of commercial airplanes.9 A degree of risk is inherent in most business dealings, but how many Australian companies are at risk of failure or takeover at any one time? With the demise, in the last two decades, of major companies such as OneTel, Ansett and HIH Insurance, and the difficulties at Angus and Robertson (of attracting shoppers to its bricks and mortar bookstores) and the closing of Borders bookshops, one could be forgiven

risk A decision has clear-cut goals, and good information is available, but the future outcomes associated with each alternative are subject to chance.

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for wondering just which businesses that currently seem solid and stable will be next to get into severe trouble. In 2007, both Qantas and the Coles Group were major takeover targets in Australia. Whereas the Qantas takeover did not proceed (although it came extremely close), the massive Coles first divested itself of its Myer chain, then was bought up by another company, Wesfarmers, which aimed to improve its operations and hence create value from such a decision. By 2014, Wesfarmers has achieved major improvements in its Coles companies operations.

Uncertai nt y uncertainty Managers know what goal they wish to achieve, but information about alternatives and future events is incomplete.

Uncertainty means that managers know which goals they wish to achieve, but that information about

alternatives and future events is incomplete.10 Managers do not have enough information to be clear about alternatives or to estimate their risk. Factors that may affect a decision, such as price, production costs, volume or future interest rates, are difficult to analyse and predict. Managers may have to make assumptions from which to forge the decision even though it may be wrong if the assumptions are incorrect. Managers may have to come up with creative approaches to alternatives and use personal judgement to determine which alternative is best. Examples include New Zealand and Australian companies that are conducting research into new technologies such as biotechnologies or energy-generating technologies such as geothermal or large-scale solar energy. The decisions on allocating valuable resources for investigating these technologies are highly uncertain. Many decisions made under uncertainty do not produce the desired results, but managers face uncertainty every day. They must find creative ways to cope with uncertainty in order to make effective decisions. Consider the uncertainty faced by managers in the movie industry. The movie Men in Black 3 cost US$250 million to make and at least the same amount in marketing expenses. The movie managed to break even, but many films don’t, which reflects the tremendous uncertainty in the industry. What do people want to see this summer? Will comic book heroes, vampires or aliens be popular? Will animated films, disaster epics, classics or romantic comedies attract larger audiences? The interests and preferences of moviegoers are extremely difficult to predict. Moreover, it is hard for managers to understand even after the fact what made a particular movie a hit. Was it because of the storyline, the actors in starring roles, the director, the release time? All of those things? Or none of them? Despite the uncertainty, managers in the big Hollywood studios make relatively good decisions overall, and one big hit can pay for a lot of flops (see Chapter 3).11

Amb i gui t y and conf l ic t ambiguity The goals to be achieved or the problems to be solved are unclear, alternatives are difficult to define and information about outcomes is unavailable. conflict Conflict involves disagreement between stakeholders involved in a decision or activity, usually as to which course of action or strategy should be preferred.

This is by far the most difficult decision situation. Ambiguity means that the goals to be achieved or the problems to be solved are unclear, alternatives are difficult to define and information about outcomes is unavailable.12 Ambiguity is what students would feel if an instructor created student groups, told each group to complete a project, but gave the groups no topic, direction or guidelines whatsoever. Ambiguity has been called a ‘wicked’ decision problem. Managers have a difficult time coming to grips with the issues. Wicked problems are associated with manager conflicts over goals and decision alternatives, rapidly changing circumstances, fuzzy information and unclear linkages among decision elements.13 Conflict, which involves disagreement between stakeholders as to which way a

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Take a Moment As a new manager, consider the degree of risk, uncertainty or ambiguity in a specific decision you face. Develop decision rules for programmed decisions and let other people handle the decisions. Save your time and energy for coping with complex, nonprogrammed decisions.

Pepsi-Cola executives faced a truly wicked decision problem in 1993, when reports began surfacing around the country that syringes and hypodermic needles had been found in cans of Pepsi. Before they could develop decision alternatives, executives first had to identify the problem – could needles have been put in Pepsi at the canning plants, or were the reports a hoax? Information was fuzzy and fast-changing, but executives needed to make a decision quickly. Pepsi faced a dilemma: clear evidence of danger would demand a product recall, but such evidence did not exist. A recall would be extremely costly for the company, but loss of consumer trust would be even more expensive in the long run. After carefully analysing the situation, Pepsi’s managers believed syringes could not appear in unopened cans of Pepsi. They decided not to issue a recall but rather to respond quickly and openly to consumer fears with a massive public relations and education campaign. Pepsi-Cola’s then CEO Craig Weatherup (now retired)

himself took to the airwaves to explain how implausible it was that syringes could have been put into Pepsi cans at the plants. At one point, Weatherup appeared on TV with government regulators, who did not believe there was evidence of nationwide tampering. The company took great care to keep bottlers up to speed on fast-breaking developments, and bottlers then passed the information along to every level of the organisation – from filling line operators to salespeople. Nationwide advertising campaigns explained the decision and assured consumers that there had been no injuries and not a single confirmed case of a needle found in an unopened can of Pepsi. By allying itself with the regulator and responding quickly and openly to public fears, Pepsi weathered the syringe-scare crisis with little damage. Pepsi managers made the right decision, believing, based on careful internal analysis, that needles could not possibly have been put into cans of Pepsi at the plants. However, it was a decision that could have backfired

if the company were unable to convince consumers that Pepsi products were truly safe. Source: Lesly, E. and Zinn, L. (5 July 1993). The Right Moves Baby. BusinessWeek, 30–1; McCarthy, M. J. (17 June 1993). Pepsi Faces Problem in Trying to Contain Syringe Scare. The Wall Street Journal, B1; The Pepsi Hoax: What Went Right? 1993, http://books. google.com.au/books?id=NvWK62lHLdsC&pg=PR 1&lpg=PR1&dq=The+pepsi+Hoax+What+went+rig ht+pepsi+cola+brochure&source=bl&ots=D_RUW I7RLX&sig=v0pm4I47dDhNezUgGwRJ-SXcFU&hl=en&sa=X&ei=zBMhU-_xAoyClQWh34HYB Q&ved=0CCwQ6AEwAQ#v=onepage&q=The%20 pepsi%20Hoax%20What%20went%20right%20 pepsi%20cola%20brochure&f=false.

Case study

Pepsi-Col a

Source: Getty Images/Joe Raedle

decision should go, can occur between different objectives or the requirements of different stakeholders. (See Chapter 18 for a discussion of conflict.) Sometimes managers will come up with a ‘solution’ only to realise that they had not clearly defined the problem to begin with.14 Fortunately, most decisions are not characterised by ambiguity. But when they are, managers must conjure up goals and develop reasonable scenarios for decision alternatives in the absence of information. When reports surfaced several years ago in the US that syringes and hypodermic needles had been found in cans of Pepsi, Pepsi-Cola executives faced ambiguity squarely in the face (see the Case Study).

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New Manager Self-test I n t o l e r a n c e o f a mb i g u i t y Instructions: Rate each statement below from 1–7, based on how strongly you disagree or agree with it. There are no right or wrong answers, so answer honestly to receive accurate feedback. Strongly disagree 1

1  An expert who doesn’t come up with a definite answer probably doesn’t know too much. 2  I would like to live in a foreign country for a while. 3  There is really no such thing as a problem that can’t be solved. 4  People who live their lives to a schedule probably miss most of the joy of living. 5  A good job is one where what is done and how it is to be done are always clear. 6  It is more fun to tackle a complicated problem than to solve a simple one. 7  In the long run, it is possible to get more done by tackling small, simple problems rather than large and complicated ones. 8  Often the most interesting and stimulating people are those who don’t mind being different and original. 9  What we are used to is always preferable to what is unfamiliar. 10 People who insist upon a yes or no answer just don’t know how complicated things really are. 11  A person who leads an even, regular life in which few surprises or unexpected happenings arise really has a lot to be grateful for. 12 Many of our most important decisions are based on insufficient information.

Moderately disagree 2

Slightly disagree 3

Neither agree nor disagree 4

Slightly agree 5

Moderately agree 6

Strongly agree 7

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Strongly disagree 1

Moderately disagree 2

Slightly disagree 3

Neither agree nor disagree 4

Slightly agree 5

Moderately agree 6

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Strongly agree 7

13 I like parties where I know most of the people more than ones where all or most of the people are complete strangers. 14 Teachers or supervisors who hand out vague assignments give one a chance to show initiative and originality. 15 The sooner we all acquire similar values and ideals the better. 16 A good teacher is one who makes you wonder about your way of looking at things. Scoring and interpretation. Sum the odd-numbered statements, giving 7 points for each Strongly agree, 6 points for each Moderately agree, 5 points for each Slightly agree, 4 points for Neither agree nor disagree, 3 points for Slightly disagree, 2 points for Moderately disagree and 1 point for each Strongly disagree. Reverse-score the even-numbered statements, giving 7 points for each Strongly disagree through 1 point for each Strongly agree. These questions were originally designed to help identify students who would be comfortable with the ambiguity associated with the practice of medicine. Managers also must manage ambiguity in their decisions about rapid change, strategy, people and social and

➜➜ Good decision making is a vital part of good management, but decision making is not easy. ➜➜ Decision making is the process of identifying problems and opportunities and then resolving them. ➜➜ A decision is a choice made from available alternatives. ➜➜ A programmed decision is one made in response to a situation that has occurred often enough to enable managers to develop decision rules that can be applied in the future.

political dynamics. Intolerance of ambiguity means that an individual tends to perceive novel, complex and ambiguous situations as potentially threatening rather than as desirable. A high score means greater intolerance of ambiguity. A low score means that you tolerate ambiguity and likely see promise and potential in ambiguous situations. Managers make many decisions under conditions of some or much ambiguity, so learning to be comfortable with ambiguity is something to work towards as a manager. Source: ‘Intolerance of Ambiguity as a Personality Variable’ by S. Budner. From the Journal of Personality (30), pp. 29–59. Copyright (1962) John Wiley & Sons. Reproduced with permission of John Wiley & Sons Inc.

➜➜ A non-programmed decision is one made in response to a situation that is unique, is poorly defined and largely unstructured, and has important consequences for the organisation. ➜➜ Decisions differ according to the amount of certainty, risk, uncertainty or ambiguity in the situation. ➜➜ Certainty is a situation in which all the information the decision maker needs is fully available. ➜➜ Risk means that a decision has clearcut goals and good information is available, but the future outcomes



associated with each alternative are subject to chance.

remember this

➜➜ Uncertainty occurs when managers know which goals they want to achieve, but information about alternatives and future events is incomplete. ➜➜ Ambiguity is a condition in which the goals to be achieved or the problem to be solved is unclear, alternatives are difficult to define and information about outcomes is unavailable. ➜➜ Highly ambiguous circumstances can create a wicked decision problem, the most difficult decision situation that managers face.

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Decision-making models The approach managers use to make decisions usually falls into one of three types: the classical model, the administrative model or the political model. The choice of model depends on the manager’s personal preference, whether the decision is programmed or non-programmed, and the extent to which the decision is characterised by risk, uncertainty or ambiguity.

Th e cl assi cal mo d el: r atio nal d ecision m akin g classical model A decision-making model based on the assumption that managers should make logical decisions that will be in the organisation’s best economic interests.

The classical model of decision making is based on economic assumptions. This model has arisen within the management literature because managers are expected to make decisions that are economically sensible and in the organisation’s best economic interests. The four assumptions underlying this model are as follows: 1 The decision maker operates to accomplish goals that are known and agreed upon. Problems are

precisely formulated and defined. 2 The decision maker strives for conditions of certainty, gathering complete information. All alternatives

and the potential results of each are calculated. 3 Criteria for evaluating alternatives are known. The decision maker selects the alternative that will

maximise the economic return to the organisation. 4 The decision maker is rational and uses logic to assign values, order preferences, evaluate alternatives normative An approach that defines how a decision maker should make decisions and provides guidelines for reaching an ideal outcome for the organisation.

and make the decision that will maximise the attainment of organisational goals. The classical model of decision making is considered to be normative, which means it defines how a decision maker should make decisions. It does not describe how managers actually make decisions so much as it provides guidelines on how to reach an ideal outcome for the organisation. The value of the classical model has been its ability to help decision makers be more rational. For example, many senior managers rely solely on intuition and personal preferences for making decisions.15 In many respects, the classical model represents an ‘ideal’ model of decision making that is often unattainable by real people in real organisations. The classical model is most useful when applied to programmed decisions and to decisions characterised by certainty or risk because relevant information is available and probabilities can be calculated. For example, new analytical software programs automate many programmed decisions, such as freezing the account of a customer who has failed to make payments, determining the cell phone service plan that is most appropriate for a particular customer or sorting insurance claims so that cases are handled most efficiently.16 Airlines use automated systems to optimise seat pricing, flight scheduling and crew assignment decisions. Retailers such as Bunnings and Gap use software programs to analyse sales data and decide when, where and how much to mark down prices. Many companies use systems that capture information about customers to help managers evaluate risks and make credit decisions.17 For example, Coles and Woolworths use demographic data from the Australian census combined with credit card and loyalty scheme data (for example, flybuys) to ensure that their offerings, in every store, are optimised to the consuming preferences of their local shoppers in every community. The growth of quantitative decision techniques that use computers has expanded the use of the classical approach. Quantitative techniques include such things as decision trees, payoff matrices, break-even analysis, linear programming, forecasting and operations research models.

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Th e adm in istr ative mo d el: h ow m anagers actually m ake d ecisi ons Another approach to decision making, called the administrative model, is considered to be descriptive, meaning that it describes how managers actually make decisions in complex situations, rather than dictating how they should make decisions according to a theoretical ideal. The administrative model recognises the human and environmental limitations that affect the degree to which managers can pursue a rational decision-making process. In difficult situations, such as those characterised by nonprogrammed decisions, uncertainty and ambiguity, managers are typically unable to make economically rational decisions even if they want to.18

Bou nded r at i onali t y and s atis f ic in g The administrative model of decision making is based on the work of Herbert A. Simon. Simon proposed two concepts that were instrumental in shaping the administrative model: bounded rationality and satisficing. Bounded rationality means that people have limits, or boundaries, on how rational they can be.

Take a Moment As a new manager, choose the right decision approach. Use the classical model when problems are clear-cut, goals are agreed upon, and clear information is available. For the classical model, use analytical procedures, including new software, to calculate the potential results of each alternative. When goals are vague or conflicting, decision time is limited, and information is unclear, use bounded rationality, satisficing and intuition. Take the New Manager Self-Test on ‘Making important decisions’ (page 365).

The organisation is incredibly complex, and managers have the time and ability to process only a limited amount of information with which to make decisions.19 Because managers do not have the time or cognitive capacity to process complete information about complex decisions, they must satisfice. Satisficing means that decision makers choose the first solution alternative that satisfies minimal decision criteria. Rather than pursuing all alternatives to identify the single solution that will maximise economic returns, managers will opt for the first solution that appears to solve the problem, even if better solutions are presumed to exist. The decision maker cannot justify the time and expense of obtaining complete information.20 The administrative model relies on assumptions different from those of the classical model and focuses on organisational factors that influence individual decisions. It is more realistic than the classical model for complex, non-programmed decisions. According to the administrative model: ●● Decision goals often are vague, conflicting and lack consensus among managers. Managers often are unaware of problems or opportunities that exist in the organisation.

administrative model A decision-making model that describes how managers actually make decisions in situations characterised by nonprogrammed decisions, uncertainty and ambiguity. descriptive An approach that describes how managers actually make decisions rather than how they should.

bounded rationality The concept that people have the time and cognitive ability to process only a limited amount of information on which to base decisions.

satisficing To choose the first solution alternative that satisfies minimal decision criteria regardless of whether better solutions are presumed to exist.

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●● Rational procedures are not always used and, when they are, they are confined to a simplistic view of the problem that does not capture the complexity of real organisational events. ●● Managers’ search for alternatives is limited because of human, information and resource constraints. ●● Most managers settle for a satisficing rather than a maximising solution. This is partly because they have limited information and partly because they have only vague criteria for what constitutes a maximising solution.

Int ui t i on

‘It’s a major gut story,’ Bruce Goldsmith says about his decision to open a retail store right in the warehouse of his family’s mail-order coffee business. Since the Baronet Coffee, Inc. warehouse is in an industrial area with little foot traffic, most employees thought the idea was a little wacky, but Goldsmith’s intuition told him it was the right thing to do. His years of experience observing customers and a few assumptions about human nature gave him a hunch that people would like the idea of picking up their coffee directly from the source. The hunch was right, and Baronet’s retail sales quadrupled Goldsmith’s original projections.

Another aspect of administrative decision making is intuition. Intuition represents a quick apprehension of a decision situation based on past experience, but without conscious thought.21 Intuitive decision making is not arbitrary or irrational, because it is based on years of practice and hands-on experience that enable managers to quickly identify solutions without going through painstaking calculations. In fact, Michael Ray and Rochelle Myers, in a book called Creativity in Business, suggest that intuition really is ‘recognition’. When people build a depth of experience and knowledge in a particular area, the right decision often comes quickly and effortlessly as recognition of information that has been largely forgotten by the conscious mind. For example, firefighters make decisions by recognising what is typical or abnormal about a fire, based on their experience. Similarly, in the business world, managers continuously perceive and process information that they may not consciously be aware of, and their base of knowledge and experience helps them make decisions that may be characterised by uncertainty and ambiguity.22 Managers rely on intuition to determine when a problem exists and to synthesise isolated bits of data and experience into an integrated picture. They also use their intuitive understanding to check the results of rational analysis. If the rational analysis does not agree with their intuition, managers may dig further before accepting a proposed alternative.23 A survey of managers conducted by Christian and Timbers found that nearly half of executives say they rely more on intuition than on rational analysis to run their companies.24 Intuition helps managers understand situations characterised by uncertainty and ambiguity that have proven impervious to rational analysis. Psychologists and neuroscientists have studied how people make good decisions using their intuition under extreme time pressure and uncertainty.25 Good intuitive decision making is based on an ability to recognise patterns at lightning speed. However, intuitive decisions don’t always work out, and managers should take care to apply intuition under the right circumstances and in the right way rather than considering it a magical way to make important decisions.26 Managers may walk a fine line between two extremes: on the one hand, making arbitrary decisions without careful study, and on the other, relying obsessively on rational analysis. One is not better than the other, and managers need to take a balanced approach by considering both rationality and intuition as important components of effective decision making.27 Source: iStockphoto/DNY59

intuition The immediate comprehension of a decision situation based on past experience but without conscious thought.

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Th e po liti cal mo d el The third model of decision making, the political model, is useful for making non-programmed decisions when conditions are uncertain, information is limited and there is disagreement among managers about what goals to pursue or what course of action to take. Most organisational decisions involve many managers who are pursuing different goals, and they have to talk with one another to share information and reach an agreement. Managers often engage in coalition building when making complex organisational decisions. A coalition is an informal alliance among managers who support a specific goal. Coalition building is the process of forming alliances among managers. In other words, a manager who supports a specific alternative, such as increasing the company’s growth by acquiring another company, talks informally to other executives and tries to persuade them to support the decision. When the outcomes are not predictable, managers gain support through discussion, negotiation and bargaining. Without a coalition, a powerful individual or group could derail the decision-making process. Coalition building gives several managers an opportunity to contribute to decision making, enhancing their commitment to the alternative that is ultimately adopted.28 Failing to build a coalition can allow conflict and disagreements to derail a decision, particularly if the opposition builds a powerful coalition of its own.

political model A decision-making model that is useful for making non-programmed decisions when conditions are uncertain, information is limited and there is disagreement among managers. coalition An informal alliance among managers who support a specific goal.

New Manager Self-test M a k i n g i m p o rta n t d e c i s i o n s How do you make important personal decisions? To find out, think about a time when you made an important career decision or made a large purchase or investment. To what extent do each of the words below describe how you reached the final decision? Please mark five words below that best describe how you made your final choice.

   1. Logic    2. Inner knowing    3. Data    4. Felt sense    5. Facts    6. Instincts    7. Concepts    8. Hunch    9. Reason 10. Feelings

Scoring and interpretation: The odd-numbered items pertain to a linear decision style and the even-numbered items pertain to a non-linear decision approach. Linear means using logical rationality to make decisions; non-linear means to use primarily intuition to make decisions. Of the five words you chose, how many represent rationality versus intuition? If all five words are either linear or non-linear, then that is clearly your dominant decision approach. If four words are either linear or non-linear, then that approach would be considered your preference. Rationality approach means a preference for the rational model of decision making as described in the text. Intuition approach suggests a preference for the satisficing and intuition models. Source: Charles M. Vance, Kevin S. Groves, Yongsun Paik and Herb Kindler. (2007). Understanding and Measuring Linear-Nonlinear Thinking Style for Enhanced Management Education and Professional Practice. Academy of Management Learning & Education, 6:2, 167–85.

The political model closely resembles the real environment in which most managers and decision makers operate. Decisions are complex and involve many people, information is often ambiguous, and disagreement and conflict over problems and solutions are normal. The basic assumptions of the political model are: ●● Organisations are made up of groups with diverse interests, goals and values. Managers disagree about problem priorities and may not understand or share the goals and interests of other managers. ●● Information is ambiguous and incomplete. The attempt to be rational is limited by the complexity of many problems as well as personal and organisational constraints.

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● Managers do not have the time, resources or mental capacity to identify all dimensions of the problem and process all relevant information. Managers talk to each other and exchange viewpoints to gather information and reduce ambiguity.

Take a Moment

As a new manager, use your political skills to reach a decision in the midst of disagreement about goals or problem solutions. Talk with other managers or employees and negotiate to gain support for the goal or solution you favour. Learn to compromise and to support others when appropriate.

● Managers engage in the push and pull of debate to decide goals and discuss alternatives. Decisions are the result of bargaining and discussion among coalition members.

The key dimensions of the classical, administrative and political models are listed in Exhibit 9.2. Research into decision-making procedures has found rational, classical procedures to be associated with high performance for organisations in stable environments. However, administrative and political decision-making procedures and intuition have been associated with high performance in unstable environments in which decisions must be made rapidly and under more difficult conditions.29

Exhibit 9.2 Characteristics of classical, administrative and political decision-making models Classical model

Administrative model

Political model

Clear-cut problem and goals

Vague problem and goals

Pluralistic; conflicting goals

Condition of certainty

Condition of uncertainty

Condition of uncertainty/ambiguity

Full information about alternatives and their outcomes

Limited information about alternatives and their outcomes

Inconsistent viewpoints; ambiguous information

Rational choice by individual for maximising outcomes

Satisficing choice for resolving problem using intuition

Bargaining and discussion among coalition members

➜➜ The ideal, rational approach to decision making, called the classical model, is based on the assumption that managers should make logical decisions that are economically sensible and in the organisation’s best economic interest. ➜➜ The classical model is normative, meaning that it defines how a manager should make logical decisions and provides guidelines for reaching an ideal outcome. ➜➜ Software programs based on the classical model are being applied to programmed decisions, such as how to schedule airline crews or



how to process insurance claims most efficiently.

➜➜ The administrative model includes the concepts of bounded rationality and satisficing and describes how managers make decisions in situations that are characterised by uncertainty and ambiguity. ➜➜ The administrative model is descriptive, an approach that describes how managers actually make decisions, rather than how they should make decisions according to a theoretical model. ➜➜ Bounded rationality means that people have the time and cognitive ability to process only a limited



amount of information on which to base decisions.

remember this

➜➜ Satisficing means choosing the first alternative that satisfies minimal decision criteria, regardless of whether better solutions are presumed to exist. ➜➜ Intuition is an aspect of administrative decision making that refers to a quick comprehension of a decision situation based on past experience but without conscious thought. ➜➜ The political model takes into consideration that many decisions require debate, discussion and coalition building. ➜➜ A coalition is an informal alliance among managers who support a specific goal or solution.

Decision-making steps Whether a decision is programmed or non-programmed, and regardless of managers’ choice of the classical, administrative or political model of decision making, six steps typically are associated with effective decision processes. These are summarised in Exhibit 9.3.

Reco gniti o n o f d ecision req u i rem ent

Source: Getty Images/Ryan Pierse

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Actor Russell Crowe is part owner of rugby league side the South Sydney Rabbitohs. Crowe has been a lifelong fan of the club and has been instrumental in its recent sporting and commercial revitalisation. Crowe can often be seen at home matches and he plays an active role in the operations of the club problem A situation in which organisational accomplishments have failed to meet established goals.

Managers confront a decision requirement in the form of either a problem or an opportunity. A problem occurs when performance is less than established goals. An opportunity opportunity exists when managers see a potential accomplishment that A situation in which exceeds specified current goals, and therefore the possibility of enhancing performance beyond current levels. managers see potential organisational Awareness of a problem or opportunity is step 1 in the decision sequence, and requires surveillance accomplishments that of the internal and external environments for issues that merit executive attention.30 This resembles the exceed current goals. military concept of gathering intelligence. Managers scan the world around them to determine whether the organisation is satisfactorily progressing towards its goals. Exhibit 9.3 Six steps in Some information comes from periodic financial reports, management information reports and other the managerial decisionmaking process sources that are designed to discover problems before they become too serious. Managers also take advantage of informal sources. They 1 talk to other managers, gather opinions on how things are going, and seek advice on which problems should be tackled Recognition of or which opportunities embraced.31 When leaders fail decision to recognise problems, they usually do not go away requirement by themselves, whatever the level of management: Diagnosis 6 Evaluation 2 when Kevin Rudd was Prime Minister of and analysis and Australia, he failed to recognise the magnitude of causes feedback of resistance among his government colleagues and the Australian public to his policies and Decision-making leadership style, and lost his leadership role as process a result. Yet in 2013, the Australian Labor Party made another collective decision and brought Implementation Development of him back to the leadership role so that, as Prime of chosen alternatives alternative Minister, he could contest the 2013 Australian 5 3 Federal election. Mr Rudd quickly lost popularity with the voting public, though, and lost the election. Selection of desired alternative Recognising decision requirements is difficult, because it often means integrating bits and pieces of information in novel ways. For example, the failure of US 4 intelligence leaders to recognise the imminent threat of Al Qaeda prior to the 11 September 2001 terrorist attacks has been attributed

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partly to the lack of systems that could help leaders put together myriad snippets of information that pointed to the problem.32 Some organisations are finding that the Internet can help them translate bits of data into useful information for better decision making. Consider the uncertainties and business risks associated with starting up an Internet distribution company in an industry that previously had not seen such a business. Although it was not able to avoid the terrible flood of January 2011 that caused loss of life and some $10 billion of property losses, the Queensland government, led by then Premier Anna Bligh, set up excellent information management and control systems which led to effective decision making about allocating emergency and recovery resources in coping (relatively well) with the disaster. Compare and contrast this with the 2005 New Orleans disaster caused by Hurricane Katrina, which was very poorly responded to by American authorities.

D iagn osis an d analysis o f causes diagnosis The step in the decisionmaking process in which managers analyse underlying causal factors associated with the decision situation.

Once a problem or opportunity has come to a manager’s attention, the understanding of the situation should be refined. Diagnosis is the step in the decision-making process in which managers analyse underlying causal factors associated with the decision situation. Managers make a mistake here if they jump right into generating alternatives without first exploring the cause of the problem more deeply. Kepner and Tregoe, who have conducted extensive studies of manager decision making, recommend that managers ask a series of questions to specify underlying causes, including the following:33 ●● What is the state of disequilibrium affecting us? ●● When did it occur? ●● Where did it occur? ●● How did it occur? ●● To whom did it occur? ●● What is the urgency of the problem? ●● What is the interconnectedness of events? ●● What result came from which activity? Such questions help to specify what actually happened and why. Diagnosing a problem can be thought of as peeling an onion layer by layer. Consultant Daniel Burrus tells of meeting with the CEO of a large accounting and professional services firm who told him the company’s biggest problem was the inability to hire enough qualified people to serve its global clients. As the two ‘peeled the onion’ further, they got down to the real problem, which was not the lack of staff, but inefficiency in internal collaboration and communication. The CEO discovered that he might actually be able to reduce staff with more effective and efficient systems.34 Managers cannot solve problems if they don’t know about them, or if they are addressing the wrong issues.

D evelo pm ent o f alternatives Once the problem or opportunity has been recognised and analysed, decision makers begin to consider taking action. The next stage is to generate possible alternative solutions that will respond to the needs of the situation and correct the underlying causes. Studies find that limiting the search for alternatives is a primary cause of decision failure in organisations.35 For a programmed decision, feasible alternatives are easy to identify and in fact usually are already available within the organisation’s rules and procedures. Non-programmed decisions, however, require developing new courses of action that will meet the organisation’s needs. For decisions made under

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conditions of high uncertainty, managers may develop only one or two custom solutions that will satisfice for handling the problem. Decision alternatives can be thought of as the tools for reducing the difference between the organisation’s current and desired performance. For example, to improve sales at fast-food giant McDonald’s, executives considered alternatives such as using mystery shoppers and unannounced inspections to improve quality and service, motivating demoralised franchisees to get them to invest in new equipment and programs, taking R&D out of the test kitchen and encouraging franchisees to help come up with successful new menu items, and closing some stores to avoid cannibalising its own sales.36

Source: Courtesy Grant Anderson

Grant Anderson, Chief Executive Officer, the ANCA Group My career started in South Australia, as an apprentice toolmaker at Chrysler. Following completion of my apprenticeship, I joined an automotive component supplier, Rainsfords Metal Products Pty Ltd, and held positions as Project Engineer, Sales and Marketing Manager, Supply Chain Manager, Manufacturing Director and finally Managing Director. During this period I studied the Toyota Production System in Japan and lean enterprise processes, enabling best practice systems to be implemented. Exports constituted 85 per cent of production. Rainsfords was taken over by global companies including Elders IXL, Britax Pty Ltd (a UK PLC) and Schefenacker. As part of the expansion into Asia, I negotiated the acquisition of a major South Korean competitor and set up a greenfield joint venture in India, of which I was Chairman. Following the global transition, my role was upgraded to Regional Managing Director – Asia, which covered five plants and two sales offices, employing 1500 people within the region. In 2003 I took up the position of President of PBR Automotive, a global automotive organisation with operations in the USA, Thailand, Italy and China and I relocated my family to Melbourne. During this period, I also held the position of President of the Federation of Automotive Products Manufacturers. Additionally, I have held roles in small and medium-sized organisations and publicly listed organisations as CEO, Non-Executive Director and Chairman. I have also provided consulting services to a number of manufacturing organisations in both strategy and lean enterprise and this was where I first had contact with ANCA Pty Ltd. I was initially attracted to ANCA because of their use of technology, the family culture and the global sales, manufacturing and distribution footprint. Since April 2010, my role has been as CEO/Director of the ANCA Group, a global leader in machine tool design and

Austr alian manager pr ofile manufacturing. ANCA was first founded in 1974 by Joint Managing Directors Pat Boland and Pat McCluskey. ANCA has manufacturing operations in Australia and Thailand, manufacturing high precision machines. The motion controls division is headquartered in Australia and has a manufacturing operation in Taiwan. A global branch network of sales, application and service personnel supports the ANCA Group, with regional centres in the USA, Europe and Asia. As a global organisation, ANCA has doubled its turnover since 2010 and despite global recessions, has expanded market share, volumes and product offerings. Additionally, ANCA has taken equity in a complementary machine manufacturer, Techni Waterjet and acquired its major sheet metal supplier, Tinfish Pty Ltd. Today, the ANCA Group employs approximately 800 people, with around 50 per cent employed within Australia. Throughout my career I have continued to focus on growing organisations by engaging and supporting key people and building teams focused on my concept of ‘Continuous improvement in everything we do, every day’. This focus has resulted in process improvements, leading to significant improvements in productivity, quality, service and a key focus on eliminating waste. Lean principles have been applied to both production and non-production processes through the empowerment of people, to make change and improvement, with the end result of improved value to all stakeholders. I have endeavoured to develop a culture of involvement and teamwork at all levels, such that all employees can make a contribution to the organisation. This includes an open door policy and a willingness to talk to employees at all levels, at any time. Throughout my career I’ve had the opportunity to be mentored and coached by some very successful managers and I employ the same principle in encouraging and training young people in enhancing their own careers. It is truly rewarding to see young people become successful senior managers over time. Source: Contributed by Grant Anderson.

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Selecti o n o f d esi red alternative Once feasible alternatives have been developed, one must be selected. The decision choice is the selection of the most promising of several alternative courses of action. The best alternative is one in which the solution best fits the overall goals and values of the organisation and achieves the desired results using the fewest resources.37 The manager tries to select the choice with the least amount of risk and uncertainty. Because some risk is inherent in most non-programmed decisions, managers try to gauge prospects for success. Under conditions of uncertainty, they may have to rely on their intuition and experience to estimate whether a given course of action is likely to succeed. Basing choices on overall goals and values can effectively guide selection of alternatives. Johnson & Johnson’s values-based decision making became evident when the company spent US$100 million pulling Tylenol (an American brand of paracetamol) from store shelves after cyanide was discovered in some of the capsules. It was an expensive alternative in the short term, but one that worked wonders for the company’s image and probably helped save Tylenol as a consumer product.38 Exhibit 9.4 Decision alternatives with different levels of risk For each of the following decisions, which alternative would you choose?

risk propensity The willingness to undertake risk with the opportunity of gaining an increased pay-off.

1

In the final seconds of a game against a traditional rival, the coach of a university football team may choose a play that has a 95 per cent chance of producing a tied score, or one with a 30 per cent chance of victory, but certain defeat if it fails.

2

The president of a major New Zealand company must decide whether to build a new plant within New Zealand that has a 90 per cent chance of producing a modest return on investment, or to build it in a foreign country with an unstable political history. The latter alternative has a 40 per cent chance of failing, but the returns would be enormous if it succeeded.

3

A university student with considerable acting talent must choose a career. She has the opportunity to go on to medical school and become a physician, a career in which she is 80 per cent likely to succeed. She would rather be an actress, but realises that the opportunity of her succeeding in that field is only 20 per cent.

Making choices depends on managers’ personality factors and willingness to accept risk and uncertainty. Risk propensity is the willingness to undertake risk with the opportunity of gaining an increased pay-off. The level of risk a manager is willing to accept will influence the analysis of costs and benefits to be derived from any decision. Consider the situations in Exhibit 9.4. A person with a low-risk propensity would tend to take assured moderate returns by going for a tied score, building a domestic plant or pursuing a career as a physician. A risk taker would go for the victory, build a plant in a foreign country or embark upon an acting career. This chapter’s Management in Practice box (p. 372) describes biases to avoid when selecting the desired alternative.

I m plem entati o n o f ch osen alternative implementation The step in the decisionmaking process that involves using managerial, administrative and persuasive abilities to translate the chosen alternative into action.

The implementation stage involves the use of managerial, administrative and persuasive abilities to ensure that the chosen alternative is carried out. This step is similar to the idea of strategy execution described in Chapter 8. The ultimate success of the chosen alternative depends on whether it can be translated into action. Sometimes an alternative never becomes reality because managers lack the resources or energy needed to make things happen. Implementation may require discussion with people affected by the decision. Communication, motivation and leadership skills must be used to see that

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the decision is carried out. When employees see that managers follow up on their decisions by tracking implementation success, they are more committed to positive action.39

Evaluati o n an d feed back In the evaluation stage of the decision process, decision makers gather information that tells them how well the decision was implemented and whether it was effective in achieving its goals. Feedback is important because decision making is a continuous, never-ending process. Decision making is not completed when a manager or board of directors votes yes or no. Feedback provides decision makers with information that can precipitate a new decision cycle. The decision may fail, thus generating a new analysis of the problem, evaluation of alternatives and selection of a new alternative. Many big problems are solved by trying several alternatives in sequence, each providing modest improvement. Feedback is the part of monitoring that assesses whether a new decision needs to be made.

The New York Times In March 2011, The New York Times took a giant strategic leap – it asked readers to begin paying for access to its journalism online. The decision wasn’t made lightly. In fact, executives and senior editors had spent years studying the problem, analysing various alternatives and reaching an agreement to implement the new subscription plan. Managers agreed on the issue: declining revenues. Analysing the causes of this problem, they recognised that the economic recession had hit the newspaper’s revenue hard, and that both print and online advertising had gone down since the recession began. However, another major cause was the continuing decline in print subscriptions. Why should people pay for a subscription when they could simply go to the Times’ website and access the paper’s high-quality journalism free of charge? Managers believed that some type of online subscription model was needed. Debate and discussion of various alternatives went on for months, both formally and informally. Eventually, a coalition of managers came together around the idea of a tiered subscription service that would allow website visitors to read 20 articles a month at no charge before being asked to select one of three subscription models at various price levels. Evaluation and feedback began immediately and continues to this day. On the day the paper launched

evaluation The step in the decisionmaking process that involves decision makers gathering information that tells them how well the decision was implemented and whether it was effective in achieving its goals.

Innovative Way the subscription model, executives gathered with web developers around two long tables, ‘their heads buried in their laptops monitoring the launch’, as one writer put it. The first subscriber signed up at practically the same moment the announcement was made. One year later, managers were surprised by the success of this decision. They had set a measure of 300 000 subscribers during the first year as a benchmark for success, and the total was actually around 390 000. Interestingly, at the same time, home delivery subscriptions of the print edition increased for the first time in five years, perhaps because some readers feared losing the paper edition altogether if they didn’t support it. In addition, advertising revenues began to grow again as advertisers saw that the new digital subscription model was working. While these early indications of consumer uptake in the new paywall business model seems to be working at The New York Times, there is still great uncertainty as to its longterm sustainability. Many new competitors have entered this arena with completely free news services. A big source of uncertainty is whether The New York Times brand and reputation will transfer fully from print to online; nobody can see into the future with certainty.

Source: Joe Pompeo. (19 March 2012). A Year into the Times’ Digital Subscription Program, Analysts and Insiders See Surprising Success, and More Challenges to Come. Capital New York Website, http://www.capitalnewyork.com/article/media/2012/03/5509293/year-timesdigital-subscription-program-analysts-and-insiderssee-surp (accessed 3 August 2012); Jeremy W. Peters. (20 March 2011). The Times’s Online Pay Model Was Years in the Making. The New York Times, http://www.nytimes.com/2011/03/21/business /media/21times.html?pagewanted=all (accessed 27 September 2011); and J. W. Peters. (8 March 2011). New York Times is Set to Begin Charging for Web Access; Chairman Concedes Plan is Risky But Says It’s an Investment in Our Future’. International Herald Tribune, 15.

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➜➜ Managers face the need to make a decision when they either confront a problem or see an opportunity.

decision, diagnosing causes, developing alternatives, selecting an alternative, implementing the alternative and evaluating decision effectiveness.

➜➜ A problem is a situation in which organisational accomplishments have failed to meet established goals. ➜➜ An opportunity is a situation in which managers see potential organisational accomplishments that exceed current goals. ➜➜ The decision-making process typically involves six steps: recognition of the need for a

management in pr actice

➜➜ Diagnosis is the step in which managers analyse underlying causal factors associated with the decision situation. ➜➜ Selection of an alternative depends partly on managers’ risk propensity, or their willingness to undertake risk with the opportunity of gaining an increased payoff.

➜➜ The implementation step involves using managerial, administrative and persuasive abilities to translate the chosen alternative into action.

remember this

➜➜ The evaluation stage involves the decision makers gathering information that tells them how well the decision was implemented and whether it was effective in achieving its goals ➜➜ Feedback is the part of monitoring that assesses whether a new decision needs to be made.

Why do managers make bad decisions? Biases to avoid

At a time when decision making is so important, many corporate executives do not know how to make a good choice among alternatives. They may rely on computer analyses or personal intuition without realising that their own cognitive biases affect their judgement. The complexities of modern corporate life make good judgement more critical than ever. Many errors in judgement originate in the human mind’s limited capacity and in the natural biases most managers display during decision making. Awareness of the six biases below can help managers make more enlightened choices:

➜➜ Being influenced by initial impressions. When considering decisions, the mind often gives disproportionate weight to the first information it receives. These initial impressions, statistics or estimates act as an anchor to our subsequent thoughts and judgements. Anchors can be as simple as a random comment by a colleague or a statistic read in a newspaper. Past events and trends also act as anchors. For example, in business, managers frequently look at the previous year’s sales when estimating sales for the coming year. However, in rapidly changing environments, giving too much weight to the past can lead to poor forecasts and misguided decisions.

➜➜ Justifying past decisions. Many people fall into the trap of making choices that justify their past decisions, even if those decisions no longer seem valid. For example,

managers may invest tremendous time and energy in improving the performance of a problem employee whom they now realise should never have been hired in the first place. Another example is when investors continue to pour money into failing businesses hoping to turn things around. People are often unwilling to admit they made a mistake, so they continue to make flawed decisions in an effort to correct the past. This tendency to ‘throw good money after bad’ is sometimes called escalating commitment.

➜➜ Seeing what you want to see. People frequently look for information that supports their existing instinct or point of view, and avoid information that contradicts it. This bias affects where managers look for information when considering decisions, as well as how they interpret the information they find. People tend to give too much weight to supporting information and too little to information that conflicts with their established viewpoints. It is important for managers to be honest with themselves about their motives and to examine all the evidence with equal rigour. Having a devil’s advocate to argue against a decision can also help avoid this decision trap.

➜➜ Perpetuating the status quo. Managers may base decisions on what has worked in the past and fail to explore new options, dig for additional information or investigate new technologies. For example, DuPont clung to its cash cow,

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nylon, despite growing evidence in the scientific community that a new product, polyester, was superior for tyre cords. Celanese, a relatively small competitor, blew DuPont out of the water by exploiting this new evidence, quickly capturing 75 per cent of the tyre market.

➜➜ Being influenced by problem framing. The decision response of a manager can be influenced by the mere wording of a problem. For example, consider a manager faced with a decision about salvaging the cargo of three barges that sank off the coast. If managers are given the option of approving (1) a plan that has a 100 per cent chance of saving the cargo of one of the three barges, worth $200 000 or (2) a plan that has a one-third chance of saving the cargo of all three barges, worth $600 000 and a twothirds chance of saving nothing, most managers choose option 1. The same problem with a negative frame would give managers a choice of selecting (3) a plan that has a 100 per cent chance of losing two of the three cargoes, worth $400 000 or (4) a plan that has a two-thirds chance of losing all three cargoes but a one-third chance of losing no cargo. With this framing, most managers choose

option 4. Because both problems are identical, the decision choice depends strictly on how the problem is framed.

➜➜ Overconfidence. One of the interesting research findings on decision-making biases is that most people overestimate their ability to predict uncertain outcomes. Before making a decision, managers have unrealistic expectations of their ability to understand the risk and make the right choice. Overconfidence is greatest when answering questions of moderate to extreme difficulty. For example, when people were asked to define quantities about which they had little direct knowledge (such as the dollar value of exports in a particular industry or the amount of taxes collected by the government), they overestimated their accuracy. Evidence of overconfidence is illustrated in cases in which subjects were so certain of an answer that they assigned odds of 1000 to 1 of being correct, but in fact were correct only about 85 per cent of the time. These findings are especially important for strategic decision making, in which uncertainty is high because managers may unrealistically expect that they can successfully predict outcomes and hence select the wrong alternative.

Sources: Hammond, J., Keeney, R. L. and Raiffa, H. (September–October 1998). The Hidden Traps in Decision Making. Harvard Business Review, 47–58; Harari, O. (February 1994), ‘The Thomas Lawson Syndrome’, Management Review, 58–61; Belsky, G. (July 1995). Why Smart People Make Major Money Mistakes. Money, 76–85.

Federal Express (FedEx) is a business that thrives on intensive communication and feedback. The company is renowned for being a great place to work, based on how well it treats its staff. Take a David Cunningham, Hong Kong-based president of FedEx’s Asia–Pacific division, claims that he Moment gets constant feedback from his 9500 staff. The company operates a daily briefing process, regular Did you know that decision conference calls with managers and staff, and a satellite system for worldwide communication. behaviour differs markedly Once decisions are made, they are strongly communicated to those whose job is to implement between new managers and them, and managers get fast, effective feedback about implementation progress. Staff cooperate successful senior executives? To understand how, complete the willingly in these processes because of the loyalty that the company gives them. Even in the Self-test at the beginning difficult economic times of late 2001 and early 2002, FedEx cut back on costs by getting rid of old of this chapter. planes and reducing managers’ bonuses, but did not lay off one of its 144 000 staff anywhere in the world. This was within a context where every day’s business news brought announcements of major companies downsizing their staff numbers by thousands of people. FedEx took conscious decisions not to engage in such lay-offs.40 By 2005 FedEx had grown to employ 198 600 staff, and was the largest employer by far in the 2005 Fortune magazine ‘Best Companies to Work For’ list. FedEx employees appreciated the respect for their rights to make decisions that satisfied customer needs, as well as perks such as free flights for employees on FedEx planes.41 By 2013, the company had substantially globalised and employed over 300 000 staff, operating nearly 700 aircraft of many sizes and types, and thousands of trucks and vans. It suffered through the GFC (when many businesses cut back on their use of services), and bounced back to manage 8 million shipments per day in 220 countries, generating profitable revenue of $A45 billion in 2013. FedEx has also undertaken a large sustainability initiative which it has called EarthSmart. It is their company roadmap for environmental performance; one of its projects includes aiming to be the first in its field to offer carbon-neutral shipping (at no extra charge) to customers. FedEx has also cleverly engaged

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technology to help reduce waste by digitally scanning parcels to ascertain volume and shape. The company has been able to eliminate 2500 trailers from the road so far by using the scanned information to help them pack and ship more efficiently.42

Personal decision framework

decision style Differences among people with respect to how they perceive problems and make decisions.

Imagine you are a manager at BHP Billiton, IBM, a local movie theatre or the public library. How would you go about making important decisions that may shape the future of your department or organisation? So far in this chapter, we have discussed a number of factors that affect how managers make decisions. For example, decisions may be programmed or non-programmed, situations are characterised by various levels of uncertainty, and managers may use the classical, administrative or political model of decision making. In addition, there are four recognised steps to take in the decision-making process, which will be outlined below. However, not all managers go about making decisions in the same way. In fact, there are significant differences in the ways individual managers may approach problems and make decisions concerning them. These differences can be explained by the concept of personal decision styles. Exhibit 9.5 illustrates the role of personal style in the decision-making process. Personal decision style refers to differences among people with respect to how they perceive problems and make decisions. Research has identified four major decision styles: directive, analytical, conceptual and behavioural.43 1 The directive style is used by people who prefer simple, clear-cut solutions to problems. Managers who

use this style often make decisions quickly because they do not like to deal with a lot of information and may consider only one or two alternatives. People who prefer the directive style generally are efficient and rational, and prefer to rely on existing rules or procedures for making decisions. 2 Managers with an analytical style, on the other hand, like to consider complex solutions based on as

much data as they can gather. These individuals carefully consider alternatives and often base their decisions on objective, rational data from management control systems and other sources. They search for the best possible decision based on the information available. 3 People who tend towards a conceptual style also like to consider a broad amount of information. However,

they are more socially oriented than those with an analytical style and like to talk to others about the problem and possible alternatives for solving it. Managers using a conceptual style consider many broad alternatives, rely on information from both people and systems, and like to solve problems creatively. 4 The behavioural style is often the style adopted by managers having a deep concern for others as

Exhibit 9.5 Personal decision framework

individuals. Managers using this style like to talk to people one-on-one and understand their feelings about the problem and the effect of a given decision upon them. People with a behavioural style usually are concerned with the personal development of others and may make decisions that help others achieve their goals.

Situation

Personal decision style

Programmed/non-programmed

Directive

Classical, administrative,

Analytical

political

Conceptual

Decision steps

Behavioural

Decision choice Best solution to problem

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Although most managers have one dominant decision style, frequently they will use several different styles or a combination of styles in making the varied decisions they confront daily. For example, a manager might use a directive style for deciding on which printing company to use for new business cards, yet shift to a more conceptual style when handling an interdepartmental conflict. The most effective managers are able to shift among styles as needed to meet the situation. Being aware of one’s dominant decision style can help a manager avoid making critical mistakes when his or her usual style may be inappropriate to the problem at hand. A particular decision style can also apply in a particular country or culture. For example, Japan’s major corporations experienced incredible growth and profits from the 1960s through to the 1990s. But by 1997, things had changed dramatically, with companies such as Nissan, Mazda, NEC, Mitsubishi Electric, Hitachi and even Sony reporting disastrous results and major losses. This was an amazing turnaround given the decades of profitable growth that preceded them. The recession in which the Japanese economy essentially imploded caused these companies to have a good, hard look at what went wrong. In many cases, elder statesmen CEOs whose authority and decisions had never been questioned in the past were being forced out of office and replaced by more progressive and younger CEOs. Two major problems in the Japanese corporate decision-making culture and processes were observed:

●● Decision-making processes required so many sign-offs that they were very slow, which meant Japanese companies were sluggish in responding to changes in market requirements. A third critical factor within the Japanese system was that there was not enough connection between the requirements of shareholders and the resource allocation and decisionmaking processes within companies. Many of the leaders of Japan’s corporations did not breed or develop successors. They did not develop the next generation of leaders. Their model worked during periods of continued growth when their technological leadership in industries, such as consumer electronics, covered up deficiencies in their management style, but such weaknesses were sorely exposed during the recession years. The good news is that a newer generation of Japanese business leaders are demonstrating increased decision-making flexibility as well as productivity improvements in some of the world’s best companies. Facebook founder Mark Zuckerberg stepped into a hole when he decided to retrofit his site with a feature named Beacon. Beacon was designed to pass information about customer web activity to participating vendors, providing a new source of revenue for Facebook. But when Beacon was implemented, Facebook was slammed with complaints about privacy intrusion and a lawsuit. What caused this poor decision? Based on the wild popularity of his social network site and his rapid rise in the business world, Zuckerberg was probably overly confident about how users would receive Beacon. Facebook management shut down the service less than two years after it was introduced.

Source: iStockphoto/Nicolas McComber

●● The older chief executives were held in such esteem that their judgement was never questioned, even when it was clearly wrong.

Those running agricultural businesses, including farms, make a neverending stream of decisions that impact on their outcomes and profitability, such as choice of feedstock, fertiliser use, technologies, selling methods and timing. Whether it’s a family farm or a corporate farm, the right decisionmaking style involves getting the data and expertise to those who are key stakeholders in the processes and outcomes.

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➜➜ A manager’s personal decision style influences how he or she makes decisions.

Concept extension

Vroom-Jago model

➜➜ Decision styles are differences among people with respect to how they perceive problems and make choices.

➜➜ The four major decision styles are directive, analytical, conceptual and behavioural.

remember this

➜➜ Most experienced managers use a variety of styles depending on the decision situation.

Innovative decision making The ability to make fast, widely supported, high-quality decisions on a frequent basis is a critical skill in today’s fast-moving organisations.44 Considering that managers are under pressure to decide quickly and that biases creep in and cloud judgement, how do managers ever make good decisions? Some innovative techniques can help managers watch out for and avoid mistakes caused by cognitive biases. It is difficult for most managers to see their own biases, but they can build in mechanisms that neutralise or reduce bias-related decision errors at the organisational level.45

Start with br ainsto r m in g brainstorming A technique that uses a face-to-face group to spontaneously suggest a broad range of alternatives for decision making.

electronic brainstorming Bringing people together in an interactive group over a computer network to suggest alternatives; sometimes called brainwriting.

Brainstorming uses a face-to-face interactive group to spontaneously suggest a wide range of alternatives

for decision making. The keys to effective brainstorming are that people can build on one another’s ideas; all ideas are acceptable, no matter how crazy they seem; and criticism and evaluation are not allowed. The goal is to generate as many ideas as possible. Brainstorming has been found to be highly effective for quickly generating a wide range of alternative solutions to a problem, but it does have some drawbacks. For one thing, people in a group often want to conform to what others are saying, a problem sometimes referred to as groupthink. Others may be concerned about pleasing the boss or impressing colleagues. In addition, many creative people simply have social inhibitions that limit their participation in a group session or make it difficult to come up with ideas in a group setting. In fact, one study found that when four people are asked to brainstorm individually, they typically come up with twice as many ideas as a group of four brainstorming together. One recent approach, electronic brainstorming, takes advantage of the group approach while overcoming some disadvantages. Electronic brainstorming, sometimes called brainwriting, brings people together in an interactive group over a computer network. One member writes an idea, another reads it and adds other ideas, and so on. Studies show that electronic brainstorming generates about 40 per cent more ideas than individuals brainstorming alone, and 25 to 200 per cent more ideas than regular brainstorming groups, depending on group size.46 Why? Because the process is anonymous, the sky’s the limit in terms of what people feel free to say. People can write down their ideas immediately, avoiding the possibility that a good idea might slip away while the person is waiting for a chance to speak in a face-to-face group. Social inhibitions and concerns are avoided, which typically allows for a broader range of participation. Another advantage is that electronic brainstorming can potentially be done with groups made up of employees from around the world, further increasing the diversity of alternatives.

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management in pr actice

Evidence-based management At a time when decision making is so important, many managers do not know how to make a good choice among alternatives. Using evidence-based decision making can help. Evidence-based decision making simply means a commitment to make more informed and intelligent decisions based on the best available facts and evidence. It means being aware of our biases and seeking and examining evidence with rigour. Managers practise evidence-based decision making by being careful and thoughtful rather than carelessly relying on assumptions, past experience, rules of thumb or intuition. Here are some ideas for applying evidence-based decision making:

➜➜ Demand evidence. Educate people throughout the organisation to use data and facts to the extent possible to inform their decisions. Many manager problems are uncertain, and hard facts and data aren’t available, but by always asking for evidence, managers can avoid relying on faulty assumptions. Managers at one computer company kept blaming the marketing staff for the trouble the company had selling their products in retail stores. Then, members of the senior team posed as mystery shoppers and tried to buy the company’s computers. They kept encountering sales clerks that tried to dissuade them from purchasing the firm’s products, citing the excessive price, clunky appearance and poor customer service. Real-world observations told them something that was very different from what they assumed.

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➜➜ Practise the five whys. One simple way to get people to think more broadly and deeply about problems rather than going with a superficial understanding and a first response is called the Five Whys. For every problem, managers ask ‘Why?’ not just once, but five times. The first why generally produces a superficial explanation for the problem, and each subsequent why probes deeper into the causes of the problem and potential solutions.

➜➜ Do a post-mortem. A technique many companies have adopted from the US Army to encourage examination of the evidence and continuous learning is the after-action review. After implementation of any significant decision, managers evaluate what worked, what didn’t and how to do things better. Many problems are solved by trial and error. For example, post-mortem reviews of decisions regarding attacks from roadside bombs in Iraq led soldiers to suggest implementation of an overall counterinsurgency strategy rather than relying so much on technology.

➜➜ Balance decisiveness and humility. The best decision makers have a healthy appreciation for what they don’t know. They’re always questioning and encouraging others to question their knowledge and assumptions. They foster a culture of inquiry, observation and experimentation.

En gage in ri go ro us d ebate An important key to better decision making is to encourage a rigorous debate of the issue at hand. Good managers recognise that constructive conflict based on divergent points of view can bring a problem into focus, clarify people’s ideas, stimulate creative thinking, limit the role of bias, create a broader understanding of issues and alternatives, and improve decision quality.47 Reed Hastings, CEO of Netflix, is trying to build rigorous debate into the decisionmaking process to avoid another calamity such as the one the company experienced following two successive unpopular decisions: to increase the price of the service, and to split Netflix into two separate businesses – one for Internet streaming and one for DVD rentals. Customers were furious, and they showed it by cancelling their

Source: Thinkstock/Wavebreakmedia Ltd

Sources: Based on Jeffrey Pfeffer and Robert I. Sutton. (January 2006). Evidence-Based Management. Harvard Business Review, 62–74; Rosemary Stewart, Evidence-based Decision Making, Abingdon, UK: Radcliffe Publishing, 2002; Joshua Klayman, Richard P. Larrick and Chip Heath. (February 2000). Organizational Repairs. Across the Board, 26–31; and Peter Eisler, Blake Morrison and Tom Vanden Brook. (19 December 2007). Strategy That’s Making Iraq Safer Was Snubbed for Years. USA Today.

This group is engaged in brainstorming to solve a problem. After generating a pool of ideas it will evaluate the various possible solutions arising from the group’s creative thinking.

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point—counterpoint A decision-making technique in which people are assigned to express competing points of view.

Netflix memberships in droves. When Hastings had told a friend before the decision that he was thinking of splitting the business, the friend said, ‘That is awful. I don’t want to deal with two accounts.’ But Hastings didn’t listen. He admits now that he was guilty of overconfidence and being out of touch with customers’ thinking. By using rigorous debate about major decisions, Hastings hopes to get Netflix back on the right track – gaining rather than losing customers.48 Stimulating rigorous debate can be done in several ways. One way is by ensuring that the group is diverse in terms of age and gender, functional area of expertise, hierarchical level and experience with the business. Some groups assign a devil’s advocate, who has the role of challenging the assumptions and assertions made by the group.49 The devil’s advocate may force the group to rethink its approach to the problem and avoid reaching premature conclusions. Jeffrey McKeever, CEO of MicroAge, often plays the devil’s advocate, changing his position in the middle of a debate to ensure that other executives don’t just go along with his opinions.50 Another approach is to have group members develop as many alternatives as they can as quickly as they can.51 It allows the team to work with multiple alternatives and encourages people to advocate ideas they might not prefer, simply to encourage debate. Still another way to encourage constructive conflict is to use a technique called point–counterpoint, which breaks a decision-making group into two subgroups and assigns them different, often competing, responsibilities.52 The groups then develop and exchange proposals and discuss and debate the various options until they arrive at a common set of understandings and recommendations.

Avo i d gro u pthin k

groupthink Groupthink involves members of a group agreeing a position on a decision or issue, in order to avoid conflict or disagreement, sometimes overly influenced by a dominating ‘opinion leader’.

escalating commitment Escalating commitment involves overly supporting a strategy, decision or activity even though rational thought would indicate the contrary.

It is important for managers to remember that some disagreement and conflict is much healthier than blind agreement. Pressures for conformity exist in almost any group, and when people in a group like one another they tend to avoid anything that might create disharmony. Groupthink refers to the tendency of people in groups to suppress contrary opinions.53 When people slip into groupthink, the desire for harmony outweighs concerns over decision quality. Group members emphasise maintaining unity rather than realistically challenging problems and alternatives. People censor their personal opinions and are reluctant to criticise the opinions of others.

Know wh en to pu ll th e plu g In a fast-paced environment, good managers encourage risk taking and learning from mistakes, but they don’t hesitate to pull the plug on something that isn’t working. Research has found that managers and organisations often continue to invest time and money in a solution despite strong evidence that it is not appropriate. This tendency is referred to as escalating commitment. Managers might block or distort negative information because they don’t want to be responsible for a bad decision, or they might simply refuse to accept that their solution is wrong. A recent study in Europe verified that even highly successful managers often miss or ignore warning signals because they become committed to a decision and believe if they persevere it will pay off.54 As companies face increasing competition, complexity and change, it is important that managers don’t get so attached to their own ideas that they’re unwilling to recognise when to move on. According to Stanford University professor Robert Sutton, the key to successful creative decision making is to ‘fail early, fail often, and pull the plug early’.55

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➜➜ Most decisions within organisations are made as part of a group, and whereas managers can’t always see their own biases, they can build in mechanisms to prevent bias from influencing major decisions at the organisational level. ➜➜ Brainstorming is a technique that uses a face-to-face group to spontaneously suggest a broad range of alternatives for making a decision.

➜➜ Electronic brainstorming brings people together in an interactive group over a computer network, rather than meeting face to face. ➜➜ Evidence-based decision making is founded on a commitment to examining potential biases, seeking and examining evidence with rigour, and making informed and intelligent decisions based on the best available facts and evidence. ➜➜ A devil’s advocate is a person who is assigned the role of challenging the assumptions and assertions made



by the group to prevent premature consensus.

remember this

➜➜ A group decision-making technique that breaks people into subgroups and assigns them to express competing points of view regarding the decision is called point–counterpoint. ➜➜ Groupthink refers to the tendency of people in groups to suppress contrary opinions in a desire for harmony. ➜➜ Escalating commitment refers to continuing to invest time and money in a decision despite evidence that it is failing.

Decisions are about making choices between alternative options. In the field of sustainable development, there are a set of reasonably complex decisions that can be seen and seized as opportunities. The complexity comes into these decisions because of the uncertainty of the outcomes and the tradeoffs that they encompass, between short-term and medium-term outcomes, and between the financial and the economic and community bottom lines. Consider the chief executive of a large bank or a mining company. Decisions that would be required include: ●● Should we be proactive with respect to sustainable development, with the bulk of the industry, or lag behind? ●● How much resource should we budget and allocate for environmental and community related activities? ●● How ambitious should the goals be for sustainable development outcomes? ●● How will we infuse the culture of sustainability into our workforce? ●● How can we best work constructively with stakeholders to empower them and achieve win-win outcomes? ●● How can criteria be set and which activities should be prioritised for moving down the sustainability path? ●● Should the company have a chief sustainability officer, a sustainability office or champion to lead the initiatives, or should another method for implementation and progress be organised? ●● Given competing demands that usually exceed resources, what prioritisation rules and processes will be used? For these chief executives, it is challenging indeed to start with a ‘blank page’ and create a sustainability strategy, then guide a series of decisions that become the enactment of that strategy. These decisions, in this relatively new field of sustainability, are non-programmed and involve uncertainty and ambiguity: yet this is no reason to shrink back and make the decision to ‘not make a decision or commitment’, for with the risk, comes potential for significant competitive advantage.

sustainable development

Sustainable development decisions

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Response to the Management Challenge

Marjorie Yang, described in the chapter-opener, uses a primarily conceptual style of decision making. She likes to talk to other managers about a problem or opportunity and get different perspectives on alternatives for action. However, she ultimately makes the decision on her own, based on her analysis of the organisation and its industry and her gut feelings about the decision. Concerning the non-programmed decision of whether to build a new factory, Yang’s intuition told her to pursue this golden opportunity, even though the managers were split about 50–50 on whether to move ahead with the factory. She ran the numbers and was willing to take the risks for the potential rewards of becoming the first company in China to achieve top quality. Yang believed the new factory could help Esquel double its sales to become a billion-dollar company. Implementation of the decision occurred when Esquel broke ground on the factory in mid 2004, and as

discussion questions

1  You are a busy partner in a legal firm. An experienced secretary complains of continued headaches, drowsiness, a dry throat and occasional spells of fatigue and flu. She tells you she believes air quality in the building is bad and that she would like something done. How would you respond?

2 Why is decision making considered a fundamental part of management effectiveness? 3 Explain the difference between risk and ambiguity. How might decision making differ for each situation? 4 Analyse three decisions you made over the past six months. Which of these were programmed and which were non-programmed? Which model – the classical, administrative or political – best describes the approach you took to make each decision? 5 Why are many decisions made by groups rather than by individuals? 6 Put yourself in the position of then Queensland Premier Anna Bligh in January 2011, receiving the news that much of Brisbane is about to be flooded. Develop a list of key decisions that you would need to take and outline how you would go about taking them. 7 What are the main differences between the administrative and political models of decision making? 8 What is meant by satisficing and bounded rationality? Why do managers not strive to find the economically best solution for many organisational decisions? 9 What techniques could you use to improve your own creativity and effectiveness in decision making?

the factory got up and running, top managers gathered feedback and evaluated whether the decision was effective in helping Esquel achieve its quality and sales goals. In 2014, with Yang as Chairman of the company, further developments into retailing its products have been implemented, and Esquel produces for many of the world’s top brands as well as its own. The company is highly vertically integrated, from its owned cotton farms to its many new prestigious shops in China and elsewhere. It has opened shops in major shopping malls in growing and wealthy cities such as Beijing and Shanghai. It supplies premium clothing to many of the world’s leading brands, and in recognition of its sustainable development efforts and achievements, Ms Yang has been awarded the prestigious Hong Kong Gold Star by the government. Sources: Murphy, Cait. (14 November 2005). Building a New Factory. Fortune, 152:10, 149; Esquel website, http://www.esquel.com.

10 Which of the four steps in the decision-making process do you think is most likely to be ignored by a manager? Explain. 11 As a new, entry-level manager, how important is it to find ways to compensate for your relative lack of experience when trying to determine which alternative before you is most likely to succeed? What are some ways you can meet this challenge? 12 List some possible advantages and disadvantages to using computer technology for managerial decision making. 13 Do you think intuition is a valid approach to making decisions in an organisation? Why or why not? How might intuition be combined with a rational decision approach? 14 Managers at Gap Inc., a once-popular retail chain, are reported to have made a series of decisions that hurt the company: they expanded so rapidly that the chain lost touch with customers; they tried to copy the successful approach of rivals rather than charting their own course; they cut quality to reduce costs; they shifted from one fashion approach to another as each failed to appeal to customers, and so on. What techniques would you recommend Gap managers use to improve the quality of their decisions? 15 What do you think is your dominant decision style? Which style are you most comfortable using? Which style feels least comfortable? What are the implications for the type of job you might want to seek?

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T h e u n h e a lt h y h o s p i ta l When Bruce Reid was hired as Blake Memorial Hospital’s new CEO, the mandate had been clear: improve the quality of care, and set the financial house in order. As Reid struggled to finalise his budget for approval at next week’s board meeting, his attention kept returning to one issue – the future of six off-site clinics. The clinics had been set up six years earlier to provide primary health care to the community’s poorer neighbourhoods. Although they provided a valuable service, they also diverted funds away from in-house services, many of which were underfunded. Cutting hospital personnel and freezing salaries could affect quality of care, which was already slipping. Eliminating the clinics, on the other hand, would save A$256 000 without compromising Blake’s internal operations. However, there would be political consequences. Clara Bryant, the recently appointed Commissioner of health services, repeatedly argued that the clinics were an essential service for the poor. Closing the clinics could jeopardise access to funds. Dr Susan Russell, the hospital’s director of clinics, was equally vocal about responsibility to the community, although Dr Winston Lee, chief of surgery, argued forcefully for closing the off-site clinics and having shuttle buses bring patients to the hospital weekly. Dr Russell argued for an entirely new way of delivering health care – ‘A hospital is not a building,’ she said, ‘it’s a service. And wherever the service is needed, that is where the hospital should be.’ That meant

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funding more clinics. Russell wanted to create a network of neighbourhood-based centres for all the surrounding neighbourhoods, poor and middle income. Besides improving health care, the network would act as an inpatient referral system for hospital services. Reid considered the proposal: if a clinic network could tap the paying public and generate more inpatient business, it might be worth looking into. The rival hospital, located on the affluent side of town, certainly wasn’t doing anything so creative. W h at d o yo u d o ? 1 Close the clinics and save a quick $256 000, and then move on to tackle the greater problems that threaten Blake’s long-term future.

2 Gradually abandon the neighbourhood altogether and open freestanding clinics in more affluent suburbs, at the same time opening a mini-hospital in the poor neighbourhood for critical care. 3 Tighten up internal efficiency to deal with immediate financial problems. Keep the clinics open for now, bring Clara Bryant into the decision-making process, and begin working with community groups to explore unmet health care needs and develop innovative options for meeting them.

Source: Based on Kovner, A. R. (September–October 1991). The Case of the Unhealthy Hospital. Harvard Business Review, 12–25.

Gr oup challenge

A new appro a ch to m a k in g d ecisio n s Managers are typically effective at focusing on problems and diagnosing what is wrong and how to fix it when they have to make a decision. The typical questions managers might ask themselves include: What is the problem here? What is the cause of this problem? Why is this problem happening to me? What alternatives do I have? What is the best alternative? How do I implement this alternative? There is a novel approach to decision making, called outcomedirected thinking, that some managers have learned to use. It focuses on future outcomes and possibilities rather than on the causes of the problem. People tend to feel more positive emotions, have more creative ideas and experience more optimism about solving a problem when they focus on desired future outcomes rather than on who or what caused the problem. Step 1. Think of a problem you have in your life right now, in which something is not what you would like it to be. It could be any problem you are having at school, home, or work that you would like to solve. Summarise the problem in a few words:

Step 2. Now write brief answers to the following questions: A. What outcome do I really want with respect to this problem? (Your answer equals your desired result about the problem.) B. How will I know when I have achieved this future outcome? (What will I see, hear and feel?) C. What resources do I need to pursue this future outcome? D. What is the first step I can take to achieve this outcome? Step 3. In a group of three to five students, take turns sharing your answers to the above four questions. In addition, share what you are feeling about your desired outcome for the problem. For example, do you feel that you have created the beginning of a solution that you can implement? In addition, share whether your thinking is more creative and effective by focusing on achieving a desired outcome rather than on the cause of the problem.

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Case for cr itical analysis

D e c i s i o n s at Pa r a d o x

Paradox Glass & Bottle Company employs more than 600 people at its regional manufacturing plant. The company is structured functionally, with manufacturing, design and engineering, finance, marketing and human resources (HR) departments. Paradox’s HR department is staffed by eight employees working in the areas of recruitment and development, payroll and conditions, and industrial relations. The HR manager takes direct responsibility for industrial relations and two senior HR officers coordinate the activities of the other areas. Nick Maddern is Paradox’s HR manager. He has only been at Paradox for three months, having moved from interstate where he had been HR manager at a large financial services company for a number of years. Accepting Paradox’s job offer and moving interstate had been a difficult decision for Nick and his wife. They had both lived in the same city all their lives, but they felt that moving to a regional area would offer them a better lifestyle. He and his wife had agreed that they would not move unless both of them were happy to do so, and they had discussed at length the issues for and against moving. On the other hand, the Senior HR Officer (Recruitment and Development), Tim Wylie, and Senior HR Officer (Payroll and Conditions), Karen Smythe, are both locals who have worked at Paradox since leaving school. Paradox is a successful and profitable company, and its board of directors has recently decided to use the company’s substantial capital to grow its operations. In response to an increasing domestic market for Paradox’s products, the company is in the process of expanding its operations by establishing a second manufacturing plant of similar size in a nearby town. The board also decided to upgrade the facilities and equipment at its existing plant, with a view to expanding its current domestic-only market into South East Asia. To ensure that the new plant has sufficient appropriately skilled workers to be up and running on schedule, the HR department needs to implement a major recruitment campaign, as well as to train a substantial number of the existing workforce on the new equipment. It is a massive task for the company’s small HR department, and will require considerable planning to ensure its success. Nick Maddern is the only person at Paradox who has experience with a large-scale recruitment and training operation. His first job after leaving university had been to coordinate the recruitment and training of over 150 field interviewers for a start-up market research company. Nick is still getting used to how things are done at Paradox, and knows that it will require a concerted team effort for the campaign to be a success. All the HR staff will need to put in some long hours over the next few weeks if the workers for the new plant are to be appointed and trained on time. Nick drew up a draft plan of what had to be done, when it needed to be done by, and who would do it. He asked the two senior HR officers, Tim and Karen, for their suggestions on his draft plan, but wasn’t sure that they understood the complexities of such a large operation. Nick feels there is neither the time nor the need for further discussion as he has to

present the final recruitment and training plan to the company’s CEO at tomorrow’s executive meeting. In the midst of all this, HR’s computers also need upgrading. Since he started at Paradox, Nick had been hearing the HR staff complain that the PCs were just not keeping pace with the department’s needs and were slowing down their work. Tim in particular was concerned that the PCs could be a real problem once the recruitment campaign got under way, with all the additional data that would need to be entered onto the HR system. Nick had asked both Tim and Karen a couple of weeks ago to have a bit of a think about what make and model of PC would best suit the department’s needs and to get back to him at the next senior staff meeting with their recommendations. Nick couldn’t help but shake his head as he remembered what had happened at their meeting earlier this week. Karen advised that she’d had a quick word with Paradox’s finance manager, who had recently purchased new computers for the finance department, as well as with a friend of hers who is an IT specialist. Karen’s recommendation was to go with the make and model that finance had recently purchased as they are very satisfied with both the performance of the computers and the price they negotiated. Her friend in IT had confirmed that she was making a good choice. Tim, on the other hand, looked amazed at what he described as Karen’s ‘ad hoc’ method, and said that such an important decision required a much more systematic approach. Having identified the problem with the computers a couple of months ago, Tim had spent a great deal of time finalising a recommendation. He had undertaken an involved process of looking at a large range of makes and models, coming up with a long list of pros and cons, and checking deals at different suppliers. At the end of this process his recommendation was to purchase the same make and model that Karen suggested! At least getting the same recommendation from both his senior officers had made Nick’s decision easier. He had signed off on the purchase orders at the meeting and the new PCs would be delivered and installed by the end of next week. Nick knew he was going to have to keep an eye on Tim over the next few weeks. Once the recruitment and training plan was agreed to at tomorrow’s executive meeting, Nick intended to hand over the day-to-day coordination to Tim. However, it just wouldn’t work if Tim was going to agonise over every decision the way he had with the new PCs. Questions 1 Identify the key drivers of decision making in this case. Discuss whether the process the various decision makers used is rational. 2 In the various decisions that Nick Maddern has made, identify which, if any, are programmed or non-programmed decisions. 3 Based on the concept of innovative group decision-making style that you have studied, discuss Nick Maddern’s decision-making style in relation to the development of the recruitment and training plan.

9: Managerial decision making

4 If you were in Nick Maddern’s position, what decision processes would you have used to develop the recruitment and training plan?

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5 Based on the information in this case, prepare your recommendations to Nick Maddern, Tim Wylie and Karen Smythe to improve the quality of their decisions.

Source: Contributed by Kerry Scott and Bishnu Sharma, Faculty of Business, University of the Sunshine Coast.

P l a n t Fa n ta s i e s : m a n a g e r i a l d e c i s i o n m a k i n g For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

On the job video case

Q uestions 1 Did Plant Fantasies owner Teresa Carleo follow the rational decision-making process to launch Plant Fantasies? Explain. 2 List an example of a programmed decision at Plant Fantasies. Identify a non-programmed decision at Plant Fantasies.

3 How might managers at Plant Fantasies conduct the final evaluation stage of the decision-making process when installing a new garden for a client?

endnotes 1  Danielle Sacks. (February 2011). Blown Away. Fast Company, 58–65, 104. 2 John Cook. (12 July 2012). After the Writedown: How Microsoft Squandered Its $6.3B Buy of Ad Giant aQuantive. GeekWire, http://www .geekwire.com/2012/ writedown-microsoft-squandered-62b-purchase-adgiant-aquantive/ (accessed 2 August 2012). 3 Howard, R. A. (1988). Decision Analysis: Practice and Promise. Management Science, 34, 679–95. 4 Simon, H. A. (1957). Administrative Behavior, 2nd edn (New York: Free Press). 5 Paul J. H. Schoemaker and J. Edward Russo. (Fall 1993). A Pyramid of Decision Approaches. California Management Review, 9–31. 6 Gunther, M. (13 May 2003). Jeff Zucker Faces Life Without Friends. Fortune, 94–8. 7 Bazerman, M. H. (1986). Judgment in Managerial Decision Making (New York: Wiley); Eilon, S. (1985). Structuring Unstructured Decisions. Omega, 13, 369–77. 8 March, J. G. and Shapira, Z. (1987). Managerial Perspectives on Risk and Risk Taking. Management Science, 33, 1404–18; Baird, I. S. and Thomas, H. (1985). Toward a Contingency Model of Strategic Risk Taking. Academy of Management Review, 10, 230–43. 9 Christopher Drew. (28 July 2011). Improved Sales Help Boeing Beat Forecasts. The New York Times, B7; and Christopher Drew. 926 July 2012). Deliveries Up, Boeing Beats Forecasts of Analysts. The New York Times, B3. 10 Eilon. Structuring Unstructured Decisions; Roussel, P. A. (September– October 1983). Cutting Down the Guesswork in R&D. Harvard Business Review, 61, 154–60. 11 Adam Davidson. (1 July 2012). When You Wish Upon ‘Ishtar’: How Does the Film Industry Actually Make Money? The New York Times Magazine, 16–17. 12 Masuch, M. and LaPotin, P. (1989). Beyond Garbage Cans: An AI Model of Organizational Choice. Administrative Science Quarterly, 34, 38–67; Daft, R. L. and Lengel, R. H. (1986). Organizational Information Requirements, Media Richness and Structural Design. Management Science, 32, 554–71. 13 Mason, R. O. and Mitroff, I. I. (1981). Challenging Strategic Planning Assumptions (New York: Wiley Interscience). 14 Pacanowsky, M. (Winter 1995). Team Tools for Wicked Problems. Organizational Dynamics, 23:3, 36–51.

15 Blai, B. Jr (January 1986). Eight Steps to Successful Problem Solving. Supervisory Management, 7–9; Archer, E. R. (February 1980). How to Make a Business Decision: An Analysis of Theory and Practice. Management Review, 69, 54–61. 16 Davenport, T. H. and Harris, J. G. (Summer 2005). Automated Decision Making Comes of Age. MIT Sloan Management Review, 83–89; McCullough, S. (15 October 1999). On the Front Lines. CIO, 78–81. 17 Schlosser, J. (12 January 2004). Markdown Lowdown. Fortune 40; Bollapragada, S., Ganti, P., Osborn, M., Quaile, J. and Ramanathan, K. (September–October 2003). GE’s Energy Rentals Business Automates Its Credit Assessment Process. Interfaces, 33:5, 45–56. 18 Simon, H. A. (1960). The New Science of Management Decision (New York: Harper & Row), pp. 5–6; Etzioni, A. (July–August 1989). Humble Decision Making. Harvard Business Review, 122–6. 19 March, J. G. and Simon, H. A. (1958). Organisations (New York: Wiley). 20 Simon, H. A. (1957). Administrative Behavior, 2nd edn (New York: Free Press); Simon, H. A. (1957). Models of Man (New York: Wiley), pp. 196–205. 21 Simon, H. A. (1987). Making Management Decisions: The Role of Intuition and Emotion. Academy of Management Executive, 1, 57–64; Agor, W. H. (Winter 1986). The Logic of Intuition: How Top Executives Make Important Decisions. Organizational Dynamics, 14, 5–18. 22 Ray, M. L. and Myers, R. (1986). Creativity in Business (Garden City: Doubleday). 23 Isenberg, D. J. (November–December 1984). How Senior Managers Think. Harvard Business Review, 62, 80–90. 24 Miller, C. C. and Ireland, R. D. (2005). Intuition in Strategic Decision Making: Friend or Foe in the Fast-Paced 21st Century? Academy of Management Executive, 19:1, 19–30. 25 Klein, G. (2002). Intuition at Work: Why Developing Your Gut Instincts Will Make You Better at What You Do (New York: Doubleday); Matzler, K., Bailom, F. and Mooradian, T. A. (Fall 2007). Intuitive Decision Making. MIT Sloan Management Review, 49:1, 13–15; Gladwell, M. (2005). Blink: The Power of Thinking Without Thinking (New York: Little Brown); Begley, S. (30 August 2002). Follow Your Intuition: The Unconscious You May Be the Wiser Half. The Wall Street Journal, B1. 26 Miller and Ireland 2005.

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27 Herbert A. Simon. Making Management Decisions: The Role of Intuition and Emotion; Sadler-Smith, S. and Shefy, E. (2004). The Intuitive Executive: Understanding and Applying ‘Gut Feel’ in Decision Making. Academy of Management Executive, 18:4, 76–91; Langley, A. (Spring 1995). Between ‘Paralysis by Analysis’ and ‘Extinction by Instinct’. Sloan Management Review, 63–76. 28 Stevenson, W. B., Pierce, J. L. and Porter, L. W. (1985). The Concept of ‘Coalition’ in Organization Theory and Research. Academy of Management Review, 10, 256–68. 29 James W. Fredrickson. Effects of Decision Motive and Organizational Performance Level on Strategic Decision Processes. Academy of Management Journal 28 (1985): 821–843; Datta, D. K., Rajagopalan, N. and Rasheed, A. M. A. (1993). Strategic Decision Processes: Critical Review and Future Directions. Journal of Management Studies, 19:2, 349–84; Dean, J. W. Jr and Sharfman, M. P. (July 1993). Procedural Rationality in the Strategic Decision-making Process. Journal of Management Studies, 30:4, 587–610; Schoemaker, P. W. H. (January 1993). Strategic Decisions in Organizations: Rational and Behavioral Views. Journal of Management Studies, 30:1, 107–29; Fredrickson, J. W. (1984). The Comprehensiveness of Strategic Decision Processes: Extension, Observations, Future Directions. Academy of Management Journal, 27, 445–66. 30 Jackson, S. E. and Dutton, J. E. (1988). Discerning Threats and Opportunities. Administrative Science Quarterly, 33, 370–87; Lyles, M. A. and Thomas, H. (1988). Strategic Problem Formulation: Biases and Assumptions Embedded in Alternative Decision-making Models. Journal of Management Studies, 25, 131–45. 31 Daft, R. L., Sormumen, J. and Parks, D. (1988). Chief Executive Scanning, Environmental Characteristics, and Company Performance: An Empirical Study. Unpublished manuscript: Texas A&M University. 32 McGregor, Jena. (February 2005). Gospels of Failure. Fast Company, 91, 62–7. 33 Kepner, C. and Tregoe, B. (1965). The Rational Manager (New York: McGraw-Hill). 34 Michael E. Porter. (January 2008). The Five Competitive Forces That Shape Strategy. Harvard Business Review, 79–93; Michael E. Porter. (1980). Competitive Strategy (New York: Free Press), pp. 36–46; Danny Miller. (1988). Relating Porter’s Business Strategies to Environment and Structure: Analysis and Performance Implementations. Academy of Management Journal, 31, 280–308; and Michael E. Porter. (May–June 1987). From Competitive Advantage to Corporate Strategy. Harvard Business Review, 43–59. 35 Paul C. Nutt. (2004). Expanding the Search for Alternatives During Strategic Decision Making. Academy of Management Executive, 18:4, 13–28; and P. C. Nutt. (1999). Surprising But True: Half the Decisions in Organizations Fail. Academy of Management Executive, 13:4, 75–90. 36 Gogoi, P. and Arndt, M. (March 2003). Hamburger Hell. BusinessWeek, 3822, 104–8. 37 Mayer, P. (March–April 1995). A Surprisingly Simple Way to Make Better Decisions. Executive Female, 13–14.

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38 O’Reilly, B. (26 December 1994). J&J Is on a Roll. Fortune, 178–91. 39 McNeilly, M. (2002). Gathering Information for Strategic Decisions, Routinely. Strategy & Leadership, 30:5, 29–34. 40 Granitsas, A. (23 August 2001). Cathay Goes for Broke. Far Eastern Economic Review. 41 Levering, R. and Moskowitz, M. (12 January 2004). 2004 Special Report: The 100 Best Companies To Work For. Fortune, 56–78. 42 FedEx Annual Report 2013, http://about.fedex.designcdt.com/our_company/ company_information. (accessed 1 November 2013). 43 Rowe, A. J., Boulgaides, J. D. and McGrath, M. R. (1984). Managerial Decision Making (Chicago: Science Research Associates); Rowe, A. J. and Mason, R. O. (1987). Managing with Style: A Guide to Understanding, Assessing, and Improving Your Decision Making (San Francisco: Jossey-Bass). 44 Kathleen M. Eisenhardt. (Spring 1999). Strategy as Strategic Decision Making. Sloan Management Review, 65–72. 45 Daniel Kahneman, Dan Lovallo and Olivier Sibony. (June 2011). Before You Make That Big Decision. Harvard Business Review, 50–60. 46 Wellner, A. S. (October 2003). A Perfect Brainstorm. Inc., 31–5; Gallupe, R. B. and Cooper, W. H. (Fall 1993). Brainstorming Electronically. Sloan Management Review, 27–36. 47 Sydney Finkelstein. (June 2009). Think Again: Good Leaders, Bad Decisions. Leadership Excellence, 7; Flaws in Strategic Decision Making: McKinsey Global Survey Results. The McKinsey Quarterly, January 2009, http://www .mckinsey.com; Michael A. Roberto. (May–June 2003). Making Difficult Decisions in Turbulent Times. Ivey Business Journal, 1–7; Eisenhardt. Strategy As Strategic Decision Making; and David A. Garvin and Michael A. Roberto. (September 2001). What You Don’t Know About Making Decisions. Harvard Business Review,108–16. 48 Nick Wingfield and Brian Stelter. (25 October 2011). A Juggernaut Stumbles. The New York Times, B1. 49 David M. Schweiger and William R. Sandberg. (1989). The Utilization of Individual Capabilities in Group Approaches to Strategic Decision Making. Strategic Management Journal, 10, 31–43; Avoiding Disasters. Sidebar in Paul B. Carroll and Chunka Mui. (September 2008). 7 Ways to Fail Big. Harvard Business Review, 82–91; and (December 1987). The Devil’s Advocate. Small Business Report, 38–41. 50 George T. Doran and Jack Gunn. (November–December 2002). Decision Making in High-Tech Firms: Perspectives of Three Executives. Business Horizons, 7–16. 51 Eisenhardt. Strategy As Strategic Decision Making. 52 Garvin and Roberto. What You Don’t Know About Making Decisions. 53 Janis, I. J. (1982). Groupthink: Psychological Studies of Policy Decisions and Fiascoes, 2nd edn (Boston: Houghton Mifflin). 54 Wissema, H. (2002). Driving Through Red Lights; How Warning Signals Are Missed or Ignored. Long Range Planning, 35, 521–39. 55 Ibid.

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ complete the online self-test to determine your personal decision style ➜ test your understanding of managerial decision making by taking the revision quiz ➜ download the audio summary for an on-the-go review.

9: Managerial decision making

G e n e r a l M o t o r s Pa r t T h r e e : P l a n n i n g The moment o f d ecisio n : ca n m a n a g e me n t fix GM ’s fin a n ci a l cr isis? In the months leading up to 2009, news leaked that General Motors (GM) was pitching a merger to other automakers in the USA. Although they are famous cross-town rivals, GM, Ford and Chrysler were facing a brutal common enemy: the devastating global economic crisis. As these storied companies struggled to survive the worst sales slump in decades, an unexpected meltdown in the US mortgage industry became the global financial crisis, freezing cash flows worldwide and dramatically slowing new car sales. Unable to obtain money, and burning through $1 billion of its own reserves monthly, GM set out to find partners who might ‘circle the wagons’ to stave off bankruptcy. Chairman Rick Wagoner and President Frederick Henderson met with Ford executives Alan Mulally and William Ford Jr. to propose merging their companies to survive the economic downturn. After numerous meetings, Mr Mulally and Mr Ford concluded that Ford Motor Company could reorganise better on its own. Not willing to give up on the idea, Wagoner took his pitch to Chrysler. The past few years have been a moment of decision for GM. With the world’s top automaker moving close to a financial precipice, senior executives have begun making tough choices and seeking out innovative solutions to rescue the organisation. Of the many possible options for saving GM, a merger strategy is perhaps the boldest. First, a merger could solidify GM’s position as global sales leader over Japanese rival Toyota, which in recent years has challenged, and some would say overtaken, GM’s status as the world’s top automaker. Although its position as top automaker is not unimportant, the bigger problem is cash: GM didn’t have any. The company reported losses of $18.7 billion in the first half of 2008, and the ensuing plunge of shares to their lowest levels since 1950 left the company valued at just $3 billion. Toyota, which was relatively successful and was cash rich, could have easily bought the whole of GM, but chose not to. Against that backdrop of GM being in a cash squeeze, Chrysler’s $11 billion cash hoard looked especially inviting to Wagoner and his executive management teams. Not surprisingly, analysts were divided about a merger option. Van Conway, a merger and acquisitions expert and partner at Conway & MacKenzie, cheered GM’s survival instinct. ‘You want to be the last man standing here because the car market is going to come back.’ However, Erich Merkle, an analyst at the accounting firm Crowe Horwath, did not applaud the move. ‘If you put two auto companies together, both that are losing money, both that are losing market share, you’ve just got an auto company that’s losing market share faster and losing more money.’

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Part 3

Management had other options for Con tinuing performing what amounts to emergency case bypass surgery on the 100-year-old company. For example, in July 2008, Wagoner announced a plan to cut $10 billion in costs while raising $5 billion through asset sales by the end of 2009. Within months, the iconic Hummer brand was up for sale. Next followed a steady drumbeat of plant closings throughout Midwest USA – even the company’s Detroit headquarters was rumoured to be up for sale. It was also considering closing some of its operations outside the USA, such as in Australia and Europe – especially those that were losing money! Among GM’s most difficult decisions has been what to do about skyrocketing labour costs. The American United Auto Workers Union, once a symbol of workforce stability and fairness, has become a financial albatross around GM’s neck. GM spent as much as $1635 on every vehicle sold to cover benefits for active and retired US workers. In addition, with all compensation perks factored in, pay for GM workers adds up to $73 per hour. Toyota pays nothing for retirees and only $215 per vehicle to cover active-worker benefits. Management addressed the imbalance in 2006 by offering 126 000 employees as much as $140 000 to sever all ties with the company. The massive buyout was part of a four-point restructuring plan announced in 2005 to achieve $7 billion in cost reductions. Yet of all the tricks GM has up its sleeve to manage its financial crisis, one option is reportedly off the table. In a written statement to the press, management acknowledged ‘unprecedented challenges’ related to global financial markets. The statement firmly added, ‘But bankruptcy protection is not an option GM is considering. Bankruptcy would not be in the interests of our employees, stockholders, suppliers, or customers.’ Questions 1 What planning approaches and methods might GM adopt to help manage its turbulent environment and respond effectively to global economic crisis? 2 In what way does a merger solution to GM’s financial crisis represent strategic thinking and planning? 3 As GM’s managers continue making decisions that affect the company’s ultimate survival, what prevents them from making purely rational decisions, and what common decision-making errors must they guard against? 4 If nothing else worked well enough, was GM’s eventual bankruptcy inevitable?

Sources: Jeff Green. (11 October 2008). GM Is Said to Be in Preliminary Talks With Chrysler. Bloomberg, http://www.bloomberg.com (accessed 12 October 2008); Alex Taylor III. (19 June 2008). Deepening Gloom at General Motors. Fortune, http://money.cnn.com/2008/06/19/news/companies/taylor_gm.fortune/index.htm (accessed 13 October 2008); (24 April 2007). Toyota Zooms Past GM. The Street.com, http://www.thestreet.com (accessed 12 October 2008); Bill Vlasic. (11 October 2008). G.M. Said to Seek Merger with Ford Before Chrysler. The New York Times, http://www.nytimes.com/2008/10/12/business/12auto.html (accessed 15 October 2008); (7 October 2008). General Motors Could Sell Detroit

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Headquarters to Raise Cash. Boston Herald, http://www.bostonherald.com (accessed 13 October 2008); Alex Taylor III. (26 January 2007). Behind Ford’s Scary $12.7 Billion Loss – The Big Three Are Hemorrhaging Money, and Struggling to Stay Competitive with Foreign Rivals. Fortune, http://money.cnn.com/2007/01/26/news/companies/pluggedin_taylor_ford.fortune/ index.htm (accessed 10 October 2008); (10 October 2008). Ford, GM Say They Won’t File for Bankruptcy. MSNBC.com, http://www.msnbc.msn.com/id/27101859 (accessed 12 October 2008); David Kiley. (9 October 2008). Can GM Make It? BusinessWeek Online, http://www.businessweek.com/lifestyle/content/oct2008/bw2008109_718575.htm (accessed 12 October 2008); Tom Krisher. (24 September 2008). General Motors Putting Hummer Brand and French Factory Up for Sale. The Associated Press, http://www.canadaeast. com/article/article/425760 (accessed 12 October 2008); Sharon Silke Carty. 27 March 2006. GM Offers Buyouts to 126,000. USA Today, http://www.usatoday.com (accessed 10 October 2008); Tom Krisher. (11 October 2008). Analysts: GM Would Need Cash to Acquire Chrysler. ABC News, http://abcnews.go.com/Business/wireStory?id=6009470 (accessed 14 October 2008); Rick Haglund. (15 October 2008). Why GM and Chrysler? You May Not Like the Answer. Mlive.com, http://www.mlive.com (accessed 15 October 2008); Alex Taylor III. (8 January 2008). Gentlemen, Start Your Turnaround. Fortune, http://money.cnn.com/2008/01/07/news/companies/gm_turnaround.fortune/index.htm (accessed 15 October 2008); (10 October 2008). Global Auto Market May ‘Collapse’ in 2009 – J.D. Power Points to Growing Concerns Around Credit Availability. MSNBC.com, http://www.msnbc.msn.com/id/27114183 (accessed 13 October 2008).

Chapter 10

Fundamentals of organising

Chapter 11 Managing change and innovation Chapter 12 Human resource management Chapter 13 Managing diversity

Par t Four Organising Sporting teams and businesses need to be well

organised. Without good organisation of their resources, they will fail. Just as a badly organised defence in a football team will lead to lots of goals being scored and result in dissatisfied players and fans, a badly organised factory will lead to defective products requiring rework and product recalls, and dissatisfied staff and customers. Imagine if a cricket captain did not organise his or her fielders before the opening bowler started the innings, but rather let players stand anywhere at random, in a disorganised manner. The team would be ineffective and the outcome would be poor. For young children playing football, which is the more effective team: the disorganised rabble of players following the ball around in a bunch, or the team organised by the coach to play in certain positions? The rabble loses every time. Sound organisation provides for much more effective outcomes! This includes organising people and their equipment, and technology, as well. Imagine the outcome for a skydiver with disorganised parachute equipment. A skipper in the Sydney to Hobart yacht race must organise the right people for various roles, the right sails for the expected winds and the right positioning of the boat to catch those winds. In all codes of team sport, the ability of the manager of the team and the club clearly determines the competitiveness and performance of the team. It’s the same in the world of

work, where managers significantly impact on the strategies, tactics, resource organisation and motivation of the ‘players’. In any business organisation, the chief executive – in fact, any team leader or middle manager – should strive to be just like the successful yacht skipper, hockey or AFL coach and captain: marshalling staff and organising equipment to accomplish the tasks needed to be effective, and hopefully to win the competitive battle. Organising is important because it follows from strategy – the topic of Part 3. Strategy defines what to do; organising defines the way to do it. Organisation structure is a tool that managers use to harness resources for getting things done. Part 4 explains the variety of organising principles and concepts used by managers. Chapter 10 covers fundamental concepts that apply to all organisations and departments. These ideas are extended in Chapter 11, where we look at the way structural designs are tailored to the organisation’s situation. Chapter 12 discusses the way to structure organisations to facilitate innovation and change. Chapter 13 considers the best way to utilise human resources within the organisation’s structure. 387

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Discuss the fundamental characteristics of

organising, including such concepts as work specialisation, chain of command, line and staff authority and task forces.

2 Explain when specific structural characteristics such

as centralisation versus decentralisation, and span of control should be used within organisations.

3 Discuss the functional and divisional approaches to structure.

4 Explain the matrix approach to structure and its application to both domestic and international organisations.

5 Describe the contemporary team and virtual

network structures and why they are being adopted by organisations.

6 Explain why organisations need coordination across departments and hierarchical levels, and describe mechanisms for achieving coordination.

7 Describe how organisation structure can be designed to fit environmental uncertainty.

8 Define production technology and explain how it influences organisation structure.

C h a p t e r 10

Fundamentals of organising

Chapter outline ➜ Organising the vertical structure

Work specialisation Chain of command Authority, responsibility and delegation Span of management Centralisation and decentralisation Formalisation

➜ Departmentalisation

Vertical functional approach Divisional approach Matrix approach Hybrid structure Team-based approach Network approach

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➜ Organising for horizontal coordination

The need for coordination Task forces, teams and project management Relational coordination

➜ Factors shaping structure

Structure follows strategy

➜ Organising for sustainable development

New Manager Self-test W h at a r e y o u r l e a d e r s h i p b e l i e f s ? The fit between a new manager and the organisation is often based on personal beliefs about the role of leaders. Things work best when organisation design matches a new manager’s beliefs about his or her leadership role. To understand your leadership beliefs, please answer each item below as Mostly true or Mostly false for you. Think about the extent to which each statement reflects your beliefs about a leader’s role in an organisation. Mark as Mostly true the four statements that are most true for you, and mark as Mostly false the four that are least true for you. Mostly true

Mostly false

1 A leader should take charge of the group or organisation. 2 The major tasks of a leader are to make and communicate decisions. 3 Group and organisation members should be loyal to designated leaders. 4 The responsibility for taking risks lies with the leaders. 5 Leaders should foster member discussions about the future. 6 Successful leaders make everyone’s learning their highest priority. 7 An organisation needs to be always changing the way it does things to adapt to a changing world. 8 Everyone in an organisation should be responsible for accomplishing organisational goals. Scoring and interpretation: Each question pertains to one of two subscales of leadership beliefs. Questions 1–4 reflect position-based leadership beliefs. This is the belief that the most competent and loyal people are placed in positions of leadership where they assume responsibility and authority for the group or organisation. Questions 5–8 reflect non-hierarchical leadership beliefs. This belief is that the group or organisation faces a complex system of adaptive challenges, and leaders see their job as facilitating the flow of information among members and their full engagement to respond to those challenges. The subscale for which you checked more items Mostly true may reveal your personal beliefs about position-based versus non-hierarchical leadership. Position-based beliefs typically work for managers in a traditional vertical hierarchy or mechanistic organisation. Non-hierarchical beliefs typically work for managers engaged with horizontal organising or organic organisations, such as managing teams, projects and re-engineering. Source: This questionnaire is based on Richard M. Wielkiewicz. (May/June 2000). The Leadership Attitudes and Beliefs Scale: An Instrument for Evaluating College Students’ Thinking About Leadership and Organizations. Journal of College Student Development, 41, 335−46.

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Management Challenge

The call to Carlos Ghosn came on a blustery March day in 1999. Louis Schweitzer, CEO of Renault, was asking Ghosn to take on the biggest challenge of his management career – to lead a turnaround of Japan’s Nissan. Renault and Nissan had just agreed to an important strategic alliance, but its success depended on transforming Nissan into a profitable business. Ghosn had succeeded before as a turnaround artist, but Nissan was a whole different story. The once-thriving company had been struggling to turn a profit for eight years. Purchasing and manufacturing costs were high and profit margins notoriously low. The company’s debt, even after the Renault investment, amounted to a staggering US$11 billion. Product innovation was at a standstill and the company was trying to compete with ageing and outdated car models. When Ghosn got to Nissan, he found deeper problems, including a culture of blame where no one was willing to accept responsibility for mistakes. One reason, he discovered, was that most Nissan managers did not have clearly defined areas of responsibility and authority. Another impediment was the lack of trust, communication and collaboration across departments. When something went wrong, sales blamed product planning, product planning blamed engineering, engineering blamed sales, sales

blamed finance, and on and on – and nothing ever got solved. Ghosn knew he was facing a do-or-die situation: either fix these fundamental problems, or Nissan would die. Toyota was a tough competitor, gaining market share at a profit and being rightly known as the world’s best automotive company, with outstanding products and production processes, making Nissan’s job even more difficult. Further, new challenges keep mounting up, such as the meltdown in demand caused by the 2008–10 global financial crisis (when car sales plummeted worldwide), changing tastes of consumers and new technologies. To be successful, Ghosn would need to steer Renault and Nissan through these difficult challenges, and also find ways to achieve synergies between the two large organisations. Source: Ghosn, C. (January 2002). Saving the Business without Losing the Company. Harvard Business Review, 37–45.

Question What advice would you give Carlos Ghosn about using structural design to help turn Nissan around? What structural changes might solve Nissan’s problems with poor coordination, and shatter the pervasive culture of blame?

The problem confronting Carlos Ghosn at Nissan was largely one of structural design. Ghosn wanted to use elements of structure to define authority and responsibility for managers, promote accountability and improve coordination so that Nissan could bring out new products and regain a competitive edge. Structure is a powerful tool for reaching strategic goals, and a strategy’s success is often determined by its fit with organisational structure. Creating strategic synergies between Renault and Nissan required structural changes to fit such a strategy. Every firm wrestles with the problem of the best way to organise. Reorganisation is often necessary to reflect a new strategy, or cope with changing market conditions or innovative production technology. Organisations throughout the world are restructuring to become leaner, more efficient and more nimble in today’s highly competitive global environment.

Innovative Way

The ‘no structure’ structure

Valve Software Corporation, which makes some of the most popular video and digital games in the world, has more than 300 employees, provides free food and massage rooms, and offers on-site laundry service. But it is what the company doesn’t have that’s really interesting: no bosses. Valve’s unique organisation structure caused a minor media blitz after someone posted the employee handbook online in the spring of 2012, but Valve has been functioning smoothly without bosses since it was founded in 1996. Founders Gabe Newell and Mike

Harrington, former Microsoft employees, wanted to create a flat, fast organisation that allowed employees maximum flexibility to be creative. The company prizes ‘fast and flexible’ so much that desks are on wheels. Employees recruit colleagues to work on a project they think is worthwhile, and people wheel their desks around to form team work areas as they choose. It sounds like a dream for employees, but many people don’t adapt to the ‘no structure structure’ and leave for more traditional jobs.

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Could you work in a company with no bosses, no permanent offices and no clearly defined structure? Valve is unusual, but many companies are flattening their hierarchies and cutting out layers of management to improve efficiency and be more flexible. Some people thrive in less hierarchical

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organisations, whereas others have difficulty without a clearly defined vertical structure. New managers in particular are typically more comfortable and more effective working in an organisation system that is compatible with their leadership beliefs.

Source: Claire Suddath. (27 April 2012). Why There Are No Bosses at Valve. Bloomberg Businessweek, http://www.businessweek.com/articles/2012-04-27/why-thereare-nobosses-at-valve (accessed 10 August 2012); Rachel Emma Silverman. (20 June 2012). Who’s the Boss? There Isn’t One. The Wall Street Journal, B1; and Alex Hern. (3 August 2012). Valve Software: Free Marketer’s Dream, or Nightmare? New Statesman, http://www.newstatesman.com/blogs/economics/2012/08/valvesoftware-free-marketeersdream-or-nightmare (accessed 10 August 2012).

Source: Courtesy of The Fletcher Trust Archives, Fletcher Challenge

Companies are increasingly using outsourcing as a structural option, as the Internet has expanded the types of activities firms can farm out to subcontractors. WuXi PharmaTech in Shanghai, China, for example, not only manufactures drugs but does laboratory and drug development work for most of the large pharmaceutical firms in the US and Europe. Drug makers such as Roche Holding of Switzerland, GlaxoSmithKline of Britain and Eli Lilly of the US are also outsourcing clinical trial work to low-wage countries such as India, a practice that is raising both economic and ethical concerns.1 Some of today’s companies operate as virtual network organisations, limiting themselves to a few core activities and letting outside specialists handle everything else. Each of these organisations is using fundamental concepts of organising. Organising is the deployment of organisational resources to achieve strategic goals. The deployment of resources is reflected in the organisation’s division of labour into specific departments and jobs, formal lines of authority and mechanisms for coordinating diverse organisation tasks. Many companies have found a need to make structural changes that are compatible with use of the Internet for e-business, which requires stronger horizontal coordination. For example, PaperlinX, a major paper and office products merchant company in Australia and New Zealand, reorganised to increase crossfunctional collaboration in connection with the roll-out of a new system that links customers, distributors and suppliers over the Internet.

organising The deployment of organisational resources to achieve strategic goals.

Fletcher Challenge, based in New Zealand, engaged in the capital-intensive and risky business of oil exploration and drilling as well as many other businesses, such as construction and building materials manufacturing. Shell took these energy assets over in 2000.

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Fonterra’s global management structure Fonterra is New Zealand’s largest business organisation, accounting for a fifth of New Zealand’s total export earnings (it has a turnover of over US$15 billion). This makes it the world’s largest exporter of dairy products. The business involves the management of a global supply chain that starts with over 12 000 dairy farms and ends with customers and consumers in 140 countries, sharing out 22 billion litres of milk each year. Unusual among global businesses, Fonterra is a cooperative owned by its farmer suppliers rather than being an investor-owned firm. This ownership structure requires Fonterra to process and market all the milk produced by its members, but otherwise it operates much as a normal business. Fonterra is a holding company with 10 wholly owned subsidiary companies in New Zealand and 28 in other countries, excluding 13 partly owned overseas subsidiaries. It employs around 11 000 staff in New Zealand and a further 6000 around the world. These companies are organised according to product type and geographic area: ➜➜New Zealand Milk Products – runs the core activities of the group, being responsible for the cow-to-customer value chain linking New Zealand to offshore markets. It looks after milk collection, processing, logistics and the marketing of dairy ingredients to the international food industry. It operates under the NZMP brand. During

2013 NZMP faced the challenge of a product recall for potential botulism in whey products and an extreme drought which reduced milk production but the company still contributed nearly NZ$500 million to group revenue. ➜➜ANZ – Australia New Zealand concentrates on the Fast Moving Consumer Goods (FMCG) operations in New Zealand and Australia and food service sales. It owns well-known brands including Mainland and Bega cheeses and Western Star butter as well as RD1 which is a rural supplies retail business and a one-stop-shop for dairy farmers. This region has been challenged by sales volumes decreasing, heavy competition and reduced margins and in 2013 earnings declined 37 per cent to NZ$142 million. ➜➜APMEA – includes the region pertaining to the Asia Pacific (including China), Middle East and Africa. It represents FMCG operations and food service sales in this region as well as Chinese farming ventures. Well-known brands in this area include Anchor and Anlene dairy products. This region has benefited from the increasing disposable income of customers and massive sales growth and in 2013 earnings grew 15 per cent to NZ$209 million making it their largest consumer business. ➜➜LATAM Latin America – represents FMCG operations in Chile and farming

ventures in South America. It includes market leader Soprole, a 50/50 joint venture with Nestlé as well as various dairy interests throughout Brazil, the Caribbean and Jamaica. Soprole continues to enjoy a very positive brand identity in Chile where it is perceived as prestigious and was voted ‘Most Loved’ and ‘Most Remembered’ in a recent brand research study. Earnings grew 3 per cent overall to NZ$137 million in 2013 but Soprole excelled with a 31 per cent increase and overall sales were up 6 per cent. Currency movements and changes to American manufacturing costs had a heavy impact on overall earnings in this region. While Fonterra is owned by a cooperative of farmers, it has continued restructuring over the years and has now achieved a structure which provides security of ownership for farmers with the ability to safely raise capital from investment markets. Overall revenue in 2013 was over NZ$18 billion Sources: Based on work contributed by Martin Perry, Massey University, Wellington, New Zealand; http://www.fonterra.com/au/en/Financial/Key+Facts (accessed 4 November 2013); http://www. fonterra.com/wps/wcm/connect/fonterracom/ fonterra.com/our+business/fonterra+at+a+glance/ about+us/key+facts (accessed 4 November 2013); and Fonterra Co-Operative Group Limited Annual Report 2013, http://www.fonterra.com/wps/wcm/ connect/0d4cb272-51cd-4a45-94a0684eebfd7a4 /2013+Annual+Financial+Results+%28Full+Financial +Statement%29.pdf?MOD=AJPERES (accessed 4 November 2013).

Organising the vertical structure organisation structure The framework in which the organisation defines how tasks are divided, resources are deployed and departments are coordinated.

The organising process leads to the creation of organisation structure, which defines the way tasks are divided and resources deployed. Organisation structure is defined as: 1 the set of formal tasks assigned to individuals and departments 2 formal reporting relationships, including lines of authority, decision responsibility, number of

hierarchical levels and span of managers’ control 3 the design of systems to ensure effective coordination of employees across departments.2

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Ensuring coordination across departments is just as critical as defining the departments to begin with. Without effective coordination systems, no structure is complete. The set of formal tasks and formal reporting relationships provides a framework for vertical control of the organisation. The characteristics of vertical structure are portrayed in the organisation chart, which is the visual representation of an organisation’s structure. A sample organisation chart for a soft drink bottling plant is illustrated in Exhibit 10.1. The plant has four major departments – finance, human resources, production and marketing. The organisation chart delineates the chain of command, indicates departmental tasks and shows how they fit together, and provides order and logic for the organisation. Every employee has an appointed task, line of authority and decision responsibility. The following sections discuss several important features of vertical structure in more detail: work specialisation; chain of command; authority, responsibility and delegation; span of management; centralisation and decentralisation; and formalisation.

Director Human Resources

Production Manager

Director Marketing

Information Centre

Benefits Administrator

Maintenance Supervisor

Eastern Region Sales

Financial Analyst

Industrial Relations Manager

Quality Control Manager

Southern State Sales

Bottling Plant Superintendent

Western Region Sales

Chief Accountant

Accounts Payable

organisation chart The visual representation of an organisation’s structure.

Exhibit 10.1 Organisation chart for a soft drink bottling plant

Managing Director

Finance Director

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Bottling supervisors

Payroll clerk

Wo rk specialisati o n Organisations perform a wide variety of tasks. A fundamental principle is that work can be performed more efficiently if employees are allowed to specialise.3 Work specialisation, sometimes called division of labour, is the degree to which organisational tasks are subdivided into separate jobs. Work specialisation

work specialisation The degree to which organisational tasks are subdivided into individual jobs; also called division of labour.

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in Exhibit 10.1 is illustrated by the separation of production tasks into bottling, quality control and maintenance. Employees within each department perform only the tasks relevant to their specialised function. When work specialisation is extensive, employees specialise in a single task. Jobs tend to be small, but they can be performed efficiently. Work specialisation is readily visible on an automobile assembly line where each employee performs the same task over and over again. It would not be efficient to have a single employee build the entire car or even perform a large number of unrelated jobs. When organisations face new strategic issues, managers often create new positions or departments to deal with them, just as Sony created a new position of chief information security officer (CISO). Many corporations have created a new position for chief diversity officer because of the importance today of creating an environment where minorities and women can flourish. Even the position of chief information officer (CIO) was practically unheard of even a decade ago, but almost every government agency, non-profit organisation, and business firm has a CIO today. Despite the apparent advantages of specialisation, many organisations are moving away from this principle. With too much specialisation, employees are isolated and do only a single, boring job. In addition, too much specialisation creates separation and hinders the coordination that is essential for organisations to be effective. Many companies are implementing teams and other mechanisms that enhance coordination and provide greater challenge for employees.The team approach to organisation design will be discussed later in this chapter, and approaches to designing jobs to fit employee needs are described in Chapters 17 and 18.

➜➜ Managers in every organisation face the question about how to organise for maximum efficiency and effectiveness. ➜➜ Organising refers to the deployment of organisational resources to achieve strategic goals.

➜➜ Organisation structure is defined as the framework in which the organisation defines how tasks are divided, resources are deployed and departments are coordinated. ➜➜ An organisation chart is the visual representation of an organisation’s structure.

Remember This

➜➜ Fundamental characteristics of vertical organisation structure include work specialisation, chain of command, span of management, and centralisation and decentralisation.

➜➜ Work specialisation, sometimes called division of labour, is the degree to which organisational tasks are subdivided into individual jobs.

Chain o f com m an d chain of command An unbroken line of authority that links all individuals in the organisation and specifies who reports to whom.

The chain of command is an unbroken line of authority that links all persons in an organisation and shows who reports to whom. It is associated with two underlying principles. Unity of command means that each employee is held accountable to only one supervisor. The scalar principle refers to a clearly defined line of authority in the organisation that includes all employees. Authority and responsibility for different tasks should be distinct. All persons in the organisation should know to whom they report, as well as the successive management levels all the way to the top. In Exhibit 10.1, the payroll clerk reports to the chief accountant, who in turn reports to the head of finance, who in turn reports to the managing director.

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Autho rit y, respo nsi bi lit y an d d elegation The chain of command illustrates the authority structure of the organisation. Authority is the formal and legitimate right of a manager to make decisions, issue orders and allocate resources to achieve organisationally desired outcomes. Authority is distinguished by three characteristics:4 1 Authority is vested in organisational positions, not people. Managers have authority because of the

positions they hold, and other people in the same positions would have the same authority.

authority The formal and legitimate right of a manager to make decisions, issue orders and allocate resources to achieve organisationally desired outcomes.

2 Authority flows down the vertical hierarchy. Positions at the top of the hierarchy are vested with more

formal authority than are positions at the bottom. 3 Authority is accepted by subordinates. Although authority flows from the top down, subordinates

comply because they believe that managers have a legitimate right to issue orders. The acceptance theory of authority argues that a manager has authority only if subordinates choose to accept his or her commands. If subordinates refuse to obey because the order is outside their zone of acceptance, a manager’s authority disappears.5 Responsibility is the flip side of the authority coin. Responsibility is the duty to perform the task or activity an employee or other stakeholder has been assigned. Typically, managers are assigned authority commensurate with responsibility. When managers have responsibility for task outcomes but little authority, the job is possible but difficult. They rely on persuasion and luck. When managers have authority exceeding responsibility, they may become tyrants, using authority towards frivolous outcomes.6 Accountability is the mechanism through which authority and responsibility are brought into alignment. Accountability means that the people with authority and responsibility are subject to reporting and justifying task outcomes to those above them in the chain of command.7 Employees must be aware that they are accountable for a task and accept the responsibility and authority for performing it. Accountability can be built into the organisation structure. At Apple, the late Steve Jobs instituted an accountability mindset throughout the organisation. The term DRI, meaning ‘directly responsible individual’, typically appears on meeting agendas and so forth, so that everyone knows who is responsible for what.8 Performance of all managers is monitored, and bonus payments are tied to successful outcomes. Some top managers at Caterpillar had trouble letting go of authority in the new structure because they were used to calling all the shots, but the new structure was an important part of returning the company to profitability.

Caterpillar Caterpillar, which makes large construction equipment, engines and power systems, had almost total control of its markets until the mid 1980s, when a combination of global recession and runaway inflation opened the door to a host of new competitors, including Japan’s Komatsu. Suddenly, the company was losing $1 million a day seven days a week. When George Schaefer took over as CEO, he and other top managers decided to undertake a major transformation to make sure Caterpillar wasn’t caught flat-footed again. They started with structure. One major problem Schaefer saw was that the organisation didn’t have clear accountability.

responsibility The duty to perform the task or activity an employee or other stakeholder has been assigned.

accountability The fact that the people with authority and responsibility are subject to reporting and justifying task outcomes to those above them in the chain of command.

Innovative Way Schaefer pushed authority, responsibility and accountability dramatically downward by reorganising Caterpillar into several new business divisions that would be judged on divisional profitability. Business units could now design their own products, develop their own manufacturing processes and set their own prices rather than getting permission or directives from headquarters. The division managers were strictly accountable for how they used their new decision-making authority. Each division was judged on profitability and return on assets (ROA), and any division that couldn’t demonstrate 15 per cent ROA was subject to elimination. The CEO held

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regular meetings with each division president and kept notes of what they said they would achieve. Then, at the next meeting, he would review each manager’s performance compared to his or her commitments. The compensation plan was also overhauled to base managers’ bonuses on meeting divisional plan targets. Previously, if things went wrong, division managers would blame headquarters. The clear accountability of the new structure forced people to find solutions to their problems rather than assigning

blame. 2012 saw record sales, revenues (US$65 875 million) and profits (US$8573 million) for Caterpillar in a globally challenging environment. The company has more than 125 341 employees worldwide including 10 000 engineers who help the company focus on innovation. Caterpillar has had over 7000 patents granted and continues to prioritise spending on research and development. Caterpillar employees earned a remarkable US$516 000 each in sales and revenue for the company in 2012.

Sources: Neilson, G. L. & Pasternack, B. A. (17 August 2005). The Cat That Came Back. Strategy + Business, 40, 32–45; Caterpillar 2012 Annual Report, p. 5, http://www .caterpillar.com/cda/files/2674611/7/2012_Year_in_Review_updated%20maps_9.11.13_ENGLISH.pdf (accessed 21 December 2013).

delegation The process managers use to transfer authority and responsibility to positions below them in the hierarchy.

Another important concept related to authority is delegation.9 Delegation is the process managers use to transfer authority and responsibility to positions below them in the hierarchy. Most organisations today encourage managers to delegate authority to the lowest possible level to provide maximum flexibility to meet customer needs and adapt to the environment. However, as at Caterpillar, many managers find delegation difficult. When managers can’t delegate, they undermine the role of their subordinates and prevent people from doing their jobs effectively. Techniques for effective delegation are discussed in the Management in Practice box on page 398.

New Manager Self-test D e l e g at i o n Instructions: How do you share tasks with others at school or work, such as when performing group assignments or club activities? Answer whether each of the following statements is Mostly true or Mostly false for you. Mostly true

 1 I completely trust other people to do good work.  2 I give assignments by patiently explaining the rationale and desired outcomes.  3 I genuinely believe that others can do a job as well as I can  4 I leave people alone after I delegate a task to them.  5 I am better at managing the work of others than actually doing it.  6 I often end up doing tasks myself.  7 I get upset when someone doesn’t do the task correctly.  8 I really enjoy doing task details to get them just right.  9 I try to do the work better than anyone else. 10 I set very high standards for myself.

Mostly false

Scoring and interpretation: The questions above represent two related aspects of delegating work – delegation and perfectionism. Give yourself one point for each Mostly true answer: Delegation, sum questions 1–5: _____________________ Perfectionism, sum questions 6–10: _________________________ Delegation and perfectionism are opposite sides of the same coin. Your score for delegation reflects your attitude towards entrusting others with work for which you are responsible. Your score for perfectionism indicates your desire to be in personal control, which prevents delegation. Perfectionists want to do everything themselves so it is just exactly the way they want it. A lower score for delegation (0–2) and a higher score for perfectionism (4–5) probably means that delegation of authority will not come easily for you. When managers cannot delegate tasks to individuals and teams, an organisation will struggle to decentralise authority and engage people in coordination. How does your delegation score compare to your perfectionism score? What would you need to change about yourself to be a better delegator?

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Lin e a nd staff aut hor i t y An important distinction in many organisations is between line authority and staff authority, terms that reflect whether managers work in line or staff departments in the organisation’s structure. Line departments perform tasks that reflect the organisation’s primary goal and mission. In a software company, line departments make and sell the product. In an Internet-based company, line departments would be those that develop and manage online offerings and sales. Staff departments include all those that provide specialised skills in support of line departments. Staff departments have an advisory relationship with line departments and typically include marketing, labour relations, research, accounting and human resources. Line authority means that people in management positions have formal authority to direct and control line authority A form of authority in which immediate subordinates. Staff authority is narrower and includes the right to advise, recommend and individuals in management counsel in the staff specialists’ area of expertise. Staff authority is a communication relationship; staff positions have the formal power to direct and control specialists advise managers in technical areas. immediate employees. For example, the finance department of a manufacturing firm would have staff authority to coordinate with line departments about which accounting forms to use to facilitate equipment purchases and staff authority The number of employees standardise payroll services. BP’s safety department, created in the wake of the 2010 BP-Deepwater who report to a supervisor, Horizon (an event referred to at various points of this textbook), advises managers in line departments also called span of control. regarding risk management, agreements with contractors and other safety-related issues. Safety staff specialists are embedded throughout the company, including on exploration projects and in refineries. Unlike many staff specialists, BP’s safety unit has broad power to challenge line managers’ decisions if it considers them too risky.10 To understand the importance of the chain of command and clear lines of authority, responsibility and delegation, consider the Deepwater Horizon oil rig explosion. Activities were so loosely organised that no one seemed to know who was in charge or what their level of authority and responsibility was. When the explosion occurred, confusion reigned. Twenty-three-year-old Andrea Fleytas issued a mayday (distress signal) over the radio when she realised no one else had done so, but she was chastised for overstepping her authority. One manager says he didn’t call for help because he wasn’t sure he had authorisation to do so. Still another said he tried to call to shore but was told that the order Take a needed to come from someone else. Crew members knew the emergency shutdown needed Moment to be triggered, but there was confusion over who had the authority to give the okay. As As a new manager, delegate authority and responsibility to fire spread, several minutes passed before people got directions to evacuate. Again, an employees so they can quickly alarmed Fleytas turned on the public address system and announced that the crew was respond to customer needs and abandoning the rig. ‘The scene was very chaotic,’ said worker Carlos Ramos. ‘There was other shifts in the environment. no chain of command. Nobody in charge.’ In the aftermath of the explosion and oil spill, Don’t hoard control and limit the effectiveness and several American federal agencies were also in the hot seat because of loose oversight and creativity of others. confusion over responsibility that led to delays and disagreements that prolonged the suffering 11 of local communities.

Span o f m anagem ent The span of management is the number of employees reporting to a supervisor. Sometimes called the span of control, this characteristic of structure determines how closely a supervisor can monitor subordinates. Traditional views of organisation design recommended a span of management of about seven to 10 subordinates per manager. However, many lean organisations today have spans of management as

span of management The number of employees who report to a supervisor; also called span of control.

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high as 30 or 40, or even higher. At PepsiCo, Inc.’s Gamesa cookie operation in Mexico, for instance, employees are trained to keep production running smoothly and are rewarded for quality, teamwork and productivity. Teams are so productive and efficient that Gamesa factories operate with around 56 subordinates per manager.12 Research over the past 40 or so years shows that span of management varies widely and that several factors influence the span.13 Generally, when supervisors must be closely involved with subordinates, the span should be small, and when supervisors need little involvement with subordinates, it can be large. The following list describes the factors that are associated with less supervisor involvement and thus larger spans of control: 1 Work performed by employees is stable and routine. 2 Employees perform similar work tasks. 3 Employees are concentrated in a single location. 4 Employees are highly trained and need little direction in performing tasks. 5 Rules and procedures defining task activities are available. 6 Support systems and personnel are available for the manager. 7 Little time is required in non-supervisory activities such as coordination with other departments or

planning. 8 Managers’ personal preferences and styles favour a large span.

management in pr actice

How to delegate

The attempt by top management to decentralise decision making often gets bogged down because middle managers are unable to delegate. Managers may cling tightly to their decision-making and task responsibilities. Failure to delegate occurs for a number of reasons: managers are most comfortable making familiar decisions; they feel they will lose personal status by delegating tasks; they believe they can do a better job themselves; or they have an aversion to risk – they will not take a chance on delegating because performance responsibility ultimately rests with them. Yet decentralisation offers an organisation many advantages. Decisions are made at the right level, lower-level employees are motivated and employees have the opportunity to develop decision-making skills. Overcoming barriers to delegation in order to gain these advantages is a major challenge. The following approach can help each manager delegate more effectively:

➜➜ Delegate the whole task. A manager should delegate an entire task to one person rather than dividing it among several people. This gives the individual complete responsibility and increases his or her initiative while giving the manager some control over the results.

➜➜ Select the right person. Not all employees have the same capabilities and degree of motivation. Managers must

match talent to task if delegation is to be effective. They should identify employees who have made independent decisions in the past and have shown a desire for more responsibility.

➜➜ Ensure that authority equals responsibility. Merely assigning a task is not effective delegation. Managers often load employees with increased responsibility but do not extend their decision-making range. In addition to having responsibility for completing a task, the worker must be given the authority to make decisions about how best to do the job.

➜➜ Give thorough instruction. Successful delegation includes information on what, when, why, where, who and how. The employee must clearly understand the task and the expected results. It is a good idea to write down all provisions discussed, including required resources, and when and how the results will be reported.

➜➜ Maintain feedback. Feedback means keeping open lines of communication with the employee to answer questions and provide advice, but without exerting too much control. Open lines of communication make it easier to trust employees. Feedback keeps the employee on the right track.

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➜➜ Evaluate and reward performance. Once the task is

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meet expectations, the manager should reward employees for a job well done with praise, financial rewards when appropriate and delegation of future assignments.

completed, the manager should evaluate results, not methods. When results do not meet expectations, the manager must assess the consequences. When they do

Sources: Horton, T. R. (September 1992). Delegation and Team Building: No Solo Acts Please. Management Review, 58–61; Schwartz, A. E. (June 1987). The Why, What, and to Whom of Delegation. Management Solutions, 31–8; Delegation (June 1986), Small Business Report, 38–43; Douglas, M. E. (February 1987). How to Delegate Safely. Training and Development Journal, 8.

Tall ver sus flat st r uct ur e The average span of control used in an organisation determines whether the structure is tall or flat. A tall structure has an overall narrow span and more hierarchical levels. A flat structure has a wide span, is

horizontally dispersed and has fewer hierarchical levels. Having too many hierarchical levels and narrow spans of control is a common structural problem for organisations. In a survey conducted for The Conference Board, 72 per cent of managers surveyed said they believed their organisations had too many levels of management.14 The result may be that routine decisions are made too high in the organisation, which pulls higher-level executives away from important, long-range strategic issues and limits the creativity, innovativeness and accountability of lower-level managers.15 The trend in recent years has been towards wider spans of control as a way to facilitate delegation.16 One recent study found that the span of management for CEOs has doubled over the past two decades, rising from about five to around 10 managers reporting directly to the top executive, with the span of management for those managers also increasing. At the same time, the types of positions in the top team are shifting, with the position of chief operating officer (COO) declining and positions such as CIO or chief marketing officer being added to the top team.17 Exhibit 10.2 illustrates how an international metals company was reorganised. The multilevel set of managers shown in panel a was replaced with 10 operating managers and nine staff specialists reporting directly to the CEO, as shown in panel b. The CEO welcomed this wide span of 19 management subordinates because it fitted his style, his management team was top quality and needed little supervision, and they were all located on the same floor of an office building. a. Old, tall structure

Executive

Staff specialists (6)

tall structure A management structure characterised by an overall narrow span of management and a relatively large number of hierarchical levels. flat structure A management structure characterised by an overall broad span of control and relatively few hierarchical levels.

Exhibit 10.2 Reorganisation to increase span of management for managing director of an international metals company

Managing Director

Executive

Executive

General Manager

Operating managers (5)

Operating managers (4)

Operating managers (10)

Staff specialists (3)

Staff specialists (5)

Staff specialists (5)

b. New, flat structure

Operating managers (10)

Managing Director

Staff specialists (9)

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Centr alisati o n an d d ecentr alisation centralisation The location of decision authority at a single point, usually near top organisational levels. decentralisation The dispersed location of decision authority, usually near lower organisational levels.

Centralisation and decentralisation pertain to the hierarchical level at which decisions are made. Centralisation means that decision authority is located at a single point, usually near the top of the organisation. With decentralisation, decision authority is pushed out and downward to lower organisation levels. Organisations may have to experiment to find the correct hierarchical level at which to make decisions. Organisations may have to experiment to find the correct hierarchical level at which to make decisions. For example, most large school systems in America are highly centralised. However, a study by William Ouchi found that three large urban school systems that shifted to a decentralised structure, giving school principals and teachers more control over staffing, scheduling and teaching methods and materials, performed better and more efficiently than centralised systems of similar size.18 Government leaders in Great Britain hope the same thing will happen when they decentralise the country’s National Health Service (NHS). The system is undergoing the most radical restructuring since it was founded in 1948, with a key part of the plan to shift control of the multibillion annual health care budget to doctors at the local level. Leaders believe decentralisation will cut costs, simplify and streamline procedures, and reduce inefficiency by ‘putting power in the hands of patients and clinicians’.19 In Australia and other Western countries, the trend over the past 30 years has been towards greater decentralisation of organisations. Decentralisation is believed to relieve the burden on top managers, make greater use of workers’ skills and abilities, ensure that decisions are made close to the action by well-informed people and permit more rapid response to external changes. However, this trend does not mean that every organisation should decentralise all decisions. Managers should diagnose their own organisational situation and select the decision-making level that will best meet the organisation’s needs. Factors that typically influence centralisation versus decentralisation are as follows: 1 Greater change and uncertainty in the environment are usually associated with decentralisation.

Today, most organisations feel greater uncertainty because of intense global competition; hence, many have decentralised. 2 The amount of centralisation or decentralisation should fit the firm’s strategy. For example, Johnson &

Johnson gives almost complete authority to its 250 operating companies to develop and market their own products. Decentralisation fits the corporate strategy of empowerment that enables each division to get closer to its customers so it can speedily adapt to their needs.20 3 In times of crisis or risk of organisation failure, authority may be centralised at the top. When Honda

could not get agreement among divisions about new car models, President Nobuhiko Kawamoto made the decision himself.21 formalisation The written documentation used to direct and control employees.

Fo r m alisati o n Formalisation is the process of creating written documentation to direct and control employees. Written documentation includes rule books, policies, procedures, job descriptions and regulations. These documents complement the organisation chart by providing descriptions of tasks, responsibilities and decision authority. The use of rules, regulations and written records of decisions is part of the bureaucratic model of organisations described in Chapter 2. As proposed by Max Weber, the bureaucratic model defines the basic organisational characteristics that enable the organisation to operate in a logical and rational manner.

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Although written documentation is intended to be rational and helpful to the organisation, it often creates ‘red tape’ that causes more problems than it solves. Some government departments are notorious for bureaucratic inefficiency. As a practical matter, many organisations today are becoming less formal in order to be flexible and responsive to a changing global environment. ➜➜ The chain of command is an unbroken line of authority that links all individuals in the organisation and specifies who reports to whom. ➜➜ Authority is the formal and legitimate right of a manager to make decisions, issue orders and allocate resources to achieve outcomes desired by the organisation. ➜➜ Responsibility is the flip side of the authority coin; it refers to the duty to perform the task or activity that one has been assigned. ➜➜ Accountability means that people with authority and responsibility are subject to reporting and justifying task outcomes to those above them in the chain of command.

➜➜ When managers transfer authority and responsibility to positions below them in the hierarchy, it is called delegation. ➜➜ Managers may have line authority, which refers to the formal power to direct and control immediate subordinates, or staff authority, which refers to the right to advise, counsel and recommend in the manager’s area of expertise. ➜➜ Span of management, sometimes called span of control, refers to the number of employees reporting to a supervisor. ➜➜ A tall structure is characterised by an overall narrow span of management and a relatively large number of hierarchical levels.

➜➜ A flat structure is characterised by an overall broad span of management and relatively few hierarchical levels.

Remember This

➜➜ The trend is towards broader spans of management and greater decentralisation. ➜➜ Decentralisation means that decision authority is pushed down to lower organisation levels. ➜➜ Centralisation means that decision authority is located near top organisation levels. ➜➜ Formalisation is the process of creating written documentation to direct and control employees.

Departmentalisation Another fundamental characteristic of organisation structure is departmentalisation, which is the basis for grouping positions into departments, and departments into the total organisation. Managers make choices about how to use the chain of command to group people together to perform their work. There are five approaches to structural design that reflect different uses of the chain of command in departmentalisation. The functional, divisional and matrix are traditional approaches that rely on the chain of command to define departmental groupings and reporting relationships along the hierarchy. Two contemporary approaches are the use of teams and networks. These newer approaches have emerged to meet organisational needs in a highly competitive global environment. A brief illustration of the five structural alternatives is presented in Exhibit 10.3. 1 Vertical functional approach. People are grouped together in departments by common skills and

work activities, such as in an engineering department and an accounting department. 2 Divisional approach. Departments are grouped together into separate, self-contained divisions based

on a common product, program or geographical region. Diverse skills rather than similar skills are the basis of departmentalisation. 3 Horizontal matrix approach. Functional and divisional chains of command are implemented

simultaneously and overlay one another in the same departments. Two chains of command exist, and some employees report to two bosses.

departmentalisation The basis on which individuals are grouped into departments and departments into total organisations.

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1 Vertical functional

Exhibit 10.3 Five approaches to structural design

Human Resources

Manufacturing

Accounting

2 Divisional

Product Division 1

Human Resources

Manufacturing

Product Division 2

Accounting

Human Resources

Manufacturing

Accounting

4 Team-based approach. The organisation creates a series of teams to accomplish specific tasks and

to coordinate major departments. Teams can exist from the CEO all the way down to the shop floor. 5 Network approach. The organisation becomes a small, central hub electronically connected to other

organisations that perform vital functions. Departments are independent, contracting services to the central hub for a profit. Departments can be located anywhere in the world.22 Each approach to structure serves a distinct purpose for the organisation, and each has advantages and disadvantages. The basic difference among structures is the way employees are departmentalised and to whom they report. The differences in structure illustrated in Exhibit 10.3 have major consequences for employee goals and motivation. Let us now turn to each of the five structural designs and examine their implications for managers.23

Verti cal fu n cti o nal approach functional structure An organisation structure in which positions are grouped into departments based on similar skills, expertise and resource use.

Functional structure is the grouping of positions into departments based on similar skills, expertise and

resource use. A functional structure can be thought of as departmentalisation by organisational resources, because each type of functional activity – human resources, engineering, manufacturing – represents specific resources for performing the organisation’s task. People and facilities representing a common organisational resource are grouped into a single department.

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3 Horizontal matrix

Exhibit 10.3 (continued)

Human Resources

Manufacturing

Accounting

Product Division 1

Product Division 2

5 Network 4 Team-based Manufacturer

Designer

Central hub

Human Resources Agency

An example of a functional structure for a large company is presented in Exhibit 10.4. The major departments under the chairman are groupings of similar expertise and resources, such as employee relations, government affairs, operations, information systems and marketing. Each of the functional departments is concerned with the company as a whole. The general manager for employee relations is concerned with human resources issues for the entire company, and the marketing department is responsible for all sales and marketing.

Ad va ntages and di sadva n tag es Grouping employees in departments based on similar skills has many advantages for an organisation. Employees who perform a common task are grouped to permit economies of scale and efficient resource use. At the company illustrated in Exhibit 10.4, all information systems people work in the same department. They have the expertise to handle almost any problem within a single, large department. The large functional departments enhance the development of in-depth skills because people work on a variety of problems and are associated with other experts. Career progress is based on functional expertise; thus, employees are motivated to develop their skills. Managers and employees are compatible because of similar training and expertise.

Marketer

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Exhibit 10.4 Functional structure for a large company

Chairman and CEO

Administration Manager & General Counsel

Government Affairs

Employee Relations

Executive General

Executive General

General Manager

Corporate Communications General Manager

International

Operations

Executive General

Executive General

Manager

Manager

Manager

Finance & Planning

Information Systems

Executive General

Executive General

Manager

Manager

Marketing Executive General Manager

The functional structure also offers a way to centralise decision making and provide unified direction from the top, because the chain of command converges at the top of the organisation. Sometimes the functional structure is also associated with wider spans of control because of large departments and common expertise. Communication and coordination among employees within each department are excellent. Finally, functional structure promotes high-quality technical problem solving. Having a pool of well-trained experts, especially those who work with sophisticated technology and are motivated towards functional expertise, gives the organisation an important resource. The disadvantages of functional structure are seen in the barriers that exist across departments and a slow response to environmental changes. Because people are separated into distinct departments, communication and coordination across functions are often poor. Poor coordination means a slow response to environmental changes, because innovation and change require involvement of several departments. Because the chains of command are separate beneath the top of the organisation, decisions involving more than one department may pile up at the top of the organisation and be delayed. The functional structure also stresses work specialisation and division of labour, which may produce routine, demotivating employee tasks. The functional structure also creates management problems, such as difficulty in pinpointing problems within departments. In the case of an insurance company, for example, each function works on all products and performs only a part of the task for any product line. Hence, if one life insurance product is not performing well, there is no specific department or group that bears responsibility. In addition, employees tend to focus on the attainment of departmental goals, often to the exclusion of organisational goals. They see only their respective tasks, not the big picture. Because of this narrow task specialisation, employees are trained to become experts in their fields, not to manage and coordinate diverse departments. Thus, they fail to become groomed for top management and general management positions. The advantages and disadvantages of a functional structure are summarised in Exhibit 10.5.

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Source: Courtesy Rachel Robertson

Rachael Robertson: leadership lessons from the world’s toughest workplace The Antarctic winter is harsh – temperatures hover around minus 35 degrees Celsius; there are constant blizzards; months of darkness; and you can’t get in or out of the place. Work becomes tedious and you know that nothing will change until the resupply ship arrives, a distant nine months away. It sounds extreme. But the reality is every workplace has an Antarctic winter. Every business has a period of time where the work slows down and work is just work. Three tools kept my team inspired, motivated and resilient through the long Antarctic winter.

1 No triangles. The practise of only having direct conversations built respect within my team and resulted in very high performance. We had a simple rule that went ‘I don’t speak to you about him, or you don’t speak to me about her’. No triangles; go direct to the source. It’s a powerful tool that reduces conflict and clarifies accountability. It ensures you deal with the important issues and avoid wasted time handling personal disputes that simply burn energy.

Austr alian manager pr ofile

2 Manage your bacon wars. A major dispute once threatened to shut down the station: Should the bacon be soft or crispy? Your workplace will have Bacon Wars. They are seemingly small, irrelevant issues that grate on people but build up until they become distractions and affect productivity. It may be dirty coffee cups; people who are consistently late for meetings; people playing on phones while someone is talking…they are offences that appear to be small but are often a symptom of a deeper issue. We must identify and probe our Bacon Wars, find out what’s underneath and resolve it quickly. If left and ignored, small problems will fester and undermine all the good things you are doing.

3 Respect trumps harmony. My expedition team was the most diverse team I had ever worked with. I didn’t recruit them, I was handed them. We were from vastly different backgrounds and a mix of professions including scientists, engineers, IT, trades, pilots and weather specialists. The interpersonal pressure was intense and privacy was scarce. It was impractical to think we’d all get along with each other all the time. Instead of ‘happy families’, we aimed for respect. Simple, professional courtesy and respect. Striving for a harmonious workplace is dangerous for two reasons. First, dysfunctional behaviour doesn’t disappear, it just goes underground, so the illusion of harmony remains. Second, it stifles innovation. People are often too afraid to put up their hand and offer a different view because they don’t want to rock the harmony boat. So, in your team, aim for respect, because ‘respect trumps harmony’, every time. Source: Rachael Robertson (MBA, Melbourne), author, professional speaker and mentor.

D ivisional approach By contrast to the functional approach, in which people are grouped by common skills and resources, the divisional structure groups departments together based on organisational outputs. Functional and divisional structures are illustrated in Exhibit 10.6. In the divisional structure, divisions are created as self-contained units for producing a single product. Each functional department resource needed to produce the product is assigned to one division. For example, in a functional structure, all engineers are grouped together and work on all products. In a divisional structure, separate engineering departments are established within each division. Each department is smaller and focuses on a single product line. Departments are duplicated across product lines. The divisional structure is sometimes called a product structure, program structure or self-contained unit structure. Each of these terms means essentially the same thing: diverse departments are brought together to produce a single organisational output, whether it be a product, a program or a service to a single customer.

divisional structure An organisation structure in which departments are grouped based on similar organisational outputs.

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In very large organisations, a divisional structure is essential. Most large organisations have separate business divisions that perform different tasks, serve different clients or use different technologies. When a huge organisation produces products for different markets, the divisional structure works because each division is an autonomous business. Exhibit 10.5 Advantages and disadvantages of functional structure Advantages

Disadvantages

● 

Efficient use of resources, economies of scale

● 

Poor communication across functional departments

● 

In-depth skill specialisation and development

● 

Slow response to external changes, lagging innovation

● 

Career progress within functional departments

● 

Decisions concentrated at top of hierarchy, creating delay

● 

Top manager direction and control

● 

Responsibility for problems is difficult to pinpoint

● 

Excellent coordination within functions

● 

Limited view of organisational goals by employees

● 

High-quality technical problem solving

● 

Limited general management training for employees

Exhibit 10.6 Functional versus divisional structures

Managing Director

a Functional structure

R&D

Finance

Manufacturing

Managing Director

b Divisional structure

Division 1

R&D

Division 2

Manufacturing

Finance

Marketing

Marketing

R&D

Division 3

Manufacturing

Finance

Marketing

R&D

Manufacturing

Finance

Marketing

A major difference between divisional and functional structures is that the chain of command from each function converges lower in the hierarchy. In an organisation with a divisional structure, such as the one in Exhibit 10.6, differences of opinion among research and development, marketing, manufacturing and finance would be resolved at the divisional level rather than by the CEO. Thus, the divisional structure encourages decentralisation. Decision making is pushed down at least one level in the hierarchy, freeing the CEO and other top managers for strategic planning.

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An alternative for assigning divisional responsibility is to group organisation activities by geographic region, as illustrated in Exhibit 10.7. In this structure, all functions in a specific country or region report to the same division manager. This structure focuses organisation activities on local market conditions. Competitive advantage may come from the production or sale of a product adapted to a given country. For example, many large globally operating companies divide the world into three geographic markets: Asia–Pacific/Japan, US/Americas and Europe. Each division of such companies has all the resources to focus on the fierce competition in its part of the world. McDonald’s has divided its operations into five geographic divisions – the United States, Europe, Asia/Pacific/Middle East/Africa, Latin America and Canada – each with its own staff functions, such as human resources and legal, and its own president. McDonald’s CEO believed this geographic structure would help speed up decision making, improve communication with franchisees and enhance innovation.24 Colgate-Palmolive Company is organised into regional divisions: North America, Latin America, Europe/South Pacific and Greater Asia/Africa.25 The structure works for Colgate because personal care products often need to be tailored to cultural values and local customs.

Source: McDonald’s

Geographic or customer-based divisions

McDonald’s has reinvented its product range in recent years to respond to consumers’ changing requirements, principally for more healthy products.

Exhibit 10.7 Geographic-based global organisation structure

Chief Executive Officer

Corporate Staff

Australia and New Zealand Division

Americas Division

European Division

Asian Division

Ad va ntages and di sadva n tag es For medium-sized organisations, the choice between functional and divisional structure is difficult because each represents different strengths and weaknesses. The advantages and disadvantages of the divisional structure are listed in Exhibit 10.8. Grouping employees and resources by division allows the organisation to be flexible and responsive to change, because each unit is small and tuned into its environment. When employees work on a single product line, their concern for customers’ needs is high. Coordination across functional departments is better because employees are grouped together in a single location and committed to one product line. Great coordination exists within divisions. The divisional structure also enables top management to pinpoint responsibility for performance problems in product

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lines. Because each division is a self-contained unit, poor performance can be assigned directly to the manager of that unit. Finally, employees’ goals typically are directed towards product success rather than towards their own functional departments. Employees develop a broader goal orientation that can help them develop into general managers. The divisional structure also has well-defined disadvantages. The main disadvantage is duplication of resources and the high cost of running separate divisions. Instead of a single research department in which all research people use a single facility, there may be several. The organisation loses efficiency and economies of scale. Because departments within each division are small, there is a lack of technical specialisation, expertise and training. The divisional structure fosters excellent coordination within divisions, but coordination across divisions is often poor.

Exhibit 10.8 Advantages and disadvantages of divisional structure Advantages

Disadvantages

● 

Fast response, flexibility in an unstable environment

● 

● 

Fosters concern for customers’ needs

● 

Duplication of resources across divisions Less technical depth and specialisation in divisions

● 

Excellent coordination across functional departments

● 

Poor coordination across divisions

● 

Easy pinpointing of responsibility for product problems

● 

Less top management control

● 

Emphasis on overall product and division goals

● 

Competition for corporate resources

● 

Development of general management skills

M atrix approach matrix approach An organisation structure that utilises functional and divisional chains of command simultaneously in the same part of the organisation.

matrix approach

The matrix approach combines aspects of both functional and divisional structures simultaneously in the same part of the organisation.26 The matrix structure evolved as a way to improve horizontal coordination and information sharing. One unique feature of the matrix is that it has dual lines of authority. In Exhibit 10.9, the functional hierarchy of authority runs vertically, and the divisional hierarchy of authority runs horizontally. While the vertical structure provides traditional control within functional departments, the horizontal structure provides coordination across departments. The matrix structure therefore provides a formal chain of command for both functional (vertical) and divisional (horizontal) relationships. As a result of this dual structure, some employees actually report to two supervisors simultaneously. The matrix structure is often used by global organisations, such as Dow Corning and Asea Brown Boveri (ABB). The problem for global organisations is to achieve simultaneous coordination of various products within each country or region and for each product line. An example of a global matrix structure is illustrated in Exhibit 10.10. The two lines of authority are geographic and product. To see how the matrix works, consider that the geographic boss in Germany coordinates all affiliates in Germany, and the plastics products boss coordinates the manufacturing and sale of plastics products around the world. Managers of local affiliate companies in Germany would report to two superiors: the country boss and the product boss. The dual authority structure violates the unity-of-command concept described earlier in this chapter, but is necessary to give equal emphasis to both functional and divisional lines of authority. Dual lines of authority can be confusing, but after managers learn to use this structure, the matrix provides excellent coordination simultaneously for each geographic region and each product line.

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In Australia the building and construction industry is served by professional engineering and architecture organisations who design and project-manage everything from roads and bridges to city buildings. Most of these firms, such as GHD, Aurecon, Arup and a host of others, are organised as matrix organisations, and are sometimes combined with an overarching divisional structure. A typical matrix for these professional service firms would include the disciplines of engineering, building and architecture as the matrix columns and the major projects as the matrix rows.

Exhibit 10.9 Dualauthority structure in a matrix organisation

Managing Director

General Manager Finance

General Manager Engineering Applications

General Manager Manufacturing

General Manager Marketing

Product Manager A Two-boss employees Product Manager B

Horizontal chain of command for product divisions

Product Manager C Vertical chain of command for functions Exhibit 10.10 Global matrix structure

Chief Executive Officer

Germany

Latin America

Worldwide plastic products Worldwide glass fibres Worldwide insulation products Affiliate Managers

Argentina/Brazil

Spain/Portugal

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two-boss employee An employee who reports to two supervisors simultaneously. matrix boss A product or functional boss, responsible for one side of the matrix. top leader The overseer of both the product and the functional chains of command, responsible for the entire matrix.

The success of the matrix structure depends on the abilities of people in key matrix roles. Two-boss employees – those who report to two supervisors simultaneously – must resolve conflicting demands from the matrix bosses. They must confront senior managers and reach joint decisions. They need excellent human relations skills with which to confront managers and resolve conflicts. The matrix boss is the product or functional boss, who is responsible for one side of the matrix. The top leader is responsible for the entire matrix. The top leader oversees both the product and functional chains of command. His or her responsibility is to maintain a power balance between the two sides of the matrix. If disputes arise between them, the problem will be ‘kicked upstairs’ to the top leader.27

Advantages and di s advan tag es The matrix can be highly effective in a complex, rapidly changing environment in which the organisation needs to be flexible, innovative and adaptable.28 The conflict and frequent meetings generated by the matrix allow new issues to be raised and resolved. The matrix structure makes efficient use of human resources because specialists can be transferred from one division to another. A major problem with the matrix is the confusion and frustration caused by the dual chain of command.29 Matrix bosses and two-boss employees have difficulty with the dual reporting relationships. The matrix structure also can generate high conflict because it pits divisional against functional goals in a domestic structure, or product line versus country goals in a global structure. Rivalry between the two sides of the matrix can be exceedingly difficult for two-boss employees to manage. This problem leads to the third disadvantage: time lost to meetings and discussions devoted to resolving these conflicts. Often the matrix structure leads to more discussion than action because different goals and points of view are being addressed. Managers may spend a great deal of time coordinating meetings and assignments, which takes time away from core work activities. The advantages and disadvantages of the matrix structure are summarised in Exhibit 10.11. Exhibit 10.11 Advantages and disadvantages of matrix structure Advantages

Disadvantages

● 

More efficient use of resources than single hierarchy

● 

● 

Flexibility, adaptability to changing environment

● 

High conflict between two sides of matrix

● 

Many meetings, more discussion than action

● 

Human relations training needed

● 

Power dominance by one side of matrix

Development of both general and specialist management skills

● 

Interdisciplinary cooperation, expertise available to all divisions

● 

● 

Enlarged tasks for employees

Frustration and confusion from dual chain of command

Hybri d stru ctu re Many organisations have found that their strategy and operations evolve to the point where no single ‘pure’ structural type best fits their needs. Organisations come in an amazing number of different shapes and sizes, with different goals, strategies, technologies, cultures, products and services, and markets that they serve. Therefore it is no surprise that organisations’ structures also come in many varieties, and these can usually be considered as hybrids of the ‘pure’ forms of functional structure, divisional structure and others. For example, many multinational organisations are organised looking from the top into geographical

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➜➜ Departmentalisation is the basis for grouping individual positions into departments, and departments into the total organisation. ➜➜ Three traditional approaches to departmentalisation are functional, divisional and matrix. ➜➜ A functional structure groups employees into departments based on similar skills, tasks and use of resources.

Source: Getty Images/Jon Feingersh

regional areas of responsibility, yet managers also have functional or divisional roles within those. Combinations of functional, product, divisional or in larger dispersed companies, geographical structures are common, and even when organisations start with a pure structure of one form or another, growth and increasing complexity in such businesses often leads them to move to hybrids of structural forms. ➜➜ The divisional structure groups employees and departments based on similar organisational outputs (products or services), such that each division has a mix of functional skills and tasks. ➜➜ An alternative approach to divisional structure is to group employees and departments based on geographic region or customer group. ➜➜ The matrix approach uses both functional and divisional chains of command simultaneously, in the same part of the organisation.

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Nowhere in the world is teamwork applied more precisely than at Formula 1 pit stops. When changing tyres and refuelling Formula 1 racing cars, the high-performing, well-coordinated teams of Ferrari and its competitors combine safety and speed to get the machines back on the track in the minimum time. High-performance teamwork such as this is based on enormous amounts of training and practice.

Remember this

➜➜ In a matrix structure, some employees, called two-boss employees, report to two supervisors simultaneously. ➜➜ A matrix boss is a functional or product supervisor responsible for one side of the matrix.

➜➜ In a matrix structure, the top leader oversees both the product and the functional chains of command and is responsible for the entire matrix. ➜➜ Each approach to departmentalisation has distinct advantages and disadvantages.

Te a m - based approach Probably the most widespread trend in departmentalisation has been the effort by organisations to implement team concepts. The vertical chain of command is a powerful means of control, but passing all decisions up the hierarchy takes too long and keeps responsibility at the top. Today, organisations are trying to find ways to delegate authority, push responsibility further down the organisation and create participative teams that engage the commitment of workers. This approach enables organisations to be more flexible and responsive in the competitive global environment. Chapter 18 discusses teams in detail. Cross-functional teams consist of employees from various functional departments who are responsible for meeting as a team and resolving mutual problems. Team members typically still report to their functional departments, but they also report to the team, one member of whom may be the leader. Cross-functional teams are used to provide needed horizontal coordination to complement an existing divisional or functional structure. A frequent use of cross-functional teams is for change projects, such as new product or service innovation. For example, Toyota uses cross-functional teams to bring a new car through the design stages to tooling up, manufacturing, supplier management, and then marketing and sales.

cross-functional team A group of employees assigned to a functional department that meets as a team to resolve mutual problems.

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permanent teams A group of participants from several functions who are permanently assigned to solve ongoing problems of common interest.

The second approach is to use permanent teams, groups of employees who are brought together in a way similar to a formal department. Each team brings together employees from all functional areas focused on a specific task or project, such as parts supply and logistics for an automobile plant. Emphasis is on horizontal communication and information sharing because representatives from all functions are coordinating their work and skills to complete a specific organisational task. Authority is pushed down to lower levels, and frontline employees are often given the freedom to make decisions and take action on their own. Team members may share or rotate team leadership. With a team-based structure, the entire organisation is made up of horizontal teams that coordinate their work and work directly with customers to accomplish the organisation’s goals. Imagination Ltd, Britain’s largest design firm, is based entirely on teamwork. Imagination puts together a diverse team at the beginning of each new project it undertakes, whether it be creating a fireworks spectacular on Sydney Harbour for the Australian Navy’s 2013 International Fleet Review or the lighting for Disney cruise ships, or redesigning the packaging for Ericsson’s cell phone products. The team then works closely with the client throughout the project.30 Imagination Ltd has managed to make every project a smooth, seamless experience by building a culture that supports teamwork, as described in the Innovative Way box below.

Innovative Way

Teams work at Imagination Ltd

The essence of teamwork is that people contribute selflessly, putting the good of the whole above their own individual interests. It doesn’t always work that way, but London-based Imagination Ltd, Europe’s largest independent design and communications agency, seems to have found the secret ingredient to seamless teamwork. According to Adrian Caddy, Imagination’s creative director: ‘The culture at Imagination is this: You can articulate your ideas without fear.’ Imagination Ltd has made a name for itself by producing award-winning, often highly theatrical programs. For example, in February 2006, it staged a launch event for the Harry Potter and the Prisoner of Azkaban DVD and video by inviting 800 guests to a historic London building where it had recreated four movie sets, among them the Great Hall at the Hogwarts School of Witchcraft and Wizardry. When Ted Baker opened its flagship store in Tokyo, Imagination Ltd wanted to create a quintessentially British experience for customers, one that would encourage ongoing social media engagement. As customers entered the store they were greeted by a Ted-taxi that took them on a ‘journey’ around London. Over 2000 images of people riding in the Ted-taxi were uploaded onto Facebook. Accomplishing such feats are teams of designers, architects, lighting experts, writers, theatre people, film directors and artists, in addition to IT specialists, marketing experts and other functional specialties. By having employees with a wide range of skills, the company is able to put together a diverse team to

provide each client with a new approach to its design problems. Imagination is deliberately non-hierarchical; only four people have formal titles, and on most project teams no one is really in charge. Teams meet weekly, and everyone participates in every meeting from the very beginning, so there is no perception that any particular talent is primary – or secondary. Information technology specialists, production people and client-contact personnel are just as much a part of the team as the creative types. In addition, each person is expected to come up with ideas outside his or her area of expertise. The philosophy is that people at Imagination must be willing to make all kinds of suggestions and also to take all kinds of suggestions. So many ideas get batted around, revised and adapted at the weekly meetings that no one can claim ownership of a particular element of the project. The team also works closely with the client as a source of ideas and inspiration. Talent and respect help to make the system work. Imagination hires its people carefully, based not only on the quality of their work but also on their open-mindedness and curiosity about the world beyond their functional area of expertise. Then, the company makes sure everyone’s work is so closely integrated that people gain an understanding and respect for what others do. ‘The integrated approach breeds respect for one another,’ says writer Chris White. ‘When you work alone, or in isolation within your discipline, you can get an overblown sense of your own importance to a project.’

Sources: Fishman, C. (April 2000). Total Teamwork: Imagination Ltd. Fast Company, 156–68; and Wardle, K. (1 February 2006). Confetti: Imagination Creates One Enchanted Evening. Special Events website, http://specialevents.com/corporate; http://www.imagination.com/en/our-work/london-calling-ted-baker (accessed 4 November 2013).

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Ad va ntages and di sadva n tag es The team approach breaks down barriers across departments and improves coordination and cooperation. Team members know one another’s problems and compromise rather than blindly pursue their own goals. The team concept also enables the organisation to adapt more quickly to customer requests and environmental changes and speeds decision making because decisions need not go to the top of the hierarchy for approval. Another big advantage is the morale boost. Employees are typically enthusiastic about their involvement in bigger projects rather than narrow departmental tasks. At video games company Ubisoft, for example, each studio is set up so that teams of employees and managers work collaboratively to develop new games. Employees don’t make a lot of money, but they’re motivated by the freedom they have to propose new ideas and put them into action.31 Yet the team approach has disadvantages as well. Employees may be enthusiastic about team participation, but they may also experience conflicts and dual loyalties. A cross-functional team may make different work demands on members than do their department managers, and members who participate in more than one team must resolve these conflicts. A large amount of time is devoted to meetings, thus increasing coordination time. Unless the organisation truly needs teams to coordinate complex projects and adapt to the environment, it will lose production efficiency with them. Finally, the team approach may cause too much decentralisation. Senior department managers who traditionally made decisions might feel left out when a team moves ahead on its own. Team members often do not see the big picture of the corporation and may make decisions that are good for their group but bad for the organisation as a whole. The advantages and disadvantages of the team structure are summarised in Exhibit 10.12. Exhibit 10.12 Advantages and disadvantages of team structure Advantages ● 

Some advantages of functional structure Reduced barriers among departments, increased compromise

● 

Less response time, quicker decisions

● 

Disadvantages ● 

Dual loyalties and conflicts

● 

Time and resources spent on meetings

● 

Unplanned decentralisation

Better morale, enthusiasm from employee involvement

● 

● 

Reduced administrative overheads

N et wo rk approach The most recent approach to departmentalisation extends the idea of horizontal coordination and collaboration beyond the boundaries of the organisation. The network structure means that the firm subcontracts many of its major functions to separate organisations and coordinates their activities from a small headquarters organisation.32 The organisation may be viewed as a central hub surrounded by a network of outside specialists, as illustrated in Exhibit 10.13. Rather than being housed under one roof, services such as accounting, design, manufacturing and distribution are outsourced to separate organisations that are connected electronically to the central office.33 The nature of the network structure

network structure An organisation structure that disaggregates major functions into separate organisations that are brokered by a small headquarters organisation.

network structure

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means that subcontractors flow into and out of the system when needed. Much like building blocks, parts of the network can be added or taken away to meet changing needs.34 A further development of the network is the virtual network organisation, which is a continually evolving group of organisations that unite temporarily to exploit specific opportunities or attain strategic advantages, and then disband when objectives are met.35 Data and information are shared electronically among participating organisations. Unlike the network structure, in which the hub organisation maintains control over work done by various subcontractors, in a virtual organisation each independent organisation gives up some control to temporarily become part of a new, larger, organisational system.

Exhibit 10.13 Network approach to departmentalisation

Accounts receivable company (Australia)

Design company (Canada)

Transportation company (Korea)

Company core (hub)

Distribution company (Europe)

Manufacturing company (Asia)

The extreme flexibility of a network approach is illustrated by Cisco Systems, the company that provides most of the routers and switches that run the Internet. Cisco comprises a relatively small core of its own operations, surrounded by a network of resellers and suppliers of its hardware and software. Cisco controls the technology and standards of all its network partners which are independent company entities. Cisco’s 75 000 staff generated a profit in 2013 of A$11 billion. Similarly, today’s business organisations can benefit from a flexible network approach that lets them shift resources and respond quickly. A network organisation can draw on resources and expertise worldwide to achieve the best quality and price and can sell its products and services worldwide. Flexibility comes from the ability to hire whatever services are needed, and to change a few months later without constraints from owning plant, equipment and facilities. The organisation can continually redefine itself to fit new product and market opportunities. This structure is perhaps the leanest of all organisation forms because little supervision is required. Large teams of staff specialists and administrators are not needed. A network organisation may have only two or three levels of hierarchy, compared with 10 or more in traditional organisations.36 One of the major disadvantages is lack of hands-on control. Managers do not have all operations under one roof and must rely on contracts, coordination, negotiation and electronic linkages to hold things together. Each partner in the network necessarily acts in its own self-interest. The weak and ambiguous boundaries create higher uncertainty and greater demands on managers for defining shared goals, coordinating activities, managing relationships and keeping people focused and motivated.37 The network approach is revolutionary because it is difficult to answer the question ‘Where is the organisation?’ in traditional terms. For example, a firm may contract for expensive services such as training,

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transportation, legal and engineering, and so these functions are no longer part of the organisation. Or consider a piece of sporting equipment that is designed in Australia, engineered in the US, manufactured in Korea and distributed worldwide by a Japanese sales organisation. These pieces are drawn together contractually and coordinated electronically, creating a new form of organisation. The network approach allows organisations to concentrate on what they do best and to outsource the rest. Companies such as Nike and Reebok have succeeded by focusing on their core strengths in design and marketing, and contracting all their footwear manufacturing to outside suppliers. Computer firms such as Dell either purchase their products ready-made or buy all the parts and handle only the final assembly.

Ad va ntages and di sadva n tag es The biggest advantage to the network structure seems to be competitiveness on a global scale. Network organisations, even small ones, can be truly global. A network organisation can draw on resources worldwide to achieve the best quality and price, and can sell its products and services worldwide. A second advantage is workforce flexibility and challenge. Flexibility comes from the ability to hire whatever services are needed, such as engineering design or maintenance, and to change a few months later without constraints from owning plant, equipment and facilities. The organisation can continually redefine itself to fit new product and market opportunities. For those employees who are a permanent part of the organisation, the challenge comes from greater job variety and job satisfaction from working within the lean structure. Finally, this structure is perhaps the leanest of all organisation forms because little supervision is required. Large teams of staff specialists and administrators are not needed. A network organisation may have only two or three levels of hierarchy compared with 10 or more in traditional organisations.38 These advantages of a network structure, along with the disadvantages, are summarised in Exhibit 10.14. Exhibit 10.14 Advantages and disadvantages of network structure Advantages ● 

Global competitiveness Workforce flexibility/challenge

● 

Reduced administrative overhead

● 

Disadvantages ● 

No hands-on control

● 

Can lose organisational part

● 

Employee loyalty weakened

One of the major disadvantages is lack of hands-on control.39 When the Commonwealth Bank of Australia took over Colonial Bank Group at a purchase price of some A$8 billion in late 2000, it wanted to keep hold of Colonial’s First State (CFS) Investment Managers division, a successful retail funds manager. With such takeovers, a strategic question is always whether to leave such divisions alone after an acquisition or to integrate them to some extent into the acquirer’s business stream. This question of structure is not straightforward, and in this case a critical factor for keeping the value in the business was keeping key executives on board at CFS. Some two years later, key executives were still there and still expanding the business. CFS’s profit vindicated the decision that the company should operate

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Case study

entrepreneurially and not be absorbed into the mainstream of the Commonwealth’s bureaucracy. Chris Cuffe, long-serving CEO of CFS, kept the independent structure and used the parent company relationship as a strength in two main ways. First is the use of the strong balance sheet associated with being part of a major bank, which allows for activities and risk-taking approaches that would otherwise not be possible. Second, there have been many referrals of venture capital financing deals from the mainstream parent bank, providing CFS with a marketing advantage. Although some would expect economies of scale from integrating and centralising CFS into the mainstream of the major bank, the structure that has been adopted – leaving CFS to operate separately – has kept its key people challenged and operating creatively, while tapping into the advantages of being part of a giant Australian company.40 However, nothing lasts forever: Cuffe and other key executives later moved on to other challenges and the business found others to lead and sustain it.

Strida Bicycles: a globally networked company How do two people run an entire company that sells thousands of high-tech folding bicycles all over the world? Steedman Bass and Bill Bennet do it with a virtual network approach that outsources design, manufacturing, customer service, logistics, accounting and everything else to other organisations. Bass, an avid cyclist, got into the bicycle business when he and his partner Bennet bought the struggling British company Strida, which was having trouble making enough quality bicycles to meet even minimum orders. The partners soon realised why Strida was struggling. The design for the folding bicycle was a clever engineering idea, but it was a manufacturing nightmare.

Bass and Bennet immediately turned over production engineering and new product development to an American bicycle designer, still with intentions of building the bikes at the Birmingham factory. However, a large order from Italy sent them looking for other options. Eventually, they transferred all manufacturing to Ming Cycle Company of Taiwan, which builds the bikes with parts sourced from parts manufacturers in Taiwan and mainland China. Finally, the last piece of the puzzle was to contract with a company in Birmingham that would take over everything else – from marketing to distribution. Bass and Bennet concentrate their energies on managing the partnerships that make the

network function smoothly. Ultimately the rights to the brand were bought in 2006 by Ming Cycle, which was still licensed to produce Strida products. Strida bikes have continued to sell well into a market niche and have won a series of design awards including the Treehugger’s Best Green Award (USA) in 2011. Sources: Wheatley, M. (September 2003). Cycle Company with a Virtual Spin. Management Today, 78–81; Tapscott, D. (third quarter 2001). Rethinking Strategy in a Networked World. Strategy & Business, 24, 34–41; Anand, N. (2000). Modular, Virtual, and Hollow Forms of Organization Design. Working paper, London Business School; Dess, G. G., McLaughlin, K. J., Priem, R. L. and Rasheed, A. M. A. (1995). The New Corporate Architecture. Academy of Management Executive, 9:3, 7–20; Strida website, http://www.strida.com.

Strida and many other firms are now making use of fast, cheap and reliable information technologies to make it easier to run virtually networked organisations. A similar approach to networking is called the modular approach, in which a manufacturing company uses outside suppliers to provide entire chunks of a product, which are then assembled into a final product by a handful of workers. The Canadian firm Bombardier’s Continental business jet is made up of about a dozen huge modular components from all over the world: the engines from the US, the nose and cockpit from Canada, the mid-fuselage from Northern Ireland, the tail from Taiwan, the wings from Japan and so forth.41 Car manufacturers, including General Motors (GM), Ford, Volkswagen and Daimler AG, are leaders in using the modular approach. GM has a modular factory in Brazil and is building several more. The modular approach hands the responsibility for engineering and production of entire sections of a car, such as the chassis

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or interior, to outside suppliers. Suppliers design a module, making some of the parts themselves and subcontracting others. These modules are delivered right to the assembly line, where a handful of employees bolt them together into a finished vehicle.42 Both Airbus and Boeing, which are the world’s two large aeroplane manufacturers, operate global networks of supply. Parts for Airbus planes are made all over Europe and elsewhere. Boeing tail rudders and wing flaps are made in Melbourne, Australia, then transported to Seattle for assembly with other components, large and small, brought in from across the globe!

Would you like to work in your pyjamas? In countries all over the world, millions of people work from home, either full-time or part of the time. Some of these people are freelancers, or ‘solopreneurs’, who enter into outsourcing contracts to perform services for companies around the world. Escaping the 9-to-5 office grind sounds like a dream to many people, but working solo has its down side. Most people who are accustomed to working in an office go through a bumpy transition when they switch to working virtually. Here are just a few of the good and bad things about working on your own.

➜➜ Pro: You can be more productive. Many people find they can get more done working from home. For one thing, you might gain a couple of extra hours a day that you used to spend commuting. When reporters, editors, designers and the numerous other professionals who put together Inc. magazine experimented with putting out an issue by working entirely outside the office, most of them found that they accomplished more work in an environment where they could focus for long stretches of time without distractions.

➜➜ Con: It’s all up to you to make it work. It takes discipline, self-management and organisation skills to make sure you complete all the jobs you’ve agreed to do. Some people can’t resist funny websites, the television, the kids and pets, or the refrigerator long enough to actually get any work done. These types typically don’t do well working from home and need the structure of an office to keep them motivated and productive. On the other hand, some people find that they work too much and have to learn to set boundaries. ‘My work–life balance sucks,’ said Matt Trifiro, who directs the virtual company 1000 Markets from his home.

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management in pr actice ➜➜ Pro: You can set your own schedule and define your own work. If you want to sleep in and work later in the day, fine. If you want to take a three-hour lunch break, there’s no one telling you that you can’t. You can choose your own projects and organise the activities and tasks the way it makes sense to you rather than having someone else dictating how to do things. You can choose the companies you want to work for – anywhere in the world.

➜➜ Con: Lack of recognition and feedback can create selfdoubt, stress and frustration. Lack of recognition is a common complaint among virtual workers. In addition, it’s often hard to assess what your client really thinks of you and your performance. A lot of virtual solopreneurs don’t get regular feedback, which can lead to self-doubt – and the solitary nature of the work doesn’t help. ‘I was spending all day in my tiny apartment, not talking to anyone,’ said one virtual worker. Many people counteract the isolation of virtual work by taking their laptop to a coffee shop or spending some time at a ‘co-working centre’, where they can rent an office space on a daily basis.

➜➜ And Finally . . . A blog on the ThereItIs website offered a lighthearted look at some of the pros and cons of virtual work: You never again have to worry about a bad hair day or spend an hour getting dressed for work. But you just might miss the chance to ‘power dress’ once in a while. Interestingly, in a world where many organisations are promoting flexible work conditions, Marissa Mayer who runs Yahoo brought in a policy in 2013 which forbids Yahoo staff from working from home and requires them all to come to the physical workplace every day.

Sources: Based on Max Chafkin. (April 2010). The Office Is Dead. Long Live the Office: The Case, and the Plan, for the Virtual Company. Inc., 62–73; Laurie Sheppard. (2011). Challenges to Working Virtually. Creating at Will website, http://creatingatwill.com/challenges-to-working-virtually (accessed 17 August 2012); Sara Fletcher. (14 August 2012). 5 Challenges of Working from Home. Recruiting Blogs, http://www.recruitingblogs.com/profiles/blogs/5-challenges-of-working-from-home (accessed 16 August 2012); Perks and Challenges of Virtual Work. ThereItIs.com, http://blog.thereitis.com/post/22640167629/challenges-of-virtual-work (accessed 17 August 2012); and Alvin Lee. Working From Home: The End Of An Era? http://www.forbes.com/sites/insead/2013/04/17/working-from-home-the-end-of-an-era/ (accessed 6 March 2014).

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➜➜ Popular contemporary approaches to departmentalisation include team and virtual network structures. ➜➜ A cross-functional team is a group of employees from various functional departments that meet as a team to resolve mutual problems. ➜➜ A permanent team is a group of employees from all functional areas permanently assigned to focus on a specific task or activity.

➜➜ A team-based structure is one in which the entire organisation is made up of horizontal teams that coordinate their activities and work directly with customers to accomplish organisational goals. ➜➜ With a virtual network structure, the organisation subcontracts most of its major functions to separate companies and coordinates their activities from a small headquarters organisation.

➜➜ The modular approach is one in which a manufacturing company uses outside suppliers to provide large chunks of a product such as an automobile, which are then assembled into a final product by a few employees.

Remember This

➜➜ Both the team and the network approach have distinct advantages and disadvantages.

Organising for horizontal coordination One reason for the growing use of teams and networks is that many managers recognise the limits of traditional vertical organisation structures in a fast-shifting environment. In general, the trend is towards breaking down barriers between departments, and many companies are moving towards horizontal structures based on work processes rather than departmental functions.43 However, regardless of the type of structure, every organisation needs mechanisms for horizontal integration and coordination. The structure of an organisation is not complete without designing the horizontal as well as the vertical dimensions of structure.44

Th e n eed fo r Co o rd ination

coordination The managerial task of adjusting and synchronising the diverse activities among different individuals and departments. collaboration A joint effort between people from two or more departments to produce outcomes that meet a common goal or shared purpose.

As organisations grow and evolve, two things happen. First, new positions and departments are added to deal with factors in the external environment or with new strategic needs, as described earlier in the chapter. As companies add positions and departments to meet changing needs, they grow more complex, with hundreds of positions and departments performing incredibly diverse activities. Second, senior managers have to find a way to tie all these departments together. The formal chain of command and the supervision it provides is effective, but it is not enough. The organisation needs systems to process information and enable communication among people in different departments and at different levels. Coordination refers to the managerial task of adjusting and synchronising the diverse activities among different individuals and departments. Collaboration means a joint effort between people from two or more departments to produce outcomes that meet a common goal or shared purpose and that are typically greater than what any of the individuals or departments could achieve working alone.45 Without coordination, a company’s left hand will not act in concert with its right hand, causing problems and conflicts. Coordination is required regardless of whether the organisation has a functional, divisional or team structure. Employees identify with their immediate department or team, taking its interest to heart, and they may not want to compromise and collaborate with other units for the good of the organisation as a whole. The dangers of poor coordination are reflected in recent quality and safety

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issues with Toyota vehicles and the inadequate initial response by top managers. A panel investigating the situation pinpointed lack of information sharing and poor communication and collaboration across different units as one distinct problem.46 The problem is amplified in the international arena because organisational units are differentiated not only by goals and work activities, but also by geographical distance, time differences, cultural values and perhaps language. Toyota, for instance, is a huge organisation with divisions all over the world. How can managers ensure that needed coordination and collaboration will take place in their company, both domestically and globally? Coordination is the outcome of information and cooperation. Managers can design systems and structures to promote horizontal coordination and collaboration. Exhibit 10.15 illustrates the evolution of organisational structures, with a growing emphasis on horizontal coordination. Although the vertical functional structure is effective in stable environments, it does not provide the horizontal coordination needed in times of rapid change. Innovations such as cross-functional teams, task forces and project managers work within the vertical structure but provide a means to increase horizontal communication and cooperation. The next stage involves re-engineering to structure the organisation into teams working on horizontal processes. Re-engineering refers to the radical redesign of business processes to achieve dramatic improvements in cost, quality, service and speed. Because the focus of re-engineering is on horizontal workflows rather than function, re-engineering generally leads to a shift away from a strong vertical structure to one emphasising stronger horizontal coordination. The vertical hierarchy is flattened, with perhaps only a few senior executives in traditional support functions such as finance and human resources.

re-engineering The radical redesign of business processes to achieve dramatic improvements in cost, quality, service and speed.

Exhibit 10.15 Evolution of organisation structures

Traditional vertical structure

Cross-functional teams and project managers

Re-engineering to horizontal teams

Task fo rces, tea ms an d proj ect m anagem ent A task force is a temporary team or committee designed to solve a short-term problem involving several departments.47 Task force members represent their departments and share information that enables coordination. In addition to creating task forces, companies also set up cross-functional teams, as described earlier. A cross-functional team furthers horizontal coordination because participants from several departments meet regularly to solve ongoing problems of common interest.48 This team is similar to a task force except that it works with continuing rather than temporary problems and might exist for several years. Team members think in terms of working together for the good of the whole rather than just for their own department. For example, top executives at one large consumer products company had

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to hold frequent marathon meetings to resolve conflicts among functional units. Functional managers were focused on achieving departmental goals and were engaged in little communication across units. Resolving the conflicts that arose was time-consuming and arduous for everyone involved. Establishing a cross-functional team solved the problem by ensuring regular horizontal communication and cooperation regarding common issues and problems.49 Companies also use project managers to increase coordination between functional departments. A project manager is a person who is responsible for coordinating the activities of several departments for the completion of a specific project.50 Project managers are critical today because many organisations are continually reinventing themselves, creating flexible structures and working on projects with an ever-changing Take a assortment of people and organisations.51 Project managers might Moment work on several different projects at one time and might have to As a new manager, be a team move in and out of new projects at a moment’s notice. or task force member who reaches out to facilitate horizontal coordination. In some organisations, project managers are included on Don’t limit yourself to your own function. the organisation chart, as illustrated in Exhibit 10.16. The Share information across departmental project manager is drawn to one side of the chart to indicate boundaries to improve horizontal authority over the project but not over the people assigned to it. communication and understanding. Build your people skills to influence Dashed lines to the project manager indicate responsibility for and persuade as an effective coordination and communication with assigned team members, project manager. but department managers retain line authority over functional employees.

Exhibit 10.16 Example of project manager relationships to other departments

President, Sailboat Division

Finance Budget Analyst

Engineering

Purchasing

Marketing

Product Designer

Project Manager, Sails and Masts

Buyer Market Researcher

Rel ati o nal co o rd ination relational coordination Refers to frequent horizontal coordination and communication carried out through ongoing relationships of shared goals, shared knowledge and mutual respect.

The highest level of horizontal coordination is relational coordination. Relational coordination refers to ‘frequent, timely, problem-solving communication carried out through [employee] relationships of shared goals, shared knowledge, and mutual respect’.52 Relational coordination isn’t a structural device or mechanism such as a project manager, but rather is part of the very fabric and culture of the organisation. In an organisation with a high level of relational coordination, people share information freely across departmental boundaries, and people interact on a continuous basis to share knowledge

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New Manager Self-test Authority role models An organisation’s structure is based on authority. Beliefs about authority for a new manager are often based on experiences with your first authority figures and role models: Mum and Dad. To understand your authority role models, please answer each of the following items as Mostly true or Mostly false for you. Think in terms about each statement as it applies to the parent or parents who made primary decisions about raising you. Mostly true

 1 My parent(s) believed that children should get their way in the family as often as the parents do.  2 When a family policy was established, my parent(s) discussed the reasoning behind it with the children.  3 My parent(s) believed it was for my own good if I was made to conform to what they thought was right.

Mostly false

Scoring and interpretation: Each question pertains to one of three subscales of parental authority. Questions 1, 4 and 7 reflect permissive parental authority, questions 2, 5 and 8 indicate flexible authority, and questions 3, 6 and 9 indicate authoritarian parental authority. The subscale for which you checked more items Mostly true may reveal personal beliefs from your early role models that shape your comfort with authority as a new manager. Authoritarian beliefs typically would fit in a traditional vertical hierarchy. Flexible authority beliefs typically would fit with horizontal organising, such as managing teams, projects and re-engineering. Because most organisations thrive on structure, permissive beliefs may be insufficient to enforce accountability under any structure. How do you think your childhood role models affect your authority beliefs? Remember, this questionnaire is just a guide because your current beliefs about authority may not directly reflect your childhood experiences. Source: Adapted from Buri, J. R. (1991). Parental Authority Questionnaire. Journal of Personality and Social Assessment, 57, 110–19.

 4 My parent(s) felt the children should make up our own minds about what we wanted to do even if we did not agree with them.  5 My parent(s) directed my activities through reasoning and discussion.  6 My parent(s) were clear about who was the boss in the family.  7 My parent(s) allowed me to decide most things for myself without a lot of direction.  8 My parent(s) took the children’s opinions into consideration when making family decisions.  9 If I didn’t meet parental rules and expectations, I could expect to be punished.

and solve problems. Coordination is carried out through a web of ongoing positive relationships rather than because of formal coordination roles or mechanisms.53 Employees coordinate directly with each other across units. To build relational coordination into the fabric of the organisation, managers invest in training people in the skills needed to interact with one another and resolve cross-departmental conflicts based on shared goals rather than emphasising goals of their separate departments. People are given freedom from strict work rules so they have the flexibility to interact and contribute wherever they are needed, and rewards are based on team efforts and accomplishments. Front-line supervisors typically have smaller spans of control so they can develop close working relationships with subordinates and coach and mentor employees.

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When relational coordination is high, people share information and coordinate their activities without having to have bosses or formal mechanisms telling them to do so.

Innovative Way

Flight coordination

Airlines face many challenges, but one that they face hundreds of times on a daily basis is getting airplanes loaded and off the ground safely and on time. Flight departure is a highly complex process. It involves numerous employees from various departments – such as ticket agents, pilots, flight attendants, baggage handlers, gate agents, mechanics, ramp agents, fuel attendants, and so forth – performing multiple tasks within a limited time period, under uncertain and ever-changing conditions. If all these groups aren’t tightly coordinated, a successful on-time departure is difficult to achieve. America’s Southwest Airlines has the shortest turnaround time in the business, partly because its managers promote relational coordination to achieve superior on-time performance and a high level of customer satisfaction. In any airline, there can be serious disagreements among employees about who is to blame when a flight is delayed, so Southwest managers

created what they call team delay. Rather than searching for who is to blame when something goes wrong, the team delay is used to point out problems in coordination between various groups. The emphasis on the team focuses everyone on their shared goals of on-time departure, accurate baggage handling, and customer satisfaction. Because delay becomes a team problem, people are motivated to work closely together and coordinate their activities rather than looking out for themselves and trying to avoid or shift blame. Supervisors work closely with employees, but their role is less ‘being the boss’ as it is facilitating learning and helping people do their jobs. Southwest uses a small supervisory span of control – about one supervisor for every eight or nine front-line employees – so that supervisors have the time to coach and assist employees, who are viewed as internal customers.

Source: Jody Hoffer Gittell. (Spring 2000). Paradox of Coordination and Control. California Management Review, 42:3, 101–17.

➜➜ In addition to the vertical structure, every organisation needs mechanisms for horizontal integration and coordination.

➜➜ As organisations grow, they add new positions, departments and hierarchical levels, which leads to greater coordination problems.

➜➜ Coordination refers to the managerial task of adjusting and synchronising the diverse activities among different individuals and departments.

➜➜ Ways to increase horizontal coordination include task forces, teams, project managers and relational coordination.

➜➜ Collaboration means a joint effort between people from two or more departments to produce outcomes that meet a common goal or shared purpose.

➜➜ A task force is a temporary team or committee formed to solve a specific short-term problem involving several departments. ➜➜ A project manager is a person responsible for coordinating the



activities of several departments for the completion of a specific project.

Remember This

➜➜ Companies often shift to a more horizontal approach after going through re-engineering, which refers to the radical redesign of business processes to achieve dramatic improvements in cost, quality, service and speed. ➜➜ Relational coordination refers to frequent horizontal coordination and communication carried out through ongoing relationships of shared goals, shared knowledge and mutual respect.

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Factors shaping structure Vertical hierarchies continue to thrive because they provide important benefits for organisations. Some degree of vertical hierarchy is often needed to organise a large number of people effectively to accomplish complex tasks within a coherent framework. Without a vertical structure, people in a large, global firm wouldn’t know what to do. However, in today’s environment, an organisation’s vertical structure often needs to be balanced with strong horizontal mechanisms to achieve peak performance.54 How do managers know whether to design a structure that emphasises the formal, vertical Take a Moment hierarchy or one with an emphasis on horizontal communication and collaboration? The As a potential new manager, answer lies in the organisation’s strategic goals and the nature of its technology. Exhibit check out your authority role 10.17 illustrates that forces affecting organisation structure come from both outside models by completing the New and inside the organisation. External strategic needs, such as environmental conditions, Manager Self-Test on p.421. Your strategic direction and organisational goals, create top-down pressure for designing the score will give you a sense of the type of structure in which you organisation in such a way as to fit the environment and accomplish strategic goals. may fit best as a new Structural decisions also take into consideration pressures from the bottom up – that is, manager. from the technology and work processes that are performed to produce the organisation’s products and services. Exhibit 10.17 Contingency factors that influence organisation structure

Contingency Factors Strategy Environment Technology

Traditional vertical structure or flexible horizontal structure

Company performance

Stru ctu re fo llows str ategy Studies demonstrate that business performance is strongly influenced by how well the company’s structure is aligned with its strategic intent and the needs of the environment, so managers strive to pick strategies and structures that are congruent.55 In Chapter 8, we discussed several strategies that business firms can adopt. Two strategies proposed by Porter are differentiation and cost leadership.56 With a differentiation strategy, the organisation attempts to develop innovative products unique to the market. With a cost leadership strategy, the organisation strives for internal efficiency. Typically, strategic goals of cost efficiency occur in more stable environments, while goals of innovation and flexibility occur in more uncertain environments. The terms mechanistic and organic can be used to explain structural responses to strategy and the environment.57 Goals of efficiency and a stable environment are associated with a mechanistic system. This type of organisation typically has a rigid, vertical, centralised structure, with most decisions made at the top. The organisation is highly specialised and characterised by rules, procedures and a clear hierarchy of authority. With goals of innovation and a rapidly changing environment, however, the organisation tends to be much looser, free-flowing and adaptive, using an organic system. The structure is more horizontal, and decision-making authority is decentralised. People at lower levels have more responsibility and authority for solving problems, enabling the organisation to be more fluid and adaptable to changes.58

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Concept extension

Experiential exercise

Exhibit 10.18 shows a simplified continuum that illustrates how structural approaches are associated with strategic goals. The pure functional structure is appropriate for achieving internal efficiency goals. The vertical functional structure uses task specialisation and a strict chain of command to gain efficient use of scarce resources, but it does not enable the organisation to be flexible or innovative. In contrast, horizontal teams are appropriate when the primary goal is innovation and flexibility. Each team is small, is able to be responsive, and has the people and resources necessary for performing its task. The flexible horizontal structure enables organisations to differentiate themselves and respond quickly to the demands of a shifting environment but at the expense of efficient resource use. New strategies also shape structure in government organisations. Exhibit 10.18 also illustrates how other forms of structure represent intermediate steps Take a on the organisation’s path to efficiency or innovation. The functional Moment structure with cross-functional teams and project managers provides As a new manager, recognise greater coordination and flexibility than the pure functional structure. how structure fits the contingency The divisional structure promotes differentiation because each factors of strategy, environment and technology. Design the right division can focus on specific products and customers, although mix of structural characteristics divisions tend to be larger and less flexible than small teams. Exhibit to fit the contingency 10.18 does not include all possible structures, but it illustrates how factors. structures can be used to facilitate the strategic goals of cost leadership or differentiation. Functional structure

Exhibit 10.18 Relationship of strategic goals to structural approach

Functional with interdepartmental task forces, integrators

Divisional structure

Horizontal teams

Strategic goals:

differentiation, innovation, flexibility Strategic goals

Strategic goals:

cost leadership, efficiency stability

➜➜ Contingency factors of strategic goals, environment and technology influence the correct structural approach.

➜➜ A mechanistic, vertical structure is appropriate for a cost leadership strategy, which typically occurs in a stable environment.

Remember This

➜➜ An organic, horizontal approach is needed for a differentiation strategy and when the organisation needs flexibility to cope with an uncertain environment.

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How should an organisation organise and best arrange and allocate resources in order to achieve a mature state of sustainability? Perhaps the most sensible way to approach this question is to work backwards from a future desired state. Suppose you work in a bank, manufacturing company, consulting firm or university: what would you like to achieve in terms of maturity in sustainability, and then, how would you get from here to there? To choose a way of structuring and organising for sustainability, it is important to first develop a sustainability strategy (earlier in this chapter we proposed that structure in general should follow strategy). In generic terms, we propose that the generic strategy would involve strong stakeholder engagement, values that include social and environmental outcomes as well as financial performance, broad involvement of employees in activities that achieve these broader outcomes and a bundling of this into a long-term vision for the organisation in the economy and society. Depending on where the organisation is starting from, we can assume there needs to be a work plan that is implemented to take these strategy elements forward. This would involve stakeholder consultation and relationship building, environmental policies and possibly investments, employee education and training, and the development of an organisational culture that is long-term rather than short-termfocused, inclusive of stakeholder concerns and broadens the performance measures of the organisation. Ultimately, the very role of the organisation can be modified in order to achieve the mature aim of ‘Doing well by doing good’! Organising for this work and change requires leadership from the centre and the top of the organisation, and also widespread implementation and decision making. Hence we would suggest that there needs to be a centrally appointed person or group who is in charge of and accountable for the formulation and implementation of the progress towards broad and mature sustainable development across the organisation. Some companies appoint a Chief Sustainability Officer (CSO) with just those responsibilities; however, whether this is or is not done in name, there is a need to have strong leadership to move the company forward and change such fundamentals as values, vision, strategy and culture. So a central unit in the organisation and a senior person with influence in the organisation is a starting point for moving forward. In the Coca-Cola organisation, global CEO Muhtar Kent has decided that he personally is also the CSO as an integral part of his job and responsibilities, and under his leadership Coke is actively pursuing water use neutrality, packaging recovery, much improved energy efficiency, and bottling plant environmental achievements and recycling, such as turning used Coke bottles into clothing. In global information systems company SAP, specially appointed CSO Peter Graf drove a 20 per cent reduction in the use of paper in just one year. Global companies such as Dow, Orange and Cisco have appointed CSOs. In Australian engineering consulting firm SKM (employing over 6000 people), Dr Nick Fleming was appointed CSO, responsible for reducing carbon output in the firm by 30 per cent, and for ensuring that sustainable development becomes fully integrated into decisions and work processes, internally and externally to the firm. SKM is owned by its staff, and has decided not to have a separate unit which implements sustainability, but rather as much as possible to embed the principles of sustainability into all its activities and services.59

sustainable development

Organising for sustainable development

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Response to the Management Challenge

Returning to the opening example, Carlos Ghosn used structural changes to help revive Nissan and restore its competitive position in the car industry. One of his first steps was to clarify managers’ areas of responsibility and authority, and implement mechanisms to ensure accountability. Positions were redesigned so that managers who previously acted as advisers had direct line authority and a clear understanding of how they were expected to contribute to the organisation. The compensation and advancement systems were also revised. The major structural change Ghosn made was to create nine crossfunctional management teams that would determine a detailed turnaround plan for the organisation. Ghosn believed the team approach was the best way to get managers to see beyond the functional and regional boundaries that were hampering collaboration and new product development, and creating a culture of blame. Each team was made up of managers from various functional areas. For example, the purchasing team consisted of members from purchasing, engineering, manufacturing and finance. Within three months, the teams had created a detailed blueprint for Nissan’s turnaround. Within three years, implementation of various aspects of the plan had returned Nissan to profitability. Brilliant new products such as the dazzling Nissan 370Z were produced. The cross-functional teams continue as an integral part of Nissan’s management structure, helping ensure continued horizontal communication and collaboration to help the company compete in the turbulent car industry. Ghosn has formally become the CEO of both Nissan and Renault, and restructured these companies to get the most out of model sharing and other synergies between them. The alliance between these two companies is very much more than having the same person as CEO: technologies and all forms of ‘know-how’ are now openly shared, with the resulting synergies claimed to be worth $2 billion in 2009. Products, technologies and other systems are equitably shared through a jointly managed French-Japanese, RenaultNissan structure and culture, which works! Strong cross shareholdings are an important piece of this cooperative joint venture. More recently, Nissan has launched environmentally friendly cars. On 2 August 2009 Nissan unveiled the very first version of its electric vehicle, the Nissan Leaf, which went on sale in Japan and the US in late 2010 and across global markets from 2012. This is a vehicle that does not

Source: Shutterstock.com/Stefan Ataman

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emit any CO2 when driven – in fact, it has no tail pipe. The hybrid car category in Europe has gained in popularity as the infrastructure to recharge vehicles has improved and sales of the Leaf more than tripled in the US after Nissan adjusted the price of the vehicle. But Japan, supported by a government subsidy, is currently Nissan’s biggest market where sales surpassed 30 000 in just its third year on the market. The world’s first mass produced 100 per cent electric car has exceeded 85 000 sales globally since 2010 and has become a top seller in its segment. Ghosn believes that electric vehicles will account for as much as 10 per cent of the global market by 2020. Global sales for Nissan have maintained a steady climb since 2008, with a market share of around 6.5% and China their largest overall customer. The Renault-Nissan alliance established a new research facility in Silicon Valley in 2013 to focus on new technological advances that can offer key potential to their customers (such as human-machine interfaces). The company entered Interbrand’s list of best Global Green Brands in 2012 and has since climbed to fifth position. Sources: Nissan website, http://www.nissan.com.au/webpages/ about/Electric_vehicles.html?utm_medium=cpc&utm_ source=google&utm_term=nissan%20electric%20car&utm_ campaign=-+Nissan+Leaf+Search+-+Awareness&utm_ content=sre9xzGUP_9454589873; Charging into the Future: How Nissan, world leader in zero-emission mobility, is changing perceptions among fleet and corporate buyers. European Financial Review, http://www .europeanfinancialreview.com/?p=5704 (accessed 5 November 2013); Ohnsman, A. (27 September 2013). Nissan Channels Tesla Offers Free Leaf Charging In Texas. Bloomberg, http://www.bloomberg.com/news/201309-26/nissan-channels-tesla-offers-free-leaf-charging-in-texas.html (accessed 5 November 2013); Nissan Leaf Sales Surpass 30,000 in Japan. Nissan Motor Company, http://www.nissan-global.com/EN/NEWS/2013/_ STORY/131008-01-e.html (accessed 5 November 2013); Ohnsman, A. (29 August 2013). Nissan Joins Tesla Selling California Green Car Credits. Bloomberg, http://www.bloomberg.com/news/2013-08-29/nissan-joinstesla-selling-california-green-car-credits.html.

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1 Sandra Holt, manager of Electronics Assembly, asked Hector Cruz, her senior technician, to handle things in the department while she worked on the budget. Sandra needed peace and quiet for at least a week to complete her figures. After 10 days, she discovered that Hector had hired a senior secretary, not realising that Sandra had promised interviews to two other people. Evaluate Sandra’s approach to delegation. 2 Many experts note that organisations have been making greater use of teams in recent years. What factors might account for this trend? 3 Contrast centralisation with span of control. Would you expect these characteristics to affect each other in organisations? Why? 4 An organisational consultant was heard to say: ‘Some aspect of functional structure appears in every organisation.’ Do you agree? Explain. 5 The divisional structure is often considered almost the opposite of a functional structure. Do you agree? Briefly explain the major differences in these two approaches to departmentalisation. 6 The Hay Group published a report that some managers have personalities suited to horizontal relationships such as project management that achieve results with little formal authority. Other managers are more suited to operating roles with much formal authority in a vertical structure. In what type of structure – functional, matrix, team or virtual network – do you believe your personality

would best fit? Which structure would be the most challenging for you? Give your reasons.

understand or care about them. Harrington, who avoided the questions he received from the floor to cover for his boss, was beginning to wonder if Rockingham would have time to make changes with the Christmas season rapidly approaching. Harrington knew it was not his job to order the changes, and he did not want to alienate Golopolus by interfering, but he was beginning

Discussion questions

7 What is the network approach to structure? Is the use of authority and responsibility different compared with other forms of departmentalisation? Explain. 8 Why are divisional structures frequently used in large organisations? Does it make sense for a huge company such as American Airlines to stay in a functional structure? 9 An international matrix structure tends to be organised by product divisions and geographic regions. Why would these two chains of command be used rather than product and function, as in domestic organisations? Explain. 10 Experts say that organisations are becoming increasingly decentralised, with authority, decision-making responsibility and accountability being pushed further down into the organisation. How will this trend affect what will be asked of you as a new manager? The chapter suggested that structure should be designed to fit strategy. Some theorists argue that strategy should be designed to fit the organisation’s structure. With which theory do you agree? Explain. 11 Some people argue that the matrix structure should be adopted only as a last resort because the dual chains of command can create more problems than they solve. Discuss. Do you agree or disagree? Why?

Caught in the middle Tom Harrington loved his job as an assistant quality control officer for Rockingham Toys. After six months of unemployment, he was anxious to make a good impression on his boss, Frank Golopolus. One of the responsibilities of his boss was ensuring that new product lines met government safety guidelines. Rockingham had made several manufacturing changes over the past year. Golopolus and the rest of the quality control team had been working 60-hour weeks to troubleshoot the new production process. While sorting incoming mail during the past weeks, Harrington had become aware of numerous changes in product safety guidelines that he knew would impact the new Rockingham toys. Golopolus was taking no action to implement new guidelines, and he did not seem to

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Ethical challenge

to worry what might happen if he did not act. Rockingham had a fine product safety reputation and was rarely challenged on matters of quality. He felt loyalty to Golopolus for giving him a job, but he worried that Golopolus was in over his head. W h at d o yo u d o ?

1 Prepare a memo to Golopolus, summarising the new safety guidelines that affect the Rockingham product line and recommending implementation. 2 Mind your own business. You do not have authority to monitor the government regulations. Besides, you have been unemployed and need this job. 3 Send copies of the reports anonymously to the operations manager, who is Golopolus’s boss.

Source: Based on Wallace, D. (March–April 1993). The Man Who Knew Too Much: What Would You Do? Business Ethics, II, 7–8.

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Gr oup challenge

Fa m i ly b u s i n e s s

Step 1. In groups of three to five students, assume that you are a consulting team to a family business. The family has used an inheritance to acquire a medium-sized pharmaceutical company. Last year, sales were down 10 per cent from the previous year. Indeed, business has declined over the past three years, even though the pharmaceutical industry has been growing. The family that acquired the business seeks your help. Step 2. Your task as a group is to rank the priority of the departmental functions in the order of importance for assigning additional resources to improve business in the future. Step 3. Individually, rank the following 10 functions in order of importance, and make a note of your reasons: ➜ Distribution ➜ Manufacturing

Case for cr itical analysis

➜ Market research ➜ New-product development ➜ Human resources ➜ Product promotion ➜ Quality assurance ➜ Sales ➜ Legal and governmental affairs ➜ Office of the comptroller Step 4. As a group, discuss the order of importance for the 10 functions, sharing your reasons for how functional priority should relate to the company’s strategic needs. Step 5. How does the group’s reasoning and ranking differ from your original thinking? Step 6. What did you learn about organisation structure and design from this exercise?

Abraham’s Grocery

The first Abraham’s Grocery Store was started in 1967 by Bill Abraham and his sister Doris. They used a small inheritance to start a small grocery store, and it was immediately successful. The location was good, and both Bill and Doris had winning personalities and a ‘serve the customer’ attitude. Abraham’s rapidly growing number of customers enjoyed an abundance of good meats and produce, for which Abraham’s became well known. By 2007, Abraham’s had over 200 stores. There were four regional managers responsible for about 50 stores each. Within each region, there were four districts of 12 to 13 stores each. Because the stores specialised in excellent meats and produce, there was a separate meat department manager, grocery department manager and produce department manager within each store. The grocery department manager also served as the store manager, but this person did not have direct authority over the meat department or the produce department. The store meat department manager reported directly to a district meat manager specialist, and the store produce department manager reported directly to a district produce manager specialist. The

promote a sale on Coke products as a loss leader. Hundreds of cases of Coke were brought into the store for the big sale, but the meat and produce department managers would not give up floor space to display Coke cases. The frustrated store manager insisted that this was no way to run a business and quit on the spot. Many stores experienced conflict rather than cooperation among the meat, produce and store managers because each was very protective of their separate responsibilities. Doris Abraham asked a consultant for advice. The consultant recommended a reorganisation within each store so that the meat, grocery and produce departments would all report to the store manager. The store manager thus would have complete control over store activities and would be responsible for coordinating across the meat, produce and grocery departments. The meat department manager in each store would report to the store manager and would also have a dashed-line relationship (communication, coordination) with the district meat specialist. Likewise, each store produce department manager would have a dashed-line relationship with the district produce specialist. The store manager would report directly to the district store supervisor. The district meat and produce specialists would visit individual stores periodically to provide advice and help the store department heads to ensure top quality

store manager (who is also the grocery department manager) reported directly to a district store supervisor. This direct line of authority for each store department provided excellent quality control over the meat, produce and grocery departments within individual stores. However, there was growing dissatisfaction within the stores. The turnover of store managers was high, mostly because they had no control over the meat and produce departments within their stores. Coordination within stores was terrible, such as when a store manager decided to

in the meat, produce and grocery areas. The consultant was enthusiastic about the proposed structure. Store managers would have more freedom and responsibility. By assigning responsibility for all store departments to the store manager, the new structure would encourage coordination within stores and give managers the ability to adapt to local tastes and customer needs. The dashedline relationships would ensure excellent meat, grocery and produce departments across all stores.

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Q uestions 1 Based on the information available in the case, sketch a picture of the original structure within an Abraham’s store and the store managers’ relationship with district specialist managers. What type of structure is this? Explain. 2 Based on the information available in the case, sketch a picture of the consultant’s recommended structure within the store and the

 relationship of store department managers with district specialist managers. What type of structure is this? Explain. 3 What are some of the advantages and disadvantages you see for the two types of structures? Which structure do you think will work best for Abraham’s? Why?

Mo d e r n S h e d : d e s i g n i n g a d a p t i v e o r g a n i s at i o n s For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

On the job video case

Q uestions 1 Which of the five approaches to structural design is used at Modern Shed, and how are the company’s departments organised and coordinated? 2 What are the advantages and disadvantages of Modern Shed’s organisational structure?

3 How did Ryan Smith determine whether his company needed a mechanistic structure with a formal vertical hierarchy or an organic one involving free-flowing partnerships?

Endnotes 1 Pollack, A. (24 February 2005). Medical Firms Join the Trend to Outsourcing. The New York Times; Rai, S. (14 July 2004). India Sees Backlash Fading Over Boom in Outsourcing. The New York Times, http:// www.nytimes.com/2004/07/14/business/worldbusiness/14infosys.html (accessed 13 March 2014). 2 Child, J. (1984). Organization: A Guide to Problems and Practice, 2nd edn (London: Harper & Row). 3 Smith, A. (1937). The Wealth of Nations (New York: Modern Library). 4 Daft, R. L. (1992). Organization Theory and Design, 4th edn (St Paul: West), pp. 387–8. 5 C. I. Barnard. (1938). The Functions of the Executive (Cambridge, MA: Harvard University Press). 6 Stewart, T. A. (6 November 1989). CEOs See Clout Shifting. Fortune, 66. 7 O’Loughlin, M. J. (November 1990). What Is Bureaucratic Accountability and How Can We Measure It? Administration & Society, 22:3, 275–302. 8 Adam Lashinsky. (23 May 2011). Inside Apple. Fortune, 125–34. 9 Leana, C. R. (1986). Predictors and Consequences of Delegation. Academy of Management Journal, 29, 754–74. 10 Clifford Krauss and Julia Werdigier. (30 September 2010). BP’s New Chief, Not Formally in the Role, Is Already Realigning Senior Managers. The New York Times, B3; and Guy Chazan. (29 September 2010). BP’s New Chief Puts Emphasis on Safety. The Wall Street Journal, http://online.wsj .com/article/SB10001424052748704116004575521394170919842.html (accessed 14 August 2012). 11 Ian Urbina. (5 June 2010). In Gulf, It Was Unclear Who Was in Charge of Oil Rig. The New York Times; and Douglas A. Blackmon et al. (27 May 2010). There Was ‘Nobody in Charge’. The Wall Street Journal. 12 George Anders. (24 March 2008). Overseeing More Employees – With Fewer Managers (Theory & Practice column), The Wall Street Journal. 13 Barbara Davison. (2003). Management Span of Control: How Wide Is Too Wide? Journal of Business Strategy, 24:4, 22–9; Paul D. Collins and Frank

Hull. (March 1986). Technology and Span of Control: Woodward Revisited. Journal of Management Studies, 23, 143–64; David D. Van Fleet and Arthur G. Bedeian. (1977). A History of the Span of Management. Academy of Management Review, 2, 356–72; and C. W. Barkdull. (May 1963). Span of Control – A Method of Evaluation. Michigan Business Review, 15, 25–32. 14 Reported in Brian Dive. (26 August 2008). Hierarchies for Flow and Profit. Strategy + Business, http://www.strategybusiness.com/ article/08315 (accessed 25 May 2010). 15 Dive. Hierarchies for Flow and Profit; and Gary Neilson, Bruce A. Pasternack and Decio Mendes. (10 December 2003). The Four Bases of Organizational DNA. Strategy + Business, 33: 48–57. 16 Anders. Overseeing More Employees; Davison. Management Span of Control; Brian Dive. (July–August 2003). When Is an Organization Too Flat? Across the Board, 20–3; Brian Dumaine. (3 July 1989). What the Leaders of Tomorrow See. Fortune, 48–62; and Raghuram G. Rajan and Julie Wulf. The Flattening Firm: Evidence from Panel Data on the Changing Nature of Corporate Hierarchies. Working paper, reported in Caroline Ellis. (Summer 2003). The Flattening Corporation. MIT Sloan Management Review, 5. 17 Gary L. Neilson and Julie Wulf. (April 2012). How Many Direct Reports? Harvard Business Review, 112–19; John Bussey. (17 May 2011). Has Time Come for More CIOs to Start Reporting to the Top? The Wall Street Journal, http://online.wsj.com/article/SB10001424052748704281504576327510720 752684.html (accessed 14 August 2012). 18 William G. Ouchi. (March–April 2006). Power to the Principals: Decentralization in Three Large School Districts. Organization Science, 17:2, 298–307. 19 Sarah Lyall. (24 July 2010). Britain Plans to Decentralize Health Care. The New York Times, http://www.nytimes.com/2010/07/25/world/ europe/25britain.html?pagewanted=all (accessed 14 August 2012).

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20 O’Reilly, B. (26 December 1994). J&J Is on a Roll. Fortune, 178–91; Weber, J. (2 May 1992). A Big Company That Works. BusinessWeek, 124–32. 21 Chandler, C. and Ingrassia, P. (11 April 1991). Just as US Firms Try Japanese Management, Honda Is Centralising. The Wall Street Journal, A1, A10. 22 Miles, M. E. (Winter 1989). Adapting to Technology and Competition: A New Industrial Relation System for the Twenty-first Century. California Management Review, 9–28. 23 Galbraith, J. R. and McCann, J. (1981). Interdepartmental Relations, in Nystrom, P. C. and W. Starbuck (eds). Handbook of Organizational Design (New York: Oxford University Press), pp. 60–84; Duncan, R. (Winter 1979). What Is the Right Organization Structure? Organizational Dynamics, 59–80; Galbraith, J. R. (1973). Designing Complex Organisations (Reading: Addison-Wesley); Galbraith, J. R. (1977). Organization Design (Reading: Addison-Wesley). 24 Branch, S. (3 February 1997). So Much Work, So Little Time. Fortune, 115–17; Tharp, M. (17 April 1986). LSI Logic Corp. Does as the Japanese Do. The Wall Street Journal, 6. 25 Kramer, R. J. (1993). Organizing for Global Competitiveness: The Geographic Design (New York: The Conference Board), pp. 29–31; http://www.colgate .com/app/Colgate/US/Corp/Annual-Reports/2009/Financial-Highlights/ Growth-Highlights-Of-Five-Divisions.cvsp (accessed 25 March 2014). 26 Burns, L. R. (1989). Matrix Management in Hospitals: Testing Theories of Matrix Structure and Development. Administrative Science Quarterly, 34, 349–68. 27 Davis, S. M. and Lawrence, P. R. (1977). Matrix (Reading: Addison-Wesley). 28 Robert C. Ford and W. Alan Randolph. (1992). Cross-Functional Structures: A Review and Integration of Matrix Organization and Project Management. Journal of Management, 18:2, 267–94; and Thomas Sy and Laura Sue D’Annunzio. (2005). Challenges and Strategies of Matrix Organizations: Top-Level and Mid-Level Managers’ Perspectives. Human Resources Planning, 28:1, 39–48. 29 These disadvantages are based on Sy and D’Annunzio. Challenges and Strategies of Matrix Organizations; and Michael Goold and Andrew Campbell. (June 2003). Making Matrix Structures Work: Creating Clarity on Unit Roles and Responsibilities. European Management Journal, 21:3, 351–63. 30 Fishman, C. (April 2000). Total Teamwork: Imagination Ltd. Fast Company, 156–68. 31 Geoff Keighley. (September 2005). Massively Multinational Player. Business 2.0, 64–6. 32 Coleman, H. G. Jr, Matthews, J. A., Miles, G., Miles, R. E. and Snow, C. C. (1997). Organizing in the Knowledge Age: Anticipating the Cellular Form. Academy of Management Executive, 11:4, 7–24; Miles, R. E. and Snow, C. C. (Spring 1995). The New Network Firm: A Spherical Structure Built on a Human Investment Philosophy. Organizational Dynamics, 5–18. 33 Miles, R. E. and Snow, C. C. (Spring 1986). Organizations: New Concepts for New Forms. California Management Review, 28, 62–73; Wilson, J. W. and Dobrzynski, J. H. (3 March 1986). And Now, the Post-Industrial Corporation. BusinessWeek, 64–74. 34 Dess, G. G., McLaughlin, K. J., Priem, R. L. and Rasheed, A. M. A. (1995). The New Corporate Architecture. Academy of Management Executive, 9:3, 7–20. 35 Dess et al. The New Corporate Architecture; Byrne, J. (20 December 1993). The Horizontal Corporation. BusinessWeek, 76–81. 36 Miles, M. E. Adapting to Technology and Competition.

37 These disadvantages are based on Cecily A. Raiborn, Janet B. Butler and Marc F. Massoud. (2009). Outsourcing Support Functions: Identifying and Managing the Good, the Bad, and the Ugly. Business Horizons 52, 347–56; Dess et al. The New Corporate Architecture; Anand and Daft. What Is the Right Organization Design?; Henry W. Chesbrough and David J. Teece. (August 2002). Organizing for Innovation: When Is Virtual Virtuous? The Innovative Entrepreneur, 127–34; N. Anand. Modular, Virtual, and Hollow Forms of Organization Design; and M. Lynne Markus, Brook Manville and Carole E. Agres. (Fall 2000). What Makes a Virtual Organization Work? Sloan Management Review, 13–26. 38 Miles and Snow. Organizations: New Concepts for New Forms. Miles, M. E. Adapting to Technology and Competition. 39 Dess et al. The New Corporate Architecture. 40 Kavanagh, J. (13 September 2001). Strategy. Business Review Weekly, 58. 41 Siekman, P. (21 January 2002). The Snap-Together Business Jet. Fortune, 104[A]–104[H]. 42 Kerwin, K. (9 November 1998). GM: Modular Plants Won’t Be a Snap. BusinessWeek, 168, 172. 43 Laurie P. O’Leary. (Spring 1996). Curing the Monday Blues: A U.S. Navy Guide for Structuring Cross-Functional Teams. National Productivity Review, 43–51; and Alan Hurwitz. (May–June 1996). Organizational Structures for the ‘New World Order’. Business Horizons, 5–14. 44 Jay Galbraith, Diane Downey and Amy Kates. (2002). Processes and Lateral Capability. Designing Dynamic Organizations (New York: AMACOM), Chapter 4. 45 Thomas Kayser. (Summer 2011). Six Ingredients for Collaborative Partnerships. Leader to Leader, 48–54. 46 Panel Says Toyota Failed to Listen to Outsiders. USA Today, 23 May 2011, http://content.usatoday.com/communities/driveon/post/2011/05/toyota-panelcalls-for-single-us-chief-paying-heed-to-criticism/1 (accessed 16 August 2012). 47 William J. Altier. (February 1987). Task Forces: An Effective Management Tool. Management Review, 52–7. 48 Henry Mintzberg. (1979). The Structure of Organizations (Englewood Cliffs, NJ: Prentice Hall). 49 Neilson, G., Pasternack, B. A. and Mendes, D. (10 December 2003). The Four Bases of Organizational DNA. Strategy + Business, 33, 48–57. 50 Paul R. Lawrence and Jay W. Lorsch. (November–December 1967). New Managerial Job: The Integrator. Harvard Business Review, 142–51. 51 Ronald N. Ashkenas and Suzanne C. Francis. (November–December 2000). Integration Managers: Special Leaders for Special Times. Harvard Business Review, 108–16. 52 Jody Hoffer Gittell. (2003). The Southwest Airlines Way: Using the Power of Relationships to Achieve High Performance (New York: McGraw-Hill). 53 This discussion is based on Jody Hoffer Gittell. (November 2002). Coordinating Mechanisms in Care Provider Groups: Relational Coordination as a Mediator and Input Uncertainty as a Moderator of Performance Effects. Management Science 48:11, 1408–26; J. H. Gittell. (Winter 2004). The Power of Relationships. Sloan Management Review,16–17; and J. H. Gittell, The Southwest Airlines Way. 54 Claudio Feser. (Summer 2012). Long Live Bureaucracy. Leader to Leader, 57–65; and Harold J. Leavitt. (March 2003). Why Hierarchies Thrive. Harvard Business Review, 96–102, discuss the benefits and problems of vertical hierarchies. See Timothy Galpin, Rod Hilpirt and Bruce Evans. (2007). The Connected Enterprise: Beyond Division of Labor. Journal of Business Strategy, 28:2, 38–47, for a discussion of the advantages of horizontal over vertical designs.

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55 Eric M. Olson, Stanley F. Slater and G. Tomas M. Hult. (2005). The Importance of Structure and Process to Strategy Implementation. Business Horizons, 48, 47–54; and Dale E. Zand. (2009). Strategic Renewal: How an Organization Realigned Structure with Strategy. Strategy & Leadership, 37:3, 23–8. 56 Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press), pp. 36–46. 57 Tom Burns and G. M. Stalker (1961). The Management of Innovation (London: Tavistock).

58 John A. Coutright, Gail T. Fairhurst and L. Edna Rogers. (1989). Interaction Patterns in Organic and Mechanistic Systems. Academy of Management Journal, 32, 773–802. 59 Coca-Cola, http://www.thecoca-colacompany.com/citizenship/index. html (accessed 25 March 2014); SKM, http://www.skmconsulting.com/ Knowledge-and-Insights/News/2008/SKM-appoints-CSO.aspx (accessed 25 March 2014).

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ test your understanding of the fundamentals of organising by taking the revision quiz ➜ use the online crossword to revise relevant key terms and their definitions ➜ apply your knowledge to the case projects.

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Cour seMate

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Define organisational change and explain the

forces driving innovation and change in today’s organisations.

2 Identify the three innovation strategies that

managers implement for changing products and technologies.

3 Explain the value of creativity, a bottom-up

approach, internal contests, idea incubators, idea champions, and new-venture teams for innovation.

4 Describe the horizontal linkage model and how

it contributes to successful product and service innovations.

5 Explain open innovation and how it is being used by today’s organisations.

6 Discuss why changes in people and culture are critical to any change process.

7 Define organisation development (OD) and large group interventions.

8 Explain the OD stages of unfreezing, changing, and refreezing.

9 Identify sources of resistance to change and describe the implementation tactics that managers can use to overcome resistance.

C h a p t e r 11

Managing change and innovation

Chapter outline ➜ Turbulent times and the changing workplace ➜ Innovation and the changing workplace ➜ Changing things: new products and technologies Exploration Cooperation Entrepreneurship and innovation roles

➜ Changing people and culture

Training and development Organisation development

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➜ Implementing change

Need for change Resistance to change Force-field analysis Implementation tactics

➜ Implementing sustainable development in the organisation

New Manager Self-test A r e y o u i n n o vat i v e ? Think about your current life. Indicate whether each item below is Mostly true or Mostly false for you. Mostly true

Mostly false

1 I am always seeking new ways to do things. 2 I consider myself creative and original in my thinking and behaviour. 3 I rarely trust new gadgets until I see whether they work for people around me. 4 In a group or at work, I am often sceptical of new ideas. 5 I typically buy new foods, gear, and other innovations before other people. 6 I like to spend time trying out new things. 7 My behaviour influences others to try new things. 8 Among my co-workers, I will be among the first to try out a new idea or method. Scoring and interpretation: Personal innovativeness reflects the awareness of the need to innovate and a readiness to try new things. Innovativeness is also thought of as the degree to which a person adopts innovations earlier than other people in the peer group. Innovativeness is considered a positive thing for people in many companies where individuals and organisations are faced with a constant need to change. To compute your score on the Personal Innovativeness scale, add the number of Mostly true answers to items 1, 2, 5, 6, 7, 8 above and the Mostly false answers to items 3 and 4 for your score. A score of six to eight indicates that you are very innovative and likely are one of the first people to adopt changes. A score of four to five would suggest that you are average or slightly above average in innovativeness compared to others. A score of zero to three means that you may prefer the tried and true and hence are not excited about new ideas or innovations. As a new manager, a high score suggests you will emphasise innovation and change. A low score suggests you may prefer stability and established methods. Source: Based on H. Thomas Hurt, Katherine Joseph and Chester D. Cook. (1977). Scales for the Measurement of Innovativeness. Human Communication Research, 4:1, 58–65, and John E. Ettlie and Robert D. O’Keefe. (1982). Innovative Attitudes, Values, and Intentions in Organizations. Journal of Management Studies, 19:2, 163–82.

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Management Challenge

Samsung Electronics began selling black-and-white televisions in Korea in the early 1970s and soon expanded its product line and extended its markets around the world. But when Samsung chairman Kun-Hee Lee visited a Los Angeles retailer two decades later, he had a painful experience. While customers inspected and admired the cutting-edge equipment from companies such as Sony, Nokia and Motorola, Samsung’s products sat gathering dust on back shelves, ignored even by the sales clerks. It was a wake-up call to Lee, who realised that foreign consumers had come to regard Samsung products as cheap, low-quality knockoffs, suitable only for the bargain bin. Back home in Korea, things weren’t looking so bright, either. To celebrate the growing success of Samsung Group, the electronics firm’s parent company, Lee had given Samsung mobile phones to friends and colleagues. Within days, he began receiving complaints that the phones were defective. Humiliated, Lee issued an order that $50 million worth of inventory from the company’s Gumi factory be piled

The Samsung managers

in a heap in the courtyard and destroyed. Top managers and employees watched as workers smashed phones, fax machines and other products under a banner proclaiming that Samsung would become known as a world-class innovator. ‘We must change no matter what,’ the chairman proclaimed. But managers knew it wouldn’t be easy. Samsung’s culture was focused on imitation, not innovation, and its strong traditions made it ultraresistant to change. Question If you were a manager at Samsung, what steps would you have taken to encourage creativity and get designers and engineers to come up with innovative products rather than crank out cheap imitations? What techniques would you have used to overcome resistance and implement the desired changes? Sources: Breen, B. (December 2005). The Seoul of Design. Fast Company, 90–9; Lewis, P. (19 September 2005). A Perpetual Crisis Machine. Fortune, 58–76.

struggling with change were not alone in their predicament. Many firms in Australia, New Zealand, US, Europe and Japan recognise the need for greater product and service innovation to keep pace with technological and societal advances and compete with the growing power of companies in China and other developing countries. Rather than focusing on ways to improve efficiency and cut costs, today’s companies are rewiring their organisations for creativity and innovation. Some observers of business trends suggest that the knowledge economy of the late 1900s and early 2000s is being transformed into the creativity economy. As more high-level knowledge work is outsourced to lessdeveloped countries, companies everywhere are evolving to the next level, generating economic value from creativity, imagination and innovation.1 For many Australian organisations, becoming more innovative is their greatest challenge and opportunity. Most Australian organisations find it difficult to compete on cost with Asian competitors, which means that creativity and innovation are not just a ‘nice-to-have’, but are becoming essential capabilities for survival. This applies all the way from Australia’s big banks such as Westpac and ANZ and the country’s biggest mining company BHP Billiton to the smallest of niche players in every corner of the economy. Glance through recent back issues of just about any business magazine and you will see them: Fast Company’s ‘Most Innovative Companies.’ Forbes’s ‘World’s Most Innovative Companies List’. Everyone’s talking about innovation and extolling the virtues of companies that do it right. Innovation is at the top of everyone’s priority list today, but managing innovation and change has always been an important management capability. If organisations don’t successfully change and innovate, they die. Consider that just 71 of the companies on Fortune magazine’s first list of America’s 500 largest corporations, compiled in 1955, survived the next half-century.2 Every organisation sometimes faces the need to change swiftly and dramatically to cope with a changing environment. For example, Nokia was the world’s largest maker of mobile phone handsets, but it lost its leading position by failing to match popular products like the Apple iPhone.3 And as described in this chapter’s Management Challenge, Samsung Electronics was becoming a brand associated with

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cheap, low-quality knockoffs until managers implemented new processes that transformed the company into a hotbed of innovation. ‘We cannot live without change,’ said previous Samsung Vice Chairman and CEO Jong-Yong Yun. ‘The race for survival in this world is not to the strongest, but to the most adaptive.’4

Turbulent times and the changing workplace Today’s organisations face an almost continual need for change. Sometimes, changes are brought about by forces outside the organisation; for example, when a powerful retailer such as Woolworths demands annual price cuts, or when a key supplier goes out of business. Consider the global financial crisis (GFC) of 2008–10: it was not anticipated, yet it forced major and difficult changes on most organisations. In China, organisations feel pressure from the government to increase wages to help workers cope with rising food costs. These outside forces compel managers to look for greater efficiencies in operations and other changes to keep their organisations profitable. At other times, managers within the company want to initiate major changes, such as forming employee-participation teams, introducing new products or instituting new training systems, but they don’t know how to make the change successful. Organisations must embrace many types of change. Businesses must develop improved production technologies, create new products and services desired in the marketplace, implement new administrative systems and upgrade employees’ skills. Companies such as Samsung, ANZ Bank, BHP Billiton, Apple, Toyota and General Electric implement all of these changes and more. How important is organisational change? Consider this: the parents of today’s university students grew up without email, digital cameras, laptop computers, iPads, Facebook and Twitter, laser checkout systems and online shopping. As companies that produce the new products and services prosper, many companies are caught with outdated products and failed technologies. Today’s successful companies are constantly innovating. Phone companies are investing in technology to push deeper into the television and broadband markets. Car makers General Motors and Toyota are perfecting fuel-cell and electric power systems that could make today’s internal combustion engine as obsolete as the steam locomotive5 (as described in the Continuing Case sections of this book). Computer companies have been developing computers that are smart enough to configure themselves, balance huge workloads, update their own software and know how to anticipate and fix problems before they happen.6 Organisations that change successfully are both profitable and admired. As evidence, innovative companies such as Target and Procter & Gamble have seen median profit margin growth of 3.4 per cent a year since 1995, compared to only 0.4 per cent for the median among Standard & Poor’s Global 1200 companies.7

Innovation and the changing workplace Organisational change is defined as the adoption of a new idea or behaviour by an organisation.8 In this

chapter, we look at how organisations can be designed to respond to the environment through internal change and development. First we look at two key aspects of change in organisations: introducing new products and technologies, and changing people and culture. Then we examine the basic forces for change and present a model for planned organisational change. Finally, we discuss how managers implement change, including overcoming resistance. Many organisations struggle with changing successfully. In some cases, employees don’t have the desire or motivation to come up with new ideas, or their ideas never get

organisational change The adoption of a new idea or behaviour by an organisation.

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organisational change

ambidextrous approach Incorporating structures and processes that are appropriate for both the creative impulse and for the systematic implementation of innovations. disruptive innovation Innovations in products, services or processes that radically change an industry’s rules of the game for producers and consumers.

Source: Thinkstock/Tatsianama

Technological advances in smartphones have paved the way for mobile credit card readers from providers such as Square, Intuit GoPayment and Merchant Anywhere. This disruptive innovation has been a major step forward for small business owners, allowing them to accept credit card payments on the fly and with minimal transaction fees. The mobile readers are especially useful for merchants who sell their wares in outdoor environments, such as flea markets, arts and crafts fairs, and farmers’ markets.

heard by managers who could put them into practice. In other cases, managers learn about good ideas but have trouble getting cooperation from employees for implementation. Successful change requires that organisations be capable of both creating and implementing ideas, which means the organisation must learn to be ambidextrous.9 An ambidextrous approach means incorporating structures and processes that are appropriate for both the creative impulse and for the systematic implementation of innovations. For example, a loose, flexible structure and greater employee freedom are excellent for the creation and initiation of ideas; however, these same conditions often make it difficult to implement a change because employees are less likely to comply. Or, as one scholar put it, companies ‘that are healthy enough to consider innovation are also hearty enough to resist change’.10 With an ambidextrous approach, managers encourage flexibility and freedom to innovate and propose new ideas with creative departments, venture teams and other mechanisms we will discuss in this chapter, but they use a more rigid, centralised and standardised approach for implementing innovations. In the following section, we discuss technology and product changes, which typically rely on new ideas that bubble up from lower levels of the organisation. Disruptive innovation is becoming a goal for companies that want to remain competitive on a global basis. Disruptive innovation refers to innovations in products, services, or processes that radically change an industry’s rules of the game for producers and consumers. DVDs all but wiped out the videotape industry, and now streaming video is threatening the same fate for DVDs. Digital cameras appear to be eliminating the photographic film industry. A company called Square developed a credit card reader that plugs into a smartphone. This is a disruptive innovation in the trillion-dollar financial services system for credit card payments. Square enabled millions of small businesses that couldn’t afford the transaction fees charged by financial companies to begin accepting credit cards.11 Many disruptive innovations come from small entrepreneurial firms like Square, founded by Twitter inventor Jack Dorsey. Some observers think companies in emerging markets such as China and India will produce a great percentage of such innovations in the coming years.12 In addition, Western firms are increasingly using an approach referred to as trickle-up innovation or reverse innovation. Rather than innovating in affluent countries and transferring products to emerging markets, companies such as General Electric (GE), John Deere, Nestlé, Procter & Gamble (P&G) and Xerox are creating innovative low-cost products for emerging markets and then quickly and inexpensively repackaging them for sale in developed countries. GE Healthcare’s team in China created a portable ultrasound machine that sold for less than 15 per cent of the cost of the company’s high-end machines. GE now sells the product around the world, and it grew to a $278 million global product line within six years. John Deere developed a high-quality, low-cost tractor for farmers in India that is increasingly in demand in the United States among farmers reeling from the global financial crisis.13 However, change – especially major change – is not easy, and many organisations struggle with changing successfully. In some cases, employees don’t have the desire or motivation to come up with new ideas, or their ideas never get heard by managers who could put them into practice. In other cases, managers learn about good ideas but have trouble getting cooperation from employees for implementation. Successful change requires that organisations be capable of both creating and implementing ideas, which means the organisation must learn to be ambidextrous.

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organic materials as a substitute for plastic, the company unveiled a mouse casing that was 100 per cent biodegradable. Now, the race is on. Fujitsu’s innovations offer a visionary promise that one day, all our electronic devices will be part of the sustainability revolution. Source: Staff writers. (25 January 2011). Fujitsu Unveils ‘World’s First’ Biodegradable Mouse. Business Green, http://www. businessgreen.com/bg/news/1939343/fujitsuunveils-worlds-biodegradable-mouse (accessed 25 January 2011).

➜➜ Every organisation must change and innovate to survive. ➜➜ Organisational change is defined as the adoption of a new idea or behaviour by an organisation.

Source: Thinkstock/triloks

We all have them: old laptops stuffed into closets, computer monitors, hard drives, and printers crammed into the corners of the garage. And who can forget the mouse (five of them, actually, still attached to cords) jammed into a drawer? In a world focused on sustainability, the challenge for managers in the electronics industry is how to change and innovate when the large outer casings for our products won’t go away. Fujitsu broke this barrier by developing a keyboard made from renewable materials. A year later, using

➜➜ An ambidextrous approach means incorporating structures and processes that are appropriate for both the creative impulse and the systematic implementation of innovations.

➜➜ Disruptive innovation refers to innovations in products, services or processes that radically change competition in an industry, such as the advent of streaming video or e-books.

Case study

Building a better mouse . . .

Remember This

Changing things: new products and technologies Competition is more intense than ever before, and companies are driven by a new innovation imperative. The past decade’s attention to efficiency in operations is no longer enough to keep organisations successful in a new, hypercompetitive environment. To thrive, companies must innovate more – and more quickly – than ever. One vital area for innovation is introducing new products and technologies. A product change is a change in the organisation’s product or service outputs. Product and service innovation is the primary way in which organisations adapt to changes in markets, technology and competition.14 Examples of new products include Apple’s iPad Air, Holden Volt and Renault–Nissan’s Leaf. The introduction of online filing of tax returns by the Australian Taxation Office is an example of a new service innovation. Product changes are related to changes in the technology of the organisation. A technology change is a change in the organisation’s production process – how the organisation does its work. Technology changes are designed to make the production of a product or service more efficient. The adoption of automatic mail sorting machines by Australia Post is one example of a technology change.

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product change A change in the organisation’s product or service outputs.

technology change A change that pertains to the organisation’s production process.

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Innovation Exhibit 11.1 Three innovative strategies for new products and technologies

Three critical innovation strategies for changing products and technologies are illustrated in Exhibit 11.1.15 The first strategy, exploration, involves designing the organisation to encourage creativity and the initiation of new ideas. The strategy of cooperation refers to creating conditions and systems to facilitate internal and external coordination and knowledge sharing. Finally, entrepreneurship means that managers put in place processes and structures to ensure that new ideas are carried forward for acceptance and implementation. Exploration Creativity

Cooperation

Entrepreneurship

Horizontal coordination mechanisms

Idea champions

Experimentation Idea incubators

Customers, partners

Skunkworks

Open innovation

New venture fund

New venture teams

Explo r ati o n

US swimmer Michael Phelps, who scored an historic eight gold medals at the Olympics in Beijing, wears the new Speedo LZR Racer one-piece suit. Olympic swimmers wearing the LZR Racer broke 25 world records. Speedo’s ‘world’s-fastestswimsuit’ innovation was developed with help from NASA scientists. The seams of the suit are ultrasonically sealed and wind-tunnel tested for surface drag. Each athlete gets a 3-D body scan to create a suit with core support in critical areas to make swimmers more streamlined. The US$550 price was a good deal for Phelps. His sponsor Speedo gave him a US$1 million bonus for his recordbreaking eight-medal win.

Source: AAP Image/Kathy Willens

creativity The generation of novel ideas that might meet perceived needs or offer opportunities for the organisation.

Exploration is the stage where ideas for new products and technologies are born. Managers design the organisation for exploration by establishing conditions that encourage creativity and allow new ideas to spring forth. Creativity, which refers to the generation of novel ideas that might meet perceived needs or respond to opportunities for the organisation, is the essential first step in innovation.16 People noted for their creativity include Edwin Land, who invented the Polaroid camera; Richard Tait and Whit Alexander, who came up with the idea for the mega-hit board game Cranium; and Swiss engineer George de Mestral, who created Velcro after noticing the tiny hooks on the burrs caught on his wool socks. Each of these people saw unique and creative opportunities in a familiar situation. Characteristics of highly creative people are illustrated in the left-hand column of Exhibit 11.2. Creative people often are known for originality, open-mindedness, curiosity, a focused approach to problem solving, persistence, a relaxed and playful attitude, and receptivity to new ideas.17 Creativity can also be designed into organisations. Companies or departments within companies can be organised to be creative and initiate ideas for change. Most companies want more highly creative employees and often seek to hire creative individuals. However, the individual is only part of the story, and each of us has some potential for creativity. Managers are responsible for creating a work environment that allows creativity to flourish.18 Creative organisations are loosely structured. People find themselves in a situation of ambiguity, assignments are vague, territories overlap, tasks are loosely defined, and much work is done by teams. Managers in creative companies embrace risk and experimentation. They involve employees in a varied

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New Manager Self-test A s s e s s y o u r c r e at i v i t y Instructions: In the list below, check each adjective that you believe accurately describes your personality. Be very

honest with yourself. Check all the words that fit your personality.

 1 affected___

11 honest___

21 original___

 2 capable___

12 humorous___

22 reflective___

 3 cautious___

13 individualistic___

23 resourceful___

 4 clever___

14 informal___

24 self-confident___

 5 commonplace___

15 insightful___

25 sexy___

 6 confident___

16 intelligent___

26 snobbish___

 7 conservative___

17 interests narrow___

27 sincere___

 8 conventional___

18 interests wide___

28 submissive___

 9 egotistical___

19 inventive___

29 suspicious___

10 dissatisfied___

20 mannerly___

30 unconventional___

Scoring and interpretation: Add one point for checking each

had average scores of 6.0, and 124 male architects received an of the following words: 2, 4, 6, 9, 12, 13, 14, 15, 16, 18, 19, 21, 22, average score of 5.3. A group of 335 female psychology students 23, 24, 25, 26 and 30. Subtract one point for checking each of the had an average score of 3.34. If you have a score above 5.0, your following words: 1, 3, 5, 7, 8, 10, 11, 17, 20, 27, 28 and 29. personality would be considered above average in creativity. Score 5 ______. The highest possible score is +18; the lowest To what extent do you think your score reflects your true possible score is 212. Innovation starts with creativity. Your creativity? Compare your score to others in your class. Which score on this questionnaire reflects your creativity for solving adjectives were more important for your score compared to problems and finding novel solutions. The average score for a other students? set of 256 males on this creativity scale was 3.57, and for Source: Harrison G. Clough. (1979). A Creative Personality Scale for the Adjective Check 126 females was 4.4. A group of 45 male research scientists List. Journal of Personality and Social Psychology, 37:8, 1398–405. and a group of 530 male psychology graduate students both

range of projects, so that people are not stuck in the rhythm of routine jobs, and they drive out the fear of making mistakes that can inhibit creative thinking.19 Research shows that successful innovations are often accompanied by a high rate of failure. SurePayroll, a payroll-services company, gives out an annual ‘Best New Mistake’ cash award to keep people taking creative risks. Similarly, Grey, an advertising agency, awards an annual ‘Heroic Failure’ trophy.20 Creative organisations are those that have an internal culture of playfulness, freedom, challenge and grass-roots participation.21 Exhibit 11.3 shows the world’s top ten innovative companies from the 2012 list in Fast Company.

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The creative individual Persistence Commitment Focused approach

1.

Resources allocated to creative personnel and projects without immediate payoff Reward system encourages innovation Absolution of peripheral responsibilities

Conceptual fluency Open-mindedness

Originality

2.

5.

The creative organisation

1.

3.

3. 4.

Playfulness Undisciplined exploration Curiosity

Sources: Based on Gary A. Steiner, ed., The Creative Organization (Chicago: University of Chicago Press, 1965), pp. 16–18; Rosabeth Moss Kanter. (July–August 1982). The Middle Manager as Innovator. Harvard Business Review, 104–5; James Brian Quinn. (May–June 1985). Managing Innovation: Controlled Chaos. Harvard Business Review, 73–84; Robert I. Sutton. (September 2001). The Weird Rules of Creativity. Harvard Business Review, 94–103; and Bridget Finn. (April 2005). Playbook: Brainstorming for Better Brainstorming. Business 2.0, 109–14.

2.

5.

4.

Exhibit 11.2 Characteristics of creative people and organisations

Open channels of communication Contact with outside sources Overlapping territories; crosspollination of ideas across disciplines Suggestion systems, brainstorming, freewheeling discussions

Less authority Independence Self-confidence

Freedom to choose and pursue problems Not a tight ship, playful culture, doing the impractical Freedom to discuss ideas; long time horizon

Assigning nonspecialists to problems Eccentricity allowed Hiring outside your comfort zone

Decentralisation, loosely defined positions, loose control Acceptance of mistakes; rewarding risk-taking People encouraged to challenge their bosses

To keep creativity alive at Google, managers let people spend 20 per cent of their time working on any project they choose, even if the project doesn’t tie in with the company’s central mission. Many Google managers hold open office hours two or three times a week, when anyone can come by to bat around ideas.22 People who interview for a job at the company are often asked, ‘If you could change the world using Google’s resources, what would you build?’ Google’s managers instil a sense of creative fearlessness, which is part of the reason Google shows up at the top of numerous lists of most innovative companies.23 Exhibit 11.3 shows the top 10 innovative companies from one recent list.

Exhibit 11.3 The world’s most innovative companies 2012 Rank

Company

Reason

    1

Apple

Creating markets others have to compete in

  2

Facebook

Ever-widening platform for people to share information

  3

Google

Transforming from search to a diversified web power

  4

Amazon

Constantly transforming itself

  5

Square

Reinventing the process of making and taking credit payments

 6

Twitter

Strengthening global dialogue

  7

The Occupy Movement

Challenging the political, financial and social establishment

  8

Tencent

Advancing China’s Internet boom

  9

Life Technologies

Products that speed up genetic sequencing

10

SolarCity

Being a full-service provider of new solar technology Source: (March 2012). The World’s 50 Most Innovative Companies. Fast Company, 70–149.

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Source: Courtesy of Richard Gunn

Richard Gunn, Director of Property, PGA Group Following a Bachelor of Commerce degree and MBA, Richard Gunn has spent 17 years in the workforce, including the past 10 as General Manager of the property division of a major private company, PGA (Management) Pty Ltd. His views on managerial work are outlined below.

➜➜ Benefits of being a manager. It is not too difficult to find advantages that come with the position of manager. Perhaps the most obvious plus is the pay, but the job will also deliver a certain amount of power and prestige, as well as a sense of personal achievement. Most of the nonmonetary benefits are intangible, such as getting to develop or have large input into the strategy, setting policy and direction, leading people/staff, exerting power over others and controlling their actions, having more freedom to decide what to do, having an opportunity to contribute and make a difference, trying out ideas, experiencing the high and lows (success/failure) of the company, and having accountability and responsibility. In short, feeling less like another ‘cog in the wheel’. The position of manager can be a very frustrating business, but it can also be very rewarding as well. The most rewarding aspect, after achieving a certain level of pay scale, is having the power to implement an idea and see it through to successful completion. The personal sense of achievement is ultimately worth more than the increase in pay grade.

➜➜ Challenges facing managers and organisations in the future. Where does one start? These are: population growth and the movement from third-world to first-world; environmental concerns – water quality, air pollution, and so on; food shortages. Regardless of what the future

Austr alian Manager Pr ofile challenges are for the world, businesses will continue to operate in a free market and exploit opportunities that the world presents in the future. The past 20 years have seen the increased pace of change and globalisation challenging the way business has traditionally been done. The key driver of change has been technology/computers and the rapid (almost instant) exchange of information from which decisions are made. As a result, the world has become one marketplace that is challenging traditional supply chains and the people managing them. Because of the pace of change, the business cycle has shortened and the way for an organisation to survive is by reshaping to meet the needs of a rapidly changing world. The challenge for management is to develop staff/people who are best equipped to meet these challenges. Resistance to change is a dead-end street for employees and for the organisation. Leaders need to emphasise action to make the change as quickly and smoothly as possible. A leader who fails to follow through the needed change could preside over the end of an organisation. This is the biggest challenge facing managers/organisations of the future. Most businesses’ key assets are the people and the organisational culture. The demands on a manager are for them to impart vision, initiate change and make difficult decisions. To do this, a manager must be flexible and adaptable. A manager must instil feelings of confidence, admiration and commitment in their people by articulating a vision for which staff are willing to work. By coaching, advising and delegating some authority to staff a manager can stimulate staff intellectually and arouse them to develop new ways of thinking about problems. Leading staff in this manner is a challenge that is increasingly essential because it creates flexible and innovative culture that is the essence of creating and sustaining a competitive advantage via its culture. Employees work at a higher capacity and staff turnover is less, adding to competitive advantage. Source: Contributed by Richard Gunn.

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Innovative Way

PwC

‘We have an average age of 27, but we have roots in tax and assurance,’ said PricewaterhouseCoopers (PwC) US chairman Bob Moritz. ‘So how do you make this place feel like a Google or a Facebook? A place that feels leading edge?’ Like other companies, PwC has felt the sting of increased competition and a shaky global economy. Harnessing the creativity of all employees in the search for profitable ideas seemed not only like a good thing to do, but also like a business imperative. Mitra Best, PwC’s ‘innovation leader’ and a fan of American Idol, took ideas from that show, plus ideas from the videogame world of live chats and online discussions, to create PowerPitch, a fun, collaborative competition that would connect and inspire 30 000 PwC employees. Employees loved it. The competition, structured in three stages over a nine-month period, was open to any US employee below the partner level. Each contestant had to recruit a team and pitch either a new service or a radical rethinking of an existing service that could be worth $100 million in revenue. The winning

team would get a $100 000 prize, plus the chance to help implement the new idea. Nearly 800 proposals were pitched at Round One, and by the time of the grand finale, nearly 60 per cent of people in the firm had participated in one way or another – direct participation, voting, comments and suggestions, and so forth. The five finalist teams were flown to PwC headquarters in New York to present their proposals and answer questions from judges in a packed corporate auditorium. Offices around the country held viewing parties, watching the competition via live Webcast. The winning team, led by 25-year-old financial services associate Zachary Capozzi, proposed creating a sophisticated data-mining practice within PwC that uses the sort of analytics that Netflix uses to predict which movies customers are interested in. For clients who don’t have that capability in-house, the service can be invaluable – and it can be a source of new clients and a big new revenue stream for PwC.

Source: Alison Overholt. (17 October 2011). American Idol: Accounting Edition. Fortune, 100–6.

bottom-up approach Encouraging the flow of ideas from lower levels and making sure they are heard and acted upon by top executives.

Concept extension

Experiential exercise

Innovative companies use a bottom-up approach, which means encouraging the flow of ideas from lower levels and making sure they get heard and acted upon by top executives.24 At Intuit, managers sponsor Design for Delight (D4D) forums, typically attended by more than 1000 employees. Two employees who had been at Intuit for only a few months came up with the idea of an online social network for the D4D initiative. In the first year, the network generated 32 ideas that made it to market.25 Japanese pharmaceutical firm Eisai Company encourages a bottom-up flow of ideas with innovation community forums that focus on specific health-care-related issues. One idea now on the market in Japan is technology for dispensing medications in a jellylike substance that Alzheimer’s patients can swallow easily.26 This chapter’s Management in Practice describes a fun technique some companies use to get people to come up with creative ideas for solving specific problems. Some companies also use internal innovation contests. Mike Hall, CEO of Borrego Solar Systems, holds ‘innovation challenge’ contests on the company intranet to get his shy, introverted engineers to speak up with their ideas for improving the business. Employees vote on their favourites, and the winner takes home a cash prize. One idea that was quickly implemented was using software that enables sales and engineering teams to collaborate.27 Managers at the accounting and consulting firm PricewaterhouseCoopers

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Managemen t in Pr actice

Use six thinking hats for better ideas A technique that can promote broader thinking is called the six thinking hats, which was developed by Edward de Bono. The model encourages people in a group to combine negative and critical thinking with positive and creative thinking. Participants either literally or figuratively wear a hat to represent a distinct perspective. The wearing of the hats helps individuals step out of their comfort zone and generate creative ideas in a risk-free way. The six hats technique can transform a typical non-productive meeting into a highly creative problemsolving endeavour.

Neutral

Organisational

Emotional

The six hats ➜➜ White Hat: This thinking hat is neutral and concerned with just the objective facts, figures, and information pertaining to a problem.

Optimistic

Creative

➜➜ Red Hat: This hat allows an emotional response to the subject. It is a perspective based on feelings, intuitions, instincts, and hunches.

Negative

➜➜ Green Hat: The green hat is the one that generates new ideas, possibilities, alternatives, and unique solutions for better problem solving.

➜➜ Black Hat: This is the negative, pessimistic, and critical hat that focuses on why a suggestion will not work. When people wear this hat, they point out the flaws and false assumptions in an idea.

➜➜ Yellow Hat: The yellow hat is the opposite of the black hat. It is optimistic and focuses on the values and benefits of an idea. Its focus is on what will work.

➜➜ Blue Hat: This hat is concerned with group facilitation. The group leader typically assumes the blue hat role, although any member can wear the blue hat from time to time.

Using the technique To apply the six hats technique, schedule a specific time during a creative problem-solving meeting when every person in the group wears the same colour of hat – that is, takes the same perspective. A time is set aside when everyone uses rational, fact-based thinking (white hat), emotional thinking (red hat), creative thinking (green hat), and so forth. The result is that each perspective (hat) is heard in sequence, and negative views or arguments do not overwhelm creativity. Everyone together has a time to think of good ideas, as well as a time for finding weak points.

Source: Based on Edward de Bono, Serious Creativity: Using the Power of Lateral Thinking to Create New Ideas (New York: HarperBusiness, 1992).

challenged the stereotype that accountants are boring and unimaginative by sponsoring an American Idol-style contest to spur employees to come up with creative ideas. European-based global company ABB achieved maturity in this regard when its advanced philosophy became that ‘Mistakes are OK as long as your batting average is high’.

Coo per ati o n Another important aspect of innovation is providing mechanisms for both internal and external coordination. Ideas for product and technology innovations typically originate at lower levels of the organisation and need to flow horizontally across departments. Implementation of an innovation typically requires changes

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Source: Reproduced with permission of Intuit

Innovative companies such as Intuit want everyone to continually be coming up with new ideas. Founder Scott Cook encourages creativity during the exploration phase by embracing failure as readily as they do success. ‘I’ve had my share of really bad ideas,’ Cook admits. Yet failure can have hidden possibilities. Sticky notes, such as those shown here on Intuit’s board, were invented at 3M Corporation based on a failed product – a not-very-sticky adhesive that resulted from a chemist’s attempts to create a superglue. Post-it Notes became one of the best-selling office products ever.

➜➜ A product change is a change in the organisation’s products or services. ➜➜ Technology change refers to a change in production processes – how the organisation does its work.

➜➜ Exploration involves designing the organisation to encourage creativity and the initiation of new ideas. ➜➜ Creativity is the generation of novel ideas that may meet perceived needs or respond to opportunities for the organisation.

Take a Moment As a new manager, you can inspire people to be more creative by giving them opportunities to explore ideas outside their regular jobs and encouraging them to experiment and take risks. Be open-minded and willing to listen to ‘crazy ideas’, and let people know it’s okay to make mistakes.

Remember This

➜➜ PricewaterhouseCoopers applied a bottom-up approach, using an American Idol-style contest to encourage employee ideas for new services at the giant accounting and consulting firm.

in behaviour across several departments. In addition, people and organisations outside the firm can be rich sources of innovative ideas. Lack of innovation is widely recognised as one of the biggest problems facing today’s businesses. Consider that 72 per cent of top executives surveyed by BusinessWeek and the Boston Consulting Group reported that innovation is a top priority, yet almost half said they are dissatisfied with their results in that area.28 Thus, many companies are undergoing a transformation in the way they find and use new ideas, focusing on improving both internal and external coordination.

Int er nal coor di natio n Successful innovation requires expertise from several departments simultaneously, and failed innovation is often the result of failed cooperation.29 Sony, once the epitome of Japanese business and innovation success, is literally fighting to stay alive because the company hasn’t had a hit product in years and hasn’t turned a profit since 2008. Sony had been battered by one disruptive new technology or unexpected competitor after another, but the biggest problem was that managers were unable to fight back because of poor cooperation within the organisation. The company had the technology to create a music player like the iPod long before Apple came out with it (co-founder Akio Morita actually envisioned such a

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device in the 1980s), but divisions couldn’t cooperate to bring the idea to fruition. Today, some top executives complain about managers who refuse to share information or work with other divisions. Consequently, the company makes a lot of different gadgets that overlap and cannibalise one another and offers disjointed services for different products rather than an integrated common platform to deliver music, movies and games.30 ‘Innovation is a team sport,’ says Drew Boyd, a businessman who speaks about innovation to other companies.31 (Sony is banking on its recently released PlayStation 4 to revive the company’s fortunes.) Companies that successfully innovate usually have the following characteristics: ●● People in research and marketing actively work with customers to understand their needs and develop solutions. ●● Technical specialists are aware of recent developments and make effective use of new technology. ●● A shared new product development process that is advocated and supported by top management cuts across organisational functions and units. ●● Members from key departments – research, manufacturing, marketing – cooperate in the development of the new product or service. ●● Each project is guided by a core cross-functional team from beginning to end.32 One approach to successful innovation is called the horizontal linkage model, which is illustrated in the centre circle of Exhibit 11.4.33 The model shows that the research, manufacturing, and sales and marketing departments within an organisation simultaneously contribute to new products and technologies. People from these departments meet frequently in teams and task forces to share ideas and solve problems. Research people inform marketing of new technical developments to learn whether they will be useful to customers. Marketing people pass customer complaints to research to use in the design of new products and to manufacturing people to develop new ideas for improving production speed and quality. Manufacturing informs other departments whether a product idea can be manufactured within cost limits. Throughout the process, development teams keep in close touch with customers. A study by McKinsey found that 80 per cent of successful innovators periodically test and validate customer preferences during development of new products and services.34 Unfortunately, ‘new products can take on a life of their own within an organisation, becoming so hyped that there’s no turning back,’ wrote Joan Schneider and Julie Hall, coauthors of The New Launch Plan: 152 Tips, Tactics, and Trends from the Most Memorable New Products. This is likely what happened with Coca-Cola’s failed introduction of ‘New Coke’ in the mid-1980s and its more recent launch of Coke C2, a failed product aimed at 20- to 40-year old men that promised half the calories and carbs but all the taste of original Coke. The product development team became so committed to the new product that it failed to look objectively at marketing data.35 Just as important as creating ideas is turning them into action. Sadly, research indicates that, on average, an employee’s ideas are implemented only once every six years.36 ‘There’s nothing worse for morale than when employees feel like their ideas go nowhere,’ says Larry Bennett, a professor of entrepreneurship.37 At PricewaterhouseCoopers, all of the final ideas in the innovations challenge were assigned to a senior ‘champion’, who will help the teams further develop and implement their proposals. Other ideas from the top 20 semifinalists were assigned to an idea incubator group. An idea incubator is a mechanism that provides a safe harbour where ideas from employees throughout the company can be developed without interference from company bureaucracy or politics.38

horizontal linkage model An approach to product change that emphasises shared development of innovations among several departments.

idea incubator An in-house program that provides a safe harbour where ideas from employees throughout the organisation can be developed without interference from company bureaucracy or politics.

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Innovative Way

Corning

Plastic screens on cell phones are easily scratched and broken, which gave a small team in Corning’s specialty materials division an idea: What if they could find a way to make mobile screens out of a super-strong but flexible glass that the company had originally attempted (unsuccessfully) to sell for automobile windshields in the 1960s? Just producing an experimental batch to gauge customer interest would cost as much as US$300 000, but managers took the risk because the project had a strong idea champion. Once the test run was completed and potential customers expressed excitement, managers had to move quickly. Corning took the project from concept to commercial success in an amazingly short period of time. One reason is that the company had both the right culture and the right systems. Corning divisions and departments know that top managers expect, support, and reward collaboration on promising new product launches. Innovation at Corning is managed not by lone inventors or small teams in silos, but rather by multidisciplinary groups all across the organisation. The company has two units – the Corporate Technology

Council and the Growth and Strategy Council – that are charged with overseeing the innovation process and making sure departments effectively cooperate in new product development efforts that are sanctioned by management. Thus, employees from R&D, manufacturing, and sales quickly agreed to serve on the team developing the new glass product. By 2013, Corning’s mobile phone glass, called Gorilla Glass, was used on more than three dozen mobile phones as well as some laptops, Ultra books and even some TVs and cameras other devices. Gorilla Glass is projected to be a $500 million business by 2015. By 2013 over one billion mobile devices have been sold globally using Gorilla Glass as the screen and Corning has continued to innovate and improve this important product, making it lighter, harder and recyclable. Through using a horizontal linkage model for new product development, Corning has been highly effective in rapidly taking products from idea to success in the marketplace.

Source: William J. Holstein. (1 March 2010). Five Gates to Innovation. Strategy + Business, http://www.strategy-business.com/article/00021?gko=0bd39 (accessed 16 September 2011).

fast-cycle team A multifunctional team that is provided with high levels of resources and empowerment to accomplish an accelerated product development project.

The horizontal linkage model is increasingly important in today’s high-pressure business environment that requires developing and commercialising products and services incredibly fast. Sprinting to market with a new product requires a parallel approach, or simultaneous linkage among departments.39 Speed is emerging as a pivotal strategic weapon in the global marketplace for a wide variety of industries.40 Stockholm’s H&M (Hennes & Mauritz) has become one of the hottest fashion retailers around because it can spot trends and rush items into stores in as little as three weeks. Nissan cut the time it takes to get a new car to market from 21 months to about 10.41 Some companies use fast-cycle teams to deliver products and services faster than competitors, giving them a significant strategic advantage. A fast-cycle team is a multifunctional, and sometimes multinational, team that works under stringent timelines and is provided with high levels of resources and empowerment to accomplish an accelerated product development project.42

Ext er nal coor di natio n Exhibit 11.4 shows that organisations look outside their boundaries to find and develop new ideas. Engineers and researchers stay aware of new technological developments. Marketing personnel pay attention to shifting market conditions and customer needs. Some organisations build formal strategic partnerships such as alliances and joint ventures to improve innovation success.

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Source: Shutterstock.com/Ken Wolter

Successful companies often include customers, strategic partners, suppliers and other outsiders directly in the product and service development process. One of the hottest trends is open innovation.43 In the past, most businesses generated their own ideas in-house and then developed, manufactured, marketed and distributed them, which is a closed innovation approach. Today, however, forwardlooking companies are trying a different

Open innovation mechanisms

New technologies

anisation Org

How does eBay keep coming up with new approaches to business and new sources of income? By tapping into the collective intelligence of customers, employees and outsiders. ‘It is far better to have an army of a million than a command and control system,’ said eBay’s former CEO Meg Whitman, referring to eBay’s approach of letting buyers and sellers largely determine how the company operates. The company thrives on this process of open innovation. eBay also runs an annual Innovation Demo Expo to encourage eBay employees to come up with new and innovative ideas that would benefit eBay buyers and sellers.

Manufacturing Department

Research Department

Marketing Department

Horizontal linkages Formal innovation partners

Customers, market needs

method. Open innovation means extending the search for and commercialisation of new ideas beyond the boundaries of the organisation and even beyond the boundaries of the industry, sharing knowledge and resources with other organisations and individuals outside the firm. For example, game maker Rovio extended the commercialisation of the Angry Birds brand into books, movies and toys by letting outsiders license the popular gaming app.44 Some of the best-selling products from consumer products company Procter & Gamble, including the Swiffer SweeperVac, Olay Regenerist and Mr Clean Magic Eraser, were developed in whole or in part by someone outside the firm.45 Even Apple, which has always been famously ‘closed’ in many ways, has found a way to tap into the power of open innovation. For example, although the company sets guidelines and technological constraints, it allows anyone to create and market mobile applications for the iPhone in exchange for a small share of the revenue generated by the apps. Apple generates around US$75 million in revenue a month through its App Store.46

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Exhibit 11.4 Coordination model for innovation

open innovation Extending the search for and commercialisation of new ideas beyond the boundaries of the organisation.

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The Internet has made it possible for companies to tap into ideas from around the world and let hundreds of thousands of people contribute to the innovation process, which is why some approaches to open innovation are referred to as crowdsourcing. Fiat introduced the first crowdsourced car, the Mio, in 2010. The automaker launched a website asking people to think about what the car of the future should be like, and more than 17 000 people around the world submitted ideas.47 Oscar de la Renta has a ‘digital inspiration board’ on the Internet, where anyone can upload images for new designs to inspire the next fashion collection. Goldcorp, a Canadian gold mining firm, asked people to examine its geologic data over the Web and submit proposals for locations to find more gold. With a prize to the top 25 finalists of $500 000, the company received more than 475 000 tips and solutions, which confirmed many suspected deposits and identified some new ones.48 Crowdsourcing is also being used to gather creative ideas for solving social problems. After the devastating earthquake in Haiti Take a in 2010, for example, relief workers trying to dispatch health care Moment workers and supplies had 400 street addresses that might be Even as a new manager, clinics. They asked for help over the Internet in ‘geotagging’ you can make sure people are communicating and cooperating across the addresses (putting coordinates on a map), and nearly all organisational boundaries. Implement 400 were mapped within 24 hours. Having people physically mechanisms to help your team or check addresses might have taken weeks. Similarly, following department members stay in touch the disastrous 2011 earthquake and tsunami in Japan, with what’s happening in other crowdsourced maps gave local relief workers a better picture departments and in the marketplace. of the situation and helped them set priorities for distribution of food, shelter and sanitation services.49

Innovative Way

Procter & Gamble

The SwifferVac. Crest Spin Brush. Mr Clean Magic Eraser. Valentino Rock ‘n Rose Eau de Parfum. Olay Regenerist. These are some of Procter & Gamble’s best-selling products – and all of them were developed in whole or in part by someone outside of P&G. The technology for the Mr Clean Magic Eraser was originally developed by Germany’s BASF for soundproofing and insulation in the construction and automotive industries. The Crest Spin Brush was invented by a small entrepreneurial firm in Cleveland. For many years, Procter & Gamble has been recognised as successful because of its systematic innovation capability. This has driven its growth and success across a wide range of consumer product sectors. In pursuit of developing the best ideas possible, Procter & Gamble CEO A. G. Lafley set a goal to get 50 per cent of the company’s

innovation from outside the organisation, up from about 35 per cent in 2004 and only 10 per cent in 2000. The company’s top executives estimated that for every P&G researcher there were 200 scientists elsewhere who were just as good, so why not tap into that vast pool of creativity and talent? P&G developed a detailed, well-organised process for open innovation with its Connect and Develop strategy, which taps into networks of inventors, scientists, academics, partners and suppliers to embrace the collective brains of the world. When P&G wanted to make snacks more fun by printing trivia questions, animal facts, jokes and cartoon characters on its Pringles potato crisps, it drew up a technology brief defining the problem and circulated it throughout the global network. It turned out that a small bakery in Bologna, Italy, had an ink-jet method for printing edible images on cakes that P&G was able to adapt for use on the potato crisps. The innovation of Pringles Prints

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helped P&G’s North America Pringles division achieve doubledigit growth for the next two years. But P&G doesn’t just look for extensions of its current product categories. An important part of its open innovation process is networking with external scientists in totally new

areas that could lead to totally new businesses. For instance, who would have thought that the company that brings us Tide and Pampers could rival beauty titan Chanel in premium fragrance sales?

Sources: Huston, L. and Sakkab, N. (March 2006). Connect and Develop; Inside Procter & Gamble’s New Model for Innovation. Harvard Business Review, 58–66; Cloyd, G. G. (December 2004). P&G’s Secret: Innovating Innovation. Industry Week, 26–34; von Stamm, B. (2004). Collaboration with Other Firms and Customers: Innovation’s Secret Weapon. Strategy & Leadership, 32, 3; Berner, R. (12 August 2002). Why P&G’s Smile Is So Bright. BusinessWeek, 58–60; Hof, R. D. (11 October 2004). Building an Idea Factory. BusinessWeek, 194–200; Sellers, P. (31 May 2004). P&G: Teaching an Old Dog New Tricks. Fortune, 167–80; Byron, E. (12 November 2007). Bottle Curve; P&G’s Push Into Perfume Tests a Stodgy Marketer. The Wall Street Journal.

➜➜ Successful product and service innovation depends on cooperation, both within the organisation and with customers and others outside the organisation. ➜➜ Using a horizontal linkage model means that several departments, such as marketing, research and

manufacturing, work closely together to develop new products. ➜➜ An idea incubator is an organisational program that provides a safe harbour where employees can generate and develop ideas without interference from company bureaucracy or politics.

➜➜ Some companies extend the search for and commercialisation of innovative ideas beyond the boundaries of the organisation – a process called open innovation.

Remember This

➜➜ Crowdsourcing, an open innovation approach, taps into ideas from around the world and lets thousands or hundreds of thousands of people participate in the innovation process, usually via the Internet.

Entrepren eu rshi p an d inn ovatio n ro les The third aspect of product and technology innovation is creating structural mechanisms to make sure new ideas are carried forward, accepted and implemented. Managers can directly influence whether entrepreneurship flourishes in the organisation by expressing support of entrepreneurial activities, giving employees a degree of autonomy, and rewarding learning and risk-taking.50 One important factor is fostering idea champions. The formal definition of an idea champion is a person who sees the need for and champions productive change within the organisation. Remember, change does not occur by itself. Personal energy and effort are required to promote a new idea successfully. When Texas Instruments studied 50 of its new-product introductions, a surprising fact emerged: without exception, every new product that failed lacked a zealous champion. In contrast, most of the new products that succeeded had a champion. Managers made an immediate decision: no new product would be approved unless someone championed it. Similarly, at SRI International, a contract research and development firm, managers use the saying ‘No champion, no product, no exception’.51 Research confirms that successful new ideas are generally those that are backed by someone who believes in the idea wholeheartedly and is determined to convince others of its value.52 Recall how the winning proposals at PricewaterhouseCoopers innovation contest were all assigned to a senior champion so they didn’t get lost in the everyday shuffle. Sometimes a new idea is rejected by top managers, but champions are passionately committed to a new idea or product despite rejection by others. For example, Robert Vincent was fired twice by two different division managers at a semiconductor company. Both times, he convinced the president and chairman of the board to reinstate him to continue working on

idea champion A person who sees the need for and champions productive change within the organisation.

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new-venture team A unit separate from the mainstream of the organisation that is responsible for developing and initiating innovations.

skunkworks A separate small, informal, highly autonomous, and often secretive group that focuses on breakthrough ideas for the business.

new-venture fund A fund providing resources from which individuals and groups can draw to develop new ideas, products or businesses.

his idea for an airbag sensor that measures acceleration and deceleration. He couldn’t get approval for research funding, so Vincent pushed to finish another project in half the time and used the savings to support the new product development.53 Championing an idea successfully requires roles in organisations, as illustrated in Exhibit 11.5. Sometimes a single person may play two or more of these roles, but successful innovation in most companies involves the interplay of different people, each adopting one role. The inventor comes up with a new idea and understands its technical value but has neither the ability nor the interest to promote it for acceptance within the organisation. The champion believes in the idea, confronts the organisational realities of costs and benefits, and gains the political and financial support needed to bring it to reality. The sponsor is a high-level manager who approves the idea, protects the idea and removes major organisational barriers to acceptance. The critic counterbalances the zeal of the champion by challenging the concept and providing a reality test against hard-nosed criteria. The critic prevents people in the other roles from adopting a bad idea.54 Another way to facilitate entrepreneurship is through a new-venture team. A new-venture team is a unit separate from the rest of the organisation that is responsible for developing and initiating a major innovation.55 New-venture teams give free rein to members’ creativity because their separate facilities and location unleash people from the restrictions imposed by organisational rules and procedures. These teams typically are small, loosely structured and flexible, reflecting the characteristics of creative organisations described earlier in this chapter, in Exhibit 11.2. One good example is Nestlé’s Nespresso venture, which developed a line of high-quality coffees packaged in individual capsules for use in specially designed coffee machines. The team found itself hampered by the large company’s rules, structures and regulations. In addition, the project faced resistance from managers who feared the new premium line would hurt the existing Nescafé brand. Top managers moved the Nespresso business outside the existing structure so it could thrive with an entrepreneurial culture and promote innovative ideas.56 Procter & Gamble has established several new-business creation groups that search for and develop breakthrough ideas that cross multiple businesses and divisions. These teams are partly responsible for a dramatic increase in P&G’s innovation success rate.57 One variation of a new-venture team is called a skunkworks.58 A skunkworks is a separate small, informal, highly autonomous and often secretive group that focuses on breakthrough ideas for a business. The original skunkworks, which still exists, was created by Lockheed Martin more than 50  years ago. The essence of a skunkworks is that highly talented people are given the time and freedom to let creativity reign.59 Consider the clandestine Google X lab, which was so hush-hush that, until The New York Times wrote about it, even many of Google’s employees didn’t know it existed. Google X is a top-secret lab in an undisclosed location where engineers are working on shoot-for-the-moon ideas like driverless cars, space elevators that can collect information from or haul things into space, and robots that can attend a conference for you while Take a you stay at the office.60 Similarly, at GM, the location of the skunkworks Moment facility known as Studio X is kept secret even from the automaker’s top As a new manager, have executives.61 the courage to promote useful change. Are you an idea A related idea is the new-venture fund, which provides resources champion for changes or new from which individuals and groups can draw to develop new ideas, ideas you believe in? To find out, products or businesses. At Pitney Bowes, for example, the New Business complete the ‘Taking charge Opportunity (NBO) program provides funding for teams to explore of change’ self-test in this chapter. potentially lucrative but unproven ideas. The NBO program is intended to generate a pipeline of new businesses for the mail and document management

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services company. Similarly, Royal Dutch Shell puts 10 per cent of its R&D budget into the GameChanger program, which provides seed money for innovation projects that are highly ambitious, radical or long-term and would get lost in the larger product development system.62 With these programs, the support and assistance of senior managers are often just as important as the funding.63

Develops and understands technical aspects of idea Does not know how to win support or make a business of it

Inventor

Critic

Champion

Sponsor

Provides reality test Looks for shortcomings Defines hard-nosed criteria that idea must pass

➜➜ To increase innovation, managers develop an internal culture, philosophy and structure that encourages entrepreneurial activity. ➜➜ An idea champion is a person who sees the need for change and is passionately committed to making it happen.

Believes in idea and visualises benefits Confronts realities of cost, resources Obtains financial and political support Overcomes obstacles

High-level manager who removes barriers Approves and protects idea within organisation

➜➜ One structural mechanism that promotes entrepreneurship is the new-venture team, which is a unit separate from the mainstream organisation that is responsible for initiating and developing innovations. ➜➜ A variation of the new-venture team is a skunkworks, a separate,



entrepreneurship

Concept Revision

Case project 11.1

Exhibit 11.5 Four roles in organisational change Sources: Based on Harold L. Angle and Andrew H. Van de Ven. Suggestions for Managing the Innovation Journey. In Research in the Management of Innovation: The Minnesota Studies, ed. A. H. Van de Ven, H. L. Angle and Marshall Scott Poole (Cambridge, MA: Ballinger/Harper & Row, 1989); and Jay R. Galbraith. (Winter 1982). Designing the Innovating Organization. Organizational Dynamics, 5–25.

informal, highly autonomous and often secretive group that focuses on breakthrough ideas.

Remember This

➜➜ A new-venture fund provides financial resources from which individuals or teams can draw to develop new ideas, products or businesses.

Changing people and culture All successful changes involve changes in people and culture as well. For example, getting products to market fast requires that people learn to work collaboratively. Changes in people and culture pertain to how employees think – changes in mindset. People change pertains to just a few employees, such as sending a handful of middle managers to a training course to improve their leadership skills. Culture change pertains to the organisation as a whole, such as when the IRS shifted its basic mindset from an organisation focused on collection and compliance to one dedicated to informing, educating and serving customers (taxpayers).64 In the business world, Jeff Immelt at General Electric strives to replace GE’s famous obsession with bottom-line results with a new culture of risk taking, bold thinking and creative energy.

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people change A change in the attitudes and behaviours of a few employees in the organisation. culture change A major shift in the norms, values, attitudes and mindset of the entire organisation.

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New top managers at GM have been praised for pulling the company back from bankruptcy and achieving impressive financial results, but even Dan Akerson, who stood down as CEO in January 2014, has said that in terms of changing the bureaucratic, tradition-bound culture, GM was at only about 25 per cent of where it wanted to be. One of Akerson’s goals was to get more women into top jobs, partly because he believes women can lead the radical culture change GM needs. Today, four of the company’s 12 directors are female, a woman heads global product development and some of the company’s biggest plants are run by women.65 On 15 January 2014, Mary Barra was appointed to the position of CEO of GM, becoming the first female CEO of a global automaker. Barra has over 33 years experience at GM and originally trained as an engineer. She has been credited with modifying GM’s culture during her time as Vice President of Global Human Resources and injecting an innovative ethos.66 Culture change of the magnitude required at GE and GM is not easy. Indeed, executives routinely report that improving people and corporate culture is their most difficult job.67 Two specific tools for changing people and culture are training and development programs and organisational development (OD).

New Manager Self-test Ta k i n g c h a r g e o f c h a n g e As a new manager, do you have what it takes to be an idea champion? Will you initiate change? Think of a job you held for a period of time. Answer the following questions according to your behaviours and perspective on that job. Please answer whether each item is Mostly true or Mostly false for you. Mostly true

1 I often tried to adopt improved procedures for doing my job. 2 I felt a personal sense of responsibility to bring about change in my workplace. 3 I often tried to institute new work methods that were more effective for the company. 4 I often tried to change organisational rules or policies that were non-productive or counterproductive. 5 It was up to me to bring about improvement in my workplace. 6 I often made constructive suggestions for improving how things operated. 7 I often tried to implement new ideas for pressing organisational problems. 8 I often tried to introduce new structures, technologies or approaches to improve efficiency.

Mostly false

Scoring and interpretation: An important part of a new manager’s job is to facilitate improvements through innovation and change. Will you be a champion for change? Your answers to the questions may indicate the extent to which you have a natural inclination towards taking charge of change. Not everyone thrives in a position of initiating change, but as a new manager, initiating change within the first six months will enhance your impact. Give yourself one point for each item you marked as Mostly true. If you scored 4 or less you may not have been flexing your change muscles on the job. You may need to become more active at taking charge of change. Moreover, you may need to be in a more favourable change situation. Research indicates that a job with open-minded management and a job where change is believed likely to succeed and be rewarded, increase a person’s initiative. So the organisation in which you are a new manager plus your own inclination will influence your initiation of change. A score of 5 or more suggests a positive level of previous change initiation behaviour and solid preparation for a new manager role as an idea champion. Source: Based on Morrison, E. W. and Phelps, C. C. (1999). Taking Charge at Work: Extrarole Efforts to Initiate Workplace Change. Academy of Management Journal, 42, 403–19.

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General Electric, long revered as a harddriving company focused on cost-cutting and process efficiency, evaluated and rewarded its managers based on the continual improvement of operations and their ability to achieve bottom-line results. Since he took over as CEO, however, Jeff Immelt has been on a mission to change that efficiency and productivity-oriented culture to one wired for creativity, risk taking and innovation. In today’s environment, Immelt knows that efficiency is not enough. To shift the culture towards one of bold thinking and creative energy, Immelt tossed out some of GE’s longstanding traditions and began evaluating top executives on innovation-oriented traits such as ‘external focus’ and ‘imagination and courage’. Bonuses are now linked to a manager’s ability to generate new ideas, improve customer satisfaction, and boost sales. In a gathering called the Commercial Council, top executives hold monthly phone meetings and meet in person each quarter to talk about new ideas and new markets. Division heads are expected to submit at least three ‘Imagination Breakthrough’ proposals a year that go before the council for evaluation and possible funding. Immelt has already committed at least US$5 billion to breakthrough projects that take GE into a new line of business, geographic region, or customer base. GE’s development of sodium batteries, which were originally designed to

power hybrid cars, has now become a standalone business, and Smart Patient Rooms for their healthcare sector and a joint venture with Honda to create a small jet engine have all originated from Imagination Breakthrough proposals. He also spent big bucks to beef up GE’s research facilities and create other structural mechanisms that foster a culture of creativity and imagination. GE currently invests $4.5 billion a year in research and development and has over 2500 total patents worldwide. Some executives hold ‘idea jams’, where people from various divisions brainstorm ideas. A ‘virtual idea box’ allows people to brainstorm and submit ideas over the Internet. Immelt knows this massive cultural shift is difficult for most of GE’s managers and employees. ‘These guys just aren’t dreamer types,’ said one consultant about GE’s workforce. ‘It almost seems painful to them, like a waste of time.’ Immelt, though, believes the culture change is essential to keep GE relevant and thriving in the changing world of the 21st century. Significantly, the conglomerate has moved to ‘disrupt’ their previously successful business model of ‘glocalisation’ which works by making performance-rich products for developed countries and then adapting them to meet more localised conditions and needs in emerging countries. GE has

looked to inverse this innovation model by focusing on local markets and technologies then distributing them globally. Their electrocardiogram machine is a good example of this as the breakthrough technology used to satisfy medical conditions in India and China (portability and price focused) enabled them to create a handheld device that is now being used at accident sites and in doctor’s offices across the globe. The business results tell the story, and in more than 10 years at the top of the company, Immelt’s continuing drive for company-wide innovation has delivered 60 per cent growth in revenue and a doubling of profits. He has led businesses to harness new technologies, processes and ways of working (known as business models) to drive innovative business success into this next decade. Sources: http://www.ge.com/about-us/fact-sheet (accessed 4 November 2013); http://www.gereports. com/reverse-innovation-how-ge-is-disrupting-itself/ (accessed 4 November 2013); Linebaugh, Kate (2011). Immelt and GE, 10 Years In. The Wall Street Journal, http://online.wsj.com/news/articles/ SB10001424053111903648204576552392321918126 (accessed 4 November 2013); Jeffrey R. Immelt, Vijay Govindarajan and Chris Trimble (1 October 2009). How GE is Disrupting Itself. Harvard Business Review, http://web.ebscohost. com.ezp.lib.unimelb.edu.au/ehost/pdfviewer/ pdfviewer?sid=bddcacdd-a718-486b-a818-0029a59 46025%40sessionmgr14&vid=5&hid=23 (accessed 4 November 2013); Brady, D. (28 March 2005). The Immelt Revolution. BusinessWeek, 64.

Tr ainin g an d d evelo pm ent Training is one of the most frequently used approaches to changing people’s mindsets. A company might offer training programs to large blocks of employees on subjects such as teamwork, diversity, emotional intelligence, quality circles, communication skills or participative management. General Electric, for example, initiated new courses in marketing and idea generation to help shift attitudes and values. Training and development programs aimed at changing individual behaviour and interpersonal skills are a big business for consultants, universities and training firms. Successful companies want to provide training and development opportunities for everyone, but they might particularly emphasise training and development for managers, with the idea that the behaviour and attitudes of managers will influence people throughout the organisation and lead to culture change.

Case study

General Electric

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A number of Silicon Valley companies, including Intel, AMD and Sun Microsystems, regularly send managers to the Growth and Leadership Center (GLC), where they learn to use emotional intelligence to build better relationships. Nick Kepler, when he was director of technology development at AMD, was surprised to learn how his emotionless approach to work was intimidating people and destroying the rapport needed to shift to a culture based on collaborative teamwork.68 Leading companies also want to provide training and development opportunities for everyone. An excellent example of training is First Data Corporation, which uses a multifaceted, team-based approach first initiated by former CFO Kim Patmore to boost morale among finance personnel.69 First Data’s ‘Extreme Teams’ bring together employees from all hierarchical levels to organise departmental training and development programs for each of First Data’s six regional finance units. One team is charged with organising a mentoring program that pairs less experienced personnel with seasoned managers who support and encourage them to make changes needed to further their own and the organisation’s wellbeing. Another team focuses on a program called ‘Fast Tracks’, an annual two-day seminar that brings people from all areas and levels of the company together to learn skills such as communication or conflict resolution. organisation development organisation development (OD) The application of behavioural science techniques to improve an organisation’s health and effectiveness through its ability to cope with environmental changes, improve internal relationships and increase learning and problemsolving capabilities.

O rganisati o n d evelo pm ent Organisation development (OD) is a planned, systematic process of change that uses behavioural science knowledge and techniques to improve an organisation’s health and effectiveness through its ability to adapt to the environment, improve internal relationships and increase learning and problemsolving capabilities.70 OD focuses on the human and social aspects of the organisation and works to change attitudes and relationships among employees, helping to strengthen the organisation’s capacity for adaptation and renewal.71 OD can help managers address at least three types of current problems:72

1 Mergers/acquisitions. The disappointing financial results of many mergers and acquisitions are

caused by the failure of executives to determine whether the administrative style and corporate culture of the two companies fit. Executives may concentrate on potential synergies in technology, products, marketing and control systems, but fail to recognise that two firms may have widely different values, beliefs and practices. These differences create stress and anxiety for employees, and these negative emotions affect future performance. Cultural differences should be evaluated during the acquisition process, and OD experts can be used to smooth the integration of two firms. 2 Organisational decline/revitalisation. Organisations undergoing a period of decline and revitalisation

experience a variety of problems, including a low level of trust, lack of innovation, high turnover and high levels of conflict and stress. The period of transition requires opposite behaviours, including confronting stress, creating open communication and fostering creative innovation to emerge with high levels of productivity. OD techniques can contribute greatly to cultural revitalisation by managing conflicts, fostering commitment and facilitating communication. 3 Conflict management. Conflict can occur at any time and place within a healthy organisation. For

example, a product team for the introduction of a new software package was formed at a computer company. Made up of strong-willed individuals, the team made little progress because members could not agree on project goals. At a manufacturing firm, salespeople promised delivery dates to customers that were in conflict with shop supervisor priorities for assembling customer orders. In a publishing

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company, two managers disliked each other intensely. They argued at meetings, lobbied politically against each other and hurt the achievement of both departments. Organisation development efforts can help resolve these kinds of conflicts, as well as conflicts that are related to growing diversity and the global nature of today’s organisations. Organisation development can be used to solve the types of problems just described and many others. However, to be truly valuable to companies and employees, organisation development practitioners go beyond looking at ways to settle specific problems. Instead, they become involved in broader issues that contribute to improving organisational life, such as encouraging a sense of community, pushing for an organisational climate of openness and trust, and making sure the company provides employees with opportunities for personal growth and development.73

OD a cti vi t i es A number of OD activities have emerged in recent years. Three of the most popular and effective include the following: 1 Team-building activities. Team building enhances the cohesiveness and success of organisational

groups and teams. For example, a series of OD exercises can be used with members of crossdepartmental teams to help them learn to act and function as a team. An OD expert can work with team members to increase their communication skills, facilitate their ability to confront one another and help them accept common goals.

team building A type of OD intervention that enhances the cohesiveness of departments by helping members learn to function as a team.

3 Large-group interventions. The need for bringing about fundamental organisational change in today’s

survey feedback A type of OD intervention in which questionnaires on organisational climate and other factors are distributed among employees and their results reported back to them by a change agent.

complex, fast-changing world prompted a growing interest in applications of OD techniques to large group settings.74 The large-group intervention approach brings together participants from all parts of the organisation – often including key stakeholders from outside the organisation as well – to discuss problems or opportunities and plan for change. A large-group intervention might involve 50 to 500 people and last several days. The idea is to include everyone who has a stake in the change, gather perspectives from all parts of the system, and enable people to create a collective future through sustained, guided dialogue.

large-group intervention An approach that brings together participants from all parts of the organisation (and may include key outside stakeholders as well) to discuss problems or opportunities and plan for major change.

2 Survey-feedback activities. Survey feedback begins with a questionnaire distributed to employees

on values, climate, participation, leadership and group cohesion within their organisation. After the survey is completed, an OD consultant meets with groups of employees to provide feedback about their responses and the problems identified. Employees are engaged in problem solving based on the data.

Traditional organisation development model

Large-group intervention model

Focus for action: Information Source: Distribution: Time frame: Learning:

Specific problem or group

Entire system

Organisation Limited

Organisation and environment Widely shared

Gradual

Fast

Individual, small group

Whole organisation

Change process:

Incremental change

Rapid transformation

Exhibit 11.6 OD approaches to culture change Source: Journal of Applied Behavioral Science by Barbara Benedict Bunker and Billie T. Alban. Copyright 1992 by Sage Publications Inc. Journals. Reproduced with permission of Sage Publications Inc. Journals in the format Textbook via Copyright Clearance Center.

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Large-group interventions reflect a significant shift in the approach to organisational change from earlier OD concepts and approaches. Exhibit 11.6 lists the primary differences between the traditional OD model and the large-scale intervention model of organisational change.75 In the newer approach, the focus is on the entire system, which takes into account the organisation’s interaction with its environment. The source of information for discussion is expanded to include customers, suppliers, community members, even competitors, and this information is shared widely so that everyone has the same picture of the organisation and its environment. The acceleration of change when the entire system is involved can be remarkable. In addition, learning occurs across all parts of the organisation simultaneously, rather than in individuals, small groups or business units. The result is that the large-group approach offers greater possibilities for fundamental, radical transformation of the entire culture, whereas the traditional approach creates incremental change in a few individuals or small groups at a time.

➜➜ Often, a manager’s toughest job is changing people and culture. ➜➜ People change refers to a change in the attitudes and behaviours of a few employees. ➜➜ Culture change is a major shift in the norms, values and mindset of the entire organisation. ➜➜ Organisation development (OD) is a planned, systematic process of change that uses behavioural science techniques to improve an organisation’s health and effectiveness through its ability to



cope with environmental changes, improve internal relationships and increase learning and problemsolving capabilities.

➜➜ OD can help managers with the task of blending corporate cultures following mergers and acquisitions, as well as with many other peoplerelated problems. ➜➜ Team building is an OD intervention that enhances cohesiveness by helping groups of people learn to work together as a team. ➜➜ With survey feedback, OD change agents survey employees to gather

their opinions regarding corporate values, leadership, participation, cohesiveness and other aspects of the organisation, then meet with small groups to share the results and brainstorm solutions to problems identified by the results.

Remember This

➜➜ Large-group intervention is an OD approach that brings together people from different parts of the organisation (and often including outside stakeholders) to discuss problems or opportunities and plan for change.

OD st ep s

unfreezing The stage of organisation development in which participants are made aware of problems in order to increase their willingness to change their behaviour. change agent An OD specialist who contracts with an organisation to facilitate change.

Organisation development experts acknowledge that changes in corporate culture and human behaviour are tough to accomplish and require major effort. The theory underlying OD proposes three distinct stages for achieving behavioural and attitudinal change: (1) unfreezing, (2) changing and (3) refreezing.76 The first stage, unfreezing, means that people throughout the organisation are made aware of problems and the need for change. This stage creates the motivation for people to change their attitudes and behaviours. Unfreezing may begin when managers present information that shows discrepancies between desired behaviours or performance and the current state of affairs. In addition, managers need to establish a sense of urgency to unfreeze people and create an openness and willingness to change. The unfreezing stage is often associated with diagnosis, which uses an outside expert called a change agent. The change agent is an OD specialist who performs a systematic diagnosis of the organisation and identifies work-related problems. He or she gathers and analyses data through personal interviews, questionnaires and observations of meetings. The diagnosis helps determine the extent of organisational problems and helps unfreeze managers by making them aware of problems in their behaviour.

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Innovative Way

General Electric’s work-out GE’s Work-Out began in large-scale off-site meetings facilitated by a combination of top leaders, outside consultants and human resources specialists. In each business unit, the basic pattern was the same. Hourly and salaried workers came together from many different parts of the organisation in an informal three-day meeting to discuss and solve problems. Gradually, the Work-Out events began to include external stakeholders, such as suppliers and customers, as well as employees. Today, Work-Out is not an event, but a process of how work is done and problems solved at GE. The format for Work-Out includes seven steps:

➜➜ Choose a work process or problem for discussion. ➜➜ Select an appropriate cross-functional team, to include external stakeholders.

➜➜ Assign a ‘champion’ to follow through on recommendations. ➜➜ Meet for several days and come up with recommendations

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➜➜ Meet with leaders, who are asked to respond to recommendations on the spot.

➜➜ Hold additional meetings as needed to implement the recommendations.

➜➜ Start the process all over again with a new process or problem. GE’s Work-Out process forces a rapid analysis of ideas, the creation of solutions and the development of a plan for implementation. Over time, this large-group process creates an organisational culture where ideas are rapidly translated into action and positive business results. This GE approach has been so effective in contributing to that company’s success, that it has been widely copied and adapted in many other organisations. However, few have been able to replicate the GE success rate and high impact on performance improvement.

to improve processes or solve problems. Sources: Ulrich, D., Kerr, S., Ashkenas, R., Burke, D. and Murphy, P. (2002). The GE Work-Out: How to Implement GE’s Revolutionary Method for Busting Bureaucracy and Attacking Organizational Problems – Fast! New York: McGraw-Hill; Quinn, J. (November 1994). What a Work-Out! Performance, 58–63; Bunker, B. B. and Alban, B. T. (December 1992). Conclusion: What Makes Large Group Interventions Effective? Journal of Applied Behavioral Science, 28:4, 570–91.

The second stage, changing, occurs when individuals experiment with new Take a Moment behaviour and learn new skills to be used in the workplace. This process As a new manager, look for and is sometimes known as intervention, during which the change agent implement training opportunities implements a specific plan for training managers and employees. The that can help people shift their changing stage might involve a number of specific steps.77 For example, attitudes, beliefs and behaviours towards managers put together a coalition of people with the will and power to what is needed for team, department and organisation success. Use organisation guide the change, create a vision for change that everyone can believe development consultants and techniques in, and widely communicate the vision and plans for change throughout such as team building, survey the company. In addition, successful change involves using emotion as feedback and large-group well as logic to persuade people and empowering employees to act on the intervention for widespread plan and accomplish the desired changes. change. changing The third stage, refreezing, occurs when individuals acquire new The intervention stage of attitudes or values and are rewarded for them by the organisation. The impact of organisation development in which individuals new behaviours is evaluated and reinforced. The change agent supplies new data that shows positive experiment with new changes in performance. Managers may provide updated data to employees who demonstrate positive workplace behaviour. changes in individual and organisational performance. Top executives celebrate successes and reward positive behavioural changes. At this stage, changes are institutionalised in the organisational culture, refreezing The reinforcement stage of so that employees begin to view the changes as a normal, integral part of how the organisation organisation development in operates. Employees may also participate in refresher courses to maintain and reinforce the new which individuals acquire a desired new skill or attitude behaviours. and are rewarded for it by the organisation.

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Innovative Way

ENSR

When top executives at ENSR began hearing that high employee turnover was hurting the company’s relationships with clients, they knew something had to be done. ENSR is a full service environmental services firm with around 3 000 employees in 90 locations around the world. Long-term relationships with clients are the key to ENSR’s success. To attack the turnover problem, managers embarked on a process of changing the culture. To make people aware of the need for change (unfreezing), ENSR’s president and CEO travelled with the senior vice president of human resources to the largest 50 or so of ENSR’s global locations. They held town-hall-style meetings with employees and leadership workshops with ENSR managers. The changing stage included training. Surveys were conducted to find out what employees considered their primary needs. For example,

supervisors were trained in how to help lower-performing employees improve their performance and how to provide greater challenge and rewards to employees who showed high potential for leadership. Within a few years, new behaviours became the norm. Turnover dropped from 22 per cent to only 9 per cent, one of the lowest rates in the industry, and employees were recognised and rewarded for meeting high individual and collective goals (refreezing). ENSR continues to attract highquality employees to fill job openings, which helps to keep the high-performance culture alive. In its changed and improved state, ENSR merged with and became a part of the bigger consulting firm AECOM, which has allowed it to pursue a wider range of market opportunities. The combined entity has 32 000 employees.

Source: Based on Bob Kelleher. (March–April 2009). Employee Engagement Carries ENSR Through Organizational Challenges and Economic Turmoil. Global Business and Organizational Excellence, 28:3, 6–19.

➜➜ OD practitioners recommend a three-stage approach for changing people’s attitudes and behaviour. ➜➜ Unfreezing is the stage in which people are made aware of problems and the need for change.

➜➜ Unfreezing requires diagnosing problems, which uses a change agent – an OD specialist who contracts with an organisation to help managers facilitate change. ➜➜ Changing is the ‘intervention’ stage of OD, when change agents teach people new behaviours and skills



and guide them in using them in the workplace.

Remember This

➜➜ At the refreezing stage, people have incorporated new values, attitudes and behaviours into their everyday work and the changes become institutionalised in the culture.

Implementing change The final step to be managed in the change process is implementation (also see Chapter 9). A new, creative idea will not benefit the organisation until it is in place and being fully used. Executives at companies around the world are investing heavily in change and innovation projects, but many of them say they aren’t very happy with their results.78 One frustration for managers is that employees often seem to resist change for no apparent reason. To effectively manage the implementation process, managers should be aware of the reasons people resist change and use techniques to enlist employee cooperation. Major, corporate-wide changes can be particularly challenging, as discussed in the Management in Practice box.

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Managemen t in Pr actice

Making change stick Employees are not always receptive to change. A combination of factors can lead to rejection of, or even outright rebellion against, management’s ‘new and better ideas’. Consider what happened when managers at Lands’ End Inc. of Dodgeville, Wisconsin, tried to implement a sweeping overhaul incorporating many of today’s management trends – teams, 401(k) plans, peer reviews, and the elimination of guards and time clocks. Despite managers’ best efforts, employees baulked. They had liked the old family-like atmosphere and uncomplicated work environment, and they considered the new requirement for regular meetings a nuisance. ‘We spent so much time in meetings that we were getting away from the basic stuff of taking care of business,’ says one employee. Even a much-ballyhooed new mission statement seemed ‘pushy’. One long-time employee complained, ‘We don’t need anything hanging over our heads telling us to do something we’re already doing.’ Confusion and frustration reigned at Lands’ End and was reflected in an earnings drop of 17 per cent. Eventually, a new CEO initiated a return to the familiar ‘Lands’ End Way’ of doing things. Teams were disbanded, and many of the oncepromising initiatives were shelved as workers embraced what was familiar. The inability of people to adapt to change is not a new phenomenon. Neither is the failure of management to sufficiently lay the groundwork to prepare employees for

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change. Harvard professor John P Kotter established an eightstep plan for implementing change that can provide a greater potential for successful transformation of a company:

➜➜ Establish a sense of urgency through careful examination of the market and identification of opportunities and potential crises.

➜➜ Form a powerful coalition of managers able to lead the change.

➜➜ Create a vision to direct the change and the strategies for achieving that vision.

➜➜ Communicate the vision throughout the organisation. ➜➜ Empower others to act on the vision by removing barriers, changing systems, and encouraging risk taking.

➜➜ Plan for and celebrate visible, short-term performance improvements.

➜➜ Consolidate improvements, reassess changes, and make necessary adjustments in the new programs.

➜➜ Articulate the relationship between new behaviours and organisational success. Major change efforts can be messy and full of surprises, but following these guidelines can break down resistance and mean the difference between success and failure.

Sources: Gregory A. Patterson. (3 April 1995). Lands’ End Kicks Out Modern New Managers, Rejecting a Makeover. The Wall Street Journal; and John P. Kotter. (March–April 1995). Leading Changes: Why Transformation Efforts Fail. Harvard Business Review, 59–67.

N eed fo r chan ge Many people are not willing to change unless they perceive a problem or a crisis. However, many problems are subtle, so managers have to recognise and then make others aware of the need for change.79 One way managers sense a need for change is through the appearance of a performance gap: a disparity between existing and desired performance levels. They then try to create a sense of urgency so that others in the organisation will recognise and understand the need for change (similar to the OD concept of unfreezing). Recall from Chapter 6 the discussion of SWOT analysis. Managers are responsible for monitoring threats and opportunities in the external environment as well as strengths and weaknesses within the organisation to determine whether a need for change exists. Big problems are easy to spot, but sensitive monitoring systems are needed to detect gradual changes that can fool managers into thinking their company is doing fine. An organisation may be in greater danger when the environment changes slowly, because managers may fail to trigger an organisational response. Failing to use planned change to meet small needs can place the organisation in hot water, as illustrated in the following passage: When frogs are placed in a boiling pail of water, they jump out – they don’t want to boil to death. However, when frogs are placed in a cold pail of water, and the pail is placed on a stove with the heat turned very low, over time the frogs will boil to death.80

performance gap A disparity between existing and desired performance levels.

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Innovative Way

Staying in the picture: Ted’s Cameras

Cameras are now sold in so many places and ways that a traditional camera store is threatened in new and different ways like never before. Mobile phones contain increasingly good cameras. Cameras can be bought from thousands of places on the Internet, without GST being paid and with low overhead costs. Chemist shops and many others have entered the camera business and are extending their ranges. People are increasingly developing and printing their own photos, or storing them online in the Internet cloud for friends and families to see. So how does a bricks and mortar camera shop, founded in 1970, survive, much less prosper? Ted’s, with 23 stores and a complementary online business, offers great service and advice, and still allows customers to feel the prospective purchases, and talk face to face with trained staff, which is a market segment that clearly has not disappeared. With 13 per cent of the Australian market, and above industry average growth in recent years, this company has adapted to the threats of new technology and channels of distribution, to use innovations such as publishing kiosks in their stores, allowing customers to customise their photographic publications into books calendars, cards and many other products, in store.

Source: Ted’s Cameras

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Ted’s is a long-established and trusted brand, with good back-up service, and it is using this brand equity to move into new technology areas that complement its camera sales portfolio. It is a family-owned company, with Brian Blythe and his three children on the board, and a managing director appointed from outside the family, Richard Robinson. The company had revenue in 2013 of $85 500 000 and was ranked 1838 in the top 2000 companies in Australia. It uses emails, Web presence and other new technologies to augment its traditional offerings as it moves into its fifth decade of operations. After more than 40 years, this company has a proud tradition of never having had a loss-making year, and it intends to keep that record going, despite the heightened competition! It has embraced new technologies and added them on to its base and trusted, more traditional brand.

Source: McColl, G. (7–13 October 2010). Right Said Ted. BRW, 32; http://www.ibisworld.com.au/car/default.aspx?entid=7521 (accessed 7 January 2014).

Resistan ce to chan ge Getting others to understand the need for change is the first step in implementation. Yet most changes will encounter some degree of resistance. Idea champions often discover that other employees are unenthusiastic about their new ideas. Members of a new-venture group may be surprised when managers in the regular organisation do not support or approve their innovations. Managers and employees not involved in an innovation often seem to prefer the status quo. People resist change for several reasons, and understanding them can help managers implement change more effectively.

Self-i nt er est People typically resist a change they believe conflicts with their self-interest. A proposed change in job design, structure, or technology may lead to an increase in employees’ workload, for example, or a real or perceived loss of power, prestige, pay or benefits. The fear of personal loss is perhaps the biggest obstacle to organisational change.81 At Fabcon, which makes huge precast concrete wall panels for commercial buildings, employees resisted a new experimental automation process because it added to their workload and reduced their productivity. ‘They were already working long days; they want to go home, and they didn’t want to spend time doing R&D,’ says Fabcon’s CEO Michael Le Jeune.82 Managers began working

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with the foremen to show them how the process could eventually save time and effort, and the change was eventually a success.

La ck of under standi ng an d tr us t Employees often distrust the intentions behind a change or do not understand the intended purpose of a change. If previous working relationships with an idea champion have been negative, resistance may occur. One manager had a habit of initiating a change in the financial reporting system about every 12 months and then losing interest and not following through. After the third time, employees no longer went along with the change because they did not trust the manager’s intention to follow through to their benefit.

Un ce rtai nt y Uncertainty is the lack of information about future events. It represents a fear of the unknown. Uncertainty is especially threatening for employees who have a low tolerance for change and fear anything out of the ordinary. They do not know how a change will affect them and worry about whether they will be able to meet the demands of a new procedure or technology.83 For example, employees at one mail-order company resisted the introduction of teams because they were comfortable with their working environment and uncertain about how the implementation of teams would alter it. People had developed good collaborative working relationships informally and they didn’t see the need for being forced to work in teams.

Dif f e rent ass ess ment s and g o al s Another reason for resistance to change is that people who will be affected by a change or innovation may assess the situation differently from an idea champion or new-venture group. Critics frequently voice legitimate disagreements over the proposed benefits of a change. Managers in each department pursue different goals, and an innovation may detract from performance and goal achievement for some departments. For example, if marketing gets the new product it wants for customers, the cost of manufacturing may increase, and the manufacturing superintendent thus will resist. Apple executives are currently encountering this type of resistance. In August 2010, Apple became the largest US corporation in terms of market valuation, and it has remained highly valued in the world’s stock markets. But executives are currently under pressure for change because of poor working conditions in overseas supplier factories. More than half of the suppliers recently audited were found to have violated aspects of Apple’s code of conduct and some have broken laws. However, there is conflict within the company because although top executives want to improve conditions, some managers argue that a radical overhaul will derail crucial supplier relationships and slow innovation and the delivery of new products.84 These reasons for resistance are legitimate in the eyes of employees affected by the change. Managers should not ignore resistance but instead diagnose the reasons and design strategies to gain acceptance by users.85 Strategies for overcoming resistance to change typically involve two approaches: the analysis of resistance through the force-field technique and the use of selective implementation tactics to overcome resistance.

Fo rce- fi eld analysis Force-field analysis grew from the work of Kurt Lewin, who proposed that change was a result of the

competition between driving and restraining forces.86 Driving forces can be thought of as problems or opportunities that provide motivation for change within the organisation. Restraining forces are the various

force-field analysis The process of determining which forces drive and which resist a proposed change.

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Case study

barriers to change, such as a lack of resources, resistance from middle managers or inadequate employee skills. When a change is introduced, management should analyse the forces that drive change (problems and opportunities) as well as the forces that resist it (barriers to change). By selectively removing forces that restrain change, the driving forces will be strong enough to enable implementation, as illustrated by the move from A to B in Exhibit 11.7. As barriers are reduced or removed, behaviour will shift to incorporate the desired changes.

3M How could it be? 3M, a century-old icon of American innovation, was looking a little tired when James McNerney took over as CEO in 2000. Sales and profits were stalled. Worse, though, was that scientists seemed to be so focused on their current markets that the company was no longer creating breakthrough products. Scotchgard and Post-it Notes were all well and good – but where were

the pioneering products that could keep 3M growing? McNerney asked Larry Wendling, then vice-president in charge of 3M’s central research and development (R&D) lab, to shake things up. He did it by stripping ‘technologies of the present’ from R&D’s priorities and reorganising scientists around fast-growth ‘technologies of the future’. The company’s R&D system, with 12 separate research units, each focused on specific target markets, worked fine for launching families of new products from existing product lines, but it gave researchers little incentive to look beyond them. Wendling reorganised R&D so that the majority of 3M scientists were assigned to the major business units. A core group at central R&D was charged specifically with working on breakthrough research.

Today, the products that are driving 3M’s growth are coming primarily from nanotechnology, an area that has proven the hardest for many companies to get out of the research lab. Scotchgard and Post-it Notes are still big sellers, but 3M is now pulling in US$500 million a year in sales of nanotech-based products such as natural-looking dental fillings, super-conductive power cables, ultrabright mobile phone displays and filters that prevent nosey onlookers from seeing your laptop screen. 3M is currently the world’s biggest manufacturer of nanotech materials, controlling more than a third of the global market. 3M has developed many new nanotechnology-based products in recent years and it lists and applies these as a core technology. Sources: Del Re, D. (November 2005). Pushing Past Post-Its. Business 2.0, 54–6; 3M Innovation, http://solutions.3m.com/innovation/en_US (accessed 7 January 2014).

Just-in-time (JIT) inventory control systems schedule materials to arrive at a company just as they are needed on the production line. Suppose that in a manufacturing company, management’s analysis showed that the driving forces (opportunities) associated with the implementation of JIT were: (1) the large cost savings from reduced inventories; (2) savings from needing fewer workers to handle the inventory; and (3) a quicker, more competitive market response for the company. Restraining forces (barriers) discovered by managers were: (1) a freight system that was too slow to deliver inventory on time; (2) a facility layout that emphasised inventory maintenance over new deliveries; (3) worker skills inappropriate for handling rapid inventory deployment; and (4) union resistance to loss of jobs. The driving forces were not sufficient to overcome the restraining forces.

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Driving forces (need for change) Inventory cost savings

Restraining forces (barriers to change)

Driving forces

Freight system

Reduced restraining forces

Inventory cost savings

Facilities layout

Addition of docks Fewer workers

Fewer workers Worker skills More competitive market response

Use of trucks

Training program

Union resistance to job loss

A. Traditional inventory system

More competitive market response

Desired movement

Reassignment

B. Just-in-time inventory system

Exhibit 11.8 Tactics for overcoming resistance to change Approach

When to use

Communication, education

● 

Change is technical. Users need accurate information and analysis to understand change.

● 

Participation

Negotiation Coercion

Top management support

● 

Users need to feel involved.

● 

Design requires information from others.

● 

Users have power to resist.

● 

Group has power over implementation.

● 

Group will lose out in the change.

● 

A crisis exists.

● 

Initiators clearly have power.

● 

Other implementation techniques have failed. Change involves multiple departments or reallocation of resources.

● 

● 

Users doubt legitimacy of change.

Source: Reprinted by permission of Harvard Business Review. Based on ‘Choosing Strategies for Change’ by J. P. Kotter and L. A. Schlesinger, March-April 1979. Copyright © 1979 by the Harvard Business School Publishing Corporation. All rights reserved.

To shift the behaviour to JIT, managers attacked the barriers. An analysis of the freight system showed that delivery by truck provided the flexibility and quickness needed to schedule inventory arrival at a specific time each day. The problem with facility layout was met by adding four new loading docks. Inappropriate worker skills were attacked with a training program to instruct workers in JIT methods and in assembling products with uninspected parts. Union resistance was overcome by agreeing to reassign workers no longer needed for maintaining inventory to jobs in another plant. With the restraining forces reduced, the driving forces were sufficient to allow the JIT system to be implemented.

Exhibit 11.7 Using force-field analysis to change from traditional to just-in-time inventory system

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I m plem entatio n tacti cs The other approach to managing implementation is to adopt specific tactics to overcome employee resistance. For example, resistance to change may be overcome As a new manager, recognise that by educating employees or inviting them to participate in implementing the people often have legitimate and rational change. Researchers have studied various methods for dealing with resistance reasons for resisting change. Don’t try to to change. The following five tactics, summarised in Exhibit 11.8, have proven bulldoze a change through a wall of resistance. successful.87 Use force-field analysis to evaluate the forces

Take a Moment

that are driving a change and those that are Comm un ic atio n an d educ ation restraining it. Try communication and education, participation and negotiation to melt Communication and education are used when solid information about the resistance, and be sure to enlist the support change is needed by users and others who may resist implementation. Education of top-level managers. Use coercion to is especially important when the change involves new technical knowledge or users implement a change only when absolutely necessary. are unfamiliar with the idea. Managers should also remember that implementing

change requires speaking to people’s hearts (touching their feelings) as well as to their minds (communicating facts). Emotion is a key component in persuading and influencing others. People are much more likely to change their behaviour when they understand the rational reasons for doing so and see a picture of change that influences their feelings.88

Part i ci pat i on Participation involves users and potential resisters in designing the change. This approach is timeconsuming, but it pays off because users understand and become committed to the change. At Learning Point Associates, which needed to change dramatically to meet new challenges, the change team drew up a comprehensive road map for transformation but had trouble getting the support of most managers. The managers argued that they hadn’t been consulted about the plans and didn’t feel compelled to participate in implementing them.89 Studies have shown that proactively engaging frontline employees in upfront planning and decision making about changes that affect their work results in much smoother implementation.90 Participation also helps managers to determine potential problems and understand the differences in perceptions of change among employees.

Negot i at i on Negotiation is a more formal means of achieving cooperation. Negotiation uses formal bargaining to win acceptance and approval of a desired change. For example, if the marketing department fears losing power if a new management structure is implemented, top managers may negotiate with marketing to reach a resolution. Companies that have strong unions frequently must formally negotiate change with the unions. The change may become part of the union contract reflecting the agreement of both parties.

Coer ci on Coercion means that managers use formal power to force employees to change. Resisters are told to accept the change or lose rewards or even their jobs. In most cases, this approach should not be used because employees feel like victims, are angry at change managers, and may even sabotage the changes. However, coercion may be necessary in crisis situations when a rapid response is urgent. For example, a number of top managers at Coca-Cola had to be reassigned or let go after they refused to go along with a new CEO’s changes for revitalising the sluggish corporation.91

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Top m anagement sup p ort One survey found that 80 per cent of companies that are successful innovators have top executives who frequently reinforce the importance of innovation both verbally and symbolically.92 The visible support of top management helps overcome resistance. For instance, one of the primary correlates of the success of new business ventures is the strong support of top managers, which gives the project legitimacy.93 Top management support symbolises to all employees that the change is important for the organisation. Top management support is especially important when a change involves multiple departments or when resources are being reallocated among departments. Without top management support, changes can get bogged down in squabbling among departments or contradictory orders from lower-level managers. Managers can soften resistance and facilitate change and innovation by using smart techniques. By communicating with employees, providing training and closely involving employees in the change process, managers can smooth implementation. In addition, change agents should never underestimate the importance of top management support for any change effort to succeed. ➜➜ A need for change is a disparity between actual and desired performance. ➜➜ When managers see a need, they want to make changes to fill it, but they may be frustrated because employees seem to resist change for no apparent reason. ➜➜ Many people aren’t willing to change unless they perceive a crisis.

➜➜ There are many legitimate reasons why people resist change, such as self-interest, uncertainty or lack of trust.



➜➜ Force-field analysis is a technique for determining which forces drive a proposed change and which forces restrain it.

➜➜ The support of top executives is crucial to the successful implementation of a change. In addition, managers use a variety of techniques to smooth the implementation process.

➜➜ Driving forces are problems or opportunities that provide motivation

Advertisers change their ways Companies competing fiercely in Australia’s advertising industry have found that some of their work practices were not sustainable. Long hours put in by staff in highly pressured environments were leading to burnout of those staff and loss of creativity and productivity. Industry observers suggest that staff turnover during the period was approximately 25 per cent per year. This has been expensive for the firms involved, which are realising that smart investments in staff development and career enhancement will lower the costs of burnout and turnover. Nick Cleaver, managing director of DDB’s Sydney office, pointed to the industry deregulation

to change. Restraining forces are barriers such as a lack of resources or inadequate employee skills.

Remember This

Innovative Way in 1997 as having led to intense pressure on firms to be productive, and this pressure was passed on to staff. DDB introduced training programs and regular performance appraisals (which previously had been ad hoc), ‘slumber days’ when staff could take personal time off and subsidised household help. One company, Leo Burnett, even installed a nine-metre, three-storey slippery-dip in its Sydney office. Twice each year, families of staff are invited to spend the day at the office and entertainment is arranged. Clemenger BBDO has similarly attempted to improve working conditions, improving the workplace environment by installing coffee shops and

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relaxation areas. Most of these companies expect their workers to spend 10 hours a day at work, so they have found it to their benefit to put some fun into the workplace and ensure that their staff can balance their work and personal lives. Professional service firms such as law firms and large consulting houses have been similarly accused by their staff of

driving low levels of morale in their quest for ever-increasing productivity and profit for partners, through driving junior staff too hard. The challenge is to find a balance between work and ‘life’ for staff, and also provide excellent customer services!

Source: Fairfax Syndication/Robert Pearce

Sources: Lloyd, S. (11 October 2001). Workplaces: Adland with Added TLC. Business Review Weekly; http://www.pa-lawfirmconsulting.com/pdfs/hr/WHAT_MAKES_A_LAW_ FIRM_A_GOOD_PLACE_TO_WORK.pdf.

Case study

McDonald’s provides job opportunities for thousands of secondary and university students in Australia. While McDonald’s provides a highly structured work environment and insists on strict standards in everything from uniforms to the way food is produced and served, it also provides very strong learning systems and opportunities for its staff.

McDonald’s senior executives have a commitment to education for employees, and they invest significant resources in organisational learning. McDonald’s executives believe that when staff are receiving good training and learning, they will be more engaged and open to change when necessary. The following advertisement from an Australian newspaper shows McDonald’s positioning itself as an educator, offering its employees business skills and professional development as well as a job flipping hamburgers:

McDonald’s employees have a lot to learn – just ask the education department. When you work at McDonald’s, you have a unique opportunity to learn a lot of things; and we are not just talking about making burgers and fries. McDonald’s offers a wide range of training and accredited programs, carefully designed to complement your studies. For example, Victorian high school students can now complete a certificate in food retail in conjunction with part-time work at McDonald’s that counts towards their VCE mark. There is also the national crew scholarship program, through which outstanding employees receive a $1500 scholarship towards their education. For managers, McDonald’s fully accredited management development program with its advanced diploma in management is the highest qualification you can receive below a university degree. It’s all part of McDonald’s philosophy of training and promotion within the company – a yearly investment of $40 million. That could be an investment opportunity you might like to take up for now and in the future.

McDonald’s is attempting to differentiate itself from the other employers that focus on young people as the foundation of their workforce in Australia.

A mini crisis of culture and performance When the German car manufacturer BMW took over the British Rover group in the mid 1990s, it acquired the famed Mini, which at the time had sold more than five and a half million cars over 40 years of production. Top executives soon broke up the Rover group and sold it piece by piece, keeping the Mini brand with an eye towards a product overhaul. However, new managers at the Cowley manufacturing plant in Oxford, England, soon realised that they had

inherited something else besides the Mini – a poisonous culture born out of decades of apathy, labour–management conflict and low productivity. The factory workers didn’t seem to feel any pride in their work or commitment to the organisation’s success. In fact, most of them seemed to leave their minds and hearts at the gate when they came to work. What little enthusiasm they showed was directed toward criticising management failures. Top executives at

BMW, a company known for its high-quality products, advanced engineering and high performance, had clear plans for upgrading the Cowley facility, elevating manufacturing processes to world-class standards and launching a new Mini that subsequently has taken the automotive world by storm. But managers at Cowley knew that unless they could first change the ‘us versus them’ attitude of the workforce, the project was doomed to failure.

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Managers at BMW’s Cowley, Oxford plant, faced the need for a major cultural overhaul. They began by shifting the plant to a selfdirected team-based structure and training employees to work as part of a team. Teambuilding sessions, cross-training and coaching by external consultants helped people make the transition from working on a traditional assembly line to working in teams of eight to 15 members who rotate jobs and solve production problems. One person within each team is designated to be responsible for continuous team development, with a reduction in other day-to-day duties. The next aspect

of the ‘Wings’ (Working in Groups) change program was to involve employees directly in determining other changes the factory could make to improve effectiveness. Every two weeks, each of the three shifts shuts down production for a 45-minute period to discuss ideas for technology changes. As managers implemented the ideas, more and more employees began to participate. BMW also instituted a ‘Back to the Track’ scheme that puts managers and directors on the production lines working side-by-side with plant workers. Employees saw first-hand that they – not the managers – were the ones with expertise and

knowledge for solving production problems. The approach helped bridge the gulf between management and labour, and enhanced the empowerment process. Within three years, BMW had implemented more than 8000 ideas from employees. Production targets were exceeded by more than 60 per cent, contributing to significant cost savings. Plant workers now feel like an important part of the business rather than like pieces of production equipment. Source: Watkins, J. (6 November 2003). A Mini Adventure. People Management, 32.

Once the strategy and the structure for achieving mature sustainability is in place, implementation can proceed. Clearly, in order to achieve implementation, behaviours need to change. Such changes will need to incorporate a good deal of education and training, incentives and strong leadership and role modelling by managers. Perhaps the first thing to do in moving an organisation forward on sustainable development is to assess the starting position. Managers might have a goal of becoming more environmentally and socially sustainable, and the question here is, Just where are we now on these things? How well are we doing now in terms of stakeholder engagement? What is our environmental performance relative to industry averages and best practice? An audit of the existing position can help with understanding how ambitious the goals should be and what sort of measures make most sense. Once the goals are set, managers should have a sense of current stakeholder expectations, particularly employee mindset on these matters. An early part of the change process should usually be a set of communications to staff and to external stakeholders too. There will be resistance and resistors, even though at first it might seem that ‘doing well by doing good’ is a noble and intrinsically attractive aim, and hence a worthy ambition to announce. Some staff might feel comfortable with the existing state of the organisation and simply be averse to any changes at all. Others will see themselves as having something to lose from this strategy, and yet others may just not understand or agree with the rationale for the strategy and hence not have their hearts in it. Workshops and training programs may well be useful here to explore the opportunities and to gain staff belief and approval of the changes. Workshops can be designed such that staff can come up with ideas to move sustainability forward, such as saving on energy or materials use, improving supplier or customer relations, reducing water consumption, or improving working conditions and productivity. Further, these workshops can be extended to include external stakeholders, such as those suppliers and key customers themselves, which will generate new and innovative ideas that cannot be seen as clearly from inside the

sustainable development

Implementing sustainable development in the organisation

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firm as from outside. If done well, the workshops themselves will build stakeholder relationship quality and engagement. Ultimately, the goal is to embed sustainability into the mindset and values of the firm at large, its stakeholders and the processes of the organisation. A final piece of advice on managing changes such as this implementation of sustainable development: most experienced executives would advise an approach that is a rapid evolution rather than a revolution. Revolutions are risky and expensive, and they often fail. Evolutionary approaches have a much higher likelihood of success, through carefully choosing pilot projects, continually working on belief systems and incrementally building the new culture, broadening the vision and implementing new measures and goals at all levels of the organisation.

Response to the Management Challenge

Samsung Electronics, described in the chapter-opening Management challenge, has become a hotbed of technology and product change and is now the global leader in eight consumer electronics categories. The consulting firm Interbrand calculated that in 2006 Samsung was the world’s most valuable electronics brand. Between 2000 and 2005, the company won more awards from the Industrial Design Society than any other firm on the planet. One step executives took to create a new mindset that values creativity, cooperation and innovation over imitation and internal competition was to set up the Innovative Design Lab (IDS), where designers, engineers, marketers and managers from various disciplines took a year-long series of courses aimed at fostering a collaborative environment. The courses also gave people the skills and confidence to risk thinking differently. At the IDS, designers are trained in how to better champion their ideas. Cross-discipline teams study consumers and create what-if scenarios about the world’s future buying patterns. Samsung stimulates creativity with the Global Design Workshop, which sends employees to the world’s great art and design centres. Designers get Wednesday afternoons off to explore for ideas outside the office. Although managers admit it seemed like slow-going at first, over time these efforts transformed the culture at Samsung. The company also reflects the horizontal model. In the Value Innovation Program (VIP) Centre, cross-functional product teams work on problems and cutting-edge ideas without the interruption of phone calls, annoying administrative tasks or other day-to-day matters that distract people from the project. In a major shift from the past, Samsung is also involved in collaborative relationships with other

organisations, such as a partnership with XM Satellite Radio to produce the first portable satellite radio combined with a digital music player. By 2011 Samsung was performing strongly, having survived the GFC and achieved market global leadership in many markets. With its 344 000 employees, Samsung achieved $21 billion in profits on sales revenue of $220 billion. In 2012 it ranked number 9 on Interbrand’s best 100 Global Brands with a brand value estimated at just on $33 billion. Samsung has achieved this progress through making quite remarkable investments in Research and Development and hence innovation, with some 50 000 of its people working in a network of 42 research centres globally. The company registered over 5000 patents in the US in 2012 and won 27 innovation awards at the world’s largest consumer electronics show in 2013. Samsung has made great strides in consumer electronics, digital components and many related businesses in recent years, having started as a small Korean exporter some 70 years ago. Samsung invests 10 per cent of its revenue into Research and Development, often in projects that look 10 years ahead. Ten per cent of its research staff hold PhD degrees, and today they are focused on advancing the use and integration of technologies such as biotechnology, information technology and nanotechnology into next generation products that consumers will want. Sources: Breen, B. (December 2005). The Seoul of Design. Fast Company, 90–9; Lewis, P. (19 September 2005). A Perpetual Crisis Machine. Fortune, 58–76; Hamm, S. and Rowley, I. (27 March 2006). Speed Demons. BusinessWeek, 68–76; Fackler, M. (25 April 2006). Electronics Company Aims to Create Break-Out Products. The New York Times; Samsung Annual Report 2013, http://www.samsung.com/us/aboutsamsung/ investor_relations/financial_information/downloads/2013/SECAR2012_ Eng_Final.pdf (accessed 7 January 2014).

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1 Times of shared crisis, such as the 11 September 2001 terrorist attacks on the World Trade Center or the Brisbane floods of 2011, can induce many companies that have been bitter rivals to put their competitive spirit aside and focus on cooperation and courtesy. Do you believe this type of change will be a lasting one? Discuss. 2 A manager of an international chemical company said that few new products in her company were successful. What would you advise the manager to do to help increase the company’s success rate?

analysis can help you more effectively implement a significant change in your own behaviour?

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Discussion questions

8 If you were a team leader in a graduate role, in charge of significantly older people in your team, how would you appeal to them to engage in significant change that might be required by your organisation?

3 What is meant by the terms internal and external forces for change? Which forces do you think are causes of change in a university? In a pharmaceuticals firm?

9 You are a manager, and you believe the expense reimbursement system for salespeople is far too slow, taking weeks instead of days. How would you go about convincing other managers that this problem needs to be addressed?

4 As a manager, how would you deal with resistance to change when you suspect employee fears of job loss are well founded?

10 How do large-group interventions differ from OD techniques such as team building and survey feedback?

5 How might businesses use the Internet to identify untapped customer needs through open innovation? What do you see as the major advantages and disadvantages of the open innovation approach?

11 If you were the head of police in an Australian state police force, which technique do you think would be more effective for implementing changes in patrol officers’ daily routines to stop more cars: simply issuing an edict, communication and education or proactively engaging them through participation?

6 Why do organisations experience resistance to change? What techniques can managers use to overcome resistance? 7 Analyse the driving and restraining forces of a change you would like to make in your life. Do you believe understanding force-field

Crowdsourcing Last year, when Ai-Lan Nguyen told her friend, Greg Barnwell, that Off the Hook Tees was going to experiment with crowdsourcing, he warned her she wouldn’t like the results. Now, as she was about to walk into a meeting called to decide whether to adopt this new business model, she was afraid her friend had been right. Crowdsourcing uses the Internet to invite anyone, professionals and amateurs alike, to perform tasks such as product design that employees usually perform. In exchange, contributors receive recognition – but little or no pay. Ai-Lan, as vice-president of operations for Off the Hook, a company specialising in witty T-shirts aimed at young adults, upheld the values of founder Chris Woodhouse, who like Ai-Lan was a graphic artist. Before he sold the company, the founder always insisted that T-shirts be well-designed by top-notch graphic artists to make sure each screen print was a work of art. Those graphic artists reported to Ai-Lan. During the past 18 months, Off the Hook’s sales had stagnated for the first time in its history. The crowdsourcing experiment was the latest in a series of attempts to jump-start sales growth. Last spring, Off the Hook issued its first open call for T-shirt designs and then posted the entries on the web so people could vote for their favourites. The top five vote-getters were handed over to the in-house designers, who tweaked the submissions until they met the company’s usual quality standards. When CEO Rob Taylor first announced the company’s foray into crowdsourcing, Ai-Lan found herself reassuring the designers that their

Ethical challenge

positions were not in jeopardy. Now Ai-Lan was all but certain she would have to go back on her word. Not only had the crowdsourced tees sold well, but Rob had put a handful of winning designs directly into production, bypassing the design department altogether. Customers didn’t notice the difference. Ai-Lan concluded that Rob was ready to adopt some form of the web-based crowdsourcing because it made T-shirt design more responsive to consumer desires. Practically speaking, it reduced the uncertainty that surrounded new designs, and it dramatically lowered costs. The people who won the competitions were delighted with the exposure it gave them. However, when Ai-Lan looked at the crowdsourced shirts with her graphic artist’s eye, she felt that the designs were competent, but none achieved the aesthetic standards attained by her in-house designers. Crowdsourcing essentially replaced training and expertise with public opinion. That made the artist in her uncomfortable. More distressing, it was beginning to look as if Greg had been right when he’d told her that his working definition of crowdsourcing was ‘a billion amateurs want your job’. It was easy to see that if Off the Hook adopted crowdsourcing, she would be handing out pink slips to most of her design people, long-time employees whose work she admired. ‘Sure, crowdsourcing costs the company less, but what about the human cost?’ Greg asked.

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What future course should Ai-Lan argue for at the meeting? And what personal decisions did she face if Off the Hook decided to put the crowd completely in charge when it came to T-shirt design? What do you do? 1 Go to the meeting and argue for abandoning crowdsourcing for now, in favour of maintaining the artistic integrity and values that Off the Hook has always stood for.

2 Accept the reality that because Off the Hook’s CEO Rob Taylor strongly favours crowdsourcing, it’s a fait accompli. Be a team player and help work out the details of the new design approach. Prepare to lay off graphic designers as needed. 3 Accept the fact that converting Off the Hook to a crowdsourcing business model is inevitable, but because it violates your own personal values, start looking for a new job elsewhere.

Sources: Based on Boutin, P. (13 July 2006). Crowdsourcing: Consumers as Creators. BusinessWeek Online, http://www.businessweek.com/innovate/content/jul2006/ id20060713_55844.htm?campaign_id= search; Howe, J. (June 2006). The Rise of Crowdsourcing. Wired, http://www.wired.com/wired/archive/14.06/crowds.html; Howe, J. Crowdsourcing Blog. http://www.crowdsourcing.com.

Gr oup challenge

Are you ready to implement personal change?

Step 1. Think about a specific behaviour change – for example, stop smoking, schedule regular exercise, learn a new skill, adopt a healthier diet, drop a bad habit – you have considered making in your life. With that specific behaviour or habit in mind, carefully answer each item below as Mostly True or Mostly False for you. Mostly True

1 To be honest, my problem is not so bad that it needs changing 2 The behaviour may be a fault, but it is nothing that I really need to change. 3 I am aware of the issue, but I am fine with it. 4 I have been thinking that I would like to change that behaviour. 5 I wish I knew more about how to solve that problem. 6 I would like to understand that behaviour better to start changing it. 7 I am actually doing something about it right now.

Mostly False

Step 2. Scoring and interpretation: The items above pertain to a person’s stage of readiness to implement a personal change. Each of the four stages is measured by three questions in the scale. Give yourself one point for each item marked Mostly True. I. Pre-contemplation: Items 1, 2, 3. Score ____________________________ II. Contemplation: Items 4, 5, 6. Score _______________________________ III. Action: Items 7, 8, 9. Score _____________________________________ IV. Maintenance: Items 10, 11, 12. Score ____________________________ You will probably find that you have a higher score for one of the stages, which means you are in that stage for your specific change. If you have the same score for two adjacent stages, then you are probably transitioning from one stage to the next. What does your score imply about your likelihood of success in making the change? Step 3. In groups of three to five students, take turns describing your desired change and the meaning of the stage you are in. Compare notes and discuss progress on each person’s change. Step 4. Discuss the answers to the following questions as a group: How likely is it that you will implement your desired change successfully? Why? To implement a personal change, how important is it to feel a strong need for change? Can you identify driving and restraining forces for the personal changes in your group? Which implementation tactics from this chapter would help your group members make the change? Why do you think so?

8 I am really starting to change, but I am not there yet. 9 I am in the process of changing, but I want to be more consistent. 10 I have already completed the change and I do not plan to backslide. 11 The change has become part of my day, and I notice if I do not stay with it. 12 The new behaviour is now a part of my life and I do not think about it any more. Source: Based on Eileen A. McConnaughy, James O. Prochaska and Wayne F. Velicer. (1983). Stages of Change in Psychotherapy: Measurement and Sample Profiles. Psychotherapy: Theory, Research, and Practice, 20:3, 368–75.

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M a l a r d M a n u fa c t u r i n g C o m pa n y

Case for cr itical analysis

Malard Manufacturing Company produces control valves that regulate flows through natural gas pipelines. Malard has approximately 1400 employees and has successfully produced a standard line of control valves that are price competitive in the industry. However, whenever the production of a new control valve is required, problems arise. Developments in electronics, metallurgy and flow control theory require the introduction of new products every year or two. These new products have been associated with interdepartmental conflict and disagreement.

and inexperienced in new-product development. Julie Crandell, the executive vice-president, likes to keep tight control over the organisation. Department managers must check with her before making major decisions. However, with the CV305, she has been unable to keep things running smoothly. The span of control is so large that Crandell has no time to personally shepherd the CV305 through the system.

Consider the CV305, which is in process. As usual, the research and development group developed the basic design, and the engineering department converted it into a prototype control valve. Now the materials department must acquire parts for the prototype and make plans for obtaining parts needed for production runs. The production department is to manufacture and assemble the product, and marketing is responsible for sales. Department heads believe that future work on the CV305 should be done simultaneously instead of sequentially. Marketing wants to provide input to research and development so that the design will meet customer needs. Production insists that the design fit machine limitations and be cost-efficient to manufacture – indeed, it wants to speed up development of the final plans so that it can acquire tooling and be ready for standard production. Engineering, on the other hand, wants to slow down development to ensure that specifications are correct and have been thoroughly tested. All of these controversies with the CV305 exist right now. Department managers are frustrated and becoming uncommunicative. The research and development and engineering departments are keeping their developmental plans secret, causing frustration for the other departments. Moreover, several department managers are new

On 1 November, Crandell received a memo from the marketing department head. It said, in part: The CV305 must go to market immediately. This is urgent. It is needed now because it provides the precision control our competitors’ products already have. Three of our salespeople reported that loyal customers are about to place orders with competitors. We can keep this business if we have the CV305 ready for production in 30 days. Questions 1 What is the balance between vertical and horizontal structure in Malard Manufacturing? Is it appropriate that department managers always turn to the executive vice-president for help rather than to one another? 2 If you were Julie Crandell, how would you resolve this problem? What could you do to facilitate production of the CV305 over the next 30 days? 3 What structural changes would you recommend to prevent these problems in future new-product developments? Would a smaller span of control help? A project manager with responsibility for coordinating the CV305? A task force?

H o l d e n O u t e r w e a r : m a n a g i n g c h a n g e a n d i n n o vat i o n For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions. Q uestions 1 Identify the type of change that Holden’s leaders are managing on a daily basis. 2 Is Holden’s creative approach to outerwear an example of disruptive innovation? Why or why not?

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3 What resistance has Holden encountered while introducing innovative garment designs?

On the job video case

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Endnotes 1  McGregor, J., Arndt, M., Berner, R. Rowley, I., Hall, K., Edmondson, G., Hamm, S., Ihlwan, M. and Reinhardt, A. (24 April 2006). The World’s Most Innovative Companies. BusinessWeek, http://www. businessweek.com; Nussbaum B, Berner, R. and Brady, D. (1 August 2005). Get Creative. BusinessWeek, 60–8. 2  Conference Board Review. (September–October 2006). 90 Years in Business, 30–9. 3 Landler, M. (10 December 2007). Nokia Pushes to Regain U.S. Sales in Spite of Apple and Google. The New York Times. 4 Fackler, M. (25 April 2006). Electronics Company Aims to Create BreakOut Products. New York Times; Lewis, P. (19 September 2005). A Perpetual Crisis Machine. Fortune, 58–76. 5 Grant, P. and Schatz, A. (7 March 2006). Battle Lines; For Cable Giants, AT&T Deal Is One More Reason to Worry. The Wall Street Journal, A1; Taylor A. III (27 June 2005). Billion-Dollar Bets. Fortune, 138–54; Kirsner, S. (September 2003). 5 Technologies That Will Change the World. Fast Company, 93–8; Brown, S. F. (30 March 1998). The Automaker’s Big-Time Bet on Fuel Cells. Fortune, 122(B)–122(D). 6 Kirsner. 5 Technologies That Will Change the World. 7 Henry, D. (24 April 2006). Creativity Pays. Here’s How Much. BusinessWeek, 76. 8 Daft, R. L. (1982). Bureaucratic vs Nonbureaucratic Structure in the Process of Innovation and Change, in S. B. Bacharach (ed.). Perspectives in Organizational Sociology: Theory and Research. Greenwich, CT: JAI Press, 129–66. 9 O’Reilly, C. A. III and Tushman, M. L. (April 2004). The Ambidextrous Organization. Harvard Business Review, 74–81; Tushman, M. L. and O’Reilly, C. A. III. (March–April 1999). Building an Ambidextrous Organization: Forming Your Own Skunk Works. Health Forum Journal, 42:2, 20–3. 10 Dobni, C. B. (2006). The Innovation Blueprint. Business Horizons, 329–39. 11 McGirt, E. (March 2012) ‘05: Square, For Making Magic Out of the Mercantile’ in The World’s 50 Most Innovative Companies. Fast Company, 83–5, 146. 12 David W. Norton and B. Joseph Pine II. (2009). Unique Experiences: Disruptive Innovations Offer Customers More Time Well Spent. Strategy & Leadership, 37:6, 4; and (17 April 2010). The Power to Disrupt. The Economist, 16. 13 Jeffrey R. Immelt, Vijay Govindarajan and Chris Trimble. (October 2009). How GE Is Disrupting Itself. Harvard Business Review, 3–11; and Navi Radjou. (9 November 2009). Polycentric Innovation: A New Mandate for Multinationals. The Wall Street Journal Online, http://online.wsj.com/article/ SB125774328035737917.html (accessed 13 November 2009). 14 Rifkin, G. (Second Quarter 1998). Competing Through Innovation: The Case of Broderbund. Strategy + Business, 11, 48–58; Dougherty, D. and Hardy, C. (1996). Sustained Product Innovation in Large, Mature Organizations: Overcoming Innovation-to-Organization Problems. Academy of Management Journal, 39:5, 1120–53. 15 Reinmoeller, P. and van Baardwijk, N. (Summer 2005). The Link Between Diversity and Resilience. MIT Sloan Management Review, 61–5. 16 Leavy, B. (Autumn 2002). Creativity: The New Imperative. Journal of General Management, 28:1, 70–85; Amabile, T. M. (Fall 1997). Motivating Creativity in Organizations: On Doing What You Love and Loving What You Do. California Management Review, 40:1, 39–58; Matherly, T. A. and Goldsmith, R. E. (September–October 1985). The Two Faces of Creativity. Business Horizons, 8. 17 Vessels, G. (1982). The Creative Process: An Open-Systems Conceptualization. Journal of Creative Behavior, 16, 185–96.

18 Leavy. Creativity: The New Imperative; Amabile. Motivating Creativity in Organizations; Sternberg, R. J., O’Hara, L. A. and Lubart, T. I. (Fall 1997). Creativity as Investment. California Management Review, 40:1, 8–21. 19 James Brian Quinn. (May–June 1985). Managing Innovation: Controlled Chaos. Harvard Business Review, 63, 73–84; Howard H. Stevenson and David E. Gumpert. (March–April 1985). The Heart of Entrepreneurship. Harvard Business Review, 63, 85–94; Marsha Sinetar. (Winter 1985). Entrepreneurs, Chaos, and Creativity – Can Creative People Really Survive Large Company Structure? Sloan Management Review, 6: 57–62; Constantine Andriopoulos. (2003). Six Paradoxes in Managing Creativity: An Embracing Act. Long Range Planning, 36, 375–88; and Michael Laff. (July 2009). Roots of Innovation. T&D, 35–9. 20 The research studies and examples are reported in Sue Shellenbarger. (27 September 2011). Better Ideas Through Failure. The Wall Street Journal, D1. 21 Cynthia Browne. (August 1989). Jest for Success. Moonbeams, 3–5; and Rosabeth Moss Kanter (1983). The Change Masters (New York: Simon and Schuster). 22 Lublin, J. S. (20 March 2006). Nurturing Innovation. The Wall Street Journal, B1; Elgin, B. (3 October 2005). Managing Google’s Idea Factory. BusinessWeek, 88–90. 23 Salter, C. (March 2008). Google: The Faces and Voices of the World’s Most Innovative Company. Fast Company, 74–91. 24 J. C. Spender and Bruce Strong. (23 August 2010). Who Has Innovative Ideas? Employees. The Wall Street Journal, R5; and Rachel Emma Silverman. (29 August 2011). How to Be Like Apple. The Wall Street Journal, http://online.wsj.com/article/SB10001424053111904009304576532842667 854706.html (accessed 16 September 2011). 25 Roger L. Martin. (June 2011). The Innovation Catalysts. Harvard Business Review, 82–7. 26 Spender and Strong. Who Has Innovative Ideas? 27 Darren Dahl. (February 2010). Technology: Pipe Up, People! Rounding Up Staff Ideas. Inc., 80–1. 28 McGregor et al. The World’s Most Innovative Companies. 29 James I. Cash, Jr., Michael J. Earl and Robert Morison. (November 2008). Teaming up to Crack Innovation and Enterprise Integration. Harvard Business Review, 90–100; Barry Jaruzelski, Kevin Dehoff and Rakesh Bordia. (5 December 2005). Money Isn’t Everything. Strategy + Business, 41, 54–67; William L. Shanklin and John K. Ryans, Jr. (November–December 1984). Organizing for High-Tech Marketing. Harvard Business Review 62, 164–71; Arnold O. Putnam. (May–June 1985). A Redesign for Engineering. Harvard Business Review, 63, 139–44; and Joan Schneider and Julie Hall. (April 2011). Why Most Product Launches Fail. Harvard Business Review, 21–3. 30 Hiroko Tabuchi. (15 April 2012). How the Parade Passed Sony By. The New York Times, BU1. 31 Quoted in Janet Rae-DuPree. (7 December 2008). Teamwork, the True Mother of Invention. The New York Times. 32 Based on Gloria Barczak and Kenneth B. Kahn. (2012). Identifying New Product Development Best Practice. Business Horizons, 55, 293–305; Andrew H. Van de Ven. (1986). Central Problems in the Management of Innovation. Management Science, 32, 590–607; Richard L. Daft. (2010). Organization Theory and Design (Mason, OH: SouthWestern), pp. 424–425; and Science Policy Research Unit, University of Sussex. (1972). Success and Failure in Industrial Innovation (London: Centre for the Study of Industrial Innovation). 33 Based on Daft, Organization Theory and Design; and Lee Norris Miller. (November–December 2011). Debugging Dysfunctional Development. Industrial Management, 10–15.

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34 Mike Gordon et al. (January 2010). The Path to Successful New Products. McKinsey Quarterly, http://www.mckinseyquarterly.com/The_path_to_ successful_new_products_2489 (accessed 10 February 2012). 35 Reported in Schneide and Hall. Why Most Product Launches Fail. 36 Reported in Rachel Emma Silverman. (17 October 2011). For Bright Ideas, Ask the Staff. The Wall Street Journal, B7. 37 Dahl. Technology: Pipe Up, People! 38 Sherry Eng. (27 November–4 December 2000). Hatching Schemes. The Industry Standard, 174–5. 39 Brian Dumaine. (13 February 1989). How Managers Can Succeed Through Speed. Fortune, 54–9; and George Stalk, Jr. (July–August 1988). Time – The Next Source of Competitive Advantage. Harvard Business Review, 41–51. 40 Hamm, S. and Rowley, I. (27 March 2006). Speed Demons. BusinessWeek, 68–76; Pearce, J. A. II (2002). Speed Merchants. Organizational Dynamics, 30:3, 191–205. 41 Hamm and Rowley. Speed Demons. 42 Narayanan, V. K., Douglas, F. L., Guernsey, B. and Charnes, J. (2002). How Top Management Steers Fast-Cycle Teams to Success. Strategy & Leadership, 30:3, 19–27. 43 This discussion of open innovation is based on Henry Chesbrough. (Spring 2003). The Era of Open Innovation. MIT Sloan Management Review, 35–41; Ulrich Lichtenthaler. (February 2011). Open Innovation: Past Research, Current Debates, and Future Directions. Academy of Management Perspectives, 75–92; Julian Birkinshaw and Susan A. Hill. (2005). Corporate Venturing Units: Vehicles for Strategic Success in the New Europe. Organizational Dynamics, 34:3, 247–57; Amy Muller and Liisa Välikangas. (2002). Extending the Boundary of Corporate Innovation. Strategy & Leadership, 30:3, 4–9; Navi Radjou. (January–February 2005). Networked Innovation Drives Profits. Industrial Management, 14–21; and Henry Chesbrough. (Spring 2003). The Logic of Open Innovation: Managing Intellectual Property. California Management Review, 45:3, 33–58. 44 Amy Muller, Nate Hutchins and Miguel Cardoso Pinto. (2012). Applying Open Innovation Where Your Company Needs It Most. Strategy & Leadership, 40:2, 35–42. 45 A. G. Lafley and Ram Charan. (2008). The Game Changer: How You Can Drive Revenue and Profit Growth with Innovation (New York: Crown Business); Larry Huston and Nabil Sakkab. (March 2006). Connect and Develop; Inside Procter & Gamble’s New Model for Innovation. Harvard Business Review, 58–66; and G. Gil Cloyd. (December 2004). P&G’s Secret: Innovating Innovation. Industry Week, 26–34. 46 Farhad Manjoo. (July–August 2010). Apple Nation. Fortune, 68–112; and Jorge Rufat-Latre, Amy Muller and Dave Jones. (2010). Delivering on the Promise of Open Innovation. Strategy & Leadership, 38:6, 23–8. 47 Reported in Muller, Hutchins and Cardoso Pinto. Applying Open Innovation. 48 Elizabeth Holmes. (14 February 2012). Before the Dresses, the Ideas; Oscar de la Renta Invites Fans to Submit Visual Inspiration for Next Collection. The Wall Street Journal, http://online.wsj.com/article/SB1000142405297 0204883304577221461560720548.html (accessed 17 February 2012); and Sang M. Lee, David L. Olson and Silvana Trimi. (2012). Innovative Collaboration for Value Creation. Organizational Dynamics, 41, 7–12. 49 Steve Lohr. (28 March 2011). Online Mapping Shows Potential to Transform Relief Efforts. The New York Times, http://www.nytimes. com/2011/03/28/business/28map.html?_r=1 (accessed 22 August 2012); and Tina Rosenberg. (28 March 2011). Crowdsourcing a Better World. The New York Times, http://opinionator.blogs.nytimes.com/2011/03/28/ crowdsourcing-a-better-world/ (accessed 29 March 2011). 50 Daniel T. Holt, Matthew W. Rutherford and Gretchen R. Clohessy. (2007). Corporate Entrepreneurship: An Empirical Look at Individual Characteristics, Context, and Process. Journal of Leadership and Organizational Studies, 13:4, 40–54.

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51 Curtis R. Carlson and William W. Wilmot. (2006). Innovation: The Five Disciplines for Creating What Customers Want (New York: Crown Business). 52 Robert I. Sutton. (September 2001). The Weird Rules of Creativity. Harvard Business Review, 94–103; and Julian Birkinshaw and Michael Mol. (Summer 2006). How Management Innovation Happens. MIT Sloan Management Review, 81–8. 53 Jane M. Howell. (2005). The Right Stuff: Identifying and Developing Effective Champions of Innovation. Academy of Management Executive, 19:2,108–19. 54 Harold L. Angle and Andrew H. Van de Ven. (1989). Suggestions for Managing the Innovation Journey. In Researching the Management of Innovation: The Minnesota Studies, ed. A. H. Van de Ven, H. L. Angle and Marshall Scott Poole (Cambridge, MA: Ballinger/Harper & Row). 55 C. K. Bart. (Summer 1988). New Venture Units: Use Them Wisely to Manage Innovation. Sloan Management Review, 35–43; Michael Tushman and David Nadler. (Spring 1986). Organizing for Innovation. California Management Review, 28, 74–92; Peter F. Drucker. (1985). Innovation and Entrepreneurship (New York: Harper & Row); and Henry W. Chesbrough. (March 2002). Making Sense of Corporate Venture Capital. Harvard Business Review, 80:3, 90–9. 56 Sebastian Raisch. (2008). Balanced Structures: Designing Organizations for Profitable Growth. Long Range Planning, 41, 483–508. 57 Bruce B. Brown and Scott D. Anthony. (June 2011). How P&G Tripled Its Innovation Success Rate. Harvard Business Review, 64–72. 58 Christopher Hoenig. (1 July 2000). Skunk Works Secrets. CIO, 74–6; and Tom Peters and Nancy Austin. (1985). A Passion for Excellence: The Leadership Difference (New York: Random House). 59 Hoenig. Skunk Works Secrets. 60 Claire Cain Miller and Nick Bilton. (13 November 2011). Google’s Lab of Wildest Dreams. The New York Times, http://www.nytimes.com/2011/11/14/ technology/at-google-x-a-top-secret-lab-dreaming-up-the-future. html?pagewanted=all (accessed 14 November 2011). 61 Alex Taylor III. (5 September 2011). The New GM: A Report Card. Fortune, 38–46. 62 David Dobson. (26 October 2009). Integrated Innovation at Pitney Bowes. Strategy + Business Online, http://www.strategy-business.com/ article/09404b?gko=f9661 (accessed 30 December 2009); and Cash et al. Teaming up to Crack Innovation and Enterprise Integration. 63 Robert C. Wolcott and Michael J. Lippitz. (Fall 2007). The Four Models of Corporate Entrepreneurship. MIT Sloan Management Review, 75–82. 64 Schein, E. H. (February 1990). Organizational Culture. American Psychologist, 45, 109–19; Eliza Newlin Carney. (October 2003). Calm in the Storm. Government Executive, 57–63. 65 Alan Murray. (7 May 2012). Women in a Man’s World: Dan Akerson of General Motors on Changing a Male-Dominated Culture. The Wall Street Journal, B11; and Alex Taylor III. The New GM: A Report Card. 66 (10 December 2013). Mary Barra Named GM CEO. Automaker’s First Female Chief. Forbes, http://www.forbes.com/sites/ maggiemcgrath/2013/12/10/mary-barra-named-as-new-gm-ceo-becomingfirst-female-chief-for-the-automaker (accessed 23 March 2014); Mary Barra to be first female CEO of GM, The Sydney Morning Herald (11 December 2013), http://www.smh.com.au/business/world-business/mary-barra-to-befirst-female-ceo-of-gm-20131211-2z4m8.html#ixzz2voVG2v20 (accessed 23 March 2014). 67 Kanter, R. M. (12 December 2005). Execution: The Un-Idea, sidebar in A. Kleiner. Our 10 Most Enduring Ideas. Strategy + Business, 41, 36–41. 68 Michelle Conlin. (29 November 1999). Tough Love for Techie Souls. BusinessWeek, 164–70. 69 Nyberg, A. (October 2000). Kim Patmore, profile in The Class of 2000. CFO, 81–2.

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70 Sashkin, M. and Burke, W. W. (1987). Organization Development in the 1980s. General Management, 13, 393–417; Beckhard, R. (2000). What Is Organization Development? in W. L. French, C. H. Bell Jr. and R. A. Zawacki (eds), Organization Development and Transformation: Managing Effective Change (Burr Ridge, IL: Irwin McGraw-Hill), pp. 16–19. 71 Worley, C. G. and Feyerherm, A. E. (March 2003). Reflections on the Future of Organization Development. The Journal of Applied Behavioral Science, 39:1, 97–115; French, W. L. and Bell, C. H. Jr (2000). A History of Organizational Development. In French, W. L., Bell, C. H. Jr and Zawacki, R. A. (2000), Organization Development and Transformation: Managing Effective Change (Burr Ridge, IL: Irwin McGraw-Hill), pp. 20–42. 72 Worley and Feyerherm. Reflections on the Future of Organization Development; Buller, P. F. (Winter 1988). For Successful Strategic Change: Blend OD Practices with Strategic Management. Organizational Dynamics, 42–55; Fulmer, R. M. and Gilkey, R. (1988). Blending Corporate Families: Management and Organization Development in a Postmerger Environment. Academy of Management Executive, 2, 275–83. 73 Burke, W. W. (Summer 1997). The New Agenda for Organization Development. Organizational Dynamics, 7–19. 74 Bunker, B. B. and Alban, B. T. (December 1992). Conclusion: What Makes Large Group Interventions Effective? Journal of Applied Behavioral Science, 28:4, 570–91; Dannemiller, K. D. and Jacobs, R. W. (December 1992). Changing the Way Organizations Change: A Revolution of Common Sense. Journal of Applied Behavioral Science, 28:4, 480–98. 75 Bunker and Alban. Conclusion: What Makes Large Group Interventions Effective? 76 Huse, E. F. and Cummings, T. G. (1985), Organization Development and Change, 3rd edn (St Paul, MN: West); Lewin, K. (1947). Frontiers in Group Dynamics: Concepts, Method, and Reality in Social Science. Human Relations, 1, 5–41. 77 Kotter, J. P. (1996). Leading Change. Boston: Harvard Business School Press, 20–5; Kotter, J. P. (March–April 1995). Leading Changes: Why Transformation Efforts Fail. Harvard Business Review, 59–67. 78 Loewe, P. and Dominiquini, J. (2006). Overcoming the Barriers to Effective Innovation. Strategy & Leadership, 34:1, 24–31; Robison, J. (10 May 2007). Innovation the Right Way: A Case Study in How a Manufacturing Company Got Innovation Right. Gallup Management Journal. 79 Kotter. Leading Change; Leading Changes: Why Transformation Efforts Fail. 80 See Andrew H. Van de Ven. (1986). Central Problems in the Management of Innovation. Management Science, 32, 590–607. 81 Kotter, J. P. and Schlesinger, L. A. (March–April 1979). Choosing Strategies for Change. Harvard Business Review, 57, 106–14. 82 Robison. Innovation the Right Way. 83 G. Zaltman and Robert B. Duncan. (1977). Strategies for Planned Change (New York: Wiley Interscience).

Cour seMate

84 E. S. Browning, Steven Russolillo and Jessica Vascellaro. (22 August 2012). Apple Now Biggest-Ever U.S. Company. The Wall Street Journal Europe, 24; and Charles Duhigg and David Barboza. (25 January 2012). In China, Human Costs Are Built Into an iPad. The New York Times, http://www. nytimes.com/2012/01/26/business/ieconomy-apples-ipad-and-the-humancostsfor-workers-in-china.html?pagewanted=all (accessed 26 January 2012). 85 Dorothy Leonard-Barton and Isabelle Deschamps. (1988). Managerial Influence in the Implementation of New Technology. Management Science, 34, 1252–65. 86 Lewin, K. (1951). Field Theory in Social Science: Selected Theoretical Papers (New York: Harper & Brothers). 87 Nutt, P. C. (1986). Tactics of Implementation. Academy of Management Journal, 29, 230–61; Kotter and Schlesinger. Choosing Strategies for Change; R. L. Daft and S. Becker. (1978). Innovation in Organizations: Innovation Adoption in School Organizations (New York: Elsevier); R. Beckhard. (1969). Organization Development: Strategies and Models (Reading, MA: Addison-Wesley). 88 Seijts, G. H. and O’Farrell, G. (January–February 2003). Engage the Heart: Appealing to the Emotions Facilitates Change. Ivey Business Journal, 1–5; Kotter, J. P. and Cohen, D. S. (2002), The Heart of Change: Real-Life Stories of How People Change Their Organizations. Boston: Harvard Business School Press; Fox, S. and Amichai-Hamburger, Y. (2001). The Power of Emotional Appeals in Promoting Organizational Change Programs. Academy of Management Executive, 15:4, 84–95. 89 Gina Burkhardt and Diane Gerard. (Autumn 2006). People: The Lever for Changing the Business Model at Learning Point Associates. Journal of Organizational Excellence, 31–43. 90 Hornstein, H. (January– February 2008). Using a Change Management Approach to Implement IT Programs. Ivey Business Journal; Mirvis, P. H. Sales, A. L. and Hackett, E. J. (Spring 1991). The Implementation and Adoption of New Technology in Organizations: The Impact on Work, People, and Culture. Human Resource Management, 30, 113–39; Wallach, A. E. (1979). System Changes Begin in the Training Department. Personnel Journal, 58, 846–8, 872; Lawrence, P. R. (January–February 1969). How to Deal with Resistance to Change. Harvard Business Review, 47, 4–12, 166–76. 91 Foust, D and Khermouch, G. (19 March 2001). Repairing the Coke Machine. BusinessWeek, 86–8. 92 Strategos survey results, reported in Pierre Loewe and Jennifer Dominiquini. (2006). Overcoming the Barriers to Effective Innovation. Strategy & Leadership, 34:1, 24–31. 93 Donald F. Kuratko, Jeffrey G. Covin and Robert P. Garrett. (2009). Corporate Venturing: Insights from Actual Performance. Business Horizons, 52, 459–67.

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ download the audio summary for an on-the-go review ➜ test your understanding of managing change to achieve performance by taking the revision quiz ➜ use the interactive flashcards to revise relevant key terms and their definitions.

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Explain the strategic role of human resource

management (HRM) in organisational strategic planning.

2 Describe societal trends that influence human resource management.

5 Describe the tools managers use to recruit and select employees.

6 Describe how organisations develop an effective workforce through training and performance appraisal.

3 Explain what the changing social contract between

7 Explain how organisations maintain a workforce

4 Show how organisations determine their future

8 Understand the key role of the organisation’s human

organisations and employees means for workers and human resource managers. staffing needs through human resource planning.

through the administration of wages and salaries, benefits and terminations. resources in taking sustainable development forward.

C h a p t e r 12

Human resource management

Chapter outline ➜ The strategic role of HRM is to drive organisational performance The strategic approach

➜ Competitive strategy

➜ Managing talent: developing an effective workforce

➜ The changing nature of careers

➜ Maintaining an effective workforce

Building human capital to drive performance External forces The changing social contract Innovations in HRM

➜ Finding the right people

Human resource planning

476

Recruiting Assessing jobs Selecting Training and development Performance appraisal Compensation Benefits Termination

➜ Sustainability and people

New Manager Self-test Getting the right people on the bus As a new manager, how much emphasis will you give to getting the right people on your team? How much emphasis on people is needed? Find out by answering the following questions based on your expectations and beliefs for handling the people part of your management job. Please answer whether each item is Mostly true or Mostly false for you. Mostly True

Mostly False

1  I will readily fire someone who isn’t working out for the interests of the organisation. 2  Selecting the right people for a winning business team is as important to me as it is to a winning sports team. 3 I expect to spend 40 per cent to 60 per cent of my management time on issues such as recruiting, developing and placing people. 4 I will paint a realistic picture of negative job aspects that will help scare off the wrong people for the job. 5 My priority as a manager is first to hire the right people, second to put people in the right positions and third to then decide strategy and vision. 6 With the right people on my team, problems of motivation and supervision will largely go away. 7 I expect that hiring the right people is a lengthy and arduous process. 8 I view firing someone as helping them find the place where they belong to find fulfilment. Scoring and interpretation: Most new managers are shocked at the large amount of time, effort and skill required to recruit, place and retain the right people. In recent years, the importance of ‘getting the right people on the bus’ has been described in popular business books such as Good to Great and Execution. The right people can make an organisation great; the wrong people can be catastrophic. Give yourself one point for each item you marked as Mostly true. If you scored four or less you may be in for a shock as a new manager. People issues will take up most of your time, and if you don’t handle people correctly, your effectiveness will suffer. You should learn how to get the right people on the bus, and how to get the wrong people off the bus. The faster you learn these lessons, the better new manager you will be. A score of five or more suggests you have the right understanding and expectations for becoming a manager and dealing with people on the bus. Source: Based on ideas presented in Jim Collins, Good to Great: Why Some Companies Make the Leap … and Others Don’t (New York: Harper Business, 2001).

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Management Challenge

When Roger Olds became the managing director of Coffey International Ltd, he knew that one of his key challenges was to differentiate his business from competitors, based on his firm’s people. Coffey is a primarily Australian consulting engineering company, mainly a group of design engineers and others who work for builders, architects, property developers, government departments and other providers of infrastructure, such as water companies, ‘telcos’ and utilities. These firms compete on the skills of their people, as they all bid for the same projects: designing ‘the built environment’. They all have access to essentially the same technology, so how can Roger make a difference? His challenge is to recruit, motivate and retain top quality engineers and place them in an environment in which they can excel. This is measured in terms of their productivity, quality of work and the service they provide to clients. A really tough challenge for Roger is to keep the top people satisfied and happy, because it is these folks who bring in the clients and win the projects. And every other

consulting engineering firm in Australia, New Zealand and, indeed, the world is trying to do essentially the same thing: find an edge based on their key people and their capabilities. When Coffey made the bold move to list on the stock exchange (most companies in this industry are privately owned partnerships), Roger’s and his firm’s performance became the focus of public scrutiny as never before. When Roger handed over the reins of the company to his successor, CEO John Douglas, the challenge remained of how to continually attract, retain and develop the best people available in the industry. Source: Coffey International, http://www.coffey.com.au.

Question How can CEOs like Roger Olds and John Douglas find and keep a core group of engineers excited about their work? In particular, all these firms experience the loss of staff at about the 25- to 30-year-old range, which is just when they start to really deliver value to their companies. How can this challenge be addressed?

The situation at Coffey provides a dramatic example of the challenges managers face human resource management (HRM) Activities undertaken to attract, develop and maintain an effective workforce within an organisation.

human resource management

every day. Hiring and retaining quality employees is one of the most urgent concerns of today’s managers.1 The people who make up an organisation give the company its primary source of competitive advantage, so talent management is a top priority for smart managers. The term human resource management (HRM) refers to the design and application of formal systems in an organisation to ensure the effective and efficient use of human talent to accomplish organisational goals.2 This system includes activities undertaken to attract, develop and maintain an effective workforce. Managers have to find the right people, place them in positions where they can be most effective and develop them so they contribute to company success. Managers at Electronic Arts, one of the world’s largest makers of video games, include a commitment to human resources as one of the company’s four worldwide goals. They must, because in a company where the creativity and mind power of artists, designers, model makers, mathematicians and filmmakers determines strategic success, the competition for talent is intense.3 Over the couple of decades, HRM has shed its old ‘personnel’ image and gained recognition as a vital cog in corporate strategy.4 Increasingly, large corporations are outsourcing routine HR administrative activities, freeing HRM staff from time-consuming paperwork and enabling them to take on more strategic responsibilities. Recruitment and selection and training are the two most commonly outsourced activities in Australia.5 Many specialist companies have come into existence in recent years that conduct efficient payroll and human resource administration services for their clients, which allows those clients to specialise in their core businesses. The information technology research Gartner group forecast HR outsourcing to be valued at over US$1 billion by 2012 in Australia.6

12: Human resource management

479

The strategic role of HRM is to drive organisational performance A survey of more than 1700 CEOs around the world found that human capital was cited as the top factor in maintaining competitive success, which reflects the critical role of managing talent. Human capital refers to the economic value of the combined knowledge, experience, skills and capabilities of employees.7 Exhibit 12.1 shows the top three factors cited by CEOs in the survey. Human capital ranked far higher than assets such as technology, physical resources and access to raw materials.8

human capital The economic value of the knowledge, experience, skills and capabilities of employees.

Th e str ategi c approach The best HR departments not only support strategic Percentage of CEOs reporting these factors as important for competitive success: objectives, but also actively pursue an ongoing, integrated plan for furthering the organisation’s Human capital 71% performance.9 Research has found that effective 66% human resource management and the alignment Customer relationships of HR strategies with the organisation’s strategic Product and service 52% innovation direction has a positive impact on performance, including higher employee productivity and stronger financial results.10 In the US, department store Macy’s HR department has implemented new systems to improve customer service and support the chain’s growth strategy. All new sales associates attend a three-and-a-half-hour training program, called ‘Magic Selling’, that focuses on how associates can make more comfortable and natural connections with shoppers. Previously, training for new hires was limited to a 90-minute video, but Mary Martin, now vice president at Macy’s Leadership Institute & Development, knew a fresh approach was needed to revive the retailer’s service reputation and drive the 3 per cent growth in annual sales that top executives set as a goal.11 The strategic approach to HRM recognises three key elements. First, all managers are involved in managing human resources. Second, employees are viewed as assets. No strategy can be implemented effectively without the right people to put it into action. Employees, not buildings and machinery, give a company its competitive edge. Third, HRM is a matching process, integrating the organisation’s strategy and goals with the correct approach to managing human capital.12 Some current strategic issues of particular concern to managers include the following: ●● Hiring the right people to become more competitive on a global basis. ●● Hiring the right people for improving quality, innovation and customer service. ●● Knowing the right people to retain after mergers, acquisitions or downsizing. ●● Hiring the right people to apply new information technology for e-business. All of these strategic decisions determine a company’s need for skills and employees. This chapter examines the three primary goals of HRM, as illustrated in Exhibit 12.2. HRM activities and goals do not take place inside a vacuum, but within the context of issues and factors affecting the entire organisation, such as globalisation, changing technology, the need for rapid innovation, quick shifts in markets and the external environment, societal trends, government regulations and changes in the organisation’s culture, structure, strategy and goals.

Exhibit 12.1 Top three factors for maintaining competitive success Source: ‘Leading through Connections: The IBM 2012 Chief Executive Officer Study’, reported in Eric Lesser and Carl Hoffman. Workforce Analytics: Making the Most of a Critical Asset. (July–August 2012). Ivey Business Journal, http://www.iveybusinessjournal. com/topics/strategy/ workforce-analytics-makingthe-most-of-a-critical-asset (accessed 27 August 2012).

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The three broad HRM activities outlined in Exhibit 12.2 are to find the right people, manage talent so that people achieve their potential and maintain the workforce over the long term.13

Exhibit 12.2 Strategic human resource management

Find the right people HRM planning Job analysis Forecasting Recruiting Selecting

Company strategy Maintain an effective workforce Wages and salary Benefits Labour relations Terminations

Manage talent Training Development Appraisal

Competitive strategy HRM contributes directly to the bottom line, because it is the organisation’s human assets – its people – that meet or fail to meet strategic goals. To keep companies competitive, HRM is changing in three primary ways: focusing on building human capital, developing global HR strategies and using information technology.

Bu i ld in g hum an capital to d rive perfo r m an ce Today, more than ever, strategic decisions are related to human resource considerations. As described earlier, in many companies, especially those that rely more on employee information, creativity, knowledge and service rather than on production machinery, success depends on the ability to manage human capital.14 To build human capital, HRM develops strategies for finding the best people, enhancing their skills and knowledge with training programs and opportunities for personal and professional development, and providing compensation and benefits that support the sharing of knowledge and appropriately reward people for their contributions to the organisation.15 The importance of human capital for business results is illustrated in Exhibit 12.3. The exhibit shows a portion of a framework developed by Accenture and used by software and services company SAP. SAP needed a way to evaluate and revise its human capital processes to shift to a new strategy that called for

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stronger customer focus and greater individual employee accountability. The idea is to show how investments in human capital contribute to stronger organisational performance and better financial results. The framework begins at the bottom (level 3) by assessing internal processes such as workforce planning, career development, performance appraisal and so forth. Managers use these activities to increase human capital capabilities that drive higher performance in key areas such as innovation or customer service (level 2). Improvements in key performance areas, in turn, lead to improved business results (level 1).16

ROIC or ROE

Total return to shareholders

Source: Adapted from Susan Cantrell et al. (2006). Measuring the Value of Human Capital Investments: The SAP Case. Strategy & Leadership, 34:2, 43–52. Copyright 2006 by Emerald Group Publishing Limited. Reproduced with permission.

Business results Level 2

Productivity

Quality

Innovation

Customer service

Key performance drivers Level 3

Career development

Human capital strategy

Rewards and recognition

human capital

Exhibit 12.3 The role and value of human capital investments

Level 1

Revenue growth

481

Recruiting

Performance appraisal

Human capital processes

Take a Moment As a new manager, recognise that human capital is the organisation’s most valuable asset. If you are involved in hiring decisions, look for the best people you can find, and then treat them like gold, with opportunities to learn, grow and develop new skills and earn appropriate compensation and benefits. Strive to build a high level of social capital for your team or department so that people work together smoothly and relationships are based on trust, respect and cooperation.

Workforce planning

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➜➜ Human resource management (HRM) refers to the design and application of formal systems to ensure the effective and efficient use of human talent to accomplish organisational goals.

➜➜ HRM includes activities undertaken to attract, select, develop and maintain an effective workforce.



➜➜ HR managers are vital players in corporate strategy because no

➜➜ Human capital refers to the economic value of the combined knowledge, experience, skills and capabilities of employees.

strategy can be effective without the right people to put it into action.

remember this

Ex ternal fo rces Globali sat i on

international human resource management (IHRM) international human resource management (IHRM) A subfield of human resource management that addresses the complexity that results from recruiting, selecting, developing and maintaining a diverse workforce on a global scale.

An issue of significant concern for today’s organisations is competing on a global basis, which brings tremendous new challenges for human resource management. Most companies are still in the early stages of developing effective HRM policies, structures and services that respond to the current reality of globalisation.17 In a study of more than 200 global companies, including Eli Lilly, PPG Industries and UPS, managers reported that the biggest challenge for HRM is leadership development and training for the international arena. In addition, HRM is responsible for recruitment, training and performance management of employees who might have to work across geographic, technical and cultural boundaries to help the organisation achieve its goals. The success of global business strategies is closely tied to the effectiveness of the organisation’s global HR strategies.18 Recent trends in businesses to go global have meant that workforces are now more spread around the world and hence human resource management and managers must adapt to these new challenges. A subfield known as international human resource management (IHRM) specifically addresses the added complexity that results from coordinating and managing diverse people on a global scale.19 Research in IHRM has revealed that as the world becomes increasingly interconnected some HR practices and trends are converging. However, IHRM managers need a high degree of cultural sensitivity and the ability to tailor and communicate policies and practices for different cultures.20 What works in one country may not translate well to another. Exhibit 12.4 lists some interesting trends related to selection, compensation, performance appraisal and training in different countries.

Infor mat i on t ech n o l o g y human resource information system An integrated computer system designed to provide data and information used in HR planning and decision making.

Information technology is transforming human resource management and helping to meet the challenges of today’s global environment. A human resource information system is an integrated computer system designed to provide data and information used in HR planning and decision making. The most basic use is the automation of administrative duties such as handling pay, benefits and leave applications, which is convenient for employees and can lead to significant cost savings for the organisation. These systems are often ‘self-serve’, allowing employees to check their own leave balances, benefits, pay and conditions.

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Exhibit 12.4 Some trends in international human resource management

Selection

 In Japan, HR managers focus on a job applicant’s potential and his or her ability to get along with others. Less emphasis is placed on job-related skills and experience.

●

 Employment tests are considered a crucial part of the selection process in Korea, whereas in Taiwan the job interview is considered the most important criterion for selection.

●

Compensation

  Seniority-based pay is used to a greater extent in Asian and Latin countries.

●

 China and Taiwan have surprisingly high use of pay incentives, and are moving towards more incentives based on individual rather than group performance.

●

Performance

●

Training

●

 Across 10 countries surveyed, managers consider recognising subordinates’ accomplishments, evaluating their goal achievement, planning their development and improving their performance to be the most important reasons for performance appraisals.  In Mexico, managers consider training and development a reward to employees for good performance.

 HR managers in Korea incorporate team-building into nearly all training and development practices.

●

Source: Von Glinow, M. A., Drost, E. A. and Teagarden, M. B. (Spring 2002). Converging on IHRM Best Practices: Lessons Learned from a Globally Distributed Consortium on Theory and Practice. Human Resource Management, 41:1, 123–40.

Some organisations are coming close to a paperless HRM system, which not only saves time and money but also frees managers from mundane chores so they can focus on important strategic issues, such as how to effectively evaluate and compensate virtual workers or how to meet the challenge of a skilled labour shortage.21 Human resource information systems also provide a source of valuable management information about the workforce, and. can dramatically improve the effectiveness of long-term planning to meet these and other HR challenges. Dozens of software packages are available off the shelf for organisations to buy or lease for their workforce administration needs.

The changing nature of careers Another current issue is the changing nature of careers. HRM can benefit employees and organisations by responding to recent changes in the relationship between employers and employees and new ways of working such as telecommuting, job sharing, outsourcing and virtual teams.

Th e chan gin g so cial co ntr act In the old social contract between organisation and employee, the employee could contribute ability, education, loyalty and commitment and expect in return that the company would provide wages and benefits, work, advancement and training throughout the employee’s working life. But volatile changes in the environment have disrupted this contract. Consider the following list found on a bulletin board at a company undergoing major restructuring: ●● We can’t promise you how long we’ll be in business. ●● We can’t promise you that we won’t be acquired. ●● We can’t promise that there’ll be room for promotion. ●● We can’t promise that your job will exist when you reach retirement age.

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●● We can’t promise that the money will be available for your pension. ●● We can’t expect your undying loyalty, and we aren’t even sure we want it.22 The global financial crisis (GFC) accelerated the erosion of the old social contract,23 The above list reflects a primarily negative view of the new employer–employee relationship, but there are positive aspects as well. While the shift has been difficult for workers from the baby boomer generation, many young people don’t have any desire to stay with one company throughout their careers. They like the expectation of responsibility and mobility embedded in the new social contract. Everyone is expected to be a self-motivated worker who is continuously acquiring new skills and demonstrating value to the organisation. Workplace expert Lynda Gratton says building trust is more important than loyalty today, when ‘serial career monogamy’ is the order for many young employees, who are continually evaluating whether their work is meaningful and challenging and fits with their lives.24 Exhibit 12.5 lists some elements of the new social contract. The new contract is based on the concept of employability rather than lifetime employment. Individuals are responsible for developing their own skills and abilities, understanding their employer’s business needs and demonstrating their value to the organisation. The employer, in turn, invests in creative training and development opportunities so that people will be more employable when the company no longer needs their services. This means offering challenging work assignments, opportunities to participate in decision making, and access to information and resources. In addition, an important challenge for HRM is revising performance evaluation, compensation and other practices to be compatible with the new social contract. For example, with the tough economy in recent years, companies have had to lay off thousands of experienced employees. Many organisations, including KPMG, IBM, Microsoft and Lockheed Martin, have set up ‘alumni social networks’ so that people who have to be let go can keep in touch with colleagues and the industry. Alumni social networks benefit the company by keeping managers in touch with qualified workers who might be recruited back when needed, and they benefit former employees by giving them access to information, contacts and job leads that they might otherwise not have.25 The new social contract can benefit both employees and organisations. However, some companies take the new approach as an excuse to treat people as economic factors to be used when needed and then let go. This attitude hurts morale, employee commitment and organisational performance. Studies in both the United States and China, for example, have found lower employee and firm performance and decreased commitment in companies where the interaction between employer and employee is treated as an economic exchange rather than a genuine human and social relationship.26 Exhibit 12.5 The changing social contract

Employee

Employer

New contract

Old contract

Employability; personal responsibility

Job security

Partner in business improvement

A cog in the machine

Learning; skill development

Knowing

Creative development opportunities

Standard training programs

Lateral career moves; incentive compensation

Traditional compensation package

Challenging assignments

Routine jobs

Information and resources; decision-making authority

Limited information

Sources: Based on Louisa Wah. (January 1998). The New Workplace Paradox. Management Review, 7; and Douglas T. Hall and Jonathan E. Moss. (Winter 1998). The New Protean Career Contract: Helping Organizations and Employees Adapt. Organizational Dynamics, 22–37.

Innovati o ns in HRM The field of HRM is constantly changing. Some important HRM issues today are branding the company as an employer of choice, addressing the needs of temporary employees and part-time workers, and acknowledging growing employee demands for a work–life balance.

Source: iStockphoto/vm

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Bra n d i ng t h e company as an em pl o yer of choi ce Skilled and knowledgeable employees are in short supply and high demand.27 Both small and large companies in a variety of industries are using employer branding to attract desirable job candidates. An employer brand is similar to a product brand except that rather than promoting a specific product, its aim is to make the organisation seem like a highly desirable place to work. Employer-branding campaigns are like marketing campaigns to ‘sell’ the company and attract the best job candidates and it was recently identified as one of the biggest priorities for companies in a survey conducted by social media platform LinkedIn. An Australian online retailer called CatchOfTheDay employs over 600 people and wanted to ‘win the war’ on talent. Their employees are predominantly Gen Y, so the company decided to improve their employer value proposition by offering a range of appealing work conditions such as chill-out zones with hammocks and encouraging casual dress or, if employees need to get active to get their ‘creative juices’ flowing, they can opt to play basketball, tennis or exercise in the company gym.28 However, many large, well-known companies, including PepsiCo, General Electric (GE), Nokia, AT&T, and Credit Suisse Group, are also using employer branding as companies fight for talent.29

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It is technology – such as laptops, smartphones, tablets and broadband – that makes telecommuting possible. But it’s social and cultural trends that make its continuing growth probable. For example, many employees believe telecommuting makes it easier to achieve worklife balance, whereas employers find the new arrangement expands their labour pool and cuts overhead expenses. The federal government has encouraged the practice as well because fewer commuters means improved air quality and reduced energy consumption. So managers will continue to find themselves dealing with the issues telecommuting raises: just how do you select, train, monitor and reward employees you very rarely see? employer brand Aims to make the organisation seem like a highly desirable place to work.

Te a m s and p r oject s The advent of teams and project management is a major trend in today’s workplace. People who used to work alone on the shop floor, in the advertising department or in middle management Take a Moment are now thrown into teams and succeed as part of a group. Each member of the team acts As a new manager, appreciate like a manager, becoming responsible for quality standards, scheduling and even hiring and the opportunities that are offered by firing other team members. With the emphasis on projects, the distinctions between job the new social contract. Allow people categories and descriptions are collapsing. Many of today’s workers straddle functional and to make genuine contributions of their departmental boundaries and handle multiple tasks and responsibilities. talents to the organisation, and provide

Using t emp or ary and part-tim e em pl o yees

them with challenging work and opportunities to learn new skills they can transfer to other jobs in the future.

Contingent workers are becoming a larger part of the workforce in most countries. Contingent workers are people who work for an organisation, but not on a permanent or fulltime basis.30 In a 2012 survey by Workforce Management, nearly 44 per cent of respondents said that they are using more or significantly more contingent workers, including temporary employees, contractors and independent consultants, than they were a decade ago.31 Although many of these people are ‘involuntary’ temporary or part-time workers who lost jobs during the GFC, other people like the option of working for different companies for short periods of time. For organisations, the primary goal is to access specialised skills for specific projects, enabling the company to maintain flexibility and keep costs low.

contingent workers People who work for an organisation, but not on a permanent or full-time basis, including temporary placements and contracted employees.

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Although in the past, most temporary workers were in clerical and manufacturing positions, in recent years demand has grown for contingent professionals, such as accountants and financial analysts, interim managers, information technology specialists, product managers and lawyers. Sometimes called supertemps, these are people who are highly skilled and choose to pursue independent careers. Supertemps often do mission-critical work. Ed Trevasani, who loves the freedom and flexibility of contingent work, has served as interim CEO for an international firm, developed a mergers and acquisitions strategy for a global manufacturer, and led the IT selection process for a major insurance company.32

Pr omot i ng wor k–l if e b al an c e

telecommuting Using computers and telecommunications equipment to perform work from home or another remote location.

Initiatives that enable people to lead a balanced life are a critical part of many organisations’ retention strategies. Particularly today, when some companies can’t afford pay raises for valued employees, managers are offering people more flexible scheduling or more control over their assignments as rewards. About 24 per cent of companies surveyed by the Society for Human Resource Management reported having a formal work–life balance policy, and 52 per cent reported having an informal policy.33 One approach is to let employees work part of the time from home or another remote location. Telecommuting means using computers and telecommunications equipment to do work without going to an office. More than 90 per cent of employees surveyed by Cisco Systems say they work from home at least one day a week. Cisco was the lead sponsor of the 2012 National Telework Week, organised by Telework Exchange, a public-private partnership devoted to promoting telecommuting, especially in the federal government.34 Other forms of flexible scheduling are also important in today’s workplace, and 53 per cent of companies surveyed offer some form of flextime, including telecommuting, compressed workweeks, job sharing, schedule adjustment and so forth.35 Many companies have implemented broad work–life balance initiatives in response to the shift in expectations among young employees.36 Generation Y (Gen Y) workers, or Millennials, are a fast-growing segment of the workforce. Typically, Gen Y employees work smart and work hard on the job, but they refuse to let work be their whole life. Unlike their parents, who placed a high priority on career, Gen-Y workers expect their jobs to accommodate their personal lives.37

➜➜ The new social contract between employers and employees is based on the notion of employability and personal responsibility rather than lifelong employment by an organisation.

➜➜ An employer brand is similar to a product brand except that it promotes the organisation as a great place to work, rather than promoting a specific product or service. ➜➜ Contingent workers are people who work for an organisation, but not on a permanent or full-time basis,

including temporary placements, independent contractors, freelancers and part-time employees.

remember this

➜➜ Telecommuting means using computers and telecommunications equipment to perform work from home or another remote location.

Finding the right people Now let’s turn to the three broad goals of HRM: finding, developing and maintaining an effective workforce. The first step in finding the right people is human resource planning – which will be described in more detail below – in which managers or HRM professionals predict the need for new employees based

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on the types of vacancies that exist, as illustrated in Exhibit 12.6. The second step is to use recruiting procedures to communicate with potential applicants. The third step is to select from the applicants those persons believed to be the best potential contributors to the organisation. Finally, the new employee is welcomed into the organisation.

HR planning Retirements Growth Resignations

Company’s needs

Choose recruiting sources Want ads Headhunters Internet

Strategic goals Current and future competencies Market changes Employee turnover Corporate culture

Select the candidate Application Interview Tests

Matching model

Match with

Company inducements Pay and benefits Meaningful work Advancement Training Challenge

Welcome the new employee

Exhibit 12.6 Attracting an effective workforce

Employee contributions Ability Education and experience Creativity Commitment Expertise and knowledge

Employee’s needs

Match with

Stage of career Personal values Promotion aspirations Outside interests Family concerns

Underlying the organisation’s effort to attract employees is a matching model. With the matching model, the organisation and the individual attempt to match the needs, interests and values that they offer each other.38 For example, a small software developer might require long hours from creative, technically skilled employees. In return, it can offer freedom from bureaucracy, tolerance of idiosyncrasies and potentially high pay. A large manufacturer can offer employment security and stability, but it might have more rules and regulations and require greater skills for ‘getting approval from the higher-ups’. The individual who would thrive working for the software developer might feel stymied and unhappy working for a large manufacturer. Both the company and the employee are interested in finding a good match.

matching model An employee selection approach in which the organisation and the applicant attempt to match each other’s needs, interests and values.

Hum an reso u rce pl ann in g Human resource planning is the forecasting of human resource needs and the projected matching of

individuals with expected vacancies. Human resource planning begins with several questions: ●● What new technologies are emerging, and how will these affect the work system? ●● What is the volume of the business likely to be in the next five to 10 years? ●● What is the turnover rate, and how much, if any, is avoidable?

human resource planning The forecasting of human resource needs and the projected matching of individuals with expected job vacancies.

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The responses to these questions are used to formulate specific questions pertaining to HR activities, such as the following: ●● How many senior managers will we need during this time period? ●● What types of engineers will we need, and how many? ●● Are persons with adequate computer skills available for meeting our projected needs? ●● How many administrative personnel – technicians, IT specialists – will we need to support the additional managers and engineers? ●● Can we use temporary, contingent or virtual workers to handle some tasks?39 Answers to these questions help define the direction for the organisation’s HRM strategy. For example, if forecasting suggests a strong upcoming need for more technically trained individuals, the organisation can: (1) define the jobs and skills needed in some detail; (2) hire and train recruiters to look for the specified skills; and (3) provide new training for existing employees. By anticipating future human resource needs, the organisation can prepare itself to meet competitive challenges more effectively than organisations that react to problems only as they arise.

Recru itin g recruiting The activities or practices that define the desired characteristics of applicants for specific jobs.

recruiting

Recruiting is defined as ‘activities or practices that define the characteristics of applicants to whom

selection procedures are ultimately applied’.40 Today, recruiting is sometimes referred to as talent acquisition to reflect the importance of the human factor in the organisation’s success.41 Although we frequently think of university campus recruiting as a typical recruiting activity, many organisations use internal recruiting, or promote-from-within policies, to fill their high-level positions.42 Internal recruiting has two major advantages: it is less costly than an external search, and it generates higher employee commitment, development and satisfaction because it offers opportunities for career advancement to employees rather than outsiders. Frequently, however, external recruiting – recruiting newcomers from outside the organisation – is advantageous. Applicants are provided by a variety of outside sources, including advertising, state employment services, online recruiting services, private employment agencies (headhunters), job fairs and employee referrals.

Assessin g jo bs job analysis The systematic process of gathering and interpreting information about the essential duties, tasks and responsibilities of a job. job description A concise summary of the specific tasks and responsibilities of a particular job. job specification An outline of the knowledge, skills, education and physical abilities needed to adequately perform a job.

Basic building blocks of HRM include job analysis, job descriptions and job specifications. Job analysis is a systematic process of gathering and interpreting information about the essential duties,

tasks and responsibilities of a job, as well as about the context within which the job is performed.43 To perform job analysis, managers or specialists ask about work activities and work flow, the degree of supervision given and received in the job, knowledge and skills needed, performance standards, working conditions and so forth. The manager then prepares a written job description, which is a clear and concise summary of the specific tasks, duties and responsibilities, and job specification, which outlines the knowledge, skills, education, physical abilities and other characteristics needed to perform the job adequately. Job analysis helps organisations recruit the right kind of people and match them to appropriate jobs. For example, to enhance internal recruiting, Sara Lee Corporation identified six functional areas and 24 significant skills that it wants its finance executives to develop, as illustrated in Exhibit 12.7. Managers are tracked on their development and moved into other positions to help them acquire the needed skills.44

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G nag enera l em ent ad m G in ist ene ra ra tio l n ma

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Multiple businesses

Source: Reprinted with permission from CFO, 1 October 1998. Visit our website at http://www.cfo. com. © CFO Publishing LLC. All Rights Reserved. Foster Printing Service: 866-879-9144, http://www. marketingreprints.com. License #13921.

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ility

Credib

M bu ana pr dge gin g oc es t s

Communication

Pre

y Profitabilit analysis ent/ t stm Inve onmen nd aba sis l ly cia ana an n i f g C SL nnin a l p

s es oc nt Pr me e ov pr m im tfor Pla ent m e nag ma

Operations finance

489

Exhibit 12.7 Sara Lee’s required skills for finance executive

De s u c is pp ion or t

al

Workin g capit al manag ement

Sou rci

ABC

rn

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In

Ge ac ner co al un tin g Fin a rep ncial ort ing

Operati on flow

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Re a list i c job p r evi ews Job analysis also enhances recruiting effectiveness by enabling the creation of realistic job previews (RJPs). A realistic job preview gives applicants all pertinent and realistic information – positive and negative – about the job and the organisation.45 RJPs contribute to greater employee satisfaction and lower turnover because they facilitate matching individuals, jobs and organisations. Individuals have a better basis on which to determine their suitability to the organisation and ‘self-select’ into or out of positions based on full information.

Social medi a Today, much recruiting is done via the Internet and social media sites such as LinkedIn, Facebook and Meetup.46 In a 2012 survey of global HR executives, 46 per cent reported using social media to find good candidates. Companies in China have become particularly adept at using this approach because traditional online recruiting boards attract far too many unqualified candidates to make them valuable. So, managers turn to social media such as Weibo, a Twitter-like messaging service, to build a community of potential candidates. Deloitte Touche Tohmatsu’s China division has a Weibo career page that has more than 48 500 followers; some keep in close touch with the company, developing relationships that can be beneficial to both sides. China’s Lenovo Group reports finding 70 good candidates during a three-month recruiting surge in 2012 via social media, including LinkedIn, Weibo and Tianji, a Chinese professional social networking site.47 Companies still use other online recruiting methods, such as posting job openings on company websites and searching commercial recruiting sites, but the trend is towards more targeted online recruiting. Rather than using online job boards, for example, Science Applications International Corporation now searches for qualified candidates on professional social networks before it ever posts a job opening.48

realistic job previews (RJPs) A recruiting approach that gives applicants all pertinent and realistic information about the job and the organisation.

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Legal consi der at i o n s Organisations must ensure that their recruiting practices conform to the law. Equal employment opportunity (EEO) laws stipulate that recruiting and hiring decisions cannot discriminate on the basis of personal characteristics such as age, ethnicity, religion, sexual orientation or gender. Affirmative action refers to the use of goals, timetables or other methods in recruiting to promote the hiring, development and retention of protected groups – persons historically under-represented in the workplace. For example, a company might establish a goal of recruiting one female staff member for every male until the proportions are commensurate with the population in the community.

➜➜ The matching model is a human resources approach in which the organisation and the individual attempt to match each other’s needs, interests and values. ➜➜ Finding the right people starts with human resource planning, which refers to the forecasting of human resource needs and the projected matching of individuals with anticipated job vacancies. ➜➜ Recruiting refers to activities or practices that define the desired

Innovative Way

characteristics of applicants for specific jobs. ➜➜ Many of today’s organisations use social media, including Twitter, Weibo, LinkedIn, Tianji and Facebook, for recruiting. ➜➜ Job analysis is the systematic process of gathering and interpreting information about the essential duties, tasks and responsibilities of a job. ➜➜ Managers prepare a job description for each open position, which is a

concise summary of the specific tasks and responsibilities of that job.

remember this

➜➜ A job specification outlines the knowledge, skills, education, physical abilities and other characteristics needed to perform a specific job adequately. ➜➜ Managers use realistic job previews in recruiting to give applicants all pertinent and realistic information, both positive and negative, about a job and the organisation.

Red 5 Studios Inc.

Several members of the team behind the popular online game World of Warcraft decided to start their own company, and Red 5 Studios was born. But the start-up quickly ran into a problem: how to attract good employees in an industry where competition for talent is stiff. The team decided to make a list of their ‘dream hires’ and then set about recruiting them. They learned everything they could about each dream developer to personalise the pitch – searching on Google, playing the

developer’s games, tracking down the prospects’ blogs and posts in industry forums, and so forth. When the research was complete, Red 5 sent each prospect a package of boxes, nested like a Russian doll. In the final box was an iPod Shuffle engraved with the prospect’s name and containing a recorded recruiting message from CEO Mark Kern. The recruiting strategy worked. Four months later, three of the passive candidates had joined Red 5 Studios, with another considering making the move.

Source: Covel, S. (4 June 2007). Start-Up Lures Talent with Creative Pitch. The Wall Street Journal.

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Kip Tindell and Garrett Boone opened the first Container Store in 1978, and the company has quietly expanded into a 33-store nationwide chain in the US. Annual sales growth has topped 20 per cent in all of the company’s 23 years of business. Part of that success is due to the popular storage items and knick-knacks the Container Store sells for neat freaks and people with more stuff than they know what to do with. But another, perhaps even greater, element is the Container Store’s approach to recruiting, which turns the company’s best customers into loyal, topperforming employees. With retail industry turnover averaging more than 70 per cent, the Container Store enjoys a low 10 per cent

turnover for full-time employees and around 30 to 35 per cent for part-timers. The company has made the Fortune 100 Best Companies To Work For list an extraordinary 14 years in a row. Whether you’re a store manager or a shelf-stacker, at the Container Store recruiting is an important part of your job. All employees carry recruiting cards, and can earn awards of $500 for every full-time and $200 for every part-time hire. Employees get to know their customers on a personal level and they learn which ones have the right attitude and personality to fit the store. As they chat to customers in the aisles, workers offer recruiting cards to people they think would make good employees.

The in-store headhunting approach has been so successful that approximately a third of the company’s 2500 workers come from employee referrals. In an industry where most companies are running classified ads every week or two for new staff, the Container Store often goes six to eight months without placing a single help-wanted ad. The company has a set of Foundation Principles that guide its business activity and it firmly maintains that employees are their most important stakeholder which they support through their employee first culture.

Case study

Container Store

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Source: Powers, V. (November 2004). Finding Workers Who Fit. Business 2.0, 74; Putting Our Employees First, http://standfor.containerstore.com/putting-ouremployees-first/ (accessed 5 November 2013).

Selectin g In the selection process, employers assess applicants’ characteristics in an attempt to determine the ‘fit’ between the job and applicant characteristics. The most frequently used selection devices are the application form, interview, employment test and assessment centre. In general, the greater the skill requirements and work demands of an open position, the greater the number and variety of selection tools the organisation will use.49

Applicat i on for m

selection The process of determining the skills, abilities and other attributes a person needs to perform a particular job. application form A device for collecting information about an applicant’s education, previous job experience and other background characteristics.

The application form is used to collect information about the applicant’s education, previous job experience and other background characteristics. Research shows that biographical information inventories can validly predict future job success.50 One pitfall to be avoided is the inclusion of questions that are irrelevant to job success. Generally, the application form should not ask questions that will create an adverse impact on protected groups unless the questions are Take a clearly related to the job.51 For example, employers should not ask whether the applicant Moment rents or owns his or her own home because (1) an applicant’s response might adversely The self-test at the beginning affect his or her chances at the job, (2) minorities and women may be less likely to own of this chapter will test your own a home and (3) home ownership is probably unrelated to job performance. By contrast, preparation for recruiting and selecting the right people for your passing the CPA exam is relevant to job performance in an accounting firm; thus, it is team. If you haven’t taken the appropriate to ask whether an applicant for employment has passed the CPA exam, even test already, do it now before if only one-half of all female or minority applicants have done so, versus nine-tenths of reading on. white male applicants.

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employee selection

In line with equal employment opportunity legislation, the application form should not include any irrelevant or invasive personal questions. Exhibit 12.8 Employment applications and interviews: what can you ask? Category

OK to ask

National origin

●

  The applicant’s name   If applicant has ever worked under a different name

●

  Nothing

Race

●

Disabilities

●

  Whether applicant has any disabilities that might inhibit performance of job

Inappropriate or illegal to ask ●

  The origin of applicant’s name

●

  Applicant’s ancestry/ethnicity

●

  Race or colour of skin

●

●

Age

  If applicant is over 18

●

●

●

Religion

  Nothing

●

●

●

Criminal record

●

Marital/family status

●

Education and experience

  If applicant has ever been convicted of a crime   Nothing

●

 If applicant has ever filed workers’ compensation claim   Applicant’s age  When applicant graduated from high school   Applicant’s religious affiliation  What religious holidays applicant observes   If applicant has ever been arrested  Marital status, number of children or planned children

●

  Childcare arrangements

  Where applicant went to school

●

  When applicant graduated

  Prior work experience

●

  Hobbies

●

●

Citizenship

●

 If applicant has any physical or mental defects

  If applicant has a legal right to work in Australia

●

●

 If applicant is a citizen of another country

Sources: Based on ‘Appropriate and Inappropriate Interview Questions’ in Bohlander, G., Snell, S. and Sherman, A. (2001), Managing Human Resources, 12th edn, Cincinnati, OH: South-Western, 207; and ‘Guidelines to Lawful and Unlawful Preemployment Inquiries’, Appendix E, in Mathis, R. L. and Jackson, J. H. (2002), Human Resource Management, 2nd edn, Cincinnati, OH: South-Western, 189–190.

Int ervi ew Some type of interview is used as a selection technique in almost every job category in nearly every organisation. It is another area where the organisation can get into legal trouble if the interviewer asks questions that violate acceptable guidelines. Exhibit 12.8 lists some examples of appropriate and inappropriate interview questions. There is some evidence that the typical interview is not generally a good predictor of job performance. One estimate is that conventional interviews have a 0.2 correlation with predicting a successful hire.52 Managers can improve their interviewing skills, and candidates can improve their chances of having a successful interview, by understanding some dos and don’ts related to the interview, as outlined in this chapter’s Management in Practice box (see page 494).

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Managers use a variety of interview approaches to get a more reliable picture of a candidate’s suitability for the job. Structured interviews use a set of standardised questions that are asked of every applicant so comparisons can easily be made. These may include biographical interviews, which ask about the person’s previous life and work experiences; behavioural interviews, which ask people to describe how they have performed a certain task or handled a particular problem; and situational interviews, which require people to describe how they might handle a hypothetical situation. With a non-directive interview, the interviewer asks broad, open-ended questions and permits the applicant to talk freely, with minimal interruption. Non-directive interviews may bring to light information, attitudes and behavioural characteristics that might be concealed when answering structured questions. Some organisations put candidates through a series of interviews, each one conducted by a different person and each one probing a different aspect of the candidate. Others use panel interviews, in which the candidate meets with several interviewers who take turns asking questions.53 In addition, some firms are using offbeat approaches, sometimes referred to as extreme interviewing, to test job candidates’ ability to handle problems, cope with change, think on their feet and work well with others. Danielle Bemoras found herself in a joint interview with a rival candidate when she applied for a job with SceneTap, a digital nightlife guide. Rather than trying to upstage her competitor, Bemoras was respectful and helpful, an approach that won her an internship, followed by a full-time job offer.54 To test candidates’ creativity, a recruiter at one marketing firm told interviewees to ‘just entertain me for five minutes’.55

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structured interview Uses a set of standardised questions that are asked of every applicant so comparisons can be made easily. non-directive interview Interviewer asks broad, open-ended questions and permits the applicant to talk freely with minimal interruption, in an attempt to bring to light information, attitudes and behavioural characteristics. panel interview Where the candidate meets with several interviewers who take turns asking questions.

Em ployment t est Employment tests may include cognitive ability tests, physical ability tests, personality inventories

employment tests

Assess candidates on and other assessments. Cognitive ability tests measure an applicant’s thinking, reasoning, verbal and various factors considered important for the job to mathematical abilities. Physical ability tests that measure qualities such as strength, energy and endurance be performed and include may be used for jobs such as delivery drivers who must lift heavy packages, electric line workers who cognitive ability tests, physical ability tests and must climb ladders and carry equipment, and other positions that involve physical tasks. It is essential personality tests. that these tests only assess cognitive and physical skills that are job related to avoid violating laws against discrimination. Many companies also use various types of personality tests to assess such characteristics as openness to learning, agreeableness, conscientiousness, creativity and Take a emotional stability. Moment In addition, companies look for personality characteristics that match the As a new manager, get the right needs of the particular job so there is a good fit. One company found that people in the right jobs by assessing your team’s or department’s needs, people who score high in traits such as assertiveness and extroversion typically offering realistic job previews, using a variety make good salespeople, so they looked for those traits in testing candidates of recruiting methods, and striving to match for new positions.56 By one estimate, 80 per cent of mid-sized and large the needs and interests of the individual to those companies use personality and ability tests for either pre-employment of the organisation. It is typically wise to use a screening or new-employee orientation.57 Another unusual type of test, variety of selection tools. For lower-skilled jobs, an application and brief interview might be called a brain teaser, is being used by companies that put a premium on enough, but higher-skilled jobs call for a innovativeness and problem solving. The answers aren’t as important as how combination of interviews, aptitude the applicant goes about solving the problem. See how you do answering the and skills tests, and assessment brain teasers in Exhibit 12.9. exercises.

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Exhibit 12.9 Try your hand at some interview brain teasers How would you answer the following questions in a job interview?

1 How would you weigh an aeroplane without using scales? 2 Why are manhole covers round? 3 How many golf balls can fit inside a standard school bus? 4 How much should you charge to wash all the windows in Sydney? 5 You’re shrunk and trapped in a blender that will turn on in 60 seconds. What do you do? There might be many solutions to these questions. Here are some that interviewers consider good answers:

1 Fly it onto an aircraft carrier or other ship big enough to hold it. Paint a mark on the hull of the ship showing the water level. Then remove the plane. The ship will rise in the water. Now load the ship with items of known weight (200 kg bales of wool, for instance) until it sinks to exactly the line you painted on the hull. The total weight of the items will equal the weight of the jet. 2 A square cover might fall into its hole. If you hold a square manhole cover vertically and turn it a little, it will fall easily into the hole. In contrast, a round cover with a slight recess in the centre can never fall in, no matter how it is held. 3 About 500 000, assuming the bus is 50 balls high, 50 balls wide, and 200 balls long. 4 Assuming 10 000 city blocks, 600 windows per block, five minutes per window, and a rate of $20 per hour, about $10 million. 5 Use the measurement marks on the side of the container to climb out. Sources: These questions are used at companies such as Microsoft, Google and eBay. (Adapted) Reported In Michael Kaplan. (September 2007). Job Interview Brainteasers. Business 2.0, 35–7; and William Poundstone. (September–October 2003). Impossible Questions. Across the Board, 44–8.

management in pr actice

The right way to interview a job applicant

A so-so interview usually nets a so-so employee. Many hiring mistakes can be prevented during the interview. The following techniques will ensure a successful interview:

➜➜ Know what you want. Before the interview, prepare questions based on your knowledge of the job to be filled.

➜➜ Prepare a road map. Develop questions that will reveal whether the candidate has the correct background and qualifications. The questions should focus on previous experiences that are relevant to the current job.

➜➜ Use open-ended questions in which the right answer is not obvious. Ask the applicant to give specific examples of previous work experiences. For example, don’t ask, ‘Are you a hard worker?’ or ‘Tell me about yourself’. Instead ask, ‘Can you give me examples from your previous work history that reflect your level of motivation?’ or ‘How did you go about getting your current job?’

➜➜ Do not ask questions that are irrelevant to the job. This caution is particularly important when the questions might

relate to age, religion, ethnicity or any other irrelevant personal characteristic that could fall under equal employment opportunity legislation.

➜➜ Listen; don’t talk. You should spend most of the interview listening. If you talk too much, the focus will shift to you, and you might miss important cues. One expert actually recommends stating all your questions right at the beginning of the interview. This approach forces you to sit back and listen and also gives you a chance to watch a candidate’s behaviour and body language.

➜➜ Allow enough time so that the interview will not be rushed. Leave time for the candidate to ask questions about the job. The types of questions the candidate asks can be an important clue to his or her interest in the job.

➜➜ Avoid reliance on your memory. Request the applicant’s permission to take notes; then do so unobtrusively during the interview or immediately after.

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Even a well-planned interview may be disrupted by the unexpected. Here are some of the unusual things that have happened during job interviews, based on surveys of vice-presidents and human resource directors at major US corporations:

➜➜ The applicant chewed bubble gum and constantly blew

➜➜ The applicant announced she hadn’t had lunch and

➜➜ The job applicant challenged the interviewer to arm

proceeded to eat a hamburger and French fries in the interviewer’s office.

➜➜ When asked if he had any questions about the job, the candidate answered, ‘Can I get an advance on my pay cheque?’

495

bubbles.

➜➜ The job candidate said the main thing he was looking for in a job was a quiet place where no one would bother him. wrestle.

➜➜ The applicant dozed off and started snoring during the interview.

➜➜ When asked how she would handle a difficult situation, the candidate replied, ‘I’d let you do it.’

Sources: Jenks, J. J. and Zevnik, B. L. P. (July–August 1989). ABCs of Job Interviewing. Harvard Business Review, 38–42; Mornell, Dr P. (March 1998). Zero Defect Hiring. Inc., 75–83; Peak, M. M. (October 1989). What Color Is Your Bumbershoot? Management Review, 63; and Levinson, M. (1 March 2004). How to Hire So You Don’t Have to Fire. CIO, 72–80.

Asse ssment cent r es First developed by psychologists at AT&T, assessment centres are typically used to select individuals for managerial and professional careers. Assessment centres present a series of managerial situations to groups of applicants over a two- or three-day period. One technique is the in-basket simulation, which requires the applicant to play the role of a manager who must decide how to respond to 10 memos in his or her in-basket within a two-hour period. Panels of two or three trained judges observe the applicant’s decisions and assess the extent to which they reflect interpersonal, communication and problem-solving skills. At one car parts plant, applicants for plant manager go through four-hour ‘day-in-the-life’ simulations in which they have to juggle memos, phone calls and employee or job problems.58 Some organisations use this technique for front-line employees as well by administering work sample tests, which require an applicant to complete simulated tasks that are a part of the desired job. Google, for instance, has applicants for positions as coders write code during the interview. There is evidence that the use of work sample tests provides a better prediction of job performance than the usual job interview.59 A communications firm in the United Kingdom asked candidates for the position of customer assistant to participate in simulated exercises with customers to assess their listening skills, customer sensitivity and ability to cope under pressure.60

Onlin e checks The Internet gives recruiters and hiring managers a new way to search for a candidate’s criminal record, credit history and other indications of honesty, integrity and stability.61 Moreover, many companies want to see what a candidate has to say about him- or herself on blogs and social networking sites to gauge whether the person would be a good fit with the organisation. A survey by Microsoft found that 75 per cent of US recruiters and HR professionals say their bosses require them to research job candidates online, and another survey found that 37 per cent specifically investigate candidates’ social media profiles. Nearly half say provocative or inappropriate photographs have caused them not to hire a candidate. For example, Miranda Shaw, a manager at a leading American consulting firm, rejected a candidate she had previously been impressed with after she discovered photographs of him drinking and using drugs with fraternity brothers on the Facebook page of one of his ‘friends’ who hadn’t enabled privacy settings.62 Other recent university graduates looking for jobs have found doors closed to them because of risqué photos or vivid comments about drinking, drug use or sexual exploits.63

assessment centre Used to select individuals with high managerial potential based on their performance on a series of simulated managerial tasks.

work sample tests Where an applicant is required to complete simulated tasks that are part of the desired job.

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➜➜ Selection is the process of assessing the skills, abilities and other attributes of applicants in an attempt to determine the fit between the job and each applicant’s characteristics. ➜➜ The application form is a selection device that collects information about the applicant’s education, previous work experience and other background characteristics. ➜➜ A structured interview uses a set of standardised questions that are asked of every applicant so comparisons can be made easily. ➜➜ In a non-directive interview, the interviewer asks broad, open-



ended questions and permits the applicant to talk freely with minimal interruption, in an attempt to bring to light information, attitudes and behavioural characteristics that might be concealed when answering structured questions.

➜➜ A panel interview is an interview in which the candidate meets with several interviewers who take turns asking questions. ➜➜ Some companies are using offbeat approaches, called extreme interviewing, to test job candidates’ ability to handle problems, cope with change and work well with others. ➜➜ Employment tests assess candidates on various factors considered

important for the job to be performed and include cognitive ability tests, physical ability tests and personality tests.

remember this

➜➜ An assessment centre is used to select individuals with high managerial potential based on their performance on a series of simulated managerial tasks. ➜➜ Managers may administer work sample tests to applicants for frontline positions to evaluate their performance in completing simulated tasks that are a part of the job. ➜➜ One way in which HR managers gauge an applicant’s suitability for an open position is by checking what the applicant says on social media sites.

Managing talent: developing an effective workforce Following selection, the next goal of HRM is to develop employees into an effective workforce. Development includes training and performance appraisal.

Tr ain in g an d d evelo pm ent Training and development programs represent a planned effort by an organisation to facilitate employees’ learning of job-related skills and behaviours.64 Training magazine’s most recent ‘Industry Report’ shows that organisations spent some $55 billion on formal training programs in 2012.65 Exhibit 12.10 shows some frequently used types and methods of training. Training conducted by a ‘stand-and-deliver’ instructor in a classroom remains the most popular method of training. Development is sometimes distinguished from the general term ‘training’. Training is typically used to refer to teaching people how to perform tasks related to their present jobs, while development means teaching people broader skills that are not only useful in their present jobs but also prepare them for greater responsibilities in future jobs. At farming equipment manufacturer John Deere (DE), rising managers get coaching from influential board members, for example, to develop their leadership skills.66 GE has adopted a new approach to developing managers due to changes in the global competitive environment.

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Type of product or service

Percentage intending to purchase in 2012

Exhibit 12.10 Methods of training and intended training expenditures

38

Online learning tools and systems Classroom tools and systems

32

Authoring tools and systems

32

Learning management systems

30

Content development

30

Consulting services

25

Presentation software and tools

25

Audio and web conferencing products

24

Certification

24

Source: (November– December 2011). 2011 Training Industry Report. Training, 22–35.

23

Assessment and analysis testing

22

Games and simulations

21

Courseware design

20

Mobile learning 0

5

10

15

20

25

30

35

40

45

50

2011 Instructional methods and media Type of delivery

Percent of training hours

Classroom with instructor

41.6

Blended (combination of live instructor, virtual classroom, social networking, etc.)

24.0

Online and computer-based

21.9

Social networking and mobile

The GE way GE has long been known for moving its executives around to different divisions every few years so that they gain a broad understanding of the company and develop general management skills. In recent years, though, a new philosophy has taken hold. Rather than moving people around, CEO Jeff Immelt wants to leave them where they are, in the belief that gaining a deeper understanding of the products and customers of a specific unit will help win more sales. ‘The world is so

497

1.3

Innovative Way complex,’ says Susan Peters, leader of executive development at GE. ‘We need people who are pretty deep.’ Putting greater emphasis on expertise in a particular business is aligned with Immelt’s strategy to streamline the company. Immelt believes having managers who gain specialised expertise in a business area can help divisions better create products to meet customer needs, as well as develop the deep customer relationships needed to sell them.

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To understand the changing philosophy, consider John Krenicki, the leader of GE Energy, the company’s biggest industrial unit. Before being moved into that position seven years ago, Krenicki held management positions in the chemicals and materials, lighting, superabrasives, transportation, plastics, and advanced materials divisions. David Joyce, in contrast to Krenicki, has spent his entire career within the GE Aviation unit.

Thomas Horton, CEO of AMR Corporation (American Airlines), one of the division’s biggest customers, says the expertise of Joyce is a big part of AMR’s positive relationship with GE. Horton was in Beijing when a critical question came up about an engine maintenance issue. He called Joyce at a late hour back in the United States, and Joyce was able to explain the issue in detail. ‘He’s a good partner,’ says Horton. Source: (21 November 2011). How Do Great Companies Groom Talent? Fortune, 166.

On-t h e-job t r ai ni ng on-the-job training (OJT) A type of training in which an experienced employee ‘adopts’ a new employee to teach him or her how to perform job duties.

on-the-job training

The most common method of training is on-the-job training. In on-the-job training (OJT), an experienced employee is asked to take a new employee ‘under his or her wing’ and show the newcomer how to perform job duties. OJT has many advantages, such as few out-of-pocket costs for training facilities, materials or instructor fees and easy transfer of learning back to the job. When implemented well, OJT is considered the fastest and most effective means of facilitating learning in the workplace.67 One type of on-the-job training involves moving people to various types of jobs within the organisation, where they work with experienced employees to learn different tasks. This cross-training may place an employee in a new position for as short a time as a few hours or for as long as a year, enabling the employee to develop new skills and giving the organisation greater flexibility.

Soci al lear ni ng

social learning Learning informally from others by using social media tools.

mentoring When an experienced employee guides and supports a less experienced employee. coaching A method of directing, instructing and training a person with the goal to develop specific management skills.

As shown earlier in Exhibit 12.10, many companies report plans to purchase products and services for online and mobile learning in 2012. This reflects an awareness of the importance of social learning, particularly for younger employees. Social learning basically means learning informally from others by using social media tools, including mobile technologies, social networking, wikis and blogs, virtual games and so forth.68 A simple example might be an employee who asks a question on a blog or in a tweet, seeking advice from colleagues about a process or task. The majority of organisational learning occurs through informal rather than formal channels, so managers are supporting the use of social media technology for learning in day-to-day work. These tools allow people to share information, access knowledge, find resources and collaborate in a natural way. An IBM survey found that high-performing organisations are 57 per cent more likely than other companies to provide employees with collaborative and social media tools.69

Ment or i ng and co ac h in g For many management and professional jobs, traditional on-the-job training is supplemented or replaced by mentoring and coaching. With mentoring, an experienced employee guides and supports a newcomer or less experienced employee. Mentors typically offer counsel regarding how to network and advance in the company in addition to guiding the employee in developing his or her skills and abilities. Coaching is a method of directing, instructing and training a person with the goal to develop specific management skills. Coaching usually applies to higher-level managers who want to develop their personal competencies. For instance, a coach might observe a senior executive in action and

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provide feedback about how the executive can improve his or her interaction skills. Managers can also discuss difficult situations as they arise, with the coach helping them work through various alternative scenarios for dealing with the situation.70 Other frequently used training methods include the following: ●● Orientation training, in which newcomers are introduced to the organisation’s culture, standards and goals. ●● Classroom training, including lectures, films, audiovisual techniques and simulations – makes up approximately 70 per cent of all formal corporate training.71 ●● Self-directed learning, also called programmed instruction, which involves the use of books, manuals or computers to provide subject matter in highly organised and logical sequences that require employees to answer a series of questions about the material. ●● Computer-based training, sometimes called e-training, including computer-assisted instruction, web-based training and teletraining. As with self-directed learning, the employee works at his or her own pace and instruction is individualised, but the training program is interactive and more complex, non-structured information can be communicated. E-training has soared in recent years because it offers cost savings to organisations and allows people to learn at their own pace.72

In - house develop ment i n c o r por ate un iv er s ities Another popular approach to training and development is the corporate university. A corporate university is an in-house training and education facility that offers broad-based learning opportunities

for employees – and frequently for customers, suppliers and strategic partners as well – throughout their careers.73 One well-known corporate university is Hamburger University, McDonald’s worldwide training centre, which has been in existence for more than 50 years. Numerous other companies, including IBM, FedEx, General Electric, Intel, Harley-Davidson and PETRONAS in Malaysia, pump millions of dollars into corporate universities to continually build human capital.74 Employees at Caterpillar attend courses at Caterpillar University, which combines e-training, classroom sessions and hands-on training activities.

Prom o t i on fr om wi t hi n Another way to further employee development is through promotion from within, which helps companies retain valuable people. This provides challenging assignments, prescribes new responsibilities, and helps employees grow by expanding and developing their abilities. The Peebles Hydro Hotel in Scotland is passionate about promoting from within as a way to retain good people and give them opportunities for growth. A maid has been promoted to head housekeeper, a wine waitress to restaurant head and a student worker to deputy manager. The hotel also provides constant training in all areas. These techniques, combined with a commitment to job flexibility, have helped the hotel retain high-quality workers at a time when others in the tourism and hospitality industry are suffering from a shortage of skilled labour. Staff members with 10, 15 or even 20 years of service are not uncommon at Hydro.75

corporate university An in-house training and education facility that offers broad-based learning opportunities for employees.

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Wor kfor ce op t i mi s ation

performance appraisal The process of observing and evaluating an employee’s performance, recording the assessment and providing feedback to the employee.

Corporate university, Equifax, was established for the consumer credit reporting company. What distinguishes corporate universities from most old-style training programs is that the courses – from classes teaching a specific technical skill to corporate-run MBA programs – are intentionally designed to foster the changes needed to achieve the organisation’s strategy. It’s clearly an idea whose time has come. In 1993, there were just 400 in-house corporate universities. Since then, numbers have grown quickly, such that all over the world many large and even some medium-sized companies have started their own.

A related approach is workforce optimisation, which can be defined as putting the right person in the right place at the right time.76 With today’s emphasis on managing and building human capital, HR professionals are pursuing a range of strategies that help organisations make the best use of the talent they have and effectively develop that talent for the future. New software programs and information technology can help identify people with the right mix of skills to tackle a new project, for example, as well as pinpoint where to move staff internally to ensure they have opportunities for growth and development. IBM has long been a leader in talent management through the practice of technology. The company manages a globally diverse workforce of hundreds of thousands of people and has successfully applied analytical tools to guide recruiting, talent management and leadership decisions. IBM’s interest in the use of big data and technology to inform HR practices encouraged it to acquire Kenexa (a HR software solutions firm) in 2012 for US$1.3 billion. In 2013 IBM launched the ‘Smarter Workforce’ initiative which offers software tools and consulting expertise to help optimise and retain workforce talent within the globally complex workplace environment. For instance, the system helps HR professionals and managers analyse what skills employees have, see how those talents match up with current and anticipated needs in a business and technology environment, and devise job transfers and other training to help close skills gaps. It can also identify HR concerns like high attrition ‘hot spots’ and trends in employee sentiment such as engagement levels. This information empowers managers to create action plans to handle retention, performance and morale issues within their firm.77

Perfo r m an ce appr aisal Performance appraisal comprises the steps of observing and assessing employee performance, recording the assessment and providing feedback to the employee. During performance appraisal, skilful managers give feedback and praise concerning the acceptable elements of the employee’s performance. They also describe performance areas that need improvement. Employees can use this information to change their job performance. At go2call.com, a provider of VOIP (voice over Internet protocol) phone services, people are reviewed every two weeks. Founders John Nix and Larry Speer have been ranked among the 15 annual ‘Best Bosses’ by Fortune Small Business magazine and Winning Workplaces, partly because of innovative practices that let their mostly young workers know how they’re doing and how they can get better.78 Generally, HRM professionals concentrate on two things to make performance appraisal a positive force in their organisations: Source: Shutterstock.com/Goodluz

workforce optimisation Implementing strategies to put the right people in the right jobs, make the best use of employee talent and skills, and develop human capital for the future.

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501

1 the accurate assessment of performance through the development and application of assessment

systems such as rating scales 2   training managers to effectively use the performance appraisal interview, so managers can provide

feedback that will reinforce good performance and motivate employee development. Current thinking is that performance appraisal should be ongoing, not something that is done once a year as part of a consideration of raises. Performance appraisal can also reward high performers with merit pay, recognition and other rewards.

Asse ssi ng p er for mance a cc ur ately Jobs are multidimensional, and performance thus may be multidimensional as well. A recent trend in performance appraisal is called 360-degree feedback, a process that uses multiple raters, including selfrating, as a way to increase awareness of strengths and weaknesses and guide employee development. Members of the appraisal group may include supervisors, co-workers and customers, as well as the individual, thus providing a holistic view of the employee’s performance.79 Some companies use social networking style systems to make 360-degree performance feedback a dynamic, ongoing process. One software program from Rypple, for example, lets people post short Twitter-style questions about their performance of a particular task and get feedback from managers, peers or anyone else the user selects. Another system from Accenture has employees post photos, status updates and two or three weekly goals that can be viewed, followed and assessed by colleagues.80 Another alternative performance-evaluation method is the performance review ranking system.81 This method is increasingly controversial because it essentially evaluates employees by pitting them against one another. As most commonly used, these systems rank employees according to their relative performance: 20 per cent would be placed in the top group of performers; 70 per cent have to be ranked in the middle; and 10 per cent are ranked at the bottom. The bottom tier are given a set period of time to improve their performance, and if they don’t improve, they are fired. The idea behind the forced ranking of employees is that everyone will be motivated to improve performance. The advantages of a performance ranking system are that it: (1) forces reluctant managers to make difficult decisions and identify the best and worst performers; and (2) creates and sustains a high performance culture in which people continuously improve. The disadvantages are that the system: (1) may increase cut-throat competition among employees; (2) discourages collaboration and teamwork; and (3) potentially harms morale.82 Many companies have dropped the ranking system or modified it so that it does not insist on quotas for underperformers.

360-degree feedback A process that uses multiple raters, including self-rating, to appraise employee performance and guide development.

Pe rf ormance evaluat i on er r or s Although we would like to believe that every manager assesses employees’ performance in a careful and bias-free manner, researchers have identified several rating problems.83 One of the most dangerous is stereotyping, which occurs when a rater places an employee into a class or category based on one or a few traits or characteristics – for example, stereotyping an older worker as slower and more difficult to train. Another rating error is the halo effect, in which a manager gives an employee the same rating on all dimensions even if his or her performance is good on some dimensions and poor on others.

halo effect A type of rating error that occurs when an employee receives the same rating on all dimensions regardless of his or her performance on individual ones.

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behaviourally anchored rating scale (BARS) A rating technique that relates an employee’s performance to specific job-related incidents.

One approach to overcome performance evaluation errors is to use a behaviour-based rating technique, such as the behaviourally anchored rating scale. The behaviourally anchored rating scale (BARS) is developed from critical incidents pertaining to job performance. Each job performance scale is anchored with specific behavioural statements that describe varying degrees of performance. By relating employee performance to specific incidents, raters can more accurately evaluate an employee’s performance.84

Exhibit 12.11 Example of a behaviourally anchored rating scale

Job: production line supervisor Work dimension: work scheduling

Have no plan or schedule of work and no concept of realistic due dates.

Develop a comprehensive schedule, observe target dates, and update the status of operations relative to plans, making schedule modifications as quickly as necessary.

Make a list of due dates and revise them but get frequently surprised by unforeseen events.

1

2 Have a sound plan but neglect to keep track of target dates or to report schedule slippages or other problems as they occur.

3

4

5

Usually satisfy time constraints, with time and cost overruns coming up infrequently.

Exhibit 12.11 illustrates the BARS method for evaluating a production line supervisor. The production supervisor’s job can be broken down into several dimensions, such as equipment maintenance, employee training or work scheduling. A behaviourally As a new manager evaluating subordinates, beware of the halo effect, anchored rating scale should be developed for each dimension. The dimension which is a tendency to give a person the in Exhibit 12.11 is work scheduling. Good performance is represented by a same rating on all dimensions of the job. 4 or 5 on the scale and unacceptable performance as a 1 or 2. If a production Remember that jobs are multidimensional and supervisor’s job has eight dimensions, the total performance evaluation will be people need to be evaluated separately on each the sum of the scores for each of eight scales. relevant dimension so they can be rewarded

Take a Moment

appropriately and improve their performance where needed. Be aware of your own prejudices so you can avoid stereotyping people during evaluations.

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have bought, revitalised and sold some 20 businesses in some 28 years, including Sydney’s VIVO Cafe. They support each other during tough personal times, such as when Con was in a very serious car accident, and also when business conditions are tough. They have clearly defined and separate roles and areas of responsibility, but despite this, they do admit to often arguing, even out loud in front of their 22 employees! However, they have benefited a lot from the factor that has helped many small and family businesses, which is obtaining independent advice as and when needed, to help sort out differences of opinion. On the upside, family businesses can be extremely rewarding, both from a financial perspective, but also personally, as there is great joy that can come from working with people that you have a close personal relationship and literally can ‘love’ working with, whether it is a brother, sister, son, daughter, parent, husband or wife! So perhaps a family business should be approached with

caution: it is seemingly not true to say ‘never do or go into business with relatives’, as proven by Angela and Con, but it is true to say, plan and expect the difficulties, and employ strategies and protocols for dealing with disagreements before they happen. Source: J. Lindhe. (11–17 November 2010). The Business End: Relationships. BRW, 42–3.

Con and Angela Vithoulkas

Source: Newspix/Michael Perini

The challenges and the rewards that come with owning a family business can be large. The challenges include managing personal relationships and not overly confounding them with the personal relationships, with spouses, siblings, parents, children, cousins etc. An MGI/ RMIT study showed that many people who go into family businesses underestimate or do not plan for these challenges. There is often a lack of communication between directors of family businesses, related to not having regular meetings, and not fully agreeing on roles and expectations up front. A core idea that often leads to success is to clearly delineate where the business stops and the family starts, in terms of time, place and activities. Problems usually occur when these get all mixed up, and the business decisions, relationships and activities get ‘confounded’ with personal decisions, relationships and activities. A fine example of a long-term successful family business is Angela and Con Vithoulkas, who as brother and sister,

remember this

➜➜ Training typically refers to teaching people skills needed in their current job, whereas development refers to teaching people broader career skills.

➜➜ A corporate university is an in-house training and development facility that offers broad-based learning opportunities for employees.



➜➜ The most common method of training is on-the-job-training (OJT), in which an experienced employee is asked to teach a new employee how to perform job duties.

➜➜ Workforce optimisation involves implementing strategies to put the right people in the right jobs, making the best use of employee talent and skills and developing human capital for the future.

➜➜ Stereotyping is a performance evaluation error that occurs when a manager places an employee into a class or category based on one or a few traits or characteristics.

➜➜ Social learning refers to using social media tools to network and learn informally. ➜➜ Mentoring involves an experienced employee guiding and supporting a less experienced employee. ➜➜ Coaching is a method of directing, instructing and training a person with the goal to develop specific management skills

➜➜ Performance appraisal is the process of observing and evaluating an employee’s performance, recording the assessment and providing feedback. ➜➜ A recent trend is 360-degree feedback, which uses multiple raters, including self-rating, to appraise employee performance and guide development. ➜➜ Performance review ranking systems are increasingly being criticised

Case study

VIVO Cafe: all in the family … the business is people

because they tend to pit employees against one another rather than promote cooperation and teamwork.

➜➜ The halo effect occurs when a manager gives an employee the same rating on all dimensions of the job, even though performance may be good on some dimensions and poor on others. ➜➜ One way to overcome evaluation errors is to use a behaviourally anchored rating scale (BARS), which is a performance evaluation technique that relates an employee’s performance to specific job-related incidents.

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Maintaining an effective workforce Now we turn to the topic of how managers and HRM professionals maintain a workforce that has been recruited and developed. Maintenance of the current workforce involves compensation, wage and salary systems, benefits and occasional terminations.

Com pensati o n compensation Monetary payments (wages, salaries) and non-monetary goods and commodities (benefits, vacations) used to reward employees.

The term compensation refers to (1) all monetary payments and (2) all goods or commodities used in lieu of money to reward employees.85 An organisation’s compensation structure includes wages and/or salaries and benefits such as health insurance, paid vacations or employee fitness centres. Developing an effective compensation system is an important part of human resource management because it helps to attract and retain talented workers. In addition, a company’s compensation system has an impact on strategic performance.86 Human resource managers design the pay and benefits systems to fit company strategy and to provide compensation equity.

Wage and salary s ys tem s Ideally, management’s strategy for the organisation should be a critical determinant of the features and operations of the pay system.87 For example, managers may have the goal of maintaining or improving profitability or market share by stimulating employee performance. Thus, they should design and use a merit pay system rather than a system based on other criteria such as seniority. The most common approach to employee compensation is job-based pay, which means linking compensation to the specific tasks an employee performs. However, these systems present several problems. For one thing, job-based pay may fail to reward the type of learning behaviour needed for the organisation to adapt and survive in today’s environment. In addition, these systems reinforce an emphasis on organisational hierarchy and centralised decision making and control, which are inconsistent with the growing emphasis on employee participation and increased responsibility.88 Skill-based pay systems are becoming increasingly popular in both large and small companies. Employees with higher skill levels receive higher pay than those with lower skill levels. Also called competency-based pay, skill-based pay systems encourage employees to develop their skills and competencies, thus making them more valuable to the organisation as well as more employable if they leave their current jobs.

Comp ensat i on equity job evaluation The process of determining the value of jobs within an organisation through an examination of job content.

wage and salary surveys Surveys that show what other organisations pay incumbents in jobs that match a sample of ‘key’ jobs selected by the organisation.

Whether the organisation uses job-based pay or skill-based pay, good managers strive to maintain a sense of fairness and equity within the pay structure and thereby fortify employee morale. Job evaluation refers to the process of determining the value or worth of jobs within an organisation through an examination of job content. Job evaluation techniques enable managers to compare similar and dissimilar jobs and to determine internally equitable pay rates – that is, pay rates that employees believe are fair compared with those for other jobs in the organisation. Organisations also want to make sure their pay rates are fair compared to other companies. HRM managers may obtain wage and salary surveys that show what other organisations pay incumbents in jobs that match a sample of ‘key’ jobs selected by the organisation. These surveys are available from a number of sources, including (in the US) the Bureau of Labor Statistics National Compensation Survey. In Australia, these surveys are often available from commercial consulting firms or from industry

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associations who survey their members. For example, the professional association Engineers Australia conducts surveys of salary and benefits, as do the equivalent professional bodies for lawyers, pharmacists, architects and other groups.

Pay- f or-p er for mance Many of today’s organisations develop compensation plans based on a pay-for-performance standard to raise productivity and cut labour costs in a competitive global environment. Pay-for-performance, also called incentive pay, means tying at least part of compensation to employee effort and performance, whether it be through merit-based pay, bonuses, team incentives, or various gain-sharing or profitsharing plans. With pay-for-performance, incentives are aligned with the behaviours needed to help the organisation achieve its strategic goals. Employees have an incentive to make the company more efficient and profitable because if goals are not met, no bonuses are paid. However, recent years have shown the potential dangers of misdirected pay-for-performance plans. Alan Blinder, Princeton professor of economics and public affairs, points out that a fundamental cause of the GFC was the ‘perverse go-for-broke incentives’ that rewarded people for taking excessive risks with other people’s money.89 During the financial meltdown, it became clear that people at every level of the financial system were getting rewarded for short-term performance – if things went wrong down the line, it was someone else’s problem. Then it all came crashing down. Managers can take care to create pay-for-performance plans that align with the long-term interests of the organisation, shareholders and the broader society.

pay-for-performance Incentive pay that ties at least part of compensation to employee effort and performance.

Ben efits The best human resource managers know that a compensation package requires more than money. Although wage/salary is an important component, it is only a part. Equally important are the benefits offered by the organisation. Benefits make up 40 per cent of labour costs in many modern economies. Some benefits are required by law, such as superannuation contributions, holiday pay, and workers’ compensation. Other types of benefits, such as paid maternity leave, salary packaging or on-site day care or fitness centres, are not required by law but are provided by organisations to maintain an effective workforce. At Aegis Living, a US chain of assisted-living centres, CEO Dwayne Clark uses benefits to keep turnover of low-paid patient care staff to a low 34 per cent (the average annual turnover rate in assisted living is 93 per cent). Clark offers Appreciation Days for employees to take days off and negotiates with suppliers and prospective vendors to provide perks such as discounted massages and haircuts, special mortgage interest rates and prepared meals from community kitchens.90 Google has won many prestigious awards for being an excellent employer, substantially because of the benefits that it provides to its staff, both in the US and internationally.

Rig htsi zi ng t h e or gani satio n In some cases, organisations have more people than they need and have to let some employees go. Rightsizing refers to reducing the company’s workforce intentionally to the point where the number of employees is deemed to be right for the company’s current situation. Also called downsizing, planned reductions in the size of the workforce are a reality for many of today’s companies. As the term rightsizing implies, the goal is to make the company stronger and more competitive by aligning the size of the workforce with the company’s current needs. However, some researchers

rightsizing Reducing the company’s workforce intentionally so that the number of employees is deemed to be right for the company’s situation.

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have found that massive cuts often fail to achieve the intended benefits and in some cases Take a significantly harm the organisation.91 Unless HRM departments effectively and humanely Moment manage the rightsizing process, layoffs can lead to decreased morale and performance. Even as a new manager, Managers can smooth the process by regularly communicating with employees and play a role in how people are providing them with as much information as possible, providing assistance to workers compensated. Consider skill-based who will lose their jobs, and using training and development to help address the pay systems and incentive pay to encourage high performers. Don’t emotional needs of remaining employees and enable them to cope with new or be dismayed if some people have additional responsibilities.92 to be let go. If people have to be laid off or fired, do it humanely.

exit interview An interview conducted with departing employees to determine reasons for their departure and learn about potential problems in the organisation.

Ter m inatio n

Despite the best efforts of line managers and HRM professionals, the organisation will lose employees. Some will retire, others will depart voluntarily for other jobs, and still others will be forced out through mergers and cutbacks or for poor performance. The value of termination for maintaining an effective workforce is twofold. First, employees who are poor performers can be dismissed. Productive employees often resent disruptive, low-performing employees who are allowed to stay with the company and receive pay and benefits comparable to theirs. Second, employers can use exit interviews as a valuable HR tool, regardless of whether the employee leaves voluntarily or is forced out. An exit interview is an interview conducted with departing employees to determine why they are leaving the company. The value of the exit interview is to provide an inexpensive way to learn about pockets of dissatisfaction within the organisation and hence find ways to reduce future turnover.93 As John Donahoe, president and CEO of eBay, put it, ‘when people are leaving, they’re often in a very reflective state and . . . they’re also just stunningly direct, because it’s like they have nothing to lose’. One thing Donahoe learned from conducting exit interviews at eBay was that mid-level executives were unclear about their responsibility and authority, so he reorganised to clarify lines of decision-making responsibility and authority.94 The oil services giant Schlumberger includes an exit interview as part of a full-scale investigation of every departure, with the results posted online so managers all around the company can get insight into problems.95 However, in some cases, employees who leave voluntarily are reluctant to air uncomfortable complaints or discuss their real reasons for leaving. Companies such as T-Mobile, Campbell Soup and Conair found that having people complete an online exit questionnaire yields more open and honest information. When people have negative things to say about managers or the company, the online format is a chance to speak their mind without having to do it in a face-to-face meeting.96 For companies experiencing downsizing through mergers or because of global competition or a shifting economy, often a large number of managers and workers are terminated at the same time. In these cases, enlightened companies try to find a smooth transition for departing employees. By showing genuine concern in helping laid-off employees, a company communicates the value of human resources and helps maintain a positive corporate culture.

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➜➜ Compensation refers to all monetary payments and all nonmonetary goods or benefits used to reward employees. ➜➜ Managers strive to maintain fairness and equity in the pay system. ➜➜ Job evaluation is the process of determining the value of jobs within an organisation through an examination of job content. ➜➜ Wage and salary surveys show what other organisations pay incumbents

in jobs that match a sample of key jobs selected by the organisation. ➜➜ Pay-for-performance, also called incentive pay, means tying at least a portion of compensation to employee effort and performance. ➜➜ Rightsizing, also called downsizing, refers to reducing the company’s workforce intentionally to the point where the number of employees is deemed right for the company’s current situation.

➜➜ If not managed effectively and humanely, rightsizing can lead to decreased morale and performance.

remember this

➜➜ An exit interview is an interview conducted with departing employees to determine reasons for their departure and learn about potential problems in the organisation.

Applied Biosystems, of Australia and New Zealand, and Starpharma, also Australian. In these companies, fast decision making, risk taking and turbulence are part of daily life, unlike long-established stable companies such as banks, insurance companies or retailers. Applied Biosystems (http://www. appliedbiosystems.com.au) is involved in the sciences of genomics, informatics and proteomics, developing drugs and instruments for sophisticated medical tests. Its iTRAQ Reagent Kit provides reagents that label peptides, claimed to be more effective than prior technologies. Starpharma (http://www.starpharma. com) uses nanotechnology to produce pharmaceuticals. Nano-drugs are being developed to fight major diseases, such as HIV, herpes and chlamydia.

These biotechnology companies and many like them are at various stages of proving their technology, in terms of their functionality, manufacturability, market development and financial viability. They pour large amounts of money into research and development, which is at substantial risk, particularly if the technology doesn’t come to fruition. The management challenges within these companies are immense, and include keeping key scientists and researchers motivated and effective, while making resource allocation decisions with scarce resources, including using judgement to stop projects that aren’t progressing well. The processes of innovation and commercialisation involve their managers, staff and organisations in constant, substantial change. These companies must win the ‘war for talent’ to keep competitive.

Case study

Biotechnology companies in turbulent environments and challenging times Australia, New Zealand, Singapore, Japan, the US and many other countries have grown significant biotechnology sectors in recent years. Large pharmaceutical companies and a new breed of smaller start-up companies have invested billions of dollars in looking for products that will find a market in improving the health and wellbeing of people. Imagine the size of the commercial prize for the first company to achieve a real breakthrough in preventing or curing a major disease such as heart disease, cancer or HIV/ AIDS. The search for these solutions to global health issues is hypercompetitive and involves intensive research and development processes, fierce protection of intellectual property (knowledge), and collaborations with other companies and university research institutes. Two companies in this sector are

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New Manager self-test D o y o u wa n t t o b e a n H R m a n a g e r ? The following questions are based on a Human Resources Capability Model developed by the Australian Public Service (APS) Commission for HR managers who work in government agencies. People who work with HR managers complete a 72-item questionnaire assessing a range of expectations for the HR manager. The results are given to the manager, who then works to improve low scores. These questions give a glimpse of the expectations for APS HR managers. Please think about how strongly you are attracted to the requirement below. 1 – Not attracted at all 2 – Not very attracted 3 – Moderately attracted 4 – Very attracted 5 – Extremely attracted

Bringing HR to the business

1 Has a detailed knowledge of current HR approaches, tools and technology.

1 2 3 4 5

2  Understands the human behaviour triggers that affect or improve organisational performance.

1 2 3 4 5

Connecting HR with the business

3  Maintains knowledge of the business through frequent interaction with people in the workplace.

1 2 3 4 5

4  Presents strong business cases for HR initiatives.

1 2 3 4 5

Partnering with the business

5  Establishes and maintains good relationships across the organisation.

1 2 3 4 5

6  Guides the top executive and line managers in actively managing people issues.

1 2 3 4 5

Achieving high-quality business results

7  Applies business acumen to HR decisions.

1 2 3 4 5

8  Monitors HR initiatives continuously to maintain consistency with business outcomes.

1 2 3 4 5

Bringing ideas to the business

9  Looks continually for ways to enhance or create new HR methods to achieve business outcomes. 10 Critically evaluates and explores alternatives to the way things are done.

Scoring and interpretation: Correct answers are not the point of the preceding questions. The five subscales (Bringing HR to the business, Partnering with business, etc.) represent elements of the HR Capability Model that APS HR managers are expected to master. Any questions for which you receive a 4 or 5 would be strong areas for you. If you averaged 4 or higher for most of the five capabilities, you may want to consider a career in HR. If you

1 2 3 4 5 1 2 3 4 5

aspire to become an HR manager, it would be good to study the entire model at the website http://www.apsc.gov.au/ publications01/hrmodel.htm. Source: Based on ‘Human Resources Capability Model’, Australian Public Service (APS) Commission, Australian Government, http://www.apsc.gov.au/publications01/hrmodel.htm (accessed 13 September 2010).

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Sustainable development has a clear and strong connection to the strategic role of human resource management, because in both aspects of management, the aim is to improve the outcomes and effectiveness of the organisation. The human resource cycle of attracting, developing and maintaining an effective workforce (see Exhibit 12.2) takes on new meaning in a firm that is strongly pursuing sustainability in its strategies. The types of people being recruited will be different. Their training will be different as it will include strong elements of sustainability as part of the strategy and value system being provided. Performance will be appraised against a broader set of measures in a sustainable organisation. Attitudes and behaviours with respect to stakeholders such as customers, suppliers and investors will be different too, being more inclusive and aimed at building long term win-win relationships. Staff who are not used to this will need some convincing, and their management by objectives cycle (see Chapter 5) will also be based on broader objectives and activities. Most stakeholders will approve and like the ideas of sustainable development once they thoroughly understand them, for after all, stakeholders are people and we all share the planet and its environmental aspects and we all live in communities and want them to be good places to live. Hence the ideas of ‘doing well by doing good’ can be generally expected to appeal to the humanity in all of us, and can be highly motivating, leading to richer, deeper engagement between the firm and its managers, and all other stakeholders, especially including employees. Sustainable development represents an opportunity to improve staff satisfaction through improved engagement and the idea that the company is doing good (hence doing well). For example, staff at Google really like what the company stands for and they like the staff benefits very much, such that this extraordinary (high) level of employee satisfaction leads to high levels of commitment, productivity and staff-driven innovation. Google gives its staff a US$5000 subsidy towards buying fuel-efficient vehicles, which is good for staff morale and for the environment. This signals an approach to ‘doing good’, which benefits the reputation of that company and gives it an edge with these stakeholders. Employees generally like to know that their employer is actively aiming to minimise its carbon footprint and this increases their ‘buy-in’ to the company’s goals in a more general manner.

At Coffey International, which was discussed in the chapter-opening Management challenge, managing director Roger Olds has invested heavily in training and in leadership development skills, beginning with senior engineers and cascading these capabilities down and then throughout the organisation. The aim is to attract and retain the types of people who clients will have confidence in, and therefore want to engage with. Olds realised that engineers are often analytically strong, but not necessarily strong on communication skills, so he has made efforts to develop the emotional quotient (EQ) in his staff to allow them to build their capability in developing relationships with existing and potential clients. Coffey has globalised and grown its business substantially

from a base in Melbourne, with some 3500 people working in 95 countries as of 2013. This company, which was founded in 1959, continues to renew itself, and in March 2011 implemented a change of CEO as Olds stepped down after 15 years as CEO and John Douglas replaced him to continue the company’s journey of growth. Douglas further initiated more in-house restructuring to create a leaner and flatter organisational structure during a slow economy. The company had a challenging time during the global financial crisis and the ensuing slowing down of business in Australia; however it can expect to improve with economic circumstances. Source: Coffey Annual Report 2013, http://www.annualreview2013.coffey. com/assets/pdf/Coffey_Annual%20Report%202013.pdf (accessed 5 December 2013).

sustainable development

Sustainability and people

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discussion questions

1  It is the year 2025. In your company, central planning has given way to front-line decision making, and bureaucracy has given way to teamwork. Shopfloor workers use handheld computers and robots. A labour shortage currently affects many job openings, and the few applicants you do attract lack skills to work in teams, make their own production decisions or use sophisticated technology. As vice-president of human resource management since 2013, what should you have done to prepare for this situation?

2 What does it mean to say that HRM plays a strategic role in driving organisational performance? Consider recruiting, training, performance appraisal and compensation strategies as part of your answer. 3 If you were asked to advise a private company about its equal employment opportunity responsibilities, which two points would you emphasise as most important? 4 Think back to your own job experience. Which human resource management activities described in this chapter were performed for the job you filled? Which ones were absent? 5 How valuable do you consider the information obtained from: 1) a personal interview; 2) an employment test; and 3) an assessment centre would be for predicting effective job performance for a university lecturer? For an assembly-line worker in a manufacturing plant? Discuss.

ethical challenge

6 How do you think the use of telecommuters, contingent workers and virtual teams affect human resource management? How can managers improve recruiting and retention of these new kinds of employees? 7 If you are in charge of training and development, which training option or options – such as on-the-job training, cross-training, classroom, self-directed or computer-based – would you be likely to choose for your company’s production line manager? A customer service representative? An entry-level accountant? 8 If you were to draw up a telecommuting contract with an employee, what would it look like? Include considerations such as job description, compensation and benefits, performance measures, training and grounds for dismissal. 9 How would you go about deciding whether to use a job-based, skills-based or pay-for-performance compensation plan for employees in a textile manufacturing plant? For waiters in a restaurant? For salespeople in an insurance company? 10 What purpose do exit interviews serve for human resource management? 11 Is it wise for managers to evaluate a candidate’s postings on social networking sites such as Facebook as grounds for rejection before even interviewing a promising candidate? What might be some ethical and legal issues managers should consider? Discuss.

Research for sale

Lucinda Jackson walked slowly back to R&D Laboratory 4 at Reed Pharmaceuticals. She was stunned. Top management was planning to sell her entire team project to Trichem Industries in an effort to raise the capital Reed needed to buy a small, competing drug company. Two years ago, when she was named project administrator for the cancer treatment program, Jackson was assured that the program was the highest priority at Reed. She was allowed to recruit the best and the brightest in the research centre in their hunt for an effective drug to treat lung cancer. There had been press releases and personal appearances at shareholder meetings. When she first approached a colleague, Len Rosen, to become head chemist on the project, he asked her whether Reed was in cancer research for the long haul or if they were just grabbing headlines. Based on what she had been told by the manager in charge of R&D, Jackson assured him that their project was protected for as long as it took. Now, a short two years later, she had learned that not only was Reed backing out but that the project was being sold as a package to an interstate firm. No

jobs at Reed were being offered as alternatives for the team. They were only guaranteed jobs if they moved with the project to Trichem. Jackson felt betrayed, but she knew it was nothing compared to what the other team members would feel. Rosen was a 10-year veteran at Reed, and his wife and family had deep roots in the local community. A move would be devastating to them. Jackson had a few friends in top management, but she didn’t know if any would back her if she fought the planned sale. W h at d o yo u d o ? 1 Approach top management with the alternative of selling the project and sending the team temporarily to train staff at Trichem, but allowing them to return to different projects at Reed after the transition. After all, they promised a commitment to the project. 2 Wait for the announcement of the sale of the project and then try to secure as much support as possible for the staff and families in their relocation – for example, moving expense reimbursement and job placement for partners.

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3 Tell a few people, such as Rosen, and then combine forces with them and threaten to quit if the project is sold. Make attempts to scuttle the sale to Trichem before it happens, and perhaps even leak the news

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to the press. Perhaps the threat of negative publicity will cause top management to reconsider.

Source: Adapted from Wallace, D. (March–April 1990). Promises Made, Promises Broken, What Would You Do? Business Ethics, 1, 16–18. Reprinted with permission from Business Ethics, PO Box 8439, Minneapolis, MN 55408 (612) 879-0695.

Management competencies Step 1. An important responsibility of the HR department at many companies is to develop a list of managerial competencies and then to provide training to help managers improve on those competencies. The list below includes desired manager competencies from IBM. Make notes to the right of each competency describing the management behaviours you think would be covered. ➜ Collaborative influence ➜ Developing IBM people and communities ➜ Earning trust ➜ Embracing challenge ➜ Enabling growth ➜ Passion for IBM’s future ➜ Strategic risk taking ➜ Thinking horizontal

Gr oup

Step 2. In groups of three to five Challenge students, compare, discuss and agree upon the expected behaviours for each competency. One student should be the recorder and be prepared to report the behaviours to the class. Step 3. After agreeing upon competency behaviours, each student should take a turn stating the competencies they believe will be easiest and hardest for them to master. Step 4. Why do you think IBM arrived at this set of competencies? How do you think it might differ from management or leadership competencies for other companies? Step 5. Outside of class, go online and look up information on IBM’s competencies. (Search for ‘IBM Leadership Competencies’.) Are the competencies defined as you expected? Look up competencies for another company as well. Why do you think HR departments in these companies put so much energy into developing a list of desired manager competencies?

Source: Based on Linda Tischler. (1 November 2004). IBM’s Management Makeover. Fast Company, http://www.fastcompany.com/51673/ibms-managementmakeover (accessed 26 November 2012); and http://www.zurich.ibm.com/employment/environment.html (accessed 13 September 2010).

T h e r i g h t way w i t h e m p l o y e e s ? As a senior manager for a global player in car manufacturing and sales, Kirby Ellis had joined thousands of fellow employees in the excitement surrounding production of the company’s new hybrid vehicles. But barely two years into production, embarrassing component shortages, delivery delays, and a recall of the first models had a ripple effect, presenting the company with mounting concerns. In the confusion, many customers cancelled orders and turned to competitors for purchase of the eco-friendly vehicles. Ellis’s company was facing a financial downturn. With three decades of service to the company, Kirby led a contingent of managers intent upon keeping together as much of the company and as many employees as possible. ‘We know there will be some necessary cuts,’ Kirby admitted. ‘But this company has a long history of sticking by its people. Our first priority should be internal streamlining of how we do things and making sure we have the right people on board.’ Many managers liked what they heard from Kirby. He was well respected and had an unequalled reputation for his leadership and collaborative skills and his ability to work with managers, as well as line workers on the factory floors. People marvelled at the number of individuals he knew on a personal level throughout the company.

Case for

Drew Cunningham influenced a cr itical second contingent within the management analysis group. A brash go-getter with a reputation for fixing companies in crisis, Cunningham proposed across-the-board cuts in employees in order to implement a solution as quickly as possible. He proposed the immediate creation of a forced ranking system in order to identify and get rid of lower-ranking employees. Kirby raised his hand and rose to his feet in objection. ‘So we’re going to create a system to fire . . .’ ‘I didn’t say fire . . .’ ‘OK, cut our own hard-working people? It sounds like some lame government commission,’ Kirby said. ‘We’ve got bright people. This thing simply got worse faster than we thought. We can work with the people we have in setting up more efficient workflow, establishing reasonable deadlines to increase output and . . .’ ‘Kirby, these are not the days of knowing everyone in the plant,’ Drew said. ‘You’re not throwing out your wife’s uncle Harry. We are taking a serious look at what we do, how we do it and streamlining everything by keeping the right people in the organisation and cutting the rest.’

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Q ue s t ions 1 What kind of employee social contract is assumed by Kirby and Cunningham? Explain. 2 If you were an HR manager at the company, which view would you support? Why?

On the job video case

3 HR departments hire and develop human capital to serve the organisation’s strategy and drive performance. Which approach – Kirby’s or Cunningham’s – is more likely to have a greater positive impact on performance? Discuss.

B a r c e l o n a R e s ta u r a n t G r o u p : m a n a g i n g h u m a n r e s o u r c e s For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

Q uesti o n s 1  List the three main activities of HRM and identify which activity is examined at length in the video. 2  Of the various steps in Barcelona’s employee selection process, the job interview is the briefest. Do you agree with the company’s approach to interviewing? Why or why not?

endnotes

1  Branham, L. (Summer 2005). Planning to Become an Employer of Choice. Journal of Organizational Excellence, 57–68. 2  Mathis, R. L. and Jackson, J. H. (2002). Human Resource Management: Essential Perspectives, 2nd edn (Cincinnati, OH: South-Western Publishing), p. 1. 3 Persaud, J. (25 September 2003). Game On. People Management, 40–1. 4 Wimbush, J. C. (2005). Spotlight on Human Resource Management. Business Horizons, 48, 463–7; Tompkins, J. (Spring 2002). Strategic Human Resources Management in Government: Unresolved Issues. Public Personnel Management, 95–110; Lengnick-Hall, C. A. and Lengnick-Hall, M. L. (July 1988). Strategic Human Resources Management: A Review of the Literature and a Proposed Typology. Academy of Management Review, 13, 454–70; Tichy, N. M., Fombrun, C. J. and Devanna, M. A. (Winter 1982). Strategic Human Resource Management. Sloan Management Review, 23, 47–61. 5 Lawler, 2004; Susomrith, P. and Brown, A. (2013). Motivations for HR outsourcing in Australia. International Journal of Human Resource Management, 24:4, 704–30 DOI; http://www.tandfonline.com.ezp.lib. unimelb.edu.au/doi/pdf/10.1080/09585192.2012.697479 6 Employment Office Australia. Global recession Spurs HR Outsourcing, http://archive-au.com/page/1936479/2013-04-26/; http://www. employmentoffice.com.au/recruitment-news/10/11/09/global-recessionspurs-hr-outsourcing. 7 This definition is based on George Bohlander, Scott Snell and Arthur Sherman, Managing Human Resources, 12th edn (Cincinnati, OH: South-Western, 2001), pp. 13–15. 8 Leading through Connections: The IBM 2012 Chief Executive Officer Study. Reported in Eric Lesser and Carl Hoffman. (July–August 2012). Workforce Analytics: Making the Most of a Critical Asset. Ivey Business Journal, http://www.iveybusinessjournal.com/topics/strategy/workforceanalytics-making-the-most-of-a-critical-asset (accessed 27 August 2012).

3 Identify Barcelona’s three-stage process for matching job applicants with its organisational objectives, and explain how each stage reveals the fit between job applicants and the needs of the restaurant.

9 P. Wright, G. McMahan and A. McWilliams. (1994). Human Resources and Sustained Competitive Advantage: A Resource-Based Perspective. International Journal of Human Resource Management, 5, 301–26; Tompkins. Strategic Human Resource Management in Government. 10 Liza Castro Christiansen and Malcolm Higgs. (Summer 2008). How the Alignment of Business Strategy and HR Strategy Can Impact Performance. Journal of General Management, 33:4, 13–33; Seema Sanghi. (May–June 2009). Building Competencies. Industrial Management, 14–17; B. Becker and M. Huselid. (1998). High Performance Work Systems and Firm Performance: A Synthesis of Research and Managerial Implications. Research in Personnel and Human Resources Management, 16, 53–101; S. Ramlall. (2003). Measuring Human Resource Management’s Effectiveness in Improving Performance. Human Resource Planning, 26, 51; Mark A. Huselid, Susan E. Jackson and Randall S. Schuler. (1997). Technical and Strategic Human Resource Management Effectiveness as Determinants of Firm Performance. Academy of Management Journal, 40:1, 171–88; and John T. Delaney and Mark A. Huselid. (1996). The Impact of Human Resource Management Practices on Perceptions of Organizational Performance. Academy of Management Journal, 39:4, 949–69. 11 Rachel Dodes. (11 April 2011). Managing & Careers: At Macy’s, a Makeover on Service. The Wall Street Journal, B10. 12 James N. Baron and David M. Kreps. (Spring 1999). Consistent Human Resource Practices. California Management Review, 41:3, 29–53. 13 Cynthia D. Fisher. (1989). Current and Recurrent Challenges in HRM. Journal of Management, 15, 157–80. 14 Floyd Kemske. (January 1998). HR 2008: A Forecast Based on Our Exclusive Study. Workforce, 46–60. 15 This discussion is based in part on George Bohlander, Scott Snell and Arthur Sherman, Managing Human Resources, 12th edn (Cincinnati, OH: South-Western, 2001), pp. 13–15; and Harry Scarbrough. (23 January 2003). Recipe for Success. People Management, 22–5.

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16 Susan Cantrell et al. (2006). Measuring the Value of Human Capital Investments: The SAP Case. Strategy & Leadership, 34:2, 43–52. 17 Wellins, R. and Rioux, S. (May 2000). The Growing Pains of Globalizing HR. Training and Development, 79–85. 18 Ibid. 19 Von Glinow, M. A., Drost, E. A. and Teagarden, M. B. (Spring 2002). Converging on IHRM Best Practices: Lessons Learned from a Globally Distributed Consortium on Theory and Practice. Human Resource Management, 41:1, 123–40; DeCieri, H., Cox, J. W. and Fenwick, M. S. (2001). Think Global, Act Local: From Naive Comparison to Critical Participation in the Teaching of Strategic International Human Resource Management. Tamara. Journal of Critical Postmodern Organization Science, 1:1, 68+; Taylor, S., Beecher, S. and Napier, N. (1996). Towards an Integrative Model of Strategic Human Resource Management. Academy of Management Review, 21, 959–85. 20 Von Glinow et al. Converging on IHRM Best Practices. Laabs, J. J. (1999). Must-Have Global HR Competencies. Workforce, 4:2, 30–2. 21 Wellner, A. S. (October 2005). The Disability Advantage. Inc., 29–31; Shein, E. (Winter 2000). Requiem for a Paperweight. eCFO, 81–3. 22 Hall, D. T. and Mirvis, P. H. (1995). The New Protean Career: Psychological Success and the Path with a Heart. In D. T. Hall & Associates. (1995). The Career is Dead–Long Live the Career: A Relational Approach to Careers (San Francisco: Jossey-Bass), pp. 15–45. 23 Phred Dvorak and Scott Thurm. (20 October 2009). Slump Prods Firms to Seek New Compact with Workers. The Wall Street Journal. 24 Lynda Gratton, as reported in Phyllis Korkki. (23 April 2011). The Shifting Definition of Worker Loyalty. The New York Times, http://www.nytimes. com/2011/04/24/jobs/24search.html (accessed 27 August 2012). 25 Stephen Baker. (4 May 2009). You’re Fired – But Stay in Touch. BusinessWeek, 54–5. 26 A. S. Tsui et al. (1997). Alternative Approaches to the EmployeeOrganization Relationship: Does Investment in Employees Pay Off? Academy of Management Journal, 40, 1089–121; D. Wang et al. (2003). Employment Relationships and Firm Performance: Evidence from an Emerging Economy. Journal of Organizational Behavior, 24, 511–35. 27 This discussion is based on Joe Light. (16 May 2011). In Hiring, Firms Shine Images. The Wall Street Journal, B9; and Lauren Weber. (11 April 2012). On the Hunt for Tech Hires. The Wall Street Journal, B6. 28 Hendy, Nina (18 February 2013). Firms launch new offensives to win war for talent: my small business. Sydney Morning Herald, 7, http://search.proquest. com.ezp.lib.unimelb.edu.au/docview/1288165440?accountid=12372 (accessed 5 November 2013). 29 Weber. On the Hunt; and Light. In Hiring, Firms Shine Images. 30 This discussion is based on Jody Greenstone Miller and Matt Miller. The Best Executive and Professional Jobs May No Longer Be Full-Time Gigs. Harvard Business Review (May 2012): 51–62; Peter Coy, Michelle Conlin and Moira Herbst. The Disposable Worker. Bloomberg BusinessWeek (18 January 2010): 33–9; Lauren Weber. (12 December 2011). Adeco Expects Temps Are Here to Stay as Hiring Revives. The Wall Street Journal, http://online.wsj.com/article/SB100014240529702043190045 77086871681893212.html (accessed 29 August 2012); Motoko Rich. (19 December 2010). Weighing Costs, Companies Favor Temporary Help. The New York Times, http://www.nytimes.com/2010/12/20/ business/economy/20temp.html?pagewanted=all (accessed 20 December 2010); and Thomas Frank. (25 February 2008). TSA Struggles to Reduce Persistent Turnover. USA Today. 31 Workforce Survey: In the Company of Contingents. Workforce Management, 6 August 2012, http://www.workforce.com/article/20120806/ NEWS02/120809957 (accessed 27 August 2012).

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32 Jody Greenstone Miller and Matt Miller. The Best Executive and Professional Jobs May No Longer Be Full-Time Gigs. 33 SHRM Survey Findings: Work-Life Balance Policies. Society for Human Resource Management, 12 July 2012, http://www.shrm.org/Research/ SurveyFindings/Articles/Pages/WorkLifeBalance.aspx (accessed 29 August 2012). 34 Meg McSherry Breslin. (4 March 2012). Teleworking Has Come a Long Way for Workers. Workforce Management, http://www.workforce.com/ article/20120304/NEWS02/120309988/teleworking-has-come-a-longwayfor-workers (accessed 27 August 2012). 35 Reported in 2012 Employee Benefits: The Employee Benefits Landscape in a Recovering Economy, A Research Report by the Society for Human Resource Management, Society for Human Resource Management and Colonial Life, 22 June 2012, http://www.shrm.org/Research/SurveyFindings /Articles/Documents/2012_EmpBenefits_Report.pdf (accessed 29 August 2012). 36 John Challenger. (February 1999). There Is No Future for the Workplace. Public Management, 20–3; Susan Caminiti. Work-Life. Fortune (19 September 2005): S1–S17. 37 Stephanie Armour. (6 November 2005). Generation Y: They’ve Arrived at Work with a New Attitude. USA Today, http://www.usatoday.com/money/ workplace/2005-11-06-gen-y _x.htm (accessed 6 November 2005); Ellyn Spragins. (October 2005). The Talent Pool. FSB, 92–101; and Caminiti. Work-Life. 38 James G. March and Herbert A. Simon. (1958). Organizations (New York: Wiley). 39 Kravetz, D. J. (1989). The Human Resources Revolution (San Francisco: Jossey-Bass). 40 J. W. Boudreau and S. L. Rynes. (1985). Role of Recruitment in Staffing Utility Analysis. Journal of Applied Psychology, 70, 354–66. 41 Megan Santosus. (Fall 2005). The Human Capital Factor. CFO-IT, 26–7. 42 Ibid. 43 This discussion is based on Mathis and Jackson, Human Resource Management, chapter 4, pp. 49–60. 44 Victoria Griffith. (October 1998). When Only Internal Expertise Will Do. CFO, 95–6, 102. 45 J. P. Wanous. (1980). Organizational Entry (Reading, MA: Addison-Wesley). 46 Juro Osawa and Paul Mozur. (1 August 2012). In China, Recruiting Gets Social. The Wall Street Journal, B4; Joe Light. (18 January 2011). Recruiters Rethink Online Playbook. The Wall Street Journal, http://online.wsj.com/ article/SB10001424052748704307404576080492613858846.html (accessed 19 January 2011); and Joe Walker. (4 October 2010).PwC Pays for Priority: New Recruiting Tool for College Students Give Accounting Firm Top Billing. The Wall Street Journal, http://online.wsj.com/article/SB1000142 4052748704029304575526641294699972.html (accessed 9 October 2010). 47 Osawa and Mozur. In China, Recruiting Gets Social. 48 Light. Recruiters Rethink Online Playbook. 49 Wimbush. Spotlight on Human Resource Management. 50 Paul W. Thayer. (Winter 1977). Somethings Old, Somethings New. Personnel Psychology 30:4, 513–24. 51 J. Ledvinka. (1982). Federal Regulation of Personnel and Human Resource Management (Boston: Kent); and Civil Rights Act, Title VII, Section 2000e et seq., US Code 42 (1964). 52 Reported in Stephanie Clifford. (August 2006). The New Science of Hiring. Inc., 90–8. 53 Bohlander, Snell and Sherman, Managing Human Resources, p. 202. 54 Tiffany Hsu. (19 February 2012). Job Interviewing, To the Extreme. The Los Angeles Times, http://articles.latimes.com/2012/feb/19/business/la-fiextremeinterviewing-20120219 (19 accessed February 2012).

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55 Ibid. 56 Susan Greco. (March 2009). Sales & Marketing: He Can Close, but How Is His Interpersonal Sensitivity: Testing Sales Recruits. Inc., 96–8. 57 Reported in Toddi Gutner. (26 August 2008). Applicants’ Personalities Put to the Test. The Wall Street Journal. 58 Erin White. (16 January 2006). Walking a Mile in Another’s Shoes – Employers Champion Tests of Job Candidates to Gauge Skills at ‘Real World’ Tasks (Theory & Practice column). The Wall Street Journal. 59 Reported in William Poundstone. (24 December 2011). How to Ace a Google Interview. The Wall Street Journal, http://online.wsj.com/article/SB 10001424052970204552304577112522982505222.html (accessed 24 December 2011). 60 Mike Thatcher. (November 1993). ‘Front-line’ Staff Selected by Assessment Center. Personnel Management, 83. 61 Jim Rendon. (19 April 2010). Ten Things Human Resources Won’t Tell You. The Wall Street Journal Online, http://online.wsj.com/article/SB10001424052 702303491304575188023801379324.html?KEYWORDS=ten+things+hum an+resources+won%27t+tell+you (accessed 19 April 2010). 62 (22 January 2011). Reported in Should You Check Facebook Before Hiring? The Washington Post, http://www.washingtonpost.com/wp-dyn/content/ article/2011/01/22/AR2011012203193.html (accessed 23 January 2011); and (18 April 2012). CareerBuilder survey results reported in Survey: 37% Use Social Media to Check Candidates. Workforce Management, http://www. workforce.com/article/20120418/NEWS01/120419964 (accessed 19 June 2012). 63 Alan Finder. (11 June 2006). For Some, Online Persona Undermines a Résumé. The New York Times. 64 Bernard Keys and Joseph Wolfe. (1988). Management Education and Development: Current Issues and Emerging Trends. Journal of Management, 14, 205–29. 65 Freifeld, L. 2012 Training Industry Report. Training, http://www.trainingmag. com/content/2012-training-industry-report (accessed 8 January 2014). 66 (21 November 2011). How Do Great Companies Groom Talent? Fortune, 166. 67 Rothwell, W. J. and Kazanas, H. C. (1994). Improving On-the-Job Training: How to Establish and Operate a Comprehensive OJT Program (San Francisco: Jossey-Bass). 68 Matt Allen and Jennifer Naughton. (August 2011). Social Learning: A Call to Action for Learning Professionals. T+D, 50–5. 69 Reported in Margaret Schweer et al. (Winter 2012). Building a WellNetworked Organization. MIT Sloan Management Review, 35–42. 70 Deutsch, C. H. (7 May 1999). A New Kind of Whistle-Blower: Company Refines Principles of Coaching and Teamwork. The New York Times; Filipczak, B. (March 1998). The Executive Coach: Helper or Healer? Training, 30–6. 71 Training (December 2005). 2005 Industry Report, 14–28. 72 Bartholomew, D. (June 2005). Taking the E-Train. Industry Week, 34–7. 73 Meister, J. C. (9 February 2001). The Brave New World of Corporate Education. The Chronicle of Higher Education, B10; Landau, M. D. (May– June 2000). Corporate Universities Crack Open Their Doors. Journal of Business Strategy, 18–23. 74 Gordon, E. E. (September 2003). Bridging the Gap. Training, 30; Meister, J. C. (9 February 2001). The Brave New World of Corporate Education; Byrne, J. (4 October 1999). The Search for the Young and Gifted. BusinessWeek, 108–16.

75 Dow, J. (29 May 2003). Spa Attraction. People Management, 34–5. 76 Forelle, C. (14 July 2005). IBM Tool Dispatches Employees Efficiently. The Wall Street Journal; Leibs, S. (Fall 2005). Building a Better Workforce. CFOIT, 20–7. 77 Talent and workforce management, http://www-03.ibm.com/software/ products/en/category/SW333 (accessed 14 March 2014); Made in IBM Labs: IBM Unveils Analytics Services to Help Clients Transform Their Global Workforce, http://www-03.ibm.com/press/us/en/pressrelease/41194. wss (accessed 14 March 2014); Bersin, Josh. (31 January 2013). IBM Launches Its Smarter Workforce Initiative. Forbes, http://www.forbes.com/ sites/joshbersin/2013/01/31/ibm-launches-its-smarter-workforce-initiative/ (accessed 14 March 2014). 78 Spragins, E. (October 2005). The Talent Pool. FSB, 92–101. 79 Kyle Couch. (February 2012). Talent Management: Build on Four Key Components. Leadership Excellence, 18; Walter W. Tornow. (Summer– Fall 1993). Editor’s Note: Introduction to Special Issue on 360-Degree Feedback. Human Resource Management, 32:2–3, 211–19; and Brian O’Reilly. (17 October 1994). 360 Feedback Can Change Your Life. Fortune, 93–100. 80 Jena McGregor. (23 & 30 March 2009). Job Review in 140 Keystrokes. BusinessWeek, 58. 81 This discussion is based on Dick Grote. (November–December 2002). Forced Ranking: Behind the Scenes. Across the Board, 40–5; Matthew Boyle. (28 May 2001). Performance Reviews: Perilous Curves Ahead. Fortune, 187–8; Carol Hymowitz. (15 May 2001). Ranking Systems Gain Popularity but Have Many Staffers Riled. The Wall Street Journal; and Kris Frieswick. (June 2001). Truth and Consequences. CFO, 56–63. 82 Forced Ranking (Forced Distribution). HR Management website, http://www.humanresources.hrvinet.com/forced-ranking-forced-distribution/ (accessed 21 January 2012). 83 Buzzotta, V. R. (August 1988). Improve Your Performance Appraisals. Management Review, 40–3; Bernardin, H. J. and Beatty, R. W. (1984). Performance Appraisal: Assessing Human Behavior at Work (Boston: Kent). 84 Buzzotta. Improve Your Performance Appraisals. Bernardin and Beatty. Performance Appraisal: Assessing Human Behavior at Work. 85 Henderson, R. I. (1985). Compensation Management: Rewarding Performance, 4th edn (Reston, VA: Reston). 86 Montemayor, E. (1996). Congruence Between Pay Policy and Competitive Strategy in High-Performing Firms. Journal of Management, 22:6, 889–908; Gomez-Mejia, L. R. (1992). Structure and Process Diversification, Compensation Strategy, and Firm Performance. Strategic Management Journal, 13, 381–97. 87 Broderick, R. F. and Milkovich, G. T. (August 1985). Pay Planning, Organization Strategy, Structure and ‘Fit’: A Prescriptive Model of Pay. Paper presented at the 45th Annual Meeting of the Academy of Management, San Diego. 88 Greene, R. J. (1993). Person-Focused Pay: Should It Replace Job-Based Pay? Compensation and Benefits Management, 9:4, 46–55; Lawler, E. F. III (1990). Strategic Pay: Aligning Organizational Strategies and Pay Systems (San Francisco: Jossey-Bass). 89 Alan S. Blinder. (28 May 2009). Crazy Compensation and the Crisis. The Wall Street Journal. 90 Sacks, D. (May 2005). Not the Retiring Sort. Fast Company, 94, 28. 91 James R. Morris, Wayne F. Cascio and Clifford Young. (Winter 1999). Downsizing After All These Years: Questions and Answers About Who Did

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It, How Many Did It, and Who Benefited from It. Organizational Dynamics, 78–86; William McKinley, Carol M. Sanchez and Allen G. Schick. (1995). Organizational Downsizing: Constraining, Cloning, Learning. Academy of Management Executive, 9:3, 32–42; and Brett C. Luthans and Steven M. Sommer. (1999). The Impact of Downsizing on Workplace Attitudes. Group and Organization Management, 2:1, 46–70. 92 Effective downsizing techniques are discussed in detail in Bob Nelson. (April 1997). The Care of the Un-Downsized. Training and Development, 40–3; Shari Caudron. (January 1996). Teaching Downsizing Survivors How to

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Thrive. Personnel Journal, 38; Joel Brockner. (Winter 1992). Managing the Effects of Layoffs on Survivors. California Management Review, 9–28; and Kim S. Cameron. (Summer 1994). Strategies for Successful Organizational Downsizing. Human Resource Management, 33:2, 189–211. 93 Scott Westcott. (April 2006). Goodbye and Good Luck. Inc., 40–2. 94 Adam Bryant. (5 April 2009). There’s No Need to Bat .900. (Corner Office column, an interview with John Donahoe), The New York Times. 95 Nanette Byrnes. (10 October 2005). Star Search. BusinessWeek, 68–78. 96 Mike Brewster. (April 2005). No Exit. Fast Company, 93.

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ Do you want to be an HR manager? Complete the online self-test to find out ➜ test your understanding of human resource management by taking the revision quiz ➜ apply your knowledge of human resource management to the case projects.

Cour seMate

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Appreciate the pervasive demographic changes

4 Recognise the factors that affect women’s

2 Understand how the definition of diversity has grown

5 Explain the five steps in developing cultural

occurring in the domestic and global workforces and how corporations are responding. to recognise a broad spectrum of differences among employees, the importance of fostering a sense of inclusion, and the dividends of a diverse workforce.

3 Recognise the complex attitudes, opinions

and issues that people bring to the workplace, including prejudice, discrimination, stereotypes and ethnocentrism.

opportunities, including the glass ceiling, the opt-out trend and the female advantage. competence in the workplace.

6 Describe how diversity initiatives and training

programs help create a climate that values diversity.

7 Understand how multicultural teams help

organisations respond to the rapidly changing and complex workplace.

C h a p t e r 13

Managing diversity

Chapter outline ➜ Valuing diversity

➜ Factors shaping personal bias

➜ Diversity on a global scale

➜ Factors affecting women’s

Diversity in the corporate world The changing nature of diversity in Australia Diversity of perspective Inclusion Dividends of workplace diversity

Workplace prejudice, discrimination and stereotypes Ethnocentrism

careers The glass ceiling The opt-out trend The female advantage

➜ The changing workplace Diversity challenges

➜ Implications of a globally diverse workforce

➜ Achieving cultural competence

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➜ Current responses to diversity

Enhancing structures and policies Expanding recruitment efforts Establishing mentor relationships Increasing awareness of sexual harassment Using multicultural teams Positive assistance for women at work in Australia

➜ Driving sustainability through effectively managing diversity

New Manager Self-test Do you know your biases? As a new manager, your day-to-day behaviour will send signals about your biases and values. Some personal biases are active and well-known to yourself and others. Other biases are more subtle, and the following questions may provide some hints about where you are biased and don’t know it. Please answer whether each item is Mostly true or Mostly false for you. Mostly true

Mostly false

1 I prefer to be in work teams with people who think like me. 2 I have avoided talking about cultural differences with people I met from different cultures because I didn’t want to say the wrong thing. 3 My mind has jumped to a conclusion without first hearing all sides of a story. 4 The first thing I notice about people is the physical characteristics that make them different from the norm. 5 Before I hire someone, I have a picture in mind of what they should look like. 6 I typically ignore movies, magazines and TV programs that are targeted towards groups and values that are different from mine. 7 When someone makes a bigoted remark or joke, I don’t confront them about it. 8 I prefer to not discuss sensitive topics such as race, age, gender, sexuality or religion at work. 9 There are people I like but would feel uncomfortable inviting to be with my family or close friends. Scoring and interpretation: Give yourself one point for each item you marked as Mostly true. The ideal score is zero, but few people reach the ideal. Each question reflects an element of ‘passive bias’, which can cause people who are different from you to feel ignored or disrespected by you. Passive bias may be more insidious than active discrimination because it excludes people from opportunities for expression and interaction. If you scored 5 or more, you should take a careful look at how you think and act towards people different from yourself. The sooner you learn to actively include diverse views and people, the better new manager you will be. Source: Lawrence Otis Graham, Proversity: Getting Past Face Values and Finding the Soul of People (New York: John Wiley & Sons, 1997).

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Management Challenge

In 2009, Major General Liz Cosson was appointed as Head of Defence Support Operations in the Australian Army. At that time she became Australia’s highest ranking female in the defence force. She continued her leadership career both inside and outside of the army, accepting the important role of patron to Defence Families of Australia, a ministerial group that represents the views and interests of Defence Families. In 2011 she was recognised and appointed a Member of Major General Liz Cosson the Order of Australia for her contributions to the Army, and for delivering profound organisational reform. After 31 years in the army, Cosson assumed a leadership role with the Department of Immigration and Citizenship. In her role with the army, Cosson had large managerial responsibilities and leadership roles to fulfil. When she joined the army in 1979 as a young recruit at the entry level, women had only recently been cleared, for the first time, to undertake weapons training in this then male-dominated context. But the army has moved its culture significantly since then, in order to allow outstanding people such as Liz Cosson to develop and grow within the organisation. Cosson has been in charge of major operations in her army career, and her husband, also in the army, is

her junior in ranking. While this example is of one person who has broken through the so-called ‘glass ceiling’, there have been many instances of scandalous problems in the field of diversity in the Australian military, from sexism to widespread bullying. The military culture still needs a lot of change and progress before it becomes one of equal opportunity for all. And it’s not just the defence force that must face this problem, which is also an opportunity to do better. Many organisations, large and small, from retailers to universities, have the opportunity to attract and retain the best people, regardless of ethnic background, gender, religion, race, age, sexual preference or any other factors of personal difference. Source: Courtesy of the Australian Government Department of Defence

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Source: Defence Families of Australia website, http://www .dfa.org.au/aboutus/patron-elizabeth-cosson-am-csc (accessed 7 November 2013).

Question With all that is happening in new technology and globalisation of labour markets, there is still a great imbalance in who is getting into management and leadership jobs. As a new manager, how will you try to get the best from all people in your workplace?

In New Zealand and Australia, and indeed everywhere, diversity in the population, the workforce and the marketplace is a fact of life no manager can afford to ignore. In addition, diversity issues have grown to be more complex than they were 30 years ago. Managing diversity today entails recruiting, training, valuing and maximising the potential of people who reflect the broad spectrum of society in all areas: gender, race, age, disability, ethnicity, religion, sexual orientation, education and economic level. Managers in other countries are struggling with similar diversity issues, but they are also discovering that it makes good business sense to support diversity programs. Not only are diversity programs the right thing to do ethically and culturally, but these initiatives also create new business opportunities. To capitalise on those opportunities, organisations recognise that workplaces need to reflect the diversity in the marketplace. ‘Our country’s consumer base is so varied,’ says Shelley WillinghamHinton, founder and CEO of the American National Organization for Diversity in Sales and Marketing. ‘I can’t think of how a company can succeed without having that kind of diversity with their employees.’1 Forward-thinking managers agree, and take steps to attract and retain a workforce that reflects the cultural diversity of the population. They take seriously the fact that there is a link between the diversity of the workforce and financial success in the marketplace.

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Many managers are finding innovative ways to integrate diversity initiatives into their organisations. These initiatives teach current employees to value differences, direct corporate recruiting efforts, influence supplier decisions and provide development training for under-represented groups. Smart managers value diversity and enforce the value in day-to-day decision making. In the past, Australia was a place where people of different national origins, ethnicities, races and religions came together and blended to resemble one another. Opportunities for advancement were limited to those workers who easily fit into the mainstream of the larger culture. Some immigrants adopted desperate measures in order to fit in, such as abandoning their native languages, changing their last names and sacrificing their own unique cultures. In essence, everyone in workplace organisations was encouraged to share similar beliefs, values and lifestyles despite differences in gender, race and ethnicity.2 Now, organisations recognise that everyone is not the same, and that the differences people bring to the workplace are valuable.3 Rather than expecting all employees to adopt similar attitudes and values, managers are learning that these differences enable their companies to compete globally and to tap into rich sources of new talent. Although diversity has been a reality for some time, genuine efforts to accept and manage diverse people began only in recent years. Exhibit 13.1 lists some interesting milestones in the history of corporate diversity from around the world. This chapter introduces the topic of diversity, its causes and its consequences. We look at some of the challenges that minority groups face in the workplace, the ways that managers deal with workforce diversity and organisational responses that can create an environment that welcomes and values diverse employees. The chapter also considers issues of sexual harassment, global diversity and new approaches to managing diversity in today’s workplace.

Valuing diversity Top managers say their companies value diversity for a number of reasons, such as to give the organisation access to a broader range of opinions and viewpoints, to spur greater creativity and innovation, to reflect an increasingly diverse customer base, to obtain the best talent in a competitive environment and to more effectively compete in a global marketplace.4 A study of diversity management in the United Kingdom, Scandinavia and Continental Europe found managers reporting similar motives, as well as a desire to enhance the company’s image and to improve employee satisfaction.5 Indeed, a survey commissioned by The New York Times found that 91 per cent of job seekers in the US thought diversity programs made a company a better place to work, and nearly all minority job seekers said they would prefer to work in a diverse workplace.6 In a survey by the Society for Human Resource Management and Fortune magazine, more than 70 per cent of human resources executives indicated that diversity had enhanced their organisations’ recruitment efforts and improved the overall corporate culture.7 When Fortune magazine compiles their list of the 100 Best Companies to Work For each year, they ask applicants to list their three top priority areas, and year after year, diversity in the workplace is reported in this top three.8 However, many managers are ill-prepared to handle diversity issues. The challenge is particularly great when working with people from other countries and cultures. One situation at IBM involved a female Muslim employee who was required to have a photo taken for a company identification badge. She protested that her religious beliefs required that, as a married woman, she wear a veil and not expose her face to men in public. A typical local manager, schooled in traditional management training, might

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Exhibit 13.1 Some milestones in the history of corporate diversity Source: (March–April 2003). Spotlight on Diversity. Special advertising section. MBA Jungle, 58–61.

1903 African American Maggie Lena Walker is the first woman to charter and head a bank, the Saint Luke Penny Savings Bank. Today, it survives as the Consolidated Bank & Trust Co., the oldest African American owned bank in the United States.

1951 Secretary and single mother Bette Nesmith Graham invents and patents Liquid Paper. She markets it herself after IBM refuses to buy it.

1964 The University of Chicago Graduate School of Business becomes the first top business school to set up a scholarship program for African Americans.

1970 Joseph L. Searles is the first African American member of the New York Stock Exchange.

1987 1986 Pepsi runs the first Spanish-language TV commercial on a major network.

1992 Levi Strauss & Co. makes history by being the first Fortune 500 company to offer full medical benefits to domestic partners.

Clifton R. Wharton becomes the first African American to head a Fortune 100 company when he takes the helm of TIAA-CREF.

1994 Rajat Kumar Gupta becomes the first Indianborn head of a US transglobal corporation, McKinsey & Company.

1999 When Carly Fiorina takes over as CEO of Hewlett-Packard, she becomes the first woman to head a Fortune 500 company. Andrea Jung breaks ground for AsianAmerican women when she is named to the CEO’s job at Avon.

2002 Stanley O’Neal is named CEO of Merrill Lynch, the first African American to head a major investment bank.

2004 Wales-born American Howard Stringer is named Sony’s first non-Japanese CEO. Nancy McKinstry becomes the first American to head Dutch publisher Wolters Kluwer.

2006 PepsiCo appoints India-born Indra K. Nooyi as its first female CEO.

have insisted that she either have the photo taken or resign. Fortunately, IBM has a well-developed diversity program, and managers worked out a satisfactory compromise.9 Consider some other hypothetical mistakes that managers in Australia and New Zealand could easily make:10 ●● To reward a Vietnamese employee’s high performance, her manager promotes her, placing her at the same level as her husband, who also works at the factory. Rather than being pleased, the worker

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becomes upset and declines the promotion, because Vietnamese husbands are expected to have a higher status than their wives. ●● A manager, having learned that a friendly pat on the arm or back makes workers feel good, takes every chance to touch his subordinates. Some of his Asian employees don’t like being touched, though, and thus started avoiding him; several ask for transfers. ●● A manager declines a gift offered by a new employee, a new immigrant who wanted to show gratitude for her job. He was concerned about ethics and explained the company’s policy about not accepting gifts. The employee is so insulted by his refusal that she quits. These issues related to cultural diversity are difficult and real. Similar complicated issues occur for managers in other countries. For example, the United Kingdom and other European countries are facing a growing diversity challenge because of the now fluid borders of the European Union encouraging mobility and immigration. A scan of job advertisements in the United Kingdom finds numerous advertisements for skilled diversity management leaders.11 Before discussing how companies handle the challenges of diversity, let’s define diversity and explore people’s attitudes towards it. Today’s organisations recognise that diversity is no longer just the right thing to do; it is a business imperative and perhaps the single most important factor of the twenty-first century for organisation performance.12 Companies that ignore diversity will have a hard time competing in a multicultural global environment. In Australia, this means that at the local grocery store, bank branch or movie theatre, employers should employ a range of people who represent the diversity in the consuming community. As Ted Childs, former director of diversity at IBM, put it, ‘Diversity is the bridge between the workplace and the marketplace’.13 The global corporations listed in Exhibit 13.2 have been recognised as leaders in corporate diversity. They have made diversity a top priority and have taken steps towards creating a corporate culture that values equality and reflects today’s multicultural consumer base.

Exhibit 13.2 Leaders in corporate diversity

Allstate

Merrill Lynch

American Express

Pepsi Bottling Group

Ambulance Service of New South Wales

PricewaterhouseCoopers

Bausch & Lomb

Procter & Gamble

Citigroup

The Coca-Cola Company

Daimler Chrysler

UPS

Deloitte

Verizon

Ernst & Young

VicRoads

FedEx

Wells Fargo

GM Holden

Westpac

IBM Australia

Woolworths

Marriott International

Xerox Source: Susan Caminiti. (29 October 2007). The Diversity Factor. Fortune, 95–105; AHRI 2013 Diversity Awards, http://diversityawards.ahri.com.au/awards_categories.php (accessed 12 December 2013).

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Diversit y in th e co rpo r ate wo rld Faced with fewer resources, a challenging economy and increased domestic and global competition, managers are searching for ways to set their organisations apart from the competition and create breakthrough innovations. Many advanced companies see positive diversity management as a potential differentiator. Although diversity in corporate Australia has been a reality for some time, genuine efforts to accept and manage diverse people began only in recent years. Diversity has become a key topic in part because of the vast changes occurring in today’s workplace. The following statistics illustrate how the workplace is changing and challenging frontline managers who are trying to build cohesive teams: ●● Unprecedented generational diversity. Today’s workforce is in a state of flux as a blend of four generations presents new management challenges, with people staying healthy and working longer not only in Australia, Europe and the United States, but also in China, Brazil, Russia and elsewhere.14 Although most people from the Second World War generation have retired, there are still some people in their late 60s, 70s and even their 80s in the workplace. In 2010, for example, this generation represented about 5 per cent of the labour force in the United States, and nearly 7 per cent in Canada. The labour force participation rate for over 65s in Australia has increased steadily over the past 10 years. For males aged 65–74 the participation rate sits at around 24 per cent and for women at 13 per cent.15 In fact, the Abbott government has proposed an increase in the formal retirement age for working Australians (to 70 years of age). Older employees, such as the rapidly ageing baby boomers, share a ‘corporate memory’ that is invaluable to organisations, but as they stay in the workforce longer than previous generations, there is little room for Generation X managers wanting to move up the hierarchy. As Gen X workers move into middle age, they are struggling with reduced guarantees about their financial futures and job security. The ageing of the baby boomers also continuously bumps up the average age of the workforce. Meanwhile, members of Gen Y – sometimes called Millennials – are characterised as ambitious, lacking loyalty to one organisation and eager for quick success. Unlike different generations working together in the past, there are strong value differences among employees from different eras today.16 ●● Increased diversity. Today’s workplace is becoming more diverse as the number of foreign-born workers increases. Foreign-born workers make up a large part of the workforce and are most likely employed in service industries, such as food preparation, cleaning and maintenance. ●● Growth in women workers. Today, women outnumber men in the workplace, and their numbers are projected to grow slightly faster, at 7.4 per cent compared to 6.3 per cent for men.17 To accelerate their progress, many corporations have initiated coaching and training programs that prepare women for senior-level positions.

Th e chan gin g natu re o f d iversit y in Austr alia Diversity is defined as all the ways in which people differ.18 Diversity wasn’t always defined this broadly. Decades ago, many Australian companies defined diversity in terms of race, gender, age, lifestyle and disability. That focus helped to create awareness, change mindsets and create new opportunities for many people. Today, those same companies are embracing a more inclusive definition of diversity that recognises a spectrum of differences that influence how employees approach work, interact with each other, derive satisfaction from their work and define who they are as people in the workplace.19 In practice,

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workforce diversity means a workforce made up of people with different human qualities or who belong

to various cultural groups. Key dimensions of diversity are illustrated in Exhibit 13.3. The inner circle represents primary dimensions of diversity, which include inborn differences or differences that have an impact throughout one’s life.20 Primary dimensions are core elements through which people shape their self-image and world view. These dimensions include age, race, ethnicity, gender, mental or physical abilities and sexual orientation.

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workforce diversity Hiring, training and valuing people with different human qualities or who belong to various cultural groups.

workforce diversity

Secondary dimensions Education

Marital status

Religious beliefs Primary dimensions

Exhibit 13.3 Primary and secondary dimensions of diversity

Age

Gender Parental status

Ethnicity Person Sexual orientation

Physical ability

Military experience

Race Work background

Geographic location Income

Secondary dimensions, shown in the outer ring of Exhibit 13.3, can be acquired or changed throughout one’s lifetime. These dimensions tend to have less impact than those of the core, but they nevertheless affect a person’s self-definition and world view and have an impact on how the person is viewed by others. For example, an employee living in public housing may be perceived differently from one who lives in an affluent suburb. Married people and people with children may be perceived differently and have different attitudes from those who are single or childless. Likewise, a person’s military experience, religion, native language, socioeconomic status, and educational and work background add dimensions to the way that person defines him- or herself and is defined by others. Secondary dimensions such as work style, communication style and educational or skill level are particularly relevant in the organisational setting.21 One interesting finding is that today’s CEOs in Western countries, while still mostly white and male, come from a wider variety of economic and educational backgrounds than they did in the past, with growing numbers of top leaders coming from humble backgrounds and fewer having attended toplevel universities. The number of top executives in the United Kingdom who graduated from exclusive universities such as Oxford and Cambridge is also declining.22

Source: Adapted from Loden, M. and Rosener, J. B. (1991), Workforce America! Homewood, IL: Business One Irwin, 20. Used with permission.

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Diversity on a global scale Managers across the globe wrestle with many of the same diversity challenges as local managers, especially concerning the progression of women into upper management positions. To boost the percentage of women on the corporate boards of European countries, the European Commission is studying whether to introduce quotas across the continent, similar to a recent law in Italy that requires Italian listed and state-owned companies to ensure that one-third of their board members are women by 2015. ‘We needed a shock to the system,’ said Alessia Mosca, a member of Parliament for the centre-left Democratic Party, who coauthored Italy’s new ‘pink quota’ law. ‘The hope is that this will set off cultural change.’23 Japanese companies have an even greater struggle to bridge the gender gap on corporate boards, where women make up just 1.2 per cent of senior executives.24 In fact, only 65 per cent of college-educated Japanese women are employed, many of them in low-paid temp jobs. The reasons for the dearth of women in the Japanese workforce are complex. Part of it relates to tepid economic growth. But over two-thirds of Japanese women leave work after their first child is born, often because of insufficient childcare and societal expectations.25 Cultural norms, such as those that restrict the progression of women in Japan, are intangible, pervasive and difficult to comprehend. However, it is imperative that managers learn to understand local cultures and deal with them effectively.26 In Australia, with the help of deliberate national initiatives, the participation by women in senior management roles is increasing, but from a low base. Female representation on boards of the top 200 Australian Securities Exchange companies increased 600 per cent between 2009 and 2011. The increase came after corporate governance recommendations on gender diversity were introduced within the Australian Securities and Stock Exchange (ASX). This was the largest increase in participation in the world at the boardroom level, and it was achieved without a quota system. The success of this increase has been partly attributed to a Chairmen’s Mentoring Program the institute established which involved some of Australia’s most influential and successful business leaders partnering up with female candidates.27 Females currently make up around 16 per cent of total board positions in Australia, and there have been calls for even further action to be taken in order to redress the gender imbalance. The members of a group called the Male Champions of Change, which includes CEOs from Telstra, ANZ, Qantas and Woolworths, want to increase the number of women in senior management roles in Australia to 50 per cent over the next two decades. There was a strong community reaction when the Australian federal government announced a Cabinet line-up in 2013 that included only one female minister, and business leaders suggest that this response indicates a general change in people’s attitude towards gender diversity.28

➜➜ Workforce diversity relates to the hiring, training and valuing of people with different human qualities or who belong to various cultural groups. ➜➜ A workforce that displays characteristics of today’s diversified marketplace is an important tool for managers who are striving for success in a highly competitive business environment.

➜➜ The workforce is being transformed by a four-generation workforce, ageing baby boomers, an increase in foreign workers and an increasing number of women employees. ➜➜ The progression of women into executive positions continues to be slow in both local and global corporations, but innovative



companies are initiating programs to boost women’s advancement into higher levels of responsibility.

Remember This

➜➜ Governments in most countries are encouraging businesses to undertake modern diversity initiatives. ➜➜ To succeed in the global marketplace, managers need to understand other cultures and deal with them effectively.

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Diversit y o f perspective

Source: iStockphoto/Vikram Raghuvanshi

You may have heard the expression that ‘great minds think alike’. But when it comes to achieving breakthrough levels of innovation, the best minds are those that don’t think alike. Successful managers understand the basic elements of successful teams, including competence, clear performance goals, shared vision and a supportive work environment. You will learn more about managing successful teams in Chapter 18. But managers who cultivate a team with a ‘diversity of perspective’ significantly increase the chance of creating hard-to-replicate competitive advantage. Diversity of perspective is achieved when a manager creates a heterogeneous team made up of individuals with diverse backgrounds and skill sets. By tapping into the strengths of diversity, teams are more likely to experience the following: higher efficiency, better quality, less duplication of effort among team members and increased innovation and creativity.29 What happens when employees are homogeneous and lack a diversity of perspective? A study conducted by Jonathan Haidt, a social psychologist at the University of Virginia, suggests that when a group is homogeneous, it can develop a tribe mentality, embracing only ideas that support its own values and ditching ideas that distort or threaten the group’s norms. Haidt observed that nearly 80 per cent of 1000 American psychologists attending a professional meeting identified their political affiliations as ‘liberal’ (what we would term in Australia as ‘progressive’ or ‘left-leaning’). Haidt claims this dominant ideology creates a bias in thinking that leads to a hostile environment for nonliberals in the profession. He also observed that the small minority of psychologists who consider themselves politically ‘conservative’ frequently hide their feelings from colleagues to avoid being shunned or ridiculed.30 Haidt’s study underscores how homogeneous groups may hinder innovative thinking and reject ideas from outsiders.

Change your frame Managers who successfully manage diversity are wellequipped to navigate the challenges of today’s global economy. But some managers are sceptical of a ‘managing diversity’ philosophy that imposes a requirement to recruit and blend together people of different ethnicities, cultures and genders. (To assess your attitude towards diversity, complete the New Manager Self-Test at the start of this chapter.) Instead of ‘managing diversity’, leaders can embrace a new frame of reference that focuses on ‘leveraging differences’ to build a stronger corporate culture and improve performance. The real value of diversity can only be achieved when managers focus

diversity of perspective A manager creates a heterogeneous team made up of individuals with diverse backgrounds and skill sets.

With roughly half of its 66 000 employees working outside the US, it’s not surprising that American Express is an acknowledged leader in managing global diversity. American Express developed a training module, ‘Valuing Diversity and Practicing Inclusion’, for managers throughout the world, but executives let local facilitators customise the tool to fit their cultures. ‘We always allow them a period of time to be able to adapt, modify and customise … so that it resonates well with employees,’ explained Henry Hernandez, former vice-president and chief diversity officer.

Managemen t in Pr actice on inviting and embracing the contributions that result from melding people of different backgrounds. Below are some reasons for adopting a ‘leveraging differences’ mindset.

➜➜ Greater collective intelligence. A group of employees with a high collective intelligence learns quickly and thinks creatively. Its collective intelligence has little relationship to the average IQ of its members. Instead, collective intelligence is highest in groups whose members demonstrate social sensitivity, which refers to sensitivity to others’ emotions. Groups with social sensitivity

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communicate effectively and encourage all members to express their ideas. Groups with the highest social sensitivity include both men and women. But the data shows that the more women in a group, the better.

➜➜ Greater creativity. Instead of a narrow mindset that is blind to differences in a group, managers can embrace the idea that people hold divergent perspectives and that there is something to be learned from each individual. Creativity is cultivated in environments where managers face the discomfort that can surface when group members disagree.

➜➜ Broader perspectives. Ideas that arise from less familiar places increase the breadth of information and knowledge to which people are normally exposed. Studies show that

senior executives need a variety of perspectives, and they’re much more likely to gain that if their organisations and management teams include people of different social and cultural backgrounds.

➜➜ Preventing groupthink. Many teams unconsciously seek to avoid conflict and place a priority on creating harmony. The term groupthink (which has already been discussed in Chapter 9) describes a faulty decision-making process by team members who are overly eager to agree with one another. Conforming to the consensus of the group restricts innovative thinking. A leveraging differences frame cultivates a decision-making environment that values divergent opinions and encourages healthy disagreements.

Sources: Glenn Llopis. (13 June 2011). Diversity Management Is the Key to Growth: Make It Authentic. Forbes, http://www.forbes.com/sites/glennllopis/2011/06/13/diversity (accessed 20 July 2011); Martin Davidson. (Spring 2012). The End of Diversity: How Leaders Make Differences Really Matter. Executive Forum, 51–6; Peter Gwynne. (March– April 2012). Group Intelligence, Teamwork, and Productivity. Perspectives, 7–8; Anita Woolley and Thomas Malone. What Makes a Team Smarter? More Women. (June 2011). Harvard Business Review, 32–3; and Natalie D. Brecher. Diversity Delivers: Four Tips for Embracing Differences. (May–June 2012). Journal of Property Management, 24.

In clusi o n inclusion The degree to which an employee feels like an esteemed member of a group in which his or her uniqueness is highly appreciated. managing diversity Creating a climate in which the potential advantages of diversity of organisational or group performance are maximised, while the potential disadvantages are minimised.

Inclusion is the degree to which an employee feels like an esteemed member of a group in which his or

her uniqueness is highly appreciated. Inclusion creates a strong sense of belonging where all people can have their voices heard and appreciated.31 In creating a culture of inclusion, managers may experience times of tension and discord as people with different backgrounds bring different opinions and ideas. Conflict, anxiety and misunderstandings may increase. Embracing these differences and using them to improve company performance can be challenging. In summary, managing diversity, a key management skill in today’s global economy, means creating a climate in which the potential advantages of diversity for organisational or group performance are maximised, while the potential disadvantages are minimised.32

Divi d en ds o f wo rkpl ace d iversit y Managers who build strong, diverse organisations reap numerous dividends.33 The dividends of diversity include the following: ●● Better use of employee talent. Companies with the best talent are the ones with the best competitive advantage. Attracting a diverse workforce is not enough; companies must also provide career opportunities and advancement for minorities and women to retain them. ●● Increased understanding of the marketplace. A diverse workforce is better able to anticipate and respond to changing consumer needs. American Express has tapped into the knowledge of its diverse employee network and encouraged them to identify and create products that connect with different customer segments. Two examples of product innovations inspired by Amex’s diverse workforce include the Diwali Gift Card (which appeals to Hindus celebrating the ‘Festival of Lights’, during which gifts are traditionally exchanged) and the American Express Lunar Year Gift Card, decorated with a Chinese dragon and flower pattern, which provides an appropriate gift choice for those celebrating the Chinese New Year.34

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●● Enhanced breadth of understanding in leadership positions. Homogeneous top management teams tend to be myopic in their perspectives. According to Niall FitzGerald of Unilever, ‘It is important for any business operating in an increasingly complex and rapidly changing environment to deploy a broad range of talents. That provides a breadth of understanding of the world and environment and a fusion of the very best values and different perspectives which make up that world.’35 ●● Increased quality of team problem solving. Teams with diverse backgrounds bring different perspectives to a discussion that result in more creative ideas and solutions.36 Although a large percentage of Ernst & Young’s senior leadership is still male, the company is taking steps to create a more diverse leadership team because it’s better for business. ‘We know you get better solutions when you put a diverse team at the table. People come from different backgrounds and they have different frames of reference. When you put these people together, you get the best solution for our clients,’ says Billie Williamson, director of flexibility and gender equity strategy at Ernst & Young.37 ●● Reduced costs associated with high turnover, absenteeism and lawsuits. Companies that foster a diverse workforce reduce turnover, absenteeism and the risk of lawsuits. Because family responsibilities contribute to turnover and absenteeism, many companies now offer child-care and elder-care benefits, flexible work arrangements, telecommuting and part-time employment to accommodate employee responsibilities at home. Discrimination lawsuits are also a costly side effect of a discriminatory work environment. ➜➜ Diversity of perspective is achieved when a manager creates a heterogeneous team made up of individuals with diverse backgrounds and skill sets. ➜➜ Inclusion is the degree to which an employee feels like an esteemed



member of a group in which his or her uniqueness is highly appreciated.

➜➜ Managing diversity, which means creating a climate in which the potential advantages of diversity for organisational performance are maximised while the potential



disadvantages are minimised, is a key management skill today.

Remember This

➜➜ Corporations that recruit and retain a diverse workforce reap numerous benefits, including improved team problem solving and increased understanding of the marketplace.

Factors shaping personal bias To reap the benefits of diversity described previously, organisations are seeking managers who will serve as catalysts in the workplace to reduce barriers and eliminate obstacles for women and minorities. To successfully manage a diverse workgroup and create a positive, productive environment for all employees, managers need to start with an understanding of the complex attitudes, opinions and issues that already exist in the workplace or that employees bring into the workplace. These include several factors that shape personal bias: prejudice, discrimination, stereotypes and ethnocentrism.

Wo rkpl ace pre j u d ice, d iscri m inati o n an d stereot ypes Prejudice is the tendency to view people who are different as being deficient in some way. If someone

acts out their prejudicial attitudes towards people who are the targets of their prejudice, discrimination has occurred.38 Paying a woman less than a man for the same work is gender discrimination. Mistreating

prejudice The tendency to view people who are different as being deficient. discrimination When someone acts out their prejudicial attitudes towards people who are the targets of their prejudice.

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stereotypes The rigid, exaggerated, irrational beliefs associated with a particular group of people.

people because they have a different ethnicity is ethnic discrimination. Although blatant discrimination is not as widespread as it was in the past, bias in the workplace often shows up in subtle ways: a lack of choice assignments, a subordinate’s disregard for a minority manager’s directions, or the ignoring of comments made by women and minorities at meetings. A survey by Korn Ferry International found that 59 per cent of minority managers had observed a racially motivated double standard in the delegation of assignments.39 A major component of prejudice is stereotypes, which are rigid, exaggerated, irrational beliefs associated with a particular group of people.40 To be successful in managing diversity, managers need to eliminate harmful stereotypes from their thinking, shedding any biases that negatively affect the workplace. For example, old stereotypes often bubble up and block women’s rise to higher-level positions. These silent but potent beliefs include the perception that women pose a greater risk in senior positions or that working mothers are unable to hold positions requiring extensive travel and stress. Managers can learn to value differences, which means they recognise cultural differences and see these differences with an appreciative attitude. To facilitate this attitude, managers can learn about cultural patterns and typical beliefs of groups to help understand why people act the way they do. It helps to understand the difference between these two ways of thinking, most notably that stereotyping is a barrier to diversity but valuing cultural differences facilitates diversity. These two different ways of thinking are listed in Exhibit 13.4 and described below.41 ●● Stereotypes are often based on folklore, media portrayals and other unreliable sources of information. In contrast, legitimate cultural differences are backed up by systematic research of real differences. Exhibit 13.4 Differences between stereotyping and valuing cultural differences Stereotyping

Valuing cultural differences

Is based on false assumptions, anecdotal evidence or impressions without any direct experience with a group

Is based on cultural differences verified by scientific research methods

Assigns negative traits to members of a group

Views cultural differences as positive or neutral

Assumes that all members of a group have the same characteristics

Does not assume that all individuals within a group have the same characteristics

Example: Suzuko Akoi is Asian, and is therefore not aggressive by white, male standards

Example: As a group, Asians tend to be less aggressive than white, male Australians

Source: Adapted from Taylor Cox, Jr. and Ruby L. Beale, Developing Competency to Manage Diversity: Readings Cases and Activities (San Francisco: Berrett-Koehler Publishers, Inc., 1997).

stereotype threat The psychological experience of a person who, when engaged in a task, is aware of a stereotype about their identity group that suggests that they will not perform well on that task.

●● Stereotypes contain negative connotations. On the other hand, managers who value diversity view differences as potentially positive or neutral. For example, the observation that Asian males are typically less aggressive does not imply they are inferior or superior to white males – it simply means that there is a difference. ●● Stereotypes assume that all members of a group have the same characteristics. Managers who value diversity recognise that individuals within a group of people may or may not share the same characteristics.42 Managers should not only rid themselves of stereotypical thinking, but should also recognise the stereotype threat that may jeopardise the performance of at-risk employees. Stereotype threat describes

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the psychological experience of a person who, when engaged in a task, is aware of a stereotype about his or her identity group that suggests he or she will not perform well on that task.43 Suppose you are a member of a minority group presenting complicated market research results to your management team and are anxious about making a good impression. Assume that some members of your audience have a negative stereotype about your identity group. As you ponder this, your anxiety skyrockets and your confidence is shaken. Understandably, your presentation suffers because you are distracted by worries and self-doubt as you invest energy in overcoming the stereotype. The feelings you are experiencing are called stereotype threat. People most affected by stereotype threat are those we consider to be disadvantaged in the workplace due to negative stereotypes: racial and ethnic minorities, members of lower socioeconomic status, women, older people, gay, lesbian and transgendered individuals, and people with disabilities. Although anxiety about performing a task may be normal, people with stereotype threat feel an extra scrutiny and worry that their failure will reflect not only on themselves as individuals but on the larger group to which they belong.

Ethn o centrism Ethnocentrism is one roadblock for managers trying to recognise, welcome and encourage differences among people so they can develop their unique talents and be effective organisational members. Ethnocentrism is the belief that one’s own group and culture is inherently superior to other groups and cultures. Ethnocentrism makes it difficult to value diversity. Viewing one’s own culture as the best culture is a natural tendency among most people. Moreover, the business world still tends to reflect the values, behaviours, and assumptions of a rather homogeneous, white, middle-class, male workforce. Indeed, most theories of management presume that workers share similar values, beliefs, motivations and attitudes about work and life in general. These theories presume that one set of behaviours best helps an organisation to be productive and effective, and therefore should be adopted by all employees.44 Ethnocentric viewpoints and a standard set of cultural practices produce a monoculture, a culture that accepts only one way of doing things and one set of values and beliefs, which can cause problems for minority employees. People of colour, women, gay, lesbian and transgendered people, the disabled, the elderly and other diverse employees may feel undue pressure to conform, be victims of stereotyping attitudes and be presumed to be deficient because they are different. White, heterosexual men – many of whom do not fit the notion of the ‘ideal’ employee – may also feel uncomfortable with the monoculture and resent stereotypes that label white males as racist and sexist. Valuing diversity means ensuring that all people are given equal opportunities in the workplace.45 The goal for organisations seeking cultural diversity is pluralism rather than a monoculture, and ethnorelativism rather than ethnocentrism. Ethnorelativism is the belief that groups and subcultures are inherently equal. Pluralism means that an organisation accommodates several subcultures. Movement towards pluralism seeks to integrate fully into the organisation the employees who otherwise would feel isolated and ignored. To promote pluralism in its Mountain View corporate headquarters, chefs at Google’s corporate cafeteria ensure that its menu accommodates the different tastes of its ethnically diverse workforce.

ethnocentrism The belief that one’s own group or subculture is inherently superior to other groups or cultures.

monoculture A culture that accepts only one way of doing things and one set of values and beliefs.

ethnorelativism The belief that groups and subcultures are inherently equal. pluralism An environment in which the organisation accommodates several subcultures, including employees who would otherwise feel isolated and ignored.

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Innovative Way

Google

Employees at Google’s corporate headquarters come from all corners of the world, but they feel a little closer to home when they see familiar foods from their homelands on the cafeteria menu. With a goal of satisfying a diverse, ethnically varied palate, Google’s first food guru and chef, Charlie Ayers, designed menus that reflected his eclectic tastes, yet also met the needs of an increasingly diverse workforce. He created his own dishes, searched all kinds of restaurants for new recipes, and often got some of his best ideas from foreignborn employees. For example, a Filipino accountant offered a recipe for chicken adobo, a popular dish from her native country. Scattered around the Googleplex are cafés specialising

in American Southwestern, Italian, California–Mediterranean and vegetarian cuisines. And because more and more Google staff originally hail from Asia, employees can also find sushi at the Japanese-themed Pacific Café or Thai red curry beef at the East Meets West Café. Google believes food can be a tool for supporting a diverse, inclusive workplace. The array of menu options gives people a chance to try new things and learn more about their co-workers. And Google knows that when people need a little comfort and familiarity, nothing takes the edge off working in a foreign country like eating food that reminds you of home.

Sources: Jim Carlton. (14 November 2005). Dig In. The Wall Street Journal; Tony DiRomualdo. Is Google’s Cafeteria a Competitive Weapon? (30 August 2005). Wisconsin Technology Network, http://wistechnology.com/article.php?id=2190 (accessed 31 August 2005); and Marc Ramirez. (21 November 2005). Tray Chic: At Work, Cool Cafeterias, Imaginative Menus. The Seattle Times, http://seattletimes.nwsource.com/html/living/2002634266_cafés21.html?pageid=display-in-thenews.module&pageregion=itnbody (accessed 22 November 2005).

➜➜ The tendency to view people who are different as being deficient is called prejudice. ➜➜ Discrimination occurs when someone acts out their negative attitudes towards people who are the targets of their prejudice. ➜➜ A rigid, exaggerated, irrational belief associated with a particular group of people is called a stereotype.

Take a Moment

➜➜ Stereotype threat occurs when a person who, when engaged in a task, is aware of a stereotype about his or her identity group suggesting that he or she will not perform well on that task. ➜➜ Ethnocentrism is the belief that one’s own group is inherently superior to other groups.

➜➜ A culture that accepts only one way of doing things and one set of values and beliefs is called a monoculture.

Remember This

➜➜ Ethnorelativism is the belief that groups and subcultures are inherently equal. ➜➜ Pluralism describes an environment in which the organisation accommodates several subcultures, including employees.

One organisation that made a firm commitment to break out of monoculture thinking is Hyatt hotels, which has a diversity council made up of employees and managers from different parts As a new manager, adopt of the company and representing different cultural and ethnic backgrounds. The council a viewpoint that accepts meets three times a year to review how well the company is recognising, developing and all groups and subcultures as promoting diverse people. For managers at Hyatt, 15 per cent of their bonus is dependent on inherently equal. Appreciate the meeting specific diversity goals.46 In 2014, Hyatt continues to implement its diversity policy differences that people bring to the workplace and consciously work and applies a Diversity and Inclusion framework across the segments it serves, ‘Workforce, towards hiring, developing Workplace and Marketplace’. It has constructed a broad vision that aims to ‘build and sustain and promoting diverse an environment where our associates [the term the Hyatt uses to refer to their employees] people. are embraced and valued for who they are so that they reach their full potential, enabling Hyatt

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to provide authentic hospitality that is individual and engages each and every guest’. ‘Hyatt abides by local equal employment opportunity policy to assure that all personnel-related actions are administered without regard to race, colour, creed, gender, sexual orientation, gender identity, marital status, pregnancy, national origin, ancestry, age, religion, mental or physical disability or any other group protected by law’, through its initiatives that are structured as ‘Commitment, Accountability, Measurement, Development and Communication’.47

Factors affecting women’s careers Progressive organisations realise the business advantage of hiring, retaining and promoting women in the workplace. In fact, research shows that companies with several senior-level women outperform those without senior-level women both financially and organisationally. One survey of 58 000 employees in over 100 global companies revealed that companies with three or more women in top management are perceived to be more capable, have stronger leadership and inspire higher employee motivation, among other important organisational characteristics.48 However, there is evidence that women are stalling at the middle-management level. In addition, men as a group still have the benefit of higher wages and faster promotions. In America, Walmart, the world’s largest retailer, struggled to rebound after seven women filed a class-action suit on behalf of all women working for the company in 2001. They complained of a general pattern of discrimination in pay and promotions. Six years before the lawsuit, a law firm had found widespread gender disparities in pay and promotion at Walmart stores and urged the company to take basic steps to address this issue. In response to the report and the lawsuit, Walmart has adopted measures to reduce the disparity occurring in the promotion and pay of women and men. In fact, Walmart has told its 50 000 managers to promote more women and minorities, with 15 per cent of managers’ bonuses tied to achieving diversity goals. Recently, women held 46 per cent of assistant store manager positions, up from 40 per cent five years previously.49

Th e gl ass cei lin g The glass ceiling is an invisible barrier that exists for women that limits their upward mobility in organisations. They can look up through the ceiling and see top management, but prevailing attitudes and stereotypes are invisible obstacles to their own advancement. This barrier also impedes the career progress of minorities. In particular, Asian managers bump up against what has been called the bamboo ceiling, a combination of cultural and organisational barriers that impede Asians’ career progress. Today, while Asian people make up a good share of the entry-level workforce in certain industries, they make up only 1.5 per cent of corporate board members in the US.50 To break through the glass ceiling into senior management roles, top executives suggest female and minority managers follow this advice: ●● Gain profit-and-loss experience. Women and minorities are often sidetracked into staff functions, such as human resources and administrative services, rather than line positions where they can gain profit-and-loss experience. For managers who want to be considered for top-level jobs, it is important to have experience in a line position with profit-and-loss responsibilities.51

glass ceiling Invisible barrier that separates women and minorities from top management positions.

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●● Be assertive and ask for what you want. Many female and Asian managers have found themselves stereotyped as ‘not top manager material’ because they are too quiet and unassertive. Sheryl Sandberg, Facebook’s chief operating officer, argues that women ‘need to sit at the table’. She said that 57 per cent of men entering the workforce negotiate their salaries, but only 7 per cent of women do likewise.52 In addition, women and minorities need to build their case around things that matter most to their employer – principally, their impact on the bottom line.53

Source: Getty Images/Bloomberg

●● Be willing to take risks. Jump in as a problem solver when an organisation is in crisis, an opportunity known as the glass cliff. Jack Welch, former CEO of General Electric (GE), underscored this advice when he told a group of women executives, ‘To get ahead, raise your hand for line jobs and tough, risky assignments.’ When asked about her experience with the glass cliff, KeyCorp’s CEO Beth Mooney said, ‘I have stepped up to many “ugly” assignments that others didn’t want.’54

As Indian-born Indra Nooyi, pictured here, once observed, ‘If you are a woman, and especially a person-of-colour woman, there are two strikes against you. Immigrant, person of colour, and woman – three strikes against you’. Nooyi herself has certainly overcome the odds. Fortune named her its 2006 most powerful woman in business shortly after she became PepsiCo’s CEO. How did she break through the glass ceiling? There’s her considerable talent and powerful work ethic, of course. But she also benefited from PepsiCo’s supportive culture and commitment to diversity. Under her predecessor, Steve Reinemund, half of all new hires were women or ethnic minorities, a policy spurred by the company’s desire to have its workforce reflect its increasingly global customers.

●  H  ighlight your achievements. Women sometimes tend to downplay their accomplishments to avoid being judged as unfeminine. In addition, modest women and minorities from group-oriented cultures often will not ask for rewards for themselves, but they may ask for rewards for others. White males, on the other hand, typically self-promote their successes. To achieve recognition and credit for their successes, female and minority managers should highlight their achievements and promote their own accomplishments.55

●  Display confidence and credibility in your body language. Women are champions in communicating warmth and empathy but can fall short in communicating authority and power. Consultant Carol Kinsey Goman suggests that women who strive for leadership positions need to be aware of nonverbal messages that reduce their authority. Her advice includes avoiding the following actions: (1) head tilts when listening; (2) girlish behaviours such as biting a finger or twirling hair; (3) excessive smiling; (4) nodding too much; (5) delicate handshakes; and (6) flirting.56

Th e o pt- o ut tren d Many women are never hitting the glass ceiling because they choose to get off the fast track long before it comes into view. In recent years, an ongoing discussion concerns something referred to as the opt-out trend. In a survey of nearly 2500 women and 653 men, 37 per cent of highly qualified women reported that they voluntarily left the workforce at some point in their careers, compared to only 24 per cent of similarly qualified men.57 Quite a debate rages over the reasons for the larger number of women who drop out of mainstream careers. Opt-out proponents say women are deciding that corporate success isn’t worth the price in terms of reduced family and personal time, greater stress and negative health effects.58 For example, Marge Magner left her job as CEO of Citigroup’s Consumer Group after suffering both the death of her mother and a personal life-changing accident in the same year. In evaluating her reasons, Magner said she realised that ‘life is about everything, not just the work’. Some women are opting out to be stay-at-home mums, while others want to continue working, but just not in the kind of fast-paced, competitive, aggressive environment that exists in most corporations. Some researchers who study the opt-out trend say that most women just don’t want to work as hard and competitively as most men want to work.59

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Critics, however, argue that this view is just another way to blame women themselves for the dearth of female managers at higher levels.60 Vanessa Castagna, for example, left a major retailer after decades with the company not because she wanted more family or personal time but because she kept getting passed over for top jobs.61 Although some women are voluntarily leaving the fast track, many more genuinely want to move up the corporate ladder but find their paths blocked. Fifty-five per cent of executive women surveyed by Catalyst said they aspired to senior leadership levels.62 In addition, a survey of 103 women voluntarily leaving executive jobs in Fortune 1000 companies found that corporate culture was cited as the number one reason for leaving.63 The greatest disadvantages of women leaders stem largely from prejudicial attitudes and a heavily male-oriented corporate culture.64 Some years ago, when Procter & Gamble asked the female executives it considered ‘regretted losses’ (that is, high performers the company wanted to retain) why they left their jobs, the most common answer was that they didn’t feel valued by the company.65 Top-level corporate culture often evolves around white, heterosexual males, who tend to hire and promote people who look, act and think like them. Compatibility in thought and behaviour plays an important role at higher levels of organisations. For example, among women who managed to break through the glass ceiling, 96 per cent said adapting to a predominantly white male culture was necessary for their success.66

Th e fem ale advantage Some people think women might actually be better managers, partly because of a more collaborative, less hierarchical, relationship-oriented approach that is in tune with today’s global and multicultural environment.67 As attitudes and values change with changing generations, the qualities women seem to naturally possess may lead to a gradual role reversal in organisations. For example, a stunning gender reversal is taking place in education, with women taking over almost every leadership role from kindergarten to university. In addition, women of all races and ethnic groups are outpacing men in earning bachelor’s and master’s degrees. According to James Gabarino, an author and professor of human development at Cornell University, women are ‘better able to deliver in terms of what modern society requires of people – paying attention, abiding by rules, being verbally competent, and dealing with interpersonal relationships in offices’.68 His observation is supported by the fact that female managers are typically rated higher by subordinates on interpersonal skills as well as on factors such as task behaviour, communication, ability to motivate others and goal accomplishment.69 A survey conducted by Harvard Business Review of 7280 leaders in 2011 from some of the most successful and progressive organisations in the world found that the majority of leaders (64 per cent) are male, but that when ranked in leadership effectiveness (by peers, bosses and direct reports), females consistently rated higher than their male counterparts. Women rated higher in 12 of the 16 competencies that comprise outstanding leadership.70 Research has found a correlation between balanced gender composition in companies (that is, roughly equal male and female representation) and higher organisational performance. Moreover, a study by Catalyst indicates that organisations with the highest percentage of women in top management financially outperform, by about 35 per cent, those with the lowest percentage of women in higher-level jobs.71 It seems that women should be marching right to the top of the corporate hierarchy, but prevailing attitudes, values and perceptions in organisations create barriers and a glass ceiling.

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➜➜ The glass ceiling is an invisible barrier that separates women and minorities from senior management positions. ➜➜ Proponents of the opt-out trend say some women choose to leave the workforce because they decide success is not worth it in terms of reduced



family and personal time, greater stress and negative health effects.

➜➜ Critics say that opinion is just a way to blame women for the scarcity of female top managers and argue that organisations must change. ➜➜ Women are likely to be more collaborative, less hierarchical and



more relationship-oriented than men, qualities that prepare them to succeed in today’s multicultural work environment.

Remember This

➜➜ Companies that promote women to senior-level positions outperform those without women in these positions, both financially and organisationally.

The changing workplace Companies that succeed in the current environment adopt radical new ways of doing business, with sensitivity towards the needs of different cultural practices. Companies now attempt to reflect a mix of native and foreign-born managers, genders, age groups and other diversity dimensions. The other dominant trend is the changing composition of the workforce and the customer base. The average worker is now older, and many more women and immigrants are seeking job and advancement opportunities. The demographics of the population are shifting dramatically. The people who used to be called minorities now make up a large part of the population. During the 1990s, the foreign-born population of Australia nearly doubled, and it continues to increase. So far, the ability of organisations to manage diversity has not kept pace with these demographic trends, thus creating a number of significant challenges for minority workers and managers.

Diversit y challen ges What do these factors mean for managers who are responsible for creating a workplace that offers fulfilling work, opportunities for professional development and career advancement, and respect for all individuals? Inappropriate behaviour by employees lands squarely at the door of the organisation’s top executives. Managers can look at different areas of the organisation to see how well they are doing in creating a workplace that values and supports all people. Exhibit 13.5 illustrates some of the key areas of challenge faced by managers dealing with a diverse workforce. Managers focus on these issues to see how well they are addressing the needs and concerns of diverse employees. One step is to ensure that their organisations’ human resources systems are designed to be bias-free, dropping the traditionally held Western perception of the middle-aged white male as the ideal employee. Recruiting and career development are only one part of the human resources challenge. For example, the increased career involvement of women represents an enormous opportunity to organisations, but it also means managers must deal with issues such as work–family conflicts, dual-career couples and sexual harassment. Providing reasonable accommodation for employees with disabilities requires more than putting in an access ramp. Demands for equal opportunities for people with physical or mental disabilities are growing, and most companies have done little to respond. ‘When it comes to dealing with the disabled, we are about where we were with race in the 1970s,’ says David Thomas, a professor of organisational behaviour and human resource management at Harvard Business School.72 In fact, employment rates for people with disabilities dropped 30 per cent between 1990 and 2004. And for the most part, the workers who do find jobs are tracked into low-skill, low-pay jobs rather than being allowed to fully participate in

13: Managing diversity

training and educational programs available to other employees.73 Over 15 years up to 2005, the rate of employing disabled people had halved in the Australian government, to only 3 per cent of staff. At the same time, there were over 700 000 people in Australia on disability pensions.74 One company bucking the trend is Habitat International, a manufacturer of carpet and turf. David Morris, Habitat’s owner and CEO, admits that the idea of giving workers with disabilities a chance originally ‘had to be forced down my throat’. Today, though, nearly every employee at the company, including some managers, has a physical or mental disability. Performance and quality have gone up at Habitat and turnover and absenteeism have gone down since Morris began hiring people with disabilities. The plant’s defect rate, for example, is less than 0.5 per cent, and every order is delivered on time.75

Exhibit 13.5 Challenges for a culturally diverse workforce Source: Cox, T. H. and Blake, S. (1991). Managing Cultural Diversity: Implications for Organizational Competitiveness. Academy of Management Executive, 5:3, 45–56.

Organisation culture? Valuing differences Prevailing value system Cultural inclusion

HR management systems (bias–free?)

Mindsets about diversity?

Recruitment Training and development Performance appraisal Compensation and benefits

Problem or opportunity? Challenge met or barely addressed? Level of majority-culture buy-in (resistance or support)

Promotion

Challenges of cultural diversity Education programs? Educate management on valuing differences Promote knowledge and acceptance Take advantage of the opportunities that diversity provides

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Higher career involvement of women? Dual-career couples Sexism and sexual harassment Work–family conflict

Heterogeneity in race/ethnicity/nationality? Effect on cohesiveness, communication, conflict, morale Effects of group identity on interactions (e.g., stereotyping) Prejudice (racism, ethnocentrism)

Recent Australian trends in being inclusive in the management of people with disabilities includes: ●● Disability can impact on a person’s opportunities to participate in the labour force. In Australia the participation rate of disabled workers generally amounts to about 50 per cent. This compares to the employment rate for non-disabled persons of 83 per cent.76 ●● Government figures estimate that 18.5 per cent of the Australian population have a disability or around 4.2 million people and if participation by this group increased just 10 per cent it is estimated that the contribution to the Australian economy could be as high as $40 billion over 10 years.77

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●● Currently Australian business ranks very poorly on a global scale for employing people with a disability, ranking 21st out of 29 OECD countries, yet there is growing evidence to indicate that disabled employees are cheaper to recruit, have a productivity level equal to or higher than other workers and they have a better attendance record.78 The growing immigrant population presents other challenges. Whereas in previous generations most foreign-born immigrants to Australia and New Zealand came from Western Europe, most recent immigrants come from Asia. These immigrants come to New Zealand and Australia with a wide range of backgrounds and skills, but are often without adequate skills in using English. Organisations must face not only the issues of dealing with race, ethnicity and nationality to provide a prejudice-free workplace, but also develop sufficient educational programs to help immigrants acquire the technical and customer service skills required in a service economy.

Implications of a globally diverse workforce

expatriates Employees who live and work in a country other than their own.

The implications of an increasingly diverse workforce are everywhere, for organisations operating globally, social and cultural differences may create more difficulties and conflicts than any other sources. National cultures are intangible, pervasive and difficult to comprehend. However, it is imperative that managers in organisations learn to understand local cultures and deal with them effectively.79 Many companies have taken this challenge seriously and have experienced growth in the global marketplace. The director of diversity at Kraft General Foods suggests that ‘Being global means that our customers are diverse. Our stockholders are diverse. The population which is available to us, our productivity, creativity, innovation, and people who supply us are diverse. There is no way we can run a business effectively without a deep understanding and accommodating all of these elements’.80 Having a diverse employee and management group can assist with understanding these elements but it can also present management with challenges when it comes to managing a globally diverse workforce. Small companies that do not do business in other countries are affected by global diversity issues. However, large multinational companies that hire employees in many countries face tremendous challenges because they apply diversity management across a broader stage than at ‘home’. Citigroup has more than 260 000 employees in more than 100 countries, creating a tremendous multicultural management challenge. Managers must develop new skills and awareness to handle the unique challenges of global diversity: cross-cultural understanding, the ability to build networks and the understanding of geopolitical forces. Two significant aspects of global diversity programs involve employee selection and training and the understanding of the communication context. Expatriates are employees who live and work in a country other than their own. Careful screening, selection, and training of employees to work overseas increase the potential for corporate global success. Human resource managers consider global skills in the selection process. In addition, expatriates receive cross-cultural training that develops language skills and provides cultural and historical orientation.81 Employees working overseas must adjust to many new conditions. Managers going global might find that their management styles need adjustment to succeed in a foreign country. One aspect of this adjustment is understanding differences in social and cultural values as identified by the Hofstede research and the GLOBE project described in Chapter 4. Another important consideration is understanding the communication context of a foreign location.

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Managemen t in Pr actice

A guide for expatriate managers Although each person is different, individuals from a specific country typically share certain values and attitudes. Managers planning to move to a foreign country can learn about these broad value patterns to help them adjust to working and living abroad. The following characteristics are some that are often used to help foreign managers understand what Australians are like.

➜➜ Australians are independent and individualistic. They

➜➜ Australians are informal. They tend to treat everyone alike,

➜➜ Australians tell it like it is and dislike silence. They would

even when individuals differ significantly in age or social status.

➜➜ Australians are direct and decisive. To some foreigners, this behaviour may seem abrupt or even rude. Typically, they don’t ‘beat around the bush’, which means they don’t talk around things but get right to the point. They quickly define a problem and decide on the course of action they believe is most likely to get the desired results.

➜➜ Australians love facts. They value statistics, data and information in any form.

➜➜ Australians are competitive. They like to keep score, whether at work or play. Australians like to win, and they don’t tolerate failure well. Some foreigners might think Australians are aggressive or overbearing.

➜➜ Australians believe in work. For many, commitment to work and career comes first.

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place a high value on freedom and believe that people can control their own destinies.

➜➜ Australians are questioners. They ask a lot of questions, even of someone they have just met. Some of these questions may seem pointless (‘How are you?’) or personal (‘What kind of work do you do?’). rather talk about the weather than deal with silence in a conversation.

➜➜ Australians value punctuality. They keep appointment calendars and live according to schedules and clocks.

➜➜ Australians pay close attention to appearances. They take note of designer clothing and good grooming. They may in fact seem obsessed with bathing, eliminating body odours and wearing clean clothes. Australians value flexibility in the workplace, meaning that work conditions increasingly allow for individual differences and needs. This has been found in 2010 in Australia to be a significant human resources issue. How many of these statements do you agree with? Discuss them with your friends and classmates, including people from different countries and members of different sub-cultural groups from Australians.

Sources: http://www.worklifebalance.com.au/images/stories/Results_of_Flexible_Work_in_2010_Pulse_Survey.pdf. Adapted from Fletcher, W. (1 August 2005). The American Way of Work. Management Today, 46; What Are Americans Like? Exhibit 4-6 in Robbins, S. P. and Coulter, M. (2005), Management, 8th edn (Upper Saddle River, NJ: Pearson Prentice Hall, 2005); as adapted from Ernest, M. (ed.) (1984), Predeparture Orientation Handbook: For Foreign Students and Scholars Planning to Study in the United States (Washington, DC: U.S. Information Agency, Bureau of Cultural Affairs), pp. 103−5; Bennett, A. (12 February 1986). American Culture Is Often a Puzzle for Foreign Managers in the US The Wall Street Journal, 29; The Pryor Report (February 1988). Don’t Think Our Way’s the Only Way. 9; and Wattenberg, B. (7 August 1989). The Attitudes Behind American Exceptionalism. U.S. News and World Report, 25.

Lenovo has a remarkably diverse senior management team and workforce at large. A little more than 50 per cent of the company’s 26 000 or so employees work in China, with the rest scattered around the world, mostly in the US. About half of them speak only English and no Mandarin, while the other half speak Chinese and little English. With such a culturally, geographically and linguistically diverse workforce, Lenovo has little choice but to implement some serious diversity training. And managers are rising to the challenge, initiating a wide-ranging worldwide strategy designed to educate

Lenovo’s far-flung employees on the cultures, customs and languages of their overseas colleagues. Programs include Mandarin lessons for US executives and English lessons for managers in China, training sessions on the predominant cultural values of the various countries where Lenovo operates, and weekly lunchtime cultural understanding seminars exploring issues such as how different cultures regard silence in conversations. A ‘knowledge exchange’ program sends employees on short-term overseas assignments so people can learn different perspectives. Lenovo even has a cross-cultural children’s pen-pal

program, called ‘Culture Kids’, for the children of employees to help them learn about one another. Top executives at Lenovo consider the diversity of the company to be its biggest competitive advantage. However, they know that to realise Lenovo’s full potential, they must find ways to smooth the tensions and stress that diversity can bring and take advantage of differences to create a stronger company. Sources: Egodigwe, L. (14 November 2005). Back to Class. The Wall Street Journal, R4; Lenovo website, http://www.lenovo.com/lenovo/au/en/our_company.html (accessed 13 November 2013).

Case study

Lenovo Corp.

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Achieving cultural competence

cultural competence The ability to interact effectively with people of different cultures.

Exhibit 13.6 Five steps to cultural competence Source: Based on Ann M. Morrison, The New Leaders: Guidelines on Leadership Diversity in America (San Francisco: Jossey-Bass Publishers, 1992), p. 160.

A corporate culture, as discussed in Chapter 3, is defined by the values, beliefs, understandings and norms shared by members of the organisation. Although some corporate cultures foster diversity, many managers struggle to create a culture that values and nurtures the organisation’s diverse employees. Managers who have made strategic decisions to foster diversity need a plan that moves the corporate culture towards one that reduces obstacles for disadvantaged employees. A successful diversity plan leads to a workforce that demonstrates cultural competence in the long run. Cultural competence is the ability to interact effectively with people of different cultures.82 Exhibit 13.6 illustrates the five-step process for implementing a diversity plan.83 These steps create cultural competence among employees by helping them better understand, communicate with and successfully interact with diverse co-workers.

Step 1: Uncover

Step 2:

diversity problems in the organisation.

Strengthen top management commitment.

Step 5: Maintain

Step 3: Choose

momentum to change the culture.

solutions to fit a balanced strategy.

Step 4: Demand results and revisit the goals.

Step 1: Uncover diversity problems in the organisation. Most doctors can’t make a medical diagnosis without first examining the patient. Similarly, organisations cannot assess their progress towards cultural competence without first investigating where the culture is right now. A cultural audit is a tool that identifies problems or areas needing improvement in a corporation’s culture. The cultural audit is completed by employees who answer the following types of questions: How do promotion rates compare? Is there pay disparity between managers in the same pay grade? Does a glass ceiling limit the advancement of women and minorities? Answers to these questions help managers assess the cultural competence of the organisation and focus their diversity efforts on specific problems. Step 2: Strengthen top management commitment. The most important component of a successful diversity strategy is management commitment, leadership and support.84 Some of the ways that top managers demonstrate their support of diversity efforts are by allocating time and money to diversity activities, supporting the recommendations of problem-solving task forces,

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and communicating the commitment to diversity through speeches and vision and mission statements. Committed top managers also make diversity a priority by setting an example for others to follow. Step 3: Choose solutions to fit a balanced strategy. The best solutions to diversity problems are those that address the organisation’s most pressing problems uncovered during Step 1. To be most effective, solutions should be presented in a balanced strategy and address three factors: education, enforcement and exposure. Education may include new training programs that improve awareness and diversity skills. Enforcement means providing incentives for employees who demonstrate new behaviours and disciplinary action for those who violate diversity standards. Exposure involves exposing traditional managers to non-traditional peers to help break down stereotypical beliefs. Step 4: Demand results and revisit the goals. The simple rule ‘What doesn’t get measured doesn’t get done’ applies to diversity efforts. Diversity performance should be measured by numerical goals to ensure solutions are being implemented successfully. Numerical goals demonstrate that diversity is tied to business objectives. Examples of numerical goals might include tracking the salaries, rates of promotion, and managerial positions for women and minorities. But these personnel statistics don’t completely measure an organisation’s progress towards cultural competence. Other measures might include productivity and profitability tied to diversity efforts, employee opinions about their co-workers and an assessment of the corporation’s ability to provide a satisfying work environment for all employees.85 Step 5: Maintain momentum to change the culture. Success with any of the previous four steps is a powerful motivator for continuing diversity efforts. Corporations should use these successes as fuel to move forward and to provide leverage for more progress. ➜➜ Cultural competence is the ability to interact effectively with people of different cultures.

➜➜ When a corporate culture embraces diversity and fosters an environment where all people thrive, the organisation has achieved cultural competence.

IBM For years, many corporate leaders paid lip service to diversity, as reflected in the comments of one consumer goods executive: ‘Diversity is another way of saying affirmative action, and we are forced to support it in order to protect our brand in the trade and with consumers.’ Unfortunately, many executives still share this opinion.

Remember This

➜➜ The five steps towards cultural competence are identifying diversity problems, strengthening top management commitment, choosing solutions, demanding results and maintaining momentum.

Innovative Way IBM, however, considers diversity a time-sensitive business imperative. IBM’s chief diversity officer Ron Glover believes that diversity must be an embedded mindset with common threads that touch all functional areas because diversity fuels innovation and business growth. ‘Innovation is about looking at complex problems and bringing new

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views to the table,’ Glover says. ‘Diversity has allowed IBM to be innovative and successful for 100 years and to work across lines of differences in 172 countries, amongst 427 000 employees.’ IBM has a long history of supporting diversity efforts. The organisation hired its first professional women, 25 college students working in systems services, in 1935. In 1943, it named its first female vice president. It instituted a three-month family leave policy in 1956, 37 years before it

became required by law. In 2011, IBM hired its first female CEO, Virginia M. Rometty. ‘IBM sees their ability to compete in today’s marketplace, to approach new markets, and to make money as being tied to diversity,’ said Caroline Simard, vice president of research at the Anita Borg Institute for Women and Technology. ‘It really is a business imperative and not just a responsibility of HR.’

Sources: Glenn Llopis. (13 June 2011). Diversity Management Is the Key to Growth: Make It Authentic. Forbes, http://www.forbes.com/sites/glennllopis/2011/06/13/diversity (accessed 20 July 2011); and Claire Cain Miller. (27 October 2011). For Incoming I.B.M. Chief, Self-Confidence Is Rewarded. The New York Times, http://www.nytimes. com/2011/10/28/business/for-incoming-ibm-chief-self-confidence-rewarded.html (accessed 20 July 2012).

Current responses to diversity In responding to a survey by the Society for Human Resource Management, 91 per cent of companies said they believe that diversity initiatives and programs help maintain a competitive advantage. Some specific benefits they cited include improving employee morale, decreasing interpersonal conflict, facilitating progress in new markets and increasing the organisation’s creativity.86

Enhan cin g stru ctu res an d po lici es Many policies within organisations originally were designed to fit the stereotypical male employee. Now leading companies are changing structures and policies to facilitate and support diversity. Most large organisations have formal policies against racial and gender discrimination, as well as structured grievance procedures and complaint review processes. Companies are also developing policies to support the recruitment and career advancement of diverse employees. Many have added a new senior management position called chief diversity officer, whose role is to create working environments where women and minorities can flourish. About 60 per cent of Fortune 500 companies have chief diversity officers.

Expan d in g recru itm ent effo rts

mentor A higher-ranking organisational member who is committed to providing upward mobility and support to a protégé’s professional career.

mentor

For many organisations, a new approach to recruitment means making better use of formal recruiting strategies, offering internship programs to give people opportunities and developing creative ways to draw on previously unused labour markets. Marathon Petroleum created a six-point recruiting strategy to increase diversity, including: (1) recruiting corporate-wide and cross-functionally; (2) building relationships with first- and second-tiered schools to recruit minority students; (3) offering internships for racial and ethnic minorities; (4) offering minority scholarships; (5) establishing informal mentoring programs; and (6) forming affiliations with minority organisations.87

Establishin g m ento r rel ati onsh i ps The successful advancement of diverse employees means that organisations must find ways to eliminate the glass ceiling. One of the most successful structures to accomplish this goal is the mentoring relationship. A mentor is a higher-ranking organisational member who is committed to providing upward mobility and support to a protégé’s professional career.88 Mentoring provides minorities and women with

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direct training and inside information on the norms and expectations of the organisation. A mentor also acts as a friend or counsellor, enabling the employee to feel more confident and capable. One researcher who studied the career progress of high-potential minorities found that those who advance the most all share one characteristic: a strong mentor or network of mentors who nurtured their professional development.89 However, research also indicates that minorities, as well as women, are much less likely than white men to develop mentoring relationships.90 Women and minorities might not seek mentors because they feel that job competency should be enough to succeed, or they might feel uncomfortable seeking out a mentor when most of the senior executives are white males. Women might fear that initiating a mentoring relationship could be misunderstood as a romantic overture, whereas male mentors may think of women as mothers, wives or sisters rather than as potential executives. Cross-race mentoring relationships sometimes leave both parties uncomfortable, but the mentoring of minority employees must often be across race because of the low number of minorities in upper-level positions. The few minorities and women who have reached the upper ranks often are overwhelmed with mentoring requests from people like themselves, and they may feel uncomfortable in highly visible minority-minority or femalefemale mentoring relationships, which isolate them from the white male status quo. The solution is for organisations to overcome some of the barriers to mentor relationships between white males and minorities. When organisations can institutionalise the value of white males actively seeking women and minority protégés, the benefits will mean that women and minorities will be steered into pivotal jobs and positions critical to advancement.

In creasin g awaren ess o f sexual har assm ent Although psychological closeness between men and women in the workplace may be a positive experience, sexual harassment is not. Sexual harassment is illegal. Many companies offer sexual harassment awareness programs that create awareness of what defines sexual harassment and the legal ramifications of violations. The following list categorises various forms of sexual harassment as defined by one university: ●● Generalised. This form involves sexual remarks and actions that are not intended to lead to sexual activity but that are directed towards a co-worker based solely on gender and reflect on the entire group.

sexual harassment

●● Inappropriate/offensive. Though not sexually threatening, the behaviour causes discomfort in a co-worker, whose reaction in avoiding the harasser may limit his or her freedom and ability Take a to function in the workplace. ●● Solicitation with promise of reward. This action treads a fine line as an attempt to ‘purchase’ sex, with the potential for criminal prosecution. ●● Coercion with threat of punishment. The harasser coerces a co-worker into sexual activity by using the threat of power (through recommendations, grades, promotions and so on) to jeopardise the victim’s career. ●● Sexual crimes. The highest level of sexual harassment, these acts would, if reported to the police, be considered criminal activity.91 Statistics in Canada indicate that between 40 and 70 per cent of women and about 5 per cent of men have been sexually harassed at work.92 The situation in Australia and New Zealand is almost as dire.

Moment

As a new manager, be careful about romantic involvement in the workplace. In particular, steer clear of such relationships with superiors or subordinates, which is a slippery ethical area. Know what sexual harassment means, and make sure everyone in your team or department understands that sexual harassment is disrespectful and against the law.

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Usin g mu lticu ltu r al te a ms multicultural teams Teams made up of members from diverse national, racial, ethnic and cultural backgrounds.

Companies have long known that putting together teams made up of members from different functional areas results in better problem solving and decision making. Now, they are recognising that multicultural teams – teams made up of members from diverse national, racial, ethnic and cultural backgrounds – provide even greater potential for enhanced creativity, innovation and value in today’s global marketplace.93 Research indicates that diverse teams generate more and better alternatives to problems and produce more creative solutions than homogeneous teams.94 A team made up of people with different perspectives, backgrounds and cultural values creates a healthy mix of ideas and leads to greater creativity and better decisions. Despite their many advantages,95 multicultural teams are more difficult to manage because of the increased potential for miscommunication and misunderstanding. Multicultural teams typically have more difficulty learning to communicate and work together smoothly, but with effective cross-cultural training and good management, teams can learn to work well together.96

Positive assistan ce fo r wom en at wo rk in Austr alia Numerous initiatives have been undertaken by government and business organisations of all sizes to improve the opportunities for women pursuing managerial careers. The equal opportunity picture in small business is different and much more positive than in bigger, traditional businesses and industries. Women in small business in Australia have significantly higher success rates, as measured by the small-business survival rates, than businesses run by males. Female small business owner/managers have higher qualifications than their male counterparts, the majority have university degrees and many have studied either business or technical subjects. There is evidence that women who head small businesses are more prepared to seek advice than men. However, in small business, the challenges to women are substantial, including: ●● establishing credibility ●● accessing finance ●● balancing family with work responsibilities ●● isolation. Federal and state governments are now providing support networks for women in business to pursue opportunities (see http://www.smallbiz.nsw.gov.au or http://www.women.nsw.gov.au). The Australian government has passed legislation and established an agency, the Equal Opportunity for Women in the Workplace Agency, to promote women at work and their issues. The legislation and the agency’s objectives can be found at the website http://www.eowa.gov.au. The following is a summary of the objectives of this program. If you have 100 or more employees in your corporate group, you are covered by the Equal Opportunity for Women in the Workplace Act 1999. As an organisation covered by the Act you need to: develop an equal opportunity program for women in the workplace – considering seven employment matters (including recruitment, promotions, training, conditions of service, work organisation and procedures for issues relating to sexual harassment and maternity) – and provide a report on your program. The objectives of the Act are to: ●● promote the principle that employment for women should be dealt with on the basis of merit ●● promote, among employers, the elimination of discrimination against, and the provision of equal opportunity for, women in relation to employment matters

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●● foster workplace consultation between employers and employees on issues concerning equal opportunity for women in relation to employment. The business objectives for having an effective workplace program are to: ●● reduce absenteeism ●● improve recruitment by being an employer of choice ●● retain a higher percentage of employees ●● improve morale ●● be more in tune with customers ●● increase productivity ●● reduce training costs ●● provide employees with clear career paths ●● reduce stress. To achieve these outcomes, business must: 1 Expand the pool of available talent and attract the best and brightest (rather than restricting the choice

to as little as half the population). 2 Enhance job performance through increased career opportunities, improved access to training, and

create a better balance between work and family life. 3 Avoid needless costs, especially those associated with staff turnover, absenteeism, retraining and

recruitment. 4 Deal with individual complaints. Even if they do not get to a formal hearing, complaints consume

enormous time and energy, which takes away from organisation productivity. It makes sense to take preventative action through reviewing current practices and outcomes. 5 Improve customer focus through having a workforce that, at all levels of the organisation, is more

representative of its client base. 6 Maintain Australia’s competitive edge.

For Australia to compete successfully at an international level, its organisations must be able to identify with the market, focus on the customer and adapt quickly to new technological innovations and organisational change. Once a vision for a diverse workplace has been created and defined, the organisation can analyse and assess the current culture and systems within the organisation. This assessment is followed by a willingness to change the status quo in order to modify current systems and ways of thinking. Throughout this process, people need support in dealing with the many challenges and inevitable conflicts they will face. Training and support are important for the people in pioneering roles. Finally, managers should not de-emphasise affirmative action programs, because these are critical for giving minorities and women access to jobs in the organisation. Once managers accept the need for a program to develop a truly diverse workplace, action can begin. A program to implement such a change involves three major steps: (1) building a corporate culture that values diversity; (2) changing structures, policies and systems to support diversity; and (3) providing diversity awareness training. For each of these efforts to succeed, top management support is critical, as well as holding all managerial ranks accountable for increasing diversity. Exhibit 13.7 illustrates some of the most common diversity initiatives.

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➜➜ Many organisations have added a new senior management position called chief diversity officer, whose role is to spearhead diversity efforts and cultivate working environments that help women and minorities flourish.

➜➜ A mentor is a higher-ranking senior member of the organisation who is committed to providing upward mobility and support to a protégé’s professional career. ➜➜ To eliminate sexual harassment, companies may offer sexual



harassment awareness programs that define harassment and the legal ramifications of harassment.

Remember This

➜➜ Multicultural teams are made up of members from diverse national, racial, ethnic and cultural backgrounds.

75%

Exhibit 13.7 The most common diversity initiatives: percentage of Fortune 1000 respondents

66%

Take a Moment

61%

As a new manager, you may have the courage to take an active stand against prejudice and inappropriate, disrespectful behaviour. But will you inadvertently exclude people who are different from the mainstream? The ‘Do you know your biases’ self-test at the beginning of this chapter will help you to find out.

Source: Data reported in Impact of Diversity Initiatives on the Bottom Line: A SHRM Survey of the Fortune 1000. (S12−S14) in Fortune (3 June 2001). Keeping Your Edge: Managing a Diverse Corporate Culture. Produced in association with the Society for Human Resource Management, http://www. fortune.com/sections. Diversity-focused recruiting

Innovative Way

Training and education

Community outreach

Women in IT

In the Australian IT sector, an industry-wide initiative known as Women in IT Executive Mentoring has been in existence since 2001 and has produced significant benefits for women being mentored, including:

➜➜ increased self-confidence and self esteem ➜➜ learned strategies to better manage their career

➜➜ a broader perspective of leadership and management ➜➜ increased networking opportunities ➜➜ increased communication up and across their organisation. Active current participants include Dell, Woolworths, Cisco, Deloitte, Ernst and Young, Westpac, Lan Systems, EMC, Intel, Lexmark and many government departments.

➜➜ learned new skills and improved existing skills Source: Orijen website, http://www.orijen.com.au/witem.aspx.

Concept extension

Internet research activity 13.3

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New Manager Self-test A r e y o u at t u n e d t o g e n d e r d i f f e r e n c e s ? How much do you know about gender differences in behaviour? Please answer whether each item below is True or False. Answer all questions before looking at the answers below. True

False

  1 Men control the content of conversations, and they work harder to keep conversations going.  2 Women use less personal space than men.  3 A male speaker is listened to more carefully than a female speaker even when they make an identical presentation.  4 In the classroom, male students receive more reprimands and criticism.  5 Men are more likely to interrupt women than to interrupt other men.  6 Female managers communicate with more emotional openness and drama than male managers.  7 Women are more likely to answer questions not addressed to them.  8 In general, men smile more than women do.  9 Both male and female direct reports see female managers as better communicators than male managers. 10 In a classroom, teachers are more likely to give verbal praise to female students. Scoring and interpretation: Check your answers below. If you scored seven or more correctly, consider yourself perceptive and observant about gender behaviour. If you scored three or fewer, you may want to tune in to the gender dynamics you are missing.

Answers 1: False (men control content, women work harder); 2: True; 3: True; 4: True; 5: True; 6: False (managers of both sexes communicate about the same way); 7: False; 8: False (women smile more); 9: True; 10: False. Source: Myra Sadker and Joyce Kaser, The Communications Gender Gap (Washington, DC: Mid-Atlantic Center for Sex Equity, 1984).

Human resource management has been a gigantic ongoing issue within the Australian Federal Police (AFP). With nearly 5000 police in its ranks, the AFP is keen to ensure that staff culture and commitment become and remain high. The AFP has achieved a lot, such as helping to make Australia the only country in the Western world to achieve a ‘heroin drought’, and making gains made in reducing people smuggling and child prostitution. Since the dramatic terrorism events of 11 September 2001, the AFP also has been at the forefront of anti-terrorism activities. While facing all of these challenges, the AFP has still found time and resources to put into managing its human resource commitment and satisfaction. The AFP has dramatically improved the percentage of its recruits who are women, and has actively

promoted women throughout the force. The AFP introduced a staff recognition and reward system in which medals are given for innovation, courage and excellence. This has produced a more flexible and capable policing organisation. The AFP has now gone further and continued its modern approach to diversity management, by establishing: ➜➜the Malunggang Indigenous Officers Network, which supports the recruitment and career development of Aboriginal and Torres Strait Islander people ➜➜the Gay and Lesbian Officer Network, which provides support to its members and advises management on strategies and initiatives relevant to the gay, lesbian, bisexual, transgender and intersex (GLBTI) communities ➜➜the Women’s Network, which aims to support, encourage and network

by providing leadership to women in the organisation and developing and implementing strategies to meet a wide range of interests and needs. The benefits to the AFP are: ➜➜A diverse organisation operates more effectively in Australia’s multicultural community. ➜➜Diversity improves communication with international law enforcement partners through understanding and respect for diverse cultures. ➜➜Diverse backgrounds, talents and experiences bring new and creative responses to issues and challenges. Sources: Way, N. (2–8 September 2004). Feds Democratic Revolution. Business Review Weekly, 56–7; Australian Federal Police website, http://www.afp.gov.au/jobs/diversity.aspx.

Case study

Australian Federal Police on the case

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sustainable development

Diversity still a big issue, problem and opportunity A lot has changed in the past 20 years in the business scene, but not much has really happened in terms of the profile of ‘who is who’ at the top of the corporate scene in Australia. From 20 years ago, when the Karpin committee recommended strongly and clearly that Australian organisations should include many more women and minorities in their senior management ranks, relatively little forward progress has occurred. While something tangible was brought to bear, at least, in 2010 (when the Australian Stock Exchange brought in recommendations on diversity), most company boards have not even discussed what they will do about these issues. The changes, which came

in on 1 January 2010, were to disclose a policy on diversity including measurable objectives. Despite the clear benefits of drawing equally from the talent base of the whole workforce in selecting and developing senior executives, practices and performance sadly still lag far behind this ideal! Clearly there is a large opportunity to bring the ratios of women in senior leadership roles into kilter with the rest of the workforce and population. The same applies to all minority groups in our society. Source: Walters K. (25 November−1 December 2010). Male CEOs High Earners. BRW, 10.

Source: Fairfax Syndication/Rob Homer

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High-flying women CEOs are in the minority. Gail Kelly heads up a large bank, Westpac, and is one of few women in such high places of managerial authority.

Driving sustainability through effectively managing diversity A mature sustainability strategy has much in common with a mature approach to diversity. Doing a good job on diversity means having a culture and set of processes which value, provide opportunity and make the most out of all human resources. This can be achieved through developing an inclusive culture which ultimately leads to a solid integration of people from different cultures, religions, genders and other aspects of background. Staff generally appreciate their employer taking a proactive approach to valuing differences between people. This builds sustainable connections and alignment between investors, who provide monetary capital, and staff, who supply their human capital. It enhances the firm’s ability to ‘do well by doing good’. It is, in short, just like all other aspects of sustainable development: good business practice to make best use of the whole workforce, and to draw on the whole population in recruiting it, and then having an open and equal set of opportunities for those who work in it. A diverse workforce will be more likely to be open-minded to a broad vision as brought by sustainable development approaches, rather than a narrow-minded approach brought by the defensive workforce and culture which is closed to diversity of staff, and hence likely closed to most other new concepts. A company that is in the denial, defence or minimising differences of diversity is likely to be generally not proactive or open minded to sustainable development concepts and practices. On the other hand, a company in which all types of people are welcomed, treated very well and fully included in advancement opportunities is also one that is likely to be proactive in seizing sustainability opportunities, as opposed to being backward or defensive in regards to sustainability.

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Global mining giant Xstrata, which has major mining operations in Australia has a well-developed and integrated approach to combining sustainability and diversity: Improving the diversity of our workforce supports our objective of enabling the best people to perform at their best at Xstrata and improves our strategic planning, decision making and operational performance by bringing together people with a range of viewpoints and backgrounds. We are proactive in promoting diversity in management and the wider workforce. We do not tolerate any form of discrimination, bullying, harassment or physical assault as set out in our Sustainable Development policy. Each site is required to implement an employee grievance mechanism to report and respond to workplace grievances fairly and systematically. Source: http://www.xstrata.com/sustainability/ourpeople/diversity/

In the defence sector, the traditional attitude was that women and minority groups had little to contribute. They suffered from discrimination. Managers have taken a number of steps to try to solve these problems. However, the required change is to overcome deep-seated cultural values. While the army, navy and air force have a fair way to go in valuing all people equally, they have made great progress in recent years and the appointment of a female Major General such as Liz Cosson, who was introduced in the Management challenge at the start of the chapter, is a positive symbol of this achievement. With women and minorities starting to occupy high offices, such as Prime Minister, and CEO positions, progress is occurring, but slowly. Affirmative action

programs have been successful in gaining employment for women and minorities, but the glass ceiling has kept many from obtaining top management positions. Some women are opting to get off the corporate ladder, although studies indicate that women have characteristics that may make them better managers than men in today’s diverse organisations. Breaking the glass ceiling ultimately means changing the corporate culture within organisations; changing internal structures and policies towards employees, including accommodating special needs; and providing diversity training to help people become aware of their own cultural boundaries and prejudices and teach them skills for effectively working with people different from themselves.

1 If you were a senior manager at a company such as ANZ, Woolworths or a government department in New Zealand or Australia, how would you address the challenges faced by minority employees? 2 What specific strategies might a manager employ to create a work environment that fosters inclusion? 3 Evaluate your own experiences so far with people from other backgrounds. How well do you think those experiences prepared you to understand the unique needs and dilemmas of a diverse workforce? 4 What is the glass ceiling, and why do you think it has proven to be such a barrier to women and minorities? 5 Describe how a diversity of perspective boosts creativity and innovation in the workplace. Why do managers consider a diversity of perspective a competitive advantage? 6 In preparing an organisation to accept diversity, do you think it is more important to change the corporate culture or to change structures and policies? Explain. 7 How might multicultural teams contribute to the advancement of women and minorities to higher-level positions in an organisation?

8 Why do you think a large number of women are opting out of corporate management? Discuss whether this trend is likely to continue over the next 10 years.

Response to the Management Challenge

Discussion questions

9 As a manager, how would you accommodate the special needs of different groups (e.g. single parents, older workers, or employees with poor English language skills or religious restrictions) without appearing to show favouritism or offending other groups? 10 How can organisations strike a balance between respecting and meeting the needs of a diverse workforce and shaping a highperformance corporate culture where shared values contribute to the accomplishment of strategic goals? 11 You are a manager at an organisation that has decided it needs a more diverse workforce. What steps or techniques will you use to accomplish this goal? What steps will you take to retain diverse employees once you have successfully recruited them?

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Ethical challenge

S u n s e t p r ay e r s

Frank Piechowski, plant manager for a refrigerator production plant, has just received his instructions from the vice-president for manufacturing. He is to hire 40 more temporary workers through Cities Staffing, the local labour agency. Frank already knows from past experience that most, if not all, of the new hires available to work the assembly line will be Muslim Somali refugees, people who have immigrated from their wartorn native country en masse over the past 15 years. The company, like all appliance manufacturers, is trying to survive in a highly competitive, mature industry. Appliance companies are competing mainly on price. The entrance of large chains has only intensified the price wars, not to mention that consumers can easily do comparison shopping before leaving home simply by logging onto the Internet. The pressure to keep production costs low is considerable. That’s where the Somali workers come in. In an effort to keep labour costs low, Frank is relying more and more on temporary workers rather than increasing the ranks of permanent employees. Frank has been quite pleased with the Somali people already at work on the assembly line. Although few in number, they are responsible, hard-working and willing to work for the wages he can afford to pay. It was the first time this son of Polish immigrants has ever come into contact with Muslims, but so far, it has gone well. Frank has established a good working relationship with the Somalis’ spokesperson, Halima Adan, who explained that, unlike in most Western faiths, Islamic religious practices are inextricably woven into everyday life. So together, they worked out ways to accommodate Muslim customs. Frank authorised changes in the plant’s cafeteria menu so the Somali workers had more options that conformed to their dietary restrictions, and he allowed

women to wear traditional clothing as long as they weren’t violating safety standards. After learning that the Somalis would need to perform at least some of the ceremonial washing and prayers they are required to do five times a day during work hours, the plant manager set aside a quiet, clean room where they could observe their 15-minute rituals during their breaks and at sunset. The Maghrib sunset prayers that second shift workers had to perform were disruptive to a smooth workflow. Compared to their midday and afternoon rituals, the Muslim faithful had considerably less leeway as to when they said the sunset prayers, and of course, the sun set at a slightly different time each day. But so far, all of them, including Frank, had coped. But what was Frank going to do about the sunset prayers with an influx of 40 Somali workers that would dramatically increase the number of people who would need to leave the line to pray? Is it time to modify his policy? Has he reached the point where the accommodations Halima Adan would probably request crossed the line from reasonable to unreasonable? But if he changes his policy, will he risk alienating his workforce? W h at d o yo u d o ? 1 Continue the current policy that leaves it up to the Muslim workers as to when they leave the assembly line to perform their sunset rituals. 2 Try to hire the fewest possible Muslim workers so the work line will be efficient on second shift. 3 Ask the Muslim workers to delay their sunset prayers until a regularly scheduled break occurs, pointing out that the production plant is primarily a place of business, not a house of worship.

Sources: Based on Johnson, R. (10 March 2005). 30 Muslim Workers Fired for Praying on Job at Dell. The Tennessean, http://tennessean.com/local/archives/05/03/66733769. shtml?Element_ID=66733769; Durrani, A. Religious Accommodation for Muslim Employees. Workforce.com. http://www.workforce.com/archive/feature/22/26/98/index. php?ht=muslim%20muslim; US Equal Employment Opportunity Commission. Questions and Answers about Employer Responsibilities Concerning the Employment of Muslims, Arabs, South Asians, and Sikhs. http://www.eeoc.gov/facts/backlash-employer.html; and US Department of Commerce, Office of Health and Consumer Goods. 2005 Appliance Industry Outlook. Trade.gov, http://www.ita.doc.gov/td/ocg/outlook05_appliances.pdf.

Gr oup challenge

Personal diversity

Each of us feels different in many ways from the average behaviour or expectations that other people seem to value. This reflects our own feelings of diversity. The differences you feel compared to others could be about your physical characteristics (height, age, skin colour), or they could reflect a difference in your thinking style, feelings, personality or behaviour, especially when you feel different from what other people expect or what you perceive are the social norms. Make a list of six ways you feel different from others:

1. 2. 3. 4. 5. 6. Now answer the following questions with respect to your perceived diversity.

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What are your feelings about being different?

How do your differences contribute to a student team or work organisation?

Which elements of diversity are you proud of? Why?

In a group of three to five students sitting in a circle, each person takes a turn to describe the answers to these questions. Then other students take turns providing feedback to the person about what

What element would you like to change so you would be less different? Why?

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perceived differences mean to them. Each student takes a turn reporting answers to the previous questions and then receiving feedback from other group members on the perceptions and impacts of those differences. Here are additional questions to discuss in the group: What did you learn about perceived diversity and interpersonal relations?  hat does it mean when our differences appear larger to ourselves than W they appear to others?  ow does personal diversity affect team or organisational performance? H (Answers can be written on the board.)

Wat e r way I n d u s t r i e s Waterway Industries, based in Gosford, New South Wales, was founded in the early 1960s as a small manufacturer of high-quality canoes. The company quickly gained a solid reputation throughout New South Wales and began building a customer base in the other states as well. By the early 2000s, Waterway was comfortably ensconced in the canoe market nationwide. Earnings growth was fairly steady up until 2012, when CEO John Maher was persuaded by a friend to venture into kayaks. After Waterway began selling its own line of compact, inexpensive kayaks in 2012, Maher quickly learned that the decision was a good one. Most of Waterway’s existing canoe customers placed sizeable kayak orders, and a number of private-label companies also began contacting Maher about making kayaks for their companies. When Lee Carter was hired to establish a formal marketing department at Waterway, things really took off. Carter began bringing in so many large orders that the company had to contract with other manufacturers to keep up. For the most part, Waterway’s 45 or so employees adjusted well to the faster pace at the company. The expanded business did not seem to change the company’s relaxed, informal working atmosphere. Most employees were outdoor enthusiasts, and when the weather was good Maher knew the building would be almost empty by 4 p.m. He also knew, however, that employees enjoyed their jobs, got their work completed on time and were always speaking out with new ideas and suggestions. However, Lee Carter, unlike other employees, seemed totally focused on her work. She travelled constantly and worked so hard that she barely had time to get to know the rest of the staff. She came in on weekends to catch up on paperwork. She had even missed the Waterway picnic, along with two of her direct reports, because they were on the road trying to nail down a large order. Maher likes the dedication, but wonders if this

Case for cr itical analysis

approach could eventually have a negative effect on the company’s culture. Turnover at Waterway has always been low, and Maher believes most employees are happy working at the company. However, within the past year, both of Waterway’s designers have approached Maher to request salary adjustments. Each suggested they would be interested in equity in the company, receiving a share of the profits if their designs did well. Maher’s response was to give the senior designer a modest pay raise and extra holidays, and to increase the bonuses for both designers. Both seemed satisfied with the new arrangements. Waterway’s CFO, on the other hand, recently left the company to take a position with a powerboat manufacturer after Maher twice refused his request for a redesigned compensation package to include equity. Now, on a trip to the cafeteria to get a cup of coffee, Maher has just overheard Lee Carter discussing a possible job opportunity with another company. He is well aware of the lucrative packages being offered to sales and marketing managers in the sporting goods industry, and he does not want to lose Carter. Even though he suspects she will eventually leave the company anyway, especially if the market for kayaks falls flat, he would like to find a way to recognise her hard work and keep her at Waterway for at least a few more years. Maher has asked you, the company’s sole HR manager, for advice about changing the company’s compensation system. In the past, he has handled things informally, giving employees annual salary increases and bonuses, and dealing with employees one-on-one (as he did with the designers) when they have concerns about their current compensation. Now, Maher is wondering if his company has grown to the point where he needs to establish some kind of formal compensation system that

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can recognise employees who make outstanding contributions to the company’s success. You were also asked how such policies and systems might need to be flexible to cater for a diversity of staff needs. Q ue s t ions 1 What impact, positive or negative, do you think a formal managing diversity compensation system might have on Waterway?

2 What type of compensation approach would you suggest Maher implement? 3 How can non-financial incentives play a role in helping Waterway retain aggressive, ambitious employees like Lee Carter? 4 What policies would you put in place to get the most from and for an increasingly diverse workforce?

Source: Based on Nicoson, R. D., McCann, J., Henry, K., Hart, M., Rudolph, R., Schlegel, B. and Johnson, A. (July–August 1996). Growing Pains (Waterway Industries). Harvard Business Review, 74, 4.

On the job video case

Mitchell Gold 1 Bob Williams: managing diversity For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

Q uestion s 1  What are advantages and disadvantages of diversity at Mitchell Gold 1 Bob Williams?

3 How might a commitment to diversity at MG1BW help managers with globalisation?

2  Which belief is championed at MG1 BW: ethnocentrism or ethnorelativism?

Endnotes 1 Quoted in Susan Caminiti. (19 October 2007). The Diversity Factor. Fortune, 95–105. 2  Fine, M., Johnson, F. and Ryan, M. S. (1990). Cultural Diversity in the Workforce. Public Personnel Management 19, 305–19. 3  Rice, F. (8 August 1994). How to Make Diversity Pay. Fortune, 78–86; Cox, T. H. (1991). Managing Cultural Diversity: Implications for Organizational Competitiveness. Academy of Management Executive, 5:3, 45–56. 4 Fortune (24 January 2005). Diversity Hiring in 2005: Are You in the Minority?, 57–8; Prince, C. J. (April 2005). Doing Diversity: The Question Isn’t Why to Do It – But How. Chief Executive, 46; Harris, R. (May 2001). The Illusion of Inclusion. CFO, 42–50. 5 Singh, V. and Point, S. (2004). Strategic Responses by European Companies to the Diversity Challenge: An Online Comparison. Long Range Planning, 37, 295–318. 6  New York Times Magazine (14 September 2003). Diversity Initiatives Shown to Be Critical to Job Seekers, 100. 7 Fortune (24 January 2005). Diversity Hiring in 2005. 8 Caccameseon, Leslie. (26 February 2013). Trends from The 2013 FORTUNE 100 Best Companies to Work For. greatplacetowork.com, http:// www.greatplacetowork.com/publications-and-events/blogs-and-news/1638 (accessed 11 November 2013). 9 Smith, L. (13 October 2003). The Business Case for Diversity, in The Diversity Factor. Fortune, S1–S12. 10 Elashmawi, D. F. (August 1993). Culture Clashes: Barriers to Business. Managing Diversity, 2:11, 1–3; Copeland, L. (25 May 1988). Learning to Manage a Multicultural Workforce. Training, 48–56. 11 Singh and Point. Strategic Responses by European Companies to the Diversity Challenge.

12 Wheeler, M. L. (March 2005). Diversity: The Performance Factor. Harvard Business Review, S1–S7. 13 Ibid. 14 Rawn Shah. (20 April 2011). Working with Five Generations in the Workplace. Forbes.com, http://www.forbes.com/sites/rawnshah/2011/04/20/working-withfive-generations-in-the-workplace/ (accessed 9 August 2012); and Jeanne Meister and Karie Willyerd. (2010). The 2020 Workplace (New York: HarperCollins). 15 Australian Bureau of Statistics, http://www.abs.gov.au/ausstats/[email protected]/ Lookup/by+Subject/4125.0~Jan+2012~Main+Features~Labour+for ce~1110 (accessed 12 November 2013). 16 Generations in the Workplace in the United States and Canada. Catalyst. org, May 2012, http://www.catalyst.org/publication/434/generations-inthe-workplace-in-theunited-states-canada (accessed 9 August 2012); Lisa Beyer, Samuel Greengard, Susan G. Hauser and Todd Henneman. (2 July 2012). Workforce 90th Anniversary: Workforce Management Looks Back at Workplace History. Workforce.com, http://www.workforce.com/ article/20120702/WORKFORCE90/120629967/1066/newsletter01 (accessed 9 August 2012); and Shah. Working with Five Generations in the Workplace. 17 Joann S. Lublin and Kelly Eggers. (30 April 2012). More Women Are Primed to Land CEO Roles. The Wall Street Journal Online, http://online.wsj .com/article/SB10001424052702303990604577368344256435440.html (accessed 29 June 2012). 18 Wheeler, M. L. (1995). Diversity: Business Rationale and Strategies. The Conference Board, Report No. 1130-95-RR, 14, 25. 19 Oshiotse, A. and O’Leary, R. (March–April 2007). Corning Creates an Inclusive Culture to Drive Technology Innovation and Performance. Wiley InterScience, Global Business and Organizational Excellence, 26:3, 10. 20 Loden, M., Implementing Diversity, Chicago: Irwin Professional, c1996; Loden, M. and Rosener, J. B. (1991). Workforce America! (Homewood: Business One Irwin).

13: Managing diversity

21 Milliken, F. J. and Martins, L. I. (1996). Searching for Common Threads: Understanding the Multiple Effects of Diversity in Organizational Groups. Academy of Management Review, 21:2, 402–33. 22 Leonhardt, D. (27 November 2005). Who’s in the Corner Office? The New York Times, http://www.nytimes.com. 23 Giada Zampano. (5 June 2012). Italy to Push Pink Quotas. The Wall Street Journal Online, https://www.google.com/search?sourceid=navclient&aq=0&o q=italy+to+push&ie=UTF-8&rlz=1T4ADRA_enUS426US427&q=italy+to+ push+’pink+quotes’&gs_upl=0l0l0l4406lllllllllll0&aqi=g4&pbx=1 (accessed 2 July 2012). 24 Mariko Sanchanta. (14 July 2010). Japan’s Women Reach Job Milestones. The Wall Street Journal, A15. 25 Hiroka Tabuchi. (17 January 2011). Leading in 3-D TV, Breaking Japan’s Glass Ceiling. The New York Times Online, http://www.nytimes.com/2011/01/18/ business/global/18screen.html?pagewanted=all (accessed 3 July 2012). 26 Richard L. Daft. (2008). The Leadership Experience (Cincinnati, OH: Cengage Learning), p. 340. 27 Lamont, Leonie. (8 September 2012). Unprecedented Number of Women Joining Boards. Sydney Morning Herald, 5, http://www.smh.com.au/business/ unprecedented-number-of-women-joining-boards-20110808-1ij75 .html (accessed 12 November 2013). 28 Knight, Elizabeth. (7 November 2013). Captains of Industry Call For More Women on Boards. Sydney Morning Herald, http://www.smh.com.au/ business/captains-of-industry-call-for-more-women-on-boards-201311072x2kn.html (accessed 12 November 2013). 29 Yair Holtzman and Johan Anderberg. (2011). Diversify Your Teams and Collaborate: Because Great Minds Don’t Think Alike. Journal of Management Development, 30:1, 75–92. 30 Reported in John Tierney. Social Scientist Sees Bias Within. The New York Times Online, www.nytimes.com/2011/02/08/science/08tier.html (accessed 5 July 2012). 31 Lynn M. Shore et al. (July 2011). Inclusion and Diversity in Work Groups: A Review and Model for Future Research. Journal of Management, 37:4, 1262–89. 32 Taylor Cox, Jr. and Ruby L. Beale. (1997). Developing Competency to Manage Diversity (San Francisco: Berrett-Koehler Publishers, Inc.), p. 2. 33 Gail Robinson and Kathleen Dechant. (1997). Building a Business Case for Diversity. Academy of Management Executive, 11:3, 21–31. 34 American Express, https://www.americanexpress.com/gift-cards (accessed 5 December 2013). 35 Robinson and Dechant. Building a Business Case for Diversity. 36 Ibid. 37 Quoted in Carol Hymowitz. (14 June 2007). Coaching Men on Mentoring Women is Ernst & Young Partner’s Mission. The Wall Street Journal Online, http://online.wsj.com/article/SB118167178575132768 search.html (accessed 9 July 2007). 38 Norma Carr-Ruffino. (1996). Managing Diversity: People Skills for a Multicultural Workplace (Tucson, AZ: Thomson Executive Press), p. 92. 39 Reported in Roy Harris. (May 2001). The Illusion of Inclusion. CFO, 42–50. 40 Carr-Ruffino, Managing Diversity, pp. 98–9. 41 Cox and Beale. Developing Competency to Manage Diversity. p. 79. 42 Ibid, pp. 80–1. 43 Loriann Roberson and Carol T. Kulik. (May 2007). Stereotype Threat at Work. Academy of Management Perspectives, 21:2, 25–7. 44 Robert Doktor, Rosalie Tung and Mary Ann von Glinow. (1991) Future Directions for Management Theory Development. Academy of Management Review, 16, 362–5; and Mary Munter. (May–June 1993). Cross-Cultural Communication for Managers. Business Horizons, 69–78. 45 Renee Blank and Sandra Slipp. (September 1994). The White Male: An Endangered Species? Management Review, 27–32; Michael S. Kimmel. (November–December 1993). What Do Men Want? Harvard Business

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Review, 50–63; and Sharon Nelton. (June 1995). Nurturing Diversity. Nation’s Business, 25–7. 46 Prince. Doing Diversity. 47 Hyatt website, http://www.hyattdiversity.com/hyatt-in-action (accessed 12 November 2013). 48 Georges Desvaux, Sandrine Devillard-Hoellinger and Mary C. Meaney. (September 2008). A Business Case for Women. The McKinsey Quarterly: The Online Journal of McKinsey & Co., http://www.mckinseyquarterly .com/A_business_case_for_women_2192 (accessed 17 June 2010). 49 Steven Greenhouse. (3 June 2010). Report Warned Wal-Mart of Risks Before Bias Suit. The New York Times, http://www.nytimes.com/2010/06/04/ business/04lawsuit.html (accessed 4 June 2010). 50 Jane Hyun. (Spring 2012). Leadership Principles for Capitalizing on Culturally Diverse Teams: The Bamboo Ceiling Revisited. Leader to Leader, 14–19. 51 Jenny M. Hoobler, Grace Lemmon and Sandy J. Wayne. (2011). Women’s Underrepresentation in Upper Management: New Insights on a Persistent Problem. Organizational Dynamics, 40, 151–6. 52 Ken Auletta. (11 and 18 July 2011). A Woman’s Place. The New Yorker, 55–63. 53 Peggy Klaus. (9 July 2011). Don’t Fret. Just Ask for What You Need. The New York Times, http://www.nytimes.com/2011/07/10/jobs/10pre.html (accessed 8 July 2012). 54 John Bussey. (18 May 2012). How Women Can Get Ahead: Advice from Female CEOs. The Wall Street Journal Online, http://online.wsj.com/article/ SB10001424052702303879604577410520511235252.html (accessed 8 July 2012). 55 Marie-Helene Budworth and Sara L. Mann. (2010). Becoming a Leader: The Challenge of Modesty for Women. Journal of Management Development, 29:2, 177–86. 56 Carol Kinsey Goman. (August 2010). Body Language. Leadership Excellence, 9. 57 Hewlett, S. A. and Luce, C. B. (March 2005). Off-Ramps and On-Ramps; Keeping Talented Women on the Road to Success. Harvard Business Review, 43–54. 58 Belkin, L. (26 October 2003). The Opt-Out Revolution. The New York Times Magazine, 43–7, 58. 59 Byrne, J. (February 2004). The Price of Balance. Fast Company; Tischler, L. (February 2004). Where Are the Women? Fast Company, 52–60; Sellers, P. (13 October 2003). Power: Do Women Really Want It? Fortune, 80–100. 60 Prince, C. J. (Second Quarter 2004). Media Myths: The Truth About the Opt-Out Hype. NAFE Magazine, 14–18; Sellers. Power: Do Women Really Want It? 61 Yang, J. L. (14 November 2005). Goodbye to All That. Fortune, 169–70. 62 Wellington, S., Kropf, M. B. and Gerkovich, P. R. (June 2003). What’s Holding Women Back? Harvard Business Review, 18–19. 63 (Summer 2003). The Leader’s Edge/Executive Women Research 2002 Survey, in Why Women Leave. Executive Female, 4. 64 Jardins, J. D. (May 2005). I Am Woman (I Think). Fast Company, 25–6; Reinhold, B. (Summer 2005). Smashing Glass Ceilings: Why Women Still Find It Tough to Advance to the Executive Suite. Journal of Organizational Excellence, 43–55; Eagly, A. H. and Carli, L. L. (2003). The Female Leadership Advantage: An Evaluation of the Evidence. The Leadership Quarterly, 14, 807–34. 65 Deutsch, C. H. (2 May 2005). Behind the Exodus of Executive Women: Boredom. USA Today. 66 Ragins, B. R. (1989). Barriers to Mentoring: The Female Manager’s Dilemma. Human Relations, 42:1, 1–22; Soloman, C. (1990). Careers under Glass. Personnel Journal, 69:4, 96–105. 67 Reinhold. Smashing Glass Ceilings: Why Women Still Find It Tough to Advance to the Executive Suite; Eagly and Carli. The Female Leadership Advantage: An Evaluation of the Evidence; Jones, D. (30 December 2003).

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2003: Year of the Woman Among the Fortune 500? USA Today, 1B; Sharpe, R. (20 November 2002). As Leaders, Women Rule. BusinessWeek, 75–84; Helgesen, S. (1990), The Female Advantage: Women’s Ways of Leadership (New York: Doubleday Currency). 68 Conlin, M. (26 May 2003). The New Gender Gap. BusinessWeek, 74–82. 69 Bartol, K. M., Martin, D. C. and Kromkowski, J. A. (2003). Leadership and the Glass Ceiling: Gender and Ethnic Group Influences on Leader Behaviors at Middle and Executive Managerial Levels. The Journal of Leadership and Organizational Studies, 9:3, 8–19; Sharpe. As Leaders, Women Rule; Bass, B. M. and Avolio, B. J. (Winter 1994). Shatter the Glass Ceiling: Women May Make Better Managers. Human Resource Management, 33:4, 549–60. 70 J. Zenger and J. Folkman. (15 March 2012). Are Women Better Leaders Than Men? Harvard Business Review. 71 Frink, D. D., Robinson, R. K., Reithel, B., Arthur, M. M., Ammeter, A. P., Ferris, G. R., Kaplan, D. M. and Morrisette, H. S. (March 2003). Gender Demography and Organization Performance: A Two-Study Investigation with Convergence. Group & Organization Management, 28:1, 127–47; Reinhold, B. (Summer 2005). Smashing Glass Ceilings: Why Women Still Find It Tough to Advance to the Executive Suite. Journal of Organizational Excellence, 43–55. 72 Smith, L. (13 October 2003). The Business Case for Diversity. In The Diversity Factor. Fortune, S1–S12. 73 Gingrich, B. (Winter 2000). Individual and Organizational Accountabilities: Reducing Stereotypes and Prejudice within the Workplace. Diversity Factor, 8:2, 14–20. 74 Das, S. (26 February 2005). Disability not always an obstacle to work. The Age. 75 Wellner, A. S. (October 2005). The Disability Advantage. Inc., 29–31. 76 Australian Bureau of Statistics. Disability – Education and Employment, http://www.abs.gov.au/ausstats/[email protected]/Lookup/E82EBA276AB693E5CA2 57C21000E5013?opendocument (accessed 12 November 2013). 77 Australian Bureau of Statistics. Disability, Ageing and Carers, Australia: Summary of Findings, 2012, http://www.abs.gov.au/ausstats/[email protected]/ Lookup/A813E50F4C45A338CA257C21000E4F36?opendocument (accessed 12 November 2013); http://www.and.org.au/news.php/31/40billion-economic-boost-predicted-if-more-people-with-disability-employed (accessed 12 November 2013). 78 PwC. (2011). Disability Expectations: Investing in a better life, a stronger Australia. p. 3, http://www.pwc.com.au/industry/government/assets/disabilityin-australia.pdf (accessed 13 November 2013); Graffam, J., Shinkfield, A., Smith, K. and Polzin, U. (2002). Employer benefits and costs of employing people with disability. Journal of Vocational Rehabilitation, 17, 251 cited in Australian Network on Disability. $40 Billion Economic Boost Predicted if More People With Disability Employed, http://www.and.org.au/news. php/31/40-billion-economic-boost-predicted-if-more-people-with-disabilityemployed (accessed 13 November 2013). 79 Richard L. Daft. (2008). The Leadership Experience (Cincinnati, OH: Cengage Learning), p. 340.

Cour seMate

80 Michael L. Wheeler. (1995). Diversity: Business Rationale and Strategies. The Conference Board, Report No. 1130-95-RR, 25. 81 Lublin, J. S. (4 August 1992). Companies Use Cross-Cultural Training to Help Their Employees Adjust Abroad. The Wall Street Journal, B1, B9. 82 Mercedes Martin and Billy Vaughn. (25 October 2010). Cultural Competence: The Nuts & Bolts of Diversity & Inclusion. Diversity Officer Magazine, http://diversityofficermagazine.com/uncategorized/culturalcompetence-the-nuts-bolts-of-diversity-inclusion/ (accessed 15 October 2012). 83 Ann M. Morrison. (1992). The New Leaders: Guidelines on Leadership Diversity in America (San Francisco: Jossey-Bass Publishers), p. 235. 84 Wheeler. Diversity: Business Rationale and Strategies. 85 Morrison, The New Leaders. 86 (3 June 2001). Impact of Diversity Initiatives on the Bottom Line: A SHRM Survey of the Fortune 1000. In Keeping Your Edge: Managing a Diverse Corporate Culture. Special advertising section produced in association with the Society for Human Resource Management, Fortune, S12–S14. 87 Diversity in an Affiliated Company. Cited in Vanessa J. Weaver. (10 September 2001). Winning with Diversity. BusinessWeek. 88 Melanie Trottman. (14 November 2005). A Helping Hand. The Wall Street Journal; B. Ragins. (1989). Barriers to Mentoring: The Female Manager’s Dilemma. Human Relations, 42:1, 1–22; and Belle Rose Ragins, Bickley Townsend and Mary Mattis. (1998). Gender Gap in the Executive Suite: CEOs and Female Executives Report on Breaking the Glass Ceiling. Academy of Management Executive, 12:1, 28–42. 89 David A. Thomas. (April 2001). The Truth About Mentoring Minorities – Race Matters. Harvard Business Review, 99–107. 90 Mary Zey. (January 1988). A Mentor for All. Personnel Journal, 46–51. 91 Sexual Harassment: Vanderbilt University Policy. (Nashville, TN: Vanderbilt University, 1993). 92 Thompson, R. (Winter 2002). Sexual Harassment: It Doesn’t Go with the Territory. Horizons, 15:3, 22–6. 93 Joseph J. Distefano and Martha L. Maznevski. (Summer 2000). Creating Value with Diverse Teams in Global Management. Organizational Dynamics, 29:1, 45–63; and Annie Finnigan. (April 2001). Different Strokes. Working Woman, 42–48. 94 W. E. Watson, K. Kumar and L. K. Michaelsen. (1993). Cultural Diversity’s Impact on Interaction Process and Performance: Comparing Homogeneous and Diverse Task Groups. Academy of Management Journal, 36, 590–602; Robinson and Dechant. Building a Business Case for Diversity; and D. A. Thomas and R. J. Ely. (September–October 1996). Making Differences Matter: A New Paradigm for Managing Diversity. Harvard Business Review, 79–90. 95 See Distefano and Maznevski, ‘Creating Value with Diverse Teams’ for a discussion of the advantages of multicultural teams. 96 Watson, Kumar and Michaelsen. Cultural Diversity’s Impact on Interaction Process and Performance.

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ test your understanding of managing diversity by taking the revision quiz ➜ use the interactive flashcards to revise relevant key terms and their definitions ➜ download the audio summary for on-the-go review.

13: Managing diversity

G e n e r a l M o t o r s Pa r t F o u r : O r g a n i s i n g Diversity equals opportunity at General Motors William ‘Billy’ Durant and Henry Ford were the celebrated founders of the two greatest automobile companies in America’s history: General Motors (GM) and Ford Motor Company. Ford was the famous inventor who introduced the Model T, the world’s first affordable car. Durant was an entrepreneur whose Flint, Michigan carriage business manufactured a variety of luxury models and farm wagons for diverse customers. Although both men were pioneers of the auto industry, their approaches could not have been more different. Whereas Ford remained focused on one brand and one vehicle, Durant dreamed of a whole family of car companies, each producing different models for different kinds of consumers and needs. Not satisfied owning only GM Buick in 1908, Durant proceeded to acquire Oldsmobile, Cadillac and Oakland Motor Car Company. (Pontiac), among others, bringing them under one roof alongside Chevrolet, which he co-founded on the side. The story of William Durant is a powerful metaphor for the spirit of diversity that infuses the work and culture of GM and its subsidiary, Holden Australia, today. In the global marketplace, managers interact with people of different cultures, languages, beliefs and values. Recognising diversity, and the unique ways in which people with different backgrounds interact and communicate, is key to success in the international arena. As GM celebrates 100 years of auto manufacturing greatness, and with all its challenges of survival, competition and profitability, its workforce is increasingly made up of people of all ethnicities and walks of life. By promoting a workforce that is as diverse as its customer base, GM brings a broad range of ideas and voices to bear on tough business challenges. ‘By valuing and respecting differences and similarities in the workplace, we will be in a better position to win in the marketplace,’ said Rod Gillum, vice president of corporate responsibility and diversity at GM. ‘It is our goal to recruit and retain diverse talent that reflects our global customers and to create an environment where everyone can fully contribute in creating great GM products and services.’ The top automaker has made great strides toward Gillum’s goal. DiversityInc magazine ranks GM among its Top 50 Companies for Diversity. The magazine writes that GM shows ‘unbiased retention’ in hiring people of all races, ethnicities and gender – and at all levels of the organisation. To appear in the magazine’s rankings, companies must demonstrate a commitment to diversity in four areas: CEO commitment, human capital, organisational communications and supplier diversity.

Part 4

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Con tinuing Cultivating a broad multinational case workforce means eliminating glass ceilings that discourage groups from participating fully in the company. Edward T. Welburn is GM’s vice president of global design, heading up a multinational division with 11 design centres around the world, including one in Australia. Appointed in 2005, Welburn is the sixth person to hold this position, and the first African-American. Under his leadership, GM unified its design efforts worldwide by establishing coordinated collaboration between 1900 designers in eight countries. The results speak for themselves. Whether it’s the sleek luxury of the Cadillac CTS, the high tech GM/Holden Volt or the retrospective cool of the 2010 Chevy Camaro, GM’s most exciting new concepts are developing rapidly under Welburn’s watchful eye. Hired by GM in 1972, Welburn appears to have been born for the job. ‘All I ever wanted to do was design cars,’ the design chief says. Yet for any diversity initiative to thrive in an organisation, it must have support all the way to the top. Previous CEO Rick Wagoner and new CEO Mary Barra understand the challenges of the new millennium as well as diversity’s role in meeting those challenges. ‘At General Motors, we know that to succeed in today’s global marketplace, we need a diverse workforce, one that brings together a wide range of talents, ideas, experiences and perspectives.’ At GM’s Holden division in Australia, the industry and company has not been as successful as it wanted to be in promoting women and minority people into senior production and managerial roles. Many observers suggested that the automotive sector was ‘masculine-oriented’ and that while ethnic diversity was achieved on the factory floor, it was not so well achieved in the technical, professional and managerial ranks. Some solid progress was finally being made when the company announced its plant closures in 2013. In 2012 Holden was named as Employer of Choice for Women, for the fifth time, by the Australian government’s Equal Opportunity for Women in the Workplace Agency (EOWA). This prestigious award recognised that progress had been made in movement towards gender pay equity, increased paid parental leave, workplace flexibility and leadership development on diversity. Yet by 2012 the achievements were cited as ‘women account for almost 13 per cent of Holden’s total workforce, 20 per cent of the salaried workforce and 15 per cent of the leadership group’.

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Q ue s t i ons 1 What do you think are the most compelling advantages of diversity presented here? 2 What challenges do managers such as in Holden face in creating a diverse workplace, and how might they respond to these challenges?

4 Holden won the 2013 award given by the Australian Human Resources Institute for Indigenous Employment: what is the business reason for such efforts at Holden Australia? 5 Evaluate Holden’s recent diversity-related achievements.

3 Do you think that Holden’s encouragement of employee development focused on women and minority employees will lead to a culture of diversity and cooperation? Explain. Sources: http://media.gm.com/media/au/en/holden/news.detail.html/content/Pages/news/au/en/2012/Mar/0313_HoldenachievesemployerofChoiceforWomen2012.html; http://www.detnews.com (accessed 13 October 2008); David Phillips. (16 September 2008). Legacy of Innovation. The Detroit News, http://www.detnews.com (accessed 15 October 2008); General Motors. (February 2007). African Americans Take the Driver’s Seat in GM Product Development. The Inside Scoop, 1:2, http://www.gmdynamic.com/newsletter/diversity/ feb_07/feb-stry1.html (accessed 4 October 2008); Katie Merx. (1 January 2008). GM Turns 100 with Focus on Future. USA Today, http://www.usatoday.com/money/autos/2008-0101-gm-birthday_N.htm (accessed 13 October 2008); (2 June 2008). 2008 DiversityInc Top 50 Companies for Diversity: General Motors. DiversityInc, http://www.diversityinc .com/public/3335.cfm (accessed 13 October 2008); General Motors. (June 2008). Leadership from a Design Perspective – GM Design Chief Addresses Entrepreneurs’ Conference. The Inside Scoop, 2:6, http://www.gmdynamic.com/newsletter/diversity/june_08/story2.html (accessed 14 October 2008); Senior Leadership Group: Edward T. Welburn Jr., GM Vice President, Global Design. General Motors website, http://www.gm.com/corporate/investor_information/corp_gov/bios/welburn.jsp (accessed 14 October 2008).

Chapter 14

Individual behaviour in organisations

Chapter 15 Leading in organisations Chapter 16

MOTIVATING EMPLOYEES

Chapter 17

Communication in organisations

Chapter 18 Teamwork in organisations

Par t five leading

Some would say the most important factor in

achieving success is good leadership, and in this regard, sporting teams and business organisations are remarkably similar. A sporting team has a captain who calls the shots and dictates tactics in real time, and behind the scenes there is a coach, or perhaps a whole group of coaches and advisers. An organisation in the business world has a managing director, usually known as the CEO (chief executive officer), who makes decisions, dictates tactics and allocates resources just as the captain of a cricket, netball or football team does. The CEO calls the shots in real time, just as a sporting team captain does. And just as a group of advisers helps the sports captain, a group of advisers known as the board of directors, led by the company chairperson, advises or directs the CEO on actions and decisions. Great sporting leaders such as Sir Donald Bradman, Dawn Fraser, Richard Hadlee, Ian Thorpe and Cathy Freeman inspire through ‘leading from the front’, with their own personal achievements being at a very high level. So do great business executives. Without good leadership, motivation is low within the team and outcomes are relatively poor, whether it is a

sporting team or a work team. Dawn Fraser provided inspirational leadership to elite sportsmen and women for decades, even in sports that had no relation to swimming. Muhammad Ali became an inspirational global sporting legend. Australian (and indeed all) top tennis players still look up to Rod Laver and his achievements, even though it is decades since they occurred. Managers can also be more than administrators – like their sporting counterparts, they can be inspirational leaders. They bring out the best in themselves and others, and lead everyone to superior performance. In the world’s best companies, all employees display leadership behaviours. Although a manager’s job includes issuing directives, leadership is not simply ordering people – go here, do that. A leader must also guide the culture and spirit of a company or business. A manager must lead with ideas and be an embodiment of those ideas: a cultural leader. In Part 5, you will learn about behaviour in organisations, the ways leadership, motivation and communications can be powerful influences on performance, and the importance of teamwork in today’s competitive world. 555

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Explain why understanding yourself is essential for

6 Define the four components of emotional

2 Define attitudes and discuss the importance of

7 Outline a step-by-step system for managing

3 Describe the perception process and explain

8 Explain the difference between challenge stress and

4 Define major personality traits and describe how

9 Identify ways individuals and organisations can

being a good manager, and describe two methods for enhancing self-awareness. work-related attitudes. perceptual distortions.

personality can influence workplace attitudes and behaviours.

intelligence and explain why they are important for today’s managers. yourself and your time. threat stress.

manage stress to improve employee health, satisfaction and productivity.

5 Identify positive and negative emotions and describe how emotions affect behaviour.

C h a p t e r 14

Individual behaviour in organisations

Chapter outline ➜ Understanding yourself and others

➜ Emotions

➜ Attitudes

➜ Emotional intelligence ➜ Managing yourself

The value of knowing yourself

High-performance work attitudes Conflicts among attitudes

➜ Perception ➜ Attributions ➜ Personality and behaviour

Personality traits Attitudes and behaviour influenced by personality Problem-solving styles and the Myers-Briggs Type Indicator

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Positive and negative emotions

Basic principles for self-management A step-by-step guide for managing your time

➜ Stress and stress management

Challenge stress and threat stress Type A and Type B behaviour Causes of work stress Innovative responses to stress management

➜ Sustainability and organisational behaviour

New Manager Self-test Are you self-confident? Self-confidence is the foundation for many behaviours of a new manager. To learn something about your level of self-confidence, answer the following questions. Please answer whether each item is Mostly true or Mostly false for you. Mostly true

Mostly false

1 I have lots of confidence in my decisions. 2  I would like to change some things about myself. 3  I am satisfied with my appearance and personality. 4  I would be nervous about meeting important people. 5 I come across as a positive person. 6 I sometimes think of myself as a failure. 7 I am able to do things as well as most people. 8  I find it difficult to believe nice things someone says about me. Scoring and interpretation: Many good things come from self-confidence. If a new manager lacks self-confidence, he or she is more likely to avoid difficult decisions and confrontations, and may tend to over-control subordinates, which is called micromanaging. A lack of self-confidence also leads to less sharing of information and less time hiring and developing capable people. Self-confident managers, by contrast, can more easily delegate responsibility, take risks, give credit to others, confront problems and assert themselves for the good of their team. Give yourself one point for each odd-numbered item above marked as Mostly true and one point for each even-numbered item marked Mostly false. If you scored three or less, your self-confidence may not be very high. You might want to practise new behaviour in problematic areas to develop greater confidence. A score of 6 or above suggests a higher level of self-confidence and a solid foundation on which to begin your career as a new manager.

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Management Challenge

Running a company of any size is not easy, as Peter Dryen knows well. Having taken over as managing director of Dryen Australia from his father, who founded this importing and manufacturing firm, Peter found he had big shoes to fill. Among his many challenges, Peter and his co-director, Neil Samuel, faced challenging decisions in numerous areas. Issues included attracting and retaining good sales staff, managing the supply chain of products sourced in China and Pakistan, and, perhaps most importantly, being competitive in the prices, designs and service levels of the bed linen and related products that Dryen Australia supplies to large retailers such as Target. And, of course, the whole idea of the business was to run at a profit and provide a return on the money invested in it, principally by Peter’s father, George, who took over the company in 1940. The effectiveness of Peter’s leadership in making key decisions and getting all 50 people who worked in the business to work effectively and in a coordinated fashion was critical to achieving organisational success and profits. There were always problems. Some staff underperformed. Sometimes customers made unreasonable demands. Sometimes suppliers sent product that was poorly made and had to be returned, which affected service levels to clients. The emergence of e-commerce made it even easier for customers in parts of the business to ‘disintermediate’ (meaning ‘go around

and hence eliminate’) Dryen Australia by purchasing their bed linen directly from foreign suppliers. An example of a particular problem was the unprofessional behaviour of one of Peter’s staff in dealing with colleagues in the workplace and with customers. Peter also believed that the business needed to expand its sales to achieve scale efficiencies, but he was hesitant to broaden the range of products too widely for fear of losing the focus that the business had traditionally had on its core bed-linen products. And all this was happening as Peter took over control and leadership from his father in an industry where everyone was watching his performance and judging whether he was ‘up to it’, in terms of running an important business. A big challenge for Peter was to encourage staff to excel in their efforts and achievements in the company, and to stay competitive in being able to afford to attract and keep high calibre people, such as top designers and sales staff. Source: Dryen website, http://www.dryen.com.au/images/ companyprofileweb.pdf (accessed 14 December 2013).

Question If you were Peter Dryen, what would you do to solve such diverse challenges as unprofessional behaviour by staff, creating and sustaining a high performance culture, providing excellent customer service, managing demanding clients and the need for expansion?

The same challenges faced by Peter Dryen faced Frank Cicutto, on a much larger scale, when he took over the helm of the National Australia Bank (NAB) from Don Argus in 1999. Don Argus had led that organisation to record profits, internationalisation, strong growth and a position of clear industry leadership. His were particularly big ‘shoes to fill’, and banking was in the middle of a transformation in cost structures, the introduction of transaction fees, the advent of Internet banking, major changes in regulatory frameworks, and intense rivalry between traditional and new, low-cost players. Executive leadership is about ‘where the buck stops’ – the point at which the ultimate responsibility lies for achieving the organisation’s goals including business strategy, staffing and motivation, technology, product, service, supply and customer issues. Getting all this right can lead to sustainable profit streams, but getting them wrong, even if only a little wrong, can lead to disaster, with loss of profits, customers and jobs. And it is not just a case of getting some decisions and strategies right every year or few months, and then relaxing. Every day, CEOs make key decisions that have both short- and long-term effects. And being CEO is like being in a fishbowl; for a large business such as a major bank, the media and financial analysts watch the CEO’s every move. There are daily press articles, which are never afraid to severely criticise poor performance, and even decisions that seemed eminently sensible when they were made can be reanalysed with the wisdom that only hindsight can provide. Other stakeholders apply pressure, as well: consumers may resist change and extra charges, and shareholders may seek more profits at annual meetings. At the NAB, ultimately, these challenges proved to be too much: the shoes were indeed too big to fill, and some major strategic missteps caused huge financial losses, resulting in the resignation of the CEO, Board Chairman and numerous others.

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management in pr actice

Getting the right fit One of the most important parts of a manager’s job is getting the right person–job fit. Bruce M. Hubby, chairman and founder of Professional Dynamic Programs, is a consultant who has designed surveys to help managers determine which candidates are right for which jobs. In the past two decades, he has helped more than 5000 companies match people to jobs, and jobs to people. Here are some of his tips:

➜➜ People do best when they can use their natural strengths. Look for employees’ strongest traits and create an environment that enhances them. When people act naturally, they are the most productive; when they are forced to act against their nature, they become stressed and less productive.

➜➜ Learn which of the four basic traits is most prominent in a person. Hubby identifies dominance, extroversion, patience and conformity as the four basic personality traits that describe most people. Dominant people are innovative and confident, and they like to be in control. Extroverted

people are outgoing and social. Patient people know how to pace themselves; they are focused but adaptable. Conforming people have a strong sense of right and wrong; they are structured and quality-oriented. Learning which basic trait is most prevalent (and how the other three factor in) will help managers determine who is right for a job.

➜➜ Resist the urge to hire someone who is exactly like you. We naturally gravitate towards people who are like us, and so a manager may hire someone who has the same natural strengths or personality traits, even if those strengths and traits are not right for the job.

➜➜ Reshape the job, not the person. If an employee is struggling with a job because of poor person–job fit, it is much easier to reshape the job – or move the employee to another job – than it is to reshape the employee’s personality. Usually, there is no need to let that worker go.

Source: Beardsley, D. (1998). These Tests Will Give You Fits. Fast Company, November, 88, 90.

IBM’s first female CEO, Virginia M. Rometty, says she learned an important lesson early in her career. Rometty was offered a big job, but she felt that she didn’t have enough experience. So, she told the recruiter she needed time to think it over. Later, she regretted this decision. The lesson Rometty learned, she says, was that ‘you have to be very confident, even though you’re so self-critical inside about what it is you may or may not know’. Managers can accomplish significant results – and advance in their careers – only when they have the self-confidence to take risks and push beyond their comfort zones. Rometty spent 30 years at IBM, rising through the ranks until being named CEO in 2011.1 Naturally, when people take risks, they sometimes fail, but many people who have accomplished great outcomes give credit to their previous failures for driving them to succeed. Consider billionaire author J. K. Rowling, whose first Harry Potter book was rejected by 12 publishers before Bloomsbury bought it for the equivalent of US$4000. In her commencement speech to the 2008 graduating class at Harvard University, Rowling recounted how setbacks and rejection had not discouraged her, but simply made her stronger.2 There are many talented individuals who, unlike J. K. Rowling and Virginia Rometty, experience one defeat or discouragement and never try again.3 What makes the difference? Psychologists suggest it comes down to a characteristic called self-efficacy. It is one of the many ways in which individuals differ, along with their personality traits, attitudes,

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self-efficacy An individual’s strong belief that he or she can accomplish a specific task or outcome successfully. self-confidence A general assurance in one’s own ideas, judgement and capabilities.

emotions and values. Self-efficacy is an individual’s strong belief that he or she can accomplish a specific task or outcome successfully.4 Self-efficacy is one dimension of self-confidence, which refers to general assurance in one’s own ideas, judgement and capabilities. Personality traits, attitudes, emotions and characteristics such as self-confidence and self-efficacy influence how people behave, including how they handle work situations and relate to others.

Understanding yourself and others Having insight into why people behave the way they do is a part of good management. People bring their individual differences to work each day, and these differences influence how they interpret assignments, whether they like to be told what to do, how they handle challenges and how they interact with others. By increasing their understanding of individual differences, as described throughout this chapter, managers can learn how to get the best out of each employee and more effectively lead people through workplace challenges. However, the first requirement for being a good manager is understanding oneself. Managers’ characteristics and behaviour can profoundly affect the workplace and influence employee motivation, morale and job performance.

Th e valu e o f kn owin g you rself

self-awareness Being aware of the internal aspects of one’s nature, such as personality traits, beliefs, emotions, attitudes and perceptions.

A survey of 75 members of the Stanford Graduate School of Business’s Advisory Council revealed the nearly unanimous answer to a question about the most important capability for leaders to develop: self-awareness.5 Self-awareness means being aware of the internal aspects of one’s nature, such as personality traits, beliefs, emotions, attitudes and perceptions, and appreciating how your patterns affect other people. Most management experts agree that a primary characteristic of effective leaders is that they know who they are and what they stand for.6 When managers deeply understand themselves, they remain grounded and constant. People know what to expect from them. As one employee put it, ‘[I]t’s like they have a stick down through the center of them that’s rooted in the ground.’7 Yet developing self-awareness is easier said than done. Consider Charlotte Beers, former chairwoman and CEO of Ogilvy & Mather Worldwide, who now conducts seminars for women leaders. When Beers first became a management supervisor, she considered herself to be a friendly, approachable, easy-going leader. She was shocked when a friend told her that one of her colleagues described her management style as ‘menacing’. That comment was devastating to Beers because it was the exact opposite of the way she thought of herself.8 Many of us, like Charlotte Beers, might be surprised to find out what others honestly think about us. Most of us don’t take the time to think about who we really are or the effect our patterns of thought and behaviour have on others. To be a good manager, such self-reflection is essential. There are a number of ways people can increase their understanding of themselves. Two important approaches to enhancing self-awareness, as shown in Exhibit 14.1, are soliciting feedback from others and using self-assessments.

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Exhibit 14.1 Two keys to self-awareness

Soliciting feedback

Greater self-awareness

Using self-assessment

Solicit i ng feedb ack Just as we use a mirror in the morning to shave or fix our hair, we can use other people as a mirror to see ourselves more clearly.9 A manager might consider him- or herself to be patient and understanding, but their employees may see that they are easily irritated and unsympathetic. Doug Rauch, retired president of American specialty grocery store Trader Joe’s, recognised that his micromanaging was hurting the company when a brave senior buyer pulled him aside and said ‘You’re driving us crazy. You’ve got to back off.’ Rauch went to the team and admitted his problem, told them he was a ‘recovering controlaholic’, and said he ‘needed them to give me regular feedback’ so he didn’t fall off the wagon.10 When we go through life without feedback, we’re like the balding man who sweeps thin strands of hair across his scalp and thinks no one notices. Seeking feedback to enhance self-awareness can improve performance and job satisfaction for both managers and employees.11 We all have illusions about ourselves, so we need help from others to get a clear picture of who we are.

Se lf - ass ess ment Another highly valuable way to increase self-awareness is self-assessment, which uses self-inquiry and reflection to gain insights into oneself from the results of scores on self-assessment instruments such as those throughout this textbook. By completing these assessments as honestly as possible, you can analyse your scores and increase your understanding of various aspects of yourself. Self-assessment also means regularly reflecting on our thoughts and feelings. Introspection – reflecting on our experiences, examining the effects of our actions and behaviour, looking at the consequences for ourselves and others, and asking, ‘What can I learn?’ – is a valuable use of time that too many managers overlook. Some people keep a journal, meditate, or just sit quietly and think through their day.12

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➜➜ Individual differences among people, including personality traits, attitudes, emotions and characteristics such as self-confidence and self-efficacy, influence how people relate to others and behave at work. ➜➜ Self-efficacy is an individual’s strong belief that he or she can successfully

of the internal aspects of one’s nature, such as personality traits, beliefs, emotions, attitudes and perceptions, and appreciating how your patterns affect other people.

accomplish a specific task or outcome. ➜➜ Self-efficacy is related to selfconfidence, which means general assurance in one’s own ideas, judgement and capabilities. ➜➜ Understanding oneself is essential for being a good manager, but selfawareness is not easy to achieve. Selfawareness means being conscious

remember this

➜➜ Two valuable ways to enhance selfawareness are soliciting feedback and self-assessment, including introspection.

Attitudes

attitude

A positive attitude towards work is likely to drive high levels of productivity, cooperation, teamwork, problem solving and commitment to continuous improvement. A key challenge for all managers is to achieve this positive attitude across their workforce.

Most students have probably heard the expression that someone ‘has an attitude problem’, which means some consistent quality about the person affects his or her behaviour in a negative way. An employee with an attitude problem might be hard to get along with, might constantly gripe and cause problems, and might persistently resist new ideas. We all seem to know intuitively what an attitude is, but we do not consciously think about how strongly attitudes affect our behaviour. Defined formally, an attitude is an evaluation – either positive or negative – that predisposes a person to act in a certain way. Understanding attitudes is important to managers, because attitudes determine how people perceive the work environment, interact with others and behave on the job. Emerging research is revealing the importance of positive attitudes to both individual and organisational success. For example, studies have found that the characteristic most common to top executives is an optimistic attitude. People rise to the top because they have the ability to see opportunities where others see problems and can instil in others a sense of hope and possibility for the future.13 Managers strive to develop and reinforce positive attitudes among all employees, because happy, positive people are healthier, more effective and more productive.14

Source: iStockphoto/Yuri

attitude A cognitive and affective evaluation that predisposes a person to act in a certain way.

H i gh - perfo r m an ce wo rk at titu d es The attitudes of most interest to managers are those related to work, especially attitudes that influence how well people perform on the job. Two attitudes that might relate to high performance are satisfaction with one’s job and commitment to the organisation. Exhibit 14.2 illustrates the three components of a positive attitude towards one’s job.

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Cognitive … thoughts …

Take a Moment

Exhibit 14.2 Components of an attitude

‘My job is interesting.’

As a new manager, be mindful of your own attitude and how it affects people who work for you. A positive attitude can go a long way towards helping others feel good about themselves and their work responsibilities. If you want to change employees’ attitudes, don’t underestimate the strength of the emotions.

Affective … feelings … ‘I love my job.’

J ob sat i sfact i on A positive attitude towards one’s job is called job satisfaction, which reflects the degree to which a person finds fulfilment in his or her job. In general, people experience this positive attitude when their work matches their needs and interests, when working conditions and rewards (such as pay) are satisfactory, when they like their co-workers and when they have positive relationships with supervisors. You can take the quiz in Exhibit 14.3 to better understand some of the factors that contribute to job satisfaction.

Behavioural … intention to act … ‘I’m going to get to work early with a smile on my face.’

Attitude:

actio Job satisf

job satisfaction A positive attitude towards one’s job.

Exhibit 14.3 Rate your job satisfaction

Instructions: Think of a job – either a current or previous job – that was important to you, and then answer the following questions with respect to how satisfied you were with that job. Please answer the six questions with a number 1–5 that reflects the extent of your satisfaction. 1 5 Very dissatisfied; 2 5 Dissatisfied;

3 5 Neutral; 4 5 Satisfied;

n

5 5 Very satisfied

1 Overall, how satisfied are you with your job?

1   2   3   4   5

2 How satisfied are you with the opportunities to learn new things?

1   2   3   4   5

3 How satisfied are you with your boss?

1  2  3  4  5

4 How satisfied are you with the people in your work group?

1   2   3   4   5

5 How satisfied are you with the amount of pay you receive?

1   2   3   4   5

6 How satisfied are you with the advancement you are making in the organisation? 1   2   3   4   5 . The Scoring and interpretation: Add up your responses to the six questions to obtain your total score: questions represent various aspects of satisfaction that an employee may experience on a job. If your score is 24 or above, you probably feel satisfied with the job. If your score is 12 or below, you probably do not feel satisfied.  What is your level of performance in your job, and is your performance related to your level of satisfaction? Sources: These questions were adapted from Daniel R. Denison, Corporate Culture and Organizational Effectiveness (New York: John Wiley, 1990); and John D. Cook et al., The Experience of Work: A Compendium and Review of 249 Measures and Their Use (San Diego, CA: Academic Press, 1981).

job satisfaction

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Many managers believe job satisfaction is important because they think satisfied employees will do better work. In fact, research shows that the link between satisfaction and performance is generally small, and is influenced by other factors.15 For example, the importance of satisfaction varies according to the amount of control the employee has; an employee doing routine tasks may produce about the same output no matter how he or she feels about the job. Managers of today’s knowledge workers, however, often rely on job satisfaction to keep motivation and enthusiasm high. They can’t afford to lose talented, highly skilled employees. Managers create the environment that determines whether employees have positive or negative attitudes towards their jobs.16 A related attitude is organisational commitment.

Or gani sat i onal com m itm en t organisational commitment Loyalty to and heavy involvement in one’s organisation. organisational citizenship Work behaviour that goes beyond job requirements and contributes as needed to the organisation’s success.

organisational citizenship

Organisational commitment refers to an employee’s loyalty to and engagement with the organisation. An employee with a high degree of organisational commitment is likely to say we when talking about the company. Such a person likes being a part of the organisation and tries to contribute to its success. People who are committed to the organisation practise organisational citizenship, which refers to the tendency of people to help one another and put in extra effort that goes beyond job requirements to contribute to the organisation’s success. An employee demonstrates organisational citizenship by being helpful to coworkers and customers, doing extra work when necessary, and looking for ways to improve products and procedures. Results of a Towers Perrin study of more than 360 000 employees from 40 companies around the world indicate that companies with highly committed employees perform better.17 Alarmingly, though, another recent survey suggests that commitment levels around the world are relatively low. Only one-fifth of the respondents were categorised as fully engaged; that is, reflecting a high level of commitment. The percentage classified as fully engaged was 29 per cent in the United States, compared to 54 per cent in Mexico, 37 per cent in Brazil and 36 per cent in India. Countries where employees reflect similar or lower levels of commitment than the United States include Canada at 23 per cent, Spain at 19 per cent, Germany at 17 per cent, China at 16 per cent, the United Kingdom at 14 per cent, France at 12 per cent and Japan at only 3 per cent.18 A recent study conducted by Gallup of 141 nations and over 73 500 people, found that, globally, only about 13 per cent of employees were actively engaged in their work, 63 per cent were not engaged (they lacked motivation and were disinclined to invest in discretionary effort towards the firm’s goals) and a startling 24 per cent were actively disengaged, meaning that they were unhappy and unproductive at work. This translates to approximately 900 million people not engaged and 340 million actively disengaged across the globe!19 The news is comparable in Australia, where 24 per cent of employees are reasoned to be engaged in their work. Interestingly Australian soldiers were found to be the most engaged employees with a rate of 50.4 per cent and biotechnology workers were the least engaged on 23.9 per cent.20 Disengaged employees can cost a company in safety incidents, they have higher absenteeism and tend to have lower retention rates than other employees. Quality can also be impacted with a higher incidence of product defects and service failure. In New Zealand it is estimated that disengaged employees cost the economy $7.5 billion a year.21 During the global financial crisis (GFC) many firms were forced to undertake restructuring measures, and sometimes they were not managed well. An outcome of this mismanagement was that employees learned that being a high performer or senior manager did not keep you safe from retrenchment, and as a result, they have responded with an increased suspicion of management.22 So how can a firm ‘win back’ the hearts and minds of employees? Corporate volunteering has been found to improve employee engagement

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Source: iStockphoto/ArtmannWitte

and commitment. Encouraging your staff to volunteer to help out at a homeless shelter or wash animals at a lost dogs’ kennel may just replenish a sense of meaning in an employee’s work contribution and will help the (triple) bottom line. The NAB (http://www.nab.com.au) offers employees the chance to volunteer on company time for two days every year. In 2012 this equated to 17 060 days of service, or $8.9 million in value.23 The NAB encourages employees to share their work-related expertise to help a community or not-for-profit organisation. In this way volunteering employees can see how their skills have a real benefit and can have a lasting impact.24

Exhibit 14.4 Changing attitudes: employees’ respect for management

80 70 Percentage saying employees generally respect management

Source: Adapted from Bernstein, 1998 (citing data from an annual survey of 450 000 employees and managers by the International Survey Research Corporation).

60 50 40

0 91

Survey respondents: Top-level managers Employees 92

93

94

95

96

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Architects and engineers who design and oversee the construction of buildings, bridges and other significant structures receive a special form of job satisfaction: seeing the finished products to which they contributed become enduring outcomes of their work. Pride in achievement contributes substantially to job satisfaction in these professional groups.

97

Year of survey

Innovation in a logistics business Many people would consider a business that stores and transports chemicals to be unexciting and to not present opportunities for innovation. The truth is just the opposite. Even in a business that mostly involves trucks and tanks, a series of innovations which lower cost and improve delivery performance and service have been the hallmark of FBT Transwest and its parent company group. These innovations have included advances in truck design, tanker design and scheduling of operations as well as differentiation from the rest of the industry by installing and maintaining the highest possible standards of safety and environmental performance in an industry that handles extremely dangerous goods such as chemicals and explosives. When CEO Cameron Dunn speaks of the achievements of the business that he runs, FBT Transwest, based in

Innovative Way Melbourne, he always attributes credit for achievements to his staff. He works hard to achieve a sense of staff alignment and commitment to the organisation’s goals. Even though Cameron’s business is not in a glamorous industry by any means Cameron leads from the front and is personally strongly focused on staff well-being, safety and high levels of environmental performance as a means towards long-term business success. In 2013, Mr Dunn and his team have significantly improved all aspects of his business’ performance, from safety, through customer service to profitability and return on investment. This high level of business performance has been achieved in an industry context in which Mr Dunn’s competitors have struggled to survive and turn a profit. Source: FBT Transwest website, http://www.fbttranswest.com.au.

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Trust in management decisions and integrity is one important component of organisational commitment.25 Unfortunately, in recent years, many employees have lost that trust. In America, only 20 per cent of people surveyed by Leadership IQ, a leadership training organisation, said they strongly trust their top management, with 36 per cent reporting a moderate trust level, and 44 per cent saying they either do not trust or strongly distrust their bosses.26 In addition, the survey confirms that trust relates to organisational commitment. According to the study, about 32 per cent of an employee’s desire to stay with a company or leave depends on trust in management. Sadly, most of us don’t need a poll to tell us that the level of trust in business and government leaders is dismal. Managers can promote stronger organisational commitment by being honest and trustworthy in their business dealings, keeping employees informed, giving them a say in decisions, providing the necessary training and other resources that enable them to succeed, treating them fairly, and offering rewards that they value. ‘People in leadership positions simply have not done a good job of earning trust,’ says Doug Harward, president of Training Industry, Inc. ‘Employees have a right to expect that their managers are trustworthy and that they will create stable organisations. Too many of our leaders have violated that trust.’27 Source: iStockphoto/cruphoto

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Pip Marlow began her new role as Managing Director of Microsoft Australia in January 2011, after the previous incumbent, Tracey Fellows was promoted to a regional role based in Singapore. Ms Marlow has held senior roles in Microsoft for 17 years and is focused in her role on Microsoft’s people, customers and channel partners. Microsoft has been a market leader and successful innovator in Australia and beyond for 30 years. Pip aims to continue to position Microsoft’s strategies at the cutting edge of value creation as the National Broadband Network and the Internet cloud technologies grow and mature.

cognitive dissonance A condition in which two attitudes or a behaviour and an attitude conflict.

Co n fli cts a mo n g at titu d es Sometimes a person may discover that his or her attitudes conflict with one another or are not reflected in behaviour. For example, a person’s high level of organisational commitment might conflict with a commitment to family members. If employees routinely work evenings and weekends, their long hours and dedication to the job might conflict with their belief that family ties are important. This conflict can create a state of cognitive dissonance, a psychological discomfort that occurs when individuals recognise inconsistencies in their own attitudes and behaviours.28 The theory of cognitive dissonance, developed by social psychologist Leon Festinger in the 1950s, says that people want to behave in accordance with their attitudes and usually will take corrective action to alleviate the dissonance and achieve balance. In the case of working overtime, people who can control their hours might restructure responsibilities so that they have time for both work and family. In contrast, those who are unable to restructure workloads might develop an unfavourable attitude towards the employer, reducing their organisational commitment. They might resolve their dissonance by saying they would like to spend more time with their kids, but their unreasonable employer demands that they work too many hours.

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➜➜ An attitude is a cognitive and affective evaluation that predisposes a person to act in a certain way.

➜➜ Organisational commitment refers to loyalty to and engagement with one’s work organisation.

➜➜ A positive attitude towards one’s job is called job satisfaction.

➜➜ Organisational citizenship refers to work behaviour that goes beyond job requirements and contributes as needed to the organisation’s success.

➜➜ Surveys suggest that job satisfaction levels are at an all-time low.

Observe Observing information via the senses

Screen Screening the information and selecting what to process

➜➜ A survey found that 32 per cent of an employee’s desire to stay with a company or leave depends on the employee’s trust in management.

remember this

➜➜ Cognitive dissonance is a psychological discomfort that occurs when two attitudes or an attitude and a behaviour conflict.

Organise Organising the selected data into patterns for interpretation and response

Exhibit 14.5 The perception process

Perception Another critical aspect of understanding behaviour is perception. Perception is the cognitive process that people use to make sense out of the environment by selecting, organising and interpreting information from the environment. Because of individual differences in attitudes, personality, values, interests and so forth, people often ‘see’ the same thing in different ways. A class that is boring to one student might be fascinating to another. One student might perceive an assignment to be challenging and stimulating, whereas another might find it a silly waste of time. We can think of perception as a step-by-step process, as shown in Exhibit 14.5. First, we observe information (sensory data) from the environment through our senses: taste, smell, hearing, sight and touch. Next, our mind screens the data and selects only the items we will process further. Third, we organise the selected data into meaningful patterns for interpretation and response. Most differences in perception among people at work are related to how they select and organise sensory data. You can experience differences in perceptual organisation by looking at the visuals in Exhibit 14.6. What do you see in part a of Exhibit 14.6? Most people see this as a dog, but others see only a series of unrelated ink blots. Some people will see the figure in part b as a beautiful young woman while others will see an old one. Now look at part c. How many blocks do you see – six or seven? Some people have to turn the figure upside down before they can see seven blocks. These visuals illustrate how complex perception is.

perception perception The cognitive processes a person uses to make sense out of the environment by selecting, organising and interpreting information.

Exhibit 14.6 Perception – what do you see?

a. Do you see the dog?

b. Old woman or young woman?

c. How many blocks?

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perceptual distortions Errors in perceptual judgement that arise from inaccuracies in any part of the perception process. stereotyping The tendency to assign an individual to a group or broad category and then attribute generalisations about the group to the individual.

Of particular concern in the work environment are perceptual distortions, errors in perceptual judgement that arise from inaccuracies in any part of the perception process. One common perceptual error is stereotyping, the tendency to assign an individual to a group or broad category (e.g. female, black, elderly; or male, white, disabled) and then to attribute widely held generalisations about the group to the individual. Thus, someone meets a new colleague, sees he is in a wheelchair, assigns him to the category ‘physically disabled’, and attributes to this colleague generalisations that she believes about people with disabilities, which may include a belief that he is less able than other co-workers. However, the person’s inability to walk should not be seen as indicative of lesser abilities in other areas. Stereotyping prevents people from truly knowing those they classify in this way. In addition, negative stereotypes prevent talented people from advancing in an organisation and fully contributing their talents to the organisation’s success. The halo effect occurs when the perceiver develops an overall impression of a person or situation based on one characteristic, either favourable or unfavourable. In other words, a halo blinds the perceiver to other characteristics that should be used in generating a more complete assessment. The halo effect can play a significant role in performance appraisal, as we discussed in Chapter 12. For example, a person with an outstanding attendance record may be assessed as responsible, industrious and highly productive; another person with less-than-average attendance may be assessed as a poor performer. Either assessment may be true, but it is the manager’s job to be sure that the assessment is based on complete information about all job-related characteristics, not just his or her preferences for good attendance. How accurate is your perception? Answering the questions in Exhibit 14.7 will give you an idea of whether you allow perceptual distortions to cloud your judgement. Exhibit 14.7 How accurate is your perception?

Instructions: Think about a job that you have held or a project that you have worked on in class or a volunteer organisation. With respect to data or information coming to you, rate whether each statement below is Mostly True or Mostly False for you. Mostly true

Mostly false

1 I look for inconsistencies and seek explanations for them. 2 I generate multiple explanations for available information. 3 I check for omissions, distortions or exaggerations in available information. 4 I make it a point to distinguish facts from opinions. 5 I stay conscious of my own style of approaching problems and how this might affect the way I process information. 6 I am well aware of my own biases and values that influence the way I see people. Scoring and interpretation: Your total score is the number of Mostly True answers to all six questions. A score of 5 or 6 suggests that you are conscious of and make attempts to remove distortions from your perception. A score of 3 or 4 indicates that you make solid effort, and a score of 1 or 2 suggests that you take perception for granted. Look at any individual items where you have marked Mostly False to get an idea of where you might have perceptual weaknesses. What can you do to improve your perception? Source: Adapted from Patricia M. Fandt, Management Skills: Practice and Experience (Minneapolis, MN: West Publishing, 1994), pp. 210–11.

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➜➜ Perception is the cognitive process that people use to make sense out of the environment by selecting, organising and interpreting information.

➜➜ Perceptual distortions are errors in perceptual judgement that result from inaccuracies in any part of the perception process.

➜➜ People often see the same thing in different ways.

➜➜ Stereotyping refers to the tendency to assign an individual to a group or broad category and then

attribute generalisations about the group to the individual.

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➜➜ The halo effect occurs when a perceiver develops an overall impression of a person or situation based on one characteristic, either favourable or unfavourable.

Attributions Among the assessments that people make as part of the perception process are attributions.29 Attributions are judgements about what caused a person’s behaviour – something about the person or something about the situation. People make attributions as an attempt to understand why others behave as they do. An internal attribution says characteristics of the person led to the behaviour. (‘Susan missed the deadline because she’s careless and lazy.’) An external attribution says something about the situation caused the person’s behaviour. (‘Susan missed the deadline because she couldn’t get the information she needed in a timely manner.’) Understanding attributions is important, because attributions influence how a manager will handle a situation. In the case of the missed deadline, a manager who blames it on the employee’s personality will view Susan as the problem, and might give her unfavourable performance reviews and less attention and support. In contrast, a manager who blames the behaviour on the situation might try to prevent such situations in the future, such as by improving horizontal communication mechanisms so that people get the information they need in a timely fashion. People often have biases that they apply when making attributions. When evaluating others, we tend to underestimate the influence of external factors and overestimate the influence of internal factors. This tendency is called the fundamental attribution error. Consider the case of someone being promoted to CEO. Employees, outsiders and the media generally focus on the characteristics of the person that allowed him or her to achieve the promotion. In reality, however, the selection of that person might have been heavily influenced by external factors, such as business conditions creating a need for someone with a strong financial or marketing background at that particular time. Another bias that distorts attributions involves attributions we make about our own behaviour. People tend to overestimate the contribution of internal factors to their successes and overestimate the contribution of external factors to their failures. This tendency, called the self-serving bias, means people give themselves too much credit for what they do well and give external forces too much blame when they fail. Thus, if your manager says you don’t communicate well enough, and you think your manager doesn’t listen well enough, the truth may actually lie somewhere in between. ➜➜ Attributions are judgements about what caused a person’s behaviour – either characteristics of the person or of the situation. ➜➜ An internal attribution says characteristics of the individual

caused the person to behave in a certain way, whereas an external attribution places the cause on aspects of the situation. ➜➜ The fundamental attribution error is a tendency to underestimate the influence of external factors on

attributions Judgements about what caused a person’s behaviour – either characteristics of the person or of the situation.

fundamental attribution error The tendency to underestimate the influence of external factors on another’s behaviour and to overestimate the influence of internal factors. self-serving bias The tendency to overestimate the contribution of internal factors to one’s successes and the contribution of external factors to one’s failures.

another person’s behaviour and to overestimate the influence of internal factors.

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➜➜ The self-serving bias is the tendency to overestimate the contribution of internal factors to one’s successes and the contribution of external factors to one’s failures.

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Innovative Way

eHarmony

Online dating has grown into a half-billion dollar industry in just over 10 years. Personality tests are central to some of these organisations’ strategies, and eHarmony is one of the most comprehensive at pursuing so-called ‘serious’ daters: people who are searching for a lasting relationship. The eHarmony Compatibility Matching System employs an exhaustive 436-question personality survey that is based on founder Neil Clark Warren’s past professional experience and his company’s research into long-lived marriages. Warren, who holds both divinity and clinical psychology degrees, believes the unions most likely to succeed are those between people who share at least 10 of the 29 personality traits eHarmony measures.

Does the approach work? So far, the only company to track relationships it has helped create is eHarmony. Claiming to have helped bring about 43 051 American marriages in one year alone, the company conducted an in-house study it says showed eHarmony couples enjoyed higher levels of marital satisfaction than those who had met through other channels. Further to this, a 2013 analysis of online dating services found that eHarmony ranked first in creating the most online marriages and in measures of marital satisfaction, and had the lowest rates of divorce and separation for couples among all other online and offline meeting places. The site has more than 20 million users worldwide.

Sources: Gottlieb, L. (March 2006). How Do I Love Thee? The Atlantic Monthly, 58–70; Lehmann-Haupt, R. (12 February 2006). Is the Right Chemistry a Click Nearer? The New York Times; Palmeri, C. (20 February 2006). Dr. Warren’s Lonely Hearts Club. BusinessWeek Online, http://www.businessweek.com/mag; eHarmony Ranks #1 for Most Online Marriages and Marital Satisfaction in Groundbreaking Marriage Data Published in Proceedings of the National Academy of Sciences (PNAS), 3 June 2013, http://www.eharmony.com/press-release/57/ (accessed 17 November 2013); John, Emma. (10 July 2011). Online Dating: Computer Says Yes. But Will We Click?, The Observer. http://www.theguardian.com/lifeandstyle/2011/jul/10/online-dating-will-we-click (accessed 17 November 2013); eHarmony, http://www.eharmony.com/blog/ 2009/07/31/behind-the-number-of-eharmony-marriages/ (accessed 10 December 2013).

Personality and behaviour personality The set of characteristics that underlie a relatively stable pattern of behaviour in response to ideas, objects or people in the environment.

personality

Big Five personality factors Dimensions that describe an individual’s extroversion, agreeableness, conscientiousness, emotional stability and openness to experience.

In recent years, many employers have shown heightened interest in matching people’s personalities to the needs of the job and the organisation. An individual’s personality is the set of characteristics that underlie a relatively stable pattern of behaviour in response to ideas, objects or people in the environment. Interestingly, although 71 per cent of human resources professionals surveyed say personality tests can be useful for predicting job related behaviour and organisational fit, the use of such tests has actually declined in recent years. Only 18 per cent reported that their companies use personality tests in hiring and promotion decisions. Part of the reason is that more companies are relying on social media to assess candidates based on what they have to say and show about themselves.30

Perso nalit y tr aits Commonly, people think of personality in terms of traits: the fairly consistent characteristics that a person exhibits. Most managers would consider it useful to try and avoid putting people into close working relationships who are going to have a personality clash; conversely, compatibility among personalities in a work team is usually seen as desirable. Researchers investigated whether any traits stand up to scientific scrutiny. Although investigators examined thousands of traits over the years, their findings fit into five general dimensions that describe personality. These dimensions, often called the ‘Big Five’ personality factors, are illustrated in Exhibit 14.8.31 Each factor may contain a wide range of specific traits. The Big Five personality factors describe an individual’s extroversion, agreeableness, conscientiousness, emotional stability and openness to experience: 1 Extroversion. The degree to which a person is outgoing, sociable, assertive and comfortable with

interpersonal relationships.

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2 Agreeableness. The degree to which a person is able to get along with others by being good-natured,

likable, cooperative, forgiving, understanding and trusting. 3 Conscientiousness. The degree to which a person is focused on a few goals, thus behaving in ways

that are responsible, dependable, persistent and achievement-oriented. 4 Emotional stability. The degree to which a person is calm, enthusiastic and self-confident, rather

than tense, depressed, moody or insecure. 5 Openness to experience. The degree to which a person has a broad range of interests and is

imaginative, creative, artistically sensitive and willing to consider new ideas. Exhibit 14.8 The Big Five personality factors

Each individual’s collection of personality traits is different; it is what makes us unique. But, although each collection of traits varies, we all share many common traits. The following phrases describe various traits and behaviours. Rate how accurately each statement describes you, based on a scale of 1 to 5, with 1 being Very inaccurate and 5 Very accurate. Describe yourself as you are now, not as you wish to be. There are no right or wrong answers.                   1 2 3 4 5              Very Inaccurate     Very Accurate Extroversion I am usually the life of the party. 1 2 3 4 5



Neuroticism (Low Emotional Stability) I often feel critical of myself. 1 2

3 4

5

I feel comfortable around people. 1 2 3 4 5

I often envy others.

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I am talkative.

1 2 3 4 5

I am temperamental.

1

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Agreeableness I am kind and sympathetic.

1 2 3 4 5

Openness to New Experiences I am imaginative. 1

2

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5

I prefer to vote for liberal political candidates.

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5

I really like art.

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I have a good word for everyone. 1 2 3 4 5 I never insult people.

1 2 3 4 5

Conscientiousness I am systematic and efficient.

1 2 3 4 5

I pay attention to details.

1 2 3 4 5

I am always prepared for class.

1 2 3 4 5

Which are your most prominent traits? For fun and discussion, compare your responses with those of classmates.

As illustrated in the exhibit, these factors represent a continuum. That is, a person may have a low, moderate or high degree of each quality. Answer the questions in Exhibit 14.8 to see where you fall on the Big Five scale for each of the factors. Having a moderate-to-high degree of each of the Big Five personality factors is considered desirable for a wide range of employees, but this isn’t always a key to success. For example, having an outgoing, sociable personality (extroversion) is considered desirable for managers, but many successful leaders, including Bill Gates, Hillary Clinton, J. K. Rowling, Mahatma Gandhi, Australian men’s cricket captain Michael Clarke and Steven Spielberg are introverts, people who become drained by social encounters and need time alone to reflect and recharge their batteries. One study found that four in 10 top executives test out to be introverts.32

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This chapter’s Management in Practice describes some benefits of the introverted personality for managers, and offers some tips for introverted managers on how to shine despite their lack of natural gregariousness.

management in pr actice

The rise of the introverted manager

In today’s world of open offices and collaborative work arrangements, being an introverted manager is a challenge, especially in Western and other cultures that reward people for being outgoing and sociable. Yet experts are beginning to tout the virtues of the introverted manager, as well as offer tips for how introverts can make sure they don’t get lost amid the gregarious leaders around them. Some benefits of an introverted personality include:

In addition, introverts are often, although not always, shy, which makes it harder for them to feel comfortable in the role of a manager. To succeed as an introverted manager, you should:

➜➜ Stretch your personality. If you want something badly

more thoughtful decisions. They can become excited by opportunities and potential rewards, but they seem to have a keener awareness of risks than extroverts, which can help to prevent companies from having unexpected disasters.

enough, you can stretch the limits of a naturally introverted personality. Consider Richard Branson, who says his flamboyant public persona, such as dressing up in silly costumes to publicise the Virgin Group, bears little resemblance to his innate personality. ‘I was a shy and retiring individual who couldn’t make speeches and get out there,’ Branson says of himself prior to founding Virgin. ‘I had to train myself into becoming more of an extrovert’ in order to promote the new company.

➜➜ Greater ability to listen and take suggestions. We’ve all

➜➜ Let people know who you are. Introverts like Branson may

➜➜ More cautious and deliberate. Introverts tend to make

been charmed by charismatic, talkative people who are ‘working the room’ while the introverts are huddled in a corner. Yet when people are talking, they have a hard time listening. Adam M. Grant, who studies this subject, says introverted managers can be better bosses in dynamic and unpredictable environments because of their ability to listen, empathise with others and empower employees to think for themselves.

➜➜ More creative. The most stunningly innovative people in many fields are introverts. Why? Because creativity thrives on solitude. ‘Without great solitude, no serious work is possible,’ Picasso said. Steve Jobs was the extrovert behind Apple, but the company would never have come into being without the hard work put in by introverted co-founder Steve Wozniak, who spent long hours working alone to create the company’s first computer. ‘Most inventors and engineers I’ve met are like me . . . they live in their heads,’ Wozniak has said. Introverted managers can get overlooked, particularly in large organisations.

be able to act more extroverted when they need to, but they will always need quiet time to reflect, process and recharge their energies. This tendency to need time alone can be misinterpreted. Douglas Conant, who led Campbell Soup Company for years as a shy, introverted leader, says he’d give a little talk to new employees and colleagues right off the bat so they didn’t think he was aloof and uninterested in them. ‘The more transparent I became, the more engaged people became,’ he says.

➜➜ Mix with people, speak up and get out there. If you want to be a manager, and particularly if you want to advance to higher levels, there is no denying that you need to push yourself to get out there and connect with people both within and outside the organisation. You will have to speak up at meetings, make presentations, and be more sociable and outgoing at conferences and other professional events. You can behave in more extroverted ways when you need to. Just remember to find alone time to recharge your batteries.

Sources: Based on Adam M. Grant, Francesca Gino and David A. Hoffmann. (December 2010). The Hidden Advantages of Quiet Bosses. Harvard Business Review, 28; Susan Cain. (15 January 2012). The Rise of the New Groupthink. The New York Times, SR-1; Bryan Walsh. (6 February 2012). The Upside of Being an Introvert (and Why Extroverts Are Overrated). Time, 40–5; (21 May 2012). How Introverts Can Be Leaders – The Expert: Doug Conant. Fortune, 56; Joann S. Lublin. (18 April 2011). Introverted Execs Find Ways to Shine. The Wall Street Journal Asia, 31; Jack and Suzy Welch. (8 December 2008). The Welchway: Release Your Inner Extrovert. BusinessWeek, 92; and Richard Branson example from Ginka Toegel and Jean-Louis Barsoux. How to Become a Better Leader. (Spring 2012). MIT Sloan Management Review, 51–60.

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Although the quality of extroversion is not as significant as is often presumed, traits of agreeableness seem to be particularly important in today’s collaborative organisations. Studies show that people who score high on agreeableness are more likely to get jobs and keep them than are less agreeable people.33 Although there is also some evidence that people who are overly agreeable tend to be promoted less often, the days when a hard-driving manager could run roughshod over others to earn a promotion are over. Executive search firm Korn/Ferry International examined data from millions of manager profiles and found that the most successful executives today are team-oriented leaders who gather information and work collaboratively with many different people.34 Recent research also suggests that traits of conscientiousness are more important than those of extroversion for effective leadership. A study at the Stanford Graduate School of Business found a link between how guilty people feel when they make serious mistakes and how well they perform as leaders. Guilt can be a positive emotion for a leader, because it is associated with a heightened sense of responsibility to others – something that certainly could have benefited the leaders involved in the GFC.35

At titu d es an d behavi ou rs in flu en ced by perso nalit y An individual’s personality influences his or her work-related attitudes and behaviours. As a new manager, you will have to manage people with a wide variety of personality characteristics. Four areas related to personality that are of particular interest to managers are locus of control, authoritarianism, Machiavellianism and problem-solving styles.

Locu s of cont r ol Individuals differ in terms of what they tend to accredit as the cause of their success or failure. Locus of control refers to how people perceive the cause of life events – whether they place the primary

responsibility within themselves or on outside forces.36 Some people believe that their own actions strongly influence what happens to them. They feel in control of their own fate. These individuals have a high internal locus of control. Other people believe that events in their lives occur because of chance, luck or outside people and events. They feel more like pawns of their fate. These individuals have a high external locus of control. Research on locus of control shows real differences in behaviour across a wide range of settings. People with an internal locus of control are easier to motivate, because they believe that their rewards are the result of their behaviour. They are better able to handle complex information and problem solving and are more achievement-oriented, but also more independent, and therefore more difficult to manage. By contrast, people with an external locus of control are harder to motivate, less involved in their jobs and more likely to blame others when faced with a poor performance evaluation, but they are also more compliant and conforming and, therefore, easier to manage.37 Do you believe luck plays an important role in your life, or do you feel that you control your own fate? To find out more about your locus of control, read the instructions and complete the questionnaire in Exhibit 14.9.

locus of control The tendency to place the primary responsibility for one’s success or failure either within oneself (internally) or on outside forces (externally).

Concept extension

Locus of control self-test

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Exhibit 14.9 Measuring locus of control

Your locus of control Instructions: For each of these 10 questions, indicate the extent to which you agree or disagree using the following scale: 1 5 Strongly disagree;

4 5 Neither disagree nor agree;

2 5 Disagree;

5 5 Slightly agree;

3 5 Slightly disagree;

6 5 Agree;

7 5 Strongly agree

1 When I get what I want, it is usually because I worked hard for it.

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2 When I make plans, I am almost certain to make them work.

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3 I prefer games involving some luck over games requiring pure skill.

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4 I can learn almost anything if I set my mind to it.

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5 My major accomplishments are entirely due to my hard work and ability.

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6 I usually don’t set goals because I have a hard time following through on them.

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7 Competition discourages excellence.

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8 Often people get ahead just by being lucky.

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9 On any sort of exam or competition, I like to know how well I do relative to everyone else.

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10 It’s pointless to keep working on something that’s too difficult for me.

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7

Scoring and interpretation To determine your score, reverse the values you selected for questions 3, 6, 7, 8 and 10 (1 5 7, 2 5 6, 3 5 5, 4 5 4, 5 5 3, 6 5 2, 7 5 1). For example, if you strongly disagree with the statement in question 3, you would have given it a value of 1. Change this value to a 7. Reverse the scores in a similar manner for questions 6, 7, 8 and 10. Now add the point values for all ten questions together. Your score Researchers using this questionnaire in a study of college students found a mean of 51.8 for men and 52.2 for women, with a standard deviation of 6 for each. The higher your score on this questionnaire, the more you tend to believe that you are generally responsible for what happens to you; in other words, higher scores are associated with internal locus of control. Low scores are associated with external locus of control. Scoring low indicates that you tend to believe that forces beyond your control, such as powerful other people, fate or chance, are responsible for what happens to you. Sources: Adapted from J. M. Burger, Personality: Theory and Research (Belmont, CA: Wadsworth, 1986), pp. 400–1, cited in D. Hellriegel, J. W. Slocum, Jr. and R. W. Woodman, Organizational Behavior, 6th edn (St Paul, MN: West, 1992), pp. 97–100. Original source: D. L. Paulhus. (1983). Sphere-Specific Measures of Perceived Control. Journal of Personality and Social Psychology, 44, no. 6 (1983): 1253–65.

Aut h or i tar i ani sm authoritarianism The belief that power and status differences should exist within the organisation.

Authoritarianism is the belief that power and status differences should exist within the organisation.38

Individuals high in authoritarianism tend to be concerned with power and toughness, obey recognised authority above them, stick to conventional values, critically judge others and oppose the use of subjective feelings. The degree to which managers possess authoritarianism will influence how they wield and share power. The degree to which employees possess authoritarianism will influence how they react to their managers. If a manager and employees differ in their degree of authoritarianism, the manager may have difficulty leading effectively. The trend towards empowerment and shifts in expectations among younger employees for more equitable relationships have contributed to a decline in strict authoritarianism in many organisations.

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The late Curtis L. Carlson built the Carlson Companies into one of the world’s largest private companies, including the Radisson hotel chain and TGI Friday restaurants, which have outlets in the UK, the US, New Zealand, Singapore, Malaysia, Australia and elsewhere. His authoritarian style marked the company during his tenure as CEO and continued even in his retirement. Until his death in 1999, Carlson retained voting control over the family-owned company’s shares. He ran the company with an iron fist for six decades, and had trouble giving up power to allow someone else to take the reins. He appointed a son-in-law, Edwin Gage, as CEO, but the two fought bitterly over decisions, and Gage left the company after a few years. Next, Carlson employed an outsider to run things, but he also left when Carlson insisted on micromanaging his affairs.

The bitter fights left the family empire in turmoil. A few years before his death, Carlson put his daughter, Marilyn Carlson Nelson, in charge of the company. Nelson initially struggled to transform the company’s culture to fit her own, less authoritarian style. ‘I want to lead with love, not fear,’ she said. Although Carlson kept close tabs on all his daughter’s decisions and the two had strong disagreements, Nelson was able to implement new benefits and profit-sharing plans, introduce flexitime and a day care centre, and recruit outside directors. She continued her efforts to make the Carlson Companies’ culture less authoritarian. In 2008, Nelson moved to become company chairperson and appointed a nonfamily member as CEO. By 2012 she had built up the company so that it now owns or

controls over 1300 hotels and 900 restaurants, employing some 175 000 people and generating $37.6 billion in annual sales – a large family company, indeed! Nelson demonstrated that a peoplefriendly attitude among leaders can indeed bring out the best in staff, and she is well known for implementing strategies along those lines, meaning that employees take as good care of customers as the company takes of its employees. This is clearly a sensible, humanistic and profitable approach to leadership and culture.

Case study

The Carlson companies

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Sources: Weimer, D. A. (17 August 1998). I Want to Lead with Love, Not Fear. BusinessWeek, 52–3; http://mitsloan.mit.edu/corporate/Carlson-nelson .pdf; http://womeninbusiness.about.com/…/iviewmarilyncarlsonnelson.htm; and http://www.carlson.com/ our-company/financials.do (accessed 17 November 2013).

Machiavelli ani sm

Source: Corbis/Bettman

Another personality dimension that is helpful in understanding work behaviour is Machiavellianism, which is characterised by the acquisition of power and the manipulation of other people for purely personal gain. Machiavellianism is named after Niccolò Machiavelli, a sixteenth-century author who wrote The Prince, a book for noblemen of the day that was designed as a guide on how to acquire and use power.39 In the 1960s, psychologists developed instruments to measure a person’s Machiavellianism (Mach) orientation.40 Research shows that high ‘Machs’ are predisposed to being pragmatic, are capable of lying to achieve personal goals, are more likely to win in win–lose situations and more likely to persuade than be persuaded.41 Different situations may require people who demonstrate one or the other type of behaviour. In loosely structured situations, high Machs actively take control, while low Machs accept the direction given by others. Low Machs thrive in highly structured situations, while high Machs perform in a detached, disinterested way. High Machs are particularly good in jobs that require bargaining skills or that involve substantial rewards for winning.42

Machiavellianism The tendency to direct much of one’s behaviour towards the acquisition of power and the manipulation of others for personal gain.

Nearly 500 years ago Niccolò Machiavelli wrote a number of books that demonstrated his remarkable knowledge of power, politics and organisational change, well before organisations were as complex and technologyladen as they are today. Machiavelli was certainly ahead of his time when he wrote, in The Prince, ‘It must be considered that there is nothing more difficult to carry out nor more doubtful of success, nor more dangerous to handle than to initiate a new order of things. For the reformer has enemies in all those who profit by the old order and only lukewarm defenders in all those who profit by the new order. This lukewarmness [arises] partly from fear of their adversaries… and partly from the incredulity of mankind, who do not truly believe in anything new until they have actual experience of it…’

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➜➜ Personality is the set of characteristics that underlie a relatively stable pattern of behaviour in response to ideas, objects or people in the environment. ➜➜ The Big Five personality factors are dimensions that describe an individual’s extroversion, agreeableness, conscientiousness,

emotional stability and openness to experience. ➜➜ Locus of control defines whether an individual places the primary responsibility for their successes and failures within themselves or on outside forces. ➜➜ Authoritarianism is the belief that power and status differences should exist within an organisation.

remember this

➜➜ A person high in authoritarianism is typically concerned with power and status, obeys established authority and sticks to conventional values.

➜➜ Machiavellianism refers to a tendency to direct one’s behaviour towards the acquisition of power and the manipulation of other people for personal gain.

Pro blem - so lvin g st yles an d th e Myers - Bri g gs T ype In d i cato r Managers also need to realise that individuals solve problems and make decisions in different ways. One approach to understanding problem-solving styles grew out of the work of psychologist Carl Jung. Jung believed that differences result from our preferences in how we go about gathering and evaluating information.43 According to Jung, gathering information and evaluating information are separate activities. People gather information either by sensation or intuition, but not by both simultaneously. Sensation-type people would rather work with known facts and hard data, and prefer routine and order in gathering information. Intuitive-type people would rather look for possibilities than work with facts, and prefer solving new problems and using abstract concepts. Evaluating information involves making judgments about the information a person has gathered. People evaluate information by thinking or feeling. These represent the extremes in orientation. Thinkingtype individuals base their judgements on impersonal analysis, using reason and logic rather than personal values or emotional aspects of the situation. Feeling-type individuals base their judgements more on personal feelings, such as harmony, and tend to make decisions that result in approval from others. According to Jung, only one of the four functions – sensation, intuition, thinking and feeling – is dominant in an individual. However, the dominant function is usually backed up by one of the functions from the other set of paired opposites. Exhibit 14.10 shows the four problem-solving styles that result from these match-ups, as well as occupations that people with each style tend to prefer.

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Exhibit 14.10 Four problem-solving styles Personal style

Action tendencies

Sensation-Thinking

● 

Emphasises details, facts, certainty

● 

Accounting

● 

Is a decisive, applied thinker

● 

Production

● 

Focuses on short-term, realistic goals

● 

Computer programming

● 

Market research

● 

Engineering

● 

Systems design

● 

Systems analysis

● 

Law

● 

Middle/top management

● 

Teaching business, economics

● 

Directing supervisor

● 

Counselling

● 

Negotiating

● 

Selling

● 

Interviewing

● 

Public relations

● 

Advertising

● 

Human Resources

● 

Politics

● 

Customer service

Develops rules and regulations for judging performance

● 

Intuitive-Thinking

Prefers dealing with theoretical or technical problems

● 

Is a creative, progressive, perceptive thinker

● 

Focuses on possibilities using impersonal analysis

Likely occupations

● 

Is able to consider a number of options and problems simultaneously

● 

Sensation-Feeling

Shows concern for current, real-life human problems

● 

Is pragmatic, analytical, methodical and conscientious

● 

Emphasises detailed facts about people rather than tasks

● 

Focuses on structuring organisations for the benefit of people

● 

Intuitive-Feeling

● 

Avoids specifics Is charismatic, participative, people oriented and helpful

● 

Focuses on general views, broad themes, and feelings

● 

Decentralises decision making, develops few rules and regulations

● 

Two additional sets of paired opposites not directly related to problem solving are introversion– extroversion and judging–perceiving. As noted earlier in this chapter, introverts gain energy by focusing on personal thoughts and feelings, whereas extroverts gain energy from being around others and interacting with others. On the judging versus perceiving dimension, people with a judging preference like certainty and closure, and tend to make decisions quickly based on available data. Perceiving people, on the other hand, enjoy ambiguity, dislike deadlines, and may change their minds several times as they gather large amounts of data and information to make decisions. A widely used test that measures how people differ on all four of Jung’s sets of paired opposites is the Myers-Briggs Type Indicator (MBTI) assessment. The MBTITM assessment measures a person’s preferences for introversion versus extroversion, sensation versus intuition, thinking versus feeling and judging versus perceiving. The various combinations of these four preferences result in 16 unique personality types.

Myers-Briggs Type Indicator (MBTI) Measures a person’s preferences for introversion versus extroversion, sensation versus intuition, thinking versus feeling, judging versus perceiving.

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Take a Moment Go to the Management CourseMate website and take the ‘Personality assessment’ self-test. This test evaluates your Myers-Briggs personality type.

Innovative Way

Each of the 16 different personality types can have positive and negative consequences for behaviour. Based on the research that has been done, the two preferences that seem to be most strongly associated with effective management in a variety of organisations and industries are thinking and judging.44 However, people with other preferences can also be good managers. One advantage of understanding your natural preferences is to maximise your innate strengths and abilities and minimise your weaknesses. John Bearden became a better manager because of what he learned from the MBTI assessment, as described in the following Innovative Way.

Understanding your leadership style

When John Bearden sold his real estate business in Canada, he decided to return to his hometown, to reflect on his career and decide what was next. During this time of introspection, Bearden realised that he had often gotten to the finish line by ‘dragging people with him’. He recalled when a consultant had told him, ‘John, you have so much potential, but you’re running over everybody . . . you turn people off.’ Bearden decided that now was the time to learn what made him tick. Before restarting his career, Bearden completed the MBTI assessment and learned that he had a ‘field marshal’ (ENTJ) leadership style. Individuals with this style are dynamic and self-confident and display essential leadership qualities of vision, drive and decisiveness. However, they can also

be impatient, insensitive, overbearing, and hasty in their judgements. Bearden said the MBTI was a ‘quantum leap’ in his understanding of his strengths and weaknesses. When he took the job as chief executive of GMAC Home Services, he began consciously refining his leadership style, making a determined effort to give more consideration to hard data and listen more carefully to colleagues’ opinions. Bearden put himself to the test at a national convention. ‘In the past, I would have gotten very much involved, interjecting my own position very early on and probably biasing the process,’ he said. ‘But here I found myself quite content to allow their positions to be articulated and argued with creative tension. All I did was sit and absorb. It was a very satisfying process.’

Source: Coeli Carr. (26 May 2002). Redesigning the Management Psyche. The New York Times, Section 3, p. 14.

Concept Revision

Case project 14.2

Some organisations use the MBTI assessment to help put people in the right jobs – where they will be happiest and make their best contribution to the organisation. In one survey, 89 of the Fortune 100 companies reported that they have used the test in hiring and promotion decisions.45 Other companies have used the MBTI to help employees better understand themselves and improve their interactions with others. For example, the MBTI assessment was a central feature of a program at Hallmark Cards designed to give managers greater self-awareness and insight into how their patterns of thought and behaviour affect employees.46

➜➜ Four problem-solving styles as developed by Carl Jung are sensation-thinking,

intuitive-thinking, sensation-feeling and intuitive feeling. ➜➜ The Myers–Briggs Type Indicator (MBTI) assessment measures a

person’s preferences for introversion versus extroversion, sensation versus intuition, thinking versus feeling and judging versus perceiving.

remember this

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Emotions Managers might like to think that people come to work and conduct their jobs in a logical and rational manner, leaving their emotions at home or tucked safely in the car until it’s time to go home for the day. Yet people cannot be separated from their emotions, and organisations suffer when managers fail to pay attention to how employees’ emotions affect their productivity and the work environment.47 Managers can increase their effectiveness by understanding positive and negative emotions and by developing emotional intelligence.

Positive an d n egative emotio ns Although the term is somewhat difficult to define in a precise way, an emotion can be thought of as a mental state that arises spontaneously within a person based on interaction with the environment, rather than through conscious effort, and that is often accompanied by physiological changes or sensations. People can experience a wide range of emotions at work, such as happiness, anger, fear and relief, and these emotions affect their workplace attitudes and behaviours. People have been attempting to understand emotions for thousands of years, and scientific debate continues about how to categorise emotions.48 One model that is useful for managers, shown in Exhibit 14.11, distinguishes the major positive and negative emotions. Negative emotions are sparked when a person becomes frustrated in trying to achieve his or her goals, while positive emotions are triggered when people are on track towards achieving goals.

Negative emotions

Anger

Positive emotions

Happiness/joy

Fright/anxiety

Pride Guilt/shame

Sadness

Love/affection

Envy/jealousy Disgust

Relief

emotions Mental states that arise spontaneously within a person based on interaction with the environment rather than through conscious effort and often accompanied by physiological changes or sensations.

Exhibit 14.11 Positive and negative emotions

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Thus, emotions can be understood as being determined by whether or not people are getting their needs and goals met. An employee who fails to get a pay raise or is reprimanded by a supervisor would likely experience negative emotions such as sadness, anger or anxiety, whereas a person who gets a promotion or receives praise would experience feelings of pride and happiness. The emotional state of the manager influences the entire team or department. Most of us realise that we can ‘catch’ emotions from others. If we’re around someone who is happy and enthusiastic, the positive emotions rub off on us. On the other hand, someone who is sad and angry can bring us down. This emotional contagion49 means that managers who express positive emotions such as happiness, enthusiasm and appreciation trigger positive emotions in employees. Research suggests that nearly all human beings are subject to emotional contagion, and will automatically and unconsciously start feeling and displaying the same emotions as those around them.50 Good managers pay attention to people’s emotions, because positive emotions are typically linked to higher productivity and greater effectiveness. A Gallup Management Journal survey found that managers, especially front-line supervisors, have a lot to do with whether employees have positive or negative emotions associated with their work lives.51

Innovative Way

Dow Chemical

When Kurt Swogger arrived at Dow Chemical’s plastics business, it took the company anywhere from six to 15 years to launch a new product – and the unit hadn’t launched a single new product for three years. Ten years later, a new product launch took just two to four years, and Swogger’s R&D team was launching hit after hit. What changed? ‘The biggest obstacle to launching great new products was not having the right people in the right jobs,’ says Swogger. He began reassigning people based on his intuition and experience, distinguishing pure inventors from those who could add value later in the game and still others who were best at marketing the new products. Swogger says he was right about 60 per cent of the time. If someone didn’t work out after six months, he’d put him or her on another

assignment. Seeking a better way to determine people’s strengths, Swogger began using the Myers–Briggs Type Indicator (MBTI), predicting which types would be best suited to each stage of the product development and launch cycles. After administering the test to current and former Dow plastics employees, he found some startling results. When Swogger came on board, the match between the right personality type and the right role was only 29 per cent. After he had been at the company for ten years, the rate had jumped to 93 per cent. Swogger’s next step was to administer the MBTI to new hires, so he could immediately assign people to jobs that matched their natural thinking and problem-solving styles, leading to happier employees and higher organisational performance.

Source: Overhold, A. (April 2004). Are You a Polyolefin Optimizer? Take This Quiz! Fast Company, 37.

Emotional intelligence emotional intelligence A theory that assesses personality by examining the capacity for self-awareness, selfmanagement, social awareness and relationship awareness.

emotional intelligence

In recent years, research in the area of emotional intelligence has shown that managers who are in touch with their own feelings and the feelings of others can enhance employee and organisational performance. Emotional intelligence includes four basic components:52 1 Self-awareness. This is the basis for all the other components: being aware of what you are feeling.

People who are in touch with their feelings are better able to guide their own lives and actions. A high degree of self-awareness means you can accurately assess your own strengths and limitations and have a healthy sense of self-confidence.

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2 Self-management. This is the ability to control disruptive or harmful emotions and balance your

moods, so that worry, anxiety, fear or anger do not cloud your thinking and get in the way of what needs to be done. People who are skilled at self-management remain optimistic and hopeful despite setbacks and obstacles. This ability is crucial for pursuing long-term goals. MetLife found that applicants who failed the company’s regular sales aptitude test but scored high on optimism made 21 per cent more sales in their first year and 57 per cent more in their second year than those who passed the sales test but scored high on pessimism.53 Self-management will be discussed in greater detail later in this chapter. 3 Social awareness. This is the ability to understand others and to practise empathy, which means

being able to put yourself in someone else’s shoes, to recognise what others are feeling without them needing to tell you. People with social awareness are capable of understanding divergent points of view and interacting effectively with many different types of people. 4 Relationship management. This is the ability to connect to others, build positive relationships,

respond to the emotions of others and influence others. People with relationship management skills know how to listen and communicate clearly, and they treat others with compassion and respect. Studies show a positive relationship between job performance and a high emotional intelligence quotient (EQ) in a variety of jobs. Numerous organisations, including the major banks in Australia, use EQ tests to measure things such as self-awareness, ability to empathise and capacity to build positive relationships.54 A high EQ seems to be particularly important for jobs, such as sales, that require a high degree of social interaction. It is also critical for managers, who are responsible for influencing others and building positive attitudes and relationships in the organisation. TalentSmart, a firm that provides EQ services to most of the Fortune 500 companies, has found EQ to be a strong predictor of employee success. It estimates that the top 90 per cent of performers across nearly every industry have high EQs and that it accounts for 58 per cent of a person’s job performance. People with a high EQ can also expect to earn about US$29 000 more than their low EQ contemporaries.55 The famous American investor and successful businessman, Warren Buffett, once suggested that good communication skills could increase an employee’s value by 50 per cent.56 Managers with low emotional intelligence can undermine employee morale and harm the organisation. Consider that 44 per cent of people surveyed by America’s Employment Law Alliance said they had worked for a manager that they considered an abusive bully.57 Growing concerns over workplace bullying have prompted enlightened companies to take action that helps managers to develop greater emotional intelligence, such as by honing their self-awareness and empathy and enhancing their selfTake management skills. One form of bullying is sexual harassment, which has been discussed in a Moment previous chapters. Sexual harassment or abuse is a reflection of low emotional intelligence Go to the Management that can destroy careers, as well as the lives of the victims. Even in countries where CourseMate website and take the people often turn a blind or accepting eye to powerful politicians and businessmen ‘What’s your EQ?’ self-test to assess your own level of emotional intelligence. engaging in extramarital dalliances, sexual abuse isn’t tolerated. Former International You might also want to refer back to the Monetary Fund (IMF) leader Dominique Strauss-Kahn was likely on his way to the questionnaire related to self-confidence French presidency before he was arrested in New York and charged with the sexual at the beginning of this chapter. Selfassault of a hotel housekeeper, with further allegations from women in France later confidence strongly influences a new manager’s EQ. coming to light.58

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New Manager Self-test Expressed emotions Instructions: Think about the feelings you express to others during your interactions with people during a typical week of study or work activities. Rate each item below based on whether you typically express that emotion often, sometimes or rarely during a typical week. There are no right or wrong answers, so answer honestly to receive accurate feedback. Often

Sometimes

Rarely

1 Enthusiastic

     

     

     

2 Interested

     

     

     

3 Inspired

     

     

     

4 Energetic

     

     

     

5 Proud

     

     

     

6 Attentive

     

     

     

7 Grateful

     

     

     

8 Amused

     

     

     

9 Hopeful

     

     

     

10 Caring

     

     

     

Scoring and interpretation: Sum items 1–10, giving 3 points for each Often, 2 points for each Sometimes and

➜➜ An emotion is a mental state that arises spontaneously rather than through conscious effort and is often accompanied by physiological changes.

1 point for each Rarely. Total 5 ______. In fulfilling their roles, managers are often required to display positive emotions in their relationships with employees and customers. Sometimes a manager may display an emotion without really feeling it, called surface acting. Deep acting is when managers generate the actual emotion that needs to be displayed as part of the job. If you have a high score, it probably means you display authentic positive emotion. If you have a lower score, can you display positive emotions when needed by pretending to feel the emotion or by generating the appropriate emotion from within? Frequent surface acting is related to stress, and frequent deep acting is related to the perceived quality of emotion expression and with job satisfaction. Compare your score with others in your class. Can you express emotions on demand? Do you think emotional expression is related to the self-management aspect of emotional intelligence? Sources: Based on David Watson, Lee Anna Clark and Auke Tellegen. (1988). Development and Validation of Brief Measures of Positive and Negative Affect: The PANAS Scales. Journal of Personality and Social Psychology, 54:6, 1063–70; Celeste M. Brotheridge and Raymond T. Lee. Development and Validation of the Emotional Labour Scale. (2003). Journal of Occupational and Organizational Psychology, 76, 365–79; and Alicia A. Grandey. (2003). When ‘The Show Must Go On’: Surface Acting and Deep Acting as Determinants of Emotional Exhaustion and Peer-Rated Service Delivery. Academy of Management Journal, 46:1, 86–96.

➜➜ People experience both positive emotions of happiness, pride, love and relief, as well as negative emotions of anger, anxiety, sadness, envy and disgust. ➜➜ The concept of emotional contagion suggests that people can catch

emotions from those around them, so good managers try to express positive emotions at work.

remember this

➜➜ Emotional intelligence includes the components of self-awareness, self-management, social awareness and relationship management.

Managing yourself Now let’s turn to another topic every manager needs to know about: time management. We introduced the topic of time management in Chapter 1, and that chapter’s Management in Practice outlined some specific time management tips. In this chapter, we talk about a broader self-management system that people can apply to gain control over their hectic schedules. Self-management is the ability to engage

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in self-regulating thoughts and behaviour to accomplish all your tasks and handle difficult or challenging situations. Yet all of us have patterns of habit and behaviour that may make it hard to manage ourselves towards more efficient behaviour. Even the best managers can sometimes find themselves feeling overwhelmed. Many people get stuck and can’t take action when they have too much on their minds or too many competing demands on their time. One approach for ‘getting a grip’ when you have too much to do and can’t seem to get any of it done is to apply a bottom-up strategy that starts by analysing the details of what you are actually doing right now, and then building a system to manage all your activities.

Basi c prin ci ples fo r self- m anagem ent Three basic principles define how to manage your many large and small commitments effectively so that you can get them accomplished:59 ●● Clarity of mind. The first principle is that, if you’re carrying too much around in your head, your mind can’t be clear. If your mind isn’t clear, you can’t focus. If you can’t focus, you can’t get anything done. Thus, anything you consider unfinished needs to be placed in some kind of trusted system outside of your head. ●● Clarity of objectives. Second, you have to be clear about exactly what you need to do and decide the steps to take towards accomplishing it. ●● An organised system. Third, once you’ve decided the actions you need to take, you need to keep reminders in a well-organised system. By building a self-management approach based on these three principles – clarity of mind, clarity of objectives and a system of organised reminders – you can get unstuck and make measurable progress towards achieving all the things you need to do.

A step- by- step gu i d e fo r m anagin g yo u r ti m e Many people don’t realise they waste at least an hour of a typical workday simply because they are unorganised.60 You can gain better control of your life and the many things you have to do by mastering some simple but powerful steps.61 Exhibit 14.12 summarises these five steps, and each is described below. 1 Empty your head. In order to clear your mind, you first have to see all the many things weighing on

it. The first step, therefore, is to write down on separate scraps of paper all the activities, duties, tasks or commitments that are demanding part of your attention. The idea is to get everything out of your head and down on paper. To organise all this ‘stuff’, combine similar items into various ‘buckets’. There are numerous tools that can serve as your buckets, including computer and wireless devices for electronic note-taking; physical in-baskets for holding mail, memos and phone slips; notebooks or legal pads for writing down things to do; or digital recorders for recording things you need to remember. Keep a notepad or handheld device with you so that you can add new projects or commitments at any time and get them out of your head. Remember to keep the number of buckets to a minimum; otherwise, you’ll still feel scattered and overwhelmed.

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self-management The ability to engage in self-regulating thoughts and behaviour to accomplish all your tasks and handle difficult or challenging situations.

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Exhibit 14.12 Follow the steps to get organised

Do it

Source: Based on David Allen, Getting Things Done: The Art of Stress-Free Productivity (New York: Viking, 2001).

Perform a weekly review

Get organised

Decide the next action

Empty your head

Consider time and context, energy level and task priority

Update calendars, action lists; process new items

Schedule appointments, tasks; set up calendars, action lists

Do it, delegate it or defer it

Collect all the things you need or want to do

2 Decide the next action. For each item in your buckets, decide the real, specific, physical action

that you need to take next. If you have a team meeting on Friday to discuss a class project, your next action might be to draft thoughts and ideas that you want to share with the team. Then, you have three options: ●● Do it. Follow the two-minute rule: If something can be done in less than two minutes, do it now. In some cases, you’ll find items in your bucket that require no action and are of no importance. These should be trashed immediately. For items that are of potential use in the future, file in a system for reference material. ●● Delegate it. Ask yourself if you’re the right person to handle a task. If something can be done as well by someone else, delegate it. ●● Defer it. If something will take longer than two minutes but cannot be delegated to someone else, you’ll have to defer it. These things go into an incubation or tickler file, such as an organised ‘To Do’ list, which you will review regularly and perhaps schedule a specific time for their completion. 3 Get organised. The third step is to organise all the items you’ve deferred. At this stage, schedule any

appointments you identified as ‘next actions’ and record these on whatever calendar you check daily. Also record on your calendar any items that have to be done on a specific day or time. You can assign yourself a specific date in the future to perform certain tasks that are in your incubation or tickler file. For all other items, keep a list of ‘Next Actions’, either on paper or in a portable device that you

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will have with you at all times so that you can take action when and where you have the time to do so. This can be either on a single list or in categories. 4 Perform a weekly review. Once a week, review your complete Next Actions list and your calendar for

the coming week. Scan the entire list of outstanding projects and actions needed so that you can make efficient choices about using your time. This weekly review is critical because it keeps your mind from taking back the job of trying to hold and remember everything. The weekly review is also the time to ‘put your house in order’ by collecting, processing and organising new items. Thus, during the weekly review, you’ll take four actions: (1) collect and process all the new stuff; (2) review your entire system; (3) revise your lists; and (4) get clear, up to date and complete about what needs to be done next. 5 Now, do it. Once you have collected, processed, organised and reviewed your current commitments,

you’ll have a better sense of what needs to be done, enabling you to make better choices about how to use your time. Your intuition and your understanding of yourself can help you in deciding what to do when. This approach to self-management can help you get a handle on all the various things you have to do and approach them in a systematic way with a clear mind. If you follow it, you’ll find yourself getting more accomplished with less stress – and with fewer things falling between the cracks. Refer to the time management tips in the Chapter 1 Management in Practice. You can pick and choose the techniques that work for you and combine them with the overall self-management approach. ➜➜ Self-management is the ability to engage in self-regulating thoughts and behaviour to accomplish all your tasks

remember this

and handle difficult or challenging situations. ➜➜ Three basic principles for selfmanagement are clarity of mind, clarity of objectives and an organised system.

Source: Courtesy Greg Smith

Dr Greg Smith, Co-Founder of SciVentures Investments

➜➜ One self-management system is based on five steps: empty your head; decide the next action; get organised; perform a weekly review; then do what needs to be done.

Austr alian manager pr ofile Now in the later stages of his career, Dr Greg Smith acts as an experienced board director. He sits on the boards of several early stage companies as well as two not-forprofit organisations. In these roles, he brings his long and successful involvement in high technology commercialisation and venture development, initially with three Dow-Jones index listed companies in USA and Europe and later with early stage Australian small and medium enterprises, to support specific strategies for innovation and business growth. In 2001, Greg co-founded SciVentures Investments Pty Ltd, which is the manager of the SciVentures Pre-Seed Fund (PSF). The SciVentures PSF has invested in very early stage technologies from Australian public sector R&D

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sources with the goal of creating global, growth-oriented start-ups. Results from the fund, which completed its 10-year closed-end trust term in 2012, include a number of promising business ventures, all of which were generated from their initial SciVentures ‘pre-seed’ investments. He actively supports these businesses towards significant realisations for the fund’s unit holders. As an example, one of these businesses, Cohda Wireless Pty Ltd, is one that Greg initially encountered in the laboratory at the University of South Australia in 2003. Thereafter the PSF became the first investor in the company. Now, 10 years later, Greg still continues his Cohda involvement, acting as Board Chairman. The company is focused on providing car-to-car collision warning safety systems, and is unique in its ability to manage critical nonline-of-sight conditions (e.g. as found at blind corners). As a result, the Cohda system is widely recognised as being the best available worldwide. It now appears in over 50 per cent of all vehicles undergoing on-road trials globally. It is anticipated that the technology will be available in commercial vehicles from 2015. Late in 2012, Cohda Wireless received significant investment from Cisco Systems, NXP and a number of private investors. This

new capital has enabled it to produce a full automotive quality radio-on-a-chip. The company is currently working with numerous industry partners in Europe and USA in purchasing discussions with various automotive majors. Prior to Greg’s return to Australia in 1999, his background was one of organisation-wide leadership in technology-based new business identification and development within very large corporations in USA and Europe; Exxon, AlliedSignal and Alcoa. There, he conceived and drove successful innovation processes for numerous major developments. Many outcomes were successfully transitioned from R&D into commercial development, achieving ultimate market impact. This background has proven extremely useful in his more recent roles in early stage venture capital. While in the USA, Greg also led organisation-wide restructuring of technology delivery processes to drive global business impact for innovation and technology at both AlliedSignal and Alcoa. Today, Greg continues his active involvement with SciVentures as it seeks exits from its promising ventures. In parallel he continues to offer his expertise to support the development of other high technology oriented businesses. Source: Contributed by Dr Greg Smith. 

Stress and stress management stress A physiological and emotional response to stimuli that place physical or psychological demands on an individual.

No matter how organised you are, as a manager you will likely experience stress – your own and that of others – at various points in your career. Formally defined, stress is an individual’s physiological and emotional response to external stimuli that place physical or psychological demands on the individual and create uncertainty and lack of personal control when important outcomes are at stake.62 These stimuli, called stressors, produce some combination of frustration (the inability to achieve a goal, such as the inability to meet a deadline because of inadequate resources) and anxiety (such as the fear of being disciplined for not meeting deadlines). In recent years, financial worries and massive job cuts have upped the stress level in almost every organisation. Managers have found themselves dealing with a workforce that is frightened, nervous and unsure about the future.63 The number of employees who are irritable, insulting, or discourteous has grown as people cope with the stress of job uncertainty, overwhelming debt, tighter access to credit and increased workloads due to downsizing. In addition, the stress caused by economic worries is contributing to health problems such as ulcers, severe depression and heart attacks.64

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Exhibit 14.13 The Yerkes-Dodson stress curve

High

Source: Based on an exhibit by Emeran A. Mayer, MD, UCLA Center for Neurobiology of Stress.

Performance

Increased performance

Exhaustion Low

Medium

High

Stress

Challen ge stress an d th re at stress Stress isn’t always negative. Without a certain amount of stress, we would be complacent and accomplish little. Psychologists have long noted this ‘dual face of stress’, and make a distinction between challenge stress and threat stress. Challenge stress fires you up, whereas threat stress burns you out.65 As originally proposed by two Harvard researchers, Robert Yerkes and John Dodson, and illustrated in Exhibit 14.13, stress up to a certain point challenges you and increases your focus, alertness, efficiency and productivity.66 After that point, however, things go downhill quickly and stress compromises your job performance, your relationships and even your health. Another interesting finding is that too much stress inhibits learning and flexibility.67 The point at which things tip over from challenge stress (good) to threat stress (bad) may vary with each individual. Most of us can easily tell when we’ve gone over the top of the stress curve. We stop feeling productive; experience emotions of anxiety, fear, depression or anger; are easily irritated; and may have trouble making decisions. Many people also have physical symptoms, such as headaches, insomnia or stomach problems. In the United States, an estimated 1 million people each day don’t show up for work because of stress.68 Similarly, a survey in the United Kingdom found that 68 per cent of non-manual workers and 42 per cent of manual workers reported missing work because of stress-related illness.69 In Australia, alarming increases in this phenomenon were found in 2013, being that 44 per cent of workers reported increased absences due to stress, anxiety and depression. This number was even higher in the public sector – 64 per cent.70 Just as big a problem for organisations as absenteeism is presenteeism, which refers to people who go to work but are too stressed and distracted to be productive.71

T ype A an d T ype B behaviou r Researchers have observed that some people seem to be more vulnerable than others to the ill effects of stress. From studies of stress-related heart disease, they categorised people as having behaviour patterns called Type A and Type B.72 The Type A behaviour pattern includes extreme competitiveness, impatience, aggressiveness and devotion to work. David Sacks, founder and CEO of Yammer, for example, has said he is ‘in a perpetual state of frustration over the product. I want it to be perfect and it’s not’.

Type A behaviour A behaviour pattern characterised by extreme competitiveness, impatience, aggressiveness and devotion to work.

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Type B behaviour A behaviour pattern that lacks Type A characteristics and includes a more balanced, relaxed lifestyle.

He added, ‘I think about work constantly, I wish I had an On/Off switch.’73 In contrast, people with a Type B behaviour pattern exhibit less of these behaviours. They consequently experience less conflict with other people and a more balanced, relaxed lifestyle. Type A people tend to experience more stressrelated illness than Type B people. Most Type A individuals, like David Sacks, are high-energy people who may seek positions of power and responsibility. By pacing themselves and learning control and intelligent use of their natural high-energy tendencies, Type A individuals can be powerful forces for innovation and leadership within their organisations. However, many Type A personalities cause stress-related problems for themselves, and sometimes for those around them. At Yammer, Sacks has consciously changed some of his behaviours so his impatience doesn’t cause stress for others. Type B individuals typically live with less stress unless they are in high-stress situations. A number of factors can cause stress in the workplace, even for people who are not naturally prone to high stress.

Causes o f wo rk stress Workplace stress has been skyrocketing worldwide for some years. A recent study by the Australian Psychological Society found that one in seven Australians reported experiencing severe to extremely severe depressive symptoms, with almost half of these ascribing job related issues as a source of their stress.74 Similarly, the number of people in the United States who reported that work is a significant source of stress soared to 69 per cent in 2009, and 41 per cent say they typically feel stressed or tense during their work day.75 Surveys in Canada consistently cite work as the top source of stress for people in that country. In India, growing numbers of young software professionals and call-centre workers are falling prey to depression, anxiety and other mental illnesses because of increasing workplace stress.76 And the long hours and stressful conditions that have led to suicides among contract manufacturing workers in China have prompted managers at technology firms such as Apple, IBM, Hewlett-Packard and Toshiba to do some serious soul-searching.77 ‘Work conditions can cause mental illness,’ says psychologist Rodney L. Lowman. ‘If we put healthy, well-adjusted people in the right foxhole with guns blaring at them, the likelihood of them experiencing depression and anxiety is very high.’78 Managers can better cope with their own stress and establish ways for the organisation to help employees cope if they understand the conditions that tend to produce work stress. Unethical environments and unsafe working conditions such as those at some contract manufacturers are, of course, major stressors. In terms of more typical, everyday work stressors, one approach is to make a distinction between stress caused by the demands of job tasks and stress caused by interpersonal pressures and conflicts. ●● Task demands are stressors arising from the tasks required of a person holding a particular job. As a manager progresses in their career into more senior roles, they get involved in making decisions with higher stakes. Some kinds of decisions are inherently stressful: those made under time pressure, those that have serious consequences and those that must be made with incomplete information. For example, emergency room doctors are under tremendous stress as a result of the task demands of their jobs. They regularly have to make quick decisions based on limited information that may determine whether a patient lives or dies. Jobs in which people have to deal with irate customers can also be highly stressful. Turnover among customer service employees can be as high as 300 per cent a year in some industries.79 Almost all jobs, especially those of managers, have some level of stress associated

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with task demands. Task demands also sometimes cause stress because of role ambiguity, which means that people are unclear about what task behaviours are expected of them. In a 2012 survey by the American Psychological Association, 35 per cent of respondents cited unclear job expectations as a cause of their workplace stress.80 ●● Interpersonal demands are stressors associated with relationships in the organisation. Although in some cases interpersonal relationships can alleviate stress, they also can be a source of stress when a group puts pressure on an individual or when conflicts arise between individuals. Managers can resolve many conflicts using techniques that will be discussed in Chapter 18. Role conflict occurs when an individual perceives incompatible demands from others. Managers often feel role conflict because the demands of their superiors conflict with those of the employees in their department. They may be expected to support employees and provide them with opportunities to experiment and be creative, while at the same time, top executives are demanding a consistent level of output that leaves little time for creativity and experimentation.

role ambiguity Uncertainty about what behaviour is expected of a person in a particular role.

role conflict Incompatible demands of different roles.

Source: iStockphoto.com/CAT London

Another source of stress is brought on by the uncertainties of the global economy and the insecurity that many people feel about the future of their organisation and continuity of their employment within it. In Australia, the ‘churn and burn’ rate for executives has risen in recent years, with restructurings, mergers and acquisitions, and volatility meaning that businesses change at ever faster rates, including changing their people. Retrenchment has become a fact of life for many managers, and indeed for people at all levels of organisations, and reached new heights during the 2008–10 GFC. Most large companies have periodically announced large groups of lay-offs at various times, and this is even the case for many successful and growing companies. It is not unusual at all to see headlines like, ‘Company Many businesses are now finding regular exercising X announces lay-off of 4000 people’. If it’s a small company, it might be opportunities for their staff. 40 people; if it’s a large company, it could be 400 people; but it still happens in most places, as changes of all types impinge on companies, who just cannot afford to carry any extra staff when things change. The Internet economy has brought many such changes based on using technology to replace service staff, as has global outsourcing and ‘offshoring’ of processes and jobs to China and India. In 2013, there was further offshoring of service jobs to India and the Philippines, manufacturing businesses and jobs to China, and the general shrinkage of the manufacturing sector in Australia. Even iconic businesses such as Ford Motor Company have announced their departure from Australia as a manufacturer, scheduled for 2016, and Toyota also plans to pull out from manufacturing in Australia in 2017.

Inn ovative respo nses to stress m anagem ent Organisations that want to challenge their employees and stay competitive will never be stress-free, but healthy workplaces promote the physical and emotional well-being of their employees. Managers have direct control over many of the things that cause people stress, including their own behaviour. Exhibit 14.14 lists some of the top things managers do to cause excessive and unnecessary stress.

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Exhibit 14.14 How managers create stress for employees

Working for a bad boss is a major cause of workplace stress. Here are some things that bad bosses do to create stress for their subordinates: 1 Impose unreasonable demands and overwhelming workloads. 2 Don’t let people have a say in how they do their work. 3 Create perpetual doubt about how well employees are performing. 4 Refuse to get involved in conflicts between employees; let them work it out. 5 Fail to give people credit for their contributions and achievements. 6 Keep people guessing about what is expected of them. 7 Bully and harass people to keep them on their toes. 8 Don’t allow people to form a community; tell them work isn’t a social club. Sources: Based on ‘Getting the Least from Your Staff’, sidebar in Don Mills. (8 April 2006). Running on High Octane or Burning out Big Time? National Post; Donna Callea. (27 March 2006). Workers Feeling the Burn: Employee Burnout a New Challenge to Productivity, Morale, Experts Say. News Journal; and Joe Humphreys. (27 July 2005). Stress Will Be Main Cause of Workplace Illness by 2020. Irish Times.

What you can do to c om b at s tr ess It is how we react to stress that can endanger our health. A variety of techniques can help individuals avoid or manage the harmful effects of stress. ●● Seek and destroy key sources of stress. A recent study found that the most beneficial stress management competency is prevention.81 None of us can eliminate all the potential sources of stress from our lives, but we can avoid some of them and manage others. Take some time each day to identify stressors in your life and find ways to eliminate or reduce them. Being well organised, planning ahead and using the various time management techniques we’ve discussed in this chapter, such as emptying your head of all the pressures weighing on you, are highly effective ways to manage and prevent stress. ●● Find meaning and support. You are much more likely to experience ill effects of stress if you’re working in a job that has no meaning for you and if you feel alone in life without social support. The buffering hypothesis says that a perceived high degree of social support from family and friends protects us from the potentially adverse effects of stressful events.82 That is, if you feel you have a lot of support, you’re less susceptible to the negative effects of bad stress. ●● Meditate and manage your energy. Meditation is a way to both prevent and alleviate harmful stress responses. Some people meditate every morning or evening as a routine practice. Others find that short breaks to meditate for a few minutes several times a day are just as effective.83 Any time during the day when you’re feeling overwhelmed, you can close your eyes, focus on an image or a Take phrase that you find calming, and breathe deeply. Meditation can be an important part of an overall a Moment healthy lifestyle, such as eating right, getting enough rest and exercising regularly, that helps you As a new manager, learn to better cope with stress. recognise the conditions that

cause stress in the workplace and then change what you can to alleviate unnecessary or excessive stress for employees. Remember that not all stress is negative, but try to help people manage stress in a healthy way.

●   Find work–life balance. The final technique for managing stress is to balance work with other interests and activities. Many organisations offer options to help people lead more balanced lives. But you, as an individual, are also responsible for finding a work–life balance. A survey by the Society for Human Resource Management found that 70 per cent of employees surveyed say they work beyond scheduled time and on weekends, but more than half of those admit that it is because of self-imposed pressure. People who live balanced lives typically accomplish more than those who push themselves.84

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New Manager Self-test P e r s o n a l i t y a s s e s s m e n t: J u n g ’ s t y p o l o g y For each of the following items, circle either a or b. In some cases, both a and b may apply to you. You should decide which is more like you, even if it is only slightly more true.

13. When I am working on an assignment, I tend to: a. Work steadily and consistently b. Work in bursts of energy with ‘down time’ in between

  1. I would rather: a. Solve a new and complicated problem b. Work on something that I have done before

14. When I listen to someone talk on a subject, I usually try to: a. Relate it to my own experience and see whether it fits b. Assess and analyse the message

  2. I like to: a. Work alone in a quiet place b. Be where ‘the action’ is

15. When I come up with new ideas, I generally: a. ‘Go for it’ b. Like to contemplate the ideas some more

  3. I want a boss who: a. Establishes and applies criteria in decisions b. Considers individual needs and makes exceptions

16. When working on a project, I prefer to: a. Narrow the scope so it is clearly defined b. Broaden the scope to include related aspects

  4. When I work on a project, I: a. Like to finish it and get some closure b. Often leave it open for possible change

17. When I read something, I usually: a. Confine my thoughts to what is written there b. Read between the lines and relate the words to other ideas

  5. When making a decision, the most important considerations are: a. Rational thoughts, ideas and data b. People’s feelings and values

18. When I have to make a decision in a hurry, I often: a. Feel uncomfortable and wish I had more information b. Am able to do so with available data

  6. On a project, I tend to: a. Think it over and over before deciding how to proceed b. Start working on it right away, thinking about it as I go along

19. In a meeting, I tend to: a. Continue formulating my ideas as I talk about them b. Speak out only after I have carefully thought the issue through

  7. When working on a project, I prefer to: a. Maintain as much control as possible b. Explore various options

20. In work, I prefer spending a great deal of time on issues of: a. Ideas b. People

  8. In my work, I prefer to: a. Work on several projects at a time, and learn as much as possible about each one b. Have one project that is challenging and keeps me busy

21. In meetings, I am most often annoyed with people who: a. Come up with many sketchy ideas b. Lengthen the meeting with many practical details

  9. I often: a. Make lists and plans whenever I start something and may hate to alter my plans significantly b. Avoid plans and just let things progress as I work on them 10. When discussing a problem with colleagues, it is easy for me: a. To see ‘the big picture’ b. To grasp the specifics of the situation 11. When the phone rings in my office or at home, I usually: a. Consider it an interruption b. Don’t mind answering it 12. The word that describes me better is: a. Analytical b. Empathetic

22. I tend to be: a. A morning person b. A night owl 23. My style in preparing for a meeting is: a. To be willing to go in and be responsive b. To be fully prepared and sketch an outline of the meeting 24. In meetings, I would prefer people to: a. Display a fuller range of emotions b. Be more task-oriented 25. I would rather work for an organisation where: a. My job was intellectually stimulating b. I was committed to its goals and mission 26. On weekends, I tend to: a. Plan what I will do b. Just see what happens and decide as I go along

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27. I am more: a. Outgoing b. Contemplative

Your Score Is: I or E    S or N    T or F    J or P    Your type is    (example: INTJ; ESFP; etc.)

Characteristics frequently associated with each type

28. I would rather work for a boss who is: a. Full of new ideas b. Practical In the following, choose the word in each pair that appeals to you more: 29. a. Social b. Theoretical 30. a. Ingenuity b. Practicality 31. a. Organised b. Adaptable 32. a. Active b. Concentration

Scoring and Interpretation Count one point for each of the following items that you circled in the inventory.

The scores above measure variables similar to the MyersBriggs Type Indicator (MBTI) assessment, based on the work of psychologist Carl Jung. The MBTI assessment, which was described in the chapter text, identifies four dimensions and 16 different ‘types’. The dominant characteristics associated with each type are shown in the chart. Remember that no one is a pure type; however, each individual has preferences for introversion versus extroversion, sensing versus intuition, thinking versus feeling and judging versus perceiving. Read the description of your type as determined by your scores in the survey. Do you believe the description fits your personality?

Characteristics associated with each type

Score for I

Score for E

Score for S

Score for N

(Introversion)

(Extroversion)

(Sensing)

(Intuition)

ISTJ: Organiser, trustworthy, responsible, good trustee or inspector.

2a

2b

1b

1a

ISFJ: Quiet, conscientious, devoted, handles detail, good

6a

6b

10b

10a

conservator.

11a

11b

13a

13b

INFJ: Perseveres, inspirational, quiet caring for others, good

15b

15a

16a

16b

counsellor.

INTJ: Independent thinker, sceptical, theory, competence,

19b

19a

17a

17b

22a

22b

21a

21b

27b

27a

28b

28a

ISTP: Cool, observant, easy-going, good craftsperson.

32b

32a

30b

30a

ISFP: Warm, sensitive, team player, avoids conflict, good artist.

Totals            

     

     

INFP: Idealistic, strong values, likes learning, good at noble

Circle the one with more points: I or E

Circle the one with more points: S or N

(If tied on I/E, don’t count #11)

(If tied on S/N, don’t count #16)

ESTP: Spontaneous, gregarious, good at problem solving and

Score for T

Score for F

Score for J

Score for P

promoting.

(Thinking)

(Feeling)

( Judging)

(Perceiving)

ESFP: Sociable, generous, makes things fun, good as entertainer.

3a

3b

4a

4b

ENFP: Imaginative, enthusiastic, starts projects, good champion.

5a

5b

7a

7b

ENTP: Resourceful, stimulating, dislikes routine, tests limits,

12a

12b

8b

8a

good inventor.

14b

14a

9a

9b

ESTJ: Order, structure, practical, good administrator or supervisor.

20a

20b

18b

18a

ESFJ: People skills, harmoniser, popular, does things for

24b

24a

23b

23a

people, good host.

25a

25b

26a

26b

29b

29a

31a

31b

ENFJ: Charismatic, persuasive, fluent presenter, sociable, active, good teacher.

Circle the one with more points: Circle the one with more points: T or F J or P (If tied on T/F, don’t count #24) (If tied on J/P, don’t count #23)

good scientist.

service.

INTP: Designer, logical, conceptual, likes challenges, good architect.

ENTJ: Visionary planner, takes charge, hearty speaker, natural leader. Source: From Dorothy Marcic, Organizational Behavior, 4th edn (Mason, OH: SouthWestern, Cengage Learning, 1995). Reproduced by permission.

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What manager s and or g an is atio n s c an do Helping employees to manage stress can sometimes be as simple as encouraging people to take regular breaks and vacations. Consider that more than a third of American employees surveyed by the Families and Work Institute don’t take their full allotment of annual leave.85 Here are some proactive approaches managers can take to combat the growing stress level in today’s workplace: ●● Create a psychologically healthy workplace. The number one way to lessen employee stress is to create a healthy corporate culture that makes people feel valued.86 This includes making sure that people don’t have unreasonable workloads, providing opportunities for growth and advancement, and offering suitable salaries and benefits. It also means setting an example for employees to live balanced lives. Paul English, co-founder and chief technology officer of travel search engine Kayak, says Kayak’s philosophy is to ‘work really hard for 40 to 45 hours a week, but we believe in people having strong personal lives’.87 English sometimes takes his children on business trips so they can have new experiences together. At night, he reads murder mysteries or books about global health rather than reading about business or technology. ●● Provide wellness programs and training. Wellness programs that offer access to nutrition counselling and exercise facilities can be highly beneficial in helping people cope with stressful jobs. A worldwide study of wellness programs conducted by the Canadian government found that for each dollar spent, the company gets from $1.95 to $3.75 return payback from benefits.88 Training programs and conferences can help people to identify stressors and teach them coping mechanisms. ●● Train managers in stress intervention. Training managers to recognise warning signs of stress overload is critical. Manager intervention is a growing trend in enlightened companies. At Boston Consulting Group, for instance, the boss steps in if he or she sees someone working too hard or displaying signs of excessive stress. Mark Ostermann says, ‘It was a great feeling [to have the boss provide support]. I didn’t have to complain to anyone. They were proactive in contacting me.’89 ●● Make sure people get to have some fun at work. Particularly for jobs that have a high degree of taskrelated stress, allowing people to blow off steam by having fun can make all the difference in the stress level. At one Tampa-based software company help desk, Zane Bond is the ‘go-to guy for angry callers’, but the stress doesn’t get to him. One reason is that he loves solving problems. Another is that he has fun with his team members, breaking out foam-dart guns and launching into battle with the soundtrack from Top Gun playing in the background.90 Managers should always remember that employees are human resources with human needs. By acknowledging the personal aspects of employees’ lives, these various initiatives communicate that managers and the organisation care about employees. In addition, managers’ attitudes make a tremendous difference in whether employees are stressed out and unhappy or relaxed, energetic and productive.

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➜➜ Stress is a physiological and emotional response to stimuli that place physical or psychological demands on an individual and create uncertainty and lack of personal control when important outcomes are at stake. ➜➜ Stress can sometimes be a positive force, but too much stress is harmful to individuals and the organisations where they work.

sustainable development

➜➜ The behaviour pattern referred to as Type A behaviour is characterised by extreme competitiveness,

impatience, aggressiveness and devotion to work. ➜➜ Type B behaviour is a behaviour pattern that reflects few of the Type A characteristics and includes a more balanced, relaxed approach to life. ➜➜ Type A managers can be powerful forces for innovation and change, but they can also create high stress for themselves and others. ➜➜ Work stress can be caused by both task demands and interpersonal demands. ➜➜ Role ambiguity refers to uncertainty about what behaviours

are expected of a person in a particular role.

remember this

➜➜ Role conflict refers to incompatible demands of different roles, such as the demands of a manager’s superiors conflicting with those of the manager’s subordinates. ➜➜ Managers have direct control over many of the things that cause stress for employees. ➜➜ Individuals can apply a variety of techniques to alleviate the ill effects of stress, and managers can implement initiatives in the workplace to help solve the problem of skyrocketing workplace stress.

Sustainability and organisational behaviour To really have sustainable development take hold in an organisation, by which we mean to achieve changed behaviours at all levels of the organisation, it is important to ‘win the hearts and minds’ of all staff – and, indeed, of external stakeholders – by convincing them of its importance and value. It will not last if it is forced on to people, although some positive encouragement may be needed, along with role modelling by leaders, to get the momentum up. Let’s examine some important methods used by managers to achieve the behaviours needed to take sustainability forward. The cognitive side appeals to many staff. This means explaining the logic of why the organisation and all employees will benefit from embracing sustainability concepts. It means that staff can be given the direct business reasons as to why doing a better job in respect of environmental issues, such as by using less paper and energy in the business, is also good for the financial bottom line. Staff should be involved in creating and implementing such opportunities where possible, because if they do, then their engagement increases, as does their ownership and commitment to the implementation of such ideas. This can also be the case with community work, such as providing waste from a firm’s processes to a community cause, rather than sending it to landfill, or linking the business to a local school and providing advice and part time work to local community members, as jointly suits the firm and the community. Once the heart and the head are committed, then the act of implementation will lead to high levels of personal and team-based job satisfaction and renew the cycle of motivation; for example: ‘Look how much water and paper we have saved, and money, too!’ From this high level of engagement with staff, extrapolation of the same cycle to other stakeholders is the next step. A fine example in Australia is the Bendigo Bank and its community banking concept. An increasing number of Australian community bank branches are opening in a market that would at first seem well served, even saturated. This bank provides grants, typically between $2000 and $20 000 to local community organisations (such as not-for-profit

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sporting clubs) to further their purposes, essentially in exchange for goodwill and loyalty in those local communities. This has allowed community banks to grow as business and personal customers move their business to a bank that is, literally, ‘Doing well by doing good’. This community-minded positioning of these local banks is innovative and ignites goodwill that provides services in local communities, that is also good for business.

Peter Dryen and Frank Cicutto, both described in the opening of this chapter, used the intuitive-thinking style, which is a useful style for top managers who have to deal with many complex problems and make decisions quickly. Each of these CEOs, even though they were in very different business contexts and scales of organisation, dealt daily with the issues described in this chapter, applying decision-making skills to the many issues put before them. However, they realised that taking a purely or overly strongly analytical approach to their leadership roles would not be effective on its own, as the technical side of strategising and decision-making is not everything – far from it. Leaders such as Peter Dryen have kept his company at the top of its industry because he has balanced the application of analytical skills with also taking care of the organisational behaviours needed to get people motivated and committed to doing a great job for the customers and company. He seeks to lead in such a way as to influence his staff’s attitudes and behaviours, so that the company is renowned for its excellent service. Peter has applied the same approach

to his staff as Marilyn Nelson of Carlson (see Case Study above), even though Marilyn leads a company some 800 times larger than Peter’s. The point clearly is that whatever the shape, size and industry of the organisation, staff behaviour is a paramount concern for managers, and that organisational leaders can, and indeed must, pay great attention to achieving the behaviours that will lead to high performance and solid customer service levels: the world is so competitive a place now that anything else will lead directly to failure. Leaders such as Peter and Marilyn have worked hard to engage their middle managers in applying these concepts right across their respective organisations. An interesting further outcome is that Peter Dryen brought his colleague Neil Samuel forward to become Managing Director of the company, so that Peter could step back from daily operational issues and focus on strategic development of that business, whereas the NAB under Frank Cicutto suffered through high levels of churn of talented senior executives, and its profitability, market position and share price languished until Mr Cicutto resigned.

1 Why is self-awareness important for being a good manager? Can you think of some specific negative consequences that might result from a manager with low self-awareness? 2 As a manager, how might you deal with an employee who is always displaying negative emotions that affect the rest of the team? How might you use an understanding of attributions and emotional contagion to help you decide what to do? 3 In what ways might attitudes influence the behaviour of employees who are faced with learning an entirely new set of computer-related skills to retain their jobs at a manufacturing facility? 4 The chapter suggests that optimism is an important characteristic for a manager, yet some employees complain that overly optimistic managers cause them significant stress because they expect their subordinates to meet unreasonable goals or expectations. How might

an employee deal with a perpetually optimistic manager?

Response to the Management Challenge

Discussion questions

5 How might a manager apply an understanding of perception to communicate more effectively with subordinates? 6 Many managers have reported declining levels of job satisfaction in their workplace. What are some factors that might explain this decline in satisfaction levels? Do you think it is possible for managers to reverse the trend? Discuss. 7 Which of the four components of emotional intelligence do you consider most important to an effective manager in today’s world? Why? 8 How might understanding whether an employee has an internal or an external locus of control help a manager better communicate with, motivate and lead the employee?

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9 How do you think a system for self-management such as the five-step system described in this chapter could benefit you as a student? Which parts of the system seem particularly useful to you? Explain.

Ethical challenge

10 Why do you think workplace stress is skyrocketing? Do you think it is a trend that will continue? Explain the reasons for your answer. Do you think it is the responsibility of managers and organisations to help employees manage stress? Why or why not?

Should I fudge the numbers?

Sara MacIntosh recently joined MicroPhone, a large telecommunications company, to take over the implementation of a massive customer service training project. The program was created by Kristin Cole, Head of Human Resources and Sara’s new boss. According to the grapevine, Kristin was hoping this project alone would give her the ‘star quality’ she needed to earn a promotion she’d been longing for. Industry competition was heating up, and MicroPhone’s strategy called for being the very best at customer service. That meant having the most highly trained people in the industry, especially those who would work directly with customers. Kristin had put together a crash team to develop the new training program, which called for an average of one full week of intense customer service training for each of 3000 people and had a price tag in the neighbourhood of AUD$40 million. Kristin’s team, made up of several staffers who already felt overwhelmed with their dayto-day workload, rushed to put the proposal together. It was scheduled to go to the board of directors next month. Kristin knew she needed someone well qualified and dedicated to manage and implement the project, and Sara, with eight years of experience, a long list of accomplishments, and advanced degrees in finance and organisational behaviour, was perfect for the job. When Sara agreed to come aboard, Kristin expressed great relief and confidence in Sara’s ability to make the program work. However, during a thorough review of the proposal, Sara discovered some assumptions built into the formulas of the proposal that raised red flags. She approached Dan Sotal, the team’s coordinator, about her concerns, but the more Dan tried to explain the way the financial projections were derived, the more Sara realised that Kristin’s proposal was seriously flawed. No matter how she tried to work them out, the most that could be squeezed out of the $40 million budget was 20 hours

of training a week, not the 40 hours everyone expected for such a high price tag. Sara knew that, although the proposal had been largely developed before she came on board, it would bear her signature. As she carefully described the problems with the proposal to Kristin and outlined the potentially devastating consequences, Kristin impatiently tapped her pencil on the marble tabletop. Finally, she stood up, leaned forward and interrupted Sara, quietly saying, ‘Sara, make the numbers work so that it adds up to 40 hours and stays within the $40 million budget.’ Sara glanced up and replied, ‘I don’t think it can be done unless we either change the number of employees who are to be trained or the cost figure.’ Kristin’s smile froze on her face and her eyes began to twitch as she again interrupted. ‘I don’t think you understand what I’m saying. We have too much at stake here. Make the previous numbers work.’ Stunned, Sara belatedly began to realise that Kristin was ordering her to fudge the numbers. She felt an anxiety attack coming on as she wondered what she should do. W h at d o yo u d o ? 1 Make the previous numbers work. Kristin and the entire team have put massive amounts of time into the project and they all expect you to be a team player. You don’t want to let them down. Besides, this is a great opportunity for you in a highly visible position. 2 Stick to your ethical principles and refuse to fudge the numbers. Tell Kristin you will work overtime to help develop an alternative proposal that stays within the budget by providing more training to employees who work directly with customers and fewer training hours for those who don’t have direct customer contact. 3 Go to the team and tell them what you’ve been asked to do. If they refuse to support you, threaten to reveal the true numbers to the CEO and board members.

Adapted from Wallace, D. (May–June 1996), ‘Fudge The Numbers or Leave’, Business Ethics, 58–59.

Gr oup Challenge

P e r s o n a l i t y r o l e p l ay

Step 1. Read the following background information: You are the new distribution manager for French Grains Bakery. Five drivers report to you that deliver French Grains baked goods to grocery stores in the metropolitan area. The drivers are expected to complete the Delivery Report to keep track of actual deliveries and any changes that occur. The Delivery Report

is a key element in inventory control and provides the data for French Grains’ invoicing of grocery stores. Errors become excessive when drivers fail to complete the report each day, especially when store managers request additional or different breads and baked goods when the driver arrives. As a result, French Grains may not be paid for several loaves of bread a day for each mistake in the Delivery Report. The result is lost revenue

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and poor inventory control. One of the drivers accounts for about 60 per cent of the errors in the Delivery Reports. This driver is a nice person and is generally reliable, but he is sometimes late for work. His major problem is that he falls behind in his paperwork. A second driver accounts for about 30 per cent of the errors, and a third driver for about 10 per cent of the errors. The other two drivers turn in virtually error-free Delivery Reports. Step 2. Divide into groups of four to six students. As a group, discuss why you think one driver makes so many mistakes. Then, one person volunteers to play the role of the new distribution manager and another

Exactly what will you say, and how will you get the driver to listen and change his behaviour? Step 4. Now, start the role play between the distribution manager and the driver. Other group members act as observers. Step 5. After the role play is completed, the observers give feedback on what worked and did not work with respect to the thinking or authoritarian personality style of giving feedback. How effective was it? Step 6. Repeat steps 3 to 5 with other students volunteering to be the distribution manager and driver. This time the manager should act as if his or her personality is strongly ‘feeling’ or non-authoritarian. Was this

person plays the role of the driver who accounts for 60 per cent of the errors in the delivery reports. Step 3. The new distribution manager should act the role as if his or her personality is high on ‘thinking’ and low on ‘feeling’, or as if he or she is high on ‘authoritarianism’. You have called the driver into your office to talk to him about doing a more complete and accurate job with the Delivery Report. Make some notes about how you will go about correcting this problem as a thinking-oriented or authoritarian leader.

personality style more or less effective for correcting the problem? Step 7. The instructor can ask students to volunteer to play the role of the distribution manager and the driver in front of the class. Different students might take turns playing the role of distribution manager, emphasising a different personality trait each time. The instructor can ask other students for feedback on the leader’s effectiveness and about which approach seems more effective for correcting this situation and why.

Source: Based on K. J. Keleman, J. E. Garcia and K. J. Lovelace, Management Incidents: Role Plays for Management Development (Dubuque, IA: Kendall-Hunt Publishing Company, 1990), pp. 69–72.

V o l k s wa g e n ’ s F e r d i n a n d P i ë c h While many of today’s organisations are shifting towards more democratic, participative types of management, one is not: Volkswagen (VW). In fact, Volkswagen’s former chief executive and current Chairman of the Supervisory Board, Ferdinand Piëch, rules his realm with an iron hand. After a long executive career at such prestigious carmakers as Audi and Porsche (Piëch’s maternal grandfather was Ferdinand Porsche), Piëch took over as Volkswagen’s CEO in 1993. He immediately centralised power in the organisation, firing managers who questioned his ideas or who didn’t follow his lead. He dived into engineering projects himself, proposing new projects, tinkering with designs. He presided over meetings with the demeanour of an autocrat, with the occasional result that ‘critical questions aren’t asked, because people know things can rapidly get uncomfortable’, notes one former executive. Piëch had – and still has – a reason for ruling supreme over his company. He isn’t satisfied that VW is Europe’s leading mass-market car manufacturer; he wants to turn it into the most powerful, most respected carmaker in the world. He won’t settle for less. ‘We’re trying to redefine the status game,’ explains Jens Neumann, a member of Volkswagen’s management board and supporter of Piëch. After creating successes at both Porsche and Audi, such as the Quattro all-wheel drive, Piëch is intent on doing even more at VW. ‘He is the most brilliant and forwardlooking CEO in the business today,’ claims an analyst for a major VW investor. Indeed, in the first five years at the wheel, Piëch turned around several languishing car models, increased the company’s lead in Europe and created a comeback in the crucial US market. Perhaps his most famous project is his reintroduction of the beloved VW Beetle. Despite warnings by market experts, Piëch pushed the bug ahead – redesigned

Case for

cr itical so that it’s a little larger than its analysis predecessor and comes with all the necessary technological bells and whistles – to a warm welcome from customers. Perhaps one reason Piëch is so successful in his method of management is his extensive knowledge of and passion for the cars themselves. From his days as an automotive engineering student at Zurich’s Swiss Federal Institute of Technology, through his stint at Porsche, where he helped create world-class racing cars, to his development of Audi’s Quattro and now the launch of the VW Beetle, Piëch has been found under the hood, tinkering. He knows his product and his customers, and how to fit them together, better than anyone else in the industry. Critics charge that Piëch has too tight a hold over his company. ‘At VW, nothing happens without Piëch,’ notes a former colleague. Oneperson rule can result in massive mistakes. For instance, at one point, Piëch pushed for the purchase of Rolls-Royce Motors from its parent, Vickers PLC. But in a botched deal, he lost the rights to the Rolls-Royce brand name, which actually belongs to Rolls-Royce PLC, the aerospace manufacturer. Critics also point out that Piëch’s fanatical grip on VW has more to do with his personal insecurity than any philosophy of management. ‘He wants to prove that he has been underestimated for years,’ muses one former VW executive. But with Piëch in the lead, the VW group is reporting nearly €200 billion a year in earnings, over 100 per cent more than before he took the driver’s seat. Under his leadership, the company operates 100 production plants in 27 countries and has become the world’s third biggest auto-maker delivering nearly

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10 million vehicles worldwide. Volkswagen has twelve brands and offers 280 models of cars. It has strengthened and diversified its brands and products, and has globalised its business and supply chains. After 20 years as the single most important leader in the VW group, Piëch has promoted others and ceded power to them, while remaining a key figure in influencing strategic decisions from his current chairman’s role. The company employs a staggering 549 763 people globally, and is clearly getting a lot of things right! Q ue s t ions

2 Hardly anyone would argue that Piëch is not an authoritarian executive. Do you sense that he is Machiavellian as well? Do you think these characteristics have a positive or negative impact on the way Volkswagen is run? Explain your answer. 3 Imagine that you are a manager at Volkswagen, and you are experiencing some cognitive dissonance about being asked to work long hours on one of Piëch’s pet projects – a new car model whose success you have doubts about. How might you resolve your dissonance?

1 What personality traits do you think Ferdinand Piëch exhibits? Do you think these contribute to a good person–job fit? Why or why not?

Source: Woodruff, D. and Naughton, K. (5 October 1998). Hard-Driving Boss. BusinessWeek, 82–7; Volkswagen Annual Report 2012, http://www.volkswagenag.com/content/vwcorp/ info_center/en/publications/2013/03/Y_2012_e.bin.html/binarystorageitem/file/GB+2012_e.pdf (accessed 10 December 2013); Yahoo Finance, http://finance.yahoo.com/news/worldlargest-automakers-222430745.html (accessed 10 December 2013); http://www.volkswagenag.com/content/vwcorp/content/en/the_group/production_plants.html (accessed 10 December 2013); Volkswagen, http://www.vw.com (accessed 23 March 2014).

On the job VIDEO CASE

M i t c h e l l G o l d 1 B o b W i l l i a m s : u n d e r s ta n d i n g i n d i v i d u a l b e h av i o u r For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

Q uest io n s 1  In the video, vice president Dan Gauthreaux says, ‘I think you can learn from any job you do and try to make the best of it.’ What does this statement say about Gauthreaux’s personality and selfawareness?

2  How did Kim Clay’s organisational citizenship behaviour lead to the creation of a new computer help desk at MG+BW? 3 What role did management play in fostering Kim Clay’s high organisational commitment? In what ways does this commitment benefit the organisation?

Endnotes 1  Claire Cain Miller and Quentin Hardy. (27 October 2011). For Incoming I.B.M. Chief, Self-Confidence Is Rewarded. The New York Times, http://www.nytimes.com/2011/10/28/business/forincoming-ibm-chiefself-confidence-rewarded.html (accessed 28 October 2011). 2  (6 January 2008). There’s Life (and a Living) after Rejection. The Independent on Sunday; Amy Ellis Nutt. (23 April 2007). Harry Potter’s Disappearing Act. Newhouse News Service, 1; and Tom Muha. (31 May 2009). Achieving Happiness: Setbacks Can Make Us Stronger. The Capital. 3 Muha. Achieving Happiness; and Melinda Beck. (29 April 2008). If at First You Don’t Succeed, You’re in Excellent Company. The Wall Street Journal. 4 M. E. Gist. (July 1987). Self-Efficacy: Implications for Organizational Behavior and Human Resource Management. Academy of Management Review, 47; and Arthur Bandura. Self-efficacy. In V. S. Ramachaudran, ed. (1994). Encyclopedia of Human Behavior, vol. 4 (New York: Academic Press): pp. 71–81.

5 Reported in William W. George et al. (February 2007). Discovering Your Authentic Leadership. Harvard Business Review, 129–38. 6 Bill George. (June 2011). Leadership Skills: It Starts with Self-Awareness. Leadership Excellence, 13; Tricia Bisoux. (September–October 2005). What Makes Leaders Great (interviews with leadership experts), BizEd, 40–5; Warren Bennis. (1989). Why Leaders Can’t Lead (San Francisco: JosseyBass); Daniel Goleman. (November–December 1998). What Makes a Leader? Harvard Business Review, 93ff; and Richard E. Boyatzis. (1982). The Competent Manager: A Model for Effective Performance (New York: Wiley). 7 Employee quoted in Stratford Sherman. (27 November 1995). How Tomorrow’s Best Leaders Are Learning Their Stuff. Fortune, 90–102. 8 Charlotte Beers, interviewed by Adam Bryant. (31 March 2012). The Best Scorecard Is the One You Keep for Yourself. The New York Times, http://www.nytimes.com/2012/04/01/business/charlotte-beers-on-theimportanceof-self-assessment.html?pagewanted=all (accessed 1 April 2012). 9 Thanks to Scott Williams. Self-Awareness and Personal Development. LeaderLetter website, for this image, http://www.wright.edu/~scott.williams/ LeaderLetter/selfawareness.htm (accessed 21 August 2007).

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10 Doug Rauch. (April 2011). Failure Chronicles: ‘You’re Driving Us Crazy. You’ve Got to Back Off’. Harvard Business Review, 56. 11 C. Fletcher and C. Baldry. (2000). A Study of Individual Differences and Self-Awareness in the Context of Multi-Source Feedback. Journal of Occupational and Organizational Behavior, 73:3, 303–19. 12 George. Leadership Skills; and Beers. The Best Scorecard Is the One You Keep for Yourself. 13 Reported in Del Jones. (15 December 2005). Optimism Puts Rose-Colored Tint in Glasses of Top Execs; Or Do They Just Have a Feeble Grip on Reality? USA Today. 14 Jerry Krueger and Emily Killham. (8 December 2005). At Work, Feeling Good Matters. Gallup Management Journal, http://gmj.gallup.com/ content/20311/workfeeling-good-matters.aspx (accessed 17 September 2010). 15 M. T. Iaffaldano and P. M. Muchinsky. (March 1985). Job Satisfaction and Job Performance: A Meta-Analysis. Psychological Bulletin, 251–73; C. Ostroff. (December 1992). The Relationship Between Satisfaction, Attitudes, and Performance: An Organizational-Level Analysis. Journal of Applied Psychology, 963–74; and M. M. Petty, G. W. McGee and J. W. Cavender. (October 1984). A Meta-Analysis of the Relationship between Individual Job Satisfaction and Individual Performance. Academy of Management Review, 712–21. 16 Tony Schwartz. (November 2000). The Greatest Sources of Satisfaction in the Workplace Are Internal and Emotional. Fast Company, 398–402. 17 Towers Perrin survey reported in Employee Engagement. TowersWatson .com, http://www.towersperrin.com/tp/showhtml.jsp?url=global/ service-areas/researchand-surveys/employee-research/ee-engagement. htm&country=global (accessed 17 September 2010). 18 Closing the Engagement Gap: A Road Map for Driving Superior Business Performance. Towers Perrin Global Workforce Study 2007– 2008, http://www.towersperrin.com/tp/getwebcachedoc?webc=HRS/ USA/2008/200803/GWS_Global_Report20072008_31208.pdf (accessed 20 September 2010). 19 Crabtree, Steve. (8 October 2013). Worldwide, 13% of Employees Are Engaged at Work. Gallup World, http://www.gallup.com/poll/165269/ worldwide-employees-engaged-work.aspx (accessed 17 November 2013). 20 Hernandez, Vittorio. (18 July 2012). Survey: Soldiers are the Most Engaged Workers in Australia. International Business Times, http://au.ibtimes.com/ articles/364135/20120718/survey-soldiers-engaged-workers-australia.htm (accessed 15 November 2013). 21 Walters, Laura. (9 October 2013). Low Worker Engagement Holds NZ Back: Study. Business Day, http://www.stuff.co.nz/business/betterbusiness/9262706/Low-worker-engagement-holds-NZ-back-study (accessed 15 November 2013). 22 Hernandez, Vittorio. Survey: Soldiers are the Most Engaged Workers in Australia. 23 National Australia Bank website, http://cr.nab.com.au/what-we-do/ volunteering-and-giving?own_cid=shortURL:volunteering (accessed 17 November 2013). 24 Arlington, Kim. (9 November 2013). Want better workers? Let them be volunteers. The Age (Melbourne), http://newsstore.fairfax.com.au/apps/ viewDocument.ac?page=1&sy=nstore&kw=Want+better+workers&pb=a ll_ffx&dt=selectRange&dr=1month&so=relevance&sf=text&sf=headline& rc=10&rm=200&sp=nrm&clsPage=1&docID=AGE131109C84157LPRAC (accessed 17 November 2013). 25 W. Chan Kin and Renée Mauborgne. (January 2003). Fair Process: Managing in the Knowledge Economy. Harvard Business Review, 127–36. 26 Leadership IQ survey, reported in (September 2007). Many Employees Don’t Trust Their Boss. Machine Design, 2.

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84 (1 August 2009). Pressured to Work? Credit Union Management, https://eds-a-ebscohost-com.ezp.lib.unimelb.edu.au/eds/pdfviewer/ pdfviewer?vid=28&sid=9c0de4ca-ea19-40ab-ae23-daf24e0b0b1c%40sessio nmgr4005&hid=4211 (accessed 14 March 2014). 85 Rosabeth Moss Kanter. (8 April 2005). Balancing Work and Life. KnightRidder Tribune News Service. 86 APA Survey Finds Feeling Valued at Work Linked to Well-Being and Performance.

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87 (February 2010). The Way I Work: Paul English, Kayak. Inc., 98–101. 88 Donalee Moulton. (December 2003). Buckling Under the Pressure. OH & S Canada, 19:8, 36. 89 Jenna Goudreau. (6 August 2007). Dispatches from the War on Stress. BusinessWeek, 74–5. 90 Shellenbarger. Health & Fitness: How to Keep Your Cool in Angry Times.

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ test your understanding of the dynamics of behaviour in organisations by taking the revision quiz ➜ use the online crossword to revise relevant key terms and their definitions ➜ extend your knowledge with Internet research activities and useful weblinks.

Cour seMate

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Define leadership and explain its importance for organisations.

2 Describe how leadership is changing in today’s organisations, including Level 5 leadership, servant leadership and authentic leadership.

  6 Describe the situational model of leadership and its application to subordinate participation.

  7 Discuss how leadership fits the organisational situation and how organisational characteristics can substitute for leadership behaviours.

3 Discuss how women’s style of leading is typically different from men’s.

4 Identify personal characteristics associated with effective leaders.

  8 Describe transformational leadership and when it should be used.

  9 Explain how followership is related to

5 Define task-oriented behaviour and

effective leadership.

people-oriented behaviour and explain how these categories are used to evaluate and adapt leadership style.

10  Identify sources of leader

power and the tactics that leaders use to influence others.

C h a p t e r 15

LEADING IN ORGANISATIONS

Chapter outline ➜ The nature of leadership ➜ Contemporary leadership Level 5 leadership Servant leadership Authentic leadership Gender differences

➜ From management to leadership Leadership traits Behavioural approaches Task versus people The Leadership Grid

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➜ Contingency approaches

The situational model of leadership Fiedler’s contingency theory

➜ Situational substitutes for leadership

➜ Charismatic and

transformational leadership Charismatic leadership Transformational versus transactional leadership

➜ Followership ➜ Power and influence

Position power Personal power Other sources of power Interpersonal influence tactics

➜ Contemporary leaders ➜ Leadership of sustainable development

New Manager Self-test W h at ’ s y o u r p ersonal st y le ? Ideas about effective leadership change over time. To understand your approach to leadership, think about your personal style towards others or towards a student group to which you belong, and then answer each item below as Mostly true or Mostly false for you. Mostly true

Mostly false

1 I am a modest, unassuming person. 2 When a part of a group, I am more concerned about how the group does than how I do. 3 I prefer to lead with quiet modesty rather than personal assertiveness. 4 I feel personally responsible if the team does poorly. 5 I act with quiet determination. 6 I resolve to do whatever needs doing to produce the best result for the group. 7 I am proactive to help the group succeed. 8 I facilitate high standards for my group’s performance. Scoring and interpretation: A recent view of leadership called Level 5 Leadership says that the most successful leaders have two prominent qualities: humility and will. Give yourself one point for each item marked Mostly true. Humility: Items 1, 2, 3, 4 Will: Items 5, 6, 7, 8. Humility means a quiet, modest, self-effacing manner. A humble person puts group or organisational success ahead of one’s personal success. Will means a quiet but fierce resolve to stay the course to achieve the group’s desired outcome and to help the group succeed. The traits of humility and will are opposite the traditional idea of leadership as loud and self-centred. If you scored 3 or 4 on either humility or will, you are on track to level 5 leadership, which says that ordinary people often make excellent leaders.

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Management challenge

When Jess Moore took over the role of general site manager at the ICI Australia (now Orica) site at Botany in Sydney, he knew he was in for a major challenge. The site was infamous in Australia as an ‘industrial relations nightmare’. In essence, the interests of the company managers and the plant employees (the operators and the tradesmen) had totally diverged. Employee relations at the site had been poor for decades, with many employees doing little work during regular work hours, leading to the creation of lots of overtime. This was a prevalent approach in Australian industrial organisations during the twentieth century, especially in the oil and gas, brewing and many other manufacturing sectors. The Botany site had a poor safety record, with numerous severe injuries and deaths on the site. When Jess first came to the site, he wanted to do what had made him a successful leader elsewhere within ICI: spend a few weeks walking the site, simply talking to everybody about the problems the site faced and discussing the way forward. From a business perspective, the whole Botany site was threatened with closure due to lack of competitiveness. Things were so bad that when Jess wanted to go into a control room to talk to the plant operators, the shop stewards who represented the unionised workforce

barred him from entering and communicating with shop floor operators, saying that all communications had to be done with the union, who would then pass the messages on to operators and tradesmen. Jess knew that he could not lead the site away from the precipice it was about to topple over while the interests of management and workers seemed so far apart. Time was of the essence, so Jess had to move quickly to turn things around and revitalise the site. Customers were dissatisfied with service levels and costs were too high, while employees were taking home very large pay packets based on the overtime they generated for themselves. Further, the site had major safety and environmental problems, having previously had a poor record of ‘health safety and environment’ stemming from poor management–worker relationships. Jess’s many challenges included turning around the whole psychology of the workplace. Question How does a leader such as Jess Moore inspire employees to give their best to the organisation? What leadership style would you recommend Jess Moore use to turn complacent workers into a team of productive employees pulling together to serve the customer?

In the previous chapter, we explored differences in attitudes and personality that affect behaviour. Some of the most important attitudes for the organisation’s success are those of its leaders, because leader attitudes and behaviours play a critical role in shaping employee attitudes, such as job satisfaction and organisational commitment. Yet there are as many variations among leaders as there are among other individuals, and many different styles of leadership can be effective. Different leaders behave in different ways depending on their individual differences as well as their followers’ needs and the organisational situation. Consider the differing styles of Pat McGovern, founder and chair of IDG, a technology publishing and research firm that owns magazines such as CIO, PC World and Computerworld, and Tom Siebel, founder and former CEO of software company Siebel Systems. McGovern treats each employee to lunch at the Ritz on his or her tenth anniversary with IDG to tell them how important they are to the success of the company. He personally thanks almost every person in every business unit once a year, which takes about a month of his time. Managers provide him with a list of accomplishments for all their direct reports, which McGovern memorises the night before his visit so he can congratulate people on specific accomplishments. In addition to appreciating and caring about employees, McGovern also shows that he believes in them by decentralising decision making so that people have the autonomy to make their own decisions about how best to accomplish organisational goals. Tom Siebel, in contrast, was known as a disciplined and dispassionate manager who remained somewhat aloof from his employees and maintained strict control over every aspect of the business. At Siebel he enforced a dress code, set tough goals and standards, and held people strictly

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Source: Shutterstock.com/s_bukley

accountable. ‘We go to work to realise our professional ambitions, not to have a good time,’ Siebel has said.1 Both Siebel and McGovern have been successful as leaders, even though their styles are quite different. This chapter explores one of the most widely discussed and researched topics in management: leadership. Here we define leadership and explore how managers develop leadership qualities. We look at some important leadership approaches for contemporary organisations; examine trait, behavioural and contingency theories of leadership effectiveness; discuss charismatic and transformational leadership; explore the role of followership; and consider how leaders use power and influence to get things done. The final section of the chapter discusses servant leadership and moral leadership, two enduring approaches that have received renewed emphasis in recent years. Chapters 16 to 18 will look in detail at many of the functions of leadership, including employee motivation, communication and encouraging teamwork.

The nature of leadership In most situations, a team, military unit, department or volunteer group is only as good as its leader. So, what does it mean to be a leader? Among all the ideas and writings about leadership, three aspects stand out: people, influence and goals. Leadership occurs among people, involves the use of influence and is used to attain goals.2 Influence means that the relationship among people is not passive. Moreover, influence is designed to achieve some end or goal. Thus, leadership as defined here is the ability to influence people towards the attainment of goals. This definition captures the idea that leaders are involved with other people in the achievement of goals. Leadership is reciprocal, occurring among people.3 Leadership is a ‘people’ activity, distinct from administrative paperwork or problem-solving activities.

➜➜ The attitudes and behaviours of leaders shape the conditions that determine how well employees can do their jobs; thus, leaders play a

tremendous role in the organisation’s success. ➜➜ Many different styles of leadership can be effective.

Bob Geldof might seem like an unlikely multinational leader, but he was one of the first to mobilise global musical forces, and in doing so he created musical history. In 1984, as lead singer with the Boomtown Rats, Geldof joined Ultravox lead singer Midge Ure to write a song to raise money for famine relief, and persuaded colleagues to donate their services to record it. Geldof later organised Live Aid, a concert that raised some £40 million for famine relief and long-term development in underdeveloped countries. Geldof joined with Nelson Mandela to champion the cause of poverty alleviation in 2005. That series of events in July 2005 was known as Live 8, which sought to influence the wealthy countries of the world to work harder to ‘Make Poverty History’. leadership The ability to influence people towards the attainment of organisational goals.

➜➜ Leadership is the ability to influence people towards the attainment of organisational goals.

Contemporary leadership The concept of leadership evolves as the needs of organisations change. That is, the environmental context in which leadership is practised influences which approach might be most effective, as well as what kinds of leaders are most admired by society. The technology, economic conditions, labour conditions

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and social and cultural mores of the times all play a role. A significant influence on leadership styles in recent years is the turbulence and uncertainty of the environment. Ethical and economic difficulties, corporate governance concerns, globalisation, changes in technology, new ways of working, shifting employee expectations and significant social transitions have contributed to a shift in how we think about and practise leadership. Four approaches that are in tune with leadership for today’s turbulent times are Level 5 leadership, servant leadership, authentic leadership and interactive leadership, which has been associated with women’s style of leading.

Exhibit 15.1 Level 5 hierarchy

Level 5 Builds excellence through dedication and humility

Effective Stimulates high standards; champions dedication to vision

Competent

Level 4 – Leader

Contributes talent, skills, knowledge

Level 2 – Team member

Level I – Individual

Capable

Contributes individually; works well in group

Level 3 – Manager

Contributing

Manages team members and assets to reach set objectives

Level 5 – Executive

Source: Based on Jim Collins, Good to Great: Why Some Companies Make the Leap . . . and Others Don’t (New York: HarperCollins, 2001), p. 20.

Level 5 lead ershi p

humility Being unpretentious and modest rather than arrogant and prideful.

A study conducted by Jim Collins and his research associates identified the critical importance of what Collins calls Level 5 leadership in transforming companies from merely good to truly great organisations.4 As described in his book Good to Great: Why Some Companies Make the Leap . . . and Others Don’t, Level 5 leadership refers to the highest level in a hierarchy of manager capabilities, as illustrated in Exhibit 15.1. As reflected in the exhibit, a key characteristic of Level 5 leaders is an almost complete lack of ego (humility) coupled with a fierce resolve to do what is best for the organisation (will). Humility means being unpretentious and modest rather than arrogant and prideful. In contrast to the view of great leaders as larger-than-life personalities with strong egos and big ambitions, Level 5 leaders often seem shy and self-effacing. Although they accept full responsibility for mistakes, poor results or failures, Level 5 leaders give credit for successes to other people. Level 5 leaders build organisations based on solid values that go far beyond just making money, with an unwavering resolve to do whatever is needed to make the company successful over the long term.5 One leader who demonstrates Level 5 leadership qualities is Qi Lu of Microsoft.

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Innovative Way

Level 5 leadership at work Qi Lu grew up in a rural village in China with no electricity or running water. Today, he is Executive Vice President, Applications and Services Group at Microsoft, having previously been president of Microsoft’s Online Services division. How did he get there? Not from personal ambition, say former colleagues at Yahoo!. ‘He shunned the limelight,’ said Tim Cadogan, now CEO of OpenX, ‘but he was considered one of the stars.’ Lu rose through the ranks at Yahoo!, and he got the job at Microsoft based not on aggressiveness and pursuit of personal

advancement, but rather because of his sheer intellectual abilities and his commitment to go above and beyond the call of duty to accomplish organisational goals. Lu feels a strong sense of duty and loyalty, pouring his heart and soul into the mission rather than spending his energies promoting himself. On his last day of work at Yahoo!, a problem came up with a database. Rather than leaving the problem for others, Lu worked side by side with his former employees to try to fix it. He finally left at midnight, when his network access was automatically cut off.

Source: Miguel Helft. (31 August 2009). A Hired Gun for Microsoft, in Dogged Pursuit of Google. The New York Times, http://www.nytimes.com/2009/08/31/technology/internet/31search.html (accessed 31 August 2009).

Level 5 leaders like Qi Lu are extremely ambitious for their companies rather than for themselves. As another example, consider Darwin Smith, CEO of Kimberly-Clark from 1971 to 1991. Over those 20 years, Smith transformed Kimberly-Clark from a stodgy paper company with falling stock prices into the leading consumer paper products company in the world. The company generated cumulative shareholder returns that were 4.1 times greater than those of the general market. Yet few people have ever heard of Smith. He shunned the spotlight and was never featured in splashy articles in Fortune magazine or The Wall Street Journal. He was ambitious for the company, not for himself.6 This attitude becomes highly evident in the area of succession planning. Level 5 leaders develop a solid core of leaders throughout the organisation, so that when they leave, the company can continue to thrive and grow even stronger. Egocentric leaders, by contrast, often set their successors up for failure because it will be a testament to their own greatness if the company doesn’t perform well without them. Rather than building an organisation around ‘a genius with a thousand helpers’, Level 5 leaders want everyone to develop to their fullest potential.

Servant lead ershi p When Jack Welch, longtime CEO of General Electric (GE), speaks to MBA students, he reminds them that ‘any time you are managing people, your job is not about you, it’s about them. It starts out about you as . . . an individual in a company’, Welch says. ‘But once you get a leadership job, it moves very quickly to being about them.’7 Some leaders operate from the assumption that work exists for the development of the worker as much as the worker exists to do the work.8 The concept of servant leadership, first described by Robert Greenleaf in 1970, has gained renewed interest in recent years as companies recover from ethical scandals and compete to attract and retain the best human talent.9 A servant leader transcends self-interest to serve others, the organisation and society.10 Marilyn Nelson, joint owner and former CEO of the Carlson Companies (Radisson Hotels, TGI Fridays), says being a true leader means you ‘have to subordinate your own emotions, your own desires, even make decisions on behalf of the whole that might conflict with what you would do on an individual basis’.11 A stunning example of this occurred in the spring of 2009 when a US-flagged cargo ship, the Maersk

servant leadership occurs when a leader transcends self-interest to serve others, the organisation and society.

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Alabama, was seized and raided by Somali pirates. Captain Richard Phillips ordered crew members of the unarmed ship not to fight and gave himself up as a hostage to free the ship and crew. (A big-budget Hollywood film about this incident, called Captain Phillips, was released in 2013.) Contrast his behaviour with that of Costa Concordia captain Francesco Schettino, who allegedly abandoned his ship while passengers were still aboard after the luxury cruise liner hit a rock and sank off the coast of Italy, killing at least 30 people. Schettino has been charged with manslaughter, shipwreck and abandoning ship.12 In organisations, servant leaders operate on two levels: for the fulfilment of their subordinates’ goals and needs and for the realisation of the larger purpose or mission of their organisation. Servant leaders give things away – power, ideas, information, recognition, credit for accomplishments, even money. Servant leaders often work in the non-profit world because it offers a natural way to apply their leadership drive and skills to serve others. But servant leaders also succeed in business. Fred Keller has built a US$250 million plastics manufacturing company, Cascade Engineering, by continuously asking one question: What good can we do? Keller started the business 40 years ago with six employees. Today, it has 1000 employees in 15 business divisions. Keller has made social responsibility a cornerstone of the business. The company offers jobs to welfare recipients. Keller has also donated large amounts to various philanthropic causes, both as an individual and through Cascade.13

Auth entic lead ersh i p authentic leadership Individuals who know and understand themselves, who espouse and act consistently with higherorder ethical values and who empower and inspire others with their openness and authenticity.

Another popular concept in leadership today is the idea of authentic leadership, which refers to individuals who know and understand themselves, who espouse and act consistently with higher-order ethical values, and who empower and inspire others with their openness and authenticity. To be authentic means to be real, to stay true to one’s values and beliefs, and to act based on one’s true self rather than emulate what others do. Authentic leaders inspire trust and commitment because they respect diverse viewpoints, encourage collaboration and help others to learn, grow and develop as leaders. Exhibit 15.2 outlines the key characteristics of authentic leaders, and each is discussed below.14 ●● Authentic leaders pursue their purpose with passion. Leaders who lead without a purpose can fall prey to greed and the desires of the ego. When leaders demonstrate a high level of passion and commitment to a purpose, they inspire commitment from followers. ●● Authentic leaders practise solid values. Authentic leaders have values that are shaped by their personal beliefs, and they stay true to them even under pressure. People come to know what the leader stands for, which inspires trust. ●● Authentic leaders lead with their hearts as well as their heads. All leaders sometimes have to make tough choices, but authentic leaders maintain a compassion for others as well as the courage to make difficult decisions. ●● Authentic leaders establish connected relationships. Authentic leaders build positive and enduring relationships, which makes followers want to do their best. In addition, authentic leaders surround themselves with good people and work to help others grow and develop. ●● Authentic leaders demonstrate self-discipline. A high degree of self-control and self-discipline keeps leaders from taking excessive or unethical risks that could harm others and the organisation.

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Pursues purpose

Practises solid

with passion

values

Exhibit 15.2 Components of authentic leadership Source: Based on Bill George, Authentic Leadership: Rediscovering the Secrets to Lasting Value (San Francisco: Jossey-Bass, 2003).

Leads with the heart as well as

The authentic leader

Connects with others

the head

Demonstrates self-discipline

Gen d er d i fferen ces Some of the general characteristics associated with Level 5 leaders and authentic leaders are also hallmarks of interactive leadership, which has been found to be associated with female leaders. Interactive leadership means that the leader favours a consensual and collaborative process, and influence derives from relationships rather than position power and formal authority.15 Although both men and women can practise interactive leadership, research indicates that women’s style of leadership is typically different from that of most men, and is particularly suited to today’s organisations.16 Using data from actual performance evaluations, one study found that when rated by peers, subordinates and bosses, female managers scored significantly higher than men on abilities such as motivating others, fostering communication and listening.17 Another study of leaders and their followers in businesses, universities and government agencies found that women were rated higher on social and emotional skills, which are crucial for interactive leadership.18 Indeed, in a study already mentioned in Chapter 13 that reviewed more than 7000 360-degree performance evaluations, it was discovered that women outshone men in almost every leadership dimension measured, even some considered typically masculine qualities, such as driving for results. The exception was that women were typically rated lower on developing a strategic perspective, which some researchers believe hinders female managers’ career advancement despite their exceptional ratings on other leadership dimensions.19 Exhibit 15.3 shows results for five of the 16 dimensions measured by the study. One good example of an interactive leader is Cindy Szadokierski, who started as a reservations agent for United Airlines and today is vice president in charge of operations for United’s largest hub at O’Hare International Airport. As she oversees 4000 employees and 600 flights a day, her favourite times are the weekly afternoon walkabouts on the O’Hare ramp and the weekly morning strolls through the terminal, where she can connect with employees and customers. Pete McDonald, chief operating officer of United’s parent, UAL Corporation, says there were serious operations problems at O’Hare, so they put ‘the most communicative person’ in the job. Szadokierski’s approach to leadership is more collaborative than autocratic or ‘command and control’.20

interactive leadership The focus on minimising personal ambition and developing others.

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Men can be interactive leaders as well, as illustrated above by the example of Pat McGovern. McGovern believes that having personal contact with employees and letting them know they’re appreciated is a primary responsibility of leaders.21 The characteristics associated with interactive leadership are emerging as valuable qualities for both male and female leaders in today’s workplace. Values associated with interactive leadership include personal humility, inclusion, relationship building and caring. Exhibit 15.3 Gender differences in leadership behaviours Leadership ability

Who does it best?

Develops others

  (Women rated higher)

Drives for results

  (Women rated higher)

Inspires and motivates others

  (Women rated higher)

  (Women and men rated about equally)

Innovates

Builds relationships

  (Women rated higher)

Technical or professional expertise

  (Women and men rated about equally)

Source: Data from Zenger Folkman, Inc., reported in Jack Zenger and Joseph Folkman. (15 March 2012). Are Women Better Leaders than Men? HBR Blog Network, Harvard Business Review, http://blogs.hbr.org/cs/2012/03/a_study_in_leadership_women_do.html (accessed 12 September 2012).

➜➜ A significant influence on leadership styles in recent years is the turbulence and uncertainty of the environment.

➜➜ A servant leader is a leader who serves others by working to fulfil followers’ needs and goals, as well as to achieve the organisation’s larger mission.

➜➜ One effective approach in today’s environment is Level 5 leadership, which is characterised by an almost complete lack of ego (humility), coupled with a fierce resolve to do what is best for the organisation (will).

➜➜ Authentic leadership refers to leadership by individuals who know and understand themselves, who espouse and act consistently with higher-order ethical values, and who empower and inspire others with their openness and authenticity.

➜➜ Humility means being unpretentious and modest rather than arrogant and prideful.

➜➜ Women leaders typically score significantly higher than men on abilities such as motivating others,

building relationships and developing others – skills that are based on humility and authenticity and are particularly suited to today’s organisations.

remember this

➜➜ Interactive leadership is a leadership style characterised by values such as inclusion, collaboration, relationship building and caring. ➜➜ Although interactive leadership is associated with women’s style of leading, both men and women can be effective interactive leaders.

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From management to leadership Hundreds of books and articles have been written in recent years about the differences between management and leadership. As we know, good management is essential in organisations, yet managers have to be leaders, too, because distinctive qualities are associated with management and leadership that provide different strengths for the organisation. A good metaphor for the distinction between management and leadership is to say that management organises the production and supply of fish to people, whereas leadership teaches and motivates people to fish. Organisations need both types of skills.22 As shown in Exhibit 15.4, management and leadership reflect two different sets of qualities and skills that frequently overlap within a single individual. A person might have more of one set of qualities than the other, but ideally, a manager develops a balance of both manager and leader qualities.23 A primary distinction between management and leadership is that management promotes stability and order within the existing organisational structure and systems. This ensures that suppliers are paid, customers invoiced, products and services produced on time, and so forth. Leadership, on the other hand, promotes vision and change. Leadership means questioning the status quo and being willing to take reasonable risks so that outdated, unproductive or socially irresponsible norms can be replaced to meet new challenges. Consider how Alan Mulally has applied both management and leadership to revive Ford Motor Company. Ford was losing $83 million a day in 2008. Three years later, the company had a net profit of $20 billion. Ford was the only one of the Big Three automakers that didn’t accept a bailout from the US government. Mulally needed excellent management skills to root out operating inefficiencies, cut costs, streamline the structure and improve quality. Yet the turnaround of Ford also depended on consummate leadership. Mulally inspired people with a vision of saving a storied American company and transforming it to meet the challenges of the twenty-first century. He shifted the culture from one of ego-driven infighting to one of cooperation, accountability and commitment. And he motivated thousands of employees to embrace change and execute the vision and strategy. Mulally ate in the company cafeteria rather than the executive dining room so that he could talk with people at all levels of the company, occasionally popped into meetings to offer encouragement and support, and personally answered emails from employees.24 Leadership cannot replace management; it should be in addition to management. Good management is needed to help the organisation meet current commitments, while good leadership is needed to move the organisation into the future. Leadership’s power comes from being built on the foundation of a wellmanaged organisation. ➜➜ Leadership and management reflect two different sets of qualities and skills that provide different benefits for the organisation.

➜➜ Management promotes stability and efficient organising to meet current commitments, whereas leadership often inspires engagement and

organisational change to meet new conditions. ➜➜ Both leadership and management are important to organisations, and people can learn to be good leaders as well as good managers.

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Manager Qualities

Focus on the organisation Rational Maintains stability Assigns tasks Organises Analyses Position power

Exhibit 15.4 Leader and manager qualities Sources: Based on ‘What Is the Difference Between Management and Leadership?’, The Wall Street Journal Online, http://guides.wsj.com/ management/developinga-leadership-style/what-isthe-difference-betweenmanagement-and-leadership (accessed 28 June 2009); and Genevieve Capowski. (March 1994). Anatomy of a Leader: Where Are the Leaders of Tomorrow? Management Review, 12.

traits The distinguishing personal characteristics of a leader, such as intelligence, honesty, self-confidence and even appearance.

strengths Natural talents and abilities that have been supported and reinforced with learned knowledge and skills.

Leader Qualities

Le ad ersh i p tr aits

Early efforts to understand leadership success focused on the leader’s traits. Traits are the distinguishing personal characteristics of a leader, such as intelligence, honesty, self-confidence and even appearance. The early research looked at leaders who had achieved a level of greatness, and hence was referred to as the ‘Great Man’ approach. The idea was relatively simple: find out what made these Focus on people people great and select future leaders who already exhibited the same traits or could be trained to develop them. Generally, early Visionary research found only a weak relationship between personal traits and Promotes change Defines purpose leader success.25 Nurtures In recent years, interest in examining leadership traits has Innovates re-emerged. In addition to personality traits, physical, social and workPersonal power related characteristics of leaders have been studied.26 Exhibit 15.5 summarises the physical, social and personal leadership characteristics that have received the greatest research support. However, these characteristics do not stand alone. The appropriateness of a trait or set of traits depends on the leadership situation. For example, sport coaches Sir Alex Ferguson of Manchester United, Bob Fulton (who successfully coached Manly and Australia in rugby league) and Kevin Sheedy (former long-time Australian Football League coach of Essendon Football Club) have different personality traits, but all have been successful leaders of their football teams. Effective leaders typically possess varied traits, and no single leader can have a complete set of characteristics that is appropriate for handling any problem, challenge or opportunity that comes along. In addition, traits that are typically considered positive can sometimes have negative consequences, and traits sometimes considered negative can have positive consequences. For example, optimism is a highly desirable trait for a leader. As described in the previous chapter, studies have shown that optimism is the single characteristic most common to top executives.27 Leaders need to be able to see possibilities where others see problems and instil in others a sense of hope for a better future. However, optimism can also lull leaders into laziness and overconfidence, causing them to miss danger signals and underestimate risks. The global financial crisis can be blamed partly on leaders who grew overconfident and led their organisations astray. Optimism has to be paired with ‘reality testing’ and conscientiousness, another trait common to successful leaders, as shown in Exhibit 15.5.28 Therefore, rather than just understanding their traits, the best leaders recognise and hone their strengths.29 Strengths are natural talents and abilities that have been supported and reinforced with learned knowledge and skills and provide each individual with his or her best tools for accomplishment and satisfaction.30 Every manager has a limited capacity; those who become good leaders are the ones who tap into their key strengths that can make a difference. Effective leadership isn’t about having the ‘right’ traits, but rather about finding the strengths that one can best exemplify and apply as a leader.

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Exhibit 15.5 Personal characteristics of leaders Physical characteristics

Personality

Work-related characteristics

Energy

Self-confidence

Achievement drive, desire to excel

Physical stamina

Honesty and integrity

Conscientiousness in pursuit of goals

Optimism

Persistence against obstacles, tenacity

Desire to lead Independence Intelligence and Ability

Social Characteristics

Social Background

Intelligence, cognitive ability

Sociability, interpersonal skills

Education

Knowledge

Cooperativeness

Mobility

Judgement, decisiveness

Ability to enlist cooperation Tact, diplomacy

Sources: Based on Bernard M. Bass, Bass & Stogdill’s Handbook of Leadership: Theory, Research, and Managerial Applications, 3rd edn (New York: The Free Press, 1990), pp. 80–1; and S. A. Kirkpatrick and E. A. Locke. (1991). Leadership: Do Traits Matter? Academy of Management Executive, 5:2, 48–60.

➜➜ Traits are distinguishing personal characteristics, such as intelligence, self-confidence, energy and independence.

➜➜ Strengths are natural talents and abilities that have been supported and reinforced with learned knowledge and skills.

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Behavi o u r al approach es The inability to define effective leadership based solely on traits led to an interest in looking at the behaviour of leaders and how it might contribute to leadership success or failure. Two basic leadership behaviours identified as important for leadership are attention to tasks and attention to people.

Task versus peo ple Two types of behaviour that have been identified as applicable to effective leadership in a variety of situations and time periods are task-oriented behaviour and people-oriented behaviour.31 Although they are not the only important leadership behaviours, concern for tasks and concern for people must be shown at some reasonable level. Thus, many approaches to understanding leadership use these metacategories, or broadly defined behaviour categories, as a basis for study and comparison. Important early research programs on leadership were conducted at the Ohio State University and the University of Michigan.32 Ohio State researchers identified two major behaviours they called consideration and initiating structure. Consideration falls in the category of people-oriented behaviour, and is the extent to which the leader is mindful of subordinates, respects their ideas and feelings, and establishes mutual trust. Initiating structure is the degree of task behaviour; that is, the extent to which the leader is task oriented and directs subordinate work activities towards goal attainment. Studies suggest that effective leaders may be high on consideration and low on initiating structure or low on consideration and high on initiating structure, depending on the situation.33

consideration The extent to which the leader is mindful of subordinates, respects their ideas and feelings, and establishes mutual trust. initiating structure The degree of task behaviour; the extent to which the leader is task oriented and directs subordinate work activities towards goal alignment.

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Research at the University of Michigan at about the same time also considered task- and peopleoriented behaviours by comparing the behaviour of effective and ineffective supervisors.34 The most effective supervisors were those who established high performance goals and displayed supportive behaviour towards subordinates. These were referred to as employee-centred leaders. The less effective leaders were called job-centred leaders; these leaders tended to be less concerned with goal achievement and human needs in favour of meeting schedules, keeping costs low, and achieving production efficiency.

Th e Lead ershi p Gri d

Exhibit 15.6 The Leadership Grid figure Source: The Leadership Grid figure, Paternalism figure and Opportunism figure from Robert R. Blake and Anne Adams McCanse, Leadership Dilemmas–Grid Solutions (formerly the Managerial Grid by Robert R. Blake and Jane S. Mouton) (Houston: Gulf Publishing Company, 1991), Grid figure, p. 29; Paternalism figure, p. 30; Opportunism figure, p. 31. Copyright © 1991 by Blake and Mouton, and Scientific Methods, Inc. Reproduced by permission of the owners.

Building on the work of the Ohio State and Michigan studies, Blake and Mouton of the University of Texas proposed a two-dimensional theory called the Managerial Grid®, which was later restated by Blake and McCanse as the Leadership Grid®.35 The model and five of its major management styles are depicted in Exhibit 15.6. Each axis on the grid is a nine-point scale, with 1 meaning low concern and 9 meaning high concern. Team management (9, 9) often is considered the most effective style and is recommended for leaders because organisation members work together to accomplish tasks. Country club management (1, 9) occurs when primary emphasis is given to people rather than to work outputs. Authority compliance management (9, 1) occurs when efficiency in operations is the dominant orientation. Middle-of-the-road management (5, 5) reflects a moderate amount of concern for both people and production. Impoverished management (1, 1) means the absence of a management philosophy; managers exert little effort towards interpersonal relationships or work accomplishment. High 9

8

7 Concern for people

Leadership Grid A two-dimensional leadership theory that measures the leader’s concern for people and for production.

9,9 Team management Work accomplishment is from committed people; interdependence through a common stake in organisation purpose leads to relationships of trust and respect.

6

5

4

3

2

1 Low

1,9 Country club management Thoughtful attention to the needs of people for satisfying relationships leads to a comfortable, friendly organisation atmosphere and work tempo.

5,5 Middle-of-the-road management Adequate organisation performance is possible through balancing the necessity to get out work with maintaining morale of people at a satisfactory level. Authority-compliance Impoverished management Efficiency in operations Exertion of minimum effort results from arranging to get required work done conditions of work in is appropriate to sustain such a way that human organisation membership. elements interfere to a 1,1 minimum degree. 9,1 1 Low

2

3

4

5

6

Concern for production

7

8

9 High

®

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➜➜ Two basic leadership behaviours identified as important for leadership are attention to tasks and attention to people. ➜➜ Consideration is the term used by researchers at Ohio State University to describe the extent to which a leader is sensitive to subordinates,

respects their ideas and feelings, and establishes mutual trust. ➜➜ Initiating structure is the term that describes the extent to which a leader is task oriented and directs subordinates’ work activities towards goal accomplishment. ➜➜ Researchers at the University of Michigan used the terms

employee-centred leaders and job-centred leaders to describe the same two basic leadership behaviours.

remember this

➜➜ The Leadership Grid is a twodimensional leadership model that measures the leader’s concern for people and concern for production to categorise the leader in one of five different leadership styles.

Sources: Forbes ‘Most Powerful People’. http://www. forbes.com/profile/rupert-murdoch/ (accessed 18 November 2013); Durie, J. and Kitney, D. (29 June 2012). News Corporation Split Will Unlock Value. The Australian, http://www.theaustralian.com.au/media/ local-news-assets-to-stay-together-as-directorsapprove-historic-split-of-the-global-media-giant/ story-e6frg996-1226411572734 (accessed 18 November 2013); Investor Relations 21st Century Fox, http://www.21cf.com/Investor_Relations/ (accessed 18 November 2013); Investor Relations News Corporation, http://investors.newscorp.com/stockquote. cfm (accessed 18 November 2013) and Rushton, K. (11 November 2013). News Corp Expected to Post $12m Loss. The Telegraph, http://uk.finance.yahoo.com/ news/news-corp-expected-post-12m-203151634.html (accessed 18 November 2013).

Source: Getty Images/Pascal Le Segretain

other growth markets. He is without doubt a strong and successful leader. However, in mid2011, News Corporation and Mr Murdoch had to move into crisis management mode as the UK phone hacking scandal severely challenged their ethics and corporate reputation. In another bold move and an attempt to regain shareholder confidence News Corp was divided into two businesses in 2013, one made up of the TV and film empire (21st Century Fox) and the other a smaller, less profitable business consisting of the newspaper and book publishing enterprises (retaining the name News Corp). Murdoch, who is now in his 80s, serves as chairman of both businesses and is CEO of 21st Century Fox. It was hoped that the split would allow both arms of the media and publishing businesses to focus on building value, and also distance the more profitable parts of the company from the UK newspaper hacking scandal. The publishing arm faces greater challenges than the entertainment arm, as the declining profitability of newspapers continues to test leadership decisions and future strategic choices. Since breaking into two, the share price for 21st Century Fox has remained close to its opening price of A$34; however, News Corp hit a low of A$14.50 soon after the split occurred, slowly recovering to around A$18.00 but it still faces heavy financial losses.

Case study

News Corporation News Corporation has certainly come a long way since its humble beginnings in Adelaide. Today, its founder, Chairman and CEO Rupert Murdoch makes multibillion-dollar deals in television, media and Internet-based industries all over the world. However, not all of these deals bear fruit immediately. For example, Star TV lost approximately A$80 million on sales of A$140 million in Asia, and News has appointed Gareth Chang to try and revitalise its Asian operations. This particularly means focusing efforts on establishing Star TV’s reach into the huge potential markets of India and China. Chang is well connected to a number of political leaders across Asia, and these relationships are important to getting the access to marketplaces and the licences that are critical to distribute media and television signals. Rupert Murdoch has been a successful leader by any measure, building from an Australian base of newspaper publishing to take News Corporation to become an A$85 billion corporate giant that includes Fox film studios and TV network, satellite TV in most major regions of the world, and ownership of major sporting teams and newspapers all over the world. Forbes ranked Murdoch the 33rd most powerful person in the world in 2013, and he has a net personal worth of $13.4 billion. While Murdoch is positioning his children to succeed him in running this business, he is also building satellite TV capacity in China and

615

Rupert Murdoch and News Corporation have created a global high technology communications network.

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Contingency approaches

contingency approach A model of leadership that describes the relationship between leadership styles and specific organisational situations.

Steven Sinofsky led a team of Microsoft software engineers working on the next generation of Windows operating system software. At Apple, Bertrand Serlet led a team to try to make sure the new Macintosh operating system is better. Although they held the same type of job, Sinofsky and Serlet were widely different in their approaches to leadership. Sinofsky is a meticulous planner and likes to run a tight ship. ‘Under Sinofsky,’ one engineer said, ‘you plan and you stick to the plan.’ Serlet, on the other hand, prefers things to be a little chaotic. He isn’t a stickler for rules and procedures, emphasising a more flexible, laid-back style. A programmer who has worked under both leaders compared Sinofsky’s style to that of a martial marching band, while Serlet’s was compared to an improvisational jazz group.36 How can two people with widely different styles both be effective leaders? The answer lies in understanding contingency approaches to leadership, which explore how the organisational situation influences leader effectiveness. Contingency approaches include the situational model based on the work of Hersey and Blanchard, the leadership model developed by Fiedler and his associates, and the substitutes-for-leadership concept.

Th e situati o nal mo d el o f le ad ersh i p situational model A contingency approach to leadership that links the leader’s behavioural style with the task readiness of employees.

The situational model of leadership, which originated with Hersey and Blanchard, is an interesting extension of the behavioural theories summarised in the Leadership Grid (see Exhibit 15.6). This approach focuses a great deal of attention on the characteristics of followers in determining appropriate leadership behaviour. The point of the situational model is that subordinates vary in readiness, which is determined by the degree of willingness and ability a subordinate demonstrates while performing a specific task. Willingness refers to a combination of confidence, commitment and motivation, and a follower may be high or low on any of the three variables. Ability refers to the amount of knowledge, experience and demonstrated skill a subordinate brings to the task. Effective leaders adapt their style according to the readiness level of the people they are managing. People low in readiness – because of little ability or training or insecurity – need a different leadership style than those who are high in readiness and have good ability, skills, confidence and willingness to work.37 According to the situational model, a leader can adopt one of four leadership styles, as shown in Exhibit 15.7. The directing style is a highly dictating style and involves giving explicit directions about how tasks should be accomplished. The coaching style is one where the leader explains decisions and gives subordinates a chance to ask questions and gain clarity and understanding about work tasks. The supporting style is one where the leader shares ideas with subordinates, gives them a chance to participate and facilitates decision making. The fourth style, the entrusting style, provides little direction and little support because the leader turns over responsibility for decisions and their implementation to subordinates. Exhibit 15.7 summarises the situational relationship between leader style and follower readiness. The directing style has the highest probability of successfully influencing low readiness followers who are unable or unwilling – because of poor ability and skills, little experience or insecurity – to take responsibility for their own task behaviour. The leader is specific, directing people exactly what to do, how to do it and when. The coaching and supporting styles work for followers at moderate readiness levels.

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High

Focus on task needs

1. Directing style 

Exhibit 15.7 The situational model of leadership

2. Coaching style

Authoritative leader provides detailed goals and tasks, closely monitors operations and performance. Use this style when followers have low readiness, low ability and lack confidence.

4. Entrusting style

Dual-focus leader provides both task instruction and personal support as needed.  Use this style when followers have moderate readiness because of confidence to proceed but lack ability.  

Source: Based on Gary Yukl, Angela Gordon and Tom Taber. A Hierarchical Taxonomy of Leadership Behavior: Integrating a Half Century of Behavior Research. Journal of Leadership and Organization Studies, 9:1, 15–32, and Paul Hersey, Kenneth Blanchard and Dewey Johnson, Management of Organizational Behavior: Utilizing Human Resources, 7th edn (Upper Saddle River, NJ: Prentice Hall, 1996).

3. Supporting style

Delegating leader who displays little focus on either task or people needs. Use this style when followers have high readiness because of ability and confidence to perform tasks themselves.

Engaging leader encourages, supports, consults with and develops followers’ skills and confidence.  Use this style when followers have moderate readiness because of ability but lack confidence and need personal support.

Low

617

High

Focus on people needs

For example, followers might lack some education and experience for the job but have high confidence, interest and willingness to learn. As shown in the exhibit, the coaching style is effective in this situation because it involves giving direction but also includes seeking input from others and clarifying tasks rather than simply instructing that they be performed. When followers have the necessary skills and experience but are somewhat insecure in their abilities or lack high willingness, the supporting style enables the leader to guide followers’ development and act as a resource for advice and assistance. When followers demonstrate high readiness, that is, they have high levels of education, experience and readiness to accept responsibility for their own task behaviour, the entrusting style can effectively be used. Because of the high readiness level of followers, the leader can delegate responsibility for decisions and their implementation to subordinates who have the skills, abilities and positive attitudes to follow through. The leader provides a general goal and sufficient authority to do the task as followers see fit. To apply the situational model, the leader diagnoses the readiness level of followers and adopts the appropriate style – directing, coaching, supporting or entrusting. For example, Jo Newton, an impulse import category leadership manager at Mars’ Slough office near London, uses primarily a supporting style. Most members of Newton’s team are at moderate to high readiness levels, so Newton advises them of the results the company wants and then steps back, providing guidance and support as needed. ‘I like people to come up with their own way of doing things. . . .’ she says. ‘I like to support people as opposed to directing them to do things.’38 A leader taking over a new team of inexperienced or uncertain members would likely have to provide more direction with either a directing or coaching style. On the other hand, Warren Buffett uses a primarily entrusting style. The octogenarian CEO of Berkshire Hathaway is considered one of the world’s best managers, but he isn’t closely involved in the day-to-day management of all the businesses Berkshire owns. He trusts the managers of the various units, who are highly skilled professionals able and willing to take responsibility for their own task behaviour.39 An entrusting leader style is not always appropriate, but all managers need to be able to delegate some tasks and decisions for the organisation to work smoothly. The Shoptalk discusses techniques for effective delegation.

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New Manager Self-test Tas k v ers u s p eo p le orientation Instructions: Responding to the statements below can help you diagnose your approach to dealing with others when you are in a leadership role. If you have been a leader at work with people reporting to you, think back to that experience. Or you can think about how you usually behave as a leader in a group to get an assignment completed. Please answer honestly about how frequently you display each behaviour. Mostly true

 1 I intentionally try to make people’s work on the job more pleasant.  2 I focus more on execution than on being pleasant with people.  3 I go out of my way to help others.  4 I personally hold people accountable for their performance.  5 I work hard to maintain a friendly atmosphere on the team.

Mostly false

Scoring and interpretation: Give yourself 2 points for each Mostly true and 1 point for each Mostly false. People Orientation: Sum your points for the odd-numbered questions: ______________________________________________. Task Orientation: Sum your points for the even-numbered questions: ______________________________________________. Your People Orientation score reveals your orientation towards people and relationships as described in the chapter. A score of 10 or higher suggests that you may be ‘high’ on people behaviour. A score of 9 or below suggests that you may be ‘low’ on people orientation. Your Task Orientation score reveals your orientation towards tasks and outcomes. A score of 10 or higher suggests that you may be ‘high’ on taskoriented behaviour. A score of 9 or below suggests that you may be ‘low’ on task orientation. What is your primary leadership orientation? Which of the following best represents your leadership style (check one)? Look at Exhibit 15.7 on page 617 to see the quadrant in which you fit. ______Low Task, Low People 5 Entrusting style

 6 I clearly tell people what I expect of them

______Low Task, High People 5 Supporting style

 7 I think a lot about people’s personal welfare.

______High Task, High People 5 Coaching style Does your quadrant seem correct based on your experience? Compare your scores to other students’ scores.

 8 I check up on people to know how they are doing.

______High Task, Low People 5 Directing style

 9 I am concerned more with relationships than with results. 10 I assign people to specific roles and tasks. 11 I focus more on being pleasant with people than on execution of tasks. 12 I am concerned more with results than with people’s feelings.

Fi ed ler’s co ntin gen cy th eo ry Whereas the situational model focused on the characteristics of followers, Fiedler and his associates looked at some other elements of the organisational situation to assess when one leadership style is more effective than another.40 The starting point for Fiedler’s theory is the extent to which the leader’s

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style is task oriented or relationship (people) oriented as referred to above. Fiedler considered a person’s leadership style to be relatively fixed and difficult to change; therefore, the basic idea is to match the leader’s style with the situation most favourable for his or her effectiveness. By diagnosing leadership style and the organisational situation, the correct fit can be arranged.

Si tu ation: favour able or un fav our able? The suitability of a person’s leadership style is determined by whether the situation is favourable or unfavourable to the leader. The favourability of a leadership situation can be analysed in terms of three elements: the quality of relationships between leader and followers, the degree of task structure (meaning the extent to which processes can be formally defined or standardised) and the extent to which the leader has formal authority over followers.41 A situation would be considered highly favourable to the leader when leader–member relationships are positive, tasks are highly structured and the leader has formal authority over followers. In this situation, followers trust, respect and have confidence in the leader. The group’s tasks are clearly defined, involve specific procedures and have clear, explicit goals. In addition, the leader has formal authority to direct and evaluate followers, along with the power to reward or punish. A situation would be considered highly unfavourable to the leader when leader–member relationships are poor, tasks are highly unstructured and the leader has little formal authority. In a highly unfavourable situation, followers have little respect for or confidence and trust in the leader. Tasks are vague and ill-defined and lack clear-cut procedures and guidelines. The leader has little formal authority to direct subordinates and does not have the power to issue rewards or punishments.

Matching leader st yle t o th e s i tuati o n When Fiedler examined the relationships among leadership style and situational favourability, he found the pattern shown in Exhibit 15.8. Task-oriented leaders are more effective when the situation is either highly favourable or highly unfavourable. Relationship-oriented leaders are more effective in situations of moderate favourability. The task-oriented leader excels in the favourable situation because everyone gets along, the task is clear and the leader has power; all that is needed is for someone to lead the charge and provide direction. Similarly, if the situation is highly unfavourable to the leader, a great deal of structure and task direction is needed. A strong leader will define task structure and establish strong authority. Because leader–member relations are poor anyway, a strong task orientation will make no difference in the leader’s popularity.

High

Performance

Task-oriented leader

Relationshiporiented leader

Low Situation very favourable to leader

Situation intermediately favourable to leader

Situation very unfavourable to leader

Exhibit 15.8 How leader style fits the situation Source: Based on Fred E. Fiedler. The Effects of Leadership Training and Experience: A Contingency Model Interpretation. (1972). Administrative Science Quarterly, 17, 455.

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management in pr actice

How to delegate

Sometimes, managers cling too tightly to their decisionmaking and task responsibilities. Failure to delegate occurs for a number of reasons: managers are most comfortable making familiar decisions; they feel they will lose personal status by delegating tasks; they believe they can do a better job themselves; or they have an aversion to risk – they will not take a chance on delegating because performance responsibility ultimately rests with them. Yet delegating tasks and decision making offers an organisation many advantages. Decisions are made at the right level, lower-level employees are motivated, and employees have the opportunity to develop decision-making skills. The following approach can help you to delegate more effectively as a manager:

➜➜ Delegate the whole task. A manager should delegate an entire task to one person rather than dividing it among several people. This type of delegation gives the individual complete responsibility and increases his or her initiative while giving the manager some control over the results.

➜➜ Select the right person. Not all employees have the same capabilities and degrees of motivation. If delegation is to be effective, managers must match talent to task. They should identify subordinates who made independent decisions in the past and show a desire for more responsibility.

➜➜ Ensure that authority equals responsibility. Merely assigning a task is not effective delegation. Managers often load subordinates with increased responsibility, but do not extend their decision-making range. In addition to having responsibility for completing a task, the worker must be given the authority to make decisions about how best to do the job.

➜➜ Give thorough instruction. Successful delegation includes information on what, when, why, where, who and how.

The subordinate must clearly understand the task and the expected results. It is a good idea to write down all provisions discussed, including required resources and when and how the results will be reported.

➜➜ Maintain feedback. Feedback means keeping open lines of communication with the subordinate to answer questions and provide advice, but without exerting too much control. Open lines of communication make it easier to trust subordinates. Feedback keeps the subordinate on the right track.

➜➜ Evaluate and reward performance. Once the task is completed, the manager should evaluate results, not methods. When results do not meet expectations, the manager must assess the consequences. When they do meet expectations, the manager should reward employees for a job well done with praise, financial rewards when appropriate and delegation of future assignments.

Are you a positive delegator? Do you help or hinder the decentralisation process? If you answer yes to more than three of the following questions, you may have a problem delegating:

➜➜ I tend to be a perfectionist. ➜➜ My boss expects me to know all the details of my job. ➜➜ I don’t have the time to explain clearly and concisely how a task should be accomplished.

➜➜ I often end up doing tasks myself. ➜➜ My subordinates typically are not as committed as I am. ➜➜ I get upset when other people don’t do the task right. ➜➜ I really enjoy doing the details of my job to the best of my ability.

➜➜ I like to be in control of task outcomes.

Sources: Thomas R. Horton. (September 1992). Delegation and Team Building: No Solo Acts Please. Management Review, 58–61; Andrew E. Schwartz. (June 1987). The Why, What, and to Whom of Delegation. Management Solutions, 31–8; Delegation. (June 1986). Small Business Report, 38–43; and Russell Wild. (May 2000). Clone Yourself. Working Woman, 79–80.

An example of matching style to situation is to consider what type of leadership is best suited to organisations which are underperforming. Researchers at the University of Chicago who looked at CEOs in turnaround situations – where companies typically have high debt loads and a need to improve results in a hurry – found that tough-minded, task-focused characteristics such as analytical skills, a focus on efficiency and setting high standards were more valuable leader qualities than relationship skills such as good communication, listening and teamwork.42

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The relationship-oriented leader performs better in situations of intermediate favourability because human relations skills are important in achieving high group performance. In these situations, the leader may be moderately well-liked, have some power and supervise jobs that contain some ambiguity. A leader with good interpersonal skills can create a positive group atmosphere that will improve relationships, clarify task structure and establish position power. A leader, then, needs to know two things to use Fiedler’s contingency theory. First, the leader should know whether he or she has a relationship- or task-oriented style. Second, the leader should diagnose the situation and determine whether leader–member relations, task structure and position power are favourable or unfavourable. Fiedler believed that fitting leader style to the situation can yield big dividends in profits and efficiency.43 On the other hand, Fiedler’s model has also been criticised.44 Some researchers have challenged the idea that leaders cannot adjust their styles as situational characteristics change. Despite these criticisms, though, Fiedler’s model has continued to influence leadership studies. Fiedler’s research called attention to the importance of finding the correct fit between leadership style and situation.

Situational substitutes for leadership The contingency leadership approaches considered so far focus on the leader’s style, the subordinates’ natures and the situation’s characteristics. The final contingency approach suggests that situational variables can be so powerful that they actually substitute for or neutralise the need for leadership.45 This approach outlines those organisational settings in which a leadership style is unimportant or unnecessary. Exhibit 15.9 shows the situational variables that tend to substitute for or neutralise leadership characteristics. A substitute for leadership makes the leadership style unnecessary or redundant. For example, highly professional subordinates who know how to do their tasks do not need a leader who initiates structure for them and tells them what to do. A neutraliser counteracts the leadership style and prevents the leader from displaying certain behaviours. For example, if a leader has absolutely no position power or is physically removed from subordinates, the leader’s ability to give directions to subordinates is greatly reduced. Situational variables in Exhibit 15.9 include characteristics of the group, the task and the organisation itself. When followers are highly professional and experienced, both leadership styles are less important. People do not need much direction or consideration. With respect to task characteristics, highly structured tasks substitute for a task-oriented style, and a satisfying task substitutes for a people-oriented style. With respect to the organisation itself, group cohesiveness substitutes for both leader styles. Formalised rules and procedures substitute for leader task orientation. Physical separation of leader and subordinate neutralises both leadership styles. The value of the situations described in Exhibit 15.9 is that they help leaders to avoid leadership overkill. Leaders should adopt a style that complements the organisational situation. Consider the work situation for bank tellers. A bank teller performs highly structured tasks, follows clearly written rules and procedures, and has little flexibility in terms of how to do the work. The head teller should not adopt a taskoriented style, because the organisation already provides structure and direction. The head teller should concentrate on a people-oriented style to provide a more pleasant work environment for the other tellers. In other organisations, if group cohesiveness or intrinsic satisfaction meets employees’ social needs, the leader is free to concentrate on task-oriented behaviours. The leader can adopt a style complementary to the organisational situation to ensure that both task needs and people needs of the work group will be met.

substitute for leadership A situational variable that makes a leadership style redundant or unnecessary. neutraliser A situational variable that counteracts a leadership style and prevents the leader from displaying certain behaviours.

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Exhibit 15.9 Substitutes and neutralisers for leadership

Task-oriented leadership

People-oriented leadership

Group cohesiveness

Substitutes for

Substitutes for

Formalisation

Substitutes for

No effect on

Inflexibility

Neutralises

No effect on

Low position power

Neutralises

Neutralises

Physical separation

Neutralises

Neutralises

Highly structured task

Substitutes for

No effect on

Automatic feedback

Substitutes for

No effect on

Intrinsic satisfaction

No effect on

Substitutes for

Professionalism

Substitutes for

Substitutes for

Training/experience

Substitutes for

No effect on

Variable

Organisational variables

Task characteristics

Group characteristics

➜➜ A contingency approach is a model of leadership that describes the relationship between leadership styles and specific situations. ➜➜ One contingency approach is the situational model, which links the leader’s behavioural style with the readiness level of followers. ➜➜ In general, a task-oriented leader style fits a low-readiness follower,

Source: Courtesy Patricia Neden

Austr alian manager pr ofile

and a relationship leader style fits a higher-readiness follower. ➜➜ In Fiedler’s contingency theory, the suitability of a leader’s style is determined by whether the situation is considered favourable or unfavourable to the leader. ➜➜ Task-oriented leaders are considered to perform better in either highly favourable or highly unfavourable situations.

➜➜ Relationship-oriented leaders are considered to perform better in situations of intermediate favourability.

remember this

➜➜ A substitute for leadership is a situational variable that makes a leadership style redundant or unnecessary. ➜➜ A neutraliser is a situational variable that counteracts a leadership style and prevents the leader from displaying certain behaviours.

Patricia Neden

Patricia Neden is the Chief Executive Officer of Innovation and Business Skills Australia (IBSA). IBSA is one of 11 Industry Skills Councils (ISCs), not-for-profit companies funded by the Australian Government. Previously, Patricia was Deputy Secretary in the Victorian Department of Innovation, Industry and Regional Development and responsible for Skills Victoria. Patricia’s experience covers policy, intergovernmental negotiations, national

systems implementation and purchasing arrangements. She previously held senior positions in other Victorian Government departments, including Industry and Labour. Patricia commenced her career in the private sector, working predominantly in information technology and manufacturing in Victoria and overseas, and in the mining industry in Western Australia. Patricia is a Director of TVET Australia, and a member of the National Quality Council’s Quality of Assessment Action Group. She is a member of the Australian Government’s Contributions Review Panel for international education

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providers and on the Board of the Victorian Registration and Qualifications Authority. Challenges facing managers today include aligning people with company objectives and driving change through the development of innovative products, processes and ways of doing things internally. Patricia believes that developing a culture of ‘can do’ energises people and results in goals being achieved. Another contemporary challenge is the mix of generations in the workforce and their varied expectations about both the nature of work and conditions. Providing work that mines the experience of older people and allows for the

development of younger ones is critical. It is also important to accommodate the different working conditions various age groups require, ranging from flexible arrangements to accommodate creche pick-up times at one end of the spectrum, to part-time arrangements to ensure grandchildren are looked after or other pursuits are factored in at the other end. In 2008, the Institute of Public Administration awarded Patricia a Victorian Fellowship in recognition of her outstanding contribution to public administration and exemplary service to the Victorian community. Source: Courtesy Patricia Neden.

Charismatic and transformational leadership Research has also looked at how leadership can inspire and motivate people beyond their normal levels of performance. Some leadership approaches are more effective than others for bringing about high levels of commitment and enthusiasm. Two types of leadership with a substantial impact are charismatic and transformational.

management in pr actice

Are you a charismatic leader? If you were the head of a major department in a company, how important would each of the following activities be to you? Answer yes or no to indicate whether you would strive to perform each activity. 1. Help employees clarify goals and how to reach them. 2. Give people a sense of mission and overall purpose. 3. Help get jobs out on time. 4. Look for new product or service opportunities. 5. Use policies and procedures as guides for problem solving. 6. Promote unconventional beliefs and values. 7. Give monetary rewards in exchange for high performance from employees. 8. Command respect from everyone in the department. 9. Work alone to accomplish important tasks. 10. Suggest new and unique ways of doing things. 11. Give credit to people who do their jobs well.

12. Inspire loyalty to yourself and to the organisation. 13. Establish procedures to help the department operate smoothly. 14. Use ideas to motivate others. 15. Set reasonable limits on new approaches. 16. Demonstrate social nonconformity. The even-numbered items represent behaviour and activities of charismatic leaders. Charismatic leaders are personally involved in shaping ideas, goals and direction of change. They use an intuitive approach to develop fresh ideas for old problems and seek new directions for the department or organisation. The odd-numbered items are considered more traditional management activities, or what would be called transactional leadership. Managers respond to organisational problems in an impersonal way, make rational decisions, and coordinate and facilitate the work of others. If you answered yes to more even-numbered than odd-numbered items, you may be a potential charismatic leader.

Sources: Based on Bass, B. M. (1985). Leadership and Performance Beyond Expectations (Free Press: New York); Burns, L. R. and Becker, S. W. Leadership and Management. In S. Shortell and A. Caluzny (eds) (1986). Health Care Management (Wiley: New York).

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Charism atic lead ersh i p charismatic leader A leader who has the ability to motivate employees to transcend their expected performance.

Charisma has been referred to as ‘a fire that ignites followers’ energy and commitment, producing results above and beyond the call of duty’.46 The charismatic leader has the ability to inspire and motivate people to do more than they would normally do, despite obstacles and personal sacrifice. Followers are willing to put aside their own interests for the sake of the team, department or organisation. The impact of charismatic leaders normally comes from (1) stating a lofty vision of an imagined future that employees identify with; (2) displaying an ability to understand and empathise with followers; and (3) empowering and trusting subordinates to accomplish results.47 Charismatic leaders tend to be less predictable because they create an atmosphere of change, and they may be obsessed by visionary ideas that excite, stimulate and drive other people to work hard. One of the best-known charismatic leaders in the business world of recent decades was the late Apple co-founder and CEO Steve Jobs.

Innovative Way

Charismatic leadership

Steve Jobs was a legend long before he died in October 2011. His creativity and obsession with innovative product design, combined with the force of his personality, made Apple what it is today. Since his death, managers have been reading books and articles that describe his leadership style to try to tap into some of the Steve Jobs magic. Part of that magic relied on Jobs’s charisma. Jobs commanded a rock-star-like following. The tale of how he dropped out of college, co-founded Apple, got fired from his own company, returned years later to save it, and then transformed it by creating a whole new business with the iPod, iPhone and iPad is the stuff of legend. Jobs provided the pizzazz for Apple employees, business partners and the public. His charismatic personality played an important role in persuading media companies to make their content available on Apple products. ‘When Steve talks, people listen,’ a Harvard Business School professor said a few months before Jobs’s

death. Jobs’s passion and commitment inspired and motivated millions of employees and customers. However, his quick, unpredictable temper, driven, wilful personality, impatience, relentless demands and hypercritical attitude sometimes undermined performance. Jobs challenged and inspired teams to reach beyond the possible, yet he could easily dismiss a promising idea or effort as ‘a piece of crap’, contributing to disillusionment and the loss of potential. Despite this, many people – even some he mistreated – admired and respected (some have even said worshipped) Steve Jobs. They tell their ‘Steve-Jobs-yelled-inmy-face’ stories with pride. His energising personality and refusal to ‘sell out’ made people want to be around him, and want to be like him. Indeed, one magazine article commented that the amazing staff loyalty he inspired turned Apple into ‘Steve Jobs with a thousand lives’.

Source: Jon Katzenbach. (Summer 2012). The Steve Jobs Way. Strategy + Business, http://www.strategy-business.com/article/00109?gko=d331b (accessed 11 June 2012); Steve Moore. (March 2009). Not Bad for a Hippie Dropout. Management Today, 27; Connie Guglielmo. (17 May 2008). What Makes Steve Jobs Run? National Post, FW–8; (18 January 2009). Editorial: Apple – and U.S. – Need Steve Jobs. McClatchy-Tribune Business News; Leslie Kwoh and Emma Silverman. (31 March 2012). Bio as Bible: Managers Imitate Steve Jobs. The Wall Street Journal, B1; and Miguel Helft and Claire Cain Miller. (17 January 2011). A Deep Bench of Leadership at Apple. The New York Times, http://www.nytimes.com/2011/01/18/technology/18cook.html?_r=0 (accessed 18 January 2011).

As the example of Steve Jobs illustrates, there can be both positive and negative aspects of charisma. Other charismatic leaders include Mother Teresa, Sam Walton, Alexander the Great, Oprah Winfrey and Martin Luther King, Jr. Charisma can be used for positive outcomes that benefit the group, but it can also be used for self-serving purposes that lead to the deception, manipulation and exploitation of others. When charismatic leaders respond to organisational problems in terms of the needs of the entire group rather than their own emotional needs, they can have a powerful, positive influence on organisational performance.48 At Apple, Steve Jobs’s personal identity was so closely aligned with his company that

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serving Apple and serving his own emotional needs were likely one and the same! As with the Level 5 and authentic leadership approaches discussed earlier in this chapter, humility typically plays an important part in distinguishing whether a charismatic leader will work to benefit the larger organisation or use his or her gifts for ego-building and personal gain.49 Charismatic leaders are skilled in the art of visionary leadership. A vision is an attractive, ideal future organisational state or outcome that is credible yet not readily attainable. Vision is an important component of both charismatic and transformational leadership. Visionary leaders, who concentrate on formulating and communicating the organisation’s longer term ‘big picture’, speak to the hearts of employees, letting them feel that they are part of something bigger than themselves. Where others see obstacles or failures, visionary leaders see possibility and hope. Charismatic leaders typically have a strong vision for the future, almost an obsession, and they can motivate others to help realise it.50 These leaders have an emotional impact on subordinates because they strongly believe in the vision and can communicate it to others in a way that makes the vision real, personal and meaningful.

vision An attractive, ideal future organisational state or outcome that is credible yet not readily attainable.

development. The company wasted no time making a public announcement of its longterm sustainability plans and undertaking new strategies led by a Sustainability Committee. Over the next six years, Acciona managers made investments in sustainability including wind generators. By 2009, Acciona had risen to third in the world in wind energy production. In less than a decade, Acciona has established a green reputation, and it was

the leadership of Entrecanales, undertaken with the precise timing and calculated moves of a great matador, that envisioned the new spheres of action. Sources: Daniel Arenas, Jeremie Fosse and Matthew Murphy. (2011). Acciona: a Process of Transformation Towards Sustainability. The Journal of Management Development, 30:10, 1027–48; and Patricia McCormick. (11 March 1963). A Brave Matador Explains the Bullfight. Sports Illustrated, http://sportsillustrated.cnn.com/vault/ article/magazine/MAG1074594/2/index.htm (accessed 4 August 2012).

Tr ansfo r m ati o nal versus tr ansacti o nal lead ersh i p Transformational leaders are similar to charismatic leaders, but are distinguished by their special ability

to bring about innovation and change by recognising their followers’ needs and concerns, providing meaning, challenging people to look at old problems in new ways and acting as role models for new values and behaviours. Transformational leaders inspire followers not only to believe in the leader personally, but also to believe in their own potential to imagine and create a better future for the organisation. Transformational leaders create significant change in both their followers and the organisation.51 Transformational leadership can be better understood when considered in comparison to transactional leadership.52 Transactional leaders clarify the role and task requirements of subordinates, initiate structure, provide appropriate rewards, and try to be considerate and meet the social needs of subordinates. The transactional leader’s ability to satisfy subordinates may improve productivity. Transactional leaders excel at management functions. They are hardworking, tolerant and fair minded. They take pride in keeping things running smoothly and efficiently. Transactional leaders often stress the impersonal aspects of

Case study

In the hands of a matador It was, by any standard, a bold move. Taking the leadership reins in 2004 as CEO and president of Spain-based Acciona, one of Europe’s most profitable real estate and construction businesses, José Manuel Entrecanales envisioned a future in which businesses would balance economic gain with environmental standards. Entrecanales convinced his board to address climate change and promote renewable energy

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transformational leaders transformational leader A leader distinguished by a special ability to bring about innovation and change. transactional leader A leader who clarifies employees’ role and task requirements, initiates structure, provides rewards and displays consideration for employees.

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Concept extension

Case study

Self-test

performance, such as plans, schedules and budgets. They have a sense of commitment to the organisation and conform to organisational norms and values. Transactional leadership is important to all organisations, but leading change requires a different approach. Transformational leaders have the ability to lead changes in the organisation’s mission, strategy, structure and culture, as well as to promote innovation in products and technologies. Transformational leaders do not rely solely on tangible rules and incentives to control specific transactions with followers. They focus on intangible qualities such as vision, shared values and ideas to build relationships, give larger meaning to diverse activities, and find common ground to enlist followers in the change process.53

Asea Brown Boveri Percy Barnevik is a transformational leader who transformed two rather sleepy engineering firms (ASEA, a Swedish engineering group, and Brown Boveri, a Swiss competitor) into one of the world’s top engineering giants. Barnevik had a vision of a new type of organisation for a new Europe without boundaries. He wanted Asea Brown Boveri (ABB) to be a transnational company operating freely across borders, one that combined global scale and world-class technology with small company dynamism and deep roots in the local community. Barnevik pushed authority, responsibility and accountability down to the lowest levels of the organisation and empowered employees throughout the company to help him achieve his vision for the new ABB. New CEO Ulrich Spiesshofer leads

this $40 billion company, which achieved a healthy 10 per cent profit margin in 2012, in a highly decentralised manner. The company employs 146 000 staff and owns many thousands of patents, using technology to build sustainable solutions for its customers worldwide. ABB has a strong business culture: ‘The key to success lies in how well all of us understand and apply the business principles – demonstrating personal, professional and corporate responsibility, showing respect for the views and needs of others and applying our shared determination to win.’ ABB has strongly embraced sustainability principles and practices, and is regarded as a sustainability leader in its industries. It is a clear example that an old, well established company, working in traditional ‘smokestack’ industries does

not have to be conservative, but can indeed be successful through embracing modern practices of staff empowerment, sustainability, knowledge management and decentralised decision making, to its great benefit. These approaches are so strongly ingrained in ABB’s ‘DNA’ that even though a few CEOs have come and gone since the foundations were laid by Barnevik, the ABB way of working has endured, matured and been prosperous, even through the difficult period of the global financial crisis. Sources: Vries, M. F. R. (Winter 1998). Charisma in Action: The Transformational Abilities of Virgin’s Richard Branson and ABB’s Percy Barnevik. Organizational Dynamics, 7–21; ABB Group Annual Report 2012, p. 10, http://www.abb.com/; http://www.abbaustralia.com.au/cawp/seitp202/ 8986869d0a190b74c1257be7004db946.aspx; http://www400.abbext.com/2012/ar/servicepages/ filelibrary/files/collection.php.

Studies show that transformational leadership has a positive impact on follower development and follower performance.54 Moreover, transformational leadership skills can be learned, and are not ingrained personality characteristics. However, some personality traits may make it easier for a leader to display transformational leadership behaviours. For example, studies of transformational leadership have found that the trait of agreeableness, as discussed in the previous chapter, is often associated with transformational leaders.55 In addition, transformational leaders are typically emotionally stable and positively engaged with the world around them, and they have a strong ability to recognise and understand others’ emotions.56 These characteristics are not surprising, considering that these leaders accomplish change by building networks of positive relationships.

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➜➜ A charismatic leader is a leader who has the ability to inspire and motivate people to transcend their expected performance, even to the point of personal sacrifice.

➜➜ Both charismatic and transformational leaders provide followers with an inspiring vision, an attractive, ideal future that is credible yet not readily attainable. ➜➜ A transformational leader is distinguished by a special ability to bring about innovation and

change by creating an inspiring vision, shaping values, building relationships and providing meaning for followers.

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➜➜ A transactional leader clarifies subordinates’ roles and task requirements, initiates structure, provides rewards and displays consideration for followers.

Followership No discussion of leadership is complete without a consideration of Exhibit 15.10 The top five qualities of leaders and followers followership. Leadership matters, but without effective followers, no organisation can survive. People have different expectations of what Leader Follower constitutes a good follower versus a good leader, as illustrated by the Honest Honest results of studies asking people to rank the desired characteristics of Competent Competent leaders and followers. The top five qualities desired in each are as listed Forward-looking Dependable in Exhibit 15.10.57 Inspiring Cooperative There may be some differences, but overall, many of the qualities that Intelligent Loyal define a good follower are the same as those possessed by a good leader. Leaders can develop an understanding of their followers and create the conditions that help them to be most effective.58 One model of followership is illustrated in Exhibit 15.11. Robert E. Kelley conducted extensive interviews with managers and their subordinates and came up with five follower styles, which are categorised according to two dimensions.59

Dependent, uncritical thinking

Exhibit 15.11 Styles of followership

Pragmatic survivor

Active

Source: Based on Robert E. Kelley, The Power of Followership (New York: Doubleday, 1992).

Passive

Conformist

Effective

Passive

Alienated

Independent, critical thinking

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critical thinking Thinking independently and being mindful of the effect of one’s behaviour on achieving goals. uncritical thinking Failing to consider the possibilities beyond what one is told; accepting others’ ideas without thinking.

Concept extension

Case project 15.2

The first dimension is the quality of independent, critical thinking versus dependent, uncritical thinking. Independent critical thinkers are mindful of the effects of their own and others’ behaviour on achieving organisational goals. They can weigh the impact of their boss’s and their own decisions and offer constructive criticism, creativity and innovation. Conversely, a dependent, uncritical thinker does not consider possibilities beyond what he or she is told, does not contribute to the cultivation of the organisation and accepts the supervisor’s ideas without thinking. The second dimension of follower style is active versus passive behaviour. An active follower participates fully in the organisation, engages in behaviour that is beyond the limits of the job, demonstrates a sense of ownership and initiates problem solving and decision making. A passive follower, by contrast, is characterised by a need for constant supervision and prodding by superiors. Passivity is often regarded as laziness; a passive person does nothing that is not required and avoids added responsibility. The extent to which an individual is active or passive and is an independent, critical thinker or a dependent, uncritical thinker determines whether the person will be an alienated follower, a passive follower, a conformist, a pragmatic survivor or an effective follower, as illustrated in Exhibit 15.11.

alienated follower A person who is an independent, critical thinker but is passive in the organisation.

●● The alienated follower is a passive, yet independent, critical thinker. Alienated employees are often effective followers who have experienced setbacks and obstacles, perhaps promises broken by their superiors. Thus, they are capable, but focus exclusively on the shortcomings of their boss. Often cynical, alienated followers are able to think independently, but they do not participate in developing solutions to the problems or deficiencies that they see. These people waste valuable time complaining about their boss without offering constructive feedback.

conformist A follower who participates actively in the organisation but does not use critical thinking skills.

●● The conformist participates actively in a relationship with their boss, but doesn’t use critical thinking skills. In other words, a conformist typically carries out any and all orders, regardless of the nature of the request. The conformist participates willingly, but without considering the consequences of what he or she is being asked to do – even at the risk of contributing to a harmful endeavour. A conformist is concerned only with avoiding conflict. This follower style might reflect an individual’s over-dependent attitude towards authority, yet it can also result from rigid rules and authoritarian environments that create a culture of conformity.

pragmatic survivor A follower who has qualities of all four follower styles, depending on which fits the prevalent situation.

●● The pragmatic survivor has qualities of all four extremes – depending on which style fits with the prevalent situation. This type of person uses whatever style best benefits his or her own position and minimises risk. Pragmatic survivors often emerge when an organisation is going through desperate times, and individuals find themselves doing whatever is needed to get through the difficulty. Within any given company, some 25 to 35 per cent of people tend to be pragmatic survivors, avoiding risks and fostering the status quo.60

passive follower A person who exhibits neither critical independent thinking nor active participation.

●● The passive follower exhibits neither critical, independent thinking nor active participation. Being passive and uncritical, these people show neither initiative nor a sense of responsibility. Their activity is limited to what they are told to do, and they accomplish things only with a great deal of supervision. Passive followers leave the thinking to the boss. Often, this style is the result of a micromanaging boss who encourages passive behaviour. People learn that to show initiative, accept responsibility, or think creatively is not rewarded and may even be punished by the boss, so they grow increasingly passive.

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●● The effective follower is both a critical, independent thinker and active in the organisation. Effective followers behave the same towards everyone, regardless of their position in the organisation. They develop an equitable relationship with their leaders and do not try to avoid risk or conflict. These people are capable of self-management, discern strengths and weaknesses in themselves and their bosses, are committed to something bigger than themselves, and work towards competency, solutions and positive impact.

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effective follower A critical, independent thinker who actively participates in the organisation.

Consider the effective followership of the night cleaner at FAVI, a French copper-alloy foundry. While she was cleaning one night, the phone rang, and she answered it to discover that an important visitor to the company had been delayed and was now waiting at the airport without the promised lift to his hotel. (FAVI’s CEO had left the airport when the visitor didn’t arrive as expected.) What did the cleaner do? She simply took the keys to one of the company cars, drove 90 minutes to pick up the visitor and deliver him to his hotel, then went back to finish the cleaning that she had stopped three hours earlier.61 Effective followers recognise that they have power in their relationships with superiors; thus, they have the courage to manage upward, to initiate change and to put themselves at risk or in conflict with the boss if they believe that it serves the best interest of the team or organisation. ➜➜ Leaders can accomplish nothing without effective followers. ➜➜ Critical thinking means thinking independently and being mindful of the effect of one’s behaviour on achieving goals. ➜➜ Uncritical thinking means failing to consider the possibilities beyond what

one is told, accepting others’ ideas without thinking. ➜➜ An effective follower is a critical, independent thinker who actively participates in the organisation. ➜➜ An alienated follower is a person who is an independent, critical thinker but is passive in the organisation. ➜➜ A conformist is a follower who participates actively in the

remember this

organisation but does not use critical thinking skills. ➜➜ A passive follower is one who exhibits neither critical independent thinking nor active participation. ➜➜ A follower who has qualities of all four follower styles, depending on which fits the prevalent situation, is called a pragmatic survivor.

Power and influence Both followers and leaders use power and influence to get things done in organisations. Sometimes the terms power and influence are used synonymously, but there are distinctions between the two. Power is the potential ability to influence the behaviour of others.62 Influence is the effect that a person’s actions have on the attitudes, values, beliefs or behaviour of others. Whereas power is the capacity to cause a change in a person, influence may be thought of as the degree of actual change. Most discussions of power include five types that are available to leaders,63 and these can be categorised as either hard power or soft power. Hard power is power that stems largely from a person’s position of authority, and includes legitimate, reward and coercive power. Soft power includes expert power and referent power, which are based on personal characteristics and interpersonal relationships more than on a position of authority.

power power The potential ability to influence the behaviour of others. influence The effect that a person’s actions have on the attitudes, values, beliefs or behaviour of others.

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Positio n power The traditional manager’s power comes from the organisation (hard power). The manager’s position gives him or her the power to reward or punish subordinates to influence their behaviour. Legitimate power, reward power and coercive power are all forms of position power used by managers to change employee behaviour.

Legit imat e p ower legitimate power Power that stems from a formal position in an organisation and the authority granted to it.

Power coming from a formal management position in an organisation and the authority granted to it is called legitimate power. Once a person has been selected as a supervisor, most employees understand that they are obligated to follow his or her direction with respect to work activities. Subordinates accept this source of power as legitimate, which is why they comply with directives given by the supervisor or manager.

Rewar d p ower reward power Power that results from the authority to reward others.

Another kind of power, reward power, stems from the authority to bestow rewards on other people. Managers may have access to formal rewards, such as pay increases or promotions. They also have at their disposal informal rewards such as praise, attention and recognition. Managers can use rewards to influence subordinates’ behaviour.

Coer ci ve p ower coercive power Power that stems from the authority to punish or recommend punishment.

The opposite of reward power is coercive power. It refers to the authority to punish or recommend punishment. Managers have coercive power when they have the right to fire or demote employees, criticise them or withhold pay increases. If an employee does not perform as expected, the manager has the coercive power to reprimand the employee, put a negative letter in the employee’s file, deny the employee a raise and hurt the employee’s chances for a promotion.

Take a Moment

Perso nal power Effective leaders don’t rely solely on the hard power of their formal position to influence others. Jeff Immelt, CEO of GE, considers himself a failure if he exercises his formal authority more than seven or eight times a year. The rest of the time, he is using softer means to persuade and influence others and to resolve conflicting ideas and opinions.64 In contrast to the external sources of position power, personal power most often comes from internal sources, such as an individual’s special knowledge or personal characteristics. Personal power is the primary tool of the leader, and it is becoming increasingly important as more businesses are run by teams of workers who are less tolerant of authoritarian management.65 Two types of personal power are expert power and referent power.

As a new manager, you may not have a lot of position power. Build your personal power by strengthening your knowledge and skills and by developing positive relationships. Interpersonal influence tactics will serve you well throughout your career, even as your position power increases.

Exp ert p ower expert power Power that stems from special knowledge or skill in tasks performed by employees.

Power resulting from a person’s special knowledge or skill regarding the tasks being performed is referred to as expert power. When someone is a true expert, others go along with their recommendations because of his or her superior knowledge. Followers as well as leaders can possess expert power. For example, some managers lead teams in which members have expertise that the leader lacks. Some

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leaders at top management levels may lack expert power because subordinates know more about technical details than they do.

Re f e re nt p ower Referent power comes from an individual’s personal characteristics that command others’ identification,

respect and admiration, meaning that others wish to emulate that individual. Referent power does not depend on a formal title or position. When employees admire a supervisor because of the way that he or she deals with them, the influence is based on referent power. Referent power is most visible in the area of charismatic leadership. In social and religious movements, we often see charismatic leaders who emerge and gain a tremendous following based solely on their personal power.

Oth er so u rces o f power There are additional sources of power that are not linked to a particular person or position, but rather to the role an individual plays in the overall functioning of the organisation. These important sources include personal effort, relationships with others and information.

Pe rsonal effort People who show initiative, work beyond what is expected of them, take on undesirable but important projects, and show interest in learning about the organisation and industry often gain power as a result. Stephen Holmes says he got his start towards the CEO’s office at Wyndham Worldwide because of personal effort. As a young internal auditor at a private-equity firm in the early 1980s, Holmes was spending his evenings trying to learn a new spreadsheet program. Noted investor Henry Silverman noticed him night after night and, intrigued by the young auditor’s efforts, stopped by to see what he was doing. Silverman asked Holmes to move with him to future companies, including Blackstone, HMS and eventually Wyndham. ‘I was a kid,’ Holmes says, ‘[but he] put me into positions that no one else my age was getting to do.’66

Ne twor k of r elat ionsh ip s People who are enmeshed in a network of relationships have greater power. A leader or employee with many relationships knows what’s going on in the organisation and industry, whereas one who has few interpersonal connections is often in the dark about important activities or changes. Developing positive associations with superiors or other powerful people is a good way to gain power, but people with the greatest power are those who cultivate relationships with individuals at all levels, both inside and outside the organisation.

In f ormat ion Information is a primary business resource, and people who have access to information and control over how and to whom it is distributed are typically powerful. To some extent, access to information is determined by a person’s position in the organisation. Top managers typically have access to more information than middle managers, who in turn have access to more information than lower-level supervisors or front-line employees. Both leaders and followers can tap into these additional sources of power. Leaders succeed when they take the time to build relationships both inside and outside the organisation and to talk informally about important projects and priorities. Jack Griffin was forced out

referent power Power that results from the characteristics that command employees’ identification, respect and admiration, so that they wish to emulate the leader.

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as CEO of Time Inc. after less than six months on the job, largely because he failed to develop positive relationships. Griffin tried to use the hard power of his position to make necessary changes at Time without building the soft power connections needed to implement the changes. Board members began to realise that Griffin had become so unpopular that the company was likely to lose valuable employees if he stayed on as CEO.67 Many political commentators have observed that previous Australian Prime Minister Kevin Rudd exhibited similar leadership behaviours to Jack Griffin at Time Inc. – and Mr Rudd suffered the same fate. Mr Rudd was rejected by his parliamentary party and stood down from his leadership role because of his overuse of position power and lack of personal power and goodwill with his colleagues.

New Manager Self-test I nter p ersonal patterns The majority of a new manager’s work is accomplished through interpersonal relationships. To understand your relationship pattern, consider the following verbs. These 20 verbs describe some of the ways people feel and act from time to time. Think about your behaviour in groups. How do you feel and act in groups? Check the five verbs that best describe your behaviour in groups as you see it.

10 verbs in either horizontal row (sociability dimension) or vertical column (dominance dimension) in which three or more are circled represents your tendency in interpersonal behaviour. High dominance

Low dominance

advises

acquiesces

coordinates

agrees

___acquiesce___coordinate___lead

directs

assists

___advise___criticise___oblige

initiates

concurs

leads

obliges

analyses

concedes

criticises

evades

disapproves

relinquishes

judges

retreats

resists

withdraws

High sociability

___agree___direct___relinquish ___analyse___disapprove___resist ___assist___evade___retreat ___concede___initiate___withdraw ___concur___judge Two underlying patterns of interpersonal behaviour are represented in the preceding list: dominance (authority or control) and sociability (intimacy or friendliness). Most individuals tend either to like to control things (high dominance) or to let others control things (low dominance). Similarly, most persons tend either to be warm and personal (high sociability) or to be somewhat distant and impersonal (low sociability). In the following diagram, circle the five verbs in the list that you used to describe yourself. The set of

Low sociability

Your behaviour pattern suggested in the diagram is a clue to your interpersonal style as a new manager. Which of the four quadrants provides the best description of you? Is that the type of leader you aspire to become? Generally speaking the high sociability and high dominance pattern reflects the type of leader to which many new managers aspire. Source: Johnson, D. W. and Johnson, F. P. (2003), Joining Together: Group Theory and Group Skills, 8th edn, New York: Allyn and Bacon, 189–90.

Interperso nal in flu en ce tactics Leaders often use a combination of influence strategies, and people who are perceived as having greater power and influence typically are those who use a wider variety of tactics. One survey of a few hundred leaders identified more than 4000 different techniques that these people used to influence others.68 However, these tactics fall into basic categories that rely on understanding the principles that cause people to change their behaviour and attitudes. Exhibit 15.12 lists six principles for asserting influence.

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Notice that most of these involve the use of personal power rather than relying solely on position power or the use of rewards and punishments.69 1 Use rational persuasion. The most frequently used influence strategy is to use facts, data and logical

argument to persuade others that a proposed idea, request or decision is appropriate. Using rational persuasion can often be highly effective because most people have faith in facts and analysis.70 Rational persuasion is most successful when a leader has technical knowledge and expertise related to the issue at hand (expert power), although referent power is also used. That is, in addition to facts and figures, people have to believe in the leader’s credibility.

Exhibit 15.12 Six interpersonal influence tactics for leaders

1. Use rational persuasion.

2. Help people like you.

3. Rely on the rule of reciprocity.

Greater influence Leader

4. Develop allies.

5. Be assertive – ask for what you want.

6. Make use of higher authority.

2 Help people to like you. People would rather say yes to someone they like than to someone they

don’t. Effective leaders strive to create goodwill and favourable impressions. When a leader shows consideration and respect, treats people fairly and demonstrates trust in others, people are more likely to want to help and support the leader by doing what he or she asks. In addition, most people like a leader who makes them feel good about themselves, so leaders should never underestimate the power of praise. 3 Rely on the rule of reciprocity. Leaders can influence others through the exchange of benefits and

favours. Leaders share what they have – whether it is time, resources, services or emotional support. The feeling among people is nearly universal that others should be paid back for what they do, in one form or another. This unwritten ‘rule of reciprocity’ means that leaders who do favours for others can expect that others will do favours for them in return.71 4 Develop allies. Effective leaders develop networks of allies – people who can help the leader accomplish

his or her goals. Leaders talk with followers and others outside of formal meetings to understand their

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needs and concerns as well as to explain problems and describe the leader’s point of view. They strive to reach a meeting of minds with others about the best approach to a problem or decision.72 5 Ask for what you want. Another way to influence others is to make a direct and personal request.

Leaders have to be explicit about what they want, or they aren’t likely to get it. An explicit proposal is sometimes accepted simply because others have no better alternative. Also, a clear proposal or alternative will often receive support if other options are less well defined. 6 Make use of higher authority. Sometimes to get things done leaders have to use their formal

authority, as well as gain the support of people at higher levels to back them up. However, research has found that the key to successful use of formal authority is to be knowledgeable, credible and trustworthy – that is, to demonstrate expert and referent power as well as legitimate power. Managers who become known for their expertise, who are honest and straightforward with others, and who inspire trust can exert greater influence than those who simply issue orders.73 Research indicates that people rate leaders as ‘more effective’ when they are perceived to use a variety of influence tactics. But not all managers use influence in the same way. Studies have found that leaders in human resources, for example, tend to use softer, more subtle approaches such as building goodwill, using favours and developing allies, whereas those in finance are inclined to use harder, more direct tactics such as formal authority and assertiveness.74 ➜➜ Power is the potential ability to influence the behaviour of others.

➜➜ Reward power results from the authority to bestow rewards.

➜➜ All leaders use power to influence people and accomplish organisational goals.

➜➜ Coercive power stems from the authority to punish or recommend punishment.

➜➜ Influence is the effect a person’s actions have on the attitudes, values, beliefs or behaviour of others.

➜➜ Expert power is power that results from a leader’s special knowledge or skill in the tasks performed by subordinates.

➜➜ Legitimate power is power that stems from a manager’s formal position in an organisation and the authority granted by that position.

➜➜ Referent power results from characteristics that command subordinates’ identification with,

respect and admiration for, and desire to emulate the leader.

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➜➜ Both leaders and followers can tap into other sources of power, including personal effort, networks of relationships and access to or control over information. ➜➜ Leaders use a wide range of interpersonal influence tactics, and people who use a wider variety of tactics are typically perceived as having greater power.

Contemporary leaders Local leaders in Australia, New Zealand and Asia are not dissimilar from those in Europe and North America. In the US, great leaders include Jack Welch, who has been referred to at various points in this textbook. Welch powered the global giant GE from being a solid and sound manufacturing company into a dynamic and extremely productive and profitable company. The company has diversified, taking its capabilities and disciplines from manufacturing businesses into GE Financial Services. This group is now GE Money, one of the world’s most successful credit card and financial services operators. Welch was a massively successful but older-style leader, and is now retired from the stable company (GE) that he ran.

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Source: © Tanya Monro

Source: Copyright © 2009 Rio Tinto

Contrast that with a new group of much younger leaders, such as Google executive chairman and former CEO Eric Schmidt, who knows that speed and change are the essence of the company’s success. Google has been massively successful since its IPO (Initial Public Offering, meaning its launch on the share market) in mid 2004, with its stock price essentially doubling, and revenue growth that is dazzling. Against longer-established giant competitors such as Microsoft, Yahoo! and Amazon, Google is winning the Internet search and related advertising game. When they founded Google, Larry Page and Sergey Brin were both in their early thirties, and realised they needed experience to bring the company to a large and successful scale, so they brought in the then 48-year-old Schmidt. From its beginning in a Stanford University dormitory room, only six years before its huge float, Google has achieved great fame, and now has a substantial revenue stream from advertising. Google employs over 46 000 people worldwide, including some 4900 ‘techies’.75 The leadership task is substantial. Google provides its employees with three free meals each day and free laundry and banking services, which is unheard of in most companies. Page, Brin and Schmidt have brought together just the right combination of technological ‘edge’ with business acumen and a culture of high quality and entrepreneurial innovation.76 In December 2004, Google was worth US$45 billion in total; by December 2013, this figure had grown to a market capitalisation of US$345 billion:77 not bad from an idea started by a couple of university students! Google’s empire includes YouTube, DoubleClick, On2 Technologies, Motorola Mobility, Google Voice and AdMob, among others. Facebook, also started by a university student (Mark Zuckerberg), was recently valued at $120 billion.78

New CEOs in the past several years have included: ●● Sally MacDonald, who successfully assumed the top job as CEO of Oroton Group for seven years, beginning at age 37, and is now the Managing Director and founder of Antipodean Group. With a Commerce degree from the University of Melbourne and a Harvard MBA, Sally moved from management consulting to a career in consumer goods leadership. ●● Stuart Crosby, of Computershare, who worked extensively in this and other businesses in New Zealand, Hong Kong and Australia. ●● Denise Goldsworthy, Rio Tinto, Managing Director of two of Rio Tinto’s subsidiary companies, Dampier Salt (DSL) and HIsmelt, is responsible for more than 500 employees and a large global customer base. Since Denise’s appointment to DSL, the world’s leading exporter of solar salt, record earnings of US$129 million were posted in 2009. In her role as MD of HIsmelt, she is responsible for

The ‘new breed’ of leader in Australian industry includes Denise Goldsworthy (Rio Tinto at left) and Tanya Monro (IPAS).

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the marketing of HIsmelt iron-making technology. Denise attributes her success to her style of leading and motivating her management team (see http://www.telstrabusinesswomensawards.com/ award-winners/past-winners/2010/national-238.aspx). ●● Inaki Berroeta, CEO of Vodafone Australia, who was formerly chief executive of Vodafone Romania and before that head of Vodafone Malta.79

●● Marius Kloppers of BHP Billiton, who, at age 45, began running the world’s biggest mining company, stepping down from the role in 2013 to be replaced by Scottish businessman Andrew Mackenzie. ●● Mike Smith, appointed at age 50 to the top job at ANZ Bank, who as CEO needed to fill the big shoes of John McFarlane who retired from a very successful period of culture revitalisation of that bank.80 ●● Paul Zahra of David Jones, appointed with the task of rebuilding the company’s image after it was tainted by the resignation of the previous CEO in distasteful circumstances (accusations of sexual harassment of an employee). ●● Howard Goldberg, CEO of Country Road, aiming to drive growth into this lifestyle brand and reinvigorate its market offerings (http://www.countryroad.com.au). ●● Tanya Monro, Director of the Institute for Photonics & Advanced Sensing (IPAS), is a recognised leader of the international scientific community who has been responsible for breakthroughs in optical fibre research. In 2005 she founded the Centre of Expertise in Photonics as a collaborative venture between the University of Adelaide and DSTO, and the success of this centre led to the creation of the Institute for Photonics & Advanced Sensing (IPAS), which brings together 130 physicists, chemists and biologists to tackle the big questions in sensing technologies (see http://www.telstrabusinesswomensawards.com/award-winners/ past-winners/2010/national-238.aspx). Source: AAP Image/Google

Maile Carnegie was appointed Managing Director of Google Australia and New Zealand in July 2013. Carnegie had previously been with Procter & Gamble for 21 years. She joined P&G straight out of university and spent three years as its Australian managing director and many years as marketing and commercial director in the US head office. Carnegie has described how she learned from mistakes made early in her leadership career and has realised that exceptional leaders manage both short- and long-term results. As a leader, she has focused on change innovation in Australia.

●● Nicole Hollows, who moved to the position of CEO of Macarthur Coal at age 36, entering as CEO into a previously ‘man’s world’ of mining at a very young age. She has since moved on to become Managing Director of AMCI Australia and SE Asia.

These CEOs have one major new factor in common that may not have been present in previous generations, and it is essentially a prerequisite for such a high level leadership job these days: substantial international experience and a global orientation.81 In all markets and supply chains, any CEO who is not constantly taking a global view of challenges and opportunities is doomed to fail, and executive search firms and boards see international business management experience as a necessary requirement for a CEO these days. Rosabeth Moss Kanter’s book on leadership points to the confluence of factors that make for success in both sporting teams and business teams, citing the factors of accountability, collaboration and initiative, as well as acting on mistakes and being able to deal effectively with adversity – as have all the above-mentioned chief executives.82 To this we would add the characteristics that make for a great leader of being able to: ●●

set vision and strategy

●●

communicate/inspire

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Source: Newspix/Michael Potter

●● have complete integrity ●● be tough and performance oriented ●● be and act humble: the leader as servant ●● care personally and be empathetic (for example, for staff) ●● be knowledge focused ●● use energy and passion ●● be smart (IQ), meaning be able to deal with complexity ●● be agile/flexible ●● always be customer oriented/focused.

Janine Allis is founder and Managing Director of Boost Juice, which she built from a start-up idea in her home. A true entrepreneur, she has achieved remarkable growth in this healthoriented business, at a profit, on an international basis, while also managing to raise a family of four children. Her recent new business venture is in healthy Mexican food, called Salsa’s Fresh Mex Grill.

Leadership is a set of behaviours that can be demonstrated at any level in an organisation in any industry or profession, and not just by the chief executive, but hopefully as encouraged by him or her in each and every employee.

New Manager Self-test W h at is t h e i m pa c t o f leaders h i p ? What are your beliefs and understandings about how top leaders influence organisational performance. To learn about your beliefs, please answer whether each item below is Mostly true or Mostly false based on your personal beliefs. Mostly true

Mostly false

1 The quality of leadership is the most important influence on the performance of an organisation. 2 People in top-level leadership positions have the power to make or break an organisation. 3 Most activities in an organisation have little to do with the decisions or activities of the top leaders. 4 Even in a bad economy, a good leader can prevent a company from doing poorly. 5 A company cannot do well unless it has high quality leadership at the top. 6 High-quality versus low-quality leadership has a bigger impact on a firm’s performance than does the business environment. 7 Poor organisational performance is often due to factors beyond the control of even the best leaders. 8 Eventually, bad leadership at the top will trigger poor organisational performance. 9 Leaders typically should not be held responsible for a firm’s poor performance. Interpretation: This scale is about the ‘romance’ of leadership, which is the romantic view that leaders are very responsible for organisational performance, while ignoring other factors such as economic conditions. Company performance is difficult to control and is an outcome of complex forces. Attributing too much responsibility to leaders is a simplification shaped by our own mental construction more than by the reality and complexity of organisational performance. Top leaders are not heroes, but they are important as one of several key factors that can shape organisational performance.

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Scoring: Give yourself 1 point for each item 1, 2, 4, 5, 6 and 8 marked as Mostly true and each item 3, 7 and 9 marked as Mostly false. A score of 7 or higher suggests a belief in the romance of leadership – that leaders have more control over performance outcomes than is actually the case. If you scored 3 or less, you may underestimate the impact of top leaders, a somewhat sceptical view. A score of 4 to 6 suggests a balanced view of leadership.

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In Class: Sit with a student partner and explain your scores to each other. What are your beliefs about leadership? What is the basis for your beliefs? The instructor can ask for a show of hands concerning the number of high, medium and low scores on the questionnaire. Discuss the following questions: Do you believe that presidents, top executives and heads of non-profit organisations act alone and hence are largely responsible for

sustainable development

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performance? What is the evidence for this belief? What other forces will affect an organisation? What is a realistic view of top leader influence in a large organisation? Source: Adapted from Birgit Schyns, James R. Meindl and Marcel A. Croon. (2007). The Romance of Leadership Scale: Cross-Cultural Testing and Refinement. Leadership, 3:1, 29–46.

Leadership of sustainable development If there is one thing that will stop a new initiative or approach stone cold, it is if senior leaders in an organisation do not ‘talk the talk’ and ‘walk the walk’. The energy, enthusiasm, role modelling and some resources to get things going are necessary for essentially any new initiative, including sustainable development. All staff at some point look to their ‘bosses’ to get guidance as to what behaviours and procedures are and are not to be implemented. People will be encouraged to save water, paper and energy if they see their organisation’s leaders doing so, and will be immediately ‘turned off’ if they see leaders not role modelling these activities. In respect of external stakeholder relationships and the empowerment of those stakeholders, only senior leaders such as board members, chief executives and general managers can usually initiate and authorise such activities. Moreover, the cultural aspects of sustainable development, meaning the sustainability orientation (see Chapter 5), becomes a state of mind that is set in place by the organisation’s leaders, and will not take hold or remain if it is not so led. The strategic aspect of sustainable development, namely the intent to pursue sustainability strategy and the work to broaden the vision and measures of success for the organisation, needs to be authorised from the top of the organisation. Leaders then can use these tools of management, meaning goals, measures, objectives and plans, to do the leadership work of influencing their staff and external stakeholders to move up the ‘sustainability maturity’ curve. Coca-Cola has embraced sustainable development through a CEO-led set of initiatives. The company has set in place stringent improvement initiatives in almost all of its functions and activities. This includes in improving the environmental impact of the materials it uses, recycling packaging, and in its community relations and support activities. Similarly, Toyota has taken the global lead in improving fuel efficiency of motoring by offering its hybrid Synergy Drive engines, which are approximately twice as fuel efficient as conventional engines, through much of its vehicle range. These companies invest large amounts of resources in such initiatives, and are led by people who believe such strategies are good business. These leaders are taking a long-term view on their business and the environment in which they operate. They recognise that stakeholder engagement – achieved by advances in ‘doing the right thing’ – is ultimately of critical importance. Such leadership comes from the application of moral and servant leadership concepts.

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Jess Moore, who was introduced earlier in this chapter, showed very strong leadership in his efforts to turn around the ICI Botany site from one where employees were totally misaligned with the business needs and goals to one in which common goals and strategies were implemented. He started with a high level of communication about the imperative to improve the plant’s performance, and of the benefits to all of doing this. At one point, he invited all the plant operators to move from their award-based wage system to become staff members on salary. This structural change removed the incentive for plant operators to create overtime, as salaries were fixed and had reasonable overtime allowances built in. Productivity and service levels to customers started to improve. There was a great deal of resistance to these major changes, and Jess had to weather a six-week-long strike at the plant, including acts of violence and even death threats. During this difficult time of change, support from his head office waned at times, and Jess and his management team needed to have and display large amounts of personal courage to stay the course of their convictions and revitalise the whole culture and way of working at Botany. The outcome was a tremendous achievement in turning a troubled and unproductive workplace into a competitive and positive

culture. The very same workers who used to spend their time looking to do the minimum possible during their work shift so as to maximise the opportunity for overtime (which sometimes meant letting plants and equipment get into mechanical trouble) became proud champions of the performance improvements. Some plants, such as the polythene (plastic sheet) plant, achieved productivity improvements of more than 500 per cent once the system and attitudes of the workforce were turned around. Jess Moore and his small team of managers were breakthrough leaders in the way that they combated fierce tradition and resistance, achieving benefits for all stakeholders, including workers, customers, managers and the company’s shareholders. The biggest challenge ultimately proved to be environmental: the ongoing cost of cleaning up the environmental disaster that came from decades of previously poor leadership and management, when toxic chemicals were poured into the ground and into drains, is proving to be monumental. ICI who operated this site, now called Orica, is spending hundreds of millions of dollars, cleaning up the sins of its past. The company now has a highly enlightened leadership and ‘top shelf’ approach to all aspects of sustainability, but is still somewhat burdened by the legacy of its (distant) past poor leadership record.

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Response to the Management Challenge

Discussion questions

1 Suggest some personal traits that you believe would be useful to a business leader today. Are these traits more valuable in some situations than in others? How do you think traits differ from strengths?

6 What is transformational leadership? Give examples of organisational situations that would call for transformational, transactional or charismatic leadership.

2 In studies where people were asked what they wanted from leaders versus followers, people have indicated they wanted a higher maturity level for followers. What might account for this?

7 How does Level 5 leadership differ from the concept of

3 If a male manager changes his behaviours to incorporate elements of interactive leadership more common to female managers, can he still be an ‘authentic’ leader? Discuss.

8 Why do you think so little attention is given to followership compared to leadership in organisations? Discuss how the role of an effective follower is similar to that of a leader.

4 Suggest the sources of power that would be available to a leader of a university’s student organisation. What sources of power may not be available? To be effective, should student leaders keep power to themselves or delegate power to other students?

9 Do you think leadership is more important or less important in today’s flatter, team-based organisations?

5 What skills and abilities does a manager need to lead effectively in a virtual environment? Do you believe a leader with a consideration style or an initiating-structure style would be more successful as a virtual leader? Explain your answer.

11 Consider the leadership position of a senior partner in a law firm. What task, subordinate, and organisational factors might serve as substitutes for leadership in this situation?

servant leadership? Do you believe anyone has the potential to become a Level 5 leader? Discuss.

10 Are some leadership styles better suited to such organisations as opposed to traditional hierarchical organisations? Explain.

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Ethical challenge

D o e s wa g e r e f o r m s ta r t at t h e t o p ?

Paula Smith has just been offered the opportunity of a lifetime. The chairman of the board of Resitronic Company has called to ask her to take the job as director of the troubled audio equipment manufacturing subsidiary. The first question Smith asked was: ‘Will the board give me the autonomy to turn this company around?’ The answer was yes. Resitronic’s problems were so severe that the board was desperate for change and ready to give Smith whatever it took to save the company. Smith knows that cost cutting is the first place she needs to focus. Labour expenses are too high, and product quality and production times are below industry standards. She sees that labour and management at Resitronic are two armed camps, but she needs cooperation at all levels to achieve a turnaround. Smith is energised. She knows she finally has the autonomy to try out her theories about an empowered workforce. Smith knows she must ask managers and workers to take a serious pay cut, with the promise of incentives to share in any improvements they might make. She also knows that everyone will be looking at her own salary as an indication of whether she walks her talk. Smith is torn. She realises she faces a year or two of complete hell, with long hours, little time for her family or outside interests, bitter resistance in employees and no guarantees of success. Even if she comes in at the current director’s salary, she will be taking a cut in pay. But if

Gr oup challenge

W h at d o yo u d o ? 1 Take the same salary as the current director for one year. Circulate the information that although you are taking a cut to come to Resitronic, you are confident that you can make a difference. Build in pay incentive bonuses for the following years if the subsidiary succeeds. 2 Take a bigger cut in pay with generous incentive bonuses. Ask the board and the entire workforce to do the same. Open the books and let the whole company know exactly where they stand. 3 Ask for the same salary you are making now. You know you are going to be worth it, and you don’t want to ask your family to suffer monetarily as well as in their quality of life during this transition.

W h i c h l e a d e r s h i p s t y l e s a r e m o r e e f f e ct i v e ? Step 1.  Think about one situation in which a leader was effective at motivating people, and

another situation in which a leader was ineffective, perhaps demotivating people. When you have these situations firmly in mind, answer the following questions: 1 What source or type of power was used by the effective leader? The ineffective leader? 2 Did the effective leader emphasise a task-oriented or relationshiporiented style? Explain your rating. What about the ineffective leader? 3 Did the effective leader come across as a humble person serving others or something larger than him- or herself, or did the leader

Case for cr itical analysis

she takes a bigger cut coming in, with the promise of bonuses and share options tied to her own performance, she sends a strong message to the entire subsidiary that they rise or fall together. She wonders what might happen if she fails. Many influences on the audio equipment subsidiary are beyond her control. Resitronic itself is in trouble. From her current vantage point, Smith believes she can turn things around, but what will she discover when she gets inside? What if the board undercuts her? Doesn’t she owe it to herself and her family to be compensated at the highest possible level for the stress and risk they will be enduring? Can she afford to risk her own security to send a message of commitment to the plan she is asking others to follow?

seem ego-centred and self-serving? What about the ineffective leader? Step 2. Divide into groups of three to five students. Compare your answers and look for patterns that distinguish effective from ineffective leaders across your group members’ experiences. What patterns do you find? Step 3. Each group member should describe the leadership situation, with respect to its ‘favourability’ or ‘readiness of followers’. What relationship do you observe between the leadership situations and the style that the leader used? Step 4. Prepare to present your findings to the class and to participate in a discussion led by your instructor.

DGL I n t e r n at i o n a l

When DGL International, a manufacturer of refinery equipment, brought in John Terrill to manage its technical services division, company executives informed him of the urgent situation. Technical services, with 20 engineers, was the highest-paid, best-educated and least productive division

in the company. The instruction to Terrill: turn it around. Terrill called a meeting of the engineers. He showed great concern for their personal welfare and asked point blank: ‘What’s the problem? Why can’t we produce? Why does this division have such turnover?’ Without hesitation, employees launched a hail of complaints. ‘I was hired as an engineer, not a pencil pusher’, and ‘We spend over half our

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time writing asinine reports in triplicate for top management, and no one reads the reports’. After a two-hour discussion, Terrill concluded he had to get top management off the engineers’ backs. He promised the engineers, ‘My job is to stay out of your way so you can do your work, and I’ll try to keep top management off your backs, too.’ He called for the day’s reports and issued an order effective immediately that the originals be turned in daily to his office rather than mailed to headquarters. For three weeks, technical reports piled up on his desk. By month’s end, the stack was nearly a metre high. During that time no one called for the reports. When other managers entered his office and saw the stack, they usually asked, ‘What’s all this?’ Terrill answered: ‘Technical reports’. No one asked to read them. Finally, at month’s end, a secretary from finance called and asked for the monthly travel and expense report. Terrill responded, ‘Meet me in the president’s office tomorrow morning.’ The next morning the engineers cheered as Terrill walked through the department pushing a cart loaded with the enormous stack of reports. They knew the showdown had come.

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Terrill entered the CEO’s office and placed the stack of reports on his desk. The CEO and the other senior executives looked bewildered. ‘This,’ Terrill announced, ‘is the reason for the lack of productivity in the technical services division. These are the reports you people require every month. The fact that they sat on my desk all month shows that no one reads this material. I suggest that the engineers’ time could be used in a more productive manner, and that one brief monthly report from my office will satisfy the needs of other departments.’ Questions 1 What leadership style did John Terrill use? What do you think was his primary source of power? 2 Based on the Hersey–Blanchard theory, described on p. 616 of this chapter, should Terrill have been less participative? Should he have initiated more task structure for the engineers? Explain. 3 What leadership approach would you have taken in this situation?

Camp Bow Wow: Leadership For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

On the job video case

Q uestions 1 Does Camp Bow Wow CEO Heidi Ganahl possess qualities associated with contemporary leadership? 2 In what way is Ganahl’s leadership charismatic and visionary? Give examples.

3 Where does Ganahl’s leadership fall on the Leadership Grid discussed in the chapter and illustrated in Exhibit 15.6? Explain.

Endnotes   1 Buchanan, L. (April 2004). Pat McGovern . . . For Knowing the Power of Respect. 25 Entrepreneurs We Love. Inc Magazine, 110–47; Warner, M. (4 September 2000). Confessions of a Control Freak. Fortune, 130–40.   2 Gary Yukl. (1989). Managerial Leadership: A Review of Theory and Research. Journal of Management 15, 251–89.   3 James M. Kouzes and Barry Z. Posner. (January 1990). The Credibility Factor: What Followers Expect from Their Leaders. Management Review, 29–33.   4  Jim Collins. (January 2001). Level 5 Leadership: The Triumph of Humility and Fierce Resolve. Harvard Business Review, 67–76; Jim Collins. (October 2001). Good to Great. Fast Company, 90–104; A. J. Vogl. (September– October 2001). Onward and Upward (an interview with Jim Collins). Across the Board, 29–34; and Jerry Useem. (19 February 2001). Conquering Vertical Limits. Fortune, 84–96.   5  Jim Collins. (January 2011). Enduring Greatness. Leadership Excellence, 8.   6  Collins. Level 5 Leadership.   7  Quoted in William J. Holstein. (8 May 2005). The View’s Still Great from the Corner Office. The New York Times.   8  Richard L. Daft and Robert H. Lengel. (1998). Fusion Leadership: Unlocking the Subtle Forces That Change People and Organizations (San Francisco: Berrett-Koehler).

  9 Leigh Buchanan. (May 2007). In Praise of Selflessness: Why the Best Leaders Are Servants. Inc., 33–5. 10 Robert K. Greenleaf. (1977). Servant Leadership: A Journey into the Nature of Legitimate Power and Greatness (Mahwah, NJ: Paulist Press). 11 (30 October 2006). Not Her Father’s Chief Executive (an interview with Marilyn Carlson Nelson). U.S. News & World Report, 64–5. 12  (16 April 2009). Maersk Alabama Crew Recalls Pirate Attack. USA Today, http://www.usatoday.com/news/nation/2009-04-16-pirates_N.htm (accessed 30 April 2009); Stacy Meichtry, Arian Campo-Flores and Leslie Scism. (17 January 2012). Cruise Company Blames Captain. The Wall Street Journal, http://online.wsj.com/article/SB1000142405297020373530457716 5290656739300.html (accessed 20 January 2012); (23 March 2012). Death Toll of Italy’s Costa Concordia Wreck Rises to 30. Philippine Star, http:// www.philstar.com/article.aspx?articleid=790169&publicationsubcategory id=200 (accessed 14 September 2012). 13 Adam Bluestein. (May 2011). Start a Company. Change the World. Inc., 71–80.

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14 Bill George. (2003). Authentic Leadership: Rediscovering the Secrets to Lasting Value (San Francisco: Jossey-Bass); Bill George. (22 October 2006). Truly Authentic Leadership. Special Report: America’s Best Leaders. U.S. News & World Report, http://www.usnews.com/usnews/news/ articles/061022/30authentic.htm (accessed 5 October 2010). 15 Judy B. Rosener. (1995). America’s Competitive Secret: Utilizing Women as a Management Strategy (New York: Oxford University Press), pp. 129–35. 16 Alice H. Eagly and Linda L. Carli. (2003). The Female Leadership Advantage: An Evaluation of the Evidence. The Leadership Quarterly, 14, 807–34; Rosener, America’s Competitive Secret; Judy B. Rosener. (November–December 1990). Ways Women Lead. Harvard Business Review, 119–25; Sally Helgesen. (1990). The Female Advantage: Women’s Ways of Leadership (New York: Currency/Doubleday); Bernard M. Bass and Bruce J. Avolio. (Winter 1994). Shatter the Glass Ceiling: Women May Make Better Managers. Human Resource Management, 33:4, 549–60; and Carol Kinsey Goman. (10 August 2011). What Men Can Learn from Women about Leadership in the 21st Century. The Washington Post, http://www .washingtonpost.com/national/on-leadership/what-men-can-learn-fromwomenabout-leadership/2011/08/10/gIQA4J9n6I_story.html (accessed 12 September 2012). 17 Rochelle Sharpe. (20 November 2000). As Leaders, Women Rule. BusinessWeek, 75–84. 18 Kevin S. Groves. (2005). Gender Differences in Social and Emotional Skills and Charismatic Leadership. Journal of Leadership and Organizational Studies, 11:3, 30ff. 19 Jack Zenger and Joseph Folkman. (15 March 2012). Are Women Better Leaders Than Men? HBR Blog Network. Harvard Business Review, http://blogs.hbr.org/cs/2012/03/a_study_in_leadership_women_do.html (accessed 12 September 2012); and Herminia Ibarra and Otilia Obodaru. (January 2009). Women and the Vision Thing. Harvard Business Review, 62–70. 20 Susan Carey. (14 August 2007). More Women Take Flight in Airline Operations. The Wall Street Journal, B1; and Ann Therese Palmer. (24 December 2006). Teacher Learns All About Airline; United VP Began as Reservations Clerk, Rose Through Ranks. Chicago Tribune, 3. 21 Leigh Buchanan. (April 2004). Pat McGovern . . . For Knowing the Power of Respect. Segment in 25 Entrepreneurs We Love. Inc., 110–47. 22 This analogy is from Gordon P. Rabey. (2010). Leadership Is Response: A Paper for Discussion. Industrial and Commercial Training, 42:2, 87–92. 23 This discussion is based on Philip A. Dover and Udo Dierk. (2010). The Ambidextrous Organization: Integrating Managers, Entrepreneurs, and Leaders. Journal of Business Strategy, 31:5, 49–58; Gary Yukl and Richard Lepsinger. (2005). Why Integrating the Leading and Managing Roles Is Essential for Organizational Effectiveness. Organizational Dynamics, 34:4, 361–75; and Henry Mintzberg. (2009). Managing (San Francisco: Berrett-Kohler Publishers). 24 Nancy F. Koehn. (1 April 2012). The Driver in Ford’s Amazing Race. The New York Times, BU.1. 25 G. A. Yukl. (1981). Leadership in Organizations (Englewood Cliffs, NJ: Prentice Hall); and S. C. Kohs and K. W. Irle. (1920). Prophesying Army Promotion. Journal of Applied Psychology, 4, 73–87. 26 R. Albanese and D. D. Van Fleet. (1983). Organizational Behavior: A Managerial Viewpoint (Hinsdale, IL: The Dryden Press); and S. A. Kirkpatrick and E. A. Locke. (1991). Leadership: Do Traits Matter? Academy of Management Executive, 5:2, 48–60. 27 A summary of various studies and surveys is reported in Del Jones. (15 December 2005) Optimism Puts Rose-Colored Tint in Glasses of Top Execs. USA Today. 28 Annie Murphy Paul. (November–December 2011). The Uses and Abuses of Optimism (and Pessimism). Psychology Today, 56–63.

29 Tom Rath and Barry Conchie. (2009). Strengths Based Leadership (Gallup Press); Marcus Buckingham and Donald O. Clifton. (2001). Now, Discover Your Strengths (New York: The Free Press), p. 12. 30 Buckingham and Clifton, Now, Discover Your Strengths. 31 Gary Yukl, Angela Gordon and Tom Taber. (2002). A Hierarchical Taxonomy of Leadership Behavior: Integrating a Half Century of Behavior Research. Journal of Leadership and Organizational Studies, 9:1, 13–32. 32 C. A. Schriesheim and B. J. Bird. (1979). Contributions of the Ohio State Studies to the Field of Leadership. Journal of Management, 5, 135–45; C. L. Shartle. (1979). Early Years of the Ohio State University Leadership Studies. Journal of Management, 5, 126–34; and R. Likert. (1979). From Productionand Employee-Centeredness to Systems 1–4. Journal of Management, 5, 147–56. 33 P. C. Nystrom. (1978). Managers and the High-High Leader Myth. Academy of Management Journal, 21, 325–31; and L. L. Larson, J. G. Hunt and Richard N. Osborn. (1976). The Great High-High Leader Behavior Myth: A Lesson from Occam’s Razor. Academy of Management Journal, 19, 628–41. 34 R. Likert. From Production- and Employee-Centeredness to Systems 1–4. 35 Robert R. Blake and Jane S. Mouton. (1985). The Managerial Grid III (Houston, TX: Gulf). 36 John Markoff. (5 June 2007). Competing as Software Goes to Web. The New York Times, C1, C5. 37 This discussion is based on Paul Hersey and Ken Blanchard. (January 1996). Revisiting the Life-Cycle Theory of Leadership. In Great Ideas Revisited. Training & Development, 42–7; Kenneth H. Blanchard and Paul Hersey. (January 1996). Life-Cycle Theory of Leadership. In Great Ideas Revisited. Training & Development, 42–7; Paul Hersey. (February 2009). Situational Leaders: Use the Model in Your Work. Leadership Excellence, 12; and Paul Hersey and Kenneth H. Blanchard, (1982). Management of Organizational Behavior: Utilizing Human Resources, 4th edn (Englewood Cliffs, NJ: Prentice Hall). The concept of readiness comes from Hersey. Situational Leaders. 38 Jennifer Robison. (10 January 2008). Many Paths to Engagement: How Very Different Management Styles Get the Same Great Results at Mars Incorporated. Gallup Management Journal, http://gmj.gallup.com/ content/103513/Many-Paths-Engagement.aspx (accessed 31 July 2010). 39 Andrew Ross Sorkin. Warren Buffett, Delegator in Chief. The New York Times, http://www.nytimes.com/2011/04/24/weekinreview/24buffett.html (accessed 14 September 2012). 40 Fred E. Fiedler. (1954). Assumed Similarity Measures as Predictors of Team Effectiveness. Journal of Abnormal and Social Psychology, 49, 381–88; F. E. Fiedler. (1958). Leader Attitudes and Group Effectiveness (Urbana, IL: University of Illinois Press); and F. E. Fiedler. (1967). A Theory of Leadership Effectiveness (New York: McGraw-Hill). 41 Fred E. Fiedler and M. M. Chemers. (1974). Leadership and Effective Management (Glenview, IL: Scott, Foresman). 42 Reported in George Anders. (19 November 2007). Theory & Practice: Tough CEOs Often Most Successful, a Study Finds. The Wall Street Journal. 43 Fred E. Fiedler. (1965). Engineer the Job to Fit the Manager. Harvard Business Review, 43, 115–22; and F. E. Fiedler, M. M. Chemers and L. Mahar. (1976). Improving Leadership Effectiveness: The Leader Match Concept (New York: Wiley). 44 R. Singh. (1983). Leadership Style and Reward Allocation: Does Least Preferred Coworker Scale Measure Tasks and Relation Orientation? Organizational Behavior and Human Performance, 27, 178–97; and D. Hosking. (1981). A Critical Evaluation of Fiedler’s Contingency Hypotheses. Progress in Applied Psychology, 1, 103–54. 45 S. Kerr and J. M. Jermier. (1978). Substitutes for Leadership: Their Meaning and Measurement. Organizational Behavior and Human Performance, 22, 375–403; and Jon P. Howell and Peter W. Dorfman. (1986). Leadership

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and Substitutes for Leadership among Professional and Nonprofessional Workers. Journal of Applied Behavioral Science, 22, 29–46. 46 Katherine J. Klein and Robert J. House. (1995). On Fire: Charismatic Leadership and Levels of Analysis. Leadership Quarterly, 6:2, 183–98. 47 Jay A. Conger and Rabindra N. Kanungo. (1987). Toward a Behavioral Theory of Charismatic Leadership in Organizational Settings. Academy of Management Review, 12,637–47; Jaepil Choi. (2006). A Motivational Theory of Charismatic Leadership: Envisioning, Empathy, and Empowerment. Journal of Leadership and Organizational Studies, 13:1, 24ff; and William L. Gardner and Bruce J. Avolio. (1998). The Charismatic Relationship: A Dramaturgical Perspective. Academy of Management Review, 23:1, 32–58. 48 Robert J. House and Jane M. Howell. (1992). Personality and Charismatic Leadership. Leadership Quarterly, 3:2, 81–108; and Jennifer O’Connor et al. (1995). Charismatic Leaders and Destructiveness: A Historiometric Study. Leadership Quarterly, 6:4, 529–55. 49 Rob Nielsen, Jennifer A. Marrone and Holly S. Slay. (February 2010). A New Look at Humility: Exploring the Humility Concept and Its Role in Socialized Charismatic Leadership. Journal of Leadership and Organizational Studies, 17:1, 33–44. 50 Robert J. House. (1985). Research Contrasting the Behavior and Effects of Reputed Charismatic vs. Reputed Non-Charismatic Leaders. Paper presented as part of a symposium, ‘Charismatic Leadership: Theory and Evidence’, Academy of Management, San Diego. 51 Bernard M. Bass. (1995). Theory of Transformational Leadership Redux. Leadership Quarterly, 6:4, 463–78; Noel M. Tichy and Mary Anne Devanna. (1986). The Transformational Leader (New York: John Wiley & Sons); James C. Sarros, Brian K. Cooper and Joseph C. Santora. (November 2008). Building a Climate for Innovation Through Transformational Leadership and Organizational Culture. Journal of Leadership and Organizational Studies, 15:2, 145–58; and P. D. Harms and Marcus Crede. (February 2010). Emotional Intelligence and Transformational and Transactional Leadership: A Meta-Analysis. Journal of Leadership and Organizational Studies, 17:1, 5–17. 52 The terms transactional and transformational come from James M. Burns. (1978). Leadership (New York: Harper & Row); and Bernard M. Bass. (Winter 1985). Leadership: Good, Better, Best. Organizational Dynamics, 13, 26–40. 53 Daft and Lengel, Fusion Leadership. 54 Gang Wang et al. (2011). Transformational Leadership and Performance Across Criteria and Levels: A Meta-Analytic Review of 25 Years of Research. Group & Organization Management, 36:2, 223–70; Taly Dvir et al. (2002). Impact of Transformational Leadership on Follower Development and Performance: A Field Experiment. Academy of Management Journal, 45:4, 735–44. 55 Robert S. Rubin, David C. Munz and William H. Bommer. (2005). Leading from Within: The Effects of Emotion Recognition and Personality on Transformational Leadership Behavior. Academy of Management Journal, 48:5, 845–58; and Timothy A. Judge and Joyce E. Bono. (October 2000). Five-Factor Model of Personality and Transformational Leadership. Journal of Applied Psychology, 85:5, 751ff. 56 Rubin, Munz and Bommer. Leading from Within. 57 Augustine O. Agho. (November 2009). Perspectives of Senior-Level Executives on Effective Followership and Leadership. Journal of Leadership and Organizational Studies, 16:2, 159–66; and James M. Kouzes and Barry Z. Posner. (1990). The Leadership Challenge: How to Get Extraordinary Things Done in Organizations (San Francisco: Jossey-Bass).

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58 Barbara Kellerman. (December 2007). What Every Leader Needs to Know About Followers. Harvard Business Review, 84–91. 59 Robert E. Kelley. (1992). The Power of Followership (New York: Doubleday). 60 Ibid., pp. 117–18. 61 Vignette recounted in Isaac Getz. (Summer 2009). Liberating Leadership: How the Initiative-Freeing Radical Organizational Form Has Been Successfully Adopted. California Management Review, 32–58. 62 Henry Mintzberg. (1983). Power In and Around Organizations (Englewood Cliffs, NJ: Prentice Hall); and Jeffrey Pfeffer. (1981). Power in Organizations (Marshfield, MA: Pitman). 63 John R. P. French, Jr. and Bertram Raven. The Bases of Social Power. In D. Cartwright and A. F. Zander, eds. (1960). Group Dynamics (Evanston, IL: Row Peterson), pp. 607–23. 64 Reported in Vadim Liberman. (November–December 2007). Mario Moussa Wants You to Win Your Next Argument. (Questioning Authority column). Conference Board Review, 25–6. 65 Jay A. Conger. (May–June 1998). The Necessary Art of Persuasion. Harvard Business Review, 84–95. 66 Roger Yu. (22 November 2010). Co-Workers Praise Wyndham CEO’s Welcoming Demeanor. USA Today, http://www.usatoday.com/money/ companies/management/profile/2010-11-22-wyndhamceo22_ST_N.htm (accessed 14 September 2012). 67 Jeremy W. Peters. (17 February 2011). Time Inc. Chief Executive Jack Griffin Out. The New York Times, http://mediadecoder.blogs.nytimes. com/2011/02/17/time-inc-chief-executive-jack-griffin-out/ (accessed 18 February 2011). 68 D. Kipnis et al. (Winter 1984). Patterns of Managerial Influence: Shotgun Managers, Tacticians, and Politicians. Organizational Dynamics, 58–67. 69 These tactics are based on Kipnis et al. Patterns of Managerial Influence; and Robert B. Cialdini. (October 2001). Harnessing the Science of Persuasion. Harvard Business Review, 72–9. 70 Kipnis et al. Patterns of Managerial Influence; and Jeffrey Pfeffer. (1992). Managing with Power: Politics and Influence in Organizations (Boston: Harvard Business School Press), Chapter 13. 71 Ibid. 72 V. Dallas Merrell. (1979). Huddling: The Informal Way to Management Success (New York: AMACOM). 73 Robert B. Cialdini. (2000). Influence: Science and Practice, 4th edn (Boston: Pearson Allyn & Bacon). 74 Harvey G. Enns and Dean B. McFarlin. (Summer 2003). When Executives Influence Peers, Does Function Matter? Human Resource Management, 4:2, 125–42. 75 http://investor.google.com/financial/tables.html (accessed 18 November 2013). 76 Vogelstein, F. (20 December 2005). Google at $165? Fortune, 22, 46–56. 77 http://finance.yahoo.com/q?s=goog (accessed 18 November 2013). 78 http://finance.yahoo.com/q?s=FB (accessed 18 November 2013); http://mashable.com/2011/08/15/google-acquisitions-price/ (accessed 27 March 2014). 79 Ramli, David. Vodafone Australia appoints Inaki Berroeta as new CEO. Sydney Morning Herald, http://www.smh.com.au/business/vodafoneaustralia-appoints-inaki-berroeta-as-new-ceo-20140124-31cys.html (accessed 20 March 2014). 80 Nicholas, K. (November 2007). Stepping Up. Boss Magazine, V8, 38–44. 81 Ibid. 82 Kanter, R. M. (2004), Confidence: How Winning and Losing Streaks Begin and End (New York: Crown).

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Define motivation and explain the difference

5 Discuss major approaches to job design and how

2 Identify and describe content theories of motivation

6 Describe how managers build a thriving workforce

3 Identify and explain process theories of

7 Explain how empowerment heightens employee

4 Describe the reinforcement perspective and social

8 Identify three elements of employee engagement

between intrinsic and extrinsic rewards. based on employee needs. motivation.

learning theory and how they can be used to motivate employees.

job design influences motivation.

for a high-performing organisation. motivation.

and describe some ways that managers can create a work environment that promotes engagement.

C h a p t e r 16

Motivating employees

Chapter outline ➜ The concept of motivation

➜ Reinforcement perspective on motivation

➜ Content perspectives on motivation

➜ Job design for motivation

Individual needs and motivation Managers as motivators The hierarchy of needs ERG theory A two-factor approach to motivation Acquired needs theory

➜ Process perspectives on motivation Goal setting Equity theory Expectancy theory

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Direct reinforcement Social learning theory

Job enrichment Job characteristics model

➜ Innovative ideas for motivating

Building a thriving workforce Empowering people to meet higher needs Giving meaning to work through engagement

➜ K  eeping staff motivated in Australia and New Zealand

➜ Motivation for sustainability

New Manager Self-test Are you engaged or disengaged? The term employee engagement is becoming popular in the corporate world. To learn what engagement means, answer the following questions twice: (1) once for a course you both enjoyed and performed well in; and (2) a second time for a course you did not enjoy and performed poorly in. Please mark a ‘1’ to indicate whether each item is Mostly true or Mostly false for the course you enjoyed and performed well. Please mark a ‘2’ to indicate whether each item is Mostly true or Mostly false for the course you did not enjoy and performed poorly in. Mostly true

Mostly false

1 I made sure to study on a regular basis. 2 I put forth effort. 3 I found ways to make the course material relevant to my life. 4 I found ways to make the course interesting to me. 5 I raised my hand in class. 6 I had fun in class. 7 I participated actively in small group discussions. 8 I helped fellow students. Scoring and interpretation: Engagement means that people involve and express themselves in their work, going beyond the minimum effort required. Engagement typically has a positive relationship with both personal satisfaction and performance. If this relationship was true for your classes, the number of ‘1s’ in the Mostly true column will be higher than the number of ‘2s’. You might expect a score of 6 or higher for a course in which you were engaged, and possibly 3 or lower if you were disengaged. The challenge for a new manager is to learn to engage subordinates in the same way your instructors in your favourite classes were able to engage you. Teaching is similar to managing. What techniques did your instructors use to engage students? Which techniques can you use to engage your people when you become a new manager? Source: Questions based on Handelsman, M., Briggs, W. L., Sullivan, N. and Towler, A. (January/February 2005), ‘A Measure of College Student Course Engagement’, Journal of Educational Research, 98, 184–91.

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Management Challenge

After 13 years at Sandstrom Products, a manufacturer of paints and coatings, Leo Henkelman was thinking about quitting. He’d started as a paint runner, the lowest job in the plant, and worked his way up to a mill operator position. Henkelman spent his days mixing paints in a giant blender, following formulas supplied by the lab. As he gained knowledge and experience, he came up with a lot of good ideas for improving formulas, yet the people in the lab continually ignored his suggestions. ‘It was like they hired me from the neck down,’ he said. ‘Warm body, strong back, weak mind.’ Increasing pressure from quality-conscious customers multiplied the frustration he shared with most of the operators, who felt powerless to change anything. Some workers, including

Henkelman, just stopped caring. Finding no challenge at work, he would show up with a hangover and just put in time until he could clock out and hit the bottle again. Top management knew the company had problems – for one thing, Sandstrom was haemorrhaging cash, losing money for the third year out of the last five. Things had to change or Sandstrom would go broke. Source: Whitford, D. (June 1995). Before & After. Inc., 44–50.

Question If you were the CEO of Sandstrom Products, how would you motivate employees like Leo Henkelman to give their all to the company? Is high motivation even possible in this kind of routine manufacturing operation?

When Joie de Vivre Hospitality took over the Hotel Carlton, most employees were simply putting in their hours until quitting time. Annual turnover was around 50 per cent (about average for the hotel industry), but employees showed no energy and enthusiasm for serving guests. Joie de Vivre managers knew it didn’t have to be that way. Hervé Blondel, the new Hotel Carlton general manager, decided to treat employees like partners. He started by finding out what they needed in order to do their jobs better and feel a sense of joy in their work lives. For Theophilus McKinney, who oversaw the front desk, it was working evenings instead of days, rearranging the phones so they were easier to answer, and being allowed to wear the funky shoes he preferred. For Anita Lum and her colleagues in housekeeping, it was simply having new vacuum cleaners that did what they were supposed to do. The previous management had refused to replace the ageing vacuums, but Blondel bought a new one for each member of the housekeeping staff, and the company now replaces them every year. Blondel also gives people more leeway in serving guests, and encourages them to participate in decisions that directly affect their jobs. Within a few years, annual turnover was down to less than 10 per cent, and customer satisfaction had dramatically improved. ‘It seems that this company cares about us,’ said Lum. Front-desk worker Emelie Dela Cruz added that ‘we’re all just happier’.1 Managers in other companies are discovering that creating an environment where people feel valued and that they are making an important contribution is one key to high employee motivation, which is an essential ingredient for organisational success. Most people begin a new job with energy and enthusiasm, but employees can lose their drive if managers fail in their role as motivators. Yet motivation is a challenge for many managers because motivation arises from within employees and may differ for each person. Some people are motivated primarily by money, others are motivated to perform well because managers make them feel appreciated for doing a good job, and still others find their primary motivation in the challenge of solving complex problems or making a contribution to society. With such diverse motivations among individuals, how do managers find the right way to motivate people towards common organisational goals? This chapter reviews several approaches to employee motivation. First, we define motivation and the types of rewards that managers use. Then, we examine several models that describe the employee needs and processes associated with motivation. We also look at the use of reinforcement for motivation, explain social learning theory and examine how job design – changing the structure of the work itself – can affect employee satisfaction and productivity. Finally, we discuss the trend of empowerment and look at how managers imbue work with a sense of meaning by fostering employee engagement.

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Degussa Peroxide Ltd (DPL) has a distinctive challenge in keeping its workforce motivated. It needs to think more about creating new demands for its staff rather than motivating them to accept change. As a highly capital-intensive petrochemical operation, it can afford to pay high wages, especially in comparison with most other employment opportunities around its location in rural Waikato, on New Zealand’s North Island. Good pay and careful selection processes have allowed the recruitment of employees who are open to learning new skills. Manufacturing peroxide is an automated, 24-hour-a-day operation. At the centre of operations is the need to monitor a process that typically needs only occasional adjustments for optimal performance. Watching computer screens has limited scope for generating job satisfaction. Mixing that job with ancillary production tasks such as machine maintenance or logistics work is not an option as such work is outsourced to specialists. DPL addresses motivation by radically expanding the range of responsibility given its shift workers and allowing them scope to design their own jobs. At any point in time, the workforce divides into four groups:

➜➜ Shift workers whose main task is to oversee production seven days a week on a roster of day and night shifts.

➜➜ Shift workers acting as support staff who work day shifts only but who are on-call to cover for night shift staff unavailable because of illness or other events.

➜➜ Shift workers performing service tasks usually filled by middle managers or specialists such as engineering services, HR, safety management, customer support and logistics management.

➜➜ A small office staff comprising the managing director, site manager (a chemical engineer), a marketing manager (located in Australia), a financial administrator and a part-time receptionist. All except the office staff move between groups. This typically gives each shift worker four months each year in a service role and the chance to fill new roles on each rotation. With most existing staff having been employed for at least 10 years, understanding of all the activities needed to keep the plant running is now well dispersed among the workforce. For example, around a third of staff have overseen the safety management system, helping to build the safety culture as well as diversifying work challenges.

This structure has evolved since the plant opened in 1991. In 1998, the plant was acquired by German company Degussa AG from the American firm DuPont. This allowed DPL to take over the office functions previously provided by DuPont’s New Zealand head office. More recently, the number of shift workers overseeing the production process was reduced to two: the original shift group had numbered five. This change released more staff time for service roles and special project work, with the additional benefit of greatly reducing the amount of night and weekend work. Within Degussa, DPL has both achieved new efficiency benchmarks for operating a peroxide plant and demonstrated how the willingness to depart from traditional workplace structures can sustain staff motivation. Tom Barratt, the managing director who has overseen DPL since its opening, believes the work structure suits the New Zealand culture of comparatively self-sufficient individuals with a low concern for status differences. Even so, it also takes a philosophical commitment to recognising the potential within people to achieve the workforce adaptability found at DPL.

Case study

Managing motivation at Degussa Peroxide Ltd

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Source: Contributed by Martin Perry, Massey University.

The concept of motivation Most of us get up in the morning, go to school or work, and behave in ways that are predictably our own. We respond to our environment and the people in it with little thought as to why we work hard, enjoy certain classes or find some recreational activities so much fun. Yet all these behaviours are motivated by something. Motivation refers to the forces either within or external to a person that arouse enthusiasm and persistence to pursue a certain course of action. Employee motivation affects productivity, and part of a manager’s job is to channel motivation towards the accomplishment of organisational goals.

In d ivi dual n eeds an d motivation A simple model of human motivation is illustrated in Exhibit 16.1. People have needs – such as for recognition, achievement or monetary gain – that translate into an internal tension that motivates specific behaviours with which to fulfil various needs. To the extent that the behaviour is successful, the person is

motivation The forces either within or external to a person that arouse enthusiasm and persistence to pursue a certain course of action.

planning

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rewarded because the need is satisfied. The reward also informs the person that the behaviour was Take a appropriate and can be used again in the future. Moment Managers who understand the motives that compel people to initiate, alter or continue a As a new manager, remember desired behaviour are more successful as motivators. Exhibit 16.2 illustrates four categories that people will be more engaged of motives based on two criteria. The vertical dimension contrasts intrinsic versus extrinsic when they do things they really like. If rewards. Intrinsic rewards are the satisfactions a person receives in the process of you haven’t already taken the Self-test at the beginning of this chapter, take performing a particular action. The completion of a complex task may bestow a pleasant it now to understand what engages feeling of accomplishment, or solving a problem that benefits others may fulfil a personal you in a class. You will read more mission. For example, employees at Salesforce.com, which provides cloud computing about engagement later in the services to organisations such as CGU Insurance, Westfield and Commonwealth Bank in chapter. Australia, and overseas for Cisco, Google, Japan Airlines and Burberry, are motivated by being on the ‘cutting edge’ of reinventing how companies handle ordinary but critical tasks like sales, customer relations and internal communications.2 Extrinsic rewards, on the other hand, are given by intrinsic reward another person, typically a manager, and include promotions, praise and pay increases. They originate The satisfaction received in the process of performing externally, as a result of pleasing others. At the Alta Gracia factory in the Dominican Republic, owned by an action. Knights Apparel, employees are motivated by the extrinsic reward of high pay because they need money extrinsic reward to support their families and can’t make nearly as much anywhere else.3 A reward given by another person.

NEED Creates desire to fulfil needs (money, friendship, recognition, achievement)

BEHAVIOUR Results in actions to fulfil needs

REWARDS Satisfy needs; intrinsic or extrinsic rewards

FEEDBACK Reward informs person whether behaviour was appropriate and should be used again

Exhibit 16.1 A simple model of motivation

The horizontal dimension of Exhibit 16.2 contrasts behaviours that are driven by fear or pain versus those driven by growth or pleasure. The four quadrants represent four differing approaches for motivating people. Quadrants 1 and 2 are both negative approaches to motivating. Quadrant 1 uses negative, extrinsic methods, such as threats or punishments, to get people to perform as desired. Quadrant 2 methods attempt to motivate people by tapping into their self-doubts or anxieties. For example, a manager might motivate people to work hard by emphasising the weak economy and high unemployment rate. Quadrant 1 and 2 methods can indeed be effective, as fear is a powerful motivator.4 However, using fear to motivate people in organisations almost always has negative consequences for employee development and longterm performance. The Management in Practice takes a light-hearted approach by looking at some negative techniques that kill employee motivation and happiness. Quadrants 3 and 4 are positive motivational approaches. Quadrant 3 methods attempt to influence behaviour by using extrinsic rewards that create pleasure. At Hilcorp Energy, for example, managers offered employees the chance to earn a bonus of $50 000 each if they helped the organisation to meet its growth goal.5 This positive motivational approach is useful, but limited. External rewards are important, but they can lose their power as motivational tools over time. The most effective managers also emphasise Quadrant 4 techniques that tap into deep-seated employee energy and commitment by helping people get intrinsic rewards from their work. For example, Chip Conley, founder and former CEO of Joie de Vivre, encouraged managers of hotel housekeeping staff to ‘focus on the impact they’re making rather than just the task of cleaning the toilet.’6

Intrinsic

Extrinsic

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1. Negative approach

3. Positive approach

Threats and punishments 

Rewards such as pay raises, bonuses, praise 

2. Negative approach

4. Positive approach

Tap into self-doubts 

Help people enjoy their work, get sense of accomplishment 

Pain/Fear 

Pleasure/Growth 

How to utterly destroy motivation Many managers unknowingly demolish positive emotions in the workplace. Destroying people’s positive feelings about themselves and their work is a sure way to kill motivation. Managers use a variety of techniques that make people miserable at work; if you’ve ever had a manager who used any of them, you’ll know how it feels. Keep that in mind when you become a practising manager.

➜➜ Never allow people to feel a sense of pride or accomplishment. In a recent study, one of the top demotivators reported by employees was constant setbacks. Setbacks are instances where people are blocked or stalled in doing their most important work or unable to make a meaningful contribution. One head of product development moved people on and off projects so often that they never experienced a sense of accomplishment. The resulting motivation level? Zero.

➜➜ Set such grandiose and vague goals that people don’t know what they mean or have any idea how to achieve them. There is nothing wrong with challenging goals. In

Exhibit 16.2 Four categories of motives managers can use Source: Based on Bruce H. Jackson. (April 2010). Influence Behavior; Become a Master Motivator. Leadership Excellence, 14.

management in pr actice fact, they can be highly motivating. But some managers set goals that have little relevance to employees, that are so extreme as to seem unattainable or so vague that they have no meaning.

➜➜ Pass up every opportunity to say ‘thank you’. No one likes to feel appreciated, after all, right? Smart managers know that’s not true! Sincerely thanking people for their efforts can provide a tremendous motivational boost, especially when times have been tough. In response to a McKinsey survey, 67 per cent of people cited praise from an immediate supervisor as an effective motivator. It ranked higher than any other incentive on the list, including pay raises and cash bonuses.

➜➜ Make sure people don’t have any fun. When people have fun at work, they want to be there. Managers influence whether people develop positive relationships and are able to have moments of levity and joy during their workday. Without some light moments, work is a hard slog every day. No wonder many people just want to stay home.

Sources: Based on Teresa Amabile and Steven Kramer. (6 March 2012). How to Completely, Utterly Destroy an Employee’s Work Life. The Washington Post, http://www. washingtonpost.com/national/on-leadership/how-to-completely-utterly-destroy-an-employees-work-life/2012/03/05/gIQAxU3iuR_story.html (accessed 8 March 2012); T. Amabile and S. Kramer. (January 2012). How Leaders Kill Meaning at Work. McKinsey Quarterly, http://www.mckinseyquarterly.com/How_leaders_kill_meaning_at_work_2910 (accessed 10 February 2012); Martin Dewhurst, Matthew Guthridge and Elizabeth Mohr. (2010). Motivating People: Getting Beyond Money. McKinsey Quarterly, 1, 12–15; and Regina M. Clark. (2009). Are We Having Fun Yet? Creating a Motivating Work Environment. Industrial and Commercial Training, 41:1, 43–6.

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M anagers as motivato rs Studies have found that high employee motivation goes hand in hand with high organisational performance and profits.7 It is the responsibility of managers to find the right combination of motivational techniques and rewards to satisfy employees’ needs and simultaneously encourage high work performance. Some ideas about motivation, referred to as content theories, stress the analysis of underlying human needs and how managers can satisfy needs in the workplace. Process theories concern the thought processes that influence behaviour. They focus on how people seek rewards in work circumstances. Reinforcement and social learning theories focus on employee learning of desired work behaviours. In Exhibit 16.1 earlier, content theories focus on the concepts in the first box, process theories on those in the second, and reinforcement and social learning theories on those in the third.

➜➜ Motivation is the arousal of enthusiasm and persistence to pursue a certain course of action.

➜➜ Intrinsic rewards are the satisfactions that a person receives in the process of performing a particular action.

➜➜ All behaviours are motivated by something, such as the desire to fulfil needs for money, recognition, friendship or a sense of accomplishment.

➜➜ Extrinsic rewards are given by another person, such as a manager, and include pay increases, promotions and praise. ➜➜ People can be driven to act by fear, but good managers avoid the use

of fear tactics to motivate people because this approach damages employee commitment and performance in the long run.

remember this

➜➜ In addition to providing appropriate extrinsic rewards, effective managers try to help people achieve intrinsic rewards from their work.

Content perspectives on motivation content theories A group of theories that emphasise the needs that motivate people.

Content theories emphasise the needs that motivate people. At any point in time, people have a variety

of needs. These needs translate into an internal drive that motivates specific behaviours in an attempt to fulfil the needs. In other words, our needs are like a hidden catalogue of the things that we want and will work to get. To the extent that managers understand employees’ needs, they can design reward systems to meet them and direct employees’ energies and priorities towards attaining organisational goals.

Th e hi er archy o f n eeds hierarchy of needs theory A content theory that proposes that people are motivated by five categories of needs – physiological, safety, belongingness, esteem and selfactualisation – that exist in a hierarchical order.

Probably the most famous content theory was developed by Abraham Maslow.8 Maslow’s hierarchy of needs theory proposes that people are motivated by multiple needs, and that these needs exist in a hierarchical order, as illustrated in Exhibit 16.3. Maslow identified five general types of motivating needs in ascending order., listed here in order of importance: 1 Physiological needs. These most basic human physical needs include food, water and oxygen. In the

organisational setting, they are reflected in the needs for adequate heat, air and base salary to ensure survival. 2 Safety needs. These needs include a safe and secure physical and emotional environment and

freedom from threats – that is, for freedom from violence and for an orderly society. In the workplace, safety needs reflect the needs for safe jobs, fringe benefits and job security. Because of the unstable economy and high unemployment in recent years, especially in some European countries such as Greece and Spain, and also in the USA, safety needs have taken priority for many people. A recent

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Fulfilment off the job Education, religion, hobbies, personal growth Approval of family, friends, community

Family, friends, community groups

Freedom from war, pollution, violence

Food, water, oxygen

Need hierarchy

Fulfilment on the job

Self-actualisation Needs

Opportunities for training, advancement, growth and creativity

Esteem Needs

Belongingness Needs

Safety Needs

Physiological Needs

Exhibit 16.3 Maslow’s hierarchy of needs

Recognition, high status, increased responsibilities Work groups, clients, co-workers, supervisors

Safe work, fringe benefits, job security

Heat, air, base salary

job satisfaction survey indicated that job security was the most important element of job satisfaction, with good benefits being second most important.9 3 Belongingness needs. These needs reflect the desire to be accepted by one’s peers, have

friendships, be part of a group and be loved. In the organisation, these needs influence the desire for good relationships with co-workers, participation in a work group and a positive relationship with supervisors. PortionPac Chemical, a maker of cleaning fluids, has exceptionally low turnover because people feel a sense of belonging. Most of the employees have worked together for more than a decade, and people treat one another like family, which contributes to a high level of motivation.10 4 Esteem needs. These needs relate to the desire for a positive self-image and to receive attention,

recognition and appreciation from others. Within organisations, esteem needs reflect a motivation for recognition, an increase in responsibility, high status and credit for contributions to the organisation. One example comes from Intuit, where Jennifer Lepird spent weeks working long, gruelling hours on a big acquisition deal. After the deal closed, Lepird was delighted to get a thank-you note from her manager, along with a small gift certificate, because it met her need to feel appreciated. ‘The fact that somebody took the time to recognise the effort made the long hours just melt away,’ she says.11 5 Self-actualisation needs. These needs include the need for self-fulfilment, which is the highest need

category. They concern developing one’s full potential, increasing one’s competence and becoming a better person. Self-actualisation needs can be met in the organisation by providing people with opportunities to grow, be creative and acquire training for challenging assignments and advancement. According to Maslow’s theory, low-order needs take priority – they must be satisfied before higherorder needs are activated. The needs are satisfied in sequence: physiological needs come before safety needs, safety needs before social needs and so on. A person desiring physical safety will devote his or her efforts to securing a safer environment and will not be concerned with esteem needs or self-actualisation needs. Once a need is satisfied, it declines in importance and the next higher need is activated. A study of employees in the manufacturing department of a major healthcare company in the United Kingdom provides some support for Maslow’s theory. Most line workers said they worked at the company primarily because of the good pay, benefits and job security. Thus, employees’ lower-level physiological and safety needs were being met. When questioned about their motivation, employees indicated the importance of positive social relationships with both peers and supervisors (belongingness needs) and a desire for greater respect and recognition from management (esteem needs).12

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Source: Getty Images/Bloomberg

Case study

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ACER Group Computers: coping with fierce competition in the world’s PC market Stan Shih built the Acer Group from scratch into a large computer manufacturer and distributing company. Acer Computers operated 34 factories in over 25 countries around the world at its peak. It had built significant market share in developing countries around Latin America and Asia. For example, it had built factories and stayed very close to its customers in Thailand, Malaysia and Mexico. Its approach has been to underprice the major companies’ products by about 20 per cent through gains in purchasing and assembling efficiency. However, Dell and Hewlett-Packard– Compaq opened plants in Malaysia, China and other low-cost countries in order to compete head-on through having a local presence in these markets. Stan Shih had a strategy in mind, which is also tied up in his management philosophy. He intended to achieve motivation in his employees by splitting his company into nearly 20 subsidiaries, and floating each of these on the local stock exchanges in each of the major countries in which he operates. Further, he planned to distribute 30 per cent of the shares in those companies to the employees of those companies and keep less than half of the ownership in his

central parent company. The intention was to make the Acer Group agile and to keep local ownership and motivation high. As Shih says: ‘A team of dragons does not need a head.’ Shih’s strategy involved the implementation of the philosophy: ‘Think global, act local.’ He achieved global scale in product design, research and development, but kept manufacturing, marketing, sales and distribution enmeshed in the local environments. Acer was very active in Australia and New Zealand markets. Charles Chung, who ran the company locally until 2009, passed IBM in the market and set his sights on HewlettPackard and Dell! Acer’s Sydney factory had capacity to assemble 1500 units per day and gave good support to sales efforts. In 2008, long-serving Acer manager and distinguished leader JT Wang, was appointed Acer Group CEO and Acer Inc. Chairman. By 2011, Acer had become the number 2 company in the PC/notebook industry globally, employing over 7000 people and with revenues of $18 billion. Acer had a strong commitment to sustainability, having planted some 60 000 trees to store carbon and through its product ‘take back’ system. Acer has been successful with its smartphones and developed four brands, Acer, Gateway, Packard Bell and eMachines, as it progresses to win accolades such as being named as a BusinessWeek ‘Hottest Tech Company’. Under the steady Chairmanship of company icon JT Wang and the leadership of CEO and president Gianfranco Lanci the company successfully overtook hot competitors Lenovo and Dell to become the second biggest computer company in the industry. Total revenues for the year 2010 reached a company record of nearly US$20 billion and ACER surpassed analyst expectations both in sales and

profit with record margins. It had also acquired US computer maker Gateway to amplify its presence in the American region and share prices reached their highest level ever in December 2012. Wang boasted that ACER would take the top spot from Hewlett Packard ‘within two to three years’. The introduction by Steve Jobs and Apple of the revolutionary iPad changed the world for ACER. By 2011 ACER recognised the threat that Apple presented and in April of that year, Mr Lanci resigned from his leadership role. The company planned a restructure and a new focus on becoming the global leader in the ‘mobile internet device market’: this would include focusing on its laptops and mini laptops as well as introducing ACER smartphones and tablets onto the market. JT Wang took over as CEO and plans were put in place to avert the threat of poor performance. Despite the optimism and the desire to produce innovative new products, shipments of ACER laptops continued to fall. The release of their much praised Chromebook and their competitively priced tablet both failed to generate the customer interest needed to significantly spawn sales. As the iPad continued to gain customer attention, Wang’s market offerings failed and in 2012 the company posted a $100 million loss for the full year. By the third quarter of 2013 ACER reported a combined loss of $106.3 million (down a further 16.6 per cent). For the second time in less than three years the CEO resigned and a restructure was planned. In just three years the company’s outlook completely altered. Lenovo became the market leader for PCs in China (one of the few regions still interested in purchasing PCs). The market

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for tablets entered a maturity phase and had been saturated with both cheap, functional devices from ACER’s competitors and higher end brands like Samsung and Apple. Most analysts recommended selling ACER stock as prices fell to a 12-year low. A once burgeoning workforce has to be cut. With management change, industry change, employee cutbacks and gloomy predictions, how will ACER’s leadership maintain the motivation of their remaining workforce and encourage innovation? One significant change made in November 2013 was the reinstatement of the

company’s founder, Stan Shih, as president and chairman of this once great company. Sources: Howarth, B. (6 May 2004). Three’s a Crowd. Business Review Weekly, 68; Jennings, Ralph. (26 January 2011). Acer Reports Record Revenue, Profit in 2010. Computer World, http://www.computerworld.com/s/ article/9206478/Acer_reports_record_revenue_profit_ in_2010 (accessed 21 November 2013); Einhorn, Bruce. (5 November 2013). Acer’s CEO Is Out, Another Victim of the iPad. Bloomberg Business Week, http://www.businessweek.com/articles/2013-11-05/ acers-ceo-is-out-another-victim-of-the-ipad (accessed 21 November 2013); Yahoo! Finance. Acer Inc. http://au.finance.yahoo.com/echarts?s=2353. TW#symbol=2353.tw;range=5y;compare=;indicator= volume;charttype=area;crosshair=on;ohlcvalues= 0;logscale=off;source=undefined

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(accessed 21 November 2013); Luk, Lorraine. (1 April 2011). Acer CEO Resigns as Tablets Threaten Market. Wall Street Journal, http://online.wsj.com/ news/article_email/SB100014240527487037­ 12504576234352629684640lMyQjAxMTAzMDIwMDEyNDAyWj (accessed 21 November 2013); Jennings, Ralph. (5 November 2013). Acer CEO Takes Pro Forma Fall For Successive Financial Losses. Forbes, http://www.forbes.com/sites/ ralphjennings/2013/11/05/1208/ (accessed 21 November 2013); Culpan, Tim. Acer Falls to 12-Year Low as CEO Quits After Loss: Taipei Mover. Bloomberg Business Week, http://www.bloomberg.com/news/ print/2013-11-05/acer-chairman-and-ceo-wangresigns-after-posting-record-loss.html (accessed 21 November 2013).

ERG th eo ry Clayton Alderfer proposed a modification of Maslow’s theory in an effort to simplify it and respond to criticisms of its lack of empirical verification.13 His ERG theory identified three categories of needs: 1 Existence needs. The needs for physical well-being. 2 Relatedness needs. The needs for satisfactory relationships with others. 3 Growth needs. The needs that focus on the development of human potential and the desire for

personal growth and increased competence.

Source: Corbis/Monalyn Gracia

The ERG model and Maslow’s needs hierarchy are similar because both are hierarchical in form and presume that individuals move up the hierarchy one step at a time. However, Alderfer reduced the number of need categories to three, and proposed that movement up the hierarchy is more complex, reflecting a frustration-regression principle; namely, that failure to meet a high-order need may trigger a regression to an already fulfilled lower-order need. Thus, a worker who cannot fulfil a need for personal growth may revert to a lower-order need and redirect his or her efforts towards making a lot of money. The ERG model, therefore, is less rigid than Maslow’s needs hierarchy, suggesting that individuals may move down as well as up the hierarchy, depending on their ability to satisfy needs. Needs hierarchy theories explain why organisations find ways to recognise employees, encourage their participation in decision making, and give them opportunities to make significant contributions to the organisation and society. Many companies are finding that creating a humane work environment that allows people to achieve a balance between work and personal life is also a great high-level motivator. Some companies go even further with job flexibility. At Coulter & Associates, an insurance and investment advisory firm, employees can come and go as they please,

ERG theory A modification of the needs hierarchy theory that proposes three categories of needs: existence, relatedness and growth. frustration-regression principle The idea that failure to meet a high-order need may cause a regression to an already satisfied lowerorder need.

Members of Gen Y, who, according to their managers, report for work with self-esteem to spare, often proceed directly from existence needs to growth needs. Once satisfied they’re receiving fair pay, what younger employees want most is training. In fact, recent studies found that respondents chose training from a list of benefits three times more often than a cash bonus. There’s a practical reason for this interest in personal growth. Younger employees know they need to acquire skills that will make them attractive job candidates. Unlike many of their elders, they don’t expect to work for a single employer throughout their careers.

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Innovative Way

Flexible work policies

Employees in low-hourly wage jobs don’t often get whitecollar perks, but some managers are trying a fresh and unlikely approach – letting shop-floor workers do some jobs at home, set their own schedules or otherwise have more control over their work lives. At Johnson Storage & Moving, which operated in five states, administrative workers, call centre staff and dispatchers have been able to work remotely or to work hours of their own choosing for well over a decade. Among the employees taking advantage of the flexible policy, there has been almost no turnover in that time span. Movers and warehouse employees, of course, can’t work from home, but company president Jim Johnson gives them as much control as possible over their start and end times, which has significantly reduced no-shows, tardiness and turnover. Managers in other companies are also giving manual workers more flexibility. Turck Inc., a manufacturer of

automation equipment, is evaluating a plan to let people do some jobs from home. ‘We have a lot of products where literally you just need to sit there and put a label on,’ says production supervisor Dee Comeau. ‘Honestly, it can be done anywhere.’ Kaiser Permanente and Marriott International have both implemented a variety of innovative policies, such as offering people control over their start and end times and providing paid time off in short increments so an employee doesn’t have to take a full day off for a doctor’s appointment, for example. At Kaiser Permanente, employee surveys show rising levels of commitment and engagement since the flex programs began. In Australia, ANZ Bank began a large number of initiatives in their ‘Breakout Program’ and over a five year period they were able to lift staff satisfaction from 49 per cent to 85 per cent, which led to higher levels of customer satisfaction, too.

Sources: Rachel Emma Silverman. (3 October 2011). For Manual Jobs, White-Collar Perks. The Wall Street Journal, B8; Samson, D. and Daft, R. (2012). Management, 4th edn (Melbourne: Cengage Learning).

without telling anyone where they are going or why, so long as they get their jobs done. Shannon Mehls, who works as an assistant to one of Coulter’s senior investment advisers, says employees now feel like ‘mini entrepreneurs’, managing their own schedules and focusing on results instead of just putting in 40 hours and getting a pay cheque.14 Although not all managers would be comfortable working in an environment where employees come and go as they please, there is some evidence that people who have greater control over their work schedules are significantly less likely to suffer job burnout and are more highly committed to their employers.15 In the recent economic downturn, some companies found flexible options a great way to cut payroll costs while retaining and motivating valued employees. Accounting firm KPMG tried a program called Flexible Futures, which offered employees in its British operations several options: (1) go to a four-day work week and take a 20 per cent pay cut; (2) choose a mini-sabbatical at 30 per cent base pay; (3) opt for both of these; or (4) stay with their current employment arrangement. Over 80 per cent of employees chose one of the flexible options. Other companies have implemented similar programs with great success.16

A t wo - facto r approach to motivatio n Frederick Herzberg developed another popular theory of motivation called the two-factor theory.17 Herzberg interviewed hundreds of workers about times when they were highly motivated to work and other times when they were dissatisfied and unmotivated. His findings suggested that the work characteristics associated with dissatisfaction were quite different from those pertaining to satisfaction, which prompted the notion that two factors influence work motivation. The two-factor theory is illustrated in Exhibit 16.4. The centre of the scale is neutral, meaning that workers are neither satisfied nor dissatisfied. Herzberg believed that two entirely separate dimensions contribute to

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an employee’s behaviour at work. The first, called hygiene factors, involves the presence or absence of job dissatisfiers, such as working conditions, pay, company policies and interpersonal relationships. When hygiene factors are poor, work is dissatisfying. However, good hygiene factors simply remove the dissatisfaction; they do not in themselves cause people to become highly satisfied and motivated in their work. The second set of factors does influence job satisfaction. Motivators focus on high-level needs and include achievement, recognition, responsibility and opportunity for growth. Herzberg believed that when motivators are absent, workers are neutral towards work, but when motivators are present, workers are highly motivated and satisfied. Thus, hygiene factors and motivators represent two distinct factors that influence motivation. Hygiene factors work only in the area of dissatisfaction. Unsafe working conditions or a noisy work environment will cause people to be dissatisfied, but their correction will not lead to a high level of motivation and satisfaction. Motivators such as challenge, responsibility and recognition must be in place before employees will be highly motivated to excel at their work. There is a growing realisation among managers of the importance of employee recognition, perhaps because tough economic conditions have made it more difficult for them to reward people with large pay increases. The Globoforce 2012 Mood Tracker survey found that employee recognition programs are on the rise. Moreover, 82 per cent of employees say that being recognised for their contributions motivates them, and 78 per cent say that they would work harder if their efforts were better recognised and appreciated.18 The implication of the two-factor theory for managers is clear. On one hand, providing hygiene factors will eliminate employee dissatisfaction but will not motivate workers to high achievement levels. On the other hand, recognition, challenge and opportunities for personal growth are powerful motivators and will promote high satisfaction and performance. The manager’s role is to remove dissatisfiers – that is, to provide hygiene factors sufficient to meet basic needs – and then to use motivators to meet higher-level needs and propel employees towards greater achievement and satisfaction. Highly satisfied

Area of satisfaction Motivators

Motivators influence level of satisfaction

Achievement Recognition Responsibility Work itself Personal growth

Neither satisfied or dissatisfied

Area of dissatisfaction

Hygiene factors

Working conditions Pay and security Company policies Supervisors Interpersonal relationships Highly dissatisfied

Hygiene factors influence level of dissatisfaction

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hygiene factors Factors that involve the presence or absence of job dissatisfiers, including working conditions, pay, company policies and interpersonal relationships. motivators Factors that influence job satisfaction based on fulfilment of high-level needs such as achievement, recognition, responsibility and opportunity for growth.

Exhibit 16.4 Herzberg’s two-factor theory

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Acq u i red n eeds th eo ry The acquired needs theory, developed by David McClelland, proposes that certain types of needs are acquired during the individual’s lifetime. In other words, people are not born with these needs but may learn them through their life experiences.19 The three needs most frequently studied are: ●● Need for achievement. The desire to accomplish something difficult, attain a high standard of success, master complex tasks and surpass others. ●● Need for affiliation. The desire to form close personal relationships, avoid conflict and establish warm friendships. ●● Need for power. The desire to influence or control others, be responsible for others and have authority over others. Early life experiences typically determine whether people acquire these needs. If children are encouraged to do things for themselves and receive reinforcement, they will acquire a need to achieve.

New Manager Self-Test N e e d f o r a c h i e v e m e n t, a ff i l i at i o n a n d p o w e r Instructions: This questionnaire asks you to describe situations that you like. For each item below, give the number ‘3’ to the phrase that best describes you, ‘2’ to the item that is next best and ‘1’ for the item that is least like you. 1.         

a. I like to do my best in whatever I undertake. b. I like to form new friendships. c. I like to tell other people how to do their jobs.

2.   

a. I like to be able to say that I have done a difficult job well.    b. I like to have strong attachments with my friends.    c. I like to take on responsibilities and obligations.

3.   

a. I like to accomplish tasks that require skill and

effort.



b. I like to share things with my friends. c. I like to be called upon to settle arguments and disputes between others.

     

4.   

a. I like to be successful in things I undertake. b. I like to do things for my friends. c. I like to be able to persuade others to do what I want to do.

     

5.   

a. I like to seek satisfaction from accomplishing a difficult task.    b. I like to meet new people.    c. I like to be regarded by others as a leader.

6.   

a. I would like to be a recognised authority in my career field.    b. I like to participate in groups in which the members have warm and friendly feelings towards one another.



   c. When with a group, I like to make the decisions about what we are going to do.

7.   

a. I like to confront the difficult challenges of the job. b. I like to make as many friends as I can. c. I would like to be a powerful executive or politician.

     

Scoring and Interpretation: Compute your scores as follows: Need for achievement 5 1a 1 2a 1 3a 1 4a 1 5a 1 6a 1 7a 5

 

 

Need for affiliation 5 1b 1 2b 1 3b 1 4b 1 5b 1 6b 1 7b 5

 

 

Need for power 5 1c 1 2c 1 3c 1 4c 1 5c 1 6c 1 7c 5

 

 

David McClelland’s research found that some human needs are learned during early life experiences, and the three that he studied are personal need for achievement, affiliation and power. Achievement means the need to excel. Affiliation means the need for harmonious relationships. Power means the need to direct and influence others. One of the three needs is typically stronger than the others in most people. The higher your score on a need, the stronger it is and the more it will guide your behaviour. What do the relative strengths of the three needs mean to you? If you can align your career to use and satisfy your stronger needs, you are more likely to be successful. Sources: Based on Joel B. Bennett. (1988). Power and Influence as Distinct Personality Traits: Development and Validation of a Psychometric Measure. Journal of Research in Personality, 22, 361–94; Yongmei Liu, Jun Liu and Longzeng Wu. (2010). Are You Willing and Able? Roles of Motivation, Power, and Politics in Career Growth. Journal of Management, 36:6, 1432–60.

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From humble beginnings, Outback Steakhouse has blossomed into a large and profitable business in an already well-supplied market.

With their years of experience in the restaurant business, Robert Basham, Timothy Gannon and Chris Sullivan, founders of Outback Steakhouse, were acutely aware of the hygiene factors in the food-service industry. Outback is an Australianthemed restaurant founded in the US that deliberately adopts an Australian theme, sells Australian menu items and is decorated with Australian artefacts. While the average restaurant is designed to maximise the number of customers at the expense of the food preparation area, Outback puts the emphasis on providing the best possible spaces for servers and kitchen staff to do their jobs effectively, even at peak business times. Outback’s dinner-only policy and maximum five-day working week give managers and staff time for a life outside the restaurant, which cuts down on employee

turnover. Each server handles only three tables at a time, ensuring first-class service to customers and higher tips for servers. To motivate managers over a sustained period, Outback provides ownership. After making a US$10 000 investment and signing a five-year contract, Outback managers receive annual company contributions equal to a percentage of the manager’s restaurant’s cash flow, known as the Partnership Ownership Account Plan (POA). This percentage increases each year in line with the manager’s ownership. Managers can also receive a President’s Club bonus for achieving beyond annual sales targets. In addition, managers can receive monthly payments based on his or her restaurant’s cash flow and they receive about 4000 shares that vest at the end of five years. Regular staff also participate in a share ownership plan.

Restaurants are usually managed by a threeperson team so that responsibility can be shared and the unfriendly hours typically experienced in the hospitality industry are reduced. Managers are thus able to have a work–life balance. Managers are further motivated by the level of responsibility Outback bestows on them. Restaurant managers have the authority to make their own decisions rather than merely implement decisions dictated by headquarters. The company also has a succession plan in place to promote identified candidates within Bloomin’ Brands, the parent company. Has Outback’s motivational approach worked? In December 1994, six years after its launch, there were 210 Outbacks, with revenues estimated at US$544 million. As Timothy Gannon put it, ‘We believe

Case study

Outback Steakhouse

Source: iStockphoto/sshepard

If they are reinforced for forming warm human relationships, they will develop a need for affiliation. If they get satisfaction from controlling others, they will acquire a need for power. For more than 20 years, McClelland studied human needs and their implications for management. People with a high need for achievement are frequently entrepreneurs. People who have a high need for affiliation are successful integrators, whose job is to coordinate the work of several departments in an organisation. Integrators include brand managers and project managers who must have excellent people skills. A high need for power often is associated with successful attainment of top levels in the organisational hierarchy.20 For example, McClelland studied managers at AT&T for 16 years and found that those with a high need for power were more likely to follow a path of continued promotion over time. More than half of the employees at the top levels had a high need for power. In contrast, managers with a high need for achievement but a low need for power tended to peak earlier in their careers and at a lower level. The reason is that achievement needs can be met through the task itself, but power needs can be met only by ascending to a level at which a person has power over others. In summary, content theories focus on people’s underlying needs and label those particular needs that motivate behaviour. The hierarchy of needs theory, the ERG theory, the two-factor theory and the acquired needs theory all help managers to understand what motivates people. In this way, managers can design work to meet needs and hence elicit appropriate and successful work behaviours.

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if you treat employees as if you were one of them and give them the right environment, they will blow you away with their performance.’ By 2012, Outback boasted 975 restaurants worldwide including six in Australia, one in China and 41 in Brazil. As a major chain in Bloomin’ Brands, Outback Steakhouse is part of an enterprise with 93 000 employees and total revenues of nearly US$4.0 billion in 2012. Outback’s co-founders, who are all significant shareholders in the parent company Bloomin’ Brands, have innovated

➜➜ Content theories emphasise the needs that motivate people. ➜➜ The most well-known content theory is Maslow’s hierarchy of needs theory, which proposes that people are motivated by five categories of needs – physiological, safety, belongingness, esteem and self-actualisation – that exist in a hierarchical order. ➜➜ ERG theory is a modification of the needs hierarchy and proposes three categories of needs: existence, relatedness and growth.

with kerbside takeaway, Internet booking and new brands, menu items and formulas combining to keep them at the leading edge. The founders clearly believe and live the idea that they succeed through their people, known as ‘Outbackers’. By keeping their employees motivated, and ‘having a good time’, Outback’s executives know that the customer service will be good. Bloomin’ Brands’ successful approach to motivating its staff has led to Outback’s expansion into 25 countries, with many hundreds of restaurants

➜➜ The frustration-regression principle is the idea that failure to meet a highorder need may cause a regression to an already satisfied lower-order need; thus, people may move down as well as up the needs hierarchy. ➜➜ Giving people more control over their work schedules and opportunities to contribute ideas are two ways that managers meet people’s higher-level needs. ➜➜ One element of Herzberg’s twofactor theory, hygiene factors, focuses on lower-level needs and involves the presence or absence

operating under numerous brand names. Such growth signifies a company and a group of managers who are clearly getting a lot of things, including staff motivation, right. Sources: Finegan, J. (December 1994). Unconventional Wisdom. Inc., 44–58; Bloomin’ Brands Inc. (4 March 2013), Form 10-K Annual Report, http://investors.bloominbrands. com/secfiling.cfm?filingID=1546417-1338&CIK=1546417 (accessed 21 November 2013); http://outbacksteakhouse.com.au/index.php/ careeropportunities/management (accessed 21 November 2013).

of job dissatisfiers, including working conditions, pay and company policies.

remember this

➜➜ Herzberg’s second factor, motivators, influences job satisfaction based on fulfilling higher-level needs such as achievement, recognition, responsibility and opportunities for personal growth. ➜➜ The acquired needs theory proposes that certain types of needs, including the need for achievement, need for affiliation and need for power, are acquired during an individual’s lifetime of experiences.

Process perspectives on motivation process theories A group of theories that explain how employees select behaviours with which to meet their needs and determine whether their choices were successful.

Process theories explain how people select behavioural actions to meet their needs and determine

whether their choices were successful. Important perspectives in this area include goal-setting, equity theory and expectancy theory.

Goal set tin g Recall from Chapter 7 our discussion of the importance and purposes of goals. Numerous studies have shown that specific, challenging targets significantly enhance people’s motivation and performance levels.21 You have probably noticed in your own life that you are more motivated when you have a specific

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goal, such as getting a high distinction on a final exam, losing five kilograms before summer holidays or earning enough money during the summer to buy a used car. Goal-setting theory, described by Edwin Locke and Gary Latham, proposes that managers can increase motivation and enhance performance by setting specific, challenging goals, and then helping people track their progress towards goal achievement by providing timely feedback. Provide Exhibit 16.5 illustrates key components of feedback 22 goal-setting theory. ●● Goal specificity refers to the degree to which goals are concrete and unambiguous. Specific goals such as ‘Visit one new customer each day’ or ‘Sell $1000 worth of merchandise a week’ are more motivating than vague goals such as ‘Keep in touch with new customers’ or ‘Increase merchandise sales.’ For example, a lack of clear, specific goals is cited as a major cause of the failure of pay-for-performance incentive plans in many organisations.23 Vague goals can be frustrating for employees.

Challenging

Specific

Accepted

●● In terms of goal difficulty, difficult goals Higher motivation are more motivating than easy ones. Easy goals provide little challenge for employees and don’t require them to increase their output. Highly ambitious but achievable goals ask people to stretch their abilities and provide a basis for greater feelings of accomplishment and personal effectiveness. A study in Germany found that, over a three-year period, only employees who perceived their goals as difficult reported increases in positive emotions and feelings of job satisfaction and success.24 ●● Goal acceptance means that employees have to ‘buy into’ the goals and be committed to them. Having people participate in setting goals is a good way to increase acceptance and commitment. ●● Finally, the component of feedback means that people get information about how well they are doing in progressing towards goal achievement. It is important for managers to provide performance feedback on a regular, ongoing basis. However, self-feedback, where people are able to monitor their own progress towards a goal, has been found to be an even stronger motivator than external feedback.25 Why does goal setting increase motivation? For one thing, it enables people to focus their energies in the right direction. People know what to work towards, so they can direct their efforts towards the most important activities to accomplish the goals. Goals also energise behaviour, because people feel compelled to develop plans and strategies that keep them focused on achieving the target. Specific, difficult goals provide a challenge and encourage people to put forth high levels of effort. In addition, when goals are achieved, pride and satisfaction increase, contributing to higher motivation and morale.26 The following Innovative Way illustrates the motivational power of goal setting.

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Exhibit 16.5 Criteria for motivational goals

goal-setting theory Motivation can be increased and performance enhanced by setting specific, challenging goals and providing timely feedback.

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Innovative Way

Fun goal setting

When Advanced Circuits was having trouble with frequent stops and restarts on its production line, costing the company about $50 000 a month, former CEO Ron Huston came up with a plan. He bought a junk car, placed it in the parking lot, and told employees they could take a sledgehammer to the car every day the production line didn’t have a restart. Employees set a goal of flattening the car in 90 days. Everybody had fun, and they met the 90-day goal by solving production line problems, which was the whole point of the exercise for Huston. Huston realised how motivating it could be for people to have a clear, specific goal, especially if achieving it was fun.

He began setting goals for other aspects of the business and rewarding people when the goals were met. ‘He sets up goals that are really hard, and then defines exactly what it will take to reach them,’ said technical support employee Kami Lichtenberg. Just as importantly, Huston steered performance towards goals and kept people energised by giving everyone ongoing numerical feedback about every aspect of the business. People began checking the data throughout the day to track their progress towards goals. ‘The more goals we get, the better it is for us,’ said employee Barb Frevert.

Sources: Julie Sloane. The Number Cruncher. In Ellyn Spragins. (October 2004). The Best Bosses, Fortune Small Business, 39–57; and Maggie Rauch. (December 2004). Great Expectations. Incentive, 18–19.

Take a Moment As a new manager, use specific, challenging goals to keep people focused and motivated. Have team members participate in setting goals and determining how to achieve them. Give regular feedback on how people are doing.

Recent research points to the importance of making progress towards goals as a key to motivation. The making progress principle The idea that the most important factor to boost motivation, positive emotions and perceptions is making progress towards meaningful goals.

making progress principle is the idea that the single most important factor that can boost motivation,

positive emotions and perceptions during a workday is making progress towards meaningful goals.27 Providing feedback on how well people are progressing and giving them a way to track their progress towards goals, as Ron Huston did at Advanced Circuits, provides a renewable energy that fuels motivation. Sometimes managers underestimate the importance of the continuous feedback aspect of goal setting and achievement. Knowing that they are making everyday progress (even only small steps) can make all the difference in how motivated people feel to continue pursuing a goal.

Eq u it y th eo ry equity theory A process theory that focuses on individuals’ perceptions of how fairly they are treated relative to others.

equity theory

Equity theory focuses on individuals’ perceptions of how fairly they are treated compared with others.

Developed by J. Stacy Adams, equity theory proposes that people are motivated to seek social equity in the rewards that they receive for performance.28 According to equity theory, if people perceive their compensation to be equal to what others receive for similar contributions, they will believe that their treatment is fair and equitable. People evaluate equity by a ratio of inputs to outcomes. Inputs to a job include education, experience, effort and ability. Outcomes from a job include pay, recognition, benefits and promotions. The input-to-outcome ratio may be compared to another person in the work group or to a perceived group average. A state of

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outcomes to inputs. Inequity occurs when the input-to-outcome ratios are out of balance, such as when a new, inexperienced employee receives the same salary as a person with a high level of education or experience. Interestingly, perceived inequity also occurs in the other direction. Thus, if an employee discovers that he or she is making more money than other people who contribute the same inputs to the company, the employee may feel the need to correct the inequity by working harder or getting more education. Scientific studies indicate that the human brain seems programmed to dislike inequity, even when we benefit from it. Moreover, people get less satisfaction from money they receive without having to earn it than they do from money they work to receive.29 Perceived inequity creates tensions within individuals that motivate them to bring equity into balance.30 The most common methods for reducing a perceived inequity are these: ●● Change work effort. A person may choose to increase or decrease his or her input to the organisation. Individuals who believe that they are underpaid may reduce their level of effort or increase their absenteeism. Overpaid people may increase their effort on the job. ●● Change outcomes. A person may change his or her outcomes. An underpaid person may request a salary increase or a bigger office. A union may try to improve wages and working conditions to be consistent with a comparable union whose members make more money. ●● C  hange perceptions. Research suggests that people may change perceptions of equity if they are unable to change inputs or outcomes. They may increase the status attached to their jobs artificially or distort others’ perceived rewards to bring equity into balance. ●● Leave the job. People who feel inequitably treated may decide to leave their jobs rather than suffer the inequity of being under- or overpaid. In their new jobs, they expect to find a more favourable balance of rewards.

equity A situation that exists when the ratio of one person’s outcomes to inputs equals that of another’s.

Zara opened its iconic fashion stores in Sydney and Melbourne in mid-2011, having become a globally successfully brand and company in just three decades from humble beginnings in Spain. Zara has positioned itself as ‘cool’ with high-variety, fast-cycle development of new products and highly motivated staff. Employees are motivated with a monetary bonus system as well as other incentives, and employee satisfaction is high – just like Zara’s customer satisfaction! Source: Getty Images/Cameron Spencer

equity exists whenever the ratio of one person’s outcomes to inputs equals the ratio of another’s

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The implication of equity theory for managers is that employees indeed evaluate the perceived equity of their rewards compared to others. Many big law firms are reducing the compensation of 10 to 30 per cent of their partners each year in order to free up money to hire and reward ‘star performers’, rejecting the traditional practice of paying partners relatively similar amounts. The change fits with the strategy of rewarding people who generate more business, but it is having a damaging effect on the morale and motivation of other partners, who perceive the new compensation scheme as inequitable.31 Inequitable pay puts pressure on employees that is sometimes almost too great to bear. They attempt to change their work habits, try to change the system, or leave the job.32

Expectan cy th eo ry Expectancy theory suggests that motivation depends on individuals’ expectations about their ability to

perform tasks and receive desired rewards. Expectancy theory is associated with the work of Victor Vroom, although a number of scholars have made contributions in this area.33 Expectancy theory is concerned not with identifying types of needs, but with the thinking process that individuals use to achieve rewards. For example, one interesting study of expectancy theory looked

expectancy theory A process theory that proposes that motivation depends on individuals’ expectations about their ability to perform tasks and receive desired rewards.

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at patrol officer drug arrests. The research found that officers who produced the most drug arrests were more likely to have perceived that such arrests were a management priority and were rewarded by their organisation, received specialised training to hone their skills related to drug interdiction, and perceived that they had sufficient time and resources to investigate suspected drug activity properly.34

Exhibit 16.6 Major elements of expectancy theory

E P expectancy Probability that effort will lead to desired performance

Effort

Valence (value of outcomes)

Outcomes (Pay, recognition, other rewards)

Performance

P O expectancy Probability that performance will produce desired outcome

expectancy theory

E→P expectancy Expectancy that putting effort into a given task will lead to high performance.

P→O expectancy Expectancy that successful performance of a task will lead to the desired outcome.

valence The value or attraction an individual has for an outcome.

Expectancy theory is based on the relationship among the individual’s effort, the individual’s performance and the desirability of outcomes associated with high performance. These elements and the relationships among them are illustrated in Exhibit 16.6. The keys to expectancy theory are the expectancies for the relationships among effort, performance and the value of the outcomes to the individual. E → P expectancy involves determining whether putting effort into a task will lead to high performance. For this expectancy to be high, the individual must have the ability, previous experience and necessary equipment, tools and opportunity to perform. Let’s consider a simple sales example. If Paloma, a salesperson at the Diamond Gift Shop, believes that increased selling effort will lead to higher personal sales, we can say that she has a high E → P expectancy. However, if Paloma believes she has neither the ability nor the opportunity to achieve high performance, the expectancy will be low, and so will be her motivation. P → O expectancy involves determining whether successful performance will lead to the desired outcome or reward. If the P → O expectancy is high, the individual will be more highly motivated. If the expectancy is that high performance will not produce the desired outcome, motivation will be lower. If Paloma believes that higher personal sales will lead to a pay increase, we can say that she has a high P → O expectancy. She might be aware that raises are coming up for consideration and talk with her supervisor or other employees to see if increased sales will help her earn a better raise. If not, she will be less motivated to work hard. Valence is the value of outcomes, or attraction to outcomes, for the individual. If the outcomes that are available from high effort and good performance are not valued by employees, motivation will be low. Likewise, if outcomes have a high value, motivation will be higher. If Paloma places a high value on the pay raise, valence is high and she will have a high motivational force. On the other hand, if the money has low valence for Paloma, the overall motivational force will be low. For an employee to be highly motivated, all three factors in the expectancy model must be high.35

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Expectancy theory attempts not to define specific types of needs or rewards, but only to establish that they exist and may be different for every individual. One employee might want to be promoted to a position of increased responsibility, and another might have high valence for good relationships with peers. Consequently, the first person will be motivated to work hard for a promotion and the second for the opportunity of a team position that will keep him or her associated with a group. Studies substantiate the idea that rewards need to be individualised to be motivating. A recent finding shows that the top reason people leave their jobs is because they ‘don’t feel appreciated’. Yet Gallup’s analysis of 10 000 workgroups in 30 industries found that making people feel appreciated depends on finding the right kind of reward for each individual. Some people prefer tangible rewards such as bonuses, gifts or luxury trips, while others place high value on words of appreciation and recognition. In addition, some want public recognition while others prefer to be quietly praised by someone they admire and respect.36 ➜➜ Process theories, including goalsetting theory, equity theory and expectancy theory, explain how people select behaviours with which to meet their needs and determine whether their choices were successful. ➜➜ Goal-setting theory proposes that specific, challenging goals increase motivation and performance when the goals are accepted by subordinates and these subordinates receive feedback to indicate their progress towards goal achievement.

➜➜ The making progress principle is the idea that the single most important factor that can boost motivation, positive emotions and perceptions during a workday is making progress towards meaningful goals.

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➜➜ Equity theory focuses on individuals’ perceptions of how fairly they are treated relative to others.

➜➜ A person’s E → P expectancy is the expectancy that putting effort into a given task will lead to high performance.

➜➜ A situation of equity exists when the ratio of one person’s outcomes to inputs equals that of another.

➜➜ P → O expectancy is the expectancy that high performance of a task will lead to the desired outcome.

From engineer to manager Source: Courtesy Rocio Bustinza

➜➜ Expectancy theory proposes that motivation depends on individuals’ expectations about their ability to perform tasks and receive desired rewards.

My name is Rocio Bustinza. I was born in Peru (South America). I graduated in Industrial Engineering with a specialisation in business process improvement, I learned about supply chain management from the early years of my career and I became passionate about the dynamics that are required in this business function. During my first year of pre-graduate studies, I decided I wanted to become a consultant and have the ability to be called into different

➜➜ Valence is the value of outcomes (rewards) to the individual.

Austr alian manager pr ofile industries to advise them on best practices. Throughout the years, this career has given me the opportunity to be in charge of managing multinational projects for big and small companies in Australia and worldwide. My career started in Peru where I completed my bachelor degree, and soon I joined the SAP world as a business consultant specialising in logistics and distribution. I have worked in several SAP mining and manufacturing implementation projects in Peru, Chile, Bolivia and Colombia. During the years I worked for BHP Billiton, an offer came through to join a global consulting firm and be based in

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Melbourne, Australia. Little did I know how much my life would change with the decision I was about to make. It has been almost six years since I decided to make a life away from home and follow my career development aspirations. Since I joined CSC Australia, I have expanded my industry knowledge and been part of multiple project opportunities across all Australian regions, New Zealand and Asian countries. My career has stepped further into business architecture and now I lead a growing team of consultants focused on enterprise mobility projects working along SAP Business Managers in charge of selling and delivering successful projects. My passion for supply chain processes has not left me despite all of the other business functions I have been involved

in. Hence, I decided to get my master’s degree in Supply Chain Management to reinforce my knowledge and learn as much as possible. Finally, I would like to share a reflection about how important it is to be yourself during your career progression and the challenges life throws at you. Don’t ever doubt yourself and what you can do when you have passion for what you do. Australia is a country of opportunities and advantages for whoever works hard and establishes the right relationships. Lastly, one of the things I have learned in my career is that people listen more to you when you show respect for what they do and work to understand their viewpoint. Good luck! Source: Contributed by Rocio Bustinza.

reinforcement theory A motivation theory based on the relationship between a given behaviour and its consequences behaviour modification The set of techniques by which reinforcement theory is used to modify human behaviour. law of effect The assumption that positively reinforced behaviour tends to be repeated, and unreinforced or negatively reinforced behaviour tends to be inhibited. reinforcement Anything that causes a given behaviour to be repeated or inhibited.

positive reinforcement The administration of a pleasant and rewarding consequence following desired behaviour.

Reinforcement perspective on motivation The reinforcement approach to employee motivation sidesteps the issues of employee needs and thinking processes described in the content and process theories. Reinforcement theory simply looks at the relationship between behaviour and its consequences. It focuses on changing or modifying employees’ on-the-job behaviour through the appropriate use of immediate rewards and punishments.

D i rect rein fo rcem ent Behaviour modification is the name given to the set of techniques by which reinforcement theory

is used to modify human behaviour.37 The basic assumption underlying behaviour modification is the law of effect, which states that behaviour that is positively reinforced tends to be repeated, and behaviour that is not reinforced tends not to be repeated. Reinforcement is defined as anything that causes a certain behaviour to be repeated or inhibited. For example, Whole Foods gives employees a 30 per cent discount on store purchases if they meet certain criteria for healthy habits, such as maintaining low cholesterol and blood pressure or quitting smoking. Indeed, many companies are searching for ways to reinforce behaviours that create healthier employees.38 The expectation at Whole Foods is that its healthier workforce will be more productive and innovative. The four reinforcement tools are positive reinforcement, avoidance learning, punishment, and extinction, as summarised in Exhibit 16.7. ●● Positive reinforcement is the administration of a pleasant and rewarding consequence following a desired behaviour, such as praise for an employee who arrives on time or does a little extra work. Research shows that positive reinforcement does help motivate desired behaviours. Moreover, nonfinancial reinforcements such as positive feedback, social recognition and attention are just as effective as financial incentives.39 Studies of children indicate that those praised for trying hard and taking risks tend to enjoy challenges and find greater success over the long term. A study of employees at fast-food drive-through windows found that performance feedback and supervisor recognition had a significant effect on increasing the incidence of ‘up-selling’, or asking customers to increase their order.40

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Positive reinforcement Increases likehood that behaviour will be repeated

Exhibit 16.7 Changing behaviour with reinforcement

Avoid reprimands, negative statements

Avoidance learning Increases likehood that behaviour will be repeated

Source: Based on Richard L. Daft and Richard M. Steers, Organizations: A Micro/Macro Approach (Glenview, IL: Scott, Foresman, 1986), p. 109.

Reprimand employee Make negative statements

Punishment Reduces likelihood that behaviour will be repeated

Withhold raises, merit pay, praise

Extinction Reduces likelihood that behaviour will be repeated

Praise employee Recommend pay raise Employee increases work rate

Slow work rate Supervisor requests faster work

Employee continues slow work

●● Punishment is the imposition of unpleasant outcomes on an employee. Punishment typically occurs following undesirable behaviour. For example, a supervisor may berate an employee for performing a task incorrectly. The supervisor expects that the negative outcome will serve as a punishment and reduce the likelihood of the behaviour recurring. The use of punishment in organisations is controversial and often criticised because it fails to indicate the correct behaviour. However, almost all managers report that they find it necessary to occasionally impose forms of punishment ranging from verbal reprimands to employee suspensions or firings.41 ●● Extinction is the withholding of a positive reward. Whereas with punishment, the supervisor imposes an unpleasant outcome such as a reprimand, extinction involves withholding praise or other positive outcomes. With extinction, undesirable behaviour is essentially ignored. The idea is that behaviour that is not positively reinforced will gradually disappear. A New York Times reporter wrote a humorous article about how she learned to stop nagging and instead use reinforcement theory to shape her husband’s behaviour after studying how professionals train animals.42 When her husband did something she liked, such as throw a dirty shirt in the hamper, she would use positive reinforcement, thanking him or giving him a hug and a kiss. Undesirable behaviours, such as throwing dirty clothes on the floor, on the other hand, were simply ignored, applying the principle of extinction.

avoidance learning The removal of an unpleasant consequence following desired behaviour. punishment The imposition of unpleasant outcomes on an employee. extinction Withdrawing a positive or reinforcing reward, leading to the cessation of a behaviour. Source: AAP Image/Sergio Dionisio

●● Avoidance learning is the removal of an unpleasant consequence once a behaviour is improved, thereby encouraging and strengthening the desired behaviour. Avoidance learning is sometimes called negative reinforcement. The idea is that people will change a specific behaviour to avoid the undesired result that the behaviour provokes. As a simple example, a supervisor who constantly reminds or nags an employee who is goofing off on the factory floor and stops the nagging when the employee stops goofing off is applying avoidance learning.

Through its continuous improvements and staff engagement program known as ‘Breakout’, ANZ Bank has lifted its staff satisfaction level from 49 per cent to over 85 per cent in recent years, resulting in higher levels of customer satisfaction and retention.

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Farm managers often use a fixed-rate reinforcement schedule by basing a fruit or vegetable picker’s pay on the amount he or she harvests. A variation on this individual piece-rate system is a relative incentive plan that bases each worker’s pay on the ratio of the individual’s productivity to average productivity among all co-workers. A study of Eastern and Central European pickers in the United Kingdom found that workers’ productivity declined under the relative plan. Researchers theorised that fast workers didn’t want to hurt their slower colleagues, so they reduced their efforts. The study authors suggested a team-based scheme – where everyone’s pay increased if the team did well – would be more effective. social learning theory Proposes that an individual’s motivation can result from observations of other people’s behaviour. vicarious learning Occurs when an individual sees others perform certain behaviours and get rewarded for them.

Take a Moment As a new manager, remember that reward and punishment practices are partial motivational tools because they focus only on extrinsic rewards and lowerlevel needs. Using intrinsic rewards to meet higher level needs is important too.

So cial le arn in g th eo ry

Social learning theory is related to the reinforcement perspective, but it proposes that an individual’s motivation can result not just from direct experience of rewards and punishments but also from the person’s observations of other people’s behaviour.43 Vicarious learning, or observational learning, occurs when an individual sees others perform certain behaviours and get rewarded for them. Young children often learn to behave well in school because they see that well-behaved children get more positive attention from the teacher, for example. Managers can enhance an individual’s motivation to perform desired behaviours by ensuring that the individual (1) has a chance to observe the desirable behaviours, (2) accurately perceives the behaviours, (3) remembers the behaviours, (4) has the necessary skills to perform the behaviours and (5) sees that the behaviours are rewarded by the organisation.44 Recall the discussion from Chapter 12 of on-the-job training. Managers typically pair a new employee with someone who models the type of behaviour that the organisation wants. Managers also promote social learning by highlighting top performers’ strengths and grooming them as examples for others.45 A key to vicarious motivation, though, is to make sure the learner knows that the desired behaviours are rewarded.

➜➜ Reinforcement theory is based on the relationship between a given behaviour and its consequences.

➜➜ Reinforcement is anything that causes a certain behaviour to be repeated or inhibited.

➜➜ Behaviour modification refers to the set of techniques by which reinforcement theory is used to modify human behaviour.

➜➜ Positive reinforcement is the administration of a pleasant and rewarding consequence following a desired behaviour.

➜➜ The law of effect asserts that positively reinforced behaviour tends to be repeated, and unreinforced or negatively reinforced behaviour tends to be inhibited.

➜➜ Managers apply avoidance learning, called negative reinforcement, when they remove an unpleasant consequence once a behaviour is improved. ➜➜ Punishment refers to the imposition of an unpleasant outcome following an undesirable behaviour.

➜➜ Extinction refers to withholding positive rewards and essentially ignoring undesirable behaviour.

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➜➜ Social learning theory proposes that an individual’s motivation can result not just from direct experience of rewards and punishments but also from thoughts, beliefs and observations of other people’s behaviour. ➜➜ Vicarious learning occurs when an individual sees others perform certain behaviours and get rewarded for them.

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The carrot-and-stick controversy Everybody thought Rob Rodin was crazy when he decided to wipe out all individual incentives for his sales force at Marshall Industries, a large distributor of electronic components based in El Monte, California. He did away with all bonuses, commissions, holidays, and other awards and rewards. All salespeople would receive a base salary plus the opportunity for profit sharing, which would be the same percentage of salary for everyone, based on the entire company’s performance. Six years later, productivity per person at the company had tripled. Rodin was standing right in the middle of a big controversy in management. Do financial and other rewards really motivate the kind of behaviour organisations want and need? A growing number of critics say no, arguing that carrot-and-stick approaches are a holdover from the Industrial Age and are inappropriate and ineffective in today’s economy, in which Gen Y and Gen Z employees are motivated by a range of monetary and non-monetary factors. Today’s workplace demands innovation and creativity from everyone – behaviour that is rarely inspired by money or other financial incentives. Reasons for criticism of carrot-and-stick approaches include the following:

➜➜ Extrinsic rewards diminish intrinsic rewards. When people are motivated to seek an extrinsic reward, whether it be a bonus, an award or the approval of a supervisor, generally they focus on the reward rather than on the work they do to achieve it. Thus, the intrinsic satisfaction people receive from performing their jobs actually declines. When people lack intrinsic rewards in their work, their performance stays just adequate to achieve the reward offered. In the worst case, employees may cover up mistakes, such as hiding an on-the-job accident in order to win a safety award.

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management in pr actice ➜➜ Extrinsic rewards are temporary. Offering outside incentives may ensure short-term success, but not longterm high performance. When employees are focused only on the reward, they lose interest in their work. Without personal interest, the potential for exploration, creativity and innovation disappears. While the current deadline or goal may be met, better ways of working will not be discovered.

➜➜ Extrinsic rewards assume people are driven by lower-level needs. Rewards such as bonuses, pay increases and even praise presume that the primary reason people initiate and persist in behaviour is to satisfy lower-level needs. However, particularly among today’s knowledge workers, behaviour also is based on yearnings for self-expression, and on feelings of self-esteem and self-worth. Offers of an extrinsic reward do not encourage the numerous types of behaviour that are motivated by people’s need to express themselves and realise their higher needs for growth and fulfilment. Alfie Kohn, one of the most vocal critics of carrot-and-stick approaches, offers the following advice to managers regarding how to pay employees: ‘Pay well, pay fairly, and then do everything you can to get money off people’s minds’. As Rob Rodin discovered at Marshall Industries, today’s organisations need employees who are motivated to think, experiment and continuously search for ways to solve new problems. Indeed, there is some evidence that money is not primarily what people work for. Managers should understand the limits of extrinsic motivators and work to satisfy employees’ higher, as well as lower, needs. To be motivated, employees need jobs that offer self-satisfaction in addition to a yearly pay rise.

Sources: Kohn, A. (January 1998), ‘Incentives Can Be Bad for Business’, Inc., 93–94; Vogl, A. J. (January 1994), ‘Carrots, Sticks, and Self-Deception’, Across the Board, 39–44; Colvin, G. (16 August 1998), ‘What Money Makes You Do’, Fortune, 213–214.

Job design for motivation A job in an organisation is a unit of work that a single employee is responsible for performing. A job could include writing tickets for parking fines in Sydney, performing MRIs at Royal Perth Hospital or doing long-range planning for the Channel Nine television network. Jobs are an important consideration for motivation because performing their components may provide rewards that meet employees’ needs. Managers need to know what aspects of a job provide motivation as well as how to compensate for routine tasks that have little inherent satisfaction. Job design is the application of motivational theories to the structure of work for improving productivity and satisfaction.

job design The application of motivational theories to the structure of work for improving productivity and satisfaction.

job design

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Jo b en ri ch m ent

In the past, an employee might have been assigned to complete just one step in the overall assembly of a new vehicle, car after car after car. A second worker would do the next step, and so forth. In manufacturing plants where job enrichment is practised, however, one employee might be asked to complete a whole series of steps in the assembly process. Not only does the variety make the work more interesting and engaging, it also helps the employee feel more responsible and invested in his or her work.

Source: Alamy/Jim West

job enrichment A job design that incorporates achievement, recognition and other high-level motivators into the work.

Recall from Chapter 2 the principles of scientific management, in which tasks are designed to be simple, repetitive and standardised. This contributes to efficiency, but simplified jobs aren’t typically effective as a motivational technique because they can be boring and routine. Thus, managers in many companies are redesigning simplified jobs into jobs that provide greater variety and satisfaction. One technique, called job rotation, is to move employees systematically from one job to another to provide variety and stimulation. Another approach is to combine a series of small tasks into one new, broader job so that people perform a variety of activities, which is referred to as job enlargement. Overall, the trend is towards job enrichment, which means incorporating high-level motivators into the work, including responsibility, recognition and opportunities for growth, learning and achievement. In an enriched job, employees have control over the resources necessary for performing tasks, make decisions on how to do the work, experience personal growth and set their own work pace. Research shows that when jobs are designed to be controlled more by employees than by managers, people typically feel a greater sense of involvement, commitment and motivation, which in turn contributes to higher morale, lower turnover and stronger organisational performance.46

Jo b char acteristi cs mo d el work redesign The altering of jobs to increase both the quality of employees’ work experience and their productivity. job characteristics model A model of job design that comprises core job dimensions, critical psychological states and employee growth-need strength.

One significant approach to job design is the job characteristics model developed by Richard Hackman and Greg Oldham.47 Hackman and Oldham’s research concerned work redesign, which is defined as altering jobs to increase both the quality of employees’ work experience and their productivity. Hackman and Oldham’s research into the design of hundreds of jobs yielded the job characteristics model, which is illustrated in Exhibit 16.8. The model consists of three major parts: core job dimensions, critical psychological states and employee growth-need strength.

Cor e job di mensi on s Hackman and Oldham identified five dimensions that determine a job’s motivational potential: ●● Skill variety. This is the number of diverse activities that compose a job and the number of skills used to perform it. A routine, repetitious assembly-line job is low in variety, whereas an applied research position that involves working on new problems every day is high in variety. ●● Task identity. This is the degree to which an employee performs a total job with a recognisable beginning and ending. A chef who prepares an entire meal has more task identity than a café worker who ladles mashed potatoes. ●● Task significance. This is the degree to which the job is perceived as important and having an impact on the company or consumers. People who distribute penicillin and other medical supplies during times of emergencies would feel they have significant jobs.

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●● Autonomy. This is the degree to which the worker has freedom, discretion and self-determination in planning and carrying out tasks. A house painter can determine how to paint the house; a paint sprayer on an assembly line has little autonomy. ●● Feedback. This is the extent to which doing the job provides feedback to the employee about his or her performance. Jobs vary in their ability to let workers see the outcomes of their efforts. A football coach knows whether the team won or lost, but a basic research scientist may have to wait years to learn whether a research project was successful. The job characteristics model says that the more these five core characteristics can be designed into the job, the more the employees will be motivated and the higher will be the employees’ performance, quality of work and satisfaction. Core job dimensions

Critical psychological states

Skill variety Task identity Task significance

Experienced meaningfulness of the work

Autonomy

Experienced responsibility for outcomes of the work

Exhibit 16.8 The job characteristics model Source: Adapted from J. Richard Hackman and G. R. Oldham. (1976). Motivation Through the Design of Work: Test of a Theory. Organizational Behavior and Human Performance, 16, 256.

Personal and work outcomes

High internal work motivation High-quality work performance

Feedback

Knowledge of the actual results of the work activities

High satisfaction with the work Low absenteeism and turnover

Employee growth-need strength

Em ployee gr owt h–need s tr en g th The final component of the job characteristics model is called employee growth–need strength, which means that people have different needs for growth and development. If a person wants to satisfy lowlevel needs, such as safety and belongingness, the job characteristics model has less effect. When a person has a high need for growth and development, including the desire for personal challenge, achievement and challenging work, the model is especially effective. People with a high need to grow and expand their abilities respond favourably to the application of the model and to improvements in core job dimensions. One interesting finding concerns the cross-cultural differences in the impact of job characteristics. Intrinsic factors such as autonomy, challenge, achievement and recognition can be highly motivating in industrialised Western cultures. However, they may contribute little to motivation and satisfaction in other cultures and might even lead to demotivation. A recent study indicates that the link between intrinsic characteristics and job motivation and satisfaction is weaker in economically disadvantaged countries with poor governmental social welfare systems, as well as in countries that value high power distance, as defined in Chapter 4.48 Thus, the job characteristics model would be expected to be less effective in these countries.

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➜➜ Jobs are an important consideration for motivation because performing their components may provide intrinsic rewards that meet employees’ needs. ➜➜ Job design refers to applying motivational theories to the structure of work to improve motivation, productivity and satisfaction.

➜➜ Most companies are moving away from simplified jobs and are using job rotation, job enlargement and job enrichment to provide employees with greater variety, stimulation and satisfaction. ➜➜ Job enrichment refers to incorporating high-level motivators, such as achievement, recognition and opportunities for growth, into the work.

➜➜ Work redesign means altering jobs to increase both the quality of employees’ work experience and their productivity.

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➜➜ The job characteristics model is a model of job design that considers core job dimensions, individuals’ critical psychological states and employee growth-need strength.

Innovative ideas for motivating Organisations are increasingly using various types of incentive compensation as a way to motivate employees to higher levels of performance. For example, when Elise Lelon, owner of the leadershipconsulting firm The You Business, couldn’t give pay raises because of budget pressures, she created a generous lump-sum bonus program tied to the amount of revenue that employees generated for the firm. ‘It gets their juices flowing and it helps the business grow,’ Lelon says.49 Exhibit 16.9 summarises several popular methods of incentive pay. Variable compensation and forms of ‘at risk’ pay such as bonus plans are key motivational tools that are becoming more common than fixed salaries at many companies. However, unless they are carefully designed, incentive plans can backfire, as evidenced by problems in the mortgage and finance industries, where some people resorted to overly aggressive and even unethical behaviour to earn huge bonuses. In the wake of the global financial crisis, numerous companies, including financial firms such as Morgan Stanley, Credit Suisse and Goldman Sachs, are revising compensation plans to make sure that incentives reward the desired behaviours.50 Unfortunately, many managers are still encouraging the wrong kinds of behaviour by rewarding people who behave unethically to get more business, signalling to employees that profits are more important than integrity. The 2011 National Business Ethics Survey from the Ethics Resource Center indicated that 45 per cent of people have witnessed ethical misconduct at work, and 13 per cent say they have felt pressure to bend the rules or even break the law to earn rewards – an increase of 5 percentage points from 2010.51 Exhibit 16.9 New motivational compensation programs Program

Purpose

Pay for performance

Rewards individual employees in proportion to their performance contributions.  Also called merit pay.

Gain sharing

Rewards all employees and managers within a business unit when predetermined performance targets are met. Encourages teamwork.

Employee share ownership plan (ESOP)

Gives employees part ownership of the organisation, enabling them to share in improved profit performance.

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Lump-sum bonuses

Rewards employees with a one-time cash payment based on performance.

Pay for knowledge

Links employee salary with the number of task skills acquired. Workers are motivated to learn the skills for many jobs, thus increasing company flexibility and efficiency.

Flexible work schedule

Flextime allows workers to set their own hours. Job sharing allows two or more part-time workers to jointly cover one job. Telecommuting, sometimes called flex-place, allows employees to work from home or an alternative workplace.

Team-based compensation

Rewards employees for behaviour and activities that benefit the team, such as cooperation, listening and empowering others.

Lifestyle awards

Rewards employees for meeting ambitious goals with luxury items, such as high-definition televisions, tickets to big-name sporting events and exotic travel.

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Incentive programs can be effective if they are used appropriately and combined with motivational ideas that also provide people with intrinsic rewards and meet higher-level needs. The most effective motivational programs typically involve much more than money or other external rewards in order to create an environment in which people thrive.

Bu i ld in g a th rivin g wo rkfo rce Recent research examining what creates a consistently high-performing organisation has focused on the importance of an environment in which people can thrive. A thriving workforce is one in which people are not only satisfied and productive, but also engaged in creating the future – both their own and the organisation’s.52 Two components of thriving individuals are vitality and learning. A thriving employee is one who feels alive, energised and passionate about what he or she is doing. The individual has a sense that his or her work has purpose and meaning. In addition, a thriving employee is one who is learning and growing, developing new knowledge, skills and abilities that can be applied now and in the future. Managers promote thriving by applying many of the motivational techniques described throughout this chapter, such as meeting higher-level needs, helping people get intrinsic rewards from their work, and providing regular feedback on performance and progress. Two specific approaches to building a thriving workforce are empowering employees and creating an environment that promotes employee engagement.

thriving workforce A workforce in which people are satisfied, productive and engaged in creating the future for themselves and their organisation.

Em powerin g peo ple to m eet h i gh er n eeds One significant way that managers can meet higher motivational needs is to shift power down from the top of the organisation and share it with employees to enable them to achieve goals. Empowerment is power sharing, the delegation of power and authority to subordinates in an organisation.53 Increasing employee power heightens motivation for task accomplishment because people improve their own effectiveness, choosing how to do a task and using their creativity.54 Empowering employees involves giving them four elements that enable them to act more freely to accomplish their jobs: information, knowledge, power and rewards.55

empowerment The delegation of power and authority to employees.

1 Employees receive information about company performance. In companies where employees are

fully empowered, all employees have access to all financial and operational information. 2 Employees have knowledge and skills to contribute to company goals. Companies use training

programs and other development tools to help people acquire the knowledge and skills that they need to contribute to organisational performance.

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3 Employees have the power to make substantive decisions. Empowered employees have the

authority to influence work procedures and organisational performance directly, such as through quality circles or self-directed work teams. 4 Employees are rewarded based on company performance. Organisations that empower workers

Case study

often reward them based on the results shown in the company’s bottom line. Organisations may also use other motivational compensation programs described in Exhibit 16.9 to tie employee efforts to company performance. The following Case Study illustrates the four elements of empowerment.

Hilcorp Energy Hilcorp Energy, based in Houston, in the United States, is a large private producer of crude oil and natural gas. But Hilcorp is different from most energy companies. The company takes over holes abandoned by the big energy companies – and produces about 25 million barrels of oil and gas a year from them. ‘It’s rewarding to be the one responsible for squeezing those last drops of energy out of a formation,’ said a Hilcorp senior geologist. ‘I’m proud to be part of that.’ Hilcorp is different from most other energy companies in its approach to managing people, too. Hilcorp was started by three guys with nothing but a telephone in 1989, and has since grown to more than 600 employees (called associates). Managers attribute the company’s success

to the people on the front lines. Jack Stack, founder of SRC Holdings, said of Hilcorp: ‘I don’t know any other company that puts as much time and money into training its people in how to run their company through the practices of openbook management.’ Open-book management means that all associates have access to all financial and operating information. Because managers put decision-making power in the hands of people on the front lines, those people need to have full information to make good choices. ‘You want to know how we’re doing? How your slice of the pie is performing? We share the good news and the bad,’ said a senior financial analyst. ‘We owe that to every employee whose work generates the numbers we report.’

Associates at Hilcorp are always interested in how well the company is doing because they are rewarded based on company performance. Managers share both the risks and the rewards. Associates can earn bonuses of up to 60 per cent of their annual salaries based on meeting performance goals. In addition, they can choose to purchase an economic stake in one of Hilcorp’s reclamation projects. At Hilcorp, employees truly do feel like owners. ‘Since we pull together, not competing against each other, and we all have skin in the game, it’s amazing what we can accomplish,’ said founder Jeff Hildebrand. Source: Jack Stack. (6 July 2010). Hilcorp Energy Shares the Wealth. The New York Times, http://boss. blogs.nytimes.com/2010/07/06/hilcorp-energyshares-thewealth/ (accessed 7 July 2010).

At some companies, such as Hilcorp Energy, empowerment means giving employees almost complete freedom and power to make decisions and exercise initiative and imagination. However, organisations empower workers to varying degrees, from a situation where managers encourage employee ideas but retain final authority for decisions to a condition of full empowerment, such as that at Hilcorp. Research shows that empowerment typically increases employee satisfaction, motivation and productivity.56

Givin g m ean in g to wo rk th ro u gh en gagem ent engagement An emotional and mental state in which employees enjoy their work, contribute enthusiastically to meeting goals, and feel a sense of belonging and commitment to the organisation.

Employee engagement, which was discussed in the previous chapter, means that people enjoy their jobs and are satisfied with their work conditions, contribute enthusiastically to meeting team and organisational goals, and feel a sense of belonging and commitment to the organisation. Fully engaged employees care deeply about the organisation and actively seek ways to serve the organisation’s mission.57 How do managers engage employees? Exhibit 16.10 illustrates the three elements that create employee engagement: a sense of meaningfulness, a sense of connection and a sense of growth.58 When

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managers organise the workplace in such a way as to create these feelings, employee engagement grows, leading to high motivation and high organisational performance. ●● People feel that they are working towards something of importance. When employees have a chance to accomplish something that provides real value, they feel a sense of meaningfulness. Good managers help people understand the purpose of their work, which contributes to feelings of pride and dignity. Kenexa, a leading human resources services company (recently purchased by IBM), uses psychologists and other scientists to study what motivates employees. One finding is that turnover is significantly lower among people who feel pride in their company and its mission than among those who don’t.59 ●● People feel connected to the company, to one another and to their managers. In a survey asking people what factors contribute to their engagement, 79 per cent of people said ‘good relationships with coworkers’ drove engagement to a high or very high extent. Even more, 91 per cent, pointed to good relationships with their immediate supervisor as being highly important.60 It can be said, then, that it is the behaviour of managers that makes the biggest difference to whether or not people feel engaged at work.61 Managers promote engagement when they listen to employees, genuinely care about their concerns and help them develop positive relationships with colleagues. ●● People have the chance to learn, grow and advance. To be fully engaged, people need to feel not only that they are competent to handle what is asked of them, but also that they have the chance to learn and expand their potential. Good managers help employees to understand their own unique set of talents, skills, interests, attitudes and needs; put people in jobs where they can make their best contribution and receive intrinsic rewards every day; and make sure people have what they need to perform well. In addition, they give people the chance to work on challenging projects, participate in high-quality training and learning programs, and provide opportunities for advancement within the organisation. Studies have identified a correlation between employee engagement and company performance, including less turnover, greater profitability, and stronger employee and customer loyalty, as illustrated in Exhibit 16.10.62 Alarmingly, recent surveys reflect low levels of engagement among many workers. Gallup’s most recent available survey showed that 52 per cent of workers reported that they were not engaged, and 19 per cent reported being actively disengaged.63 As referred to in Chapter 15, active disengagement means that people are actively undermining their organisation’s success. Managers can use strategies to facilitate engagement and improve performance. Morrison Management Specialists, which provides food, nutrition, and dining services to the healthcare and senior living industries, found a way to engage employees who often perform menial jobs, which is described in the Innovative Way.

Meaningfulness

High performance Increased employee performance

Connectedness

Engagement

Less turnover Higher profits

Learning/Growth

Greater employee and customer loyalty

Exhibit 16.10 Employee engagement model Source: Based on Fig. 1, ‘Integrative Model of Employee Engagement’, in J. Lee Whittington and Timothy J. Galpin. (2010). The Engagement Factor: Building a High-Commitment Organization in a LowCommitment World. Journal of Business Strategy, 32:5, 14–24.

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Concept Revision

Audio summary

Sometimes, even simple changes in how managers treat employees can make all the difference. Nate Carrasco, a 26-year-old employee at a car accessories store, agrees. ‘Most of the time, [managers] only listen to what their bosses are saying. They need to come down to the employee level more and see what actually goes on, versus what their paperwork tells them.’64

Innovative Way

Employee engagement

Several years ago, executives at Morrison Management Specialists, which has 14 000 employees in 450 locations, decided to make employee engagement a top priority. They started by making sure that everyone understood the company’s mission statement and five core values of trust, teamwork, customer focus, learning and profit. The company’s web address and ending for corporate email addresses is iammorrison.com, which reinforces that every employee is the company. Each year, top executives present an update on the company’s direction and accomplishments to managers,

who in turn hold conversations with people throughout the organisation to disseminate information about where the company stands and where it wants to go. Training sessions for hourly associates are organised under the title ‘Our Great Partnership’, and aim to help people see how their everyday jobs tie in with the larger mission. A ‘People First’ recognition program gives employees a chance to recognise one another for exceptional service. The company builds connections in other ways, too, such as monthly meetings that give managers and employees a chance to discuss issues on a personal level.

Source: This example is from Maureen Soyars and Justin Brusino. (March 2009). Essentials of Engagement: Contributions, Connections, Growth. T&D, 62–5.

➜➜ Variable compensation and ‘at risk’ pay have become key motivational tools, although these practices have been criticised in recent years for rewarding the wrong types of behaviour. ➜➜ Employee empowerment and engagement are recent motivational trends that focus less on extrinsic rewards and more on creating a work environment that enables people to achieve intrinsic rewards and meet higher-level needs. ➜➜ A thriving workforce is one in which people are satisfied, productive and

engaged in creating the future for themselves and their organisation. ➜➜ Two components of thriving employees are vitality and learning, which managers can promote through empowering people and creating the conditions for employee engagement. ➜➜ Empowerment is the delegation of power and authority to subordinates in an organisation. ➜➜ Empowering employees involves giving them information, knowledge, power and rewards.

➜➜ Engagement is an emotional and mental state in which employees enjoy their work, contribute enthusiastically to meeting goals, and feel a sense of belonging and commitment to the organisation.

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➜➜ Managers create an environment that promotes engagement by providing employees with a sense of meaning, a sense of connection and a sense of competence and growth. ➜➜ The behaviour of managers is the biggest factor in determining whether people feel motivated and engaged at work.

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New Manager Self-test Wh at m o t i vat e s y o u ? Indicate how important each characteristic is to you. Answer according to your feelings about the most recent job you had or about the job you currently hold. Circle the number on the scale that represents your feeling – 1 (very unimportant) to 7 (very important).

 1 The feeling of self-esteem a person gets from being in that job

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 2 The opportunity for personal growth and development in that job

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 3 The prestige of the job inside the company (i.e. regard received from others in the company)

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 4 The opportunity for independent thought and action in that job

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 5 The feeling of security in that job

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 6 The feeling of self-fulfilment a person gets from being in that position (i.e. the feeling of being able to use one’s own unique capabilities, realising one’s potential)

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 7 The prestige of the job outside the company (i.e. the regard received from others not in the company)

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 8 The feeling of worthwhile accomplishment in that job

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 9 The opportunity in that job to give help to other people

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10 The opportunity in that job for participation in the setting of goals

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11 The opportunity in that job for participation in the determination of methods and procedures

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12 The authority connected with the job

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13 The opportunity to develop close friendships in the job

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Scoring and interpretation

Divide by 4 = ______ autonomy.

Score the exercise as follows to determine what motivates you:

Rating for questions 2, 6, and 8 = ______.

Rating for question 5 = ______.

Divide by 3 = ______ self-actualisation.

Divide by 1 = ______ security.

Your instructor has national norm scores for presidents, vice presidents, and upper-middle-level, lower-middle-level and lower-level managers with which you can compare your mean importance scores. How do your scores compare with the scores of managers working in organisations?

Rating for questions 9 and 13 = ______. Divide by 2 = ______ social. Rating for questions 1, 3, and 7 = ______. Divide by 3 = ______ esteem. Rating for questions 4, 10, 11, and 12 = ______.

Source: Lyman W. Porter, Organizational Patterns of Managerial Job Attitudes (New York: American Foundation for Management Research, 1964), pp. 17, 19. Used with permission.

Keeping staff motivated in Australia and New Zealand At a time of global economic instability, when many organisations are retrenching their staff, how do Australian organisations achieve and maintain high levels of motivation in those who remain? Garry Adams, Talent Business Leader at Mercer Pacific, claims that nearly half of Australian executives who earn over A$100 000 a year have some incentive component in their remuneration. This follows trends in both the US and Europe of hard-wiring managers’ and executives’ wallets

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to the performance outcomes of their organisation. Australian executives are working increasingly longer hours, often between 60 and 80 hours per week, and are expected to perform at high levels for all of that time. This is why some are bailing out and starting their own businesses. With 23 per cent of workers putting in over 50 hours per week in Australia, it is no surprise that managers are putting in even longer hours. For those who do start their own businesses, this is usually not a recipe for shorter hours, as entrepreneurs normally have to ‘eat, sleep and live in the business’ while they grow it.

Innovative Way

Respect: from peers to Australian corporate leaders

Respect is a high form of privilege, and when given by business leaders to others’ businesses, it is noteworthy. Hay Group, a global management consulting firm, conducted a survey and interviews of many chief executives to assess those companies and leaders who are most respected in Australia. The results were somewhat predictable, with BHP Billiton leading the list, due to its scale and quality of business operations. It was followed, in rank order by Wesfarmers, Virgin Australia, Apple, Woolworths, Google, Westpac, Qantas, Commonwealth Bank and ANZ Bank. These all tend to be quite high profile companies, and are ‘on people’s minds’; however they do command respect because they are well run, generally successful and apply high standards of integrity in their business relationships with stakeholders. Other companies that topped their industry in terms of respect were IBM, PwC and Harvey Norman. This ‘respect factor’ is strongly and positively connected with staff engagement and motivation, through the pride that staff experience when they feel good about their employing organisation. It is interesting that in the short run, there is no guarantee that such highly respected companies will outperform their competitors in terms of profit or share price; however they are respected substantially for their

Source: Courtesy Qantas

Source: Courtesy Wesfarmers

longer term vision and strategies which usually lead to superior performance in the long run. An example is Wesfarmers, which invested a massive $20 billion in the Coles Group, which had been underperforming as a retail group for a long time. This was a bold strategic positioning investment, which needed much work to restructure and revitalise, and was clearly a long-term – and certainly not a short-term – play. The moves in and out of the top ten list are also of interest. High technology companies Apple and Google have captured the world’s interest and have created products and shareholder value at what can only be described as ‘highly respectable levels’! Conversely, after more than 50 years of growth and stellar performance, Toyota sullied its very fine record in 2009–10, due to product recalls (mostly outside Australia), and dropped off the top 10 ‘respect’ list. Source: Walters K. (25 November–1 December 2010). Peer Prism. BRW, 22–8.

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Motivation can basically come from intrinsic or extrinsic sources for people, and this applies as much to the implementation of sustainable development work as anything else. People can be motivated by a combination of: ●● A sense of long-term survival and desire to improve quality of life. Creating value, broadly defined, for communities in cities and regional areas is reasonably expected to be of interest to the majority of people. Most reasonable people have a strong interest in longer-term issues of the quality of life for the human race – if not just for us, then for future generations. ●● A desire to do good, especially if it means doing well for our own organisation, meaning the one we own or work in. Whether it is equity that we have in a firm, or what is known as ‘sweat equity’, meaning the investment that employees make in their employer firm, we all want to be associated with a firm that is winning as against losing, and it is intrinsically attractive to want our employing organisation to be doing well by doing good things rather than otherwise. ●● Straight benefits for the organisation and each of us as an individual. Initiatives such as recycling, using less materials, energy and services, and becoming more efficient by reducing greenhouse gas production are activities that most people will want to achieve. ●● A sense of belonging (refer to Maslow’s hierarchy) to a group of people and stakeholders who are in pursuit of ‘noble’ goals. ●● A sense of achievement from knowing that one’s work is not just contributing to profits, but that it is sustainably advancing environmental and community/social outcomes too. For managers, this strong sense of motivation can lead to higher levels of effort and productivity, service and quality, as well as progress on the environmental and social outcomes side. Attempts to achieve higher levels of sustainability, meaning stakeholder satisfaction and social and environmental outcomes, can lead to the unleashing of creative juices in a workforce. The organisation becomes more proactive and progressive on a number of performance fronts that become the implementation of ‘doing well by doing good’.

A very successful application of motivational ideas occurred for the factory workers at Sandstrom Products. Recall from the chapter opening Management Challenge that Leo Henkelman was an alienated mill operator who was considering quitting. When top management empowered workers by implementing open-book management – the same strategy used by Hilcorp Energy and described in the earlier Green Power Case study. Henkelman was given the opportunity to take on more responsibility, learn new skills and make improvements. He learned his own strengths and limitations in the process. While serving as a

temporary plant manager, he found that delegation was not his strength – doing was. When a technician job opened up in the lab, he applied. Although he lacked the educational background normally required, the lab director gave him a chance. Using his experience, Henkelman guided the manufacturing process from beginning to end, working with customers to develop new products and refine old ones. As his skills and responsibilities increased, so did his pay, thanks to a proficiency pay system that based his pay on his skills and accomplishments and a gain-sharing plan that allowed him to share in the company’s profits.

sustainable development

Motivation for sustainability

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By trusting and empowering its workers, Sandstrom gave them a reason to care about the company, and the knowledge and power to make personal contributions to organisational performance. Results were staggering, as Sandstrom rebounded from a loss of more than $100 000 to profits of over $800 000 two years later. Surprisingly, the turnaround occurred while sales stayed the same, without new product lines or new customers. Cost cutting and

discussion questions

1  Why do you think making progress ranks as the most important factor contributing to motivation according to a recent study? How can managers provide a sense of progress for employees working on long-range projects that might not show results for months or even years?

2 Suppose that a small company recognises an employee of the month, who is given a parking spot next to the president’s space near the front door. What theories would explain the positive motivation associated with this policy? 3 Assume that you are a front-line manager at a call centre. Try to come up with a specific motivational idea that fits in each of the four quadrants in Exhibit 16.2: Positive extrinsic; Positive intrinsic; Negative extrinsic; Negative intrinsic. 4 Security screening staff at airports watch thousands of people each day pass through X Ray machines: to do their job well, they must maintain high levels of concentration on each and every item and person being scrutinised, without relaxing their standards or daydreaming for even one second. How might these employees be motivated to provide the security that travel threats now demand? 5 Using Hackman and Oldham’s core job dimensions, compare and contrast the jobs of these two state employees: (1) Jared, who spends much of his time researching and debating energy policy to make recommendations that will eventually be presented to

improvements instituted by an empowered workforce made the difference. Sandstrom went on to successfully develop and apply whole ranges of new products that have been successfully launched by this quite old company, including high technology coatings for the Space Shuttle, demonstrating that if the motivation is right, new and long serving employees can, and usually will, do great things. Source: Whitford, D. (June 1995). Before and After. Inc., 44–50.

the state government and (2) Anise, who spends her days planting and caring for the flower gardens and grounds surrounding Parliament House. 6 If an experienced executive assistant discovered that he or she made the same amount of money as a newly hired cleaner, how do you think they would react? What inputs and outcomes might they evaluate to make this comparison? 7 A survey of teachers found that two of the most important rewards were the belief that their work was important and a feeling of accomplishment. According to Maslow’s theory, which needs do these rewards meet? 8 The teachers in question 7 also reported that pay and benefits were poor, yet they continue to teach. Use Herzberg’s two-factor theory to explain this finding. 9 How does empowerment provide the two conditions (vitality and learning) for a thriving workforce that are described in the chapter? Do you see any ways in which a manager’s empowerment efforts might contribute to demotivation among employees? Discuss. 10 Gallup’s 2011 survey shows that highly educated workers are significantly less likely to be engaged than are those with a high school diploma or less. What might be some reasons for this lower level of engagement among more-educated employees?

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Ethical

When Suzanne Lebeau, human resources manager, received a call from Bert Wilkes, financial controller of Farley Glass Works, she expected to receive good news to share with the Wage and Bonus Committee. She had already seen numbers to indicate that the yearend bonus plan, which was instituted by her committee in lieu of the traditional guaranteed rises of the past, was going to exceed expectations. It was a relief to her, because the plan, devised by a committee representing all levels of the workforce, had taken

Lebeau felt her temper rising. After challenge all their hard work, she was not going to sit by and watch the employees be disappointed because the accounting department had not structured the employee bonus plan to work with the executive plan. She was afraid they would undo all the good that the bonus plan had done in motivating the plant workers. They had kept their

11 months to complete. It had also been a boost to morale at a low point in the company’s history. Workers at the glass shower production plant were bringing new effort and energy to their jobs, and Lebeau wanted to see them rewarded. She was shocked to see Wilkes’ face so grim when she arrived for her meeting. ‘We have a serious problem, Suzanne,’ Wilkes said to open the meeting. ‘We ran the numbers from our third quarter to project our endof-year figures and discovered that the executive bonus objectives, which are based on net operating profit, would not be met if we paid out the employee bonuses first. The executive bonuses are a major source of their income. We can’t ask them to do without their salary to ensure a bonus for the workers.’

end of the bargain, and the company’s high profits were common knowledge in the plant. W h at d o yo u d o ? 1 Ask to appear before the executive committee to argue that the year-end bonus plan for workers be honoured. Executives could defer their bonuses until the problem in the structure of the compensation plan is resolved. 2 Go along with the financial controller. It isn’t fair for the executives to lose so much money. Begin to prepare the workers to not expect much this first year of the plan. 3 Go to the board of directors and ask for a compromise plan that splits the bonuses between the executives and the workers.

Source: Based on Wallace, D. (July–August 1993). Promises to Keep, What Would You Do? Business Ethics, II, 11–12. Reprinted with permission from Business Ethics PO Box 8439, Minneapolis, MN 55408.

Should, need, like, love Step 1. Divide into groups of three to five students. Individually write down answers to the following four instructions. 1 Think of a study or work task that you felt an obligation to complete, but that you did not want to do. Write the task here: ____________________________________________________________ ____________________________________________________________ 2 Think of a study or work task that you did only because you needed an extrinsic benefit, such as money or course credit. Write the task here: ____________________________________________________________ ____________________________________________________________ 3 Think of a study or work task that you do because you like it – it is enjoyable for you. Write that task here: ____________________________________________________________ ____________________________________________________________ 4 Think of a study or work task that you love to do – one in which you become completely absorbed and from which you feel deep satisfaction when finished. Write the task here: ____________________________________________________________ ____________________________________________________________

Step 2. Reflect on those four tasks and what they mean to you. Rate how highly motivated (high, medium, low) you were to

Gr oup Challenge

perform each of the four tasks. Then rate how much mental effort (high, medium, low) was required for you to complete each of the four tasks. Step 3. Compare your ratings with other members of your team. What is the correlation between doing a task because you ShouldNeed-Like-Love, your level of motivation and the amount of mental effort required to complete the task? Develop conclusions from your analysis to present to the class. Step 4. Discuss in your group: Are you more highly motivated when engaged in tasks that you like or love versus tasks you should do or need to do? Why? Does this corroborate any motivation theory in the chapter? How can you increase the number of ‘like’ and ‘love’ tasks in your life? How might you reduce the number of ‘should’ and ‘need’ tasks? When you become a manager, will you want to increase the number of ‘like’ and ‘love’ tasks for your employees? How might you do so?

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Case for cr itical analysis

Lauren’s balancing act

DeMarco’s Department Store manager Lauren Brewster’s ‘Wow’ moment came when she observed a Chicago restaurant staff ’s gushing treatment of an international celebrity. ‘Everyone dreams of that kind of star treatment,’ Lauren told her assistant, Jack Klein. ‘Think about it. People brag about their bank or the local bar where “everybody knows your name”, or enjoy showing off a favourite restaurant where the hostess always remembers their favourite table.’ DeMarco’s, like other upscale department stores, suffered the double whammy of a slumping economy and increased competition from discount retailers and online shopping. How could the store, the ‘box’, compete, retain its old customers and build a strong future customer base? ‘We’ve always known that it’s all about customer service,’ Lauren said. ‘But what’s so great about grabbing a giant plastic shopping cart and slogging through some giant warehouse in your shorts and flipflops, and then joining the herd at the checkout? That is not a shopping experience.’ ‘And what isn’t great about being treated like Oprah from the moment you hit the door until the sales associate swipes your card and hands over something lovely that you just purchased?’ Jack asked. Lauren’s idea was that store customers receive that personal, upscale, ‘you’re somebody special here’ treatment at DeMarco’s. Sales associates would raise their own professional level, regard customers as worthy of personalised service and build their own clientele. As added incentive, the entire DeMarco’s sales team was changed over from hourly pay to straight commission. ‘Your pay is built through your own initiative and individualised service that makes customers return to you again and again,’ Lauren instructed the sales force at the outset of the experiment. The idea intrigued Corporate, which approved a two-year experiment. As expected, the new plan created a minor exodus among those who wanted the assurance of a ‘regular pay cheque’. But as the program moved through its first year, both store and corporate management was pleased with the overall results. Marketing pushed the new image of elite, personalised customer service, and phrases such as ‘Katherine at DeMarco’s helped me select this outfit’, or ‘Damien always lets me know when something new arrives at DeMarco’s that he thinks is perfect for me’ became the typical boast of savvy shoppers. Now, two years into the experiment, Corporate urged Lauren to submit a full assessment of the program as a potential model for implementation throughout the department store chain. Sales numbers vouched for the overall success, particularly over the last two quarters

of the second year. Certain associates, including Katherine Knowles in designer dresses and Damien Fotopolous in women’s shoes, showed significant gains as a result of straight commissions, and sales associates and customers responded favourably overall, urging a continuation of the program. Reliance on commissions inspired these and other sales associates to treat their individual department as if it were their own small business, becoming experts on nuances of merchandise, exploring designs and trends, finding ways to promote their expertise and building an impressive number of loyal customers. The satisfaction level of customers was apparent in the numbers – not only sales numbers, but in repeat business, customer referrals to friends and customer comment cards, all of which had been tracked since the beginning of the program. The down side of the experiment was that while some associates soared, others either veered towards an aggressive, pushy sales style or became intimidated by co-workers and teetered, monthly, on the verge of being replaced because they weren’t making sales. The once-proud tradition of cooperation among sales staff was, in many instances, being eaten away by relentless competition. Work assignments away from the sales floor were resented. In addition, the managers and sales associates of certain departments, such as women’s accessories, complained of lower wages because, as one sales associate pointed out, ‘My commission on a $50 belt is nothing compared to Katherine’s commission on a $2800 designer dress.’ Resentment was mounting among those who witnessed the extravagant wages of a few. ‘If we change this program, if we keep straight commission for some and return to hourly pay for others, how does that fit with our new image?’ Lauren said to Jack. ‘How does it deal with the difference in pay scale? How does it assure us that the attitudes of our sales team and the culture of this store will not return to what we were before – just another store?’ Questions 1 What do you see as the advantages and disadvantages of the incentive system that DeMarco’s is using for sales associates? What impact do you think it is having on the DeMarco’s culture? Explain. 2 Do you think the complaints of lower-paid sales associates are legitimate? Why? How do you suggest Lauren respond to these complaints, such as the gripe that the system offers few opportunities for large commissions in some departments? 3 Have the successes of sales associates such as Katherine or Damien created a situation in which loyalty to customers is stronger than loyalty to the store? For example, if a successful associate leaves DeMarco’s, might the customer leave also?

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U r b a n E s c a p e s : m o t i vat i n g e m p l o y e e s For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

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On the job VIDEO CASE

Q uestions 1 Which needs in Maslow’s hierarchy are most important to the employees who work for Urban Escapes, and how can managers use this information to develop a highly motivated workforce?

3 What outcomes or rewards possess high valence for managers and guides who work at Urban Escapes?

2 According to equity theory, how might an Urban Escapes guide react if he or she feels underpaid or unappreciated?

Endnotes 1 Phred Dvorak. (17 December 2007). Hotelier Finds Happiness Keeps Staff Checked In; Focus on Morale Boosts Joie de Vivre’s Grades from Workers, Guests. The Wall Street Journal, B3. 2 David A. Kaplan. (6 February 2012). Salesforce’s Happy Workforce. Fortune, 100–12. 3 Steven Greenhouse. (18 July 2010). A Factory Defies Stereotypes, But Can It Thrive? The New York Times, BU1. 4 Ashley Halsey III. (10 July 2011). Fines Lower Drivers’ Use of Cellphones. The Washington Post, http://www.washingtonpost.com/local/fines-lowerdriversuse-of-cellphones/2011/07/08/gIQAMvX67H_story.html (accessed 11 July 2011). 5 Jack Stack. (6 July 2010). Hilcorp Energy Shares the Wealth. The New York Times, http://boss.blogs.nytimes.com/2010/07/06/hilcorp-energy-sharesthewealth/ (accessed 7 July 2010). 6 Dvorak. Hotelier Finds Happiness Keeps Staff Checked In. 7 See Linda Grant. (12 January 1998). Happy Workers, High Returns. Fortune, 81; Elizabeth J. Hawk and Garrett J. Sheridan. (June 1999). The Right Stuff. Management Review, 43–8; Michael West and Malcolm Patterson. (8 January 1998). Profitable Personnel. People Management, 28–31; Anne Fisher. (September 2002). Why Passion Pays. FSB, 58; and Curt Coffman and Gabriel Gonzalez-Molina. (2002). Follow This Path: How the World’s Great Organizations Drive Growth by Unleashing Human Potential (New York: Warner Books). 8 Abraham F. Maslow. (1943). A Theory of Human Motivation. Psychological Review 50, 370–96. 9 Barbara Bowes. (24 July 2010). More than Money: Make Your Employees Feel Secure, Satisfied in Job. Winnipeg Free Press, I.1. 10 Leigh Buchanan. (June 2010). The Un-Factory. Inc., 62–7. 11 Telis Demos. (12 April 2010). The Way We Work: Motivate Without Spending Millions. Fortune, 37–8. 12 Sarah Pass. (15 September 2005). On the Line. People Management, 38. 13 Clayton Alderfer. (1972). Existence, Relatedness, and Growth (New York: Free Press). 14 Scott Westcott. (August 2008). Beyond Flextime; Trashing the Work Week. Inc., 30–1. 15 Studies and surveys reported in Karol Rose. (29 September 2003). Work-Life Effectiveness. Special advertising section, Fortune, S1–S17. 16 Sylvia Ann Hewlett. (19 December 2009). Making Flex Time a Win-Win. The New York Times. 17 Frederick Herzberg. (January 2003). One More Time: How Do You Motivate Employees? Harvard Business Review, 87–96. 18  Workforce Mood Tracker Spring 2012 Report: The Growing Influence of Employee Recognition (Southborough, MA: Globoforce, 2012), http://www.

workforce.com/assets/PDF/WF80532710. PDF (accessed 18 September 2012). 19 David C. McClelland. (1985). Human Motivation (Glenview, IL: Scott, Foresman). 20 David C. McClelland. (1971). The Two Faces of Power. In Organizational Psychology, ed. D. A. Colb, I. M. Rubin and J. M. McIntyre (Englewood Cliffs, NJ: Prentice Hall), pp. 73–86. 21 See Gary P. Latham and Edwin A. Locke. (2006). Enhancing the Benefits and Overcoming the Pitfalls of Goal Setting. Organizational Dynamics, 35:4, 332–8; Edwin A. Locke and Gary P. Latham. (September 2002). Building a Practically Useful Theory of Goal Setting and Task Motivation: A 35-Year Odyssey. The American Psychologist, 57:9, 705ff; Gary P. Latham and Edwin A. Locke. (December 1991). Self-Regulation Through Goal Setting. Organizational Behavior and Human Decision Processes, 50:2, 212–47; G. P. Latham and G. H. Seijts. (1999). The Effects of Proximal and Distal Goals on Performance of a Moderately Complex Task. Journal of Organizational Behavior, 20:4, 421–8; P. C. Early, T. Connolly and G. Ekegren. (1989). Goals, Strategy Development, and Task Performance: Some Limits on the Efficacy of Goal Setting. Journal of Applied Psychology, 74, 24–33; E. A. Locke. (1968). Toward a Theory of Task Motivation and Incentives. Organizational Behavior and Human Performance, 3, 157–89; Gerard H. Seijts, Ree M. Meertens and Gerjo Kok. (1997). The Effects of Task Importance and Publicness on the Relation Between Goal Difficulty and Performance. Canadian Journal of Behavioural Science, 29:1, 54ff. See Gerard H. Seijts and Gary P. Latham. (2012). Knowing When to Set Learning versus Performance Goals. Organizational Dynamics, 41, 1–6, for a discussion of the importance of learning goals versus performance goals in turbulent environments. 22 Locke and Latham. Building a Practically Useful Theory of Goal Setting and Task Motivation. 23 Edwin A. Locke. (2005). Linking Goals to Monetary Incentives. Academy of Management Executive, 18:4, 130–3. 24 Latham and Locke. Enhancing the Benefits and Overcoming the Pitfalls of Goal Setting. 25 J. M. Ivanecevich and J. T. McMahon. (June 1982). The Effects of Goal Setting, External Feedback, and Self-Generated Feedback on Outcome Variables: A Field Experiment. Academy of Management Journal, 25:2, 359–72; G. P. Latham and E. A. Locke. (1991). Self-Regulation through Goal Setting. Organizational Behavior and Human Decision Processes, 50:2, 212–47. 26 Gary P. Latham. (2004). The Motivational Benefits of Goal-Setting. Academy of Management Executive, 18:4, 126–9.

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27 This definition and discussion is based on Teresa M. Amabile and Steven J. Kramer. (May 2011). The Power of Small Wins. Harvard Business Review, 71–80; and Teresa M. Amabile and Steven J. Kramer. (January–February 2010). What Really Motivates Workers: Understanding the Power of Progress. Harvard Business Review, 44–5. 28 J. Stacy Adams. (1965). Injustice in Social Exchange. In Advances in Experimental Social Psychology, 2nd edn, ed. L. Berkowitz (New York: Academic Press); and J. Stacy Adams. (November 1963). Toward an Understanding of Inequity. Journal of Abnormal and Social Psychology, 422–36. 29 Elizabeth Weise. (25 February 2010). Our Brains Dislike Inequality, Even When It’s In Our Favor. USA Today, http://content.usatoday.com/ communities/sciencefair/post/2010/02/our-brains-dont-like-inequality-evenwhen-its-in-our-favor/1 (accessed 21 March 2011); Daniel Yee. (14 May 2004). Brain Prefers Working over Money for Nothing. Cincinnati Post. 30 Ray V. Montagno. (1985). The Effects of Comparison to Others and Primary Experience on Responses to Task Design. Academy of Management Journal, 28, 491–8; and Robert P. Vecchio. (1982). Predicting Worker Performance in Inequitable Settings. Academy of Management Review, 7, 103–10. 31 Nathan Koppel and Vanessa O’Connell. (18 February 2011). Pay Gap Widens at Big Law Firms as Partners Chase Star Attorneys. The Wall Street Journal, http://online.wsj.com/article/SB1000142405274870457010457612 4232780067002.html (accessed 8 February 2011). 32 James E. Martin and Melanie M. Peterson. (1987). Two-Tier Wage Structures: Implications for Equity Theory. Academy of Management Journal, 30, 297–315. 33 Victor H. Vroom. (1964). Work and Motivation (New York: Wiley); B. S. Gorgopoulos, G. M. Mahoney and N. Jones. (1957). A Path-Goal Approach to Productivity. Journal of Applied Psychology, 41, 345–53; and E. E. Lawler III. (1981). Pay and Organizational Effectiveness: A Psychological View (New York: McGraw-Hill). 34 Richard R. Johnson. (2009). Explaining Patrol Officer Drug Arrest Activity Through Expectancy Theory. Policing, 32:1, 6ff. 35 Richard L. Daft and Richard M. Steers. (1986). Organizations: A Micro/ Macro Approach (Glenview, IL: Scott, Foresman). 36 Studies reported in Tom Rath. (9 December 2004). The Best Way to Recognize Employees. Gallup Management Journal, 1–5; and Erin White. (19 December 2005). Theory & Practice: Praise from Peers Goes a Long Way – Recognition Programs Help Companies Retain Workers as Pay Raises Get Smaller. The Wall Street Journal. 37 Alexander D. Stajkovic and Fred Luthans. (October 1997). A Meta-Analysis of the Effects of Organizational Behavior Modification on Task Performance, 1975–95. Academy of Management Journal, 1122–49; H. Richlin. (1970). Modern Behaviorism (San Francisco: Freeman); and B. F. Skinner. (1953). Science and Human Behavior (New York: Macmillan). 38 (23 May 2011). 100 Best Companies to Work For: Whole Foods Market. Fortune, 30; (2 June 2010). Employees Earn Cash for Exercising More. The Wall Street Journal, D3. 39 Stajkovic and Luthans. A Meta-Analysis of the Effects of Organizational Behavior Modification on Task Performance, 1975–95; Fred Luthans and Alexander D. Stajkovic. (1999). Reinforce for Performance: The Need to Go Beyond Pay and Even Rewards. Academy of Management Executive, 13:2, 49–57. 40 Michael Alison Chandler. (15 January 2012). In Schools, Self-Esteem Boosting Is Losing Favor to Rigor, Finer-Tuned Praise. The Washington Post, http://www.washingtonpost.com/local/education/in-schoolsself-esteemboosting-is-losing-favor-to-rigor-finertuned-praise/2012/01/11/gIQAXFnF1P_ story.html (accessed 16 January 2012); and Daryl W. Wiesman. (2006). The Effects of Performance Feedback and Social Reinforcement on Up-Selling at Fast-Food Restaurants. Journal of Organizational Behavior Management, 26:4, 1–18.

41 Kenneth D. Butterfield and Linda Klebe Treviño. (December 1996). Punishment from the Manager’s Perspective: A Grounded Investigation and Inductive Model. Academy of Management Journal, 39:6, 1479–512; and Andrea Casey. (1997). Voices from the Firing Line: Managers Discuss Punishment in the Workplace. Academy of Management Executive, 11:3, 93–4. 42 Amy Sutherland. (25 June 2006). What Shamu Taught Me About a Happy Marriage. The New York Times, http://www.nytimes.com/2006/06/25/ fashion/25love.html?ex=1175659200&en=4c3d257c4d16e70d&ei=5070 (accessed 2 April 2007). 43 Arthur Bandura. (1977). Social Learning Theory (Englewood Cliffs, NJ: Prentice Hall); and T. R. V. Davis and F. Luthans. (1980). A Social Learning Approach to Organizational Behavior. Academy of Management Review, 5, 281–90. 44 Bandura, Social Learning Theory; and Davis and Luthans. A Social Learning Approach to Organizational Behavior. 45 Ilya Pozin. (February 2012). The Takeaway: Three Things That Motivate Employees More Than Money. Inc., 6. 46 Christine M. Riordan, Robert J. Vandenberg and Hettie A. Richardson. (Winter 2005). Employee Involvement Climate and Organizational Effectiveness. Human Resource Management, 44:4, 471–88. 47 J. Richard Hackman and Greg R. Oldham. (1980). Work Redesign (Reading, MA: Addison-Wesley); and J. Richard Hackman and Greg Oldham. (1976). Motivation Through the Design of Work: Test of a Theory. Organizational Behavior and Human Performance, 16, 250–79. 48 Xu Huang and Evert Van de Vliert. (2003). Where Intrinsic Job Satisfaction Fails to Work: National Moderators of Intrinsic Motivation. Journal of Organizational Behavior, 24, 157–79. 49 Sarah E. Needleman. (14 January 2010). Business Owners Try to Motivate Employees: As Recession Lingers, Managers Hold Meetings and Change Hiring Practices to Alleviate Workers’ Stress. The Wall Street Journal. 50 Aaron Lucchetti. (29 December 2009). Morgan Stanley to Overhaul Pay Plan. The Wall Street Journal; Graham Bowley. (21 October 2009). Credit Suisse Overhauls Compensation. The New York Times; Liam Pleven and Susanne Craig. (17 January 2008). Deal Fees Under Fire Amid Mortgage Crisis; Guaranteed Rewards of Bankers, Middlemen Are in the Spotlight. The Wall Street Journal; Phred Dvorak. (6 April 2009). Companies Seek Shareholder Input on Pay Practices. The Wall Street Journal; and Carol Hymowitz. (28 April 2008). Pay Gap Fuels Worker Woes. The Wall Street Journal. 51 Reported in Sarah Fister Gale. (6 September 2012). Keeping Your Nose Clean: A Look at Ethics in the Workplace. Workforce.com, http://www .workforce.com/article/20120906/NEWS02/120909987/keeping-yournoseclean-a-look-at-ethics-in-the-workplace (accessed 24 September 2012). 52 This section is based on Gretchen Spreitzer and Christine Porath. (January–February 2012). Creating Sustainable Performance. Harvard Business Review, 92–9; and Gretchen Spreitzer, Christine L. Porath and Cristina B. Gibson. (2012). Toward Human Sustainability: How to Enable More Thriving at Work. Organizational Dynamics, 41, 155–62. 53 Edwin R. Hollander and Lyn R. Offermann. (February 1990). Power and Leadership in Organisations. American Psychologist, 45, 179–89. 54 Jay A. Conger and Rabindra N. Kanungo. (1988). The Empowerment Process Integrating Theory and Practice. Academy of Management Review, 13, 471–82. 55 David E. Bowen and Edward E. Lawler III. (Spring 1992). The Empowerment of Service Workers: What, Why, How, and When. Sloan Management Review, 31–9; and Ray W. Coye and James A. Belohav. (March 1995). An Exploratory Analysis of Employee Participation. Group and Organization Management, 20:1, 4–17. 56 Golnaz Sadri. (May–June 2011). Empowerment for the Bottom Line. Industrial Management, 8–13; and Robert C. Ford and Myron D. Fottler.

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(1995). Empowerment: A Matter of Degree. Academy of Management Executive, 9:3, 21–31. 57 This definition is based on Mercer Human Resource Consulting’s Employee Engagement Model, as described in Paul Sanchez and Dan McCauley. (November–December 2006). Measuring and Managing Engagement in a Cross Cultural Workforce: New Insights for Global Companies. Global Business and Organizational Excellence, 41–50. 58 This section is based on Maureen Soyars and Justin Brusino. (March 2009). Essentials of Engagement: Contributions, Connections, Growth. T&D, 62–5; Kenneth W. Thomas. (November–December 2009). The Four Intrinsic Rewards That Drive Employee Engagement. Ivey Business Journal, http://www.iveybusinessjournal.com/article.asp?intAtricle_id=867 (accessed 24 November 2009); and Cristina de Mello e Souza Wildermuth and Patrick David Pauken. (2008). A Perfect Match: Decoding Employee Engagement – Part II: Engaging Jobs and Individuals. Industrial and Commercial Training, 40:4, 206–10. 59 Kate Rockwood. (November 2008). The Employee Whisperer. Fast Company, 72–3.

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60 Soyars and Brusine. Essentials of Engagement. 61 Theresa M. Welbourne. (Spring 2007). Employee Engagement: Beyond the fad and into the Executive Suite. Leader to Leader, 45–51. 62 See J. K. Harter, F. L. Schmidt, and T. L. Hayes. (2002). Business Unit Level Relationship Between Employee Satisfaction, Employee Engagement, and Business Outcomes: A Meta Analysis. Journal of Applied Psychology, 87:2, 268–79; Coffman and Gonzalez, Follow This Path; M. Buckingham and C. Coffman. (1999). First, Break All the Rules: What the World’s Greatest Managers Do Differently (New York: Simon & Schuster); A. M. Saks. (2006). Antecedents and Consequences of Employee Engagement. Journal of Managerial Psychology, 21:7, 600–19; and Nikki Blacksmith and Jim Harter. (28 October 2011). Majority of American Workers Not Engaged in Their Jobs. Gallup.com, http://www.gallup.com/poll/150383/majority-americanworkers-not-engagedjobs.aspx (accessed 24 September 2012). 63 Reported in Blacksmith and Harter. Majority of American Workers Not Engaged in Their Jobs. 64 Rockwood. (5 January 2010). The Employee Whisperer; and quote from Americans’ Job Satisfaction Falls to Record Low. USA Today.

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ test your understanding of motivation by taking the revision quiz ➜ take the online self-test to evaluate your approach to motivating others ➜ extend your knowledge with Internet research activities and useful weblinks.

Cour seMate

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Explain why communication is essential for

5 Appreciate the role of personal communication

2 Describe how an open communication climate and

6 Recognise the manager’s role in using social media

effective management, and describe the model of communication. the choice of a communication channel influence the quality of communication.

3 Understand how communicating with candour,

asking questions, listening and non-verbal communication affect communication between a manager and employee.

channels, including the grapevine, in enhancing organisational communication. to improve organisational communication.

7 Explain strategies for managing communication during a crisis.

8 Explain why effective communication is essential for sustainable development.

4 Explain the difference between formal and informal organisational communications.

C h a p t e r 17

Communication in organisations

Chapter outline ➜ Communication is the manager’s job

➜ Organisational communication

➜ Communicating among people

➜ Workplace communication

What is communication? A model of communication

Open communication climate Communication channels Communicating to persuade and influence others Communicating with candour Asking questions Listening Non-verbal communication

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Formal communication channels Personal communication channels Social media Listening to customers Communicating to customers Connecting employees Crisis communication

➜ Communications and sustainability

New Manager Self-test Are you building a personal network? How much effort do you put into developing connections with other people? Personal networks may help a new manager in the workplace. To learn something about your networking skills, answer the questions below. Please indicate whether each item is Mostly true or Mostly false for you at university or at work. Mostly True

Mostly False

1  I learn early on about changes going on in the organisation and how they might affect me or my position. 2  I network as much to help other people solve problems as to help myself. 3  I am fascinated by other people and what they do. 4  I frequently use lunches to meet and network with new people. 5  I regularly participate in charitable causes. 6  I maintain a list of friends and colleagues to whom I send Christmas cards. 7  I maintain contact with people from previous organisations and school groups. 8  I actively give information to subordinates, peers and my boss. Scoring and interpretation: Many good things flow from active networking, which will build a web of personal and organisational relationships for a new manager. Networking builds social, work and career relationships that facilitate mutual benefit. People with active networks tend to be more effective managers and have broader impact on the organisation. Give yourself 1 point for each item marked as Mostly true. A score of 6 or higher suggests active networking and a solid foundation on which to begin your career as a new manager. If you scored 3 or less, you may want to focus more on building relationships if you are serious about a career as a manager.

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Management Challenge

When he was CEO of the ANZ Bank, John McFarlane spent some seven years trying to strongly and substantially influence the culture of that large organisation. When he took on the role, banks were not highly regarded in Australia by customers and the general public, and employee satisfaction within ANZ was not high. The cultural revolution that MacFarlane wanted to catalyse was an attempt to drive the ‘service profit chain’, meaning that if he could light up the effort, motivation and connection to the bank of its 30 000 staff, then they would give better customer service to paying customers. By improving the way that staff worked together, and hence improving customer outcomes, better profits for shareholders would also result. Such a high level plan sounds good, but turning it into an action plan that could be successfully implemented was not easy. Perhaps the biggest challenge for the CEO was to

communicate and convince those 30 000 people to sign on to such a major change. Staff satisfaction in ANZ Bank was a lowly 49 per cent at the time, similar to the other banks, and not satisfactory. As part of this, many staff were not happy with the company’s communications. As MacFarlane said, just over half of the paid staff were unhappy working at ANZ. MacFarlane needed to hatch and resource a substantial plan, then find a way to convince that large workforce of the sincerity and substance of the planned change initiative. Question If you were John MacFarlane, how would you communicate to staff at ANZ so as to improve their staff satisfaction and engagement levels? What steps do you think he took to enhance communications and improve morale?

Personal networking is an important skill for managers because it enables them to get things done more smoothly and rapidly than they could do in isolation. How do managers build a personal network that includes a broad range of professional and social relationships? One key is knowing how to communicate effectively. In fact, communication is a vital factor in every aspect of the manager’s job. Nick Chen loved his job as a software engineer designing programs for mobile phones. The work was rewarding, the pay was good and the working conditions were excellent. ‘The best part of being a software engineer,’ said Nick, ‘is working with a team of professionals who are excited about finding the next breakthrough in mobile technology.’ Nick’s team had recently designed a chipset that would revolutionise the way people communicate with their mobile phones. Nick’s managers recognised his contributions with a year-end bonus, so he was feeling confident about his future with the company. However, Nick had become eager for more responsibility, so he began looking for a management position. During his one-hour commute to work every morning, he used LinkedIn to strengthen his professional network and explore job openings in the mobile technology industry. His efforts paid off. One morning while updating his profile, Nick got a message from a former colleague who had recently taken a position at Qualcomm. She recommended that Nick apply for a new position as product manager for the Android smartphone. Eager to learn more, Nick started following Qualcomm as one of the company’s 54 000 LinkedIn followers. He learned Qualcomm had earned a strong reputation as a great place to work and had been named in Fortune magazine’s list of ‘100 Best Companies to Work For’ 14 years in a row. Nick quickly updated his resume and applied for the position.1 The most successful organisations are the ones whose managers keep the lines of communication open. They have the courage to talk about what employees want to hear and explain difficult decisions, especially during tough economic times. In fact, one study shows that companies with highly effective communication had 47 per cent higher total returns to shareholders over a five-year period, compared to companies with less effective communication practices.2 Effective communication leads to better bottom-line results, and much of a manager’s time is spent communicating. Managers spend at least 80 per cent of every working day in direct communication with others. In other words, 48 minutes of every hour is spent in meetings, on the telephone, communicating online or talking informally while walking around. The other 20 per cent of a typical manager’s time is spent doing desk work, most of which is also communication in the form of reading and writing.3

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This chapter explains why managers should make effective communication a priority. First, we examine communication as a crucial part of the manager’s job and describe a model of the communication process. Next, we consider how the interpersonal aspects of communication, including open communication climates, communication channels, persuasion, communicating with candour, asking questions and listening, affect managers’ ability to communicate. Then, we look at the organisation as a whole and consider formal upward, downward and horizontal communications, as well as personal networks and informal communications. Finally, we describe the manager’s role in using social media to enhance organisational communication and developing strategies to manage crisis communication.

Communication is the manager’s Job Exhibit 17.1 illustrates the crucial role of managers as communication champions who are highly effective communicators and make special efforts at ensuring that all employees and other stakeholders receive the information they need to make them successful. Managers gather important information from both inside and outside the organisation and then distribute appropriate information to others who need it. Managers’ communication is purpose-directed in that it directs everyone’s attention towards the vision, values and desired goals of the team or organisation and influences people to act in a way to achieve the goals. Managers facilitate strategic conversations by using open communication, actively listening to others, asking questions and using feedback for learning and change. Strategic conversation refers to people talking across boundaries and hierarchical levels about the team or organisation’s vision, critical strategic themes and the values that help achieve important goals.4

External information

Internal information

Purpose-directed

Strategic conversations Open communication climate Asking questions Listening Feedback

Exhibit 17.1 The manager as communication champion Sources: Adapted from Henry Mintzberg, The Nature of Managerial Work (New York: Harper and Row, 1973); and Richard L. Daft, The Leadership Experience, 3rd ed (Cincinnati, OH: South-Western, 2005), p. 346.

Manager as communication champion

Direct attention to vision, values, desired outcomes Influence employee behaviour

strategic conversation Dialogue across boundaries and hierarchical levels about the team or organisation’s vision, critical strategic themes and the values that help achieve important goals.

Methods Rich channels Social media Upward, downward and horizontal channels Personal networks

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Managers use different methods to communicate, depending on the purpose of the communication and the audience. Social media is one method that is growing in popularity. In fact, 65 per cent of managers surveyed in the Communication ROI Study Report said that they expected to use social media more the next year to communicate with employees.5 When Red Robin Gourmet Burgers introduced its new line of Tavern Burgers, top executives decided to use an internal social network to communicate the recipe and cooking methods to company managers. Instead of mailing out spiral-bound books, Red Robin successfully used social media as a method to train managers and encourage freewheeling discussions and feedback.6

What is com mu n i cation?

communication The process by which information is exchanged and understood by two or more people, usually with the intent to motivate or influence behaviour.

Most of us think of spoken or written language when we think about communication, but words are only a small part of human communication. Managers are observed carefully by employees, so it’s important to remember that everything a manager does and says will communicate something. In addition, communication is a two-way street that includes asking questions, seeking feedback, paying attention to the non-verbal communication of others and listening actively. Communication is the process by which information is exchanged and understood by two or more people, usually with the intent to influence or motivate behaviour. Surveys of managers show that they consider communication their most critical skill and one of their top responsibilities.7 Most managers reveal, however, that they need to improve their communication effectiveness. Fewer than half of responding managers bother to tailor their messages to employees, customers or suppliers. Even fewer seek feedback from employees or customers because they fear hearing bad news. Without feedback, though, managers can’t respond adequately to problems or opportunities, and their plans and decisions may be out of alignment with employee perceptions and interests.8

A mo d el o f com mu n i catio n

encode To select symbols with which to compose a message. message The tangible formulation of an idea to be sent to a receiver. channel The carrier of a communication. decode To translate the symbols used in a message for the purpose of interpreting its meaning. feedback A response by the receiver to the sender’s communication.

Being a good communicator starts with appreciating how complex communication is and understanding the key elements of the communication process, as illustrated in Exhibit 17.2 and described in this section. Many people think communication is simple and natural. After all, we communicate every day without even thinking about it. In reality, though, human communication is quite complex and fraught with opportunities for misunderstanding. Communication is not just sending information, but sharing information in a planned way. A manager who has the ability to deliver rousing speeches or write brilliant commentary, but who doesn’t know how to listen, is not an effective communicator. Honoring this distinction between sharing and proclaiming is crucial for successful management. Knowing what communication entails helps you appreciate the complexity of it. As shown in Exhibit 17.2, a manager who wants to communicate with an employee encodes a thought or idea by selecting symbols (such as words) with which to compose a message. The message is the tangible formulation of the thought or idea sent to the employee, and the channel is the medium by which the message is sent. The channel might be a telephone call, an email message, a formal report or a face-to-face conversation. The employee decodes the symbols to interpret the meaning of the message. Feedback occurs when the employee responds to a manager’s communication with a return message. As illustrated in the exhibit, the nature of effective communication is cyclical, in that a sender and receiver may exchange messages several times to achieve a mutual understanding.

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689

Encoding and decoding sometimes can cause communication errors. Have you heard someone say, ‘But that’s not what I meant!’ or wasted time and energy on misunderstood Take a Moment instructions? Individual differences, knowledge, values, attitudes and background act As a new manager, be a as filters and may create ‘noise’ when translating from symbols to meanings. We’ve communication champion by all likely experienced communication breakdowns because people can misinterpret communicating across boundaries, a message easily. Feedback enables a manager to determine whether the employee actively listening to others and using correctly interpreted the message. The potential for communication errors is why feedback to make improvements. Remember that effective feedback is so important. Without feedback, the communication cycle is incomplete. communication requires sharing Effective communication involves both the transference and the mutual understanding and achieving mutual of information.9 understanding.

Message

Ch an Formulate message

n

Interpret message

Potential for error or misunderstanding

Interpret message

a Ch

nn el

Formulate message

Receiver Exhibit 17.2 Model of communication

ha nn el

Sender

Ch an

el

ne l

Verbal and non-verbal symbols

Message

C

Verbal and non-verbal symbols

➜➜ Effective managers build broad personal communication networks through which they accomplish their jobs. ➜➜ The manager’s role as communication champion means to engage in purpose-driven strategic conversations via multiple channels. ➜➜ Social media is a method of communication that is growing in popularity as an effective way to communicate information within an organisation.

➜➜ Strategic conversation refers to dialogue across boundaries and hierarchical levels about the team or organisation’s vision, critical strategic themes and the values that help achieve important goals. ➜➜ Communication is the process by which information is exchanged and understood by two or more people. ➜➜ The sender encodes the idea by selecting symbols with which to compose a message and selecting a communication channel; the

receiver decodes the symbols to interpret the meaning of the message.

remember this

➜➜ The message is the tangible formulation of an idea to be sent to the employee. ➜➜ The term channel refers to the medium by which a message is sent, such as a phone call, blog or text message. ➜➜ Feedback occurs when the receiver responds to the sender’s communication with a return message.

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New Manager Self-test W h at i s y o u r s o c i a l d i s p o s i t i o n ? How do you come across to others? What is your social disposition? To find out, please mark whether each item below is Mostly true or Mostly false for you. Mostly true

1  I want to climb the corporate ladder as high as I can. 2  I confront people when I sense a conflict. 3  People consider me cooperative and easy to work with. 4  I like to get right to the point. 5  I make quick decisions usually without consulting others. 6  I make a real effort to understand other people’s point of view. 7  I enjoy competing and winning. 8  I like to get to the bottom line. 9  I take a personal interest in people.

Mostly false

Scoring and interpretation: Give yourself one point for items 1, 2, 4, 5, 7 and 8 that you marked Mostly true and one point for items 3, 6, and 9 that you marked Mostly false. The questions pertain to whether your social disposition is one of being focused and driven towards personal success or whether you tend to come across as affable and friendly. If you scored seven or higher, you are probably ambitious and goal oriented. A score of three or less would mean that you probably are empathic, ask questions and enjoy collaborating with others. A person with a driven disposition may be promoted to manager, but may not be a good listener, fail to pick up on body language or take time to engage in dialogue. A manager has to get things done through other people, and it helps to slow down, listen, build relationships and take the time to communicate. Too much focus on your personal achievement may come across as uncaring. A new manager with a friendly disposition is often a good listener, makes inquiries and experiences fewer communication mistakes. Source: Based on ‘Social Styles’, in Paula J. Caproni, Management Skills for Everyday Life: The Practical Coach, 2nd edn (Upper Saddle River, NJ: Prentice-Hall, 2005), pp. 200–3.

Communicating among people Many top managers admit their performance as communication champions likely fell short during the worst of the global financial crisis as they spent more time trying to make sure the financial status of their companies remained sound. Yet, as soon as the worst was over, Quicken Loans CEO Bill Emerson got back out among Quicken’s 3000 employees to reinforce his commitment to open communication. Emerson holds two-hour lunch meetings with groups of 15 employees at a time. He fills them in on what is happening with the company and the mortgage industry, asks about their problems and concerns, and solicits ideas and opinions about how the company operates. Emerson depended heavily on middle- and lower-level managers for maintaining a strong communication climate while he wrestled with business problems, but he knows that his visible commitment is essential to keep effective organisational conversations going.10 To achieve the best possible outcome, managers must understand how factors such as open communication climates, communication channels, the ability to persuade, communicating with candour, asking questions, listening and non-verbal behaviour all work to enhance or detract from communication. Managers should also consider how gender affects communication. This chapter’s Management in Practice explores how gender differences influence the effectiveness of communication between men and women.

O pen com mu ni catio n cli m ate A survey of employees reveals that people genuinely want open and honest communication from their managers, including the bad news as well as the good.11 This created a dilemma for Tom Szaky, CEO of

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TerraCycle, a waste-recycling business, because he was hesitant to share bad news with his employees. He didn’t want them worrying about something that didn’t affect their jobs and becoming distracted and unproductive. ‘The problem with hiding information,’ Szaky said, ‘was that when challenges came up, I felt pretty much alone on them, and the staff was left guessing what was happening. Predictably, the lack of information fuelled rumours and damaged morale.’ Today, Szaky encourages transparency and promotes open, honest communication. Employees see everything in great detail, even the bad news. This new climate has fostered a feeling of ownership and trust. It also brings issues to the forefront faster than ever before.12 Open communication means sharing all types of information throughout the organisation, across functional and hierarchical boundaries. People throughout the organisation need to see the big picture, understand the decisions that managers make and know how their work contributes to the success of the company. Particularly in times of change, if people don’t hear what’s happening from managers, they rely on rumours and will often assume the worst.13 In an open communication environment, people know where they stand and what rules they need to play by. Open communication helps people to accept, understand and commit to goals. People can see how their actions interact with and affect others in the organisation. When people have access to complete information, they are more likely to come up with creative solutions to problems and make decisions that are good for the company. Unfortunately, when the employees in the survey mentioned above were asked to evaluate how well their managers were doing in providing open and honest communication, the average score on a scale of zero to 100 was 69.14 Managers can build an open communication climate by breaking down conventional hierarchical and department boundaries that may be barriers to communication. They can take care to communicate honestly with subordinates, keep people posted when things change in either a positive or negative direction, and help people to see the financial impact of their decisions and actions.15 To achieve the advantages of open communication, managers should use the type of communication network that maximises employee performance and job satisfaction. Research into employee communication has focused on two characteristics of effective communication: the extent to which team communications are centralised, and the nature of the team’s task.16 The relationship between these characteristics is illustrated in Exhibit 17.3. In a centralised network, team members must communicate through one individual to solve problems or make decisions. Centralised communication can be effective for large teams because it limits the number of people involved in decision making. The result is a faster decision that involves fewer people.17 In a decentralised network, individuals can communicate freely with other team members. Members process information equally among Slower and less accurate

Simple tasks

Complex tasks

Faster and more accurate

691

open communication Sharing all types of communication throughout the organisation, across functional and hierarchical boundaries.

Concept Revision

Audio summary

centralised network A team communication structure in which team members communicate through one individual to solve problems or make decisions. decentralised network A team communication structure in which team members can communicate freely with each other and arrive at decisions together.

Exhibit 17.3 Effectiveness of team communication networks

Centralised = Y

Wheel

Circle

All channel

Decentralised =

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Exhibit 17.4 Communication networks Source: Joel Spolsky. (February 2010). A Little Less Conversation. Inc., 28–9. Copyright 2010 by Mansueto Ventures LLC. Reproduced with permission of Mansueto Ventures LLC.

Centralised network

Decentralised network

themselves until all agree on a decision.18 Decentralised communication is best for complex, difficult work environments where teams need a free flow of communication in all directions.19 See Exhibit 17.4.

Com mu n i cati o n Chann els

Source: Getty Images/Chaos

Managers have a choice of many channels through which to communicate. A manager may discuss a problem face to face, make a telephone call, use text messaging, send an email, write a memo or letter, or post an entry to a company blog, depending on the nature of the message. Research has attempted to explain how managers select communication channels to enhance communication effectiveness.20 One approach to selecting an effective communication channel is to interpret the emotions of the person who will be receiving the message and then select the channel that will result in the best outcome. Scientists have shown that managers can understand how a person is feeling by studying important clues: facial expressions, gestures, body posture and tone of voice. A smirk, a furrowed brow or sagging body posture are strong indicators of a person’s emotions.21 Another factor that shapes a manager’s selection of a communication channel is the type and amount of information to be communicated. Research has shown that channels differ in their capacity to convey data. Just as a pipeline’s physical characteristics limit the kind and amount of liquid that can be pumped through it, a communication channel’s physical characteristics limit the kind and amount of information that can be conveyed through it. The channels available to managers can be classified into a hierarchy based on information richness.

Meetings to discuss issues, challenges, problems and opportunities at the workplace can range from the formality of most board meetings to informal meetings over lunch in which staff talk about the daily issues that they face. Many executives in business say it is impossible to have too much communication going up, down and across their companies. Although meetings are sometimes described as being time-wasters, meetings can be productive if they are short, sharp and focused − then they can lead to coordination of efforts and good team-based problem solving. Such informal meetings also help develop informal relationships between staff that are kept professional, but can ease workplace tensions when the going gets tough.

Th e h ier ar c h y o f c h an n el r ic h n es s Channel richness is the amount of information that can be transmitted

during a communication episode. The hierarchy of channel richness is illustrated in Exhibit 17.5. The capacity of an information channel is influenced by three characteristics: (1) the ability to handle multiple cues simultaneously; (2) the ability to facilitate rapid, two-way feedback; and (3) the ability to establish a personal focus for the communication.

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Face-to-face discussion is the richest medium because it permits direct experience, multiple information cues, immediate feedback and personal focus. Because of its richness, it is the best channel when communicating to people who are exhibiting strong emotions, such as anxiety, fear or defensiveness. Face-toface discussions facilitate the assimilation of broad cues and deep, emotional understanding of the situation. Telephone conversations are next in the richness hierarchy. Although eye contact, posture and other body language cues are missing, the human voice still can carry a tremendous amount of emotional information. Electronic communication, such as email, instant messaging and text messaging, is increasingly being used for messages that were once handled face to face or by telephone. However, in a survey by researchers at Ohio State University, most respondents said they preferred the telephone or face-to-face conversation for communicating difficult news, giving advice or expressing affection.22 Because email messages lack both visual and verbal cues and don’t allow for interaction and feedback, email messages can sometimes be misunderstood. Using email to discuss disputes, for example, can lead to an escalation rather than a resolution of conflict.23 Too often, managers use email or text messaging to avoid the emotional discomfort of a real-time conversation, hiding behind their computers to send rebukes or criticisms that they would never deliver in person. ‘Because we can’t see their hurt, it doesn’t matter as much,’ says business consultant Margie Warrell. She advises managers to never use email in the following circumstances:

channel richness The amount of information that can be transmitted during a communication episode.

●● When you are angry. As our anger increases, so does our inability to communicate effectively. Wait at least two hours to cool off before sending an email. Then you will be better able to choose the most constructive way to convey that you are upset.

Advantages Personal Two-way Fast feedback

Face-to-face communication

High channel richness

Disadvantages No permanent record Spontaneous Difficult to disseminate

Telephone Electronic messages (e-mail, Twitter, IM, blogs) Advantages Permanent record Premeditated Easy to disseminate

Letters and memos Reports/bulletins

Low channel richness

Disadvantages Impersonal One-way Slow feedback

●● When your message may be misunderstood. Meet in person with someone who may be defensive about certain issues. A face-to-face conversation ensures that the other person hears your message in the most positive way. ●● When you are cancelling or apologising. To cancel an engagement, pick up the phone and call instead of emailing to demonstrate that you care about the relationship. When an apology is called for, meet in person so you can ask and receive forgiveness, which goes a long way towards restoring a damaged relationship. ●● When you are rebuking or criticising. While it is never easy to deliver negative feedback, it is better to communicate rebukes or criticisms in person so you can read visual cues and address any issues the other person might raise.24

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Exhibit 17.5 A continuum of channel richness

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Still lower on the hierarchy of channel richness are written letters and memos. Written communication can be personally focused, but it conveys only the cues written on paper and is slower to provide feedback. Impersonal written media, including flyers, bulletins and standard computer reports, are the lowest in richness. These channels are not focused on a single receiver, as they use limited information cues, and do not permit feedback.

Select i ng t h e ap p r o pr iate c h an n el It is important for managers to understand that each communication channel has advantages and disadvantages, and that each can be an effective means of communication in the appropriate circumstances.25 Channel selection depends on whether the message is routine or non-routine. Non-routine messages typically are ambiguous, concern novel events and involve great potential for misunderstanding. They often are characterised by time pressure and surprise. Managers can communicate non-routine messages effectively by selecting rich channels. Routine messages are simple and straightforward. They convey data or statistics or simply put into words what managers already agree on and understand. Routine messages can be efficiently communicated through a channel lower in richness, such as a memo, email, text message or Twitter. Written communications should be used when the communication is official and a permanent record is required.26 The key is to select a channel to fit the message. During a major acquisition, one firm decided to send top executives to all major work sites of the acquired company, where most of the workers met the managers in person, heard about their plans for the company and had a chance to ask questions. The results were well worth the time and expense of the personal face-to-face meetings, because the acquired workforce saw their new managers as understanding, open and willing to listen.27 Communicating their non-routine message about the acquisition in person prevented damaging rumours and misunderstandings. The choice of a communication channel can also convey a symbolic meaning to the receiver; in a sense, the medium becomes the message. The firm’s decision to communicate face to face with the acquired workforce signalled to employees that managers cared about them as individuals.

Innovative Way

Valuedance

When Susan Cramm was asked by a client to help persuade the client’s boss to support an initiative she wanted to launch, Cramm readily agreed. They scheduled a meeting with the boss, then held a series of planning sessions where the two discussed the current situation at the client’s firm, weighed the options, and decided on the best approach for launching the initiative. Filled with enthusiasm and armed with a PowerPoint presentation, Cramm was sure the client’s boss would see things their way. An agonising 15 minutes later, she was out the door, PowerPoint presentation and all, having just had a lesson about the art of persuasion. What went wrong? Cramm had

focused on the hard, rational matters and ignored the soft skills of relationship building, listening, and negotiating that are so critical to persuading others. ‘Never did we consider the boss’s views,’ Cramm said later about the planning sessions she and her client held to prepare for the meeting. ‘Like founding members of the “it’s all about me” club, we fell upon our swords, believing that our impeccable logic, persistence, and enthusiasm would carry the day.’ With that approach, the meeting was over before it even began. The formal presentation shut down communications because it implied that Cramm had all the answers and the boss was just there to listen and agree. Source: Cramm, S. (1 July 2005). The Heart of Persuasion. CIO, 28–30.

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Com mu n i catin g to persuad e an d in flu en ce oth ers Communication is not just for conveying information, but also to persuade and influence people. Although communication skills have always been important to managers, the ability to persuade and influence others is even more critical today. The command-and-control mindset of managers telling workers what to do and how to do it is no longer dominant. Key points for practising the art of persuasion include the following:28 ●● Establish credibility. A manager’s credibility is based on knowledge, expertise and interpersonal skills. By demonstrating a consistent ability to make well-informed, sound decisions, managers inspire employees to have stronger confidence in the manager’s leadership abilities. ●● Build goals on common ground. To be persuasive, managers should describe the benefits that employees will experience by embracing a new policy or fulfilling a request. An example is the manager who wanted to persuade fast food franchisees to support new pricing discounts desired by headquarters. The manager didn’t just explain that headquarters wanted the policies implemented; he cited research showing that the revised pricing would increase franchisees’ profits.29 When the franchisees saw how they would benefit personally, they were eager to adopt the new policies. If a manager can’t find common advantages, this is typically a good signal that goals and plans need to be adjusted. ●● Connect emotionally. The most effective managers learn to understand others’ emotions and adjust their approach to match the audience’s ability to receive their message. In Take a Moment addition, by looking at how people have interpreted and responded to past events, a As a new manager, use stories manager can get a better grasp on how they might react to new ideas and proposals and metaphors to tap into people’s that the manager wants them to adopt. imagination and emotions. When

●● Use multiple media to send important messages. When managers send the influencing or persuading, first listen same message using different media, they move their projects forward faster and strive to understand the other person’s point of view. And pay and more smoothly. By saying the same thing twice, they add more weight to the attention to non-verbal message and keep their issues at the top of the employee’s mind. For example, communication. one manager explained a request to an employee in person. He immediately composed a follow-up email to the same employee that summarised the request in writing.30 To persuade and influence, managers have to communicate frequently and easily with others. Yet some people find interpersonal communication experiences unrewarding or difficult and thus tend to avoid situations where communication is required. The term communication apprehension describes this avoidance behaviour, and is defined as an individual’s level of fear or anxiety associated with either real or anticipated communication. With training and practice, managers can overcome their communication apprehension and become more effective communicators.

Com mu n i catin g with can dou r To influence and persuade, managers also have to be frank and straightforward about what they want and need from others. Communicating with candour means being direct, honest and clear about what employees need to do to meet objectives, while also expressing respect for others and

communication apprehension An individual’s level of fear or anxiety associated with real or anticipated communication.

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Case study

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General Electric For more than 17 years, Jack Welch (who is frequently referred to throughout this textbook) led General Electric to one revenue and earnings record after another and helped to increase the market share of GE from US$12 billion in 1981 to about US$280 billion in 1998. Welch, a master at communication, spent more than half his time on what he calls ‘people issues’. He created a sense of informality and sharing that is rare for a huge company such as GE. His preferred form of communication was typically a personal note accompanied by a phone call. He was well known for dashing off handwritten notes to people throughout the company to congratulate them for a job well done or to explain a controversial decision. For example, when Welch vetoed the idea of buying AT&T Universal Card, he sent a note to the manager at GE Capital who had spent hundreds of hours studying the proposed acquisition. He wanted her to know that, despite his decision, he had been impressed with her analysis and presentation. There were no forms, letters or memos from Welch – not to employees, managers, top executives or even board members. Everything was handled with personal notes, phone calls or face-to-face communication. Welch kicked off each year for GE with a session for the company’s top 500 executives. The meeting gave Welch a chance to set the agenda for the year

and to celebrate the company’s newest heroes. Managers from the various businesses could exchange ideas with their counterparts. Informal chat sessions lasted until 2 a.m. or later, with Welch himself participating. His wrap-up talk at the end of the meeting was videotaped, translated into eight different languages and dispatched to GE locations around the world, where managers used it to spark communication with their own teams about the issues GE would face in the coming year. Other formal means of communication used at GE are the Corporate Executive Council sessions held each quarter, at which GE’s top 30 executives track progress and swap ideas. These meetings have earned descriptions from executives such as ‘food fights’ or ‘free-for-alls’ because all information – good and bad – is shared openly. At these sessions Welch got unfiltered information. One of the most important forms of communication for Welch was the informal, unscheduled communication in which he participated almost daily. Every week, there were unexpected visits to plants and offices, during which Welch talked directly with GE people at all levels. He regularly scheduled impromptu luncheons with managers several layers below him to get their ideas and perspectives. Indeed, in an average year, Welch directly met and talked with

several thousand GE employees. He used a metaphor of the company as an oldfashioned grocery store, where he could mentally roll up his sleeves, get behind the counter and get to know employees and customers intimately. In September 2001, Jeffrey Immelt took over from Welch what Fortune described as ‘the best-managed, best-regarded company in America’. In 2011, GE continued to receive numerous accolades for its organisational excellence, from winning ‘Best company to work for’, ‘Most Admired Leadership’, ‘Most Inventive Company’, ‘Most Sustainable Company’ and many other awards that could only be accomplished with a high level of motivation in the workforce, from top to bottom! By 2013, GE was ranked seventh on the Forbes list of World’s Most Valuable Brands, eighth of the Fortune 500 companies, number 90 on the list of World’s Most Innovative Companies and it had a market capitalisation of US$243.74 billion with 305 000 employees. Sources: Byrne, J. A. (8 June 1998). Special Report: Jack. BusinessWeek, 91–106; Useem, J. (12 November 2001). What It Takes. Fortune, 126–32; http://www.ge.com/news/ ge_in_the_news/awards.html; http://www.forbes.com/companies/ general-electric/ (accessed 2 November 2013); http://money.cnn .com/magazines/fortune/fortune500/ index.html (accessed 2 November 2013).

not making people feel slighted, controlled or exploited. Unfortunately, communicating with candour is a problem for many managers. Jack Welch says that when he would ask groups of managers how many of them had received candid performance appraisals, only about 10 per cent of people raised their hands. When he asked how many had given candid appraisals to their employees, the results weren’t much better.31

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Communicating with candour is a confident, positive approach that lets others know exactly where you stand and what you’re asking of them. The appropriate use of candid communication acknowledges the other person’s perspective and opinion, yet is very specific about what the manager wants and why. Some valuable techniques for communicating with candour include:32 ●● Use ‘I statements’. To communicate with candour, you should keep the focus on the specific perception you have, how it makes you feel and the effect it is having on you, rather than accusing or blaming the other person. Suppose that you share office space with a sloppy colleague. Rather than saying, ‘You drive me crazy by leaving food wrappers scattered all over the place,’ you might say, ‘I’m finding it really hard to get our work done with all this clutter on the work table.’ ●● Stick to facts rather than judgements. Don’t tell your colleague that she’s a disgusting slob; just let her know that the clutter she’s leaving on the table is interfering with your ability to do your work. ●● Be clear, specific and direct in your requests. Say ‘I’d like for you to keep the work table clean because we both have to use it to get our jobs done’, rather than ‘Why don’t you clean up the mess you leave around here?’

New Manager Self-Test Candour Instructions: Respond to the statements below based on how you speak to others during personal or work conversations. Answer whether each statement is Mostly true or Mostly false for you. There are no right or wrong answers, so answer honestly.. Mostly True

1  I try to be courteous and respectful of people’s feelings. 2  I say exactly what I think to people. 3  I never hesitate to upset someone by telling the truth. 4  I like to be strictly candid about what I say. 5  I am very straightforward when giving feedback. 6  I present evidence for my opinions. 7  I am an extremely frank communicator. 8  I would not deliberately say something that would hurt someone’s feelings.

Mostly False

Scoring and interpretation: Give yourself one point for each Mostly true answer to items 2–7, plus one point for each Mostly false answer to items 1 and 8. Total score: . Your score reflects the level of candour with which you communicate. Many people have a hard time giving straightforward opinions and feedback because they don’t want to hurt a person’s feelings nor do they want people to dislike them. Hence, the sharing of honest observations is limited. A score of 6–8 on this scale suggests that you may have a habit of candour, which will add to your managerial effectiveness. A score of 1–3 may mean that you have a hard time speaking your mind and you may want to practise to improve your candour.

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Communicating with candour is an important part of creating an open communication climate. When managers communicate with candour, they encourage others to do the same. In an organisation where candid communication is the norm, everything works faster and better.33 When everyone feels free to open up and speak frankly, more people get involved in organisational conversations, which leads to more ideas and faster learning. In addition, candour means that ideas get debated, adapted and acted upon more quickly. Candid communication leads to genuine ongoing conversations and limits common problems such as meaningless meetings, workplace incivility or rancorous silence. Carol Bartz, former CEO of Yahoo! and Autodesk, has always been a straight talker. She believes that if a person has an opinion, they should state it, which allows others to either try to change the opinion, to agree with it or to agree to disagree. ‘Agreeing is easy’ she said. ‘Disagreeing takes more guts.’

Askin g q u esti o ns The traditional model of primarily top-down communication is giving way to a more dynamic form of communication that is characterised by organisational conversations, which involve a give-and-take exchange of information.34 To have successful organisational conversations, managers need to learn to ask questions. Most managers do 80 per cent telling and 20 per cent asking, while it should be the other way around. Asking questions can benefit both managers and employees in numerous ways.35 ●● Asking questions builds trust and openness between managers and employees. Managers who ask questions encourage their employees to share ideas and offer feedback. Duke Energy’s president and CEO, James E. Rogers, holds listening sessions with groups of 90–100 employees, where he asks questions and offers responses. By engaging with employees in a format that resembles ordinary person-to-person conversation, Rogers is developing a culture built on trust and authenticity.36 ●● Asking questions builds critical thinking skills. In one survey, 99 per cent of top managers said critical thinking skills at all levels are crucial to the success of their organisations.37 Asking questions stimulates critical, independent thinking, encourages people to use their creativity and leads to deeper, more lasting learning. ●● Questions stimulate the mind and give people a chance to make a difference. When a manager asks a question of someone, it puts the individual on alert in a way that making a statement does not. People have to think in order to respond to a question. If a plant foreman says, ‘We have to increase production to fill this order’, workers can listen to him or not and try to speed things up or continue working as they have been. If, instead, the foreman asks employees, ‘What can we do to make sure we fill this order on time?’ people can’t ignore him; they have to start looking for solutions. Thus, asking questions gets people to accept responsibility for solving their own problems. Asking questions is an important dimension of the organisational conversation. Consider how Cisco Systems uses powerful technology and instant connectivity to facilitate fluid and open conversations among managers and employees.

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Innovative Way

Cisco Systems Organisational conversations occur when managers talk with employees, not just to them. To transform its organisational communication into a two-way conversation between managers and employees, Cisco successfully implemented several innovative strategies that incorporate state-of-the-art technology. First, Cisco uses its own next-generation video conferencing, called Telepresence, to facilitate interactive communication. Telepresence is a three-screen communication system that simulates in-person meetings by beaming video feeds between locations. Telepresence allows for a natural dialogue among people, no matter the time, place or type of computer system being used.

Participants appear life-sized and can look one another in the eye. Randy Pond, Cisco’s executive vice president of operations, processes, and systems, thinks that this type of interaction offers the benefit of the ‘whole’ conversation. In addition, Cisco CEO John Chambers keeps in touch with employees using other communication technologies, including social media. Chambers records a video blog about once a month to deliver brief, improvisational messages. These messages allow him to speak to employees directly and informally without a script. Chambers and his team have made it interactive by inviting reactions and responses by video or text messages.

Source: Boris Groysberg and Michael Slind. (June 2012). Leadership Is a Conversation. Harvard Business Review, 75–84.

Listen in g Of all the competencies critical to successful managerial communication, listening is at the top of the list. Yet listening seems to be a rare skill among managers, and the inability to listen is one of the key reasons that managers fail.38 Listening involves the skill of grasping both facts and feelings to interpret a message’s genuine meaning. Only then can the manager provide the appropriate response. Listening requires attention, energy and skill. Although about 75 per cent of effective communication is listening, most people spend only 30 to 40 per cent of their time listening, which leads to many communication errors.39 One of the secrets of highly successful salespeople is that they spend 60 to 70 per cent of a sales call letting the customer talk.40 However, listening involves much more than just not talking. Many people do not know how to listen effectively. They concentrate on formulating what they are going to say next rather than on what is being said to them. Our listening efficiency, as measured by the amount of material understood and remembered by subjects 48 hours after listening to a 10-minute message, is, on average, no better than 25 per cent.41 Most managers now recognise that important information flows from the bottom up, not the top down, and managers had better be tuned in.42 Some organisations use innovative techniques for finding out what’s on employees’ and customers’ minds. Intuit, for example, instituted an annual employee survey that gives managers an opportunity to listen to employees’ feelings on a range of company practices. Then, during the year, managers are encouraged to meet with subordinates to gather more feedback. Since instituting these listening strategies, turnover at Intuit has dropped from 24 per cent to 12 per cent. ‘Employees know that we are serious about asking for their feedback, and we listen and do something about it,’ said former CEO Stephen Bennett.43 Done correctly, listening is a vital link in the communication process, shown in the model of communication in Exhibit 17.2. What constitutes good listening? Exhibit 17.6 gives 10 keys to effective listening and illustrates a number of ways to distinguish a bad listener from a good listener. A good listener

listening The skill of grasping facts as well as feelings to interpret a message’s genuine meaning.

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finds areas of interest, is flexible, works hard at listening and uses thought speed to mentally summarise, weigh and anticipate what the speaker says. Good listening means shifting from thinking about self to empathising with the other person, which requires a high degree of emotional intelligence, as described in Chapter 14. As well as listening to what people say in face to face communications, managers are also tapping into the interactive nature of blogs to stay in touch with employees and customers. Blogs, running web logs that allow people to post opinions, ideas and information, provide a low-cost, always-fresh, real-time link between organisations and customers, employees, the media and investors.44 One estimate is that 16 per cent of Fortune 500 companies use blogs to keep in touch with stakeholders.45 (FastLane, the blog of General Motors in America, is discussed in the Part 5 Continuing case.) Blogs give managers another way to get valuable feedback. Exhibit 17.6 Ten keys to effective listening Keys to effective listening

Poor listener

Good listener

1. Listen actively.

Is passive, laid-back

Asks questions, paraphrases what is said

2. Find areas of interest.

Tunes out dry subjects

Looks for new learning

3. Resist distractions.

Is easily distracted; answers phone or sends text messages

Gives full attention, fights distractions, maintains concentration

4. Capitalise on the fact that thought is faster.

Tends to daydream

Mentally summarises; weighs the evidence

5. Be responsive.

Avoids eye contact; is minimally involved

Nods and shows interest

6. Judge content, not delivery.

Tunes out if delivery is poor

Judges content; skips over delivery errors

7. Avoid premature judgement.

Has preconceptions

Does not judge until comprehension is complete

8. Listen for ideas.

Listens for facts

Listens to central themes

9. Work at listening.

Shows no energy; forgets what the speaker says

Works hard; exhibits active body state and eye contact

Resists difficult material in favour of light, recreational material

Uses heavier material as exercise for the mind

10. Exercise one’s mind.

Sources: Adapted from Diann Daniel. (7 September 2004). Seven Deadly Sins of (Not) Listening. CIO, http://www.cio.com/article/134801/ Seven_Deadly_Sins_of_Not_Listening_ (accessed 7 December 2012); Sherman K. Okum. (August 1975). How to Be a Better Listener. Nation’s Business, 62; and Philip Morgan and Kent Baker. (November 1985). Building a Professional Image: Improving Listening Behavior. Supervisory Management, 34–8.

N o n -verbal com mu n i catio n non-verbal communication A communication transmitted through actions and behaviour rather than words.

Managers should be aware that their body language – facial expressions, gestures, touch, and use of space – can communicate a range of messages, from enthusiasm, warmth, and confidence to arrogance, indifference and displeasure.46 Non-verbal communication refers to messages sent through human actions and behaviour rather than through words.47 Managers are watched, and their behaviour, appearance, actions and attitudes are symbolic of what they value and expect of others.

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Most of us have heard the saying, ‘Actions speak louder than words’. Indeed, we communicate without words all the time, whether we realise it or not. Most managers are astonished to learn that words themselves carry little meaning without their non-verbal context. A significant portion of the shared understanding from communication comes from the non-verbal messages of facial expression, voice, mannerisms, posture and dress. Consider the following example. During a 2010 interview about Facebook’s then-new, controversial privacy policy with reporters from The Wall Street Journal, Mark Zuckerberg, Facebook’s chief executive, sweated profusely and appeared to be shaken. As he defended the company’s policy, so much sweat was dripping from his forehead that the interviewer suggested he take off his ‘hoodie’. While his verbal responses provided plausible explanations for the privacy policy, Zuckerberg’s non-verbal cues suggested that he was unprepared and lacked confidence in the new direction.48 Non-verbal communication occurs mostly face to face. One researcher found three sources of communication cues during face-to-face communication: the verbal, which are the actual spoken words; the vocal, which include the pitch, tone and timbre of a person’s voice; and facial expressions. According to this study, the relative weights of these three factors in message interpretation are as follows: verbal impact, 7 per cent; vocal impact, 38 per cent; and facial impact, 55 per cent.49 To some extent, we are all natural face readers, but at the same time, facial expressions can be misinterpreted, suggesting that managers need to ask questions to make sure they’re getting the right message. Managers can hone their skills at reading facial expressions and improve their ability to connect with and influence followers. Studies indicate that managers who seem responsive to the unspoken emotions of employees are more effective and successful in the workplace.50 Managers should take care to align their facial expressions and body language to support an intended message. When non-verbal signals contradict a manager’s words, people become confused and may discount what is being said and believe the body language instead.51 One manager who was a master at using body language to convey credibility and confidence was Steve Jobs of Apple. When he unveiled Apple’s new cloud service, iCloud, in June 2011, Jobs fully faced the audience, made eye contact, kept his movements relaxed and natural, and stood tall. Through his body language, he communicated credibility, commitment and honesty.52 ➜➜ Open communication means sharing all types of information throughout the organisation and across functional and hierarchical boundaries. ➜➜ A centralised network is a communication structure in which team members communicate through a single individual to solve problems or make decisions. ➜➜ A decentralised network is a communication structure in which team members freely communicate with one another and arrive at decisions together.

➜➜ Channel richness is the amount of information that can be transmitted during a communication episode.

respect for others and not making people feel slighted, controlled or exploited.

remember this

➜➜ Although communication skills have always been important to managers, the ability to persuade and influence others is even more critical today.

➜➜ To encourage a give-and-take exchange of information between managers and employees, managers need to learn to ask questions.

➜➜ Communication apprehension is an individual’s level of fear or anxiety associated with interpersonal communication.

➜➜ Listening involves the skill of grasping both facts and feelings to interpret a message’s genuine meaning.

➜➜ Communicating with candour means being direct, honest and clear about what employees need to do to meet objectives, while also expressing

➜➜ Non-verbal communication means communicating through actions, gestures, facial expressions and behaviour rather than through words.

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Organisational communication Another aspect of management communication concerns the organisation as a whole. Organisation-wide communications typically flow in three directions – downward, upward and horizontally. Managers are responsible for establishing and maintaining formal channels of communication in these three directions. Managers also use informal channels, which means that they get out of their offices, mingle with employees and practise ‘management by walking around’. organisational communication formal communication channels Involve written and verbal ways of exchanging information among people who have recognised status in the organisation.

Exhibit 17.7 Downward, upward and horizontal communication in organisations

Fo r m al com mu n i cation chann els Formal communication channels are those that flow within the chain of command or task responsibility

defined by the organisation. The three formal channels and the types of information conveyed in each are illustrated in Exhibit 17.7.53 Downward and upward communications are the primary forms of communication used in most traditional, vertically organised companies. However, many of today’s organisations emphasise horizontal communication, with people continuously sharing information across departments and levels. Electronic communication methods such as email and instant messaging have made it easier than ever for information to flow in all directions.

Upward communication

Problems and exceptions Suggestions for improvement Performance reports Grievances and disputes Financial and accounting information

Downward communication Implementation of goals, strategies Job instructions and rationale Procedures and practices Performance feedback Indoctrination

Horizontal communication

Intradepartmental problem solving Interdepartmental coordination Change initiatives and improvements

Coordinate

Interpret

Influence

Downwar d commun ic ation downward communication messages and information sent from top management down to employees.

The most familiar and obvious flow of formal communication, downward communication, refers to the messages and information sent from top management to subordinates in a downward direction. Managers can communicate downward to employees in many ways. Some of the most common are through speeches, videos, blogs, podcasts and company intranets. It is impossible for managers to communicate with employees about everything that goes on in the organisation, so they have to make choices about the important information to communicate.54 Unfortunately, many managers could do a better job of effective downward communication. The results

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of one survey show that employees want open and honest communication about both the good and the bad aspects of the organisation’s performance. A study of 1500 managers, mostly at first and second management levels, found that 84 per cent of these leaders perceive communication as one of their most important tasks, yet only 38 per cent believe they have adequate communication skills.55 Managers can do a better job of downward communication by focusing on specific areas that require regular communication. Downward communication usually encompasses these five topics: ●● Goals and strategies. Communicating new strategies and goals provides information about specific targets and expected behaviours. It gives direction for lower levels of the organisation. Example: ‘The new quality campaign is for real. We must improve product quality if we are to survive.’ ●● Job instructions and rationale. These directives indicate how to do a specific task and how the job relates to other organisational activities. For high-priority or time-sensitive issues, some managers use Twitter as a preferred channel of downward communication. With a limit of 140 characters, reading and replying to a ‘tweet’ is a lot faster than other forms of communication.56 Example of a Twitter message: ‘Brand managers from Adele will attend our presentation at the Sydney trade show on October 24. We’ll meet Friday at 9 a.m. to outline the presentation.’ ●● Procedures and practices. These messages define the organisation’s policies, rules, regulations, benefits and structural arrangements. Example: ‘After your first 90 days of employment, you are eligible to enrol in our company-sponsored savings plan.’ ●● Performance feedback. These messages appraise how well individuals and departments are doing their jobs. Example: ‘Joe, your work on the computer network has greatly improved the efficiency of our ordering process.’ ●● Coaching and training. These messages are designed to motivate employees to adopt the company’s mission and cultural values and to participate in special ceremonies, such as picnics and United Way campaigns. Example: ‘The company thinks of its employees as family and would like to invite everyone to attend the annual picnic and fair on March 3.’

Source: Getty Images/Stuart O'Sullivan

A major problem with downward communication is drop-off; that is, the distortion or loss of message content. Although formal communications are a powerful way to reach all employees, much information gets lost – 25 per cent or so each time a message is passed from one person to the next. In addition, the message can be distorted if it travels a great distance from its originating source to the ultimate receiver. Information drop-off cannot be avoided completely, but the techniques described in the previous sections can reduce it substantially. Using the right communication channel, consistency between verbal and non-verbal messages, and active listening can maintain communication accuracy as it moves down the organisation.

Upwa rd communi cat i on Formal upward communication includes messages that flow from the lower to the higher levels of the organisation’s hierarchy. Most organisations take pains to build in healthy

upward communication Messages that flow from the lower to the higher levels in the organisation’s hierarchy.

Despite the prevalence of email and other forms of electronic communication in organisations, there is often no substitute for face-to-face meetings. All employees need the opportunity to provide feedback to their managers, make suggestions for how to improve work processes, air grievances, and discuss problems and opportunities at work. This is most effective when employees feel they can honestly air their frustrations without expecting recriminations or blame, and communication is encouraged in a spirit of positive improvement.

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channels for upward communication. Employees need to air grievances, report progress and provide feedback on management initiatives. Coupling a healthy flow of upward and downward communication ensures that the communication circuit between managers and employees is complete.57 Five types of information communicated upward are the following: ●● Problems and exceptions. These messages describe serious problems with and exceptions to routine performance to make senior managers aware of difficulties. Example: ‘The website went down at 2:00 a.m., and our engineers are currently working to resolve the problem.’ ●● Suggestions for improvement. These messages are ideas for improving task-related procedures to increase quality or efficiency. Example: ‘I think we should eliminate step 2 in the audit procedure because it takes a lot of time and produces no results.’ ●● Performance reports. These messages include periodic reports that inform management how individuals and departments are performing. Example: ‘We completed the audit report for Smith & Smith on schedule but are one week behind on the Jackson report.’ ●● Grievances and disputes. These messages are employee complaints and conflicts that travel up the hierarchy for a hearing and possible resolution. Example: ‘After the reorganisation of my district, I am working excessively long hours. I have lost any semblance of a work–life balance.’ ●● Financial and accounting information. These messages pertain to costs, accounts receivable, sales volume, anticipated profits, return on investment and other matters of interest to senior managers. Example: ‘Costs are 2 per cent over budget, but sales are 10 per cent ahead of target, so the profit picture for the third quarter is excellent.’ Smart managers make a serious effort to facilitate upward communication. For example, Mike Hall, CEO of Borrego Solar Systems, found an effective way to encourage his introverted engineers to speak up and submit ideas for improving the business. To get his staff to offer feedback and suggestions, Hall organised an internal contest he called the Innovation Challenge. All employees were encouraged to submit ideas about improving the business using the company intranet. Once all of the ideas were submitted, employees voted for their favourite idea, and the winner won $500 in cash. Nearly all of Borrego’s employees participated in the contest. ‘We’ve been able to generate a lot of great ideas by tapping everyone’s brains,’ Hall says.58

Hor i zontal commun ic atio n horizontal communication The lateral or diagonal exchange of messages among peers or co-workers.

Horizontal communication is the lateral or diagonal exchange of messages among peers or co-workers. It

may occur within or across departments. The purpose of horizontal communication is not only to inform but also to request support and coordinate activities. Horizontal communication falls into one of three categories: ●● Intradepartmental problem solving. These messages take place among members of the same department and concern task accomplishment. Example: ‘Kelly, can you help us figure out how to complete this medical expense report form?’ ●● Interdepartmental coordination. Interdepartmental messages facilitate the accomplishment of joint projects or tasks. Example: ‘Michael, please ask your team to edit the IBM report using Google Docs by Monday morning.’

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Recall from Chapter 10 that many organisations build in horizontal communications in the form of task forces, committees, or even a matrix or horizontal structure to encourage coordination. At Chicago’s Northwestern Memorial Hospital, two doctors created a horizontal task force to reduce the incidence of hospitalborne infections. The infection epidemic that kills nearly 100 000 people a year is growing worse worldwide, but Northwestern reversed the trend by breaking down communication barriers. Infectious-disease specialists Lance Peterson and Gary Noskin launched a regular Monday morning meeting involving doctors and nurses, lab technicians, pharmacists, computer technicians, admissions representatives and even the maintenance staff. The enhanced communication paid off. Over a three-year period, Northwestern’s rate of hospital-borne infections plunged 22 per cent and was roughly half the national average.59

Source: Getty Images/Maartje van Caspel

●● Change initiatives and improvements. These messages are designed to share information among teams and departments that can help the organisation change, grow and improve. Example: ‘We are streamlining the company travel procedures and would like to discuss them with your department.’

Workplace communications, often through meetings, can help to coordinate work processes across organisations. Without communication, the left hand of the organisation would not know what its right hand is doing and vice versa. Many organisations have regular meetings: ‘Wednesday morning production planning meetings’ or ‘Monday afternoon production and marketing coordination meetings’. In addition, ad hoc or informal meetings are often held to discuss specific challenges or opportunities facing organisations. Efficiency and effectiveness in conducting and participating at meetings is vital to organisational effectiveness.

Susan Williams’ business, called The Finishing Touch, has only five full-time employees, but has a network of several hundred part-time staff right around Australia and New Zealand who provide home services that help customers to pack and unpack when they move house. Effective communication across this business, which revolves around a diverse group of clients and a geographically spread staff, is a vital ingredient of its success. The operating staff – mostly mothers aged 35 to 55 – also cook and care for children as their clients settle into new homes. Before email and the Internet, the cost and difficulty of communicating

with staff would have been problematic for this type of business. However, with the provision of forms, schedules, work assignments, shift times, brochures and customer feedback sheets all by email and the Internet, Susan has the business under control and running efficiently. After only four years in operation, the business turned over A$2 million and won the Telstra Victorian Business of the Year award. Tax, payment, superannuation, and fees and salaries are all paid online. The efficiency of the Internet and email for communications and transactions has allowed this business to spread its wings and conduct its business with great efficiency.

By 2013, this business employed 200 staff in Australia, 50 in New Zealand and had undertaken over 50 000 assignments for clients. And on the subject of communicating effectively: ‘Our office staff work with stateof-the-art online systems, meaning we are constantly in touch with our clients and their removalists. Moving is a complicated logistics exercise and attention to detail is vital. Our company tracks every interaction and all staff access this knowledge 24 hours a day via a purpose-built online system.’ Sources: Watts, T. (22 February 1999). Cyber Tools Keep a Far Flung Empire on Track. Business Review Weekly, 21:6; The Finishing Touch website, http://www.ftouch.com.au.

Case study

Susan Williams

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Perso nal com mu n i catio n chann els personal communication channels Communication channels that exist outside the formally authorised channels and do not adhere to the organisation’s hierarchy of authority.

Personal communication channels exist outside the formally authorised channels. These informal

communications coexist with formal channels but may skip hierarchical levels, cutting across vertical chains of command to connect virtually anyone in the organisation. In most organisations, these informal channels are the primary way that information spreads and work gets accomplished. Three important types of personal communication channels are personal networks, the grapevine and written communication.

Develop i ng p er son al c om m un ic atio n net wor ks personal networking The acquisition and cultivation of personal relationships that cross departmental, hierarchical and even organisational boundaries.

Personal networking refers to the acquisition and cultivation of personal relationships that cross

departmental, hierarchical and even organisational boundaries.60 Successful managers consciously develop personal communication networks and encourage others to do so. In a communication network, people share information across boundaries and reach out to anyone who can further the goals of the team and organisation. Exhibit 17.7 illustrates a communication network. Some people are central to the network while others play only a peripheral role. The key is that relationships are built across functional and hierarchical boundaries. The value of personal networks for managers is that people who have more contacts have greater influence in the organisation and get more accomplished. For example, in Exhibit 17.8, Sharon has a well-developed personal communication network, sharing information and assistance with many people across the marketing, manufacturing and engineering departments. Contrast Sharon’s contacts with those of Mike or Jasmine, who are on the periphery of the network. Who do you think is likely to have greater access to resources and more influence in the organisation? Here are a few tips from one expert networker for building a personal communication network:61 ●● Build it before you need it. Smart managers don’t wait until they need something to start building a network of personal relationships – by then, it’s too late. Instead, they show genuine interest in others and develop honest connections. ●● Never eat lunch alone. People who excel at networking make an effort to be visible and connect with as many people as possible. Master networkers keep their social as well as business conference and event calendars full. ●● Make it win–win. Successful networking isn’t just about getting what you want; it’s also about making sure that other people in the network get what they want. ●● Focus on diversity. The broader your base of contacts, the broader your range of influence. Build connections with people from as many different areas of interest as possible (both within and outside the organisation). Most of us know from personal experience that ‘who you know’ sometimes counts for more than what you know. By cultivating a broad network of contacts, managers can extend their influence significantly and accomplish greater results.

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the development of the five Terry White Chemists philosophies. Rhonda recognised the vital role of effective communications for a franchise model and implemented an all-inclusive, ongoing process of communication with all staff, no matter what position they held. Their involvement gave them a sense of ownership that has stood the brand in good stead to this day. With the franchise company established in 1994, Rhonda was CEO from 1994 to 1998 when the company was then sold to FH Faulding. But in 2009, after six corporate owners, Rhonda joined Terry and five other advisory board members to bring the business back under the control of pharmacists. Since then, under the stewardship of a new team, the network has grown to include 165 stores (2014). This record growth came with record profits too! Rhonda’s recognition as one of

Marketing

Manufacturing

‘The Leading Women Entrepreneurs of the World’ is well justified. Source: http://terrywhitechemists.com.au

Source: Courtesy Terry White Management

Over a 10-year period Rhonda White, with Terry and Anthony, achieved their vision by developing the Terry White Chemists Group from a single pharmacy to 100 pharmacies and a national brand. After a break from pharmacy to complete her graduate studies and practise in Organisational Development, Rhonda returned to pharmacy in 1985 when it was very much a cottage industry. In tandem with the pharmacies’ skilled staff, Rhonda applied her expertise to the development of systems and services that now underpin the brand. Rhonda says, ‘There is no doubt it was the people who made the difference to the group’s success.’ Every system developed for the Terry White Chemists Operations Manual was developed on the ‘shop floor’ in concert with staff, with each member having a clear understanding for the shared vision of a national brand and contributing to

Terry White Chemists have successfully expanded around much of Australia.

Engineering

David

Ann

Sharon

Case study

Rhonda White achieved her vision

707

Jasmine

Mike

The g r ap evi ne Because 90 per cent of employees engage in gossip, every manager eventually will have to contend with its effects in the workplace.62 Although the word gossip has a negative connotation, it may actually be good for a company, especially during times of significant organisational change,

Exhibit 17.8 An organisational communication network

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Exhibit 17.9 Formal and informal organisational communication channels

grapevine An informal, person-toperson communication network of employees that is not officially sanctioned by the organisation.

Exhibit 17.10 Two grapevine chains in organisations Source: Based on Keith Davis and John W. Newstrom, Human Behavior at Work: Organizational Behavior, 7th edn (New York: McGraw-Hill, 1985).

Gossip chain (One tells many)

Cluster chain

such as layoffs or downsizing. In fact, gossip can be an invaluable tool for managers. Gossip l nta rizo o provides an efficient channel H to communicate information because it will move more rapidly than through a formal channel. Another advantage of gossip is that managers who tap into the gossip network may find it a useful ‘early warning system’ that helps them learn about internal situations or events that might Formal channels Informal channels need their attention. Plus, gossip is one way employees relieve feelings of tension and anxiety, especially during periods of change. Another benefit is that gossip may give marginalised employees an opportunity to have a voice within the organisation.63 Gossip typically travels along the grapevine, an informal, person-to-person communication network that is not officially sanctioned by the organisation.64 The grapevine links employees in all directions, ranging from the CEO through middle management, support staff and line employees. The grapevine will always exist in an organisation, but it can become a dominant force when formal channels are closed. In such cases, the grapevine is actually a service because the information that it provides helps makes sense of an unclear or uncertain situation. Employees use grapevine rumours to fill in information gaps and clarify management decisions. One estimate is that as much as 70 per cent of all communication in a firm is carried through its grapevine.65 The grapevine tends to be more active during periods of change, excitement, anxiety and sagging economic conditions. For example, a survey by professional employment services firm Randstad found that about half of all employees reported first hearing of major company changes through the grapevine.66 Surprising aspects of the grapevine are its accuracy and its relevance to the organisation. About 80 per cent of grapevine communications pertain to business-related topics rather than personal gossip. Moreover, from 70 to 90 per cent of the details passed through a grapevine are accurate.67 Many managers would like the grapevine to be destroyed because they consider its rumours to be untrue, malicious, and harmful – which typically is not the case. Managers should be aware that almost five of every six important messages are carried to some extent by the grapevine rather than through official channels. In a survey of 20 000 shift workers in varied industries, 55 per cent said they get most of their information via the grapevine.68 Smart managers understand the company’s grapevine. ‘If a leader has his ear to the ground, gossip can be a way for him to get a sense of what his employees are thinking or feeling,’ says Mitch Kusy, an organisational consultant, psychologist and professor at Antioch University.69 In all cases, but particularly in times of crisis, executives need to manage communications effectively so that the grapevine is not the only source of information.70 Upward and downward

708

(A few tell selected others)

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Written communi cat i on Written communication skills are becoming increasingly important in today’s collaborative workplace. ‘With the fast pace of today’s electronic communications, one might think that the value of fundamental writing skills has diminished in the workplace,’ said Joseph M. Tucci, president and CEO of EMC Corporation. ‘Actually, the need to write clearly and quickly has never been more important than in today’s highly competitive, technology-driven global economy.’71 Managers who are unable to communicate in writing will limit their opportunities for advancement. Managers can improve their writing skills by following these guidelines:72 ●● Respect the reader. The reader’s time is valuable; don’t waste it with a rambling, confusing memo or email that has to be read several times to try to make sense of it. Pay attention to your grammar and spelling. Sloppy writing indicates that you think your time is more important than that of your readers. You’ll lose their interest – and their respect. ●● Know your point and get to it. What is the key piece of information that you want the reader to remember? Many people just sit and write, without clarifying in their own mind what it is they’re trying to say. To write effectively, know what your central point is and write to support it. ●● Write clearly rather than impressively. Don’t use pretentious or inflated language, and avoid jargon. The goal of good writing for business is to be understood the first time through. State your message as simply and as clearly as possible. ●● Get a second opinion. When the communication is highly important, such as a formal memo to the department or organisation, ask someone you consider to be a good writer to read it before you send it. Don’t be too proud to take their advice. In all cases, read and revise the memo or email a second and third time before you hit the send button. A former manager of communication services at consulting firm Arthur D. Little Inc. has estimated that around 30 per cent of all business memos and emails are written simply to get clarification about an earlier written communication that didn’t make sense to the reader.73 By following the guidelines above, you can get your message across the first time. ➜➜ A communication channel that flows within the chain of command is called a formal communication channel. ➜➜ Downward communication refers to messages sent from top management down to subordinates; upward communication includes messages that flow from the lower to the higher levels in the organisation’s hierarchy.

remember this

➜➜ Horizontal communication is the lateral or diagonal exchange of messages among peers or co-workers and includes team communication.

➜➜ Personal networking refers to the acquisition and cultivation of personal relationships that cross departmental, hierarchical and even organisational boundaries.

➜➜ Personal communication channels exist outside formally authorised channels and include personal networks, the grapevine and written communication.

➜➜ The grapevine carries workplace gossip, a dominant force in organisation communication when formal channels are not functioning effectively.

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Austr alian manager pr ofile

Jane Evans

Jane Evans works as a program manager within a Victorian government department overseeing the development and implementation of policy and strategic frameworks that operate across the whole state. Jane has worked in the public service for nearly 20 years at both Commonwealth and state levels, and has also worked in the direct service delivery level. After six years working in the corporate world following university, Jane moved to a job in the Commonwealth public service to fulfil a need to have a job that delivered something to society rather than just maximise profits for shareholders. Jane undertook a Master of Public Health degree and went on to work in a Victorian government department overseeing a large statewide pharmaceutical program, and also working with other states and territories on joint Commonwealth/ state legislation. Jane also spent eight years working in a hospital in strategy, planning and quality improvement roles before returning to government to run a statewide program, working with agencies across Victoria. Jane’s current role requires the ability to understand and negotiate the competing priorities of government while developing and delivering a program that meets the needs of the stakeholders who are the service delivery agencies. It also requires working with and influencing the service delivery agencies to achieve the desired program outcomes without direct governance authority over the agencies. The role requires negotiating and communication skills, demonstration of Source: Courtesy Jane Evans

technical knowledge and a strategic approach that translates into direct service delivery and improved outcomes for the public. Throughout Jane’s career, her passion has been to make service delivery more efficient and effective through pursuing operational excellence and building processes to prioritise and deploy strategy throughout the organisations in which she has worked. Initially, Jane’s role focused on the delivery of ‘quality’ from a primarily compliance perspective combined with strategic and business planning and risk management. This provided an organisation-wide view of operations and identified the need for a holistic systems approach to improvement and change. Jane then expanded this approach to include the principles of business process redesign methodologies as important organisational management tools and now works with service delivery organisations across the state to implement a statewide approach to building improvement capability and measurement of performance outcomes using redesign techniques such as lean, six sigma, theory of constraints and so on. The value of this approach in building high performing organisations is well-known, and evidence in the Victorian context is beginning to emerge. The most interesting part of the job of managing a government program is the challenge of balancing government and political imperatives with the needs and priorities of stakeholders to deliver a program that provides the best outcomes for the public. In the main, all of these things align; but it is the instances where finding a solution to bring competing elements into position is required that provide the best learning experiences as a manager, and are often also the most rewarding. Source: Contributed by Jane Evans.

Workplace communication Effective communication throughout a workplace is an essential ingredient to aligning people’s efforts towards achieving goals. Two additional aspects of effective manager communication are using social media to improve internal and external communication and developing strategies for managing crisis communication.

social media A group of Internet-based applications that allow the creation and exchange of user-generated content.

So cial m ed ia The term social media describes a group of Internet-based applications that allow the creation and exchange of user-generated content. Social media covers a broad number of applications including wikis, blogs, micro-blogs (e.g. Twitter and China’s Weibo), content communities (e.g. YouTube), social networking sites

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(e.g. Facebook) and virtual social networks (e.g. Social Life).74 Social media is reinventing how people in organisations communicate. Dr. Pepper, for example, has built an 8.5 million-strong fan base on Facebook to listen to its customers. These loyal followers who ‘like’ the soft drink help the brand hone its marketing message. The company sends out two messages daily on its Facebook fan page and then monitors the fans’ reactions. Using tools from Facebook, Dr. Pepper measures how many times a message is viewed, how many times it is shared with other Facebook users and what responses it gets. This data helps managers adjust their brand messaging. ‘We mine data to understand what is appreciated, and what is not,’ says Robert Stone, director of interactive media services for Dr. Pepper Snapple Group Inc. ‘It helps us shape what we are.’75 Companies also use social media to build teams that solve problems faster, share information better among their employees and partners, and respond to customer ideas for new product designs. In fact, big business is embracing social media in a big way. Forrester Research says that sales of software to run corporate social networks will grow 61 per cent a year and be a US$6.4 billion business by 2016.76 So far, social media hasn’t boosted productivity significantly, but economists such as MIT’s Erik Brynjolfsson say that it takes about five years for a new technology to show its full impact on companies that use it. Social media has been used for only two or three years in most companies, largely for communicating with customers and enhancing employee collaboration.77

Listen in g to custom ers Managers in many organisations, from small entrepreneurial firms and non-profit agencies to huge corporations, are experimenting with using social media to listen to customers. One organisation that has implemented a clearly thought-out social media strategy is Dell’s computer division. Through its IdeaStorm site, Dell has received 17 000 ideas for new or improved products and has adopted nearly 500, including backlit keyboards that are better for working on planes. Dell also promotes its own new product ideas on IdeaStorm and requests customer feedback before moving forward with product development. After posting an idea related to a specialty laptop, customers posted 83 ideas for refinements to the machine, more feedback than Dell would receive from traditional focus groups.78

Com mu n i catin g to custom ers Managers also use social media to communicate corporate news quickly to customers. Domino’s relied on the popularity of online communities to calm jittery customers after a damaging prank video showing two employees defacing pizzas and sandwiches was uploaded to YouTube. Domino’s managers chose to respond with a viral video of their own. The company president apologised and thanked the online community for bringing the issue to his attention. He announced that the wrongdoers would be prosecuted and outlined the steps that Domino’s was taking to ensure that the episode would never happen again. By engaging in an online conversation about the crisis, Domino’s demonstrated concern for its customers and squelched further rumours and fears.79

Co nn ectin g em ployees Using social media can enable people to connect with one another easily across organisational and geographical boundaries based on professional relationships, shared interests, problems or other criteria. Social networking, both through public sites and corporate networks, offers peer-to-peer communication

social networking A group of Internet-based applications that allow the creation and exchange of user-generated content.

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channels where employees interact in an online community, sharing personal and professional information and photos, producing and sharing all sorts of ideas and opinions. Social networks designed for business use, such as Yammer and Chatter, increase productivity by making it easier for employees to share their knowledge. In America, the convenience store 7-Eleven has 2000 employees who use Yammer to help the company’s field consultants and franchisees share their knowledge and learn best practices from one another. A local franchisee might post a picture of a display that worked particularly well in one location, for instance, so that others can see it and try the same approach in their own stores.80 SuperValu tapped into social networks to build a virtual network of executives and store managers.

Innovative Way

SuperValu

In Australia and America, supermarket chains are struggling to compete against new entrants such as Costco, as well as budget chain stores like Aldi that lure customers with lower prices. Conventional grocery stores in the US now account for 51 per cent of grocery sales, down from 66 per cent in 2000. For these stores operating in a complex, competitive environment, improved employee communication and collaboration is paramount. Social media is one tool that American chain SuperValu has applied effectively in response to these challenges. SuperValu is a grocery giant with stores in 48 American states. Because the company has been created through a series of acquisitions, most of its managers are spread across different divisions and don’t know one another. Hoping to improve communication and build a sense of shared culture, Wayne Shurts, chief information officer, decided to

install Yammer for the company’s 15 000 associates. Yammer brings Facebook-like functionality into the office. Employees post queries and comments to internal conversation threads, where coworkers can offer feedback and solutions. Content can be shared and searched, so the same issues don’t keep resurfacing. Managers also can organise themselves into virtual groups to talk about specific challenges. For example, managers from different divisions at SuperValu joined a virtual group to discuss their shared problem of the best way to run stores in college towns. Another group of 153 managers banded together to talk about running stores in beach communities, where business is seasonal. These virtual groups allow managers with shared interests to collaborate and share solutions without incurring the expense of meeting together in one location.

Source: (30 July 2012). Supervalu Ousts Chief Executive. The New York Times, http://www.nytimes.com/2012/07/31/ business/supervalu-grocery-chain-ousts-chief-executive.html?_r=0 (accessed 30 July 2012).

Crisis com mu ni cation A manager’s skill at communicating becomes even more crucial during times of rapid change, uncertainty or crisis. Over the past few years, the sheer number and scope of crises have made communication a more demanding job for managers. Consider the importance of communication in the success of Robert Dudley, appointed as CEO for BP in the midst of the 2010 oil spill crisis in the Gulf of Mexico. Dudley faced the massive task of helping BP survive one of the greatest environmental disasters in history, caused when a rig drilling a well for BP exploded, killing 11 workers and releasing hundreds of millions of gallons of oil into the gulf. Dudley entered his new role facing myriad challenges, all requiring superior communication skills: restoring trust among communities and the public, dealing with the costs and legal consequences of the oil spill, repairing damaged relationships with federal and state authorities, bolstering morale among BP employees and winning back investors. His ability to communicate confidence, concern and stability were critically important. ‘I can’t think of any new chief executive of an oil company stepping into a more complicated situation,’ said Daniel Yergin, chairman of IHS Cambridge Energy Research Associates. ‘BP is going to be in a rebuilding mode, and the aftermath of the spill will go on for a long time.’81

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As a manager, your ability to communicate effectively during a crisis will determine how effectively the organisation survives the upheaval (see Chapter 7, Crisis Planning). ●● Stay calm, listen hard. Good crisis communicators don’t allow themselves to be overwhelmed by the situation. Calmness and listening become more important than ever. Managers also learn to tailor their communications to reflect hope and optimism as they acknowledge current difficulties. ●● Be visible. Many managers underestimate just how important their presence is during a crisis.82 A manager’s job is to step out immediately, both to reassure employees and respond to public concerns. Face-to-face communication with employees is crucial for letting people know that managers care about them and what they’re going through. ●● Get the awful truth out.83 Effective managers gather as much information as they can, do their best to determine the facts, and tell the truth to employees and the public as soon as possible. Getting the truth out quickly prevents harmful rumours and misunderstandings. ●● Communicate a vision for the future. People need to feel that they have something to work for and look forward to. Moments of crisis present opportunities for managers to communicate a vision of a better future and unite people towards common goals. ➜➜ Social media is a group of Internetbased applications that allow the creation and exchange of usergenerated content.

➜➜ Social networking sites offer peer-topeer communication channels where employees interact in an online community, sharing personal and professional information, ideas and opinions.

Leaping over language barriers In today’s global business environment, odds are good that at times you’ll find yourself conversing with an employee, colleague or customer who has limited skills in your native language. Here are some guidelines that will help you speak – and listen – more effectively.

➜➜ Keep your message simple. Be clear about what you want to communicate, and keep to the point.

➜➜ Select your words with care. Don’t try to dazzle with your vocabulary. Choose simple words, and look for opportunities to use cognates – that is, words that resemble words in your listener’s language. Assemble those simple words into equally simple phrases and short sentences. And be sure to

➜➜ During a communication crisis, a manager should stay calm and listen carefully, reassure employees and the public, tell the truth and communicate a vision for the future.

remember this

management in pr actice avoid idioms, slang, jargon and vague terminology such as soon, often or several.

➜➜ Pay close attention to non-verbals. Effective communicators carefully and clearly notice the body language of those they are speaking to but keep in mind that the meaning of such cues can vary significantly from culture to culture. For example, some people may view eye contact as a sign you’re giving someone your full attention, but the Japanese consider prolonged eye contact rude.

➜➜ Don’t cover your mouth with your hand. Being able to see your lips helps your listener to decipher what you’re saying.

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➜➜ Speak slowly and carefully. In particular, avoid running words together. ‘Howyadoin?’ won’t make any sense to someone still struggling with the English language, for example.

➜➜ Allow for pauses. If you are a Westerner, your culture has taught you to avoid silence whenever possible, but pauses give your listener time to take in what you’ve said, ask a question or formulate a response.

➜➜ Fight the urge to shout. Speaking louder doesn’t make it any easier for someone to understand you. It also tends to be intimidating and could give the impression that you’re angry.

➜➜ Check for comprehension frequently, and invite feedback. Stop from time to time and make sure you’re being understood, especially if the other person laughs inappropriately, never asks a question, or continually nods and smiles politely. Ask the listener to repeat what you’ve said in his or her own words. If you find the other person hasn’t understood you, restate the information in a different way instead of simply repeating yourself. Similarly, listen carefully when the other person speaks, and offer feedback so they can check your understanding of his or her message. Above all, when communicating with someone who doesn’t speak your language well, be patient with yourself and the listener, be encouraging and be persistent.

Sources: How to Communicate with a Non Native English Speaker. wikiHow, http://www.wikihow.com/Communicate-With-a-Non-Native-English-Speaker; Thiederman, S. Language Barriers: Bridging the Gap. http://www.thiederman.com/articles_detail.php?id=39 (accessed 28 January 2008); Communicating with Non-native Speakers. Magellan Health Services, http://www.magellanassist.com/mem/library/default.asp?TopicId=95&CategoryId=0&ArticleId=5 (accessed 28 January 2008).

Slower and less accurate

Exhibit 17.11 Effectiveness of team communication networks Simple tasks

Complex tasks

Innovative Way

Faster and more accurate

Centralised = Y

Wheel

Circle

All channel

Decentralised =

NECX

From the outside, everything looked fine at NECX, the world’s leading independent distributor of semiconductors and other computer products. The company was highly successful and growing fast – its workforce had swelled from 100 to 250 in just a few years. However, from the inside, Henry Bertolon, cofounder and CEO, could see that NECX was coming apart at the seams. ‘We’d have meetings that just melted down,’ he says. ‘Everyone would scream at each other and then leave.’

Bertolon’s first plan was to hire a management consultant to help solve the company’s communication problems. However, most consultants he interviewed came in and told the company what its problems were, rather than listening to managers and employees. So Bertolon took an unusual approach: he hired Wil Calmas, a Boston psychologist with an MBA, to be the organisational shrink. Calmas set up a one-day-a-week program to get people talking – and listening – to one another on a new and deeper level.

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The day began at 8 a.m. with a 90-minute meeting of the company’s top executives. There was never a formal agenda for the meetings – executives were encouraged to express fear, hostility, frustration, secret wishes, whatever feelings are affecting their lives and work. The early morning meeting was just the first of a day-long series of dialogues among NECX employees from all ranks and departments. The sales department became so adept at dialogue that they ultimately began meeting on their own, without Calmas’s guidance. According to Bertolon, the sessions had a positive impact on NECX’s people and performance. When Calmas first began his work, Bertolon asked managers to rate, on a scale of 1 to 10, how much they agreed with statements such as, ‘All the managers help one another’, and, ‘My staff finds it easy to talk to me about everything’. The average score was 1.5. When the test was given again after Bertolon’s communication initiative had been in place for some time, the average score had jumped to 7.5. Bertolon believes those results have also driven other important numbers, such as revenues, which jumped from US$62 million in 1992 to

almost US$400 million in 1996. In the same period, employee turnover dropped from 42 per cent to 20 per cent. In a fast-growing business, Bertolon believed that getting people communicating in a way that built common understanding was critical to success. The dialogue sessions created a safe environment for people to reveal their feelings, voice their opinions and build common ground. It also kept them loose, flexible and open to new ideas – ready to respond to rapid changes taking place all around them. This approach to improved communications – and hence workplace effectiveness and productivity – is today quite widespread in businesses of all shapes and sizes. Around the turn of the century, it became increasingly common for senior executives and business teams to hire ‘business coaches’ who attend meetings and advise on processes and team effectiveness. Through better communication, these teams and executives are achieving improved work outcomes. Coaching has become a large and growing profession in recent years, aimed at facilitating improved communication and outcomes in the workplace.

Sources: Kirsner, S. (December–January 1998). Want to Grow? Hire a Shrink! Fast Company, 68, 70; http://www.icfaustralasia.com; http://www.certifiedcoach.org; http://www.necx.com.

New manager self-test P e r s o n a l a s s e s s m e n t o f c o m m u n i c at i o n a p p r e h e n s i o n The following questions are about your feelings towards communication with other people. Indicate the degree to which each statement applies to you by marking (5) Strongly agree, (4) Agree, (3) Undecided, (2) Disagree or (1) Strongly

disagree. There are no right or wrong answers. Many of the statements are similar to other statements. Do not be concerned about their similarities. Work quickly, and just record your first impressions.

Disagree Strongly 1 2 3 4 5 Agree Strongly 1 When talking in a small group of acquaintances, I am tense and nervous.

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2 When presenting a talk to a group of strangers, I am tense and nervous.

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3 When conversing with a friend or colleague, I am calm and relaxed.

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4 When talking in a large meeting of acquaintances, I am calm and relaxed.

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5 When presenting a talk to a group of friends or colleagues, I am tense and nervous.

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6 When conversing with an acquaintance or colleague, I am calm and relaxed.

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7 When talking in a large meeting of strangers, I am tense and nervous.

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8 When talking in a small group of strangers, I am tense and nervous.

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9 When talking in a small group of friends and colleagues, I am calm and relaxed.

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10 When presenting a talk to a group of acquaintances, I am calm and relaxed.

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11 When I am conversing with a stranger, I am calm and relaxed.

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12 When talking in a large meeting of friends, I am tense and nervous.

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13 When presenting a talk to a group of strangers, I am calm and relaxed.

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14 When conversing with a friend or colleague, I am tense and nervous.

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15 When talking in a large meeting of acquaintances, I am tense and nervous.

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16 When talking in a small group of acquaintances, I am calm and relaxed.

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17 When talking in a small group of strangers, I am calm and relaxed.

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18 When presenting a talk to a group of friends, I am calm and relaxed.

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19 When conversing with an acquaintance or colleague, I am tense and nervous.

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20 When talking in a large meeting of strangers, I am calm and relaxed.

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21 When presenting a talk to a group of acquaintances, I am tense and nervous.

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22 When conversing with a stranger, I am tense and nervous.

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23 When talking in a large meeting of friends or colleagues, I am calm and relaxed.

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24 When talking in a small group of friends or colleagues, I am tense and nervous.

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Scoring and interpretation: This questionnaire permits computation of four subscores and one total score. Subscores relate to communication apprehension in four common situations – public speaking, meetings, group discussions and interpersonal conversations. To compute your scores, add or subtract your scores for each item as indicated next.

Subscore/scoring formula: For each subscore, start with 18 points. Then add the scores for the plus (1) items and subtract the scores for the minus (2) items. Public speaking 18 1 scores for items 2, 5 and 21; 2 scores for items 10, 13 and 18. Score 5

Meetings 18 1 scores for items 7, 12 and 15; 2 scores for items 4, 20 and 23. Score 5

Group discussions 18 1 scores for items 1, 8 and 24; 2 scores for items 9, 16 and 17. Score 5

Interpersonal conversations 18 1 scores for items 14, 19 and 22; 2 scores for items 3, 6 and 11. Score 5

Total score Sum the four subscores for Total score

This personal assessment provides an indication of how much apprehension (fear or anxiety) you feel in a variety of communication settings. Total scores may range from 24 to 120. Scores above 72 indicate that you are more apprehensive about communication than the average person. Scores above 85 indicate a high level of communication apprehension. Scores below 59 indicate a low level of apprehension. These extreme scores (below 59 and above 85) are generally outside the norm. They suggest that the degree of apprehension you may experience in any given situation may not be associated with a realistic response to that communication situation. Scores on the subscales can range from a low of 6 to a high of 30. Any score above 18 indicates some degree of apprehension. For example, if you score above 18 for the public speaking context, you are like the overwhelming majority of people. To be an effective communication champion, you should work to overcome communication anxiety. The interpersonal conversations create the least apprehension for most people, followed by group discussions, larger meetings and then public speaking. Compare your scores with another student. What aspect of communication creates the most apprehension for you? How do you plan to improve it? Sources: J. C. McCroskey. (1970). Measures of Communication-Bound Anxiety. Speech Monographs, 37, 269–77; J. C. McCroskey and V. P. Richmond. (1978). Validity of the PRCA as an Index of Oral Communication Apprehension. Communication Monographs, 45, 192–203; J. C. McCroskey and V. P. Richmond. (1979). The Impact of Communication Apprehension on Individuals in Organizations. Communication Quarterly, 27, 55–61; and J. C. McCroskey, An Introduction to Rhetorical Communication (Englewood Cliffs, NJ: Prentice Hall, 1982).

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There are at least two important aspects of communication that relate to sustainability: communication of sustainability activities and achievements, and the sustainability aspects of an organisation’s communications activities themselves. First, consider the need to communicate the organisation’s policies, strategies and activities regarding sustainability. If a firm is going to do good things for the environment, community and in so doing, for itself, then such achievements need not be kept quiet at all. Indeed, with due consideration of the prevailing culture and style of the organisation, it is useful to let all stakeholders know of these. The benefits of sustainability come from stakeholder empowerment, competitive edge in the market and sheer efficiency, all of which merit reporting widely to stakeholders. An increasing number of organisations in most industries now publish a sustainability report, which in some places is called a corporate social responsibility (CSR) report. There is essentially no downside from reporting achievements in doing good and hence doing well. Now we can consider how to advance sustainability outcomes in the firm’s own communication processes. All organisations spend a lot of time and money doing the work of communication. Every day, many thousands of business managers fly all around the country and world to attend meetings. This consumes time and also means that more planes are flying than would be the case if this was reduced – and it can be reduced! Flights create a large amount of greenhouse gases, and many advanced firms have learned that they can reduce the number of executives they have flying around to meetings. This has environmental benefits and also saves both the direct cost of such travel, as well as the cost of wasted time in transit. Companies are increasingly making use of video conferences, voice over Internet protocol (VOIP) technologies, Skype and other substitutes for the frequent meetings that spur plane travel. For example, a company that has a national monthly face-to-face sales meeting requiring people to travel all over the country might decide to have every second meeting via phone or video conference, thus halving their flight bill and saving greenhouse gas emissions. Telecommuting and working from home is becoming more and more feasible with the superb new technologies now in existence for communication. With the Internet now being generally fast, reliable and secure, many people can work at home or remotely at least one day a week. Having a policy such as this means that fewer cars are being driven, which reduces greenhouse gas production and also leads to more productive time for employees, as time spent in traffic is essentially wasted. And when such people can improve their personal quality of life, perhaps by making less use of childcare, then quality of life in the community improves, too. The amount of paper that most organisations use is enormous. Even though some of it might be recycled, it is always more environmentally sound to use less than more. Many organisations have set goals of using less paper in their communications processes, doing more electronic communications. For example, at the University of Melbourne, hundreds of copies of papers for monthly academic board meetings were printed, with most of them not being read on a regular basis. These are now circulated electronically, and while they can be printed, most board members choose not to do so. This initiative is also happening at other universities and businesses, with an increasing proportion of lecture notes, meeting files and minutes being e-published rather than printed. For external stakeholders, annual reports for listed companies used to be printed and mailed to every stakeholder, often with multiple copies going to the same address. Most companies have now made this element of communication much more efficient and lower in cost, being published online and available for downloading, saving many trees and delivery activities.

sustainable development

Communications and sustainability

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corporate social responsibility (CSR) report The publication of the organisation’s record of activities and performance outcomes on social/community and environmental impacts and outcomes, as well as the usual financial performance report.

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Response to the Management Challenge

At ANZ Bank, CEO John MacFarlane used a variety of tools to harness employee brainpower and break down communication barriers. Customers as well as employees were frustrated and dissatisfied, and John knew the company needed to open the lines of communication fast to remain competitive in the banking business. A new employee culture emphasising the importance of active listening skills, together with a massive training program called Breakout, refocused organisational efforts on service through communication. Key elements were improved levels of openness, trust and collaboration, which are all based on effective communications. Upwards as well as downwards communications were strengthened with regular meetings, get-togethers for all employees, and between a manager and employees to brainstorm about problems or opportunities. Committees were set up to encourage cross-functional communication and understanding. In addition, a monthly newsletter, employee mailboxes, a computer-based ideas system,

discussion questions

1  What are the characteristics of an open communication climate? Describe the organisational benefits of managers cultivating an open communication climate.

2 Describe the elements of the communication model in Exhibit 17.2. Give an example of each part of the model as it exists in the classroom during communication between teacher and students. 3 Lana Lowery, a regional manager for a 100-person inside sales staff, notices that the team’s best performer is struggling. Her sales are down 20 per cent from a year ago, and she frequently arrives late for work, looking upset. Lowery needs to find out why her performance is suffering. What advice would you give Lowery for communicating with this employee? Which communication channel should she use? What would be the relative importance of candour, listening and asking questions? Explain. 4 What are the characteristics of an effective listener? How would you rate yourself on those characteristics? 5 Some senior managers believe they should rely on written information and computer reports because these yield more accurate data than do face-to-face communications. Do you agree? Why or why not?

a telephone hotline and a weekly email update keep information flowing across departmental lines to assure better and faster customer service. Today, information flows throughout the company in all directions, and an employee-run team is charged with continuous improvement in internal communications. Customer service measures improved substantially, and employee turnover is among the lowest in the industry. The company has achieved much praise and many awards, but of most importance, it has lifted its employee engagement through improved communications, hence its customer satisfaction, hence its profitability. A key lesson is that despite all the telecommunications systems and devices that we all have at work and at home, communications is all about people and is aimed at making them more effective in their achievement of their goals. Under current Chief Executive Mike Smith, ANZ has continued to work hard on all aspects of its communications effectiveness and has made progress in improving its resultant effectiveness.

6 During times of significant organisational change, such as downsizing and layoffs, the grapevine becomes more active as anxious employees share organisational news and rumours. As a manager, what communication strategies would you employ during a time of uncertainty in the workplace? What are the advantages and disadvantages of gossip during a time of uncertainty? 7 Assume that you manage a small online business that sells herbal supplements. Without your knowledge, a disgruntled employee has posted damaging information about your company in the company’s blog, including false information about dangerous ingredients in your best-selling supplement. What specific steps would you take to minimise the impact of this crisis? 8 If you were asked to design a training program to help managers become better communicators, what would you include in the program? 9 Suppose that you manage an employee who is spending too much time using social media at work. The result is that he has missed three important deadlines in one week. You are planning a face-toface conversation to address this performance problem and your goal is to communicate with candour. Using ‘I statements’ as described in this chapter, how would you begin this conversation? 10 Describe specific ways that an organisation might use social media to communicate with customers. How about with employees?

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The voice of authority

Ethical challenge

When Gehan Rasinghe was hired as an account assistant at Werner and Thompson, a business and financial management firm, he was very relieved. He was overqualified for the job with his degree in accounting, but the combination of his accented English and his quiet manner had prevented him from securing any other position. Beatrice Werner, one of the managing partners of the firm, was impressed by his educational credentials and his courtly manner. She assured him he had advancement potential with the firm, but the account assistant position was the only one

Werner had seen the problem coming. Although she had found Rasinghe’s bank reconciliations and financial report preparations to be first-rate, she knew that phone work and client contact were a big part of any job in the firm. But as the daughter of German immigrants, Werner also knew that language and cultural barriers could be overcome with persistence and patience. Diversity was one of her ideals for

available. After months of rejections in his job hunt, Rasinghe accepted the position. He was committed to making his new job work at all costs. Account manager Cathy Putnam was Rasinghe’s immediate superior. Putnam spoke with a heavy accent, speaking at a lightning pace to match her enormous workload. She indicated to Rasinghe that he would need to get up to speed as quickly as possible to succeed in working with her. It was soon apparent that Putnam and Rasinghe were at odds. She resented having to repeat directions more than once to teach him his responsibilities. He also seemed resistant to making the many phone calls asking for copies of invoices, disputing charges on credit cards and following up with clients’ staff to get the information necessary to do his job. His accounting work was impeccable, but the public contact part of his job was in bad shape. Even his quiet answer of ‘No problem’ to all her requests was starting to wear thin on Putnam. Before giving Rasinghe his three-month review, Putnam appealed to Beatrice Werner for help. Putnam was frustrated at their communication problems and did not know what to do.

her company, and it was not always easy to achieve. She felt sure that Rasinghe could become an asset to the firm in time. She worried that the time it would take was more than they could afford to give him. W h at d o yo u d o ? 1 Give Rasinghe his notice, with the understanding that a job that is primarily paperwork would be a better fit for him. Make the break now rather than later. 2 Place him with an account manager who has more time to help him develop his assertiveness and telephone skills and appreciates his knowledge of accounting. 3 Create a new position for him, where he could do the reports and reconciliations for several account managers, while their assistants concentrated on the public contact work. He would have little chance of future promotion, however.

Listen like a professional The fastest way to become a great listener is to act like a professional listener, such as a clinical psychologist. Psychologists drop the need to interrupt or to express their own point of view in order to concentrate on the client’s point of view. The psychologist focuses intently and listens totally, drawing out information rather than thinking about a response. Step 1. Divide into groups of four students. Within this group, each student selects one partner. Sit face to face with your partner, at a comfortable distance, and hold a steady gaze into your partner’s left eye (not the nose or face, but the left eye) – use a soft gaze, not a hard stare. Step 2. After you are comfortable with the eye contact, one partner should tell of an annoying experience over the last few days. The listener should maintain eye contact and can use facial expression, but should say nothing – just gaze into the pupil of the left eye. When the talker has finished, the partners should trade roles, with the previous listener now telling about an annoying experience and the new listener maintaining eye contact but not speaking. Step 3. Discuss in your group how it felt to maintain eye contact and to not make any verbal response to what your partner was saying. Step 4. Select a new partner in your group, and follow the same procedure, with the speaker talking about the same annoyance. The

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challenge only change is that the listener is to paraphrase what the speaker said after the speaker is finished. If the paraphrase is incorrect, the speaker can repeat the annoyance, and the listener can paraphrase a second time to be more accurate. Step 5. Discuss in your group how it felt to maintain eye contact and to paraphrase what was said. How did paraphrasing affect your ability to concentrate on what the speaker was saying? Step 6. Select another partner in your group, and follow the same procedure; only this time, instead of paraphrasing at the end, the listener is to ask five questions during the speaker’s story. Each partner takes a turn as speaker and listener. Step 7. Discuss in your group how it felt to ask questions. How did the questions affect your concentration on what the speaker was saying? In addition, discuss in your group the relative importance of each technique (eye contact, paraphrasing and asking questions) for helping you maintain focus and listen like a professional. Your instructor may facilitate a class discussion about which listening techniques are more effective in various listening situations.

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WA M a n u fa c t u r i n g

Case for cr itical analysis

The president of WA Manufacturing, Richard Langston, wanted to facilitate upwards communication. He believed an open-door policy was a good place to start. He announced that his own door was open to all employees and encouraged senior managers to do the same. He felt this would give him a way to get early warning signals that would not be filtered or redirected through the formal chain of command. Langston found that many employees who used the open-door policy had been with the company for years and were comfortable talking to the president. Sometimes messages came through about inadequate policies and procedures. Langston would raise these issues and explain any changes at the next senior managers’ meeting. The most difficult complaints to handle were those from people who were not getting along with their bosses. One employee, Larry, complained bitterly that his manager had overcommitted the department and put everyone under too much pressure. Larry argued that long hours and low morale were major problems. But he would not allow Richard Langston to bring the manager into the discussion nor to seek out other employees to confirm the complaint. Although Langston suspected that

Larry might be right, he could not let the matter sit, and blurted out, ‘Have you considered leaving the company?’ This made Larry realise that a meeting with his immediate boss was unavoidable. Before the three-party meeting, Langston contacted Larry’s manager and explained what was going on. He insisted that the manager come to the meeting willing to listen and without hostility towards Larry. During the meeting, Larry’s manager listened actively and displayed no ill will. He learned the problem from Larry’s perspective and realised he was over his head in his new job. After the meeting, the manager said he was relieved. He had been promoted into the job from a technical position just a few months earlier and had no management or planning experience. He welcomed Richard Langston’s offer to help him do a better job of planning. Questions 1 What techniques increased Richard Langston’s communication effectiveness? Discuss. 2 Do you think that an open-door policy was the right way to improve upwards communications? What other techniques would you suggest? 3 What problems do you think an open-door policy creates? Do you think many employees are reluctant to use it? Why? Source: Based on Suters, E. T. (January 1987). Hazards of an Open-Door Policy. Inc., 99–102.

On the job video case

P l a n t Fa n ta s i e s : m a n a g i n g c o m m u n i c at i o n For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

Q uestio n s 1   Using the concept of channel richness, explain why leaders at Plant Fantasies place a high value on face-to-face communication.

3 Which of the three types of formal organisational communication would you expect to originate from Teresa Carleo and Steve Martucci, and why?

2 What influence might gender have on the communication styles of Teresa Carleo and Steve Martucci? Give examples.

endnotes 1  Careercast.com website, http://www. careercast.com/jobsrated/10-best-jobs-2012 (accessed 21 September 2012); George Anders. (3 August 2012). LinkedIn’s Edge: The 7 Habits of a Well-Run Social Network. Forbes, http://www.forbes. com/sites/georgeanders/2012/08/03/linkedins-edge-the-7habits-of-a-well-run-socialnetwork/ (3 accessed September 2012); CNNmoney.com website, http://money.cnn.com/magazines/fortune/ best-companies/2012/full_list/. 2 Capitalizing on Effective Communication: How Courage, Innovation, and Discipline Drive Business Results in Challenging Times. Communication ROI Study Report by Watson, Wyatt, Worldwide, 2009/2010, http://www.

towerswatson.com/assets/pdf/670/Capitalizing%20on%20Effective%20 Communication.pdf (accessed 5 September 2012). 3 Henry Mintzberg. (1973). The Nature of Managerial Work (New York: Harper & Row). 4 Phillip G. Clampitt, Laurey Berk and M. Lee Williams. (May–June 2002). Leaders as Strategic Communicators. Ivey Business Journal, 51–5. 5 Communication ROI Study Report. 6 Tim Mullaney. (31 August 2012). Social Media Is Reinventing How Business Is Done. USA Today, http://www.usatoday.com/money/economy/story/2012-05-14/ social-media-economy-companies/55029088/1 (accessed 5 September 2012). 7 Eric Berkman. (1 March 2002). Skills. CIO, 78–82; Louise van der Does and Stephen J. Caldeira. (27 March 2006). Effective Leaders Champion

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Communication Skills. Nation’s Restaurant News, 20; and Byron Reimus. (July 1996). Ready, Aim, Communicate. Management Review. 8 Reimus. Ready, Aim, Communicate; and Dennis Tourish. (2005). Critical Upward Communication: Ten Commandments for Improving Strategy and Decision Making. Long Range Planning, 38, 485–503. 9 Bernard M. Bass. (1990). Bass & Stogdill’s Handbook of Leadership, 3rd edn (New York: The Free Press). 10 Dana Mattioli. (5 April 2010). As Crisis Eases, CEOs Give Staff Some TLC. The Wall Street Journal, http://online.wsj.com/article/SB1000142405270230 3450704575159850647117086.html (accessed 21 September 2012). 11 Reported in van der Does and Caldeira. Effective Leaders Champion Communication Skills. 12 Tom Szaky. (8 September 2011). How Much Information Do You Share With Employees? The New York Times, http://boss.blogs.nytimes.com/author/ tom-szaky/page/2/ (accessed 5 September 2012). 13 Quint Studer. (April 2010). Case for Transparency. Leadership Excellence, 19. 14 Van der Does and Caldeira. Effective Leaders Champion Communication Skills. 15 Studer. Case for Transparency. 16 E. M. Rogers and R. A. Rogers. (1976). Communication in Organizations (New York: Free Press); and A. Bavelas and D. Barrett. (1951). An Experimental Approach to Organization Communication. Personnel, 27, 366–71. 17 Joel Spolsky. (February 2010). A Little Less Conversation. Inc., 28–9. 18 This discussion is based on Richard L. Daft and Richard M. Steers. (1986). Organizations: A Micro/Macro Approach (New York: Harper Collins). 19 Richard L. Daft and Norman B. Macintosh. (1981). A Tentative Exploration into the Amount and Equivocality of Information Processing in Organizational Work Units. Administrative Science Quarterly, 26, 207–24. 20 Robert H. Lengel and Richard L. Daft. (August 1988). The Selection of Communication Media as an Executive Skill. Academy of Management Executive, 2, 225–32; Richard L. Daft and Robert H. Lengel. (May 1986). Organizational Information Requirements, Media Richness, and Structural Design. Managerial Science, 32, 554–72; and Jane Webster and Linda Klebe Treviño. (1995). Rational and Social Theories as Complementary Explanations of Communication Media Choices: Two Policy-Capturing Studies. Academy of Management Journal, 38:6, 1544–72. 21 Janina Seubert and Christina Regenbogen. (March/April 2012). I Know How You Feel. Scientific American Mind, 54–8. 22 Research reported in (17 September 2000), E-mail Can’t Mimic Phone Calls. Johnson City Press. 23 Raymond E. Friedman and Steven C. Currall. E-Mail Escalation: Dispute Exacerbating Elements of Electronic Communication. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=459429 (accessed 21 September 2010); Lauren Keller Johnson. (Fall 2002). Does E-Mail Escalate Conflict? MIT Sloan Management Review, 14–15; and Alison Stein Wellner. (September 2005). Lost in Translation. Inc. Magazine, 37–8. 24 Margie Warrell. Hiding Behind E-mail? Four Times You Should Never Use E-mail. Forbes, http://www.forbes.com/sites/margiewarrell/2012/08/27/doyou-hidebehind-email/ (accessed 10 September 2012). 25 Ronald E. Rice. Task Analyzability, Use of New Media, and Effectiveness: A Multi-Site Exploration of Media Richness. Organizational Science 3, no. 4 (November 1992): 475–500; and M. Lynne Markus. (November 1994). Electronic Mail as the Medium of Managerial Choice. Organizational Science, 5:4, 502–27. 26 Richard L. Daft, Robert H. Lengel and Linda Klebe Treviño. (1987). Message Equivocality, Media Selection and Manager Performance: Implication for Information Systems. MIS Quarterly, 11, 355–68.

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27 Mary Young and James E. Post. Managing to Communicate, Communicating to Manage: How Leading Companies Communicate with Employees. Organizational Dynamics (Summer 1993): 31–43. 28 This section is based heavily on Jay A. Conger. (May–June 1998). The Necessary Art of Persuasion. Harvard Business Review, 84–95. 29 This section is based heavily on Conger. The Necessary Art of Persuasion. 30 Tsedal Neeley and Paul Leonardi. (May 2011). Effective Managers Say the Same Thing Twice (and More). Harvard Business Review, 38–9. 31 This discussion is based in part on Jack Welch with Suzy Welch. (2005). Winning (New York: HarperBusiness), Chapter 2. 32 Neeley and Leonardi. Effective Managers Say the Same Thing Twice (and More). 33 Based on Welch, Winning, Chapter 2. 34 Boris Groysberg and Michael Slind. (June 2012). Leadership Is a Conversation. Harvard Business Review, 75–84. 35 Many of these benefits are based on (Spring 2005), The Power of Questions. Leader to Leader, 59–60; Quinn Spitzer and Ron Evans. (September–October 1997). The New Business Leader: Socrates with a Baton. Strategy & Leadership, 32–8; and Gary B. Cohen. July–August 2010. Just Ask Leadership: Why Great Managers Always Ask the Right Questions. Ivey Business Journal, http://www.iveybusinessjournal.com /topics/leadership/just-ask-leadership-why-greatmanagers-always-ask-the -right-questions (accessed March 7, 2011). 36 Groysberg and Slind. Leadership Is a Conversation. 37 Reported in Spitzer and Evans. The New Business Leader: Socrates with a Baton. 38 Kevin Cashman. Powerful Pause: Listening Is Leadership. (January 2012). Leadership Excellence, 5. 39 M. P. Nichols. (1995). The Lost Art of Listening (New York: Guilford Publishing). 40 Benchmarking the Sales Function. A report based on a study of 100 salespeople from small, medium, and large businesses, conducted by the Ron Volper Group, White Plains, New York, as reported in (1 June 1997), Nine Habits of Highly Effective Salespeople. Inc.com, http://www.inc.com/ articles/1997/06/12054.html (accessed 23 September 2010). 41 Gerald M. Goldhaber. (1980). Organizational Communication, 4th edn (Dubuque, IA: Brown), p. 189. 42 C. Glenn Pearce. Doing Something About Your Listening Ability. (March 1989). Supervisory Management, 29–34; and Tom Peters. Learning to Listen. (Spring 1988). Hyatt Magazine, 16–21. 43 Kelley Holland. (5 November 2006). Under New Management; The Silent May Have Something to Say. The New York Times. 44 Debbie Weil. (2006). The Corporate Blogging Book (New York: Penguin Group), p. 3. 45 Fortune 500 Business Blogging Wiki, http://www.socialtext.net/bizblogs/index .cgi (accessed 26 July 2010). 46 Carol Kinsey Goman. (17 July 2009). Body Language: Mastering the Silent Language of Leadership (The Leadership Playlist column), The Washington Post Online, http://views.washingtonpost.com/leadership/leadership_ playlist/2009/07/body-language-masteringthe-silent-language-of-leadership .html (accessed 17 July 2009). 47 I. Thomas Sheppard. (March 1986). Silent Signals. Supervisory Management, 31–3. 48 Carmine Gallo. (22 June 2010). How to Stay Cool in the Hot Seat. BusinessWeek, http://www.businessweek.com/print/smallbiz/content/ jun2010/sb20100622_820980.htm (accessed 28 July 2010). 49 Albert Mehrabian. (1971). Silent Messages (Belmont, CA: Wadsworth); and Albert Mehrabian. (September 1968). Communicating Without Words. Psychology Today, 53–5.

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50 Meridith Levinson. (1 December 2004). How to Be a Mind Reader. CIO, 72–6; Mac Fulfer. (Spring 2001). Non-verbal Communication: How to Read What’s Plain as the Nose . . . . Journal of Organizational Excellence, 19–27; and Paul Ekman. (2003). Emotions Revealed: Recognizing Faces and Feelings to Improve Communication and Emotional Life (New York: Time Books). 51 Goman. Body Language: Mastering the Silent Language of Leadership. 52 Ibid. 53 Daft and Steers, Organizations; and Daniel Katz and Robert Kahn. (1978). The Social Psychology of Organizations, 2nd edn (New York: Wiley). 54 Phillip G. Clampitt, Robert J. DeKoch and Thomas Cashman. (2000). A Strategy for Communicating about Uncertainty. Academy of Management Executive, 14:4, 41–57. 55 Reported in van der Does and Caldeira. Effective Leaders Champion Communication Skills. 56 Alexandra Samuel. Better Leadership Through Social Media. The Wall Street Journal, http://online.wsj.com/ article/SB1000142405297020375370457725 5531558650636.html (accessed 12 September 2012). 57 Michael J. Glauser. (1984). Upward Information Flow in Organizations: Review and Conceptual Analysis. Human Relations, 37, 613–43; and (October 1985). Upward/Downward Communication: Critical Information Channels. Small Business Report, 85–8. 58 Darren Dahl. Pipe Up People! Rounding Up Staff. Inc. (February 2010): 80–81. 59 Thomas Petzinger. (8 May 1998). A Hospital Applies Teamwork to Thwart an Insidious Enemy. The Wall Street Journal. 60 This discussion of informal networks is based on Rob Cross, Nitin Nohria and Andrew Parker. (Spring 2002). Six Myths About Informal Networks. MIT Sloan Management Review, 67–75; and Rob Cross and Laurence Prusak. The People Who Make Organizations Go – or Stop. (June 2002). Harvard Business Review, 105–12. 61 Tahl Raz. (January 2003). The 10 Secrets of a Master Networker. Inc. 62 Travis J. Grosser et al. (2012). Hearing It Through the Grapevine: Positive and Negative Workplace Gossip. Organizational Dynamics, 41, 52–61. 63 Grant Michelson, Ad van Iterson and Kathryn Waddington. (2010). Gossip in Organizations: Contexts, Consequences, and Controversies. Group & Organizational Management, 35:4, 371–90. 64 Keith Davis and John W. Newstrom. (1985). Human Behavior at Work: Organizational Behavior, 7th edn (New York: McGraw-Hill). 65 Suzanne M. Crampton, John W. Hodge and Jitendra M. Mishra. (Winter 1998). The Informal Communication Network: Factors Influencing Grapevine Activity. Public Personnel Management, 27:4, 569–84. 66 Survey results reported in Jared Sandberg. (29 October 2003). Ruthless Rumors and the Managers Who Enable Them. The Wall Street Journal. 67 Donald B. Simmons. (November 1985). The Nature of the Organizational Grapevine. Supervisory Management, 39–42; and Davis and Newstrom, Human Behavior at Work.

Cour seMate

68 Barbara Ettorre. (November 1997). Hellooo. Anybody Listening? Management Review, 9. 69 Eilene Zimmerman. (3 February 2008). Gossip Is Information by Another Name. The New York Times, http://www.nytimes.com/2008/02/03/ jobs/03career.html?scp=1&sq=Gossip%20Is%20Information%20by%20 Another%20Name&st=cse (accessed 3 February 2008). 70 Lisa A. Burke and Jessica Morris Wise. (May–June 2003). The Effective Care, Handling, and Pruning of the Office Grapevine. Business Horizons, 71–4; They Hear It Through the Grapevine. Cited in Michael Warshaw. (April–May 1998). The Good Guy’s Guide to Office Politics. Fast Company, 157–78; and Carol Hildebrand. (15 July 1998). Mapping the Invisible Workplace. CIO Enterprise, section 2, 18–20. 71 The National Commission on Writing. (14 September 2004). Writing Skills Necessary for Employment, Says Big Business, http://www .writingcommission.org/pr/writing_for_employ.html (accessed 8 April 2008). 72 Based on Michael Fitzgerald. (15 October 2005). How to Write a Memorable Memo. CIO, 85–7; and Jonathan Hershberg. (May 2005). It’s Not Just What You Say. Training, 50. 73 Mary Anne Donovan. (November 2002). E-Mail Exposes the Literacy Gap. Workforce, 15. 74 Andreas M. Kaplan and Michael Haenlein. (2012). Social Media: Back to the Roots and Back to the Future. Journal of Systems and Information Technology, 14:2, 101–4. 75 Geoffrey A. Fowler. (25 April 2011). Are You Talking to Me? The Wall Street Journal, http://online.wsj.com/article/SB1000142405274870411640457626 3083970961862.html (accessed 18 September 2012). 76 Mullaney. Social Media Is Reinventing How Business Is Done. 77 Ibid. 78 Ibid. 79 Richard S. Levick. (21 April 2009). Domino’s Discovers Social Media. BusinessWeek, http://www.businessweek.com/print/managing/content/ apr2009/ca20090421_555468.htm (accessed 21 April 2009). 80 Shayndi Raice. Social Networking Heads to the Office. The Wall Street Journal, http://online.wsj.com/article/SB1000142405270230445980457728 5354046601614.html (accessed 18 September 2012). 81 Julia Werdigier and Jad Mouawad. (26 July 2010). Road to New Confidence at BP Runs Through U.S. The New York Times, http://www.nytimes. com/2010/07/27/business/27dudley.html?_r=1&sq=BP%20Hayward&st=cs e&adxnnl=1&scp=7&adxnnlx=1280315332-P6V5i9wUaL40EYFeOSH52w (accessed 27 July 2010). 82 Stephen Bernhut. (January–February 2002). Leadership, with Michael Useem (interview). Ivey Business Journal, 42–3. 83 Ian I. Mitroff. (August 2001). Crisis Leadership. Executive Excellence, 19.

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ assess your own communication apprehension with the online self-test ➜ test your understanding of communication in organisations by taking the revision quiz ➜ use the online crossword to revise relevant key terms and their definitions.

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Identify the types of teams in organisations. 2 Discuss new applications of teams to facilitate employee involvement.

6 Understand the causes of conflict within and among teams and how to reduce conflict, including the importance of negotiation.

3 Identify roles within teams and the type of role you

7 Define the outcomes of effective teams and how

4 Explain the general stages of team development.

8 Discuss how teamwork can be used to successfully

could play to help a team be effective.

5 Explain the concepts of team cohesiveness and team

managers can enhance team effectiveness. implement sustainable development.

norms and their relationship to team performance.

C h a p t e r 18

Teamwork in organisations

Chapter outline ➜  The value of teams

➜  Team processes

➜  The dilemma of teams

➜  Managing team conflict

What is a team? Contributions of teams Types of teams Model of team effectiveness Virtual teams

➜  Team characteristics Size Diversity Member roles

Stages of team development Team cohesiveness Team norms Types of conflict Balancing conflict and cooperation Causes of conflict Styles to handle conflict

➜  Negotiation

Types of negotiation Rules for reaching a win-win solution

➜ Implementing sustainable development through teamwork

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New Manager Self-test How do you like to work? Your approach to your job or university work may indicate whether or not you thrive in a team. Answer the questions below about your work preferences. Please answer whether each item below is Mostly true or Mostly false for you. Mostly True

Mostly False

1 I prefer to work on a team rather than do individual tasks. 2 Given a choice, I try to work by myself rather than face the hassles of group work. 3 I enjoy the personal interaction when working with others. 4 I prefer to do my own work and let others do theirs. 5 I get more satisfaction from a group victory than an individual victory. 6 Teamwork is not worthwhile when people do not do their share. 7 I feel good when I work with others, even when we disagree. 8 I prefer to rely on myself rather than others to do an assignment. Scoring and Interpretation: Give yourself one point for each odd-numbered item you marked as Mostly true and one point for each even-numbered item you marked Mostly false. An important part of a new manager’s job is to be both part of a team and to work alone. These items measure your preference for group work. Teamwork can be both frustrating and motivating. If you scored two or fewer points, you definitely prefer individual work. A score of seven or above suggests that you prefer working in teams. A score of three to six indicates comfort working alone and in a team. A new manager needs to do both. Source: Stark, E. M. Shaw, J. D. and Duffy, M. K. (December 2007). Preference for Group Work, Winning Orientation, and Social Loafing Behavior in Groups. Group & Organization Management, 32:6, 699–723.

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Management Challenge

NEC, a large Japanese-owned company, was operating a significant manufacturing facility on Springvale Road in suburban Mulgrave in Melbourne. One of its major telephone products involved electronic circuit boards, but unfortunately, at the facility, both productivity and quality were below international standards. The factory was laid out so that the many products and component circuit boards were organised into three main departments: pre-production, where the electronic components were readied for soldering onto circuit boards; production (soldering); and testing and assembly. People in each of these three departments hardly knew those who did the next process step on their product, who might be working as near as 70 metres away. When errors were made, such as the soldering of the wrong parts onto a circuit board, feedback to those who did the soldering was slow, so the error was often repeated

many times before it was corrected. Large batches of defective parts were moved to the assembly department, who tested the work and returned defective batches. Feedback often came in the form of a rude note from one department to another accompanying the defective work and requesting reworking. Relations between staff across the departments were generally not positive, and the business imperatives to improve quality and productivity were pressing. At first, managers thought the problem was technical, and that the answer would be based around new technology and better process equipment. Question What would you recommend to improve quality and productivity at NEC’s Mulgrave factory? How might the formation of teams help as part of the answer?

The problems faced by NEC also confront many other organisations. How can they get people to work together more effectively, and to be more flexible and responsive in an increasingly competitive environment? A quiet revolution has been taking place in organisations around the world as organisations respond by using employee teams. From the assembly line to the executive office, from large companies such as ANZ Bank, British Petroleum and 3M to government agencies such as the Victorian Transport Accident Commission and Australia Post, teams are becoming the basic building blocks of organisations. Many people get their first management experience in a team setting, and you probably will sometimes have to work in a team as a new manager. You may have already experienced the challenges of teamwork as a student, where you’ve had to give up some of your independence and rely on the team to perform well in order to earn a good grade. For example, at Boeing, managers were facing a problem they knew it was good to have: demand for the company’s 737 jetliner was soaring. But they had to find a way to keep pace with the demand without jeopardising Boeing’s future with a rapid expansion of factories and operating costs. How to produce more aircraft without expanding became the driving question at Boeing – and cross-functional teams provided the innovative answers. One team made up of engineers, mechanics and other employees came up with a new process for assembling the hydraulic tubes that go into the landing gear wheel-well of the 737. The new process saves about 30 hours of mechanics’ time (and a lot of money) on each system. Another team redesigned the workspace so that four engines rather than three could be produced at a time. Boeing has about 1300 of these ‘innovation teams’ across its commercial jet programs. Each team of seven to 10 workers typically focuses on a specific part of a jet; teams meet each week to work on problems or come up with new processes. Overall, Boeing’s teams have come up with ideas that have boosted 737 output to 35 jets a month, up from 31, and the goal was to produce 42 a month by 2014.1 Good teams can produce amazing results, but teams aren’t always successful. In a survey of manufacturing organisations, about 80 per cent of respondents reported using some kind of teams, but only 14 per cent of those companies rated their teaming efforts as highly effective. Just over half of the respondents said their efforts were only ‘somewhat effective’ and 15 per cent considered their efforts not effective at all.2

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This chapter focuses on teams and their applications within organisations. We define what a team is, look at the contributions that teams can make and define various types of teams. Then we discuss the dilemma of teamwork and present a model of work team effectiveness, explore the stages of team development, and examine how characteristics such as size, cohesiveness, diversity and norms influence team effectiveness. We will also look at the roles that individuals play on teams, discuss techniques for managing team conflict, and describe how negotiation can facilitate cooperation and teamwork. Teams are a central aspect of organisational life, and the ability to manage them is a vital component of manager and organisation success.

The value of teams Why aren’t organisations just collections of individuals going their own way and doing their own thing? Clearly, teamwork provides benefits; otherwise companies wouldn’t continue to use it as a structural mechanism. Think of surgical teams, comprising surgeons, nurses, anaesthetists and many other specialists, all coordinating their actions to achieve a shared goal – successful surgical outcomes – when the effectiveness of their teamwork can make the difference between life or death. It is not enough for  these professionals to be individually skilled and motivated: they must also work cooperatively to achieve the desired outcome. Although their missions might not involve life or death, all organisations are made up of various individuals and groups that have to work together and coordinate their activities to accomplish objectives. Much work in organisations is interdependent, which means that individuals and departments rely on other individuals and departments for information or resources to accomplish their work. When tasks are highly interdependent, a team can be the best approach to ensuring the level of coordination, information sharing and exchange of materials necessary for successful task accomplishment.

Managers at Subaru Indiana Automotive (SIA) put the company’s desire to reduce, reuse and recycle waste squarely on the line with television ads boasting ‘zero-landfill’. SIA was not hedging, maintaining that ‘zero means zero’, and managers placed confidence in every member of every team in every manufacturing process to hit the target. And the teams proved to be up to the challenge. For example, shop floor initiatives

within the stamping unit led to partnering agreements with suppliers for more precise steel sheeting that reduced 100 pounds of steel per vehicle. Teams initiated efforts to use plant water-flow to drive mini-hydraulic electric generators, and the company’s Green Payback Curve recycled a variety of waste products. Assembly-line lights were turned down during breaks and shift changes to decrease the company’s carbon footprint.

Respect for and confidence in its teams has made SIA a recognised leader of sustainability in manufacturing. Sources: Brad Kenney. (July 2008). The Zero Effect: How to Green Your Facility. Industry Week, 36–41; and Dean M. Schroeder and Alan G. Robinson (2010). Green Is Free: Creating Sustainable Competitive Advantage Through Green Excellence. Organizational Dynamics, 39:4:345–52.

Case study

The team’s the thing

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What is a tea m ? team A unit of two or more people who interact and coordinate their work to accomplish a specific goal.

A team is a unit of two or more people who interact and coordinate their work to accomplish a common goal to which they are committed and for which they hold themselves mutually accountable.3 The definition of a team has four components. First, two or more people are required. Second, people in a team have regular interaction. People who do not interact (for example, when standing in line at a lunch counter or riding in an elevator) do not comprise a team. Third, people in a team share a performance goal, whether it is to design a new smartphone app, build an engine or complete a class project at university. Fourth, people in a team are committed to the goal and hold themselves mutually accountable for performance. Although a team is a group of people, the terms ‘team’ and ‘group’ are not interchangeable. An employer, a teacher or a coach can put together a group of people and never build a team. The team concept implies a sense of shared mission and collective responsibility. Exhibit 18.1 lists the primary differences between groups and teams. Exhibit 18.1 Differences between groups and teams Group

Team

  Has a designated strong leader

●

  Holds individuals accountable

●

  Sets identical purpose for group and organisation

●

  Has individual work products

●

  Runs efficient meetings

●

● ● ● ● ●

  Measures effectiveness indirectly by influence on business (such as financial performance)

●

  Discusses, decides, and delegates work to individuals

●

  Shares or rotates leadership roles   Holds team members accountable to each other   Sets specific team vision or purpose   Has collective work products   Runs meetings that encourage open-ended discussion and problem solving   Measures effectiveness directly by assessing collective work

●

  Discusses, decides and shares work

●

Source: Adapted from Jon R. Katzenbach and Douglas K. Smith. (March–April 1995). The Discipline of Teams. Harvard Business Review, 111–20.

Co ntri buti o ns o f te a ms Effective teams can provide many advantages in organisations, as illustrated in Exhibit 18.2. These contributions of teams lead to stronger competitive advantage and higher overall organisational performance. ●● Creativity and innovation. Because teams include people with diverse skills, strengths, experiences and perspectives, they contribute to a higher level of creativity and innovation in the organisation.4 One factor that has been overlooked in the success of Apple, for instance, is that the late Steve Jobs built a top management team of superb technologists, marketers, designers and others who kept the company’s innovative juices flowing. Most of Jobs’s top management team worked with him for a decade or more.5 ●● Improved quality. One criterion for organisational effectiveness is whether products and services meet customer requirements for quality. Perhaps nowhere is this more essential than in health care. The days when a lone physician could master all the skills, keep all the information in his or her head, and manage everything required to treat a patient are long gone. Medical organisations that provide the highest quality of patient care are those in which teams of closely coordinated professionals provide an integrated system of care.6

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Exhibit 18.2 Five contributions teams make

Creativity

Quality Competitive advantage Contributions of teams

Speed

Higher organisational

Productivity/

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performance

lower costs Employee satisfaction

●● Speed of response. Tightly integrated teams can manoeuvre incredibly fast. Apple, again, provides an appropriate example. Apple’s close-knit team has changed pricing as late as 48 hours before the launch of a new product, which would be inconceivable at most companies.7 In addition to making those kinds of decisions quickly, teams can speed product development (as we discussed in Chapter 10), respond more quickly to changing customer needs and solve cross-departmental problems more quickly. ●● Higher productivity and lower costs. Effective teams can unleash enormous energy from employees. Social facilitation refers to the tendency for the presence of others to enhance one’s performance. Simply being around others has an energising effect.8 In addition, the blend of perspectives enables creative ideas to percolate. As described earlier in the chapter, teams at Boeing have come up with numerous ideas that have helped them to build planes faster and at lower cost.

social facilitation Social facilitation is the effect of other people on raising one’s effort and organisational motivation.

●● Enhanced motivation and satisfaction. As described in Chapter 16, people have needs for belongingness and affiliation. Working in teams can meet these needs and create greater camaraderie across the organisation. Teams also reduce boredom, increase people’s feelings of dignity and self-worth, and give people a chance to develop new skills. Individuals who work in an effective team cope better with stress, enjoy their jobs more, and have a higher level of motivation and commitment to the organisation.

T ypes o f tea ms Organisations use many types of teams to achieve the advantages discussed in the previous section. Two common types of teams in organisations are functional and cross-functional, as illustrated in Exhibit 18.3 and described in the following sections. Organisations also use self-managed teams to increase employee participation.

Fu n cti onal teams A functional team is composed of a manager and his or her subordinates in the formal chain of command. Sometimes called a command team, the functional team in some cases may include three or four levels of hierarchy within a functional department. Typically, the team includes a single department in an organisation. For example, a financial analysis department, a quality control department, an engineering department and a human resource department are all functional teams. Each is created by the organisation to attain specific goals through members’ joint activities and interactions.

functional team A team composed of a manager and his or her subordinates.

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President

Project Control

Finance

Engineering

Production

Marketing

Cross-functional team for L21 modification project Functional engineering team

Exhibit 18.3 Functional and cross-functional teams in an organisation

Cr oss-functi onal t eam s

special-purpose team A team created from outside the formal organisational structure to undertake a project of special importance or creativity.

A cross-functional team is composed of employees from about the same hierarchical level, but from different areas of expertise. One type of cross-functional team is a task force, which is a group of employees from different departments formed to deal with a specific activity and existing only until the task is completed. In Australia, Ford Motor Company learned the hard way that the best way to design a new model of car is to form and use a cross-functional team from the initial design phases, with people from engineering, design, manufacturing, human resources, marketing, sales, service and cost accounting participating. Previously at Ford, these functions were performed by separate groups of people, and some disastrous results occurred, due to lack of coordination. A particular model of a Ford Falcon was designed by designers, technically specified by the engineers and by the time the marketing and sales people saw the prototype and declared that the car was visually unappealing, the design was ‘frozen’ and couldn’t be changed. This lack of coordination across single function teams has been solved by forming crossfunctional teams who work together from start to finish of a product design project. Another type of cross-functional team, the special-purpose team, is created outside the formal organisation structure to undertake a project of special importance or creativity.9 Sometimes called a project team, a special-purpose team still is part of the formal organisation structure, but members perceive themselves as a separate entity. Special-purpose teams are often created for developing a new product or service. To again use the example of the Ford Motor Company – this time, in America – in 2008, Ford created a special-purpose team to solve a problem that could determine whether the organisation survived the turmoil in the automotive industry. This special-purpose team played a critical role in helping Ford prevent a supply breakdown – and ultimately in helping CEO Alan Mulally and other managers revive the company.

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Se lf - m anaged teams The fourth common type of team used in organisations is designed to increase the participation of workers in decision making and the conduct of their jobs, with the goal of improving performance. Self-managed teams typically consist of five to 20 multiskilled workers who rotate jobs to produce an entire product or service, or at least one complete aspect or portion of a product or service (for example, engine assembly or insurance claim processing). The central idea is that the teams themselves, rather than managers or supervisors, take responsibility for their work, make decisions, monitor their own performance, and alter their work behaviour as needed to solve problems, meet goals and adapt to changing conditions.10 At the software firm 37signals, for example, customer service is run by a self-managed team that handles everything associated with providing service and support. The role of team leader rotates each week. Customer service, support and satisfaction have improved since the company started using a self-managed team. ‘We’ve measured the difference, and we know it works,’ says co-founder Jason Fried. Today, 37signals is run almost entirely by self-managed teams.11 Self-managed teams are permanent teams that typically include the following characteristics:

self-managed team A team that consists of multiskilled employees who rotate jobs to produce an entire product or service, often led by an elected team member.

●● The team includes employees with several skills and functions, and the combined skills are sufficient to perform a major organisational task. For example, in a manufacturing facility, a team may include members from the foundry, machining, grinding, fabrication and sales departments, with members cross-trained to perform one another’s jobs. The team eliminates barriers among departments, enabling excellent coordination to produce a product or service. ●● The team is given access to resources such as information, equipment, machinery and supplies needed to perform the complete task. ●● The team is empowered with decision-making authority, which means that members have the freedom to select new members, solve problems, spend money, monitor results and plan for the future. Selfmanaged teams can enable employees to feel challenged, find their work meaningful and develop a stronger sense of identity with the organisation. ➜➜ A team is a unit of two or more people who interact and coordinate their work to accomplish a goal to which they are committed and hold themselves mutually accountable. ➜➜ Teams provide distinct advantages in the areas of innovation, quality, speed, productivity and employee satisfaction. ➜➜ Social facilitation is the tendency for the presence of other people to influence an individual’s motivation and performance.

➜➜ A functional team is composed of a manager and his or her subordinates in the formal chain of command. ➜➜ A cross-functional team is made up of employees from about the same hierarchical level but from different areas of expertise. ➜➜ Cross-functional teams include task forces and special purpose teams. ➜➜ A task force is a group of employees from different departments who deal with a specific activity and exist as a team only until the task is completed.

➜➜ A special-purpose team is a team created outside the formal structure to undertake a project of special importance, such as developing a new product.

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➜➜ A self-managed team consists of multiskilled employees who rotate jobs to produce an entire product or service, often led by an elected team member. ➜➜ Self-managed teams take responsibility for their work, make decisions, monitor their own performance, and alter their work behaviour as needed to solve problems and meet goals.

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Austr alian manager pr ofile

Invention is singular; innovation is plural: Peter Richardson

Source: Courtesy Peter Richardson

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As an Arts graduate, a traditional career path was never ordained for me; nor, as it turns out, would my personality ever have accommodated one. I ended up working for a small but technologically focused medical and travel assistance company called IMAN. Ten years of overseas travel assistance, including emergency medical repatriations, strengthened my ability as a decision maker. For the last decade I have worked in the family business Doorstep organics. In that time, both Doorstep and the market around it have matured and grown, allowing me to further my passion for technology and processbased innovation. To invent something takes an idea, a lot of work and endless refinement. This can be done on your own. However, to truly innovate and realise success, one must be prepared to extend this process. You must assemble a team of mini inventors, all of whom are committed to working towards your endlessly shifting goal posts. Employees will not, however, blindly follow your lead; they require information about where they are going and why. It is essential that you share your vision and knowledge with those around you. This is especially important at the start of

the journey. At the start of a venture, this may be all you have to offer. To people, a sense of purpose, recognition and training are often more valuable than financial reward. These offerings attract loyal, hungry disciples. These qualities can be more important to the entrepreneur than skill or raw talent. Talented, skilled employees know their worth, and can be poached by a business with better capacity to pay. It is especially important here at the start, just as it is into the future, to find employees who match your business’ stage in the life cycle. Not all employees want the same thing. Find out what it is that your employees want. Once you have your employees, structure your system to continually inform them about your expectations for their work. Like businesses, people require certainty. Develop structures that allow the goals of your business to be easily identifiable to your employees. This is also the most cost-effective way of ensuring the alignment of shareholder goals with employee action. Reward, recognise and continue to enrich their skills. Seeing people gain satisfaction from this is one of the most rewarding parts of being an employer. Not only do you see the roles grow and develop according to your vision, but you see people grow and prosper from that success. You have the vision. Let others do the inventing. Together, you can innovate. Source: Contributed by Peter Richardson.

The dilemma of teams When David Ferrucci was trying to recruit scientists to join a team at IBM to build a computer smart enough to beat grand champions at the game of Jeopardy, he learned first-hand that teamwork presents a dilemma for many people. To be sure, building ‘Watson’ was an unusual project, and its results would be put to the test in a televised ‘human versus machine’ competition. If the computer failed, it would be a public relations fiasco that would hurt the credibility of everyone involved. And if it succeeded, the hero would be the team, not any individual team member. Many of the scientists Ferrucci approached preferred to work on their individual projects, where the success would be theirs alone. Eventually, though, he pulled together a core team of people willing to take the risk. ‘It was a proud moment, frankly, just to have the courage as a team to move forward,’ Ferrucci says.12 In organisations all over the world, some people love the idea of teamwork, others hate it, and many people have both positive and negative emotions about being part of a team. There are three primary reasons that teams present a dilemma for many people: ●● We have to give up our independence. When people become part of a team, their success depends on the team’s success; therefore, they must depend on how well other people perform, not just on their

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own individual initiative and actions. Most people are comfortable with the idea of making sacrifices to achieve their own individual success, yet teamwork demands that they make sacrifices for group success.13 The idea is that each person should put the team first, even if it hurts the individual at times. Many employees, particularly in individualistic cultures, have a hard time appreciating and accepting that concept. For example, a recent study suggests that Americans have become increasingly focused on the individual over the group since 1960, reflecting ‘a sea change in American culture towards more individualism’.14 Other countries, including Japan, have had greater success with teams, because their culture values the group over the individual. Australian business cultures are usually thought to lie somewhere in the middle of these (Japanese and American) extremes. ●● We have to put up with free riders. Teams are sometimes made up of people who have different work ethics. The term free rider refers to a team member who attains benefits from team membership but does not actively participate in and contribute to the team’s work. You might have experienced this frustration in a university group assignment, where one group member put little effort into the project but benefited from the hard work of others when grades were handed out. Free riding is sometimes called social loafing, because some members do not exert equal effort.15

free rider A person who benefits from team membership but does not make a proportionate contribution to the team’s work.

●● Teams are sometimes dysfunctional. Some companies have had great success with teams, but there are also numerous examples of how teams in organisations fail spectacularly.16 ‘The best Take a Moment groups will be better than their individual members, and the worst groups will be worse than The Group Challenge on the worst individual,’ says organisational psychologist Robert Sutton.17 A great deal of research page 754 of this chapter and team experience over the past few decades has produced significant insights into what gives you a chance to causes teams to succeed or fail. The evidence shows that the way teams are managed plays the evaluate and discuss various team member most critical role in determining how well they function.18 Exhibit 18.4 lists five dysfunctions behaviours. that are common in teams and describes the contrasting desirable characteristics that effective team leaders develop.

Exhibit 18.4 Five common dysfunctions in teams Dysfunction

Effective team characteristics

Lack of trust – People don’t feel safe to reveal mistakes, share concerns or express ideas.

Trust – Members trust one another on a deep emotional level; feel comfortable being vulnerable with one another.

Fear of conflict – People go along with others for the sake of harmony; don’t express conflicting opinions.

Healthy conflict – Members feel comfortable disagreeing and challenging one another in the interest of finding the best solution.

Lack of commitment – If people are afraid to express their true opinions, it’s difficult to gain their true commitment to decisions.

Commitment – Because all ideas are put on the table, people can achieve genuine buy-in around important goals and decisions.

Avoidance of accountability – People don’t accept responsibility for outcomes; engage in fingerpointing when things go wrong.

Accountability – Members hold one another accountable rather than relying on managers as the source of accountability.

Inattention to results – Members put personal ambition or the needs of their individual departments ahead of collective results.

Results orientation – Individual members set aside personal agendas; focus on what’s best for the team. Collective results define success.

Sources: Based on Patrick Lencioni, The Five Dysfunctions of a Team (New York: John Wiley & Sons, 2002); and P. Lencioni. (October 2009). Dissolve Dysfunction: Begin Building Your Dream Team. Leadership Excellence, 20.

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➜➜ Teams present a dilemma for most people because individual success depends on how well others perform, there are common dysfunctions that



afflict teams, and there is a potential for free riders.

➜➜ A free rider is a person who benefits from team membership but does not make a proportionate contribution to the team’s work.

➜➜ Five common dysfunctions of teams are lack of trust, fear of conflict, lack of commitment, avoidance of accountability and inattention to results.

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Mo d el o f tea m effectiven ess Smoothly functioning teams don’t just happen. Stanford sociologist Elizabeth Cohen studied group work among young schoolchildren and found that only when teachers took the time to define roles, establish norms and set goals did the groups function effectively as teams.19 In organisations, effective teams are built by managers who take specific actions to help people come together and perform well as a team. The Management in Practice examines the role of the team leader in creating an effective team. Some of the factors associated with team effectiveness are illustrated in Exhibit 18.5. Work team effectiveness is based on three outcomes: productive output, personal satisfaction, and the capacity to adapt and learn.20 Satisfaction pertains to the team’s ability to meet the personal needs of its members and hence maintain their membership and commitment. Productive output pertains to performance and the quality and quantity of task outputs as defined by team goals. Capacity to adapt and learn refers to the ability of teams to bring greater knowledge and skills to job tasks and enhance the potential of the organisation to respond to new threats or opportunities in the environment. The model of team effectiveness shown in Exhibit 18.5 provides a structure for this chapter. The factors that influence team effectiveness begin with the organisational context.21 The organisational context in which the team operates is described in other chapters, and includes such matters as overall leadership, strategy, environment, culture, and systems for controlling and rewarding employees. Within that context, managers define teams. Important team characteristics are the type of team, the team structure and team composition. Managers must decide when to create permanent self-managed teams and when to use a temporary task force or special-purpose team. The diversity of the team, in terms of task-related knowledge and skills, can have a tremendous impact on team processes and effectiveness. In addition, diversity in terms of gender and race can affect a team’s performance, as will be discussed later in this chapter.22 Team size and roles also are important. These team characteristics influence processes that are internal to the team, which, in turn, affect output, satisfaction and the team’s contribution to organisational adaptability. Good team leaders understand and manage stages of team development, cohesiveness, norms and conflict to build an effective team. These processes are influenced by team and organisational characteristics and by the ability of members and leaders to direct these processes in a positive manner.

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Exhibit 18.5 Work team effectiveness model

Team type Formal Self-managed Virtual/global

Organisational context Leadership Environment Culture Strategy Reward, control systems

Team characteristics Size Diversity Roles

Team processes Stages of development Cohesiveness Norms Conflict resolution

Work team effectiveness Productive output Personal satisfaction Capacity to adapt and learn

Team composition Knowledge and skills Benefits and costs

How to be a great team leader Perhaps no single factor plays a greater role in determining team effectiveness than the team leader. Teams fail when leaders try to manage them in traditional command-andcontrol fashion. There are four specific ways in which leaders contribute to team success:

➜➜ Rally people around a compelling purpose. It is the leader’s responsibility to articulate a clear, compelling purpose, one of the key elements of effective teams. This ensures that everyone is moving in the same direction rather than floundering around, wondering why the team was created and where it’s supposed to be going. Effective leaders also establish clear goals and timelines.

➜➜ Share control to spur commitment and motivation. Overly controlling leaders sabotage team effectiveness. Good team leaders share power, information, control and genuine responsibility. When Todd Conger became a team leader at Morton International, he felt the impulse to jump in as soon as the project started falling behind schedule. But the more work he did, the less work seemed to be accomplished – and the less motivated team members became. Conger’s ‘helping’ was actually hurting the team, because its members interpreted it as criticism and felt no control over their work. Sharing power and control requires that

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management in pr actice the leader have faith that team members will make good decisions, even if those decisions might not be the ones that the leader would make.

➜➜ Clarify norms and expectations. Leaders should define roles and expectations clearly from the start, so that everyone knows what they should be doing and what they can expect from their teammates. Team members who are confused about their roles will be unproductive, which will spark resentment from other members. Sometimes a leader might need to meet with each team member individually to make sure that each person understands and accepts his or her obligations.

➜➜ Admit ignorance. Often, people appointed to lead teams find that they don’t know nearly as much as their teammates know. Good team leaders aren’t afraid to admit their ignorance and ask for help. This serves as a fallibility model that lets people know that lack of knowledge, problems, concerns, and mistakes can be discussed openly without fear of appearing incompetent. Although it’s hard for many managers to believe, admitting ignorance and being willing to learn from others can earn the respect of team members faster than almost any other behaviour.

Sources: Based on J. Richard Hackman, Leading Teams: Setting the Stage for Great Performances (Boston, MA: Harvard Business School Press, 2002); Lee G. Bolman and Terrence E. Deal. (August 1992). What Makes a Team Work? Organizational Dynamics, 34–44; Amy Edmondson, Richard Bohmer and Gary Pisano. (October 2001). Speeding up Team Learning. Harvard Business Review, 125–32; Jeanne M. Wilson, Jill George and Richard S. Wellings, with William C. Byham, Leadership Trapeze: Strategies for Leadership in Team-Based Organizations (San Francisco: Jossey-Bass, 1994); Sarah Fister Gale. (October 2007). The Turn Around Artist. PM Network, 28–35; and Eric Matson. (June–July 1997). Congratulations, You’re Promoted (Now What?). Fast Company, 116–30.

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Vi rtual tea ms virtual team A team that uses computer technology and groupware so that geographically distant members can collaborate on projects and reach common goals.

global team A cross-border team that is made up of different nationalities whose activities span multiple countries.

An exciting new approach to teamwork has resulted from advances in information technology, shifting employee expectations and the globalisation of business. A virtual team is a group made up of geographically or organisationally dispersed members who are linked primarily through advanced information and telecommunications technologies.23 A 2010 survey of employees at multinational corporations found that 80 per cent of respondents belong to virtual teams.24 In a virtual team, members use groupware, email, instant messaging, telephone and text messaging, wikis and blogs, videoconferencing, and other technological tools to collaborate and perform their work, although they also might meet face to face at times. Although some virtual teams are made up of only organisational members, virtual teams often include contingent workers, members of partner organisations, customers, suppliers, consultants or other outsiders. Many virtual teams are also global teams. A global team is a cross-border team made up of members of different nationalities whose activities span multiple countries.25 One of the primary advantages of virtual teams is the ability to assemble the most talented group of people to complete a complex project, solve a particular problem or exploit a specific strategic opportunity. The diverse mix of people can fuel creativity and innovation. On a practical level, organisations can save employees time and cut travel expenses when people meet in virtual rather than physical space. IBM reported that it saved more than $50 million in travel-related expenses in one year alone by using virtual teams.26 However, virtual teams also present unique challenges. Exhibit 18.6 lists some critical areas that managers should address when leading virtual teams. Each of these areas is discussed in more detail in the following list:27 ●● Using technology to build trust and relationships is crucial for effective virtual teamwork. Leaders first select people who have the right mix of technical, interpersonal and communication skills to work in a virtual environment, and then make sure that they have opportunities to get to know one another and establish trusting relationships. Encouraging online social networking, where people can share photos and personal biographies, is one key to virtual team success. One study suggests that higher levels of online communication increase team cohesiveness and trust.28 Leaders also build trust by making everyone’s roles, responsibilities and authority clear from the beginning, by shaping norms of full disclosure and respectful interaction, and by providing a way for everyone to stay up to date. In a study of which technologies make virtual teams successful, researchers found that roundthe-clock virtual work spaces, where team members can access the latest versions of files, keep track of deadlines and timelines, monitor one another’s progress and carry on discussions between formal meetings, got top marks.29 ●● Shaping culture through technology reinforces productive norms. This involves creating a virtual environment in which people feel safe to express concerns, admit mistakes, share ideas, acknowledge fears or ask for help. Leaders reinforce a norm of sharing all forms of knowledge, and they encourage people to express ‘off-the-wall’ ideas and ask for help when it’s needed. Team leaders set the example by their own behaviour. Leaders also make sure that they bring diversity issues into the open and educate members early on regarding possible cultural differences that could cause communication problems or misunderstandings in a virtual environment. ●● Monitoring progress and rewarding members keep the team progressing towards goals. Leaders stay on top of the project’s development and make sure that everyone knows how the team is progressing

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Exhibit 18.6 What effective virtual team leaders do Practice

How it’s done

Use technology to build relationships

●

  Bring attention to and appreciate diverse skills and opinions   Use technology to enhance communication and trust

●

  Ensure timely responses online

●

  Manage online socialisation

●

Shape culture through technology

  Create a psychologically safe virtual culture

●

  Share members’ special experience/strengths

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  Engage members from cultures where they may be hesitant to share ideas

●

Monitor progress and rewards

  Scrutinise electronic communication patterns

●

  Post targets and scorecards in virtual work space

●

  Reward people through online ceremonies, recognition

●

Sources: Based on Table 1, ‘Practices of Effective Virtual Team Leaders’, in Arvind Malhotra, Ann Majchrzak and Benson Rosen. Leading Virtual Teams. (February 2007). Academy of Management Perspectives, 21:1, 60–9; and Table 2, ‘“Best Practices” Solutions for Overcoming Barriers to Knowledge Sharing in Virtual Teams’, in Benson Rosen, Stacie Furst and Richard Blackburn. Overcoming Barriers to Knowledge Sharing in Virtual Teams. (2007). Organizational Dynamics, 36:3, 259–73.

towards meeting its goals. Posting targets, measurements and milestones in the virtual workspace can make progress explicit. Leaders also provide regular feedback, and they reward both individual and team accomplishments through avenues such as virtual award ceremonies and recognition at virtual meetings. They are liberal with praise and congratulations, but criticism or reprimands are handled individually, rather than in the virtual presence of the team. As the use of virtual teams grows, there is growing understanding of what makes them successful. Some experts suggest that managers solicit volunteers as much as possible for virtual teams, and interviews with virtual team members and leaders support the idea that members who truly want to work as a virtual team are more effective.30 At Nokia, many virtual teams consist of people who volunteered for the task.

Nokia In a study of 52 virtual teams in 15 leading multinational companies, London Business School researchers found that Nokia’s teams were among the most effective, even though they were made up of people working in several different countries, across time zones and cultures. What makes Nokia’s teams so successful? Nokia managers are careful to select people who have a collaborative mindset, and they form many teams with volunteers who are highly committed to the task or project. The company also tries to make sure that some members of

Innovative Way a team have worked together before, providing a base for trusting relationships. Making the best use of technology is critical. In addition to a virtual work space that team members can access 24 hours a day, Nokia provides an online resource where virtual workers are encouraged to post photos and share personal information. With the inability of members to get to know each another being one of the biggest barriers to effective virtual teamwork, encouraging and supporting social networking has paid off for Nokia.

Sources: Pete Engardio. (20 August 2007). A Guide for Multinationals: One of the Greatest Challenges for a Multinational Is Learning How to Build a Productive Global Team. BusinessWeek, 48–51; Lynda Gratton. (18 June 2007). Working Together . . . When Apart. The Wall Street Journal.

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Global teams such as those at Nokia present even greater challenges for team leaders, who have to bridge gaps of time, distance, and culture. Different cultural attitudes can affect work pacing, team communications, decision making, the perception of deadlines and other issues, and provide rich soil for misunderstandings and conflict. No wonder when the executive council of CIO magazine asked global chief information officers (CIOs) to rank their greatest challenges, managing virtual global teams ranked as the most pressing issue.31

Case study

➜➜ A virtual team is a team made up of members who are geographically or organisationally dispersed, rarely meet face to face, and interact to accomplish their work primarily



using advanced information and telecommunications technologies.

➜➜ A global team is a group made up of employees who come from different countries and whose activities span multiple countries.

➜➜ Virtual teams provide many advantages, but they also present new challenges for leaders, who must learn to build trusting relationships in a virtual environment.

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The Aconex team in Melbourne Teamwork plays a big part in virtually every business organisation, but is particularly important in fast-growing businesses. From the Melbourne suburb of Carlton, Aconex founders and directors Leigh Jasper and Rob Philpott work on their software platform that provides the web-based infrastructure to support document exchange and communication infrastructure for building projects. Jasper and Leigh are in their thirties, and strongly tapped into the opportunities that the digital age can bring to traditional industries such as building and construction. Their software links designers, architects, engineers, builders and subcontractors to a single centralised communications hub, and their platforms have now become ‘the world’s most widely used online project solutions for the construction, infrastructure, power, mining and oil and gas industries’. It logs all emails and documents that are sent, and hence keeps an audit trail of communication, keeping the project management under

control for large and complex projects. Aconex has managed projects worth US$800 billion with over 430 000 users in 65 countries including nearly all of the Fortune 500 construction and engineering companies. One such project involved IKEA’s expansion into China, which required thousands of documents to be exchanged between team members in China and IKEA’s European headquarters. The platform enables documents to be shared quickly and efficiently and it allows tasks to be tracked so that ‘who did what and when’ can be monitored. Another was the Westpac headquarters building in Sydney, in which one million documents have been exchanged efficiently using Aconex software, saving the many contributors to this project significant amounts of time and money. Aconex works with teams using teams. The company won the ‘Overall Best’ in the SmartCompany Awards and continues to grow and globalise from an Australian base. Aconex operates from

43 locations worldwide and provides document management and online collaboration services for mega projects such as those being conducted in the Middle East. Those projects can generate 500 000 documents and 200 000 emails in a year. Teamwork is an important theme in this fast-moving company, starting with the founders who run it, and throughout the technical and business development staff down the line. Effective teamwork is critical to ensuring that the various activities going on in the company are well coordinated. The top team of this company has had to give away some of the ownership of the company to attract financing for its growth, although they retain half of the shares and managerial control. One of the best indicators that their team is getting things right for clients is the repeat business: ‘Clients keep coming back.’ Sources: Myer, R. (19 February 2005). Fortune Awaits as Duo Cut to the Paperchase. The Age, B2; http://www.aconex.com (accessed 6 November 2013).

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Team characteristics After deciding which type of team to use, the next issue of concern to managers is designing the team for greatest effectiveness. Team characteristics of particular concern are size, diversity and member roles.

Size More than 30 years ago, psychologist Ivan Steiner examined what happened each time the size of a team increased, and ultimately proposed that a team’s performance and productivity peaked when it had about five members – a quite small number. He found that adding members beyond five caused a decrease in motivation, an increase in coordination problems and a general decline in performance.32 Since then, numerous studies have found that smaller teams perform better, although most researchers say that it’s impossible to specify an optimal team size. One investigation of team size based on data from 58 software development teams found that the best-performing teams ranged in size from three to six members.33 Teams need to be large enough to incorporate the diverse skills needed to complete a task, enable members to express good and bad feelings, and aggressively solve problems. However, they also should be small enough to permit members to feel an intimate part of the team and to communicate effectively and efficiently. The ability of people to identify with the team is an important determinant of high performance.34 At Amazon.com, CEO Jeff Bezos established a ‘two-pizza rule’. If a team gets so large that members can’t be fed with two pizzas, it should be split into smaller teams.35 In general, as a team increases in size, it becomes harder for each member to interact with and influence the others. Subgroups often form in larger teams, and conflicts among them can occur. Turnover and absenteeism are higher because members feel less like an important part of the team.36 Although the Internet and advanced technologies are enabling larger groups of people to work more effectively in virtual teams, studies show that members of smaller virtual teams participate more actively, are more committed to the team, are more focused on team goals and have higher levels of rapport than larger virtual teams.37

D iversit y Because teams require a variety of skills, knowledge and experience, it seems likely that heterogeneous teams would be more effective than homogeneous ones. In general, research supports this idea, showing that diverse teams produce more innovative solutions to problems (see Chapter 13: Managing Diversity).38 Diversity in terms of functional area and skills, thinking styles and personal characteristics is often a source of creativity. In addition, diversity may contribute to a healthy level of disagreement that leads to better decision making. Research studies have confirmed that both functional diversity and demographic diversity can have a positive impact on work team performance.39 For example, recent research suggests that gender diversity, particularly with more women on a team, leads to better performance.40 Ethnic, national and racial diversity sometimes can hinder team interaction and performance in the short term, but with effective leadership, the problems fade over time.41

M em ber ro les For a team to be successful over the long run, it must be structured so as to both maintain its members’ social well-being and accomplish its task. To understand the importance of members fulfilling various

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roles on a team, consider the 33 miners who were trapped underground after a copper mine collapsed in San José, Chile, in August 2010. With little food, scant water, dusty conditions and frayed nerves, the situation could have led to chaos. However, the miners organised into several teams in charge Complete the New of critical activities, such as communication with rescue workers, the transport of supplies from Manager Self-Test ‘How above ground, rationing and distribution of food, managing health concerns and securing the mine do you like to work?’ on page 725 of this chapter to to prevent further collapses. Some team members were focused on helping the trapped miners to see how you contribute meet their needs for physical survival; some focused on helping people coordinate their activities; as a team member. and still others focused on the group’s psychological and social needs, helping people to maintain hope and a sense of solidarity as the ordeal stretched to a harrowing 69 days. Experts agree that teamwork and leadership were key to the miners’ survival.42 In successful teams, the requirements for task performance and social satisfaction are met by the emergence of two types of roles: task specialist and socio-emotional.43 People who play a task specialist task specialist role role spend time and energy helping the team reach its goal. They often display the following behaviours: A role in which the individual

Take a Moment

devotes personal time and energy to helping the team accomplish its task.

●● Initiate ideas. Propose new solutions to team problems.

●● Give opinions. Offer judgements on task solutions; give candid feedback on others’ suggestions. ●● Seek information. Ask for task-relevant facts. ●● Summarise. Relate various ideas to the problem at hand; pull ideas together into a brief overview. ●● Energise. Stimulate the team into action when interest drops. 44

socio-emotional role A role in which the individual provides support for team members’ emotional needs and social unity.

People who adopt a socio-emotional role support team members’ emotional needs and help strengthen the social entity. They display the following behaviours: ●● Encourage. Are warm and receptive to others’ ideas; praise and encourage others to draw forth their contributions. ●● Harmonise. Reconcile group conflicts; help disagreeing parties reach agreement. ●● Reduce tension. Tell jokes or diffuse emotions in other ways when the group atmosphere is tense. ●● Follow. Go along with the team; agree to other team members’ ideas.

Transport Corporation of India (TCI) The Transport Corporation of India (TCI) was begun in 1965 by Prabhudayal Agarwal. His son, Dharanpal, now runs the much-expanded business, which has annual revenue of around US$200 million. From a single truck, the company has expanded to over 5000 employees, with 1000 branches across India and 7000 trucks handling more than four million tonnes of cargo of all kinds per year. TCI transports industrial products, pharmaceuticals, agricultural products and many other forms of consumer durables. (The logistics sector in India is estimated at between

US$90–125 billion and growing.) As the second-generation CEO of this company, Dharanpal credits the success of this grown-up family company to its ability to retain loyal staff, foster teamwork and attract loyal customers. These fundamental principles of sound management are enduring in every region of the world and in every industry. Teamwork can be a positive factor in producing effective organisational outcomes in any country or industry, if the organisational culture and task circumstances are right.

Sources: http://www.tcil.com/tcil/ (accessed 10 December 2013); TCI Annual Report 2012–13.

Source: Courtesy of Transport Corporation of India

Case study

●● Compromise. Will shift own opinions to maintain team harmony.45

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New Manager Self-Test Are you a contributing team member? Instructions: Think about how you have behaved as a member of a specific student or work team. Respond to the statements below based on how you typically behaved on that team. Mostly true

Mostly false

Scoring and Interpretation: These questions pertain to your contributions as a team member, which are important to the success of any type of formal team and especially to self-managed teams. Give yourself one point for each Mostly true answer.

 2 I suggested corrective actions to improve performance.

Total score: ______ Generally, if you score 11 or higher, you are considered a contributing team member. A score of 5 or lower suggests that you should be contributing more to the team. You also can assess the specific ways in which you contributed most or least to the team.

 3 I kept the discussion focused on relevant items.

1. Meeting the team’s performance needs; one point for each Mostly true answer to questions 1–3: ______

 4 I came to meetings well prepared.  5 I was consistently on time to meetings.

2. Taking personal responsibility for own participation; one point for each Mostly true answer to questions 4–6: ______

 6 I followed through on promises and commitments.

3. Facilitating team communication; one point for each Mostly true answer to questions 7–9: ______

 7 I was a focused, active listener.

4. Managing healthy conflict among members; one point for each Mostly true answer to questions 10–12: ______

 1 I engaged the team in clarifying plans and deadlines.

 8 I verbalised my insights and recommendations.  9 I provided constructive feedback to others. 10 I did not shy away from disputes. 11 I knew when to stop pushing for my own position. 12 I intervened constructively when conflicts arose. 13 I showed team members appreciation and support. 14 I celebrated the accomplishments of others. 15 I praised people for a job well done.

5. Meeting socio-emotional needs of team members; one point for each Mostly true answer to questions 13–15: ______ A score of 3 in any of the above categories suggests a high contribution on that dimension. A score of 0 or 1 suggests a low contribution. An effective team must have someone performing each of the five parts, but no single member is expected to perform all parts. Indeed, if you scored well on most questions, you were likely playing a leadership role on the team. There are five types of contributions that someone on a team must make, including performance management or focus on accomplishing the team’s tasks (1–3), displaying personal responsibility (4–6), facilitating quality team communication (7–9), managing conflict among team members (10–12) and meeting the social needs of members (13–15). How do you feel about your contributions to the team? In what ways do you take the initiative to be an effective member? What might you do to be more effective?

Teams with mostly socio-emotional roles can be satisfying, but they also can be unproductive. At the other extreme, a team made up primarily of task specialists will tend to have a singular concern for task accomplishment. This team will be effective for a short period of time, but will not be satisfying for members over the long run. Effective teams have people in both task specialist and socio-emotional roles. A well-balanced team will do best over the long term because it will be personally satisfying for team members, as well as permit the accomplishment of team tasks.

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➜➜ Issues of particular concern to managers for team effectiveness are selecting the right type of team for the task, balancing the team’s size and diversity, and ensuring that both task and social needs are met.

➜➜ Small teams are typically more productive and more satisfying to their members than are large teams. ➜➜ The task specialist role is a team role in which an individual devotes personal time and energy to helping



the team accomplish its activities and reach its goal.

remember this

➜➜ The socio-emotional role is a team role in which an individual provides support for team members’ emotional needs and helps strengthen social unity.

Team processes Now we turn our attention to internal team processes. Team processes pertain to those dynamics that change over time and can be influenced by team leaders. In this section, we discuss stages of development, cohesiveness and norms. The fourth type of team process, conflict, will be covered in the next section.

Stages o f tea m d evelo pm ent After a team has been created, it develops by passing through distinct stages. New teams are different from mature teams. Recall a time when you were a member of a new team, such as a sporting team, a university, a committee, or a small group formed to do a class assignment. Now consider how, over time, the team changed. In the beginning, team members had to get to know one another, establish roles and norms, divide the labour, and clarify the team’s task. In this way, each member became part of a smoothly operating team. The challenge for leaders is to understand the stages of development and take action that will lead to smooth functioning. Research findings suggest that team development is not random, but evolves over definitive stages. One useful model for describing these stages is shown in Exhibit 18.7. Each stage confronts team leaders and members with unique problems and challenges.46

For mi ng forming The stage of team development characterised by orientation and acquaintance.

The forming stage of development is a period of orientation and getting acquainted. Members break the ice and test one another for friendship possibilities and task orientation. Uncertainty is high during this stage, and members usually accept whatever power or authority is offered by either formal or informal leaders. During this initial stage, members are concerned about questions such as ‘What is expected of me?’, ‘What behaviour is acceptable?’ and ‘Will I fit in?’ During the forming stage, the team leader should provide time for members to get acquainted with one another and encourage them to engage in informal social discussions.

St or mi ng storming The stage of team development in which individual personalities and roles, and resulting conflicts, emerge.

During the storming stage, individual personalities emerge. People become more assertive in clarifying their roles and what is expected of them. This stage is marked by conflict and disagreement. People may disagree over their perceptions of the team’s goals or how to achieve them. Members may jockey for position, and coalitions or subgroups based on common interests may form. Unless teams can successfully move beyond this stage, they may get bogged down and never achieve high performance. Think of the

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Adjourning

Performing

Norming Cooperation, problem solving

Storming

Forming

Task completion

Establishment of order and cohesion

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Exhibit 18.7 Five stages of team development Sources: Based on the stages of small group development in Bruce W. Tuckman. (1965). Developmental Sequence in Small Groups. Psychological Bulletin, 63, 384–99; and B. W. Tuckman and M. A. Jensen. (1977). Stages of Small Group Development Revisited. Group and Organizational Studies, 2, 419–27.

Conflict, disagreement

Orientation, breaking the ice

Australian Olympic Swim team that underperformed at the 2012 London Olympics. They had trouble achieving a cohesive team spirit because the team was loaded with superstar athletes with disparate personalities and expectations. Post the Olympics, and some serious team reflection, the team started to come together and show signs of solidarity only when it became clear that they couldn’t win unless they did. During the storming stage, the team leader should encourage participation by each team member. Members should propose ideas, disagree with one another, and work through the uncertainties and conflicting perceptions about team tasks and goals.

Norm ing During the norming stage, conflict is resolved and team harmony and unity emerge. Consensus develops on who has the power, who the leaders are, and what members’ roles are. Members come to accept and understand one another. Differences are resolved, and members develop a sense of team cohesion. During the norming stage, the team leader should emphasise unity within the team and help to clarify team norms and values.

norming The stage of team development in which conflicts developed during the storming stage are resolved and team harmony and unity emerge.

Pe rf ormi ng During the performing stage, the major emphasis is on problem solving and accomplishing the assigned task. Members are committed to the team’s mission. They are coordinated with one another and handle disagreements in a mature way. They confront and resolve problems in the interest of task accomplishment. They interact frequently and direct their discussions and influence towards achieving team goals. During

performing The stage of team development in which members focus on problem solving and accomplishing the team’s assigned task.

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this stage, the leader should concentrate on managing high task performance. Both socio-emotional and task specialist roles contribute to the team’s functioning.

Adjour ni ng adjourning The stage of team development in which members prepare for the team’s disbandment.

The adjourning stage occurs in committees and teams that have a limited task to perform and are disbanded afterward. During this stage, the emphasis is on wrapping up and gearing down. Task performance is no longer a top priority. Members may feel heightened emotionality, strong cohesiveness, and depression or regret over the team’s disbanding. At this point, the leader may wish to signify the team’s disbanding with a ritual or ceremony, perhaps giving out plaques and awards to signify closure and completeness. These five stages typically occur in sequence, but in teams that are under time pressure, they may occur quite rapidly. The stages may also be accelerated for virtual teams. For example, at a large consumer goods company with a virtual team of engineers working in the United States and India, leaders started the project with a couple of days of team building to help the team move rapidly through the forming and storming stages, as described in the Innovative Way box.

Innovative Way

Spring Company

When top executives at Spring Company decided to move some aspects of supply chain process development to one of the company’s Indian facilities, one of their key concerns was making sure that the engineers at head office and the ones in India came together quickly around a shared mission and a focus on key performance goals, putting the success of the team ahead of individual interests. To take the team to the performing stage as quickly as possible, leaders and consultants held a series of teambuilding activities during which team members together

created a shared vision, developed specific team norms and agreements, built virtual relationships, and clarified roles and responsibilities. Cultural education and exercises on virtual communication were also a part of the process. By the end of the team-building activities, members were laughing together and eager to get on with their work. A follow-up by Webinar and phone found that the team was on track towards meeting its goals; moreover, everyone was still having a good time working together.

Source: This is based on a true story of an anonymous company reported in Vicki Fuller Hudson. (May–June 2010). From Divided to Ignited to United. Industrial Management, 17–20.

Te a m co h esiven ess team cohesiveness The extent to which team members are attracted to the team and motivated to remain in it.

Another important aspect of the team process is cohesiveness. Team cohesiveness is defined as the extent to which members are attracted to the team and motivated to remain in it.47 Members of highly cohesive teams are committed to team activities, attend meetings and are happy when the team succeeds. Members of less cohesive teams are less concerned about the team’s welfare. High cohesiveness is normally considered to be a desirable feature of teams.

Deter mi nants of team c oh es iv en es s Several characteristics of team structure and context influence cohesiveness. First is team interaction. When team members have frequent contact, they get to know one another, consider themselves a unit and become more committed to the team.48 Second is the concept of shared goals. If team members agree

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on purpose and direction, they will be more cohesive. Third is personal attraction to the team, meaning that members have similar attitudes and values and enjoy being together. Two factors in the team’s context also influence cohesiveness. The first is the presence of competition. When a team is in moderate competition with other teams, its cohesiveness increases as it strives to win. Finally, team success and the favourable evaluation of the team by outsiders add to cohesiveness. When a team succeeds in its task and others in the organisation recognise the success, members feel good and their commitment to the team will be high.

Consequences of team c oh es iv en es s The outcome of team cohesiveness can fall into two categories – morale and productivity. As a general rule, morale is higher in cohesive teams because of increased communication among members, a friendly team climate, maintenance of membership because of commitment to the team, loyalty, and member participation in team decisions and activities. High cohesiveness has almost uniformly positive effects on the satisfaction and morale of team members.49 With respect to the productivity of the team as a whole, research findings suggest that teams in which members share strong feelings of connectedness and generally positive interactions tend to perform better.50 Thus, a friendly, positive team environment contributes to productivity, as well as member satisfaction. Other research, however, indicates that the degree of productivity in cohesive teams may depend on the relationship between management and the work team. One study surveyed more than 200 work teams and correlated job performance with their cohesiveness.51 Highly cohesive teams were more productive when team members felt management support and less productive when they sensed management hostility and negativism.

Tea m no r ms

Concept extension

Internet research activity 18.2

team norm A standard of conduct that is shared by team members and guides their behaviour.

A team norm is an informal standard of conduct that is shared by team members and guides their behaviour.52 Norms are valuable because they provide a frame of reference for what is expected and acceptable. Norms begin to develop in the first interactions among members of a new team. Exhibit 18.8 illustrates four common ways in which norms develop.53 Sometimes the first behaviours that occur in a Exhibit 18.8 Four ways team set a precedent. For example, at one company, a team leader began his first meeting by team norms develop raising an issue and then ‘leading’ team members until he got the solution he wanted. The pattern became ingrained so quickly into an unproductive team norm that members dubbed meetings the ‘Guess What I Think’ game.54 Other influences on team norms include critical events in the team’s history, as well as behaviours, attitudes and norms that members bring with them Critical events Primacy: firstin team’s history behaviour precedents from outside the team. Team leaders play an important role in shaping norms that will help the team be effective. For example, research shows that Team norms when leaders have high expectations for collaborative problem solving, teams develop strong collaborative norms.55 Making explicit statements about desired team behaviours is a powerful way that Explicit statements Carryover from from leader other experiences leaders influence norms. or members

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➜➜ The forming stage of team development is a period of orientation and getting acquainted. ➜➜ Storming is the stage of team development in which individual personalities and roles emerge, along with resulting conflicts. ➜➜ Norming refers to the stage of development in which conflicts are

management in pr actice



resolved and team harmony and unity emerge.

➜➜ The performing stage is the stage in which members focus on problem solving and accomplishing the team’s assigned task. ➜➜ Adjourning is the stage during which members of temporary teams prepare for the team’s disbanding.

➜➜ Team cohesiveness refers to the extent to which team members are attracted to the team and motivated to remain a part of it.

remember this

➜➜ Morale is almost always higher in cohesive teams, and cohesiveness can also contribute to higher productivity. ➜➜ A team norm is an informal standard of conduct that is shared by team members and guides their behaviour.

Team leader qualities

‘We’re going to be implementing teams, and each of you will serve as facilitator for your team.’ Those words can send traditional managers into near panic. Few understand what the transition to teams involves. In addition, managers can be confused about their role as coach and facilitator rather than supervisor, and are reluctant to share information and power with lower-level workers. Many are suspicious that the move to teams is simply a fancy way to eliminate their jobs. In the traditional hierarchical structure, career paths were clear, and the ambitious moved from shop floor to line supervisor and, potentially, into management by developing clearly defined skills. But under the team concept, a new set of skills is called for – the so-called soft skills, which include communication, conflict resolution, motivation, sharing and trust building. Development of successful teams begins with development of confident team leaders; organisations should not merely toss the ball to managers and expect them to automatically become experts in team leadership. Training can help managers to define and learn how to be effective team leaders. There are a number of points team leaders should remember:

➜➜ Team leaders do not have to know everything. This can be especially daunting in leading cross-functional teams. The leader should determine his or her own strengths and how those can benefit the entire group.

➜➜ Team leaders embrace the concept of teamwork in deeds as well as words. That means sharing power and

information in order to empower team members and reach goals.

➜➜ Team leaders enable members to find answers for themselves by asking questions and encouraging balanced participation.

➜➜ Team leaders coordinate team activities and avoid wasting time on details that can be better handled through transfer of responsibility to the team.

➜➜ Team leaders accept the concept of continuous, on-the-job learning. Following these guidelines can help you become an effective team leader. For example, after seven years as a manufacturing engineer, Boeing’s Bruce Moravec knew he had mastered his technical discipline, but when he was appointed to lead the 757 Stretch Program team, he had to lead people who worked in areas he knew little about. Moravec knew better than to pretend he had all the answers: ‘That dooms you to failure. I tell all my people we have different roles. My job is to pull things together. They’re the experts.’ Boeing has a series of training programs, from workshops to an intranet site offering instructional materials and diagnostic tools, to teach people how to be effective team leaders. Phil Polizatto leads a workshop that has a waiting list of 340 eager team leaders who understand the importance of their new roles. ‘Just as a flight crew is dependent on the captain’s behaviour,’ Polizatto says, ‘the work of a team is dependent on its leader’s behaviour.’

Sources: Caminiti, S. (20 February 1995). What Team Leaders Need to Know. Fortune, 93–100; Holpp, L. (March 1995). New Roles for Leaders: An HRD Reporter’s Inquiry. Training & Development, 46–50; Matson, E. (June–July 1997). Congratulations, You’re Promoted. Fast Company, 116–30; Boeing website, http://www.boeing.com.

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Managing team conflict The final characteristic of team process that must be consciously managed is team conflict. Conflict can arise among members within a team or between one team and another. Conflict refers to antagonistic interaction in which one party attempts to block the intentions or goals of another.56 Whenever people work together in teams, some conflict is inevitable. Bringing conflicts into the open and effectively resolving them is one of the team leader’s most challenging, yet most important, jobs. Effective conflict management has a positive impact on team cohesiveness and performance.57

conflict An antagonistic interaction in which one party attempts to thwart the intentions or goals of another.

T ypes o f co n fli ct Two basic types of conflict that occur in teams are task conflict and relationship conflict.58 Task conflict refers to disagreements among people about the goals to be achieved or the content of the tasks to be performed. Two shop foremen might disagree over whether to replace a valve, or let it run despite the unusual noise that it is making. Or two members of a top management team might disagree about whether to acquire a company or enter into a joint venture as a way to expand globally. Relationship conflict refers to interpersonal incompatibility that creates tension and personal animosity among people. For example, in one team at a company that manufactures and sells upscale children’s furniture, team members found their differing perspectives and working styles to be a significant source of conflict during crunch times. Members who needed peace and quiet were irked at those who wanted music playing in the background. Compulsively neat members found it almost impossible to work with those who liked working among stacks of clutter.59 In general, research suggests that task conflict can be beneficial because it leads to better decision making and problem solving. On the other hand, relationship conflict is typically associated with negative consequences for team effectiveness.60 One study of top management teams, for example, found that task conflict was associated with higher decision quality, greater commitment and more decision acceptance, while the presence of relationship conflict significantly reduced those same outcomes.61

task conflict Conflict that results from disagreements about the goals to be achieved or the content of the tasks to be performed. relationship conflict Conflict that results from interpersonal incompatibility that creates tension and personal animosity among people.

Bal an cin g co n fli ct an d co o per atio n There is evidence that mild conflict can be beneficial to teams.62 A healthy level of conflict helps to prevent groupthink, a phenomenon already discussed in Chapter 9, in which people are so committed to a cohesive team that they are reluctant to express contrary opinions. When people in work teams go along with an idea simply for the sake of harmony, problems typically result. Thus, a degree of conflict leads to better decision making because multiple viewpoints are expressed. However, conflict that is too strong, that is focused on personal rather than work issues or that is not managed appropriately can be damaging to the team’s morale and productivity. Too much conflict can be destructive, tear relationships apart and interfere with the healthy exchange of ideas and information.63 Team leaders have to find the right balance between conflict and cooperation, as illustrated in Exhibit 18.9. Too little conflict can decrease team performance because the team doesn’t benefit from a mix of opinions and ideas – even disagreements – that might lead to better solutions or prevent the team from making mistakes. At the other end of the spectrum, too much conflict outweighs the team’s cooperative efforts and leads to a decrease in employee satisfaction and commitment, hurting team performance. A moderate amount of conflict that is managed appropriately typically results in the highest levels of team performance.

managing team conflict

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High

Causes of conflict

Team performance

Exhibit 18.9 Balancing conflict and cooperation

Several factors can lead to conflict.64 One of the primary causes of conflict is competition over resources, such as money, information or supplies. When individuals or teams must compete for scarce or declining resources, conflict is almost inevitable. In addition, conflict Low Low Moderate High often occurs simply because people are pursuing differing goals. Goal Amount of conflict differences are natural in organisations. For instance, individual salespeople’s targets may put them in conflict with one another or with the sales manager. Moreover, the sales department’s goals might conflict with those of manufacturing, and so forth. Conflict may also arise from communication breakdowns. Poor communication can occur in any team, but virtual and global teams are particularly prone to communication breakdowns. In one virtual team developing a custom polymer for a Japanese manufacturer, the marketing team member in the United States was frustrated by a Japanese team member’s failure to provide her with the manufacturer’s marketing strategy. The Japanese team member, in turn, thought that her teammate was overbearing and unsupportive. She knew that the manufacturer hadn’t yet developed a clear marketing strategy, and that pushing for more information could damage the relationship by causing the customer to ‘lose face’.65 Trust issues can be a major source of conflict in virtual teams if members feel that they are being left out of important communication interactions.66 In addition, the lack of non-verbal cues in virtual interactions leads to more misunderstandings.

St yles to han d le co n fli ct Teams as well as individuals develop specific styles for dealing with conflict, based on the desire to satisfy their own concern versus the other party’s concern. A model that describes five styles of handling conflict is shown in Exhibit 18.10. The two major dimensions are the extent to which an individual is assertive versus cooperative in his or her approach to conflict.67 Exhibit 18.10 A model of styles to handle conflict Sources: Adapted from Kenneth Thomas, ‘Conflict and Conflict Management’, in Handbook of Industrial and Organizational Behavior, ed. M. D. Dunnette (New York: John Wiley, 1976), p. 900; and Nan Peck. (20 September 2005). Conflict 101: Styles of Fighting. North Virginia Community College website, http://www.nvcc.edu/home/ npeck/conflicthome/conflict/ Conflict101/conflictstyles.htm (accessed 13 April 2011).

Assertive

Dominating (my way)

Collaborating (our way)

Compromising (halfway)

Assertiveness

Avoiding (no way)

Accommodating (your way)

Unassertive Uncooperative

Cooperativeness

Cooperative

●   The dominating style (my way) reflects assertiveness to get one’s own way, and should be used when quick, decisive action is vital on important issues or unpopular actions, such as during emergencies or urgent cost cutting. ●   The avoiding style (no way) reflects neither assertiveness nor cooperativeness. It is appropriate when an issue is trivial, when there is no chance of winning, when a delay to gather more information is needed or when a disruption would be costly.

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●● The compromising style (halfway) reflects a moderate amount of both assertiveness and cooperativeness. It is appropriate when the goals on both sides are equally important, when opponents have equal power and both sides want to split the difference, or when people need to arrive at temporary or expedient solutions under time pressure. ●● The accommodating style (your way) reflects a high degree of cooperativeness, which works best when people realise that they are wrong, when an issue is more important to others than to oneself, when building social credits for use in later discussions and when maintaining harmony is especially important. ●● The collaborating style (our way) reflects a high degree of both assertiveness and cooperativeness. The collaborating style enables both parties to win, although it may require substantial bargaining and negotiation. The collaborating style is important when both sets of concerns are too important to be compromised, when insights from different people need to be merged into an overall solution and when the commitment of both sides is needed for a consensus. An example of the collaborating style comes from the 2008 Summer Olympics in Beijing. When building the Beijing National Aquatics Center (typically called the ‘Water Cube’), two architectural firms – one Chinese and the other Australian – developed designs that were totally different. Although this created some tension, instead of fighting for their own ideas, the two sides came up with a totally new concept that excited everyone. The resulting award-winning building is spectacular.68 Each of the five styles is appropriate in certain cases, and effective team members and leaders vary their style to fit the specific situation.

Innovative Way

McDevitt Street Bovis Rather than the typical construction project characterised by conflicts, frantic scheduling, and poor communications, McDevitt Street Bovis (which later became a subsidiary of the Australian based Lend Lease group) wanted its collection of contractors, designers, suppliers, and other partners to function like a true team – putting the success of the project ahead of their own individual interests. The team-building process at Bovis is designed to take teams to the performing stage as quickly as possible by giving everyone an opportunity to get to know one another; explore the ground rules; and clarify roles, responsibilities, and expectations. The team is first divided into separate groups that may have competing objectives – such as the clients in one group, suppliers in another, engineers and architects in a third, and so

forth – and asked to come up with a list of their goals for the project. Although interests sometimes vary widely in purely accounting terms, common themes almost always emerge. By talking about conflicting goals and interests, as well as what all the groups share, facilitators help the team gradually come together around a common purpose and begin to develop shared values that will guide the project. After jointly writing a mission statement for the team, each party says what it expects from the others, so that roles and responsibilities can be clarified. The intensive team-building session helps take members quickly through the forming and storming stages of development. ‘We prevent conflicts from happening,’ says former facilitator Monica Bennett. Leaders at McDevitt Street Bovis believe building better teams builds better buildings.

Source: Petzinger, T. Jr. 21 March 1997. Bovis Team Helps Builders Construct a Solid Foundation. The Wall Street Journal, B1.

Negotiation One distinctive type of conflict management is negotiation, whereby people engage in give-and-take discussions and consider various alternatives to reach a joint decision that is acceptable to both parties. Negotiation is used when a conflict is formalised, such as between a union and management.

negotiation Involves people engaging in give-and-take discussions and considering various alternatives to reach a joint decision that is acceptable to both parties.

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New Manager Self-Test Managing conflict Conflicting opinions and perspectives occur in every team. The ability to handle conflict and disagreement is one mark of a successful new manager. To understand your approach to managing conflict, think about disagreements you have had with people on student teams or in other situations, then answer each of the following items as Mostly true or Mostly false for you Mostly true

1 I typically assert my opinion to win a disagreement. 2 I often suggest solutions that combine others’ points of view. 3 I prefer not to argue with team members. 4 I raise my voice to get other people to accept my position. 5 I am quick to agree when someone makes a good point.

Mostly false

Scoring and Interpretation: Three categories of conflicthandling strategies are measured in this instrument: competing, accommodating, and collaborating. By comparing your scores you can see your preferred conflict-handling strategy. Give yourself 1 point for each item marked Mostly true. Competing: Items 1, 4, 7 Accommodating: Items 2, 5, 8 Collaborating: Items 3, 6, 9 For which conflict-handling strategy do you score highest? New managers may initially be accommodating to get along with people until they size up the situation. A too-strong competing style may prevent subordinates from having a say in important matters. The collaborating style tries for a win-win solution and has the long-run potential to build a constructive team. How would your strategy differ if the other people involved in a disagreement were family members, friends, subordinates or bosses?

6 I tend to keep quiet rather than argue with other people. 7 I stand firm in expressing my viewpoints during a disagreement. 8 I try to include other people’s ideas to create a solution they will accept. 9 I like to smooth over disagreements so people get along.

T ypes o f n egotiation integrative negotiation A collaborative approach based on a win-win assumption, whereby the parties want a creative solution that benefits both sides of the conflict. distributive negotiation A competitive and adversarial approach in which each party strives to get as much as it can, usually at the expense of the other party.

Conflicting parties may embark on negotiation from different perspectives and with different intentions, reflecting either an integrative approach or a distributive approach. Integrative negotiation is based on a win-win assumption, in that all parties want to come up with a creative solution that can benefit both sides. Rather than viewing the conflict as a win-lose situation, people look at the issues from multiple angles, consider tradeoffs, and try to ‘expand the pie’ (meaning to create additional value) rather than divide it. With integrative negotiation, conflicts are managed through cooperation and compromise, which fosters trust and positive long-term relationships. Distributive negotiation, on the other hand, assumes that the size of the ‘pie’ is fixed, and each party attempts to get as much of it as they can. One side wants to win, which means the other side must lose. With this win-lose approach, distributive negotiation is competitive and adversarial, rather than collaborative, and does not typically lead to positive long-term relationships.69

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Most experts emphasise the value of integrative negotiation for today’s collaborative business environment. That is, the key to effectiveness is to see negotiation not as a zero-sum game, but as a process for reaching a creative solution that benefits everyone.70

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Case project 18.2

Ru les fo r reachin g a win -win so lutio n Achieving a win-win solution through integrative negotiation is based on four key strategies:71 ●● Separate the people from the problem. For successful integrative negotiation, people stay focused on the problem and the source of conflict, rather than attacking or attempting to discredit each other. ●● Focus on interests, not current demands. Demands are what each person wants from the negotiation, whereas interests represent the ‘why’ behind the demands. Consider two sisters arguing over the last orange in the fruit bowl. Each insisted she should get the orange and refused to give up (demands). If one sister had asked the other why she wanted the orange (interests), the sisters would have discovered that one wanted to eat it, and the other wanted the peel to use for a project. By focusing on interests, the sisters would have been able to arrive at a solution that gave each what she wanted.72 Demands create yesor-no obstacles to effective negotiation, whereas interests present problems that can be solved creatively. ●● Listen and ask questions. A good strategy for most negotiations is to listen and ask questions. You can learn more about your opponent’s position, their constraints and their needs by being quiet or asking questions. Smart negotiators want to learn the other side’s constraints so that they can help overcome them. Don’t dismiss the opposing party’s limitation as unreasonable or think ‘That’s their problem’. You can take it on as your own problem and try to come up with a solution for your opponent so that you can get closer to an agreement. ●● Insist that results be based on objective standards. Each party in a negotiation has its own interests and naturally would like to maximise its outcomes. Successful negotiation requires focusing on objective criteria and maintaining standards of fairness rather than using subjective judgements about the best solution. ➜➜ Conflict refers to antagonistic interaction in which one party attempts to block the intentions or goals of another. ➜➜ Some conflict, particularly task conflict, can be beneficial to teams. ➜➜ Task conflict is conflict that results from disagreements about the goals to be achieved or the content of the tasks to be performed. ➜➜ Relationship conflict results from interpersonal incompatibility



that creates tension and personal animosity among people.

➜➜ Causes of conflict include competition over resources, goal differences and communication breakdowns. ➜➜ Teams and individuals use a variety of styles for dealing with conflict, including the dominating style, the avoiding style, the compromising style, the accommodating style and the collaborating style, and each can be effective under certain circumstances. ➜➜ Negotiation is a conflict management strategy whereby people engage



in give-and-take discussions and consider various alternatives to reach a joint decision that is acceptable to both parties.

remember this

➜➜ Integrative negotiation is a collaborative approach that is based on a win-win assumption, whereby the parties want to come up with a creative solution that benefits both sides of the conflict. ➜➜ Distributive negotiation is a competitive and adversarial approach in which each party strives to get as much as it can, usually at the expense of the other party.

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v

sustainable development

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Implementing sustainable development through teamwork The concepts of sustainable development are a response to the new complexities in the business environment. Gone are the ‘good old days’ – which were actually bad old days – of last century, when managers were able to get away with still making money while polluting the environment and treating many stakeholders badly. Achieving maturity in sustainable development means balancing short-term goals with medium- and long-term goals. And it means doing so in a multidimensional world of financial goals, environmental goals and societal goals, in which life has become more complex for managers. So, when it comes time to formulate a sustainability strategy, the task is complex, and no single person is likely to know all the answers. We should use a team-based approach! The top team of the organisation, often known as the leadership team, can indeed work together to design the strategy and formulate and authorise the practices, initiatives and operations that result in sustainable development. When the team does this, ownership and commitment is strongly built in, and each of these executives will then have a shared belief and ability to sell the strategy around the organisation. At the implementation level, on the ‘shop floor’, people are then expected to implement the sustainability projects and practices. An example is to reduce the use of electricity or paper. Another is to implement more flexible human resources policies, or to improve an employee health plan, or safety system. Is this implementation best done by single individuals or by collectives? Almost always, a project team will do a better job than an individual, especially if the initiative and its implementation project are not simple. A team can bring different perspectives to bear, different types of expertise, and a team can achieve motivation levels and commitment to other team members which help get the job done. Finally, consider the ‘spirit’ underpinning teamwork, and compare it to sustainability at the organisational level. Teamwork requires engagement and collaboration between people and joint goals, and sustainable development is concerned with collaboration and win-win practices and outcomes between stakeholder groups. The concepts are complementary, and are philosophically overlapping. Executives and organisations which are likely to perceive and drive for the benefits of teamwork, are likely to be ‘sympathetic’ to and disposed towards being proactive in their sustainability practices. So in summary, what is the best way to formulate and then implement this rather complex thing called sustainable development? Get an enthusiastic, expert team! The right team of people, given a vision, will be able to create a strategy, and the initiatives that go with it, and then organise implementation. Team composition for sustainability strategy formulation should probably best be quite senior people, but for implementing specific initiatives, can be a slice of people from various functions and levels of the organisation, as needed (see Exhibit 18.2).

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At NEC’s Australian operation in Melbourne, described at the beginning of this chapter, one brave manager suggested that the company discard its traditional way of organising its operations, and bring the segregated workers physically together, as a team. This meant bringing staff from the pre-production process, the electronic testing and the final assembly tasks to work closely together as a single team-based work cell. As you will recall, they had previously been spread around the large factory. The experiment worked better than anyone could have forecast. Within a short period, the group had formed a cohesive team, and moved from communicating by

rude notes to helping each other achieve record levels of productivity and quality. The people who had previously been working on the same parts went from being strangers to workmates, took their lunch and tea breaks together, and solved production problems together; some even became friends. Both personal and work outcomes were improved. The reorganisation of the whole factory followed, transforming NEC from departments doing similar processes, passing work from one remote department to another, to teams of people working together on products in closely knit cellular teams.

1 One company had 40 per cent of its workers and 20 per cent of its managers resign during the first year after reorganising into teams. What might account for this dramatic turnover? How might managers ensure a smooth transition to teams?

differences among team members, what would you do? How might you use the various conflict-resolution techniques described in the chapter?

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Response to the Management Challenge

Discussion questions

2 Have you experienced any of the five contributions of teams shown in Exhibit 18.2 with a team you have participated in? Describe your experience and why you think the team was able to make that specific contribution.

6 Experts say that for teams to function well, members have to get to know one another in some depth. What specifically would you do to facilitate this in a collocated team? What about in a global virtual team?

3 Suppose that you are the leader of a team that has just been created to develop a new registration process at your college or university. How can you use an understanding of the stages of team development to improve your team’s effectiveness?

7 Think of your favourite sport team, or observe a sport team training or playing at university. Can you identify which team members seem to play task-specialist roles and who might play socio-emotional roles? What behaviours did you observe for each type of role?

4 Imagine yourself as a potential member of a team responsible for designing a new package for a breakfast cereal. Do you think interpersonal skills would be equally important if the team is organised face to face versus a virtual team? Why or why not? Might different types of interpersonal skills be required for the two types of teams? Be specific.

8 Some people argue that the presence of an outside threat correlates with a high degree of team cohesion. Would you agree or disagree with this assertion? Explain your answer.

5 If you were the leader of a special-purpose team developing a new computer game and conflicts arose related to power and status

10 If you were the leader of a newly formed team, what might you do to make sure that the team developed norms of high performance?

9 Discuss how the dilemmas of teamwork might be intensified in a virtual team. What dilemmas do you encounter when you have to do class assignments as part of a team? Discuss.

Consumer safety or team commitment? Nancy was part of a pharmaceutical team developing a chemical substance called loperamide, a liquid treatment for diarrhoea for people unable to take solid medicine – namely infants, children and the elderly. Loperamide contained 44 times the amount of saccharin allowed in a soft drink, but there were no regulations governing saccharin content in medication. Nancy was the only medical member of the seven-person project team. The team made a unanimous decision to reduce the saccharin

Ethical challenge

content before marketing loperamide, and so the team initiated a three-month effort for reformulation. In the meantime, management was pressuring the team to allow human testing with the original formula until the new formula became available. After a heated team debate, all the team members except Nancy voted to begin testing with the current formula.

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Nancy believed it was unethical to test on old people and children a drug she considered potentially dangerous. As the only medical member of the team, she had to sign the forms allowing testing. She refused and was told that unless she signed, she would be removed from the project, demoted and seen as a poor team player, non-promotable, lacking in judgement and unable to work with marketing people. Nancy was aware that no proof existed that high saccharin would be directly harmful to potential users of loperamide.

W h at d o yo u d o ? 1 Refuse to sign. As a medical doctor, Nancy must stand up for what she believes is right. 2 Resign. There is no reason to stay in this company and be punished for ethically correct behaviour. Testing the drug will become someone else’s responsibility. 3 Sign the form. The judgement of other team members cannot be all wrong. The loperamide testing is not illegal and will move ahead anyway, so it would preserve team unity and company effectiveness to sign.

Source: Based on Beauchamp, T. L. (1983). Ethical Theory and Business, 2nd edn (Englewood Cliffs: Prentice-Hall).

Gr oup challenge

Feedback exercise

Step 1. Divide into groups of three to four students. Think back to recent experiences working in a team, either at work or school. Write down your answers to the following questions.

●

●

●

 What behaviours by other team members did you most appreciate?

What behaviours of other team members did you least appreciate?

What do you think the team members appreciated about you?

Case for cr itical analysis

What actions of yours might the team members have appreciated least? Step 2. Take turns sharing your answers with other members of your group. Make notes about common themes for answers to each of the above questions. What is the single most important theme for each of these answers? Step 3. What are the implications of these answers for you as a member of a future team? How might you change your behaviour to make a larger contribution to a team?

●

Are we a team? Suppose that you are the newly appointed CIO of a medium-sized technology company. Your company recruits top graduates from schools of business and engineering. Talent, intellect,

You are surprised by the consistency of remarks and opinions. For example, a picture emerges of the previous CIO, Bob, who was obviously awed by the talent level of team members. Comments such as, ‘Bob pretty much let us do what we wanted’, and ‘Bob would start the meeting

creativity – it’s all there in your team. If you lined up this crowd for a group photo, credentials in hand, the ‘wow’ factor would be there. Your company has offices in every Australian state and territory, with headquarters in Sydney. The talent pool is amazing across the board, both in information technology (IT) and the rest of the company. But when the CEO hires you, he says, ‘The company is performing nowhere near its potential. On the surface, we are doing fine. But we should be a Fortune 500 organisation. With this much talent, we should be growing at a much faster rate. The CEO also says that you are inheriting 'a super team with disappointing performance'. His task for you is to pull the IT stars into a cohesive team that will meet company needs for new IT systems and services much faster and more effectively. Without making your superstars feel that they were being critiqued and second-guessed, or indicating that ‘there’s a real problem here’, you want to gather as much information and feedback as possible from the 14 team members (regional CIOs and department heads) who report to you. You hold one-on-one meetings in order to give a voice to each person, allowing each individual to provide an honest assessment of the team as well as areas for improvement and a vision for the future of team efforts.

and then just fade into the background, as if he found us intimidating’ are typical. The most disturbing comment, ‘Bob always agreed with me’, is expressed by most of the team members at some point in your conversations. It is as if the regional heads believe that your predecessor wanted them to succeed by doing as they thought best for themselves. You query team members about the level of cooperation during meetings and uncover areas of concern, including the complaint that others at the table constantly check their iPads and BlackBerrys during meetings. One department head tells you, ‘You could turn off the sound while watching one of our meetings and just by the body language and level of attention tell who is aligned with whom and who wishes the speaker would just shut up. It would be comical if it weren’t so distressing.’ Such remarks are indicative of a lack of trust and respect and a breakdown of genuine communication. One team member tells you, ‘I recently encountered a problem that a department head from another region had successfully solved, but the information was never shared, so here I am reinventing the wheel and wasting valuable time.’ It is apparent that these so-called ‘high performers’ are territorial, and that the ‘each division for itself’ attitude is becoming a cultural norm; unchecked, this has been slowing the team’s response to line departments and customers.

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You are also struck by the similarity of the regional IT leaders in their backgrounds, comments and attitudes, which presents a whole new dilemma: How do you create diversity, jump-start ideas and reignite passion? This looks like a group of individualists who don’t know how to play as a team. You don’t want to diminish the individual talent, but you are concerned by the lack of cohesion. You need to find a way to help people think less about themselves and more about sharing work and information and achieving collective results for the good of the company. Team building is an art, anchored by trust and communication, and committed to mutual success. What you’re seeing instead looks like team

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dysfunction. Now, you have to determine the steps necessary to build a cohesive, visionary team. Questions 1 What type of team do you, the new CIO, have? What do you see as the key problem with the team? 2 How do you think the team evolved to this low level of cooperation and cohesiveness? 3 What would you do to help turn this collection of individual regional and department heads into a top-performing team?

H o l d e n O u t e r wa r e : l e a d i n g t e a m s For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

On the job video case

Q uestions 1 Is design manager Nikki Brush part of a group, or part of a team? Explain the difference. 2 What type of team did Nikki Brush participate in when she was a freelancer? What type of team does she participate in as a full-time employee at Holden?

3 What are potential disadvantages of these teams for Holden’s apparel designers? What can managers do to help avoid these downsides?

endnotes   1 David Kesmodel. (7 February 2012). Boeing Teams Speed Up 737 Output. The Wall Street Journal Online, http://online.wsj.com/article/SB10001424 052970203436904577155204034907744.html (accessed 25 September 2012).   2 Industry Week/Manufacturing Performance Institute’s Census of Manufacturers for 2004, reported in Traci Purdum. (May 2005). Teaming, Take 2. Industry Week, 41–3.   3 Carl E. Larson and Frank M. J. LaFasto. (1989). TeamWork (Newbury Park, CA: Sage); J. R. Katzenbach and D. K. Smith. (1993). The Wisdom of Teams (Boston, MA: Harvard Business School Press); and Dawn R. Utley and Stephanie E. Brown. (2010). Establishing Characteristic Differences Between Team and Working Group Behaviors. Institute of Industrial Engineers Annual Conference Proceedings, 1–6.   4 Some of the advantages in this section are discussed in ‘The Rewards of Teaming’ sidebar in Amy C. Edmondson. (April 2012). Teamwork on the Fly. Harvard Business Review, 72–80.   5 Geoff Colvin. (21 May 2012). First: Team Players Trump All-Stars. Fortune, 46–7.   6 See the excellent discussion in Atul Gawande. (26 May 2011). Cowboys and Pit Crews. 2011 Harvard Medical School commencement address, The New Yorker, http://www.newyorker.com/online/blogs/newsdesk/2011/05/ atul-gawande-harvard-medical-school-commencement-address.html (accessed 26 September 2012).   7 Colvin. First: Team Players Trump All-Stars.   8 R. B. Zajonc. (1969). Social Facilitation. Science, 145, 269–74.   9 Susanne G. Scott and Walter O. Einstein. (2001). Strategic Performance Appraisal in Team-Based Organizations: One Size Does Not Fit All. Academy of Management Executive, 15:2, 107–16. 10 The discussion of self-managed teams is based on Ruth Wageman. (Summer 1997). Critical Success Factors for Creating Superb Self-Managing Teams.

Organizational Dynamics, 49–61; James H. Shonk. (1992). Team-Based Organizations (Homewood, IL: Business One Irwin); Thomas Owens. (February 1991). The Self-Managing Work Team. Small Business Report, 53–65. 11 Jason Fried. (April 2011). Get Real: When the Only Way Up is Out. Inc., 35–6. 12 David A. Ferrucci. (7 January 2012). Building the Team That Built Watson. The New York Times, http://www.nytimes.com/2012/01/08/ jobs/building-the-watsonteam-of-scientists.html?_r=0 (accessed 1 October 2012). 13 Study by G. Clotaire Rapaille, reported in Karen Bernowski. (January 1995). What Makes American Teams Tick? Quality Progress, 28:1, 39–42. 14 Study by Jean Twenge and colleagues, reported in Sharon Jayson. (10 July 2012). What’s on Americans’ Minds? Increasingly ‘Me’. USA Today, http://usatoday30.usatoday.com/LIFE/usaedition/2012-07-11-Individualism-Twenge----_ST_U.htm (accessed 2 October 2012). 15 Avan Jassawalla, Hemant Sashittal and Avinash Malshe. (2009). Students’ Perceptions of Social Loafing: Its Antecedents and Consequences in Undergraduate Business Classroom Teams. Academy of Management Learning and Education, 8:1, 42–54; Robert Albanese and David D. Van Fleet. (1985). Rational Behavior in Groups: The Free-Riding Tendency. Academy of Management Review, 10, 244–55. 16 See David H. Freedman. (September 2006). The Idiocy of Crowds (‘What’s Next’ column). Inc., 61–2. 17 Quoted in Jason Zweig. (25 April 2009). The Intelligent Investor: How Group Decisions End Up Wrong-Footed. The Wall Street Journal. 18 Why Some Teams Succeed (and So Many Don’t). (October 2006). Harvard Management Update, 3–4; Frederick P. Morgeson, D. Scott DeRue and Elizabeth P. Karam. (January 2010). Leadership in Teams: A Functional

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Approach to Understanding Leadership Structure and Processes. Journal of Management, 36:1, 5–39; and Patrick Lencioni. (October 2009). Dissolve Dysfunction: Begin Building Your Dream Team. Leadership Excellence, 20. 19 Reported in Jerry Useem. (12 June 2006). What’s That Spell? Teamwork! Fortune, 65–6. 20 Eric Sundstrom, Kenneth P. DeMeuse and David Futtrell. (February 1990). Work Teams. American Psychologist, 45, 120–33; María Isabel Delgado Piña, Ana María Romero Martínez and Luis Gómez Martínez. (2008). Teams in Organizations: A Review on Team Effectiveness. Team Performance Management, 14:1–2, 7–21; Morgeson, DeRue and Karam. Leadership in Teams. 21 Deborah L. Gladstein. (1984). Groups in Context: A Model of Task Group Effectiveness. Administrative Science Quarterly, 29, 499–517. For an overview of research on team effectiveness, see John Mathieu et al. (June 2008). Team Effectiveness 1997–2007: A Review of Recent Advancements and a Glimpse into the Future. Journal of Management, 34:3, 410–76. 22 Sujin K. Horwitz and Irwin B. Horwitz. (December 2007). The Effects of Team Diversity on Team Outcomes: A Meta-Analytic Review of Team Demography. Journal of Management, 33:6, 987–1015; Dora C. Lau and J. Keith Murnighan. (1998). Demographic Diversity and Faultlines: The Compositional Dynamics of Organizational Groups. Academy of Management Review, 23:2, 325–40. 23 The discussion of virtual teams is based on Phillip L. Hunsaker and Johanna S. Hunsaker. (2008). Virtual Teams: A Leader’s Guide. Team Performance Management, 14:1–2, 86ff; Chris Kimble. (January–February 2011). Building Effective Virtual Teams: How to Overcome the Problems of Trust and Identity in Virtual Teams. Global Business and Organizational Excellence, 6–15; Wayne F. Cascio and Stan Shurygailo. (2002). E-Leadership and Virtual Teams. Organizational Dynamics, 31:4 362–76; Anthony M. Townsend, Samuel M. DeMarie and Anthony R. Hendrickson. (August 1998). Virtual Teams: Technology and the Workplace of the Future. Academy of Management Executive, 12:3, 17–29; Deborah L. Duarte and Nancy Tennant Snyder. (1999). Mastering Virtual Teams (San Francisco: Jossey-Bass). 24 Survey by RW3CultureWizard, reported in Golnaz Sadri and John Condia. (January–February 2012). Managing the Virtual World. Industrial Management, 21–5. 25 Vijay Govindarajan and Anil K. Gupta. (Summer 2001). Building an Effective Global Business Team. MIT Sloan Management Review, 42:4, 63–71. 26 Jessica Lipnack and Jeffrey Stamps. (January– February 1999). Virtual Teams: The New Way to Work. Strategy & Leadership, 14–19; Sadri and Condia. Managing the Virtual World. 27 This discussion is based on Arvind Malhotra, Ann Majchrzak and Benson Rosen. (February 2007). Leading Virtual Teams. Academy of Management Perspectives, 21:1, 60–9; Benson Rosen, Stacie Furst and Richard Blackburn. (2007). Overcoming Barriers to Knowledge Sharing in Virtual Teams. Organizational Dynamics, 36:3, 259–73; Marshall Goldsmith. (31 May 2007). Crossing the Cultural Chasm; Keeping Communication Clear and Consistent with Team Members from Other Countries Isn’t Easy, Says Author Maya Hu-Chan. BusinessWeek Online, http://www .businessweek.com/careers/content/may2007/ca20070530_521679. htm (accessed 24 August 2007); Bradley L. Kirkman et al. (2002). Five Challenges to Virtual Team Success: Lessons from Sabre, Inc. Academy of Management Executive, 16:3, 67–79. 28 Darl G. Kolb, Greg Prussia and Joline Francoeur. (May 2009). Connectivity and Leadership: The Influence of Online Activity on Closeness and Effectiveness. Journal of Leadership and Organizational Studies, 15:4, 342–52. 29 Ann Majchrzak et al. (May 2004). Can Absence Make a Team Grow Stronger? Harvard Business Review, 82:5, 131. 30 Lynda Gratton. (18 June 2007). Working Together . . . When Apart. The Wall Street Journal; Kirkman et al. Five Challenges to Virtual Team Success.

31 Reported in Richard Pastore. (23 January 2008). Global Team Management: It’s a Small World After All. CIO, http://www.cio.com/article/174750/Global_ Team_Management_It_s_a_Small_World_After_All (accessed 20 May 2008). 32 Reported in Jia Lynn Yang. (12 June 2006). The Power of Number 4.6. Part of a special series. Secrets of Greatness: Teamwork. Fortune, 122. 33 Martin Hoegl. (2005). Smaller Teams–Better Teamwork: How to Keep Project Teams Small. Business Horizons, 48, 209–14. 34 Stephanie T. Solansky. (2011). Team Identification: A Determining Factor of Performance. Journal of Managerial Psychology, 26:3, 247–58. 35 Reported in Yang. The Power of Number 4.6. 36 For research findings on group size, see Erin Bradner, Gloria Mark and Tammie D. Hertel. (March 2005). Team Size and Technology Fit: Participation, Awareness, and Rapport in Distributed Teams. IEEE Transactions on Professional Communication, 48:1, 68–77; M. E. Shaw. (1981) Group Dynamics, 3rd edn (New York: McGraw-Hill); G. Manners. Another Look at Group Size, Group Problem-Solving, and Member Consensus. (1975). Academy of Management Journal, 18, 715–24; Martin Hoegl. Smaller Teams – Better Teamwork. 37 Bradner, Mark and Hertel. Team Size and Technology Fit: Participation, Awareness, and Rapport in Distributed Teams; Sadri and Condia. Managing the Virtual World. 38 Warren E. Watson, Kamalesh Kumar and Larry K. Michaelsen. (1993). Cultural Diversity’s Impact on Interaction Process and Performance: Comparing Homogeneous and Diverse Task Groups. Academy of Management Journal, 36, 590–602; Gail Robinson and Kathleen Dechant. (1997). Building a Business Case for Diversity. Academy of Management Executive, 11:3, 21–31; David A. Thomas and Robin J. Ely. (September– October 1996). Making Differences Matter: A New Paradigm for Managing Diversity. Harvard Business Review,79–90. 39 D. van Knippenberg and M. C. Schippers. (2007). Work Group Diversity. Annual Review of Psychology, 58, 515–41; J. N. Cummings. (2004). Work Groups: Structural Diversity and Knowledge Sharing in a Global Organization. Management Science, 50:3, 352–64; J. Stuart Bunderson and Kathleen M. Sutcliffe. (2002). Comparing Alternative Conceptualizations of Functional Diversity in Management Teams: Process and Performance Effects. Academy of Management Journal, 45:5, 875–93; and Marc Orlitzky and John D. Benjamin. (2003). The Effects of Sex Composition on Small Group Performance in a Business School Case Competition. Academy of Management Learning and Education, 2:2, 128–38. 40 Anita Woolley and Thomas Malone. (June 2011). Defend Your Research: What Makes a Team Smarter? More Women. Harvard Business Review, http://hbr.org/2011/06/defend-your-research-what-makes-a-teamsmartermore-women/ar/1 (accessed 1 October 2012). 41 Watson et al. Cultural Diversity’s Impact on Interaction Process and Performance; and D. C. Hambrick et al. (1998). When Groups Consist of Multiple Nationalities: Towards a New Understanding of the Implications. Organization Studies, 19:2, 181–205. 42 Matt Moffett. (25 August 2010). Trapped Miners Kept Focus, Shared Tuna – Foiled Escape, Bid to Organize Marked First Two Weeks Underground in Chile. The Wall Street Journal; Lessons on Leadership and Teamwork – From 700 Meters Below the Earth’s Surface. Universia Knowledge@Wharton, 22 September 2010, http://www.wharton.universia.net/index.cfm?fa=viewArt icle&id=1943&language=english (accessed 29 September 2010). 43 R. M. Belbin. (1983). Team Roles at Work (Oxford, UK: Butterworth Heinemann); Tony Manning, R. Parker and G. Pogson. (2006). A Revised Model of Team Roles and Some Research Findings. Industrial and Commercial Training, 38:6, 287–96; George Prince. (April 1989). Recognizing Genuine Teamwork. Supervisory Management, 25–36; K. D. Benne and P. Sheats. (1948). Functional Roles of Group Members. Journal of Social Issues, 4, 41–9; R. F. Bales. (1980). SYMOLOG Case Study Kit (New York: Free Press).

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44 Robert A. Baron. (1986). Behavior in Organizations, 2nd edn (Boston: Allyn & Bacon). 45 Ibid. 46 Bruce W. Tuckman and Mary Ann C. Jensen. (1977). Stages of Small-Group Development Revisited. Group and Organizational Studies, 2, 419–27; Bruce W. Tuckman. (1965). Developmental Sequences in Small Groups. Psychological Bulletin, 63, 384–99. See also Linda N. Jewell and H. Joseph Reitz. (1981). Group Effectiveness in Organizations (Glenview, IL: Scott Foresman). 47 M. E. Shaw. (1981). Group Dynamics, 3rd edn (New York: McGraw-Hill). 48 Daniel C. Feldman and Hugh J. Arnold. (1983). Managing Individual and Group Behavior in Organizations (New York: McGraw-Hill). 49 Amanuel G. Tekleab, Narda R. Quigley and Paul E. Tesluk. (April 2009). A Longitudinal Study of Team Conflict, Conflict Management, Cohesion, and Team Effectiveness. Group & Organization Management, 34:2, 170–205; Dorwin Cartwright and Alvin Zander. (1968). Group Dynamics: Research and Theory, 3rd edn (New York: Harper & Row); and Elliot Aronson. (1976). The Social Animal (San Francisco: W. H. Freeman). 50 Vishal K. Gupta, Rui Huang and Suman Niranjan. (2010). A Longitudinal Examination of the Relationship Between Team Leadership and Performance. Journal of Leadership and Organizational Studies, 17:4, 335–50; Marcial Losada and Emily Heaphy. (February 2004). The Role of Positivity and Connectivity in the Performance of Business Teams. American Behavioral Scientist, 47:6, 740–65. 51 Stanley E. Seashore. (1954). Group Cohesiveness in the Industrial Work Group (Ann Arbor, MI: Institute for Social Research). 52 J. Richard Hackman. (1976). Group Influences on Individuals. In Handbook of Industrial and Organizational Psychology, ed. M. Dunnette (Chicago: Rand McNally). 53 These are based on Daniel C. Feldman. (1984). The Development and Enforcement of Group Norms. Academy of Management Review, 9, 47–53. 54 Jeanne M. Wilson et al. (1994). Leadership Trapeze: Strategies for Leadership in Team-Based Organizations (San Francisco: Jossey-Bass), p. 12. 55 Simon Taggar and Robert Ellis. (2007). The Role of Leaders in Shaping Formal Team Norms. The Leadership Quarterly, 18, 105–20. 56 Stephen P. Robbins. (1974). Managing Organizational Conflict: A Nontraditional Approach (Englewood Cliffs, NJ: Prentice Hall). 57 Tekleab, Quigley and Tesluk. A Longitudinal Study of Team Conflict, Conflict Management, Cohesion, and Team Effectiveness. 58 Based on K. A. Jehn. (1995). A Multimethod Examination of the Benefits and Determinants of Intragroup Conflict. Administrative Science Quarterly, 40, 256–82; K. A. Jehn. (1997). A Qualitative Analysis of Conflict Types and Dimensions in Organizational Groups. Administrative Science Quarterly, 42, 530–57.

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59 Linda A. Hill. (28 August 1995). A Note for Analyzing Work Groups. Harvard Business School Cases; revised 3 April 1998, Product # 9-496-026, ordered at http://hbr.org/search/linda+a+hill/4294934969/. 60 A. Amason. (1996). Distinguishing the Effects of Functional and Dysfunctional Conflict on Strategic Decision Making: Resolving a Paradox for Top Management Teams. Academy of Management Journal, 39:1, 123–48; Jehn. A Multimethod Examination of the Benefits and Determinants of Intragroup Conflict; K. A. Jehn and E. A. Mannix. (2001). The Dynamic Nature of Conflict: A Longitudinal Study of Intragroup Conflict and Group Performance. Academy of Management Journal, 44, 238–51. 61 Amason. Distinguishing the Effects of Functional and Dysfunctional Conflict on Strategic Decision Making. 62 Dean Tjosvold et al. (2003). Conflict Values and Team Relationships: Conflict’s Contribution to Team Effectiveness and Citizenship in China. Journal of Organizational Behavior, 24, 69–88; C. De Dreu and E. Van de Vliert. (1997). Using Conflict in Organizations (Beverly Hills, CA: Sage); Kathleen M. Eisenhardt, Jean L. Kahwajy and L. J. Bourgeois III. (Winter 1997). Conflict and Strategic Choice: How Top Management Teams Disagree. California Management Review, 39:2, 42–62. 63 Kenneth G. Koehler. (19 July 1989). Effective Team Management. Small Business Report, 14–16; Dean Tjosvold. (June 1984). Making Conflict Productive. Personnel Administrator, 29, 121. 64 This discussion is based in part on Richard L. Daft. (1992).Organization Theory and Design (St Paul, MN: West), Chapter 13; Paul M. Terry. (1996). Conflict Management. Journal of Leadership Studies, 3:2, 3–21. 65 Some of the advantages in this section are discussed in ‘The Rewards of Teaming’ sidebar in Amy C. Edmondson. (April 2012). Teamwork on the Fly. Harvard Business Review, 72–80. 66 Yuhyung Shin. Conflict Resolution in Virtual Teams. Organizational Dynamics 34, no. 4 (2005): 331–345. 67 This discussion is based on K. W. Thomas. Towards Multidimensional Values in Teaching: The Example of Conflict Behaviors. Academy of Management Review 2 (1977): 487. 68 Some of the advantages in this section are discussed in ‘The Rewards of Teaming’ sidebar in Amy C. Edmondson. Teamwork on the Fly. 69 Negotiation Types. (9 June 2010). The Negotiation Experts, http://www .negotiations.com/articles/negotiationtypes/ (accessed 28 September 2010). 70 Rob Walker. (August 2003). Take It or Leave It: The Only Guide to Negotiating You Will Ever Need. Inc., 75–82. 71 Ibid. 72 This familiar story has been reported in many publications, including The Six Best Questions to Ask Your Customers. Marketing and Distribution Company Limited, http://www.madisco.bz/articles/The%20Six%20 Best%20Questions%20to%20Ask%20Your%20Customers.pdf (accessed 28 September 2010).

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ use the interactive flashcards to revise relevant key terms and their definitions ➜ test your understanding of teamwork in organisations by taking the revision quiz ➜ download the audio summary for an on-the-go review.

Cour seMate

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Part 5 Continuing case

G e n e r a l M o t o r s Pa r t F i v e : L e a d i n g

Blogs take GM’s corporate communication into fast lane Whether it’s the no-nonsense directness of legendary CEO Jack Welch, or the change-the-world idealism of Apple’s Steve Jobs, effective communicators exhibit powerful mastery over their messages. Yet in the age of new media and the Internet, getting one’s point across requires mastery of both the message and medium. Thanks to blogs, texting,

One such headache occurred in 2008 when off-the-cuff comments made during a closed-door session with journalists spread like wildfire across the blogosphere. Vice Chairman Lutz stated that hybrids didn’t make ‘economic sense’, adding that global warming was ‘a total crock’. Critics seized on the moment to advance their crusade against the automaker. Lutz likewise took to his FastLane blog to respond. ‘An offhand comment I made recently about the concept of global warming seems to have a lot of people heated, and it’s spreading through

instant messaging and social networking websites, leaders have more options than ever before for reaching large audiences. Who exactly are the grand communicators of the digital age? The pimple-faced founders of Facebook? The 30-something search-engine geniuses at Google? Try Bob Lutz, the 77-year-old vice chairman of global product development at General Motors (GM). Lutz stunned the business community in 2005 when he ventured out into the blogosphere, exchanging his podium for podcasts and memoranda for message boards. Launched as the social media initiative of GM’s Global Communications Group, Lutz’s FastLane blog marked the first time an executive of a nontechnology Fortune 100 firm began blogging as a means of corporate communication. Like other blogs, FastLane features commentary, product news, podcasts, video clips, photo galleries, user feedback and twittering. Visitors to the blog – mostly car enthusiasts, members of the press and GM employees – find information about auto shows, new vehicles, manufacturing breakthroughs and more. With trademark informality, FastLane defines itself as ‘your source for the latest, greatest musings of GM leaders on topics relevant to the company, the industry and the global economy, and – most of all – to our customers'. Although the blogosphere is generally upbeat, blogs can become cauldrons of conflict between adversarial groups. As a consequence of the blogosphere’s reach and informal style, inappropriate comments may be published instantly on blogs and disseminated worldwide in seconds, creating severe headaches for public relations teams.

the Internet like ragweed,’ wrote Lutz in his 12 February 2008 FastLane entry. ‘My opinions on the subject – like anyone’s – are immaterial. General Motors is dedicated to the removal of cars and trucks from the environmental equation, period.’ The vice chairman urged the public to ignore his personal musings and to focus instead on the company’s push for clean transportation. ‘We’re going to keep working on it – via E85, hybrids, hydrogen and fuel cells, and the electrification of the automobile.’ Lutz took the opportunity to praise GM’s new electric car. ‘The Chevrolet Volt program is occurring under my personal watch, because I – and others in senior management – believe in it. I fully expect that it will revolutionise the automotive industry.’ GM’s ongoing support for FastLane shows that executives at the top automaker see blogging as a legitimate form of corporate communication. And no surprise: FastLane is an information centre, marketing tool, crisis management instrument and customer feedback system wrapped up in one. If Lutz is any indication, the corporate blog is here to stay. Where else could an outspoken vice chairman find so versatile a megaphone. Questions 1 Visit FastLane online to identify the blog’s various communication channels and their channel richness. 2 Is the information posted at FastLane appropriate for a blog? Why or why not? 3 What unique communication benefits do blogs offer to GM executives?

Sources: Glenn Hunter. (30 January 2008). GM’s Lutz On Hybrids, Global Warming and Cars As Art. D magazine, http://frontburner.dmagazine.com/2008/01/30/ gms-lutz-on-hybrids-global-warmingand-cars-as-art (accessed 17 October 2008); Rob Kelley. (18 November 2007). Tahoe Hybrid SUV named ‘Green Car of Year’. CNNMoney, http://money.cnn.com/2007/11/15/autos/green_car/index.htm (accessed 17 October 2008); Bob Lutz. (21 February 2008). Talk About a Crock. FastLane Blog, http://fastlane. gmblogs.com/archives/2008/02/talk_about_a_cr.html (accessed 17 October 2008); (5 January 2005). Welcome to Fastlane. FastLane Blog, http://fastlane.gmblogs.com/archives/ 2005/01/welcome_to_fast_1.html (accessed 17 October 2008); (8 September 2008). Half of GM Plants to Be Landfill-Free By Late 2010. Green-Biz, http://www.greenbiz.com/ news/2008/09/08/half-gm-plants-be-landfill-free-by-late-2010 (accessed 17 October 2008); Kevin Krolicki. (22 February 2008). GM Exec Stands by Calling Global Warming a ‘Crock’. Reuters, http://www.reuters.com (accessed 17 October 2008).

Chapter 19 Managerial and quality control

Just as in sport, business and political life

produce winners and losers. And winners today had better be on their mettle, because whatever the field – sport or business – today’s winners are always targeted and benchmarked by the rest of the competitors, who aim to knock them off their pedestal. The use of high-performance equipment, such as graphite tennis racquets and titanium golf clubs, is equally important to elite sportspeople and suburban amateurs, even though they compete at such different levels. Few people want to play tennis today with wooden racquets, because advanced materials improve performance for players at all levels. The ability to implement and control operations, achieve consistent quality of output and measure performance are hallmarks of great sports performances and business organisations alike. And, just as a professional tennis player, footballer or golfer plays for consistency – known as ‘playing the percentages’ – so is a business like McDonald’s organised to produce consistent product and service quality all day, every day and in thousands of places. Information technology is important to many sports. Ocean-racing yachts need excellent, real-time information on weather conditions to be competitive. Formula 1 cars are very technically sophisticated – indeed, they are right on the cutting edge in their engines, tyres and other technical developments, where performance, design and human elements are enhanced with technology. They use telecommunications to relay all kinds of data to and from the car to the mechanics in the pits, and tactical instructions to the driver. Similarly, all businesses need information systems to allow them to measure and control operations, and to inform strategy processes. Technology plays a major role in controlling organisations as well as Formula 1 cars and yachts. When Nico Rosberg won the Melbourne Grand Prix in March 2014, his efforts capped a technological and human effort brought to fruition by a large team that worked together like clockwork to achieve the highest possible level of performance, yet keep the car under control. Part 6 discusses the importance of quality control and productivity, information systems and technology, and operations and service management to managerial excellence. Quality controls make certain that goals are still being met, products are being made to specification, customers are getting the desired service, and employees are upholding company ethics and standards. But changing technology requires innovation and imagination, both in applying technology to solve problems and in addressing new problems that come along with the new technology. So, along with the efficiencies gained by

Chapter 20 Managing the value chain, information technology and e-business Capstone chapter: Making effective management happen

Par t six controlling

the computer age, managers must also address concerns such as inappropriate emails or employees misusing access to the Internet. The 2008–10 global financial crisis and the ongoing financial difficulties in Greece, Spain, Italy and other impaired economies are clear examples of what can happen when one of the world’s biggest systems constructed by humans, the global economy, goes essentially out of control. The results were massive bankruptcies, from the giant General Motors (an example discussed in this book’s Continuing case) to thousands of small businesses, as well as large increases in unemployment almost all over the world, with governments needing to bail out institutions, companies and industries. There is an ongoing price to pay for the aberration which led the global economy to fall into a state of being out of control: many people who lost their jobs during this period of instability have still not found work in Europe and the US. It is an important part of management that operating systems, whether they comprise a single piece of machinery in a factory, a Formula 1 vehicle hurtling along at 300 kph or the global economy, are able to be maintained in a state of being ‘in control’, meaning able to consistently and sustainably perform to their specifications. 759

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Define organisational control and explain why it is a key management function.

2 Explain the four steps in the control process. 3 Explain the benefits of using the balanced scorecard to track the performance and control of the organisation.

4 Discuss the use of financial statements, financial analysis and budgeting as management controls.

5 Contrast the hierarchical and decentralised methods

6 Identify the benefits of open-book management. 7 Describe the concept of total quality management

(TQM) and major TQM techniques, such as quality circles, benchmarking, Six Sigma principles, quality partnering and continuous improvement.

8 Identify current trends in quality and financial control, including ISO 9000 and corporate governance, and discuss their impact on organisations.

of control.

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Managerial and quality control

Chapter outline ➜ The meaning of control ➜ Feedback control model

Steps of feedback control The balanced scorecard

➜ Budgetary control

Expense budget Revenue budget Cash budget Capital budget Zero-based budget

➜ Financial control

Financial statements Financial analysis: interpreting the numbers

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➜ The changing philosophy of control

Hierarchical versus decentralised approaches Open-book management

➜ Total quality management (TQM) TQM techniques TQM success factors

➜ Trends in quality and financial control International quality standards Corporate governance

➜ Qualities of effective control systems ➜ Sustainable development and management control

New Manager Self-test W h at i s y o u r at t i t u d e t o wa r d s o r g a n i s at i o n a l r e g u l at i o n a n d c o n t r o l ? Managers have to control people for organisations to survive, yet control should be the right amount and type. Companies are often less democratic than the society of which they are a part. Think honestly about your beliefs regarding the regulation of other people and answer each item that follows as Mostly true or Mostly false. Mostly true

Mostly false

1  I believe people should be guided more by feelings and less by rules. 2 I think employees should be on time to work and to meetings. 3 I believe efficiency and speed are not as important as letting everyone have their say when making a decision. 4 I think employees should conform to company policies. 5 I let my significant other make the decision and have his or her way most of the time. 6 I like to tell other people what to do. 7 I am more patient with the least capable people. 8 I like to have things running ‘just so’. Scoring and interpretation: Give yourself one point for each Mostly true answer to the odd-numbered questions and one point for each Mostly false answer to the evennumbered questions. A score of six or above suggests you prefer decentralised control for other people in organisations. A score of three or less suggests a preference for more control and bureaucracy in a company. Enthusiastic new managers may exercise too much of their new control and get a negative backlash. However, too little control may mean less accountability and productivity. The challenge for new managers is to strike the right balance for the job and people involved. Source: Adapted from J.J. Ray. (1976). Do Authoritarians Hold Authoritarian Attitudes? Human Relations, 29, 307–25.

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Management Challenge

Michael Dell was 19 years old when he started his computer company from his room at the University of Texas in 1984. He had no way to push his computers through traditional distribution channels, so he took US$1000 of his personal savings and advertised in various publications that he was selling computer components through the mail. Dell’s success in selling made-to-order PCs directly to consumers is now legendary. At the beginning, Dell focused on growth – wooing large corporate customers by offering an unprecedented level of service for the PC industry and taking its direct-sales model global. But within a few years, the company was in trouble because top management had failed to implement effective control systems. Most of Dell’s managers did not have experience running a large company, and top executives soon learned that a single-minded focus on growth, and the failure to measure other performance indicators, was hurting profitability. For example, the company had expanded its product line to include notebook

computers on the assumption that any growth was good, but it wound up with poorly designed, unreliable machines that had to be withdrawn from the market. Dell also experimented with selling through retail stores. Although sales grew to US$2.8 billion in one year, Dell actually suffered a net loss of US$36 million. ‘Any one strength used to excess becomes a weakness,’ notes Thomas J Meredith, formerly Dell’s chief financial officer, who joined the company from Sun Microsystems in 1993. Meredith needed to work with Michael Dell to implement an effective overall control system that could keep Dell both growing and profitable. Source: Fisher, L. M. (First Quarter 1998). Inside Dell Computer Company. Strategy and Business, 10, 68–75.

Question If you were a consultant to Dell, what would you have recommended to top managers? How can the company broaden its control strategies to strengthen its position in the computer industry?

When terrible floods hit the city of Brisbane and nearby towns in January 2011, closely followed by cyclones and floods in other parts of Queensland and in Victoria, political and community leaders worked very hard to keep matters ‘in control’. They worked hard to prepare in advance, which is a form of ‘feedforward’ control. They kept communications open and coordinated all emergency services effectively to maintain as good as possible real-time control during the events, and they also marshalled and coordinated clean-up resources after the weather events as response or feedback controls. Although there was extensive property damage, very few lives were lost. This was in stark contrast to the disastrous bushfires in Victoria some two years prior, in which nearly 200 lives were lost when planning and control of those fires was lost, and chaotic, uncoordinated responses led to much worse outcomes than might otherwise have been the case. Similarly chaotic lack of control occurred in the US when Hurricane Katrina swept through New Orleans in 2005. Business organisations need to be concerned about keeping their financial and operational systems well under control. During times of rapid growth, especially when successful, managers need to ensure that their organisation doesn’t ‘run off the rails’. Groupon is a popular online-coupon company that advertises and promotes discounted gift certificates for local and national companies. The company earns a percentage of the revenue generated from the featured discounts. For example, for a $10 purchase at a sandwich shop, Groupon might make $5 and give the rest to the merchant. When Groupon was founded in November 2008 in the United States, few would have anticipated its stunning success. After just two years, Forbes reported that this technology start-up was the world’s fastest-growing company, on pace to make an astonishing $1 billion in sales. But in its first quarter as a public company, Groupon reported unsettling news to investors. Managers were unprepared to handle the high rate of returns during the 2011 holiday period, and as a result, they were forced to drive down reported fourth-quarter revenue by $14 million and earnings by about 3 per cent. Sandra Peters, head of financial reporting policy for the CFA Institute, said, ‘It really demonstrates, for a [new public company], were they really ready to go? Did they have the financial systems? Did they have the processes and procedures in place?’ Groupon grew so fast that its accounting and control systems were unable to keep up, creating havoc for managers and investors.1

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As a manager, you will use a variety of measures to monitor performance and keep track of the organisation’s finances. Many of these measures will involve control issues, including controlling work processes, regulating employee behaviour, setting up basic systems for allocating financial resources, developing human resources, analysing financial performance and evaluating overall profitability. This chapter introduces basic mechanisms for controlling the organisation. We begin by defining organisational control and summarising the four steps in the control process. Then we discuss the use of the balanced scorecard to measure performance and methods for controlling financial performance, including the use of budgets and financial statements. The next sections examine the changing philosophy of control, today’s approach to total quality management (TQM), and trends such as International Organization for Standardization (ISO) certification and corporate governance.

The meaning of control Organisational control refers to the systematic process of regulating organisational activities to make

organisational control

The systematic process them consistent with the expectations established in plans, targets and standards of performance. through which managers regulate organisational In a classic article on the control function, Douglas S. Sherwin summarises the concept as follows: activities to make ‘The essence of control is action which adjusts operations to predetermined standards, and its basis is them consistent with 2 expectations established in information in the hands of managers.’ Thus, effectively controlling an organisation requires information plans, targets and standards about performance standards and actual performance, as well as actions taken to correct any deviations of performance. from the standards. Managers must decide what information is essential, how they will obtain that information, and how they can and should respond to it. Having the correct data is essential. Take Managers decide which standards, measurements and metrics are needed to monitor and control a Moment the organisation effectively and set up systems for obtaining that information. If a hospital, for The Group Challenge on page 794 of this chapter will example, carefully monitors and controls its health care services, patients should receive safe, give you a chance to practise high-quality health care. developing a control system Unfortunately, medical mistakes happen, many of which go unreported. Without data that includes rules to guide that describe these mistakes, it’s often difficult to correct common problems such as drug behaviours and statistics for measuring performance. mix-ups, radiation overdoses and surgical blunders. However, a well-run organisation must be able to measure key aspects of performance so that it will be alerted to deviations from accepted standards. This aspect of organisational control is often referred to as ‘management by exception’. This chapter’s Management in Practice describes an innovative reporting system for individuals, called auto-analytics, which can provide information that may lead to personal and professional growth.

➜➜ Statistical measurement is an important part of achieving high performance.

➜➜ Organisational control is the systematic process through which managers regulate organisational

activities to meet planned goals and standards of performance. ➜➜ Most organisations measure and control performance using quantitative financial measures.

remember this

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Feedback control model feedback control Control that focuses on the organisation’s outputs; also called post-action or output control.

A feedback control model helps managers meet strategic goals by monitoring and regulating an organisation’s activities and using feedback to determine whether performance meets established standards. Consider how, in the US, FreshDirect, a premium online supermarket has used a feedback control model to improve the quality of its products and customer service. With more than 45 000 deliveries per week, FreshDirect is known for its farm-fresh produce, custom-butchered meat, seafood, and bakeryfresh pastries and breads. It may be surprising that this successful organisation stumbled through a series of missteps during its early days. Although FreshDirect was very successful in attracting first-time customers with coupons and incentives, the majority of these customers dropped the service after placing one or two orders because of poor customer service. ‘We broke too many eggs,’ said Richard S. Braddock, who became CEO in 2008. ‘We showed up with thawed ice cream. We bruised produce. We delivered late. We missed boxes.’ Braddock decided to take drastic action by creating a system of continuous feedback, a real-time database that would follow every step – and misstep – of each business day, so minor problems could be corrected before they erupted into big problems.3 A four-step feedback control system that managers can use is described in the following section.

Steps o f feed back contro l Managers set up control systems that consist of the four key steps, which are illustrated in Exhibit 19.1: establish standards, measure performance, compare performance to standards and make corrections as necessary.

Estab li sh standar d s of per f o r m an c e Within the organisation’s overall strategic plan, managers define goals for organisational departments in specific, operational terms that include a standard of performance against which to compare organisational activities. FreshDirect developed performance standards designed to strengthen customer service and build loyal customers. For example, managers introduced a rating system to measure the quality of its produce and seafood. Every morning, managers and buyers rank their products from one star (below average) to five (never better) and share that information with customers so they can simulate the in-store shopping experience and decide what to purchase. Other standards of performance included tracking on-time deliveries and the number of errors per order.4 Tracking such measures as customer service, product quality or order accuracy is an important supplement to traditional financial and operational performance measurement, but many companies have a hard time identifying and defining non-financial measurements. To evaluate and reward employees effectively for the achievement of standards, managers need clear standards that reflect activities that contribute to the organisation’s overall strategy in a significant way. Standards should be defined clearly and precisely so that employees know what they need to do and can determine whether their activities are on target.5

19: managerial and quality control

Exhibit 19.1 Feedback control model

Feedback Adjust standards Establish strategic goals

1. Establish standards of performance.

Adjust performance 2. Measure actual performance.

3. Compare performance to standards.

If inadequate

4. Take corrective action.

If adequate

Feedback

Quantify yourself Imagine becoming better at your job and more satisfied with your life by tracking information that reveals exactly how you spend your day. For 22 years, entrepreneur and scientist Stephen Wolfram did just that. He mapped data about his time spent in meetings, his email usage and the number of keystrokes he logged, so that he could analyse how he spent his time. Wolfram was able to identify work habits that squelched his creativity and stymied his productivity. So he started planning changes that would help him become more productive and happier. New devices such as computer software and smartphone apps can help people to gather and analyse data about what they do at work so they can use it to do their jobs better. This interest in self-awareness is part of a growing discipline called auto-analytics, which is the practice of voluntarily collecting and analysing data about oneself in order to improve (see Chapter 14: Emotional Intelligence).

➜➜ Tracking screen time. While it may be unsettling to have our managers watching what’s on our computer screens, it’s much more acceptable when we are the ones doing the watching. New technology called knowledge workload tracking records how you use your computer, such as measuring how long you have a window open, how often you switch between windows and how long you’re idle. The software turns all these measurements into charts so that you can see where you’re spending your time and how you can improve your productivity. One computer programmer thought his online chats were eating into his programming time, so he analysed how much time he spent chatting during certain periods, and then looked at how much code he wrote during those times. Surprisingly, he found that

4. Do nothing or provide reinforcement.

management in pr actice talking online with colleagues actually improved his productivity.

➜➜ Measuring cognitive tasks. Another set of tracking tools can help you to gather data as you perform cognitive tasks, such as client research on your smartphone or statistical analysis in Excel. Although it is notoriously difficult to measure knowledge work, a tool such as MeetGrinder (an app that measures the time and cost spent in meetings and related activities) can measure the time and money spent doing any activity. Bob Evans, a Google engineer, used it to explore the relationship between his attention and productivity. ‘As engineers, we load up our heads with all these variables, the intellectual pieces of the systems we are building. If we get distracted, we lose that thread in our heads,’ he said. MeetGrinder revealed to him that he needs about four straight hours to get anything challenging done, so he tackles those projects when he has that kind of time, not on days that are interrupted with meetings and phone calls.

➜➜ Improving health. Exercise, amount of sleep and the stress levels of knowledge workers have been shown to affect productivity, creativity, and job performance. Employees can choose from a variety of mobile apps and wearable sensors that collect valuable data about their physical health. Sacha Chua wanted to better understand how her sleep schedule affected her professional priorities, so she monitored her bedtimes, wake-up times and amount of sleep over several weeks using a tracker called Sleep On It. She changed her routine and started waking up at 5.40 a.m. instead of 8.30 a.m. She gave up late-night activities like browsing the web and

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started going to bed earlier. With these adjustments, she discovered that her work productivity soared. The data from Sleep On It gave Chua measurable information that allowed her to establish priorities on what really mattered to her.

Tools used for auto-analytics will continue to become more sophisticated. The data that they reveal will provide the hard evidence we sometimes need to adjust the way we use our time and nurture our minds and bodies to have more success in work and life.

Sources: Based on H. James Wilson. (2 April 2012). Employees, Measure Yourselves. The Wall Street Journal, http://online.wsj.com/article /SB10001424052970204520204577249691204802060.html#articleTabs%3Darticle (accessed 28 September 2012); and H. James Wilson. (September 2012). You, by the Numbers. Harvard Business Review, 2–5.

Measur e act ual p er f o r m an c e Most organisations prepare formal reports of quantitative performance measurements that managers review daily, weekly or monthly. These measurements should be related to the standards set in the first step of the control process. For example, if sales growth is a target, the organisation should have a means of gathering and reporting sales data. If the organisation has identified appropriate measurements, regular review of these reports helps managers stay aware of whether the organisation is doing what it should or not. FreshDirect has a warehouse where workers are responsible for butchering, baking and food preparation. Warehouse managers analyse numerous reports that track plant operations, including inventory levels, quality assurance and freshness. Managers also monitor real-time data that show the popularity of certain products in specific delivery zones and time slots.6

Compar e p er for manc e to s tan dar ds The third step in the control process is comparing actual activities to performance standards. When managers read computer reports or walk through work areas, they identify whether actual performance meets, exceeds or falls short of standards. Typically, performance reports simplify such comparisons by placing the performance standards for the reporting period alongside the actual performance for the same period and computing the variance – that is, the difference between each actual amount and the associated standard. To correct the problems that most require attention, managers focus on variances. When performance deviates from a standard, managers must interpret the deviation. They are expected to dig beneath the surface and find the cause of the problem. Assume that FreshDirect established a goal of increasing seafood sales by 10 per cent during the month of July, but sales increased by only 8 per cent. Managers must investigate the reasons behind the shortfall. They may discover that recent price increases for prawns and three late shipments of salmon caused weaker sales during July, for instance. Managers should take an inquiring approach to deviations to gain a broad understanding of factors that influence performance. Effective management control involves subjective judgement and employee discussions, as well as objective analysis of performance data.

Take cor r ect i ve ac tion Managers also determine what changes, if any, are needed. In 2008, FreshDirect was falling short of its revenue and cash goals, and customers were complaining about sold-out items, limited delivery options and mistakes in orders. Sales were suffering, and 85 per cent of customers placed only one or two orders before giving up on the company. The CEO chose to take corrective action by remaking the company with a focus on customer service. He dropped the company’s obsession with luring in new customers with coupons and began focusing on building loyal customers. He upgraded the company’s website and developed a database to profile customers and provide a customised online experience. Now, the website

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can analyse order patterns, remind customers of their favourite products, and suggest other items they might like.7

Th e bal an ced sco recard One current approach to organisational control is to take a balanced perspective of company performance, integrating various dimensions of control that focus on markets and customers, as well as employees and financials.8 Managers recognise that relying exclusively on financial measures can result in short-term, dysfunctional behaviour. Non-financial measures provide a healthy supplement to traditional financial measures, and companies are investing significant sums in developing more balanced measurement systems as a result.9 The balanced scorecard is a comprehensive management control system that balances traditional financial measures with operational measures relating to a company’s critical success factors.10 A balanced scorecard contains four major perspectives, as illustrated in Exhibit 19.2: financial performance, customer service, internal business processes, and the organisation’s capacity for learning and growth.11 Within these four areas, managers identify the key performance metrics the organisation will track. ●● Financial performance. The financial performance perspective reflects a concern that the organisation’s activities contribute to improving short- and long-term financial performance. It includes traditional measures such as net income and return on investment.

balanced scorecard A management control system that balances traditional financial measures with operational measures relating to a company’s critical success factors.

●● Customer service. Customer service indicators measure information such as how customers view the organisation and customer retention and satisfaction. This data may be collected in many forms, including testimonials from customers describing superlative service or from customer surveys that explore important product or service attributes.12 ●● Internal business processes. Business process indicators focus on production and operating statistics. For an airline, business process indicators may include on-time arrivals and adherence to safety guidelines. ●● Potential for learning and growth. The final component of the balanced scorecard looks at the organisation’s potential for learning and growth, focusing on how well resources and human capital are being managed for the company’s future. Metrics may include things such as employee retention and the introduction of new products. The components of the scorecard are designed in an integrative manner, as illustrated in Exhibit 19.2. Managers record, analyse and discuss these various metrics to determine how well the organisation is achieving its strategic goals. The balanced scorecard is an effective tool for managing and improving performance, but only if it is clearly linked to a well-defined organisational strategy and goals.13 At its best, use of the scorecard cascades down from the top levels of the organisation so that everyone becomes involved in thinking about and discussing strategy. The scorecard has become the core management control system for many organisations, including well-known organisations such as PETRONAS in Malaysia, Exxon Mobil Corporation, Cigna (insurance), Hilton Hotels and even some government departments.14 As with all management systems, the balanced scorecard is not right for every organisation in every situation. The simplicity of the system causes some managers to underestimate the time and commitment that is needed for the approach to become a truly useful management control system. If managers implement the balanced scorecard using a performance measurement orientation rather than a performance management approach that links targets and measurements to corporate strategy, use of the scorecard can actually hinder or even decrease organisational performance.15

Concept Revision

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Exhibit 19.2 The balanced scorecard Sources: Based on Robert S. Kaplan and David P. Norton. (January–February 1996). Using the Balanced Scorecard as a Strategic Management System. Harvard Business Review, 75–85; and Chee W. Chow, Kamal M. Haddad and James E. Williamson. (August 1997). Applying the Balanced Scorecard to Small Companies. Management Accounting, 79:2, 21–7.

o ns Correcti

es Outco m

Meas ures

Targ e

Do actions contribute to improving financial performance?

ts

Financial

ons Correcti

mes Outco

res

ons Correcti

mes Outco

ures Meas

Targ e

Are we learning, changing and improving?

ts

Missions and goals

Measu

Do internal activities and processes add value for customers and shareholders?

Targ e

tions Correc

mes Outco

res Measu

Targe ts

How well do we serve our customers?

ts

Internal business processes

Customers

Learning and growth

➜➜ The feedback control model involves using feedback to determine whether performance meets established standards.

➜➜ Well-designed control systems include four key steps: establish standards, measure performance, compare performance to standards and make corrections as necessary.

➜➜ A balanced scorecard is a comprehensive management control system that balances traditional financial measures with measures of customer service, internal business processes and the organisation’s capacity for learning and growth.

remember this

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Austr alian manager pr ofile

Roger Perry, Chief Executive Officer, Bevington Group The Bevington Group is a process improvement and change management service provider based in Melbourne. Its methods have been successful in many of Australia’s most significant businesses and institutions, including: ANZ Banking Group; Austrade (Australian Trade Commission); CASA (Civil Aviation Safety Authority); Bartter Steggles Group; GE Finance; Pacific Brands; Shell (domestically and internationally); Swire Group; Unisys; Visy; and Westpac. Over the course of the company’s existence, it has developed (and continues to evolve) a range of repeatable methods aimed at delivering sustainable process improvement for its clients. The Group is distinctive in that it offers a holistic process improvement service, from training and supporting tools to consulting and mentoring. The Bevington team believe that clients buy their services because:

➜➜ their methods have an extremely high success rate ➜➜ the team members are well qualified, but distinctively down-to-earth

➜➜ the Group has an exceptionally high level of determination to see client projects successfully implemented. Roger Perry was appointed CEO of the Bevington Group in early 2005. Since then, the company has been expanding its revenues at a compound growth rate of over 40 per cent. Bevington has had a professional staff turnover rate of 0 per cent in recent years: this is a factor which Roger believes to be essential to successful growth. The low turnover rate, combined with the high revenue growth rate, makes the Bevington Group an extremely unusual enterprise in an industry known for revenue volatility and staff turnover. Roger attributes much of the Group’s success to:

➜➜ clarity of purpose

➜➜ cultural consistency ➜➜ the creation of opportunities for clients and staff. The Bevington Group’s mission statement is a clear reflection of corporate values:

➜➜ Improve our clients. ➜➜ Improve our business. ➜➜ Improve ourselves. When not leading the Bevington Group directly, or advising clients on their own transformations, Roger is an active speaker to a very broad range of audiences including: Committee for the Economic Development of Australia; Australian College of Health Care Professionals; Congress for Certified Practising Accountants; and Forums for Chief Information Officers. He is an avid student of both history and psychology. He believes in leading from the front, so he is an active consultant as well as a business leader in his own right. He believes that you cannot really know the market unless you are in it, and feels that the examples shown by leaders in action are one of the most effective forms of communication. Prior to joining the Bevington Group, Roger was a Group Senior Executive with the ANZ Bank, responsible for financial performance management (Head of Group Performance Management), as well as being responsible for major project governance (Head of Group Project Centre of Excellence). Immediately prior to this he ran ANZ Ventures – a strategic venture capital arm of the ANZ Bank. He is also an experienced public company director having sat on the boards of a range of companies including E*TRADE Australia, ANZ International Ltd (Singapore) and Bevington Consulting Pty Ltd.

➜➜ effective methods Source: Contributed by Roger Perry.

Budgetary control Every organisation, large or small, should prepare a financial budget which details the financial expectations (revenue and cost items) over the next 12 months. Without a budget, it is difficult to know how a business is tracking. Debbie Dusenberry was following her dream as a successful entrepreneur. She had opened a beautifully designed store called Curious Sofa and filled its expansive showroom with antiques, offbeat furniture, accessories and gifts. She had a dedicated staff and sales reaching $800 000 per year. She had borrowed a lot of money and was planning to expand her inventory. Business was growing fast. But Dusenberry was typical of many small business owners who are long on drive and passion but short on

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budgetary control Budgetary control is the process of setting specific financial plans in place, then managing in real time to achieve those plans, carefully attending to variations between plans and ‘actuals’. responsibility centre An organisational unit under the supervision of a single person who is responsible for its activity.

financial experience. Caught up in the excitement of growing sales, she was unaware that excessive costs in staffing, inventory and freight were hurting her profitability. She was operating without a budget and not keeping track of all her expenses. When sales dropped during the global financial crisis, the glaring weaknesses in her financial system were exposed. Scared and exasperated, Dusenberry began thinking about how she could save her business and realised she needed a new system that would help her monitor and manage her costs. Her first step was to create a budget.16 Budgetary control, one of the most commonly used methods of managerial control, is the process of setting targets for an organisation’s expenditures, monitoring results and comparing them to the budget, and making changes as needed. As a control device, budgets are reports that list planned and actual expenditures for cash, assets, raw materials, salaries and other resources. In addition, budget reports usually list the variance between the budgeted and actual amounts for each item. A budget is created for every division or department within an organisation, no matter how small, as long as it performs a distinct project, program or function. The fundamental unit of analysis for a budget control system is called a responsibility centre. A responsibility centre is defined as any organisational department or unit under the supervision of a single person who is responsible for its activity.17 A threeperson appliance sales office is a responsibility centre, as is a quality control department, a marketing department and an entire refrigerator manufacturing plant. The manager of each unit has budget responsibility. Top managers use budgets for the company as a whole, and middle managers traditionally focus on the budget performance of their department or division. Budgets that managers typically use include expense budgets, revenue budgets, cash budgets and capital budgets.

Expense bu d get expense budget A budget that outlines the anticipated and actual expenses for a responsibility centre.

An expense budget includes anticipated and actual expenses for each responsibility centre and for the total organisation. An expense budget may show all types of expenses, or it may focus on a particular category, such as materials or research and development expenses. When actual expenses exceed budgeted amounts, the difference signals the need for managers to identify possible problems and take corrective action if needed. The difference may arise from inefficiency, or expenses may be higher because the organisation’s sales are growing faster than anticipated. Conversely, expenses below budget may signal exceptional efficiency or possibly the failure to meet some other standards, such as a desired level of sales or quality of service. Either way, expense budgets help identify the need for further investigation but do not substitute for it.

Reven u e bu d get revenue budget A budget that identifies the forecasted and actual revenues of the organisation. cash budget A budget that estimates and reports cash flows on a daily or weekly basis to ensure that the organisation has sufficient cash to meet its obligations.

A revenue budget lists forecasted and actual revenues of the organisation. In general, revenues below the budgeted amount signal a need to investigate the problem to see whether the organisation can improve revenues. In contrast, revenues above budget would require determining whether the organisation can obtain the necessary resources to meet the higher-than-expected demand for its products or services. Managers then formulate action plans to correct the budget variance.

Cash bu d get The cash budget estimates receipts and expenditures of money on a daily or weekly basis to ensure that an organisation has sufficient cash to meet its obligations. The cash budget shows the level of funds

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flowing through the organisation and the nature of cash disbursements. If the cash budget shows that the firm has more cash than necessary to meet short-term needs, the company can arrange to invest the excess to earn interest income. In contrast, if the cash budget shows a payroll expenditure of $20 000 coming at the end of the week but only $10 000 in the bank, the organisation must borrow cash to meet the payroll.

Capital bu d get The capital budget lists planned investments in major assets such as buildings, heavy machinery or complex information technology systems, often involving expenditures over more than a year. Capital expenditures not only have a large impact on future expenses, but they also are investments designed to enhance profits. Therefore, a capital budget is necessary to plan the impact of these expenditures on cash flow and profitability. Controlling involves not only monitoring the amount of capital expenditures, but also evaluating whether the assumptions made about the return on the investments are holding true. Managers can evaluate whether continuing investment in particular projects is advisable, as well as whether their procedures for making capital expenditure decisions are adequate. Some companies, including Boeing, Merck, Shell, BHP Billiton, Coles, Westpac and Whirlpool, evaluate capital projects at several stages to determine whether they are still in line with the company’s strategy.18

capital budget A budget that plans and reports investments in major assets to be depreciated over several years.

Zero - based bu d get Zero-based budgeting is an approach to planning and decision making that requires a complete

justification for every line item in a budget, instead of carrying forward a prior budget and applying a percentage change. A zero-based budget begins with a starting point of $0, and every dollar added to the budget is reflected by an actual, documented need.19 Shell, the oil and gas industry giant, implemented a zero-based budget to drive significant financial performance improvements. Facing unpredictable oil and gas demand and an uncertain global economy, then CFO Gerard Paulides believed that a cost reduction strategy was as important to Shell’s business as oil and gas production and hydrocarbon maturation. ‘We dove in deeply, stripping all business areas down to zero and then going back through the exercise of building them back up.’ Paulides and other executives looked at the minimum resources required to run each part of the business, which Paulides referred to as the must-haves. ‘All other activities are essentially discretionary and optional, or in the zero-based framework, nice to have,’ said Paulides.20 This approach to budgeting helped Shell to shave excessive and unnecessary costs from its yearly expenditures. Budgeting is an important part of organisational planning and control. Many traditional companies use top-down budgeting, which means that the budgeted amounts for the coming year are literally imposed on middle- and lower-level managers.21 These managers set departmental budget targets in accordance with overall company revenues and expenditures specified by top executives. Although the top-down process provides some advantages, the movement towards employee empowerment, participation and learning means that many organisations are adopting bottom-up budgeting, a process in which lower-level managers anticipate their departments’ resource needs and pass them up to top management for approval.22 Companies of all kinds are increasingly involving line managers in the budgeting process.

zero-based budgeting A budgeting process that requires a complete justification for every line item in a budget.

top-down budgeting A budgeting process in which middle- and lower-level managers set departmental budget targets in accordance with overall organisation revenues and expenditures specified by top management. bottom-up budgeting A budgeting process in which lower-level managers budget their departments’ resource needs and pass them up to top management for approval.

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➜➜ Budgetary control, one of the most commonly used forms of managerial control, is the process of setting targets for an organisation’s expenditures, monitoring results and comparing them to the budget and making changes as needed.

➜➜ A revenue budget lists forecasted and actual revenues of the organisation.

➜➜ A responsibility centre is any organisational department or unit under the supervision of a single person who is responsible for its activity.

➜➜ A budget that plans and reports investments in major assets to be depreciated over several years is called a capital budget.

➜➜ An expense budget outlines the anticipated and actual expenses for a responsibility centre.

➜➜ The cash budget estimates receipts and expenditures of money on a daily or weekly basis to ensure that an organisation has sufficient cash to meet its obligations.

➜➜ Zero-based budgeting is an approach to planning and decision making that requires a complete justification

for every line item in a budget, instead of carrying forward a prior budget and applying a percentage change.

remember this

➜➜ Many companies use top-down budgeting, which means that the budgeted amounts for the coming year are literally imposed on middleand lower-level managers. ➜➜ Bottom-up budgeting involves lower-level managers anticipating their department’s budget needs and passing them up to top management for approval.

Financial control ‘Numbers run companies,’ claims Norm Brodsky, a veteran entrepreneur and writer for Inc. magazine.23 In every organisation, managers need to watch how well the organisation is performing financially by watching the numbers. Not only do the numbers tell whether the organisation is on sound financial footing, but they also can be useful indicators of other kinds of performance problems. For example, a sales decline may signal problems with products, customer service or sales force effectiveness.

Finan cial statem ents balance sheet A financial statement that shows the firm’s financial position with respect to assets and liabilities at a specific point in time.

income statement A financial statement that summarises the firm’s financial performance for a given time interval; sometimes called a profitand-loss statement.

Financial statements provide the basic information used for financial control of an organisation. Two major financial statements – the balance sheet and the income statement – are the starting points for financial control. Think of the balance sheet as a thermometer that provides a reading on the health of the business at the moment you take its temperature.24 The balance sheet shows the firm’s financial position with respect to assets and liabilities at a specific point in time. An example of a balance sheet is presented in Exhibit 19.3. The balance sheet provides three types of information: assets, liabilities and owners’ equity. Assets are what the company owns, and they include current assets (those that can be converted into cash in a short time period) and fixed assets (such as buildings and equipment that are long term in nature). Liabilities are the firm’s debts, including both current debt (obligations that will be paid by the company in the near future) and long-term debt (obligations payable over a long period). Owners’ equity is the difference between assets and liabilities and is the company’s net worth in stock and retained earnings. The income statement, sometimes called a profit-and-loss statement or P&L for short, summarises the firm’s financial performance for a given time interval, usually one year. A sample income statement is shown in Exhibit 19.4. Some organisations calculate the income statement at three-month intervals during the year to see whether they are on target for sales and profits. The income statement shows revenues coming into the organisation from all sources and subtracts all expenses, including cost of goods sold, interest, taxes and depreciation.

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The bottom line indicates the net income – profit or loss – for the given time period. Exhibit 19.3 Balance sheet New Creations Landscaping Consolidated Balance Sheet 31 December 2015 Assets

Liabilities and owners’ equity

Current assets:

Current liabilities:

 Cash

$ 25 000

 Accounts payable

$200 000

75 000

 Accrued expenses

20 000

 Income taxes payable

30 000

 Accounts receivable

500 000

 Inventory   Total current assets

$ 600 000   Total current liabilities

Fixed assets:

$ 250 000

Long-term liabilities:

 Land  Buildings and fixtures

250 000

  Mortgages payable

350 000

1 000 000

 Bonds outstanding

250 000

  Total long-term liabilities Less depreciation

200 000

Owners’ equity: $1 050 000  Common stock

 Total fixed assets

$ 600 000 540 000 260 000

 Retained earnings

$ 800 000

  Total owners’ equity $1 650 000 Total liabilities and net worth

Total assets

$ 1 650 000

Exhibit 19.4 Income statement New Creations Landscaping Income Statement For the Year Ended 31 December 2015

Gross sales Less sales returns

$3 100 000 200 000 $2 900 000

 Net sales Less expenses and cost of goods sold:  Cost of goods sold  Depreciation  Sales expenses  Administrative expenses

2 110 000 60 000 200 000 2 460 000

90 000

$ 440 000

Operating profit Other income

$

Gross income

$ 460 000

Less interest expense

80 000 380 000

Income before taxes Less taxes Net income

 20 000

165 000 $

215 000

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During the global financial crisis, companies cut discretionary spending, such as travel expenses, to improve their bottom line, and managers are pushing to keep those expenses from creeping up again. If managers keep costs low where they can, they can spend scarce dollars on higher-priority areas, such as salary increases for staff or research and development. To avoid a cost creep in travel expenses, Deloitte reminds its employees of company travel policies when managers see costs rising. Employees are discouraged from travelling to meetings that are expected to last less than eight hours and to use video and web conferencing whenever possible as an alternative to travel.25 The Innovative Way describes how one successful franchise owner uses a financial control system to manage a highly profitable 7-Eleven store.

Innovative Way

7–Eleven

Norman Jemal, an enthusiastic and gregarious 7-Eleven franchise owner, loves crunching the numbers with field consultant Kunta Natapraya. Together, they study the sales data and profit margins for the thousands of snack foods that Jemal sells in his three profitable stores. Some claim that Jemal’s success is due to the location of his stores on busy streets. High vehicle and pedestrian traffic do produce lots of potential customers. But Jemal’s success also comes from his knack for analysing financial data to spot the most profitable products in his inventory and maximising profits through efficient ordering. When faced with reordering decisions, Jemal uses 7-Eleven’s proprietary Retail Information System (RIS), which helps him to analyse sales and profitability data for each product in his inventory. For example, when corporate 7-Eleven announced it was rolling out a sugar-free Slurpee Lite, Jemal

needed to make room for it by eliminating an existing product. Using RIS, he studied the profitability of each snack product and discovered that the spicy beef patty was lagging in sales and profitability, so he slashed it from the stores’ inventory to make room for the new products. 7-Eleven focuses on its core competence of figuring out what to sell to rushed customers and how to sell it to them. ‘Other franchises pitch their name,’ Jemal says. ‘7-Eleven, which I think has a great name, pitched their [RIS] system.’ That system is part of a carefully designed financial control model that also includes regular audits. A good audit performance will go a long way toward determining if 7-Eleven allows Jemal to open more stores. He says he’d like to open 20 more.

Source: Willy Staley. (14 May 2012). How 7-Eleven Plans to Put the Bodega Out of Business. New York, 38–41, 87–8.

Finan cial analysis: interpretin g th e n um bers A manager needs to be able to evaluate financial reports that compare the organisation’s performance with earlier data or industry norms. These comparisons enable the manager to see whether the organisation is improving and whether it is competitive with others in the industry. The most common financial analysis focuses on ratios; that is, statistics that express the relationships between performance indicators such as profits and assets, sales and inventory. Ratios are stated as a fraction or proportion; Exhibit 19.5 summarises some financial ratios, which are measures of an organisation’s liquidity, activity, profitability and leverage. These ratios are among the most common, but many measures are used. Managers decide which ratios reveal the most important relationships for their business.

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Exhibit 19.5 Common financial ratios Liquidity ratios

Current ratio

Current assets/Current liabilities

Quick ratio

Cash 1 accounts receivable/Current liabilities

Activity ratios

Inventory turnover

Total sales/Average inventory

Conversion ratio

Purchase orders/Customer inquiries

Profitability ratios

Profit margin on sales

Net income/Sales

Gross margin

Gross income/Sales

Return on assets (ROA)

Net income/Total assets

Leverage Ratios

Debt ratio

Total debt/Total assets

Liqu id i t y r at i os The liquidity ratio indicates an organisation’s ability to meet its current debt obligations. For example, the current ratio (current assets divided by current liabilities) tells whether the company has sufficient assets to convert into cash to pay off its debts, if needed. If a hypothetical company, Oceanographics Inc., has current assets of $600 000 and current liabilities of $250 000, the current ratio is 2.4, meaning it has sufficient funds to pay off immediate debts 2.4 times. This level for the current ratio is normally considered a satisfactory margin of safety. Another liquidity ratio is the quick ratio, which is typically expressed as cash plus accounts receivable divided by current liabilities. The quick ratio is a popular metric to pair with the current ratio to gauge liquidity. ‘If a business does not have decent liquidity, then one unexpected expense could severely hurt it,’ said Brad Schaefer, an analyst with Sageworks Inc., a financial information company.26

liquidity ratio A financial ratio that indicates the organisation’s ability to meet its current debt obligations.

Ac tivit y r at i os The activity ratio measures internal performance with respect to key activities defined by management. For example, inventory turnover is calculated by dividing total sales by average inventory. This ratio tells how many times the inventory is used up to meet the total sales figure. If inventory sits too long, money is wasted. Dell Inc. achieved a strategic advantage by minimising its inventory costs. Dividing Dell’s annual sales by its small inventory generates an inventory turnover rate of 35.7.27 Another type of activity ratio, the conversion ratio, is purchase orders divided by customer inquiries. This ratio is an indicator of a company’s effectiveness in converting inquiries into sales. For example, if Cisco Systems moves from a 26.5 to a 28.2 per cent conversion ratio, more of its inquiries are turned into sales, indicating better sales activity.

activity ratio A financial ratio that measures the organisation’s internal performance with respect to key activities defined by management.

Prof itab i li t y r at i os

profitability ratio A financial ratio that describes the firm’s profits in terms of a source of profits (e.g. sales or total assets).

Managers analyse a company’s profits by studying profitability ratios, which state profits relative to a source of profits, such as sales or assets. When Alan Mulally became CEO of Ford Motor Company in 2008, he emphatically stressed the importance of profitability. At that time, Ford was a sick company,

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losing $83 million a day, and the stock price had plummeted to $1.01. Mulally initiated Ford’s remarkable turnaround by fostering a new culture of accountability that emphasised the use of consistent metrics to gauge performance. Mulally expected each department head to know and report how his or her department was performing. His emphasis on data-driven management permanently changed the culture at Ford. In 2010, Ford posted a profit of $6.6 billion, the most money the company had made in more than a decade.28 As described in the Continuing case of this book, General Motors in the US went through similar turmoil to Ford and has recently rebounded. Both Ford and General Motors have announced the closure of their Australian manufacturing operations in 2016 as part of their global profit optimisation programs. One important profitability ratio is the profit margin on sales, which is calculated as net income divided by sales. Similarly, gross margin is the gross (before-tax) profit divided by total sales. Another profitability measure is return on assets (ROA), which is a percentage representing what a company earned from its assets, computed as net income divided by total assets. ROA is a valuable yardstick for comparing a company’s ability to generate earnings with other investment opportunities. In basic terms, the company should be able to earn more by using its assets to operate the business than it could by putting the same investment in the bank. Source: Getty Images/The Washington Post

Entrepreneurs, as well as large corporations, use leveraged funds to finance their companies. Joshua Silver, a physics professor at Oxford University, needs US$8 million for the manufacture and marketing of his glasses, which are the world’s first adjustableprescription specs. At a cost of only $10 per pair, the glasses could be a boon for the one-sixth of the world’s population who are vision impaired and can’t afford regular glasses. However, having already invested $650 000 in his idea, Silver has an immense sum of money yet to borrow before he and the world can profit from his invention.

L ev er ag e r atios Leverage refers to funding activities with borrowed money. A company can use leverage to make its assets produce more than they could on their own. However, too much borrowing can put the organisation at risk that it will be unable to keep up with repayment of its debt. Managers therefore track their debt ratio, or total debt divided by total assets, to make sure it does not exceed a level that they consider acceptable. Lenders may consider a company with a debt ratio above 1.0 to be a poor credit risk.

remember this

➜➜ Financial statements provide the basic information used for financial control of an organisation.

➜➜ The income statement summarises the firm’s financial performance for a given time interval.

➜➜ The liquidity ratio indicates the organisation’s ability to meet its current debt obligations.

➜➜ The balance sheet shows the firm’s financial position with respect to assets and liabilities at a specific point in time.

➜➜ The most common financial analysis focuses on the use of ratios – statistics that express the relationships between performance indicators such as profits and assets, sales and inventory.

➜➜ The activity ratio measures the organisation’s internal performance with respect to key activities defined by management. ➜➜ The profitability ratio describes the firm’s profits relative to a source of profits, such as sales or assets.

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The changing philosophy of control Managers’ approach to control is changing in many of today’s organisations. In connection with the shift to employee participation and empowerment, many companies are adopting a decentralised rather than a hierarchical control process. Hierarchical control and decentralised control represent different philosophies of corporate culture, which was discussed in Chapter 3. Most organisations display some aspects of both hierarchical and decentralised control, but managers generally emphasise one or the other, depending on the organisational culture and their own beliefs about control.

Hi er archi cal versus d ecentr alised approach es Hierarchical control involves monitoring and influencing employee behaviour through extensive use

of rules, policies, hierarchy of authority, written documentation, reward systems and other formal mechanisms.29 In contrast, decentralised control relies on cultural values, traditions, shared beliefs and trust to foster compliance with organisational goals. Managers operate on the assumption that employees are trustworthy and willing to perform effectively without extensive rules and close supervision. Exhibit 19.6 contrasts the use of hierarchical and decentralised methods of control. Hierarchical methods define explicit rules, policies and procedures for employee behaviour. Control relies on centralised authority, the formal hierarchy and close personal supervision. Responsibility for quality control rests with quality control inspectors and supervisors rather than with employees. Job descriptions generally are specific and task related, and managers define minimal standards for acceptable employee performance. In exchange for meeting the standards, individual employees are given extrinsic rewards such as wages, benefits and possibly promotions up the hierarchy. Employees rarely participate in the control process, with any participation being formalised through mechanisms such as grievance procedures. With hierarchical control, the organisational culture is somewhat rigid, and managers do not consider culture a useful means of controlling employees and the organisation. Technology often is used to control the flow and pace of work or to monitor employees, such as by measuring the number of minutes employees spend on phone calls or how many keystrokes they make at the computer. The hierarchical approach to control is strongly evident in many Japanese companies. Japanese culture reflects a preoccupation with rules and a penchant for bureaucracy that can excel at turning chaos to order. For example, after the devastating 2011 earthquake and tsunami, Japan efficiently organised evacuation centres for families who lost homes during the disaster. Self-governing committees managed these temporary shelters and laid out in painstaking detail the daily responsibilities of the residents. People were assigned specific tasks, including sorting the garbage, washing the bathrooms and cleaning freshwater tanks. ‘The Japanese people are the type to feel more reassured the more rules are in place,’ said Shintara Goto, a tsunami survivor. This hierarchical method of managing the temporary evacuation centres helped survivors find routine and responsibility, which could play a big role in reducing the longterm psychological and physical toll of this natural disaster.30 Decentralised control is based on values and assumptions that are almost opposite to those of hierarchical control. Rules and procedures are used only when necessary. Managers rely instead on shared goals and values to control employee behaviour. The organisation places great emphasis on the selection and socialisation of employees to ensure that workers have the appropriate values needed to influence behaviour towards meeting company goals. No organisation can control employees 100 per cent of the

hierarchical control The use of rules, policies, hierarchy of authority, reward systems and other formal devices to influence employee behaviour and assess performance. decentralised control The use of organisational culture, group norms and a focus on goals, rather than rules and procedures, to foster compliance with organisational goals.

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time, and self-discipline and self-control are what keep workers performing their jobs up to standard. Empowerment of employees, effective socialisation and training all can contribute to internal standards that provide self-control. With decentralised control, power is more dispersed and is based on knowledge and experience as much as position. The organisational structure is flat and horizontal, as discussed in Chapter 10, with flexible authority and teams of workers solving problems and making improvements. Everyone is involved in quality control on an ongoing basis. Job descriptions generally are results-based, with an emphasis more on the outcomes to be achieved than on the specific tasks to be performed. Managers use not only extrinsic rewards such as pay, but the intrinsic rewards of meaningful work and the opportunity to learn and grow. Technology is used to empower employees by giving them the information they need to make effective decisions, work together and solve problems. People are rewarded for team and organisational success as well as their individual performance, and the emphasis is on equity among employees. Employees participate in a wide range of areas, including setting goals, determining standards of performance, governing quality and designing control systems. With decentralised control, the culture is adaptive, and managers recognise the importance of organisational culture for uniting individual, team and organisational goals for greater overall control. Ideally, with decentralised control, employees will pool their areas of expertise to arrive at procedures that are better than managers could come up with working alone. Campbell Soup is using decentralised control by enlisting its workers to help squeeze efficiency out of its plants. Exhibit 19.6 Hierarchical and decentralised methods of control Hierarchical control

Decentralised control

Basic assumptions

People are incapable of self-discipline and cannot be trusted. They need to be monitored and controlled closely.

People work best when they are fully committed to the organisation.

Actions

Uses detailed rules and procedures; formal control systems.

Features limited use of rules; relies on values, group and self-control, selection, and socialisation.

Uses top-down authority, formal hierarchy, position power, quality control inspectors. Relies on task-related job descriptions. Emphasises extrinsic rewards (pay, benefits, status).

Consequences

Relies on flexible authority, flat structure, expert power; everyone monitors quality. Relies on results-based job descriptions; emphasises goals to be achieved.

Features rigid organisational culture; distrust of cultural norms as means of control.

Emphasises extrinsic and intrinsic rewards (meaningful work, opportunities for growth).

Employees follow instructions and do just what they are told.

Employees take initiative and seek responsibility.

Employees feel a sense of indifference towards work.

Employees are actively engaged and committed to their work.

Employee absenteeism and turnover is high.

Employee turnover is low.

Features adaptive culture; culture recognised as means for uniting individual, team and organisational goals for overall control.

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Innovative Way

Campbell Soup Campbell Soup Company, which controls much of the Australian and US soup markets, is piling up profits by implementing costsaving ideas suggested by its employees. At many of its plants, factory workers huddle every morning with managers to find ways to save the company money. These employees are part of a decentralised culture in which both managers and workers share the company’s goals and collaborate on ways to improve efficiency. The daily worker–manager huddles are about ‘getting everybody involved,’ says ‘Big John’ Filmore, a 28-year soupmaking veteran. ‘Instead of being told what to do, we get to tell people about our problems,’ he said. When challenged to find efficiency in the new broth line, which processes 100 000 tonnes of raw ingredients per year, operators and mechanics devised a numbering system for each gasket to speed repairs of the processing equipment. They cut windows into the metal covers over conveyor belts so they could

identify signs of wear. They colour-coded valve handles to avoid confusion in settings. With employee-driven changes like these, Campbell says operating efficiency at the plant has climbed to 85 per cent of what its managers say is the maximum possible, up from 75 per cent three years ago. That pays off, as a 1 per cent gain in plant efficiency adds $3 million to operating profits. Campbell’s latest challenge is reinventing how the company makes soup. In the past, each soup had its own recipe. Now many soups will share a common base, such as chicken broth, and will be adapted by adding different types of meats and vegetables. Employees at all levels of the organisation will help plan and implement the new processes. ‘We have to collaborate at the highest levels of the organisation right down to the plant floor,’ says Dave Biegger, Campbell’s vicepresident for supply chain.

Source: Craig Torres and Anthony Feld. (29 November–5 December 2010). Campbell’s Quest for Productivity. Bloomberg BusinessWeek, 15–16.

O pen - boo k m anagem ent One important aspect of decentralised control in many organisations is open-book management. An organisation that promotes information sharing and teamwork admits employees throughout the organisation into the loop of financial control and responsibility to encourage active participation and commitment to goals. Open-book management allows employees to see for themselves – through charts, digital files, meetings and so forth – the financial condition of the company. Second, open-book management shows the individual employee how his or her job fits into the big picture and affects the financial future of the organisation. Finally, open-book management ties employee rewards to the company’s overall success. With training in interpreting the financial data, employees can see the interdependence and importance of each function. If they are rewarded according to performance, they become motivated to take responsibility for their entire team or function, rather than merely their individual jobs.31 The goal of open-book management is to get every employee thinking and acting like a business owner. To get employees to think like owners, management provides them with the same information owners have: what money is coming in and where it is going. Open-book management helps employees to appreciate why efficiency is important to the organisation’s success as well as their own. Laura Ortmann, who owns Ginger Bay Salon and Spa with her husband, discovered that her hairstylists and massage therapists became more motivated to reach their own performance goals once she trained them to understand the company’s financial goals. Individual and company goals were recorded prominently on a scoreboard in the break room and listed each employee’s daily sales results and whether goals were met. ‘Behaviour changed overnight,’ said Ortmann. ‘No one wants their name next to a low number.’ By helping her employees see how their efforts affected the financial success of the company, Ortmann increased their motivation. ‘I love the numbers, and I love knowing how I’m doing,’ says nail technician Terri Kavanaugh.32

open-book management Sharing financial information and results with all employees in the organisation.

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Managers in some countries have more trouble running an open-book company because prevailing attitudes and standards encourage confidentiality, even secrecy, concerning financial results. Many businesspeople in countries such as China, Russia and India, for example, are not accustomed to disclosing financial details publicly, which can present problems for multinational companies operating there.33 Exhibit 19.7 lists a portion of a recent Opacity Index, which offers some indication of the degree to which various countries are open regarding economic matters. The higher the rating the more opaque, or hidden, the economy of that country. In the partial index in Exhibit 19.7, Nigeria has the highest opacity rating at 57 and Finland the lowest at 9. The United States has an opacity rating of 23 and Australia has a quite healthy score of 15. In countries with higher ratings, financial figures are typically closely guarded, and managers may be discouraged from sharing information with employees and the public. Globalisation is beginning to have an impact on economic opacity in various countries by encouraging a convergence towards global accounting standards that support more accurate collection, recording and reporting of financial information. Thus, most countries have improved their ratings over the past few years. Indonesia, Singapore and Ireland all show significant decreases in opacity since the 2005–2006 ratings, for example. Exhibit 19.7 International Opacity Index: which countries have the most secretive economies? Country

2009 Opacity Score

2008 Opacity Score

Nigeria

55

57

Venezuela

48

48

Saudi Arabia

45

47

China

42

45

India

41

44

Indonesia

40

41

Russia

40

41

Mexico

37

37

Taiwan

32

34

South Korea

29

31

South Africa

24

26

Japan

25

25

United States

22

23

Canada

20

22

Germany

17

17

Ireland

15

16

Australia

14

15

Singapore

14

14

Hong Kong

12

12

Finland

9

9

The higher the opacity score, the more secretive the national economy, meaning that prevailing attitudes and standards discourage openness regarding financial results and other data. Sources: Joel Kurtzman and Glenn Yago. (April 2009). Opacity Index, 2009: Measuring Global Risks. Published by Milken Institute, http://www.kurtzmangroup.com/pdf/InstituteOpacityIndex_Apr8.pdf (accessed 9 December 2013); http://www.milkeninstitute.org/pdf/ InstituteOpacityIndex_Apr8.pdf (accessed 17 March 2014).

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When Ricardo Semler took over from his father as head of the family business, Brazil’s Semco, a large equipment manufacturer, he decided to manage based on a philosophy of ‘giving up control’ by having faith in people and respect for their ideas. At Semco, he designed a business model in which employees have no set work schedules, no dress codes, no strict rules and regulations, and no employee manuals. Workers choose their own training and nobody approves expense accounts. About 30 per cent of employees even set their own pay, and everyone in the company knows everyone else’s salary. All workers receive the company’s financial statements and are taught how to read them through classes set up by the labour union. Two board seats are reserved for employees, and board meetings are open to all employees who want to attend. Self-managed teams have replaced the management hierarchy, and people have a chance to choose how they can best contribute to the company. Top managers are evaluated on a regular basis by employees – with the outcomes posted for all to see. The idea that ties all this together is Semler’s belief in taking top management out of running the business, which led Fortune magazine to give him the title of ‘anti-control freak’. Semler believes that if an organisation gives people complete freedom and full information, they will act in their own, and consequently the company’s, best interests. ‘It is only when you rein them in, when you tell them what to do and how to think, that they become inflexible, bureaucratic and stagnant,’

says Semler. Semler dislikes the American organisation model, which he sees as basically a military hierarchy. Despite all the freedom, organisational control at Semco is quite strong, based not on power and authority but on organisational vision and cultural values that emphasise self-initiative, self-discipline and full disclosure of all types of information. Employees think like business owners because they can see how their jobs and actions fit in and contribute to the organisation’s – and their own – success or failure. The decentralised approach must be working. Over 20 years, Semco grew its revenue from US$4 million to $212 million and staff numbers grew from 90 people to over 3000. Semler believes his company’s success is a powerful reminder that it is possible to have an efficient business with shared norms, values and self-discipline replacing strict rules and controls, guided by managers who lead rather than wield their power. Semco’s most recent strategic direction is to use its excellent managerial control systems and philosophies to diversify from its historical equipment industries into a range of other business activities and international joint ventures. Their published principles are listed below:

Semco principles and values At Semco, we follow a few basic rules which, we believe, a dependable and reliable company should follow. This means that the Group can grow and each one of our employees fully understands their place of

➜➜ The philosophy of control has shifted to reflect changes in leadership methods. ➜➜ Hierarchical control involves monitoring and influencing employee behaviour through extensive use

of rules, policies, hierarchy of authority, written documentation, reward systems and other formal mechanisms. ➜➜ With decentralised control, the organisation fosters compliance with organisational goals through the

work. In practice, we have 10 principles and make a special effort to follow them: ➜➜To be a dependable and reliable company. ➜➜Value honesty and transparency over and above all temporary interests. ➜➜Seek a balance between short-term and long-term profit. ➜➜Offer products and services at fair prices which are recognised by customers as the best on the market. ➜➜Provide the customer with differentiated services, placing our responsibility before profits. ➜➜Encourage creativity, giving support to the bold. ➜➜Encourage everyone’s participation and question decisions that are imposed from the top down. ➜➜Maintain an informal and pleasant environment, with a professional attitude and free of preconceptions. ➜➜Maintain safe working conditions and control industrial processes to protect our personnel and the environment. ➜➜Have the humility to recognise our errors and understanding that we can always improve.

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Semco’s open-book policy

Sources: Vogl, A. J. (May–June 2004). The Anti-CEO. Across the Board, 30–6; Colvin, G. (26 November 2001). The Anti-Control Freak. Fortune, 60, 80; Semler, R. (September– October 2000). How We Went Digital Without a Strategy. Harvard Business Review, 51–8; http:// www.inc.com/articles/2004/03/7dayweekend. html; http://www.semco.com.br/en/content. asp?content=3&contentID=567 (accessed 17 December 2013).

use of organisational culture, group norms and a focus on goals rather than rules and procedures.

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➜➜ Open-book management allows employees to see for themselves the financial condition of the organisation and encourages them to think and act like business owners.

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Total quality management (TQM)

A lesson in qualit y from China Zhang Ruimin is CEO of the Haier group of companies in China. He heads a company that makes a number of different types of home appliances, such as refrigerators, computers, televisions and DVD players. A critical time in the company’s development was when it received customer complaints about the quality of its products. Zhang had 400 units on the factory floor inspected. When 76 of these were found to be defective, he asked the workers who were responsible for these defective parts to use sledge hammers to smash them. This caused a change in attitude in the company

about only making parts and products that are of acceptable quality. Zhang’s management style may seem extreme to some, but such lessons have driven the right attitudes into a workforce that needed to change. Zhang has successfully transformed a number of previously stateowned enterprises in China, and has taken these businesses to international success in fiercely competitive markets such as North America. Source: Peter Day. Smashing Way to Start a Global Business, http://www.bbc.com/news/ business-24622247.

Source: Shutterstock.com/s_oleg

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total quality management (TQM) An organisation-wide effort to infuse quality into every activity in a company through continuous improvement. 

Another popular approach based on a decentralised control philosophy, which has already been discussed in Chapter 7, is total quality management (TQM), an organisation-wide effort to infuse quality into every activity in a company through continuous improvement. Managing quality is a concern for every organisation. Ford, for example, vows that its new compact and subcompact vehicles will have substantially fewer problems during their first three months on the road than models from other automakers. According to Vice President of Global Quality Bennie Fowler, Ford planned to keep the number of quality problems (called ‘things gone wrong’) at 800 problems per 1000 vehicles, well below the industry average of around 1500 problems per 1000 vehicles. Problems include a range of customer complaints, from things customers just don’t like to product features that fail or don’t work properly. The company has worked hard to regain customer confidence after lagging behind foreign competitors such as Toyota and Honda.34 It hopes that an emphasis on TQM will recapture confidence among consumers. TQM became attractive to Australian managers in the 1980s because it had been implemented successfully by Japanese companies, such as Toyota, Canon and Honda, which were gaining market share and an international reputation for high quality. The Japanese system was based on the work of such researchers and consultants as W. Edwards Deming, Joseph Juran and Armand Feigenbaum, whose ideas attracted Australian and US executives after the methods were tested overseas.35 The TQM philosophy focuses on teamwork, increasing customer satisfaction and lowering costs. Organisations implement TQM by encouraging managers and employees to collaborate across functions and departments, as well as with customers and suppliers, to identify areas for improvement, no matter how small. Each quality improvement is a step towards perfection and meeting a goal of zero defects. Quality control becomes part of the day-to-day business of every employee, rather than being assigned to specialised departments.

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TQM techn i q u es The implementation of TQM involves the use of many techniques, including quality circles, benchmarking, Six Sigma principles, quality partnering and continuous improvement.

Qu ality ci r cles A quality circle is a group of six to 12 volunteer employees who meet regularly to discuss and solve problems affecting the quality of their work.36 At a set time during the work week, the members of the quality circle meet, identify problems and try to find solutions. Circle members are free to collect data and take surveys. Many companies train people in team building, problem solving and statistical quality control. The reason for using quality circles is to push decision making to an organisation level at which recommendations can be made by the people who do the job and know it better than anyone else.

Team creates quality circle and collects information

quality circles quality circle A group of six to 12 volunteer employees who meet regularly to discuss and solve problems affecting the quality of their work.

Exhibit 19.8 The quality circle process

Team selects problems to be solved

Team gathers data and analyses problems

Feedback from managers to quality circles

Team recommends solutions

Decision by top management

Be nchmar ki ng Introduced by Xerox in 1979, benchmarking is now a major TQM component. Benchmarking is defined as ‘the continuous process of measuring products, services, and practices against the toughest competitors or those companies recognised as industry leaders to identify areas for improvement’.37 Organisations may also use benchmarking for generating new business ideas, assessing market demand or identifying best practices within an industry. A five-step benchmarking process is shown in Exhibit 19.9. The first step involves planning the benchmarking study, which includes identifying the objectives of the study and the characteristics of a product or service that significantly influence customer satisfaction. The second step involves identifying the source of the information to be collected. For example, the sources of data for a Sherwin-Williams benchmarking study may include national independent lab studies or studies published in Consumer Reports magazine. Once the source of information is identified, data is then collected. Xerox collected information on the order fulfilment techniques of L. L. Bean, the mailorder firm, and learned ways to reduce warehouse costs by 10 per cent. The fourth step includes analysing the benchmarking data that has been collected and recommending areas of improvement. The fifth step includes implementing recommendations and then monitoring them through continuous benchmarking.

benchmarking The continuous process of measuring products, services and practices against major competitors or industry leaders.

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Improve

Exhibit 19.9 A five-step benchmarking process Source: Based on Deven Shah and Brian H. Kleiner. (MarchApril 2011). Benchmarking for Quality. Industrial Management, 22–5.

Analyse

Collect

Find

Plan

Si x Si gma benchmarking

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Six Sigma A quality control approach that emphasises a relentless pursuit of higher quality and lower costs.

Six Sigma quality principles were first introduced by Motorola in the 1980s and were later popularised by General Electric (GE), where former CEO Jack Welch praised Six Sigma for quality and efficiency gains that saved the company billions of dollars. Based on the Greek letter sigma, which statisticians use to measure how far something deviates from perfection, Six Sigma is a highly ambitious quality standard that specifies a goal of no more than 3.4 defects per million parts. That essentially means being defect-free 99.9997 per cent of the time.38 However, Six Sigma has deviated from its precise definition to become a generic term for a quality-control approach that takes nothing for granted and emphasises a disciplined and relentless pursuit of higher quality and lower costs. The discipline is based on a five-step methodology referred to as DMAIC, pronounced ‘deMay-ick’ (standing for Define, Measure, Analyse, Improve and Control), which provides a structured way for organisations to approach and solve problems.39 Effectively implementing Six Sigma requires a major commitment from top management because Six Sigma involves widespread change throughout the organisation. At Honeywell, for example, all employees are expected to understand Six Sigma fundamentals. Six Sigma provides a common language among employees, complements efforts to remove fat from the organisation and supports efforts to ‘get it right the first time’.

The honeybee st yle The honeybee is known for its hard work and wise use of natural resources, as well as for living in a cooperative, interconnected community. Likewise, Munich-based BMW recognises that true sustainability involves the protection and wise use of not only the environment, but of every resource used to provide quality vehicles for consumers. Dating

back to the 1970s, BMW’s approach to sustainable growth can be seen throughout its well-controlled production process. Self-managed teams oversee rigorous quality control measurement of sustainability, building for BMW an A+ international sustainability rating. A total of 23 interconnected ‘honeybee’ practices address everything from ethical

behaviour and social responsibility to quality and innovation. The results include the recycling of production waste and the reuse of scrap from BMW’s new carbonfibre car bodies. Source: Gayle C. Avery and Harald Bergsteiner. (2011). How BMW Successfully Practices Sustainable Leadership Principles. Strategy & Leadership, 39:6, 11–18.

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Honeywell explains its dedication to Six Sigma and what it means to reach this high level of performance with these examples: ●● If your water heater operated at Four Sigma (not Six), you would be without hot water for more than 54 hours each year. At Six Sigma, you would be without hot water for less than two minutes a year. ●● If your mobile phone operated at Four Sigma, you would be without service for more than four hours a month. At Six Sigma, it would be about nine seconds a month. ●● A Four Sigma process will typically result in one defective package of product for every three truckloads shipped. A Six Sigma process means one defective package for every 5350 truckloads.40 Exhibit 19.10 lists some additional statistics that illustrate why Six Sigma is important for both manufacturing and service organisations. Exhibit 19.10 The importance of quality improvement programs 99 Per cent amounts to:

Six Sigma amounts to:

117 000 pieces of lost first-class mail per hour

1 piece of lost first-class mail every two hours

800 000 mishandled personal cheques each day

3 mishandled cheques each day

23 087 defective computers shipped each month

8 defective computers shipped each month

7.2 hours per month without electricity

9 seconds per month without electricity

Source: Based on data from Statistical Abstract of the United States, US Postal Service, as reported in Tracy Mayor. (1 December 2003). Six Sigma Comes to IT: Targeting Perfection. CIO, 62–70.

Qu ality part ner i ng One of the drawbacks of a traditional quality control program is that people from the quality control department are often seen as ‘outsiders’ to the business groups that they serve. Because they don’t always have a strong knowledge of the processes that they are studying, their work may be viewed with suspicion or as an interruption to the normal work routine. The risk here is that quality control is seen as separate from everyday work. Another drawback of the traditional model is that quality control is usually conducted after a product is completed or a service delivered – the time when it is most expensive to make corrections. A new approach called quality partnering involves assigning dedicated personnel within a particular functional area of the business. In this approach, the quality control personnel work alongside others within a functional area identifying opportunities for quality improvements throughout the work process. This integrated, partnering approach to quality makes it possible to detect and address defects early in the product life cycle, when they can be corrected most easily. Another advantage of this approach is that quality partners are viewed as ‘insiders’ and peers who are readily accepted into the work group.41

Continuous i mp r ovement In Australia, crash programs and designs traditionally have been the preferred method of innovation. Managers measure the expected benefits of a change and favour the ideas with the biggest payoffs. In contrast, Japanese companies have realised extraordinary success from making a series of mostly small improvements. This approach, called continuous improvement, or kaizen, is the implementation of a

quality partnering A quality control approach that involves assigning dedicated personnel within a particular functional area of the business.

continuous improvement The implementation of a large number of small, incremental improvements in all areas of the organisation on an ongoing basis.

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Source: © Corbis/Xinhua Press/Yue Yuewei

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large number of small, incremental improvements in all areas of the organisation on an ongoing basis. In a successful TQM program, all employees learn that they are expected to contribute by initiating changes in their own job activities. The basic philosophy is that improving things a little bit at a time, all the time, has the highest probability of success. Innovations can start simple, and employees can build on their success in this unending process.

TQM su ccess facto rs

Toyota is generally acknowledged as one of the best companies in the world when it comes to worker-driven continuous improvement. With the achievement of some 10 improvement suggestions per worker per year, this contributes to Toyota’s superior value in its vehicle and its industry leadership in mid-market cars.

Despite its promise, TQM does not always work. A few firms have had disappointing results. In particular, Six Sigma principles might not be appropriate for all organisational problems, and some companies have expended tremendous energy and resources for little payoff.42 Many contingency factors (listed in Exhibit 19.11) can influence the success of a TQM program. For example, quality circles are most beneficial when employees have challenging jobs; participation in a quality circle can contribute to productivity because it enables employees to pool their knowledge and solve interesting problems. TQM also tends to be most successful when it enriches jobs and improves employee motivation. In addition, when participating in the TQM program improves workers’ problem-solving skills, productivity is likely to increase. Finally, a TQM program has the greatest chance of success in a corporate culture that values quality and stresses continuous improvement. Exhibit 19.11 Quality program success factors Positive factors

Negative factors

Tasks make high skill demands on employees.

Management expectations are unrealistically high.

TQM serves to enrich jobs and motivate employees.

Middle managers are dissatisfied about loss of authority.

Problem-solving skills are improved for all employees.

Workers are dissatisfied with other aspects of organisational life.

Participation and teamwork are used to tackle significant problems.

Union leaders are left out of quality-control discussions.

Continuous improvement is a way of life.

Managers wait for big, dramatic innovations.

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Innovative Way Source: Thinkstock/Dan Kitwood

The global success of eBay One of Meg Whitman’s guiding rules is: ‘If you can’t measure it, you can’t control it.’ As CEO of eBay for 10 years, during which time she built it from having 30 employees to being a global powerhouse, Whitman ran a company that was obsessed with performance measurement. She personally monitored a slew of performance metrics, including standard measurements such as site visitors, new users and time spent on the site, as well as the ratio of eBay’s revenues to the value of goods traded. She brought in a benchmarking consultant to measure eBay against peers to see how fast it adds features to the website. The results showed Whitman the company has some improvement to make in that area. Managers and employees throughout the company also monitor performance almost obsessively. Category managers, for example, have clear standards of performance for their auction categories (such as sports memorabilia, jewellery and watches, health and beauty, fashion, etc.). They are constantly measuring, tweaking and promoting their categories to meet or outperform the targets.

Whitman believes getting a firm grip on performance measurement is essential for a company to know where to spend money, where to assign more personnel, and which projects to promote or abandon. But performance measurement isn’t just about numbers. At eBay, ‘it’s all about the customer’, and gauging customer (user) satisfaction requires a mix of methods, such as surveys, monitoring eBay’s discussion boards and personal contact. Whitman gets her chance to really connect with users at the annual eBay Live conference. There, she wanders the convention hall talking with anyone and everyone about their eBay experiences. By defining standards, using a combination of measurement approaches and comparing performance to standards, eBay managers are able to identify trouble spots and move quickly to take corrective action when and where it’s needed. Managers may wish to provide positive reinforcement when performance meets or exceeds targets. They may reward a department that has exceeded its planned goals or congratulate employees for a job well done. Managers should not ignore high-performing departments at the expense of taking corrective actions elsewhere. When Ms Whitman handed over the eBay CEO role to John Donahoe in 2008, the culture and value created by measuring and controlling key performance metrics was firmly and deeply established in the company. Source: Lashinsky, A. (1 September 2003). Meg and the Machine. Fortune, 68–78.

➜➜ Total quality management (TQM) is an organisation-wide effort to infuse quality into every activity in a company through continuous improvement. ➜➜ The TQM philosophy focuses on teamwork, increasing customer satisfaction and lowering costs. ➜➜ Quality circles offer one technique for implementing TQM and include a group of six to 12 volunteer

employees who meet regularly to discuss and solve problems affecting the quality of their work. ➜➜ Another option for tracking quality is benchmarking, the continuous process of measuring products, services and practices against major competitors or industry leaders. ➜➜ Six Sigma is a quality control approach that emphasises a relentless pursuit of higher quality and lower costs.

➜➜ Quality partnering involves assigning dedicated personnel within a particular functional area of the business to identify opportunities for improvement throughout the work process. ➜➜ Continuous improvement, or kaizen, is the implementation of a large number of small, incremental improvements in all areas of the organisation on an ongoing basis.

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Innovative Way

Toyota

At many of Toyota’s manufacturing plants, workers can assemble as many as eight different models on the same line. Production has been streamlined to the point where workers can build a car in just 20 hours. But speed and flexibility are only part of Toyota’s success. Quality is the primary goal. Toyota has a defect rate far below that of any other Japanese, Australian, European or US car maker. Toyota leads the world in this regard. Toyota managers created the doctrine of kaizen or continuous improvement. Today, methodically studying problems and quickly solving them is second nature to people throughout the organisation. Employees can receive cash awards for searching out glitches in production and coming up with solutions. No detail is too small. Toyota has kicked its kaizen process into overdrive in its quest to become the world’s leading car maker (in 2004 it overtook Ford to become global number 2 behind General Motors). Unfortunately, the rapid growth has strained Toyota’s focus on quality in the US. To stop the quality slide, Toyota is getting back to basics by launching special task forces to reinvigorate the kaizen concept. In the Kentucky factory, for example, a group of highly productive employees has been pulled off regular assembly to serve on a special kaizen team. The team works in a barracks-

ISO 9000 standards A set of international standards for quality management, setting uniform guidelines for processes to ensure that products conform to customer requirements.

like structure and spends all its time just coming up with ways to save time and money while maintaining standards of excellence. Toyota has a slogan emblazoned on a giant banner that hangs in its Takaoka assembly plant just outside Nagoya, Japan: ‘Yoi Kangae, Yoi Shina!’ It means ‘Good thinking means good products’, and the culture of Toyota supports the belief that everyone throughout the company should continuously be thinking of ways to make products better, faster and cheaper. Although many Australian, US and European car makers have implemented elements of TQM, no company has yet come close to Toyota in its execution. In 2010, Toyota experienced major defect problems in the US and recalled some 7 million cars, proving it to be imperfect and more like the other major car companies. However subsequent independent investigations found that the only problem was the way drivers adjusted floor mats, clearing Toyota’s mechanical and software of having any defects. This company has built innovative capability on top of its ability to effectively manage quality. In recent years it has mass produced hybrid engines in its Prius, Camry and Lexus range, having become the market leader in these technologies and markets on a global basis by 2011.

Trends in quality and financial control Many companies are responding to changing economic realities and global competition by reassessing organisational management and processes – including control mechanisms. Two major trends are international quality standards and increased corporate governance.

Internatio nal q ualit y stan dards One impetus for TQM in most industries is the increasing significance of the global economy. Many countries have adopted a universal benchmark for quality management practices, ISO 9000 standards, which represent an international consensus of what constitutes effective quality management as outlined by the International Organization for Standardization (ISO).43 Hundreds of thousands of organisations in 157 countries, including Australia, have been certified against ISO 9000 standards to demonstrate their commitment to quality. Europe continues to lead in the total number of certifications, but the greatest number of new certifications in recent years has been in the United States. Government departments and agencies such as police forces and stations have invested in this form of control system.

Source: Copper Leife/Craig Forsythe

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ISO certification has become the recognised standard for evaluating and comparing companies on a global basis, and more companies are feeling the pressure to participate to remain competitive in international markets. In addition, many countries and companies require ISO certification before they will do business with an organisation.

Cyberslackers beware: the boss is watching When employees have access to the Internet’s vast resources, and the ability to communicate quickly via email and instant messaging with anyone in the world, that’s got to be good for productivity, right? Not necessarily, as many organisations are discovering. Many companies are experiencing a growing problem with ‘cyberslackers’, people who spend part of their workday sending personal emails, on Facebook and other social media sites, online shopping, or downloading music and videos that hog available bandwidth and sometimes introduce viruses. In addition, it takes just a few bad apples engaging in harmful and possibly illegal activities, such as harassing other employees over the Web, to cause serious problems for their employers. So it’s not surprising that the use of increasingly sophisticated software to both block employees’ access to certain sites and monitor their Internet and email use has grown exponentially. A certain degree of vigilance is clearly warranted. However, enlightened managers strive for a balanced approach that protects the organisation’s interests while at the same time maintaining a positive, respectful work environment. Surveillance overkill can sometimes cost more than it saves, and it can also have a distinctly negative impact on employee morale. At the very least, employees may feel as though they’re not being treated as trustworthy, responsible adults. Here are some guidelines for creating an effective but fair ‘acceptable use policy’ for workplace Internet use.

➜➜ Make sure employees understand that they have no legal right to privacy in the workplace. The courts so far have upheld an organisation’s right to monitor any and all employee activities on computers purchased by an employer for work purposes.

management in pr actice ➜➜ Create a written Internet policy. Make sure you clearly state what qualifies as a policy violation by giving clear, concrete guidelines for acceptable use of email, the Internet, and any other employer-provided hardware or software. For example, spell out the types of websites that are never to be visited while at work and what constitutes acceptable email content. Are employees ever permitted to use the web for personal use? If so, specify what they can do, for how long, and whether they need to confine their personal use to lunchtime or breaks. List the devices you’ll be checking and tell them the filtering and monitoring procedures you have in place. Get employees to sign a statement saying they’ve read and understand the policy.

➜➜ Describe the disciplinary process. Give people a clear understanding of the consequences of violating the organisation’s Internet and electronic use policy. Make sure they know the organisation will cooperate if a criminal investigation arises.

➜➜ Review the policy at regular intervals. You’ll need to modify your guidelines as new technologies and devices appear. Managers should remember that monitoring email and Internet use doesn’t have to be an all-or-nothing process. Some organisations use continuous surveillance; others only screen when they believe a problem exists, or they disseminate a policy and leave enforcement to the honour system. Look carefully at your workforce and the work they’re doing, and assess your potential liability and security needs. Then come up with a policy and monitoring plan that makes sense for your organisation.

Sources: Ware, L. C. (15 August 2005). People Watching. 24, http://www.cio.com; Lambert, A. (14 February 2005). Technology in the Workplace: A Recipe for Legal Trouble. Workforce.com, http://www.workforce.com/archive/article/23/95/08.php?ht=lambert%20lambert; Technical Resource Group. Employee E-mail and Internet Usage Monitoring: Issues and Concerns. http://www.picktrg.com/pubs/EmployeeMonitoring_WP062804.pdf; Tam, P., White, E., Wingfield, N. and Maher, K. (9 March 2005). Snooping E-Mail by Software Is Now a Workplace Norm. The Wall Street Journal, B1; and Sherman, A. (17 May 2006). Firms Address Worries over Workplace Web Surfing. Broward Daily Business Review, 11.

Co rpo r ate governan ce Many organisations have moved towards increased control from the top in terms of corporate governance. Traditionally defined as the ways in which an organisation safeguards the interests of shareholders, the term corporate governance has been expanded to refer to the framework

corporate governance The system of governing an organisation so that the interests of corporate owners are protected.

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of systems, rules and practices by which an organisation ensures accountability, fairness and transparency in its relationships with all stakeholders, including investors, employees, customers Take and the general public.44 a Moment Concerns over corporate governance came to the forefront some years ago in light of the As a new manager, find a balance between oversight failure of top executives and corporate directors to provide adequate oversight and control and control on the one hand at failed companies such as Enron, OneTel, HealthSouth and WorldCom. In some cases, and mutual trust and respect financial reporting systems were manipulated to produce false results and hide internal failures. on the other. Go to the Ethical In response, the US government enacted the Sarbanes-Oxley Act of 2002, often referred to as Challenge on pages 794 that pertains to new workplace SOX, which requires several types of reforms, including better internal monitoring to reduce the control issues. risk of fraud, certification of financial reports by top leaders, improved measures for external auditing and enhanced public financial disclosure. Many Australian companies which are trading in the USA have needed to comply with this new set of laws. With the failure of large firms such as Lehman Brothers and Bear Stearns in 2008, corporate governance again became a hot topic. Lax oversight likely contributed both to the failure of these firms and to the global financial crisis. ‘I don’t think there’s any question that a dramatic failure of corporate governance was a central issue of the crisis,’ said Phil Angelides, chairman of the Financial Crisis Inquiry Commission appointed by the US Congress. Global regulators from 27 countries imposed new rules and restraints on financial institutions designed to limit risk-taking and increase oversight.45 In addition, in America, the Securities and Exchange Commission (SEC) now requires that companies justify their board structure in proxy statements to ensure that boards are designed in a way to provide needed oversight of management actions.46 Although Australian companies did not fall prey to the practices which brought the US economy to its knees, there have been instances of poor governance in many sectors. This includes companies such as HIH and Gunns, sporting organisations such as the Cronulla Sharks (rugby league) and Essendon Football Club (AFL), and the Health Services Union.

➜➜ As global business expands, many companies have adopted a universal benchmark for quality management practices, including ISO 9000 standards, which represent an international consensus of what

constitutes effective quality management as outlined by the International Organization for Standardization (ISO). ➜➜ Many organisations are moving towards increased control from

remember this

the top in terms of corporate governance, which refers to the framework of systems, rules and practices by which an organisation ensures accountability, fairness and transparency in the firm’s relationships with stakeholders.

Qualities of effective control systems Properly used, controls help managers respond to unforeseen developments and achieve strategic plans. Improperly designed management control systems can lead an organisation into bankruptcy. When such problems signal that control systems are not working properly, management must examine them for possible clarification, revision or overhaul.

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Whether organisational control focuses on feedforward or feedback measurement, or emphasises the bureaucratic or decentralised approach, certain characteristics should be present. In general, for organisational controls to be effective, they should be tailored to the organisation’s needs and facilitate the accomplishment of its tasks. More specifically, effective controls share the following traits: 1 Linkage to strategy. The control system should not simply measure what was important in the past

or be tailored to current operations. It should reflect where the organisation is going and adapt to new strategies. Moreover, the organisation should focus on activities that are relevant to strategic goals. If the dominant competitive issue facing an organisation is to reduce cycle time, the control system should not emphasise raw materials cost, which is unrelated. 2 Understandable measures. Organisations depend on employees to carry out work according to

standards. An effective control system ensures that employees know and understand what is expected. A highly sophisticated analysis of a department’s performance is wasted if the manager cannot interpret whether, or where, problems exist. 3 Acceptance by employees. The more committed employees are to control standards, the more

successful the control system will be. The control system should motivate rather than demotivate. This is most likely when it includes standards that are understandable and reasonable, when employees understand the reason for the control system, and when they do not perceive the measurement process as overly intrusive. 4 Balance of objective and subjective data. Managers can be misled when control system

data are either completely numeric or based solely on subjective opinion. Control should be perceived as objective, but quantitative information tells only part of the story. Managers should balance quantitative and qualitative performance indicators to provide a well-rounded picture of performance. 5 Accuracy. Upward communication, especially about performance, often is influenced by what

employees believe management wants to hear. However, the control system should encourage accurate information in order to detect deviations. 6 Flexibility. Internal goals and strategies must be responsive to changes in the environment and the

control system should be flexible enough to adapt as needed. Managers who rely too heavily on existing controls, especially feedback controls, will find themselves out of synchronisation with changing events. 7 Timeliness. The control system should provide information soon enough to permit a management

response. Corrective action is of no value if performed too late. 8 Support of action. Control goes beyond monitoring performance to taking corrective action. Managers

therefore need a system that helps them focus on performance areas in which change is needed. The control system should highlight variances, and managers should focus on these variances, diagnosing the cause of each and using judgement to decide when intervention is required.

Concept Revision

Audio summary

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sustainable development Response to the Management Challenge

Sustainable development and management control Like any other aspect of management or strategic initiative, a move to make a business more sustainable in terms of its environmental, financial and social outcomes must be not just well planned and resourced: it must be well controlled, too. This means applying the ideas of feedforward control, of setting expectations and budgets in place, as well as anticipated target outcomes. Each year, BHP Billiton sets aside a planned amount of money and capability of its staff to engage in community building in the vicinity of its mining operations. During the year, it executes its sustainability plans, including measuring progress of its projects and expenditure, and adjusting its actions as necessary if they are not going to plan. Finally it reviews every major sustainability initiative, reports on these to a variety of stakeholders and holds itself accountable both inside and outside the company for its actions (see http://www.bhpbilliton.com/bb/ sustainableDevelopment.jsp). The management reviews and the close public scrutiny of its sustainability efforts and performance are a strong form of feedback control, leading to a formal review and then a renewal of the cycle. New, usually higher goals are set, resourced and implemented every year, in this well-controlled cycle. BHP Billiton also uses a balanced scorecard approach to control and performance outcomes, even linking the pay for its CEO, to the balanced scorecard of company performance, including return on investment, safety, environmental factors and growth. The company’s balanced scorecard performance has been doing quite well lately, with a 2012 profit of A$15.2 billion, and performance on the balanced scorecard leading the retiring CEO Marius Kloppers receiving a farewell package of about A$45.4 million.47 Stakeholders are also generally well satisfied with this company that has taken the balanced scorecard and its commitment to sustainable development very seriously indeed since it was, 15 years ago, a poor environmental and social performer. The company’s highly disciplined approach has ensured that its good intentions are generally well controlled and executed, hence are transferred into ‘good deeds’, to the benefit of all stakeholders.

The story of Dell Computer Corporation at the beginning of the chapter demonstrates the importance of financial control, as well as the importance of aligning control systems with an organisation’s strategy. As we learned in this chapter, managers should carefully assess and define the indicators they will measure. Some years ago, Dell began to suffer because managers focused entirely on measuring growth and failed to look at other key factors that determine organisational success. Dell’s top managers, including Michael Dell himself, knew they had to make some changes in management structure and financial controls in order for their company to survive. First, Dell refocused the company’s financial control strategy on a cash conversion cycle, which is made up of inventory, payables, receivables and cash flow from operations. The pay of the company’s top managers also

was adjusted to reflect the return on invested capital as well as growth. For the first time, managers were actually invested in the success of the company. Then Dell made sure that training videos, newsletters and other information packages were distributed to all employees, so that they became part of the financial information loop through open-book management. Dell also brought in experienced managers, including Morton L. Topfer, a 23-year veteran of Motorola, to implement the systems needed to control a large company. As vicechairman of Dell, Topfer pulled the company out of retail sales to allow managers to focus on improving their direct sales efforts. Topfer also reorganised the company from a centralised, functional structure to a decentralised structure based on geographic divisions. Topfer recognised the change in structure as one way to shift to a more decentralised approach to control.

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Kevin Rollins, senior vice-president and general manager of Dell Americas, says the company’s managers are expected to communicate constantly with each other, with employees, with customers – in fact, with everyone. ‘You have to talk, you have to listen, and all of a sudden, you’ll realise you are in the loop,’ he explains. Ironically, by attacking its previous singular focus on growth, Dell was in fact growing. But growing in a stronger, more focused manner. By the mid 2000s, the company was known as one of the best in the industry at rapidly responding to changes in the volatile PC market, and had achieved industry leadership status in terms of its cost and supply chain performance and equipment reliability. Dell achieved excellent control over its operations, quality, delivery performance, culture and people, and financial performance. By 2011 Dell had grown to be one of the world’s most admired large companies, with profitable sales of $61 billion, and a unique business model. Despite having mastered the PC market and their quality operations, though, Dell was completely caught off guard in terms of

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the popularity of tablets. Tablet sales grew from 17 million to 122 million between 2010 and 2012. The company watched in startled alarm as consumer demand for their core product swiftly sunk. While Dell suffered an 11 per cent drop in shipments in 2013, the top five global tablet companies recorded 142 per cent growth. The publicly owned Dell company sold for US $24.4 billion in early 2013 and was taken back into private ownership by a consortium including Microsoft, Silver Lake Partners and the company’s founder Michael Dell. Dell is hoping that it can now make swifter decisions and take bigger risks without having to answer to shareholders. By having effective control systems, Dell aims to be able to more effectively respond to the high uncertainty it faces in the fast moving computer industry. Sources: Greenfield, R. (5 February 2013). Everything You Need to Know About the Dell Buyout. The Wire, http://www.thewire.com/ technology/2013/02/everything-you-need-know-about-dellbuyout/61801/ (accessed 9 December 2013); Inocencio, Ramy. (17 May 2013). Dell’wether: Does the desktop decline point to an era’s end? CNN, http://edition.cnn.com/2013/05/17/business/dell-profit-plunge-desktoplaptop-futures/index.html (accessed 9 December 2013); http://finance. yahoo.com/q/ks?s=DELL.

1 Why is it important for managers to understand the process of organisational control? 2 Suppose you’re a manager who employs a participative control approach. You’ve concluded that corrective action is necessary to improve customer satisfaction, but first you need to convince your employees that the problem exists. What kind of evidence do you think employees will find more compelling: quantitative measurements or anecdotes from your interactions with customers? 3 Describe the advantages of using a balanced scorecard to measure and control organisational performance. Suppose you created a balanced scorecard for McDonald’s. What specific customer service measures would you include? 4 What standards of performance has your lecturer established for this class? How will your actual performance be measured? How will your performance be compared with the standards? Do you think the standards and methods of measurement are fair? Why or why not? 5 What is the difference between budgeting and financial analysis? Why is each type of control important to a company?

Discussion questions

6 Imagine that you are going to be the manager of a new Woolworths being built in your area. What items might be listed in your capital budget? What items might be listed in your expense budget?

7 In the Innovative Way about eBay, CEO Meg Whitman is quoted as saying, ‘If you can’t measure it, you can’t control it.’ Do you agree with this statement? Provide examples from your school or business experience that support your argument. 8 Some critics argue that Six Sigma is a collection of superficial changes that often result in doing a superb job of building the wrong product or offering the wrong service. Do you agree or disagree? Explain. 9 Would you like to work for a company that uses open-book management? Would you like to be a manager in the company? Why or why not? 10 Why is it important for an organisation’s control system to be linked to its overall strategy? 11 Why is benchmarking an important component of TQM programs? Do you believe a company could have a successful TQM program without using benchmarking?

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Ethical challenge

T h e wa g e s o f s i n ?

Chris Dykstra, the person responsible for loss prevention at Westwind Electronics, took a deep breath before he launched into making his case for the changes that he was proposing to the company’s shoplifting policy. He knew that convincing Ross Chenoweth was going to be a hard sell. Ross, the company’s chairman and CEO, was the son of the founder of the local, still-family-owned consumer electronics chain. He’d inherited not only the company, but also his father’s strict moral code. ‘I think it’s time to follow the lead of other stores,’ Chris began. He pointed out that most other retailers didn’t bother calling the police and pressing charges unless the thief had shoplifted merchandise worth more than $50 to $100. In contrast, Westwind currently had the zero tolerance policy towards theft that Ross’s father had put in place when he started the business. Chris wanted to replace that policy with one that prosecuted only individuals between 18 and 65 who had stolen more than $40 worth of goods, and who had a previous history of theft at Westwind. In the case of first-time culprits under 18 or over 65, he argued for letting them off with a strict warning, regardless of the value of their ill-gotten goods. Repeat offenders would be arrested. ‘Frankly, the local police are getting pretty tired of having to come to our stores every time a teenager sticks a DVD in his jacket pocket,’ Chris pointed out. ‘And besides, we just can’t afford the costs associated with prosecuting everyone.’ Every time he pressed charges against a shoplifter who’d made off with a $10 item, Westwind lost money. The company had to engage a lawyer and pay employees overtime for their court appearances. In addition, Chris was looking at hiring more security guards to keep up with the workload. Westwind was already in a losing battle with mass retailers that were competing, all too successfully, on price, so passing on the costs of its zero-tolerance policy to customers wasn’t really an option. ‘Let’s concentrate on catching dishonest

employees and those organised-theft rings. They’re the ones who are really hurting us,’ Chris concluded. There was a long pause after Chris finished his carefully prepared speech. Ross thought about his recently deceased father, who was both an astute businessman and a person for whom honesty was a key guiding principle. If he were sitting here today, he’d no doubt say that theft was theft, and that setting a minimum was tantamount to saying that stealing was acceptable just as long as you don’t steal too much. He looked at Chris. ‘You know, we’ve both got teenagers. Is this really a message you want to send out, especially to kids? You know as well as I do that there’s nothing they like better than testing limits. It’s almost an invitation to see if you can beat the system.’ But then Ross faltered as he found himself glancing at the latest financial figures on his desk – another in a string of quarterly losses. If Westwind went under, a lot of employees would be looking for another way to make a living. In his heart, he believed in his father’s high moral standards, but he had to ask himself: just how moral could Westwind afford to be? W h at w o u l d yo u d o ? 1 Continue Westwind’s zero-tolerance policy towards shoplifting. It’s the right thing to do – and it will pay off in the end in higher profitability because the chain’s reputation for being tough on crime will reduce overall losses from theft. 2 Adopt Chris Dykstra’s proposed changes and show more leniency to first-time offenders. It is a more cost-effective approach to the problem than the current policy, plus it stays close to your father’s original intent. 3 Adopt Chris Dykstra’s proposed changes with an even higher limit than the proposed $40 amount (say, $80 or $100), but which is still less than the cost of prosecution. In addition, make sure the policy isn’t publicised. That way, you’ll reduce costs even more and still benefit from your reputation for prosecuting all shoplifters.

Source: Based on Michael Barbaro. (13 July 2006). Some Leeway for the Small Shoplifter. The New York Times.

Gr oup challenge

C r e at e a g r o u p c o n t r o l s y s t e m

Step 1. Form into groups of three to five students. Each group will assume that another student group has been given an assignment of writing a major paper that will involve research by individual group members that will be integrated into the final paper. Each group member has to do his or her part. Step 2. Your assignment is to develop a list of rules and identify some statistics by which to control the behaviour of members in that group. Brainstorm and discuss potential rules to govern member behaviour and consequences for breaking those rules.

Step 3. First, select the five rules you think are most important for governing group member behaviour. Consider the following situations that rules might cover: arriving late for a meeting; missing a meeting; failing to complete a work assignment; disagreements about desired quality of work; how to resolve conflicts about paper content; differences in participation, such as one person doing all the talking and someone else talking hardly at all; how to handle meetings that start late; the use of an agenda and handling deviations from the agenda; and any other situation that your group thinks a rule should cover. Step 4. Now consider what statistics could be developed to measure the behaviour and outcome of the group pertaining to those five rules.

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What kinds of things could be counted to understand how the group is performing and whether members are following the rules? Step 5. Discuss the following questions: Why are rules important as a means of control? What are the advantages and disadvantages of having

many rules (hierarchical control) versus few rules (decentralised control) for a student group? How can statistics help a group ensure appropriate behaviour and a high-quality product? Step 6. Be prepared to present your conclusions to the class.

Lincoln Electric Imagine having a management system that is so successful people refer to it with capital letters – the Lincoln Management System – and other businesses benchmark their own systems by it. That is the situation of Lincoln Electric. For a number of years, other companies have tried to figure out Lincoln Electric’s secret – how management coaxes maximum productivity and quality from its workers, even during difficult financial times. Lincoln Electric is a leading global manufacturer of welding products, welding equipment and electric motors, with more than US$2.7 billion in sales and over 10 000 workers worldwide. The company has had a factory in Sydney as part of its global network of operations. The company’s products are used for cutting, manufacturing and repairing other metal products. Although it is now a publicly traded company, members of the Lincoln family still own more than 60 per cent of the shares. Lincoln uses a diverse control approach. Tasks are rigidly defined, and individual employees must meet strict measurable standards of performance. However, the Lincoln system succeeds largely because of an organisational culture based on openness and trust, shared control and an egalitarian spirit. Although the line between managers and workers at Lincoln is firmly drawn, managers respect the expertise of production workers and value their contributions to many aspects of the business. The company has an open-door policy for all top executives, middle managers and production workers, and regular face-to-face communication is encouraged. Workers are expected to challenge management if they believe practices or compensation rates are unfair. Most workers are hired right out of high school, then trained and crosstrained to perform different jobs. Some eventually are promoted to executive positions, because Lincoln believes in promoting from within. Many Lincoln workers stay with the company for life. One of Lincoln’s founders felt that organisations should be based on certain values, including honesty, trustworthiness, openness, selfmanagement, loyalty, accountability and cooperativeness. These values continue to form the core of Lincoln’s culture, and management regularly rewards employees who manifest them. Because Lincoln so effectively socialises employees, they exercise a great degree of self-control on the job. Production workers are paid on a piece-rate system, plus merit pay based on performance. Employees also are eligible for annual bonuses that fluctuate according to the company’s fortunes, and they participate in share purchase plans. Bonuses are based on a number of factors, such

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as productivity, quality, dependability and cr itical cooperation with others. Factory workers at analysis Lincoln have been known to earn well above industry averages; however, there also are other, less tangible rewards. Pride of workmanship and feelings of involvement, contribution and esprit de corps are intrinsic rewards that flourish at Lincoln Electric. Cross-functional teams, empowered to make decisions, take responsibility for product planning, development and marketing. Information about the company’s operations and financial performance is openly shared with workers throughout the company. Lincoln places emphasis on anticipating and solving customer problems. Sales representatives are given the technical training they need to understand customer needs, help customers understand and use Lincoln’s products, and solve problems. This customer focus is backed up by attention to the production process through the use of strict accountability standards and formal measurements for productivity, quality and innovation for all employees. In addition, a software program called Rhythm is used to streamline the flow of goods and materials in the production process. Lincoln’s system has worked extremely well. The cultural values, open communication, and formal control and reward systems interact to align the goals of managers, workers and the organisation, as well as encourage learning and growth. Now Lincoln is discovering whether its system can hold up overseas. Although most of Lincoln’s profits come from its domestic operations, and a foreign venture in the 1990s lost a lot of money for the company, top managers want to expand globally because foreign markets are growing much more rapidly than domestic markets. Thus far, Lincoln managers have not developed a strategic control plan for global operations, relying instead on duplicating the domestic Lincoln system. Questions 1 What types of control – feedforward, concurrent or feedback – are illustrated in this case? Explain. 2 Based on what you have just read, what do you think makes the Lincoln System so successful? 3 What changes might Lincoln managers have to make to adapt their management system to overseas operations?

Source: Maciariello, J. (Spring 1997). A Pattern of Success: Can This Company Be Duplicated? Drucker Management, 1:1, 7–11; http://www.lincolnelectric.com.

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On the job video case

B a r c e l o n a R e s ta u r a n t G r o u p : m a n a g i n g q u a l i t y a n d p e r f o r m a n c e For a real-world application of the management theories described in this chapter, log on to CourseMate to watch the On the Job video and answer the following questions.

Q uesti o n s 1  How do managers at Barcelona control the company’s financial performance? 2  What is the ‘balanced scorecard’ approach to measuring corporate performance, and in what ways does Barcelona use this approach?

3 List the four steps of the feedback control model and describe an instance where Barcelona followed this process to improve its performance.

Endnotes 1  Shayndi Raice and John Letzing. (31 March 2012). Groupon Forced to Revise Results. The Wall Street Journal, http://online.wsj .com/article/SB10001424052702303816504577313983 768173826.html (accessed 9 October 2012); Adam Hartung. (15 August 2012). Groupon Needs a New CEO – NOW!!’ Forbes, http://www.forbes.com/sites/adamhartung/2012/08/15/ groupon-needs-a-new-ceo-now/ (accessed 9 October 2012); Rolfe Winkler. (30 March 2012). Groupon Gets Socked by Accounting. The Wall Street Journal, http://www.localeyesurgeon.com/groupon-gets-sockedbyaccounting-wall-street-journal/ (accessed 9 October 2012). 2 Douglas S. Sherwin. (January 1956). The Meaning of Control. Dunn’s Business Review. 3 Jessica Bruder. Can FreshDirect Survive a Crisis and Reinvent Itself? The New York Times, http://www.nytimes.com/2010/08/12/business/ smallbusiness/12sbiz.html?pagewanted=all&_r=0 (accessed 28 September 2012). 4 Ibid. 5 Richard E. Crandall. (January–February 2002). Keys to Better Performance Measurement. Industrial Management: 19–24; Christopher D. Ittner and David F. Larcker. (November 2003). Coming up Short on Nonfinancial Performance Measurement. Harvard Business Review, 88–95. 6 Bruder. Can FreshDirect Survive a Crisis and Reinvent Itself? 7 Ibid. 8 This discussion is based on a review of the balanced scorecard in Richard L. Daft. (2001). Organization Theory and Design, 7th ed. (Cincinnati, OH: South-Western), pp. 300–1. 9 Andy Neely and Mohammed Al Najjar. (Spring 2006). Management Learning Not Management Control: The True Role of Performance Measurement. California Management Review, 48:3, 101–14. 10 Robert Kaplan and David Norton. (January–February 1992). The Balanced Scorecard: Measures That Drive Performance. Harvard Business Review, 71–9; and Chee W. Chow, Kamal M. Haddad and James E. Williamson. (August 1997). Applying the Balanced Scorecard to Small Companies. Management Accounting, 79:2, 21–7. 11 Based on Kaplan and Norton. The Balanced Scorecard; Chow, Haddad and Williamson. Applying the Balanced Scorecard; Cathy Lazere. (February 1998). All Together Now. CFO, 28–36. 12 Karen S. Cravens, Elizabeth Goad Oliver and Jeanine S. Stewart. (2010). Can a Positive Approach to Performance Evaluation Help Accomplish Your Goals? Business Horizons, 53, 269–79. 13 Geert J. M. Braam and Edwin J. Nijssen. (2004). Performance Effects of Using the Balanced Scorecard: A Note on the Dutch Experience. Long Range Planning, 37, 335–49; Kaplan and Norton. The Balanced Scorecard; Cam Scholey. (2005). Strategy Maps: A Step-by-Step Guide to Measuring,

Managing, and Communicating the Plan. Journal of Business Strategy, 26:3, 12–19. 14 Nils-Göran Olve et al. (May–June 2004). Twelve Years Later: Understanding and Realizing the Value of Balanced Scorecards. Ivey Business Journal Online, http://www.iveybusinessjournal.com/article.asp?intArticle_ ID=487 (accessed 4 October 2010); Eric M. Olson and Stanley F. Slater. (May–June 2002). The Balanced Scorecard, Competitive Strategy, and Performance. Business Horizons, 11–16; Eric Berkman. (15 May 2002). How to Use the Balanced Scorecard. CIO, 93–100; Brigitte W. Schay et al. (Fall 2002). Using Standardized Outcome Measures in the Federal Government. Human Resource Management, 41:3, 355–68. 15 Braam and Nijssen. Performance Effects of Using the Balanced Scorecard. 16 Jay Goltz. (23 June 2009). The Dusenberry Diary: When Passion Meets Math. The New York Times, http://boss.blogs.nytimes.com/2009/06/23/ thedusenberry-diary-when-passion-meets-math/ (accessed 2 October 2012). 17 Sumantra Ghoshal. (1986). Strategic Control (St Paul, MN: West), Chapter 4; and Robert N. Anthony, John Dearden and Norton M. Bedford. (1984). Management Control Systems, 5th edn (Homewood, IL: Irwin). 18 John A. Boquist, Todd T. Milbourn and Anjan V. Thakor. (Winter 1998). How Do You Win the Capital Allocation Game? Sloan Management Review, 59–71. 19 Jason Gillikin. What Is Zero-Based Budgeting and How Is It Used by an Organization? Houston Chronicle, http://smallbusiness.chron.com/ zerobasedbudgeting-used-organization-22586.html (accessed 3 October 2012). 20 Gerard Paulides. (Winter 2011). Resetting the Cost Structure at Shell. Strategy + Business, 65, 1–4. 21 Anthony, Dearden and Bedford, Management Control Systems. 22 Participation in budget setting is described in a number of studies, including Neil C. Churchill. (July–August 1984). Budget Choice: Planning versus Control. Harvard Business Review, 150–64; Peter Brownell. (1983). Leadership Style, Budgetary Participation, and Managerial Behavior. Accounting Organizations and Society, 8, 307–21; and Paul J. Carruth and Thurrell O. McClandon. (November 1984). How Supervisors React to ‘Meeting the Budget’ Pressure. Management Accounting, 66, 50–4. 23 Norm Brodsky. (October 2011). Balance-Sheet Blues. Inc., 34. 24 This analogy is from Brodsky. Balance-Sheet Blues. 25 Dana Mattioli. (1 January 1998). CEOs Fight to Prevent Discretionary Spending from Creeping Back Up. The Wall Street Journal, http://online.wsj. com/article/SB10001424052748703609004575354901545566456.html (accessed 11 December 2012). 26 Mary Ellen Biery. (25 May 2012). Five Metrics You Should Know. The Washington Post, http://www.washingtonpost.com/blogs/on-small-business/ post/5-financial-metricsyou-should-know/2012/05/25/gJQAuDSjpU_blog. html (accessed 9 October 2012).

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27 Lawrence M. Fisher. (First Quarter 1998). Inside Dell Computer Corporation: Managing Working Capital. Strategy + Business, 10, 68–75; Randy Myers. (August 2000). Cash Crop: The 2000 Working Capital Survey. CFO, 59–69. 28 Nancy F. Koehn. (31 March 2012). The Driver in Ford’s Amazing Race. The New York Times, http://www.nytimes.com/2012/04/01/business/americanicon-examinesfords-rebound-review.html?pagewanted=all&_r=0 (accessed 28 September 2012). 29 William G. Ouchi. (1980). Markets, Bureaucracies, and Clans. Administrative Science Quarterly, 25, 129–41; and B. R. Baligia and Alfred M. Jaeger. (Fall 1984). Multinational Corporations: Control Systems and Delegation Issues. Journal of International Business Studies, 25–40. 30 Daisuke Wakabayashi and Toko Sekiguchi. Disaster in Japan: Evacuees Set Rules to Create Sense of Normalcy. The Wall Street Journal, http://online. wsj.com/article/SB10001424052748703784004576220382991112672.html (accessed 3 October 2012). 31 Perry Pascarella. (May 1998). Open the Books to Unleash Your People. Management Review, 58–60. 32 Leigh Buchanan. (June 2010). Learning from the Best. Inc., 85–86. 33 Mel Mandell. (1 December 2001). Accounting Challenges Overseas. World Trade, 48–50. 34 Matthew Dolan and Jeff Bennett. (12 August 2008). Corporate News: Ford Vows to Build Higher-Quality Small Cars. The Wall Street Journal. 35 A. V. Feigenbaum. (1961). Total Quality Control: Engineering and Management (New York: McGraw-Hill); John Lorinc. (September 1990). Dr. Deming’s Traveling Quality Show. Canadian Business, 38–42; Mary Walton. (1986). The Deming Management Method (New York: Dodd-Meade & Co.); and J. M. Juran and Frank M. Gryna, eds. (1988). Juran’s Quality Control Handbook, 4th edn (New York: McGraw-Hill). 36 Edward E. Lawler III and Susan A. Mohrman. (January–February 1985). Quality Circles After the Fad. Harvard Business Review, 65–71; and Philip C. Thompson. (1982). Quality Circles: How to Make Them Work in America (New York: AMACOM). 37 D. J. Ford. (July1993). Benchmarking HRD. Training & Development, 37–41. 38 Tracy Mayor. (1 December 2003). Six Sigma Comes to IT: Targeting Perfection. CIO, 62–70; Hal Plotkin. (June 1999). Six Sigma: What It Is and How to Use It. Harvard Management Update, 3–4; Tom Rancour and Mike McCracken. (October 2000). Applying Six Sigma Methods for Breakthrough Safety Performance. Professional Safety, 45:10, 29–32; G. Hasek. (21 August

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2000). Merger Marries Quality Efforts. Industry Week, 89–92; and Lee Clifford. (22 January 2001). Why You Can Safely Ignore Six Sigma. Fortune, 140. 39 Dick Smith and Jerry Blakeslee. (September 2002). The New Strategic Six Sigma. Training & Development, 45–52; Michael Hammer and Jeff Goding. (October 2001). Putting Six Sigma in Perspective. Quality, 58–62; and Mayor. Six Sigma Comes to IT. 40 Jack Bouck. (November/December 2007). Creating a Customer-Focused Culture: The Honeywell Experience. Industrial Management, 11. 41 This discussion is based on Eileen Newman Rubin. (May–June 2012). A Partnered Approach to QA Increases Efficiency Through Early Problem Detection. Global Business and Organizational Excellence, 28–37. 42 Clifford. Why You Can Safely Ignore Six Sigma; and Hammer and Goding. Putting Six Sigma in Perspective. 43 Syed Hasan Jaffrey. (May 2004). ISO 9001 Made Easy. Quality Progress, 37:5, 104; Frank C. Barnes. (Spring 1998). ISO 9000 Myth and Reality: A Reasonable Approach to ISO 9000. SAM Advanced Management Journal, 23–30; and Thomas H. Stevenson and Frank C. Barnes. (May–June 2001). Fourteen Years of ISO 9000: Impact, Criticisms, Costs, and Benefits. Business Horizons, 45–51. 44 Corporate Governance. Business Dictionary website, http://www .businessdictionary.com/definition/corporategovernance.html (accessed 16 September 2010); Words to Understand: Corporate Governance Models. Gruppo Hera Italy website, http://eng.gruppohera.it/group/hera_ondemand/ words_understand/page23.html (accessed 16 September 2010); and (10 March 2009). Corporate Governance Issues in 2009. The Corporate Eye, http://www.corporate-eye.com/blog/2009/03/corporate-governanceissues-2009 (accessed 16 September 2010). 45 Damian Paletta and David Enrich. (13 September 2010). Banks Get New Restraints. The Wall Street Journal. 46 Joann S. Lublin. (13 September 2010). Lead Directors Gain Clout to Counterbalance Strong CEOs. The Wall Street Journal. 47 Michael Bleby. (30 January 2013). Biggest Profit: BHP Billiton. BRW, http://www.brw.com.au/p/biggest_profit_bhp_billiton_ BZ68y2FOjUFFU8F5hNZI2M (accessed 9 December 2013) and BHP Chief Marius Kloppers Strikes It Rich With Staggering Farewell Payout. news.com.au, http://www.news.com.au/business/companies/bhp-chiefmarius-kloppers-strikes-it-rich-with-staggering-farewell-payout/storyfnda1bsz-1226623824930 (accessed 9 December 2013).

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ extend your knowledge with Internet research activities and useful weblinks ➜ test your understanding of managerial and quality control by taking the revision quiz ➜ assess whether your personal budget is in control with the online self-test.

Cour seMate

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Define operations management and

describe its application within manufacturing and service organisations.

2 Explain today’s partnership approach to supply chain management.

6 Identify ways in which information technology has transformed the manager’s job.

7 Describe different types of IT systems used

in today’s organisations and how they support daily operations and decision making.

3 Summarise considerations in designing

8 Summarise the key components of e-business

4 Discuss new technologies used for

9 Identify the benefits of connecting innovations

facilities layout.

manufacturing and service operations, and explain what is meant by lean manufacturing.

and explain common e-business strategies. in operational management to improved sustainability standards.

5 Explain why small inventories are preferred by most organisations and describe just-in-time inventory management.

Chapter 20

Chapter outline ➜ The organisation as a value chain Service and manufacturing operations Supply chain management

➜ Facilities layout

Process layout Product layout Cellular layout Fixed-position layout

➜ Technology automation

Radio-frequency identification (RFID) Digital manufacturing systems Lean thinking

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M a n a g i n g t h e va l u e c h a i n , i n f o r m at i o n technology and e-business ➜ Inventory management

The importance of inventory Just-in-time inventory

➜ Operations deliver outcomes ➜ Information technology has transformed management Boundaries dissolve; collaboration reigns

Knowledge management and Web 2.0 Enterprise resource planning systems

➜ The Internet and e-business

e-business strategy: market expansion e-business strategy: increasing efficiency

➜ Operations management, information and sustainable development

New Manager Self-test Which side of your brain do you use? The following questions ask you to describe your behaviour. For each question, check the answer that best describes you.

1 I am usually running late for class or other appointments: _____ a Yes _____ b No 2 When taking a test I prefer: _____ a Subjective questions (discussion or essay) _____ b Objective questions (multiple choice) 3 When making decisions, I typically: _____ a Go with my gut – what feels right _____ b Carefully weigh each option 4 When solving a problem, I would more likely: _____ a Take a walk, mull things over, then discuss _____ b Write down alternatives, prioritise them, then pick the best 5 I consider time spent daydreaming as: _____ a A viable tool for planning my future _____ b A waste of time 6 To remember directions, I typically: _____ a Visualise the information _____ b Make notes 7 My work style is mostly: _____ a To juggle several things at once _____ b To concentrate on one task at a time until complete 8 My desk, work area or laundry area are typically: _____ a Cluttered _____ b Neat and organised Scoring and interpretation: People have two thinking processes: one visual and intuitive, which is often referred to as right-brained thinking, and the other verbal and analytical, referred to as left-brained thinking. The thinking process you prefer predisposes you to certain types of knowledge and information – visual charts and operations dashboards versus written reports, intuitive suggestions versus quantitative data – as effective input to your thinking and decision making. Count the number of checked ‘a’ items and ‘b’ items. Each ‘a’ represents right-brain processing, and each ‘b’ represents left-brain processing. If you scored six or higher on either, you have a distinct processing style. If you checked less than six for either, you probably have a balanced style. New managers typically need left-brain processing to handle data and to justify decisions. At middle and upper management levels, right-brain processing enables visionary thinking and strategic insights. Source: Hopper, C. (2003), Practicing Management Skills, New York: Houghton Mifflin; Wonder, J. and Donovan, P. (March 1984). Mind Openers. Self.

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Management Challenge

logistics

Boeing made the planes that carry more than three-quarters of all air travellers every day, and is building most of the commercial airliners that will enter service in the near future. However, at a crucial point in the company’s history, in the late 1990s, it became apparent that Boeing had stumbled badly, and earnings had plummeted. After Boeing bought McDonnell Douglas, Boeing managers cut costs and aggressively sought new business in an effort to dominate the market against the company’s only remaining commercial-airline competitor, Europe’s Airbus Industrie. But the plan backfired when Boeing’s inefficient production system could not handle the hundreds of new orders. Their labour-intensive, paper-dependent design system was slow as well as extremely costly. Also, the company had evolved using 400 separate computer systems that were not linked, leading to errors and delays. Due to earlier downsizing, Boeing had to hire thousands of mostly inexperienced new assembly workers, but the combination of inexperience and haste led to mistakes and mounting bottlenecks. Adding to the problem was an inability to obtain needed supplies in a timely manner. Parts were often rushed in by taxi, and one worker told of spending a frantic weekend chasing parts stockpiles all over Seattle trying to find rubber seals for jetliner doors. A securities analyst who followed the company said of Boeing: ‘It’s been like an episode of I Love Lucy, the one in the chocolate factory where the assembly line becomes chaotic.’ Eventually, the chaos led to the shutdown of two Boeing production lines and a US$1.6 billion charge against profits. With both Boeing and Airbus moving to produce newer technology planes, their operational capability to deliver sound quality with high levels of productivity and good on-time delivery performance was never more important. Airbus was producing a gigantic double-decker plane, the A380, capable of carrying well over 800 people in

full economy configuration; Boeing was proceeding forward with its new 787 Dreamliner model, smaller than the earlier 747. Given its fierce rivalry with Airbus, Boeing had to make a great success of this plane to stay competitive. Boeing had received some 800 orders for the Dreamliner including significant orders from Air New Zealand and Qantas, but had experienced delays in its development program and readiness. These problems experienced by Boeing were globally not dissimilar to those the company experienced in Australia. The takeover of McDonnell Douglas brought the Melbourne aerospace factory site into the Boeing stable; tail rudders, wing flaps and other components for both Boeing and Airbus planes were manufactured there. The site had a history of industrial relations difficulties, low productivity, and quality and service problems. There was a poor connection between the engineering and manufacturing services divisions, and the operations and customer service aspects, of the Port Melbourne site. Managers often worked in departmental silos and generally did not have the respect of their shopfloor workers, who often listened more to their union leaders than to their managers. The operation had originally been the Government Aircraft Factory, and it suffered from a shop-floor culture that was driven by the creation of overtime for workers rather than by productive and competitive outcomes for the company. Source: Labich, K. (1 March 1999). Boeing Finally Hatches a Plan. Fortune, 100–6; Biddle, F. M. and Helyar, J. (24 April 1998). Behind Boeing’s Woes: Clunky Assembly Line, Price War with Airbus. The Wall Street Journal, A1.

Question If you were a manager at Boeing, what would you do to solve Boeing’s production and performance problems? How can an understanding of operations management help Boeing managers turn things around?

The airline industry is brutal. Almost every day, there’s a new report about an airline in trouble. European airlines reported a loss of $1.7 billion in the first quarter of 2012. With costs going up and revenue going down, Air Canada managers are considering filing for bankruptcy. In the United States, US Airways, United, Northwest and Delta all filed for bankruptcy protection within the space of a few years. Managers at AMR Corporation, the parent company of American Airlines and American Eagle, filed for bankruptcy protection in 2011 to reorganise and reduce costs. In Australia, Qantas had to shut down its whole airline for a few days to get the changes it wanted in employee relations to be taken seriously. Qantas continues to close or reduce its maintenance facilities in Australia in order

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to reduce costs and in an attempt to avoid the fate suffered by Ansett, its former chief competitor, which folded in 2002 after nearly 70 years of operation. Qantas announced the layoffs of 5000 staff in early 2014. Labour unrest, flight delays and cancellations, skyrocketing fuel costs, emergency landings due to equipment malfunctions – the airlines just don’t seem to stand a chance of making a profit.1 And when there is a disaster, such as with Malaysia Airlines losing a plane, crew and 227 passengers in March 2014, the loss of life, assets and reputation makes it even harder to sustain a profitable business. And then there’s Southwest Airlines, which in 2012 recorded its 39th consecutive year of profitability. In an industry in which profits are agonisingly tough to eke out, how has Southwest done it? The short answer: operational efficiency. Southwest keeps operations simple, so that fewer things can go wrong. Southwest uses just one type of aircraft, the Boeing 737, whereas most airlines use 10 or more types. That means Southwest has to train mechanics and keep parts in inventory for only one type of plane. If something goes wrong and a plane has to be swapped at the last minute, the fleet is totally interchangeable. Southwest has numerous other procedures that save time and contribute to operational efficiency. Even the decision not to charge passengers to check bags was based on operations considerations. ‘When you charge people to check bags, they try to carry more on,’ said Chris Wahlenmaier, who has been vice president of ground operations and is now Vice President Customer Support & Services. ‘That results in more bags being checked at the gate, right before departure. And that wastes time.’ Southwest managers know that ‘we only make money off our planes when they’re in the air,’ as Wahlenmaier puts it.2 Managers in all types of organisations, from airlines to smartphone manufacturers to rock bands, have to be concerned with operational issues. Van Halen became infamous during the rock band’s touring heyday for one unusual clause buried in its complex touring contract: a demand for a bowl of M&Ms backstage, with all the brown ones removed. What was the purpose of this unusual demand? It may look like just the unreasonable whim of spoiled celebrities, but really, it was a way for the band to assess quickly whether stagehands were paying attention to operational issues. If lead singer David Lee Roth spotted a brown M&M, he would demand a line check of the entire production. ‘Guaranteed you’re going to arrive at a technical error,’ he wrote in his autobiography. ‘Sometimes it would threaten to destroy the whole show.’3 Today’s managers rely on all types of data and information to spot problems and keep their business operations running smoothly. As suggested by this chapter’s opening Self-test, people gather and use information in different ways. Some people like written reports with lots of explicit data, while others prefer a visual presentation or a broad overview. Both styles are useful, and as managers grow in their abilities, they typically learn to use and appreciate a balanced approach. This chapter describes techniques for the planning and control of manufacturing and service operations and the use of information technology in today’s organisations. Chapter 19 described overall control concepts. This chapter will focus on the control of production operations and the use of information systems for management and control. First, we define operations management and supply chain management, consider specific operational design issues, such as facilities layout and the use of technology in the production system, and take a close look at inventory management. The second part of this chapter explores the application of information technology, including enterprise resource planning systems, Web 2.0 for knowledge management and strategies for e-business.

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The organisation as a value chain technical core The heart of the organisation’s production of its product or service.

operations management The field of management that focuses on the physical production of goods or services and uses specialised techniques for solving manufacturing problems.

Exhibit 20.1 The organisation as a value chain

Taking the ‘value chain perspective’, the organisation can be considered as a system used for transforming inputs into outputs. At the centre of this transformation process is the technical core, which is the heart of the organisation’s production of its product or service.4 In a university, the technical core includes the academic activities of teaching and research. In an automobile company, such as Holden–GM (which is discussed in this book’s Continuing case), the technical core includes the plants that manufacture automobiles. As illustrated in Exhibit 20.1, the organisation can be thought of as a value chain that receives inputs from the environment, such as raw materials and other resources, and adds value by transforming them into products and services for customers. Inputs into the technical core typically include materials and equipment, human resources, land and buildings, and information. Outputs from the technical core are the goods and services produced by the organisation and sold or provided to customers and clients. Operations strategy and control feedback shape the quality of outputs and the efficiency of operations within the technical core. The topic of operations management pertains to the day-to-day management of the technical core, as illustrated in Exhibit 20.1, including acquiring inputs, transforming them and distributing outputs. Operations management refers to using various tools and techniques to ensure that goods and services are delivered successfully to customers or clients. This involves bringing people, processes, raw materials and technology together to create value. The importance of operations management becomes clear when one looks at critical situations where things go haywire. Consider the chaos that McDonald’s managers faced after the 2011 earthquake and tsunami in Japan disrupted the supply of food to the company’s 3300 restaurants in that country. Agricultural regions were devastated, and several of McDonald’s processing plants and distribution centres were damaged, meaning that food had to be imported from the United States and parts of Asia. However, fuel shortages, delays at ports and other logistics difficulties created additional problems. About three weeks after the earthquake, Simone Hoyle, vice president of supply chain for McDonald’s Asia, Pacific, Middle East and Africa region, said ‘We’ve been working around the clock to keep our restaurants stocked.’ Nevertheless, at that point, 88 McDonald’s in Japan remained closed, and others were still on restricted menus.5

Feedback Competitive strategy

Operations management

Supply chain inputs Raw materials Human resources Land, buildings Information technology

Products and facilities Product design Facilities layout Capacity planning Facilities location

Structure Reporting relationships Teams

The technical core

Control processes Inventory management Productivity Quality

Outputs Products and services to customers

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When managers must organise a project quickly to deliver a product or service on time, operations management can be particularly challenging. Yet all managers deal with operations management issues every day. They have to consider the best location to manufacture products or provide services, how to most cost-effectively obtain raw materials and other resources, and how to produce products or services and get them delivered to customers efficiently. ➜➜ Operations management involves the design and improvement of the organisation’s production resources.

➜➜ Operations management effectiveness impacts on cost, quality, service and delivery outcomes of the organisation.

remember this

While manufacturing companies and mass producers of services (such as banks) have been the subject of management studies for more than 100 years, professional services firms have generally not had the same focus on productivity, quality and service levels for nearly as long. But this is all starting to change. For example, accounting firms, law firms, engineering firms and architects are now competing fiercely with each other for their customers’ business, and this means those that are well managed are out-competing those that are not. The new focus on customer service and professional management of these firms has been recognised as a key advantage within those firms that ultimately are successful. An example of a relatively small business is the Quinn Group, based in Sydney and owned by Michael and Peter Quinn. This firm earns A$2 million in fees per partner and provides a wide range of financial planning, investment, training, legal and accounting services.

The group employs 25 staff, all of whom are multiskilled, handling their own administration, billing, research and report writing, thus reducing support staff overheads. Staff are paid on a flexible basis; they work by the hour and are paid by the hour so that they can choose to do productive work on the weekends, and the offices are open a full six days per week. The business has grown by 20 per cent per year for the past 10 years. Statistics have shown that revenue and profitability per staff member and per partner in accounting and other professional service firms are no higher for the ‘Big Five’ accounting companies than they are for the smaller firms. Revenue per professional staff member is around A$200 000 per person, and around A$150 000 per staff member in total. Key managerial challenges for professional services firms are ongoing, including managing and balancing the supply of work with the capacity of the employed staff.

If the work orders exceed capacity, service levels and responsiveness fall away. If work order volumes reduce below the staff capacity, productivity immediately falls and the business fails to cover its operating costs. By 2014, the company had five operating locations in Sydney, had expanded its range of services and grown its profits and income continuously. Source: The Quinn Group website, http://www.quinns.com.au.

Michael and Peter Quinn

Case study

Managing the professional services firm

Source: Courtesy of The Quinn Group

➜➜ Operations management refers to using various tools and techniques to ensure that goods and services are delivered successfully to customers or clients.

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Servi ce an d m an u factu rin g o per atio ns As the example of McDonald’s in Japan illustrates, operations management applies to service organisations as well as manufacturing. The service sector has increased three times as fast as the manufacturing sector in industrial economies over the past two decades. More than half of all businesses in Australia are service organisations, and two-thirds of the workforce is employed in services such as hospitals, hotels and resorts, retail, financial services, information services or telecommunications firms.6 Exhibit 20.2 shows the differences between manufacturing and service organisations. Exhibit 20.2 Differences between manufacturing and service organisations Manufacturing organisations

Service organisations

Produce physical goods

Produce nonphysical outputs

Goods inventoried for later consumption

Simultaneous production and consumption

Quality measured directly

Quality perceived and difficult to measure

Standardised output

Customised output

Production process removed from consumer

Consumer participates in production process

Examples: car manufacturers, steel companies, soft-drink companies

Examples: airlines, hotels, hospitals

Sources: Based on Richard L. Daft, Organization Theory and Design (Cincinnati, OH: South-Western, 2005), p. 256; and Byron J. Finch and Richard L. Luebbe, Operations Management (Fort Worth, TX: Dryden Press, 1995), p. 50.

manufacturing organisation An organisation that produces physical goods. service organisation An organisation that produces non-physical outputs that require customer involvement and cannot be stored in inventory.

Manufacturing organisations are those that produce physical goods, such as cars, e-readers, television sets or smartphones. In contrast, service organisations produce non-physical outputs, such as medical, educational, communication or transportation services for customers. Doctors, consultants, online auction companies and the local hairdresser all provide services. Services also include the sale of merchandise. Although merchandise is a physical good, the service company does not manufacture it, but merely sells it as a service to the customer. Services differ from manufactured products in two primary ways. First, the service customer is involved in the actual production process.7 The patient actually visits the doctor to receive the service, and it’s difficult to imagine a hairdresser providing services without direct customer contact. The same is true for airlines, restaurants and banks. Second, manufactured goods can be placed in inventory, whereas service outputs, being intangible, cannot be stored. Manufactured products such as clothes, food, cars or iPhones can all be put in warehouses and sold at a later date. However, a hairdresser cannot wash, cut and style hair in advance and leave it on the shelf for the customer’s arrival, nor can a doctor place examinations in inventory. The service must be created and provided for the customer exactly when he or she wants it. There are also similarities between services and manufacturing. For instance, most manufacturing firms have substantial service components, and most service firms have some tangible elements that must

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be managed. A car manufacturer has to provide both a well-made car and good customer service for warranty repairs. A fast-food restaurant has to Take a provide top-notch service, but also a high-quality product. Moment Almost all organisations feature a combination of manufacturing As a new manager, think about your team as part of a value chain and service components, and manufacturing and service firms that receives inputs, adds value and face similar operational problems. First, each kind of organisation provides outputs to customers or is concerned with scheduling. A medical clinic must schedule clients. Help your team implement appointments so that both doctors’ and patients’ time will be used operations techniques to achieve superior customer responsiveness, efficiently. Second, both manufacturing and service organisations innovation, quality and must obtain materials and supplies. Third, both types of organisations efficiency. are concerned with quality and productivity. Because many operational problems are similar, operations management tools and techniques can be applied to service organisations as readily as they are to manufacturing operations.

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Self-test

Su pply chain m anagem ent Managers in both service and manufacturing organisations focus on managing the entire supply chain, coordinating the flow of materials, information and other resources to maximise customer value. As defined in Chapter 2, supply chain management refers to managing the sequence of suppliers and purchasers, covering all stages of processing from obtaining raw materials to distributing finished goods to consumers. Supply chain management means managing all the activities that facilitate the satisfactory fulfilment of an order at the highest degree of customer satisfaction and the lowest possible cost.8 The importance of supply chain management can be seen by looking at the ‘Supply Chain Top 25 for 2013’ from Gartner, Inc., which reflects that organisations with excellent supply chain management are some of the most successful organisations in the world. Apple, for instance, was ranked the best-performing supply chain for the sixth year in a row. Other 2013 rankings included McDonald’s at No. 2, Procter & Gamble (P&G) at No. 6, The Coca-Cola Company at No. 9, Nike at No. 14 and Nestlé at No. 21.9 Exhibit 20.3 illustrates a simplified goods-producing supply chain, consisting of suppliers, manufacturers, distributors, retailers and final consumers. The most recent advances in supply chain Flow of goods Suppliers

Flow of goods

Exhibit 20.3 An integrated supply chain Regional warehouse

Manufacturer Exchange of data

Exchange of data Exchange of data

Flow of goods

Retail stores

supply chain management Managing the sequence of suppliers and purchasers, covering all stages of processing from obtaining raw materials to distributing finished goods to final consumers.

Consumers Flow of goods

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management involve using Internet technologies to achieve the right balance of low inventory levels and customer responsiveness. An e-supply chain creates a seamless, integrated link that stretches from customers to suppliers by establishing electronic linkages between the organisation and these external partners for the sharing and exchange of data.10 For example, in Exhibit 20.3, a manufacturer would be electronically connected to suppliers, distributors and retailers so that everyone along the supply chain has almost completely transparent information about sales, orders, shipments and other data. A manufacturer such as P&G is linked to Target and knows how quickly products are selling and when a new shipment will be needed; suppliers know what materials and supplies are needed at P&G factories; and distributors know when final products are ready to be shipped. Enterprise integration through the use of electronic linkages is creating a level of cooperation not previously imaginable for many organisations. Supplier relationships used to be based on an arm’s-length approach, in which an organisation spreads purchases among many suppliers and encourages them to compete with one another. With integration, more companies are opting for a partnership approach, which involves cultivating intimate relationships with a few carefully selected suppliers and collaborating closely to coordinate tasks that benefit both parties. Both Boeing and Airbus are taking a new approach to supply chain management to speed the development and manufacture of new planes. To build the new A350, which is scheduled to be available to airlines in 2014, Airbus established electronic links with key suppliers so that they are constantly seeing updated digital blueprints. Frequent design changes immediately ripple through the entire supply chain, avoiding problems such as the one that occurred several years ago when Airbus was building the A380 superjumbo jetliner. The company still has bins overflowing with useless wiring from suppliers that was too short to be used.11 Integrating every company along the supply chain means a quicker response to end consumers by reducing the time it takes to move critical data through the information pipeline. An integrated supply chain enables managers at Spanish clothing manufacturer Inditex to have hot-selling items in its Zara retail stores within two days, and to get new items from concept to store shelf within weeks, rather than the six months that it typically takes.12

➜➜ Service operations management, involving the production of many types of services, is the biggest part of our economy. ➜➜ Services differ from manufacturing operations in many ways, such as the inability to store services, and

service operations often involve the customer within the production processes. ➜➜ Supply chain management refers to managing the sequence of suppliers and purchasers, covering all stages of processing from obtaining raw

materials to distributing finished goods to consumers.

remember this

➜➜ Supply chain management means managing all the activities that facilitate the satisfactory fulfilment of an order at the highest degree of customer satisfaction and the lowest possible cost.

Facilities layout Another important consideration for operations management is planning the facilities layout for producing goods or services. The four most common types of layout are process, product, cellular and fixed-position, and are shown in Exhibit 20.4.

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Drop-off

Dent Repair and Paint Touch-up

Prep Wash and Engine Cleaning Bay

Exterior Detailing

Vacuuming Station

Exhibit 20.4 Basic production layouts

Final Inspection and Storage Area

Exterior Shampoo Area

Interior Detailing

Wash Bays

Pick-up Area

(a) Process layout

Receiving

B

Lathe

C

Saw

Lathe

Saw

Mill

Paint

Assembly

Paint

Assembly

Grinder

Product A Storage

A

Product B Product C

Plating

(b) Product layout

Client 1

Output (databases, text files)

Client 2

Output (databases, text files)

Export Station Input (claim forms)

Scanning Station

Export Station Input (claim forms)

Verification Station Correction Station

Scanning Station

(c) Cellular layout

Materials Supplies Machines Labour Equipment

(d) Fixed-position layout

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Verification Station Correction Station

Sources: Based on J. T. Black. (November 1983). Cellular Manufacturing Systems Reduce Setup Time, Make Small Lot Production Economical. Industrial Engineering, 36–48; Richard J. Schonberger. (November 1983). Plant Layout Becomes Product-Oriented with Cellular, Just-in-Time Production Concepts. Industrial Engineering, 66–77; Keith Duplessie. (17 June 2009). Designing a Detail Shop for Success. ModernCarCare.com, http://www.moderncarcare. com/articles/2009/06/ designing-a-detail-shop-forsuccess.aspx (accessed 15 September 2010); and Rely Services website, http://www .relyservices.com/insuranceclaims-processing-services.htm (accessed 15 September 2010).

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Pro cess l ayo ut process layout A facilities layout in which machines that perform the same function are grouped together in one location.

Exhibit 20.4(a) illustrates a process layout for a car detail shop. This shop provides a variety of services. All the equipment and materials that relate to a similar function or service task – such as prepping the car and cleaning the engine, shampooing the boot and interior, or washing, waxing and polishing the paint – are grouped together.13 Similarly, in a manufacturing firm, all machines that perform a similar function or task are grouped together. In a machine shop, the lathes are located in one section of the shop, the grinders in another section, the milling machines in another and so forth. The advantage of the process layout is that it has the potential for economies of scale and reduced costs. For example, having all painting done in one spray-painting area means that fewer machines and people are required to paint all products for the organisation. In a bank, having all tellers located in one controlled area provides increased security. At Montefiore Medical Center in America, rather than having specialised medical, surgical, cardiothoracic and neurosurgical intensive care units (ICUs), Dr Vladimir Kvetan combined them into a central critical care department to increase efficiency and improve patient care. Kvetan, director of critical-care medicine, is continually thinking of ways to provide better care more efficiently, which means Montefiore rarely encounters the critical-care bottlenecks that many other large hospitals experience.14 One drawback to the process layout, as illustrated in Exhibit 20.4(a), is that the actual path a product or service takes can be long and complicated. For a full auto detail, the car needs several different services performed on it, and thus it must travel through many different areas before the entire process is complete.

management in pr actice

A German factory shows how to be fast and flexible

Many students might assume that a factory that makes polymer bearings and power-supply chains is not the best place to get a view of the factory of the future, but in this case, they’d be wrong. In Cologne, Germany’s igus Inc. manufacturing plant represents a highly innovative approach to facilities design. The plant’s flexible design enables the factory to shrink or expand at a moment’s notice, keeping pace with an unpredictable market. Almost nothing is bolted down on the plant floor, meaning that machines, modules and even entire departments can be rearranged. Other design features, such as exposed overhead wiring and few support columns, mean the company can redesign itself as needed with little disruption to the 24/7 production flow. Over the past decade and a half, igus has made at least 50 significant changes to the factory’s configuration to accommodate strategic shifts, facilitate fast growth or meet new customer needs. Fast, agile organisations do not evolve of their own accord. Managers have to make decisions that include considering the physical as well as the human environment. Frank Blase, president of igus, offers the following tips for building a nimble organisation:

➜➜ Create a flexible environment. A plant’s space, facilities design, and layout should accommodate the business, not the other way around.

➜➜ Recruit carefully. Not everyone is comfortable working in a highly flexible, fast-changing environment. Human resource managers should screen job candidates carefully and make sure they understand the nature of the workplace. At igus, candidates are given a schnuppertag, or sniffing-around day, to explore, observe and ask questions.

➜➜ Practise being fast. Every aspect of the company should be designed to encourage speed and agility. All igus employees are equipped with mobile phones and get around on shiny, motorised scooters. An open physical environment encourages collaboration and information transparency. Department teams conduct quick daily huddles to review what went well and what didn’t the day before.

➜➜ Inspire your staff. This last tip may be the most important of all. Flexibility hinges on innovation and creativity, Blase says, which depends on employees who are inspired to think differently and express their ideas and opinions. ‘We’re trying to be a different kind of company,’ he adds,

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‘and our building helps us tremendously in doing that. It creates a holistic system for how to behave.’ igus has grown from a company of 40 employees in 1985 to more than 2050 in 2013 and has over 26 subsidiary companies globally, distributing over 80 000 products and testing between 1500 and 2000 new products every year. The current management philosophy at igus is ‘Our customers are as important to us as the sun is to life on earth. The sun provides light, heat and energy, while our customers provide

us with ideas, work and money. Nothing impresses customers all over the world more than speed! Worldwide deliveries the same day, quotes submitted within a matter of hours, visits the very next day. With 28 branches we are already fast, but intend to get faster. Our structure: team leader management in a single system geared towards dealing with the laws of chaos. And nearly every team member acts as an independent manager from the start. “To manage” actually translates into “Accomplishing a task successfully”.’

Source: Salter, C. (August 2001). This Is One Fast Factory. Fast Company, 32–3; http://www.igus.co.uk/aboutigus (accessed 13 December 2013).

Pro du ct l ayo ut Exhibit 20.4(b) illustrates a product layout – one in which machines and tasks are arranged according to the progressive steps in producing a single product. The automobile assembly line is a classic example, because it produces a single product, starting from the raw materials and moving to the finished output. Many fast-food restaurants use the product layout, with activities arranged in sequence to produce hamburgers, fried chicken and other products. For example, the founder of Taco Bell restaurants designed a wire basket with six slots for corn tortillas. After being dunked in boiling oil, the shells are placed on a sliding rack that passes trays of beef, lettuce and cheese, the tacos taking shape much the same way a car does as it rolls along an assembly line. Other menu items are handled similarly. ‘If you have it laid out where it doesn’t flow right, that means less order flow, less product, lower sales,’ says Mike Watson, executive vice president of WD Partners, a consulting firm that works with ‘QSR’ (quick-serve restaurant) brands. ‘The most advanced operational thinking in the world is going on in the back of a QSR,’ Watson adds.15 The product layout is efficient when the organisation produces or provides huge volumes of identical products or services, as Taco Bell does. Note in Exhibit 20.4(b) that two lines have paint areas. This duplication of functions can be economical only if the volume is high enough to keep each paint area busy working on specialised products.

product layout A facilities layout in which machines and tasks are arranged according to the sequence of steps in the production of a single product.

Cellu l ar l ayout Illustrated in Exhibit 20.4(c) is an innovative layout, called cellular layout, based on group-technology principles. In a service firm that processes millions of insurance and institutional claims for organisations in the medical field, people and equipment are grouped into cells that perform all the tasks needed to serve a particular client, as shown in the exhibit.16 Work flows from one station to another, such as from scanning to verification to correction. In a manufacturing plant, all machines dedicated to sequences of operations are grouped into cells, and materials flow from one station to another.17 Grouping technology into cells provides some of the efficiencies of both process and product layouts. Even more important, the U-shaped cells in Exhibit 20.4(c) offer efficiencies in material and tool handling and inventory movement. People and technology within the cluster can be allocated to whatever work needs doing in that cluster. Arranging employees in clusters facilitates teamwork and joint problem solving. Staffing flexibility is enhanced because people are cross-trained so that each worker can perform all the tasks, assisting co-workers as needed. Conmed, a maker of surgical devices, replaced its long assembly lines with U-shaped workstations where teams of employees build products to order. The assembly area for fluidinjection devices used in orthoscopic surgery once covered 306 square metres and had US$93 000 worth

cellular layout A facilities layout in which machines dedicated to sequences of production are grouped into cells in accordance with group technology principles.

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of parts on hand. With the cellular layout, it takes up one-fifth of that space and stocks just US$6000 worth of parts. Moreover, output per worker increased 21 per cent with the new system.18

Fixed - positi o n l ayo ut As shown in Exhibit 20.4(d), the fixed-position layout is one in which the product remains in one location and employees and equipment are brought to it. The fixed position layout is used to create a product or service that is either large or one of a kind. Product examples include aircraft, ships and buildings. The product cannot be moved from function to function or along an assembly line; rather, the people, materials and machines all come to the fixed position site for assembly and processing. Londonbased Imagination Ltd, Europe’s largest independent design and communications agency, provides an interesting service example. The Imagination team was hired to stage a one-of-a-kind event at a historic London building for the launch of the Harry Potter and the Prisoner of Azkaban DVD.19 The fixed-position layout is not good for high volume, but it is often necessary for large, bulky products, custom orders and special events like the launch of the Harry Potter DVD. Many manufacturers are adapting the fixed-position layout to speed up production. Boeing now builds many of its planes on a type of moving assembly line, which has cut in half the time that it takes to assemble a single-aisle 737. Airbus uses assembly stations, moving the plane only from one major workstation to the next, with the idea that a glitch in one plane won’t slow a whole production line.20 Source: AP Photo/John Froschauer

fixed-position layout A facilities layout in which the product remains in one location and the required tasks and equipment are brought to it.

Because its manufactured goods are too large and cumbersome to move along a traditional assembly line, Boeing Corporation typically uses a fixed-position layout. Products, such as this 787 Dreamliner, remain in one location, and employees, components and equipment are brought to them for assembly. To increase speed and flexibility, Boeing has begun implementing a hybrid system for some of its products. After the wings and landing gear have been attached, a plane such as the 737 is dragged towards the door at 5 centimetres a minute, with workers moving along it on a float-like apparatus. Boeing’s goal is to push a 737 out the door in only five days.

Technology automation A goal for many of today’s operations managers is to find the right combination of technology and management to produce goods and services most efficiently. Let’s look at three advances in manufacturing and service operations.

R ad i o - freq u en cy i d enti fi cation (RFID) In August 2010, Walmart began putting tiny electronic tags on individual pieces of men’s clothing, including jeans, underwear and socks. The tags emit a weak radio signal that enables employees to know which sizes are missing on the shelf and which items are available in the stock room. The retailer is expanding this use of radio-frequency identification (RFID) tags to all types of merchandise.21 RFID tags can identify and track pallets of merchandise or individual items such as jeans, books, jugs of laundry detergent, automobiles or even people. Until recently, most retailers had used RFID only

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to track pallets or cases of goods, and the move to tracking individual items has raised concerns over potential invasions of privacy. However, RFID has been used effectively for years. One of the best-known uses of RFID is OnStar, which is a satellite-based RFID system used in automobiles. RFID tags emit radio signals that can be read remotely by electronic readers and provide precise, real-time information about the location of specific items, whether it be a car with a dead battery, a misplaced book in a bookshop or a pallet of merchandise in a warehouse.22 Although RFID is also used by manufacturing firms, the technology has revolutionised services. Dutch bookseller Selexyz tags every book on its shelves with RFID, which increases profits and cuts costs, because taking inventory by hand is unnecessary, lost books can be found and returns to publishers have decreased.23 The potential of RFID for streamlining inventory management and cutting costs for retailers is enormous, which has prompted many companies to require that suppliers use the new technology. Other service firms use RFID as well. Mumm is a producer of prestigious champagne and a subsidiary of Pernod Ricard. The company uses a radio tracking system to trace the location of batches of stored champagne. Champagne ages over several years and the company needs to be able to locate and monitor all of its 25 million bottles of champagne which are cellared in among 25 kilometres of galleries in Reims, France.24 The US Department of Defense requires suppliers to use RFID on shipping pallets and cases, enabling the military to track shipments of combat-support goods and other items easily.25 A recent application of RFID is for contactless payments, which means a shopper can wave an RFID-embedded debit card, credit card or other device over a reader to pay for items without having to swipe a card or go through a cashier.26 The technology might even ameliorate the age-old problem of lost luggage, which is maddening for passengers and costly for airlines. An RFID baggage-tagging system in use at the Las Vegas McCarran International Airport reduced lost luggage by about 20 per cent, and bags that do go astray are located more quickly.27 Australian hospitals have begun to use RFID to track and control the efficient use of equipment and implants.28

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radio-frequency identification (RFID) Radio-frequency identification (RFID) uses radio system tracking to allow location tracking of items in production systems, transport networks or society.

D i gital m an u factu rin g systems Advanced technology has also revolutionised manufacturing. Most of today’s factories use a variety of new technologies, including robots, numerically controlled machine tools, RFID, wireless technology and computerised software for product design, engineering analysis and remote control of machinery. One study found that manufacturers use more than six times the amount of information processing equipment than they used 20 years ago.29 The ultimate automated factories are referred to as digital factories.30 Also called computer-integrated manufacturing, flexible manufacturing systems, smart factories, advanced manufacturing technology or agile manufacturing, digital factories use computers to link together manufacturing components that previously stood alone. Thus, robots, machines, product design and engineering analysis are coordinated by a single computer system. The computer can instruct the machines to change parts, machining and tools when a new product must be produced. Human operators make adjustments to the computer and not to the production machinery itself, dramatically cutting the time and expense of making changes. This approach is a breakthrough compared with the traditional assembly line in which a single line is restricted to a single product. With a digital manufacturing system, a single production line can be readily adapted to small batches of different products based on computer instructions. Consider the flexibility that Honda has

digital factories A system that uses advanced technologies, digitally controlled, to allow for adaptation to produce a range of products.

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mass customisation A process by which products are produced cost-effectively in high volume but are customised to meet individual needs.

achieved in its assembly plants: the Honda plant can switch from making Civic compacts to making the longer, taller CRV crossover in as little as five minutes. Most of the company’s vehicles are designed to be put together the same way, even if their parts are different. All that’s needed to switch assembly from one type of vehicle to another is to put different ‘hands’ on the robots to handle different parts. The ability to adjust inventory levels of different types of vehicles quickly has been a key strategic advantage for Honda in an era of volatile petrol prices and shifting vehicle popularity.31 Digital manufacturing also enables mass customisation, a process by which products are produced cost-effectively in high volume but are customised to meet individual needs.32 A customer can order a Dell laptop with one of several hard drive capacities, processing chip speeds and software packages, or a BMW car with the exact combination of features and components desired. About 60 per cent of the cars BMW sells in Europe are built to order.33

Lean thin kin g

lean thinking Combining advanced technology and innovative management processes and using highly trained employees to cut waste and improve quality.

Several years ago, Starbucks Corporation hired a vice president of lean thinking, who has been travelling with a lean team around the world to work with employees to find ways to cut waste and improve customer service. Rival Dunkin’ Donuts uses lean thinking techniques ‘everywhere from manufacturing to in-store organisation and workflow’, says Joe Scafido, chief creative and innovation officer at Dunkin’ Brands.34 Lean thinking basically means combining advanced technology and innovative management processes and using highly trained employees to solve problems, cut waste, improve the productivity, quality and efficiency of products and services, and increase customer value.35 At one Starbucks store that implemented lean methods, customer satisfaction improved from 56 per cent to 76 per cent within a couple of months. Lean thinking is based on the principles of lean manufacturing, pioneered by Toyota. In fact, Japan Post, under pressure to cut a $191 million loss in operations, hired Toyota’s Toshihiro Takahashi to help apply the famed Toyota Production System (TPS) to the collection, sorting and delivery of mail. In all, Takahashi’s team came up with 370 improvements and reduced the post office’s person-hours by 20 per cent. The waste reduction is expected to cut costs by around $350 million a year.36 Technology plays a key role in lean manufacturing, but the heart of the process for both manufacturing and service organisations is not machines or technology, but people.37 A lean system combines techniques, systems and management philosophy, such as commitment to employee empowerment and a creative culture. Besides installing the methodology for running an efficient assembly line, such as just-in-time shipments of supplies, managers must instil the necessary attitudes, such as concern for quality and a desire to innovate.38 At E-Z-GO, which manufactures golf carts, implementation of a lean system involved four critical areas: process flow, or the physical aspects of production; material flow and inventory management; information flow; and culture and mindset changes. Employees received training in leadership and practical problem solving and were empowered to identify and address issues and drive continuous improvement throughout the plant. The full implementation of lean thinking led to a 200 per cent increase in profits and system-wide improvements that helped E-Z-GO earn the prestigious Shingo Prize for Operational Excellence.39

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IKEA is a company known to hate waste; it has a culture of thrift. It is also known for its innovative designs and extraordinary ability to produce attractive furniture at affordable prices, a combination its customers love. To achieve this, the company implements lean thinking throughout many of its design processes and taps into the ingenuity of their employees to find waste-reducing solutions. When IKEA designers create a new product for market, it must satisfy the criterion that it creates customer value and firm value through meeting particular product specifications and

cost margins. It should also have a retail price that is somewhere between 30 to 50 per cent lower than a competitor’s same product. Some examples of this include the ‘Färgrik’ mug, which sells in Australia for $1.00. Once the mug had been designed to meet IKEA’s criteria, they continued to work on its shape until more mugs could be packed onto a shipping pallet – taking it from 864 mugs to 2204 mugs, cutting shipping costs by 60 per cent. Designers also found an alternative way to pack the ‘Ektorp’ sofa so that they could double the amount of couches in a given packed space

and pass on cost savings to customers (in this instance $150 worth). Both of these examples show how lean thinking can achieve sustainable, profitable growth for a firm and satisfy customer wants. Sources: (24 February 2011). The Secret of IKEA’s Success. The Economist, http://www.economist.com/ node/18229400 (accessed 12 December 2013); (8 August 2012). Three Things You Can Learn From a Bottle of Water. Business Review Weekly, http://www .brw.com.au/p/sections/the_business_end/three_things_ you_can_learn_from_93FB39xjXOmfNwCaDqdRuN (accessed 12 December 2013); Pallet Science, http://blog.phpallets.com/?m=201208 (accessed 12 December 2013); IKEA website, http://ikea.com.

Case study

IKEA

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Inventory management Inventory – which we have already discussed in Chapters 2 and 3 – is the goods the organisation keeps

on hand for use in the production process. Most organisations have three types of inventory: finished goods prior to shipment, work-in-process and raw materials. Finished-goods inventory includes items that have passed through the entire production process but have not been sold. This inventory is highly visible. The new cars parked in the storage lot of an automobile factory are finished-goods inventory, as are the hamburgers and chips stacked under the heat lamps at a McDonald’s restaurant. Finished-goods inventory is expensive, because the organisation has invested labour and other costs to make the finished product. Work-in-process inventory includes the materials moving through the stages of the production process that are not completed products. Work-in-process inventory in an automobile plant includes engines, wheel and tyre assemblies, and dashboards waiting to be installed. In a fast-food restaurant, the chips in the fryer and hamburgers on the grill are work-in-process inventory. Raw materials inventory includes the basic inputs to the organisation’s production process. This inventory is cheapest because the organisation has not yet invested labour in it. Steel, wire, glass and paint are the raw materials inventory for an auto plant, and meat patties, buns and raw potatoes are the raw materials inventory in a fast-food restaurant.

Dell’s electronic communication systems Dell, which has already been discussed in Chapter 19, has thrived for decades because its managers found the most efficient way to make, sell, and deliver personal computers. With 100 000+ employees and expected 2014 sales of $50 billion, this company thrives on its capability of operational

inventory The goods that the organisation keeps on hand for use in the production process up to the point of selling the final products to customers. finished-goods inventory Inventory consisting of items that have passed through the complete production process but have yet to be sold. work-in-process inventory Inventory composed of the materials that are still moving through the stages of the production process. raw materials inventory Inventory consisting of the basic inputs to the organisation’s production process.

Innovative Way excellence. Dell is electronically connected to suppliers, contract manufacturers and distributors, so that everyone along the supply chain has almost completely transparent information about sales, orders, shipments and other data. That means, for instance, that suppliers have data about orders

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and production levels and know what parts Dell’s factories are going to need and when they’ll need them. Distributors know when computers will be ready for shipment and where they’ll be going. At the end of the supply chain, Dell develops close connections to customers through a range of channels,

including online sales and services, call centres and a direct sales force and technical personnel serving larger customers. Dell’s role in the supply chain is to manage the electronic information flows and physical connections among suppliers, partners and customers.

Sources: Dedrick J. and Kraemer, K. L. (Spring 2005). The Impacts of IT on Firm and Industry Structure: The Personal Computer Industry. California Management Review, 47:3, 122–42; Jones, K. (February 2003). The Dell Way. Business 2.0, 61–6; Deck, S. (1 February 2000). Fine Line. CIO, 88–92.

Th e i m po rtan ce o f invento ry

Concept extension

Revision quiz

Exhibit 20.5 Large inventories hide operations management problems

Inventory management is vitally important to organisations, because inventory sitting idly on the shop floor or in a warehouse costs money. Many years ago, a firm’s wealth was measured by its inventory. Today, inventory is recognised by cost-conscious firms as an unproductive asset. One CEO went so far as to put it this way: ‘Inventory is evil.’ By trimming it, said Drew Greenblatt, CEO of Marlin Steel Wire, ‘you find a big pile of cash.’40 Darden Restaurants, which owns many successful American restaurant chains including Red Lobster and Olive Garden, recently automated its supply chain so that it buys only what its restaurants need when they need it.41 Sealy, the world’s top maker of mattresses, has cut raw materials inventory by 50 per cent, down to 16 days’ worth.42 Managers at Acer Inc. are currently assessing the company’s inventory policies because tough economic conditions in Europe have left large quantities of finished inventory, such as PCs and netbooks, sitting in warehouses and distribution centres. Inventory management is crucial for companies such as Acer because finished products sitting in warehouses depreciate quickly as new technology emerges.43 The Japanese analogy of rocks and water describes the current thinking about the importance of inventory.44 As illustrated in Exhibit 20.5, in this formulation, water is the inventory in the organisation. The higher the water, the less managers have to worry about the rocks, which represent problems. In operations management, these problems apply to scheduling, facilities layout or quality. When the water level goes down, managers see the rocks and must deal with them. When inventories are reduced, the problems of a poorly designed and managed operations process also are revealed and then must be solved. When inventory can be kept at an absolute minimum, operations management is considered excellent.

Sources: Based on R. J. Schonberger, Japanese Manufacturing Techniques: Nine Hidden Lessons in Simplicity (New York: Free Press, 1982).

Inventory Operations management problems

Operations management problems

Inventory

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Just- in -ti m e invento ry Just-in-time (JIT) inventory systems are designed to reduce the level of an organisation’s inventory

and its associated costs, aiming to push to zero the amount of time that raw materials and finished products are sitting in the factory, being inspected or in transit.45 Sometimes these systems are referred to as stockless systems, zero inventory systems or kanban systems. Each system centres on the concept that suppliers deliver materials only at the exact moment needed, thereby reducing raw material inventories to zero. Moreover, work-in-process inventories are kept to a minimum because goods are produced only as needed to service the next stage of production. Finished-goods inventories are minimised by matching them exactly to sales demand. JIT systems have tremendous advantages. Reduced inventory level frees productive capital for other company uses. In addition, JIT plays a crucial role in enhancing flexibility. A study of manufacturing firms in seven countries found that those that were performing better in terms of flexibility ranked JIT as one of their top two improvement initiatives, along with total quality management (TQM), as defined in Chapter 19.46 Recall the analogy of the rocks and the water. To reduce inventory levels to zero means that all management and coordination problems will surface and must be resolved. Scheduling must be scrupulously precise and logistics tightly coordinated. The coordination required by JIT demands that information be shared among everyone in the supply chain. Communication between only adjoining links in the supply chain is too slow. Rather, coordination requires a kind of information web in which members of the supply chain share information simultaneously with all other participants, often using Internet technologies and RFID.47

just-in-time (JIT) inventory system An inventory control system that schedules materials to arrive precisely when they are needed on a production line.

Over the last decade, Lakshmi Mittal has regularly been named by Forbes magazine as one of the world’s richest and most powerful people. Mittal originally hails from Rajasthan, India, and has identified and exploited a core capability to his great advantage. He buys and revitalises troubled, loss-making steel mills, most of which were previously government owned. He revitalises them by removing bureaucracy and layers of cost. He achieved this first in Indonesia, then in Trinidad, and then expanded by turning around such operations in countries as far apart as Mexico, Canada, Ireland, Germany and Kazakhstan, and in Eastern Europe. With a personal wealth in 2013 of some US$15 billion, Mittal has become one of the wealthiest people in the world in a very tough industry indeed: steelmaking. The world’s steel industry has been generally depressed for more than 20 years, as a traditional smoke stack industry that has been out of favour with investors and difficult

to make profits in since the Japanese and then the Koreans implemented low-cost strategies in the 1970s. In North America, many steelmaking companies went bankrupt and closed down during this period. Mittal bought such companies, and by slashing the costs of producing steel turned loss-making operations into viable, profitable businesses. For example, he bought Inland Steel for US$1.4 billion in 1998, and instantly became the employer of 7000 unionised steelworkers. The difficult industrial environment caused him to take the drastic action of threatening to close the businesses entirely. This resulted in major cost reductions and efficiency gains, and Mittal was able to squeeze US$50 per tonne out of the cost base of this business, restoring its economic viability. In an industry that is very mature, in which the product – a tonne of steel – is a pure commodity around the world, the only sensible competitive strategy is to be the low-cost producer. Mittal has proven

that by achieving costs of as much as 20 per cent less than other major players in the business, significant profits can be generated. As the world’s largest steel producer, his ArcelorMittal steel company generated some US$84 billion in revenue in 2012, and has produced 93.6 million tonnes of the world’s steel, making it a significant player. He sees his 10 per cent global market share as being a position of potential, and looks to the future growth potential from this low-cost profitable base as being a future of great promise. In 2006, Mittal engineered the merger of two steel making giants to be under his control and substantial ownership: bringing together Arcelor and Mittal Steel into one gigantic company with some A$90 billion in sales and 245 000 employees. By 2014, the company was producing steel in over 20 countries, and had extended its supply chain backwards into iron ore mining and processing operations.

Case study

Profiting in a depressed smoke stack industry

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On a more personal note, Mittal bought Formula 1 leader Bernie Ecclestone’s London home for US$120 million in 2004. With marble to rival the Taj Mahal in India, it is

sometimes referred to as ‘Taj Mittal’. He also spent some US$70 million on his daughter’s wedding. He has, in simple and powerful terms, become the world’s most successful steelmaker!

Sources: Tomlinson, R. (25 January 2005). Europe Businessman of the Year. Fortune. http://www .corporate.arcelormittal.com; http://www.ispatinland. com; http://corporate.arcelormittal.com/ (accessed 17 December 2013).

Operations deliver outcomes The operations of an organisation can be considered to be its heart and soul: most of the organisation’s people and assets are deployed in the firm’s productive operations. Managers focus on four major outcomes to build a highly effective operations system:48 1 Achieving superior customer responsiveness. The operations system should be designed so that the

organisation can satisfy customer needs, giving customers what they want, when they want it, at an acceptable price. Companies that are more responsive to customers and provide good value are more competitive. 2 Achieving superior innovation with speed and flexibility. Innovation leads to new and better

products and services as well as better ways of producing them and delivering them to customers. Innovation is a top priority for many organisations today, including big, established companies like John Deere. John Deere is building tractors with computer systems that enable farmers to analyse fertiliser, soil composition and yields in each section of their fields, and producing forestry equipment that allows operators to select and cut trees in a way that fosters regrowth.49 As discussed in Chapter 11, successful innovation, including the ability to introduce new or improved products fast, means a company can differentiate itself from rivals and attract more customers. 3 Achieving superior quality. Quality means producing products or services that are highly

reliable and have features or characteristics that customers desire. Offering high-quality products builds brand-name reputation, which means the company can typically charge higher prices for its products or services. For example, Hyundai Motor Company’s high-volume, low-cost Hyundai brand jumped from eleventh place to third place, behind Porsche and Toyota, in the JD Power & Associates Initial Quality Study. Hyundai’s reputation for quality is growing rapidly, nearly approaching that of Toyota, enabling the company to increase prices and profits.50 Today’s organisations use a variety of techniques already discussed in Chapter 19 such as quality circles, Six Sigma principles and benchmarking to improve quality in products, service and processes. 4 Achieving superior efficiency. As discussed in Chapter 1, efficiency refers to the amount of resources

used to achieve organisational goals. As applied to the operations system, efficiency measures the amount of inputs used to produce a given amount of outputs, as illustrated in Exhibit 20.1 on page 802. An organisation that uses fewer inputs for a given level of outputs is more efficient, meaning its costs will be lower and it can provide outputs to customers at a more competitive price and still make money.

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➜➜ Facilities layout, which can be focused around process, product, fixed-position or in cells, provides the process design and structure needed to make the operation effective. ➜➜ Advances in technology, such as RFID, can contribute much to operational effectiveness.

➜➜ Lean operations combine advanced technology and innovative management processes and use highly trained employees to solve problems, cut waste, improve the productivity, quality and efficiency of products and services, and increase customer value.

➜➜ Inventory is the goods the organisation keeps on hand for use in the production process. Most organisations have three types of inventory: finished goods prior to shipment, work in process and raw materials.

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➜➜ An organisation’s operations can deliver effective levels of quality, efficiency, responsiveness, speed and flexibility.

Information technology has transformed management Advanced information technology makes JIT inventory management work seamlessly, but it has also transformed management in many other ways. An organisation’s information technology (IT) consists of the hardware, software, telecommunications, database management and other technologies that the company uses to store data and make them available in the form of information for organisational decision making. In general, information technology has positive implications for the practice of management.

Boun dari es d isso lve; co ll abo r ation rei gns Time, distance and other boundaries between individuals, departments and organisations are irrelevant in today’s world. Collaboration is what it’s all about. Information technology can connect people around the world for the sharing and exchange of information and ideas. The hospitals of Partners HealthCare System, a large private hospital network, are linked by an electronic medical records system with the offices of more than 4000 doctors with admitting privileges. The system ties doctors, nurses, staff specialists and others into a coordinated team to provide better care, avoid redundant tests, and prevent potentially conflicting prescriptions.51 Via an Internet competition, PepsiCo let consumers decide which new flavour of soft drink to stock permanently on store shelves.52 As Pulitzer Prize–winning journalist and author Thomas L. Friedman put it, ‘Wherever you look today . . . hierarchies are being flattened and value is being created less and less within vertical silos and more and more through horizontal collaboration within companies, between companies, and among individuals.’53

information technology (IT) The hardware, software, telecommunications, database management and other technologies used to store, process and distribute information.

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NTT DoCoMo: the leading edge of the mobile phone business NTT DoCoMo, Japan’s largest mobile phone operator, took the lead in Japan in connecting up mobile phones to the Internet, and allowing efficient email messaging and Web-based communication from miniaturised mobile phones. In August 2000, DoCoMo had a market value of over US$500 billion, making it Japan’s most valuable company, which is amazing given that it did not exist at all until 1991. By March 2013 DoCoMo achieved profit of nearly ¥500 billion (US$4.8 billion), on revenues of ¥4470.1 billion (approximately US$43 billion). DoCoMo’s next challenge is to take its technology systems and products to the world, including the US, Europe, Asia and Australia. With over 61 million customers in Japan, DoCoMo is a substantial company but it lacks management experience in international markets. Its major challenges will be to conquer both the technological and the brand marketing challenges that different countries and regions present to it as it tries to expand from its Japanese base. DoCoMo is using its 20 years of experience and technical expertise to further its growth potential. The company is working on a fourth generation (4G) high-speed communications system as well

as technical development in cloud services and the use of renewable energy. Recent major investments outside Japan have been in phone services markets in Italy and India. The introduction of true webbased capabilities merged into mobile phones has huge revenue possibilities if DoCoMo can get it right. The technical problems of doing so are no longer the biggest issue. One of DoCoMo’s challenges is to establish relationships and partnerships, then business contracts, with content providers of all different kinds, from Internet providers and search engines to telecommunications and apps and games. DoCoMo’s other major challenge is the conflict between its history and tradition, and the capabilities needed to take it forward in a marketplace that moves at Internet speed. DoCoMo’s parent company, NTT, developed DoCoMo from a background of engineering, conservatism, longterm planning, structure, stability and hierarchy. These sacred traditions are at odds with its future, which lie in rapidly developing markets, speed of decision making and content that is essentially in the entertainment sector. Without doubt the technological platform is important.

However, it is likely that the software and content will decide who the winners and losers are in this marketplace. DoCoMo’s 23 890 staff serve over 61 million customers. In a remarkably short timeframe, they have created value for these customers and built a business with value of over US$100 billion. Recently, this impressive company set a new 10-year vision, called HEART, an acronym that stands for: ➜➜ Harmonise: Social contribution beyond borders, across generations ➜➜ Evolve: Evolution of service and network ➜➜ Advance: Advance industries through convergence of services ➜➜ Relate: Creating joy through connections ➜➜ Trust: Support for safe, secure and comfortable living. Each of these aspects of its vision translates into strategies, plans and goals for DoCoMo to continue its remarkable journey as an organisation. Sources: DoCoMo. ‘Harnessing Strengths’ Annual Report 2013, https://www.nttdocomo.co.jp/english/ corporate/ir/binary/pdf/library/annual/fy2012/ docomo_ar2013_e.pdf (accessed 19 January 2014); https://www.nttdocomo.co.jp/english/info/ media_center/pr/2010/001480.html.

Kn owled ge m anagem ent an d Web 2.0 knowledge management The process of systematically gathering knowledge, making it widely available throughout the organisation and fostering a culture of learning. information Data that has been converted into a meaningful and useful context for the receiver.

Information technology plays a key role in managers’ efforts to support and leverage organisational knowledge. Knowledge management refers to efforts to systematically gather knowledge, organise it, make it widely available throughout the organisation, and foster a culture of continuous learning and knowledge sharing.54 Knowledge is not the same thing as data or information, although it uses both. Data is simple, absolute facts and figures that, in and of themselves, may be of little use. A company might have data, for example, that shows 30 per cent of a particular product is sold to customers in Queensland. To be useful to the organisation, the data is processed into finished information by connecting it with other data – for example, nine out of 10 of the products sold in Queensland are bought by people over the age of 60. Information is data that has been linked with other data and converted into a useful context for specific

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use. Knowledge goes a step further; it is a conclusion drawn from the information after it is linked to other information and compared to what is already known. Knowledge, as opposed to information and data, always has a human factor. Books can contain information, but the information becomes knowledge only when a person absorbs it and puts it to use.55 IT systems facilitate knowledge management by enabling organisations to collect, store and analyse a tremendous amount of data, as well as share information and knowledge all across the enterprise.56 One IT application for knowledge management is the use of business intelligence software that analyses data and extracts useful insights, patterns and relationships that might be significant.57 Managers can identify sets of products that particular market segments purchase, patterns of transactions that signal possible fraud or patterns of product performance that may indicate defects. Another hot topic in corporate IT concerns expert-locator systems that identify and catalogue experts in a searchable database so people can identify who has knowledge that they can use.58 Consider the example of Converteam, a company with headquarters in the United Kingdom that maintains power generation and propulsion systems for hundreds of ships and oil exploration platforms around the world. Employees working in China, India, Brazil, the United States and Norway can access an IT system that includes contact details for engineers working in various countries along with an expertise inventory. Engineers can contact one another directly regarding new products, challenges and so forth, rather than having to go through headquarters.59 Many organisations use groupware, software that works on a computer network or via the Internet to link people or workgroups across a room or around the globe. The software enables managers or team members to communicate, share information and work simultaneously on the same document, chart or diagram and see changes and comments as they are made by others. Sometimes called collaborative work systems, groupware systems allow people to interact with one another in an electronic meeting space and at the same time take advantage of computer-based support data.

Putting performance dashboards to work It’s first thing in the morning. You sit down at your computer, coffee cup in hand, and click on an icon. Attractively arrayed on the screen is current information organised under various headings – for example, ‘Calendar’, ‘Tasks’, ‘Key Performance Indicators’, ‘Sales by Manager’ and those always eye-catching ‘Alerts’. Critical information about your business is presented in colourful tables, pie charts, graphs, and other visual displays. With just a glance, you’re up-to-date on everything you need to know before you start your day. If you’re puzzled by a particular figure or alarmed by an alert, you just click on the item and start ‘drilling down’ into the data until you get a detailed picture of exactly what is going on. Welcome to the world of business performance dashboards. As impressive as the technology is, it’s the way organisations design and use dashboards that determines

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knowledge Knowledge involves the use of information by humans to achieve a task or goal.

business intelligence software Software that analyses data from multiple sources and extracts useful insights, patterns and relationships that might be significant. expert-locator systems Computerised systems that identify and catalogue experts in a searchable database so people can quickly identify who has knowledge they can use.

groupware Software that works on a computer network or the Internet to facilitate information sharing, collaborative work and group decision making.

management in pr actice whether they turn out to be a boon or a distracting bane. Here are some tips.

➜➜ Don’t contribute to information overload. Because dashboards collate information from many databases and programs, it’s all too easy to construct a Web page that delivers too much information. To make dashboards useful, carefully choose what data will be tracked and what information will be displayed. Make sure it’s what employees need to know to do their jobs better.

➜➜ Let line managers and employees drive the development. Always remember that designing a dashboard is primarily a strategic project, not a technical one. The IT department can help implement the dashboard, but it is the responsibility of managers to determine its content. One way to make sure people get the right information is to solicit input from end users during the design process.

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➜➜ Carefully assess who needs a dashboard. At General Electric, business unit chiefs use dashboards, but CEO Jeffrey Immelt rarely does. Immelt doesn’t want to get so mired in the details that he loses sight of the big picture. On the other hand, using dashboards to push information further down into the organisation can help employees at all levels see from day to day in concrete terms exactly

how their actions contribute to an organisation’s success or failure in achieving its goals.

➜➜ Don’t forget the human touch. Having all the latest facts and figures at your fingertips is certainly valuable, but it’s only part of what managers need to know to run an effective organisation. Getting out and talking to employees and customers is still just as important.

Sources: Spencer E. Ante. (13 February 2006). Giving the Boss the Big Picture. BusinessWeek, 48–51; Tad Leahy. (1 June 2006). Warming Up to Performance Dashboards. Business-FinanceMag.com, http://businessfinancemag.com/article/warmingperformance-dashboards-0601; and Doug Bartholomew. (Summer 2005). Gauging Success. CFO-IT, 17–19.

Source: Dundas Data Visualization, http://www.dundas.com

Many of today’s companies also incorporate the use of new technologies collectively referred to as Web 2.0 to support knowledge sharing. Web 2.0 encompasses a range of tools, the most commonly used being blogs, wikis and social networks. The simplicity and informality of blogs make them an easy and comfortable medium for people to communicate and share ideas. The microblogging service Twitter has become a phenomenon, used by organisations as diverse as FedEx, Metro Trains Melbourne and the Australian Football League.60 A wiki is similar to a blog and uses software to create a website that allows people to create, share and edit content through a browser-based interface. Rather than simply sharing opinions and ideas as with a blog, wikis are free-form, allowing people to edit what they find on the site and add content.61 At Rosen Law, managers moved all contracts, court orders, case files and other documents to a secure wiki. If people see a better way to organise information, they go ahead and do it. Lawyers and

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paralegals, for instance, have different needs, so the two groups edited one another’s entries until both were happy with certain categorisations.62 Social networking is an extension of blogs and wikis. Social networking sites provide an unprecedented peer-to-peer communication channel, where people interact in an online community, producing and sharing all sorts of information and opinions.63 Because of the popularity of Facebook in people’s personal lives, most employees are comfortable with the idea of ‘following’ and communicating with their colleagues online. Using social networks enables employees to connect with one another across organisational and geographical boundaries based on professional relationships, shared interests, problems or other criteria. 7-Eleven Inc. has thousands of field consultants using Yammer to share knowledge among themselves and with local franchise owners.64 A Symantec salesman in Dubai created a group on the company’s social network that exchanges sales tips from employees around the world.65 The nature of social networking builds trust so that people are more likely to cooperate and share information.66

Enterprise reso u rce pl ann in g systems Another key IT component for many companies is an approach to information management called enterprise resource planning. Enterprise resource planning (ERP) systems integrate and optimise all the various business processes across the entire firm.67 An ERP system can collect, process, and provide information about an organisation’s entire enterprise, including orders, product design, production, purchasing, inventory, distribution, human resources, receipt of payments and forecasting of future demand. Such a system links these areas of activity into a network, as illustrated in Exhibit 20.6. When a salesperson takes an order, the ERP system checks to see how the order affects inventory levels, scheduling, human resources, purchasing and distribution. The system replicates organisational processes in software, guides employees through the processes step by step, and automates as many of them as possible. For example, the software can create a payment automatically as soon as a clerk confirms that goods have been received in inventory, send an online purchase order immediately after a manager has authorised a purchase, or schedule production at the most appropriate plant after an order Manufacturing

Inventory management

Sales Exhibit 20.6 Example of an ERP network

Financial and accounting

Distribution

ERP Purchasing STA 103 AUGUST

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enterprise resource planning (ERP) system A networked information system that collects, processes and provides information about an organisation’s entire enterprise, from identification of customer needs and receipt of orders to distribution of products and receipt of payments.

Human resources

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is received.68 In addition, because the system integrates data about all aspects of operations, managers and employees at all levels can see how decisions and actions in one part of the organisation affect other parts, using this information to make better decisions. More recently, ERP has incorporated tools for supply chain management, so that coordination across organisational boundaries with customers and suppliers is strengthened as well.69 ERP systems can be expensive and difficult to implement, but when applied successfully, an ERP system can cut costs, shorten cycle time, enhance productivity and improve relationships with customers and suppliers.

➜➜ An organisation’s information technology (IT) consists of the hardware, software, telecommunications, database management and other technologies that the company uses to store data

and make it available in the form of information for organisational decision making. ➜➜ Knowledge management refers to the efforts to systematically gather knowledge, organise it, make it

widely available throughout the organisation, and foster a culture of continuous learning and knowledge sharing.

remember this

➜➜ Enterprise resource planning (ERP) systems integrate and optimise all the various business processes across the entire firm.

The Internet and e-business

e-business Any business that takes place by digital processes over a computer network rather than in physical space. e-commerce Business exchanges or transactions that occur electronically.

Managers in almost every organisation have incorporated the Internet as part of their information technology strategies.70 Business, government and non-profit organisations quickly realised the potential of the Internet for expanding their operations globally, improving business processes, reaching new customers or clients, and making the most of their resources. Red Bull, to take just one example, has built a Facebook fan base of 43 million people and has 1.4 million followers on Twitter. Managers make one to two posts a day on the company’s main Facebook page and leave the conversation up to the consumers. The images and videos posted reflect the brand’s overall strategy as a lifestyle choice and often focus on extreme sports and content that fans may like to comment on or share. Greenpeace International used Facebook, Twitter and YouTube to organise and conduct an online protest claiming food giant Nestlé purchases palm oil from companies that are destroying the Indonesian rain forest.71 And numerous businesses advertise and sell products over the Internet. Exhibit 20.7 shows one of the many products that Apple sells over the Internet and in retail stores. Most large organisations, and many small ones, are involved in some type of e-business. E-business can be defined as any business that takes place by digital processes over a computer network rather than in physical space. E-commerce is a more limited term that refers specifically to business exchanges or transactions that occur electronically. Today, e-commerce is transforming into m-commerce, which simply means the ability to conduct business transactions through a mobile device. The world has gone well and truly mobile. For many people, their mobile phone is always within reach, and they use it for everything from ordering a pizza to accessing their bank accounts.72 A study by ABI Research suggests that by 2015, shoppers around the world will spend about US$119 billion on goods and services bought via their mobile phones.73

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Source: Alamy/Justin Kase z12z

Some organisations, such as eBay, Amazon.com, Expedia and Google, would not exist without the Internet. However, most traditional, established organisations, including General Electric (GE), ANZ Bank and Australia Post, also make extensive use of the Internet; we will focus on these types of organisations in the remainder of this section. Exhibit 20.7 illustrates the key components of e-business for two organisations, a manufacturing company and a retail chain. First, each organisation operates an intranet, an internal communications system that uses the technology and standards of the Internet but is accessible only to people within the company. The next component is a system that allows the separate companies to share data and information.

Manufacturing company

Retail chain Secure exchange link

Intranet

Websites

Shared data through extranet

Websites

Intranet

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Apple sells products in retail stores and via the Internet

intranet An internal communications system that uses the technology and standards of the Internet but is accessible only to people within the organisation.

Exhibit 20.7 The key components of e-business for two traditional organisations

Sources: Based on Jim Turcotte, Bob Silveri and Tom Jobson. (August 1998). Are You Ready for the E-Supply Chain? APICS – The Performance Advantage, 56–9.

Public access Internet

An extranet is an external communications system that uses the Internet and is shared by two or more organisations. With an extranet, each organisation moves certain data outside its private intranet but makes the data available only to the other companies sharing the extranet. The final piece of the overall system is the Internet, which is accessible to the general public. Organisations make some information available to the public through their websites, which may include products or services offered for sale. The first step towards a successful e-business for an established firm is for managers to determine why they need such a business to begin with.74 Failure to align the e-business initiative with corporate strategy can lead to e-business failure. Two basic strategic approaches for traditional organisations setting up an Internet operation are illustrated in Exhibit 20.8. Some companies embrace e-business primarily

extranet An external communications system that uses the Internet and is shared by two or more organisations.

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Exhibit 20.8 Strategies for engaging clicks with bricks

Competitive business environment

E-business strategy:

Benefits:

Market expansion and revenue growth

Add new markets Integrate bricks and clicks Increase market size Use social media

Increased productivity and cost efficiency

Immediate short-term effects Measurable productivity impact Driven by internal processes

Source: AAP/PR Image

to expand into new markets and reach new customers. Others use e-business as a route to increased productivity and cost efficiency.

Graeme Wood was co-founder and Chief Executive Officer of the online travel service wotif.com, which brought discounted hotel and other travel options to consumers on the Internet from 2000. Wood has used his influence and wealth to create a philanthropic foundation and become involved in a range of social and environmental initiatives, while continuing the development of his entrepreneurial corporate group and investing in new technologies and businesses.

e - busin ess str ategy: m arket expansio n

Using the Internet allows a company to establish direct links to customers and expand into new markets. For example, to increase sales for his family’s wine business, Wine Library, Gary Vaynerchuk offered free shipping of online orders and promoted it three ways. A direct marketing mailing cost $15 000 and attracted 200 new customers. A billboard ad cost $7500 and brought in 300 new customers. When Vaynerchuk tweeted the promotion on Twitter, it cost him nothing and attracted 1800 new customers. Vaynerchuk also posts a daily webcast that has won a wide following. He calls it ‘virtual handshaking, working the room’.75 An Internet division enables the organisation to provide access around the clock to a worldwide market. Despite the huge lead of Amazon.com in online sales of merchandise, traditional retailers have been big winners with a market expansion strategy. Myer was one of the first traditional retailers to launch a website, and it now has one of the most productive online stores among mainstream retailers. Most other retailers selling products online also use their websites to drive more traffic into stores. Getting people to the store gives staff a chance to push accessory items and increase sales.

e - busin ess str ategy: in cre asin g effi ci en cy With this approach, the e-business initiative is seen primarily as a way to improve the bottom line by increasing productivity and cutting costs. Managers at some companies are following tweets on Twitter to help them predict sales for the coming weeks and make decisions such as how many products to manufacture and ship, whether to increase store inventories or whether to cut the price of certain items.76 Managers at Wet Seal, a specialty clothing store selling mainly to teenage girls, uses the Internet to spot

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changing trends fast so that they can make better decisions about what to manufacture. A web feature called Outfitter allows users to put together their own outfits online; analysing the 300 000 user-generated outfits gave managers an early lead on the trend towards wearing dressy tops with casual pants and jeans.77 At NIBCO, a manufacturer of piping products, 12 plants and distribution centres automatically share data on inventory and orders via the Internet, resulting in about 70 per cent of orders being automated. The technology has helped NIBCO trim its inventory by 13 per cent, as well as respond more quickly to changes in orders from customers.78 Several studies attest to real and significant gains in productivity from e-business.79 Even the smallest companies can realise gains. Rather than purchasing parts from a local supplier at premium rates, a small firm can access a worldwide market and find the best price, or negotiate better terms with the local supplier.80 Service firms and government agencies can benefit too.

Innovative Way

AGL Australian Gas Light (AGL) is Australia’s second-oldest company, having been in existence since 1837 when it was created to light the streets of Sydney with coal gas. AGL has remained a leading energy provider and is involved in the businesses of selling natural gas, electricity and related products to approximately three and a half million people in Australia. AGL’s information technology (IT strategy) needed reshaping and modernising, and David Boyles came from his senior role in reshaping the ANZ Bank’s IT infrastructure to take on this task. His strategy involved strengthening the IT staff and matching capabilities within the IT team to the businesses’ capabilities and requirements. Boyles and his team created a three- to five-year plan, known as Driving Excellence, aimed at using IT to provide maximum technical support and a competitive edge to the modern AGL organisation. Key executives were put in charge of key IT processes such as software development, information security, business continuity, disaster recovery, vendor management, project management and others. The emphasis at AGL is a flexible and robust information infrastructure that takes time to develop and mature. Boyles spoke of a ‘service-oriented architecture’. As Chief Information Officer (CIO), Boyles matured the IT philosophy and systems at AGL to the

point where he was entirely comfortable handing it over to a new CIO when he moved on to other challenges. Boyles’ view is that excellent CIOs must have a technology background, but also be competent businesspeople. With some 3.5 million customers and record profits of over A$598 million in 2013, which is the equivalent of a gross profit of around $200 per customer, AGL is the largest private owner and operator of renewable energy assets in Australia. The company employs 2750 people and is a Top 50 ASX listed company. The company requires superb information systems as a key part of its infrastructure. Current CIO Owen Coppage has participated in AGL’s moves into renewable energy supply chains, including thermal energy and coal seam gas. This company might be one of Australia’s oldest, but that doesn’t stop it from being innovative, focusing strongly on renewable energy resources; in 2011, it was able to produce enough electricity to power 500 000 homes in this manner. Currently 30 per cent of AGL’s generation capacity comes from renewable sources. AGL has taken a leadership position in environmental and sustainability matters, as a matter of business advantage, in ‘Doing well by doing good’, in the process winning numerous awards and accolades for its sustainability performance.

Source: Bushell, S. (August 2004). Shared Vision: It’s a Gas. CIO, 63–8; http://www.agl.com.au/about-agl/who-we-are/our-company (accessed 19 January 2014); Robins, B. (29 August 2013). AGL Profit Boosted By Price Surge. The Sydney Morning Herald, http://www.smh.com.au/business/agl-profit-boosted-by-price-surge-20130828-2sqtf.html (accessed 19 January 2014); http://www.agl.com.au/about-agl/how-we-source-energy/renewable-energy (accessed 19 January 2014).

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➜➜ The Internet has led to large changes, opportunities and threats, as to how managers run their organisations.

sustainable development

➜➜ E-business can be defined as any business that takes place by digital

Global Reporting Initiative (GRI) Index Global Reporting Initiative (GRI) Index is a comprehensive measurement system aiming to provide an assessment of an organisation’s sustainability actions and outcomes on a broad basis.

processes over a computer network rather than in physical space. ➜➜ The Internet and e-business applications can drive market expansion or increasing efficiency.

➜➜ Knowledge management refers to the efforts to systematically gather knowledge, organise it, make it widely available throughout the organisation, and foster a culture of continuous learning and knowledge sharing.

remember this

Operations management, information and sustainable development Since operations management is the core of almost every business, with most employees engaged in ‘making the stuff’, whether goods or services, and most of the firm’s assets deployed in the operations function or information systems that support operations, then there must clearly be a strong connecting influence between operations and the sustainability outcomes of the firm. In the design of products and services, to what extent are environmentally friendly products being used? Is logistics and transport being carried out efficiently so as to reduce or minimise greenhouse gas emission? Has packaging been designed to be environmentally friendly and recyclable? Is energy efficiency in operations being pursued and achieved? These questions apply to all organisations, whether in manufacturing, mining or in pure services. National Australia Bank has invested significantly and effectively in achieving carbon neutral operations, through reducing its net energy consumption, paper use and in many other environmentally effective ways. This company operates in hundreds of buildings around Australia and in other countries. This bank has done more than simply adjust its own practices in order to improve its environmental performance, but has also won awards for its achievement in influencing its supply chain partners. These industry-leading achievements lead to stronger employee commitment and provide a marketplace advantage, as well as cost reductions. Orica is a major producer of chemicals and explosives based in Australia, and has likewise made great strides forward in recent years in its environmental record, which was previously poor, to now take great care of its environmental footprint and its community obligations: in a single year it reduced its greenhouse gas output by 51 per cent and its water consumption by 35 per cent, and it improved in its employee well-being and engagement activities, conducting 9000 health assessments and achieving 56 per cent global participation in its employee engagement measures (http://www.orica.com.au/sustainability). Orica reports its performance according to the world’s standard on sustainability reporting, the Global Reporting Initiative (GRI) Index, which comprehensively documents all aspects of an organisation’s sustainability outcomes and is independently audited.81 Sustainability not only has strong connections to how operations and information are managed, but is also a clear driver of innovation. The motivation to improve societal and environmental outcomes has driven a lot of process innovations and technologies, from ‘green buildings’ to safer and more environmentally friendly products and services, through to recycling of packaging such as the reduction of single-use plastic bags by supermarket chains.

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In the future, the company is aiming for its prepacked products to tap into airlines, catering, schools and hospitals, in addition to the supermarkets they already supply. ‘We will introduce a similar production line in our Victorian plant’, says Munton. By 2011, the company was supplying thousands of made salads per day to major retailers and groceries, employed 750 people around Australia from mango farms to retail distributors, and has won awards for its excellent service, such as the prestigious Woolworths supplier award. Its CEO, Rob Robson states the management approach as:

Japan as airfreight with lightning speed and efficiency to be served fresh to premium paying customers there. Sustainability is a big part of this company’s values and practices expressed as: We exceed social legal requirements and provide valuable people with a work/ life balance; provide improved health to communities; support selected charities and are energy neutral and sustainable in the environment in which we operate. (See http://www.oneharvest.com.au/ content/?id=218) Sources: Esterson, E. (15 September 1998). First-Class Delivery. Inc. Technology, 89; http://www.oneharvest.com.au.

Having a family owned business means we aren’t driven by the shareholder imperative. We take a long term view of the business and we reinvest into people, sustainability, safety, training and quality … We have a vision of changing the way Australians eat by making high quality fresh produce extremely convenient. Our ‘Big Hairy Audacious Goal’ (BHAG) is three million Harvest food experiences every day by 2020. We measure ourself against that goal every day – so far we are on track! (See http://www .oneharvest.com.au)

In a similar vein, fresh seafood caught off the coast of Australia is transshipped to

Boeing, described in the chapter opening Management challenge, refocused its operations management by tackling operations problems from several angles. The company launched a US$1 billion program to modernise and better computerise production (so that it no longer uses hundreds of unconnected computer systems) and trained managers and workers in the new technology. The automated production technology sped up the production process, helping to prevent delays and eliminate bottlenecks. However, Boeing was still struggling with supply chain management – in particular, working out better supplier arrangements to be sure it gets parts when they are needed to keep the production process running smoothly. Another change was the decision to outsource the manufacture of certain components, gradually focusing more and more on Boeing’s core competence of design.

In addition to new techniques and technology, managers have been changing management philosophy to make Boeing a more performance-oriented company. In particular, they established rigorous production standards and a team-oriented culture. The chief of the commercial airliner division and several of his top managers were let go because they did not want to go along with the CEO’s new ideas. Each Boeing jetliner has up to four million discrete parts; one mistake means undoing and redoing lots of perfect work to get at the problem. Boeing believes that a commitment to quality should be a part of the entire production process. ‘The automobile guys used to roll cars off to the side to fix things they didn’t get right on the assembly line,’ former CEO Condit says. ‘Go look at production lines at Ford or Toyota now – that doesn’t happen any more.’ Boeing managers want to be able to say

Source: iStockphoto/Teun van den Dries

Before 1995, Harvest FreshCuts was a wholesaler of fresh vegetables in Queensland and interstate. The company has since progressed to supplying hygienically packed fresh salads, stir-fries and fresh vegetables for the supermarket chains, and making and supplying fresh, prepacked sandwiches in a range of 24 fillings. The company also merged with Veg Co. of Bairnsdale in Victoria to gain access to a wider range of fresh food supplies and Australia-wide distribution. The result is that Harvest FreshCuts has quickly increased its annual turnover to A$25 million, with staff of 225 and markets from Darwin to Hobart. ‘The move to chilledpacked vegetable products followed the trend in consumer buying habits,’ said Rob Munton, Harvest’s general manager. ‘Similar trends saw us moving into fresh-packed chilled salads and sandwich making. A few years ago, 80 per cent of Australian sandwiches were made in the home. That proportion has halved. We have the capacity to now make 200 000 sandwiches a week, superior in taste and hygienic aspects to corner stores – plus a wide range.’

Case study

Harvest FreshCuts

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that about aircraft manufacturers, as well. Boeing operates seven business units in Australia, its largest operation outside US. The company has revitalised its ‘technical core’, using advanced operations and information systems to achieve high levels of competitiveness in global terms: ‘Boeing Aerostructures Australia produces significant components such as control surfaces and major structural assemblies for many of the world’s large commercial and military aircraft, exporting its manufactured products to the US, France, UK and Canada. This international success is a result of the company’s development of innovative solutions to manufacturing, particularly from its research and development, design, testing, fabrication and assembly of aerostructure components using both advanced composite and metallic materials. Boeing Aerostructures Australia exports around 95 per cent of its output to world’s leading aircraft manufacturers including Airbus, Boeing Commercial Airplanes, Boeing Integrated Defense Systems, Lockheed Martin, Bombardier and BAE Systems.’ After some significant difficulties over the past

discussion questions

decade, including late delivery of aircraft, ethical scandals inside the company and financial troubles, Boeing is flying high again, with new technologies bringing success in aeroplanes and in aerospace vehicles. After some turbulent years, its roughly 169 000 employees and US$86 billion in revenue seem to be better managed today than they have been for quite some time. In 2011 the company released its most efficient plane ever, the 787–8 Intercontinental, which it claims is superior in all ways to the Airbus A380, as it waits for the market to decide! Despite teething problems with the GE engines that it used, the 787 continues in 2014 to fly and to achieve further customer orders, such as from Jetstar in Australia, which started flying this modern plane from Australia to Bali, and which offers customers larger windows, cleaner air and reduced cabin noise. Sources: http://money.cnn.com/magazines/fortune/fortune_ archive/1999/03/01/255790/index.htm; http://www.boeing.com.au/ ViewContent.do?id=39464&aContent=Company Overview; http://www.boeing.com/boeing/aboutus/employment/employment_table. page; http://boeing.mediaroom.com/2014-01-29-Boeing-ReportsRecord-2013-Revenue-EPS-and-Backlog-and-Provides-2014-Guidance.

1  What are the major differences between manufacturing and service organisations? Give examples of how each type might benefit from using social media or other Web 2.0 tools.

6 Critics argue that radio-frequency identifications (RFID) can potentially jeopardise consumer privacy by making it possible to link purchases to individuals or even to track the movement of individuals. Should this concern prevent companies from adopting RFID? Explain.

2  Boeing’s 787 Dreamliner was seriously delayed because of slow deliveries from suppliers who were responsible for large chunks of the jet. Outsourcing has become an important aspect of supply chain management as companies strive to cut costs, yet the practice gives managers less control, as at Boeing, and may decrease speed and flexibility. As an operations manager, how would you decide if a multinational supply chain is a better approach than trying to manufacture as much as possible in-house?

7 How do you think the growth of sophisticated management information systems (MIS) has changed the importance of personal experience and intuition in decision making? In other words, does MIS make decision making more of a science than an art? Discuss.

3 What type of production layout do you think would work best in a car dealership? What type would work best for a company that produces handmade pottery? Discuss reasons for your answers. 4 What are the three types of inventory? Which type is most likely to be affected by the just-in-time inventory system? Explain. 5 Some companies are using both lean manufacturing and Six Sigma (see Chapter 19) methods simultaneously to improve their operations. How do you think the two approaches might complement or conflict with each other? Explain.

8 How might the organisers of an upcoming Olympics use an extranet to get all the elements of the event up and running on schedule? 9 Do you think it makes sense for companies such as Target and Kmart to focus resources on building their online business at the expense of their bricks-and-mortar business? Discuss. 10 The openness of wikis is both their strength and their weakness. As a business owner, why might you want to take advantage of this new technology? How might you guard against potential problems, such as vulnerability to mistakes, pranks, self-serving posts or cybervandalism?

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M a n i p u l at i v e o r n o t ? As head of the marketing department for Butter Crisp Snack Foods, 55-year-old Frank Bellows has been forced to learn a lot about the Internet in recent years. Although he initially resisted the new technology, Frank has gradually come to appreciate the potential of the Internet for serving existing customers and reaching potential new ones. In fact, he has been one of the biggest supporters of the company’s increasing use of the Internet to stay in touch with customers. However, something about this new plan just doesn’t feel right. At this morning’s meeting, Keith Deakins, Butter Crisp’s CEO, announced that the company would soon be launching a website geared specifically to children. Although Deakins has the authority to approve the site on his own, he has asked all department heads to review the site and give their approval for its launch. He then turned the meeting over to the Information Technology team that developed the new site, which will offer games and interactive educational activities. The team pointed out that although it will be clear that Butter Crisp is the sponsor of the site, the site will not include advertising of Butter Crisp products. So far, so good, Frank thinks. However, he knows that two of the young hotshot employees in his department have been helping to develop the site and that they provided a list of questions that children will be asked to answer online. Just to enter the website, for example, a user must provide name, address, gender, email address and favourite TV show. In return, users receive ‘Crisp Cash’, a form of virtual money that they can turn in for toys, games, Butter Crisp samples and other prizes. After they enter the site, children can earn more Crisp Cash by providing other information about themselves and their families. Frank watched the demonstration

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and agreed that the website does indeed have solid educational content. However, he is concerned about the tactics for gathering information from children when that information will almost certainly be used for marketing purposes. So far, it seems that the other department heads are solidly in favour of launching the website. Frank is wondering whether he can sign his approval with a clear conscience. He also knows that several groups, including the Centre for Media Education, are calling for stricter governmental controls regarding collecting information from children via the Internet. W h at w o u l d yo u d o ? 1 Stop worrying about it. There’s nothing illegal about what Butter Crisp is proposing to do, and any personal information gathered will be closely guarded by the company. Children can’t be harmed in any way by using the new website.

2 Begin talking with other managers and try to build a coalition in support of some stricter controls, such as requiring parental permission to enter areas of the site that offer Crisp Cash in exchange for personal information. 3 Contact the Centre for Media Education and tell them you suspect Butter Crisp intends to use the website to conduct marketing research. The centre might be able to apply pressure that would make it uncomfortable enough for Deakins to pull the plug on the new kids’ website.

Source: Based on Denise Gellene, ‘Internet Marketing to Kids Is Seen as a Web of Deceit’, Los Angeles Times, 29 March 1996.

D e v e l o p i n g a n o n l i n e s t r at e g y Your group operates a business that imports premium home furnishings from China and Vietnam, selling them through two stores that you own, one in Sydney’s Balmain, and the other in Melbourne’s fashionable Chapel Street. Business has been quite solid and you are considering expansion; however, there are two schools of thought. One is to duplicate the success with more ‘physical’ stores’ in Sydney and Melbourne, followed by expansion to Brisbane and Auckland. Others feel that the expansion and investment should be through the establishment of an online store. Until now, the online presence has been just a small website without even much of a catalogue.

Discuss the following points

Gr oup challenge

1 What further information would you need to make a decision between these strategies? 2 What are the costs, benefits and risks of each strategy? 3 What type of online presence would be best? What would be your business’s online features? 4 What operational and supply chain capabilities does each strategy require?

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Case for cr itical analysis

SunBright Outdoor Furniture, Inc.

James Cowart started making and selling outdoor furniture in 1984. He built up the business to 300 employees and $28 million in sales in 2005. SunBright operates a single factory, where it fabricates and assembles a wide range of outdoor furniture, including tables, chairs, umbrellas and matching accessories. SunBright’s major production tasks include extruding the aluminium furniture parts, bending and shaping the extruded parts, finishing and painting the parts, and then assembling the parts into completed furniture. Cloth and leather upholstery, glass for tabletops, wood finishing and hardware such as screws and bolts are purchased from outside vendors. Running this business was an almost 24-hour-a-day job for Cowart, because manufacturing or sales problems arose constantly. Cowart seemed to be the only person who could solve them. In 2005, Cowart decided to hire a general manager to run the manufacturing and sales department so he could have more time for other interests, including his grandchildren. To his good fortune, he was approached by Eva Rucker, who offered to invest in the business and grow it from a regional manufacturer to one that sold to major national retailers. Rucker had excellent experience in sales and understood manufacturing. After a few months of getting to know each other, Cowart sold Rucker 25 per cent of the business and installed her as general manager. Cowart retained for himself the position of president. Although he would not be at work full-time, he would retain final authority on major decisions. After just two months, Rucker started adding salespeople, with the goal of doubling the sales force in one year to reach new regional and national retail accounts. As sales began to increase, she also hired additional support staff, including a purchasing agent, two furniture designers and an accountant. By the end of Rucker’s first year, SunBright was carried by three national retail chains on a trial basis. However, new problems started to surface. SunBright was missing the delivery dates promised by sales reps and a few orders had been returned for not meeting quality standards. With the consolidation of retail stores into fewer chains, the national retailers had the power to demand high quality, low prices and rapid delivery from SunBright or they would order outdoor furniture from other suppliers. At the end of her first year, Rucker was struggling to improve operations to meet the demands of national retailers, but with little success. She invited a consultant to evaluate SunBright’s operations. The consultant’s report contained the following elements.

●

●

Cooperation among departments is minimal or nonexistent. For example, the purchasing manager changed to a new supplier for paint because it saved a few cents per litre. But the paint had to be applied in a thicker coat to wear as long in outdoor use. The additional labour and paint actually cost more than the few cents saved in purchasing, and no one in the manufacturing department had been consulted. Salespeople frequently run promotions and promise sales delivery dates that are impossible for manufacturing to meet. The department head of manufacturing emphasises that it takes time to work out the bugs when introducing new products or increasing production levels.

●

●

The accounting department reports that productivity for the plant is low. Equipment utilisation is too low. The operation is not lean enough to make acceptable profits. The comptroller reports that inventory is too high. Too much capital is tied up in raw materials. Too much capital is also tied up in excessive in-process inventory waiting at machines to be finished and processed for delivery to customers.

Salespeople want to use the Internet to publicise SunBright product information and to make routine sales, freeing them to call on new customers. This approach would entail hiring people who could design and manage a sophisticated SunBright web page. Eva Rucker discussed these six issues with the consultant and agreed with the report’s findings. She met with Jim Cowart to report the findings and ask for his support and financial resources to make corrections. Cowart listened to the presentation and then said he had some other things to attend to. ‘I don’t think it’s as serious as you say,’ he told Rucker, ‘but you can have a meeting with the department heads if you want to discuss it with them. Remember that our production problems are no worse than our competitors’ issues. You don’t have to fix everything overnight. Things worked pretty well before we started to grow so fast, and I’m sure they’ll work well again.’ ●

Questions 1 Which of the problems outlined by the consultant do you consider the highest priority? Second priority? Why? 2 If you were the consultant, what types of information systems would you recommend for SunBright? Explain your reasons. 3 If you were James Cowart, how would you have responded to the report from Eva Rucker? If you were Rucker, what would you do now?

Source: Adapted from ‘Taracare, Inc.’, in Jack R. Meredith and Scott M. Shafer, Operations Management for MBAs (New York: John Wiley, 2002), pp. 17—18.

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Miller, W. (January 1999). Building the Ultimate Resource. Management Review, 42–5; Datz, T. (15 April 1999). How to Speak Geek. CIO Enterprise, Section 2, 46–52. 55 McDermott, R. (Summer 1999). Why Information Technology Inspired But Cannot Deliver Knowledge Management. California Management Review, 41:4, 103–17. 56 Thomas H. Davenport, Laurence Prusak and Bruce Strong. (10 March 2008). Business Insight (A Special Report): Organization; Putting Ideas to Work: Knowledge Management Can Make a Difference – But It Needs to Be More Pragmatic. The Wall Street Journal. 57 Meridith Levinson. (15 January 2006). Business Intelligence: Not Just for Bosses Anymore. CIO, 82–8; and Alice Dragoon. (15 September 2003). Business Intelligence Gets Smart. CIO, 84–91. 58 Dorit Nevo, Izak Benbasat and Yair Wand. (26 October 2009). Knowledge Management; Who Knows What? The Wall Street Journal. 59 Mark Easterby-Smith and Irina Mikhailava. (June 2011). Knowledge Management: In Perspective. People Management, 34–7. 60 Shel Israel. (8 October 2009). In Business, Early Birds Twitter Most Effectively. Bloomberg Businessweek, http://www.businessweek.com/ managing/content/oct2009/ca2009106_370257.htm (accessed 1 September 2010). 61 Rob Koplowitz. (November–December 2009). Building a Collaboration Strategy. KM World, 14–15; and Cindy Waxer. (April 2005). Workers of the World – Collaborate. Fortune Small Business, 57–8. 62 Evelyn Nussenbaum. (February 2008). Tech to Boost Teamwork. Fortune Small Business, 51–4. 63 Andreas M. Kaplan and Michael Haenlein. (2010). Users of the World, Unite! The Challenges and Opportunities of Social Media. Business Horizons, 53, 59–68; and Shayndi Raice. (2 April 2012). Social Networking Heads to the Office. The Wall Street Journal, R6. 64 Raice. Social Networking Heads to the Office. 65 Verne G. Kopytoff. (27 June 2011). Companies Stay in the Loop by Using In-House Social Networks. The New York Times, B3. 66 Nevo, Benbasat and Wand. Who Knows What? 67 This discussion is based on Judy Sweeney and Simon Jacobson. (January 2007). ERP Breaks. Industry Week, 11a–13a; and Vincent A. Mabert, Ashok Soni and M. A. Venkataramanan. (May–June 2001). Enterprise Resource Planning: Common Myths Versus Evolving Reality. Business Horizons, 69–76. 68 Derek Slater. (15 May 1999). What Is ERP? CIO Enterprise, 86. 69 Raymond F. Zammuto et al. (September–October 2007). Information Technology and the Changing Fabric of Organization. Organization Science, 18:5, 749–62. 70 Turcotte, Silveri and Jobson. Are You Ready for the E-Supply Chain? 71 Emily Steel. (29 March 2010). Nestlé Takes a Beating on Social Media Sites; Greenpeace Coordinates Protests over Food Giant’s Palm-Oil Purchases from Firm Alleged to Have Cut Down Rain Forest. The Wall Street Journal. 72 Stephanie Marcus. (22 July 2010). Top 5 Mobile Commerce Trends for 2010. Mobile Trends Series, Mashable.com, http://mashable .com/2010/07/22/2010-mobile-commerce-trends/ (accessed 25 August 2011); and Julie Jargon. (24 November 2009). Business Technology: Domino’s IT Staff Delivers Slick Site, Ordering System. The Wall Street Journal, B5. 73 ABI Research study reported in Stephanie Marcus. Top 5 Mobile Commerce Trends for 2010. 74 This discussion is based on Long W. Lam and L. Jean Harrison-Walker. (November– December 2003). Toward an Objective-Based Typology of E-Business Models. Business Horizons, 17–26; and Detmar Straub and Richard Klein. (May–June 2001). E-Competitive Transformations. Business Horizons, 3–12.

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75 Jan M. Rosen. (12 March 2009). Be It Twittering or Blogging, It’s All About Marketing. The New York Times, http://www.nytimes.com/2009/03/12/ business/smallbusiness/12social.ready.html (accessed 12 March 2009). 76 Huaxia Rui, Andrew Whinston and Elizabeth Winkler. (30 November 2009). Follow the Tweets. The Wall Street Journal. 77 Steve Lohr. (3 January 2010). A Data Explosion Remakes Retailing. The New York Times, BU3. 78 The Web Smart 50. (21 November 2005). BusinessWeek, 82–112.

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79 Jonathan L. Willis. (Second Quarter 2004). What Impact Will E-Commerce Have on the U.S. Economy? Economic Review – Federal Reserve Bank of Kansas City, 89:2, 53ff; and Timothy J. Mullaney with Heather Green, Michael Arndt, Robert D. Hof and Linda Himelstein. (12 May 2003). The E-Biz Surprise. BusinessWeek, 60–8. 80 Straub and Klein. E-Competitive Transformations. 81 http://www.orica.com.au/sustainability/index.asp?page=134.

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ test your understanding of managing the value chain, IT and e-business by taking the revision quiz ➜ download the audio summary for an on-the-go review ➜ extend your knowledge with Internet research activities and useful weblinks.

Cour seMate

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pa r t s i x : C o n t r o l l i n g

Part Six Continuing case

G e n e r a l M o t o r s Pa r t S i x : C o n t r o l l i n g

General Motors gives design teams the green light With all the bad news about layoffs, outsourcing and plant closings at General Motors (GM), including its Australian Holden operations closing in 2017, it’s not hard to guess what keeps many GM employees up at night. In Australia, some 3000 staff will lose their jobs in 2017 when GM closes its Holden Australian manufacturing operations in Victoria and South Australia. However, with the company’s renewed mission to reinvent the automobile, and with a new $25 billion bailout from the federal government for automakers who invest in green technology, at least one group at GM is sleeping a little easier. E-Flex Systems, the hybrid-vehicle task force behind the 2010 Chevy Volt, recently received the green light from senior management to design cleaner more energy-efficient vehicles. And now with a $25 billion credit line from the US government, GM’s group of more than 600 engineers and designers is hard at work developing high-quality low-emissions vehicles for the future. In videotaped comments posted on the company’s FastLane blog, Bob Lutz, GM’s vice chairman of global product development, explained the automaker’s perspective on quality. ‘If you ask me, “Are we satisfied where we are in quality?” the answer has to be “No”. Because until you’re absolutely perfect, which no company will ever be, this is really an area where you strive.’ Although quality may be a never-ending pursuit, getting it right may be more important than ever before in GM’s history. In recent years, the company has overhauled design processes to make way for alternative-fuel vehicles like the Chevy Tahoe hybrid, the hydrogen-powered Equinox SUV and the battery-powered Volt. Such uncharted waters could prove treacherous if controls are not in place to measure performance and provide swift corrective action when problems arise. In the case of the Chevy Volt, E-Flex teams are keeping a close eye on the car’s plug-in electric drive unit – especially the missioncritical lithium-ion batteries that deliver Volt’s 70 kilometres of gas-free driving. As anyone with a laptop computer knows, battery technology is improving slowly. Drawbacks of batteries include limited storage capacity, cost of production, performance deterioration and life cycle – and they’re heavy, too. Some batteries in computers had overheated and caught fire, and some automotive batteries had done similar, which can be disastrous in the marketplace. ‘It’s the biggest challenge we have with this car,’ says Andrew Farah, chief engineer of

the E-Flex Systems group. To ensure quality in Volt’s state-of-the-art battery technology, engineers are testing batteries from Massachusettsbased supplier A123 Systems as well as packs from Compact Power, a subsidiary of LG Chem. While not on par with the V-8 engines GM pioneered in the past, Volt’s electric drive train produces plenty of pep. The unit delivers 150 horsepower, speeds of 160 km per hour, and 0-to-90 in nine seconds. ‘That doesn’t sound like a golf cart to me,’ quipped Tony Posawatz, vehicle line director for the Volt. ‘It’ll be fun to drive.’ But Volt’s gamechanging fuel efficiency also comes from its unique design. The Volt seats only four people, allowing integration of a two-metre T-shaped battery that sits economically under the centre spine and rear seats. As Global Design Vice President Ed Welburn noted, ‘The battery is so integrated into the design that it’s like, “where is it?”’ Precisely the point, according to chief engineer Farah. ‘The whole idea is to integrate it. You don’t want to have a battery with some wheels.’ GM product-development teams have more ordinary concerns as well. Although the Volt’s electric motor is pivotal, Lutz noted that consumers are more likely to notice things like precise body fits and the radiance of the paint job. ‘These are things that people associate with quality,’ says the vice chairman. ‘They like to have an object that looks like it was put together with great care and by somebody that had a lot of respect for the ultimate customer.’ As Lutz sees it, the customer is always at the centre of GM’s commitment to quality. ‘We shoot not only for absence of problems, but we especially shoot for a joyous owner experience.’ Questions 1 How might GM use organisational control to ensure that the Chevy Volt meets the expectations set for it during the vehicle’s early planning stages? 2 Which total quality management (TQM) techniques may not be applicable to GM as it pioneers next-generation alternative-fuel vehicles? 3 Would the partnership approach to supply chain management improve GM’s procurement of materials for new energy-efficient vehicles? Why or why not? 4 Given that some quality problems are almost inevitable with new technology and prototypes, what quality management and communication strategies should GM and Holden have planned for in developing and launching the Volt?

Sources: Michael Kanellos. (14 December 2007). Does GM Now Mean ‘Green Motors’? CNET News, http://news.cnet.com/Does-GMnow-mean-greenmotors/2100-11389_3-6222853.html (accessed 13 October 2008); Robert Snell. (17 September 2008). GM Enters Its Second Century by Finally Taking Wraps Off Volt. The Detroit News, http://www.detnews.com (accessed 11 October 2008); (28 September 2008). GM Starts Its Next 100 Years with New Approach. The Bay City Times, http://blog.mlive.com/ bcopinion/2008/09/gm_starts_its_next_100_years_w.html (accessed 11 October 2008); James Quinn. (13 October 2008). GM Steers Towards Green Funding. Telegraph, http:// www.telegraph.co.uk (accessed 14 October 2008); Chuck Squatriglia. (11 December 2007). GM Dedicates Design Studio to Electric Vehicles. Wired, http://www.wired.com/cars/ futuretransport/news/2007/12/eflex (accessed 13 October 2008); General Motors. (6 October 2008). The Case for GM: Has GM Closed the Quality Gap? videotaped interview with Bob Lutz, GM FastLane Blog, http://fastlane.gmblogs.com (accessed 13 October 2008); David Welch. (17 September 2008). GM Charges Up the Electric Chevy Volt. BusinessWeek Online, http://www.businessweek.com/lifestyle/content/sep2008/bw20080916_356100.htm (accessed 13 October 2008).

Lear ning objectives After study ing this c hapte r, you s hou ld be ab le to:

1 Understand some key points of difference between companies that lead in their industries and the rest of the pack.

2 Evaluate leaders and the quality of leadership according to key characteristics.

5 Understand the requirements of and benefits from achieving innovation capabilities in organisations.

6 Describe the processes of and benefits from

achieving high levels of customer focus and quality management.

3 Analyse any organisation in terms of the extent to

7 Know the concepts and benefits from pursuing

4 Evaluate the likely future prospects of an

8 Understand the systemic linkages between

which certain ‘best practice’ principles are in place. organisation according to its leadership and management capabilities.

effective knowledge management.

strategies, resources, measures and behaviours in the overall design of organisations.

Capstone chapter

Making effective management happen Chapter outline ➜   Fundamental practices common to winning organisations Leadership practices People management practices Customer focus practices Quality management practices Innovation practices Knowledge management practices

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➜   Deeper principles common to the world’s best organisations

➜   Putting it all together: the organisation as a system

Capstone: Making effective management happen

In this capstone chapter, we will examine some key aspects of the leading edge of management practices, and the deeper principles that underpin these, in excellent organisations. This chapter summarises and reinforces key management theories outlined in this book by putting them into a practical setting. What do managers in the world’s best companies do that has driven them to their industry-leading positions, and in the best of cases, allowed them to remain in those winning positions for a considerable time? What specific managerial practices do they employ that have pulled them out to the front of the pack? What are the deep-seated cultural, process and other key elements of these firms? We will examine this by considering the core capabilities of these organisations and how these capabilities are developed, led and used to great effect. First, it is worth pointing out that in every industry there is a lot of variance in performance between the best performers, the average performers and the underperformers. There are companies that are thriving, growing and profiting while creating a lot of value for their stakeholders, and there are others that are struggling, and ultimately going out the ‘back door’ of business bankruptcy. What explains this high degree of variance in performance? To begin with, we propose that the most straightforward way to explain this variance in performance is to examine the practices in place in these organisations. Exhibit C.1 shows how those firms that have certain practices strongly in place, sometimes referred to as ‘best practice’ organisations, usually outperform their industry averages or benchmarks. And the converse is true, that organisations which fail to effectively implement certain practices are most likely the underperformers in their industry. Exhibit C.1 depicts this relationship between practice and performance. It is certainly not a perfect relationship, in that there are no guarantees in life, including in managerial and organisational life. There are some firms that do well (for a while) despite not having all these practices in place, and there are some firms that have many of them in place, but do not prosper to the extent we would predict and expect. The reason is that there are many other factors that influence and explain organisational performance apart from the management factors, such as industry level effects, country level effects and just occasionally luck or ‘fortune’, which can be good or bad on any day. However, there is a great deal of evidence to show that certain sets of management ‘best practices’ are significantly associated with high performance. In the first part of this chapter we will draw on many of the previous chapters of this book and outline and extend our explanation of these practices. To stretch our thinking even further, let us consider the following question: if it is possible to know what these best practices are – and it is indeed eminently possible – then why don’t the underperforming firms in any and every industry identify these and set about implementing them and lifting their game? Is it that some firms choose to not lift their game? Probably not: most organisations strive to improve and want to succeed. Is it lack of knowledge? We would argue that this is less and less the case, as thousands of management books, courses and seminars are available that extol the organisational benefits of improving practices and performance: in other words, knowledge abounds about these best practices. Is it that the managers in these struggling or underperforming organisations are unintelligent or lazy? Also not. To crystallise this idea, we propose that there is a big difference between knowing what to do to improve, and doing it effectively on a lasting basis. Knowing is not the same as doing. So, with reference to Exhibit C.1, we show that just as practices can explain variance in performance, there are deep principles within organisations that explain the variance in being able to make the practices ‘stick’, and work and deliver improved performance outcomes. Principles are different in nature from practices. Practices are things that people do, whereas deep principles are the ideas and values that

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Capstone: Making effective management happen

provide capability and guidance. When those principles are strongly in place, certain practices will be likely to work and deliver. Without these principles in place, attempts to implement leading edge practices are likely to fail. In the latter half of this chapter, we will describe and illustrate these deeper principles and their applications.

Exhibit C.1 Explaining variation in organisational performance

Core principles: STRONG

Sound strong management practices

High performance

Core principles: WEAK

Weak or poor management practices

Low performance

We can now review the meaning and purpose of management activities as they were introduced in Chapter 1 and discussed throughout this textbook. They involve planning, leading, organising and controlling the firm’s activities in order to achieve goals. In doing so, all organisations must work with and serve a range of stakeholders in a value-adding manner. By this, we mean value as defined by: Value 5 Benefits/Cost The benefits are best defined by the stakeholder, as they are the recipient of these. For customers, the benefits are in terms of those dimensions of value that the products or services provide to them, as perceived by them. For employees, the benefits are mainly the pay and other rewards, such as sense of achievement through job satisfaction, which they receive in exchange for their work effort. For investors or lenders to an organisation, value means that the return they get from investing or lending money is worth the risk of doing so. Stakeholders will do business with us when we can create net positive value for them in their terms, more than our competitors can. The three key stakeholder groups, customers, employees and investors, can essentially define the manager’s job: that he or she must be able to be competitive in three markets. 1 The market for the goods and services produced by the organisation. 2 The labour market, in terms of being able to give value to employees in order to attract, retain and

motivate them to perform effectively. 3 The financial market, in which investors will want to invest and lenders will want to lend money to

finance the firm’s activities. Although there are clearly other important stakeholders of any organisation, such as communities, suppliers, governments and the natural environment, the three primary stakeholder groups listed above provide a set of foundations or imperatives for managerial success.

Capstone: Making effective management happen

Two useful theoretical frames: resources and capabilities Two theoretical frames that allow us to deeply understand organisations and how they can best get ahead, through effectively making decisions, are the resource-based view and the dynamic capabilities approach. The resource-based view considers how an organisation can succeed through the creation, accumulation and application of resources that have certain characteristics:

1 They should be valuable resources, providing a cost or other advantage to the organisation. Acquiring the resource should generally lead to higher levels of competitiveness than outsourcing them and their activities.

2 They should be rare resources, limited in supply and not easily or cheaply available to competitors, and hence providing competitive advantage.

3 The resources should be inimitable, meaning they cannot be replicated by a competitor, and they can include knowledge, machinery, human resources or other unique elements of the organisation’s systems.

4 The resources should be non-substitutable, meaning that it should be difficult, impossible or expensive for competitors to achieve the same purpose or outcomes with alternatives to the key resources. A firm should identify, invest in and apply its key resources to its advantage. The dynamic capabilities approach was developed to overcome the static notion of the resource-based view,

Managemen t in Pr actice

recognising that in a fast-changing world, it is not just the key resources, but the ability to quickly and effectively reconfigure these resources, that drives advantage. Hence, dynamic capabilities is focused on:

1 Learning effectiveness of the organisation, arguing that the ability of an organisation to learn (more quickly than its competitors) is critical to its ongoing success.

2 Process change, meaning that as markets and customer requirements change, the ability to stay with or ahead of key trends is a driver of success.

3 Transforming of existing assets and flexibility is key to not being left behind. This means being fast and effective at updating products, processes and ways of doing business including adapting resources such as equipment and people to new tasks.

4 Innovation is a key to remaining relevant to customers and driving improved business outcomes.

5 Integration and combination of resources, including ensuring the adjustment and fit of ‘soft’ resources, such as knowledge and human skills, with ‘hard’ resources, such as machinery, computers, land and buildings. Dynamic capabilities emphasises the ability to reconfigure and change the organisation with an eye to responding to or leading the changes happening in the organisation’s external environment.

Fundamental practices common to winning organisations We can classify the practices common to leading organisations: ●● leadership practices ●● people management practices ●● customer focus practices ●● quality and process management practices ●● innovation management practices ●● knowledge management practices. We can specify and illustrate the nature of ‘what works’ in these practice areas. If an organisation is doing most of these well, then it is likely to be effective in creating the value that we described earlier and in being competitive and successful in its industry.

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➜➜ Value can be considered the creation of benefits by the organisation, divided by price. ➜➜ Some critical aspects of managing organisations include leadership



practices, people management practices, customer focus practices, quality and process management practices, innovation management practices and knowledge management practices.

Remember This

➜➜ Theoretical frameworks such as the resource-based view and dynamic capabilities help us to understand and make decisions about value creation in organisations.

Lead ershi p pr actices We have already discussed many leadership concepts in Chapter 15; it is also possible to observe the practices of successful leaders. What do leaders do in order to effectively influence others and guide their organisations to success? Observation of great leaders reveals their practices to include the following: 1 Effectively setting vision and strategy. Leaders can crystallise a view of what the organisation is

to stand for and achieve in the long term, and what is a sensible and aspirational journey to set out on. This vision, and the strategies for getting there, must be value-adding to the key stakeholders (as described above), or they will not cooperate in turning the vision into reality. When it is done well, the vision can be inspiring to stakeholders, especially staff. For example, consider the vision set by Steve  Jobs: the creation of a world in which information and entertainment could be created and delivered in such a user-friendly way to make it enjoyable to produce and to consume Apple’s cleverly designed products and services. Jobs and the company he led have clearly achieved great success in the three key stakeholder markets.1 2 Communications and inspiration. There is little point in leaders having brilliant ideas about vision

and strategy if they keep them to themselves! These great ideas must be disseminated to staff, and also to external stakeholders, in order to inspire them to ‘jump on board’ and participate in the achievement of those strategies and, ultimately, the fulfilment of the vision. The leader must be a powerful communicator, able to relate to all stakeholders and their needs and desires, and to translate the vision and strategies into their terms in such a way as to attract them to energetically join in. Communication can be via multiple channels: via formal presentations, talking to small groups or written communications, as outlined in Chapter 17. The leader is the symbol of the organisation and must be visible in communication of the purpose of the organisation and its actions. It certainly helps if the messages are heartfelt and sincere, and if the leader can send these messages with charm and charisma. However, at the very least, they must be powerfully and convincingly communicated so that stakeholders will see the value of joining in. Leaders can never implement the vision and strategy by themselves! They must be able to engage and motivate a range of people to go with them on the journey, and for this, excellent communication skills and practices are vital. 3 Integrity. This is a key characteristic for effective leadership of organisations.2 Staff at all levels look

to their senior executives for symbols and signals of the ethical stance that they take. When employees see their leaders taking the ‘high road’ on integrity, they understand the expectations being set in the organisation and are likely to behave accordingly; the same is true when staff observe their leaders taking the ‘low road’. Imagine staff who worked in Bond Corporation or Coles Group in Australia, when they saw their organisations embarrassed and chief executives very publicly prosecuted and

Capstone: Making effective management happen

found guilty of various crimes related to illegally using the corporation’s assets for personal gain. When CEOs such as Brian Quinn of Coles and Alan Bond of Bond Corporation are convicted of crimes and jailed, employees cannot be blamed for lowering their sense of belief in the organisation’s vision and standards of ethical behaviour. Such outcomes were demoralising for staff. On the other hand, when a senior executive visibly demonstrates a high level of integrity, even when taking an unethical shortcut or cutting a corner might be cheaper and easier, staff will learn and respect the value of those actions and the value system they are based on, and are likely to apply similarly high standards.3 4 Strong performance orientation. The drive to influence everybody to reach their goals, and to ensure

that the whole organisation is always performing at its best, is in the DNA of great leaders. Leaders achieve this mindset of high performance in all their staff by ensuring that they lead by example. Great leaders make sure that they personally deliver on their commitments and initiatives; they can then insist that others do likewise. Leaders are often quite tough and demanding in their performance management expectations. When staff are assigned and accept responsibility for projects, such as new product development, their senior business leaders expect these projects to be completed on time, and unless reasons are truly exceptional, staff know that on-time delivery is expected.4 5 Humble and ‘servant-like’. Great leaders do not have great big egos, or if they do, then they

successfully suppress these when dealing with their staff and other stakeholders. Great leaders are able to communicate with all their staff on a mature, adult-to-adult basis, and do not ‘talk down’ to staff under normal circumstances. They see their role not only as leading, such as by setting bigpicture strategy, but also as serving their organisation and their staff, and providing the resources needed by those staff so that they can excel. This ‘leader as servant’ approach is highly motivating for staff, who ‘love to love’ a senior leader who comes across as very human and humble. On the other hand, leaders who remain aloof from staff do not gain staff loyalty, and can even engender disloyalty and low morale and motivation in those staff. An example is one chief executive of a major resources company in Australia who went to great lengths to avoid face-to-face contact with his staff, even to the point of installing a private toilet for himself and a locking device in the head office lift so that the lift would not stop between his basement car park and his private top-floor office. Once staff knew of these things, they lost any sense of loyalty to the chief executive, and their level of commitment to the organisation also fell significantly. The worst leaders look down on their staff, treating them like pawns in a game that they command, or – worse – as a necessary evil. The best leaders let their staff know that leaders have deeper and broader sets of responsibilities than lower level staff, but they also establish a clear relationship of mutual respect for the different work responsibilities that people have. These great leaders explicitly acknowledge to their staff that without their staff achieving individual and collective success, neither can the leaders! They set up this clearly understood mutual dependency so that everyone can then get on with ‘growing the cake’ for the organisation, with much less whingeing about how the cake is sliced up. These organisations, therefore, are set up to succeed. 6 Knowledge-focused. Great leaders make it their business to know the details of what is happening in

all corners of their organisation. They ensure that they are well-informed about issues, opportunities and problems in the organisation, and they keep their finger on the pulse by monitoring performance. This includes personally knowing the key stakeholders, such as highest value customers, suppliers and investors, and having open and honest relationships with key people within the organisation. Leaders need people inside the organisation who will tell them the truth about what is going on. They cultivate such relationships with opinion leaders across the organisation.

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7 Energy and passion. Both energy and passion are required at a high level, because leadership is

hard work! Strong leaders are committed to their organisation and show their motivation to others as an indication of what is expected in terms of effort. Leaders live and breathe the organisation, almost on a 24/7 basis! To really know the detail of the organisation (see point 6 above), long hours are required of talking to people, reading reports and communicating strategies and motivating staff. Some people call this ‘management by walking around’, which boils down to being strongly visible as a leader. 8 Smart. Modern-day organisations must find their way through a complex maze of circumstances, and

leaders can best add value by contributing to problem solving and using their business acumen to drive through the complexity and solve problems. Conversely, one might say that if you lack intelligence, you shouldn’t aspire to be a leader of an organisation, as it will be difficult to cope with the complexity of the job and its many demands. 9 Agile of mind and innovative. Great leaders are open to new ideas, particularly those brought

forward by others. Successful leaders realise that they do not need to come up with all the good ideas within the organisation; they also encourage others to solve problems and bring forward their best ideas and business improvement opportunities. This means that good leaders need to be good listeners! They need to encourage those around them to be prepared to open up and not feel apprehensive about speaking their mind. By doing this, a leader can build an honest and frank organisational culture, which is psychologically healthy for all stakeholders – and good for performance, too. 10 Customer-focused. This means setting a standard and culture of ‘acute customer focus’ for all to see.5

It is all too easy for a leader to lose touch with the customer interface and the value proposition of the firm, if these are not consciously kept front of mind. Successful leaders use a variety of methods to remind themselves and their staff of perhaps the most important single goal of the organisation: satisfying the consumer. They sometimes serve on the front counter of the organisation, as McDonald’s leaders occasionally do, or they read and directly respond to customer complaints, and stay in touch with customer satisfaction survey reports. In their communications, leaders let their passion for satisfying customers shine brightly.6 11 Courageous and determined. It can be lonely at the top of an organisation, whether it is a team, a

department or a whole organisation. Sometimes it can feel as if there is a lot of opposition to a leader’s strategies, and strong leaders need to show their backbone. They need to be prepared to remain strong, staying the course when things are not working out in the first instance, as is often the case with new initiatives, strategies and products. At the same time, leaders must have good judgement, knowing when to back off and not be overly stubborn.7 12 Delegate and trust. In order to bring out the best in others, successful leaders give their staff the

responsibility and scope to take initiative without forever coming back to ask permission. Leaders choose good people to work with them, then give these people room to make decisions in order to implement the vision and strategies that have been agreed. However, while successful leaders do give quite a lot of trust and delegation, many of them follow the maxim, ‘Trust . . . but verify’. They keep a watchful eye on all aspects of activities and performance.8 13 Team builder. A leader cannot implement strategies on his or her own. Leaders need lieutenants

who they can weld into a cohesive team, to communicate the consistent messages throughout the organisation, and to control and coordinate execution of those strategies. Just as in sporting teams,

Capstone: Making effective management happen

leaders foster strong team-based efforts through their role as a combination of coach and captain.9 Leaders of all but the smallest organisations create and support a leadership team of senior and middle managers who will help them sell the vision and strategy to all stakeholders, and drive implementation and goal achievement. 14 Sincerity as a people person and developer. Leaders need to be ‘people-friendly’. This does not

mean that a leader must be forever socialising with staff; rather, that at work, the leader is genuinely interested in people’s welfare and the quality of their lives, at work and beyond.10 A legendary example is John Mars of Mars Corporation, which leads pet food and confectionery market segments on a global basis, being one of the world’s largest and most successful privately owned companies. John was known to travel the world and visit his company’s many factories and business offices, asking people, with genuine interest, about themselves and their families, and then asking them what they did to make the company a better place. 15 Technologically literate. Successful leaders know at least enough about the processes and products

of their organisation and industry to be able to make good decisions regarding these, and to converse comfortably with their technical specialists. When a leader is technologically illiterate, poor decisions can result, as they must simply accept advice from others and cannot connect their business judgement to important technical aspects of those decisions. On the other hand, high-level technological literacy is certainly not necessary, and it can in fact sometimes be unhelpful for a leader to be too much the technical specialist, for this sometimes leads them to immerse themselves in so much detail as to miss the big picture. Take a Moment 16 Committed beyond the short-term. Strong leadership means not only driving for strong Fill out the leadership performance in the short term, but also investing in capability-building for the future. self-evaluation questionnaire When leaders are too short-term and operationally focused, then the organisation can in Exhibit C.2. Which of these suffer from a lack of sound long-term strategies and under-resourcing of business, characteristics would you like to and therefore lack the capability to sustain competitiveness into the medium and improve on in the next 12 months? Prioritise three of these long term. In the most extreme of such cases, organisations simply run out of characteristics for improvement: capability and go out of business. The personal commitment of leaders need not be which three would be most indefinite – as nothing lasts forever – but it should be long enough to see out a series valuable for you to of strategies to ensure the consistency of their implementation and realisation of their improve on? intentions.

➜➜ Leadership characteristics of visionary strategy capability,



communication, integrity, sincerity, delegation and courage are



important to a leader’s, and to the organisation’s, outcomes.

Remember this

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Exhibit C.2 Leadership characteristics assessment Very weak

Weak

OK

Strong

Very strong

Can set vision and strategy

1

2

3

4

5

Communicate/inspire

1

2

3

4

5

Integrity

1

2

3

4

5

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Knowledge focused

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Team builder

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Technologically literate

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Committed to longer term

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Peo ple m anagem ent pr actices People are unique as individuals, but in some ways, we all want many of the same things. As considered in Chapter 16’s discussion of motivation, we all share a desire for basics such as food, water, shelter, safety, a sense of belonging and social interaction, and a need for achievement. We all differ in what these mean to us as individuals. However, we are all wired in a similar way, despite differences in culture, history and age or generation. Managers know that for their organisations to achieve their goals at high levels of effectiveness, the majority of employees need to be working well and working hard. Leaders have tried various methods to motivate their staff, ranging from engendering fear through to using monetary incentives and providing employees with paths to self-fulfilment. We have found that in most circumstances, management by fear doesn’t work very well, or for long. Employees may well do what they need to do to get by in a fear-driven culture, but they will find ways to do little more than comply, not show initiative and, ultimately, find ways to escape such a culture. It is quite an understatement to say that management by fear is not best practice. Employees of all types and at all levels of most organisations will respond much more positively and energetically to incentives which allow them to be personally successful while also making a contribution to the organisation’s goal achievement. This personal success can involve recognition, learning and training, promotion and rewards, leading to two major types of personal benefits that the employee can literally take home. One of these can be thought of as intangibles, such as job satisfaction from realising (intrinsically) and being told by others (extrinsically), such as managers, that they have completed a ‘job well done’. This knowledge gives employees a sense of pride, one that they will want more of, which means that it will motivate further high-performance behaviours. This need in humans can be called a ‘need for achievement’. The second major personal benefit is the tangibles, meaning money, benefits and the potential for progress and promotion – and to achieve more tangible (and intangible) benefits.

Capstone: Making effective management happen

Source: Newspix/Andrew Henshaw

Richard Goyder: Managing Director of Wesfarmers

Richard Goyder needs to be a truly exceptional leader to continue to meet the expectations of stakeholders in the complex and multiindustry company that he commands. Many critics of such conglomerate businesses argue that diversified companies are a relic of the past, yet with sound leadership, Wesfarmers seems to be able to operate with success in a number of different businesses and even different industries.

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Many experts would say that to succeed, a company needs to ‘stick to its knitting’ – meaning it should stay focused on its core business. Wesfarmers, however, is a highly successful and, at the same time, highly diversified company. With over 200 000 employees, making it one of Australia’s largest employers, the company has thrived on strong leadership and sound strategies. The company has an open culture and sound business systems of reporting and information management. Richard Goyder helps to runs businesses as diverse as Bunnings, various insurance businesses, Target, coal mines, Kmart, Officeworks, chemicals businesses and Coles supermarkets. Share markets and investors have had confidence in Goyder and Wesfarmers, as he invested some A$8.5 billion in the Coles Group acquisition, and then invested significantly more, again, in a program of renewing those businesses. The primary challenge for Coles has been to compete with its well-run competitor, Woolworths, and all this happened just as the world went in to the 2008–10 global financial crisis. Goyder has worked very hard to build a team of business leaders who can take these various businesses forward. He sees innovation as critical, as it is the only way he sees Coles as being able to catch up to and pass Woolworths in the market. Goyder’s leadership style is to try to engage each worker’s sense of involvement and ownership in the businesses, which stimulates them into bringing their best ideas to the workplace. He sees the importance of and encourages process innovation, which he views as a large number of small innovations that keep people involved in doing the things they do, but better.

Most managers have worked in recent years to the concept that management by fear only achieves low levels of motivation, and can only be effective with ‘shirkers’, meaning low performers. To get staff to effectively work with high effort levels and creativity that leads to innovation, more positive signals are needed. We refer here to the concept of discretionary work effort: the notion that staff are doing more than the necessary minimum in striving to make themselves and the organisation excel. Discretionary work effort is a matter of choice for staff, meaning that they don’t have to give the extra effort, but that they might do so as a personal decision. Discretionary work effort being at high levels is clearly one of the features of winning organisations. Google is a fine example of a company that achieves high levels of discretionary effort. Google provides its employees with many non-monetary benefits, and is famous for these discretionary and other psychological benefits, which are described in the Case Study on page 847. As a result, Google is a place that many talented people strive to work for, and when they do get a job at Google, they enjoy giving their very best efforts to the company while enjoying superb benefits. It is an understatement to say that at Google, people do a lot more than the minimum to get by; yet there are companies in which many people are indeed ‘coasting through the day’. Consider the differences between these companies and Google in terms of the impact of discretionary effort on customer service, quality innovation and overall productivity. In order to achieve such outcomes in staff on a widespread basis, managers must work to capture the hearts and minds of their staff – and it doesn’t hurt if their wallets are closely aligned to the wallet of the employing organisation! By ‘heart’, we mean allowing and encouraging the staff to bring to work and use their passion in the workplace. When we see staff really putting their hearts into their work, it is amazing how much more they can achieve!

discretionary work effort Discretionary work effort is the effective activity by staff above and beyond an acceptable norm or minimum.

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Innovative Way

GE people/talent management

GE has achieved legendary status in relation to its ability to stimulate people at all levels of the company to ‘be the best they can be’ through its corporate university and development centre located at, and known, as ‘Crotonville’. The company espouses its approach and activities as: Worldwide we spend about $1 billion each year on training and education programs for the people at GE. The results can be measured in the leadership capabilities of our own people and ultimately in the value and opportunities generated for our customers and their communities.

➜➜ Entry-level Leadership Programs. GE’s Corporate Entrylevel Leadership Programs offer recent college graduates prized development opportunities that combine real-world experience with formal classroom study. Through a series of rotating assignments – typically over a period of two years – young professionals receive accelerated professional development, world-class mentors and global networking that cuts across GE’s businesses.

➜➜ Experienced Leadership Programs. Experienced professionals who wish to accelerate their careers find fitting opportunity in our Experienced Leadership Programs. The programs position high-potential talent in collaboration with some of the top innovators in their fields, offering intensive on-the-job development in the areas of Corporate Audit, Human Resources and Sales and Marketing.

➜➜ John F. Welch Leadership Development Center. At GE, learning is a cultural force and Crotonville is its epicentre. For over half a century, the legendary John F. Welch Leadership Development Center has been at the forefront of real-world application for cutting-edge thinking in organisational development, leadership, innovation and change. Established in 1956, the 210 hectare corporate learning campus was the first of its kind in the world. The Crotonville campus attracts the world’s brightest and most influential minds in academia and business. Every year, for thousands of our people from entry-level employees to our highest-performing executives, a journey to Crotonville is something of a pilgrimage – a transformative learning experience that, for many, becomes a defining career event. The facility’s meandering outdoor walkways and recreation areas were designed to encourage exploration and spontaneous connection with other learners. Its very structure is a reinforcement of what is best about learning at GE: authentic human connection coupled with the invigorating pursuit of ideas. Today the Welch Leadership Center continues its legacy, serving as a powerful organisational force that commissions each of our employees with an important reminder: to never stop learning. Source: http://www.ge.com/company/culture/leadership_learning.html.

By ‘mind’, we mean the logic and rational side of the person: all staff know the organisation’s goals and priorities and have their own personal goals aligned to those broader goals. This can largely be achieved through an effective system of management by objectives (see Chapter 7), plus a lot of communication and consultation regarding the organisation’s values, purpose and strategy, and how it can be deployed and connected to the staff’s work. As to pay (the ‘wallet’ factor), benefits and promotion, when staff know that by working hard and well they will not only get psychological fulfilment and help their organisation to succeed, but also that there will be a direct return on effort to them, then this can be an additional motivator for many staff. Incentive schemes have historically worked well for staff in sales jobs, and in many countries and companies these have been used more broadly for all job types, including managers. Like all things, if implemented badly, incentive schemes will lead to poor outcomes. Indeed, if employees are incentivised on the wrong measures, then highly dysfunctional outcomes can and probably will occur. Best practices in managing staff really involve treating people as people, meaning treating them well, understanding their personal needs and differences, and giving them the opportunity to grow and develop to their fullest ability, while gaining the fruits of their contributions for the organisation.

Capstone: Making effective management happen

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When people management practices become really effective, staff become substantially self-managing on a day-to-day basis, and managers can do less ‘management’ of their activities. A great benefit of this is that managers can then free up their time from managing short-term operational activities, since staff are now self-managing, and work on bigger and longer-term issues. In the very best of such organisations, which we should all perhaps strive to emulate, staff can be considered not just as self-managing, but as self-leading, meaning that they set their own goals, at least partially, and behave with great responsibility and accountability in delivering those goals. In order to reach this point, delegation of some decisionmaking authority must go hand-in-hand with the responsibilities given to staff. Leaders stand back and let staff lead jointly. When these leaders and managers make investments in their staff, such as through upskilling and training, the employees responsibly make sure they are providing a return on those investments, which makes them highly worthwhile as investments, rather than wasted, as they can be in other organisations.

For most of us, Google is a fast, efficient search engine. However, for most of its staff, it’s an even better place to work! As an employer, Google boasts the following features in Australia and globally: ➜➜restaurant-quality meals provided free and unlimited to staff ➜➜movie nights for staff and guests ➜➜significant subsidies for buying hybrid cars ➜➜laundry facilities ➜➜employee clubs and special interest groups ➜➜allowing pets at work. In Australia, the Sydney Morning Herald published an article under the following headline: ‘Google named Australia’s best place to work’ Its key points are summarised below. ➜➜Corporate success is clearly linked to staff satisfaction – and Internet search company Google is the proof. ➜➜After its outstandingly successful parent company topped a 100 Best Places To Work survey conducted by the US magazine Fortune, Google Australia

has claimed the No.1 spot in a similar Australian poll. ➜➜BRW’s Top 50 Great Places to Work list was based on research conducted by the Great Place to Work Institute, Australia which surveyed more than 15 000 employees. ➜➜BRW said Google had created a legendary corporate culture of perks, fun, appreciation and reward for its staff. ➜➜The facilities and conditions that make Google Australia the nation’s best place to work include beanbag-filled meeting rooms, ping-pong tables and a cafeteria offering free food. ➜➜The magazine said there was a common theme at all the Top 50 companies: perks. ➜➜Benefits vary from free iPods to Krispy Kreme doughnuts to the opportunity for international travel. ➜➜Popular firms also offer such benefits as education subsidies, onsite fitness centres or subsidised gym memberships, flexible work arrangements (including

telecommuting), health insurance plans and child care. Google is a company that believes in giving plenty to its staff, and in return it clearly gets back a lot of discretionary work effort! The BRW award of Best Employer to Work For once again in 2011 went to Google Australia, which increased its staffing levels by 50 per cent in that year and still kept its employer–employee relationship at the highest level of achievement and satisfaction for all concerned. It is interesting to note that in these BRW-sponsored awards, most businesses were of a small to medium size, often about 150 employees (with a notable exception being Deloitte, with 5000 staff). This indicates that the influence of a single compassionate founder, owner or leader can lead to great things in the workplace, but perhaps cannot, in general, stretch to the ‘big end of town’. Source: http://www.smh.com.au/news/technology/ biztech/google-named-australias-best-place-towork/2009/04/29/1240982266605.html.

Great organisations get themselves into a virtuous cycle of investing in their staff and giving them fulfilling, well-rewarded roles. This in turn leads to the achievement of both high levels of discretionary work effort and high levels of productivity, service and quality – and, hence, success in the marketplace. With this comes the satisfaction of stakeholders such as owners or shareholders, and further availability of resources to reinvest. Google clearly fits this description.

Case study

Google: a great place to search – and work

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Custom er fo cus pr actices We have all had both good and bad experiences as customers or clients of firms. We know that this service experience significantly affects whether we will go back, how much we are prepared to pay, and whether we recommend or ‘bad mouth’ a business. Effective managers know that the revenue stream of the business, meaning the money paid to it by customers, is its critical lifeline, without which every organisation would soon collapse and die. So the leaders and managers of successful organisations go to great lengths to demonstrate and require their staff to provide high levels of customer focus and strive to satisfy client requirements. While ordinary companies also realise this and try to give customers what they want and are supposed to deliver, great companies engage in some additional best practices, which differentiate them in the eyes of their clients.11 Some of these practices are: 1 Building personal bonds between the client/customer and the organisation. This basically means

finding a way to get the client to like the experience of doing business with the firm. It may manifest as ‘friendly service’, flexible approaches or personal bonds between staff and key clients’ representatives. 2 The client focus means delivering the tangibles exactly as they are supposed to be delivered:

with reliability and a high level of value to the client. This means thoroughly knowing the client’s requirements in the first place. 3 By building relationships with key customers, great managers and their staff take the opportunity to

establish a dialogue about future client needs, so that the manager can ensure that the supplying firm can be well-positioned and capable of supplying to those future needs. 4 This information about current and future requirements of clients should be effectively disseminated

throughout the organisation, so that all staff in all roles know the nuances of clients’ preferences and can directly act upon them. 5 In the best organisations, innovation – a key theme of this textbook – comes to the fore. Skilled staff

are encouraged to solve client problems in novel ways, and have the authority to act ‘outside the square’, up to a point, when required. Staff are always on the lookout not only to deliver to the exact client requirements, on time and on budget, but also to look for ways to improve the client outcome through new and different forms of value creation. 6 Staff pursue sustainable practices and outcomes, finding ways to reduce environmental footprints,

and ‘do well by doing good’ in a societal sense. Clients increasingly care about these factors. The sustainability orientation of staff brings both tangible benefits (such as reduced energy use) and intangible benefits (better societal acceptance and market edge) to the firm and its clients.12 7 Managers find out what clients do with their services once purchased and try to position the

services supplied to ensure that clients succeed in using those services. So, if a leading company like Hewlett Packard (HP) is supplying hardware and software to another industrial company, HP works hard to find out how that client firm competes in its client markets, then strives to design and provide products and services that will contribute strongly to that success. In this way, HP can potentially become more than just a supplier that means a cost to its client, but in the best of situations, can lock itself in as an integral part of its client revenue model that drives the client’s competitiveness.

Capstone: Making effective management happen

➜➜ The ability for managers to motivate staff, and create high levels of discretionary work effort in the workforce. is a key driver of success.

➜➜ A hallmark of successful organisations is their ability to design their processes and focus their



culture and behaviours on achieving high levels of customer focus and satisfaction.

Q ualit y m anagem ent pr actices The foundation for many of the world’s best organisations is a set of stable, robust processes, meaning all the organisation’s processes. The core ideas of quality management practice, which are set out below, are hard to argue against, as they are just so sensible. However, it is surprising how many firms have not yet deployed them well. Those key ideas of quality management practice are: 1 Bring the ‘voice of the customer’ pervasively into every corner of the organisation. As in our earlier

discussion about customer focus, this means being customer-centric in how all decisions are made and resources allocated. In the best companies, even IT systems are designed primarily with customers in mind. When this practice is firmly established, customers achieve satisfaction, don’t leave because they are disappointed, come back with their friends and may even be prepared to pay a premium for the great services they receive. 2 Reduce all forms of organisational waste, and hence strive to ‘get it right the first time, every time’.

Most organisations waste a tremendous amount of resources through not getting it right the first time: they do large amounts of rework, must follow up in the market when customers are unsatisfied, and do lots of inspection of their services and products, because they do not systematically get it right in the first instance. It is typical for an organisation to waste over 20 per cent, and perhaps 30 per cent, of its resources, and many waste higher levels than this. Things simply ‘fall between the cracks’ in these organisations on a continuing basis. As a result, staff at all levels are constantly frustrated and ‘fighting fires’; that is, dealing with problems and scrambling to fix them, as the organisation lurches from one crisis to the next. In the best organisations, the total cost of all forms of waste is less than one-tenth of the average above: 2 to 3 per cent. Much of that relates to an investment in preventing errors. Things go right and work right most of the time. Work is not frustrating, but is usually smooth and flows well. Managers do not spend their days solving operational problems, but planning the next level of capabilities or products the organisation will develop. Nor do managers spend their days working on customer complaints, because there are fewer of these. And because fewer resources are poured down the drain of waste, clients are more satisfied, profits and organisational effectiveness are higher, so shareholders are highly satisfied and will reinvest. 3 These companies focus on achieving process control. That is, managers work on the firm as a series

of systems and ensure that the systems are robust and stable, and able to do what is needed: produce goods and services to clients’ required specifications. This field, sometimes called process control and capability, requires a conscious focus on reducing all aspects of variability in processes, whether it is from a machine, materials being processed or how people operate within the firm. Few companies have achieved this capability better than McDonald’s, which gives its clients a high level of value

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in its market segment, through low rates of wastage based on excellent ‘repeatability’ and process stability on a global basis. This capability of outstanding ‘sameness’ comes from strict discipline in designing standard operating procedures (SOPs) and ensuring that all staff ‘live’ these standard operating procedures. McDonald’s goes to a lot of trouble to ensure that their potatoes, beef and, indeed, all other ingredient inputs to their processes have very low variability, so that, coupled with stable preparation processes, they can guarantee their clients a known, stable product as required, with extremely high reliability and ‘constancy’. While ensuring process stability, these firms also drive strong levels of process improvement; these two practices are not in any conflict in the best of firms. Through process improvement, employees behave as if they actually have two jobs. The first job (Job 1) is, of course, to create and deliver the goods and services as required by the customer, with robust delivery performance and conformance quality, to meet client expectations. It does not matter whether the service being produced is an insurance policy, a bottle of soft drink or a university lecture; it is done to the specification and by the book, meaning according to well-defined SOP. However, doing ‘same-old-same-old’ is not enough in great organisations. There is a second job, as illustrated in Exhibit C.3, which involves everybody in the firm. This second job (Job 2) requires employees to be well-informed about the organisation’s performance, especially in terms of its operating outcomes, on elements such as safety, cost, quality, service, delivery and client satisfaction levels. Added to the information that is provided to all employees are a series of tools and ways of thinking such as how to solve problems and drive operating performance permanently forward through process improvement. These tools of ‘continuous improvement’ include problem-solving tools, analysis tools such as the 80:20 rule which helps staff prioritise the main causes of problems, and the ability to determine which activities are value adding and which are not. These staff can then do their second job effectively, which is to constantly strive for ways to improve the primary processes defined as their first job – namely ‘making the stuff’. Readers should note that we acknowledge that at first there might seem to be a contradiction or conflict between the ideals of keeping processes constant and ticking over in exactly the same way so as to minimise variance to customers, and the constant search for process improvement. Actually, there is no conflict, because: ●● Staff live the SOP with minimal variance in their primary job, always ‘doing it by the book’. ●● When someone comes up with a process change idea, it is properly evaluated. If it is decided to institute a process change, then the process SOP is formally unfrozen from its previous definition, redefined and refrozen on the new settings for all staff to see and know about. ●● The change is then widely communicated to all those who need to know about it, and permanently frozen on the new position until it gets formally changed again in the future (if this occurs). So, all staff ‘live’ the SOP and work to enact a series of changes to those SOPs. Indeed, in the very best of firms, there is even a standard way that staff investigate opportunities to improve processes and services, and all staff learn and follow that standard process investigation and change method. In other words, in the best of firms, there are SOPs for how to change and improve the SOPs. This should serve to provide the reader with a sense of just how well the world’s best organisations conduct themselves! Other organisations, which we could label as ‘just ordinary’, lag far behind in their ability to reliably produce and deliver, and simultaneously to improve their SOPs.

Capstone: Making effective management happen

Job #2

Exhibit C.3 The concept of two jobs, of production and of improvement

Improvement of all aspects of workplace (Job #1) processes. Requires training, motivation to improve, data and methods, and usually teamwork Data from measurement of Job #1 processes Inputs, e.g. raw materials

Job #1 Primary processes of making, selling etc. the organisation’s goods and services

Outputs, goods and services

4 Relating to the section above on managing people in the best organisations, the ideas of how quality

is managed must, and do, hinge on high levels of staff engagement. Job 2 is essentially discretionary work effort in most workplaces: if the hearts, minds and even wallets of the staff are not on board, then we should not expect to see a vital set of improvement initiatives, people will comply and do Job 1; many will leave it at that. This was the problem with Western enterprises during much of last century, a phenomenon that caused firms like GM and Ford to lose many customers to companies such as Toyota. Toyota has had a powerful form of Job 2 in place for decades and the others in its market segment have only recently been playing effective catch-up in this regard. So the key to effective process change, and to process improvement, is employee participation, and effort in a motivated staff group.

Innovati o n pr actices As has been discussed throughout this book, leading organisations work hard to find new and different ways to deliver value to their clients.13 They are prepared to reshape their products, services, processes and technologies, and even their strategies, structure and business models, to achieve this aim. The firms that are systematically successful at innovation, as compared with those that have an occasional or ad hoc lucky break, employ a series of practices designed to deliver added value to their clients. These include:14 1 Leadership of innovation. Senior managers in leading organisations do not punish employees who

make decisions ‘out of the box’, and even who make the occasional mistake while doing so. Rather, as in the multinational company Asea Brown Boveri (ABB), which has many business units all over the world (including in Australia and New Zealand), they encourage people to make decisions, take sensible risks and hold the attitude that ‘mistakes are okay as long as your batting average is high’. This approach is very different from companies that manage by fear and inhibit innovation by punishing change initiators, who will then hide their mistakes and try not to take any decisions at all so as not to make mistakes, thus totally stopping the flow of innovation. 2 Encouraging creativity at all levels of the organisation.15 In leading organisations, staff are trained

to be creative, to question existing processes and to volunteer their best ideas. These will be evaluated, feedback on them given and the best of them will be implemented; this is highly satisfying to those staff responsible for the ideas. In many firms, creative ideas are rewarded, with both psychological rewards of staff satisfaction, and sometimes monetary benefits, corporate gifts or similar tangibles. Training provides staff with the ability to evaluate their own ideas first, and to bring the best ones forward to their work teams and supervisors for more formal evaluation and potential implementation.

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3 Strategising for innovation. This means positioning the organisation in market segments in which

innovation will be valued by clients, and prioritising innovation in product and service design, and all of the organisation’s processes. When the organisation explicitly declares a focus on innovation, then employees at all levels will feel authorised to innovate, and will be less likely to feel inhibited from trying new things. This innovation strategy means that innovative efforts will be valued in the firm, as legitimised, and will be likely to spur innovation actions and behaviours. 4 Resourcing the innovation efforts. This involves giving employees the time to work on innovative

projects, as well as training in problem solving and creative thinking. It is likely to include investing in research and product development, and opening up the organisation to outside influences which are innovative. 5 Measuring innovation as a primary dimension of value in the organisation’s value system.

Innovation can be measured in terms of its inputs, processes or outputs. For example, in 3M, a company renowned globally for its innovation, managers are expected to achieve 10 per cent annual revenue growth from new offerings to their markets. 6 Recognising and rewarding staff for their contribution to innovation efforts and achievements.

This gives staff a personal motivation for driving innovation outcomes and achieves the business outcomes as well. Once these building blocks are in place, then the firm can be expected to become innovative, because staff are motivated, strategies, measures and resources are in place, and the behaviour and culture needed for innovation will build on and follow these.

Kn owled ge m anagem ent pr actices Knowledge management means, first, ensuring that everyone in the organisation is able to draw on the collective knowledge of all staff, not just use their own personal knowledge. This requires the organisation to achieve a focus on creating new knowledge, as well as acquiring it effectively from the outside environment. Second, the organisation must be effective at validating this knowledge, capturing and recording it where possible, then sharing it widely among staff, who can adapt and adopt it for business applications. Knowledge management effectiveness allows everyone in an organisation to have access and incentives to use the cumulative knowledge of all their colleagues.16 This is achieved by codified knowledge management systems, and also through person-to-person knowledge management systems. Companies that do this well, such as Schlumberger, Shell Oil, ABB and a host of others, realise that their investment in requiring staff to derive lessons learned from projects, and record this information, pays big dividends. In short, the company has a collective learning curve. For staff, this means that they must feel comfortable in publicising their lessons learned, even when they are learned from mistakes.17 The goal for the organisation is that, just as for individuals, mistakes will only occur once across the organisation. Some forms of knowledge cannot be written down, and these elements are called tacit knowledge, as against the explicit or codifiable knowledge. Some forms of knowledge are not easily amenable to being recorded in computer systems, but thrive through personal communication, so organisations often have internal conferences, communities of practice and special interest groups, in which staff who are conducting similar functions get together regularly to share knowledge. Ford Motor Company reported a benefit of some US$850 million over four years by using its knowledge management facilities to share best practices and avoid mistakes.18 Lee also reported that sharing knowledge on best practices was valuable in all firms.

Capstone: Making effective management happen

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The wonderful thing about knowledge is that, unlike almost every other type of commodity, using knowledge does not use it up. Indeed, the application of knowledge generates further knowledge about its use. There is an investment to be made in a knowledge management capability, which, if made wisely, should provide a handsome return. When maturity is achieved in this regard, every staff member will become a ‘knowledge worker’. Before they start a new initiative or take an important decision, they will check on what the organisation already knows about the subject and be likely to achieve more effective outcomes. Firms that have made knowledge management work for them are making good use of the maxim ‘knowledge is power’. These companies usually have overcome the culture of fear, in order to get people to open up, share their knowledge, and not be insecure about their role and position.19 ➜➜ Quality management provides a consistent approach to creating products and services with low wastage rates and high efficiency and effectiveness.

➜➜ Innovation management is a set of processes that allows organisations to effectively create new forms of value, beyond the existing offerings, and involves new or improved products, services, processes or business models.

Remember This

➜➜ Knowledge management is the process of systematically gathering knowledge, making it widely available throughout the organisation, and fostering a culture of learning.

Deeper principles common to the world’s best organisations Given that it is possible to know of all the practices discussed above, why don’t all organisations have them in place and working strongly to deliver outstanding performance for all stakeholders? We have outlined the key characteristics, from a practical perspective, of sound leadership; best practices in management of staff and customers; and management of organisational quality, innovation and knowledge. Clearly, it is possible to know about these things; just as clearly, it is apparent that excellent managers have many of these practices in place, driving their organisations to achieve high levels of performance. So, if it is possible to know of these things, and know that they work, then why don’t they become widespread in every organisation? Have poorly performing organisations simply not tried to implement these practices? The answer is that managers in most organisations do know of these practices, but that implementation is not as easy as following a recipe from a cookbook. It would appear that certain fundamental ‘preconditions’ need to be in place for these powerful practices to ‘stick’ and deliver when managers try to implement them. Successful implementation of practices requires the organisation to have a set of foundational principles in place (as shown in Exhibit C.1). These principles are outlined below: 1 Agreed purpose and direction throughout the organisation. When managers and staff in an

organisation have a strong alignment in their sense of purpose and organisational strategy and direction, it is much easier to effectively implement initiatives that involve new or changed practices. Purpose is the statement of intent and overall aims of the organisation, usually specified as a set of objectives; while directions is the set of overall priorities of the organisation, which defines the criteria for making key decisions. Hence, before trying to implement any new initiatives, managers should take the time to ensure that all staff are ‘on the bus’ and facing the agreed direction: that is, towards the organisation’s

purpose Purpose is the statement of intent and overall aims of the organisation, usually specified as a set of objectives. direction Direction is the set of overall priorities of the organisation, which defines the criteria for making key decisions and the sense of purpose of its outcomes.

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mission Mission is the high level summary statement of the reason for existence of the organisation and its formal desired purpose.

statement of mission or purpose. Conversely, if staff do not have a shared sense of purpose, then when managers try to introduce a new initiative or set of improved practices, there will likely be disagreement about it. This leads to less than full energy being applied to the implementation, and disappointing results, or even the complete failure of the initiative, leading to deep frustration. So, before trying anything in the way of new practices, managers should check for workforce-wide alignment of values and purpose. 2 Empowered staff with decisions made at the right level. When organisations work well, one basic

micro-management Micro-management is the overly controlling detailed supervision of employees’ actions, often in a meddlesome manner, such that employees’ efforts and creativity become stifled and reduced. project management Project management is the planning and implementation of projects in order to achieve outcomes of cost, timeliness of completion and quality of the specified outcome. accountability Accountability is the ‘answerability’, responsibility and ‘blameworthiness’ of a person or team for a set of outcomes that are agreed to be achieved.

condition must be that decisions are made by the right people at the right level of the organisation. When it works well, the people making decisions are those with the best level of expertise on the matter. If it is a shop-floor matter, meaning an operational decision, it is best made not by a senior executive, but by a person or team who are close to the issue – namely shop-floor staff. Of course, this presupposes that they are both given and accept the responsibility for such decisions and the skills to make those choices. Bigger, longer-term decisions should be made by people who are familiar with the big picture facing the organisation – namely, executives. Linking decisions in between purely short-term operational and larger strategic decisions, which connect strategy to operations, are made by middle management in coordinating roles. So, the more senior an executive, the more long-term the time horizon of decisions and the larger the stakes of those decisions. This establishes that every person in an organisation can be a responsible decision maker. In the best organisations, every person does become a responsible decision maker! They accept accountability for their decisions, and they are trained and capable of making those choices. When shop-floor staff make operational decisions, often in teams, a wonderful benefit is that managers at all levels are not burdened with those tasks and can therefore use that saved time productively to focus on their longer-term challenges. Operating staff feel empowered to ‘run the show’ on a daily basis, which is highly motivating for them. Middle managers find a satisfying role of linking strategic and operational activities, and of teaching and supporting shop-floor staff to drive improvements. When senior managers do not allow the rest of the staff to take on responsibility and decisionmaking authority, we often call it micro-management on the part of managers. Micro-management occurs when managers cannot or do not let go of any power to make decisions, and insist on making even relatively small decisions themselves. When this happens, staff get frustrated, decisions are not made by those with close knowledge of operations, and managers often do not fully attend to strategic matters because they spend too much time working on lower-level details. Micro-management is highly dysfunctional in organisations, and it stops them from effectively implementing any new initiatives or best practices. 3 Execution excellence. In order to achieve successful implementation of best practices and new

initiatives, two deep capabilities are needed. First, to organise the initiative, great organisations use the philosophy and techniques of ‘project management’. This involves decomposing an initiative into its parts, down to individual activities and then assigning these activities to people in such a way that if all those activities are completed to specification, then the initiative will be ‘delivered’. Project management provides the planning and organising structure for initiatives such as introducing new practices. It contains a set of tools for this purpose, such as sequencing tools, critical path analysis, Gantt charts (which plot out the activities on a calendar), and work-breakdown structures. The second core requirement for execution excellence is tough and hard accountability for delivery of agreed commitments.20 In an excellent organisation, delivering on key projects for all staff is not optional or negotiable: it just gets done, regardless of the effort required.

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4 Diligence, focus and discipline. These core ideas refer to the nature and level of effort which is

fundamental to successfully implementing initiatives and new practices. Diligence refers to the level of energy that all staff put in: which is high. There is no shortage of enthusiasm in these companies, and a sense of positive activity that is expected to lead to positive outcomes. Without being unrealistic, there is a ‘can do’ attitude that makes a difference. Focus refers to the notion that these firms do not spread their efforts too thinly on too many initiatives, but instead specialise and concentrate their efforts on doing a few things well. Certain other firms, though, try to implement too many different initiatives, and suffer from initiative fatigue, related to starting a lot more initiatives than they finish. In the worst of organisations, managers seem to jump from fad to fad, never properly resourcing them, and always expecting short-term fixes – which never seem to work. Discipline involves choosing the best way to conduct activities and ensuring that all staff adhere to doing things in that best way. Discipline is a sense of stability and order that provides control over the activities and work processes of the organisation. 5 Learning as a key principle of the organisation. In excellent organisations, everybody is on a quite

formal training and development plan. Everybody has a career path planned. Succession planning is linked to the learning and development plan for individuals and the organisation. For managers and professionals, this means staying current with the leading edge of knowledge in their field by attending conferences, reading journals and professional magazines, or maintaining and upgrading qualifications through continuing education (often called ‘professional development’ by industry associations such as accounting and engineering groups). For tradespeople, it means deepening or broadening their trade skills. Overall, it means that the whole organisation is filled with people who are lifting their knowledge levels in ways that are directly or indirectly related to their contribution at work. In every organisation that is built on staff who are energised through improved knowledge, we see creativity, productivity, and service and quality all improving. It is not unusual to see such organisations improving their competitiveness on all these dimensions at 5 to 10 per cent per year. Imagine what the difference in competitiveness would be after five years of two firms that start at the exact same place, when one is improving through constant staff learning and the other is not.

diligence Diligence is the earnest and persistent application of hard work to required tasks. focus Focus is the prioritisation of work efforts on the ‘vital few’ elements that make a difference rather than the ‘trivial many’ less important tasks. initiative fatigue Initiative fatigue is the attitude and subsequent behaviour of workplace tiredness, leading to less than full enthusiasm or cooperation with workplace programs because of their large number. discipline Discipline is the workplace approach to consistently conducting processes and activities in the same standard way, often specified as ‘standard operating procedures’.

6 Integrity, values and the ethical high road. These organisations are value driven, in that they

decide to have a strong set of central ‘high’ ideals that guide behaviour, and they ask all staff to ‘sign on’ to these. This idea of values strongly fits with the sense of the ethical high road: the idea that these companies and their staff are expected to never cheat, lie or ‘scam’ any stakeholder – ever. It is about integrity.21 In short, we have discovered that these companies have an embedded behaviour of honesty, meaning telling the whole truth, always. This means not accepting behaviour that does not fit with the values, and never accepting immoral or illegal behaviour. It also means dealing with customers, and even underperforming staff, with full honesty.22 7 Distinctive capabilities and position. Successful companies have just one or two distinctive

capabilities that are lasting sources of competitive advantage. These can arise due to superior technology, superior culture, a distinctively better business model or any other specific point of difference. Since any single point of comparative advantage only lasts a few years before being whittled away by competitive forces, to make these advantages last longer, companies reinvest in them, refocusing them and continuing to sharpen them up. Sony kept its advantage in consumer electronics for over 20 years due to outstanding technology and marketing lasting, through continued cycles of investment, until the gap was finally closed through the extraordinary efforts of companies such as

ethical high road Ethical behaviour is the high standard of behaviour meaning behaviour that will not cheat, lie or scam any stakeholder, and will pursue the highest standards of honesty and integrity. integrity Steadfast adherence to a strict moral or ethical code of honesty. point of difference A differentiating aspect of the organisation, that distinguishes it from its competitors, as perceived by key stakeholders such as customers or investors.

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Samsung. BMW and Mercedes both had a technical and a luxury brand advantage for over 30 years, which Lexus brand (part of Toyota) and Honda have significantly eroded in the past decade. During the 1980s and 1990s, National Australia Bank had a distinct advantage over its competitors through lower cost structures and superior risk management processes, which have now been eroded. These examples show how such distinctive capabilities can deliver years of benefits, but also that ‘nothing lasts forever’. Once BHP and Billiton merged to create the world’s largest mining company (with its head office in Melbourne), it created a distinctive advantage over its rivals based on economies of scale. Newcrest, an Australian-based gold and copper mining company, has built and used innovation, introducing new technologies and process improvements in order to reduce its costs of production. It has become more profitable than ever before. Microsoft has leveraged its very extensive customer reach, having some 90 per cent market share of office and browser markets, to extend its brand and product leadership over some 30 years, through reinvesting in its product leadership based advantages. On the other hand, Apple has more recently taken a leading position in phones and music markets through both hardware and software production (iPod, iPhone, iPad and related software), and even more recently through distinctive sales and distribution dominance (Apple stores and iTunes). Apple, like Microsoft, is not waiting for competitors to catch up – a recipe for mediocrity – but continuing to forge ahead with more and more distinctive offerings to its customers.

Values can come from Mars Mars Corporation is a major privately owned corporation, and is part of the Mars family. It generates global sales of over $30 billion through confectionery and pet food activities in many countries. Most readers will know of famous products such as Mars bars; many would be unaware, though, that Mars also owns many of the leading brands of pet food. This company is very strongly values driven, and lives to its five values of: ➜➜Quality: The consumer is our boss, quality is our work and value for money is our goal. ➜➜Responsibility: As individuals, we demand total responsibility from

ourselves: as associates, we support the responsibilities of others. ➜➜Mutuality: A mutual benefit is a shared benefit: a shared benefit will endure. ➜➜Efficiency: We use resources to the full, waste nothing and do only what we can do best. ➜➜Freedom: We need freedom to shape our future: we need profit to remain free. Since it began, this company has urged all staff to live these values and guide their behaviour at work through these values. These specific values are not suitable for all companies, but they have certainly suited Mars Corporation for a very long time.

Source: 123rf/Leah-Anne Thompson

Case study

These deep principles, combined with agreed strategy, empowered staff, execution, implementation excellence and constant learning, provide a base of organisational capability that makes it possible for practices and initiatives in areas such as customer focus, innovation, knowledge management and others to stick in place, work properly and deliver consistent performance improvements. Imagine a company in which these deep principles are absent, or only in place to a weak degree: the strategy is not agreed, staff are poorly empowered and implementation is undisciplined; newly introduced practices and initiatives will not take hold and will instead be like spinning wheels with no traction.

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Putting it all together: the organisation as a system In the best organisations, the principles described in this chapter are strong, and the practices in areas such as leadership, quality customer focus and people management are strong. As a result, the performance outcomes for all stakeholders are also strong. The whole organisation works like a beautifully oiled machine, in the sense that there is little or no dysfunction, and the organisation’s functions, activities and subsystems just work well. Exhibit C.4 shows this set of systems. First, consider strategy as the direction-setting process of the organisation. Strategy is set as the distinct focus of the organisation that tells everyone inside and outside what the focus and priorities are. Strategy provides the fit between the organisation’s capabilities, current and future, and the business environment. Examples of generic strategies are lean/low cost, distinction through quality/superior service, product leadership, flexibility and innovativeness. Whichever of these is chosen, the next core building block is the organisation’s delivery system, namely its operating processes. In a great organisation, the operating systems are designed precisely to deliver the specific strategy. There is no disconnect between the stated strategy and the operational capability to deliver it. See also Chapter 8 for a discussion of strategy. Strategy

Concept Revision

Audio summary

operating processes Operating processes are the set of direct and support activities within every organisation that create its products and services.

Exhibit C.4 Overall organisation as a system

Positioning in a market, fit with business environment and capabilities

Operating practices Production and various support activities

Behaviour and culture

Measures of performance

Performance oriented for the business

E.g. operating and business performance

Rewards and recognition Pay, promotion, satisfaction

Next in the system is the firm’s core measurement system, which is the process of assessing and reporting the key performance parameters of the organisation that provides information about its progress towards achieving its goals. Key performance indicators (KPIs) are set to match the strategy, because ‘what gets measured gets done’. These organisations know that they must match their measures to the overall strategy and the focus of the operations. So, if the competitive strategy is all about being innovative,

core measurement system Core measurement system is the process of assessing and reporting the key performance parameters of the organisation that provides information about its progress towards achieving its goals. key performance indicators (KPIs) Key performance indicators (KPIs) are the focused set of important metrics that describe the organisation’s performance in delivering its strategy.

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and the operations are resourced to deliver innovation, then the key measures must be innovation. At 3M, they certainly are. The same applies to Toyota and its focus on productivity and quality, and Ritz Carlton hotels and its focus on quality. Next come the factors that align outcomes for staff and for the organisation as a whole. Staff always need to know the answer to what is colloquially known as the ‘WIFM’ question, in which the letters stand for, ‘What’s in it for me?’ Great organisations have a comprehensive answer to this question, in that the very things that measure and make the organisation successful are exactly aligned to the things that make individuals successful. This means that some combination of pay, promotion prospects and psychological rewards, as referred to earlier in this chapter, are set to reflect the organisation’s KPIs. The system of management by objectives (MBO) reflects these individual and team goals and is directed by the system of KPIs. Once this is achieved, then the organisation can be assured that its staff will be directed to deliver the organisation’s goals, which is fundamental to the very definition of management’s role. Once the staff have their sights set and focused on achieving the things that will make their personal, and simultaneously the organisation’s, goals come to fruition, then the behaviour and culture will be correctly focused on delivering the strategy. In summary, strategy defines direction and sets priorities to accompany the delivery cycle of operations practices, performance measures (KPIs), personal rewards and recognition, and the overall culture and behaviour of the organisation.

➜➜ Excellent organisations have some deeper principles strongly in place, such as an organisation-wide sense of integrity, execution (implementation excellence), delegation of authority,



accountability and investment in learning.

➜➜ Organisations that sustain success have a holistic framework that makes sense of and connects their

Discussion Questions

1  Conduct some research (via books, journals and the Internet) on a well-known business or government leader. What is it about his or her leadership style that has contributed to their success?

2  Look up the Fortune Magazine set of ‘Top 100 employers to work for’ on the Internet. What are some of the most important human resource management practices of these companies? 3 Discuss an example of a service experience you have had in which excellent customer service was given, and contrast it with one where you received poor service. What resulting approach to repurchasing from those suppliers will you have? What differences in staff behaviour and attitude did you observe? What management practice do you think might have led to this difference?

strategy, operational priorities, key measures and performance indicators, recognition and reward systems and culture/ behaviour.

Remember this

4 Describe a company or product that you like because it is innovative. Would it be an attractive place to work, and why? Can the company charge a premium price for its services? Does its bottom line outcome benefit from being innovative? 5 Through online or offline research, find an example of an organisation that is active in knowledge management. Describe the organisation’s knowledge management methods and the business benefits that result. 6 Select an organisation with which you are familiar. Discuss its strengths and weaknesses in relation to the core principles described in this chapter. How could the organisation’s performance on two of these principles be improved?

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U n d e r s ta n d i n g h o w a n ORGANISATION w o r k s

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Gr oup challenge

Pick an organisation with which you are familiar, perhaps where one of you has worked, or even the university that you study at, and examine it with respect to the elements of Exhibit C.4. For each box in Exhibit C.4, describe what you know about how that organisation works. Further, if

your group was in charge, what policies and conditions would you ideally put in place for each box of Exhibit C.4?

1 Montgomery, Cynthia A. (1 January 2008). Putting Leadership Back into Strategy. Harvard Business Review. 2 Heineman, Ben W., Jr. (1 April 2007). Avoiding Integrity Land Mines. Harvard Business Review. 3 O’Toole, James and Warren G. Bennis. (1 June 2009). What’s Needed Next: A Culture of Candor, Harvard Business Review. 4 Goleman, Daniel and Richard Boyatzis. (1 September 2008). Social Intelligence and the Biology of Leadership. Harvard Business Review. 5 Field, Anne. (1 July 2007). Leadership That Focuses on the Customer – Really. Harvard Business Review. 6 Gulati, Ranjay. (1 May 2007). Silo Busting: How to Execute on the Promise of Customer Focus. Harvard Business Review. 7 Kanter, Rosabeth Moss. (1 April 2011). Cultivate a Culture of Confidence. Harvard Business Review. 8 Amar, Carsten Hentrich and Vlatka Hlupic. (1 December 2009). To Be a Better Leader, Give Up Authority. Harvard Business Review. 9 Rooke, David and William R. Torbert. (1 April 2005). Seven Transformations of Leadership. Harvard Business Review. 10 George, William W., Peter Sims, Andrew N. McLean, David Mayer and Diana Mayer. (1 February 2007). Discovering Your Authentic Leadership. Harvard Business Review. 11 Field. Leadership That Focuses on the Customer. 12 Porter, Michael E. and Mark R. Kramer. (1 December 2006). Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility. Harvard Business Review. 13 Drucker, Peter, F. (1 August 2002). Discipline of Innovation, Harvard Business Review; Day, George S. (1 December 2007). Is It Real? Can We Win? Is It Worth Doing? Managing Risk and Reward in an Innovation Portfolio. Harvard Business Review.

14 Frangos, Cassandra A. (14 January 2011). How to Embed Innovation into Your Organizational Culture. Harvard Business Review. 15 Coyne, Kevin P., Patricia Gorman Clifford, Renee Dye, Teresa M. Amabile, Dorothy Leonard, Susan Straus and Ed Catmull. (1 September 2008). Secrets of Successful Innovation. Harvard Business Review. 16 Pugh, Katrina and Nancy M. Dixon. (1 May 2008). Don’t Just Capture Knowledge – Put It to Work. Harvard Business Review. 17 Edmondson, Amy C. (1 April 2011). Strategies for Learning from Failure. Harvard Business Review. 18 Lee, D. (February 2010). Managing Know How. Management Science, 56:2, 270(16). 19 Cohen, Don. (1 December 2006). What’s Your Return on Knowledge? Harvard Business Review. 20 Bevington,T. and Samson, D. (2012). Implementing Strategic Change (London: Kogan Page). 21 Bazerman, Max H. and Ann E. Tenbrunsel. (1 April 2011). Ethical Breakdowns. Harvard Business Review. 22 Wood, G. (2000). A cross cultural comparison of the contents of codes of ethics: USA, Canada and Australia. Journal of Business Ethics; Wood, G. and Callaghan, M. Communicating the Ethos of Codes of Ethics in Corporate Australia, 1995–2001: Whose Rights, Whose Responsibilities? Employee Responsibilities and Rights Journal, 15:4, 209–21; Singh, Jang, Emily Carasco, Goran Svensson, Greg Wood and Michael Callaghan. (February 2005). A comparative study of the contents of corporate codes of ethics in Australia, Canada and Sweden. Journal of World Business, 40:1, 91–109.

Endnotes

Go to http://login.cengagebrain.com to access CourseMate, your online study tool for Management. CourseMate brings chapter concepts to life with interactive learning, study and exam preparation tools: ➜ extend your knowledge with Internet research activities and useful weblinks ➜ use the interactive flashcards to revise relevant key terms and their definitions ➜ apply your knowledge to the case projects.

Cour seMate

Glossary A 360-degree feedback  A process that

uses multiple raters, including self-rating, to appraise employee performance and guide development. accountability  The fact that the people with authority and responsibility are subject to reporting and justifying task outcomes to those above them in the chain of command. achievement culture  A results-oriented culture that values competitiveness, personal initiative and achievement. activity ratio  A financial ratio that measures the organisation’s internal performance with respect to key activities defined by management. adaptability culture  Characterised by values that support the company’s ability to interpret and translate signals from the environment into new behaviour responses. adjourning  The stage of team development in which members prepare for the team’s disbandment. administrative model  A decision-making model that describes how managers actually make decisions in situations characterised by non-programmed decisions, uncertainty and ambiguity. administrative principles  A sub-field of the classical management perspective that focused on the total organisation rather than the individual worker, delineating the management functions of planning, organising, commanding, coordinating and controlling. alienated follower  A person who is an independent, critical thinker but is passive in the organisation. ambidextrous approach  Incorporating structures and processes that are appropriate for both the creative impulse and for the systematic implementation of innovations. ambiguity  The goals to be achieved or the problems to be solved are unclear, alternatives are difficult to define and information about outcomes is unavailable. angel financing  Financing provided by a wealthy individual who believes in the idea for a start-up and provides personal funds and advice to help the business get started. application form  A device for collecting information about an applicant’s education, previous job experience and other background characteristics.

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assessment centre  Used to select individuals

with high managerial potential based on their performance on a series of simulated managerial tasks. attitude  A cognitive and affective evaluation that predisposes a person to act in a certain way. attributions  Judgements about what caused a person’s behaviour – either characteristics of the person or of the situation. authentic leadership  Individuals who know and understand themselves, who espouse and act consistent with higher-order ethical values and who empower and inspire others with their openness and authenticity. authoritarianism  The belief that power and status differences should exist within the organisation. authority  The formal and legitimate right of a manager to make decisions, issue orders and allocate resources to achieve organisationally desired outcomes. avoidance learning  The removal of an unpleasant consequence following desired behaviour.

B balance sheet  A financial statement that

shows the firm’s financial position with respect to assets and liabilities at a specific point in time. balanced scorecard  A management control system that balances traditional financial measures with operational measures relating to a company’s critical success factors. BCG matrix  A concept developed by the Boston Consulting Group that evaluates strategic business units with respect to the dimensions of business growth rate and market share. behaviour modification  The set of techniques by which reinforcement theory is used to modify human behaviour. behavioural sciences approach  A sub-field of the humanistic management perspective that applies social science in an organisational context, drawing from economics, psychology, sociology and other disciplines.

behaviourally anchored rating scale (BARS) 

A rating technique that relates an employee’s performance to specific job-related incidents. benchmarking  The continuous process of measuring products, services and practices against major competitors or industry leaders. Big Five personality factors  Dimensions that describe an individual’s extroversion, agreeableness, conscientiousness, emotional stability and openness to experience.

bottom-up approach  Encouraging the flow of ideas from lower levels and making sure they are heard and acted upon by top executives. bottom-up budgeting  A budgeting process in which lower-level managers budget their departments’ resource needs and pass them up to top management for approval. boundary-spanning roles  Roles assumed by people and/or departments that link and coordinate the organisation with key elements in the external environment. bounded rationality  The concept that people have the time and cognitive ability to process only a limited amount of information on which to base decisions. brainstorming  A decision-making technique in which group members present spontaneous suggestions for problem solution, regardless of their likelihood of implementation, in order to promote freer, more creative thinking within the group. budgetary control  Budgetary control is the process of setting specific financial plans in place, then managing in real time to achieve those plans, carefully attending to variations between plans and ‘actuals’. bureaucratic organisation  A sub-field of the classical management perspective that emphasised management on an impersonal, rational basis through such elements as clearly defined authority and responsibility, formal record keeping, and separation of management and ownership. business incubator  An innovation that provides shared office space, management support services and management advice to entrepreneurs. business intelligence software  Software that analyses data from multiple sources and extracts useful insights, patterns and relationships that might be significant. business plan  A document specifying the business details prepared by an entrepreneur in preparation for opening a new business. business-level strategy  The level of strategy concerned with the question: ‘How do we compete?’ It relates to each business unit or product line within the organisation.

C capital budget  A budget that plans and reports investments in major assets to be depreciated over several years. cash budget  A budget that estimates and reports cash flows on a daily or weekly basis to ensure that the organisation has sufficient cash to meet its obligations.

cellular layout  A facilities layout in which machines dedicated to sequences of production are grouped into cells in accordance with grouptechnology principles. central planning department  A group of planning specialists who develop plans for the organisation as a whole and its major divisions and departments, and typically report to the CEO. centralisation  The location of decision authority near top organisational levels. centralised network  A team communication structure in which team members communicate through one individual to solve problems or make decisions. ceremony  A planned activity that makes up a special event and is conducted for the benefit of an audience. certainty  All the information the decision maker needs is fully available. chain of command  An unbroken line of authority that links all individuals in the organisation and specifies who reports to whom. change agent  An OD specialist who contracts with an organisation to facilitate change. changing  The intervention stage of organisation development in which individuals experiment with new workplace behaviour. channel  The carrier of a communication. channel richness  The amount of information that can be transmitted during a communication episode. charismatic leader  A leader who has the ability to motivate employees to transcend their expected performance. chief ethics officer  A manager who oversees all aspects of ethics and legal compliance. classical model  A decision-making model based on the assumption that managers should make logical decisions that will be in the organisation’s best economic interests. classical perspective  A management perspective that emerged during the nineteenth and early twentieth centuries that emphasised a rational, scientific approach to the study of management and sought to make organisations efficient operating machines. closed system  A system that does not interact with the external environment. coaching  A method of directing, instructing and training a person with the goal to develop specific management skills. coalition  An informal alliance among managers who support a specific goal. code of ethics  A formal statement of the organisation’s values regarding ethics and social issues.

coercive power  Power that stems from the authority to punish or recommend punishment. cognitive dissonance  A condition in which two attitudes or a behaviour and an attitude conflict. collaboration  A joint effort between people from two or more departments to produce outcomes that meet a common goal or shared purpose. collectivism  A preference for a tightly knit social framework in which individuals look after one another and organisations protect their members’ interests. communication  The process by which information is exchanged and understood by two or more people, usually with the intent to motivate or influence behaviour. communication apprehension  An individual’s level of fear or anxiety associated with real or anticipated communication. company  A legal entity created and registered by the government and existing apart from its owners. compensation  Monetary payments (wages, salaries) and non-monetary goods/ commodities (benefits, holidays) used to reward employees. compensatory justice  The concept that individuals should be compensated for the cost of their injuries by the party responsible and also that individuals should not be held responsible for matters over which they have no control. competitive advantage  What sets the organisation apart from others and provides it with a distinctive edge in the marketplace. competitors  Other organisations in the same industry or type of business that provide goods or services to the same set of customers. conceptual skill  The cognitive ability to see the organisation as a whole and the relationship among its parts. conflict  Conflict involves disagreement between stakeholders involved in a decision or activity, usually as to which course of action or strategy should be preferred. conformist  A follower who participates actively in the organisation but does not use critical thinking skills. consideration  The extent to which the leader is mindful of subordinates, respects their ideas and feelings, and establishes mutual trust. consistency culture  A culture that values and rewards a methodical, rational, orderly way of doing things. content theories  A group of theories that emphasise the needs that motivate people. contingency approach  A model of leadership that describes the relationship between

leadership styles and specific organisational situations. contingency plans  Plans that define organisation responses to specific situations, such as emergencies, setbacks or unexpected conditions. contingency view  An extension of the humanistic perspective in which the successful resolution of organisational problems is thought to depend on managers’ identification of key variables (or contingencies) in the situation at hand. contingent workers  People who work for an organisation, but not on a permanent or fulltime basis, including temporary placements and contracted employees. continuous improvement  The implementation of a large number of small, incremental improvements in all areas of the organisation on an ongoing basis. controlling  The management function concerned with monitoring employees’ activities, keeping the organisation on track towards its goals and making corrections as needed. coordination  The managerial task of adjusting and synchronising the diverse activities among different individuals and departments. core competence  A business activity that an organisation does particularly well in comparison to competitors. core measurement system  Core measurement system is the process of assessing and reporting the key performance parameters of the organisation that provides information about its progress towards achieving its goals. corporate governance  The system of governing an organisation so that the interests of corporate owners are protected. corporate-level strategy  The level of strategy concerned with the question: ‘What business are we in?’ It pertains to the organisation as a whole and the combination of business units and product lines that make it up. corporate social responsibility (CSR)  The obligation of organisation management to make decisions and take actions that will enhance the welfare and interests of society as well as the organisation.

corporate social responsibility (CSR) report  Is the publication of the organisation’s

record of activities and performance outcomes on social/community and environmental impacts and outcomes, as well as the usual financial performance report. corporate university  An in-house training and education facility that offers broad-based learning opportunities for employees. glossary

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cost leadership  A type of competitive strategy

with which the organisation aggressively seeks efficient facilities, cuts costs and employs tight cost controls to be more efficient than competitors. creativity  The generation of novel ideas that may meet perceived needs or offer opportunities for the organisation. crisis management plan (CMP)  A detailed written plan that specifies the steps to be taken, and by whom, if a crisis occurs. critical thinking  Thinking independently and being mindful of the effect of one’s behaviour on achieving goals. cross-functional team  A group of employees assigned to a functional department that meets as a team to resolve mutual problems. crowdfunding  Funding that is raised from a large number of investors giving small amounts of money; typically through social media and the Internet. cultural competence  The ability to interact effectively with people of different cultures. cultural leader  Defines and articulates important values that are tied to a clear and compelling mission. culture  The shared knowledge, beliefs, values, behaviours and ways of thinking among members of a society. culture change  A major shift in the norms, values, attitudes and mindset of the entire organisation.

customer relationship management (CRM)  Systems that help companies keep in close touch with customers, collect and manage customer data, and collaborate with customers to provide the most valuable products and services. customers  People and organisations in the environment who acquire goods or services from the organisation.

D debt financing  Borrowing money that has

to be repaid at a later date in order to start a business. decentralisation  The dispersed location of decision authority, usually near lower organisational levels. decentralised control  The use of organisational culture, group norms and a focus on goals, rather than rules and procedures, to foster compliance with organisational goals. decentralised network  A team communication structure in which team

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glossary

members can communicate freely with each other and arrive at decisions together. decentralised planning  Managers work with planning experts to develop their own strategic plans. decision  A choice made from available alternatives. decision making  The process of identifying problems and opportunities and then resolving them. decision style  Differences among people with respect to how they perceive problems and make decisions. decode  To translate the symbols used in a message for the purpose of interpreting its meaning. delegation  The process managers use to transfer authority and responsibility to positions below them in the hierarchy. departmentalisation  The basis on which individuals are grouped into departments and departments into total organisations. descriptive  An approach that describes how managers actually make decisions, rather than how they should. diagnosis  The step in the decision-making process in which managers analyse underlying causal factors associated with the decision situation. digital factories  A system that uses advanced technologies, digitally controlled, to allow for adaptation to produce a range of products. differentiation  A type of competitive strategy with which the organisation seeks to distinguish its products or services from those of its competitors. diligence  Diligence is the earnest and persistent application of hard work to required tasks. direct investing  An entry strategy in which the organisation is involved in managing its production facilities in a foreign country. direction  Direction is the set of overall priorities of the organisation, which defines the criteria for making key decisions and the sense of purpose of its outcomes. discipline  Discipline is the workplace approach to consistently conducting processes and activities in the same standard way, often specified as ‘standard operating procedures’. discretionary responsibility  Organisational responsibility that is voluntary and guided by the organisation’s desire to make social contributions not mandated by economics, law or ethics. discretionary work effort  Discretionary work effort is the effective activity by staff above and beyond an acceptable norm or minimum.

discrimination  When someone acts out their prejudicial attitudes towards people who are the targets of their prejudice. disruptive innovation  Innovations in products, services or processes that radically change an industry’s rules of the game for producers and consumers. distributive justice  The concept that different treatment of people should not be based on arbitrary characteristics. In the case of substantive differences, people should be treated differently in proportion to the differences among them. distributive negotiation  A competitive and adversarial approach in which each party strives to get as much as it can, usually at the expense of the other party. diversification  The strategy of moving into new lines of business. diversity of perspective  A manager creates a heterogeneous team made up of individuals with diverse backgrounds and skill sets. divisional structure  An organisation structure in which departments are grouped based on similar organisational outputs. downward communication  Messages and information sent from top management down to employees. dynamic capabilities  Leveraging and developing more from the firm’s existing assets, capabilities and core competencies in a way that will provide a sustained competitive advantage.

E e-business  Any business that takes place by

digital processes over a computer network rather than in physical space. e-commerce  Business exchanges or transactions that occur electronically. E→P expectancy  Expectancy that putting effort into a given task will lead to high performance. economic dimension  The dimension of the general environment representing the overall economic health of the country or region in which the organisation functions. economic forces  Forces that affect the availability, production and distribution of a society’s resources among competing users. effective follower  A critical, independent thinker who actively participates in the organisation. effectiveness  The degree to which the organisation achieves a stated goal. efficiency  The use of minimal resources – raw materials, money and people – to produce a desired volume of output.

electronic brainstorming  Bringing people together in an interactive group over a computer network to suggest alternatives; sometimes called brainwriting. emotional intelligence  A theory that assesses personality by examining the capacity for selfawareness, self-management, social awareness and relationship awareness. emotions  Mental states that arise spontaneously within a person based on interaction with the environment rather than through conscious effort and often accompanied by physiological changes or sensations. employer brand  Aims to make the organisation seem like a highly desirable place to work. employment tests  Assess candidates on various factors considered important for the job to be performed and include cognitive ability tests, physical ability tests and personality tests. empowerment  The delegation of power and authority to employees. encode  To select symbols with which to compose a message. engagement  An emotional and mental state in which employees enjoy their work, contribute enthusiastically to meeting goals, and feel a sense of belonging and commitment to the organisation. enterprise resource planning (ERP) system  A networked information system that

collects, processes and provides information about an organisation’s entire enterprise, from the identification of customer needs and receipt of orders to the distribution of products and receipt of payments. entrepreneur  Someone who recognises a viable idea for a business product or service and carries it out. entrepreneurship  The process of initiating a business venture, organising the necessary resources and assuming the associated risks and rewards. entropy  The tendency for a system to run down and die. equity  A situation that exists when the ratio of one person’s outcomes to inputs equals that of another’s. equity financing  Financing that consists of funds that are invested in exchange for ownership in the company. equity theory  A process theory that focuses on individuals’ perceptions of how fairly they are treated relative to others. escalating commitment  Escalating commitment involves overly supporting a strategy, decision or activity even though rational thought would indicate the contrary.

ERG theory  A modification of the needs hierarchy theory that proposes three categories of needs: existence, relatedness and growth. ethical dilemma  A situation that arises when all alternative choices or behaviours have been deemed undesirable because of potentially negative ethical consequences, making it difficult to distinguish right from wrong. ethical high road  The high standard of behaviour that will not cheat, lie or scam any stakeholder, and will pursue the highest standards of honesty and integrity. ethics  The code of moral principles and values that governs the behaviours of a person or group with respect to what is right or wrong. ethics committee  A group of executives assigned to oversee the organisation’s ethics by ruling on questionable issues and disciplining violators. ethnocentrism  The belief that one’s own group or subculture is inherently superior to other groups or cultures. ethnorelativism  The belief that groups and subcultures are inherently equal. euro  The single European currency that has replaced 17 national currencies in the EU. The eight coins have one side common to all countries and a reverse side specific to each country. The seven different banknotes look the same in each country. evaluation  The step in the decision-making process that involves decision makers gathering information that tells them how well the decision was implemented and whether it was effective in achieving its goals. exchange rate  The rate at which one country’s currency is exchanged for that of another country. exit interview  An interview conducted with departing employees to determine reasons for their departure and learn about potential problems in the organisation. expatriates  Employees who live and work in a country other than their own. expectancy theory  A process theory that proposes that motivation depends on individuals’ expectations about their ability to perform tasks and receive desired rewards. expense budget  A budget that outlines the anticipated and actual expenses for a responsibility centre. expert power  Power that stems from special knowledge of or skill in tasks performed by employees. expert-locator systems  Computerised systems that identify and catalogue experts in a searchable database so people can quickly identify who has knowledge they can use.

exporting  An entry strategy in which the

organisation maintains its production facilities within its home country and transfers its products for sale in foreign markets. extinction  Withdrawing a positive or reinforcing reward, leading to the cessation of a behaviour. extranet  An external communications system that uses the Internet and is shared by two or more organisations. extrinsic reward  A reward given by another person.

F fast-cycle team  A multi-functional team that is provided with high levels of resources and empowerment to accomplish an accelerated product development project. feedback  A response by the receiver to the sender’s communication. feedback control  Control that focuses on the organisation’s outputs; also called post-action or output control. femininity  A cultural preference for cooperation, group decision making and quality of life. finished-goods inventory  Inventory consisting of items that have passed through the complete production process but have yet to be sold. first-line manager  A manager who is at the first or second management level and is directly responsible for the production of goods and services. fixed-position layout  A facilities layout in which the product remains in one location and the required tasks and equipment are brought to it. flat structure  A management structure characterised by an overall broad span of control and relatively few hierarchical levels. focus  Focus is the prioritisation of work efforts on the ‘vital few’ elements that make a difference rather than the ‘trivial many’ less important tasks. focus strategy  A type of competitive strategy that emphasises concentration on a specific regional market or buyer group. force-field analysis  The process of determining which forces drive and which resist a proposed change. formal communication channel  A communication channel that flows within the chain of command or task responsibility defined by the organisation. formalisation  The written documentation used to direct and control employees. forming  The stage of team development characterised by orientation and acquaintance. glossary

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franchising  An arrangement by which the owner of a product or service allows others to purchase the right to distribute the product or service with help from the owner; a form of licensing in which an organisation provides its foreign franchisees with a complete assortment of materials and services. free rider  A person who benefits from team membership but does not make a proportionate contribution to the team’s work. frustration–regression principle  The idea that failure to meet a high-order need may cause a regression to an already satisfied lower-order need. functional manager  A manager who is responsible for a department that performs a single functional task and has employees with similar training and skills. functional structure  An organisation structure in which positions are grouped into departments based on similar skills, expertise and resource use. functional team  A team composed of a manager and his or her subordinates. functional-level strategy  The level of strategy concerned with the question: ‘How do we support the business-level strategy?’ It relates to all of the organisation’s major departments. fundamental attribution error  The tendency to underestimate the influence of external factors on another’s behaviour and to overestimate the influence of internal factors.

G general environment  The layer of the external

environment that affects the organisation indirectly. general manager  A manager who is responsible for several departments that perform different functions. glass ceiling  An invisible barrier that separates women and minorities from top management positions. global mindset  The ability to appreciate and influence individuals, groups, organisations and systems that represent different social, cultural, political, institutional, intellectual and psychological characteristics. global outsourcing  Engaging in the international division of labour so as to obtain the cheapest sources of labour and supplies regardless of country; also called global offshoring.

Global Reporting Initiative (GRI) Index  Global Reporting Initiative (GRI) Index

is a comprehensive measurement system aiming to provide an assessment of an organisation’s

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sustainability actions and outcomes on a broad basis. global team  A cross-border team that is made up of different nationalities whose activities span multiple countries. goal  A desired future state that the organisation attempts to realise. goal-setting theory  Motivation can be increased and performance enhanced by setting specific, challenging goals and providing timely feedback. grapevine  An informal, person-to-person communication network of employees that is not officially sanctioned by the organisation. greenfield venture  The most risky type of direct investment, whereby a company builds a subsidiary from scratch in a foreign country. groupthink  Groupthink involves members of a group agreeing a position on a decision or issue, in order to avoid conflict or disagreement, sometimes overly influenced by a dominating ‘opinion leader’. groupware  Software that works on a computer network or the Internet to facilitate information sharing, collaborative work and group decision making.

H halo effect  A type of rating error that occurs

when an employee receives the same rating on all dimensions regardless of his or her performance on individual ones. Hawthorne studies  A series of experiments on worker productivity, begun in 1924 at the Hawthorne plant of Western Electric Company in Illinois, attributed employees’ increased output to managers’ better treatment of them during the study. hero  A figure who exemplifies the deeds, character and attributes of a strong corporate culture. hierarchical control  The use of rules, policies, hierarchy of authority, reward systems, and other formal devices to influence employee behaviour and assess performance. hierarchy of needs theory  A content theory that proposes that people are motivated by five categories of needs – physiological, safety, belongingness, esteem and self-actualisation – that exist in a hierarchical order. high-context culture  A culture in which communication is used to enhance personal relationships. high-performance culture  Created when managers emphasise both values and business results.

horizontal communication  The lateral or diagonal exchange of messages among peers or co-workers. horizontal linkage model  An approach to product change that emphasises shared development of innovations among several departments. human capital  The economic value of the knowledge, experience, skills and capabilities of employees. human relations movement  A movement in management thinking and practice that emphasised satisfaction of employees’ basic needs as the key to increased worker productivity. human resource information system  An integrated computer system designed to provide data and information used in HR planning and decision making. human resource management (HRM)  Activities undertaken to attract,

develop and maintain an effective workforce within an organisation. human resource planning  The forecasting of human resources needs and the projected matching of individuals with expected job vacancies. human resources perspective  A management perspective that suggests jobs should be designed to meet higher-level needs by allowing workers to use their full potential. human skill  The ability to work with and through other people and to work effectively as a group member. humanistic perspective  A management perspective that emerged around the late nineteenth century that emphasised understanding human behaviour, needs and attitudes in the workplace. humility  Being unpretentious and modest rather than arrogant and prideful. hygiene factors  Factors that involve the presence or absence of job dissatisfiers, including working conditions, pay, company policies and interpersonal relationships.

I idea champion  A person who sees the need

for and champions productive change within the organisation. idea incubator  An in-house program that provides a safe harbour where ideas from employees throughout the organisation can be developed without interference from company bureaucracy or politics. implementation  The step in the decisionmaking process that involves using managerial,

administrative and persuasive abilities to translate the chosen alternative into action. inclusion  The degree to which an employee feels like an esteemed member of a group in which his or her uniqueness is highly appreciated. income statement  A financial statement that summarises the firm’s financial performance for a given time interval; sometimes called a profitand-loss statement. individualism  A preference for a loosely knit social framework in which individuals are expected to take care of themselves. individualism approach  The ethical concept that acts are moral when they promote the individual’s best long-term interests, which ultimately leads to the greater good. influence  The effect that a person’s actions have on the attitudes, values, beliefs or behaviour of others. information  Data that has been converted into a meaningful and useful context for the receiver. information technology (IT)  The hardware, software, telecommunications, database management and other technologies used to store, process and distribute information. infrastructure  A country’s physical facilities that support economic activities. initiating structure  The degree of task behaviour; the extent to which the leader is task oriented and directs subordinate work activities towards goal alignment. initiative fatigue  Initiative fatigue is the attitude and subsequent behaviour of workplace tiredness, leading to less than full enthusiasm or cooperation with workplace programs because of their large number. instant messaging (IM)  Electronic communication that allows users to see who is connected to a network and share information instantly. integrative negotiation  A collaborative approach based on a win-win assumption, whereby the parties want a creative solution that benefits both sides of the conflict. integrity  Steadfast adherence to a strict moral or ethical code of honesty. intelligence team  A cross-functional group of managers and employees who work together to gain a deep understanding of a specific business issue and offer insight and recommendations for planning. interactive leadership  The focus on minimising personal ambition and developing others. internal environment  Includes elements within the organisation’s boundaries, such as employees, management and corporate culture.

international dimension  The portion of the external environment that represents events originating in foreign countries, as well as opportunities for local organisations in other countries.

international human resource management (IHRM)  A subfield of human resource

management that addresses the complexity that results from recruiting, selecting, developing and maintaining a diverse workforce on a global scale. international management  The management of business operations conducted in more than one country. intranet  An internal communications system that uses the technology and standards of the Internet but is accessible only to people within the organisation. intrapreneurship  The process of recognising the need for innovation and promoting it within an organisation. intrinsic reward  The satisfaction received in the process of performing an action. intuition  The immediate comprehension of a decision situation based on past experience but without conscious thought. inventory  The goods that the organisation keeps on hand for use in the production process up to the point of selling the final products to customers. involvement culture  A culture that places high value on meeting the needs of employees and values cooperation and equality. ISO 9000  A set of international standards for quality management, setting uniform guidelines for processes to ensure that products conform to customer requirements.

J job analysis  The systematic process of

gathering and interpreting information about the essential duties, tasks and responsibilities of a job. job characteristics model  A model of job design that comprises core job dimensions, critical psychological states and employee growth-need strength. job description  A concise summary of the specific tasks and responsibilities of a particular job. job design  The application of motivational theories to the structure of work for improving productivity and satisfaction. job enrichment  A job design that incorporates achievement, recognition and other high-level motivators into the work. job evaluation  The process of determining the value of jobs within an organisation through an examination of job content.

job satisfaction  A positive attitude towards one’s job.

job simplification  A job design whose purpose is to improve task efficiency by reducing the number of tasks a single person must perform. job specification  An outline of the knowledge, skills, education and physical abilities needed to adequately perform a job. joint venture  A variation of direct investment in which an organisation shares costs and risks with another firm to build a manufacturing facility, develop new products or set up a sales and distribution network. justice approach  The ethical concept that moral decisions must be based on standards of equity, fairness and impartiality. just-in-time (JIT) inventory system  An inventory control system that schedules materials to arrive precisely when they are needed on a production line.

K key performance indicators (KPIs)  Key performance indicators (KPIs) are the focused set of important metrics that describe the organisation’s performance in delivering its strategy. knowledge  Knowledge involves the use of information by humans to achieve a task or goal. knowledge management  The efforts to systematically find, organise and make available a company’s intellectual capital and to foster a culture of continuous learning and knowledge sharing so that a company’s activities build on what is already known.

L labour market  The people available for hire by the organisation.

large-group intervention  An approach that brings together participants from all parts of the organisation (and may include key outside stakeholders as well) to discuss problems or opportunities and plan for major change. law of effect  The assumption that positively reinforced behaviour tends to be repeated, and unreinforced or negatively reinforced behaviour tends to be inhibited. leadership  The ability to influence people towards the attainment of organisational goals. leadership grid  A two-dimensional leadership theory that measures a leader’s concern for people and for production. leading  The management function that involves the use of influence to motivate employees to achieve the organisation’s goals. glossary

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lean thinking  Combining advanced technology and innovative management processes and using highly trained employees to cut waste and improve quality. legal–political dimension  The dimension of the general environment that includes federal, state and local government regulations, and political activities designed to control organisation behaviour. legitimate power  Power that stems from a formal position in an organisation and the authority granted to it. licensing  An entry strategy in which an organisation in one country makes certain resources available to organisations in another in order to participate in the production and sale of its products abroad. line authority  A form of authority in which individuals in management positions have the formal power to direct and control immediate employees. liquidity ratio  A financial ratio that indicates the organisation’s ability to meet its current debt obligations. listening  The skill of grasping facts as well as feelings to interpret a message’s genuine meaning. locus of control  The tendency to place the primary responsibility for one’s success or failure either within oneself (internally) or on outside forces (externally). low-context culture  A culture in which communication is used to exchange facts and information.

M Machiavellianism  The tendency to direct much of one’s behaviour towards the acquisition of power and the manipulation of others for personal gain. making progress principle  The idea that the most important factor to boost motivation, positive emotions and perceptions is making progress towards meaningful goals. management  The attainment of organisational goals in an effective and efficient manner through planning, organising, leading and controlling organisational resources. management by means (MBM)  Focuses attention on the methods and processes used to achieve goals. management by objectives (MBO)  A method of management whereby managers and employees define goals for every department, project and person, and use them to monitor subsequent performance.

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management science perspective  A management perspective that emerged after the Second World War and applied mathematics, statistics and other quantitative techniques to managerial problems. managing diversity  Creating a climate in which the potential advantages of diversity of organisational or group performance are maximised, while the potential disadvantages are minimised. manufacturing organisation  An organisation that produces physical goods. market entry strategies  The various tactics that managers use to enter foreign markets. masculinity  A cultural preference for achievement, heroism, assertiveness, work centrality and material success. mass customisation  A process by which products are produced cost-effectively in high volume but are customised to meet individual needs. matching model  An employee selection approach in which the organisation and the applicant attempt to match each other’s needs, interests and values. matrix approach  An organisation structure that utilises functional and divisional chains of command simultaneously in the same part of the organisation. matrix boss  A product or functional boss, responsible for one side of the matrix. mentor  A higher-ranking organisational member who is committed to providing upward mobility and support to a protégé’s professional career. mentoring  When an experienced employee guides and supports a less experienced employee. message  The tangible formulation of an idea to be sent to a receiver. micro-management  Micro-management is the overly controlling detailed supervision of employees’ actions, often in a meddlesome manner, such that employees’ efforts and creativity become stifled and reduced. middle manager  A manager who works at the middle levels of the organisation and is responsible for major departments. mission  Mission is the high level summary statement of the reason for existence of the organisation and its formal desired purpose. mission statement  A broadly stated definition of the organisation’s basic business scope and operations that distinguishes it from similar types of organisations. monoculture  A culture that accepts only one way of doing things and one set of values and beliefs.

moral rights approach  The ethical concept

that moral decisions are those that best maintain the rights of those people affected by them. motivation  The forces either within or external to a person that arouse enthusiasm and persistence to pursue a certain course of action. motivators  Factors that influence job satisfaction based on fulfilment of high-level needs such as achievement, recognition, responsibility and opportunity for growth. multicultural teams  Teams made up of members from diverse national, racial, ethnic and cultural backgrounds. multidomestic strategy  The modification of product design and advertising strategies to suit the specific needs of individual countries. multinational corporation (MNC)  An organisation that receives more than 25 per cent of its total sales revenues from operations outside the parent company’s home country; also called a global company or transnational company.

Myers-Briggs Type Indicator (MBTI) 

Measures a person’s preferences for introversion versus extroversion, sensation versus intuition, thinking versus feeling, judging versus perceiving.

N natural dimension  Dimension of the general environment that includes all elements that occur naturally on earth, including plants, animals, rocks and natural resources such as air, water and climate. need to achieve  A human quality linked to entrepreneurship in which people are motivated to excel and pick situations in which success is likely. negotiation  Involves people engaging in giveand-take discussions and considering various alternatives to reach a joint decision that is acceptable to both parties. network structure  An organisation structure that disaggregates major functions into separate organisations that are brokered by a small headquarters organisation. neutraliser  A situational variable that counteracts a leadership style and prevents the leader from displaying certain behaviours. new-venture fund  A fund providing resources from which individuals and groups draw to develop new ideas, products or businesses. new-venture team  A unit separate from the mainstream of the organisation that is responsible for developing and initiating innovations.

non-directive interview  Interviewer asks

broad, open-ended questions and permits the applicant to talk freely with minimal interruption, in an attempt to bring to light information, attitudes and behavioural characteristics. non-programmed decision  A decision made in response to a situation that is unique, is poorly defined and largely unstructured, and has important consequences for the organisation. non-verbal communication  A communication transmitted through actions and behaviour rather than through words. normative  An approach that defines how a decision maker should make decisions and provides guidelines for reaching an ideal outcome for the organisation. norming  The stage of team development in which conflicts developed during the storming stage are resolved and team harmony and unity emerge.

O on-the-job training (OJT)  A type of training in which an experienced employee ‘adopts’ a new employee to teach him or her how to perform job duties. open-book management  Sharing financial information and results with all employees in the organisation. open communication  Sharing all types of communication throughout the organisation, across functional and hierarchical boundaries. open innovation  Extending the search for and commercialisation of new ideas beyond the boundaries of the organisation. open system  A system that interacts with the external environment. operating processes  Operating processes are the set of direct and support activities within every organisation that create its products and services. operational goals  Specific, measurable results expected from departments, work groups and individuals within the organisation. operational plans  Plans developed at the organisation’s lower levels that specify action steps towards achieving operational goals and that support tactical planning activities. operations management   The field of management that focuses on the physical production of goods or services and uses specialised techniques for solving manufacturing problems. operations strategy  The recognition of the importance of operations to the firm’s success and the involvement of operations managers in the organisation’s strategic planning.

opportunity  A situation in which managers see potential organisational accomplishments that exceed current goals. organisation  A social entity that is goal-directed and deliberately structured. organisation chart  The visual representation of an organisation’s structure. organisation structure  The framework in which the organisation defines how tasks are divided, resources are deployed and departments are coordinated. organisational change  The adoption of a new idea or behaviour by an organisation. organisational citizenship  Work behaviour that goes beyond job requirements and contributes as needed to the organisation’s success. organisational commitment  Loyalty to and heavy involvement in one’s organisation. organisational control  The systematic process through which managers regulate organisational activities to make them consistent with expectations established in plans, targets and standards of performance. organisational development (OD)  The application of behavioural science techniques to improve an organisation’s health and effectiveness through its ability to cope with environmental changes, improve internal relationships and increase problem-solving capabilities. organisational ecosystem  Includes organisations in all the sectors of the task and general environments that provide the resource and information transactions, flows and linkages necessary for an organisation to thrive. organisational environment  All elements existing outside the organisation’s boundaries that have the potential to affect the organisation. organising  The deployment of organisational resources to achieve strategic goals. outsourcing  Contracting out to another company of a function or activity which could be or was previously produced in-house.

P P→O expectancy  Expectancy that successful performance of a task will lead to the desired outcome. panel interview  Where the candidate meets with several interviewers who take turns asking questions. partnership  An unincorporated business carried on by two or more people together, for the purpose of making a profit. passive follower  A person who exhibits neither critical independent thinking nor active participation.

pay-for-performance  Incentive pay that ties

at least part of compensation to employee effort and performance. people change  A change in the attitudes and behaviours of a few employees in the organisation. perception  The cognitive process a person uses to make sense of the environment by selecting, organising and interpreting information from the environment. perceptual distortions  Errors in perceptual judgement that arise from inaccuracies in any part of the perception process. performance appraisal  The process of observing and evaluating an employee’s performance, recording the assessment and providing feedback to the employee. performance gap  A disparity between existing and desired performance levels. performing  The stage of team development in which members focus on problem solving and accomplishing the team’s assigned task. permanent team  A group of participants from several functions who are permanently assigned to solve ongoing problems of common interest.

personal communication channels  Communication channels that exist

outside the formally authorised channels and do not adhere to the organisation’s hierarchy of authority. personal networking  The acquisition and cultivation of personal relationships that cross departmental, hierarchical and even organisational boundaries. personality  The set of characteristics that underlie a relatively stable pattern of behaviour in response to ideas, objects or people in the environment. plan  A blueprint specifying the resource allocations, schedules and other actions necessary for attaining goals. planning  The management function concerned with defining goals for future organisational performance and deciding on the tasks and resource use needed to attain them. pluralism  An environment in which the organisation accommodates several subcultures, including employees who would otherwise feel isolated and ignored. point of difference  A differentiating aspect of the organisation, that distinguishes it from its competitors, as perceived by key stakeholders such as customers or investors. glossary

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point–counterpoint  A decision-making technique in which people are assigned to express competing points of view. political forces  The influence of political and legal institutions on people and organisations. political model  A decision-making model that is useful for making non-programmed decisions when conditions are uncertain, information is limited and there is disagreement among managers. political risk  An organisation’s risk of loss of assets, earning power or managerial control due to politically based events or actions by host governments. portfolio strategy  A type of corporate-level strategy that relates to the organisation’s mix of strategic business units and product lines that fit together in such a way as to provide the organisation with synergy and competitive advantage. positive reinforcement  The administration of a pleasant and rewarding consequence following desired behaviour. power  The potential ability to influence the behaviour of others. power distance  The degree to which people accept inequality in power among institutions, organisations and people. practical approach  Bases decisions on prevailing standards of the profession and larger society, taking the interests of all stakeholders into account. pragmatic survivor  A follower who has qualities of all four follower styles, depending on which fits the prevalent situation. prejudice  The tendency to view people who are different as being deficient. pressure group  An interest group that works within the legal–political framework to influence organisations to behave in certain ways. problem  A situation in which organisational accomplishments have failed to meet established goals. procedural justice  The concept that rules should be clearly stated, and consistently and impartially enforced. process layout  A facilities layout in which machines that perform the same function are grouped together in one location. process theories  A group of theories that explain how employees select behaviours with which to meet their needs and determine whether their choices were successful. product change  A change in the organisation’s product or service output. product layout  A facilities layout in which machines and tasks are arranged according to

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the sequence of steps in the production of a single product. profitability ratio  A financial ratio that describes the firm’s profits in terms of a source of profits (e.g., sales or total assets). programmed decision  A decision made in response to a situation that has occurred often enough to enable decision rules to be developed and applied in the future. project management  Project management is the planning and implementation of projects in order to achieve outcomes of cost, timeliness of completion and quality of the specified outcome. project manager  A manager responsible for a temporary work project that involves the participation of other people in the organisation. punishment  The imposition of unpleasant outcomes on an employee. purpose  Purpose is the statement of intent and overall aims of the organisation, usually specified as a set of objectives.

Q quality circle  A group of six to 12 volunteer employees who meet regularly to discuss and solve problems affecting the quality of their work. quality partnering  A quality control approach that involves assigning dedicated personnel within a particular functional area of the business.

R radio-frequency identification (RFID) 

Radio-frequency identification (RFID) uses radio system tracking to allow location tracking of items in production systems, transport networks or society. raw materials inventory  Inventory consisting of the basic inputs to the organisation’s production process. realistic job preview (RJP)  A recruiting approach that gives applicants all pertinent and realistic information about the job and the organisation. recruiting  The activities or practices that define the desired characteristics of applicants for specific jobs. re-engineering  The radical redesign of business processes to achieve dramatic improvements in cost, quality, service and speed. referent power  Power that results from the characteristics that command employees’ identification, respect and admiration, so that they wish to emulate the leader. refreezing  A step in the reinforcement stage of organisational development in which individuals acquire a desired new skill or attitude and are rewarded for it by the organisation.

reinforcement  Anything that causes a given behaviour to be repeated or inhibited. reinforcement theory  A motivation theory based on the relationship between a given behaviour and its consequences. relational coordination  Refers to frequent horizontal coordination and communication carried out through ongoing relationships of shared goals, shared knowledge and mutual respect. responsibility  The duty to perform the task or activity an employee or other stakeholder has been assigned. responsibility centre  An organisational unit under the supervision of a single person who is responsible for its activity. revenue budget  A budget that identifies the forecasted and actual revenues of the organisation. reward power  Power that results from the authority to reward others. rightsizing  Reducing the company’s workforce intentionally so that the number of employees is deemed to be right for the company’s situation. risk  A decision has clear-cut goals, and good information is available, but the future outcomes associated with each alternative are subject to chance. risk propensity  The willingness to undertake risk with the opportunity of gaining an increased pay-off. role  A set of expectations for one’s behaviour. role ambiguity  Uncertainty about what behaviour is expected of a person in a particular role. role conflict  Incompatible demands of different roles.

S satisficing  To choose the first solution

alternative that satisfies minimal decision criteria regardless of whether better solutions are presumed to exist. scenario building  Scenario building is the planning activity in which future possibilities are visualised by extrapolating current trends and considering future discontinuities. scientific management  A sub-field of the classical management perspective that emphasised scientifically determined changes in management practices as the solution to improving labour productivity. selection  The process of determining the skills, abilities and other attributes a person needs to perform a particular job.

self-awareness  Being aware of the internal aspects of one’s nature, such as personality traits, beliefs, emotions, attitudes and perceptions. self-confidence  A general assurance in one’s own ideas, judgement and capabilities. self-efficacy  An individual’s strong belief that he or she can accomplish a specific task or outcome successfully. self-managed team  A team that consists of multiskilled employees who rotate jobs to produce an entire product or service, often led by an elected team member. self-management  The ability to engage in selfregulating thoughts and behaviour to accomplish all your tasks and handle difficult or challenging situations. self-serving bias  The tendency to overestimate the contribution of internal factors to one’s successes and the contribution of external factors to one’s failures. servant leadership  Occurs when a leader transcends self-interest to serve others, the organisation and society. service organisation  An organisation that produces non-physical outputs that require customer involvement and cannot be stored in inventory. Shewhart cycle  A planning cycle used in organisations that have instituted quality management; also called the PDCA (plan, do, check, act) cycle. single-use plans  Plans that are developed to achieve a set of goals that are unlikely to be repeated in the future. SWOT (situation) analysis  Analysis of the strengths, weaknesses, opportunities and threats (SWOT) that affect organisational performance. situational model  A contingency approach to leadership that links the leader’s behavioural style with the task readiness of employees. Six Sigma  A quality control approach that emphasises a relentless pursuit of higher quality and lower costs. skunkworks  A separate small, informal, highly autonomous, and often secretive group that focuses on breakthrough ideas for the business. slogan  A phrase or sentence that succinctly expresses a key corporate value. small to medium enterprise (SME)  Small to medium enterprise has a different meaning in different countries; for example, in Australia it refers to businesses generally having under 200 employees but in the US, under 500 employees. social entrepreneur  A leader who is committed to both good business and positive social change.

social entrepreneurship  Focuses primarily on creating social value by providing solutions to social problems, with a secondary purpose of generating profit and returns. social facilitation  The effect of other people on raising one’s effort and organisational motivation. social forces  The aspects of a culture that guide and influence relationships among people – their values, needs and standards of behaviour. social media  A group of Internet based applications that allow the creation and exchange of user-generated content. social networking  Social networking is the expansion of an individual’s set of business or social contacts, often using Internet-based media. socially responsible investment  Socially responsible investment involves investing in companies which, in the judgement of the investor, do not harm people or the environment through their activities. sociocultural dimension  The dimension of the general environment representing the demographic characteristics, norms, customs and values of the population within which the organisation operates. socio–emotional role  A role in which the individual provides support for team members’ emotional needs and social unity. span of management  The number of employees who report to a supervisor; also called span of control. special-purpose team  A team created from outside the formal organisational structure to undertake a project of special importance or creativity. spin-off  An independent company producing a product or service similar to that produced by the entrepreneur’s former employer. staff authority  The number of employees who report to a supervisor, also called span of control. stakeholder  Any group within or outside the organisation that has a stake in the organisation’s performance. stakeholder mapping  Provides a systematic way to identify the expectations, needs, importance and relative power of various stakeholders. standing plans  Ongoing plans used to provide guidance for tasks performed repeatedly within the organisation. stereotype threat  The psychological experience of a person who, when engaged in a task, is aware of a stereotype about their identity

group that suggests that they will not perform well on that task. stereotypes  The rigid, exaggerated, irrational beliefs associated with a particular group of people. stereotyping  The tendency to assign an individual to a group or broad category and then attribute generalisations about the group to the individual. storming  The stage of team development in which individual personalities and roles, and resulting conflicts, emerge. story  A narrative based on true events that is repeated frequently and shared by organisational employees. strategic business units (SBUs)  A division of the organisation that has a unique business mission, product line, competitors and markets relative to other SBUs in the same organisation. strategic conversation  Dialogue across boundaries and hierarchical levels about the team or organisation’s vision, critical strategic themes and the values that help achieve important goals. strategic goals  Broad statements of where the organisation wants to be in the future, they pertain to the organisation as a whole, rather than to specific divisions or departments. strategic management  The set of decisions and actions used to formulate and implement strategies that will provide a competitively superior fit between the organisation and its environment so as to achieve organisational goals. strategic plans  The action steps by which an organisation intends to attain its strategic goals. strategy  A plan of action that describes resource allocation and activities for dealing with the environment, achieving a competitive advantage, and attaining goals. strategy formulation  The stage of strategic management that involves the planning and decision making that lead to the establishment of the organisation’s goals and of a specific strategic plan. strategy implementation  The stage of strategic management that involves the use of managerial and organisational tools to direct resources towards achieving strategic outcomes. strategy map  A visual representation of the key drivers of an organisation’s success, showing the cause-and-effect relationships among goals and plans. strengths  Natural talents and abilities that have been supported and reinforced with learned knowledge and skills. glossary

869

stress  A physiological and emotional response

to stimuli that place physical or psychological demands on an individual. structured interview  Uses a set of standardised questions that are asked of every applicant so comparisons can be made easily. substitute for leadership  A situational variable that makes a leadership style redundant or unnecessary. subsystems  Parts of a system that depend on one another for their functioning. suppliers  Suppliers are individuals or organisations who provide goods or services to the buying entity. supply chain management  Managing the sequence of suppliers and purchasers, covering all stages of processing from obtaining raw materials to distributing finished goods to final consumers. survey feedback  A type of OD intervention in which questionnaires on organisational climate and other factors are distributed among employees and the results reported back to them by a change agent. sustainable development  Involves making balanced and equitable decisions so that financial, environmental and social outcomes are achieved in both the short and longer terms. sustainability  Economic development that generates wealth and meets the needs of the current population while preserving the environment for the needs of future generations. symbol  An object, act or event that conveys meaning to others. synergy  The condition that exists when the organisation’s parts interact to produce a joint effect that is greater than the sum of the parts acting alone. system  A set of interrelated parts that function as a whole to achieve a common purpose. systems thinking  An extension of the humanistic perspective that describes organisations as open systems that are characterised by entropy, synergy and subsystem interdependence.

T tactical goals  Goals that define the outcomes

that major divisions and departments must achieve in order for the organisation to reach its overall goals. tactical plans  Plans designed to help execute major strategic plans and to accomplish a specific part of the organisation’s strategy.

870

glossary

tall structure  A management structure

characterised by an overall narrow span of management and a relatively large number of hierarchical levels. target customer  An effective strategy defines the customers to be targeted and which of their needs are to be served by the company. task conflict  Conflict that results from disagreements about the goals to be achieved or the content of the tasks to be performed. task environment  The layer of the external environment that directly influences the organisation’s operations and performance. task specialist role  A role in which the individual devotes personal time and energy to helping the team accomplish its task. team  A unit of two or more people who interact and coordinate their work to accomplish a specific goal. team building  A type of OD intervention that enhances the cohesiveness of departments by helping members learn to function as a team. team cohesiveness  The extent to which team members are attracted to the team and motivated to remain in it. team norm  A standard of conduct that is shared by team members and guides their behaviour. technical core  The heart of the organisation’s production of its product or service. technical skill  The understanding of and proficiency in the performance of specific tasks. technological dimension  The dimension of the general environment that includes scientific and technological advancements in the industry and society at large. technology change  A change that relates to the organisation’s production process. telecommuting  Using computers and telecommunications equipment to perform work from home or another remote location. thriving workforce  A workforce in which people are satisfied, productive and engaged in creating the future for themselves and their organisation. tolerance for ambiguity  The psychological characteristic that allows a person to be untroubled by disorder and uncertainty. top leader  The overseer of both the product and the functional chains of command, responsible for the entire matrix. top manager  A manager who is at the top of the organisational hierarchy and is responsible for the entire organisation. top-down budgeting  A budgeting process in which middle and lower-level managers set

departmental budget targets in accordance with overall organisation revenues and expenditures specified by top management. total quality management (TQM)  A concept that focuses on managing the total organisation to deliver quality to customers. Four significant elements of TQM are employee involvement, focus on the customer, benchmarking and continuous improvement. trade association  An association made up of organisations with similar interests for the purpose of influencing the environment. traits  The distinguishing personal characteristics of a leader, such as intelligence, honesty, selfconfidence and even appearance. transactional leader  A leader who clarifies employees’ role and task requirements, initiates structure, provides rewards and displays consideration for employees. transformational leader  A leader distinguished by a special ability to bring about innovation and change. transnational strategy  A strategy that combines global coordination to attain efficiency with flexibility to meet specific needs in various countries. triple bottom line  Triple bottom line performance of an organisation involves measuring the three types of outcomes of an organisation’s activities, namely financial, environmental and community/social. two-boss employee  An employee who reports to two supervisors simultaneously. Type A behaviour  A behaviour pattern characterised by extreme competitiveness, impatience, aggressiveness and devotion to work. Type B behaviour  A behaviour pattern that lacks Type A characteristics and includes a more balanced, relaxed lifestyle.

U uncertainty  Managers know what goal

they wish to achieve, but information about alternatives and future events is incomplete. uncertainty avoidance  A value characterised by people’s intolerance for uncertainty and ambiguity, resulting in support for beliefs that promise certainty and conformity. uncritical thinking  Failing to consider the possibilities beyond what one is told; accepting others’ ideas without thinking. unfreezing  The stage of organisation development in which participants are made aware of problems in order to increase their willingness to change their behaviour.

upward communication  Messages that flow from the lower to the higher levels in the organisation’s hierarchy. utilitarian approach  The ethical concept that moral behaviour produces the greatest good for the greatest number.

state or outcome that is credible yet not readily attainable. Vroom–Jago model  A model designed to help managers gauge the amount of subordinate participation in decision making.

V

W

valence  The value or attraction an individual has

wage and salary surveys  Surveys that show

for an outcome.

venture capital firm  A group of organisations

or individuals that invests money in new or expanding businesses for ownership and potential profits. vicarious learning  Occurs when an individual sees others perform certain behaviours and get rewarded for them. virtual team  A team made up of members who are geographically or organisationally dispersed, rarely meet face to face and do their work using advanced information technologies.

vision  An attractive, ideal future organisational

what other organisations pay incumbents in jobs that match a sample of ‘key’ jobs selected by the organisation. whistle-blowing  Disclosure by an employee of illegal, immoral or illegitimate practices by the organisation. wholly owned foreign affiliate  A foreign subsidiary over which an organisation has complete control. work redesign  The altering of jobs to increase both the quality of employees’ work experience and their productivity.

work sample tests  Where an applicant is

required to complete simulated tasks that are part of the desired job. work specialisation  The degree to which organisational tasks are subdivided into individual jobs; also called division of labour. workforce diversity  Hiring, training and valuing people with different human qualities or who belong to various cultural groups. workforce optimisation  Implementing strategies to put the right people in the right jobs, make the best use of employee talent and skills, and develop human capital for the future. work-in-process inventory  Inventory composed of the materials that still are moving through the stages of the production process.

Z zero-based budgeting  A budgeting process that requires a complete justification for every line item in a budget.

glossary

871

Name Index A A.H. Robins 195 Abbott, Tony 7 Abbott Laboratories 150, 165 Abraham’s Grocery Store 428 Accenture 14, 501 Acciona 625 Acer 333, 652–3, 814 Aconex 738 Adams, Garry 675 Adams, Scott 226–7 Advanced Circuits 660 Aegis Living 505 Agarwal, Prabhudayal 740 Agency.com 101 AGL 51 AIG 183 Air Canada 800 Air New Zealand 50, 108 Airbus 150, 357, 417 Akerson, Dan 452 Alderfer, Clayton 653 Aldi 314, 333 Alexander, Whit 438 Allis, Janine 637 Alta Gracia 648 Amazon.com 74, 301, 311, 316–17, 328, 739, 832 Amcor 95, 138, 144 AMD 323, 454 Amelio, Bill 136 American Airlines 800 American Express 526 American National Organization for Diversity in Sales and Marketing 518 AMP 98 AMR Corporation 800 ANCA Group 369 Anderson, Grant 369 Angus, David 96 Angus & Robertson 96, 357 Anheuser-Busch 120 Animal Compassion Foundation 124 Ansell Ltd 146–7 Ansett 50, 357, 801 Antipodean Group 635 ANZ Bank 18, 91, 272, 290, 344, 434, 435, 524, 636, 654, 665, 676, 686, 718, 726, 823 Apple 5, 30–1, 90, 101, 116, 120, 145, 164, 235, 311, 319, 328, 353, 354, 435, 444, 447, 461, 588, 616, 624, 676, 701, 856 Applied Biosystems 507 aQuantive 353 ArcelorMittal 60 Arthur D. Little Inc. 709 Argus, Don 8, 13, 272 Argyle Diamonds 103 Armstrong, Lance 183 Arnott’s Biscuits 108 Arthur Andersen 180 Asea Brown Boveri (ABB) 141, 408, 443, 626, 851, 852

872

AT&T 485, 495, 657 Atlassian 75 Aurora Energy 50 Aussie Furniture Imports 218 Autogen Limited 329 Austral 314, 315 Australia Post 310, 345, 438, 823 Australian Federal Police (AFP) 545 Australian Ford 51 Australian Gas Light (AGL) 825 Australian Securities and Stock Exchange (ASX) 24 Australian Unity Ltd 146–7 Australian Wallabies 110 Autodesk 698 AWB 180 AXA 98, 139 Axis 142

B Bain & Company 73–4, 76 Baker’s Delight 251, 253 Balsillie, Jim 31 Bank, Grameen 243 Barnard, Chester 61 Barnes, Glenn 146–7 Barnevik, Percy 626 Barra, Mary 452 Barronet Coffee Inc. 364 Bartlett, Christopher 141 Bartz, Carol 698 Basham, Robert 343, 657 Bass, Steedman 416 Bear Stearns 183, 790 Bearden, John 578 Beers, Charlotte 560 Bemoras, Danielle 493 Bendigo Bank 594–5 Bennet, Bill 416 Bennett, Larry 445 Bennett, Stephen 699 Bentham, Jeremy 186 Berkshire Hathaway 617 Berroeta, Inaki 636 Bertelsmann AG 139 Bertolon, Henry 714–15 Bethlehem Steel 56 Betzell, Ray 174 Bevington Group 769 Bezos, Jeff 301, 739 Bharti Airtel Ltd 12–13 BHP 144, 272, 337 BHP Billiton 71, 91, 136, 138, 139, 144, 197, 210, 211, 212, 272, 277–8, 304, 337, 374, 434, 435, 636, 676, 771, 792, 856 Big Dad’s Pies 252–3 Big Issue 33 Biocon Ltd 150 Birch, David 230 Black & Decker 290 BlackBerry 31 Blackmores 212 Blake Memorial Hospital 381 Blankfein, Lloyd 181 Bligh, Anna 368 Blinder, Alan 505 Blondel, Hervé 646 Bloom, Nicholas 22

Bloomsbury 559 BMW 140, 164, 466–7, 784, 812, 856 Bodine, Ken 218–19 Boeing 138, 182, 280–1, 357, 417, 726, 771, 800, 806, 810, 827–8 Bombardier’s Continental 416 Bond, Alan 226, 841 Bond, Zane 593 Bono 228 Boone, Garrett 491 Boost Juice 637 Booth, Lewis 102 Borders 96 Borrego Solar Systems 442, 704 Boston Consulting Group (BSG) 327, 444, 593 Bowes, Pitney 450 Boyd, Drew 445 BP 15, 20, 31–2, 100, 108, 138, 320, 397, 712, 726 Braddock, Richard S. 764 Branson, Richard 5, 50, 120, 229, 244 Bremen Castings 356 Brewster, Lauren 680 Bridgestone 138 Brin, Sergey 229, 239, 342, 635 Brito, Carlos 120 BroadGrain (Canada) 157 Brodsky, Norm 772 Brookes, Mike Cannon 75 Brumby’s Bakeries 68 Brynjolfsson, Erik 711 BSA 257 Buffett, Warren 186, 617 Bulcke, Paul 144 Bunnings 240, 362 Burberry 648 Burns, Ursula 10, 18 Burrs, Daniel 368 Business Council of Australia (BCA) 111 Bustinza, Rocio 663–4 Butter Crisp Snack Foods 829 Button, John 51

C Cable and Wireless Optus 156 Cadbury 150, 171, 314 Camatic 169 Cameron, Jan 239 Campbell, Charles 264–5 Campbell, James 329–30 Campbell Soup 506, 778, 779 Cannon 90, 782 Carden, Justin 241 CareerBuilder 76 Carlson, Curtis L. 575 Carlson Companies 575, 595, 607 Carlton & United Breweries (CUB) 111 Cartridge World 253–4 Cascade Engineering 608 Castagna, Vanessa 533 CatchOfTheDay 485 Caterpillar 138, 339, 395–6, 499 Catholic Church 183 Cementos Mexicanos (Cemex) 50, 79 CGU Insurance 648 Chaney, Michael 239–40 Channing, Pete 26

Chanut Piyaoui 9 Chatter 712 ChemGenex 329 Chen, Nick 686 Chernin, Peter 17 Chickenfeed 239 Childs, Ted 521 Chiu Wai 174 chocolate.com 255 Chrysler 108, 116 Chugg, Juliana 153 Cicutto, Frank 558, 595 Cigna 767 Cisco Systems 14–15, 337, 414, 486, 648, 698, 699 Citigroup 532 Clark, Dwayne 505 Clarke, Michael 571 Cleanevent 233 Cleaver, Nick 465 Clickcorp 35 Clinton, Hillary 571 Clorox 336 Coast-to-Coast Installations 245 Coca-Cola 94, 101, 138, 141, 262, 295, 339–40, 425, 464, 638, 805 Coffey International Ltd 478, 509 Cohda Wireless Pty Ltd 585–6 Cohen, Elizabeth 734 Cole, Kristin 596 Coleman, Felicia 100 Coles 8, 10, 15, 74, 101, 117, 194, 210, 314, 358, 362, 771, 841, 845 Coles Myer 67 Coles Online 74 Colgate-Palmolive 407 Collins, Dave 305–6 Collins, James C. 114 Collins, Jim 606 Colonial Bank Group 415 Colonial First State CFS) 415–16 Columbia Gas Systems 299 Columbia Business School 204 Comambault 60 Committee on Industrial Lighting (CIL) 62 Commonwealth Bank 415, 648, 676 Commonwealth Games (Melbourne) 312 Commsec 333 Computershare 635 ComputerSource 304–5 Conair 506 Conley, Chip 648 Conmed 809 Constantine, Mark 118 Container Store 491 Control Data 108 Converteam 819 Cook, Tim 30–1, 116, 145, 354 Corning 446 Cosson, Liz 518, 547 Costa Concordia 608 Costco 103, 104, 105, 712 Cotte, June 208 Cotton on Group 111–12 Coughlin, Thomas 182 Coulter & Associates 653–4 Country Road 636 Countrywide 183

Cowart, James 830 CRA 337 Cramm, Susan 694 Cranium 438 Crazy Clarke’s 239 Credit Suisse Group 485, 670 Crosby, Stewart 635 Crowe, Russell 367 CSL 138 CSR 210 Cuffe, Cris 416 Cunningham, David 373 Curious Sofa 769–70

D Daft, Douglas 295 Daimler AG 416 Darden Restaurants 814 Davey, Laura Mae 260–1 David Jones 23, 636 Davis, Glyn 275 Davis, Kathy 26 DDB 465 de Bono, Edward 443 de Corti, Barb 77 de Mestral, George 438 Deakins, Keith 829 DeCocinis, Mark 117 Defence Families of Australia 518 Degussa Peroxide Ltd 647 Dell, Michael 137, 239, 321–2, 762, 792–3 Dell Computer 74, 137, 145, 239, 311, 321–2, 333, 711, 762, 775, 792–3, 812, 813–14 Deloitte Touche Tohmatsu 489, 774 Delta Airways 800 DeMarco’s Department Store 680 Deming, W. Edwards 71, 291, 782 Devereux, Mike 85 DGL International 640–1 Dick Smith 229 Dimon, Jamie 341 Dodo 340 Dodson, John 587 Dollar Shave Club 250 Domino’s pizza 711 Donahoe, John 506 Dongfang Electric 37 Donnelly, Stephan 252–3 Dorsey, Jack 5–6, 436 Dow Chemical 96, 580 Dow Corning 408 Downs, Paul 259 Dr. Pepper 711 Drew, Ina 341 Drucker, Peter 76, 279, 287 Dryen, George 227, 239 Dryen, Peter 21, 117, 227, 239, 558, 595 Dryen Australia 21, 95, 117, 227, 239, 314, 558, 595 Dudley, Robert 31, 712 Duersten, Althea 341 Duke Energy 698 Duke University Hospital 297 Dun & Bradstreet 102 Dunkin Donuts 812 Dunn, Cameron 565 DuPont 71, 181, 290

Dusenberry, Debbie 769–70 Dykstra, Chris 794

E E & J Gallo Winery 328 Eastman Kodak Company 181 eBay 74, 164, 447, 506, 787, 823 Eckert, Robert 91 Edison, Thomas 62 eHarmony 570 Eisai Company 442 Electrolux 181 Electronic Arts 478 Eli Lilly 212, 391, 482 Ellis, Kirby 511 EMC Corporation 709 Emergency Medical Associates 301 Emerson, Bill 690 Emirates Airline 286 Emma’s Parlour 265–6 Energex 50 Energy Australia 51 English, Paul 593 Enjo 77 Enron 180, 183, 790 ENSR 458 Enterprise Rent-A-Car 333 Entrecanales, Jose Manuel 625 Ernst & Young 279, 527 Espressobus 281 Esquel Group 352 Etihad Airways 286 Ethical Trading Initiative (ETI) 196 Evans, Jane 710 Expeditions Unlimited 264–5 Exxon Mobil 354, 767 E-Z-GO 812

F Fabcon 460 Facebook 10, 24, 76, 101, 105, 120, 164, 239, 255, 311, 325–6, 375, 435, 489, 495, 635, 701, 711, 821, 822 Fahour, Ahmed 310, 345 Farley Glass Works 679 Farooqi, Sajjad 31 Farquhar, Scott 75 FASTPASS 67 FAVI 629 Fayol, Henri 59–60 FBT Transwest 585 Federal Express (FedEx) 139, 235, 373, 499, 820 Feigenbaum, Armand 782 Fenster, Igor 35 Ferguson, Alex 612 Ferragamo, Branden 334 Ferrucci, David 732 Festinger, Leon 566 Fiat 448 First Data Corporation 454 FitzGerald, Niall 527 Fleming, Nick 425 Fleytas, Andrea 397 Follett, Mary Parker 61 Folley, Mark 257 Fonterra 392 Name Index

873

Ford, Henry 239 Ford Motor Company 10, 16, 51–2, 74, 99, 102, 108, 138, 141, 157, 239, 416, 589, 611, 730, 775–6, 782, 851 Fortescue Metals Group 229 Forest, Andrew 229 Fortune 110 Foster’s Group 138, 139, 153, 157, 197 Fox Broadcasting Company 141 Foxconn Technologies 145 Foxtel 314 Franklin, Benjamin 52 FreshDirect 764, 766 Frey, Art 262 Fried, Jason 731 Friedman, Milton 202 Friedman, Thomas 93, 817 Frito Lay 227 Fujitsu 437 Fukushima Daiichi nuclear power plant 272 Fuller, Scott 120 Fulton, Bob 612

G Gabarino, James 533 Gage, Edwin 575 Gandhi, Mahatma 571 Gannon, Timothy 343, 657 Gantt, Henry 56 Gap Inc. 195–6, 202, 362 Gartner Group 478 Gates, Bill 229, 239, 571 Geldof, Bob 605 General Electric (GE) 11, 52, 71, 96, 123, 143, 199, 328, 335, 435, 436, 451, 453, 457, 485, 496, 497–8, 532, 607, 634, 696, 784, 846, 847 General Mills Corporation 153 General Motors (GM) 72, 85–6, 91, 108, 138, 195, 268, 354, 385, 416, 452, 758, 776, 834, 851 General Motors Holden (GMH) 16, 98, 268, 802 Ghosn, Carlos 390, 426 Gibson Guitar Corporation 333 Gilbreth, Frank and Lillian 56–7 Gillard, Julia 7 Gillette 98, 250 Ginger Bay Salon & Spa 779 GIO 98 Giordano 14 Girl Guides 33 Giusti, Kathy 243 GlaxoSmithKline PLC 167, 181, 391 Global Engine Manufacturing Alliance 108 Global Entrepreneurship Monitor (GEM) 231, 234 GMAC Home Services 578 go2call.com 500 Godrej & Boyce 145, 146 Goldberg, Howard 636 Goldcorp 448 Goldman Sachs 181, 670 Goldsworthy, Denise 635 Go-Lo 239 Goman, Carol Kinsey 532 Goodyear 138 Google 18–19, 24, 70, 90, 95, 105, 120, 164, 170–1, 206, 229, 237, 239, 262, 342, 353, 440, 450, 495, 505, 509, 529, 530, 635, 648, 676, 845

874

Name Index

Governance Metrics International 207 Govidien 165 Goyder, Richard 845 GPC Electronics 136, 172 Graf, Peter 425 Granite Transformations 253 Green, David 244 Greenblatt, Drew 814 Grey 439 Griffin, Jack 631–2 Grossman, Mindy 115 Groupon 762 Graham, David 24 Graham Industries 346 Greenpeace 99 GTO 125 Gunn, Richard 441 Gunns 790

H Habitat International 535 Hackman, Richard 668 Haidt, Jonathan 525 Haier 782 Haley, Kevin 346 Haley, Usha C.V. 95 Hall, Julie 445 Hall, Mike 442, 704 Hallandale Beach 189 Hallmark Cards 117, 578 Hanson, Leslie 173 Harley-Davidson 107, 499 Harward, Doug 566 Harvard Business School 26, 204 Harvest FreshCuts 827 Harvey, Gerry 226, 239, 264 Harvey Norman 226, 239, 264, 676 Hastings, Reed 377–8 Hayward, Tony 20, 31 HCL 35 HealthMastery 245–6 HealthSouth 180, 790 Hefner, High 229 Heineken 149, 167 Heinz 108 Henkelman, Leo 646 Hennes & Mauritz 446 Hennings, Jasper 130 Hercules Inc. 156 Hering, John 140 Herron Pharmaceuticals 108 Hershey 171 Herzberg, Frederick 654 Heskett, James 123 Hewlett-Packard 13, 114–15, 323, 333, 588 Heyer, Steven J. 182 HID 305–6 Highfield, Bruce 124 HIH Insurance 180, 357, 790 Hilcorp Energy 648, 672 Hill, Linda 25 Hilton Hotels 767 Hitachi 375 Hjorten, Lisa 120 Hofstede, Geert 158–60 Holden 51–2, 175, 802

Hollows, Nicole 636 Hollywood Studios 149 Holmes, Stephen 631 Honda 99, 138, 154, 782, 812, 856 Honeywell 784–5 Horne, Maxine 239 Horowitz, Andreessen 250 Hotel Carlton 646 Housing and Commercial Bank of Korea 109 HSN Inc. 115 Hubby, Bruce M. 559 Huston, Ron 660 Hyatt 530–1 Hyundai 91, 108, 333, 816

I IAG (Insurance Australia) 71 IBM 13, 96, 137, 138, 141, 163, 272, 323, 335–6, 374, 484, 499, 500, 519–21, 539–40, 559, 588, 676, 732, 736 ICI Australia 604 IDG 604 igus Inc. 808–9 IKEA 151, 738, 813 Illumination Entertainment 17 Imagination Ltd 412, 810 IMAN 732 Immelt, Jeffrey 199, 335, 451, 453, 497, 630 InBev 120 Inditex 806 Infosys 229 Innovation and Business Skills Australia (IBSA) 622–3 InPace Solutions 218–19 Instagram 101, 256, 311 Institute for Photonics & Advanced Sensing (IPAS) 636 Intel 96, 290, 323, 454, 499 International Service System (ISS) 14 Intuit 442, 651 Iridium Co. 259 iSentia 107 ITC 227

J J.D. Power & Associates 98 Jackson, Lucinda 510 Jägermeister 336 James Hardie 195 Janssen, Christopher 136 Japan Airlines 648 Jasper, Leigh 738 JCPenney 342 Jessett, Andrew 238 JetBlue Airways 297 Jobs, Steve 5, 13, 30, 116, 229, 353, 624, 701 Jong-Yong Yun 435 John Deere 436, 496 Johnson, Eric 91 Johnson, Ron 342 Johnson & Johnson 96, 193–4, 205, 300, 370 Johnson Electric Holdings 140 Johnson Storage & Moving 654 Johnsonville Sausage 22 Joie de Vivre 648 Joyce, Allan 51

JPMorgan Chase 341 Jung, Carl 576–7 Juran, Joseph 782 Jury, Len 355

K Kaiser Permanente 654 Kam, Noreen 64 Kanter, Rosabeth Moss 636 Kares, Michael 245 Kathmandu 239 Kayak 593 Keldine Technologies 346 Keller, Fred 608 Kelley, Robert E. 627 Kellogg 138 Kelly, Gail 21, 546 Kelso, Laura 28 Kenexa 500 Kent, Muhtar 94, 339, 425 Kepler, Nick 454 Kern, Martin 490 Kestelman, Larry 340 KeyCorp 532 KFC 143 Kickstarter 250 Kim Jung Tae 109 Kimberly-Clark 140, 607 Kindle e-reader 301 Kitts, Tracy 254 Kiyoshi Kurokawa 272 Kloppers, Marius 272, 636, 792 Kmart 101 Knights Apparel 648 Kodak 157, 311 Kookmin Bank 109 Korn/Ferry International 573 Kotter, John 123 KPMG 279, 484, 654 Kraft Foods 138, 150, 314, 536 Krieger, Mike 256 Kroc, Ray 239 Kvetan, Vladimir 808

L L.L.Bean 783 Lancôme 75 Land, Edwin 438 Land’s End Inc. 459 Langston, Richard 720 Larsen, Ralph 300 Latham, Gary 659 Lathbury, Emma 265–6 Lau, Peter 14 Lawton, Jim 102 Lazaridis, Mike 31 Le Jeune, Michael 460 Learning Point Associates 464 Lebeau, Suzanne 679 Lees, John 342 LEGO 106–7, 122 Lehman Brothers 180, 183, 790 Len Jury Limited 355 Lenovo 137, 163, 165, 489, 537 Leo Burnett 465 Lepird, Jennifer 651

Lewin, Kurt 461 LG Electronics 170 Li Shufu 313 Lincoln Electric 795 Lindt 171 LinkedIn 76, 485, 489 Little, Paul 287 LivingSocial 33, 290 Locke, Edwin 659 Lockheed Martin 450, 484 London School of Economics 26 Lonely Planet Publications 276 Lookout Mobile Security 140 LookSmart 138 Lopez, Thomas 189 Lovett, Craig 233 Lowman, Rodney L. 588 Lowy, Frank 229 Lum, Anita 646 Lush Cosmetics 118

M McCain 227 Macarthur Coal 636 McClelland, David 656–7 McDevitt Street Bovis 749 McDonald’s 15, 99, 119, 138, 141, 151, 155, 239, 252, 253, 367, 407, 466, 499, 802, 804, 805, 849–50 McDonald, Pete 609 MacDonald, Sally 635 McFarlane, John 18, 686, 718 McGovern, Pat 604–5, 610 McGregor, Douglas 63 MacIntosh, Sara 596 McKeever, Jeffrey 378 MacKenzie, Colin 253 Mackey, John 124 McKinney, Theophilus 646 McKinsey 343 McNerney, James 357 M&Ms 801 Machiavelli, Niccolò 575 Macris, Achilles 341 Macy’s 479 Maer Snowboarding 260–1 Maersk Alabama 607–8 Magner, Marge 532 Malard Manufacturing Company 471 Malaysian Airlines 801 Manchester United 612 Manville Corporation 195 Marathon Petroleum 540 Marlin Steel Wire 814 Marriott Corporation 324 Marriott International 654 Mars Corporation 14, 171, 856 Marshall Industries 667 Maslow, Abraham 63, 650–1 Master stores 20 MasterCard 107 Matsushita 90, 298–9 Mattel 90–1 Mayo, Elton 62 Mazda 138, 272, 375 Mazzola, Mike 153

Meetup 489 Mehls, Shannon 654 Melbourne Commonwealth Games 312 Meledandri, Christopher 17 Mengniu Dairy 209 Mercer Pacific 675 Merck & Company 202, 771 Metal Trades Industry Association (MTIA) 111 Metro trains Melbourne 820 Michelin 138 MicroAge 378 MicroPhone 596 Microsoft 90, 128, 138, 239, 311, 353, 484, 495, 606–7, 616, 856 Middelhoff, Thomas 139 Milgram, Naomi 239 Mill, John Stuart 186 Miller, Andrew 155 Milton-Smith, J. 210 MineWare 238 Mintzberg, Henry 24, 26, 27, 29, 33 Mitchell, Chuck 125 Mitsubishi 51, 99, 108, 375 Mittal, Lakshmi 815–16 Mittal, Sunil 12–13 Mizrahi, Susan 198–9 Mobil 13 Mohamed, Nik 119 Monash University 295 Monro, Tanya 636 Monsanto 180, 216 Montefiore Medical Centre 808 Montgomery, David 227 Moody’s 154 Mooney, Beth 532 Moore, Jess 604, 638 Morgan Stanley 102, 670 Morgan Stanley Dean Witter 296 Morita, Akio 444–5 Morris, David 535 Morrison Management Specialists 674 Mosca, Alessia 524 Mother Teresa 244, 625 Motorola 71, 107, 157, 206, 259 M-Pesa mobile money transfer 52 MTV Networks 105 Mulcahy, Anne 90 Mulally, Alan 611, 730, 775–6 Multiple Myeloma Research Foundation (MMRF) 243 Multiplex 212 Murdoch, Rupert 113, 141, 615 Murthy, Narayana 229 Myer 23, 358 Myers, Rochelle 364 MYOB 314 MySpace 105, 311

N NASA 96 National Australia Bank (NAB) 8, 13, 111, 144, 272, 314, 317, 344, 558, 565, 826, 856 National Broadband Network (NBN) 7 National Foods Limited 31 National Mutual 98, 139 Name Index

875

Nature Conservancy 33 Nautica 313 Nayar, Vineet 35 NBC Universal 328 NEC 375, 726, 753 NECX 714–15 Neden, Patricia 622–3 Neferis, Penny 297 Nelson, Marilyn Carlson 575, 595, 607 Nestlé 141, 144, 171, 328, 436, 450, 805 Netflix 293, 377–8 New York Stock Exchange 109 New York Times 371 New Zealand Milk Products 392 New Zealand Post 310, 345 News Corporation 112–13, 141, 615 Newton, Jo 617 NIBCO 825 Nike 171, 295, 415, 805 Nissan 51, 100, 140, 375, 390, 426, 446 Nix, John 500 Nokia 90, 434, 485, 737–8 Nolan, Sam 304–5 Norman Ross 226 Norsa, Michele 334 Noskin, Gary 705 Nortel Networks 107, 138 NTT DoCoMo 818 NutraSweet Co 107 NutriSystem Inc. 318 Nypro Inc. 109

Peebles Hydro Hotel 49 Pegatron Corp 145 Penguin 98, 140 PepsiCo 359, 398, 485, 817 Perry, Roger 769 Peters, Sandra 762 Peterson, Lance 705 PETRONAS 4, 499, 767 PGA Group 441 Phillips, Richard 608 Philpott, Rob 738 Pierce, Justin 111–12 Pinchot, Gifford 262 Pizza Hut 138, 143 Plastics and Chemicals Industry Association (PACIA) 111 Plaxcor Metals 173 Polaroid 438 Porras, Jerry I. 114 Porter, M. E. 330–3, 423 PortionPac Chemicals 651 Portman Hotel in Shanghai 117 Post Company 24 Powell, Colin 273 PPG Industries 482 PricewaterhouseCoopers (PwC) 95, 98, 165, 279, 442, 445, 449, 676 Procter & Gamble 71, 98, 114, 140, 336, 435, 436, 447, 448–9, 450, 533, 805, 806 Professional Dynamic Programs 559 Project Impact 244

O

Q

Ogilvy & Mather Worldwide 560 Oldham, Richard 668 Olds, Roger 478 Olive Garden 814 Olympic Games (Sydney) 312 OneHarvest/Vegco 212 OneTel 357, 790 Optus 110, 195 Orica 16, 604 Oracle 314 Origin Energy 50, 51 Oroton Group 635 Ortmann, Laura 779 O’Shaughnessy, Tim 33, 290 Osterman, Mark 593 Ouchi, William 400 Outback Steakhouse 342–3, 657–8 Outfitter 825

Qadoumi, Zaid 157 Qantas 50–1, 108, 124, 138, 195, 358, 524, 676, 800–1 Qi Lu 606–7 Quadrant Communications 259 Qualcomm 686 Qualls, Ashley 254–5 Quicken Loans 690 Quinn, Brian 841 Quinn Group 803

P Pacific Dunlop 139 Pacific Edge Software 120–1 Pacific Hydro 50 Page, Larry 229, 239, 342, 635 Panasonic 298–9 PaperlinX 391 Paradox Glass & Bottle Company 382 Partners HealthCare System 817 Patel, Nalisha 245–6 Patmore, Kim 454 Patterson, Scott 68 Paul Downs Cabinetmakers 259 Paulides, Gerard 771

876

Name Index

R Radisson Hotels 575 Random House 98, 139–40 Rasinghe, Gehan 719 Rauch, Doug 561 Ray, Michael 364 Red 5 Studios 490 Red Bull 822 Red Cross 311 Red Lobster 814 Reebok 415 Reed Pharmaceuticals 510 Rees, Dan 196 Renault 273, 390 Renshaw, Juan 281 Research in Motion (RIM) 31 Retail Adventures 239 Retail Food Group 252–3 Reuters Ltd 153 Richardson, Peter 732 Richmond Supply Co. 130 Ricoh 90

Rinehart, Gina 229 Rio Tinto 95, 238, 337, 635 Ritz-Carlton 116–17 Robertson, George 96 Robertson, Rachael 405 Robinson Helicopter 314 Roche Holdings 391 Rocky River Industries 174 Rodin, Rob 667 Roethlisberger, Fritz 62 Rogers, James E. 698 Rollins, Kevin 793 Rometty, Virginia M. 559 Ross, Julia 239 Ross Human Directions 239 Rovio 447 Rowling, J.K. 242, 559, 571 Royal DSM 202 Royal Dutch Shell Group 141, 294–5, 320, 451 RTZ Mining 337 Rudd, Kevin 367, 632 Russwurm, Siegfried 143

S 7-Eleven 314, 339, 712, 774 Sacks, David 19, 587–8 salesforce.com 648 Salvation Army 33, 311 Sam’s Warehouse 239 Samsung 90, 96, 120, 138, 434–5, 468, 856 Samsung Motors 273 Samuel, Neil 558 Sandberg, Sheryl 24 Sandstrom Products 646, 677–8 Santillan, Jessica 297 SAP 425, 480 Sara Lee Corporation 328, 488 Sarnacki, Ray 28 Scafido, Joe 812 SceneTap 493 Schettino, Francesco 608 Schlumberger 506, 852 Schmidt, Eric 635 Schneider, Joan 445 Schultz, Howard 346–7 SciVentures Investments Pty Ltd 585–6 Semco 13, 65–6, 125–6, 781 Semler, Ricardo 125–6, 781 Senge, Peter 69 Serlet, Bertrand 616 Serna Software 120 Seven Network 156 Shah, Jigar 250 Shanghai Fabrics 174 Shannon, Kyle 101 Sharma, Shikha 142 Shaw, Miranda 495 Sheedy, Kevin 612 Shell 15, 108, 138, 181, 272, 294–5, 771, 852 Sherlock, Michael 68 Sherwin, Douglas S. 763 Shih, Stan 652 Shui Fabrics 174 Siebel, Tom 604–5 Siebel Systems 604

Siemens 143, 289 Silliker Australia 64 Silverman, Henry 631 Sime Darby 119 Simplot 139, 227 Sinegal, Jim 103 Singapore Airlines 51, 108 Singapore Telecommunications (SingTel) 156 SingTel-Optus 259 Sinofsky, Steven 616 SKM 425 Smith, Bob 253 Smith, Darwin 607 Smith, Dick 229 Smith, Fred 235 Smith, Greg 585–6 Smith, Mike 636 Smith, Paula 640 Sony 55–6, 394, 444–5 Southwest Airlines 122, 124, 313, 422, 801 Speer, Larry 500 Spielberg, Steven 571 Spotless Group 233 Spring Company 744 Square 436 SRI International 449 St George Bank 21 St James Ethics Centre 210 St Lukes 115–16 Standard & Poor’s 435 Staples 107 Starbucks 93–4, 346–7, 812 Starwood Hotels & Resorts Worldwide 182 Stayer, Ralph 22 Steiner, Ivan 739 Stemberg, Tom 107 Stokes, Bryan 253 Stokes, Kerry 156 Stoll, Jerome 273 Stone, Christine 254 Stonecipher, Harry 182 Strauss-Khan, Dominique 581 Strida Bicycles 416 Subaru Indiana Automotive (SIA) 727 Subway 252, 253 Sullivan, Chris 343, 657 Sun Edison 250 Sun Microsystems 314, 454 SunBright 830 Supertemps 486 SuperValue 712 SurePayroll 439 Sussan Group 239 Sutton, Robert 378 Swartz, Jeffrey 201 Swogger, Kurt 580 Syd Howard Fireworks International 312 Sydney Olympic Games 312 systems analysis laboratory (SL) 280–1 Systrom, Kevin 256 Szadokierski, Cindy 609 Szaky, Tom 690–1

Taco Bell 809 Tait, Richard 438 Target 100, 101, 435 Tata Group 52, 279 Taylor, Frederick 56, 57, 74, 75 Technico 227–8 Ted’s 460 Telecom NZ 90 Telekom Malaysia 259 Telework Exchange 486 Telstra 8, 67, 90, 110, 139, 195, 314, 524 TELUS Corp. 107 TerraCycle 691 Terrill, John 640–1 Terry White Chemist Group 707 Texaco 195 Texas Instruments 71, 139, 449 TGI Friday restaurants 575 The Finishing Touch 705 The North Face 313–14 The You Business 670 Theo Chocolate 219 Thomas, David 534 Tianji 489 Ticos Coffee 254 Tiger Airlines 51, 333 Timberland 201 Tine Inc. 632 Tindell, Kip 491 T-Mobile 506 Toga Group 239 Toll Holdings 287 Topfer, Morton L. 792 Toshiba 588 Toyoda, Akio 91 Toyota 16, 51–2, 74, 91, 99, 102, 114, 136, 138, 143, 154, 172, 236, 237, 354, 419, 435, 589, 638, 782, 786, 788, 812, 851, 856, 858 Training Industry Inc. 566 Transport Accident Commission 342 Transport Corporation of India (TCI) 740 Trevasani, Ed 486 Trudel, Remi 208 TRUenergy 51 Tsintsiper, Alexander 35 Tucci, Joseph M. 709 Twitter 5, 76, 164, 255, 435, 436, 710, 820, 822, 824 Tyco 180

T

Valve Software Corporation 390–1 Van Reenen, John 22 Vanity Fair 313 Vaynerchuk, Gary 824

3M 96, 236, 237, 262, 462, 726 37signals 731

U UAL Corporation 609 Uncle Ben’s 14, 153 Unilever 141, 208, 527 United Airlines 101, 151, 609, 800 United Energy 50 University of Melbourne 275 UPS 59, 116, 482 US Airways 800

V

Velcro 438 Verizon 107 VF Corporation 313–14 Viacom 105 VicSuper 212 Vidor, Charlotte 239 Villagetheatres.com 74 Vincent, Robert 449–50 Virgin Airlines 50, 244 Virgin Australia 278 Virgin Blue 51, 124, 195 Visa 107 Visy Industries 138 Vita Group 239 Vithoulkas, Angela and Con 503 Vodaphone 110, 636 Volkswagen 91, 157, 416 Volvo 108, 282, 313 Vroom, Victor 661

W WA Manufacturing 720 Wahlenmaier, Chris 801 Walker Research 208 Walmart 137–8, 143, 154, 182, 202, 241, 531 Walt Disney 101, 114, 116 Walton, Sam 241 Warner Communications 337 Warren, Neil Clark 570 Wasserman, Noam 241 Waterhouse, David 227 Waterway Industries 549–50 Watson, Mike 809 WD Partners 809 Weber, Max 57–8, 60, 400 Weibo 76, 489, 710 Welch, Jack 123, 532, 607, 634, 696, 784 Werner & Thompson 719 Western Electric Company 62 Wesfarmers 239–40, 358, 676, 845 Westfield Group 229, 648 Westpac Banking Group 21, 91, 139, 211, 290, 344, 434, 771 Westwind Electronics 794 Wet Seal 824 WhateverLife.com 254–5 Wheeler, Maureen and Tony 276 Wheeler, Paul 253 Whirlpool 771 White, Rhonda 707 Whitman, Meg 787 Whitcoulls 96 White, Carol 102 Williams, Susan 705 Willingham-Hilton, Shelley 518 Wine Library 824 Winfrey, Oprah 229, 625 Whole Foods 124, 664 Whole Planet Foundation 124 Winfrey, Oprah 13 Winkler, Craig 316 Wishlist 74 Wolf, Michael J. 105 Wolfram, Stephen 765–6 Woolworths 10, 15, 20, 74, 101, 117, 290, 314, 362, 435, 524 Name Index

877

WorldCom 180, 183, 790 Wrangler 313 WuXi PharmaTech 391 Wyckoff Heights Medical Centre 183 Wyndham Worldwide 631

X Xerox 10, 13, 18, 90, 107, 157, 436, 783 Xstrata 547

878

Name Index

Y

Z

Yahoo! 417, 698 Yale School of Management 204 Yammer 19, 587–8, 712, 821 Yang, Marjorie 352 Yergin, Daniel 712 Yerkes, Robert 587 YouTube 255, 353, 710, 822 Yunus, Muhammad 243

Zahra, Paul 636 Zapolin, Michael 255 Zappos Family 113–14 Zara 806 Zhang Rumin 782 Zhejiang Geely Holding Group 108, 282 Zuckerberg, Mark 10, 24, 229, 239, 325–6, 375, 635, 701

A acceptance theory of authority 61 accountability 341, 395, 854 achievement culture 120 acquired needs theory 656–7 acquisitions 337, 454 activity ratios 775 adaptability culture 118–20 adjourning 744 administrative model in decision making 363–4 administrative principles 59–60 advertising 110–11 affirmative action 490 airline industry 50–1, 50–1, 800–1 alienated follower 628 alternatives in decision making 368–71 ambidextrous approach 436 ambiguity in decision making 358–9 analysis of causes in decision making 368 angel financing 249 application form (employment) 491–2 assessment centres (employment) 495 attributions 569 attitudes 562–7 and behaviours influenced by personality 573–5 conflicts among 566–7 Association of South East Asian Nations (ASEAN) 157, 168 Australia 137 changing nature of diversity 522–3 managerial ethics and sustainable development 210 managers 38–40 managing diversity 520 small businesses 233–4 and staff motivation 675–6 and uncertainty 358 women in the workforce 542–5 authentic leadership 608 authoritarianism 574 authority chain of command 395 definition 395 line 397 staff 397 automation, technology 810–12 automotive industry 51–2, 51–2, 91, 114, 136, 354 avoidance learning 665

B balance sheet 772, 773 balanced scorecard 767–8 bargaining power buyers 330 suppliers 330–1 BCG matrix 327–8 behaviour people-oriented 613 and personality 570–8 task-oriented 613 Type A 587 Type B 588 behaviour modification 664 behavioural approaches 613–14 behavioural interviews 493 behavioural sciences approach 66

behaviourally anchored rating scale (BARS) 502 benchmarking 71, 783–4 benefits and HRM 505–6 Big Five personality traits 570 biographical interviews 493 borderless world 139–43 bottom line 773 bottom of the pyramid (BOP) 145 bottom-up-approach 442 bottom-up budgeting 771 boundary-spanning roles 106–7 bounded rationality 363–4 brainstorming 376 Brazil 136, 137, 165, 522 budgetary control 769–72 bureaucratic organisations 57–9 business buying an existing 251 challenges 7–8 growth rates 327 growth stages of entrepreneurial 257–61 intelligence 107 intrapreneurship 262 online, starting an 254–5 plan 246–7 starting a new 251 see also small businesses business environment and entrepreneurship 231–3 international 151–2 and sustainable development 127 business case for ethics and social responsibility 207–8 business incubator 254 business intelligence software 819 business-level strategy 317, 330–4 business performance dashboards 301–2 business-to-business e-commerce (B2B) 74 business-to-consumer e-commerce (B2C) 74 buyers bargaining power 330

C Canada 137, 138, 154 candid communication 342 capital budget 771 careers, changing nature of 483–6 cash budget 770–1 cash cow 327 cellular layout 809–10 central planning departments 299 centralised network 691 centralisation 400 ceremonies 117 certainty in decision making 356 chain of command 394, 395 change culture 451–8 implementing 458–67 innovation 435–6 need for 459 people 451–8 product 437–51 resistance to 450–61 technologies 437–51 turbulent time 435 workplace 435–6

Subject Index

change agent 456 changing 457 nature of careers 483–6 social contract 483–4 channel 688 channel richness 692–4 charismatic leader 624 charismatic leadership 623–5 China 136, 137, 138, 143, 153, 156, 157, 160, 163, 164, 180–1, 230, 435, 522 citizenship, organisational 564 classical model in decision making 362 classical perspective 55–61 classroom training 499 coaching 498–9 coalition 365 Code of Conduct 205 code of ethics 205–6 coercion and change implementation 464 coercive power 630 cognitive ability test 493 cognitive dissonance 566 collaboration 418 collectivism 159 commitment organisational 564–6 source of 275 communication apprehension 695 asking questions 698 candid 342, 695–8 and change implementation 464 channels 692–4, 702, 70–9 crisis 712–13 definition 688 differences 163 downward 702–3 horizontal 704–5 and listening 699–700 and managers 687–90 model 688–9 non-verbal 700–1 open 690–2 organisational 702–10 and people 690–701 to persuade and influence others 695 and sustainability 717 upward 703–4 workplace 710–16 written 709 company (legal entity) 247 company ethics and social responsibility 203–7 compensation (employees) 504–5 pay-for-performance 505 wage and salary systems 504 compensation equity (employees) 504–5 compensatory justice 187 competency-based pay 504 competitive advantage 312 competitive intelligence (CI) 107 competitive strategies 332–4 and HRM 480–3

879

competitor rivalry 331 competitors 101 computer-based training 499 conceptual skills 18 conflict, managing team 747–9 conflict in decision making 358–9 conflict management 454 conflicts among attitudes 566–7 conformist 268 consideration 613 consistency culture 120–1 consumer-to-consumer e-commerce (C2C) 74 containment 297 contemporary leaders 634–7 contemporary leadership 605–10 contemporary management tools 72–3 contingency approaches 616 contingency plans 294 contingency view 70 contingent workers 485 continuous improvement 71, 785–6 control budgetary 769–72 changing philosophy of 777–81 feedback control model 764–9 financial 772–6, 788–90 hierarchical vs decentralised 777–8 meaning of 763 organisational 763 quality 788–90 systems, qualities go 790–1 controlling 759 entrepreneurial 260 and management 14–15 cooperation 438, 443–9 external coordination 446–51 internal coordination 444–6 coordination definition 418 horizontal 418–22 need for 418–19 relational 420–1 core competence 313–14 core measurement system 857 corporate credos 205 corporate culture 112–18 changing and merging 125 leadership 124 managing high-performance culture 122–4 shaping for innovative response 122–6 types of 118–21 corporate diversity 520, 522–3 corporate-level strategy 317, 326–30 corporate social responsibility (CSR) 194–5, 717 evaluating 201–3 corporate university 499 corporations, multinational 143–4 cost leadership 333 creativity 438 creativity economy 434 crises events management 36–7 crisis communication 712–13 crisis management plan (CMP) 296 crisis planning 295–7 critical thinking 628

880

Subject Index

cross-functional teams 411, 730 crowdfunding 250 cultural competence 538–9 cultural leadership 124 culture achievement 120 adaptability 118–20 and change 451–8 consistency 120–1 definition 112 high-performance 122–4 involvement 120 organisational 112 types of 118–21 see also corporate culture customer-based divisions 407 customer focused practices 848 customer relationship management (CRM) 76 customers 101 and communication 711 listening to 711 target 313

D decentralisation 400 decentralised control 777–8 decentralised network 691 decentralised planning 300 decision alternatives 368–71 decision failure 357 decision making administrative model 363–4 classical model 362 definition 353 entrepreneurial 259 innovative 376–9 and managers 363–4, 372–3 models 362–6 rational 362 political model 365–6 steps 367–74 types of 353–61 decision requirement, recognition of 367–8 decision styles 374–5 decisional roles of managers 31–2 decisions definition 353 non-programmed 354 personal framework 374–5 programmed 354 rationale for 275 sustainable development 379 decoding 688 debt financing 249 delegation 396 deliberately structured means 15 departmentalisation 401–17 divisional approach 401, 402, 405–8 horizontal matrix 401, 403 hybrid structure 410–11 matrix approach 401, 408–10 network approach 402, 403, 413–17 team-based approach 402, 403, 411–13 vertical functional approach 401, 402–5 descriptive (decision making) 363

development organisational 454–8 and training programs 453–4 diagnosis in decision making 368 differentiation 332 digital manufacturing systems 811–12 digital strategy, planning a 279 diligence 855 direct investing 150 directions 853 discipline 855 discretionary responsibility 202 discretionary work effort 845 discrimination, workplace 527–9 disruptive innovation 436 disseminator role 30 distributive justice 187 disturbance handler role 31 diversification strategy 328 diversity, managing 516–46 and changing workplace 534–6 cultural competence 538–40 current responses to 540–6 definition 526 factors effecting women’s careers 531–4 factors shaping personal bias 527–31 globally diverse workforce 536–7 inclusion 526 multicultural teams 542 sexual harassment 541 and sustainability 546–7 diversity challenges 534–6 in the corporate world 520, 522–3 current responses to 540–6 and entrepreneurship 238–9 on a global scale 524–7 valuing 519–21 workplace 526–7 diversity of perspective 525 divisional approach 401, 402, 405–8 advantages and disadvantages 407–8 customer-based divisions 407 geographic divisions 407 divisional structure 405 dog 327 downward communication 702–4 dynamic capabilities 335

E e → p expectancy 662 e-business 74–5 and internet 822–6 strategy, increasing efficiency 824–5 strategy, market expansion 824 e-commerce 74, 822 economic changes and entrepreneurs 231 economic dimension of general environment 97–8 economic environment 152–6 economic forces 54 economic growth 155–6 economic independence 153–4 economic responsibility 202 education and change implementation 464

effective control systems 790–1 effective follower 629 effective management 836–57 effectiveness 15 efficiency 15, 214 electronic brainstorming 376 emotional intelligence 580–2 emotions 579–80 employee involvement 71 employee growth–need strength 669 employees challenges 9 connecting to 711–12 finding the right people 486–96 lack of understanding and trust 461 selection 491–6 temporary and part-time 485–6 employer brand 486 employment test 493 empowerment 671–2 encoding 688 engagement 672–4 enterprise resource planning (ERP) systems 821–2 entrepreneur role 31 entrepreneurial firm, starting an 245–57 arranging finance 249–54 business plan 246–7 legal structure 247–8 new-business idea 245–6 starting an online business 254–5 tactics for a business owner 256 entrepreneurial organisations 233–5 entrepreneurial struggle 241 entrepreneurs 227 arranging finance 249–54 autonomy 241 competition and globalisation 232 and economic changes 231 high energy 241 and need to achieve 241–2 new opportunities and market niches 233 power and influence 241 and self-confidence 242 and technology 232–3 tolerance for ambiguity 242 traits 240–2 who are? 239–42 entrepreneurship 227–39 and the business environment 231–3 changing products and technologies 438, 449–51 controlling 260 decision making 259 definition 227 and diversity 238–9 internationally 229–39 leading 259–60 organising 258–9 planning 258 as an option 229 social 242–4 in solar energy 250 stages of growth 257–61 environment adaptation 106–12 internal 112–18

environment–organisation relationship 105–12 environmental uncertainty 105–6 equal employment opportunity (EEO) 490 equity financing 249–50 equity theory 660–1 ERG theory 653–4 escalating commitment 378 ethical choices and individual managers 189–94 and organisations 193–4 ethical decision making criteria 186–8 guidelines 192 ethical dilemmas 185–6 ethical high road 855 ethical issues 190 ethical leadership 203 ethical responsibility 202 ethical structures 206–7 Ethical Trading Initiative (ETI) 196 ethics business case for 207–8 code of 205–6 committee 206 definition 181 managerial 181–4, 210 ethnocentrism 158, 529–31 ethnorelativism 529 European Union (EU) 157, 166–7 evaluation in decision making 371–4 evidence-based management 377 exchange rates 155 exit interviews 506 expatriates 536–7 expectancy theory 661–3 expense budget 770 expert-locator systems 819 expert power 630–1 exploration (new products and technologies) 438–43 export strategy 338 exporting 148 external environment 92–104 competitors 101 customers 101 economic dimension 97–8 general environment 92, 93–100 international dimension 93–5 labour market 103 legal–political dimension 99 natural environment 99–100 sociocultural dimension 97 suppliers 101–2 technological dimension 96 task environment 92, 93, 101–4 extinction 665 extranet 823 extrinsic rewards 648

F facilities layout 806–710 fast-cycle team 446 feedback in communication 688 in decision making 371–4

feedback control model 764–9 steps of 764–7 femininity 159 Fielder’s contingency theory 618–21 figurehead role 31 finance and entrepreneurs 249–54 business incubator 254 buying an existing business 251 buying a franchise 252 debt financing 249 equity financing 249–50 starting a new business 21 financial analysis 774–6 financial control 772–6 financial statements 772–4 finished-goods inventory 813 first-line managers 23 five competitive forces 330–1 fixed-position layout 810 flat structure 399 focus 855 focus strategy 333 followership 627–9 forecasting 107–8 force-field analysis 461–2 formal communication channels 702–5 formalisation 400–1 forming 742 franchising 252–4 free rider 733 frugal engineering 52 frustration-regression principle 653 functional-level strategy 317, 318, 334–5 functional managers 23 functional structure 402 advantages and disadvantages 406 functional teams 729–30 fundamental attribution error 569

G Gantt Chart 56 gender differences in leadership 609–10 General Agreement on Tariffs and Trade (GATT) 157, 166 general environment 92, 93–100, 104 economic dimension 97–8 international dimension 93–5 legal–political dimension 99 natural environment 99–100 sociocultural dimension 97 technological dimension 96 general managers 23 genetic engineering 96 geographic divisions 407 Germany 138 glass ceiling 531–2 global environment 135–72 borderless world 139–43 changing international landscape 164–71 economic environment 152–6 getting started internationally 148–51 globalisation backlash 145–7 international business environment 151–2 legal–political environment 156–8 multinational corporations 143–4 sociocultural environment 158–63 Subject Index

881

global financial crisis (GFC) 54, 68, 73, 91, 98, 109, 112, 155, 229, 234, 294, 435, 484, 485, 505, 774 global mindset 142–3 global outsourcing 148, 149 Global Reporting Initiative (GRI) 826 global strategy 337–40 implementing 343 global team 736, 738 globalisation 140–1, 144, 145–7, 232, 338–9 and HRM 482 globally diverse workforce 536–7 GLOBE Project 160–1 goal directed means 15 goal setting theory and motivation 658–60 and sustainable development 303 goals 273–6 aligned hierarchy of 283–4 aligning with strategy maps 282–3 criteria for effective 285–6 messages and values contained in 274–5 operational 274, 280, 284 in organisations 277–85 and plans 279–82 strategic 274, 279, 284 stretch 300 tactical 274, 280, 284 government challenges 6–7 grapevine 707–8 Greece 153 Green Movement 199–202 greenfield ventures 150 groupthink 378 groupware 819

H halo effect 501, 568 harassment, sexual 541 Hawthorne studies 62 heroes 116 hierarchical control 777–8 hierarchy of channel richness 692–4 hierarchy of goals 283–4 hierarchy of needs 650–1 high-context culture 163 high-performance culture 122–4 high-performance work attitudes 562–6 horizontal communication 704–5 horizontal coordination 418–22 horizontal differences in management 23 horizontal linkage model 445, 446 horizontal matrix approach 401, 403 human capital 479, 480–1 human relations movement 61–2 human resource information system 482–3 human resource management (HRM) 476–509 changing nature of careers 483–6 competitive strategy 480–3 definition 478 finding the right people 486–96 and globalisation 482 and information technology 482–3 maintaining an effective workforce 504–8 managing talent 496–503 and organisational performance 479–80

882

Subject Index

strategic approach 479–80 sustainability and people 509 human resource planning 487–8 human resources 342 human resources perspective 63 human skills 18–19 humanistic perspective 61–8 humility 606 hybrid structure 410–11 hygiene factors 655

I idea champion 449 idea incubator 445 implementation 458 in decision making 37–1 implementing change 458–67 force-field analysis 461–3 implementation tactics 464–6 need for change 459 resistance to change 450–61 income statement 772, 773 India 136, 137, 142, 146, 165 individual needs and motivation 647–9 individualism 159 individualism approach 187 Indonesia 153 inflation 155–6 influence (leading in organisations) 629–34 informal organisation 61 information and power 631–2 information technology (IT) 67 definition 817 and HRM 482–3 has transformed management 817–22 informational roles of managers 30–1 infrastructure 153 in-house development in corporate universities 499 initiating structure 613 initiative fatigue 855 innovation 52, 75, 230 and changing workplace 435–6 disruptive 436 from within 335–6 in HRM 485–6 management 6, 72–7 mining industry and competitive 238 open 447 organisational 235–8 practices 851–2 product and technology 437–8, 449–51 trickle-up/reverse 436 innovative approaches to planning 300–2 innovative decision making 376–9 innovative ideas for motivating 670–5 innovative responses to stress management 589–93 integrity 855 intelligence, emotional 580–1 intelligence teams 302 interactive leadership 609 interest rates 155–6 internal environment 92, 112–18 international dimension of external environment 93–5 international business environment 151–2

international human resource management (IHRM) 482 international landscape 164–70 international management 151 international services and jobs 139 international trade alliance 166–9 internet and e-business 822–6 interorganisational partnerships 108 interpersonal demands 589 interpersonal influence tactics 632–4 interpersonal roles of managers 31 interview (employment) 492–3 intranet 823 intrapreneurship 262 intrinsic rewards 648 intuition 364 inventory 813 importance of 814 just-in-time 815 management 813–15 involvement culture 120

J Japan 138, 163 job(s) analysis 488 assessing 488–9 characteristics model 668–9 core job dimensions 668–9 creation 230, 234–5 design for motivation 667–70 description 488 enrichment 668 evaluation 504 previews 489 satisfaction 563–4 specification 488 job-based pay 504 joint ventures 109, 337 jugaad 52, 72 justice approach 187 just-in-time (JIT) 102, 462–3 just-in-time (JIT) inventory systems 815

K kaizen 52, 71 Karpin inquiry 38–40 key performance indicators (KPIs) 857 knowledge 819 knowledge economy 434 knowledge management 76, 818–21, 852–3

L labour market 103 large-group intervention 455–6 law of effect 664 laws and regulations 157 leading 556–95 attitudes 562–7 attributions 569–70 emotional intelligence 580–2 emotions 579–80 entrepreneurial 259–60 and management 13–14 managing yourself 582–6 in organisations 602–37

perception 567–9 personality and behaviour 570–8 stress management 586–93 understanding yourself and others 560–2 leadership authentic 608 behavioural approaches 613 charismatic 623–5 contemporary 605–10 contingency approaches 616–21 cultural 124 definition 605 Fielder’s contingency theory 618–21 gender differences 609–10 influence and power 629–34 interactive 609 level 5 606–7, 609 and management 611–15 nature of 605 servant 607–8 situational model of 616–18 situational substitutes for 621–3 strengths 612 of sustainable development 638 task vs people 613–14 traits 612 transformational 623–6 visible 341 Leadership Grid 614 leaders contemporary 634–7 personal characteristics 613 transactional 625 transformational 625 leadership practices 840–4 lean thinking 812 legal considerations and employment 490 legal structure and entrepreneurs 247–8 legal–political dimension of general environment 99 legal–political environment 156–7 legal responsibility 202 legitimacy 275 legitimate power 630 less-developed countries (LDCs) 152 level 5 leadership 606–7, 609 leverage ratios 776 liaison role 31 licensing 149–50 line authority 397 line managers 23 liquidity ratios 775 listening and communication 699–700 to customers 711 locus of control 573–4 long-term orientation 159 low-context culture 163

M Machiavellianism 575 making progress principle 660 management challenges for future research and policy development 40 classical perspective 55–61 competencies, state-of-the-art 34–5

conflict 454 control and sustainable development 792 and controlling 14–15 crises and unexpected events 36–7 definition 10 effective 836–57 evidence-based 377 flat structure 399 four functions 11–15 humanistic perspective 61–8 has information technology 817–22 innovation 6, 72–7 international 151 inventory 813–15 knowledge 76, 818–21, 852–3 and leading 13–14 and leadership 611–15 and organising 13, 53–5 not-for-profit organisations 32–4 open-book 779–80 people 844–7 and planning 11–12 recent historical trends 69–72 relationship 581 scientific 56–7 self-management 581, 582–3 skills 17–21 small businesses 32–4 span of 397–9 stress 586–93 supply chain 805–6 support and change implementation 464–5 tall structure 399 team 614 tools and trends 73–4 trends, awareness of 72 types 21–4 see also total quality management (TQM) management by means 290 management by objectives (MOB) 70, 287–91 benefits and problems 290–1 management information systems (MIS) 67 management science perspective 67–8 managerial decision making 352–79 managerial ethics 181–4 in Australia 210 Managerial Grid 614 managers activities 26–33 Australia’s 38–40 challenges 6–9 and communication 687–90 and decision making 363–4, 372–3 and ethical choices 189–94 first-line 23 functional 23 general 23 middle 22 and motivation 650 new 24–6 project 22 roles of 29–32 strengths 38 and stress management 593 and sustainable development 41 and time 28–9 top 22

weaknesses 38–40 what is it like to be? 24–6 who make a difference 9 managing company ethics and social responsibility 203–7 managing diversity 526 current responses to 540–6 see also diversity, managing manufacturing operations 804–5 market edge 214 market entry strategies 148 market niches 233 masculinity 159 mass customisation 812 matrix approach 401, 403, 408–10 advantages and disadvantages 410 definition 408 matrix boss 410 mechanistic structure 423 men and leadership 609–10 mentoring 498–9, 540–1 mergers 109, 337, 454 messages contained in goals and plans 274–5 micro-management 854 middle managers 22 mining industry and competitive innovation 238 mission 277, 284, 854 mission statement 277 monitor role 30 monoculture 529 moral rights approach 187 motivation acquired needs theory 656–7 concept of 647–50 content perspectives 650–8 definition 647 direct reinforcement 664–5 equity theory 6601 ERG theory 653–4 expectancy theory 661–3 and goal setting 658–60 and individual needs 647–9 innovative ideas 670–5 and job design 667–70 and managers 650 process perspectives 658–64 reinforcement perspective 664–7 social learning theory 666 source of 275 staff 675 for sustainability 677 two-factor approach 654–5 motivators 655 multicultural teams 542 multidomestic strategy 339 multinational corporations (MNCs) 143–4 multitasking 26–7 Myer-Briggs indicator 576–8

N natural dimension of general environment 99–100 needs acquired needs theory 656–7 hierarchy of 650–1 negative emotions 579–80 Subject Index

883

negotiation and change implementation 464 and conflict management 749–51 types of 750–1 win-win situation 751 network approach 402, 403, 413–17 advantages and disadvantages 415–17 to departmentalisation 414 network structure 413 networking personal 686–7, 706 social 711–12 neutraliser 621 new-business idea 245 new entrants, potential 330 new products and technologies 437–51 new-venture fund 450 new-venture team 450 New Zealand 168, 169, 233, 358, 540, 675–6 non-directive interviews 493 non-programmed decisions 354 non-verbal communication 700–1 normative (decision making) 362 norming 743 North American Free Trade Agreement (NAFTA) 157, 168 not-for-profit organisations, managing in 32–4

O offshoring 148, 149 online business 254–5 online checks (recruiting) 495 on-the-job training 498 open communication 690–2 open innovation 447 open-book management 779–80 operating processes 857 operational goals 274, 280, 284 operational plans 274, 280 operational research teams 67 operations delivery outcomes 816 management 67, 802, 826 manufacturing 804–5 research 67 service operations 804–5 opportunities 324–5 opt-out trend 532–3 organic structure 423 organisation as a value chain 802–6 organisation chart 393 organisation structure 392 organisation–environment relationship 105–12 adapting to the environment 106–9 environmental uncertainty 105–6 influencing the environment 110–12 organisational behaviour and sustainability 594–5 organisational change 435 organisational citizenship 564 organisational commitment 564–6 organisational communication 702–10 organisational control 763 organisational culture 112–13 organisational decline/revitalisation 454 organisational development (OD) 66, 454–8 activities 455–6 steps 456–7

884

Subject Index

organisational ecosystem 92 organisational environment 92 organisational innovation 235–8 organisational mission 277–9 organisational performance 15–17 organisational planning process 281 organisational stakeholders 195–7 organisational sustainable development 210–15 organisations 15 bureaucratic 57–9 centralisation 400 decentralisation 400 entrepreneurial 233–5 and ethical choices 193–4 goals 277–85 and management 53–5 manufacturing 804 rightsizing 505–6 service 804 and sustainable development 467–8 as a system 857–8 winning, fundamental practices 839–53 world’s best 853–6 organising 390–425 definition 391 entrepreneurial 258–9 factors shaping structure 423–4 for horizontal coordination 418–22 and management 13 for sustainable development 425 tall vs flat structure 399 the vertical structure 392–401 orientation training 499 outsourcing 76, 148, 149, 391

P p → o expectancy 662 panel interviews 493 participation and change implementation 464 partnerships 247 interorganisational 108 passive follower 628 pay-for-performance 505 people and change 451–8 management practices 844–7 and sustainability 509 people-oriented behaviour 613 perception 567–9 perceptual distortions 568 performance 273–6 360-degree feedback 501 appraisal 500–3 assessing accuracy 501 dashboards 301–2 evaluation errors 501–2 halo effect 501 and human capital 480–1 measuring 766 standard of 275, 764, 765 performance gap 459 performing 743–4 permanent teams 412 personal bias (managing diversity) 527–31 personal communication channels 706–9 personal decision framework 374–5

personal identity 25 personal networking 686–7, 706 personal power 630 personality attitudes and behaviours influenced by 573–5 and behaviour 570–8 Myer-Briggs indicator 576–8 problem solving styles 576–8 personality test 493 personality traits 570–3 physical ability test 493 planning 273 benefits and limitations 293 crisis 295–7 decentralised 300 a digital strategy 279 entrepreneurial 258 and forecasting 107–8 innovative approaches 300–2 and management 11–12 modern approaches 300 quality 291–2 scenario 294–6 time horizons 298–9 traditional approaches 299 in a turbulent environment 294–5 plans 273–6 contingency 294 and goals 279–82 messages and values contained in 274–5 operational 274, 280 single issue 291–2 standing 291 strategic 280 tactical 280 pluralism 529 point of difference 855 point-counterpoint 378 policy-based statements 205 political activity 111 political forces 53–4 political instability 157 political model in decision making 365–6 political risk 156 Porter’s competitive forces and strategies 330–4 portfolio strategy 326 position power 630 positive emotions 579–80 positive reinforcement 664 power (leading in organisations) 629–34 power distance 158 practical approach 188 pragmatic survivor 628 prejudices, workplace 527–9 pressure groups 99 principle-based statements 205 problem in decision making 353–61 problem solving personality styles 576–8 procedural justice 187 process layout 808 process perspectives on motivation 658–64 equity theory 660–1 expectancy theory 661–3 goal setting 658–60 product change 437 product layout 809 product markets 155

product structure 405 products new 437–51 substitute 331 profitability ratios 775–6 program structure 405 programmed decisions 354 project management 419–20, 485, 854 project managers 22 profit-maximising view 202 promotion within (employee development) 499 protected groups 490 public relations 110–11 punishment 665 purpose 853

Q quality control effective control systems 790–1 trends 788–91 see also total quality management (TQM) quality circles 783 quality management practices 849–51 quality partnering 785 quality planning 291–2 question mark 327 queuing theory 67

R radio-frequency identification (RFID) 811–12 raw materials inventory 813 realistic job previews 489 recruiting 488 re-engineering 419 referent power 631 refreezing 457 regulations and laws 157 reinforcement perspective on motivation 664–7 reinforcement theory 664 relational conflict 747 relational coordination 420–1 relationship management 581 Relay Assembly Test Room (RATR) experiment 62 resource allocation 275 resource allocator role 31 resource markets 155 responsibility 395 responsibility centre 770 revenue budget 770 reverse innovation 436 reward power 630 rewards, extrinsic/intrinsic 648 rightsizing 505–6 risk and decision making 357–8 risk propensity 37 role conflict 589 role ambiguity 589 role of managers 29–32 Russia 137, 522

S salary systems 504 satisficing (decision making) 363–4 scalar principle 394 scenario planning 294–5 scientific management 56–7

selection, employee 491–6 self-assessment 561, 580 self-awareness 560 self-confidence 560 self-contained unit structure 405 self-directed learning 499 self-efficacy 560 self-interest 460–1 self-managed teams 731 self-management 581, 582–3 self-serving bias 569 servant leadership 607–8 service operations 804–5 service organisations 804 sexual harassment 541 Shewhart cycle 291–2 short-term orientation 159 single issue plans 291–2 situational interviews 493 situational model of leadership 616–17 situational substitutes for leadership 621–3 Six Sigma methodology 71, 784 skill-based pay 504 skunkworks 450 slogans 116–17 small businesses entrepreneurial 233–5, 242–4 managing in 32–4 and sustainability 263 small to medium enterprise (SME) 263 social awareness 581 social contract 483–4 social entity 15 social entrepreneur 243 social entrepreneurship 242–4 social forces 53 social learning 498 social learning theory 666 social media 255 and communication 710–11 programs 76–7 and recruitment 489 social networking 711–12 social responsibility 202 business case for 207–8 managing company ethics and 203–7 social values 158–62 socially responsible investing 197 sociocultural dimension of general environment 97 sociocultural environment 158–63 socio-emotional role in teams 740 sole proprietorship 247 span of control 397, 399 span of management 397–9 special-purpose teams 730 spokesperson role 30 staff authority 397 staff managers 23 staff motivation 675–6 stakeholder 195 stakeholder empowerment 212 stakeholder mapping 195 stakeholder support 213–14 stakeholders, organisational 195–7 standards of performance 275, 764, 765 standing plans 291–2 star 327

state-of-the-art management competencies 34–5 stereotypes, workplace 527–9 stereotyping 568 stories 116 storming 742–3 strategic approach to HRM 479–80 strategic business units (SBUs) 326 strategic conversation 687 strategic goals 274, 279, 284 strategic management definition 312 process 320–6 strategic partnerships 336–7 strategic plans 279 strategic thinking 311–19 strategy business-level 317, 330–4 corporate-level 317, 326–30 definition 312 diversification 328 execution 323, 341–4 export 338 formulation 323 functional-level 317, 318, 334–5 global 337–40, 343 implementation 323 levels of 317–19 multidomestic 339 new trends 335–7 portfolio 328 purpose of 312–16 sustainability 344 testing the quality of 343–4 transnational 339–40 strategy maps, aligning goals with 282–3 stress 586 management 586–93 work 589–90 strengths 324 managers 38 stretch goals 300 structure, factors facing 423–4 structured interviews 493 substitute for leadership 621 subsystems 69 suppliers 101–2 bargaining power 330–1 supply chain management 805–6 survey feedback 455 sustainable development 200 in Australia 210 and the business environment 127 decisions 379 global issue 171–2 and goal setting 303 implementation in the organisation 467–8 and information 826 leadership 638 and management control 792 and management thinking 78 and managerial action 215 and managers 41 and operations management 826 organisational 210–15 organising for 425 and teamwork 752 the ‘what’ of 213–14 Subject Index

885

sustainable development (Continued) the ‘when’ of 214–15 the ‘why’ of 212 sustainability of business strategy 344 and communication 717 and managing diversity 546–7 and motivation 667 and organisational behaviour 594–5 and the small or start-up organisation 263 and the triple bottom line 200 SWOT analysis 323–5, 459 symbols 115 synergy 69, 314 system 69 systems thinking 69–70

T 360-degree feedback 501 tactical goals 274, 280, 284 tactical plans 280 tall structure 399 target customers 313 task conflict 747 task demands 588–9 task environment 92, 93, 101–4 competitors 101 customers 101 labour market 103 suppliers 101–2 task forces 419–20 task-oriented behaviour 613 team-based approach 402, 403, 411–13 advantages and disadvantages 413 team-based structure 412 team building 455 team characteristics 739–41 diversity 739 member roles 739–40 size 739 socio-emotional role 740 team conflict, managing 747–9 team effectiveness 734–5 team management 614 team processes 742–6 cohesiveness 744–5 norms 745–6 stages of development 742–4 teams 419–20 cohesiveness 744–5 contributions of 728–9 cross-functional 411, 730 definition 728 dilemma of 732–8 fast-cycle 446 functional 729–30 global 736, 738 and HRM 485 intelligence 302 multicultural 542 new venture 450 permanent 412 self-managed 731 special-purpose 730

886

Subject Index

types of 729–31 value of 727–32 virtual 736–8 teamwork and sustainable development 752 technical core 802 technical skills 19 technological dimension of general environment 96 technologies, new 437–51 technology 232–3 automation 810–13 change 437 technology-driven workplace 74 telecommuting 486 termination and HRM 506 Theory X 63 Theory Y 63 threats 324–5 three Ps 200 thriving workforce 671 time horizons, planning 298–9 time management 583–5 tolerance for ambiguity 242 top-down budgeting 771 top leader 410 top managers 22 total quality management (TQM) 71, 291, 782–8 success factors 786 trade alliance international 166–9 promise or pitfall? 168–9 trade associations 111 training and development programs 453–4 traits Big Five personality 570 definition 612 entrepreneurs 240–2 leadership 612 personality 570–3 transactional leaders 625–6 transformational leaders 625 transformational leadership 623–6 transnational strategy 339–40 trickle-up/reverse innovation 436 triple bottom line 200 two-boss employees 410 two-factor approach to motivation 654–5 Type A behaviour 587 Type B behaviour 588

U uncertainty in decision making 358 and resistance to change 461 uncertainty avoidance 18 uncritical thinking 628 unethical behaviour 202 unexpected events management 36–7 unfreezing 456 United Kingdom 519, 521 United States 137, 150, 154, 155–6, 522 unity of command 394 upward communication 703–4 utilitarian approach 186–7

V valence 662 value, customer 314 value chain, organisation as a 802–6 values contained in goals and plans 274–5 venture capital firms 249–50 vertical differences in management 22–3 vertical functional approach 401, 402–5 advantages and disadvantages 403–4 vertical structure, organising the 392–401 vicarious learning 666 virtual teams 736–8 visible leadership 341

W wage systems 504 weaknesses 324 managers 38–40 Web 2.0 818–21 whistle-blowing 207 wholly owned foreign affiliates 150 win-win situation in negotiation 751 women and leadership 609–10 women’s careers (managing diversity) 531–3 in Australia 542–5 female advantage 533 glass ceiling 531–2 opt-out trend 532–3 work attitudes, high-performance 562–6 work effort, discretionary 845 work redesign 668 work sample tests 495 work specialisation 393–4 work stress 588–90 work–life balance 486 workers, contingent 485 workforce developing an effective 496–500 discrimination 527–9 globally diverse 536–7 maintaining an effective 504–8 management 26 optimisation 500 prejudice 527–9 stereotypes 527–9 thriving 671 and women 531–3, 542–5 work-in-progress inventory 813 workplace changing 435–6, 534–6 communication 710–13 diversity 526–7 technology-driven 74 World Bank 231 World Trade Organization (WTO) 166 world’s best organisations 853–6 written communication 709

Z zero-based budget 771